FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
________________ to ________________.
Commission file number: 33-62613
33-62613-01
INTEGRATED MEDICAL SYSTEMS, INC.
--------------------------------------------
(Name of small business issuer in its charter)
Colorado 84-0970775
------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
15000 West 6th Avenue, Suite 400, Golden, Colorado 80401
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 279-6116
Securities registered pursuant to Section 12(b) or Section 12(g) of the Act:
None
--------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10- KSB. [X]
The issuer's revenue for its most recent fiscal year was $20,408,258.
As of March 15, 1996 the aggregate market value of the Registrant's voting
stock held by nonaffiliates was $ -0-.
As of March 15, 1996 Registrant had 15,660,200 shares of its no par value
common stock and 5,622,323 shares of Series D non-voting redeemable preferred
stock issued and outstanding.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
<PAGE>
PART I
ITEM 1. BUSINESS
Integrated Medical Systems, Inc. ("IMS" or the "Company") was founded in
1985. IMS develops and operates computer-based communications networks that link
physicians with other participants in healthcare delivery and payment systems,
enabling such participants to automate routine and specialized messages and to
provide a practical means for providers and payors to integrate the services
they provide. Healthcare, 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 developer and
operator 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.
Acquisition of the Company by Eli Lilly and Company ("Lilly"). On December
18, 1995, the Shareholders of the Company approved an Agreement and Plan of
Merger dated August 2, 1995 (the "Merger Agreement") providing for the merger
(the "Merger") of Trans-IMS Corporation, a wholly-owned subsidiary of Lilly
("Subsidiary"), with and into the Company. Prior to the Merger, Lilly, through
wholly-owned subsidiaries, owned shares of the Company's common stock ("Common
Stock") and all of the Company's Series C Preferred Stock ("Series C Stock"),
which together constituted approximately 28% of the outstanding voting
securities of the Company. As a result of the Merger, (i) the Company issued
5,263,995 shares of non-voting Series D Preferred Stock ("Series D Stock") and
paid approximately $21.4 million in cash contributed to the Company by Lilly in
exchange for all outstanding Common Stock and Series B Stock Preferred Stock
("Series B Stock") held by persons other than Lilly; (ii) all options
exercisable for shares of Common Stock were exchanged for cash contributed to
the Company by Lilly or options to acquire Series D Stock or Lilly Stock
(Company employees only); (iii) all warrants exercisable for shares of Common
Stock were exchanged for cash contributed to the Company by Lilly or warrants to
acquire Series D Stock; and (iv) all Subsidiary stock and Company Series C Stock
held by Lilly subsidiaries was converted into Common Stock of the Company. Lilly
contributions to the Company related to options and warrants totaled
approximately $8.1 million. As a result of the Merger, Lilly subsidiaries
acquired all of the voting stock of the Company.
In addition, pursuant to the Merger Agreement, Lilly entered into put-call
agreements with respect to the holders of 5,254,995 shares of Series D Preferred
Stock pursuant to which the holders will have the right to require Lilly to
purchase ("put") any or all of a holder's shares of Series D Stock during each
of two put periods at a price of $8.00 per share plus any unpaid dividends
accrued to the purchase date ("Purchase Price"). Further, Lilly will have the
right to require a holder to sell ("call") any or all of the holder's Series D
Stock then held to Lilly at the Purchase Price in whole or in part at any time
or from time to time after the third anniversary of the Merger.
The Company's Articles of Incorporation were amended and restated in the
Articles of Merger to change the total authorized capitalization of the Company
to 20,000,000 shares of Common Stock and 12,000,000 shares of Series D Preferred
Stock. The amended Articles of Incorporation changed the rights and preferences
of the Series B Stock (which was eliminated as a result of exchange by the
holders pursuant to the Merger) and established certain preferences, limitations
and relative rights with respect to the Series D Stock. Under the amended
Articles, following the Merger, the Series D Stock is superior in respect to
rights to payments upon liquidation, dissolution or winding up of the Company to
the Common Stock of the Company. The amended Articles provide that, other than
the right to elect directors following certain failures in the payment of
dividends and redemption of the Series D Stock, there are no voting rights other
than those required by Colorado Business Corporation Act with respect to the
- 2 -
<PAGE>
Series D Stock. All outstanding Series B Stock was cancelled upon exchange by
holders pursuant to the Merger and the Company is not authorized to issue
additional Series B Preferred. Also in connection with the Merger, the Company's
shareholders approved an amendment to the Company's 1994 Stock Option Plan (the
"Plan") to increase the number of shares of Common Stock authorized to be issued
under the Plan.
For financial reporting purposes, the Merger was accounted for as a
purchase in accordance with generally accepted accounting principles.
Accordingly, the total acquisition cost was allocated to the assets and
liabilities of the Company based on their relative estimated fair market values
at the date of the Merger. The Company's results of operations and financial
position will be included in Lilly's consolidated results of operations and
financial position from the date of the Merger. See Notes (1) and (11) to the
Consolidated Financial Statements included under Item 7. for additional
information.
Effects of the Merger. The Company entered into the Merger in order to
continue to fund the growth of its business, to facilitate expansion into new
markets and to provide an opportunity for liquidity to the Company's
shareholders and a continued incentive to management and employees of the
Company. The Merger provided Lilly with an opportunity to expand its
pharmaceutical management services by connecting to the large number of
physicians utilizing the Company's IMS MEDACOM(R) networks. Through these
networks, Lilly expects to use the Company's networks in conjunction with the
pharmacy benefit management business of Lilly's subsidiary, PCS, to further
develop a nationally integrated information technology system for health care
providers and payors. Lilly also intends to provide disease management
utilization tools to existing and future Company network subscribers, as well as
to expand its technological intervention capabilities and connectivity not only
to physicians but to all disparate sources of the health care community.
Description of Business
The first IMS medical communication network was deployed in 1988. IMS has
pioneered the concept of "open" architecture (available on a fee-for-use basis
regardless of the user's affiliation or computer hardware/operating system
requirements) computer-based communication networks for delivery of information
in the healthcare field (the "IMS MEDACOM(R) Networks"). IMS has developed
networks in more than 51 areas across the United States. IMS MEDACOM(R) Networks
are in 27 of the largest 50 metropolitan statistical areas in the country,
connect with over 35,000 physicians, 196 hospitals, 12 laboratories and at least
15 health plans and insurers.
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 25 million total messages were delivered over IMS MEDACOM(R) Networks
in 1995.
The Company's core set of three software connectivity tools are: RELAY(TM),
which provides system integration of diverse formats; ComCenter, the network
switch which distributes messages among network users; and PC-COM(TM), 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 by becoming subscriber s, for which
there are no costs or fees to the physician. Network sponsors are healthcare
institutions, organizations and services which communicate regularly with
- 3 -
<PAGE>
subscriber physicians in the normal course of business. Sponsors pay annual
network communications or license fees that typically relate to the number of
physician subscribers the sponsor chooses to reach on the network. As more
sponsors pay for network connectivity, the Company receives additional license,
implementation and communications fees and more physicians become subscribers.
Growing numbers of sponsors and physician subscribers connected with networks
lead to increased usage and acceptance and, ultimately, revenue to the Company.
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. The Company's strategy
includes the following key elements:
o 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.
o 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.
o 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 adds revenue for the
Company in both operated and licensed networks.
o Technology and Services Leadership: The Company has established a single
method of access for physicians and other network users which combines open
architecture, ease of use and bi-directional communications and employs a common
look and feel for users. The system is simple, utilizes those computer operating
systems most commonly found in physicians' offices 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.
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,
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 are connected as a network through the
- 4 -
<PAGE>
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 PC-COM(TM) software is installed on the office computer.
Healthcare institutions, such as hospitals, pay implementation and annual
communications and license fees to become network sponsors with the right to
communicate electronically with a designated group of physician subscribers or
other users. The sponsors link into the local IMS MEDACOM(R) Network using both
the Company's RELAY(TM) software which interfaces to their own proprietary
automated systems and an unlimited site license for PC-COM(TM) software to
enable in-house computers across the sponsor's organization to become NCWs. Each
institutional department or function of the hospital can format standard
automated transactions for an unlimited range of routine communications to
physicians or other network participants using the Company's proprietary
computer protocols (Script) and imbedding the Scripts in the subscriber NCWs
under a multi-level directory-driven communications module.
The ComCenter maintains the network directory of users, message ordering
system and transaction log. In the largest 50 markets, each ComCenter is
installed in a centrally located office leased by the Company that houses an IMS
network staff which develops, coordinates and supports the network. The network
staff also provides training with scheduled classes covering all aspects of
network use and benefits along with new sponsor and subscriber orientation and
specialty training covering new sponsor applications or network enhancements.
The networks do not process data or provide and operate value-added data
management or storage applications. The IMS strategy is focused on connectivity,
message delivery, automated message handling systems, facilitating functional
systems integration initiatives and enabling the practical implementation of
multi-provider organized delivery systems. During 1995 the Company deployed its
ComCenter NT software, based upon the MicroSoft Windows NT(R) network operating
system, to enhance its core strategy, gain flexibility in scaling ComCenters and
to add communications options such as on-line sessions, "near-time" automated
response host inquires and single point access for national sponsors
communicating across multiple networks.
The IMS MEDACOM(R) Network provides multi-platform functionality. The
RELAY(TM) software enables the network to permit sponsors to automate virtually
any communication to any network user from any host computer system that can
generate a print stream. Utilizing RELAY(TM), the Company has connected networks
with healthcare information systems sold by all of the major computer or
software vendors. The majority of the NCWs on the Company's various networks are
IBM-compatible, DOS-based personal computers, either stand-alone units or as
participants on a local area network. The Company's software can also be
installed on computers operating under other operating systems, such as UNIX,
ZENIX and AIX. The Company has designed a MicroSoft Windows(R) based operating
system version for its software which is scheduled for release to network users
during the first half of 1996.
A key feature of IMS MEDACOM(R) Networks is that communication for every
NCW is bi-directional. As opposed to general purpose E-mail systems, or special
purpose EDI applications (such as electronic claims submission), the IMS
MEDACOM(R) Network permits a message to be launched to or from a designated NCW.
In this way, network participants are assured that their network messages have
been received at the destination and the receiver can process the message
instantly because it is resident as electronic media on the NCW.
The IMS MEDACOM(R) Networks connect participants using modems and basic
phone lines, and because the highest volume message usually consists of 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.
- 5 -
<PAGE>
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: local sponsors, national 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 hospitals,
pharmaceutical companies, clinical laboratories, pharmacy chains, managed
care/insurance companies, medical publishers, etc., and usually are also
sponsors of more than one, and generally all, other IMS medical information
networks located throughout the United States.
Physician Subscribers. Each physician or medical practice is a key
influence or client for a wide range of local and national sponsors. Physician
subscribers create revenue by attracting local and national sponsors which pay
to use the network to communicate with subscribers. Although some sponsors' fees
are dependent upon the number of physicians with which communication is sought,
no network revenue is provided by physicians.
Network Support
The Company provides extensive centralized network monitoring field and
sponsor staff training, technical implementation resources and real time support
from its Golden, Colorado offices. The network services division delivers: (a)
network design services including on-site sponsor requirement evaluations and
RELAY(TM) specification development; (b) RELAY(TM) and other interface
programming, testing and installation; (c) call-in support with direct
technician interfaces who operate an automated problem logging, tracking,
resolution and follow-up system; and (d) a national training center, housed in a
separate, purpose-built facility with a curriculum that covers a Company
orientation, the industry, the Company's technology and products, policies and
procedures and a variety of application and programming credentialing.
- 6 -
<PAGE>
IMS MEDACOM Network Locations
IMS MEDACOM(R) Networks are currently serving the following market areas:
<TABLE>
<CAPTION>
<S> <C> <C>
oAlbany, New York(2) oHouston, Texas(1) oOrlando, Florida(1)(3)
oBirmingham, Alabama(3) oIndianapolis, Indiana(1)(3) oPensacola, Florida(2)
oBoca Raton, Florida(2) oJackson, Mississippi(2) oPhiladelphia, Pennsylvania(1)
oBoise, Idaho(2) oJacksonville, Florida(2) oPhoenix, Arizona(1)(3)
oCapitol Region, Washington, D.C. area(1) oKansas City, Missouri(1) oRichmond, Virginia(1)
oBoynton Beach, Florida(1) oKnoxville, Tennessee(2) oRockford, Illinois(3)
oChicago, Illinois(1)(3) oLexington, Kentucky(1) oSacramento, California(1)
oCincinnati, Ohio(1) oLincoln, Nebraska(2) oSan Antonio, Texas(1)
oColumbus, Ohio(1) oLittle Rock, Arkansas(3) oSan Diego, California(1)
oColorado Springs, Colorado(1) oLos Angeles, California(1) oSan Jose, California(1)
oDallas-Ft. Worth, Texas(1) oLouisville, Kentucky(1) oSavannah, Georgia(2)
oDavenport, Iowa(2) oMemphis, Tennessee(1) oSt. Louis, Missouri(1)
oDenver, Colorado(1) oMiami/Fort Lauderdale, Florida(1) oTampa, Florida(1)
oFlint, Michigan(2) oMinneapolis, Minnesota(1)(3) oTulsa, Oklahoma(2)
oGreat Falls, Montana(2) oMonroe, Louisiana(2) oWichita, Kansas(2)
oHonolulu, 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 approximately 150,000 physicians in practice, of which
20% are subscribers to an IMS network. Physician subscribers connected to
MEDACOM(R) Networks have grown from 845 at December 31, 1991 to approximately
35,000 at December 31, 1995, with more than half the growth occurring in 1995.
At December 31, 1995, IMS and networks operated by IMS or affiliates had
sponsorship agreements with 124 sponsors. One hundred one of the sponsors were
hospitals or hospital systems, managed care providers or payors, 12 were
laboratories, and 11 were other categories.
In addition, IMS has network license agreements with 27 licensee hospitals
or healthcare organizations, which authorize the licensee to use IMS network
software to set up and operate a proprietary network in smaller markets. IMS and
national sponsors are usually authorized to communicate with users of the
licensee's network. The licensee frequently retains IMS to manage its network or
to provide various ancillary services. Sponsors and licensees each pay initial
implementation fees, annual fees and other charges for specialized or additional
services for fixed contract terms, generally five years, renewable thereafter
for negotiated fees.
- 7 -
<PAGE>
Co-Ventures
In selected large 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 at
December 31, 1995 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%): Swedish Amer- JV Corporation Illinois, 2 Indiana counties,
ican Hospital (5%): Alexian (Illinois) and portion of Eastern Iowa
Brothers Medical Ctr. (1%)(HFN)
Arkansas Medical Information
Network (IMS-NET of Arkansas,
Inc.) ............................ 51% Baptist Medical System (Baptist) JV Corporation Arkansas
(Arkansas)
IMS-NET of Arizona Joint Venture,
Ltd .............................. 50% BC-BS of Arizona, Inc. (IMS- JV Ltd. Partner- Arizona
NET of Arizona, Inc., general ship (Arizona)
partner)
IMS-NET of Central Florida, Inc. .. 51% Adventist Health JV Corporation Orlando and central Florida
System/Sunbelt (Colorado)
Indiana Medical Communication
Network LLC ...................... 51% Methodist Hospital of JV Limited Indiana (except 2 counties)
Indiana, Inc. (IMS) Liability Company
(Colorado)
Minnesota Medical Communication
Network LLC ...................... 90% Blue Cross and Blue Shield of JV Limited Minnesota
Minnesota (IMS) Liability Company
(Colorado)
</TABLE>
Pursuant to each venture arrangement, an open architecture 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. IMS may negotiate to increase its ownership interest in the above
entities from time to time.
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. 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. On January 2, 1996, IMS acquired the 49%
interest which it did not own in a joint venture partnership organized in 1998
to develop networks in Alabama and western Florida. IMS has not initiated any
venture relationships since 1993 and has no plans to do so in the future.
Product Development
The implementation of the ComCenter NT technology has opened up a broad
range of product development opportunities for the Company, including data file
level host system integration; a Windows(TM) version of the PC-Com(TM) 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
- 8 -
<PAGE>
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 may join healthcare support service vendors to create
enhanced value applications of their core activities by adding a network
communications or similar functionality. Arrangements have been initiated for a
technology and service relationship in claims processing; for point-of-service
materials management; and, with PCS, for automated physician/pharmacy
communications.
As of December 31, 1995, approximately 175 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 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 payors. The Company intends to continue this strategy of developing services
in cooperation with key customers in targeted market sectors.
Sales and Marketing
The Company markets its services and software licenses through a direct
sales force consisting, as of December 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 of Sales. The
sales executives are supported by General Managers and by a 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.
No single customer accounted for more than 10% of the Company's total
revenues for the year ended December 31, 1995. One customer, a hospital system
licensee under an NLA, accounted for approximately 19% of the Company's total
revenue in the prior fiscal year.
Competition
The health care communications industry is competitive. Many hospitals,
third party administrators, claims processing organizations, hospital systems
vendors, system 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. ln 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
- 9 -
<PAGE>
allow users to communicate with more physicians and more hospitals using a
bidirectional standardized communications format than any other commercial
provider of similar communications in the medical field.
Employees
As of December 31, 1995, the Company had 277 full-time employees, of which
175 were technical and engaged in maintaining or developing IMS products or
services, 25 were marketing and sales, 37 were involved in administration and
finance and 40 provided nontechnical operation support in IMS business units
which operated various networks. The Company's network ventures employed an
additional 44 people. None of the Company's employees were represented by a
union. The Company believes that its relationship with its employees is good.
ITEM 2. 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 28,000 square feet of office space for which the Company
pays annual rent of $240,225. The Company also leases approximately 56,000
square feet of additional office space in 26 offices throughout the country
where network services are provided. 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 $892,700 for this space.
The Company plans to lease space from time to time as it establishes new
networks. The Company believes that its facilities are adequate for its present
operations.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings currently pending, or, to the best
of the Company's knowledge, contemplated against the Company by governmental
authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders of the Company was held on Monday,
December 18, 1995 for the purpose of voting on the approval and adoption of the
Merger Agreement. The Merger Agreement provided for the merger of Trans-IMS
Corporation, a wholly-owned subsidiary of Lilly, with and into the Company; an
amendment to the 1994 Employee Stock Option Plan of the Company to increase the
number of shares available under the Plan from 400,000 shares of Company Common
Stock to 838,600 shares of Company Common Stock, which equalled the total number
of shares subject to options which had been granted previously under the Plan;
and an amendment to the Articles of Incorporation of the Company which, among
other things, eliminated the voting rights of the Series B Stock other than as
required by Colorado Law, established Series D Stock and provided for parity of
the Series B Stock and the Series D Stock upon liquidation, dissolution or
winding up of the Company. The Merger required the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Common Stock, Series
B Stock and Series C Stock voting together as a class, and the affirmative vote
of at least two-thirds of the outstanding shares of each of the Series B Stock
and Series C Stock voting as separate classes. The Merger was approved by the
required vote of each class of stock as well as all classes voting together. All
of the votes cast, which consisted of 6,206,000 shares of the Common Stock,
1,950,000 shares of the Series B Stock and 3,500,000 shares of the Series C
Stock, voted in favor of the Merger Agreement. The Merger was effective on
December 18, 1995.
- 10 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. None of the Company's securities have ever traded
in any established public trading market, there is presently no public market
for the Company's equities securities, and it is unlikely that such a market
will develop in the future.
(b) Holders. As of December 31, 1995, Lilly, through its PCS Holding
Corporation subsidiary, was the sole owner of all of the Company's 15,660,200
issued and outstanding Common Stock and there were 74 holders of the Company's
5,622,323 outstanding shares of Series D non-voting redeemable preferred stock.
(c) Dividends. The Company has not declared cash dividends on its Common
Stock since its inception and the Company does not anticipate paying any
dividends on the Common Stock in the foreseeable future. The Company's Series D
Stock is preferred as to the payment of dividends over the Common Stock. The
Series D Stock accumulates cash dividends at an annual rate of $0.62 per share.
The dividends accrue and cumulate, regardless of whether such dividends have
been declared by the Board of Directors, beginning on the date of issuance of
the shares and are payable annually when declared in arrears each December 31
until and unless the shares of Series D Stock are redeemed by the Company.
Dividends are payable on the Common Stock only when, as, and if declared by the
Board of Directors, in accordance with Colorado law, and only after all accrued
dividends on Series D Stock have been paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company's networks, generally referred to as IMS MEDACOM(R) Networks,
enable 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 27 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
- 11 -
<PAGE>
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, clinic, 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
(5) 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.
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
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 the NLA includes 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.
- 12 -
<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
Annual Report. The table below sets forth certain items of revenue and expenses
reflected in the Company's income statement (in thousands) and the percentages
of total revenue represented by the items.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995(1) 1994
----------------------- --------------------
<S> <C> <C> <C> <C>
Net Sales and Fee Revenue:
Network Service Agreement revenue ............ $ 11,937 58.5% $ 7,457 41.7%
Network License Agreement revenue ............ 6,596 32.3% 10,058 56.3%
Network License Service revenue .............. 1,875 9.2% 366 2.0%
-------- ----- ------- -----
Total revenue ............................ 20,408 100.0% 17,881 100.0%
Costs and Expenses:
Salaries, payroll taxes and benefits ......... 19,331 94.7% 11,839 66.2%
Facilities ................................... 4,965 24.3% 3,187 17.8%
Selling, general and administrative .......... 9,044 44.3% 5,848 32.7%
Amortization of goodwill and other
intangibles ................................ 471(2) 2.3% -- --
Costs of subsidiary litigation ............... 115 .6% 785 4.4%
Reorganization costs ......................... -- -- 479 2.7%
-------- ----- ------- -----
Total expenses ........................... 33,926 166.2% 22,138 123.8%
LOSS FROM OPERATIONS ........................... (13,518) (66.2)% (4,258) (23.8)%
Other Income (Expense):
Interest income .............................. 120 0.6% 343 1.9%
Interest expenses ............................ (560) (2.8)% (119) (.7)%
Other, net ................................... (228) (1.1)% (65) (.3)%
-------- ----- -------- -----
Total other income (expense) ............. (668) (3.3)% 159 .9%
LOSS BEFORE MINORITY INTEREST IN OPERATIONS
OF SUBSIDIARIES ................................ (14,186) (69.5)% (4,098) (22.9)%
MINORITY INTEREST IN INCOME FROM OPERA-
TIONS OF SUBSIDIARIES .......................... (292) (1.4%) (153) (.9)%
-------- ----- -------- -----
NET LOSS ....................................... (14,478) (70.9)% (4,252) (23.8)%
======== ===== ======== =====
</TABLE>
- ------------------------
(1) The period from January 1, 1995 through December 18, 1995, the effective
date of the Merger ("pre- Merger"), and the period from December 18, 1995
through December 31, 1995 ("post-Merger"), have been combined for purposes
of this presentation. Because of purchase accounting adjustments resulting
from the Merger, the results of operations between pre- and post-Merger
periods may not be comparable. See Note 1 to Consolidated Financial
Statements included under Item 7. However, the post-Merger period does not
materially change the results of operations for the full year and are
included to provide a better comparison from year-to-year.
(2) Represents primarily amortization of goodwill during the post-Merger
period. See Note 1 to Consolidated Financial Statements.
- 13 -
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales and Fee Revenue. Total revenue increased $2.53 million from
$17.88 million in 1994 to $20.41 million for the year ended December 31, 1995.
Sponsor revenue under Network Service Agreements increased $4.48 million from
$7.46 million in 1994 to $11.94 million in 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. Quarterly sponsorship revenue under NSAs has continued
to increase, 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 $3.46 million from $10.06
million in 1994 to $6.60 million in 1995. The first half of 1994 was
exceptionally strong, reflecting recognition of substantial revenue from the
sale of a network license for Hawaii and several other smaller licenses. In
1995, the Company completed nine license sale transactions, including seven in
the last two quarters, 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. Although management anticipated that revenue would
increase significantly in the third quarter, the Company believes that the
market expectation of the merger with Lilly was in part responsible for a
postponement in the finalization of several pending contracts.
Network license service revenue increased from $.37 million in 1994 to
$1.88 million in 1995, reflecting increased management service fees,
implementation fees and recognition of the portion of initial license fees sold
in previous periods allocated to service revenue. 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 and network size under NSAs increases.
Salaries and Benefits. Salaries and benefits increased approximately $7.49
million or 63% to $19.33 million in 1995 compared to $11.84 million in 1994, and
salaries and benefits represented 95% of revenue in 1995 compared to 66% of
revenue in 1994. The substantial increase reflects an increase in the number of
employees from 146 at the beginning of 1994 to 321, including employees of
network ventures, at December 31, 1995 due to increased activities and growth of
the Company's business. Also, the Company charged an additional $2.3 million to
payroll following the Merger in 1995 to reflect sales commissions paid in prior
periods but which were being amortized over the life of the contracts, costs of
developing the Company's ComCenter NT operating system and previously
capitalized development costs.
Facilities and Related Expenses. Facilities and related expenses are
composed of rent, equipment, maintenance and depreciation, telephone, utilities,
insurance and taxes. Facilities expenses increased $1.8 million over 1994 to
$4.97 million for 1995, or 39%. 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 related to the
Company's San Diego office which closed at the end of 1994 were charged to
reorganization in 1994 and are not included in 1995 facilities expenses,
although such expenses were paid in 1995. Telephone expenses increased $.87
million 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 $3.2 million or 55% in 1995 compared to 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
- 14 -
<PAGE>
rose due to the Company's growth. Also, the Company charged to SG&A costs
incurred in early 1995 in connection with an abandoned securities offering and
approximately $1.1 million in Merger related fees and expenses.
Amortization of Goodwill. The excess of the amounts paid by Lilly in
connection with the Merger over the estimated fair market values of the assets
of the Company, approximately $97 million, was allocated to goodwill and other
intangibles and will be amortized over 10 years. The amount of amortization in
1995 primarily reflects this amortization for the period following the Merger.
In future years, the annual amortization charge for the transaction,
approximately $9.7 million, will significantly and adversely affect results of
operations.
Cost of Subsidiary Litigation. Litigation involving the Company, two
subsidiaries and certain directors commenced in 1992 was concluded in 1995 with
a judgment in favor of the Company and the directors following trials. As a
result, costs of subsidiary litigation decreased $.67 million from 1994. The
Company is not currently involved in any major 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 paid in 1995 to the former chairman and founder of the
Company who continued on as a director following the reorganization.
Financial Condition
IMS had working capital of $.6 million at December 31, 1994 compared to a
working capital deficit of approximately $11 million at December 31, 1995.
Treating the obligations due to Lilly in 1996 as long term debt would increase
the Company's working capital to approximately $1.7 million at December 31,
1995. At December 31, 1995, IMS had $3.5 million in cash and cash equivalents on
hand compared to $1.4 million at December 31, 1994. The increase in cash was
primarily attributable to borrowings from Lilly, which totaled $12.7 million at
year end, due in 1996. The Company also had increased sales of receivables
remaining under NLAs during 1995 and increased fees paid under NSAs signed in
the fourth quarter of 1995. Lilly has indicated that it does not intend to call
this debt for payment when due. IMS' contract receivables at December 31, 1994
were $6.8 million compared to $6.2 million at December 31, 1995, of which $.37
million were long term. The modest decrease reflects an increased amount of
contracts receivable sold to third parties in 1995.
Since December 31, 1994, in accordance with the Merger Agreement the
Company has funded operations primarily through approximately $12.7 million in
borrowings from Lilly, $6.9 million from the exercise by Lilly of warrants to
purchase 875,000 shares of Series C Preferred Stock and $4.6 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 utilized,
on an interim basis, a portion of a $1 million line of credit secured by
guarantees of certain directors. The credit line expired and there was no
balance outstanding as of December 31, 1995.
The Company had stockholders' equity of $5.7 million and accumulated
deficit of approximately $23.4 million at December 31, 1994 and stockholders'
equity and retained earnings of approximately $48.3 million and $.5 million,
respectively at December 31, 1995. This very significant improvement in
financial condition is due primarily to the acquisition of the Company by Lilly
and the related purchase accounting adjustment required in connection with the
Merger. See Notes 1, 8 and 11 to Consolidated Financial Statements.
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 additional sponsor revenue for its networks.
- 15 -
<PAGE>
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 continue to require substantial
amounts of capital for the foreseeable future from outside sources. Lilly has
represented that it is committed to provide the necessary level of financial
support to the Company to enable it to pay its debts as they become due for the
year ending December 31, 1996 and to provide funding for the Company to continue
its development and expansion until it is self sufficient. As a result, the
Company anticipates that financing for rapid growth will be available.
New Accounting Pronouncement
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," issued
in March 1995 and effective for 1996, establishes accounting standards for the
impairment of long-lived assets. The Company will adopt this standard as of
January 1, 1996 and does not expect that adoption will have a material impact on
the Company's financial position or results of operations.
ITEM 7. FINANCIAL STATEMENTS
The following Consolidated Financial Statements that constitute Item 7 are
included at the end of this report beginning on page F-1.
Report of Independent Public Accountants
(for the period December 19, 1995 through December 31, 1995
and as of December 31, 1995)........................................ F-1
Report of Independent Public Accountants
(for the period January 1, 1995 through December 18, 1995
and for the year ended December 31, 1994)........................... F-2
Consolidated Balance Sheet as of December 31, 1995.................. F-3
Consolidated Statements of Operations............................... F-5
Consolidated Statements of Stockholders' Equity..................... F-6
Consolidated Statements of Cash Flows............................... F-8
Notes to Consolidated Financial Statements.......................... F-11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements of the type required
to be reported under this item between the Company and its independent
accountants during the fiscal year ended December 31, 1995.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(a) Identification of Directors and Executive Officers
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.
The following table sets forth as of the date hereof certain information with
respect to the persons who serve as executive officers and directors of the
Company.
- 16 -
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
- ----- --- --------
<S> <C> <C>
Kevin E. Moley .................... 49 President, Chief Executive Officer and Director
Edward B. Daniels ................. 45 Executive Vice President and Chief Operating Officer
Charles I. Brown .................. 64 Executive Vice President, Chief Financial Officer,
Secretary and Director
George R. Beauchamp, M.D .......... 53 Senior Vice President - Physician Affairs
Joseph G. Ferguson, Sr ............ 44 Senior Vice President - Technology
William B. Hein., Sr .............. 46 Senior Vice President - Sales and Marketing
Charles S. Iobe, Sr ............... 53 Senior Vice President - National Operations
Richard J. Smeltz ................. 53 Vice President - Finance
Robert Ashworth ................... 53 Director
Michael S. Hunt, Ph.D ............. 49 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 E. MOLEY has served as President and Chief Executive Officer of the
Company since January 1996. He also has been a director since 1994 and was
interim Chief Executive Officer of the Company from July 1994 to December 1994.
Mr. Moley served as Senior Vice President, Health Systems Management of PCS
Health Systems, Inc., a subsidiary of Lilly from, February 1993 to January 1996.
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, and Chief
Financial Officer from 1989 to 1992, and director of the office of Prepaid
Health Care from 1986 to 1988. He served as Vice Chairman of the President's
Council on Management Improvement from 1989 to 1992 and on the steering
committee of the National Health Policy Forum from 1989 to 1993. Prior to
serving at HHS, Mr. Moley held several positions with CNA from 1969 to 1974 and
New England Life Insurance in marketing and underwriting management from 1974 to
1983. He attended Georgetown University in Washington, D.C., served in the
United States Marines in Vietnam and was awarded the Navy Commendation medal
with Combat V and the Purple Heart.
EDWARD B. DANIELS has served as Executive Vice President and Chief
Operating Officer since January 1996 and served as Senior Vice President for
National Network Services from 1994 to 1996. 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 I. BROWN has served as the Executive Vice President and Chief
Financial Officer since March 1995 and as a director since 1992. From 1992 to
- 17 -
<PAGE>
March 1995, Mr. Brown was a Senior Vice President and the Chief Financial
Officer. 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, 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 lzzo 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 degree from Williams College in 1954.
GEORGE R. BEAUCHAMP, M.D. has served as the Senior Vice
President--Physician Affairs since January 1996 and was Vice President for
Strategic Development from December 1994 until 1996 and was Vice
President--Medical Affairs for the Company from 1991 to 1994. From 1975 to the
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 bachelor of arts degree in 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.
JOSEPH G. FERGUSON, SR., has served as the Senior Vice
President--Technology since January 1996 and was Senior Vice President for
Engineering and Development from March 1995 until 1996. 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 received a master of business administration degree from the
Wharton School of Business in 1974 and a bachelor's degree from the University
of California at Santa Cruz in 1972.
WILLIAM B. HEIN has served as the Senior Vice President of Sales since 1994
and as Senior Vice President of Marketing since January 1996. Mr. Hein was
previously the President/Central Region for the Company and was Vice President
of the Company from 1988 to 1993. From 1979 to 1987, Mr. Hein was with Control
Data Corporation, a computer systems and service company, where he managed field
sales and support organizations and developed strategic plans for domestic and
international computer sales programs. From 1972 to 1979, Mr. Hein was Vice
President and a principal of Computing Associates, Inc., a software development
and consulting organization. Mr. Hein received a bachelor of science degree in
engineering from the University of Arizona in 1973, where he also took post
graduate courses in business administration.
- 18 -
<PAGE>
CHARLES S. IOBE, SR., has served as the Senior Vice President--National
Operations since January 1996 and was Senior Vice President of Field Operations
from 1994 until 1996. 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 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 has served as a director of the Company since the Merger in
December 1995. 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 in 1967, and is
a graduate of the 1984 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 in 1972.
THOMAS TRAINER has served as a director of the Company since the Merger in
December 1995. Mr. Trainer serves as the Vice President, Information Technology,
and Chief Information Officer of Lilly. Prior to joining Lilly, he served as
Vice President and Chief Information Officer of Reebok International Ltd.and as
Senior Vice President of Operations of A.C. Nielson Co. He attended Strathclyde
University in Scotland, graduating in 1966 with a bachelor's degree in English.
Other than as stated above, no director of the Company is a director of any
other entity that is required to file reports under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act").
(b) Identification of Significant Employees.
Not applicable.
(c) Family Relationships.
There are no family relationships among directors, executive officers, or
persons nominated or chosen to become directors or executive officers.
- 19 -
<PAGE>
(d) Involvement in Certain Legal Proceedings.
Directorship.
During the last five years, no director, person nominated to become a
director, executive officer, promoter or control person of the Company: (i) has
been convicted of, or is subject to, a pending criminal proceeding; (ii) is
subject to any order, judgment or decree of any court of competent jurisdiction,
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; and (iii) has been found by a
court of competent jurisdiction in a civil action, the Securities Exchange
Commission, the Commodities Futures Trading Commission, to have violated a
federal or state securities or commodities law. Further, no bankruptcy petition
was filed by or against any business of which any of such persons was a general
partner or executive officer either at the time of the bankruptcy or within two
years prior to that time.
Compliance with Section 16(a) of the Exchange Act.
Not applicable.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain information pertaining to the
compensation paid by the Company and its subsidiaries for services rendered by
the persons who served as Chief Executive Officer of the Company at any time
during the last fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation Awards
Other -------------------
Annual Compensation Annual Securities
----------------------- Compensa- Underlying
Name and Principal Position Year Salary($) Bonus($) tion(1) Options(#)
- --------------------------- ---- --------- ---------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Kevin E. Moley(1)....................... 1995 - - - - - - - -
Director, Chief Executive Officer and 1994 - - - - - - - -
President 1993 - - - - - - - -
Kevin R. Green(1)........................ 1995 168,950.00 30,593(3) 52,303(4) 76,250
President, Chief Executive Officer 1994 124,999.92 25,000(5) - - 100,000
1993 123,333.16 168,750(6) - - - -
Charles I. Brown......................... 1995 130,833.00 - - 2,391 101,250
Executive Vice President and 1994 124,999.92 25,000(5) - - - -
Chief Financial Officer 1993 108,333.39 - - - - - -
William B. Hein, Sr...................... 1995 125,000.00 - - 2,604 35,000
Senior Vice President -- Sales 1994 124,999.92 25,000(5) - - 100,000
1993 133,333.39 104,500(7) - - - -
Donald S. Chenoweth(8)................... 1995 125,000.00 - - 3,482 5,000
1994 124,999.92 25,000(5) - - 100,000
1993 108,333.18 - - - - - -
James T. Murphy(8)....................... 1995 150,000.00 - - 1,625 51,250
1994 141,666.64 25,000(5) - - 100,000
1993 108,333.19 - - - - - -
John A. McChesney(9)..................... 1995 197,500.00 - - - - 1,250
1994 199,999.02 166,478(10) - - 79,302
1993 99,999.84 - - - - - -
</TABLE>
- 20 -
<PAGE>
- -------------------------
(1) Company cash contributions on behalf of named executives under 401(k) plan,
unless otherwise indicated.
(2) Mr. Moley was the Company's Vice Chairman and interim Chief Executive
Officer from July 1994 to December, 1994 and became the Company's Chief
Executive Officer in January 1996. Kevin R. Green was the President and
Chief Executive Officer of the Company from March, 1995 to January 1996.
(3) Represents reimbursement of closing costs and real estate commissions
incurred in connection with sale of residence upon relocation to Denver,
Colorado to become Chief Executive Officer in 1995.
(4) $50,000 represents reimbursement for taxes payable on the value of
securities and cash awarded to Mr. Green in 1994 as compensation for 1993
and earlier years. See Note 6 below.
(5) Paid in 1995 for 1994 services.
(6) Paid in 1994 for 1993 and prior years and includes $25,000 in cash and
47,500 shares of Common Stock valued at $143,750.
(7) Paid in 1994 and 1993 for 1993 and includes $17,000 in cash and 25,000
shares of Common Stock valued at $87,500.
(8) Mr. Murphy served as Executive Vice President of the Company from March
1995 until January 1996. Mr. Chenoweth served as Senior Vice President and
Assistant Secretary of the Company from 1991 until January 1996.
(9) Mr. McChesney was the Company's President and Chief Executive Officer until
April 1994 and an executive officer through January 1995.
(10) Paid in 1994 for services in prior years.
- 21 -
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information as to options and warrants granted
to the Named Executive Officers during the fiscal year ended December 31, 1995.
No stock appreciation rights have ever been granted by the Company.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted Exercise
Options/Warrants to Employees in Price Expiration
Name Granted Fiscal Year 1995 ($/SH)(1) Date(2)
- ---- ------------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Kevin E. Moley...................................O -- -- -- --
W -- -- -- --
Kevin R. Green...................................O 75,000 22.36% -- --
W 1,250 1.35% -- --
Charles I. Brown.................................O -- -- -- --
W 1,250 1.35% -- --
William B. Hein, Sr..............................O 35,000 10.43% -- --
W -- -- -- --
Donald S. Chenoweth..............................O 5,000 1.49% -- --
W -- -- -- --
James T. Murphy..................................O 50,000 14.90% -- --
W 1,250 1.35% -- --
John A. McChesney................................O -- -- -- --
W 1,250 1.35% -- --
</TABLE>
- -------------------------
(1) The exercise price of all options and warrants was $6.50.
(2) The term of each warrant was three years from the date of grant and the
term of each option was 10 years from the date of grant. All options and
warrants were exercised or exchanged in December 1995 in connection with
the Merger.
- 22 -
<PAGE>
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR
END OPTION VALUES
The following table sets forth information as to options and warrants
exercised during the fiscal year ended December 31, 1995 by the named Executive
Officers and options held as of fiscal year end. All of the named Executive
Officers exercised the options for cash in December 1995 in connection with the
Merger.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/Warrants at Options/Warrants at
Shares Acquired Value December 31, 1995 December 31, 1995
Name on Exercise(#) (1) Realized(1) Exercisable(2) Exercisable/Unexercisable
- ---- ----------------- ---------- ---------------- -------------------------
<S> <C> <C> <C> <C>
Kevin E. Moley...............................O -- -- -- --
W -- -- -- --
Kevin R. Green...............................O 226,800 $758,100 -0- -0-
W 1,250 1,875 -0- -0-
Charles I. Brown.............................O 151,200 $617,900 -0- -0-
W 1,250 1,875 -0- -0-
William B. Hein, Sr..........................O 15,000 $ 97,500 36,800 $163,100(3)
W -- -- -- --
Donald S. Chenoweth..........................O 155,900 $649,050 -0- -0-
W -- -- -0- -0-
James T. Murphy..............................O 201,200 $501,815(4) -0- -0-
W 1,250 $ 1,875 -0- -0-
John A. McChesney............................O 125,000 $687,500 -0- -0-
W 1,250 $ 1,875 -0- -0-
</TABLE>
- -------------------------
(1) Reflects shares and value acquired on surrender of options and warrants in
connection with the Merger for cash equal to the difference between the
exercise price and $8.00 per share a specified in the Merger Agreement.
Does not include shares and value for other warrants acquired in
noncompensation transactions in earlier years and surrendered in connection
with the Merger.
(2) As a result of the Merger, holders of options or warrants could elect to
exchange for vested options or warrants to purchase the same number of
shares of Series D Preferred for the same exercise price or options (as to
Company employees) to purchase Lilly Common Stock with an equivalent value.
(3) Pursuant to the Merger, Mr. Hein elected to convert options for 135,000
shares of Common Stock into options to purchase shares of Lilly Common
Stock with a value of approximately $452,500 and options to purchase 36,800
shares of Series D Stock (as described in the Merger Agreement).
(4) Includes 127,389 shares received for options exercised in October 1995, for
realized value of $314,111 at a value per share of $6.50.
(f) Compensation of Directors.
All directors are reimbursed for actual out-of-pocket expenses incurred in
connection with attending meetings. In addition, certain directors received
stock purchase warrants for personally guaranteeing debt of the Company. In the
fiscal year ending December 31, 1995, six directors each received warrants to
purchase 1,250 shares of Common Stock at $6.50 per share for guaranteeing
repayment of the Company's $1.0 million credit facility from a bank.
- 23 -
<PAGE>
Limitations on Liability of Officers and Directors
The Company's Articles of Incorporation, as amended and restated in the
Articles of Merger, and By-Laws each contain a provision eliminating or limiting
director liability to the Company and its shareholders or 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.
(g) Employment Contracts and Termination of Employment and
Change-In-Control Arrangements.
In connection with the Merger, Lilly entered into severance agreements with
certain members of the Company's management, including Messrs. Brown, Chenoweth,
Hein, and Murphy, pursuant to which Lilly, through the Company, agreed not to
reduce such persons' rates of compensation and benefits or to relocate the
employee during the one-year period following the date of the Merger. Pursuant
to the agreements, Lilly or the Company is required to pay an amount equal to
one year's base salary for a one-year period if such persons' employment is
terminated by the Company for any reason other than for cause, or if the person
resigned because he is required to relocate to any office not within reasonable
commuting distance of his residence.
Kevin Green, the Company's former President and Chief Executive Officer,
had an employment arrangement approved by the Company's Board of Directors,
completed in connection with his relocation to Denver in June 1995, which
included 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 determined 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. Mr. Green
resigned his position with the Company in January 1996. In March 1996, the
Company and Mr. Green reached an agreement pursuant to which the Company will
pay an amount equal to 12 months compensation to Mr. Green over the last 10
months of 1996, in full satisfaction of the Company's obligation under the
employment arrangement.
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, which included amounts to be paid to Mr. McChesney in 1995. In connection
with the resignation, Mr. McChesney entered into a noncompetition and
confidentiality agreement with the Company which expired at the end of 1995.
- 24 -
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(a)(b) Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of December 31, 1995, the number of
shares of the Company's outstanding Common Stock and Series D Stock beneficially
owned by each of the Company's current directors and officers, sets forth the
number of shares of the Company's Common Stock and Series D Stock beneficially
owned by all of the Company's current directors and officers as a group and sets
forth the number of shares of the Company's Common Stock and Series D Stock
owned by each person who owned of record, or was known to own beneficially, more
than 5% of the Company's outstanding shares of Common Stock and Series D Stock
respectively As of December 31, 1995, the following securities were outstanding;
15,660,200 shares of Common Stock, no shares of Series B Stock, and 5,263,995
shares of Series D Stock.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name and Address of Ownership(2)
Beneficial Owner or ----------------------- Percent of
Officer or Director(1) Common Series D Class
- ---------------------- ---------- ---------- ---------
<S> <C> <C> <C>
PCS Holding Corporation(3) ............... 15,660,200 -0- 100%
Lilly Corporate Center,
Indianapolis, Indiana 46285
Kevin E. Moley ........................... -0- -0- --
Charles I. Brown ......................... -0- 300,000(4) 5.8%
George R. Beauchamp ...................... -0- -0- --
Joseph G. Ferguson, Sr ................... -0- -0- --
William B. Hein, Sr ...................... -0- 36,800(5) .5%
Edward B. Daniels ........................ -0- -0- --
Charles S. Iobe, Sr ...................... -0- -0- --
Richard J. Smeltz ........................ -0- -0- --
Robert Ashworth .......................... -0- -0- --
Michael S. Hunt, Ph.D .................... -0- -0- --
Thomas Trainer ........................... -0- -0- --
All officers and directors as a group
(11 persons) ............................. -0- 336,800 6.4%
</TABLE>
- ------------------
(1) The address of each director and executive officer is in care of the
Company at the Company's address at 15000 West 6th Avenue, Suite 400,
Golden, Colorado 80401.
(2) Each person has the sole voting and investment power over the shares
indicated.
(3) PCS Holding Corporation is owned by Eli Lilly and Company, Lilly Corporate
Center, Indianapolis, Indiana 46285.
(4) Includes 200,000 shares of Series D Stock held by a family partnership of
which Mr. Brown is general partner.
(5) Does not include options to acquire shares of Lilly common stock which were
issued in exchange for an IMS option to purchase 135,000 shares of IMS
Common Stock pursuant to the Merger.
- 25 -
<PAGE>
(c) Changes in Control.
Not applicable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1994 and 1995, the Company paid $125,000 and $1,600, 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., a subsidiary of the
Company, 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 former 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. Mr.
Green also had an employment arrangement with the Company pursuant to which he
would be paid 24 months compensation as severance payment upon a change of
control of the Company if he reasonably determined that as a result of the
change of control he would be unable to perform his services to the Company. See
"Item 10(g) - Employment Contracts and Termination of Employment and
Change-In-Control Arrangements" above.
In 1994, the Company sold software and equipment valued at $177,500 to RMBA
Associates, a company owned by Robert M. Brice, 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.
(c) Eli Lilly and Company is the parent of the Company by virtue of its or
its subsidiaries' ownership of 100% of the Company's outstanding voting
securities, the Company's no par value Common Stock. Lilly acquired the
Company's Common Stock in connection with the Merger. Holders of Class D Stock
may vote their shares only under certain limited circumstances. See "Item 1.
Business - Acquisition of the Company by Eli Lilly and Company."
(d) Not applicable.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1* Agreement and Plan of Merger, dated August 2, 1995, among Lilly,
Trans-IMS Corporation, and IMS.
- 26 -
<PAGE>
Exhibit 2.2* Form of Put/Call Agreement among Lilly, IMS and certain
shareholders of IMS.
Exhibit 2.3* Form of Support Agreement, dated August 2, 1995, between Lilly and
certain shareholders of IMS.
Exhibit 4.1* Articles of Incorporation including Articles of Merger of Trans-
IMS Corporation with and into Integrated Medical Systems, Inc.
Exhibit 4.2* By Laws of IMS
Exhibit 10.1* Stock Purchase Agreement, dated January 6, 1994, between IMS and
McKesson Corporation.
Exhibit 10.2* Sponsorship and Participation Agreement, dated November 17, 1993,
between IMS and McKesson Corporation.
Exhibit 10.3* Stockholder's Rights Agreement, dated January 6, 1994, between IMS
and McKesson Corporation.
Exhibit 10.4* Senior Subordinated Note from IMS (which includes the registration
right for Charles Brown).
Exhibit 10.5* Indemnification Agreement, dated August 14, 1992, between IMS and
David Holbrooke.
Exhibit 10.6* IMS 1989 Restated Stock Option Plan.
Exhibit 10.7* IMS 1994 Employee Stock Option Plan.
Exhibit 10.8* Promissory Note, dated June 12, 1995, between Lilly and IMS.
Exhibit 10.9* Security Agreement, dated June 12, 1995, between Lilly and IMS.
Exhibit 10.10* Pledge Agreement, dated June 12, 1995, between Lilly and IMS.
Exhibit 10.11* Promissory Note, dated July 27, 1995, between Lilly and IMS.
Exhibit 10.12* Security Agreement, dated July 27, 1995, between Lilly and IMS.
Exhibit 10.13* Pledge Agreement, dated July 27, 1995, between Lilly and IMS.
Exhibit 10.14* Promissory Note, dated August 28, 1995, between Lilly and IMS.
Exhibit 10.15* Security Agreement, dated August 28, 1995, between Lilly and IMS.
Exhibit 10.16* Pledge Agreement, dated August 28, 1995, between Lilly and IMS.
Exhibit 10.17* Form of Registration Agreement applicable to holders of Series B
Preferred Stock.
Exhibit 10.18* Joint Venture Agreement, dated May 15, 1992, with HFN, Inc.
Exhibit 10.19* Shareholders' Agreement, dated May 31, 1992, with Adventist
Health System.
- 27 -
<PAGE>
Exhibit 10.20* Joint Venture Limited Partnership Agreement, dated June 30, 1992,
with Blue Cross and Blue Shield of Arizona, Inc.
Exhibit 10.21* Operating Agreement for Indiana Medical Communications Network,
L.L.C., dated April 10, 1993.
Exhibit 10.22* Operating Agreement for Minnesota Medical Communications dated
November 7, 1993.
Exhibit 10.23* Stock Purchase and Termination Agreement, dated September 30,
1995, with Unihealth America Ventures.
Exhibit 10.24* Promissory Note, dated September 25, 1995, between Lilly and IMS.
Exhibit 10.25* Promissory Note, dated October 17, 1995, between Lilly and IMS.
Exhibit 10.26* Promissory Note, dated October 25, 1995, between Lilly and IMS.
Exhibit 10.27* Form of Severance Agreement with certain employees of IMS.
Exhibit 21.1* List of Subsidiaries of IMS.
Exhibit 27 Financial Data Schedule
- -------------------
* Incorporated by reference to the same exhibit number to Registration
Statement No. 33-62613/33-62613-01.
(b) Current Reports on Form 8-K:
None.
- 28 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1996
INTEGRATED MEDICAL SYSTEMS, INC.
a Colorado corporation
By /s/ Kevin E. Moley
----------------------------------
Kevin E. Moley,
President, Principal Executive Officer
By /s/ Charles I. Brown
----------------------------------
Charles I. Brown
Executive Vice President and
Chief Financial Officer
By /s/ Richard J. Smeltz
-----------------------------------
Richard J. Smeltz
Vice President Finance and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
- ---- -------------- ---------
March 28, 1996 Kevin E. Moley /s/ Kevin E. Moley
Director --------------------------------
March 28, 1996 Charles I. Brown /s/ Charles I. Brown
Director -------------------------------
March 28, 1996 Robert Ashworth /s/ Robert Ashworth
Director -------------------------------
March 28, 1996 Michael S. Hunt /s/ Michael S. Hunt
Director -------------------------------
March 28, 1992 Thomas Trainer /s/ Thomas Trainer
Director -------------------------------
- 29 -
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
<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 wholly owned subsidiary of Eli
Lilly and Company) and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from the date of acquisition (December 19, 1995) to December 31, 1995
(see Notes 1 and 11). 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 audit.
We conducted our audit 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 audit provides 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, 1995, and the results of their
operations and their cash flows for the period from the date of acquisition
(December 19, 1995) to December 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN L.L.P.
Dnver, Colorado,
January 23, 1996.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Medical Systems, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of INTEGRATED MEDICAL SYSTEMS, INC. (a
Colorado corporation) and subsidiaries for the period from January 1, 1995 to
December 18, 1995 (see Notes 1 and 11) and for the year 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 results of operations and cash flows of
Integrated Medical Systems, Inc. and subsidiaries for the period from January 1,
1995 to December 18, 1995 and for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN L.L.P
Denver, Colorado,
January 23, 1996.
F-2
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(See Note 1)
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 3,503,014
Contracts receivable and other (Note 2) ................. 5,851,368
Prepaid expenses ........................................ 387,329
Deposits (Note 12) ...................................... 1,900,000
-------------
Total current assets ............................. 11,641,711
-------------
CONTRACTS RECEIVABLE, long-term portion (Note 2) ............. 374,432
-------------
EQUIPMENT AND FURNITURE (Notes 2 and 5):
Computer equipment ...................................... 3,988,751
Computer software ....................................... 460,735
Furniture and fixtures .................................. 888,824
Leasehold improvements .................................. 327,089
Equipment held under capital leases ..................... 240,606
--------------
5,906,005
Less-Accumulated depreciation and amortization .......... (1,857,769)
--------------
4,048,236
--------------
GOODWILL AND OTHER INTANGIBLES, net of
accumulated amortization of $471,280 (Notes 1 and 2) .... 98,783,846
--------------
OTHER ........................................................ 802,074
--------------
$ 115,650,299
==============
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-3
<PAGE>
<CAPTION>
Page 2 of 2
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(See Note 1)
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C>
CURRENT LIABILITIES:
Accounts payable .............................................. $ 987,822
Accrued expenses .............................................. 1,824,055
Payables to predecessor stockholders (Note 11) ................ 1,697,568
Payables to related parties (Note 3) .......................... 743,824
Deferred contract revenue (Note 2) ............................ 4,622,330
Current maturities of long-term debt (Note 5) ................. 12,776,928
------------
Total current liabilities ..................................... 22,652,527
------------
LONG-TERM DEFERRED CONTRACT REVENUE (Note 2) .................. 412,500
------------
LONG-TERM DEBT (Note 5) ....................................... 79,734
------------
COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ............... 399,494
-----------
SERIES D PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION (Note 11), $.01 par value, 12,000,000 shares
authorized, 5,263,995 shares issued and outstanding ......... 43,761,843
------------
STOCKHOLDER'S EQUITY (Notes 8 and 11):
Common stock, no par value, 20,000,000 shares authorized,
15,660,200 shares issued and outstanding .................... 47,825,545
Retained earnings ............................................. 518,656
------------
Total stockholder's equity .................................... 48,344,201
------------
$115,650,299
============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
F-4
<PAGE>
<TABLE>
<CAPTION>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(See Note 1)
(Post- (Pre-
acquisition) acquisition)
For the For the
Period from Period From
December 19, January 1, For the Year
1995 to 1995 to Ended
December 31, December 18, December 31,
1995 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
REVENUES:
Network service agreement revenue ..... $ 797,637 $ 11,139,053 $ 7,456,654
Network license agreement revenue ..... 2,038,000 4,557,956 10,057,983
Network license service revenue ....... 9,423 1,866,189 365,726
------------ ------------ ------------
2,845,060 17,563,198 17,880,363
------------ ------------ ------------
COSTS AND EXPENSES:
Salaries, payroll taxes and benefits .. 1,389,342 17,941,485 11,838,793
Facilities ............................ 206,922 4,757,684 3,187,007
Selling, general and administrative ... 296,819 8,747,712 5,848,436
Amortization of goodwill and other
intangibles (Note 2) ................ 403,261 68,019 --
Costs of subsidiary litigation (Note 6) -- 115,021 784,787
Reorganization costs .................. -- -- 479,439
------------ ------------ ------------
2,296,344 31,629,921 22,138,462
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS ............ 548,716 (14,066,723) (4,258,099)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ....................... 367 119,184 343,221
Interest expense ...................... (35,038) (524,607) (118,850)
Other, net ............................ -- (227,841) (64,772)
------------ ------------ ------------
(34,671) (633,264) 159,599
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY ............ 514,045 (14,699,987) (4,098,500)
INTEREST IN OPERATIONS OF
SUBSIDIARIES
PROVISION FOR INCOME TAXES(Note 4) ....... -- -- --
MINORITY INTEREST IN LOSS ................ 4,611 (296,546) (153,281)
(INCOME) FROM OPERATIONS OF
SUBSIDIARIES
------------ ------------ ------------
NET INCOME (LOSS) ........................ $ 518,656 $(14,996,533) $ (4,251,781)
============ ============ ============
NET INCOME (LOSS) PER COMMON
SHARE (Note 2) ........................... $ 0.03 $ (2.30) $ (0.73)
============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING ....................... 15,660,200 6,600,692 6,099,120
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 19, 1995 TO DECEMBER 31, 1995 AND
FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 18, 1995 AND
THE YEAR ENDED DECEMBER 31, 1994
(See Note 1)
Series B Series C
Preferred Stock Preferred Stock Common Stock
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <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
Issuances of Series C
preferred stock at
$5.00 per share ........ -- -- 1,000,000 5,000,000 -- --
Exercises 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 ..... -- -- -- -- 37,500 131,250
share
Issuance of common
stock at $5.00 per ..... -- -- -- -- 409,000 2,045,000
share .................. --
Joint venturers'
contributions receivable -- -- -- -- -- --
Exercise of common
stock purchase
warrants at ............ -- -- -- -- 15,000 52,500
$3.50 per share
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 . -- -- -- -- -- --
Net loss ................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES,
December 31, 1994 .......... 2,000,000 2,000,000 2,625,000 11,875,000 6,554,730 8,836,973
----------- ----------- ----------- ----------- ----------- -----------
<PAGE>
<CAPTION>
Stock
Subscriptions
Capital and Joint
Retained Contributions Venturers'
Earnings from Joint Contributions
(Deficit) Venturers Receivable Total
----------- ------------ -------------- --------
<S> <C> <C> <C> <C>
BALANCES,
December 31, 1993 .......... $(19,189,872) $ 6,358,230 $ (130,000) $ 340,251
Issuances of Series C
preferred stock at
$5.00 per share ........ -- -- -- 5,000,000
Exercises 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 -- 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's
contributions receivable
subsequently collected . -- -- 50,000 50,000
Net loss ................. (4,251,781) -- -- (4,251,781)
------------ ------------ ------------ ------------
BALANCES,
December 31, 1994 .......... (23,441,653) 6,508,230 (80,000) 5,698,550
------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
<PAGE>
<CAPTION>
Page 2 of 2
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 19, 1995 TO DECEMBER 31, 1995 AND
FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 18, 1995 AND
THE YEAR ENDED DECEMBER 31, 1994
(See Note 1)
Series B Series C
Preferred Stock Preferred Stock Common Stock
-------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31, 1994 .......... 2,000,000 $ 2,000,000 2,625,000 $ 11,875,000 6,554,730 $ 8,836,973
Issuances of Series C
preferred stock at
$5.00 per share ........ -- -- 375,000 1,875,000 -- --
Issuance of Series C
preferred stock
at $6.00 per
share .................. -- -- 500,000 3,000,000 -- --
Exercise of common
stock purchase
warrants at
$3.50 per share ........ -- -- -- -- 5,000 17,500
Exercise of common
stock purchase
warrants at
$5.00 per
share .................. -- -- -- -- 1,000 5,000
Exercise of employee
common stock purchase
options at $2.50
per share .............. -- -- -- -- 25,000 62,500
Exercise of employee
common stock purchase
options at $3.50
per share .............. -- -- -- -- 27,612 96,642
Exercise of employee
common stock purchase
options at $4.00
per share .............. -- -- -- -- 119,810 479,240
Exercise of employee
common stock purchase
options at $5.00
per share .............. -- -- -- -- 1,551 7,755
Exercise of employee
common stock purchase
options at $6.50 ....... -- -- -- -- 11,806 76,739
per share
Issuance of common stock
to purchase minority
interest in IMS-Net of
Kansas City, Inc. at ... -- -- -- -- 20,000 100,000
$5.00 per share
Joint venturers'
contributions receivable -- -- -- -- -- --
subsequently collected
Net loss for the period .... -- -- -- -- -- --
Purchase adjustments related
to the acquisition of
the Company by Lilly
(Note 11) .............. (2,000,000) (2,000,000) (3,500,000) (16,750,000) 8,893,691 38,143,196
------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
December 18, 1995 ........ -- -- -- -- 15,660,200 47,825,545
Net income for the period -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
December 31, 1995 .......... -- $ -- -- $ -- 15,660,200 $ 47,825,545
============ ============ ============ ============ ============ ============
<PAGE>
<CAPTION>
Stock
Subscriptions
Capital and Joint
Retained Contributions Venturers'
Earnings from Joint Contributions
(Deficit) Venturers Receivable Total
----------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
BALANCES,
December 31, 1994 .......... $(23,441,653) $ 6,508,230 $ (80,000) $ 5,698,550
Issuances of Series C
preferred stock at
$5.00 per share ........ -- -- -- 1,875,000
Issuance of Series C
preferred stock
at $6.00 per
share .................. -- -- -- 3,000,000
Exercise of common
stock purchase
warrants at
$3.50 per share ........ -- -- -- 17,500
Exercise of common
stock purchase
warrants at
$5.00 per
share .................. -- -- -- 5,000
Exercise of employee
common stock purchase
options at $2.50
per share .............. -- -- -- 62,500
Exercise of employee
common stock purchase
options at $3.50 ....... -- -- -- 96,642
per share
Exercise of employee
common stock purchase
options at $4.00
per share .............. -- -- -- 479,240
Exercise of employee
common stock purchase
options at $5.00
per share .............. -- -- -- 7,755
Exercise of employee
common stock purchase
options at $6.50
per share .............. -- -- -- 76,739
Issuance of common stock
to purchase minority
interest in IMS-Net of . -- -- -- 100,000
Kansas City, Inc. at
$5.00 per share
Joint venturers'
contributions receivable -- -- 80,000 80,000
subsequently collected
Net loss for the period .... (14,996,533) -- -- (14,996,533)
Purchase adjustments related
to the acquisition of
the Company by Lilly
(Note 11) .............. 38,438,186 (6,508,230) -- 51,323,152
------------ ------------ ------------ ------------
BALANCES,
December 18, 1995 ........ -- -- -- 47,825,545
Net income for the period 518,656 -- -- 518,656
------------ ------------ ------------ ------------
BALANCES,
December 31, 1995 .......... $ 518,656 $ -- $ -- $ 48,344,201
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 3
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See Note 1)
(Post- (Pre-
acquisition) acquisition)
For the For the
Period from Period From
December 19, January 1, For the Year
1995 to 1995 to Ended
December 31, December 18, December 31,
1995 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................... $ 518,656 $(14,996,533) $ (4,251,781)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities-
Depreciation and amortization ....................... 509,242 1,113,468 743,313
Minority interest in (loss) income of subsidiaries .. (4,611) 296,546 153,281
Loss on write-off of computer equipment ............. -- 720,400 --
Loss on sales of contracts receivable ............... -- 222,093 --
Changes in operating assets and liabilities-
Contracts receivable and other .................... (906,454) (1,156,882) (6,120,108)
Prepaid expenses .................................. 20,144 (73,917) (211,402)
Other long-term assets ............................ 128 (380,072) (207,142)
Accounts payable .................................. (368,595) (846,236) 1,151,965
Accrued expenses .................................. 489,851 (627,574) 1,292,325
Deferred contract revenue ......................... (90,549) 964,591 782,210
------------ ------------ ------------
Net cash provided by (used in) operating activities 167,812 (14,764,116) (6,667,339)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and furniture .................... (49,067) (1,568,423) (3,396,099)
Purchase of remaining minority interest in Medical
Communications Networks, Inc. ......................... -- (4,350,000) --
------------ ------------ ------------
Net cash used in investing activities ............. (49,067) (5,918,423) (3,396,099)
------------ ------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<PAGE>
<CAPTION>
Page 2 of 3
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See Note 1)
(Post- (Pre-
acquisition) acquisition)
For the For the
Period Period
from From
December 19, January 1, For the Year
1995 to 1995 to Ended
December December December
31, 1995 18, 1995 31, 1994
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... $ -- $ 745,376 $ 490,080
Proceeds from issuance of Series C preferred stock .......... -- 4,875,000 5,875,000
Proceeds from lines of credit ............................... -- 1,200,000 --
Payments on lines of credit ................................. -- (1,200,000) --
Proceeds from issuance of long-term debt .................... 2,409,683 10,260,000 935,000
Payments on long-term debt .................................. -- (178,200) (1,536,555)
Related party borrowings, net ............................... (175,764) (189,035) 474,382
Proceeds from the sales of contracts receivable ............. -- 4,606,901 --
Joint venturers' contributions .............................. -- -- 150,000
Stock and joint venturers' subscriptions receivable collected -- 355,000 4,556,250
Minority interest distributions ............................. -- -- (244,276)
------------ ------------ ------------
Net cash provided by financing activities ............. 2,233,919 20,475,042 10,699,881
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND ........................... 2,352,664 (207,497) 636,443
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period ................ 1,150,350 1,357,847 721,404
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period ...................... $ 3,503,014 $ 1,150,350 $ 1,357,847
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
<PAGE>
<CAPTION>
Page 3 of 3
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See Note 1)
(Post- (Pre-
acquisition) acquisition)
For the For the
Period from Period From
December January For the Year
19, 1995 to 1, 1995 to Ended
December December December
31, 1995 18, 1995 31, 1994
----------- -------------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ....................................................... $ 170 $ 211,732 $ 83,483
=============== ============ ============
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 costs applied to issuance of Series C
preferred stock (Note 8) ................................................. $ -- $ -- $ 1,000,000
=============== ============ ============
Subscription receivable for common stock ................................... $ -- $ -- $ 225,000
=============== ============ ============
Issuance of common stock to purchase remaining minority interest
in IMS-Net of Kansas City, Inc. .......................................... $ -- $ 100,000 $ --
=============== ============ ============
Effective December 18,1995, Eli Lilly and Company acquired all of
the outstanding common and preferred stocks and warrants and options to
purchase common stock of the Company (see Notes 1 and 11). The cost of the
purchase by Eli Lilly and Company has been pushed down to the accompanying
financial statements and the following noncash items occurred as a result
of the purchase-
Conversion of Series B preferred stock ............................... $ -- $ (2,000,000) $ --
Conversion of Series C preferred stock ............................... -- (16,750,000) --
Conversion of capital contributions from joint venturers ............. -- (6,508,230) --
Conversion of predecessor common stock ............................... -- (9,682,344) --
Elimination of accumulated deficit at December 18, 1995 .............. -- 38,438,186 --
Issuance of common stock ............................................. -- 47,825,545 --
Issuance of Series D preferred stock ................................. -- 43,761,843 --
Increase in payables to predecessor stockholders ..................... -- 1,697,568 --
--------------- ------------ ------------
Goodwill and other intangibles ...................................... $ -- $ 96,782,568 $ --
=============== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-10
<PAGE>
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) ORGANIZATION, MERGER AND LIQUIDITY
Organization
Integrated Medical Systems, Inc., ("IMS" or the "Company") develops, markets and
operates computerized 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 December 18, 1995 (the "Effective Date"), the stockholders of the Company
approved an Agreement and Plan of Merger dated August 2, 1995 (the "Merger
Agreement") providing for the Merger (the "Merger") of Trans-IMS Corporation,
which was a wholly owned subsidiary of Eli Lilly and Company ("Lilly"), with and
into the Company. The purchase price was paid with cash and other consideration
(see Note 11).
The following presents pro forma results of operations for the Company as if the
Company had been acquired at the beginning of the respective fiscal year:
<TABLE>
<CAPTION>
(Pre-acquisition)
1995 1994
-------------- ------------
<S> <C> <C>
Revenues ................ $ 17,563,198 $ 17,880,363
Net loss ................ $(24,471,400) $(14,209,576)
Net loss per common share $ (1.56) $ (0.91)
</TABLE>
F-11
<PAGE>
The Merger was accounted for by the purchase method of accounting whereby the
total acquisition cost was allocated to the acquired identifiable assets and
liabilities of the Company based on their relative estimated fair market values
at the Effective Date, which approximated their historical carrying amounts. The
excess of the purchase price over the tangible net assets acquired of
approximately $97 million was allocated to goodwill and other intangibles in the
accompanying consolidated balance sheet.
As a result of the Merger and the related purchase accounting adjustments, the
results of operations and the financial position of the Company are not
comparable between pre- and post-acquisition periods.
Liquidity
Since its inception, the Company has incurred significant losses from operations
and ongoing significant cash flow deficits. Prior to entering into the Merger
Agreement with Lilly in August 1995, the Company relied on the sale of preferred
and common equity, capital contributions from joint venturers, borrowings from
existing stockholders and various banks, collections on network license and
service agreements, and the sale of the rights to the remaining payments due
under certain network license agreements to fund its losses and cash needs.
During 1995, the Company continued to experience cash flow deficits from
expenditures for expansion into new markets throughout the United States and
continued penetration of existing network markets. The Company's cash flow
deficits during the latter half of 1995 were funded by loans from Lilly. As of
December 31, 1995, Lilly has loaned the Company approximately $12.7 million (see
Note 5) which is due and payable July 1, 1996; however, the Company's plans
currently contemplate additional loans from Lilly to fund 1996 operations and
network expansion.
Lilly has represented that it is committed to provide the necessary level of
financial support to IMS to enable it to pay its debts as they become due for
the year ending December 31, 1996 and to provide funding for the Company to
continue its development and expansion until it is self sufficient. In addition,
Lilly has represented to the Company that if the Company's financial resources
are not sufficient to satisfy loans from Lilly due in July 1996, Lilly will not
demand payment and will extend the loans on similar terms to those described in
Note 5.
F-12
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 1994 1995(H)
---------- ---- -------
<S> <C> <C>
IMS-Net of Alabama, Inc. ........... 100% 100%
IMS-Net of Alabama Joint Venture 51(C) 51(C)(G)
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
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. ....... 97 100(D)
IMS-Net of Northern California, Inc. 100(F) 100(F)
IMS-Net of Sacramento, Inc. .... (A) (A)
Indiana Medical Communication
Network, LLC ..................... 51 51
Medical Communication Networks, Inc. 49 100(E)
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) In May 1995, IMS purchased the remaining 3% of IMS-Net of Kansas
City, Inc. for 20,000 shares of common stock, to increase the IMS
ownership to 100%.
(E) In October 1995, IMS purchased the remaining 51% of Medical
Communication Networks, Inc. for $4,350,000 subject to certain
contingencies (see Note 12).
(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) Subsequent to yearend, IMS purchased the remaining 49% of IMS-Net
of Alabama Joint Venture for $410,000.
(H) Several of the entities listed above are governed by
stockholders' 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-13
<PAGE>
Cash Equivalents
For purposes of the consolidated 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 ("Support") 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 Support is
provided as part of a network license agreement, the Company allocates a portion
of the network license agreement fee to Support activities. The portion of the
fee allocated to Support activities is based on the pricing of separate network
license service agreements. All Support 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 1994, one venturer paid $150,000,
relating to a joint venture commenced in 1993.
No single customer accounted for more than 10% of the Company's total revenue
for the year ended December 31, 1995. One customer, a hospital system licensee
under a network licensing agreement, accounted for approximately 19% of the
Company's total revenue in fiscal 1994.
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.
Goodwill and Other Intangibles
The excess of purchase price over the estimated fair market values of the assets
at the dates of acquisitions were allocated to goodwill and other intangibles
and are being amortized over an estimated useful life of 10 years.
F-14
<PAGE>
Income Taxes
The Company accounts for income taxes under 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 Income (Loss) Per Common Share
For the year ended December 31, 1994, and for the period from January 1, 1995 to
December 18, 1995, 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 their effect was antidilutive. For the
period from December 19, 1995 to December 31, 1995, net income per common share
is computed based on the weighted average number of common shares outstanding
during the period.
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.
Use of Estimates in the Presentation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncement
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", issued
in March 1995 and effective for 1996, establishes accounting standards for the
impairment of long-lived assets. The Company will adopt this standard as of
January 1, 1996 and does not expect that adoption will have a material impact on
the Company's financial position or results of operations.
F-15
<PAGE>
(3) RELATED PARTY TRANSACTIONS
In January 1995, the Company's then-chairman transitioned from his role in
day-to-day management to that of a board member only. The Company continued his
compensation through December 31, 1995. In connection with this transition, the
former chairman entered into a noncompetition and confidentiality agreement with
the Company.
The Company issued warrants to purchase 79,302 shares of common stock at $4.00
per share to its then-chairman in January of 1994.
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 1994 compensation, the five members of the
management committee received options to purchase 500,000 shares of common stock
at $4.00 per share. As part of their 1995 compensation, the five members of the
management committee and four other officers received options to purchase
290,000 shares of common stock at $6.50 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, 1995, such payables
totaled approximately $740,000, and are included in payables to related parties
in the accompanying consolidated balance sheet.
During 1995 and 1994 the Company reimbursed a director of the Company for
approximately $1,600 and $61,000, 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.
In consideration for certain loans and/or personal guarantees related to the
Company's borrowings from a bank and other obligations, the Company issued
warrants to purchase 10,000 and 28,000 shares of common stock to directors
during 1995 and 1994, respectively, at $5.00-$6.50 per share (see Note 8).
(4) INCOME TAXES
The net deferred tax assets and liabilities as of December 31, 1995 and December
18, 1995, are comprised of the following:
<TABLE>
<CAPTION>
December 31, December 18,
1995 1995
------------- ------------
<S> <C> <C>
Current:
Accrued vacation ................................. $ 165,000 $ 159,100
------------ ------------
Current deferred tax assets ................... 165,000 159,100
------------ ------------
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
December 31, December 18,
1995 1995
------------- ------------
<S> <C> <C>
Noncurrent:
Share in losses from joint
ventures/partnerships .................... 205,500 203,400
Reorganization costs ........................... -- (6,300)
Deferred revenue ............................... 152,600 147,200
Depreciation ................................... (191,100) (187,500)
Tax credits .................................... 67,600 67,600
Net operating loss carryforwards ............... 12,284,400 12,091,200
------------ ------------
Noncurrent net deferred tax assets ...... 12,519,000 12,315,600
------------ ------------
Total net deferred tax assets before
valuation allowance .................. 12,684,000 12,474,700
Valuation allowance ............................. (12,684,000) (12,474,700)
------------ ------------
Net deferred tax assets ......................... $ -- $ --
============ ============
</TABLE>
The Company has determined that $12,474,700 and $12,684,000 of net deferred tax
assets as of December 18, 1995 and December 31, 1995, respectively, do not
satisfy the realization criteria set forth in SFAS 109. Recognition of these
assets requires future taxable income, the attainment of which is uncertain.
Accordingly, a valuation allowance has been recorded to offset the entire net
deferred tax assets.
At December 31, 1995, the Company has tax credit carryforwards available to
offset future taxable income of approximately $68,000 which expire through 2006.
In addition, the Company has net operating loss carryforwards of approximately
$33,200,000 which expire through 2010.
As a result of the Company's acquisition by Lilly, substantially all the
Company's net operating loss carryforwards are subject to limitations as to
future use in any given year. Operating loss and credit amounts are subject to
examination by the tax authorities.
At December 31, 1995, the Company had no current federal or state income taxes
payable.
The difference between the year ended December 31, 1994 and the period from
January 1, 1995 to December 18, 1995 losses reported for financial reporting and
the losses reported for income tax purposes and the difference between income
for financial reporting purposes and the losses for income tax purposes for the
period from December 19, 1995 to December 31, 1995 were primarily the result of
accelerated depreciation for tax purposes, certain accruals not currently
deductible for tax reporting purposes, amortization of goodwill and other
intangibles and nonqualified option exercise compensation.
F-17
<PAGE>
The difference between the statutory federal income taxes and the Company's
effective income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the For the
Period from Period From
December January For the Year
19, 1995 to 1, 1995 to Ended
December December December
31, 1995 18, 1995 31, 1994
----------- ----------- -------------
<S> <C> <C> <C>
Federal income tax provision (benefit)
computed at the statutory rate ..... $ 176,300 $(5,098,800) $(1,445,600)
State income tax provision (benefit),
net of federal effect .............. 17,400 (668,600) (142,400)
Goodwill and other intangibles
amortization ....................... 5,800 154,500 --
Nonqualified stock option
exercise compensation .............. -- (2,354,300) --
Allocation of 1995 loss for tax
return treatment ................... (408,800) -- --
Increase as a result of joint venture
capital contributions treated as
income for tax reporting purposes .. -- -- 51,000
Other ................................ -- (77,500) 179,500
Valuation allowance .................. 209,300 8,044,700 1,357,500
----------- ----------- -----------
Effective taxes ...................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
(5) LONG-TERM DEBT
Long-term debt is comprised of the following at December 31, 1995:
Notes payable to Lilly--secured by substantially all
assets of IMS, subordinated to other
indebtedness as discussed below, interest at 10%
per annum, due on July 1, 1996 (see Note 1) ................. $ 12,669,683
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 ...................................... 69,301
Capital lease obligations--secured by
equipment and letter of credit, interest
ranging from 6% to 11.4%, due in varying
monthly installments through 1999 ........................... 117,678
------------
Total debt ......................................... 12,856,662
Less-Current maturities ........................................ (12,776,928)
------------
Long-term debt ..................................... $ 79,734
=============
F-18
<PAGE>
Long-term debt matures as follows:
Year ended December 31-
1996 ................ $12,776,928
1997 ................ 29,551
1998 ................ 23,673
1999 ................ 26,510
-----------
$12,856,662
===========
(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 1995 and 1994, the Company expensed approximately $115,000 and $785,000,
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 three networks under
the terms of three joint venture agreements. At December 31, 1995, the aggregate
net amount of advances to the venture entities was approximately $253,000. In
management's opinion, these potential future funding obligations will not have a
material adverse effect on the Company's financial position.
F-19
<PAGE>
Lease Obligations
The Company has entered into various noncancelable operating leases for office
space and computer equipment. Total rental expense related to these lease
agreements during the period from December 19, 1995 to December 31, 1995, the
period from January 1, 1995 to December 18, 1995 and for year ended December 31,
1994 was $18,302, $1,574,020 and $1,035,111, respectively.
Future minimum lease payments under noncancelable operating lease agreements as
of December 31, 1995 are as follows:
1996 ................ $1,369,872
1997 ................ 1,070,316
1998 ................ 428,995
1999 ................ 203,779
2000 ................ 6,034
----------
Total ............... $3,078,996
==========
Letters of Credit
At December 31, 1995, 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.
Other
Under terms of a Letter of Intent and Option Agreement dated November 10, 1993,
an unrelated corporation paid the Company $600,000. The option agreement
provided this corporation with an option to make an equity investment in IMS.
The option agreement was terminated in January 1995. The corporation did not
make such an investment and, therefore, the $600,000 is being applied to
payments due under this corporation's Communications Services Agreement with the
Company. At December 31, 1995, $533,026 is included in deferred contract revenue
in the accompanying consolidated balance sheet.
(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 1994, the Partnership distributed $209,219 to the limited partners
representing 99% of the royalties earned by the Partnership. 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.
F-20
<PAGE>
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 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 limited partner and stockholder 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
As discussed in Notes 1 and 11, the stockholders of the Company approved the
Merger Agreement with Lilly effective December 18, 1995. The discussions below
describe the capital structure of the Company through the Effective Date. For a
description of the effect of the Merger on the Company's previous capital
structure and the Company's current capital structure see Note 11.
Series B Preferred Stock
Each share of Series B voting preferred stock ("Series B") was convertible at a
price per share of $1.50, at the option of the holder into common stock. The
Series B was 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 at December 31, 1994. Such cumulative dividends were
not accrued as the Company had an accumulated deficit and, therefore, was unable
to declare or pay dividends. The undeclared and unpaid dividends would increase
the net loss to the common stockholders by $193,000 and $200,000, respectively,
for the period from January 1, 1995 to December 18, 1995 and for the year ended
December 31, 1994.
Series C Preferred Stock
Under terms of a Subscription Agreement dated December 30, 1993, a Series C
Preferred Stock Purchase Agreement dated January 6, 1994, and a Network
Sponsorship and Participation Agreement dated November 17, 1993, McKesson
Corporation ("McKesson") 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, McKesson 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.
F-21
<PAGE>
The Company also issued warrants to McKesson 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, McKesson exercised warrants
to purchase 375,000 shares of Series C for $1,875,000.
During November 1994, McKesson was acquired by Lilly who succeeded to the rights
of McKesson. During early 1995, Lilly exercised warrants to purchase an
additional 375,000 shares of Series C for $1,875,000.
The additional 500,000 warrants were exercised at $6.00 per share ($3,000,000)
by Lilly at the time of the Company's acquisition of the remaining 51% interest
of Medical Communication Networks, Inc. (see Note 12).
Stock Warrants
Stock warrants had been issued to certain investors. Common stock warrant
activity during 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share
-------- --------------
<S> <C> <C>
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 ................................ (6,000) 3.50 - 5.00
-------- -------------
Balance, December 18, 1995 ................. 655,103 1.50 - 6.50
Converted in connection with
Merger (see Note 11) ................... (655,103) 1.50 - 6.50
-------- -------------
Balance, December 31, 1995 ................. -- $ --
======== =============
</TABLE>
As discussed at Note 11, the stock warrants were converted in connection with
the Merger. Therefore, no warrants are outstanding at December 31, 1995.
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. In 1995,
holders of such warrants exercised the remaining warrants to purchase 875,000
shares of Series C for $4,875,000.
F-22
<PAGE>
Common Stock Option Plans
The Company had a 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 was
to be no less than the fair market value of IMS's stock on the date of grant.
Options were exercisable three months following the date of grant and up to 10
years from such date.
Stock option activity during 1994 and 1995 for the 1989 Plan is as follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share
-------- --------------
<S> <C> <C>
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 ............................... (13,786) 3.50 - 4.00
Exercised .............................. (91,311) 2.50 - 4.00
---------- -------------
Balance, December 18, 1995 ............... 1,460,690 1.00 - 4.00
Converted in connection with
Merger (see Note 11) ................. (1,460,690) 1.00 - 4.00
---------- -------------
Balance, December 31, 1995 ............... -- $ --
========== =============
</TABLE>
Stock options from the 1989 Plan became fully vested and exercisable upon the
Effective Date of the Merger and were converted in connection with the Merger
(see Note 11); therefore, none are outstanding at December 31, 1995.
On April 22, 1994, the stockholders of IMS approved the 1994 Employee Stock
Option Plan (the "1994 Plan"). The 1994 Plan allowed granting incentive and
nonqualified stock options; however, in 1994 and 1995, only nonqualified stock
options were granted. Under the 1994 Plan, the Company was authorized to grant
options to purchase a maximum of 838,600 shares of common stock to key
employees. Such options were exercisable six months following the date of grant.
All other terms were similar to the 1989 Plan.
F-23
<PAGE>
Stock option activity during 1994 and 1995 for the 1994 Plan is as follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share
------- --------------
<S> <C> <C>
Balance, December 31, 1993 .................. -- $ --
Granted ................................... 492,730 3.50 - 5.00
-------- ------------
Balance, December 31, 1994 .................. 492,730 3.50 - 5.00
Granted ................................... 345,870 5.00 - 6.50
Canceled .................................. (27,128) 5.00
Exercised ................................. (94,468) 4.00 - 6.50
-------- ------------
Balance, December 18, 1995 .................. 717,004 3.50 - 6.50
Converted in connection with
Merger (see Note 11) .................... (717,004) 3.50 - 6.50
-------- ------------
Balance, December 31, 1995 .................. -- $ --
======== ============
</TABLE>
Stock options from the 1994 Plan became fully vested and exercisable upon the
Effective Date of the Merger and were converted in connection with the Merger
(see Note 11); therefore, none are outstanding at December 31, 1995.
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.
(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 period from December 19, 1995
to December 31, 1995, the period from January 1, 1995 to December 18, 1995 and
for the year ended December 31, 1994 was $5,998, $145,159 and $79,353,
respectively.
(10)SALES OF CONTRACTS RECEIVABLE
During 1995, 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 $4.6 million. The Company recognized losses of
approximately $220,000 related to these sales.
F-24
<PAGE>
(11)MERGER WITH LILLY
As discussed in Note 1, the stockholders of the Company approved the Merger
Agreement with Lilly effective December 18, 1995. The following discussion
outlines the general terms of the Merger and the impact of the Merger on the
Company's capital structure.
Each existing holder of common stock obtained the right to receive $8.00 in cash
or one share of new Series D preferred stock subject to mandatory redemption
("Preferred D") in exchange for each share of common stock held. In connection
with the Merger, holders of 2,308,147 shares of common stock elected to receive
$18,465,176 in cash and holders of 4,298,162 shares of common stock elected to
convert into 4,298,162 shares of Preferred D.
Each existing holder of Series B preferred stock obtained the right to receive
$5.33 in cash plus any accrued unpaid dividends as of the Effective Date or
two-thirds of a Preferred D share plus any accrued unpaid dividends on the
Series B as of the Effective Date, or such Series B stockholders could elect to
retain the Series B shares with the amended terms of conditions set forth in the
Merger Agreement and exhibits thereto. In connection with the Merger, holders of
551,250 shares of Series B elected to receive $2,938,163 in cash and holders of
1,448,750 shares of Series B elected to convert into 965,833 shares of Preferred
D. No holder elected to retain Series B shares, and no accrued unpaid dividends
were payable at the Effective Date as the $1,493,000 of accrued but unpaid
dividends were paid as a condition of the Merger.
Each Series C preferred share was converted to one share of common stock for a
total of 3,500,000 shares.
The 12,000 shares of Trans-IMS Corporation and the 160,200 shares of common
stock held by Lilly were converted into 12,000,000 shares and 160,200 shares of
common stock, respectively, after the Merger.
Holders of outstanding Company options and warrants had the right either to (i)
receive $8.00 in cash per share into which each such option or warrant was
exercisable as of the Effective 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 Effective
Date. Option holders had the further right to receive fully vested options to
acquire shares of common stock of Lilly under the 1994 Lilly Stock Plan. Holders
of options to purchase 1,543,633, 146,762 and 487,300 shares of common stock
elected to receive $6,442,023 in cash, options to purchase 146,762 shares of
Preferred D and options to purchase a certain number of shares of Lilly common
stock, as defined in the Merger Agreement, respectively.
Holders of warrants to purchase 404,936 and 250,167 shares of common stock
elected to receive $1,617,560 in cash and options to purchase 250,167 shares of
Preferred D, respectively.
As of December 31, 1995, the Company had payables to predecessor stockholders of
$1,697,568 related to the Merger based on the stockholders' conversion
elections. As a result of the Merger, Lilly owns all of the 15,660,200 common
shares outstanding as of December 31, 1995.
F-25
<PAGE>
Series D Preferred Stock Subject to Mandatory Redemption
Each share of Preferred D is entitled to cumulative cash dividends at an annual
rate of $.62 per share, payable in arrears each December 31 until and unless
redeemed by IMS. Holders of Preferred D have no voting rights and have no right
to convert their shares of Preferred D into any other class of capital stock of
IMS. Upon liquidation, dissolution or winding-up of IMS, holders of Preferred D
are entitled to an amount in cash equal to $8.00 per share, plus an amount equal
to all accumulated and unpaid dividends on such shares and have preference over
shares of IMS common stock.
Holders of 5,263,995 shares of Preferred D and holders of options/warrants to
purchase 199,762 shares of Preferred D elected to enter into Put/Call Agreements
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
Effective Date and 30 months after the Effective 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 Effective 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, 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 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. All
such shares redeemed will be canceled and will not be issuable by IMS
thereafter.
(12)PURCHASE OF MEDICAL COMMUNICATION NETWORKS, INC.
In October 1995, the Company acquired the remaining 51% interest of Medical
Communication Networks, Inc. ("MCN") from Unihealth America Ventures
("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. Such extensions had not yet been
received as of January 23, 1996. 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 the Company's Series C preferred stock for
$3,000,000 and a loan to the Company of $1,350,000.
F-26
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
2.1 Agreement and Plan of Merger, dated August 2, 1995, among Lilly, N/A
Trans-IMS Corporation, and IMS.
2.2 Form of Put/Call Agreement among Lilly, IMS and certain N/A
shareholders of IMS.
2.3 Form of Support Agreement, dated August 2, 1995, between Lilly N/A
and certain share- holders of IMS.
4.1 Articles of Incorporation including Articles of Merger of N/A
Trans-IMS Corporation with and into Integrated Medical Systems,
Inc.
4.2 By Laws of IMS N/A
10.1 Stock Purchase Agreement, dated January 6, 1994, between IMS and N/A
McKesson Corporation.
10.2 Sponsorship and Participation Agreement, dated November 17, N/A
1993, between IMS and McKesson Corporation.
10.3 Stockholder's Rights Agreement, dated January 6, 1994, between N/A
IMS and McKess- on Corporation.
10.4 Senior Subordinated Note from IMS (which includes the N/A
registration right for Charles Brown).
10.5 Indemnification Agreement, dated August 14, 1992, between IMS N/A
and David Holbrooke.
10.6 IMS 1989 Restated Stock Option Plan. N/A
10.7 IMS 1994 Employee Stock Option Plan. N/A
10.8 Promissory Note, dated June 12, 1995, between Lilly and IMS. N/A
10.9 Security Agreement, dated June 12, 1995, between Lilly and IMS. N/A
10.10 Pledge Agreement, dated June 12, 1995, between Lilly and IMS. N/A
10.11 Promissory Note, dated July 27, 1995, between Lilly and IMS. N/A
10.12 Security Agreement, dated July 27, 1995, between Lilly and IMS. N/A
10.13 Pledge Agreement, dated July 27, 1995, between Lilly and IMS. N/A
10.14 Promissory Note, dated August 28, 1995, between Lilly and IMS. N/A
10.15 Security Agreement, dated August 28, 1995, between Lilly and N/A
IMS.
10.16 Pledge Agreement, dated August 28, 1995, between Lilly and IMS. N/A
10.17 Form of Registration Agreement applicable to holders of Series N/A
B Preferred Stock.
10.18 Joint Venture Agreement, dated May 15, 1992, with HFN, Inc. N/A
<PAGE>
10.19 Shareholders' Agreement, dated May 31, 1992, with Adventist N/A
Health System.
10.20 Joint Venture Limited Partnership Agreement, dated June 30, N/A
1992, with Blue Cross and Blue Shield of Arizona, Inc.
10.21 Operating Agreement for Indiana Medical Communications Network, N/A
L.L.C., dated April 10, 1993.
10.22 Operating Agreement for Minnesota Medical Communications dated N/A
November 7, 1993.
10.23 Stock Purchase and Termination Agreement, dated September 30, N/A
1995, with Unihealth America Ventures.
10.24 Promissory Note, dated September 25, 1995, between Lilly and N/A
IMS.
10.25 Promissory Note, dated October 17, 1995, between Lilly and IMS. N/A
10.26 Promissory Note, dated October 25, 1995, between Lilly and IMS. N/A
10.27 Form of Severance Agreement with certain employees of IMS. N/A
21.1 List of Subsidiaries of IMS. N/A
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTEGRATED
MEDICAL SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995
AND FOR THE PERIODS THEN ENDED
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS<F1>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,503,014
<SECURITIES> 0
<RECEIVABLES> 5,851,368
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,641,711
<PP&E> 5,906,005
<DEPRECIATION> 1,857,769
<TOTAL-ASSETS> 115,650,299
<CURRENT-LIABILITIES> 22,652,527
<BONDS> 0
43,761,843
0
<COMMON> 47,825,545
<OTHER-SE> 518,656
<TOTAL-LIABILITY-AND-EQUITY> 115,650,299
<SALES> 20,408,258
<TOTAL-REVENUES> 20,408,258
<CGS> 0
<TOTAL-COSTS> 33,926,265
<OTHER-EXPENSES> 667,935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 559,645
<INCOME-PRETAX> (14,477,877)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,477,877)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,477,877)
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
<FN>
<F1>The period from January 1, 1995 through December 18, 1995, the effective
date of the Merger ("pre-Merger"), and the period from December 18, 1995 through
December 31, 1995 ("post-Merger"), have been combined for purposes of this
presentation.
</FN>
</TABLE>
HOPPER AND KANOUFF, P.C.
1610 Wynkoop Street, Suite 200
Denver, Colorado 80202-1196
(303) 892-6000
March 29, 1996
OFIS Filer Support
SEC Operations Center
6432 General Green Way
Alexandria Virginia 22312-2413
Re: Integrated Medical Systems, Inc.
Annual Report on Form 10-KSB
Ladies and Gentlemen:
Enclosed pursuant to Rule 901(d) of Regulation S-T is a copy of the Annual
Report on Form 10-KSB of Integrated Medical Systems, Inc., which we are filing
through EDGAR.
The fee has been paid on March 27, 1996 to:
Mellon Bank
Account No. 9108739
Reference 04300261
Sincerely,
/s/ Alan W. Peryam
Alan W. Peryam
TSS:blk
Enc.
cc: Integrated Medical Systems, Inc.
Arthur Andersen LLP
