<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 1995
REGISTRATION NO.
33-62613
33-62613-01
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
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 GENERAL COUNSEL PRESIDENT AND CHIEF 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 STEEN & HAMILTON 1610 WYNKOOP STREET
AMERICAS ONE LIBERTY PLAZA SUITE 200
NEW YORK, NEW YORK 10019 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. [_]
---------------
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.
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<PAGE>
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
<TABLE>
<CAPTION>
ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
-------- ---------------- ---------------------
<C> <S> <C>
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; Unaudited Pro Forma
Consolidated Statement of Income of
Lilly; Unaudited Pro Forma Consolidated
Financial Information of IMS
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 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.. *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
-------- ---------------- ---------------------
<C> <S> <C>
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
Item 18. Information if Proxies, Financial Statements of IMS
Consents or
Authorizations are to be
Solicited............... Summary; The Special Meeting; Special
Factors to be Considered; The Merger
Agreement; Rights of Dissenting
Item 19. Information if Proxies, Shareholders; Business of IMS;
Consents or Ownership of IMS; Management of IMS
Authorizations are not
to be Solicited or in an
Exchange Offer.......... *
</TABLE>
- --------
* Omitted because inapplicable or answer is in the negative.
<PAGE>
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 3,465,184 shares of Company
common stock representing approximately 51.6% of the Company common stock
entitled to vote on the Merger and 1,581,562 shares of Series B Stock
representing approximately 79.1% 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 71.3% 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, Lilly will own 100% of IMS's voting stock and IMS
shareholders who elect to receive cash as described in the Proxy Statement-
Prospectus will not have any continuing interest in IMS or Lilly. In addition,
IMS shareholders who elect Series D Stock or who elect to continue to hold
Series B Stock as described below will hold non-voting securities which
generally entitle the holder thereof only to fixed dividends and redemption
values. Specifically, 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
will be converted into one share of common stock of the surviving
corporation.
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC.
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. If dissenters' rights are
exercised by the holders of more than 10% of the common stock or Series B
Stock, Lilly may, at its election, terminate the Merger Agreement.
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. SHARE CERTIFICATES
SHOULD BE SENT IN ONLY WITH THE LETTER OF TRANSMITTAL.
Respectfully,
Kevin R. Green,
President and Director
Charles I. Brown,
Executive Vice President
and Director
2
<PAGE>
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.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 OCTOBER 26, 1995
INTEGRATED MEDICAL SYSTEMS, INC.
PROXY STATEMENT
----------
INTEGRATED MEDICAL SYSTEMS, INC.
10,792,695 SHARES OF SERIES D PREFERRED STOCK
2,000,000 SHARES OF SERIES B PREFERRED STOCK
655,103 WARRANTS TO PURCHASE SERIES D PREFERRED STOCK
2,380,457 OPTIONS TO PURCHASE SERIES D PREFERRED STOCK
ELI LILLY AND COMPANY
292,979 OPTIONS TO PURCHASE LILLY COMMON STOCK
292,979 SHARES OF LILLY COMMON STOCK
10,792,695 PUT RIGHTS FOR SERIES D PREFERRED STOCK
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" BEGINNING ON PAGE 11 FOR A DESCRIPTION
OF CERTAIN MATERIAL RISKS 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. The Series D Preferred Stock generally is non-
voting, is redeemable at the option of the Company or the holder after five
years, and has a cash dividend of $0.62 per share per annum and a liquidation
value of $8.00 per share. The Series B Preferred Stock, as amended, generally
is non-voting, has a cash dividend of $0.10 per share per annum and a
liquidation value of $1.00 per share, and is convertible into Series D
Preferred Stock or the liquidation value. 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 SECURITIES
AND EXCHANGE 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.
<PAGE>
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.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 1
THE SPECIAL MEETING....................................................... 9
Time, Date and Place.................................................... 9
Purpose of the Meeting.................................................. 9
Record Date and Outstanding Shares...................................... 9
Required Vote........................................................... 9
Revocability of Proxies................................................. 10
Solicitation of Proxies................................................. 10
SPECIAL FACTORS TO BE CONSIDERED.......................................... 11
Risk Factors Applicable to IMS.......................................... 11
Background to the Merger................................................ 12
Effects of the Merger................................................... 16
Lilly's Purpose of the Merger........................................... 16
Recommendation of the IMS Board of Directors; Fairness of the Merger.... 17
Opinion of Financial Advisor............................................ 17
Prior Agreements/Relationships of the Parties........................... 20
Accounting Treatment of the Merger...................................... 24
Tax Treatment of the Merger............................................. 24
Interests of Certain Persons in the Merger.............................. 24
No Stock Exchange or NASDAQ Listing; Resales of Series D Preferred Stock
and Series B Preferred Stock........................................... 24
Governmental and Regulatory Approvals................................... 25
Market Prices........................................................... 25
THE MERGER AGREEMENT...................................................... 26
The Merger.............................................................. 26
Description of Election Procedures...................................... 26
Procedures for Exchange of Certificates................................. 27
Effect of the Merger on Company Options and Company Warrants............ 29
Representations and Warranties.......................................... 30
Certain Understandings and Agreements................................... 30
Conditions to the Merger................................................ 33
Amendment and Modification.............................................. 34
Termination............................................................. 34
Liability of the Parties Upon Termination............................... 34
Expenses................................................................ 34
Indemnification of Officers and Directors............................... 34
PUT/CALL AGREEMENTS....................................................... 35
General................................................................. 35
Put Right............................................................... 35
Call Right.............................................................. 35
Escrow.................................................................. 35
Transfers of Subject Shares............................................. 36
No Restrictions on Lilly................................................ 36
Submission to Jurisdiction.............................................. 36
AMENDMENT TO THE ARTICLES OF INCORPORATION OF IMS......................... 36
Capitalization.......................................................... 36
Voting Rights........................................................... 37
Liquidation Rights...................................................... 37
Conversion Rights....................................................... 37
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COMPARISON OF SHAREHOLDER RIGHTS.......................................... 37
Voting Rights........................................................... 38
Notice of Shareholder Meetings.......................................... 38
Conflicting Interest Transactions....................................... 38
Vote Required for Extraordinary Matters................................. 38
Indemnification......................................................... 38
Holders of Series B Preferred Stock..................................... 39
DESCRIPTION OF CAPITAL STOCK OF IMS....................................... 40
Authorized Capital Stock................................................ 40
Common Stock............................................................ 40
Series D Preferred Stock................................................ 40
Series B Preferred Stock................................................ 43
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER..................... 46
RIGHTS OF DISSENTING SHAREHOLDERS......................................... 50
SELECTED CONSOLIDATED FINANCIAL DATA OF LILLY............................. 52
CAPITALIZATION OF IMS FOLLOWING THE MERGER................................ 53
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF LILLY............. 54
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF IMS............. 56
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF IMS.... 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF IMS........................................................ 61
Overview................................................................ 61
Results of Operations................................................... 63
Liquidity and Capital Resources......................................... 65
BUSINESS.................................................................. 66
Industry Background..................................................... 66
Strategy................................................................ 68
Health Care Industry Information Needs.................................. 69
IMS MEDACOM(R) Network.................................................. 69
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.................................................. 82
Compensation of Directors............................................... 83
Limitations on Liability of Officers and Directors...................... 83
Certain Transactions.................................................... 84
AMENDMENT TO THE IMS 1994 EMPLOYEE STOCK OPTION PLAN...................... 85
EXPERTS................................................................... 85
LEGAL OPINIONS............................................................ 85
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 86
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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
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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.
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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
shareholders, other than Lilly, owning non-voting Series D Preferred Stock or
Series B Preferred Stock and with Lilly owning all of IMS's outstanding voting
stock (subject to possible post-Merger issuance of voting stock to others) (see
"THE MERGER--Effect of the Merger on Company Options, Warrants and Exchange
Rights").
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 6,711,569 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 3,500,000 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 3,465,184 shares of
Company Common Stock, representing approximately 51.6% of the Company Common
Stock entitled to vote on the Merger, and 1,581,562 shares of Series B
Preferred Stock, representing approximately 79.1% 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 71.3% 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 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
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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. 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 only by written notice received by the Exchange Agent prior to the Election
Deadline. See "THE MERGER AGREEMENT -- Form of Election Procedures."
SHAREHOLDERS SHOULD SEND IN THEIR SHARE CERTIFICATES ONLY WITH THE LETTER OF
TRANSMITTAL AND NOT WITH THEIR PROXY CARDS.
Effect of the Merger on Company Options, Warrants and Exchange Rights
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
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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.
A Form of Election for use by holders of Company Options and Company Warrants
will be mailed separately to the holders thereof. 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."
Under a joint venture agreement with IMS, Blue Cross and Blue Shield of
Arizona, Inc. ("BCBSAZ"), as limited partner in the joint venture, has the
right to elect to exchange all or part of its rights to profit allocations in
the joint venture for shares of Company Common Stock. The number of shares is
to be determined by dividing $3.5 million by the market price of Company Common
Stock at the time of exchange. This right is available to BCBSAZ at any time
until three years and 120 days after commencement of an initial public offering
of equity securities of the Company. It is possible that BCBSAZ will exercise
this right after the Merger, with the result that BCBSAZ would own Company
Common Stock after the Merger with a value at the time of issuance of $3.5
million.
Lilly reserves the right to cause the Company to issue Company Common Stock
or other securities, whether voting or non-voting, following the Merger at any
time or from time to time to Lilly or third parties for any proper corporate
purpose.
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
"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
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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 made loans to IMS that aggregated as of October 25, 1995,
$8.85 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.
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.
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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 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."
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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. If dissenters' rights are exercised by the holders of more than
10% of the common stock or Series B Preferred Stock, Lilly may, at its
election, terminate the Merger Agreement. See "RIGHTS OF DISSENTING
SHAREHOLDERS."
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 or in respect of
accrued dividends on the Series B Preferred Stock).
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.
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COMPARATIVE PER SHARE DATA
The following table presents historical and pro forma per share data for
Lilly and IMS. The pro forma per share data for Lilly reflects the impact of
the Merger and certain other transactions described in the Notes below.
<TABLE>
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LILLY PRO FORMA
REFLECTING LILLY PRO FORMA
LILLY ACQUISITION WITH IMS IMS
HISTORICAL(3) OF PCS(1)(3) IMS(2)(3) HISTORICAL PRO FORMA(4)
------------- --------------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1994
Cash dividends
declared............. $ 2.52 $ 2.52 $ 2.52 $ 0 $ 0
Income (loss) from
continuing
operations........... 4.10 3.63 3.58 (0.73) (0.86)
SIX MONTHS ENDED JUNE
30, 1995
Book value............ $20.47 N/A $19.43 $(2.42) $ 1.21
Cash dividends
declared............. 1.29 N/A 1.29 0 0
Income (loss) from
continuing
operations........... 2.37 N/A 2.48 (1.00) (0.71)
</TABLE>
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(1) The unaudited Lilly pro forma per share data for the year ended December
31, 1994 are based on Lilly's historical results from continuing operations
adjusted to reflect the impact of the acquisition of PCS and the
disposition of Guidant Corporation ("Guidant"). See "UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME OF LILLY" for more details.
The pro forma per share data for the six months ended June 30, 1995 and
book value per share at June 30, 1995 are not applicable since the
financial results of PCS are included in the Lilly Historical per share
data.
(2) 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. 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. 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 net
gain from the disposition of discontinued operations.
The net gain from disposition of discontinued operations and the Guidant
exchange offer was realized and reported in the third quarter of 1995.
Retained earnings are adjusted by the net gain (net of tax) resulting from
Lilly's disposal of all its discontinued operations (including its
remaining shares of Guidant Common Stock). The gain is calculated as the
net of Lilly's investment in the discontinued operations and the
consideration received. In the case of the Guidant Common Stock, the
consideration received is measured by the market value of the shares of
Guidant Common Stock exchanged on the expiration date. Lilly exchanged 3.49
shares of Guidant Common Stock for each share of Lilly Common Stock
tendered and exchanged aggregating 16,504,298 shares of Lilly Common Stock.
The Lilly Common Stock received pursuant to the exchange was recorded as an
increase to treasury stock at the market value of the shares of Guidant
Common Stock distributed on the expiration date of the offer ($1,533.6
million or $26.625 per Guidant share).
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.
(3) On October 17, 1995, the Board of Directors of Lilly declared a two-for-one
stock split effected in the form of a 100-percent stock dividend payable to
shareholders of record at the close of business November 15, 1995. The
outstanding and weighted average number of shares of Lilly common stock and
per share data have NOT been adjusted to reflect the stock split. The
effect of the stock split would be to reduce the Lilly historical and pro
forma per share data by 50%.
(4) The unaudited pro forma financial information of IMS is based on IMS's
historical financial information adjusted to reflect the acquisition of IMS
by Lilly and the acquisition by IMS of the remaining 51% of a consolidated
subsidiary. See "UNAUDITED PRO FORMA FINANCIAL INFORMATION OF IMS" for more
details.
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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 6,711,569 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 3,500,000 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 3,465,184 shares of
Company Common Stock, representing approximately 51.6% of the Company Common
Stock entitled to vote on the Merger, and 1,581,562 shares of Series B
Preferred Stock, representing approximately 79.1% 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 71.3% 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 shareholder of Subsidiary, have approved the proposed Merger.
Lilly shareholder approval is not required for the consummation of the Merger.
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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.
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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." Also,
persons who acquire Series D Preferred Stock in the Merger or subsequently
should be aware that, even if they elect not to enter into Put/Call
Agreements, their shares will be subject to redemption by the Company at its
election at any time on or after the fifth anniversary of the Merger, thereby
terminating their continuing interest in the Company.
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 (subject to possible post-Merger
issuance of voting stock to others) (see "THE MERGER--Effect of the Merger on
Company Options, Warrants and Exchange Rights"). 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,
11
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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 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.
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
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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 the value range proposed by
Lilly 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 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,
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$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 and that IMS networks would be established in 27
of the largest 50 markets at the end of 1995, and that networks would be
established in the remaining 23 largest markets by the end of 1999. The
estimates also assumed that license and related revenue would be generated for
12 new small market networks in each of the five years through 1999. Expenses
were projected on the basis of historical cost, given the size and maturity of
each projected network. 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 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
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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 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
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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 network
(a network available to any user in the medical field for standard fees).
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.
EFFECTS OF THE PROPOSED MERGER
The Merger is intended to provide IMS with a means to continue to fund the
growth of its business and to expand into new markets while providing an
opportunity for liquidity to IMS shareholders and continued incentive to
management and employees of IMS. As a result of the Merger, future
appreciation, if any, of IMS value will accrue to the benefit of Lilly and its
shareholders and not to the present shareholders of IMS, whose return will be
limited to the fixed dividend on Series D Preferred Stock or Series B
Preferred Stock if the shareholder elects to accept or retain such securities
in lieu of cash. Future control of IMS and its business will pass from the
present Board of Directors of IMS to a new Board of Directors designated by
Lilly.
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. Assuming all IMS shareholders elect to
receive cash in the Merger and all holders of Company Options and Warrants
elect to receive the net cash value, Lilly would pay approximately $76 million
for all such securities. Lilly intends to finance the acquisition through
general corporate funds and through borrowings (most likely the private sale
of commercial paper to institutional investors).
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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 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.
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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 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
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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").
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.
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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. Smith Barney assisted IMS in the negotiation of the terms of the
Merger, including the structuring of the Merger Consideration, but made no
recommendation as to the form and amount of the consideration, other than as
set forth in Smith Barney's fairness opinion.
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.
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. In September 1993
McKesson purchased 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
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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. In October 1995, PCS exercised its sole remaining Warrant and
thereby purchased 500,000 shares of Series C Preferred Stock at a price of $6
per share. Lilly has made loans, and is obligated to make additional loans, to
the Company. See "PRIOR AGREEMENTS/RELATIONSHIPS OF THE PARTIES--Lilly Loans
to IMS."
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.
(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.
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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 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
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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 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 June 12, 1995,
July 27, 1995, August 28, 1995, September 25, 1995, October 17, 1995 and
October 25, 1995, Lilly loaned IMS $3 million, $1 million, $1 million, $1.5
million, $1.35 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 Lilly's
loans to IMS will be approximately $ by the date of the Special Meeting.
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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.
TAX TREATMENT OF THE MERGER
The tax 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.
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 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
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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.
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 $ .
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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.
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.
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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.
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 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
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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.
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 SEND IN THEIR SHARE CERTIFICATES ONLY WITH THE LETTER OF
TRANSMITTAL AND NOT WITH THEIR PROXY CARDS
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EFFECT OF THE MERGER ON COMPANY OPTIONS, WARRANTS AND EXCHANGE RIGHTS.
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.
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.
A Form of Election for use by holders of Company Options and Company
Warrants will be mailed separately to holders thereof. 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."
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Under a joint venture agreement with IMS, Blue Cross and Blue Shield of
Arizona, Inc. ("BCBSAZ"), as limited partner in the joint venture, has the
right to elect to exchange all or part of its rights to profit allocations in
the joint venture for shares of Company Common Stock. The number of shares is
to be determined by dividing $3.5 million by the market price of Company
Common Stock at the time of exchange. This right is available to BCBSAZ at any
time until three years and 120 days after commencement of the initial public
offering of equity securities of the Company. It is possible that BCBSAZ will
exercise this right after the Merger, with the result that BCBSAZ would own
Company Common Stock after the Merger with a value at the time of issuance of
$3.5 million.
Lilly reserves the right to cause the Company to issue Company Common Stock
or other securities, whether voting or non-voting, following the Merger at any
time or from time to time to Lilly or third parties for any proper corporate
purpose.
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, 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
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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, 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.
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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 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."
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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
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 satisfaction of certain conditions
regarding the Company's joint venture arrangements (which requirements have
now been satisfied or waived).
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
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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 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
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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.
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.
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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.
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
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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 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
(subject to possible redemption thereafter by the Company in accordance with
the terms of the 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."
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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 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
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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 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.
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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.
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
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(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 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
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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.
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
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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, 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 Par 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.
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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.
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. However, each share
of Series B Preferred Stock will be convertible into two-thirds of a share of
Series D Preferred Stock and thus, if converted, would thereafter be entitled
to $5.33, plus accrued and unpaid dividends on the Series D Preferred Stock,
upon any liquidation, dissolution or winding up of IMS. See "Series B
Preferred Stock--Conversion" and "Series D Preferred Stock--Liquidation
Preference." 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 (subject to possible redemption
thereafter by the Company in accordance with the terms 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
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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
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.
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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. The following
discussion is based on the advice of Dewey Ballantine, counsel to Lilly, and
Cleary, Gottlieb, Steen & Hamilton, counsel to the Special Committee of the
Board of Directors of IMS, who have rendered opinions to their respective
clients that the discussion constitutes a fair summary of the principal
federal income tax consequences of the Merger to holders of IMS stock,
warrants and options. However, opinions of counsel are not binding on the
Internal Revenue Service, and 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 (including any cash received in respect of
accrued dividends on the Series B Preferred Stock) 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, except that a holder of Series B
Preferred Stock should recognize taxable gain (but not loss) equal to the
lesser of (i) the amount of any accrued dividends on the Series B Preferred
Stock that is received by such holder in connection with the Merger and (ii)
the excess, if any, of (a) the amount realized by such holder (in general, the
sum of the fair market value of the Series D Preferred Stock and the amount
received in respect of such accrued dividends) over (b) the holder's adjusted
tax basis in the shares of Series B Preferred Stock exchanged therefor. 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, decreased by
the amount of cash received in respect of accrued dividends on the Series B
Preferred Stock and increased by the amount of taxable gain recognized.
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
46
<PAGE>
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 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, the sum of $8.00 per share of Series D Preferred Stock plus the
amount of any payment received in respect of
47
<PAGE>
accrued dividends on the Series B 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 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 of accrued dividends will be taxable as
ordinary 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.
48
<PAGE>
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 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
required to be recognized. The Optionee's holding period in the stock
49
<PAGE>
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.
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
50
<PAGE>
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.
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.
51
<PAGE>
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.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Ratio of earnings to
fixed charges(1)....... 7.0x 19.6x 14.0x 7.6x 11.7x 19.1x 15.7x
PER-SHARE DATA(2):
Income from continuing
operations............. $ 2.37 $ 2.14 $ 4.10 $ 1.58 $ 2.86 $ 3.99 $ 3.54
Income (loss) from dis-
continued 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
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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 liabili-
ties................... 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 liabil-
ities.................. 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 percent-
age of total capital-
ization(3)............. 46.9% 47.5% 22.9% 19.3% 17.9% 30.4%
Book value per share(2). $ 20.47 $ 18.35 $ 15.61 $ 16.72 $ 16.97 $ 12.98
</TABLE>
- --------
(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) On October 17, 1995, the Board of Directors of Lilly declared a two-for-
one stock split effected in the form of a 100-percent stock dividend
payable to shareholders of record at the close of business November 15,
1995. The outstanding and weighted average number of shares of Lilly
common stock and per share data have not been adjusted to reflect the
stock split. The effect of the stock split would be to reduce the Lilly
historical and pro forma per share data by 50%.
(3) This percentage is computed by dividing the sum of short-term borrowings
and long-term debt by total capitalization.
52
<PAGE>
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.
<TABLE>
<CAPTION>
JUNE 30, 1995
-----------------------------------------------------
AS ADJUSTED
---------------------------------------
ACTUAL (50% CONVERTED) (100% CONVERTED)
------------ --------------- ----------------
<S> <C> <C> <C>
LONG-TERM DEBT.......... $ 3,245,155 $ 3,245,155 $ 3,245,155
SERIES D REDEEMABLE PRE-
FERRED STOCK, $0.01 par
value; 12,000,000
shares authorized;
5,398,518 and
10,797,035 shares to be
outstanding as adjust-
ed, respectively....... -- 37,130,066(1)(3)(5) 74,260,132(6)(7)(8)
STOCKHOLDERS' EQUITY
(DEFICIT)
Series B Preferred
Stock, $1 par value;
2,000,000 shares autho-
rized, issued and out-
standing 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 autho-
rized, 3,000,000 shares
issued and outstanding
before the Merger; no
Series C Preferred
Stock exists as adjust-
ed..................... 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 out-
standing as adjusted... 8,947,591 53,081,066(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 receiv-
able................... (50,000) -- --
------------ ----------- -----------
Total stockholders' eq-
uity (deficit)......... 1,250,504 53,081,066 15,951,000
------------ ----------- -----------
Total capitalization.... $ 4,495,659 $93,456,287 $93,456,287
============ =========== ===========
</TABLE>
- --------
(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 cumulative undeclared preferred 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
paid by Lilly and which is treated as a capital contribution to IMS.
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 into 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
$6,132,218.
(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 cumulative undeclared preferred 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 the purchase of 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 $12,264,436. Assumes no
option holders elect to receive options to purchase Lilly shares in lieu
of options to purchase Series D Preferred Stock.
53
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF LILLY
The following unaudited pro forma consolidated statement of income of Lilly
has been prepared to reflect the effect of the disposition of Guidant and the
acquisition of PCS as if these transactions had been consummated on January 1,
1994.
The unaudited pro forma consolidated statement of income and related
earnings per share data for the year ended December 31, 1994 is based on
Lilly's historical results from continuing operations adjusted to reflect the
impact of the transactions as if they had occurred on January 1, 1994. The
effect of the disposition of Guidant Corporation reduced 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.
The unaudited pro forma consolidated statement of income is not necessarily
indicative of Lilly's consolidated results of operations had the disposition
of Guidant or acquisition of PCS reflected therein actually been consummated
at the assumed dates, nor is it necessarily indicative of Lilly's consolidated
results of operations for any future period. The unaudited pro forma
consolidated statement of income should be read in conjunction with Lilly's
consolidated financial statements and notes thereto incorporated by reference
in this Proxy Statement--Prospectus.
54
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF LILLY
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales................................... $5,711.6 $ 178.7 (2) $5,890.3
Cost of sales............................... 1,679.7 94.7 (2) 1,774.4
Research and development.................... 838.7 838.7
Acquired research........................... 58.4 58.4
Marketing and administrative................ 1,398.3 47.9 (2) 1,446.2
Special charges............................. 66.0 66.0
Other (income)/expense--net................. (28.1) 303.1 (2) 275.0
-------- ------- --------
4,013.0 445.7 4,458.7
-------- ------- --------
Income from continuing operations before in-
come taxes................................. 1,698.6 (267.0) 1,431.6
Income taxes................................ 513.5 (71.1)(2) 442.4
-------- ------- --------
Income from continuing operations........... $1,185.1 $(195.9) $ 989.2
======== ======= ========
Earnings per share from continuing opera-
tions(1)................................... $ 4.10 $ 3.63
</TABLE>
- --------
(1) Reflects the effect of the disposition of Guidant as if it had occurred at
the beginning of the period presented. Unaudited pro forma earnings per
share from continuing operations is calculated using the level of
participation in the Guidant exchange offer. The Guidant exchange offer
effectively reduced the weighted average number of shares outstanding by
the number of shares of Lilly Common Stock exchanged for shares of Guidant
Common Stock. This reduction in outstanding shares results in an increase
in earnings per share from continuing operations. Also, earnings per share
from continuing operations for the year ended December 31, 1994 has been
reduced by $.72 to reflect Lilly's acquisition of PCS as if it had
occurred as of January 1, 1994. (See note 2 hereto.)
(2) Represents the adjustments to reflect the impact of the PCS operations for
the pre-acquisition period beginning January 1, 1994 to November 21, 1994,
the acquisition date. These adjustments include the amortization of the
excess purchase price over the book value of the PCS net assets
(goodwill), assumed additional interest expense related to the issuance of
debt for the purchase of PCS and the related tax effect of these
adjustments based on the statutory tax rates in effect during the period.
The goodwill amortization and interest expense adjustments, included in
other income, amounted to $87.2 million and $216.2 million, respectively.
55
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF IMS
The following unaudited pro forma consolidated balance sheet of IMS as of
June 30, 1995, and the unaudited pro forma consolidated statements of
operations of IMS for the six months ended June 30, 1995 and the year ended
December 31, 1994, have been prepared to reflect the effect of the Merger
contemplated by this Proxy Statement Prospectus as well as the acquisition of
the remaining 51% interest of Medical Communication Network, Inc. ("MCN") from
Unihealth America Ventures ("Unihealth"). The MCN acquisition was consummated
on October 20, 1995. The unaudited pro forma consolidated financial
information is based on the historical consolidated financial statements of
IMS adjusted to reflect the investment in IMS by Lilly as well as the MCN
acquisition under the assumptions and adjustments set forth in the Notes to
unaudited pro forma consolidated financial information of IMS.
The unaudited pro forma consolidated balance sheet of IMS assumes that these
transactions occurred on June 30, 1995 and the unaudited pro forma
consolidated income statements of IMS assume these transactions occurred on
January 1, 1994.
The MCN transaction represents the purchase by IMS of the ownership interest
in MCN from Unihealth. The purchase price was $4,350,000 of which $1,900,000
is contingent upon MCN receiving extensions to eight existing Network Services
Agreements with hospitals owned by Unihealth. As a result, the purchase price
reflected in the unaudited pro forma consolidated financial information of IMS
is $2,450,000. Of the total purchase price, Unihealth received $3,350,000 in
cash at closing and $1,000,000 was placed in escrow at a bank. The funding for
this purchase was provided by Lilly through the exercise of a warrant to
purchase 500,000 shares of Series C Preferred Stock for $3,000,000 and an
additional loan to IMS of $1,350,000.
The Lilly transaction is reflected herein based on the terms and conditions
described elsewhere in this Proxy Statement-Prospectus.
The unaudited pro forma consolidated financial information of IMS may not be
indicative of the results that actually would have occurred if these
transactions had occurred on the dates indicated or which may be obtained in
the future. The unaudited pro forma consolidated financial information of IMS
should be read in conjunction with the historical consolidated financial
statements and accompanying notes for IMS.
56
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF IMS
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
JUNE 30, PRO FORMA JUNE 30,
1995 ADJUSTMENTS 1995
----------- ----------- ------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......... $ 1,317,791 $ $ 1,317,791
Contract and other receivables..... 3,102,600 -- 3,102,600
Deposits........................... -- 1,900,000 (1) 1,900,000
Other current assets............... 1,218,184 -- 1,218,184
----------- ------------
Total current assets............. 5,638,575 7,538,575
CONTRACTS RECEIVABLES, long-term por-
tion................................ 1,005,956 -- 1,005,956
EQUIPMENT AND FURNITURE, net......... 4,645,488 -- 4,645,488
EXCESS OF PURCHASE PRICE OVER TANGI-
BLE -- 2,352,655 (1) 91,313,283
NET ASSETS ACQUIRED.................. 88,960,628 (2)
OTHER................................ 814,211 -- 814,211
----------- ------------
$12,104,230 $105,317,513
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $1,377,495 $ -- $ 1,377,495
Deferred contracts payable......... 2,686,837 -- 2,686,837
Other current liabilities.......... 2,186,213 -- 2,186,213
----------- ------------
Total current liabilities........ 6,250,545 6,250,545
LONG-TERM DEFERRED CONTRACT REVENUE.. 712,414 -- 712,414
LONG-TERM DEBT....................... 3,121,378 1,350,000 (1) 4,471,378
OTHER LONG-TERM LIABILITIES.......... 769,389 (97,345)(1) 672,044
SERIES D REDEEMABLE PREFERRED STOCK.. -- 74,260,132 (2) 74,260,132
STOCKHOLDERS' EQUITY:
Series B voting preferred stock.... 2,000,000 (2,000,000)(2) --
Series C preferred stock........... 13,750,000 3,000,000 (1) --
(16,750,000)(2)
Common stock....................... 8,947,591 1,000,000 (1) 18,951,000
16,750,000 (2)
1,400,000 (2)
(9,146,591)(2)
Capital contributions from joint 6,508,230 --
venturers......................... (1,000,000)(1)
(5,508,230)(2)
Accumulated deficit.................. (29,905,317) 29,905,317 (2) --
Less-Stock subscriptions and joint
venturers
contributions receivable............ (50,000) 50,000 (2) --
----------- ------------
Total stockholders' equity....... 1,250,504 -- 18,951,000
----------- ------------
$12,104,230 $105,317,513
=========== ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial
Information of IMS
57
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS OF IMS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
JUNE 30, PRO FORMA JUNE 30,
1995 ADJUSTMENTS 1995
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Network service agreement revenue.. $ 5,436,113 -- $ 5,436,113
Network license agreement revenue.. 1,371,400 -- 1,371,400
Network license service revenue.... 1,122,503 -- 1,122,503
----------- ------------
7,930,016 7,930,016
----------- ------------
COST AND EXPENSES:
Salaries payroll taxes and bene-
fits.............................. 8,477,812 -- 8,477,812
Facilities, general and administra-
tive.............................. 2,430,190 -- 2,430,190
Selling, general and administra-
tive.............................. 3,418,612 120,627 (3) 8,032,783
4,493,544 (4)
----------- ------------
14,326,614 18,940,785
----------- ------------
LOSS FROM OPERATIONS................. (6,396,598) (11,010,769)
----------- ------------
OTHER INCOME (EXPENSES): 17,802 (67,500)(5) (27,198)
22,500 (6)
----------- ------------
17,802 (27,198)
----------- ------------
LOSS BEFORE MINORITY INTEREST IN OP-
ERATIONS OF SUBSIDIARIES............ (6,378,796) (11,037,967)
PROVISION FOR INCOME TAXES........... -- -- --
MINORITY INTEREST IN INCOME FROM OP-
ERATIONS OF SUBSIDIARIES............ (84,868) 19,913 (7) (64,955)
----------- ------------
NET LOSS............................. $(6,463,664) $(11,102,922)
=========== ============
NET LOSS PER COMMON SHARE............ ($1.00) ($0.71)
=========== ============
WEIGHTED AVERAGE COMMON SHARES 6,563,019 15,660,200
OUTSTANDING......................... =========== ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial
Information of IMS
58
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF IMS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
DECEMBER 31, PRO FORMA DECEMBER 31,
1994 ADJUSTMENTS 1994
------------ ----------- -------------
<S> <C> <C> <C>
REVENUES
Network service agreement revenue. $ 7,456,654 -- $ 7,456,654
Network license agreement revenue. 10,057,983 -- 10,057,983
Network license service revenue... 365,726 -- 365,726
----------- -------------
17,880,363 17,880,363
----------- -------------
COSTS AND EXPENSES:
Salaries, payroll taxes and bene-
fits............................. 11,838,793 -- 11,838,793
Facilities and other.............. 4,451,233 -- 4,451,233
Selling, general and administra-
tive............................. 5,848,436 241,254 (3) 15,076,778
8,987,088 (4)
----------- -------------
22,138,462 31,366,804
LOSS FROM OPERATIONS................ (4,258,099) (13,486,441)
----------- -------------
OTHER INCOME (EXPENSES): 159,599 (135,000)(5) 69,599
45,000 (6)
159,599 69,599
----------- -------------
LOSS BEFORE MINORITY INTEREST IN OP-
ERATIONS OF SUBSIDIARIES........... (4,098,500) (13,416,842)
PROVISION FOR INCOME TAXES -- -- --
MINORITY INTEREST IN INCOME FROM OP-
ERATIONS OF SUBSIDIARIES........... (153,281) 58,326 (7) (94,955)
----------- -------------
NET LOSS............................ $(4,251,781) $(13,511,797)
=========== =============
NET LOSS PER COMMON SHARE........... ($0.73) ($0.86)
=========== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................ 6,099,120 15,660,200
=========== =============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial
Information of IMS
59
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF IMS
The unaudited pro forma financial information of IMS was prepared to reflect
the acquisition of IMS by Lilly and the acquisition of MCN by IMS. Lilly's
cost of the acquisition of $75,660,132 has been pushed down to the unaudited
pro forma consolidated financial information of IMS. The identifiable assets
and liabilities of IMS have been reflected at their estimated fair market
values as of June 30, 1995. The excess of the Lilly purchase price over
tangible net assets acquired has been recorded as such on the unaudited pro
forma consolidated balance sheet. The allocation of this asset to identifiable
intangible assets will be completed prior to December 31, 1995. For purposes
of the unaudited pro forma consolidated information, the excess of the
purchase price over the tangible net assets acquired is being amortized over
its estimated useful life of ten years. The purchase of MCN has been accounted
for as a purchase with the net assets acquired reflected at their fair market
values. The excess of the purchase price over the fair value of MCN's tangible
net assets is similarly recorded as excess of purchase price over tangible net
assets acquired and is being amortized over its estimated useful life of ten
years.
(1) Represents the acquisition of MCN's remaining 51% interest, including
the cash funded by Lilly in the form of debt and the purchase of Series C
Preferred Stock, the deposit for the contingent MCN purchase price and the
elimination of MCN's minority interest from the historical Consolidated
Balance Sheet.
(2) Represents the acquisition of IMS by Lilly as contemplated by the
Merger. The purchase price has been pushed down to the financial statements of
IMS. As a result, the assets, liabilities and stockholders' equity associated
with the Lilly acquisition have been adjusted to reflect Lilly's purchase
price. The pro forma adjustments to the Series D Redeemable Preferred Stock
and the amounts included in Stockholder's Equity are described in detail in
the footnotes in the table entitled "CAPITALIZATION OF IMS FOLLOWING THE
MERGER" assuming 100% of the securities are converted.
(3) Represents the amortization of the MCN acquisition excess of purchase
price over tangible net assets acquired calculated as of January 1, 1994, over
its estimated useful life of ten years.
(4) Represents the amortization of the Lilly acquisition contemplated by the
Merger excess of purchase price over tangible net assets acquired calculated
as of January 1, 1994, over its estimated useful life of ten years.
(5) Represents IMS interest expense incurred at a rate of 10% in connection
with the $1,350,000 borrowed from Lilly to complete the MCN acquisition.
(6) Represents earned interest income on the $1,000,000 escrowed deposit at
an assumed annual rate of 4.5%.
(7) Represents the elimination of historical minority interest recorded by
IMS for the earnings of MCN for the periods presented.
60
<PAGE>
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 IMS to
manage the
61
<PAGE>
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.
62
<PAGE>
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.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------------------
1993 1994 1994 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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% -- 0.0% -- 0.0%
------- ----- ------- ----- ------- ----- ------- -----
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)% -- 0.0% -- 0.0% -- 0.0%
Other, net............. (33) (.3)% (65) (.4)% (31) (.3)% -- 0.0%
------- ----- ------- ----- ------- ----- ------- -----
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)%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
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.
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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.
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
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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.
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.
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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 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.
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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.
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
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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 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.
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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, 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
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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.
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
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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 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,
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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.
IMS MEDACOM Network Locations
IMS MEDACOM(R) Networks are currently serving the following market areas:
<TABLE>
<S> <C> <C>
. 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) . 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)
</TABLE>
- --------
(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 20% 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 30,400 at September 30, 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
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<PAGE>
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.
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
areas of interest and ownership of present joint venture participants are
summarized as follows:
<TABLE>
<CAPTION>
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
- ------------------------------- ---------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Illinois Medical
Information Network,
Inc. .................. 68% HFN, Inc. (26%); JV Corporation Illinois, 2
Swedish American (Illinois) Indiana counties,
Hospital (5%); and portion of
Alexian Brothers Eastern Iowa
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
(IMS-NET of Arkansas,
Inc.).................. 51% Baptist Medical JV Corporation Arkansas
System (Baptist) (Arkansas)
IMS-NET of Arizona Joint
Venture, Ltd. ......... 50% BC-BS of Arizona, JV Ltd. Arizona
Inc. (IMS-NET of Partnership
Arizona, Inc.) (Arizona)
IMS-NET of Central
Florida, Inc. ......... 51% Adventist Health JV Corporation Orlando and
System/Sunbelt (Colorado) central Florida
Indiana Medical
Communication Network
LLC.................... 51% Methodist Hospital JV Limited Indiana (except 2
of Indiana, Inc. Liability Company counties)
(IMS) (Colorado)
Minnesota Medical
Communication Network
LLC.................... 90% Blue Cross and Blue JV Limited Minnesota
Shield of Minnesota Liability Company
(IMS) (Colorado)
</TABLE>
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.
In October 1995, IMS acquired the 51% interest which it did not own in a
joint venture corporation organized in 1991 to develop and operate a network
in and around Los Angeles. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION OF IMS" for a description of the terms of the acquisition. As a
result of the acquisition, the venture was terminated, the corporation became
a wholly owned subsidiary of IMS, and IMS assumed control of the network. IMS
has not initiated any venture relationships since 1993 and has no plans to do
so in the future. IMS may negotiate to increase its ownership interest in the
above entities from time to time.
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
73
<PAGE>
technologically competent, functionally flexible and expandable, ubiquitous in
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.
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.
74
<PAGE>
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 IBM, Physicians Computer
Network, Shared Medical Systems, Meditech and AmeriTech and other regional
Bell operating companies. 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. IMS
believes that its networks allow users to communicate with more physicians and
more hospitals using a bi-directional standardized communications format than
any other commercial provider of similar communications in the medical field.
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
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****
---------------- ------------ ---------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
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......... 150,382(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...... 1,409,568(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
</TABLE>
- --------
* 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.
**** The number of shares of Common Stock or Series B Preferred Stock
outstanding used in calculating the percentage for each listed person or
entity includes the shares of Common Stock underlying options and
warrants and shares issuable upon the conversion of Series B Preferred
Stock held by person or entity but excludes shares of Common Stock
underlying options or warrants of held by any other person or entity.
(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.
(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
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<PAGE>
157,050 shares underlying warrants held by the Charles I. Brown Charitable
Remainder Unitrust and 2,000 shares underlying warrants 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 73,811 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 71,818 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 3,500,000 shares of common stock underlying Series C Preferred
Stock. 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.
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<PAGE>
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
President, Chief Executive Officer and
Kevin R. Green............. 40 Director
Executive Vice President, Chief Financial
Charles I. Brown........... 63 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
Senior Vice President -- Corporate Services
Donald S. Chenoweth........ 48 and Assistant Secretary
Senior Vice President -- Development and
Joseph G. Ferguson, Sr. ... 44 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
Robert Ashworth............ 53 Director
Michael S. Hunt, Ph.D...... 49 Director
Kevin E. Moley............. 48 Director
Thomas Trainer............. 48 Director
</TABLE>
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 and 1976, respectively, 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, 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.
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<PAGE>
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 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
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<PAGE>
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.
ROBERT ASHWORTH will serve as a director of the Company following the
Merger. Mr. Ashworth has served as Executive Vice President and Chief
Information Officer of PCS since 1989. Prior to joining PCS, Mr. Ashworth was
Vice President and General Manager, Information Technologies Division, for
McKesson Corporation. Mr. Ashworth completed his undergraduate studies in
Mathematics at the University of Washington, Seattle, Washington, and is a
graduate of the summer executive program at Stanford University, Stanford,
California.
MICHAEL S. HUNT has served as a director of the Company since 1994. Since
1994, Dr. Hunt has been the Vice President, North American Business
Development for Lilly. From 1993 to 1994, Dr. Hunt served as Vice President of
Pharmaceutical Strategic Planning and Japan Business Planning for Lilly. Dr.
Hunt joined Lilly in 1974 and had increasing responsibilities until he was
appointed Vice President of Finance and Treasurer in 1985. Dr. Hunt is a
member of the Board of Directors for Circle Income Shares, and the
Indianapolis Symphony Orchestra Financing. Dr. Hunt received a bachelor of
arts 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
80
<PAGE>
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.
THOMAS TRAINER will serve as a director of the Company following the Merger.
Mr. Trainer serves as the Vice President, Information Technology, and Chief
Information Officer of Lilly. Prior to joining Lilly, he had served as Vice
President and Chief Information Officer of Reebok International Ltd. Prior to
joining Reebok, he was Senior Vice President of Operations of A.C. Nielson Co.
81
<PAGE>
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
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION OTHER SECURITIES
------------------- ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
- --------------------------- ---- ---------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Kevin R. Green(1)........ 1994 124,999.92 25,000(2) -- 100,000
President, Chief
Executive Officer 1993 123,333.16 168,750(3) -- --
1992 92,907.87 -- --
Charles I. Brown......... 1994 124,999.92 25,000(2) -- 100,000
Executive Vice President
and Chief Financial
Officer 1993 108,333.39 -- -- --
1992 91,666.73 -- -- --
James T. Murphy.......... 1994 141,666.64 25,000(2) -- 100,000
Executive Vice
President -- Corporate
Business Development 1993 108,333.19 -- -- --
1992 72,475.83 25,000 -- --
Donald S. Chenoweth...... 1994 124,999.92 25,000 -- 100,000
Senior Vice President --
Corporate Services and
Assistant Secretary 1993 108,333.18 -- -- --
1992 99,230.71 10,000 -- --
William B. Hein, Sr...... 1994 124,999.92 25,000(2) -- 100,000
Senior Vice President --
Sales 1993 133,333.39 104,500(4) -- --
1992 74,759.70 -- -- --
Kevin E. Moley(1)........ 1994 -- -- -- --
Director 1993 -- -- -- --
1992 -- -- -- --
John A. McChesney(1)..... 1994 199,999.02 166,478(5) -- 79,302
Director 1993 99,999.84 -- -- --
1992 100,640.88 -- -- --
</TABLE>
- --------
(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 $87,500.
(5) Paid in 1994 for services in prior years.
82
<PAGE>
OPTION GRANTS TABLE
The following table provides information as to options granted to the Named
Executive Officers during the fiscal year ended December 31, 1994. No stock
appreciation rights have ever been granted by the Company.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE
OPTIONS/WARRANTS FISCAL YEAR PRICE EXPIRATION
NAME GRANTED 1994 ($/SH) DATE
---- ---------------- --------------- -------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
- --------
(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.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS AT OPTIONS/WARRANTS AT
SHARES ACQUIRED VALUE DECEMBER 31, 1994 DECEMBER 31, 1994
NAME ON EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE*
---- --------------- -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
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-
</TABLE>
- --------
* 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
83
<PAGE>
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 in June 1995 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 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 $250,000 and
three directors (Robert Brice, David Holbrooke and Charles Brown) each
advanced $75,000 to the Company. These advances bore interest at prime plus 3%
annually, were secured by assignments of cash flows, and were repaid in 1993.
84
<PAGE>
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, 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.
The combined financial statements of PCS for each of the three years in the
period ended March 31, 1994, included in Lilly's Current Report (Form 8-K/A)
dated November 29, 1994, and incorporated by reference in this registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have
been so incorporated in reliance upon the report of such firm given upon their
authority 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
<PAGE>
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/A and Form 8-K dated November 29,
1994 and June 12, 1995, respectively.
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
<PAGE>
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 IN THE PERIOD ENDED DECEMBER 31, 1994
AND FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Operations...................................... F-6
Consolidated Statements of Stockholders' Equity............................ F-7
Consolidated Statements of Cash Flows...................................... F-9
Notes to Consolidated Financial Statements................................. F-10
</TABLE>
F-1
<PAGE>
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
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-3
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1995
1994 (UNAUDITED)
------------ -------------
<S> <C> <C>
ASSETS
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.................................. 333,556 994,244
----------- -----------
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
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-4
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1995
1994 (UNAUDITED)
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
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
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-5
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED DECEMBER 31 ENDED JUNE 30
------------------------- ------------------------
1993 1994 1994 1995
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
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
(Note 2)................. $ (1.05) $ (0.73) $ (0.48) $ (1.00)
=========== ============ =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING....... 5,868,577 6,099,120 6,008,509 6,563,019
=========== ============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
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)
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS
SERIES B SERIES C CAPITAL AND JOINT
PREFERRED STOCK PREFERRED STOCK COMMON STOCK CONTRIBUTIONS VENTURES
-------------------- -------------------- ---------------------- ACCUMULATED FROM JOINT CONTRIBUTIONS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT VENTURES RECEIVABLE
--------- ---------- --------- ---------- ---------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31,
1992............ 2,000,000 $2,000,000 -- $ -- 5,783,368 $5,612,143 $(13,169,152) $2,285,100 $(208,875)
Issuance of
common stock at
$5.00 per share
including
accretion to put
price of $6.00
per share....... -- -- -- -- 40,000 240,000 (40,000) -- --
Issuance of
common stock at
$5.00 per share. -- -- -- -- 50,000 250,000 -- -- --
Issuance of
common stock at
$3.50 per share. -- -- -- -- 18,500 64,750 -- -- --
Exercise of
common stock
purchase
warrants at
$1.50 per share. -- -- -- -- 62,500 93,750 -- -- --
Exercise of
employee common
stock purchase
options at $2.50
per share....... -- -- -- -- 16,500 41,250 -- -- --
Issuance of
Series C
preferred stock
at $4.00 per
share........... -- -- 1,250,000 5,000,000 -- -- -- -- --
Stock
subscriptions
receivable
subsequently
collected....... -- -- -- -- -- -- -- -- 28,875
Joint venturers
contributions
receivable
subsequently
collected....... -- -- -- -- -- -- -- -- 50,000
Joint venturers
contributions... -- -- -- -- -- -- -- 4,073,130 --
Issuance of
common stock at
$5.00 per share. -- -- -- -- 45,000 225,000 -- -- --
Repurchase and
retirement of
common stock at
put price of
$6.00 per share. -- -- -- -- (45,000) (225,000) (45,000) -- --
Net loss........ -- -- -- -- -- -- (5,935,720) -- --
--------- ---------- --------- ---------- ---------- ---------- ------------ ---------- ---------
BALANCES,
December 31,
1993............ 2,000,000 $2,000,000 1,250,000 $5,000,000 $5,970,868 $6,301,893 $(19,189,872) $6,358,230 $(130,000)
========= ========== ========= ========== ========== ========== ============ ========== =========
<CAPTION>
TOTAL
------------
<S> <C>
BALANCES,
December 31,
1992............ $(3,480,784)
Issuance of
common stock at
$5.00 per share
including
accretion to put
price of $6.00
per share....... 200,000
Issuance of
common stock at
$5.00 per share. 250,000
Issuance of
common stock at
$3.50 per share. 64,750
Exercise of
common stock
purchase
warrants at
$1.50 per share. 93,750
Exercise of
employee common
stock purchase
options at $2.50
per share....... 41,250
Issuance of
Series C
preferred stock
at $4.00 per
share........... 5,000,000
Stock
subscriptions
receivable
subsequently
collected....... 28,875
Joint venturers
contributions
receivable
subsequently
collected....... 50,000
Joint venturers
contributions... 4,073,130
Issuance of
common stock at
$5.00 per share. 225,000
Repurchase and
retirement of
common stock at
put price of
$6.00 per share. (270,000)
Net loss........ (5,935,720)
------------
BALANCES,
December 31,
1993............ $ 340,251
============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
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)
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS
SERIES B SERIES C CAPITAL AND JOINT
PREFERRED STOCK PREFERRED STOCK COMMON STOCK CONTRIBUTIONS VENTURES
-------------------- --------------------- -------------------- ACCUMULATED FROM JOINT CONTRIBUTIONS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT VENTURES RECEIVABLE
--------- ---------- --------- ----------- --------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31,
1993............ 2,000,000 $2,000,000 1,250,000 $ 5,000,000 5,970,868 $6,301,893 $(19,189,872) $6,358,230 $(130,000)
Issuance of
Series C
preferred stock
at $5.00 per
share........... -- -- 1,000,000 5,000,000 -- -- -- -- --
Exercise of
Series C
preferred stock
purchase
warrants at
$5.00 per share. -- -- 375,000 1,875,000 -- -- -- -- --
Exercise of
common stock
purchase
warrants at
$2.50 per share. -- -- -- -- 122,000 305,000 -- -- --
Issuance of
common stock at
$3.50 per share. -- -- -- -- 37,500 131,250 -- -- --
Issuance of
common stock at
$5.00 per share. -- -- -- -- 409,000 2,045,000 -- -- --
Joint venturers
contributions... -- -- -- -- -- -- -- 150,000 --
Exercise of
common stock
purchase
warrants at
$3.50 per share. -- -- -- -- 15,000 52,500 -- -- --
Exercise of
employee common
stock purchase
options at $3.50
per share....... -- -- -- -- 236 826 -- -- --
Exercise of
employee common
stock purchase
options at $4.00
per share....... -- -- -- -- 126 504 -- -- --
Joint venturers
contributions
receivable
subsequently
collected....... -- -- -- -- -- -- -- -- 50,000
Net loss........ -- -- -- -- -- -- (4,251,781) -- --
--------- ---------- --------- ----------- --------- ---------- ------------ ---------- ---------
BALANCES,
December 31,
1994............ 2,000,000 2,000,000 2,625,000 11,875,000 6,554,730 8,836,973 (23,441,653) 6,508,230 (80,000)
UNAUDITED:
Issuance of
Series C
preferred stock
at $5.00 per
share........... -- -- 375,000 1,875,000 -- -- -- -- --
Exercise of
common stock
purchase
warrants at
$5.00 per share. -- -- -- -- 1,000 5,000 -- -- --
Exercise of
employee common
stock purchase
options at $4.00
per share....... -- -- -- -- 1,213 4,852 -- -- --
Exercise of
employee common
stock purchase
options at $3.50
per share....... -- -- -- -- 219 766 -- -- --
Issuance of
common stock to
purchase
minority
interest in IMS-
Net of Kansas
City, Inc....... -- -- -- -- 20,000 100,000 -- -- --
Joint venturers
contributions
receivable
subsequently
collected....... -- -- -- -- -- -- -- -- 30,000
Net loss........ -- -- -- -- -- -- (6,463,664) -- --
--------- ---------- --------- ----------- --------- ---------- ------------ ---------- ---------
BALANCES, June
30, 1995
(Unaudited)..... 2,000,000 $2,000,000 3,000,000 $13,750,000 6,577,162 $8,947,591 $(29,905,317) $6,508,230 $ (50,000)
========= ========== ========= =========== ========= ========== ============ ========== =========
<CAPTION>
TOTAL
------------
<S> <C>
BALANCES,
December 31,
1993............ $ 340,251
Issuance of
Series C
preferred stock
at $5.00 per
share........... 5,000,000
Exercise of
Series C
preferred stock
purchase
warrants at
$5.00 per share. 1,875,000
Exercise of
common stock
purchase
warrants at
$2.50 per share. 305,000
Issuance of
common stock at
$3.50 per share. 131,250
Issuance of
common stock at
$5.00 per share. 2,045,000
Joint venturers
contributions... 150,000
Exercise of
common stock
purchase
warrants at
$3.50 per share. 52,500
Exercise of
employee common
stock purchase
options at $3.50
per share....... 826
Exercise of
employee common
stock purchase
options at $4.00
per share....... 504
Joint venturers
contributions
receivable
subsequently
collected....... 50,000
Net loss........ (4,251,781)
------------
BALANCES,
December 31,
1994............ 5,698,550
UNAUDITED:
Issuance of
Series C
preferred stock
at $5.00 per
share........... 1,875,000
Exercise of
common stock
purchase
warrants at
$5.00 per share. 5,000
Exercise of
employee common
stock purchase
options at $4.00
per share....... 4,852
Exercise of
employee common
stock purchase
options at $3.50
per share....... 766
Issuance of
common stock to
purchase
minority
interest in IMS-
Net of Kansas
City, Inc....... 100,000
Joint venturers
contributions
receivable
subsequently
collected....... 30,000
Net loss........ (6,463,664)
------------
BALANCES, June
30, 1995
(Unaudited)..... $ 1,250,504
============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-8
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31 ENDED JUNE 30
------------------------ ------------------------
1993 1994 1994 1995
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
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)
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 preferred
stock (Note 8)........... $ 4,500,000 $ -- $ -- $ --
=========== =========== =========== ===========
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 interest
in subsidiary............ $ -- $ -- $ -- $ 100,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-9
<PAGE>
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 and 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.
(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.
F-10
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
IMS and the following subsidiaries:
<TABLE>
<CAPTION>
IMS OWNERSHIP INTEREST
AS OF DECEMBER 31
-----------------------------
SUBSIDIARY 1993 1994 (G)
---------- ----------- -------------
<S> <C> <C>
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, Ltd........ 50(C) 50(C)
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. ("CHCN,
L.P.")...................................... (E) (E)
IMS-Network of Colorado, Ltd................. (B) (B)
IMS-Net of Illinois, Inc....................... 100 100
Illinois Medical Information Network, Inc.... 68(C) 68(C)
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 Network, LLC... 90 90
</TABLE>
- --------
(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 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.
F-11
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 paid to the Company in connection with the
formation of consolidated subsidiary entities are recorded as capital
contributions from joint venturers. In 1993, four venturers paid $4,073,130 in
such fees and in 1994 one venturer paid $150,000, relating to a joint venture
commenced in 1993.
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.
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 Common Share
Net loss per common share is computed based upon net loss increased to
reflect undeclared preferred stock dividends at an annual rate of $200,000 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.
F-12
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Subsequently, an additional $5,850,000 in
varying increments was received from Eli Lilly 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 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.
F-13
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
(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:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
<S> <C>
Current:
Accrued vacation........................................ $ 93,600
-----------
Current deferred tax assets........................... 93,600
Noncurrent:
Share in losses from joint ventures/partnerships........ $ 207,700
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.................... 4,336,400
-----------
Total net deferred tax assets before valuation
allowance............................................ 4,430,000
Valuation allowance....................................... (4,430,000)
-----------
Net deferred tax assets................................... $ --
===========
</TABLE>
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.
F-14
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
------------------------
1993 1994
----------- -----------
<S> <C> <C>
Federal income tax benefit computed at the statutory
rate................................................ $(2,018,100) $(1,445,600)
Increase (decrease) as a result of Joint venture
capital contributions treated as income for tax
reporting purposes.................................. 1,384,800 51,000
Other................................................ (48,400) 37,100
Valuation allowance.................................. 681,700 1,357,500
----------- -----------
Effective taxes...................................... $ -- $ --
=========== ===========
</TABLE>
(5) LONG-TERM DEBT
Long-term debt is comprised of the following at December 31, 1994 and June
30, 1995:
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1994 1995
--------- -----------
(UNAUDITED)
<S> <C> <C>
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
========= ==========
</TABLE>
F-15
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31 JUNE 30
----------- ----------
<S> <C> <C> <C>
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
======== ==========
</TABLE>
(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 a joint venture agreement with the Company, Blue Cross and Blue Shield
of Arizona, Inc. ("BCBSAZ"), as limited partner in the joint venture, has the
right to 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
BCBSAZ at any time until three years and 120 days after commencement of the
initial public offering of equity securities of the Company.
Obligation to Fund Joint Ventures
The Company has agreed to fund operating cash shortfalls of four networks
under the terms of four joint venture agreements. At December 31, 1994, the
aggregate net amount of advances to the venture entities was $403,620. In
management's opinion these potential future funding obligations will not have
a material adverse effect on the Company's financial position.
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-16
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under noncancelable operating lease agreements
as of December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995........................................................... $ 990,198
1996........................................................... 880,812
1997........................................................... 671,552
1998........................................................... 275,835
1999........................................................... 131,280
Thereafter..................................................... 4,237
----------
Total........................................................ $2,953,914
==========
</TABLE>
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.
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.
F-17
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 quarterly cumulative
dividends (equal to 10% of the par value or $.10 per share per annum).
Cumulative 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. The undeclared and unpaid dividends would increase the
net loss to the common stockholders by $200,000 for each of the years ended
December 31, 1993, and 1994 and by $100,000 for the six month periods ended
June 30, 1994 and 1995. In the event of liquidation, holders of Series B will
be entitled to a liquidation preference of $1.00 per share plus accumulated
unpaid dividends. At December 31, 1994 the Company was not in compliance with
certain reporting covenants of the Series B Preferred Stock Agreement which
require reporting of quarterly financial information to holders. In the
opinion of management, such non-compliance will have no material adverse
consequence to the Company.
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 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.
F-18
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
-------- --------------
<S> <C> <C>
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
========
</TABLE>
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 the remaining
warrants to purchase 875,000 shares of Series C for $4,875,000.
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.
F-19
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity during 1993 and 1994, and the first six months in 1995
for the 1986 Plan is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
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
=========
</TABLE>
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 year end, 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:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
------- --------------
<S> <C> <C>
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
=======
</TABLE>
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
year end.
F-20
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
(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-21
<PAGE>
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:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
---- -------------
<S> <C>
TRANS-IMS CORPORATION.......................................... Colorado
INTEGRATED MEDICAL SYSTEMS, INC. .............................. Colorado
</TABLE>
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
A-1
<PAGE>
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:
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 ($1.00) per share plus accrued and unpaid
dividends (the "Liquidation Value").
2. Dividends. The Series B Preferred Stock shall earn cumulative
dividends at a rate of ten percent (10%) of the Par Value (i.e., ten
cents ($.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.
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 $.01 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
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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.
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 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
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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 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
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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.
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 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
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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 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 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
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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.
(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 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
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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.
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.
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.
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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.
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
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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.
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(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 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); 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
B-2
<PAGE>
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
(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 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:
B-3
<PAGE>
(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. 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.
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;
B-4
<PAGE>
(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);
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.
B-5
<PAGE>
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.
B-6
<PAGE>
[SIGNATURE PAGE FOR HOLDER]
_____________________________________
(name of Holder)
_____________________________________
(signature of Holder)
Address:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------------
RIGHT RIGHT
TO ACQUIRE TO ACQUIRE
OWNED UNDER OPTIONS UNDER WARRANTS
----- ------------- --------------
<S> <C> <C> <C>
Common Stock.................................
Series B Preferred Stock.....................
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE ACQUIRED IN MERGER
----------------------------------
OWNED UNDER OPTIONS UNDER WARRANTS
----- ------------- --------------
<S> <C> <C> <C>
Series D Preferred Stock.....................
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
SERIES D PREFERRED STOCK
SUBJECT TO PUT/CALL
----------------------------------
OWNED UNDER OPTIONS UNDER WARRANTS
----- ------------- --------------
<S> <C> <C> <C>
Series D Preferred Stock.....................
</TABLE>
B-7
<PAGE>
[SIGNATURE PAGE FOR LILLY AND IMS]
Eli Lilly and Company
By __________________________________
Integrated Medical Systems, Inc.
By __________________________________
B-8
<PAGE>
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
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
B-9
<PAGE>
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 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]
B-10
<PAGE>
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 __________________________________
B-11
<PAGE>
ATTACHMENT 1
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS*# SHARES BEING PURCHASE
OF HOLDER SOLD PRICE
------------------ ------------ --------
<S> <C> <C>
</TABLE>
- --------
* Address to which payment should be mailed
# [Any special delivery instructions to be noted here]
B-12
<PAGE>
EXHIBIT 2
CALL EXERCISE CERTIFICATE
Eli Lilly and Company ("Lilly") hereby certifies to , as Agent under the
Escrow Agreement dated , 1995 as follows:
1. Lilly has exercised its Call Right pursuant to Section 2 of the
Put/Call Agreement, dated , 1995 (the "Agreement"), as specified on
Attachment 1 hereto;
2. Such exercise has not been revoked;
3. The number of Subject Shares being purchased from each Holder pursuant
to such exercise is specified on Attachment 1 hereto, and the aggregate
number of Subject Shares being purchased from 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 purchased from
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
a Holder's instructions) 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______________________________
B-13
<PAGE>
ATTACHMENT 1
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS*# SHARES BEING PURCHASE
OF HOLDER PURCHASED PRICE
------------------ ------------ --------
<S> <C> <C>
</TABLE>
- --------
* Address to which payment should be mailed
# [Any special delivery instructions to be noted here]
B-14
<PAGE>
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").
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
C-1
<PAGE>
available to us, and financial, stock market and other conditions and
circumstances existing and disclosed to us, as of the date hereof.
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 for
the information of the Company (including its Board of Directors) in its
evaluation of the proposed Merger. 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.
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.
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<PAGE>
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
(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:
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(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.
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
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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
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;
(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.
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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 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.
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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, 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
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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.
(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 corporations 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.
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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.
"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).
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"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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
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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 --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.
7.1* --Liquidation Preference Opinion of Hopper and Kanouff, P.C. (included
in Exhibit 5.2)
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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.
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.
10.18+ --Joint Venture Agreement, dated May 15, 1992, with HFN, Inc.
10.19+ --Shareholder's Agreement, dated May 31, 1992, with Adventist Health System.
10.20+ --Joint Venture Limited Partnership Agreement, dated June 30, 1992, with Blue Cross
and Blue Shield of Arizona, Inc.
10.21+ --Operating Agreement for Indiana Medical Communications Network, L.L.C., dated
April 10, 1993.
10.22* --Operating Agreement for Minnesota Medical Communications dated November 7, 1993.
10.23* --Stock Purchase and Termination Agreement, dated September 30, 1995, with Unihealth
America Ventures.
10.24+ --Promissory Note, dated September 25, 1995 between Lilly and IMS.
10.25+ --Promissory Note, dated October 17, 1995 between Lilly and IMS.
10.26+ --Promissory Note, dated October 25, 1995 between Lilly and IMS.
10.27* --Form of Severance Agreement with certain employees of IMS.
10.28* --Form of Letter of Transmittal and Form of Election to accompany Certificates for
shares of Common Stock of IMS.
10.29* --Form of Letter of Transmittal and Form of Election to accompany Certificates for
Shares of Series B Preferred Stock of IMS.
10.30* --Form of Letter of Transmittal, Form of Election and Exercise Form to make
Elections with respect to Options to Purchase Common Stock of IMS.
10.31* --Form of Letter of Transmittal, Form of Election and Exercise Form to make
Elections with respect to Warrants to Purchase Common Stock of IMS.
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 Deloitte & Touche.
23.4 --Consent of Dewey Ballantine (included in Exhibits 5.1 and 8.1 hereto).
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
23.5 --Consent of Hopper and Kaunoff, P.C. (included in Exhibits 5.2 and 7.1 hereto).
23.6 --Consent of Cleary, Gottlieb, Steen & Hamilton (included in Exhibit 8.2 hereto).
23.7+ --Consent of Smith Barney Inc.
23.8* --Consent of Robert Ashworth
23.9* --Consent of Thomas Trainer
</TABLE>
- --------
* To be filed by amendment.
+ Filed herewith.
(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 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.
II-4
<PAGE>
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.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;"
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose 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.
(3) To remove form registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF INDIANAPOLIS,
STATE OF INDIANA, ON OCTOBER 26, 1995.
Eli Lilly and Company
By /s/ Randall L. Tobias
-----------------------------------
RANDALL L. TOBIAS,
CHAIRMAN OF THE BOARD OF
DIRECTORS AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Randall L. Tobias Chairman of the October 26, 1995
- ------------------------------------ Board of Directors
RANDALL L. TOBIAS and Chief
Executive Officer
and a Director
(principal
executive officer)
/s/ Sidney Taurel* Executive Vice
- ------------------------------------ President, and a
SIDNEY TAUREL Director
(principal
financial officer)
/s/ Arnold C. Hanish* Chief Accounting
- ------------------------------------ Officer (principal
ARNOLD C. HANISH accounting
officer)
/s/ Steven C. Beering, M.D.* Director
- ------------------------------------
STEVEN C. BEERING, M.D.
/s/ James W. Cozad* Director
- ------------------------------------
JAMES W. COZAD
/s/ Alfred G. Gilman, M.D. Ph.D.* Director
- ------------------------------------
ALFRED G. GILMAN, M.D., PH.D.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Karen N. Horn, Ph.D* Director
- -----------------------------------------
KAREN N. HORN, PH.D
/s/ J. Clayburn La Force Jr., Ph.D.* Director
- -----------------------------------------
J. CLAYBURN LA FORCE JR., PH.D.
/s/ Kenneth L. Lay, Ph.D.* Director
- -----------------------------------------
KENNETH L. LAY, PH.D.
/s/ Franklyn G. Prendergast, M.D., Ph.D.* Director
- -----------------------------------------
FRANKLYN G. PRENDERGAST, M.D., PH.D.
/s/ Kathi P. Seifert* Director
- -----------------------------------------
KATHI P. SEIFERT
/s/ August M. Watanabe, M.D.* Director
- -----------------------------------------
AUGUST M. WATANABE, M.D.
/s/ Alva O. Way* Director
- -----------------------------------------
ALVA O. WAY
/s/ Richard D. Wood* Director
- -----------------------------------------
RICHARD D. WOOD
</TABLE>
*By: /s/ Randall L. Tobias
-----------------------------------
RANDALL L. TOBIAS ATTORNEY-IN-FACT
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF GOLDEN, STATE OF
COLORADO, ON OCTOBER 26, 1995.
Integrated Medical Systems, Inc.
By /s/ Kevin R. Green
----------------------------------
KEVIN R. GREEN
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Kevin R. Green President and Chief October 26, 1995
- ------------------------------------- Executive Officer
KEVIN R. GREEN and a Director
(principal
executive officer)
/s/ Charles I. Brown Chief Financial October 26, 1995
- ------------------------------------- Officer and a
CHARLES I. BROWN Director (principal
financial officer)
/s/ Richard J. Smeltz* Vice President--
- ------------------------------------- Finance (principal
RICHARD J. SMELTZ accounting officer)
/s/ James A. Larson* Director
- -------------------------------------
JAMES A. LARSON
/s/ Alan S. Danson* Director
- -------------------------------------
ALAN S. DANSON
/s/ John W. Hanes, Jr.* Director
- -------------------------------------
JOHN W. HANES, JR.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David R. Holbrooke* Director
- -------------------------------------
DAVID R. HOLBROOKE
/s/ Michael S. Hunt* Director
- -------------------------------------
MICHAEL S. HUNT
/s/ John A. McChesney* Director
- -------------------------------------
JOHN A. MCCHESNEY
/s/ Kevin E. Moley* Director
- -------------------------------------
KEVIN E. MOLEY
/s/ James T. Murphy* Director
- -------------------------------------
JAMES T. MURPHY
</TABLE>
By /s/ Charles I. Brown
-----------------------------
CHARLES I. BROWN
ATTORNEY-IN-FACT
II-9
<PAGE>
Exhibit 10.18
JOINT VENTURE AGREEMENT
-----------------------
THIS JOINT VENTURE AGREEMENT is made and entered into as of May 15,
1992, by and between HFN, Inc., an Illinois corporation ("HFN"), Integrated
Medical Systems, Inc., a Colorado corporation ("IMS"), IMS-NET of Illinois,
Inc., an Illinois corporation ("IMS-NET"), and HFN Information Systems, Inc., an
Illinois corporation ("HFN Info") (HFN, IMS-NET and HFN Info shall sometimes be
collectively referred to herein as the "Shareholders" and individually referred
to as a "Shareholder"), and Illinois Medical Information Network, Inc., an
Illinois corporation to be formed hereunder (the "Company").
W I T N E S S E T H:
-------------------
WHEREAS, HFN markets an array of health care services to members of
the health care community and has extensive contacts and good will with various
members of the health care community, including hospitals;
WHEREAS, IMS establishes and operates medical information networks
within health care communities using proprietary technology and business rights;
WHEREAS, IMS has established IMS-NET, a wholly-owned subsidiary of
IMS, and has transferred to IMS-NET the know-how and certain rights to enable
IMS-NET to establish and operate medical information networks in the State of
Illinois and certain contiguous areas (as defined herein); and
WHEREAS, HFN, IMS-NET and HFN Info (an affiliate of HFN) desire to
organize the Company under the laws of the State of Illinois for the purpose of
owning, operating and marketing a medical information network or networks in the
Exclusive Territory (as hereinafter defined), and to operate the Company in
accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the recitals, covenants,
conditions and promises contained herein, the parties agree as follows:
1. Definitions. For purposes of this Agreement and in addition to
-----------
the terms otherwise defined herein, the following terms shall have the meanings
set forth below:
<PAGE>
1.1 Agreement. "Agreement" means this document dated on the day and
---------
year appearing in the opening paragraph hereof and all Exhibits attached hereto,
as amended from time to time.
1.2 Closing. "Closing" shall mean the closings of the various
-------
purchases and sales of the Stock, as hereafter defined, and related transactions
pursuant to Paragraphs 2 and 3 of this Agreement.
1.3 ComCenter Hardware. "ComCenter (Communications Center) Hardware"
------------------
refers to the Network-owned, message switching computer(s) on which the
ComCenter Software runs. Such hardware is part of the Digital Equipment
Corporation ("DEC") VAX family of computers.
1.4 Com-Center(TM) Software. The "Com-Center(TM) Software" shall
-----------------------
mean the computer software, as defined on Exhibit A attached to the Software
License Agreement (as hereafter defined), developed and owned by IMS, and which
shall be licensed to the Company pursuant to the covenants, terms and conditions
of the Software License Agreement, that supports and facilitates the
transmission of data, text, voice, clinical graphics and diagnostic images over
a telephone network which resides on and operates the ComCenter Hardware and
includes the Network Interface.
1.5 Exclusive Territory. "Exclusive Territory" shall mean (a) the
-------------------
State of Illinois with the exception of the counties in northwestern Illinois
which constitute the territory of the Northern Illinois Health Care Network
which operates pursuant to a nonexclusive license of the software to which the
Software License Agreement relates, provided that the Software License Agreement
grants a nonexclusive license in such counties, except as to certain hospitals
in such counties which hold exclusive rights thereto, (b) Lake and Porter
Counties in Indiana, and (c) certain collar cities to the State of Illinois,
including, without limitation, Dubuque and Quad cities, but excluding Saint
Louis.
1.6 IMS-Net(TM) Software. The "IMS-Net(TM) Software" is a series of
--------------------
independent but interrelated computer programs, which includes the PC-Com(TM)
Software, the Com-Center(TM) Software and Network Interface, which interacts
with a central processor and remotely located personal computers and their
operating systems to form a complete and functioning network by which medical
and other information and data, text, voice, clinical graphics and diagnostic
images can be transmitted, shared, stored and accessed randomly over a dial-up
telephone network. The IMS-Net(TM) Software includes, but is not limited to,
computer program listings, user manuals, functional specifications, technical
documentation, source code, object code, related procedure codes and tangible
- 2 -
<PAGE>
media upon which the computer programs are recorded. The IMS-Net(TM) Software
performs the functions described on Exhibit A attached to the Software License
Agreement and shall be licensed to the Company pursuant to the covenants, terms
and conditions of the Software License Agreement.
1.7 Local Sponsor. "Local Sponsor" shall mean any individual or
-------------
entity desiring to use any portion of the Network, as hereafter defined, to
receive and/or disseminate information from or to Network users and who or which
agrees to pay fees to the Company for the right to use the Network.
1.8 National Sponsor. "National Sponsor" shall mean any health care
----------------
related entity desiring to use the Network and any other network operated by an
affiliate of IMS or which uses IMS-Net(TM) Software to receive and/or
disseminate information from or to Network users, and which agrees to pay fees
to the Company for the right to use the Network.
1.9 Network. "Network" shall mean the electronic medical information
-------
network or networks to be owned and operated by the Company and/or sublicensees,
which utilizes IMS-Net(TM) Software to permit messages, data, voice, facsimile,
medical images and clinical graphics to be transmitted in an "open architecture"
format (i.e., all users can secure electronic access to the Network for a user
----
fee--thus "open" architecture) between and among physicians, hospitals, clinical
laboratories, pharmacies, managed care organizations, insurance companies, other
payors, employers and other members of the health care community.
1.10 Network Interface. "Network Interface" refers to portions of
-----------------
IMS-Net(TM) Software which automate or partially automate message transmission
and which shall be used to interface the Company's computer system(s) to the
Network.
1.11 PC-Com(TM) Software. "PC Com Software" shall mean the computer
-------------------
software, as defined on Exhibit A attached to the Software License Agreement,
developed and owned by IMS, and which shall be licensed to the Company pursuant
to the covenants, terms and conditions of the Software License Agreement, that
supports and facilitates the transmission of data, text, voice, clinical
graphics and diagnostic images over a telephone network and which operates on
International Business Machine ("IBM") Personal Computers or IBM-compatible
Personal Computers.
1.12 Software License Agreement. "Software License Agreement" shall
--------------------------
mean that certain Software License Agreement between IMS, as licensor, and HFN
Info and SwedishAmerican Corporation as licensees, which shall be assigned by
HFN Info and SwedishAmerican Corporation to the Company, and the license granted
thereunder.
- 3 -
<PAGE>
1.13 Stock. "Stock" shall mean the no par value common stock of the
-----
Company sold and purchased pursuant to this Agreement for the consideration set
forth herein.
1.14 Subscriber. "Subscriber" shall mean physicians and other members
----------
of the health care community who use the Network and with whom Local and
National Sponsors wish to communicate over one or more Networks.
1.15 Synergy Series(TM) Software. The "Synergy Series(TM) Software"
---------------------------
shall mean the computer software, portions of which were developed and are owned
by IMS and portions of which IMS possesses and uses pursuant to one or more
perpetual licenses under which IMS has the right to use and to sub-license, and
includes practice support software intended primarily for use by persons or
entities who use the Network, including such capabilities as "Word-Pro(TM)" word
processing, "Clinical Manager(TM)" clinical data management "RX-Manager(TM)"
drug therapy manager, "CME-Manager(TM)" continuing medical education management
and others, as described in more detail on Exhibit B attached to the Software
License Agreement. The portions of such Software owned by IMS shall be licensed
to the Company pursuant to the covenants, terms and conditions of the Software
License Agreement.
2. Organization of the Company.
---------------------------
2.1 Articles of Incorporation. The Articles of Incorporation of the
-------------------------
Company are attached hereto as Exhibit A.
2.2 Sale of Stock to IMS-NET. At the Closing, the Company shall
------------------------
sell to IMS-NET, and IMS-NET shall purchase from the Company, fifty-one (51)
shares of the Stock for Fifty-One Thousand Dollars ($51,000), due and payable at
the Closing by delivery to the Company of a certified or cashier's check in that
amount.
2.3 Sale of Stock to HFN. At the Closing, the Company shall sell to
--------------------
HFN, and HFN shall purchase from the Company, twenty-five (25) shares of the
Stock for Forty-Nine Thousand Dollars ($49,000), due and payable at the Closing
by delivery to the Company of a certified or cashier's check in that amount.
2.4 Sale of Stock to HFN Info. At the Closing, the Company shall
-------------------------
sell to HFN Info, and HFN Info shall purchase from the Company, nineteen (19)
shares of the Stock in consideration of HFN Info assigning all of its rights,
title and interest in and to the Software License Agreement to the Company.
2.5 Sale of Stock to SwedishAmerican Corporation. At the Closing, the
--------------------------------------------
Company shall sell Five (5) shares of Stock to SwedishAmerican Corporation
("Swedish") in consideration of
- 4 -
<PAGE>
Swedish assigning all of its rights, title and interest in and to the Software
License Agreement to the Company. To reflect that transaction and the
restrictions and requirements relative to the Stock to be acquired by Swedish,
Swedish will be required to sign a Stock Subscription Agreement in the form
attached hereto as Exhibit B.
2.6 The Closing. The Closing shall take place at a time and place
-----------
agreed upon by IMS-NET and HFN. At the Closing, the Company will deliver to each
Shareholder a certificate evidencing the number of shares of the Stock purchased
by such Shareholder, against delivery of the consideration therefore. Also at
the Closing, the Company and HFN shall execute and deliver the Management
Services Agreement, and directors and officers shall be appointed and Bylaws
adopted for the Company, all as provided in Paragraph 3.
2.7 Post-Closing. Following consummation of the purchases and sales
------------
described in Paragraphs 2.2-2.5, shares of the Stock shall be held as follows:
<TABLE>
<CAPTION>
Percentage Consideration
Shareholder Number of Shares Interest Paid
- ----------- ---------------- ---------- -------------
<S> <C> <C> <C>
IMS-NET 51 51% $51,000
HFN 25 25% $49,000
HFN Info 19 19% Software
License
Agreement
Assignment
Swedish 5 5% Software
License
Agreement
Assignment
TOTAL 100 100%
=== ====
</TABLE>
2.8 Potential Reductions in Purchase Prices. If at any time during
---------------------------------------
the first five (5) years of the term of this Agreement, IMS or an IMS affiliate
offers ownership interests in an "open architecture" medical information network
in any of the ten (10) largest metropolitan markets in the United States
(excluding Los Angeles, Denver and Minneapolis) at a price less than Fifty
Thousand Dollars ($50,000.00) per One Percent (1%) ownership interest, then HFN
Info and Swedish each shall receive a credit equal to (a) Fifty Thousand Dollars
($50,000) per One Percent (1%) ownership interest times its
- 5 -
<PAGE>
percentage ownership interest in the Company, minus (b) the lower price offered
elsewhere per One Percent (1%) ownership interest times its percentage ownership
interest in the Company. Such credit shall be given through the preferential
distribution to HFN Info and Swedish, on a pro rata basis according to their
relative percentage ownership interests in the Company, of Fifty Percent (50%)
of any net after-tax profits otherwise payable to IMS-NET by the Company up to
the amount of such credits. Such preferential distributions shall be at fiscal
year end.
2.9 Additional Capital Contributions. If at any time (or from time
--------------------------------
to time) the Board of Directors of the Company determines that funds in excess
of the initial capital contributions of the Shareholders and Swedish and the
Company's revenues from operations are required by the Company for its business
or any of its obligations, expenses, costs, liabilities or expenditures, the
Board of Directors may require the Shareholders and Swedish to make additional
contributions to the Company as follows:
(a) For additional capital requirements up to Five Hundred
Thousand Dollars ($500,000) in the aggregate during the term hereof, each
Shareholder and Swedish shall make additional capital contributions to the
Company in proportion to its relative ownership interest in the Company, on such
date(s) set by the Board of Directors. Such contributions shall be made in cash,
provided, however, that HFN and IMS shall have the right, in their sole
discretion, to satisfy their additional contributions through the forgiveness of
fees due to them from the Company for services rendered (e.g., for HFN, fees due
----
under the Management Services Agreement entered into pursuant to Paragraph 3.5).
If all of the Shareholders and Swedish satisfy the additional capital
contributions required of them, there shall be no change in Stock ownership. If
a Shareholder or Swedish fails to make an additional capital contribution (a
"Defaulting Shareholder"), each non-defaulting party (a "Non-Defaulting
Shareholder") shall be entitled, in its sole discretion, to contribute its pro
rata share of the additional capital contribution of the Defaulting Shareholder.
For purposes hereof, a Non-Defaulting Shareholder's "pro rata share" shall equal
the percentage which the number of shares of Stock owned by it bears to the
total number of shares of Stock owned by all of the NonDefaulting Shareholders
desiring to satisfy the Defaulting Shareholder's additional capital
contribution. Further, each Non-Defaulting Shareholder shall, in return for its
additional capital contribution (including any portion of a Defaulting
Shareholder's contribution made by it), be issued by the Company additional
shares of Stock at a value of $50,000 per share if the additional contribution
is made during the first two (2) years of the term of this Agreement and, for
contributions made thereafter, at fair market value per share on the date of the
contribution, as determined by the appraisal consultants of the Company's
regularly retained independent auditors (at the
- 6 -
<PAGE>
Company's expense), and relative Stock ownership shall be adjusted accordingly.
(b) The Company's additional capital requirements over Five
Hundred Thousand Dollars ($500,000) shall be met by loans to the Company from
any or all of the Shareholders and/or Swedish. Such loans shall be classified as
senior indebtedness, bear interest at the prime rate set by Northern Trust Bank,
Chicago, Illinois, and be repaid in full by the Company before any distributions
are made with respect to the Stock.
3. Governance of the Company.
-------------------------
3.1 Bylaws. As of the Closing, the Company's Bylaws in the
------
form attached hereto as Exhibit C shall be in full force and effect.
3.2 Board of Directors. From and after the Closing, each
------------------
Shareholder shall vote all of its Stock and shall take all other necessary or
desirable actions within its control (whether in its capacity as a Shareholder,
through its representatives who are directors or officers of the Company or
otherwise, and including, without limitation, attendance at Shareholder meetings
in person or by proxy for purposes of obtaining a quorum and execution of
written consents in lieu of meetings), and the Company shall take all necessary
or desirable actions within its control (including, without limitation, calling
special board and shareholder meetings), so that:
(a) The authorized number of directors on the Company's Board
of Directors (the "Board") shall be established and maintained at six (6)
directors;
(b) The following persons shall be elected to the Board:
(i) three (3) representatives designated by IMS-NET;
(ii) two (2) representatives designated by HFN; provided,
however, that only one (1) HFN representative shall be
entitled to serve on the Board if, at any time following the
Closing, HFN and HFN Info, in the aggregate, own less than
twenty percent (20%) of the total issued and outstanding
shares of Stock; and
(iii) the President/CEO of HFN;
(c) Any committees of the Board shall be created only upon
the approval of a majority of the members of the Board and the composition of
each such committee (if any) shall be
- 7 -
<PAGE>
proportionately equivalent to that of the Board (including with respect to
voting rights of members);
(d) The removal from the Board (with or without cause) of
any representative designated hereunder by HFN or IMS-NET shall be at HFN's or
IMS-NET's written request, respectively, but only upon such written request and
under no other circumstances; and
(e) In the event that any representative designated hereunder
by HFN or by IMS-NET for any reason ceases to serve as a member of the Board
during his or her term of office, the resulting vacancy on the Board shall be
filled by a representative designated by HFN or IMS-NET, respectively, as
provided hereunder.
3.3 Unfilled Vacancy. If any party fails to designate a
----------------
representative to fill a directorship pursuant to the terms of this Paragraph 3,
the election of a person to such directorship shall be accomplished in
accordance with the Company's Bylaws and applicable law.
3.4 Major Corporate Changes. From and after the Closing,
-----------------------
the Shareholders agree that the affirmative vote of shares constituting at least
80% of all issued and outstanding shares of the Stock entitled to vote shall be
required to effectuate any of the following transactions:
(a) Amendment or restatement of the Company's Articles of
Incorporation or Bylaws attached hereto as Exhibits A and E, respectively;
(b) The issuance, sale or other distribution of, or the
issuance, sale, distribution or granting of any rights to subscribe for or
purchase or warrants or options for the purchase of, by the Company any
additional shares of the Stock or any other stock or security of the Company
(including any securities convertible into shares of the Stock), except as
expressly provided for herein; or
(c) Dissolution of the Company.
3.5 Management Services Agreement; Officers of the Company.
------------------------------------------------------
At the Closing, the Company will enter into a Management Services Agreement with
HFN in the form attached hereto as Exhibit D whereby HFN will be given the
authority and responsibility to manage the day-to-day operations of the Company.
Also at the Closing, the Board shall elect individuals to fill the following
offices with the Company: (i) Chairman of the Board; (ii) vice Chairman of the
Board; (iii) President/CEO; (iv) Treasurer; (v) Secretary; and (vi) Assistant
Secretary. The parties agree that the President/CEO of the Company shall be the
- 8 -
<PAGE>
President/CEO of HFN for so long as the current President/CEO of HFN holds such
office at HFN and the Management Services Agreement is in effect. If the
Company's Board of Directors decides to separate the offices of President and
CEO during such time period, the current HFN President/CEO shall be the
Company's CEO. Upon the current HFN President/CEO ceasing to hold such office at
HFN or the Management Services Agreement being terminated, the Company will be
free to retain a President/CEO independent of HFN.
3.6 Resolution of Deadlocks. In the event of a deadlock of
-----------------------
the Board on any issue which does or threatens to materially and adversely
affect the ability of the Company to conduct its business in the ordinary
course, and such deadlock continues for a period of sixty (60) days, HFN and/or
IMS-NET may submit the deadlocked issue to an independent, nationally recognized
management consultant for final, binding resolution. The management consultant
shall be selected by the Company's regularly retained independent auditors. The
management consultant shall submit his/her/its decision/recommendations to the
Board within thirty (30) days of the date of the submission of the dispute to
him/her/it, which shall be binding on the Board and all parties. The cost of the
management consultant's services shall be borne by the Company.
4. Warranties and Representations of Shareholders. Each Shareholder
----------------------------------------------
hereby represents and warrants to the Company that:
(a) Its officers and directors understand that the Stock is not
registered under the Securities Act of 1933, as amended, on the grounds that the
issuance thereof is exempt under the Securities Act of 1933 and applicable state
securities laws and that the reliance on such exemption is predicated in part on
the Shareholder's representations in this Agreement;
(b) Its officers and directors understand that the statutory
basis for the exemption claimed under the Securities Act of 1933 would not be
present if, notwithstanding each of these representations hereunder, any
investor has in mind merely acquiring any of the shares for resale upon the
occurrence or non-occurrence of some pre-determined event or if any Shareholder
is not financially responsible; and
(c) Its officers and directors understand that the Stock may not
be offered, sold, transferred, pledged or hypothecated in the absence of
registration or the availability of and exemption from registration under the
Securities Act of 1933. Furthermore, no offer, sale, transfer, pledge or
hypothecation is to take place unless the prior written approval of counsel for
the Company has been affixed to the certificate evidencing the Stock, the stock
transfer agent of the Company has
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<PAGE>
been ordered to effectuate transfers of the Stock only in accordance with the
above instructions and the appropriate restrictive legend has been placed on all
certificates representing outstanding shares of the Stock (as described in
Paragraph 12.1).
5. HFN's Performance Obligation. HFN agrees, as a performance
----------------------------
obligation, that it shall obtain Network planning and option agreements from at
least two (2) hospitals in the Exclusive Territory within one hundred twenty
(120) days of the date of this Agreement (the "Performance Obligation"). If HFN
fails to meet the Performance Obligation, at the election of IMSNET, this joint
venture shall unwind by automatic termination of this Agreement and all related
agreements and instruments involving HFN, IMS-NET, HFN Info, Swedish, the
Company and IMS, the pro rata return of the cash consideration paid by HFN for
its Stock (based on the total cash consideration for all of the Stock and the
Company's expenditures prior to termination hereof), the transfer of all of
HFN's, HFN Info's and Swedish's Stock to the Company and the resignation of all
HFN representatives as directors and officers of the Company. The provisions of
Subparagraphs 12.1(a)-(c) and Paragraph 12.3 shall not apply in the event of
dissolution of the Company hereunder.
6. Exclusive Territory; Rights of First Refusal. The Company shall
--------------------------------------------
own, operate and market the Network in the Exclusive Territory, as defined
herein. In addition, if IMS or an affiliate of IMS proposes to establish any
medical information network in the State of Wisconsin and/or any areas east of
Interstate 35 in Iowa, HFN shall have the right of first refusal to participate
with IMS or its affiliate, on an exclusive basis, in the establishment,
ownership and operation of such network(s), on such terms as the parties may
agree.
7. Preferential Pricing for HFN Hospitals and Affiliates. During
-----------------------------------------------------
the term of this Agreement, HFN-affiliated hospitals and hospital systems and
physicians on their medical staffs will be entitled to preferential pricing for
Network products and services, as set forth in Exhibit E attached hereto. Such
preferential pricing shall involve discounts of not less than twenty-five
percent (25%) from IMS' published charges. The form of agreement to be entered
into by the Company with HFN-affiliated hospitals and systems and other
hospitals and systems as Local Sponsors, and physicians as Subscribers, shall be
attached hereto as Exhibit F.
8. National Sponsors. IMS will, on behalf of the Company and the
-----------------
Network, market the Network to, contract with and be responsible for billing and
collecting charges due from National Sponsors. The terms of the relationship
between the Company and IMS with respect to National Sponsors shall be set
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<PAGE>
forth in the National Sponsor Marketing Agreement entered into by the Company
and IMS, which shall be attached hereto as Exhibit G.
9. Share Transfer Restrictions. Except as expressly provided herein
---------------------------
or in Paragraph 10, neither HFN nor HFN Info shall assign, sell, transfer,
pledge, hypothecate, gift or otherwise dispose of or encumber all or any portion
of its shares of the Stock or any interest therein. If at any time during the
term hereof, HFN or HFN Info desires to transfer any interest in Stock, such
transfer must be effectuated as follows:
(a) HFN or HFN Info (the "Selling Shareholders") shall first offer
to sell its Stock to the Company and the other Shareholders (including, for
purposes hereof, Swedish) by presenting to the Company and to the other
Shareholders an executed written offer (the "Offer Notice") to sell its Stock on
the same terms and conditions on which the Selling Shareholder proposes to
transfer its Stock and a copy of the bona fide written offer to sell or purchase
---- ----
(if any);
(b) Upon receipt of the Offer Notice, the Company, acting through
its Board of Directors (any director who is an HFN representative not voting),
shall have thirty (30) days in which to notify the Selling Shareholder in
writing of its desire to purchase the Selling Shareholder's Stock. If the
Company does not elect to purchase the Selling Shareholder's Stock as just
described or takes no action, the provisions of Subparagraph (c) below shall
become applicable;
(c) If the Company does not elect to purchase the Selling
Shareholder's Stock pursuant to Subparagraph (b) above, the other Shareholders
shall have thirty (30) days after expiration of the thirty (30) day period
referred to in Subparagraph (b) to notify the Selling Shareholder in writing of
their offer to purchase their pro rata share of the Selling Shareholder's Stock.
--- ----
For purposes of this Agreement, a Shareholder's "pro rata share" shall equal the
--- ----
percentage which the number of shares of Stock owned by it bears to the total
number of shares of Stock owned by all of the Shareholders desiring to accept
the Selling Shareholder's offer;
(d) If the Company and/or the other Shareholders do not elect to
purchase the Selling Shareholder's Stock as just described, the Selling
Shareholder shall be free to sell its Stock to the prospective purchaser at the
price and on the other terms and conditions described in the Offer Notice
delivered pursuant to Subparagraph (a) above; and
(e) The closing of any purchase by the Company or the other
Shareholders pursuant to this Paragraph 10 shall occur on a date designated by
the purchasing party(s) not more than sixty (60) nor less than fifteen (15) days
after exercising
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<PAGE>
its/their option to purchase. Against payment of the purchase price at the
closing (by certified or cashier's check or wire transfer of immediately
available funds), the Selling Shareholder shall assign and deliver to the
Company or the purchasing Shareholders the share certificates and/or other
documents representing its interest in the Stock to be sold, free and clear of
all liens, claims or other encumbrances, in form ready for transfer and duly
endorsed for transfer or accompanied by stock powers duly executed by the
Selling Shareholder.
10. Participation in Sales and IMS Public Offering.
----------------------------------------------
10.1 Sale of the Company. Subject to the provisions hereof, if
-------------------
IMS-NET, as the holder of a majority of the shares of the Stock, approves a Sale
of the Company (an "Approved Sale"), the other Shareholders shall vote for,
consent to and raise no objections to the Approved Sale. If the Approved Sale is
structured as a merger or consolidation, the other Shareholders shall waive any
dissenter's rights, appraisal rights or similar rights in connection with such
merger or consolidation. If the Approved Sale is structured as a sale of Stock,
HFN shall have the option to: (a) sell all of its Stock, and require the other
Shareholders to sell all of their Stock, on the terms and conditions approved by
IMS-NET; (b) purchase all of IMS-NET's Stock at the approved price plus $1.00;
or (c) elect, on its own behalf and on behalf of the other Shareholders, not to
sell Stock in connection with the Sale of the Company. All of the other
Shareholders, including HFN Info and Swedish, shall be bound by HFN's election.
The obligations of HFN and the other Shareholders with respect to an Approved
Sale of the Company also are subject to the satisfaction of the following
conditions: (a) upon the consummation of the Approved Sale, each Shareholder
shall receive the same form of consideration and the same amount of
consideration for its Stock as all other Shareholders; (b) if any Shareholders
are given options as to the form and amount of consideration to be received,
each Shareholder shall be given the same options; and (c) HFN and the other
Shareholders, in the case of a Stock sale in which HFN has elected to
participate, shall have the right to sell the same proportion of their Stock as
IMS-NET and shall not be obligated to sell a greater proportion of their Stock
than IMS-NET.
10.2 Sale of IMS. In the event of a proposed Sale of IMS,
-----------
immediately prior to such Sale, HFN will have the option to: (a) purchase all of
IMS-NET's Stock at a price based on the greater of the fair market value per
share, determined by the appraisal consultants of the Company's regularly
retained independent auditors (at the Company's expense), and Fifty
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<PAGE>
Thousand Dollars ($50,000) per share; (b) sell all of its Stock, and require the
other Shareholders to sell all of their Stock, to IMS-NET at a price based on
the greater of the fair market value per share (determined as provided in
Subparagraph (a)), and Fifty Thousand Dollars ($50,000) per share; or (c)
retain, and require the other Shareholders to retain, the same interest in the
Company notwithstanding the Sale of IMS. HFN will have thirty (30) days from its
receipt of notice of the proposed Sale of IMS to make such election and, if no
affirmative election is made within such time period, HFN will be deemed to have
elected option (c). In the event IMS or HFN disputes the valuation placed on the
Company hereunder, either party may submit the dispute to binding arbitration in
Chicago, Illinois in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. All of the other Shareholders, including HFN
Info and Swedish, will be bound by HFN's election hereunder.
10.3 Public Offering of IMS Stock. In the event of a proposed
----------------------------
Public Offering of IMS common stock, neither HFN, HFN Info, Swedish nor any
future minority shareholder of the Company shall have the right to exchange
their shares of Stock for shares of IMS common stock prior to the Public
Offering. However, in the event that IMS, in its sole discretion, offers such
exchange rights to HFN Info, Swedish and any future minority shareholders, and
all of those parties agree to exchange all of their Stock, HFN shall be
obligated to exchange, on the same terms and conditions agreed upon by such
parties and IMS, an amount of its Stock equal to no more than the amount needed
to give IMS, following the exchange, ownership of eighty percent (80%) of all of
the issued and outstanding Stock. In such event, IMS also agrees that HFN, in
its sole discretion, shall have the option to exchange any additional amount or
all of its Stock for IMS common stock, on the same terms and conditions.
10.4 Definitions. For purposes hereof, a Sale of the Company or
-----------
a Sale of IMS means the sale of the Company or IMS to an unrelated third party
or group of unrelated third parties pursuant to which such party or parties
acquire: (a) a majority of the Stock of the Company (whether by merger,
consolidation or sale of Stock) or the capital stock of IMS possessing the
voting power to elect a majority of IMS' board of directors (whether by merger,
consolidation or sale of stock); or (b) all or substantially all of the assets
of the Company, or of all or substantially all of the assets of IMS on a
consolidated basis. For purposed hereof, a Public Offering means any sale of IMS
common stock to the public pursuant to an offering registered under the
Securities Act of 1933, as amended, or through a broker, dealer or market maker
pursuant to the provisions of Rule 144 promulgated under the Securities Act of
1933, as amended.
11. Restrictive Legend; All Shares of Stock Subject to Restriction.
--------------------------------------------------------------
11.1 Restrictive Legend. Each certificate representing shares of
------------------
the Stock shall be endorsed with a legend in substantially the following form:
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<PAGE>
"The sale, transfer, pledge, hypothecation, gift or other
disposition or encumbrance of the shares represented by this
certificate is subject to, and the shares are transferable only
in accordance with, the terms of a Joint Venture Agreement
between the Company and certain of its Shareholders dated
May 15, 1992, a copy of which is on file at the offices of the
Company. The securities represented by this certificate have
not been registered under the Securities Act of 1933. These
securities may not be offered, sold, transferred, pledged or
hypothecated in the absence of registration or the availability
of and exemption from registration under the Securities Act of
1933. Furthermore, no offer, sale, transfer, pledge or
hypothecation is to take place unless the prior written approval
of counsel for the Company has been affixed to this certificate.
The stock transfer agent of the Company has been ordered to
effectuate transfers of this certificate only in accordance with
the above instructions."
11.2 All Shares of Stock Subject to Restriction.
------------------------------------------
(a) Notwithstanding any provision hereof to the contrary, in the
case of any transfer or disposition of shares of the Stock or the issuance of
any new shares of the Stock, each transferee shall execute an appropriate
instrument agreeing to be bound by the restrictions set forth in this Agreement
(which shall be substantially in the form of the Stock Subscription Agreement
attached hereto as Exhibit B). The transferee or transferees shall receive and
hold such Stock subject to all of the restrictions, obligations and rights
created hereunder, and the Shareholders and each transferee shall be bound by
the restrictions contained in this Agreement with respect to each subsequent
transferee.
(b) The terms "Shareholder" or "Shareholders" as used in this
Agreement shall include any new shareholder or any transferee of a Shareholder
as just described.
12. Dissolution.
-----------
12.1 Voluntary Dissolution. In the event that the shareholders
---------------------
of the Company at any time and for any reason agree to a voluntary dissolution
and winding up of the business operations of the Company, the rights and
obligations of the Shareholders, as well as the procedures governing dissolution
and winding up, shall be as provided in the Illinois Business
- 14 -
<PAGE>
Corporation Act of 1983, as amended; provided, however, that the parties shall
have the following additional rights and obligations upon such dissolution
(except dissolution pursuant to Paragraph 5):
(a) Upon ninety (90) days prior written notice from HFN to IMS and
subject to payment of the consideration described below, the Software License
Agreement (along with the accompanying Escrow Agreement) will be assigned by the
Company to HFN, and consented to as necessary by IMS, without consideration.
IMS will thereafter abide by the then existing terms of the Software License
Agreement, except as those terms may be amended from time to time pursuant to
the provisions of said Agreement and further except that, upon such assignment,
the license granted thereunder shall convert to a non-exclusive license. Such
assignment is, however, subject to the prior payment of total cash consideration
to IMS for the license granted under the Software License Agreement of One
Million Two Hundred Thousand Dollars ($1,200,000), including amounts paid by HFN
Info and/or Swedish therefor;
(b) In the event the Software License Agreement is assigned to HFN
pursuant to Subparagraph (a), IMS will thereafter also provide such technical
and other maintenance, support and assistance (in addition to that required
under the Software License) which is available from IMS and requested by HFN, on
terms at least as favorable as those available to IMS' most favored clients. In
addition, National Sponsors and Local Sponsors which continue to do business
with IMS following dissolution of the Company shall continue to have access to
the Network pursuant to an assignment of the National Sponsor Marketing
Agreement attached hereto as Exhibit G to HFN or the creation of a substantially
comparable new arrangement between HFN and IMS using the same reimbursement
system then in effect. Participants in HFN's Network also will be given access
to the products and services offered by CSC Health Care Services, Inc. through
IMS, to the extent possible; and
(c) Also in the event the Software License Agreement is assigned
to HFN pursuant to Subparagraph (a), all of the Company's agreements with Local
Sponsors and Subscribers shall be assigned to HFN without consideration, subject
to the consent of the Local Sponsors and Subscribers, if necessary. In addition,
following dissolution of the Company, IMS hereby authorizes HFN to market the
Network to and to contract with any and all potential Local Sponsors and
Subscribers affiliated with HFN and located within the Exclusive Territory. For
purposes hereof, a Local Sponsor shall be considered affiliated with HFN" if it
is: (i) an HFN shareholder hospital/system, affiliate hospital/system or
participant hospital/system; (ii) a hospital for which HFN acts as a contracting
agent; or (iii) an affiliated entity of any of the foregoing hospitals. A
Subscriber shall be
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<PAGE>
considered "affiliated with HFN" if he/she has medical staff privileges at any
of the foregoing hospitals or refers patients for admission to any of the
foregoing hospitals.
12.2 Involuntary Dissolution. Involuntary dissolution proceedings
-----------------------
commenced against the Company shall trigger and be governed by all of the same
rights, obligations and terms set forth in Paragraph 12.1 as to a voluntary
dissolution, subject to the requirements of the United States Bankruptcy laws,
if applicable.
12.3 Competition After Dissolution. For a period of three (3) years
-----------------------------
following dissolution and completion of the winding up of the affairs of the
Company pursuant to Paragraphs 12.1 or 12.2, HFN shall not, alone or with third
parties, establish, own, manage or operate a medical information network or
networks within the Exclusive Territory other than the Network as permitted
pursuant to this Paragraph 12, and further shall not solicit, market the Network
to or contract with any Local Sponsors or Subscribers which or who are not
affiliated with HFN (other than those unaffiliated Local Sponsors or Subscribers
under contract at the time of dissolution). Also for a period of three (3)
years following dissolution and completion of the winding up of the affairs of
the Corporation pursuant to Paragraphs 12.1 or 12.2, IMS shall not, alone or
with third parties, solicit, market or contract with any Local Sponsors or
Subscribers affiliated with HFN in the Exclusive Territory for the purposes of
offering a medical information network competitive with the Network owned and
operated by HFN within the Exclusive Territory.
13. Miscellaneous.
-------------
13.1 Notices. All notices required to be given hereunder shall be
-------
given in writing and shall be personally delivered or deemed delivered if
dispatched by certified mail, return receipt requested, postage prepaid,
addressed to the parties at its last known business address, or such other
addresses the party may designate in writing. A notice shall be deemed given on
the date it is personally delivered or deposited in the mail in accordance with
the foregoing.
13.2 Governing Law. This Agreement and all rights, duties and
-------------
obligations hereunder shall be construed and interpreted in accordance with the
internal laws (not the choice of law) of the State of Illinois.
13.3 Waiver. No waiver of any term, covenant or condition contained
------
in this Agreement or failure to exercise a right or remedy shall be deemed to
imply a further waiver of such term, covenant, right or remedy.
- 16 -
<PAGE>
13.4 Severability. Nothing contained in this Agreement shall be
------------
construed so as to require the commission of an act contrary to law and whenever
there is any conflict between any provision of this Agreement and any present
statute, law, ordinance or regulation contrary to which the parties have no
legal right to contract, the latter shall prevail, but in such event, the
provisions of the Agreement affected shall be curtailed and limited only to the
extent necessary to bring it within the requirements of the law and to carry out
the purposes of this Agreement.
13.5 Binding Agreement. Subject to the restrictions set forth herein,
-----------------
this Agreement shall inure to the benefit of and be binding upon all parties
hereto and their respective legal representatives, successors, transferees, and
assigns. Whenever a reference is herein made to any party such reference shall
be deemed to include a reference to the legal representatives, successors,
transferees, and assigns of such party.
13.6 Assignment. Except as provided herein, this Agreement shall
----------
not be assigned by any party without the express prior written consent of all of
the other parties.
13.7 Headings. All headings and captions used herein are for
--------
convenience of reference only, and shall not be a part or affect the
interpretation of this Agreement.
13.8 Entire Agreement. This Agreement supersedes all prior oral and
----------------
written understandings and agreements between the parties hereto with respect to
the subject matter hereof. The parties acknowledge and agree that this
Agreement, together with all Exhibits, documents and agreements referenced and
incorporated herein, contain the entire agreement between the parties. No
representations, promises, conditions or warranties with reference to the
execution of this Agreement have been made or entered into between the parties
hereto other than as herein expressly provided.
13.9 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
- 17 -
<PAGE>
13.10 Modification. This Agreement may be modified only upon
------------
execution of a written agreement signed by all of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
HFN, INC. INTEGRATED MEDICAL SYSTEMS, INC.
By: /s/ David E. Kolb By: ^SIGNATURE TO COME^
-------------------------------- --------------------------------
David E. Kolb
Its: President Its: President
-------------------------------
HFN INFORMATION SYSTEMS, ILLINOIS MEDICAL INFORMATION
INC. NETWORK, INC.
By: David E. Kolb By: David E. Kolb
-------------------------------- --------------------------------
Its: President Its: President
------------------------------- -------------------------------
IMS-NET OF ILLINOIS, INC.
By: ^SIGNATURE TO COME^
--------------------------------
Its: Secretary/Treasurer
-------------------------------
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<PAGE>
Exhibit 10.19
SHAREHOLDERS' AGREEMENT
IMS--NET OF CENTRAL FLORIDA, INC.
THIS SHAREHOLDERS' AGREEMENT ("Agreement") is made and entered into as of
May 31, 1992, by and between Adventist Health System/Sunbelt dba Florida
Hospital, a Florida corporation ("Hospital") and Integrated Medical Systems,
Inc., a Colorado corporation ("IMS").
THIS SHAREHOLDERS' AGREEMENT is made and entered into with reference to the
following facts:
A. IMS has developed and owns certain proprietary computer software
operating on various types of computers that facilitates the transmission of
data, text, voice, clinical graphics and diagnostic images over telephone lines
which can improve the efficiency and effectiveness of communication related to
health care delivery.
B. Hospital, directly or through its Affiliates or Subsidiaries, as
hereafter defined, operates a variety of health care facilities in the Exclusive
Territory, as hereafter defined.
C. Hospital, and IMS desire to establish a corporation to develop, own and
operate a community medical information network in the Exclusive Territory, to
improve the efficiency and effectiveness of communication related to health care
delivery between hospitals, acute care facilities, mental health and substance
abuse facilities or other facilities and the health care professionals with
privileges to utilize such facilities and others who desire to use the Network
to communicate with others on the Network.
D. Hospital and IMS desire to set forth their intentions and agreements
with respect to the development, ownership and operation of said corporation.
NOW THEREFORE, in consideration of the recitals, covenants, conditions and
agreements contained herein, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement and in addition to the
terms otherwise defined herein, the following terms shall have the meanings as
set forth below:
1.1. Agreement. "Agreement" means this document dated on the day and
---------
year appearing in the opening paragraph hereof and all Exhibits attached hereto.
1.2. ComCenter(TM) Software. "ComCenter(TM) Software" shall mean
----------------------
the computer Software, as hereafter defined, developed and owned by IMS that
supports and facilitates the transmission of data, text, voice, clinical
graphics and diagnostic images over a telephone network and which operates on
the Digital Equipment Corporation ("DEC") VAX family of computers.
<PAGE>
1.3. Corporation. "Corporation" shall mean IMS--NET of Central
-----------
Florida, Inc., a Colorado for profit corporation to be established and owned by
the parties to this Agreement for the purposes and in accordance with the
covenants, terms and agreements set forth in this Agreement.
1.4. Exclusive Territory. "Exclusive Territory" shall mean within
-------------------
the state of Florida, the Counties of Orange, Seminole, Polk, Highlands,
Brevard, Volusia, Lake and Osceola.
1.5. IMS-NET(TM). "IMS-NET(TM)" shall mean the ComCenter(TM)
-----------
Software together with the PC-Com Software(TM), as hereafter defined.
1.6. Local Sponsor. "Local Sponsor" shall mean any individual or
-------------
entity desiring to use the Network, as hereafter defined, to receive and/or
disseminate advertising or information, which agrees to pay fees to the
Corporation for the right to so use the Network and to pay fees to sponsor other
users of the Network, and which does not meet the definition of National
Sponsor, as hereafter defined.
1.7. National Sponsor. "National Sponsor" shall mean any individual
----------------
or entity desiring to use the Network, as hereafter defined, to receive and/or
disseminate information to other sponsors or to subscribers of the Network,
which agrees to pay fees to the Corporation for the right to so use the Network
and which participates with more than one other Network with which IMS is
affiliated.
1.8. Network. "Network" shall mean the medical information network
-------
owned and operated by IMS which utilizes IMS--NET software to improve the
efficiency and communication of and among Network Subscribers, as hereafter
defined, Local Sponsors and National Sponsors on any medical information network
in the Exclusive Territory owned, operated or sold by IMS.
1.9. PC-Com(TM) Software. "PC-Com(TM) Software" shall mean the
-------------------
computer Software, as hereafter defined, developed and owned by IMS, that
supports and facilitates the transmission of data, text, voice, clinical
graphics and diagnostic images over a telephone network and which operates on
International Business Machine ("IBM") Personal Computers or IBM-compatible
Personal Computers.
1.10. Software. "Software" shall mean a series of independent but
--------
interrelated computer programs which interact with computer equipment and
operating systems to form a complete data processing system. "Software"
includes, but is not limited to, computer program listings, user manuals,
functional specifications, technical documentation, source code, and tangible
media upon which the computer programs are recorded.
- 2 -
<PAGE>
1.11. Subscriber. "Subscriber" shall mean a party desiring to use
----------
the Network to receive information from Network users and to obtain the various
other Network services which facilitate the transmission of data, text, voice,
clinical graphics and diagnostic images over dial-up telephone lines, and the
fee for whose participation is paid by one or more sponsors.
1.12. Synergy Series(TM) Software. "Synergy Series(TM) Software"
---------------------------
shall mean the computer Software, portions of which were developed and are owned
by IMS and portions of which IMS possesses and uses pursuant to a perpetual
license which grants IMS the right to use and sublicense in the Exclusive
Territory, as described in Exhibit 1.14 attached hereto and incorporated herein
------------
by this reference.
1.13. Affiliate. The term "Affiliate" when used in association with
---------
the Hospital shall be limited to Florida Hospital/Altamonte which is located at
601 E. Altamonte Drive, Altamonte Springs, Florida; Florida Hospital/Apopka
which is located at 201 N. Park Avenue, Apopka, Florida; Florida Hospital/East
Orlando which is located at 7727 Lake Underhill Drive, Orlando, Florida 32822;
and Florida Hospital Medical Center which is located at 601 E. Rollins Street,
Orlando, Florida, all of which are operated as part of Florida Hospital.
2. FORMATION OF CORPORATION.
------------------------
2.1. Incorporation. The parties acknowledge that on May 31, 1992,
-------------
Articles of Incorporation in substantially the form attached hereto and
incorporated herein by this reference as Exhibit 2.1 (the "Articles") were
-----------
executed and filed with the office of the Colorado Secretary of State. The
Articles IMS--NET of Central Florida, Inc., a for-profit corporation (the
"Corporation"). The parties further acknowledge that the Corporation has all
requisite power and authority to own and operate its properties and conduct its
business. Hospital and IMS agree to execute and deliver all certificates and
other documents and to take such further action as may be necessary or
convenient to organize, establish or maintain in good standing the Corporation.
2.2. Classes of Stock. The Corporation shall have one (1) class of
----------------
common stock. The common stock shall have voting rights and there shall be two
million (2,000,000) shares authorized, par value $0.01 per share.
2.3. Basic Capitalization. Hospital and IMS acknowledge and agree
--------------------
that establishment and operation of the Corporation and implementation of the
Network shall require initial capital contributions of approximately
Ten-Thousand Dollars ($10,000) (the "Cash Capitalization") and the rights and
benefits of IMS-NET(TM) and Synergy Series(TM) Software pursuant to the terms
and conditions of that certain Software License and Services Agreement between
IMS and the Corporation in the form Attached hereto as Exhibit 2.3 and
-----------
incorporated herein this reference (the "Non-Cash Capitalization").
- 3 -
<PAGE>
(The Cash Capitalization and the Non-Cash Capitalization shall hereinafter be
collectively referred to as the "Basic Capitalization"). This Basic
Capitalization shall consist of the issuance of common stock.
2.3.1. Hospital agrees that it shall subscribe for and
purchase as hereinafter set forth forty-nine percent (49%) of the
Basic Capitalization on the date hereinafter set forth.
2.3.2. IMS agrees that it shall subscribe for and purchase as
hereinafter set forth fifty-one percent (51%) of the Basic
Capitalization on the terms as hereinafter set forth.
2.4 Preemptive Rights. There shall be preemptive rights in the
-----------------
issuance and sale of the common stock of the Corporation as follows:
2.4.1. Hospital may, but shall not be required to, exercise
its preemptive rights with respect to any further issuance of common
stock beyond the subscription for and purchase of its forty-nine
percent (49%) interest in the Basic Capitalization.
2.4.2. IMS may, but shall not be required to, exercise its
preemptive rights with respect to any further issuance of common stock
beyond the subscription for and purchase of its fifty-one percent
(51%) interest in the Basic Capitalization.
2.5. Bylaws. The Corporation shall promptly, but in no event more
------
than ten (10) days, after the date the Articles are filed with Colorado's
Secretary of State, adopt the Bylaws attached hereto as Exhibit 2.5 and
-------
incorporated herein by this reference as the Bylaws of the Corporation. Hospital
and IMS agree to execute and deliver all certificates and other documents and to
take such further action as may be necessary or convenient to adopt said Bylaws.
2.6. Corporate Action. Hospital and IMS, for themselves and their
----------------
successors and assigns, agree to vote all of their common stock in the
Corporation and to take such other actions as may be necessary or convenient to
cause the Corporation, its Board of Directors and authorized officers, to take
all of the actions and implement all of the provisions required by this
Agreement.
3. PURCHASE OF STOCK AND LOANS TO CORPORATION.
------------------------------------------
3.1. Subscription to Purchase Common Stock.
-------------------------------------
3.1.1 IMS hereby subscribes to purchase fifty-one thousand
(51,000) shares of the common stock of the Corporation for the
aggregate price of Five-
- 4 -
<PAGE>
Thousand, One-Hundred Dollars ($5,100) to be paid via cash, check or
wire transfer to the Corporation on May 31, 1992. Concurrently with
such payment, the Corporation shall issue to IMS a stock certificate
representing said fifty-one thousand (51,000) shares registered in the
name of IMS.
3.1.2 Hospital hereby subscribes to purchase forty-nine
thousand (49,000) shares of common stock of the Corporation for (i) an
aggregate cash price of Two-hundred and Fifty Thousand Dollars
($250,000) to be paid via (a) Four-Thousand, Nine-Hundred Dollars
($4,900) in cash, check or wire transfer to the Corporation on or
before May 31, 1992; and, (b) acquisition on behalf of the
Corporation from IMS of the Software License and Service Agreement
(the "License") pursuant to which the Corporation shall have an
exclusive license in the Exclusive Territory to commercialize the
software described therein; and (ii) execution of a Network Services
Agreement for Hospital's four owned-campuses that includes funding
Network Installation and Sponsoring a minimum of 250 members of their
medical staff for five years pursuant to the general terms and
conditions attached hereto as Exhibit 3.1, and including the special
-----------
provisions that (a) Hospital's per-Subscriber Sponsorship Fee shall be
capped at 500 physicians with only an Installation and Annual
Maintenance Fee that covers the Corporation's costs applicable for
Hospital Sponsored physicians in excess of 500; and, (b) Hospital
shall have a Right of Early termination after three (3) years.
Hospital and IMS mutually agree that the minimum value of the license
and other rights and duties as conveyed or provided in said License
shall be Two-Hundred and Forty-five Thousand, One Hundred Dollars
($245,100). Concurrently with the payment and assignment of the
Software License and Services Agreement, the Corporation shall deliver
to Hospital a validly issued and executed stock certificate
representing said 49,000 shares of common stock of the Corporation
registered in the name of Hospital.
3.2 Payment. Concurrent with signature to this Agreement, Hospital
-------
shall deliver a check or wire transfer to IMS for Two Hundred, Thirty-five
Thousand, One Hundred Dollars ($235,100) reflecting the License cost in Section
3.1 less Hospital's Ten Thousand Dollar ($10,000) deposit, along with a check to
the Corporation for Four Thousand, Nine Hundred Dollars ($4,900).
3.3. Limitation on Transferability. The common stock of the
-----------------------------
Corporation owned at any time by Hospital or IMS shall not be transferable
except as specified in Sections 5, 13, and 14.7 hereof.
4. BOARD OF DIRECTORS.
-------------------
4.1. Initial Board of Directors. Subject to the right of the
--------------------------
shareholders owning a majority of the common stock of the Corporation to remove,
nominate and elect
- 5 -
<PAGE>
replacement directors as provided herein and in the Bylaws of the Corporation,
from the date of incorporation until they are removed, resign, or their
successors are elected in accordance with the Bylaws, the initial Board of
Directors of the Corporation shall consist of five (5) members of which two (2)
shall be nominated by IMS; and, so long as Hospital retains a 49% interest in
the Corporation, two (2) by Hospital and an additional one (1) shall be
President of the Corporation who shall be nominated by Hospital and remain the
Hospital's nominee throughout the life of the Corporation, subject to the
Corporation maintaining Minimum Performance for year three (3) of operations and
thereafter as stated in Section 4.2.2.1.
-------
4.1.1 Notwithstanding majority shareholder rights described or the
composition of the Board in 4.1, IMS agrees not to oppose any Board
---
Actions or Decisions or exercise or impose any local operating
authorities so long as (i) the Minimum Performance is achieved, and
(ii) any Board Actions involving capitalization, budget authorization,
officer employment or designations, significant contracts or purchases
that obligate the Corporation in an amount in excess of five times its
Cash Capitalization (Ref 2.3) require the affirmative vote of both
IMS-nominated Directors.
4.2. Terms of Directors. The term of each member of the Board of
------------------
Directors shall be one (1) year. The members of the Board of Directors shall be
elected annually by the owners of the common stock at the times and in the
manner set forth from time to time in the Bylaws of the Corporation. Hospital
and IMS each further agree that at no time shall either Hospital or IMS vote its
common stock of the Corporation to effectuate a change in the residency or place
of business requirements for directors of the Corporation as currently set forth
in Article III, Section 3 of the Bylaws of the Corporation.
4.2.1. Without limiting the generality of the foregoing, Hospital
and IMS each agree to vote their common stock in the Corporation to
require the Board of Directors to initially organize and consistently
thereafter operate and maintain accounting, budgeting and financial
reporting systems and records for the Corporation.
4.2.2. The President shall submit to the Board of Directors an
Annual Business Plan and Budget (the "Plan"), including but not
limited to forecasts of revenue, expense, net profit, number of Local
Sponsors and number of Subscribers, approval of which shall require
the affirmative votes of both IMS Directors, and such votes shall be
affirmative for any Plan with forecasted performance above the prior
year.
4.2.2.1 Minimum Performance shall be defined as annual
operating results at or above 75% of the Plan.
- 6 -
<PAGE>
4.3. Parties' Responsibilities. In the absence of cumulative voting,
-------------------------
Hospital agrees that it shall at all times vote its shares of common stock of
the Corporation for two (2) Board of Director nominees nominated by IMS, and IMS
agrees that it shall at all times vote its shares of common stock of the
Corporation for two (2) Board of Director nominees nominated by Hospital plus a
President nominated by Hospital, pursuant to IMS majority rights as expressed in
section 4.1. In the event of the number of the Board of Directors is, for
---
whatever reason, changed, Hospital and IMS agree to vote their shares of common
stock of the Corporation such that Board of Director nominees nominated by IMS
shall be elected to fifty percent (50%) of the total without the President and
that the Minimum Performance requirement remain applicable to the Hospital's
right to nominate the President.
5. RESTRICTIONS ON TRANSFERS OF COMMON STOCK.
-----------------------------------------
5.1. Right of First Refusal.
----------------------
5.1.1. Prior to the sale, transfer or disposition of all or any
portion of the common stock of the Corporation by Hospital to any person
or entity other than Hospital's Affiliates, or by IMS, the other party
shall have a right of first refusal to purchase said stock as set forth
in Section 5.1.9 hereinbelow. The right of first refusal granted to each
of the parties hereto shall exist only for as long as such party owns
any of the common stock of the Corporation.
5.1.2. If pursuant to Sections 5.1.1 hereof, either Hospital or IMS
has a right of first refusal on the sale transfer or disposition of
stock, the party desiring to sell, transfer or otherwise dispose of said
stock (Offering Party) shall first offer to sell, transfer or otherwise
dispose of said stock to the party having the right of first refusal
(Offeree Party). The Offering Party shall give written notice to the
Offeree Party. Such notice must specify: (i) the name and address of the
person, firm or corporation to whom the Offering Party intends to sell,
transfer or otherwise dispose of said stock; (ii) the price or other
consideration to be paid to the Offering Party; and (iii) all other
terms and conditions of the proposed sale, transfer or disposition. If
the Offeree Party elects to accept said offer, written notice of
acceptance must be sent by the Offeree Party to the Offering Party by
certified or registered mail within thirty (30) calendar days after the
giving of the original notice by the Offering Party to the Offeree
Party. Upon acceptance of said offer, the Offering Party and the Offeree
Party shall cause such sale, transfer or disposition to be consummated
in accordance with the terms and conditions set forth in the original
notice within a reasonable time and shall execute and deliver all
necessary documents to evidence such sale, transfer or disposition. In
the event the Offeree Party fails to timely accept said offer, the
Offering Party shall be free to sell, transfer or dispose of said stock
to the party identified in the original notice as the intended buyer on
the same terms and conditions set forth
- 7 -
<PAGE>
in said original notice. However, unless said sale, transfer or
disposition is consummated within thirty (30) calendar days after the
failure of the Offeree Party to accept said offer, the Offeree Party's
right of first refusal shall continue in existence and the Offering
Party shall then be obligated to give notice from time to time of any
intent to sell, transfer or dispose of said stock and upon the giving of
said notice, the Offeree Party shall have the same right to purchase or
acquire said stock as set forth hereinabove. As a condition precedent to
the sale, transfer or disposition of the stock to the party identified
in the notice as the intended buyer, the intended buyer must execute a
written agreement granting the same right of first refusal to the
Offeree Party in the event of any future sale, transfer or disposition
of said stock.
5.2. Restricted Stock Legend. Each certificate for shares of the
-----------------------
common stock initially issued hereunder, and each certificate for shares of the
common stock issued to subsequent transferees of any such certificate shall be
stamped or otherwise imprinted with a legend in substantially in the following
form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, THE COLORADO
SECURITIES LAW, NOR ANY OTHER STATE SECURITIES LAWS, AND THE
TRANSFER OF SUCH SECURITIES IS SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE SHAREHOLDERS' AGREEMENT DATED
MAY 31, 1992, BETWEEN ADVENTIST HEALTH SYSTEM/SUNBELT AND
INTEGRATED MEDICAL SYSTEMS, INC. A COPY OF WHICH AGREEMENT IS
ON FILE AT THE PRINCIPAL BUSINESS OFFICE OF THE CORPORATION.
This legend shall be in addition to and shall be conformed to any legend
required to appear on such certificates of common stock in accordance with
applicable provisions of the State of Colorado.
6. OPERATIONS AND NETWORK MANAGEMENT.
---------------------------------
6.1. Business. Hospital and IMS agree that the Corporation will be
--------
operated and managed to fulfill IMS' Network design, under which all physicians
in the Corporation's territory are solicited to become Subscribers, regardless
of referral affiliations, and the necessary complement of Local Sponsors are
recruited to communicate with them over the Network, including, but not limited
to, non-Hospital hospitals, clinical laboratories, pharmacies, diagnostic
centers and services, home health providers, managed care services, professional
associations and practice support services.
- 8 -
<PAGE>
6.2. Identification. The Corporation will operate under IMS' trade
--------------
name Community Medical Information Network of Central Florida.
6.3. Access Fees and Other Charges. Hospital agrees that the Hospital
-----------------------------
Sponsorship Fees as defined in Exhibit 3.1. have been structured specifically to
------------
fulfill the combined business relationship between Hospital and IMS and do not
represent the Corporations market prices, and Hospital further agrees to cause
its named Directors to require that the Corporation charge Local Sponsorship
Fees at least equal to those Fees set out in Exhibit 6.3.
------------
6.3.1. Hospital agrees that acceptance of any Local Sponsorship
Agreement at fees below those set out in Exhibit 6.3 will require a
-----------
Board vote with an affirmative vote from both IMS-named Directors.
6.4. Hospital Network Services Agreement. IMS agrees that the Network
-----------------------------------
Services Agreement to be signed separately by Hospital or its subsidiaries for
Network participation by Hospitals owned-campuses will contain the following
specific Terms and Conditions:
6.4.1 Notwithstanding the Corporation's Business statement as expressed
in 6.1 above, IMS agrees that:
6.4.1.1. The Corporation will neither solicit nor install
Orlando Regional Medical Center, nor any of its owned campuses
nor any healthcare facility in which it has an equity interest
("ORMC") without the prior written acceptance of Hospital's Chief
Executive Officer during the entire duration of the Corporation.
6.4.1.2. The Corporation will neither solicit nor install any
additional hospital in the exclusive territory without the prior
acceptance of Hospital's Chief Executive Officer, which shall not
be unreasonably withheld, until either the earliest of eighteen
(18) months from the date of incorporation or all Hospital owned
campuses are installed as well as all Hospital's Affiliate
hospitals in the exclusive territory as listed in Exhibit 6.4.
------------
6.4.2 The Network Installation Fees will not exceed Seventy-Five
Thousand Dollars ($75,000) for the Hospital's configuration as set forth
in Exhibit 6.4.2, and, at Hospital's option, any additional capital
-------------
purchases to fulfill additional Network capabilities will be
pre-approved by Hospital and billed by IMS at its standard rates as
indicated on Exhibit 6.3.
------------
6.5 Facilities and Personnel. Within six (6) months of incorporation,
------------------------
the Corporation will be located in independent space with separate identity and
access that
- 9 -
<PAGE>
is fully equipped internally and will be staffed by dedicated employees or
contracted services. However, during the first six (6) months of operations
after incorporation, the Parties agree that:
6.5.1. IMS shall provide to the Corporation at no cost from both IMS'
Southeast Region Office and Corporate Office such advisory and
consultant management services, support and personnel as the Corporation
may require to initiate operations and establish a fully-functional
local business unit, including, but not limited to, planning, market
research, marketing, sales, software support, user support and
accounting.
6.5.2. Hospital shall provide at no cost other than direct
measurable costs such as long distance telephone charges, per-page
photocopy charges, postage, etc. such office space and office support
facilities and services as the Corporation may require including, but
not limited to, office space for the President, desk space for
three-to-five technical support, training and marketing staff, space for
a temporary ComCenter, access to phone service, secretarial support, and
standard office equipment -- copier, fax, PC and mail machines.
6.6. Hospital Mission. IMS agrees that in recognition of the Mission
----------------
of Florida Hospital and its adherence to the beliefs of the Seventh-day
Adventist Church, the Corporation will be operated in accordance with the
Mission of Hospital, which would include not holding business meetings or
conducting sales, marketing, training or regular office hours recognized as the
seventh day Sabbath (Saturday).
7. REPRESENTATIONS AND WARRANTIES. Hospital and IMS each, for itself alone,
------------------------------
warrants and represents that:
7.1. Content of Agreement. Each has carefully read and understands
--------------------
the content of this Agreement.
7.2. Financial Risks. Each understands the financial risks involved
---------------
in this investment, which could result in a substantial or complete l its
investment. Each can assume a high degree of risk in making such an investment
and can afford the loss of its entire investment in this security.
7.3. Reliance on Own Counsel. Each, in evaluating the merits of an
-----------------------
investment in the Corporation has relied, to the extent each deems necessary, on
the advise of its own personal accountant and tax and legal counsel. Each
acknowledges that neither the Corporation nor its counsel has provided any tax
opinion or other legal advice in connection with this offering.
- 10 -
<PAGE>
7.4. No Public Market for Stock. Each is aware that the common stock
--------------------------
of the Corporation has not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), that the Corporation has no present intention to
register the said stock under the Securities Act, that currently there is no
public market for the common stock and that the transfer of the common stock is
subject to certain restrictions. As a consequence, each understands that it may
not be possible for it to sell its shares, which may have to be held
indefinitely.
7.5. Business and Financial Experience. Each, by reason of their
---------------------------------
business and financial experience or the business and financial experience of
their professional advisors who are unaffiliated with the Corporation, believe
that they have the capacity to protect their own interests in connection with
this offering.
7.6. Restricted Stock Legend. Each is aware that each certificate
-----------------------
for the common stock shall bear a legend setting forth restrictions on transfer
of the common stock substantially similar to the following:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, THE COLORADO
CORPORATE SECURITIES LAW, NOR ANY OTHER STATE SECURITIES LAWS,
AND THE TRANSFER OF SUCH SECURITIES IS SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE SHAREHOLDERS'
AGREEMENT DATED MAY 3l, 1992, BETWEEN ADVENTIST HEALTH
SYSTEM/SUNBELT AND INTEGRATED MEDICAL SYSTEMS, INC., A COPY
OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL BUSINESS OFFICE
OF THE CORPORATION.
7.7. Purchase for Investment Only. Each is the sole party in interest
----------------------------
agreeing to make this purchase, is purchasing the common stock for its own
account for investment purposes only and not with a view to or for sale in
connection with the distribution of the common stock.
7.8. Access to Information. Prior to the sale of the stock, the
---------------------
Corporation afforded Hospital and IMS and their advisors, if any, full and
complete access to all information with respect to the Corporation and proposed
operations that it and its advisors deemed necessary to evaluate the merits and
risks of an investment in the Corporation to the extent such information was
possessed or could be acquired by the Corporation without unreasonable effort or
expense. Each understands that the documents, records and books of the
Corporation shall be available upon reasonable notice for inspection by
shareholders during reasonable business hours at the Corporation's principal
office.
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<PAGE>
7.9. Due Organization and Authority. Each is duly organized, validly
------------------------------
existing and in good standing in the state of its incorporation and possesses
all necessary powers and authority to enter into this Agreement.
8. PAYMENT OF CERTAIN EXPENSES.
---------------------------
8.1 Reimbursable Expenses. Subject to the limitations hereinbelow
---------------------
described, Hospital and IMS agree to cause the Corporation either to pay or
reimburse Hospital or IMS, as the case may be, only for the following
preincorporation expenses, or to credit such expenses against the purchase price
paid by them for the common Stock of the corporation. Such preincorporation
expenses shall be only:
8.1.1. Such filing fees, costs, prepaid franchise taxes or other
expenses directly incurred in organizing or registering the Corporation
in good standing with the State of Colorado, and any county or local
government department or agency necessary or convenient to the operation
of the Corporation as contemplated by the Articles and this Agreement.
8.1.2. Such other expenses as may be agreed upon, in writing, from
time to time by Hospital and IMS.
8.2 Nonreimbursable Expenses. Hospital and IMS agree that any and all
------------------------
other expenses incurred by Hospital and IMS in organizing and
incorporating the Corporation other than as is expressly set forth in
Section 8.1 above shall not be reimbursable by the Corporation and shall
be paid solely by the party incurring such expenses. Without limiting
the generality of the foregoing, each party shall bear its own legal and
accounting fees, travel, lodging, telephone and other out of pocket
expenses involved in the negotiation, organization and formation of the
Corporation.
9. COVENANT NOT TO COMPETE.
-----------------------
9.1. Noncompetition. At all times after incorporation, while both
--------------
Hospital and IMS own any of the common stock of the Corporation, Hospital, for
itself and, and IMS, for itself agree not to, and shall use their reasonable
best efforts to cause their respective officers, directors, shareholders,
members and management employees not to, directly or indirectly own, manage,
operate, control, organize, participate in the management, control, or
organization of, be employed by any individual or organization which manages,
operates or offers any type of medical information network arrangements (other
than the Corporation's Network), if such individual or other organization in any
manner or to any extent provides, arranges for or pays for any such medical
information network services anywhere in the Exclusive Territory.
Notwithstanding the foregoing, during the time periods set forth in the
immediately preceding sentence, IMS may, but Hospital shall not, invest or own
an interest in any organization that manages, operates or offers such
- 12 -
<PAGE>
medical information network services or arrangements operating exclusively
outside of the Exclusive Territory. Exceptions to the covenant not to
compete restrictions set forth in this Section 9.1 may be made upon
approval by two-thirds (2/3) of the shareholders of the Corporation
entitled to vote.
9.1.1 Notwithstanding any provision contained elsewhere in this
Agreement, the parties hereto agree that Sunbelt Systems Concepts,
Inc., which provides hardware and software capabilities, including the
development of specific software programs and capabilities to meet the
needs of organizations affiliated with Adventist Health System/Sunbelt
Health Care Corporation, including the Hospital and its affiliates,
shall not be subject to the provisions of this Shareholder's
Agreement, including but not limited to the provisions of Section 9.1.
9.2. Enforcement by Injunction. Hospital, IMS and their successors
-------------------------
and assigns, acknowledge and agree that irrevocable harm and damage will be
sustained by the Corporation and its business in the event that they or
either of them or any of their officers, directors, shareholders, members,
management employees, compete with the Corporation except as herein
provided. In the event of violation of Section 9.1 hereof, the parties
acknowledge that said breach would result in irreparable injury to the
Corporation for which monetary damages would be inadequate, and therefore,
in the event of said breach, the Corporation shall be entitled (in addition
to all other legal and equitable remedies) to have an injunction issued by
any court of equity enjoining and restraining said breach. The running of
any statute of limitations shall be tolled during the period of said
breach.
9.3. Limitation. If the restriction contained in Section 9.1 or the
----------
application thereof is held to be unenforceable because of the area
covered, or the duration or scope thereof, the court making such
determination shall have the power to reduce the area and/or duration
thereof and/or otherwise reduce the scope thereof and the restriction shall
then be enforceable in its reduced form.
10. SOFTWARE LICENSE BETWEEN IMS AND HOSPITAL. Concurrently with the
-----------------------------------------
execution of this Agreement, Hospital and IMS shall execute, deliver and enter
into the Software License and Services Agreement in the form attached hereto as
Exhibit 2.3 and incorporated herein by this reference.
- -----------
11. REMARKETING AGREEMENT. Concurrently with the execution of this
---------------------
Agreement, Hospital and IMS shall cause the Corporation to execute, deliver and
enter into the Remarketing Agreement with IMS in the form attached hereto as
Exhibit 11 and incorporated herein by this reference.
- ----------
- 13 -
<PAGE>
12. DISSOLUTION.
-----------
12.1. Voluntary Dissolution. In the event of Hospital and IMS at any
---------------------
time and for any reason agree to a voluntary dissolution and winding up of the
business operations of the Corporation, the rights and obligations of the
parties as well as the procedures governing the dissolution and winding up of
the Corporation shall be as is provided in the Articles and the Colorado
Corporations Code, as amended, provided that Hospital and IMS shall have the
following additional rights and obligations:
12.1.1. IMS shall thereafter provide to Hospital for use of the
IMS-NET(TM) and Synergy Series(TM) Software updates and enhancements, and
the additional technical and computer programming support and assistance
as then available by IMS and requested by Hospital, all at prices and
upon terms at least as favorable as those then available to the most
favored IMS clients. In addition, Hospital and all participants in the
IMS-NET System shall continue to have access upon terms at least as
favorable as IMS then charges its most favored customers to all Network
Local Sponsors and National Sponsors which continue to advertize or
otherwise do business with IMS after dissolution of the Corporation.
12.2. Involuntary Dissolution. In the event involuntary dissolution
-----------------------
proceedings are commenced, for whatever reason, against the Corporation, the
rights and obligations of Hospital and IMS as well as the procedures governing
such involuntary dissolution and winding up of the Corporation shall be as is
provided in the Articles and the Colorado Corporations Code, as amended.
12.3. Competition After Dissolution. Upon the dissolution and
-----------------------------
completion of the winding up of the affairs of the Corporation pursuant to
Sections 12.1 or 12.2, each party to this Agreement shall have the right, for
its own behalf and without obligation to the other party or the other party's
Affiliates or Subsidiaries, to establish, own and operate, by itself or with any
third party, one or more medical information network(s) in the Exclusive
Territory or elsewhere, provided that Hospital shall have no right to utilize
IMS-Net(TM) or Synergy series(TM) Software in the management, ownership or
operation of such other medical information networks.
13. MANDATORY BUY-SELL.
------------------
13.1. IMS Change of ownership. The parties agree that, other than a
-----------------------
sale of registered stock to the public, should IMS sell, merge or otherwise
combine with another corporate entity or group of shareholders or investors in
such a fashion that the ownership of IMS is altered by more than fifty-one
percent (51%) from the ownership existent at the time of this Agreement, than
Hospital shall have a right to mandate the sale of IMS' 51% interest in the
Corporation to Hospital at its then Fair Market Value to be determined by an
appraiser selected jointly by separate appraisers nominated by each
- 14 -
<PAGE>
Party, only for the purpose of Hospital to own a 100% equity position in
Corporation and continue to operate Corporation according to Section 6 of this
Agreement.
13.2. Expiration. If either Hospital or IMS acquires all of the common
----------
stock of the Corporation owned by the other pursuant to this Section 13, neither
Hospital or IMS (nor any of their permitted transferees, if any) shall have any
further right to exercise the option set forth in this Section 13.
13.3. Purchase by Hospital. In the event Hospital acquires all of the
--------------------
stock of the Corporation owned by IMS pursuant to this Section 13, IMS hereby
covenants and agrees that:
13.3.1. IMS shall thereafter provide to Hospital IMS-NET(TM) and
Synergy Series(TM) Software updates and enhancements, and the additional
technical and computer programming support and assistance as then
available by IMS and requested by Hospital, all at prices and upon terms
at least as favorable as those then available to the most favored IMS
clients. In addition, Hospital shall continue to have access upon terms
at least as favorable as IMS then charges its most favored customers to
all Network Local Sponsors and National Sponsors which continue to
advertise or otherwise do business on the Network after acquisition of
the Corporation by Hospital.
13.4. Purchase by IMS. In the event IMS acquires all of the stock of
---------------
the Corporation owned by Hospital pursuant to this Section 13, Hospital and IMS
hereby mutually covenant and agree:
13.4.1. For a period of three (3) years after the date IMS acquires all
of the Corporation's stock owned by Hospital pursuant to this Section 13,
Hospital and its Subsidiaries and Affiliates shall not, directly or
indirectly own, manage, operate, control, organize, participate in the
management, control, or organization of, be employed by any individual or
organization which is in the business of managing, operating or offering
any type of medical information network services or arrangements wherever
located. Notwithstanding, nothing in this section 13.4 shall be
----
interpreted to restrict Hospital's communication of its own information
with its medical staff.
13.4.2. Hospital, and its Subsidiaries and Affiliates acknowledge and
agree that irrevocable harm and damage will be sustained by IMS and its
business in the event that Hospital and its Subsidiaries or Affiliates
compete with IMS except as herein provided. In the event of violation of
Section 13.4.1 hereof, the parties acknowledge that said breach would
result in irreparable injury to IMS for which monetary damages would be
inadequate, and therefore, in the event of said breach, IMS shall be
entitled (in addition to all other legal and equitable remedies) to have
an injunction issued by any court of equity enjoining and
- 15 -
<PAGE>
restraining said breach. The running of any statue of limitations shall
be tolled during the period of said breach.
13.4.3. If the restriction contained in Section 13.4.1 or the
application thereof is held to be unenforceable because of the area
covered, or the duration or scope thereof, the court making such
determination shall have the power to reduce the area and/or duration
thereof and/or otherwise reduce the scope thereof and the restriction
shall then be enforceable in its reduced form.
13.5. Protection of Technology to Insure Continuity of the Network. IMS
------------------------------------------------------------
will place the source code and documentation for the Network Controller, IMS-NET
and Synergy Series software in escrow with Hopper & Kanouff ("Escrow Agent")
pursuant to the provisions of that Escrow Agreement attached hereto as
Exhibit 13.5. Software source code and documentation will be sent to the Escrow
- ------------
Account whenever a new software release occurs, or every six (6) months,
whichever occurs first. Should IMS default in the payment or performance of any
of its obligations, warranties or representations under this Agreement or any
other agreement related hereto, then Escrow Agent, upon notice from Hospital
with appropriate documentation, shall deliver to Hospital the contents of the
Escrow Account. Hospital shall then have an absolute license to use the IMS
software in the limited geographic area described in Paragraph 1.4.
14. MISCELLANEOUS.
--------------
14.1. Notices. All notices required to be given hereunder shall be
-------
given in writing and shall be personally delivered or deemed delivered if
dispatched by certified or registered mail, return receipt requested, postage
prepaid, addressed to the parties as set forth opposite their respective names
below:
Hospital: Florida Hospital
--------------------------------
601 East Rollins Street
--------------------------------
Orlando, FL 32803
--------------------------------
Attn: President
With a copy to: Adventist Health System/SunBelt
--------------------------------
2400 Bedford Road
--------------------------------
Orlando, FL 32803
--------------------------------
Attn: Legal Department
IMS: Integrated Medical Systems, Inc.
15000 West 6th Avenue
Golden, Colorado 80401
Attn: President
- 16 -
<PAGE>
With a copy to: Hopper and Kanouff, P.C.
1610 Wynkoop Street, Suite 200
Denver, Colorado 80202
Attn: Alan Peryam, Esq.
A notice shall be deemed given on the date it is deposited in the mail in
accordance with the foregoing. Any party may change the address to which to
send notices by notifying the other party of such change of address in writing
in accordance with the foregoing.
14.2. Governing Law. This Agreement and all rights, duties and
-------------
obligations hereunder shall be construed and interpreted in accordance with the
internal laws (not the choice of law) of the state of Colorado.
14.3. Waiver. The waiver by a party of any breach of any term, covenant
------
or condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance by a party of
performance by the other shall not be deemed to be a waiver of any proceeding
breach of any term, covenant or condition of this Agreement, other than the
failure to perform the particular duties so accepted, regardless of knowledge of
such preceding breach at the time of acceptance of such performance.
14.4. Severability. Nothing contained in this Agreement shall be
------------
construed so as to require the commission of an act contrary to law and whenever
there is any conflict between any provision of this Agreement and any present
statute, law, ordinance or regulation contrary to which the parties have no
legal right to contract, the latter shall prevail, but in such event, the
provisions of this Agreement affected shall be curtailed and limited only to the
extent necessary to bring it within the requirements of the law and to carry out
the purposes of this Agreement.
14.5. Binding Agreement. Subject to the restrictions on transfer and
-----------------
encumbrances set forth herein, this Agreement shall inure to the benefit of and
be binding upon Hospital and IMS and their respective legal representatives,
successors, transferees, and assigns, and any other person holding stock in the
Corporation by whatever means. Whenever a reference is herein made to any party
such reference shall be deemed to include a reference to the legal
representatives, successors, transferees, and assigns of such party.
14.6. Term and Termination. This Agreement shall continue for so long as
--------------------
the Corporation is in existence unless sooner amended or terminated by the
affirmative vote of the holders of not less than two thirds (2/3) of the common
stock or terminated either by the acquisition by a single party of all the
outstanding shares of common stock of the Corporation or by operation of any
applicable law.
- 17 -
<PAGE>
14.7. Assignment. This Agreement shall not be assigned by either Hospital
----------
or IMS without the express prior written consent of the other party, except that
either party may at any time without prior written consent assign this Agreement
or its rights, duties and obligations hereunder, and any or all common stock of
the Corporation to any parent corporation or wholly-owned subsidiary
corporation.
14.8. Gender. As used herein, the singular includes the plural, the
------
plural the singular, and the masculine includes the feminine and the neuter all
as the context requires.
14.9. Headings. All headings and captions used herein are for
--------
convenience of reference only, and shall not be a part or affect the
interpretation of this Agreement.
14.10. Time of Essence. Hospital and IMS acknowledge and agree that time
---------------
is of the essence in this Agreement.
14.11. Confirmation by Corporation. Hospital and IMS agree to take all
---------------------------
action necessary and convenient to cause the Corporation's Board of Directors to
confirm in writing that each Director has read and understood this Agreement
that each Director shall take appropriate action to cause the Corporation to
comply with all of the relevant provisions of this Agreement.
14.12. Entire Agreement; Supersedure of Shareholders' Agreement. This
--------------------------------------------------------
Agreement supersedes all prior oral and written understandings and agreements
between the parties hereto. The parties acknowledge and agree that this
Agreement together with all documents and agreements referenced and incorporated
herein contain the entire agreement between the parties. No representations,
promises, conditions or warranties with reference to the execution of this
Agreement have been made or entered into between the parties hereto other than
as herein expressly provided. If there is any inconsistency between any
provision in this Shareholders' Agreement, or any amendment thereof, and any
provision of the Corporation's Articles' of Incorporation, as amended from time
to time, or the Corporation's Bylaws, as amended from time to time, or any
other License, Agreement, or supporting document, Hospital and IMS agree to
vote their shares of the Corporation's common stock to cause the Corporation to
amend said Articles of Incorporation or said Bylaws to be consistent with this
Shareholders' Agreement or any amendment thereof to the extent legally
permissible.
14.13. Attorneys Fees.
--------------
14.13.1. In the event of any suit under this Agreement, reasonable
attorneys' fees and costs shall be awarded by the court to the prevailing
party, to be included in any judgment recovered.
- 18 -
<PAGE>
14.13.2. In addition, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs incurred in enforcing any
judgment arising from a suit under this Agreement. This post judgment
attorneys' fees and costs provision shall be severable from the other
provisions of this Agreement and shall survive any judgment on such
suit and is not to be deemed merged into the judgment.
14.14. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
14.15. Exhibits. All exhibits attached hereto and referred to
--------
herein are hereby incorporated herein as though fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
Adventist Health Systems/Sunbelt:
By ^SIGNATURE TO COME^
----------------------------------------------
Title Executive Vice President, Florida Hospital
--------------------------------------------
By ^SIGNATURE TO COME^
-----------------------------------------------
Title President, CentraHealth Network
--------------------------------------------
"IMS"
INTEGRATED MEDICAL SYSTEMS, INC.
By ^SIGNATURE TO COME^
-----------------------------------------------
Title Sr. Vice President, Chief Operating Officer
--------------------------------------------
By ^SIGNATURE TO COME^
-----------------------------------------------
Title Vice President, Finance & Administration
--------------------------------------------
- 19 -
<PAGE>
Exhibit 10.20
JOINT VENTURE LIMITED PARTNERSHIP AGREEMENT
THIS JOINT VENTURE LIMITED PARTNERSHIP AGREEMENT ("Agreement") is made and
entered into as of June 30, 1992, by and between BLUE CROSS AND BLUE SHIELD OF
ARIZONA, INC., an Arizona corporation ("BCBSAZ") and IMS--NET OF ARIZONA, INC.,
an Arizona corporation ("IMS--NET") sometimes referred to collectively as the
"Joint Venturers."
THIS AGREEMENT is made and entered into with reference to the following
facts:
A. IMS--NET is a wholly-owned subsidiary of Integrated Medical Systems,
Inc. ("IMS") which has developed and owns certain proprietary computer software
operating on various types of computers that facilitates the transmission of
data, text, voice, clinical graphics and diagnostic images over telephone lines
which can improve the efficiency and effectiveness of communication related to
health care delivery.
B. IMS has granted IMS--NET an exclusive license for use of its
proprietary network and related computer software in the state of Arizona.
C. BCBSAZ is familiar with the Arizona health care market and has
developed business, contacts and communications with hospitals, physicians and
other licensed health care professionals.
D. BCBSAZ and IMS--NET desire to establish a limited partnership as a
joint venture to establish and operate a medical information network in Arizona,
to improve the efficiency and effectiveness of communication related to health
care delivery between BCBSAZ, hospitals, acute care facilities, mental health
and substance abuse facilities or other facilities and physicians and other
licensed health care professionals with privileges to utilize such facilities in
accordance with this Agreement.
E. BCBSAZ and IMS--NET desire to set forth their intentions and agreements
with respect to the development, ownership and operation of the limited
partnership joint venture (hereinafter "Joint Venture").
NOW, THEREFORE, in consideration of the recitals, covenants, conditions and
agreements contained herein, the parties agree as follows:
1. Definitions. For purposes of this Agreement and in addition to the
-----------
terms otherwise defined herein, the following terms shall have the meanings as
set forth below:
1.1. Act. "Act" shall mean the Arizona Limited Partnership Act,
---
Arizona Revised Statutes, Section 29-301, et seq.
------
1.2. Agreement. "Agreement" shall mean this Joint Venture Limited
---------
Partnership Agreement dated on the day and year appearing in the opening
<PAGE>
paragraph hereof and all Exhibits attached hereto or incorporated by
reference herein and all amendments duly adopted from time to time.
1.3. AZMIN. "AZMIN" refers to the Arizona Medical Information
-----
Network and the Joint Venture Limited Partnership which owns and operates
the Network.
1.4. ComCenter Hardware. "ComCenter (Communications Center)
------------------
Hardware" refers to the Network-owned, message switching computer(s) on
which the ComCenter Software runs. Such hardware is the Digital Equipment
Corporation ("DEC") VAX family of computers.
1.5. ComCenter(TM) Software. "ComCenter(TM) Software" shall mean the
----------------------
computer software, as hereafter defined, developed and owned by IMS that
supports and facilitates the transmission of data, text, voice, clinical
graphics and diagnostic images over a telephone network which resides on
and operates the ComCenter hardware and includes the Network Interface.
1.6. ComCenter System. "ComCenter (Communications Center) System"
----------------
refers to the ComCenter Software and ComCenter Hardware together.
1.7. Exclusive Territory. "Exclusive Territory" shall mean the state
-------------------
of Arizona.
1.8. IMS--NET(TM). "IMS--NET(TM)" shall mean the Comcenter(TM)
------------
Software together with the PC-C Software(TM), as hereafter defined
including all Network Interface. IMS--NET(TM) software is proprietary to
IMS.
1.9. Joint Venture. "Joint Venture" shall mean the limited
-------------
partnership entity created by this Agreement.
1.10. Local Sponsor. "Local Sponsor" shall mean any individual or
-------------
entity desiring to use the Network, as hereafter defined, to receive and/or
disseminate advertising or information, which agrees to pay fees to the
Joint Venture for the right to so use the Network and/or for the right of
others to use the Network, and which does not meet the definition of
National Sponsor, as hereafter defined.
1.11. National Sponsor. "National Sponsor" shall mean any health
----------------
care related entity desiring to use a Network as defined, to receive and/or
disseminate information, which agrees to pay fees for the right to so use
the Network and which participates in at least two networks with which
Integrated Medical Systems, Inc. is affiliated.
1.12. NCW. "NCW" (Network Communications Workstation) refers to an
---
IBM PC or fully compatible computer on which the PC-COM Software(TM) runs.
- 2 -
<PAGE>
1.13. Network Interface. "Network Interface" refers to portions of
-----------------
IMS--NET(TM) software which automate or partially automate message
transmission and which are used to interface BCBSAZ'S existing computer
system(s) to the Network, and includes such existing IMS software products
as Automsg(TM) and Relay(TM).
1.14. Network. "Network" shall mean the medical information network
-------
owned and operated by IMS--NET which utilizes IMS-NET(TM) software to
improve the efficiency and effectiveness of communication of and among
Subscribers, BCBSAZ and other sponsors or users authorized to use the
Network by IMS--NET.
1.15. NSA. "NSA" ("Network Services Agreement") refers to an
---
agreement between the Joint Venture and a local sponsor, such as BCBSAZ.
1.16. PC-Com(TM) Software. "PC-Com(TM) Software" shall mean the
-------------------
computer software, as hereafter defined, developed and owned by IMS, that
supports and facilitates the transmission of data, text, voice, clinical
graphics and diagnostic images over a telephone network and which operates
on International Business Machine ("IBM") Personal Computers or
IBM-compatible Personal Computers. The PC-Com(TM) resides on the NCW.
1.17. Script. "Script" refers to any customized screen or message
------
format that will appear on BCBSAZ'S or Subscriber NCWs, and used to
facilitate the sending or receiving of information in a format desired by a
Local Sponsor.
1.18. Software. "Software" shall mean a series of independent but
--------
interrelated computer programs which interact with computer equipment and
operating systems to form a complete data processing system. "Software"
includes, but is not limited to, computer program listings, user manuals,
functional specifications, technical documentation, source code, and
tangible media upon which the computer programs are recorded.
1.19. Subdirectory. "Subdirectory" refers to a list of a Local
------------
Sponsor's sites and Subscriber sites that appears as a screen or screens on
a Local Sponsor's NCWs and designates those Subscribers that the Local
Sponsor has paid to communicate with over the Network.
1.20. Subscriber. "Subscriber" refers to any physician private
----------
practice site or other party authorized by AZMIN to participate in the
Network.
1.21. Synergy Series(TM). "Synergy Series" refers to the practice
------------------
support software modules provided by IMS to Subscribers in addition to the
PC-Com Software. Certain Synergy Series(TM) software is provided to
Subscribers without charge, such as "Word Pro(TM)" word processing,
"Clinical Manager(TM)" clinical data management, "Rx Manager(TM)" drug
therapy management and "CME Manager(TM)"
- 3 -
<PAGE>
continuing medical education management and other modules may be offered at
the option of Subscribers.
2. Formation of Limited Partnership.
--------------------------------
2.1. Formation. The Joint Venturers hereby form and establish a limited
---------
partnership (the "Joint Venture") under the terms and provisions of this
Agreement and the provisions of the Act and the rights and liabilities of the
Joint Venturers shall be as provided in the Act, except as otherwise expressly
provided in this Agreement.
2.2. Name of the Limited Partnership. The name of the Joint Venture shall
-------------------------------
be "IMS--NET of Arizona Joint Venture, Ltd.," d/b/a Arizona Medical Information
Network, or such other name as the Joint Venturers may from time to time
designate. The Joint Venturers shall cause to be filed, on behalf of the Joint
Venture, such certificate of limited partnership or assumed or fictitious name
certificate or certificates as may from time to time be required by law.
2.3. Place of Business of the Joint Venture. The principal place of
--------------------------------------
business of the Joint Venture shall be located at 11636 North 60th Street,
Scottsdale, Arizona 85254. The agent for service of process on the Joint
Venture at such address shall be Kevin R. Green.
2.4. Partners Names and Addresses. The names and addresses of the Partners
----------------------------
("Joint Venturers") are:
General Partner (also Limited Partner:
designated as "Managing
Partner"):
IMS--NET of Arizona, Inc. Blue Cross Blue Shield of Arizona, Inc.
11636 North 60th Street 2444 West Las Palmaritas Drive
Scottsdale, Arizona 85254 P. O. Box 13466
Phoenix, Arizona 85002-3466
2.5. Title to Property. All property owned by the Joint Venture, whether
-----------------
real or personal, tangible or intangible, shall be deemed to be and shall be
owned by IMS--NET and the Joint Venture shall not have any ownership interest in
such property, except as set forth in this Agreement.
2.6. Filing of Certificates. The Managing Venturer (as defined below)
----------------------
shall file and publish all such certificates, notices, statements or other
instruments required by law for the formation and operation of a limited
partnership in all jurisdictions where the Joint Venture may elect to do
business.
- 4 -
<PAGE>
3. Purpose.
-------
3.1. Purpose. The purpose of the Joint Venture is to establish and operate
-------
one or more for-profit Networks in the Exclusive Territory, to improve the
efficiency and effectiveness of communication related to health care delivery
between hospitals, acute care facilities, mental health, substance abuse
facilities and other medical facilities and physicians and other licensed health
care professionals with privileges to utilize such facilities and other
providers or payors with a bona fide interest in communicating with such other
participants, including BCBSAZ. In furtherance of its business, the Joint
Venture shall have and may exercise all the powers now or hereafter conferred by
the Act on limited partnerships formed thereunder, and shall do any and all
things related or incidental to its business as fully as natural persons might
or could do under the laws of the state of Arizona. The Joint Venture shall
engage in no other business.
4. Term and Fiscal Year.
--------------------
4.1. Duration of the Joint Venture. The Joint Venture shall commence upon
-----------------------------
the date of execution of this Agreement, and shall continue until December 31,
2032 or until its earlier termination in accordance with the provisions of
Section 14 of this Agreement.
4.2. Fiscal Year. Except for the Joint Venture's initial fiscal year,
-----------
which shall commence on the date hereof and end on December 31, 1992, the fiscal
year of the Joint Venture shall commence on the first day of January of each
year and shall end on the last day of December in the same year.
5. Capital Contributions.
---------------------
5.1. Initial Capital Contributions.
-----------------------------
5.1.1. Concurrently herewith, each Joint Venturer shall make the
following contributions to the Joint Venture:
(a) In exchange for its interest in the Joint Venture, effective
upon the date of this Agreement, IMS--NET shall cause to be licensed
to the Joint Venture the business plan for operation of one or more
Networks in the Exclusive Territory, all proprietary concepts, trade
secrets, techniques or business expertise or other acumen developed by
IMS for the purpose of commercializing a medical information network
and an exclusive license to use the Software owned by IMS, including
IMS--NET(TM), Com-Center(TM), and Synergy Series(TM) Software in the
Exclusive Territory, as more fully set forth in the License Agreement
attached to this Agreement as Exhibit B and incorporated herein by
this reference.
- 5 -
<PAGE>
(b) In exchange for a capital contribution of $1,000, BCBSAZ
shall receive its interest in the Joint Venture, which amount shall be
paid upon the date of execution of this Agreement.
5.1.2. No interest shall accrue on any contribution to the capital of
the Joint Venture, and no Joint Venturer shall have the right to withdraw
or to be repaid any capital contributed by it.
5.2. Additional Capital Contributions. Additional capital contributions
--------------------------------
shall be made only with the consent of the Joint Venturers.
6. Allocation of Profits and Losses.
--------------------------------
6.1. Losses. All Joint Venture losses shall be allocated 100% to
------
IMS--NET.
6.2. Profits. So long as (i) BCBSAZ is in compliance or has complied with
-------
its obligations under the NSA and (ii) BCBSAZ has not exchanged all its interest
in the profits of the Joint Venture as described in Section 6.7 below, BCBSAZ
shall be allocated a portion of the profits of the Joint Venture in a manner
described in this Section 6, and that portion of the profits of the Joint
Venture not allocated to BCBSAZ shall be allocated to IMS--NET.
6.2.1. Profits Interest. BCBSAZ shall be allocated 50% of the net
----------------
profits of the Joint Venture adjusted and determined in accordance with the
following:
(a) Net Profits of the Joint Venture shall be determined
using generally accepted accounting principles, consistently applied,
provided that cumulative net losses incurred by the Joint Venture from
the date of this Agreement through the time of calculation and
allocated to IMS--NET under Section 6.1 shall be offset against
profits; and
(b) The portion of the net profits of the Joint Venture to be
allocated to BCBSAZ under this Agreement shall be reduced by the
portion of such profits interest which BCBSAZ has theretofore elected
to exchange with Integrated Medical Systems, Inc. ("IMS"), the parent
corporation of IMS--NET for common stock of IMS as described in
Section 6.7 below.
6.3. Federal Tax Allocation. Except as otherwise required hereunder or as
----------------------
otherwise provided by the Code and the rules and Treasury Regulations, for
federal income tax purposes, each item of income, gain or credit, and each item
of loss or deduction entering into the computation of the Joint Venture's
taxable income shall be allocated to the Joint Venturers on the same basis as
profits and losses are allocated to the Joint Venturers for book purposes.
- 6 -
<PAGE>
6.4. Allocations Respecting Contributed Assets. In accordance with Code
-----------------------------------------
Section 704(c) and the Treasury Regulations thereunder, income gain, credit,
loss and deduction with respect to any asset contributed to the capital of the
Joint Venture shall, solely for tax purposes, be allocated among the Joint
Venturers so as to take account of any variation between the adjusted basis of
such property to the Joint Venture for federal income tax purposes and its
initial Adjusted Asset Value. In the event the Adjusted Asset Value of any
Joint Venture asset is adjusted pursuant to the terms of this Agreement,
subsequent allocations of income, gain, credit, loss and deduction with respect
to such asset shall take account of any variation between the adjusted basis of
such asset for federal income tax purposes and its Adjusted Asset Value in the
same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
6.5. Capital Account Balance. Each Joint Venturer's capital account (a)
-----------------------
shall be credited with (i) its contributions of cash, licenses and agreed values
of intangibles respectively with the valuations set forth in Sections 5.1.1(a)
and 5.1.1(b), to the capital of the Joint Venture, (ii) its allocable share of
the Joint Venture profits determined as set forth in Section 6.2, (iii)
additional capital contributions made by it, if any, and (iv) by the amount of
any Joint Venture liabilities that are assumed by it or that are secured by any
Joint Venture property distributed to it, and (b) shall be debited with (i) its
allocable share, if any, of the Joint Venture losses, (ii) the amount of any
withdrawals by or distributions to it by the Joint Venture, and (iii) by the
amount of any of its liabilities that are assumed by the Joint Venture or that
are secured by any property contributed by it to the Joint Venture. The capital
accounts are to be maintained in a manner consistent with Treasury Regulations
Section 1.704-1(b)(2)(iv).
6.6. General. The respective interests of the Joint Venturers in the
-------
profits and losses of the Joint Venture shall remain as set forth above unless
changed by amendment to this Agreement or by an assignment of an interest in the
Joint Venture authorized by the terms of this Agreement.
6.7. Exchange by BCBSAZ. The parties acknowledge and agree the BCBSAZ has
------------------
an agreement with IMS, a Colorado corporation which is the parent corporation of
IMS--NET, to exchange part or all of the rights of BCBSAZ under this Agreement
in exchange for an equity interest in IMS, and to the extent that such exchange
is effected, IMS shall become a party to this Agreement, shall become an
additional limited partner and one of the joint venturers and shall be subject
to the other terms and conditions of this Agreement and shall share in the
rights and responsibilities of BCBSAZ as described in this Agreement to the
extent such exchange has been effected.
6.8. Distributions of Available Cash. The Joint Venture shall make cash
-------------------------------
distributions to Joint Venturers only out of profits as determined and allocated
under Section 6.2. Distributions, if available, shall be made within 60 days
following: (i) the end of calendar years 1992 and 1993, (ii) semi-annually in
1994 and 1995 and (iii) quarterly thereafter.
- 7 -
<PAGE>
7. Managing Venturer.
-----------------
7.1. Appointment. The business and affairs of the Joint Venture shall be
-----------
conducted under the direction and control of the General Partner which shall be
designated as "Managing Venturer" or "Manager." The Managing Venturer of the
Joint Venture shall be IMS--NET which shall serve, with the powers described
below, until it resigns or is replaced by a new Managing Venturer pursuant to
the written agreement of both Joint Venturers.
7.2. Management Services Agreement. The duties, rights, responsibilities
-----------------------------
and authority of the Managing Venturer shall be as set forth in the Management
Services Agreement in the form attached as Exhibit A, which the Managing
---------
Venturer shall sign and which shall be incorporated by reference into this
Agreement.
7.3. Approval of Certain Actions. Notwithstanding anything in Section 7.2
---------------------------
to the contrary,
7.3.1. Actions with respect to the purchase or sale of real estate,
the making of distributions of dividends or surplus by the Joint Venture to
the Joint Venturers or any of them other than in accordance with this
Agreement or the Management Services Agreement, or the material changing
the way the Networks are operated may not be taken without prior and
specific approval of both Joint Venturers.
7.3.2. The authority of the Managing Venturer to operate the Network
or Networks shall be subject to review only in the following matters which,
if not approved unanimously by the Joint Venturers, shall be submitted to
binding arbitration:
(a) Payment of fees or other compensation to employees, officers
or directors of Joint Venturers, Management Committee members, or
other persons, which compensation is not contemplated by the budget of
the Joint Venture or is not fair value for services actually provided
to the Joint Venture;
(b) Distribution of dividends or surplus by the Joint Venture to
the Joint Venturers or other distributions or payments of cash other
than in accordance with this Agreement, or the Management Services
Agreement;
(c) Joint Venture participation in any business venture not
contemplated by this Agreement or any extraordinary expense or
purchase of capital items exceeding $50,000 in any 12 month period;
and
- 8 -
<PAGE>
(d) Payment by the Joint Venture to IMS or any affiliate or
subsidiary thereof of a management fee, home office fee, or any
extraordinary fee not specifically provided in the Joint Venture
Agreement.
7.4. Liability of Joint Venturers to Other Joint Venturer and the Joint
------------------------------------------------------------------
Venture. Neither Joint Venturer shall be liable to the other Joint Venturer
- -------
because any taxing authorities disallow or adjust any deductions or credits in
the Joint Venture income tax returns. In addition, the doing of any act or the
omission to do any act by either Joint Venturer, the effect of which may cause
or result in loss or damage to the Joint Venture, if done in good faith and
otherwise in accordance with the terms of this Agreement, shall not subject such
Joint Venturer to any liability. The Joint Venture will indemnify and hold
harmless each Joint Venturer and its successors and assigns from any claim,
loss, expense, liability, action or damage resulting from any act or omission in
connection with Joint Venture affairs, including, without limitation, reasonable
costs and expenses of litigation, except where the same is due to or arising out
of the fraud, bad faith or gross negligence of the Joint Venturer.
8. Additional Responsibilities of the Joint Venturers.
--------------------------------------------------
8.1. IMS--NET.
--------
8.1.1. IMS--NET will be solely responsible for funding all marketing
expenses associated with the recruiting, servicing and billing of National
Sponsors. IMS--NET shall receive all revenues from National Sponsors and,
after deducting 25% of such revenue as its compensation, shall promptly
transmit the balance to the Joint Venture.
8.1.2. Pursuant to the provisions of the Software License Agreement,
IMS--NET shall enter into the Escrow Agreement attached as an exhibit to
the Software License Agreement which is Exhibit B to this Agreement.
---------
8.1.3. IMS--NET shall make available to the Joint Venture and the
Network any improvements in the technology or business practices reasonably
available to IMS--NET through its affiliated entities which would improve
the operation of the Joint Venture or the Networks.
8.2. Responsibilities of BCBSAZ. Any additional responsibilities or
--------------------------
duties of BCBSAZ other than as described elsewhere in this Agreement or in an
agreement referred to herein, shall be subject to unanimous approval of the
Joint Venturers.
9. Representations and Warranties. BCBSAZ and IMS--NET each, for itself
------------------------------
alone, warrants and represents that:
- 9 -
<PAGE>
9.1. Content of Agreement. Each has carefully read and understands
--------------------
the content of this Agreement.
9.2. Financial Risks. Each understands the financial risks involved
--------------------
in this investment, which could result in a substantial or complete loss of
its investment. Each can assume a high degree of risk in making such an
investment and can afford the loss of its entire investment.
9.3. Reliance on Own Counsel. Each, in evaluating the merits of an
-----------------------
investment in the Joint Venture has relied, to the extent each deems
necessary, on the advice of its own personal accountant and tax and legal
counsel. Each acknowledges that neither the Joint Venture nor its counsel
has provided any tax opinion or other legal advice in connection with this
offering.
9.4. Business and Financial Experience. Each, by reason of their
---------------------------------
business and financial experience or the business and financial experience
of their professional advisors who are unaffiliated with the Joint Venture,
believe that they have the capacity to protect their own interests in
connection with this offering.
9.5. Due Organization and Authority. Each is duly organized, validly
------------------------------
existing and in good standing in the state of its incorporation and
possesses all necessary powers and authority to enter into this Agreement.
10. Payment of Certain Expenses.
---------------------------
10.1. Reimbursable Expenses. BCBSAZ and IMS--NET agree to cause the
---------------------
Joint Venture either to pay or reimburse BCBSAZ or IMS--NET, as the case
may be, only for such filing fees, costs, prepaid franchise taxes or other
expenses directly incurred in organizing or registering the Joint Venture
as a limited partnership in good standing with the state of Arizona, and
any county or local government department or agency necessary or convenient
to the operation of the Joint Venture as contemplated by this Agreement.
10.2. Nonreimbursable Expenses. BCBSAZ and IMS--NET agree that any
------------------------
and all other expenses incurred by BCBSAZ and IMS--NET in organizing the
Joint Venture other than as is expressly set forth in Section 10.1 above
and in the Management Services Agreement shall not be reimbursable by the
Joint Venture and shall be paid solely by the party incurring such
expenses. Without limiting the generality of the foregoing, each party
shall bear its own legal and accounting fees, travel, lodging, telephone
and other out-of-pocket expenses involved in the negotiation, organization
and formation of the Joint Venture.
- 10 -
<PAGE>
11. Confidentiality.
---------------
11.1. Confidentiality. The parties acknowledge that after execution of
---------------
this Agreement, BCBSAZ and IMS--NET will each have access to certain
confidential information and trade secrets which are proprietary to IMS--NET or
BCBSAZ. Each party to this Agreement acknowledges that the unauthorized use of
such information or the disclosure of any such information of the other party,
or the disclosure of any such information, any part thereof belonging to the
other party, to any unauthorized third party shall be injurious to the party
whose confidential information and trade secrets are disclosed. Each party to
this Agreement, on its own behalf and on behalf of its officers, directors and
employees, by becoming a party to this Agreement, covenants and agrees that,
except as authorized hereunder, they will not use or disclose to any
unauthorized third party, information related to the Software, clients,
marketing, research and development or other trade secrets or proprietary
confidential information of the other party. Further, both IMS--NET and BCBSAZ
agree to treat as confidential all Joint Venture information such as client
lists, pricing information and related data and both acknowledge that
unauthorized use of any such information would cause irreparable damage to the
Joint Venture.
11.2. Enforcement by Injunction. The parties agree and acknowledge that
-------------------------
irrevocable harm and damage will be sustained by the party to whom the
proprietary information and trade secrets belongs in the event that the other
party or its officers, directors or employees violate or threatened to violate
the provisions of Section 11.1 above. In the event of such a breach or
threatened breach of Section 11.1, the party seeking to enforce Section 11.1
shall be entitled to have an injunction issued by any court of competent
jurisdiction enjoining and restraining such breach. The seeking of an
injunction shall not preclude such party from seeking such other remedies as may
be available, including monetary damages.
11.3. Enforcement by Injunction by Joint Venture. The parties further
------------------------------------------
agree and acknowledge that irrevocable harm and damage would be sustained by the
Joint Venture in the event that either BCBSAZ or its officers or directors or
IMS--NET or its officers or directors or affiliates violate the provisions of
Section 11.1 above. In the event of a breach or threatened breach of Section
11.1 by either BCBSAZ or IMS--NET, or both, then either Joint Venturer, acting
in the name and place of the Joint Venture shall be entitled to have an
injunction issued by any court of competent jurisdiction enjoining and
restraining such breach. The seeking of an injunction shall not preclude
IMS--NET from seeking such other remedies as are available, including monetary
damages.
- 11 -
<PAGE>
12. Dissolution and Termination.
---------------------------
12.1. Events of Dissolution.
---------------------
12.1.1. The Joint Venture shall be terminated and dissolved upon
the earlier to occur of the following:
(i) In the event a Joint Venturer shall be in material breach
of this Agreement, in addition to such other remedies as may be
available to the non-defaulting Joint Venturer under law, upon
the election of such non-defaulting Joint Venturer after written
notice of said material breach to the breaching Joint Venturer,
which breach remains uncured for sixty (60) days after written
notice of such breach;
(ii) Upon the dissolution and commencement of winding up of
either Joint Venturer, or upon either an adjudication of either
Joint Venturer as bankrupt or insolvent, or upon the filing by
either Joint Venturer of any petition under any chapter of the
United States Bankruptcy Code or any other present or future
applicable federal, state or other statute or law regarding
bankruptcy, insolvency or other relief for debtors, or either
Joint Venturer's seeking, or consenting to, or acquiescing in,
the appointment of any trustee, receiver or liquidator of itself
or of all, or any substantial portion of, its property or of its
interest in the Joint Venture;
(iii) upon the unanimous consent of the Joint Venturers; or
(iv) a date which is 40 years from the date of this Agreement.
12.1.2. Dissolution of the Joint Venture shall be effective on
the day on which the event occurs giving rise to the dissolution, but
the Joint Venture shall not terminate until the assets of the Joint
Venture shall have been distributed as provided herein.
Notwithstanding the dissolution of the Joint Venture, prior to the
termination of the Joint Venture as aforesaid, the business of the
Joint Venture and the affairs of the Joint Venturers, as such, shall
continue to be governed by this Agreement.
12.1.3. Dissolution shall not be caused by the admission of a
new limited partner to the Joint Venture; any such admission (other
than admission of IMS as contemplated by Section 6.7 above) shall
occur only upon unanimous consent of the Joint Venturers.
- 12 -
<PAGE>
12.2. Liquidation of Assets. Upon dissolution, the Managing Venturer
---------------------
shall liquidate the assets of the Joint Venture, and apply and distribute the
proceeds thereof as contemplated by this Agreement.
12.3. Distributions Upon Liquidation.
------------------------------
12.3.1. After payment of liabilities owing to creditors, the
Managing Venturer shall set up such reserves as it deems reasonably
necessary for any contingent or unforeseen liabilities or obligations
of the Joint Venture. Said reserves may be paid over by the Managing
Venturer to a bank, to be held in escrow for the purpose of paying any
such contingent or unforseen liabilities or obligations and, at the
expiration of such period as the Managing Venturer may deem advisable,
such reserves shall be distributed to the Joint Venturers or their
assigns in the manner set forth in paragraph 12.3.2 below.
12.3.2. After paying such liabilities and providing for such
reserves, the Managing Venturer shall cause the remaining net assets
of the Joint Venture to be distributed to the Joint Venturers in
respect of the positive balances in their capital accounts in
compliance with Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2),
and if any Joint Venturer's capital account has a deficit balance
(after giving effect to all contributions, distributions and
allocations for all taxable years, including the year in which such
liquidation occurs), such Joint Venturer shall contribute to the
capital of the Joint Venture the amount necessary to restore such
deficit balance to zero in compliance with Treasury Regulations
Section 1.701(b)(2)(ii)(b)(3).
12.4. Valuations. For the purposes of valuing the assets of the Joint
----------
Venture for distribution as contemplated in Section 14 hereof, the Joint
Venture's assets shall be deemed to be sold at their fair market value and the
resulting profits and losses shall be allocated to the Joint Venturers capital
accounts in accordance with Section 5 hereof.
13. Agreement Not to Compete. In the event IMS--NET acquires all of
------------------------
BCBSAZ's interest in the Joint Venture as described in Section 6.7, BCBSAZ and
IMS--NET hereby mutually covenant and agree:
13.1. No Competition by BCBSAZ. During the term of this
------------------------
Agreement and for three (3) years after the date on which all of
BCBSAZ's interest in this Agreement is exchanged by BCBSAZ for common
stock of IMS as described above, BCBSAZ and IMS--NET agree as follows:
13.1.1. BCBSAZ and its officers and directors shall not,
directly or indirectly own, manage, operate, control, organize,
participate in the management, control, or organization of, be
- 13 -
<PAGE>
employed by any individual or organization which manages,
operates or offers medical information network services or
similar arrangements wherever located, which competes with, or
would compete with, the Network.
13.1.2. BCBSAZ and its officers and directors acknowledge
and agree that irrevocable harm and damage will be sustained by
IMS--NET and its business in the event that BCBSAZ or its
officers and directors compete with IMS--NET. In the event of
violation of Section 13.1.1 hereof, the parties acknowledge that
said breach would result in irreparable injury to IMS--NET for
which monetary damages would be inadequate, and therefore, in the
event of a breach or threatened breach of Section 13.1.1,
IMS--NET shall be entitled (in addition to all other legal and
equitable remedies) to have an injunction issued by any court of
competent jurisdiction enjoining and restraining said breach. The
running of any statute of limitations shall be tolled during the
period of said breach.
13.1.3. If the restriction contained in Section 13.1.1 or
the application thereof is held to be unenforceable because of
the area covered, or the duration or scope thereof, the court
making such determination shall have the power to reduce the area
and/or duration thereof and/or otherwise reduce the scope thereof
and the restriction shall then be enforceable in its reduced
form.
14. Miscellaneous.
-------------
14.1. Notices. All notices required to be given hereunder shall be given
-------
in writing and shall be personally delivered or deemed delivered if dispatched
by certified mail, return receipt requested, postage prepaid, addressed to the
parties as set forth in Section 2.4 above.
A notice shall be deemed given on the date it is deposited in the mail in
accordance with the foregoing. Any party may change the address to which to
send notices by notifying the other party of such change of address in writing
in accordance with the foregoing.
14.2. Governing Law. This Agreement and all rights, duties and
-------------
obligations hereunder shall be construed and interpreted in accordance with the
internal laws (not the choice of law) of the state of Arizona
14.3. Waiver. No waiver of any term, covenant or condition contained in
------
this Agreement or failure to exercise a right or remedy shall be deemed to imply
a further waiver of such term, covenant, right or remedy.
- 14 -
<PAGE>
14.4. Severability. Nothing contained in this Agreement shall be
------------
construed so as to require the commission of an act contrary to law and whenever
there is any conflict between any provision of this Agreement and any present
statute, law, ordinance or regulation contrary to which the parties have no
legal right to contract, the latter shall prevail, but in such event, the
provisions of this Agreement affected shall be curtailed and limited only to the
extent necessary to bring it within the requirements of the law and to carry out
the purposes of this Agreement.
14.5. Binding Agreement. Subject to the restrictions on transfer and
-----------------
encumbrances set forth herein, this Agreement shall inure to the benefit of and
be binding upon BCBSAZ and IMS--NET and their respective legal representatives,
successors, transferees, and assigns. Whenever a reference is herein made to
any party such reference shall be deemed to include a reference to the legal
representatives, successors, transferees, and assigns of such party.
14.6. Assignment. This Agreement shall not be assigned by either BCBSAZ
----------
or IMS--NET without the express prior written consent of the other party.
14.7. Headings. All headings and captions used herein are for convenience
--------
of reference only, and shall not be a part or affect the interpretation of this
Agreement.
14.8. Modification. This Agreement may be modified only upon execution of
------------
a written agreement signed by both parties.
14.9. Entire Agreement. This Agreement and the other agreements referred
----------------
to herein supersede all prior oral and written understandings and agreements
between the parties. The parties acknowledge and agree that this Agreement,
together with all documents and agreements referenced and incorporated herein,
contains the entire agreement between the parties. No representations,
promises, conditions or warranties with reference to the execution of this
Agreement have been made or entered into between the parties other than as
expressly stated herein.
14.10. Attorneys Fees. In the event of any suit under this Agreement,
--------------
reasonable attorneys' fees and costs shall be awarded by the court to the
prevailing party, to be included in any judgment recovered. In addition, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs incurred in enforcing any judgment arising from a suit under this
Agreement. This post-judgment attorneys' fees and costs provision shall be
severable from the other provisions of this Agreement and shall survive any
judgment on such suit and is not to be deemed merged into the judgment.
14.11. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
- 15 -
<PAGE>
14.12. Exhibits. All exhibits attached hereto and referred to herein are
--------
incorporated as though fully set forth in this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
BLUE CROSS AND BLUE SHIELD
OF ARIZONA, INC.
2444 West Las Palmaritas Drive
P. O. Box 13466
Phoenix, Arizona 85002-3466
By /s/ ^SIGNATURE TO COME^
--------------------------------------------
Title President & CEO
-----------------------------------------
IMS--NET OF ARIZONA, INC.
11636 North 60th Street
Scottsdale, Arizona 85254
By /s/ Kevin R. Green
--------------------------------------------
Kevin R. Green, President
- 16 -
<PAGE>
EXHIBIT 10.21
OPERATING AGREEMENT
FOR
INDIANA MEDICAL COMMUNICATION NETWORK
LIMITED LIABILITY COMPANY
THIS OPERATING AGREEMENT ("Agreement") is made and entered into as of April
30, 1993, by and between METHODIST HOSPITAL OF INDIANA, INC., an Indiana
corporation ("MHI") and INTEGRATED MEDICAL SYSTEMS INC., a Colorado corporation
("IMS"). The parties hereto are sometimes hereafter individually referred to as
"Member" and collectively referred to as "Members", which terms shall include
any other person or entity from time to time admitted to the Company, as
hereafter defined, in accordance with the terms and conditions of this
Agreement.
THIS AGREEMENT is made and entered into with reference to the following
facts:
A. IMS has developed and owns proprietary computer software operating on
various types of computers that supports the transmission of, text, voice,
graphics, images and other data, as hereafter defined, and has developed
business plans, concepts and other proprietary ideas and technology for the
operation of medical communication networks using IMS computer software.
B. IMS has formed Indiana Medical Communication Network Limited Liability
Company ("Company"), a limited liability company formed under the laws of
Colorado and authorized to conduct business in Indiana, and has granted an
exclusive license to Company for use of its proprietary business rights and
related computer software in the Exclusive Territory, as hereafter defined.
D. MHI is a major provider to and is familiar with the Indiana healthcare
market and knows of or has developed relationships with healthcare consumers,
other hospitals, physicians, employers, insurance companies and other healthcare
related entities.
E. IMS and MHI, in exchange for their respective good and valuable
considerations to each other as hereafter defined, wish to enter into a joint
venture to develop, own and operate Company as a for-profit medical
communication network business in the Exclusive Territory.
F. MHI and IMS desire to set forth their intentions and agreements with
respect to the development, ownership and operation of Company as a joint
venture between the Members.
NOW, THEREFORE, in consideration of the recitals, covenants, conditions and
agreements contained herein, the parties agree as follows:
1. Definitions. For purposes of this Agreement and in addition to the
-----------
terms otherwise defined herein, the following terms shall have the meanings as
set forth below:
1
<PAGE>
1.1. ComCenter(TM) Hardware. "ComCenter (Communications Center) Hardware"
----------------------
refers to the message switching computer(s) on which the ComCenter Software
runs. Such hardware is part of the Digital Equipment Corporation ("DEC") VAX
family of computers.
1.2. ComCenter Software. "ComCenter Software" shall mean the computer
------------------
software developed and owned by IMS that supports and facilitates the
transmission of data, text, voice, graphics, images and other data, and which
resides on and is operated on the ComCenter hardware.
1.3. ComCenter System. "ComCenter System" refers to the ComCenter
----------------
Software and ComCenter Hardware together.
1.4. Company. "Company" refers to "Indiana Medical Communication Network
-------
Limited Liability Company", a limited liability company formed under the laws of
Colorado and registered to conduct business in Indiana, to be developed, owned
and operated by the Members as a joint venture between the Members.
1.5. Exclusive Territory. "Exclusive Territory" shall mean all of the
-------------------
state of Indiana except Lake and Porter Counties.
1.6. IMS-Net(TM) Software. The "IMS--Net Software" shall mean the
--------------------
computer software developed and owned by IMS which includes the PC-Com Software,
RELAY Software, ComCenter Software and other software, which interact with the
ComCenter Hardware and remotely located computers and their operating systems to
form a complete and functioning network by which medical and other information
and data, text, voice, graphics and images can be transmitted, shared, stored
and accessed.
1.7. Licensed SoftWare. "Licensed Software" shall mean the IMS-Net
-----------------
Software and that portion of the Synergy Series Software owned outright by IMS,
together with any and all subsequent modifications, revisions, improvements,
enhancements or updates made by IMS in such software, and all of which has been
licensed to Company by IMS through the Software License Agreement referred to
herein.
1.8. Local Sponsor. "Local Sponsor" shall mean any individual or entity
-------------
desiring to use a Network to receive and/or disseminate information from or to a
particular group of Network users and who or which agrees to pay fees to a
Network for the right to use a Network.
1.9. National Sponsor. "National Sponsor" shall mean any individual or
----------------
entity desiring to use a Network, and any other networks operated by IMS or an
affiliate of IMS, to receive and/or disseminate information from or to network
users and who or which agrees to pay fees for the right to use the networks.
2
<PAGE>
1.10. Network. "Network" shall mean one or more electronic medical
-------
communication networks to be owned and operated in the Exclusive Territory by
the Company, which utilizes IMS-Net software to permit text, voice, graphics,
images and other data to be transmitted between and among physicians, hospitals,
clinical laboratories, pharmacies, managed care organizations, insurance
companies, other payors, employers and other individuals or entities.
1.11. PC-Com(TM) Software. "PC-Com Software" shall mean the computer
-------------------
software developed and owned by IMS which supports and facilitates the
transmission of text, voice, graphics, images and other data from (or to) a
Network user's computer to (or from) the ComCenter System, and which acts as a
user interface between a Network user and a Network, and which operates on a
user's International Business Machines ("IBM") or compatible personal computer
("PC") or other computer.
1.12. RELAY(TM) Software. "RELAY Software" shall mean the computer
------------------
software developed and owned by IMS which supports and facilitates the
transmission of text, voice, graphics, images and other data from a host
computer system to the ComCenter System, and which acts as an automatic
interface between a host computer system and a Network, and which operates on
PCs or other computers.
1.13. Subscriber or Network Subscriber. "Subscriber" or "Network
--------------------------------
Subscriber" shall mean physicians and other members of the healthcare community
who use a Network and with whom Local and National Sponsors pay to communicate
over one or more networks.
1.14. Synergy Series(TM) Software. The "Synergy Series Software" shall
---------------------------
mean the computer software, portions of which were developed and are owned by
IMS, and portions of which IMS possesses and uses pursuant to one or more
perpetual licenses under which IMS has the right to use and to sub-license,
which includes practice support software intended primarily for use by persons
or entities who use a Network, and which includes such capabilities as "Word-
Pro(TM)" word processing, "Clinical Manager(TM)" clinical data management, "RX-
Manager(TM)" drug therapy management and "CME-Manager(TM)" continuing medical
education management.
2. Business and Purpose of Company.
-------------------------------
2.1. Purpose. The purpose of Company is to establish and operate, and
-------
facilitate the rapid growth of, one or more for-profit Networks in the Exclusive
Territory, with the intent that such Networks shall become the recognized
standard for medical communication in the Exclusive Territory, to improve the
efficiency and effectiveness of communication related to health care delivery
among all hospitals, labs, pharmacies, payors, managed care and other medical
facilities and physicians, and other licensed health care professionals with
privileges to utilize such facilities, and other providers, payors, individuals
and entities with a bona fide interest in communicating with such other
participants, including MHI.
3
<PAGE>
2.2. Scope of Powers. Company shall be engaged in all such activities
---------------
related to its purpose, including marketing, sales, administration, Network
operations and management, consulting, and installation, education, training,
service and support of Local Sponsors, National Sponsors and Subscribers. In
furtherance of its business, Company shall have and may exercise all the powers
now or hereafter conferred by applicable law, and shall do any and all things
related or incidental to its business as fully as natural persons might or could
do by applicable law.
3. Formation of Company, Members.
-----------------------------
3.1. Formation and Controlling Law. IMS certifies that on February 26,
-----------------------------
1993, Articles of Organization of Company as a wholly owned affiliate of IMS, a
copy of which is attached as Exhibit A-1 hereto and hereby incorporated herein,
-----------
were executed and, on March 1, 1993, filed with the office of the Colorado
Secretary of State under the provisions of the Colorado Limited Liability
Company Act (C.R.S. 7-80-101, et seq.), as amended, which, in conjunction with
------
Colorado case law relating thereto, shall be the controlling law for purposes of
this Agreement and shall be utilized in this or any other jurisdiction for
purposes of construing the terms and conditions contained herein.
3.1.1. This Agreement shall be the Operating Agreement of Company,
as may be amended from time to time upon the agreement of the Members, and
as referenced in the Articles of Organization, and hereby replaces the
interim Operating Agreement established by Company on April 1, 1993, a
copy of which is attached as Exhibit A-2 hereto.
------------------
3.2. Authority in Indiana. IMS certifies that on March 29, 1993, an
--------------------
Application For Registration As A Foreign Limited Liability Company, a copy of
which is attached as Exhibit A-3 hereto, was executed and submitted to the
-----------
office of the Indiana Secretary of State under the provisions of Indiana Code
23-16-10.1. IMS further acknowledges that on March 29, 1993, a Certificate of
Assumed Business Name, a copy of which is attached as Exhibit A-4 hereto, was
-----------
executed and submitted to the office of the Indiana Secretary of State under the
provisions of Indiana Code 23-15-1-1.
3.3. Future Reorganization in Indiana. If and when Indiana law has been
--------------------------------
enacted to authorize the formation of limited liability companies, and Indiana
has received U.S. Internal Revenue Service recognition and approval of such
limited liability companies, then Company, at its expense, shall be reorganized
as a limited liability company under the provisions of such law, and the
controlling law for the purposes of this Agreement shall then become the laws of
the state of Indiana, provided that there are no adverse tax or other
consequences to Company or any of its Members.
3.4. Filing of Certificates. IMS shall file and publish all such
----------------------
certificates, notices, statements or other instruments required by law for the
formation and
4
<PAGE>
operation of a limited liability company in all jurisdictions where Company may
elect to do business.
3.5. Duration of Company. The duration of Company shall be the maximum
-------------------
allowed by law, which is thirty (30) years from its date of organization, unless
dissolved earlier in accordance with the provisions of this Agreement and
applicable law.
3.6. Fiscal Year. Except for the Company's first and last fiscal years,
-----------
the fiscal year of the Company shall start on January 1 and end on December 31.
3.7. Name of Company. The name of Company shall be "Indiana Medical
---------------
Communication Network Limited Liability Company", d/b/a "Indiana Medical
Communication Network", d/b/a "Indiana MedNet", or such other name as the
Members may from time to time designate. The Members shall cause to be filed,
on behalf of Company, such certificates of assumed or fictitious names as may
from time to time be required by law.
3.8. Place of Business of Company. The principal place of business of
----------------------------
Company shall be at an Indianapolis location consistent with the purpose and
business activities of Company, said location to be selected promptly upon
execution of this Agreement, and until such time the business of Company shall
be conducted from the addresses of the Members.
3.9. Members Names and Addresses. The names and addresses of the Members,
---------------------------
along with the titles of the persons to whom notices should be sent, are:
Integrated Medical Systems, Inc.
15000 West Sixth Avenue, Ste. 400
Golden, Colorado 80401
Attention: Senior Vice President and CFO
and
Methodist Hospital of Indiana, Inc.
1701 North Senate Boulevard
Indianapolis, Indiana 46206
Attention: Vice President and CIO
(second copy to Senior VP and General Counsel)
3.10. Members Rights. Members shall have all of the rights granted under
--------------
the Colorado Limited Liability Company Act, subject to the provisions of this
Agreement.
3.11. Transfer of Interest. Except for the transfer of ownership interest
--------------------
between IMS and MHI described in Section 4, no Member may sell, exchange,
encumber, hypothecate, assign, transfer or otherwise dispose of any portion of
its
5
<PAGE>
ownership interest in Company, or its right to receive any share of
distributions as described herein, without the unanimous consent of the Members.
3.12. Additional Members. No additional Member may be added to Company
------------------
without the unanimous consent of the Members.
4. Contributions, Purchases, Ownership of Members.
----------------------------------------------
4.1. IMS Contribution to and Interest in Company. IMS and Company have
-------------------------------------------
executed the Software License Agreement, a copy of which is attached as Exhibit
-------
B hereto and hereby made a part of this Agreement, which provides to Company an
- -
exclusive and perpetual license in the Exclusive Territory to IMS' proprietary
concepts, trade secrets, techniques, business plans and other acumen developed
by IMS for the purpose of commercializing medical communication networks, and to
the Licensed Software, and including the escrow of said software which provides
for the survival of Company's licensed rights in the event of IMS' bankruptcy,
non-performance or substantial discontinuance of business, as more fully set
forth in Exhibit B hereto. Upon the execution of this Agreement and pursuant to
---------
Section 4.2 herein, IMS shall then have a fifty-one percent (51%) ownership
interest in Company.
4.2. MHI Purchase of Interest in Company. MHI is hereby purchasing, from
-----------------------------------
IMS, a forty-nine percent (49%) ownership interest in Company for $1,715,000,
payable in three installments as follows:
(i) $500,000 shall be paid, by check to IMS, at the closing and upon
the execution of this Agreement, at which time a certificate representing
MHI's ownership interest in Company shall be provided to MHI.
(ii) $600,000 shall be paid, by check to IMS, upon the completion of
registration of Company to conduct business in Indiana; approval, selection
of and acceptance of employment by the CEO of Company; and approval,
selection of and acceptance of Company's officers and Board of Managers
("Board"), as hereafter defined, said approvals to be made unanimously by
the Members.
(iii) $615,000 shall be paid, by check to IMS, upon completion of
Company's first year business plan and budget with revenue and cost
projections, occupation of its Indianapolis place of business, commencement
of operation of the ComCenter System, and operation of the Network among
six MHI departments and twenty physicians according to the Network Services
Agreement to be executed between IMS and MHI, a copy of which is attached
as Exhibit E hereto for reference only.
---------
4.2.1. MHI and IMS hereby agree that time is of the essence in
completing these conditions for payment, and will mutually take all
6
<PAGE>
reasonable actions to complete these conditions as promptly as reasonably
possible.
4.2.2. In the event that these conditions cannot be completed due to
non-performance by IMS, its products or services, or other circumstances
within the control of IMS, then MHI shall have the right to terminate this
Agreement, and IMS shall then, within ninety (90) days of receiving written
notice from MHI and provided IMS cannot within that time remedy the
completion of said conditions, return any payments made to IMS under this
Agreement. MHI shall then have no portion of ownership interest in Company,
and shall promptly return its ownership certificate in Company to IMS.
4.2.3. In the event that these conditions cannot be completed due to
non-performance by MHI, or other circumstances within the control of MHI,
then IMS shall have the right to terminate this Agreement and, provided
that MHI cannot remedy the completion of said conditions within ninety (90)
days of receiving written notice of termination from IMS, retain the first
payment as liquidated damages and return any other payments made to IMS
under this Agreement. MHI shall then have no portion of ownership interest
in Company, and shall promptly return its ownership certificate in Company
to IMS.
5. Capital Contributions and Sources of Funds.
------------------------------------------
5.1. Capital Contributions of MHI. MHI shall have no obligation to make
----------------------------
any capital contributions to Company at any time.
5.2. Capital Contributions of IMS. IMS shall have no obligation to make
----------------------------
any capital contributions to Company at any time.
5.3. Sources of Funds. It is the intent of the Members that adequate
----------------
funding of the financial requirements of Company shall be derived from Local
Sponsor and National Sponsor fees, the first source of which shall be from MHI
as the charter Local Sponsor of the Network under the terms and conditions of
the Network Services Agreement to be executed between MHI and IMS. The Members
shall direct Company, through the Board, to manage and grow Company in a manner
consistent with this intent.
5.3.1. Notwithstanding the above, IMS hereby agrees that, in the
event at any time that sufficient funds are not available from Network
fees, IMS shall loan Company non-interest bearing funds, not to exceed a
cumulative balance of $100,000 at any one time.
5.3.2. In addition, in the event that the outstanding loan balance
of Section 5.3.1 is at its maximum, and as necessary and upon the approval
of the Board, or as stated in the Company budget or business plan approved
7
<PAGE>
by the Board, additional funding shall be provided by loans secured by
Local and National Sponsor contracts and provided by IMS or a third party,
in a manner so as not to impair ongoing or future operations or expose
Company to undue risk, including the premature distribution of any profits
of Company. Such loans, if provided by IMS, shall be provided at an
interest rate not to exceed the interest rate incurred by IMS in securing
such loans.
5.3.3. MHI hereby acknowledges that, coincident with the execution of
this Agreement, IMS has separately provided MHI with evidence demonstrating
IMS' ability to secure and loan such funds.
5.4. Additional Contributions. Additional contributions shall be made
------------------------
only with the consent of the Members.
5.5. No Dilution of Equity. No Member's portion of its ownership interest
---------------------
in Company shall be diluted by virtue of any financial provisions as described
in this Section 5.
6. Consolidation and Allocation of Profits and Losses.
--------------------------------------------------
6.1. Consolidation of Results. IMS shall be entitled to consolidate the
------------------------
financial results of Company by virtue of its fifty-one percent (51%) ownership
interest in Company.
6.2. Profits and Losses. All Company profits and losses shall be
------------------
determined using generally accepted accounting principles, consistently applied.
All Company losses shall be allocated fifty-one percent (51%) to IMS and
forty-nine percent (49%) to MHI. All Company profits, following the recovery of
cumulative net losses, shall be allocated fifty-one percent (51%) to IMS and
forty-nine percent (49%) to MHI.
6.3. Federal Tax Allocation. Except as otherwise required hereunder or as
----------------------
otherwise provided by the Code and the rules and Treasury Regulations, for
federal income tax purposes, each item of income, gain or credit, and each item
of loss or deduction entering into the computation of the Members' taxable
income shall be allocated to the Members on the same basis as profits and losses
are allocated to the Members for book purposes.
6.4. Allocations Respecting Contributed Assets. In accordance with Code
-----------------------------------------
Section 704(c) and the Treasury Regulations thereunder, income gain, credit,
loss and deduction with respect to any asset contributed to the capital of
Company shall, /solely for tax purposes, be allocated among the Members so as to
take account of any variation between the adjusted basis of such property to
Company for federal income tax purposes and its initial Adjusted Asset Value.
In the event the Adjusted Asset Value of any Company asset is adjusted pursuant
to the terms of this Agreement, subsequent allocations of income, gain, credit,
loss and deduction with respect to such asset shall take account of any
variation between the adjusted basis
8
<PAGE>
of such asset for federal income tax purposes and its Adjusted Asset Value in
the same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
6.5. Capital Accounts and Balances. A separate capital account shall be
-----------------------------
maintained for each Member. Each Member's capital account shall be zero at the
commencement of this Agreement and after completion of the transactions
described in Sections 4.1 and 4.2. The capital accounts are to be maintained in
a manner consistent with Treasury Regulations Section 1.704-1(b)(2)(iv). In the
case of the distribution of property which is subject to any special allocation,
the credit or debit to the capital account shall occur as if the property had
been sold for its then fair market value. No Member shall be entitled to
receive interest on its capital account, and none shall be paid.
6.5.1. Each Member's capital account shall be credited with:
(i) any contributions of cash to the capital of Company;
(ii) its allocable share of Company profits determined as set forth
in Section 6.2;
(iii) additional capital contributions made by it, if any; and
(iv) the amount of any Company liabilities that are assumed by it or
that are secured by any Company property distributed to it.
6.5.2. Each Member's capital account shall be debited with:
(i) its allocable share, if any, of Company losses;
(ii) the amount of any withdrawals by or distributions to it by
Company; and
(iii) the amount of any of its liabilities that are assumed by
Company or that are secured by any property contributed by it to
Company.
6.6. Distributions of Available Cash. The Company shall make cash
-------------------------------
distributions to Members only out of profits as determined and allocated under
Section 6.2. Distributions, if available, shall be made within 60 days following
the end of each calendar year. It is the intent of the Members to make such
distributions, if available, at least equal to the current year's taxes on the
previous year's allocated net income from Company operations. The Board may
authorize such other cash distributions from time to time, if available and as
agreed to, and consistent with cash needs for the on-going operation and growth
of Company.
9
<PAGE>
6.7. General. The respective interests of the Members in the profits and
-------
losses of Company shall remain as set forth above unless changed by amendment
to this Agreement or by approval of the Board.
7. IMS Services on Behalf of Company.
---------------------------------
7.1. IMS Services. IMS shall provide certain services on behalf of
------------
Company regarding the general business, affairs and certain management of
Company. IMS shall serve, with the powers described below, until it resigns or
is replaced pursuant to the agreement of the Board or other provisions herein.
7.2. Services Agreement. The duties, rights, responsibilities,
------------------
obligations and authority of IMS and Company regarding the provision of certain
services by IMS on behalf of Company shall be as set forth in the Services
Agreement executed between IMS and Company, a copy of which is attached as
Exhibit C hereto and hereby incorporated into this Agreement.
- ---------
7.3. Approval of Certain Actions. Notwithstanding the foregoing, the
---------------------------
authority of IMS to provide certain services on behalf of Company shall be
subject to the approval of the Board in certain matters which are described in
this Agreement and in the Services Agreement, and, in addition or including, the
following matters:
(a) Actions with respect to the purchase, sale or lease of real
estate and other significant assets on behalf of Company;
(b) Payment of fees or other compensation to employees, officers or
directors of Members, or other persons, which compensation is not
contemplated by the budget of Company or is not fair value for services
actually provided to Company;
(c) Distribution of dividends or surplus by Company to the Members or
other distributions or payments of cash other than in accordance with this
Agreement or the Services Agreement;
(d) Participation in any business venture not contemplated by this
Agreement, or any extraordinary expense or purchase of capital items
exceeding $50,000 in any 12 month period, which expense or purchase is not
contemplated by the Board-approved budget of Company; and
(e) Payment by Company to IMS or any affiliate or subsidiary thereof
of a management fee, home office fee, or any extraordinary fee not
specifically provided in this Agreement or contemplated by the
Board-approved budget of Company;
(f) Termination and dissolution of Company, except as otherwise
provided herein.
10
<PAGE>
(g) Approval of Company's annual budget.
(h) Timing of the marketing of Network to hospitals in the Exclusive
Territory, said timing to be based on a three phase approach whereby (i)
the Network will be marketed to hospitals identified by MHI as positive
with respect to MHI's strategic plan; (ii) the Network will be marketed to
hospitals identified by MHI as neutral with respect to MHI's strategic
plan; and (iii) the Network will be marketed to other hospitals. IMS hereby
acknowledges receipt and acceptance of a separate list of said hospitals
and phases, and agrees not to market to or permit the use of Network by
hospitals not on the list without the written consent of MHI.
Notwithstanding the foregoing, MHI hereby agrees that, should a third party
payor wish to use the Network as a Local or National Sponsor, said payor
shall not be prohibited from communication via the Network with any
hospital in the Exclusive Territory to provide the Network functions needed
to transact that third party payor's business on the Network. The
provisions of this Section 7.3 (h) shall survive any termination of this
Agreement and shall remain in full force and effect until termination of
the Network Services Agreement described in Section 9.1.
8. Board of Managers, Officers, Decisions.
--------------------------------------
8.1. Board of Managers. The business and affairs of Company shall be
-----------------
directed by its Board of Managers, and the Members of Company hereby authorize
the Board to act on their behalf and represent their interests with respect to
this Agreement and the Company, except as otherwise may be provided herein.
8.1.1. Number, Tenure, Voting Privileges. There shall be four (4)
---------------------------------
voting members of the Board, of which two shall be appointed by MHI and two
shall be appointed by IMS. Each such member of the board shall have an equal
vote in the voting on or transaction of issues pertaining to Company. Each
Member hereby agrees to accept the other Member's appointments. Each such member
of the Board shall serve until his/her resignation or until his/her successor
shall have been appointed by the respective Member. Vacancies of such members
shall be filled by notice, to the Board, by the respective Member. The Board may
choose to appoint the President and Chief Executive Officer ("President") of
Company as a fifth member of the Board, which member shall not have voting
privileges unless approved by the Board. The number, tenure and voting
privileges of the Board may not be modified without the unanimous written
consent of the Members.
8.1.2. Initial Board. Prior to the execution of this Agreement, the
-------------
initial Board consisted of:
11
<PAGE>
1. Charles I. Brown
2. William B. Hein
Upon the execution of this Agreement and personal acceptance by each individual
named below, the Board shall consist of:
1. Charles I. Brown, IMS appointee
2. William B. Hein, IMS appointee
3. Rebecca M. Shanahan, MHI appointee
4. Walter C. Zerrenner, MHI appointee
The Members shall have such rights and perform such duties as are contemplated
for the Board until such time as the individual members of the Board have
accepted their appointment.
8.1.3. Regular Meetings. The first meeting of the Board shall take place
----------------
within thirty (30) days of execution of this Agreement. An annual meeting of the
Board shall take place each year no later than April 30 of each year. The Board
shall provide, by resolution, the time and place for the holding of such other
regular meetings as they decide upon without other notice than such resolution.
8.1.4. Special Meetings. Special meetings of the Board may be called by
----------------
or at the request of any member of the Board or the President.
8.1.5. Governance at Meetings. In addition to the provisions of voting
----------------------
and other provisions of this Agreement, provisions of the Colorado Limited
Liability Company Act shall govern actions taken in the conduct of any meeting.
8.1.6. Telephone Participation at Meetings. One or more members of Board,
-----------------------------------
or other designated persons, may participate in a meeting by means of conference
telephone or similar equipment by which all persons participating in the meeting
can hear each other at the same time. Such participation shall constitute
presence in person at the meeting.
8.1.7. Notice of Meeting. Notice of any special meeting shall be given at
-----------------
least two (2) days previous thereto by written notice delivered personally,
mailed, faxed, or otherwise delivered to each Board member at his or her
business address. Any Board member may waive notice of any meeting whether
before, at or after the meeting.
12
<PAGE>
8.1.8. Quorum, Manner of Acting. At least one member of Board appointed
------------------------
by each Member must be present at a meeting and, in such cases where a majority
of the members fixed by Section 8.1.1 are present, shall constitute a quorum for
the transaction of or voting on issues pertaining to Company. An act of the
majority of the voting members present at a meeting at which a quorum is present
shall be an act of the Board. Any member of Board may delay an action to vote if
all voting members are not present at a meeting, provided however, that such
delay shall not exceed thirty (30) days from the date of said meeting without
the unanimous written consent of the Members.
8.1.9. Presumption of Assent. A voting member who is present at a meeting
---------------------
at which action on any matter is taken is deemed to have assented to the action
taken unless (a) he/she objects at the beginning of such meeting to the holding
of the meeting or the transacting of business at the meeting; (b) he/she
contemporaneously requests that his/her dissent from the action be entered in
the minutes of the meeting; or (c) he/she gives written notice of his/her
dissent to the presiding officer of the meeting before its adjournment or to the
Secretary of Company immediately after adjournment of the meeting. The right of
dissent as to a specific action taken in a meeting is not available to a voting
member who votes in favor of such action.
8.1.10. Informal Action by Members of Board. Any action required or
-----------------------------------
permitted to be taken at a meeting may be taken without a meeting if the action
is evidenced by one or more written consents describing the action taken, signed
by each voting member of the Board, and delivered to the Secretary of Company
for inclusion in the minutes or for filing with Company's records. Action thus
taken is effective when all voting members have signed the consent, unless the
consent specifies a different effective date. Such consent has the same force
and effect as a unanimous vote of the Board and may be stated as such in any
document.
8.1.11. Compensation of Board. Except for the payment of expenses, if
---------------------
any, of attendance at each meeting, there shall be no other compensation to the
members of the Board. Notwithstanding the foregoing, no member is precluded from
serving the Company in any other capacity and receiving compensation therefor.
8.1.12. Chairman of Board. One member of the Board shall be appointed
-----------------
annually by the Board as its Chairman, provided such appointment shall alternate
each year between appointees of each Member, unless this provision is waived by
the Board. The Chairman, when present, shall preside at all meetings of the
Board and shall perform all duties as may be prescribed by the Board from time
to time.
13
<PAGE>
8.2. Officers of Company. The Board shall appoint officers of Company
-------------------
which shall consist of at least a President, Secretary and Treasurer. The
offices of Treasurer and Secretary may be held by one person. The officers of
Company shall be appointed annually at the annual meeting. Each officer shall
hold office until his/her successor shall have been duly elected or until death,
resignation or removal in the manner hereafter provided. The officers of Company
shall perform all duties as are contemplated in the performance of the Services
Agreement and in general perform all of the duties incident to their offices and
other such duties as from time to time may be assigned by the Board.
8.2.1. Initial Officers. Prior to the execution of this Agreement,
----------------
the initial officers were:
President: William B. Hein
Secretary: Charles I. Brown
Upon execution of this Agreement, all positions of officers of Company
shall be vacant. The Board shall then take such steps as appropriate to
appoint officers of Company, and shall have such rights and perform such
duties as are contemplated for the officers of Company until such time as
the officers are appointed.
8.2.2. Removal, Vacancies. Any officer may be removed by the Board
------------------
whenever in its judgment the best interests of Company would be served
thereby. A vacancy in any office may be filled, under the provisions
herein, for the unexpired portion of the term.
8.2.3. President. The President shall be the chief executive
---------
officer of Company and, subject to the Board, shall in general supervise
and control all business and affairs of Company according to the Services
Agreement. The President shall, when present, preside at any meeting of the
Board in the absence of the Chairman.
8.2.4. Employment, Compensation. Compensation of the President,
------------------------
although anticipated to be provided by IMS and charged under the Services
Agreement, shall be subject to the approval of the Board. Other officers,
who are employees of a Member and whose duties to Company are on an
occasional basis, shall not be directly compensated for their duties by
Company, but such Member shall be reimbursed by Company for the services of
such employees under allocated charges, whether or not specifically covered
under the Services Agreement, provided if such reimbursement has not been
contemplated by the Board-approved budget, it shall be subject to Board
approval.
8.3. Inspection. The books, accounts and records of Company shall be open
----------
to inspection by any member of the Board at all times.
14
<PAGE>
8.4. Personal Liability. Unless specifically undertaken or required by
------------------
the Colorado Limited Liability Company Act, or other applicable law, no Member,
member of the Board or officer of Company shall have personal liability for the
debts and obligations of Company.
9. Miscellaneous Responsibilities of the Members.
---------------------------------------------
9.1. Network Services Agreement. Coincident with the execution of this
--------------------------
Agreement, IMS and MHI shall execute the Network Services Agreement, and MHI
shall make payment, by check made out to Company ("Indiana Medical Communication
Network LLC") in the amount of $62,500, for its first quarterly portion of the
Annual Network Fee thereunder.
9.2. Assignment of Network Services Agreement. Coincident with the
----------------------------------------
execution of this Agreement, IMS and Company shall execute an Assignment
Agreement, a copy of which is attached as Exhibit D hereto and hereby made a
part hereof, assigning to Company IMS' Network Services Agreement with MHI.
9.3. National Sponsor Expenses and Revenues. IMS shall be solely
--------------------------------------
responsible for funding all expenses associated with the national marketing,
servicing and billing of National Sponsors. IMS shall receive all Network
revenues from National Sponsors and, after deducting twenty-five percent (25%)
of such revenue as its compensation, shall promptly transmit the balance to
Company. Notwithstanding the foregoing, IMS shall promptly pay, from its twenty-
five percent (25%) direct allocation, directly to MHI or to its designated
affiliate, ten percent (10%) of total network revenue received by IMS on a
national basis from any National Sponsor which is primarily domiciled in and
directed from within the Exclusive Territory, at such time as and provided (i)
MHI played a substantial and significant role in recruiting such National
Sponsor and (ii) such National Sponsor is also a Local Sponsor. In the event of
any dispute between IMS and MHI regarding the substance and significance of
MHI's role in recruiting such National Sponsors, the dispute will be brought to
the Board for resolution. MHI shall use its best efforts to assist IMS and
Company in recruiting such National Sponsors which may exist within the
Exclusive Territory.
9.4. Improvements by IMS. IMS shall make available to Company, at no
-------------------
cost, any improvements in the technology or business practices developed by IMS,
or reasonably available to IMS through its affiliated entities, which would
improve the operation of Company or Network.
9.5. Improvements by Company. Any improvements in technology developed by
-----------------------
Company at its expense shall be owned by Company, provided that IMS shall have a
perpetual nonexclusive license authorizing IMS to incorporate such improvements
into IMS software marketed or licensed outside the Exclusive Territory, at
reasonable agreed upon terms, conditions and fees as approved by the Board.
15
<PAGE>
9.6. Improvements bv MHI. Any improvements in technology or other
-------------------
technology owned or developed by MHI and provided to Company at MHI's expense
shall be owned by MHI, provided that Company and IMS shall have the right to
negotiate in good faith with MHI to obtain nonexclusive licenses authorizing
Company and IMS to incorporate such improvements or other technology into IMS
software marketed or licensed within and outside the Exclusive Territory, at
reasonable agreed upon terms, conditions and fees as approved by the Board and
IMS.
9.7. Network Pricing. IMS, by virtue of the Services Agreement, its
---------------
business expertise in the affairs of Company, its reasonable need for
consistency among its owned or affiliated networks outside the Exclusive
Territory, and its contractual obligations in certain cases to maintain certain
minimum pricing, shall provide guidelines to Company for setting the prices of
standard Network services and products to be offered by Company, said standard
services being the same that IMS or its affiliated networks provide outside the
Exclusive Territory. Notwithstanding the foregoing, Company, through the Board,
shall have the right to approve or modify such pricing charged by Company,
provided that Company shall take no action that would violate certain minimum
pricing obligations of IMS based on evidence provided by IMS. Company, through
the Board, shall be responsible for setting the prices of non-standard Network
services and products, if any, that may be developed and offered by Company in
the Exclusive Territory.
9.8. Member Liabilities to Company and Each Other. No Member, including
--------------------------------------------
any of its employees, officers or directors serving as a member of the Board or
officer of Company, shall be liable to any other Member or the Company because
any taxing authorities disallow or adjust any deductions or credits in Company
income tax returns. In addition, the doing of any act or the omission to do any
act by any Member, the effect of which may cause or result in loss or damage to
Company or a Member, if done in good faith and otherwise in accordance with the
terms of this Agreement, shall not subject such Member to any liability. Company
will indemnify and hold harmless each Member and its successors and assigns from
any claim, loss, expense, liability, action or damage resulting from any act or
omission in connection with Company including, without limitation, reasonable
costs and expenses of litigation, except where the same is due to or arising out
of the fraud, bad faith or negligence of the indemnified Member.
9.9. IMS Repurchase of MHI's Ownership Interest. In the event that, as a
------------------------------------------
condition for IMS becoming a public company or being acquired by or merging with
a public company, it is necessary that IMS re-acquire MHI's ownership interest
in Company as part of a re-acquisition of all minority interests in its
affiliated network businesses, MHI and IMS hereby agree to negotiate in good
faith to permit the repurchase of MHI's ownership interest in Company, payable
in cash, marketable securities or other forms of payment, in an amount and under
terms and conditions that are acceptable to MHI and IMS.
16
<PAGE>
9.10. Other. Additional responsibilities or duties of IMS or MHI, other
-----
than as described in this Agreement, shall be subject to the approval of the
Members.
10. Dissolution and Liquidation.
---------------------------
10.1. Events of Dissolution.
---------------------
10.1.1. The Company shall be terminated and dissolved upon the
earlier to occur of the following:
(i) in the event a Member shall be in material breach of this
Agreement, in addition to such other remedies as may be available to the
non-defaulting Member under law, upon the election of such non-defaulting
Member after written notice of said material breach to the breaching
Member, which breach remains uncured for sixty (60) days after written
notice of such breach;
(ii) upon the dissolution and commencement of winding up of either
Member, or upon either an adjudication of either Member or Company as
bankrupt or insolvent, or upon the filing by either Member or Company of
any petition under any chapter of the United States Bankruptcy Code or any
other present or future applicable federal, state or other statute or law
regarding bankruptcy, insolvency or other relief for debtors, or either
Member's or Company's seeking, or consenting to, or acquiescing in, the
appointment of any trustee, receiver or liquidator of itself or of all, or
any substantial portion of, its property or, in the case of a Member, its
interest in Company, subject to the provisions of Section 10.2;
(iii) upon the unanimous consent of the Members;
(iv) the expiration of the term of Company, which is thirty (30)
years from the date of organization of Company; or
(v) any other act causing a dissolution under the appropriate state
Limited Liability Company Act.
10.1.2. Dissolution of Company shall be effective on the day on
which the event occurs giving rise to the dissolution, but Company shall
not terminate until the assets of Company shall have been distributed as
provided herein. Notwithstanding the dissolution of Company, prior to the
termination of Company as aforesaid, the business of Company and the
affairs of the Members, as such, shall continue to be governed by this
Agreement.
17
<PAGE>
10.2. Continuation of Business of Company.
-----------------------------------
10.2.1. In the event of a threat of, or actual, bankruptcy or other
insolvency of Company as described in Section 10.1.1 (ii), and if both
Members elect not to do so collectively, then either Member may elect to
take such actions as may be appropriate to cure the conditions causing said
event.
10.2.2. Notwithstanding anything to the contrary in this Agreement,
upon any dissolution under either Section 10.1.1 (ii) or (v), MHI may, at
its sole election, unless MHI is then insolvent, elect, in writing within
sixty (60) days of the event, to acquire and continue the business of
Company. Upon such election, MHI shall assume control of Company, shall
within thirty (30) days replace IMS under the Services Agreement, and
within 180 days after such date shall pay to IMS all amounts to which IMS
would have been entitled had the parties agreed to liquidate Company and
had disposed of its assets and its business at fair market value.
10.2.3. Any disputes under this Section 10.2 shall be resolved by
binding arbitration under terms and conditions acceptable to IMS and MHI.
10.3. Liquidation of Assets. Upon dissolution, the Board shall liquidate
---------------------
the assets of Company, and apply and distribute the proceeds thereof as
contemplated by this Agreement.
10.4. Distributions Upon Liquidation.
------------------------------
10.4.1. After payment of liabilities owing to creditors, the Board
shall set up such reserves as it deems reasonably necessary for any
contingent or unforeseen liabilities or obligations of Company. Said
reserves may be paid over by Board to a bank, to be held in escrow for the
purpose of paying any such contingent or unforseen liabilities or
obligations and, at the expiration of such period as the Board may deem
advisable, such reserves shall be distributed to the Members or their
assigns in the manner set forth below.
10.4.2. After paying such liabilities and providing for such
reserves, the Board shall cause the remaining net assets of Company to be
distributed to the Members in respect of the positive balances in their
capital accounts in compliance with Treasury Regulations Section 1.704-
1(b)(2)(ii)(b)(2), and if any Member's capital account has a deficit
balance (after giving effect to all contributions, distributions and
allocations for all taxable years, including the year in which such
liquidation occurs), such Member shall contribute to the capital of Company
the amount necessary to restore such deficit balance to zero in compliance
with Treasury Regulations Section 1.701(b)(2)(ii)-(b)(3).
18
<PAGE>
10.5. Valuations. For the purposes of valuing the assets of
----------
Company for distribution as contemplated herein, Company's assets shall be
deemed to be sold at their fair market value and the resulting profits and
losses shall be allocated to the Members capital accounts in accordance
with Section 6 hereof.
10.6. No Recourse. No Member shall have recourse against another
-----------
if the assets of Company or the proceeds received by Company upon
liquidation are insufficient to return the positive balance in their
capital account, except as is provided in Section 9.8 herein.
10.7. Information Concerning Liquidation. Each Member shall be
----------------------------------
furnished with a statement prepared by the Board setting forth the assets
and liabilities of Company on the date of complete liquidation. Members
shall cease to be such, and the Board shall cause to be executed,
acknowledged and filed, in duplicate, with the appropriate Secretary of
State, a Certificate of Cancellation of Company.
11. Representations and Warranties. MHI and IMS each, for itself alone,
------------------------------
warrants and represents that:
11.1. Content of Agreement. Each has carefully read and
--------------------
understands the content of this Agreement.
11.2. Financial Risks. Each understands the financial risks
---------------
involved in this investment, which could result in a substantial or
complete loss of its investment. Each can assume a high degree of risk in
making such an investment and can afford the loss of its entire investment.
11.3. Reliance on Own Counsel. Each, in evaluating the merits of
-----------------------
an investment in Company has performed its own due diligence and has
relied, to the extent each deems necessary, on the advice of its own
personal accountant and tax and legal counsel. Each acknowledges that
neither Company nor its counsel has provided any tax opinion or other legal
advice in connection with this offering.
11.4. Business and Financial Experience. Each, by reason of their
---------------------------------
business and financial experience or the business and financial experience
of their professional advisors who are unaffiliated with Company, believe
that they have the capacity to protect their own interests in connection
with this offering.
11.5. Due Organization and Authority. Each is duly organized,
------------------------------
validly existing and in good standing in the state of its incorporation and
possesses all necessary powers and authority to enter into this Agreement.
12. Payment of Certain Expenses.
---------------------------
12.1. Reimbursable Expenses. MHI and IMS agree to cause Company
---------------------
either to pay or reimburse MHI or IMS, as the case may be, only for such
filing
19
<PAGE>
fees, costs, prepaid franchise taxes or other expenses directly incurred in
organizing and registering Company as a limited liability company in good
standing with the states of Colorado and Indiana, and any county or local
government department or agency necessary or convenient to the operation of
Company as contemplated by this Agreement.
12.2. Nonreimbursable Expenses. MHI and IMS agree that any and all
------------------------
other expenses incurred by MHI and IMS in organizing Company other than as
is expressly set forth above and in the Services Agreement shall not be
reimbursable by Company and shall be paid solely by the party incurring
such expenses. Without limiting the generality of the foregoing, each party
shall bear its own legal and accounting fees, travel, lodging, telephone
and other out-of-pocket expenses involved in the negotiation, organization
and formation of Company.
13. Confidentiality.
---------------
13.1. Confidentiality. The parties acknowledge that after execution
---------------
of this Agreement, MHI and IMS will each have access to certain
confidential information and trade secrets which are proprietary to IMS or
MHI. Each party to this Agreement acknowledges that the unauthorized use of
such information or the disclosure of any such information of the other
party, or the disclosure of any such information, any part thereof
belonging to the other party, to any unauthorized third party shall be
injurious to the party whose confidential information and trade secrets are
disclosed. Each party to this Agreement, on its own behalf and on behalf of
its officers, directors and employees, by becoming a party to this
Agreement, covenants and agrees that, except as authorized hereunder, they
will not use or disclose to any unauthorized third party, information
related to technology, clients, marketing, research and development or
other trade secrets or proprietary confidential information of the other
party. Further, both IMS and MHI agree to treat as confidential the terms
and conditions of this Agreement. Further, both IMS and MHI agree to treat
as confidential all Company information such as client lists, pricing
information and related data and both acknowledge that unauthorized use of
any such information would cause irreparable damage to Company.
13.2. Enforcement by Injunction. The parties agree and acknowledge
-------------------------
that irrevocable harm and damage will be sustained by the party to whom the
proprietary information and trade secrets belongs in the event that the
other party or its officers, directors or employees violate or threatened
to violate the provisions of this Section. In the event of such a breach or
threatened breach, the party seeking to enforce this Section shall be
entitled to have an injunction issued by any court of competent
jurisdiction enjoining and restraining such breach. The seeking of an
injunction shall not preclude such party from seeking such other remedies
as may be available, including monetary damages.
20
<PAGE>
13.3. Enforcement by Injunction by Company. The parties further
------------------------------------
agree and acknowledge that irrevocable harm and damage would be sustained
by Company in the event that either MHI or IMS, their officers, directors
or affiliates violate the provisions of this Section. In the event of a
breach or threatened breach by either MHI or IMS, or both, then either
Member, acting in the name and place of Company shall be entitled to have
an injunction issued by any court of competent jurisdiction enjoining and
restraining such breach. The seeking of an injunction shall not preclude
IMS or MHI from seeking such other remedies as are available, including
monetary damages.
14. Intent Not to Compete. It is the intent of IMS and MHI to use their
---------------------
respective best efforts and good faith to position Company as the preferred
entity for the use and sale of medical information network technology, services
and arrangements within the Exclusive Territory, to provide access by Company to
related technology which may be made available to IMS or MHI through
acquisitions of or other relationships with other companies, and to wherever
possible and reasonable provide Company with the opportunity to propose, develop
and offer, or join with others in proposing, developing and offering, existing
or new medical information network technology and services to healthcare persons
and entities within the Exclusive Territory, in keeping with the purpose of
Company and its business and marketing plans. Nothing in the foregoing shall
deny either IMS or MHI the right to independently or jointly make use of other
medical information network technology, services and arrangements for their own
enjoyment or requirements if it is in their respective best interests to do so,
or, in the case of MHI, to pursue the same if it is not in the scope of
Company's or IMS' business to provide the same.
15. Disputes. In the event of any unresolvable dispute between the
--------
Members, or deadlocked vote by the Board, the Members may, in addition to any
other remedies available, elect to choose one of any of the following methods of
resolution, said method to then be the deciding method for resolution in that
instance.
15.1. President as Voting Board Member. If agreed to by the Members,
--------------------------------
and in the event of a deadlocked vote by the Board, the Members may direct
the Board to authorize the President as a fifth voting member of the Board,
if such authorization is not already in effect.
15.2. Binding Arbitration. The Members may agree to submit a dispute
-------------------
to binding arbitration, the terms and conditions of which shall be agreed
to in advance by the Members.
15.3. Buy/Sell Agreement.
------------------
l5.3.1. Offerer's Right. At any time after the first twelve
---------------
months of this Agreement, a Member ("Offerer") may offer to purchase
from the other Member ("Offeree"), all of the Offeree's ownership
interest in Company at a price to be specified as an amount in dollars
per one percent (1%) ownership interest. Such offer shall be in
writing, and shall offer to pay to the Offeree the total amount then
due
21
<PAGE>
in cash within thirty (30) days of acceptance by the Offeree and shall
further provide that the Offeree shall have at least sixty (60) days
to consider the offer.
15.3.2. Offeree's Right. Within the period of the offer, the
---------------
Offeree shall have the right to elect either (i) to sell all of its
ownership interest to the Offerer or (ii) to purchase from the Offerer
all of the Offerer's ownership interest in Company at a purchase price
equivalent to the Offerer's offer on a per one percent (1%) basis. On
or before the expiration of the Offerer's offer, the Offeree shall
indicate in writing whether it elects to sell all of its ownership
interest in Company or to buy the ownership interest in Company owned
by Offerer.
15.3.3. Closing of Buy/Sell Transaction. The closing of a
-------------------------------
buy/sell transaction as described herein shall occur within thirty
(30) days after the expiration of the Offerer's offer. The purchaser
in the transaction shall pay to the seller at the closing an amount in
cash equal to the purchase price per one percent (1%) ownership
interest first specified in the Offerer's offer times the total
percent ownership interest of the seller. Upon such payment, all
interest in and to Company and its business and assets shall be owned
by the purchaser and the seller shall have no further interest in any
aspect of Company's business. If MHI is the purchaser under this
provision, then either MHI or IMS shall have the right to terminate
the Services Agreement between Company and IMS.
16. Miscellaneous.
-------------
16.1. Time of Essence. The Members acknowledge and agree that time
---------------
is of the essence in this Agreement.
16.2. Confirmation by Company. The Members agree to take all action
-----------------------
necessary and convenient to cause each member of the Board to confirm in
writing that he/she has read and understood this Agreement, and that each
member shall take appropriate action to cause the Company to comply with
all of the relevant provisions of this Agreement.
16.3. Notices. All notices required to be given hereunder shall be
-------
given in writing and shall be personally delivered or deemed delivered if
dispatched by certified mail, return receipt requested, postage prepaid,
addressed to the Members as set forth in Section 3.9. A notice shall be
deemed given on the date it is deposited in the mail in accordance with the
foregoing. Any party may change the address to which to send notices by
notifying the other party of such change of address in writing in
accordance with the foregoing.
16.4. Governing Law. This Agreement and all rights, duties and
-------------
obligations hereunder shall be construed and interpreted in accordance with
the laws of Colorado.
22
<PAGE>
16.5. Waiver. No waiver of any term, covenant or condition contained
------
in this Agreement or failure to exercise a right or remedy shall be deemed
to imply a further waiver of such term, covenant, right or remedy.
16.6. Severability. Nothing contained in this Agreement shall be
------------
construed so as to require the commission of an act contrary to law and
whenever there is any conflict between any provision of this Agreement and
any present statute, law, ordinance or regulation contrary to which the
parties have no legal right to contract, the latter shall prevail, but in
such event, the provisions of this Agreement affected shall be curtailed
and limited only to the extent necessary to bring it within the
requirements of the law and to carry out the purposes of this Agreement.
16.7. Binding Agreement. Subject to the restrictions on transfer
-----------------
and encumbrances set forth herein, this Agreement shall inure to the
benefit of and be binding upon MHI and IMS and their respective legal
representatives, successors, transferees, and assigns. Whenever a reference
is herein made to any party such reference shall be deemed to include a
reference to the legal representatives, successors, transferees, and
assigns of such party.
16.8. Assignment. This Agreement shall not be assigned by either MHI
----------
or IMS without the express prior written consent of the other party, except
that MHI may assign this Agreement to any MHI wholly owned affiliate.
16.9. Headings. All headings and captions used herein are for
--------
convenience of reference only, and shall not be a part or affect the
interpretation of this Agreement.
16.10. Modification. This Agreement may be modified only upon
------------
execution of a written agreement signed by the Members.
16.11. Entire Agreement. This Agreement and any exhibits
----------------
specifically made a part hereof or referred to herein supersede all prior
oral and written understandings and agreements between the parties. The
parties acknowledge and agree that this Agreement and any exhibits
specifically made a part hereof or referred to herein contain the entire
agreement between the parties. No representations, promises, conditions or
warranties with reference to the execution of this Agreement have been made
or entered into between the parties other than as expressly stated herein.
In the event of a conflict, the provisions of this Agreement will govern.
16.12. Attorneys Fees. In the event of any suit under this
--------------
Agreement, reasonable attorneys' fees and costs shall be awarded by the
court to the prevailing party, to be included in any judgment recovered. In
addition, the prevailing party shall be entitled to recover reasonable
attorneys' fees and costs incurred in enforcing any judgment arising from a
suit under this Agreement. This postjudgment attorneys' fees and costs
provision shall be severable from the other
23
<PAGE>
provisions of this Agreement and shall survive any judgment on such suit
and is not to be deemed merged into the judgment.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
Integrated Medical Systems, Inc. Methodist Hospital of Indiana, Inc.
By /s/ (Signature Appears Here) By /s/ (Signature Appears Here)
--------------------------------- ----------------------------------
Its Senior Vice President Its Executive V.P.
-------------------------------- ---------------------------------
24
<PAGE>
Exhibit 10.24
PROMISSORY NOTE
$1,500,000.00 September 25, 1995
FOR VALUE RECEIVED, Integrated Medical Systems, Inc., a Colorado
corporation ("Maker"), does hereby promise to pay to the order of Eli Lilly and
Company, an Indiana corporation ("Payee"), on July 1, 1996, or such earlier date
as payment may become due pursuant to the terms hereof (the "Maturity Date"),
the sum of One Million and Five Hundred Thousand Dollars ($1,500,000), with
interest computed from the date hereof on the unpaid principal sum from time to
time outstanding at a rate of ten percent (10%) per annum except that if any
portion of the principal or interest payable hereunder shall not be paid on the
Maturity Date, the interest rate from and after the Maturity Date shall be 12%.
Payee, as holder of this Note, and any subsequent holder of this Note, is
sometimes hereinafter referred to as "Holder." Principal and interest shall be
payable in money of the United States of America that at the time is legal
tender for the payment of public and private debts.
This Note is one of the "New Notes" secured by a certain Security
Agreement, dated as of August 28, 1995, between Maker and Payee (the "Security
Agreement"), and a certain Pledge Agreement, dated as of August 28, 1995,
between Maker and Payee (the "Pledge Agreement"), which secure the obligations
of Maker under promissory notes that may be issued from time to time by Maker to
Payee. Maker has also previously issued promissory notes to Payee secured by
Pledge Agreements and Security Agreements dated as of June 12, 1995 and July
27,1995. In the event of a Default (as hereinafter defined) under this Note,
Holder shall be entitled to enforce its rights and shall have recourse against
the Maker in accordance with the terms of this Note and applicable law and
Holder shall be entitled to enforce its rights against the Collateral (as
defined in the Security Agreement) and the Pledged Collateral (as defined in the
Pledge Agreement) and shall have recourse against Maker as described in the
Security Agreement and the Pledge Agreement.
The indebtedness evidenced by this Note shall be subordinate and
junior in right of payment, to the extent set forth in clauses (i) to (iv) of
this paragraph, to all principal and interest on all indebtedness of Maker for
borrowed money outstanding on the date hereof and listed on Schedule 1 hereto.
Such indebtedness of Maker to which this
<PAGE>
Note is subordinate and junior is referred to as "Senior Debt."
(i) Upon maturity of any Senior Debt by lapse of time, acceleration
or otherwise, then all principal of, premium, if any, and interest on, all
such matured Senior Debt shall first be paid in full before any payment on
account of principal or interest is made upon this Note.
(ii) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceeding, or any receivership proceedings
in connection therewith, relative to Maker or its creditors or its
property, and in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of Maker, whether or not involving
insolvency or bankruptcy proceedings, then all principal and interest due
on Senior Debt shall first be paid in full, or such payment shall have been
provided for, before any payment on account of principal or interest is
made upon this Note. In any of the proceedings referred to in the first
sentence of this clause (ii), any payment or distribution of any kind or
character, whether in cash, property, stock or obligations, which may be
payable or deliverable in respect of this Note shall be paid or delivered
directly to the holders of Senior Debt (or to a banking institution
selected by the court or person making the payment or delivery or
designated by any holder of Senior Debt) for application in payment
thereof, unless and until all principal and interest on all Senior Debt
shall have been paid in full, or such payment shall have been provided for;
provided, however, that:
(a) in the event that payment or delivery of such cash,
property, stock or obligations to the Holder is authorized by an order
or decree giving effect, and stating in such order or decree that
effect is given, to the subordination of this Note to Senior Debt, and
made by a court of competent jurisdiction in a reorganization
proceeding under any applicable bankruptcy or reorganization law, no
payment or delivery of such cash, property, stock or obligations
payable or deliverable with respect to this Note shall be made to the
holders of Senior Debt; and
(b) no such delivery shall be made to holders of Senior Debt of
stock or obligations which are issued pursuant to reorganization
proceedings or dissolution or liquidation proceedings, or upon any
merger, consolidation,
2
<PAGE>
sale, lease, transfer or other disposal by Maker, as reorganized, or
by the corporation succeeding to Maker or acquiring its property and
assets, if such stock or obligations are subordinate and junior at
least to the extent provided in this paragraph to the payment of all
Senior Debt then outstanding and to the payment of any stock or
obligations which are issued in exchange or substitution for any
Senior Debt then outstanding.
(iii) Maker shall not make any payment of principal or interest on
this Note during the continuance of any default in the payment of principal
of or interest on any Senior Debt.
(iv) The provisions of this paragraph are for the purpose of
defining the relative rights of the holders of Senior Debt, on the one
hand, and Holder, on the other hand, and as between Maker and the Holder,
nothing herein shall impair the obligation of Maker, which is unconditional
and absolute, to pay to the Holder the principal of and any interest on
this Note, in accordance with its terms, nor shall anything herein prevent
the Holder from exercising all remedies otherwise permitted by applicable
law upon default hereunder, subject to the rights, under this paragraph, of
holders of Senior Debt in respect of cash, property, stock, or other
securities received upon the exercise of such remedies.
This Note may be prepaid, at any time or from time to time, in whole
or in part, without penalty, at the option of Maker.
Upon the happening of any Default of Maker, the entire unpaid balance
of the amount owed by Maker under this Note, together with interest accrued
thereon, shall become immediately due and payable. Each of the following shall
constitute a "Default" of Maker:
(i) failure of Maker to make any payment of principal or interest when due
hereunder or under any other promissory note issued by Maker to Payee;
(ii) default by Maker in the performance or observance of any covenant or
agreement, or breach by Maker of any representation or warranty,
contained (x) herein or in any other promissory note issued by Maker
to Payee, in the Security Agreement or in the Pledge Agreement or in
any prior Security Agreement or prior Pledge Agreement made by Maker
in favor of Payee, or (y) in the Agreement and Plan of Merger, dated
as of August 2, 1995, among
3
<PAGE>
Maker, Payee and a subsidiary of Payee; provided that in the case of
--------
any default or breach under clause (y), if such default or breach is
reasonably capable of cure by Maker, then such default or breach shall
not be a Default hereunder unless such default or breach has not been
cured by 12:00 noon, New York City time, on the tenth business day
after written notice of such default or breach is provided by Holder
to Maker in the manner specified below;
(iii) any default by Maker in respect of any obligation to pay principal
under, or any acceleration of any right to payment under, any Senior
Debt.
(iv) Maker purporting to assign any of its obligations under this Note to
any person or entity without the prior written consent of Holder;
(v) Maker (a) admits in writing its inability generally to pay its debts
as they become due; (b) files a petition commencing a voluntary case
concerning it under any Chapter of Title 11 of the United States Code
entitled "Bankruptcy" ("Title 11"); (c) petitions or applies to any
tribunal for the appointment of any receiver, liquidator or trustee of
or for it or any substantial part of its property or assets; or (d)
commences any proceeding relating to it under any other bankruptcy,
reorganization, arrangement, readjustment or debt, receivership,
dissolution, liquidation or similar law or statute of any jurisdiction
(domestic or foreign), whether now or hereafter in effect, or any
other procedure for the relief of financially distressed debtors;
(vi) commencement against Maker of an involuntary case under Title 11 and
an order for relief under Title 11 is entered or the petition is
controverted but is not dismissed within 60 days after the
commencement of the case; or
(vii) commencement against Maker of any proceeding under any other
applicable federal or state bankruptcy, insolvency or other similar
law seeking the appointment of a receiver, liquidator, assignee,
trustee, sequestrator, agent or custodian (or other similar official)
of it or any substantial part of its property, and relief against it
is ordered in such proceeding or such proceeding remains undismissed
for a period of 60 days or more.
4
<PAGE>
In the event an attorney at law or other agent is retained for
collection of this Note after any Default of Maker, in addition to principal and
interest, Holder shall be entitled to collect all reasonable costs of
collection, including but not limited to, reasonable attorneys' fees and costs,
incurred in connection with any of Holder's collection efforts, whether or not
suit on this Note is filed, and all such costs and expenses shall be payable by
Maker on demand and also shall be secured by all other collateral at any time
held by Holder as security for Maker's obligations to Holder.
No failure on the part of Holder to exercise any right or remedy
hereunder with respect to Maker, whether before or after the happening of a
Default, shall constitute waiver of any future Default or any other Default. No
failure to accelerate the debt of Maker evidenced hereby by reason of a Default
or indulgence granted from time to time shall be construed to be a waiver of the
right to insist upon prompt payment thereafter, or shall be deemed to be a
novation of this Note or a reinstatement of the debt evidenced hereby or a
waiver of such right of acceleration or any other right, or be construed so as
to preclude the exercise of any right Holder may have, whether by the laws of
the state governing this Note, by agreement or otherwise; and Maker hereby
expressly waives the benefit of any statute or rule of law or equity that would
produce a result contrary to or in conflict with the foregoing. This Note may
not be modified orally, but only by an agreement in writing signed by the party
against whom such agreement is sought to be enforced.
Any notice provided to Maker hereunder shall be sent (and shall be
deemed given on the date sent) by facsimile (and confirmed by mailing by first
class mail) as follows:
Integrated Medical Systems, Inc.
15000 West 6th Avenue, Suite 400
Golden, Colorado 80401
Fax No.: (303) 271-7998
or to such other facsimile number and address as Maker shall provide in writing
to Holder for purposes of notices hereunder.
This Note is binding upon Maker's successors and permitted assigns,
shall inure to the benefit of Holder, its successors and assigns and shall be
governed by and construed in accordance with laws of the State of New York.
5
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Note on the date first
above written.
INTEGRATED MEDICAL SYSTEMS, INC.
-----------------------------
Name:
Title:
6
<PAGE>
Schedule 1
to
Promissory Note
Senior Debt
-----------
<TABLE>
<CAPTION>
Creditor Amount
-------- ------
<S> <C>
First National Bank of Wyoming $1,000,000
Prime Leasing Corporation 120,013
CHCN Partners 30,112
NEC/XEROX (Long Term Debt) 135,404
</TABLE>
7
<PAGE>
Exhibit 10.25
PROMISSORY NOTE
$1,350,000.00 October 17, 1995
FOR VALUE RECEIVED, Integrated Medical Systems, Inc., a Colorado
corporation ("Maker"), does hereby promise to pay to the order of Eli Lilly and
Company, an Indiana corporation ("Payee"), on July 1, 1996, or such earlier date
as payment may become due pursuant to the terms hereof (the "Maturity Date"),
the sum of One Million Three Hundred Fifty Thousand Dollars ($1,350,000), with
interest computed from the date hereof on the unpaid principal sum from time to
time outstanding at a rate of ten percent (10%) per annum except that if any
portion of the principal or interest payable hereunder shall not be paid on the
Maturity Date, the interest rate from and after the Maturity Date shall be 12%.
Payee, as holder of this Note, and any subsequent holder of this Note, is
sometimes hereinafter referred to as "Holder." Principal and interest shall be
payable in money of the United States of America that at the time is legal
tender for the payment of public and private debts.
This Note is one of the "New Notes" secured by a certain Security
Agreement, dated as of August 28, 1995, between Maker and Payee (the "Security
Agreement"), and a certain Pledge Agreement, dated as of August 28, 1995,
between Maker and Payee (the "Pledge Agreement"), which secure the obligations
of Maker under promissory notes that may be issued from time to time by Maker to
Payee. Maker has also previously issued promissory notes to Payee secured by
Pledge Agreements and Security Agreements dated as of June 12, 1995 and July
27,1995. In the event of a Default (as hereinafter defined) under this Note,
Holder shall be entitled to enforce its rights and shall have recourse against
the Maker in accordance with the terms of this Note and applicable law and
Holder shall be entitled to enforce its rights against the Collateral (as
defined in the Security Agreement) and the Pledged Collateral (as defined in the
Pledge Agreement) and shall have recourse against Maker as described in the
Security Agreement and the Pledge Agreement.
The indebtedness evidenced by this Note shall be subordinate and
junior in right of payment, to the extent set forth in clauses (i) to (iv) of
this paragraph, to all principal and interest on all indebtedness of Maker for
borrowed money outstanding on the date hereof and listed on Schedule 1 hereto.
Such indebtedness of Maker to which this
<PAGE>
Note is subordinate and junior is referred to as "Senior Debt."
(i) Upon maturity of any Senior Debt by lapse of time, acceleration
or otherwise, then all principal of, premium, if any, and interest on, all
such matured Senior Debt shall first be paid in full before any payment on
account of principal or interest is made upon this Note.
(ii) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceeding, or any receivership proceedings
in connection therewith, relative to Maker or its creditors or its
property, and in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of Maker, whether or not involving
insolvency or bankruptcy proceedings, then all principal and interest due
on Senior Debt shall first be paid in full, or such payment shall have been
provided for, before any payment on account of principal or interest is
made upon this Note. In any of the proceedings referred to in the first
sentence of this clause (ii), any payment or distribution of any kind or
character, whether in cash, property, stock or obligations, which may be
payable or deliverable in respect of this Note shall be paid or delivered
directly to the holders of Senior Debt (or to a banking institution
selected by the court or person making the payment or delivery or
designated by any holder of Senior Debt) for application in payment
thereof, unless and until all principal and interest on all Senior Debt
shall have been paid in full, or such payment shall have been provided for;
provided, however, that:
(a) in the event that payment or delivery of such cash,
property, stock or obligations to the Holder is authorized by an order
or decree giving effect, and stating in such order or decree that
effect is given, to the subordination of this Note to Senior Debt, and
made by a court of competent jurisdiction in a reorganization
proceeding under any applicable bankruptcy or reorganization law, no
payment or delivery of such cash, property, stock or obligations
payable or deliverable with respect to this Note shall be made to the
holders of Senior Debt; and
(b) no such delivery shall be made to holders of Senior Debt of
stock or obligations which are issued pursuant to reorganization
proceedings or dissolution or liquidation proceedings, or upon any
merger, consolidation,
2
<PAGE>
sale, lease, transfer or other disposal by Maker, as reorganized, or
by the corporation succeeding to Maker or acquiring its property and
assets, if such stock or obligations are subordinate and junior at
least to the extent provided in this paragraph to the payment of all
Senior Debt then outstanding and to the payment of any stock or
obligations which are issued in exchange or substitution for any
Senior Debt then outstanding.
(iii) Maker shall not make any payment of principal or interest on
this Note during the continuance of any default in the payment of principal
of or interest on any Senior Debt.
(iv) The provisions of this paragraph are for the purpose of
defining the relative rights of the holders of Senior Debt, on the one
hand, and Holder, on the other hand, and as between Maker and the Holder,
nothing herein shall impair the obligation of Maker, which is unconditional
and absolute, to pay to the Holder the principal of and any interest on
this Note, in accordance with its terms, nor shall anything herein prevent
the Holder from exercising all remedies otherwise permitted by applicable
law upon default hereunder, subject to the rights, under this paragraph, of
holders of Senior Debt in respect of cash, property, stock, or other
securities received upon the exercise of such remedies.
This Note may be prepaid, at any time or from time to time, in whole
or in part, without penalty, at the option of Maker.
Upon the happening of any Default of Maker, the entire unpaid balance
of the amount owed by Maker under this Note, together with interest accrued
thereon, shall become immediately due and payable. Each of the following shall
constitute a "Default" of Maker:
(i) failure of Maker to make any payment of principal or interest when due
hereunder or under any other promissory note issued by Maker to Payee;
(ii) default by Maker in the performance or observance of any covenant or
agreement, or breach by Maker of any representation or warranty,
contained (x) herein or in any other promissory note issued by Maker
to Payee, in the Security Agreement or in the Pledge Agreement or in
any prior Security Agreement or prior Pledge Agreement made by Maker
in favor of Payee, or (y) in the Agreement and Plan of Merger, dated
as of August 2, 1995, among
3
<PAGE>
Maker, Payee and a subsidiary of Payee; provided that in the case of
--------
any default or breach under clause (y), if such default or breach is
reasonably capable of cure by Maker, then such default or breach shall
not be a Default hereunder unless such default or breach has not been
cured by 12:00 noon, New York City time, on the tenth business day
after written notice of such default or breach is provided by Holder
to Maker in the manner specified below;
(iii) any default by Maker in respect of any obligation to pay principal
under, or any acceleration of any right to payment under, any Senior
Debt.
(iv) Maker purporting to assign any of its obligations under this Note to
any person or entity without the prior written consent of Holder;
(v) Maker (a) admits in writing its inability generally to pay its debts
as they become due; (b) files a petition commencing a voluntary case
concerning it under any Chapter of Title 11 of the United States Code
entitled "Bankruptcy" ("Title 11"); (c) petitions or applies to any
tribunal for the appointment of any receiver, liquidator or trustee of
or for it or any substantial part of its property or assets; or (d)
commences any proceeding relating to it under any other bankruptcy,
reorganization, arrangement, readjustment or debt, receivership,
dissolution, liquidation or similar law or statute of any jurisdiction
(domestic or foreign), whether now or hereafter in effect, or any
other procedure for the relief of financially distressed debtors;
(vi) commencement against Maker of an involuntary case under Title 11 and
an order for relief under Title 11 is entered or the petition is
controverted but is not dismissed within 60 days after the
commencement of the case; or
(vii) commencement against Maker of any proceeding under any other
applicable federal or state bankruptcy, insolvency or other similar
law seeking the appointment of a receiver, liquidator, assignee,
trustee, sequestrator, agent or custodian (or other similar official)
of it or any substantial part of its property, and relief against it
is ordered in such proceeding or such proceeding remains undismissed
for a period of 60 days or more.
4
<PAGE>
In the event an attorney at law or other agent is retained for
collection of this Note after any Default of Maker, in addition to principal and
interest, Holder shall be entitled to collect all reasonable costs of
collection, including but not limited to, reasonable attorneys' fees and costs,
incurred in connection with any of Holder's collection efforts, whether or not
suit on this Note is filed, and all such costs and expenses shall be payable by
Maker on demand and also shall be secured by all other collateral at any time
held by Holder as security for Maker's obligations to Holder.
No failure on the part of Holder to exercise any right or remedy
hereunder with respect to Maker, whether before or after the happening of a
Default, shall constitute waiver of any future Default or any other Default. No
failure to accelerate the debt of Maker evidenced hereby by reason of a Default
or indulgence granted from time to time shall be construed to be a waiver of the
right to insist upon prompt payment thereafter, or shall be deemed to be a
novation of this Note or a reinstatement of the debt evidenced hereby or a
waiver of such right of acceleration or any other right, or be construed so as
to preclude the exercise of any right Holder may have, whether by the laws of
the state governing this Note, by agreement or otherwise; and Maker hereby
expressly waives the benefit of any statute or rule of law or equity that would
produce a result contrary to or in conflict with the foregoing. This Note may
not be modified orally, but only by an agreement in writing signed by the party
against whom such agreement is sought to be enforced.
Any notice provided to Maker hereunder shall be sent (and shall be
deemed given on the date sent) by facsimile (and confirmed by mailing by first
class mail) as follows:
Integrated Medical Systems, Inc.
15000 West 6th Avenue, Suite 400
Golden, Colorado 80401
Fax No.: (303) 271-7998
or to such other facsimile number and address as Maker shall provide in writing
to Holder for purposes of notices hereunder.
This Note is binding upon Maker's successors and permitted assigns,
shall inure to the benefit of Holder, its successors and assigns and shall be
governed by and construed in accordance with laws of the State of New York.
5
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Note on the date first
above written.
INTEGRATED MEDICAL SYSTEMS, INC.
-----------------------------
Name:
Title:
6
<PAGE>
Schedule 1
to
Promissory Note
Senior Debt
-----------
<TABLE>
<CAPTION>
Creditor Amount
-------- ------
<S> <C>
First National Bank of Wyoming $1,000,000
Prime Leasing Corporation 120,013
CHCN Partners 30,112
NEC/XEROX (Long Term Debt) 135,404
</TABLE>
7
<PAGE>
Exhibit 10.26
PROMISSORY NOTE
$1,000,000.00 October 25, 1995
FOR VALUE RECEIVED, Integrated Medical Systems, Inc., a Colorado
corporation ("Maker"), does hereby promise to pay to the order of Eli Lilly and
Company, an Indiana corporation ("Payee"), on July 1, 1996, or such earlier date
as payment may become due pursuant to the terms hereof (the "Maturity Date"),
the sum of One Million Dollars ($1,000,000), with interest computed from the
date hereof on the unpaid principal sum from time to time outstanding at a rate
of ten percent (10%) per annum except that if any portion of the principal or
interest payable hereunder shall not be paid on the Maturity Date, the interest
rate from and after the Maturity Date shall be 12%. Payee, as holder of this
Note, and any subsequent holder of this Note, is sometimes hereinafter referred
to as "Holder." Principal and interest shall be payable in money of the United
States of America that at the time is legal tender for the payment of public and
private debts.
This Note is one of the "New Notes" secured by a certain Security
Agreement, dated as of August 28, 1995, between Maker and Payee (the "Security
Agreement"), and a certain Pledge Agreement, dated as of August 28, 1995,
between Maker and Payee (the "Pledge Agreement"), which secure the obligations
of Maker under promissory notes that may be issued from time to time by Maker to
Payee. Maker has also previously issued promissory notes to Payee secured by
Pledge Agreements and Security Agreements dated as of June 12, 1995 and July
27,1995. In the event of a Default (as hereinafter defined) under this Note,
Holder shall be entitled to enforce its rights and shall have recourse against
the Maker in accordance with the terms of this Note and applicable law and
Holder shall be entitled to enforce its rights against the Collateral (as
defined in the Security Agreement) and the Pledged Collateral (as defined in the
Pledge Agreement) and shall have recourse against Maker as described in the
Security Agreement and the Pledge Agreement.
The indebtedness evidenced by this Note shall be subordinate and
junior in right of payment, to the extent set forth in clauses (i) to (iv) of
this paragraph, to all principal and interest on all indebtedness of Maker for
borrowed money outstanding on the date hereof and listed on Schedule 1 hereto.
Such indebtedness of Maker to which this
<PAGE>
Note is subordinate and junior is referred to as "Senior Debt."
(i) Upon maturity of any Senior Debt by lapse of time,
acceleration or otherwise, then all principal of, premium, if any, and
interest on, all such matured Senior Debt shall first be paid in full
before any payment on account of principal or interest is made upon this
Note.
(ii) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceeding, or any receivership proceedings
in connection therewith, relative to Maker or its creditors or its
property, and in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of Maker, whether or not involving
insolvency or bankruptcy proceedings, then all principal and interest due
on Senior Debt shall first be paid in full, or such payment shall have been
provided for, before any payment on account of principal or interest is
made upon this Note. In any of the proceedings referred to in the first
sentence of this clause (ii), any payment or distribution of any kind or
character, whether in cash, property, stock or obligations, which may be
payable or deliverable in respect of this Note shall be paid or delivered
directly to the holders of Senior Debt (or to a banking institution
selected by the court or person making the payment or delivery or
designated by any holder of Senior Debt) for application in payment
thereof, unless and until all principal and interest on all Senior Debt
shall have been paid in full, or such payment shall have been provided for;
provided, however, that:
(a) in the event that payment or delivery of such cash,
property, stock or obligations to the Holder is authorized by an order
or decree giving effect, and stating in such order or decree that
effect is given, to the subordination of this Note to Senior Debt, and
made by a court of competent jurisdiction in a reorganization
proceeding under any applicable bankruptcy or reorganization law, no
payment or delivery of such cash, property, stock or obligations
payable or deliverable with respect to this Note shall be made to the
holders of Senior Debt; and
(b) no such delivery shall be made to holders of Senior Debt of
stock or obligations which are issued pursuant to reorganization
proceedings or dissolution or liquidation proceedings, or upon any
merger, consolidation,
2
<PAGE>
sale, lease, transfer or other disposal by Maker, as reorganized, or
by the corporation succeeding to Maker or acquiring its property and
assets, if such stock or obligations are subordinate and junior at
least to the extent provided in this paragraph to the payment of all
Senior Debt then outstanding and to the payment of any stock or
obligations which are issued in exchange or substitution for any
Senior Debt then outstanding.
(iii) Maker shall not make any payment of principal or interest on
this Note during the continuance of any default in the payment of principal
of or interest on any Senior Debt.
(iv) The provisions of this paragraph are for the purpose of
defining the relative rights of the holders of Senior Debt, on the one
hand, and Holder, on the other hand, and as between Maker and the Holder,
nothing herein shall impair the obligation of Maker, which is unconditional
and absolute, to pay to the Holder the principal of and any interest on
this Note, in accordance with its terms, nor shall anything herein prevent
the Holder from exercising all remedies otherwise permitted by applicable
law upon default hereunder, subject to the rights, under this paragraph, of
holders of Senior Debt in respect of cash, property, stock, or other
securities received upon the exercise of such remedies.
This Note may be prepaid, at any time or from time to time, in whole
or in part, without penalty, at the option of Maker.
Upon the happening of any Default of Maker, the entire unpaid balance
of the amount owed by Maker under this Note, together with interest accrued
thereon, shall become immediately due and payable. Each of the following shall
constitute a "Default" of Maker:
(i) failure of Maker to make any payment of principal or interest when due
hereunder or under any other promissory note issued by Maker to Payee;
(ii) default by Maker in the performance or observance of any covenant or
agreement, or breach by Maker of any representation or warranty,
contained (x) herein or in any other promissory note issued by Maker
to Payee, in the Security Agreement or in the Pledge Agreement or in
any prior Security Agreement or prior Pledge Agreement made by Maker
in favor of Payee, or (y) in the Agreement and Plan of Merger, dated
as of August 2, 1995, among
3
<PAGE>
Maker, Payee and a subsidiary of Payee; provided that in the case of
--------
any default or breach under clause (y), if such default or breach is
reasonably capable of cure by Maker, then such default or breach shall
not be a Default hereunder unless such default or breach has not been
cured by 12:00 noon, New York City time, on the tenth business day
after written notice of such default or breach is provided by Holder
to Maker in the manner specified below;
(iii) any default by Maker in respect of any obligation to pay principal
under, or any acceleration of any right to payment under, any Senior
Debt.
(iv) Maker purporting to assign any of its obligations under this Note to
any person or entity without the prior written consent of Holder;
(v) Maker (a) admits in writing its inability generally to pay its debts
as they become due; (b) files a petition commencing a voluntary case
concerning it under any Chapter of Title 11 of the United States Code
entitled "Bankruptcy" ("Title 11"); (c) petitions or applies to any
tribunal for the appointment of any receiver, liquidator or trustee of
or for it or any substantial part of its property or assets; or (d)
commences any proceeding relating to it under any other bankruptcy,
reorganization, arrangement, readjustment or debt, receivership,
dissolution, liquidation or similar law or statute of any jurisdiction
(domestic or foreign), whether now or hereafter in effect, or any
other procedure for the relief of financially distressed debtors;
(vi) commencement against Maker of an involuntary case under Title 11 and
an order for relief under Title 11 is entered or the petition is
controverted but is not dismissed within 60 days after the
commencement of the case; or
(vii) commencement against Maker of any proceeding under any other
applicable federal or state bankruptcy, insolvency or other similar
law seeking the appointment of a receiver, liquidator, assignee,
trustee, sequestrator, agent or custodian (or other similar official)
of it or any substantial part of its property, and relief against it
is ordered in such proceeding or such proceeding remains undismissed
for a period of 60 days or more.
4
<PAGE>
In the event an attorney at law or other agent is retained for
collection of this Note after any Default of Maker, in addition to principal and
interest, Holder shall be entitled to collect all reasonable costs of
collection, including but not limited to, reasonable attorneys' fees and costs,
incurred in connection with any of Holder's collection efforts, whether or not
suit on this Note is filed, and all such costs and expenses shall be payable by
Maker on demand and also shall be secured by all other collateral at any time
held by Holder as security for Maker's obligations to Holder.
No failure on the part of Holder to exercise any right or remedy
hereunder with respect to Maker, whether before or after the happening of a
Default, shall constitute waiver of any future Default or any other Default. No
failure to accelerate the debt of Maker evidenced hereby by reason of a Default
or indulgence granted from time to time shall be construed to be a waiver of the
right to insist upon prompt payment thereafter, or shall be deemed to be a
novation of this Note or a reinstatement of the debt evidenced hereby or a
waiver of such right of acceleration or any other right, or be construed so as
to preclude the exercise of any right Holder may have, whether by the laws of
the state governing this Note, by agreement or otherwise; and Maker hereby
expressly waives the benefit of any statute or rule of law or equity that would
produce a result contrary to or in conflict with the foregoing. This Note may
not be modified orally, but only by an agreement in writing signed by the party
against whom such agreement is sought to be enforced.
Any notice provided to Maker hereunder shall be sent (and shall be
deemed given on the date sent) by facsimile (and confirmed by mailing by first
class mail) as follows:
Integrated Medical Systems, Inc.
15000 West 6th Avenue, Suite 400
Golden, Colorado 80401
Fax No.: (303) 271-7998
or to such other facsimile number and address as Maker shall provide in writing
to Holder for purposes of notices hereunder.
This Note is binding upon Maker's successors and permitted assigns,
shall inure to the benefit of Holder, its successors and assigns and shall be
governed by and construed in accordance with laws of the State of New York.
5
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Note on the date first
above written.
INTEGRATED MEDICAL SYSTEMS, INC.
-----------------------------
Name:
Title:
6
<PAGE>
Schedule 1
to
Promissory Note
Senior Debt
-----------
<TABLE>
<CAPTION>
Creditor Amount
- -------- ------
<S> <C>
First National Bank of Wyoming $1,000,000
Prime Leasing Corporation 120,013
CHCN Partners 30,112
NEC/XEROX (Long Term Debt) 135,404
</TABLE>
7
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Denver, Colorado,
October 25, 1995.
/s/ Arthur Andersen LLP
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial Data of Lilly" in the Registration Statement
(Amendment No. 1 to Form S-4) and related Prospectus of Eli Lilly and Company
and Integrated Medical Systems, Inc. (IMS) for the registration of 10,792,695
shares of Series D Preferred Stock of IMS, 2,000,000 shares of Series B
Preferred Stock of IMS, 655,103 warrants to purchase Series D Preferred Stock of
IMS, 2,380,457 Options to Purchase Series D Preferred Stock of IMS, 292,979
Options to Purchase Common Stock of Eli Lilly and Company, 292,979 shares of Eli
Lilly and Company Common Stock, and 10,792,695 Put Rights for Series D Preferred
Stock of IMS and to the incorporation by reference therein of our report dated
February 8, 1995, with respect to the consolidated financial statements of Eli
Lilly and Company incorporated by reference in its Annual Report (Form 10-K) for
the year ended December 31, 1994, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
October 26, 1995
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 33-62613 of Eli Lilly and Company and Integrated
Medical Systems, Inc. on Form S-4 of our report dated August 19, 1994, on the
combined financial statements of PCS Group for each of the three years in the
period ended March 31, 1994 appearing in the Current Report on Form 8-K/A dated
November 29, 1994, of Eli Lilly and Company. We also consent to the reference to
us under the heading "Experts" in the Prospectus, which is part of such
Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 25, 1995
<PAGE>
EXHIBIT 23.7
CONSENT OF SMITH BARNEY INC.
We hereby consent to the inclusion of our opinion in the Proxy
Statement-Prospectus included in the Joint Registration Statement of Eli Lilly
and Company and Integrated Medical Systems, Inc. and to all references to our
name under the captions "Summary - The Merger - Opinion of Financial Adviser"
and "Special Factors to be Considered - Opinion of Financial Advisor" therein.
In giving such consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 or the rules and regulations adopted by the Securities and Exchange
Commission thereunder.
/s/ Smith Barney Inc.
New York, New York
October 25, 1995
