<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Pharmaceutical Marketing Services, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
PHARMACEUTICAL MARKETING SERVICES INC.
SUITE 912
45 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10111
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
MARCH 29, 1999
A special meeting of stockholders of Pharmaceutical Marketing Services Inc.
("PMSI") will be held on Monday, March 29, 1999 at 11:00 a.m., local time, at
The Lotos Club, 5 East 66(th) Street, New York, New York, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the Merger
Agreement, dated as of December 14, 1998 among Quintiles Transnational
Corp. ("Quintiles"), QTRN Acquisition Corp., a subsidiary of Quintiles
("Sub"), and PMSI, pursuant to which PMSI will be merged into Sub. Pursuant
to the merger agreement, shares of common stock of PMSI issued and
outstanding at the effective time of the merger will be converted into the
right to receive at the election of the holder thereof, either (i) if you
exchange all your shares of PMSI common stock at the time of the merger,
for each share of PMSI common stock between 0.247 and 0.371 of a share of
common stock of Quintiles, depending on the average closing prices of the
Quintiles common stock over the 10 trading days ending on the second
trading day before consummation of the merger, with each share of PMSI
common stock valued at $15.40, or (ii) if you exchange one-half of your
shares of PMSI common stock at the time of the merger and defer the
exchange of the remainder of your shares, for each share of PMSI common
stock between 0.247 and 0.371 of a share of Quintiles common stock and a
contingent value payment of Quintiles for one-half of your shares. The
merger is more completely described in the accompanying Proxy
Statement/Prospectus, and a copy of the merger agreement is attached as
Appendix A thereto.
2. To transact such other business as may properly come before the
special meeting or any adjournments or postponements thereof.
Only holders of record of shares of PMSI common stock at the close of
business on February 5, 1999, the record date for the special meeting, are
entitled to notice of, and to vote at, the special meeting.
Each share of PMSI common stock will entitle the holder thereof to one vote
on each matter that may properly come before the special meeting. The
affirmative vote of the holders of a majority of the outstanding shares of PMSI
common stock is necessary to approve and adopt the merger agreement.
<PAGE> 3
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND PROMPTLY RETURN IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME.
YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY SIGNING AND
RETURNING A LATER DATED PROXY WITH RESPECT TO THE SAME SHARES, BY FILING WITH
THE SECRETARY OF PMSI A WRITTEN REVOCATION BEARING A LATER DATE OR BY ATTENDING
AND VOTING AT THE SPECIAL MEETING.
By Order of the Board of Directors,
Warren J. Hauser
Secretary
Dated: February 26, 1999
2
<PAGE> 4
<TABLE>
<S> <C>
PHARMACEUTICAL MARKETING QUINTILES TRANSNATIONAL CORP.
SERVICES INC.
PROXY STATEMENT PROSPECTUS
FOR SPECIAL MEETING OF COMMON STOCK AND CONTINGENT
STOCKHOLDERS VALUE PAYMENTS
</TABLE>
The board of directors of Pharmaceutical Marketing Services Inc. ("PMSI")
has unanimously approved a merger of PMSI with a subsidiary of Quintiles
Transnational Corp. ("Quintiles"). If the merger is completed, you will receive
a fraction of a share of Quintiles common stock valued at $15.40 for each of
your shares of PMSI common stock. You may choose to exchange all your shares of
PMSI common stock at the time of completion of the merger or you may choose to
exchange half your shares of PMSI common stock at the time of completion of the
merger and defer receipt of the other half of the Quintiles common stock for up
to 75 days. If you choose to defer for the full 75-day period after the merger,
then for each deferred share of Quintiles common stock you will also receive a
contingent value payment in cash to the extent, if any, that the market value of
such deferred shares of Quintiles common stock has declined over the 75-day
period. The contingent value payments are designed to guarantee those
stockholders who choose to defer receipt of up to half their shares a value of
$15.40 per share of PMSI common stock exchanged for those shares of Quintiles
common stock deferred for the full 75-day period following the merger. The right
to receive a contingent value payment is not transferable. In general, you will
not have to pay taxes on the Quintiles common stock you receive in the merger,
but you will have to pay tax on any contingent value payments you receive.
The number of shares of Quintiles common stock you receive will be
calculated based on the average of the closing price of Quintiles common stock
for the 10 trading days ending on the second day before completion of the
merger. The number of contingent value payments, if any, you receive on the 75th
day after completion of the merger will be calculated based on the difference
between the average of the closing price of Quintiles common stock for the 10
trading days ending on the second day before completion of the merger and the
average of the closing price of Quintiles common stock on The Nasdaq Stock
Market for 10 days selected at random by the exchange agent out of the 20
trading days ending with the 74th day after the merger. If the average of the
closing price of Quintiles common stock for the 10 trading days ending on the
second day before completion of the merger is less than $41.55 or greater than
$62.32 it is possible that the merger will not be completed even if the
stockholders of PMSI have approved it.
Quintiles common stock trades on The Nasdaq Stock Market under the symbol
"QTRN." On February 23, 1999, the closing sale price of Quintiles common stock
was $46.25, as reported on The Nasdaq Stock Market.
The merger cannot be completed unless it is approved by the holders of a
majority of PMSI common stock. A special meeting of PMSI stockholders has been
scheduled for March 29, 1999 at 11:00 a.m. at The Lotos Club, 5 East 66(th)
Street, New York, New York to vote on the merger.
-------------------------
THE MERGER AND AN INVESTMENT IN QUINTILES COMMON STOCK AS A RESULT OF THE
MERGER INVOLVE CERTAIN RISKS. YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS
BEGINNING ON PAGE 17 BEFORE YOU VOTE ON THE MERGER.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Proxy Statement/Prospectus dated February 24, 1999 and first
mailed to stockholders on February 26, 1999.
<PAGE> 5
This Proxy Statement/Prospectus incorporates important business and
financial information about Quintiles that is not included in or delivered with
this document. You should refer to "Where You Can Find More Information," on
page 98 for a description of the documents incorporated by reference in this
Proxy Statement/Prospectus.
You may obtain copies of Quintiles' documents, other than exhibits to those
documents, unless exhibits are specifically incorporated by reference into the
information that this Proxy Statement/Prospectus incorporates, without charge
upon written or oral request to Quintiles directed to:
Investor Relations
Attention: Greg Connors
Quintiles Transnational Corp.
4709 Creekstone Drive
Riverbirch Building, Suite 200
Durham, North Carolina 27703-8411
(919) 998-2000
IN ORDER TO OBTAIN TIMELY DELIVERY PRIOR TO THE SPECIAL MEETING, PLEASE
MAKE YOUR REQUESTS FOR DOCUMENTS BY MARCH 17, 1999.
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE AT THE SPECIAL MEETING. WE
HAVE NOT AUTHORIZED ANYONE TO GIVE YOU DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS, OR ANY
SUPPLEMENT, IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF SUCH
DOCUMENTS, AND NEITHER THE MAILING OF THE PROXY STATEMENT/ PROSPECTUS TO THE
STOCKHOLDERS OF PMSI NOR THE ISSUANCE OF QUINTILES COMMON STOCK SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
i
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... iv
SUMMARY..................................................... 1
RISK FACTORS YOU SHOULD CONSIDER............................ 17
About the Merger.......................................... 17
About Quintiles........................................... 18
About PMSI................................................ 25
About ENVOY............................................... 26
SPECIAL MEETING OF PMSI STOCKHOLDERS........................ 33
THE MERGER.................................................. 36
Background of the Merger.................................. 36
PMSI Reasons for the Merger and Recommendation of PMSI
Board of Directors..................................... 38
Quintiles Reasons for the Merger.......................... 39
Opinion of PMSI Financial Advisors........................ 40
Interests of Certain Persons in the Merger................ 48
Form of the Merger........................................ 50
Consideration for the Merger.............................. 51
Effective Time of the Merger.............................. 52
Procedures for Exchange of PMSI Stock Certificates........ 52
Anticipated Accounting Treatment.......................... 53
Material Federal Income Tax Considerations................ 53
Amendment of PMSI Rights Agreement........................ 57
Regulatory Approvals Required............................. 58
Stock Exchange Listing; Delisting and Deregistration of
PMSI Common Stock...................................... 58
No Appraisal Rights....................................... 58
Resale of Quintiles Common Stock After the Merger......... 58
THE MERGER AGREEMENT........................................ 60
Certain Representations and Warranties.................... 60
Certain Covenants and Agreements.......................... 60
Conditions to the Merger.................................. 64
Termination............................................... 66
Termination Fee and Expense Reimbursement................. 66
Amendment and Waiver...................................... 67
Expenses.................................................. 67
Effect on Employee Benefits, Stock Plans and Stock
Options................................................ 68
Effect on Debt............................................ 68
THE STOCK OPTION AGREEMENT.................................. 69
THE CONTINGENT VALUE PAYMENTS............................... 71
ABOUT QUINTILES............................................. 72
ABOUT PMSI.................................................. 74
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PMSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION........................ 79
COMPARISON OF THE RIGHTS OF HOLDERS OF QUINTILES COMMON
STOCK AND PMSI COMMON STOCK............................... 86
FUTURE SHAREHOLDER PROPOSALS................................ 97
LEGAL MATTERS............................................... 97
EXPERTS..................................................... 97
WHERE YOU CAN FIND MORE INFORMATION......................... 98
LIST OF DEFINED TERMS....................................... 100
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- Merger Agreement
APPENDIX B -- Terms of Contingent Value Payments
APPENDIX C -- Stock Option Agreement
APPENDIX D -- Opinion of SG Cowen Securities Corporation
</TABLE>
iii
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: AS A PMSI STOCKHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive a fraction of a share of Quintiles common stock valued at
$15.40 for each of your shares of PMSI common stock. You also will receive
cash instead of fractional shares of Quintiles common stock. You may elect
to receive, at the time of the completion of the merger, shares of Quintiles
common stock for one-half of your shares of PMSI common stock and defer
receipt of Quintiles common stock for the other half of your shares of PMSI
common stock for up to 75 days. If you choose to defer for the full 75-day
period after the merger, then for each deferred share of Quintiles common
stock you receive on the 75th day after the merger, you will also receive a
contingent value payment in cash as described below.
Q: HOW WILL THE NUMBER OF SHARES I RECEIVE IN THE MERGER BE DETERMINED?
A: The number of shares of Quintiles common stock you will receive, or the
exchange ratio, will be determined by dividing $15.40 by the average of the
closing prices per share of Quintiles common stock on The Nasdaq Stock
Market for the 10 consecutive trading days ending on the day that is two
days immediately prior to the closing date of the merger. We refer to this
10-day average as the "Average Trading Price" of Quintiles common stock.
Q: WHAT IS A CONTINGENT VALUE PAYMENT?
A: The contingent value payment is intended to provide a $15.40 value per
share for 75 days after completion of the merger with respect to up to half
of the shares of PMSI common stock you exchange in the merger. The
contingent value payment represents your right to receive a cash payment on
the 75th day after the merger if the value of the Quintiles common stock as
of that date (determined as described below) is less than the value at the
time the merger is completed. For each share of Quintiles common stock you
receive on the 75th day after the merger, Quintiles will pay to you in cash
the amount, if any, by which the Average Trading Price of Quintiles common
stock exceeds the average closing price of Quintiles common stock for 10
trading days selected at random by the exchange agent out of the 20 trading
days prior to the 75th day after the merger. However, the contingent value
payments terminate if, for any 30 consecutive trading days following the
merger, the average closing price of Quintiles common stock is equal to or
greater than the Average Trading Price. If the contingent value payments
are terminated for this reason, you will not receive any cash.
Q: WHAT HAPPENS AS THE MARKET PRICE OF QUINTILES COMMON STOCK FLUCTUATES?
A: The market value of Quintiles common stock will fluctuate before and after
the closing of the merger. Any fluctuation prior to completion of the
merger will affect the number of Quintiles shares you will receive in
exchange for your PMSI shares since that number is based on the exchange
ratio, which depends on the Average Trading Price. In addition, PMSI may
terminate the merger agreement if the Average Trading Price is more than
$62.325, unless Quintiles agrees to an exchange ratio of approximately
0.247. Quintiles may terminate the merger agreement if the Average Trading
Price is less than $41.55, unless PMSI agrees to an exchange ratio of
approximately 0.371. Fluctuation in the market price of Quintiles common
stock after the merger will also affect the contingent value payments. If
the average closing price of Quintiles common stock for the 10 trading days
selected at random by the exchange agent out of the 20 trading days prior
to
iv
<PAGE> 9
the 75th day after the merger exceeds or equals the Average Trading Price,
the contingent value payments will have no value. In addition, if the
average closing price of the Quintiles common stock is greater than or
equal to the Average Trading Price for any 30 consecutive trading days
during the 75 days following the merger, the contingent value payments will
terminate. In either event, PMSI stockholders who elected to receive shares
of Quintiles common stock on the 75th day after the merger will not receive
any cash.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail
the proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the special meeting. If you sign and send
in your proxy but do not indicate how you want to vote, your proxy will be
counted as a vote in favor of the merger. If you do not vote on the merger
or if you abstain, the effect will be a vote against the merger.
The special meeting will take place on March 29, 1999. You are invited to
the special meeting to vote your shares in person, rather than signing and
mailing your proxy card. We provide more detailed instructions about voting
on page 33.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in any of three ways. First, you can send
a written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy card. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy
card to the Secretary of PMSI at the address below. Third, you can attend
the special meeting and vote in person. Simply attending the meeting and
not voting, however, will not revoke your proxy. You should send any
written notice or new proxy card to the Secretary of PMSI at the following
address: 45 Rockefeller Plaza, Suite 912, New York, New York 10011.
Q: SHOULD I SEND MY PMSI STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions
for exchanging your stock certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible. We currently
expect to complete the merger by the end of March 1999.
Q: AS A PMSI STOCKHOLDER, WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER TO ME?
A: We expect that no gain or loss generally should be recognized by a PMSI
stockholder for federal income tax purposes on the conversion of shares of
PMSI common stock into only shares of Quintiles common stock, except for
gain or loss attributable to cash received for a fractional share. However,
a PMSI stockholder who elects to receive both shares of Quintiles common
stock and contingent value payments in exchange for his or her shares of
PMSI common stock may recognize gain on the exchange of his or her PMSI
common stock to the extent of the fair market value of the contingent value
payments received or to the extent of the cash received on the maturity
date of the contingent value payments.
v
<PAGE> 10
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Only if you provide instructions on how your broker should vote. You should
instruct your broker how to vote your shares, following the directions your
broker provides. Without instructions from you to your broker, your shares
will not be voted and this will effectively be a vote against the merger.
vi
<PAGE> 11
SUMMARY
This summary highlights the material terms of this Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a complete description
of the legal terms of the merger, you should read carefully the entire document
and the documents to which we have referred you. See "Where You Can Find More
Information" (page 98). The merger agreement is attached as Appendix A to this
Proxy Statement/Prospectus.
For the location of definitions of capitalized terms used in this document,
please see "List of Defined Terms" (page 100). For your reference, we have
included page references to direct you to more complete descriptions of the
topics presented in this summary.
ABOUT PMSI AND QUINTILES
PHARMACEUTICAL MARKETING SERVICES INC. (page 74)
45 Rockefeller Plaza, Suite 912
New York, New York 10111
(212) 841-0610
PMSI was formed in 1991 by carving out the pharmaceutical services business
from Walsh International Inc. and consummating a public offering of PMSI common
stock. Through its Scott-Levin subsidiary in the United States, PMSI provides a
range of information and market research services to pharmaceutical and
healthcare companies to enable them to optimize the performance of their sales
and marketing activities. Most of PMSI's services are generated from its own
proprietary databases containing unique pharmaceutical, managed care, healthcare
market, and medical prescriber data.
PMSI's services are comprised of (1) proprietary database services, (2)
syndicated market research audits, (3) managed care and governmental information
services and added value services, including strategic studies and surveys, (4)
consulting services and (5) software solutions. Scott-Levin has implemented
state-of-the-art data access technology and internet capabilities for virtually
all its services.
QUINTILES TRANSNATIONAL CORP. (page 72)
4709 Creekstone Drive
Riverbirch Building, Suite 200
Durham, North Carolina 27703-8411
(919) 998-2000
Quintiles is a market leader in providing full-service contract research,
sales, marketing and health care policy consulting and health information
management services to the global pharmaceutical, biotechnology, medical device
and health care industries. Supported by its extensive information technology
capabilities, Quintiles provides a broad range of contract services to help its
clients reduce the length of time from the beginning of development to peak
sales of a new drug or medical device. Quintiles' contract research services
include a full range of development services focused on helping its clients
through the development and regulatory approval of a new drug or medical device.
Quintiles' contract sales services, including sales and specialized marketing
support services, focus on helping its clients achieve commercial success for a
new product or medical device. Quintiles also offers healthcare policy research
and management consulting which emphasize improving the quality, availability
and cost-effectiveness of healthcare.
<PAGE> 12
On January 5, 1999, Quintiles announced the completion of its previously
announced acquisition of substantial assets of Hoechst Marion Roussel's Kansas
City-based Drug Innovation and Approval facility and the opening of a Kansas
City contract research facility.
On December 15, 1998, Quintiles agreed to acquire all of the outstanding
stock of ENVOY Corporation in a merger that would result in ENVOY becoming a
subsidiary of Quintiles. ENVOY common stock is listed on The Nasdaq Stock Market
under the symbol "ENVY." As of February 15, 1999, there were approximately
21,589,861 shares of ENVOY common stock and 2,800,000 shares of ENVOY Series B
convertible preferred stock outstanding. ENVOY stockholders would receive 1.166
shares of Quintiles common stock in exchange for each outstanding share of ENVOY
common stock and Series B convertible preferred stock. The transaction requires
shareholder approval of both Quintiles and ENVOY. ENVOY's directors and the
holders of its Series B convertible preferred stock have agreed to vote in favor
of the proposed transaction. The ENVOY special meeting of shareholders is
scheduled for March 30, 1999.
SPECIAL MEETING TO BE HELD MARCH 29, 1999; RECORD DATE SET AT FEBRUARY 5, 1999
(page 33)
The special meeting will be held at 11:00 a.m. on March 29, 1999 at The
Lotos Club, 5 East 66(th) Street, New York, New York. At the special meeting,
you will be asked to consider and vote on the merger. If you held shares of PMSI
common stock at the close of business on February 5, 1999, you are entitled to
vote on the merger and any other matters considered at the special meeting.
FORM OF THE MERGER (page 50)
In the merger, PMSI will merge with and into QTRN Acquisition Corp. QTRN
Acquisition Corp. will be the surviving corporation in the merger.
WHAT YOU WILL RECEIVE IN THE MERGER (page 51)
In the merger, you will receive approximately $15.40 worth of Quintiles
common stock in exchange for each share of PMSI common stock you own immediately
prior to the merger. You also will receive cash instead of fractional shares of
Quintiles common stock. The number of shares of Quintiles common stock you will
receive, or the exchange ratio, will be determined by dividing $15.40 by the
average of the closing prices per share of Quintiles common stock on The Nasdaq
Stock Market for the 10 consecutive trading days ending on the day that is two
days immediately prior to the closing date of the merger. We refer to this 10
day average as the "Average Trading Price" of Quintiles common stock.
You may elect to defer your receipt of half the shares of Quintiles common
stock that you would be entitled to receive in the merger for up to 75 days. If
you make this election and do not request the deferred Quintiles shares until
the 75th day after the merger you also will receive, to the extent payable, a
contingent value payment in cash with respect to each share of Quintiles common
stock you receive on that day. You may elect to receive the deferred Quintiles
shares at any time, however, you will only receive a contingent value payment
for each share of Quintiles common stock that you receive on the 75th day after
the merger. The contingent value payments are more fully described below under
"Terms of Contingent Value Payments."
2
<PAGE> 13
Example: If you own 100 shares of PMSI common stock and if the Average
Trading Price of Quintiles common stock is $50 when the merger is completed (for
purposes of this example only), following the merger you would receive 30 shares
of Quintiles common stock plus $40 in cash in lieu of a fractional share. If you
elect to defer receipt of 15 shares of Quintiles common stock until the 75th day
after the merger, you would be entitled to receive a contingent value payment
with respect to each share of Quintiles common stock you receive on that date to
the extent that the Quintiles common stock price is then less than $50.
UNTIL THE SPECIAL MEETING ON MARCH 29, 1999, YOU MAY CALL, TOLL FREE, (800)
293-7059 (DOMESTIC) OR (619) 812-6434 (INTERNATIONAL) FOR A RECORDED MESSAGE
CONCERNING THE HYPOTHETICAL EXCHANGE RATIO AS IF THE DATE OF YOUR CALL WAS THE
DATE OF CLOSING FOR THE MERGER.
TERMS OF THE CONTINGENT VALUE PAYMENTS (page 71)
The contingent value payments represent the right to receive a cash payment
on the 75th day after the merger. For each share of Quintiles common stock you
receive on that 75th day, Quintiles will pay to you in cash the amount, if any,
by which the Average Trading Price of Quintiles common stock exceeds the average
closing price of Quintiles common stock for 10 trading days selected at random
by the exchange agent out of the 20 trading days prior to the 75th day after the
merger. The contingent value payments are intended to guarantee a $15.40 value
per share for 75 days with respect to up to half of the PMSI shares exchanged in
the merger. However, the contingent value payments terminate if, for any 30
consecutive trading days following the merger, the average closing price of
Quintiles common stock is equal to or greater than the Average Trading Price.
You will not receive any cash upon such termination of the contingent value
payments. The terms of the contingent value payments are set forth in Appendix B
to this Proxy Statement/Prospectus.
REASONS FOR THE MERGER (page 38)
In approving the merger agreement and the merger, the PMSI board of
directors considered a number of factors, including that the merger and the
consideration to be received by PMSI stockholders would:
- transfer the value of PMSI's substantial non-operating assets to its
stockholders;
- provide PMSI stockholders with the opportunity to have a continuing
equity participation in a larger, more diversified enterprise with
greater equity value and greater liquidity; and
- allow PMSI stockholders, through receipt of the contingent value
payments, to realize a guaranteed premium on a portion of their shares of
PMSI common stock.
The PMSI board of directors also considered the potential synergies of the
post-merger combined company and that the combined company would provide greater
opportunity for the development and commercial exploitation of PMSI's products
and services. In addition, the PMSI board of directors considered SG Cowen
Securities Corporation's opinion that the consideration to be received in the
merger is fair, from a financial point of view, to the PMSI stockholders.
3
<PAGE> 14
PMSI BOARD RECOMMENDS STOCKHOLDER APPROVAL (page 38)
The PMSI board of directors has determined that the merger is in the best
interests of the PMSI stockholders. The PMSI board of directors unanimously
approved the merger agreement and the merger and recommends that you vote "FOR"
the merger proposal.
CONSIDERATION TO BE PAID BY QUINTILES FAIR TO STOCKHOLDERS, ACCORDING TO PMSI
FINANCIAL ADVISOR (page 40)
SG Cowen Securities Corporation, the financial advisor to PMSI, has
delivered its opinion that, as of February 17, 1999, the "Per Share Merger
Consideration" was fair, from a financial point of view, to the holders of PMSI
common stock (other than Quintiles and Envoy and their affiliates). The Per
Share Merger Consideration refers to the number of shares of Quintiles common
stock and, if you elect to defer your receipt of half the Quintiles shares,
contingent value payments you are entitled to receive in the merger in exchange
for a share of PMSI common stock. The full text of SG Cowen's opinion is
attached to this Proxy Statement/Prospectus as Appendix D. You should read the
opinion in its entirety to understand the assumptions made, matters considered
and limitations of the review undertaken by SG Cowen. In addition to
reimbursement for expenses incurred in connection with its services to PMSI and
indemnification against certain liabilities, PMSI has agreed to pay SG Cowen a
transaction fee of $2,000,000 if the merger is completed, of which $700,000 has
previously been paid and will be credited against the transaction fee. In
addition, PMSI has agreed to pay SG Cowen a fee of $350,000 with respect to SG
Cowen rendering its opinion as of February 17, 1999.
REQUIRED VOTE (page 33)
A majority of the shares of PMSI common stock outstanding on February 5,
1999 must vote in favor of the merger for the merger to be completed. Each share
is entitled to one vote on each matter to be voted on at the special meeting. As
of February 5, 1999, directors and executive officers of PMSI and their
affiliates owned 744,302 shares of PMSI common stock (including vested options
and options that will vest within 60 days), which represented approximately 6%
of the shares of PMSI common stock outstanding on such date. Each PMSI director
and executive officer intends to vote his or her PMSI common stock in favor of
the merger.
MONETARY BENEFITS OF THE MERGER TO CERTAIN PMSI EXECUTIVE OFFICERS AND DIRECTORS
(page 48)
In considering the recommendation of the PMSI board of directors regarding
the merger, you should be aware of interests which certain PMSI executive
officers and directors have in the merger that are different from your and their
interests as stockholders. Certain employees of PMSI and Scott-Levin, including
senior officers, will enter into employment agreements or consultancy
arrangements with Quintiles. Certain executive officers of PMSI and Scott-Levin
are entitled to bonus payments upon completion of the merger. In addition, the
merger would constitute a "change of control" under the employment agreements
between PMSI and certain executive officers of PMSI and Scott-Levin. As a
result, if these executive officers' employment is terminated due to the merger,
they would be entitled to severance payments. The PMSI board of directors has
approved the payment of "retention arrangements" and similar incentive
compensation in an aggregate dollar value of approximately $2.95 million. If the
merger is consummated, PMSI and Quintiles have agreed that
4
<PAGE> 15
certain of the retention arrangements will be payable in the form of options to
purchase shares of Quintiles common stock.
At February 5, 1999 executive officers and directors of PMSI held options
to purchase an aggregate of 725,500 shares of PMSI common stock. Under the terms
of these options, completion of the merger would cause the immediate vesting of
any of these options that have not yet vested. At the time of completion of the
merger, each stock option will become an option to purchase shares of Quintiles
common stock and contingent value payments.
Quintiles has agreed to indemnify current directors and officers of PMSI
and to maintain directors' and officers' insurance for those individuals for
three years following the merger.
The PMSI board was aware of these and other interests and considered them
before approving and adopting the merger agreement.
CONDITIONS TO THE MERGER (page 64)
The merger will not be completed unless customary conditions (relating, for
example, to stockholder approval, the delivery of tax opinions and the obtaining
of third party consents) are satisfied or waived by Quintiles and PMSI.
TERMINATION AND AMENDMENT OF THE MERGER AGREEMENT (page 66 and 67)
Quintiles and PMSI can agree at any time to terminate the merger agreement
without completing the merger. Either company may terminate the merger agreement
if, among other reasons:
- a court or other governmental entity permanently prohibits the merger;
- the holders of PMSI common stock do not approve the merger; or
- the merger is not completed by May 15, 1999.
Quintiles may terminate the merger agreement if, among other reasons:
- the PMSI board of directors withdraws or changes its recommendation in
favor of the merger;
- the PMSI board of directors fails to mail this Proxy Statement/Prospectus
on time;
- the PMSI board of directors recommends a business combination other than
with Quintiles;
- the PMSI board of directors fails to recommend against the acceptance of
any tender offer or exchange offer for PMSI common stock; or
- the Average Trading Price of Quintiles common stock is less than $41.55,
unless PMSI agrees that the exchange ratio will be approximately 0.371.
PMSI may terminate the merger agreement if, among other reasons:
- the PMSI board of directors approves or recommends certain business
combinations or change of control transactions with a third party that
the PMSI board of directors determines are more favorable to you than
this merger; or
5
<PAGE> 16
- the Average Trading Price of Quintiles common stock is more than $62.325,
unless Quintiles agrees that the exchange ratio will be approximately
0.247.
We can agree to amend the merger agreement in any way before or after
approval by PMSI stockholders. After approval, no amendment that would adversely
affect PMSI stockholders may be made without their further approval.
TERMINATION FEE (page 66)
The merger agreement requires PMSI to pay Quintiles a termination fee of $8
million and to reimburse Quintiles' out-of-pocket expenses of up to $1 million
upon termination of the merger agreement where a third party has taken steps to
acquire PMSI or the PMSI board of directors has changed its recommendation in
favor of the merger. The termination fee may discourage persons from making a
competing offer for PMSI common stock.
PMSI MAY NOT SOLICIT COMPETING TRANSACTIONS (page 62)
The merger agreement restricts PMSI's ability to consider or encourage any
alternative acquisition transactions with third parties beyond what is required
by the PMSI board of director's fiduciary duties. PMSI must promptly notify
Quintiles if it receives offers or proposals for any such alternate
transactions.
REGULATORY APPROVALS (page 58)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
prohibits Quintiles and PMSI from completing the merger until each company has
furnished certain information and materials to the Antitrust Division of the
Department of Justice and the Federal Trade Commission and the required waiting
period has expired or been terminated. The waiting period may be extended by
requests for additional information. On December 22, 1998, Quintiles and PMSI
both filed the required notification and report forms with the Antitrust
Division and the FTC. The waiting period expired on January 21, 1999.
STOCK OPTION AGREEMENT (page 69)
As a condition to Quintiles' willingness to enter into the merger
agreement, and to discourage other companies from acquiring PMSI, Quintiles has
required PMSI to grant Quintiles an option to purchase up to 2,466,947 shares
(approximately 19.9%) of PMSI common stock at an exercise price of $12.00 per
share. Quintiles can exercise the option only if the merger agreement is
terminated under circumstances in which Quintiles is entitled to receive a
termination fee or in the event a third party proposes to acquire PMSI, neither
of which has happened as of the date of this Proxy Statement/Prospectus. The
maximum compensation Quintiles may receive under the stock option agreement,
together with any termination fees and reimbursed expenses, is $9 million.
NO APPRAISAL RIGHTS (page 58)
PMSI stockholders are not entitled to appraisal rights in connection with
the merger.
6
<PAGE> 17
LISTING OF QUINTILES COMMON STOCK (page 58)
Quintiles will list the shares of its common stock to be issued in the
merger on The Nasdaq Stock Market.
NO FEDERAL INCOME TAX ON SHARES RECEIVED IN THE MERGER; CONTINGENT VALUE
PAYMENTS MAY BE TAXABLE (page 53)
As a condition to the merger, PMSI and Quintiles each will receive an
opinion of its own tax counsel that the merger will qualify as a reorganization
for federal income tax purposes. Assuming the merger qualifies as a
reorganization, no gain or loss generally should be recognized by a PMSI
stockholder for federal income tax purposes on the conversion of shares of PMSI
common stock into only shares of Quintiles common stock. A PMSI stockholder who
elects to receive both shares of Quintiles common stock and contingent value
payments in exchange for his or her shares of PMSI common stock may recognize
gain on the exchange of his or her PMSI common stock to the extent of the fair
market value of the contingent value payments received or to the extent of the
cash received on the maturity date of the contingent value payments. PMSI
stockholders will also recognize gain or loss on the receipt of cash in lieu of
a fractional share of Quintiles common stock.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER
TO YOU WILL DEPEND ON YOUR PERSONAL CIRCUMSTANCES. WE URGE YOU TO
CONSULT YOUR OWN TAX ADVISORS TO UNDERSTAND FULLY THE TAX CONSEQUENCES
TO YOU.
A WARNING ABOUT FORWARD LOOKING STATEMENTS (page 15)
We make statements in this Proxy Statement/Prospectus and in the documents
incorporated by reference that are forward looking. You can identify these
statements by our use of words like "may," "will," "expect," "anticipate,"
"estimate," or "continue" or similar expressions. Forward looking statements
represent our judgment about the future and are not guarantees of our future
performance. Certain risks and uncertainties could cause our actual operating
results and financial position to differ materially from our projections. We
caution you not to place undue reliance on forward looking statements. Such
forward looking statements represent our estimates and assumptions only as of
the date of this Proxy Statement/Prospectus.
COMPARISON OF MARKET PRICES AND DIVIDEND POLICIES
MARKET PRICES
Quintiles common stock is traded on The Nasdaq Stock Market under the
symbol "QTRN," and PMSI common stock is traded on The Nasdaq Stock Market under
the symbol "PMRX." The following table shows, for the periods indicated, the
high and low sale prices per share on The Nasdaq Stock Market, based on
published financial sources. The Quintiles share prices below have been adjusted
to reflect a two-for-one stock split on December 1, 1997.
7
<PAGE> 18
<TABLE>
<CAPTION>
QUINTILES PMSI
COMMON STOCK COMMON STOCK
----------------- -----------------
CALENDAR PERIOD HIGH LOW HIGH LOW
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Quarter ended March 31, 1997.............. $39.000 $26.625 $10.750 $ 8.750
Quarter ended June 30, 1997............... 35.000 21.500 11.625 8.750
Quarter ended September 30, 1997.......... 43.688 35.032 13.125 9.875
Quarter ended December 31, 1997........... 43.500 31.000 11.500 8.750
Quarter ended March 31, 1998.............. $52.428 $34.000 $14.750 $ 8.750
Quarter ended June 30, 1998............... 53.500 42.250 14.625 12.125
Quarter ended September 30, 1998.......... 52.000 33.375 14.563 7.313
Quarter ended December 31, 1998........... 56.875 41.000 14.500 7.250
Quarter ending March 31, 1999
(through February 23, 1999)............... $53.375 $41.500 $14.625 $13.875
</TABLE>
Following the merger, Quintiles common stock will continue to be traded on
The Nasdaq Stock Market under the symbol "QTRN"; PMSI common stock will cease to
be traded and there will be no further market for such stock.
As of January 21, 1999, there were approximately 32,700 beneficial owners
of Quintiles common stock, including 692 holders of record. As of February 5,
1999, there were approximately 14,000 beneficial owners of PMSI common stock,
including 715 holders of record.
The following table presents trading information for Quintiles and PMSI
common stock on The Nasdaq Stock Market on December 14, 1998 (the last full
trading day prior to announcement of the signing of the merger agreement) and
February 23, 1999 (the last practicable trading day for which information was
available prior to the date of this Proxy Statement/Prospectus).
<TABLE>
<CAPTION>
DECEMBER 14, 1998 FEBRUARY 23, 1999
------------------ ------------------
HIGH LOW HIGH LOW
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Quintiles................................. $56.8750 $55.250 $46.3750 $45.500
PMSI...................................... $12.0625 $11.750 $14.5625 $14.375
</TABLE>
DIVIDEND POLICIES
Neither Quintiles nor PMSI has ever declared or paid any cash dividends on
its common stock. The merger agreement prohibits PMSI from declaring or paying
dividends before completion of the merger. If the merger agreement is
terminated, PMSI, in order to transfer the value of its non-operating assets to
its stockholders, may declare a dividend or initiate a stock repurchase program.
Quintiles does not anticipate paying any cash dividends following the completion
of the merger or in the foreseeable future, and it intends to retain future
earnings for the development and expansion of its business.
SELECTED HISTORICAL FINANCIAL DATA
Quintiles and PMSI are providing the following financial information to
help you in your analysis of the financial aspects of the merger. The annual
selected historical financial data presented below are derived from the audited
consolidated financial statements of each company. The interim selected
historical financial data presented below are derived from the unaudited
consolidated financial statements of each company. In the opinion of Quintiles
8
<PAGE> 19
management, the unaudited financial statements of Quintiles include all
adjustments that Quintiles considers necessary for a fair presentation of the
results of operations and financial position for each of the periods presented.
In the opinion of PMSI management, the unaudited financial statements of PMSI
include all adjustments that PMSI considers necessary for a fair presentation of
the results of operations and financial position for each of the periods
presented. Operating results for each company for the interim period ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the full fiscal year.
Quintiles has restated its consolidated financial statements to reflect
material acquisitions for which Quintiles used the pooling of interests method
of accounting. Quintiles did not restate its consolidated financial statements
to reflect other acquisitions accounted for as pooling-of-interests where
Quintiles determined that its consolidated financial data would not be
materially different if the pooled companies were included. Quintiles has
restated the financial statements for these poolings, which include two
transactions in 1997 and two transactions in 1996, for the year of each
transaction to include the pooled companies from January 1 of that year, but
Quintiles has not restated its financial statements for years prior to the year
of each transaction because the effect of such a restatement would be
immaterial.
As this information is only a summary, you should read it in conjunction
with the historical financial statements and related notes of Quintiles
contained in the annual reports and other information that Quintiles has filed
with the Securities and Exchange Commission and the financial statements of PMSI
included in this Proxy Statement/Prospectus. See "Where You Can Find More
Information" on page 98 and the Index to Financial Statements on page F-1.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF QUINTILES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue.............. $169,623 $230,583 $368,056 $600,100 $852,900 $608,436 $848,379
Income from operations... 12,545 17,456 25,900 43,851 88,812 63,387 88,654
Income before income
taxes.................. 9,785 16,567 24,655 24,241 86,535 61,387 86,737
Net income available for
common shareholders.... 5,230 10,598 14,626 7,648 55,683 38,862 58,914
Basic net income
per share.............. 0.11 0.18 0.23 0.11 0.76 0.53 0.77
Diluted net income per
share.................. $ 0.10 $ 0.18 $ 0.23 $ 0.11 $ 0.74 $ 0.52 $ 0.76
Weighted average shares
outstanding (2)
Basic.................. 49,681 58,128 63,171 69,148 73,739 73,283 76,476
Diluted................ 50,191 58,512 64,946 71,785 75,275 74,967 77,987
</TABLE>
9
<PAGE> 20
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash
equivalents............. $ 18,188 $ 52,011 $ 84,569 $ 74,474 $ 80,247 $ 77,338 $ 88,499
Working capital........... 18,879 48,245 72,102 99,787 164,987 141,204 197,667
Total assets.............. 136,272 208,944 352,277 554,619 814,027 741,544 937,952
Long-term debt including
current portion......... 20,855 21,386 52,662 185,493 185,511 187,690 191,570
Shareholders' equity...... $ 89,015 $ 90,193 $165,943 $150,528 $388,639 $339,628 $464,947
</TABLE>
- -------------------------
(1) Prior to Quintiles' November 29, 1996 share exchange with Innovex Limited,
Innovex had a fiscal year end of March 31 and Quintiles had (and continues
to have) a fiscal year end of December 31. As a result, the data presented
above for 1993 through 1995 include Innovex's March 31 fiscal year data in
combination with Quintiles' December 31 fiscal year data. In connection with
the share exchange, Innovex changed its fiscal year end to December 31.
Accordingly, the data presented above for 1996 include both Innovex's and
Quintiles' data on a December 31 year end basis. Because of the difference
between Innovex's fiscal year end in 1995 compared with 1996, Innovex's
quarter ended March 31, 1996 data are included in Quintiles' pooled data for
both 1995 and 1996.
(2) Restated to reflect the two-for-one stock splits of Quintiles' common stock
in November 1995 and December 1997.
10
<PAGE> 21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF PMSI
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenue............................ $ 76,876 $ 89,893 $ 93,027 $ 98,485 $ 77,966 $ 41,666 $ 18,386
Production costs................... (43,168) (49,991) (51,605) (54,457) (43,663) (21,980) (7,112)
Selling, general and
administrative................... (25,791) (29,773) (34,208) (34,847) (34,243) (16,091) (14,140)
In-process research and development
write-off........................ -- -- -- -- (12,046) (12,046) --
Amortization of intangible
assets........................... (1,541) (1,889) (2,012) (1,733) (1,596) (684) (471)
Income (loss) from assets held for
sale............................. -- -- -- 76 (281) (188) --
Impairment of long-lived assets.... -- -- (2,368) -- -- -- --
Impairment of assets held for
sale............................. -- -- -- -- (14,735) (14,735) --
Restructuring costs................ (1,820) -- (2,314) -- -- -- --
Transaction costs.................. -- -- -- -- (1,151) -- (800)
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)............ 4,556 8,240 520 7,524 (29,749) (24,058) (4,137)
Gain on sale of operations, net of
loss............................. -- -- -- -- 34,106 36,239 52,844
Interest and other income.......... 2,805 2,940 2,503 3,299 5,677 1,962 9,671
Interest expense................... (3,032) (2,915) (2,633) (3,490) (4,632) (2,330) (1,868)
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before income taxes and
extraordinary income............. 4,329 8,265 390 7,333 5,402 11,813 56,510
Income tax (provision) benefit..... (1,662) (2,950) (1,156) (2,655) (5,705) (9,149) (7,591)
Minority interest.................. -- (3) 57 (17) -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
gain and discontinued
operations....................... 2,667 5,312 (709) 4,661 (303) 2,664 48,919
Extraordinary gain on redemption of
debt, net of tax of $1,009....... -- -- -- -- -- -- 1,154
-------- -------- -------- -------- -------- -------- --------
Income(loss) from continuing
operations....................... 2,667 5,312 (709) 4,661 (303) 2,664 50,073
Income (loss) from discontinued
operations, net.................. 2,057 (131) (8,915) (9,914) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $ 4,724 $ 5,181 $ (9,624) $ (5,253) $ (303) $ 2,664 $ 50,073
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings (loss)
per share data(1):
Income (loss) before
extraordinary gain and
discontinued operations,
basic.......................... $ 0.21 $ 0.41 $ (0.05) $ 0.35 $ (0.02) $ 0.20 $ 3.94
Net income (loss), basic(2)...... $ 0.37 $ 0.40 $ (0.73) $ (0.40) $ (0.02) $ 0.20 $ 4.03
Income (loss) before
extraordinary gain and
discontinued operations,
diluted........................ $ 0.20 $ 0.41 $ (0.05) $ 0.35 $ (0.02) $ 0.20 $ 3.16
Net income (loss), diluted(2).... $ 0.36 $ 0.40 $ (0.73) $ (0.40) $ (0.02) $ 0.20 $ 3.25
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Working Capital(3)............... $ 74,553 $ 72,901 $ 47,627 $ 64,210 $ 73,722 $ 75,320 $ 58,113
Total Assets(4).................. 189,229 187,681 173,408 167,202 186,358 204,596 253,708
Long-term debt, excluding current
portion........................ 69,248 69,295 69,131 69,552 69,114 69,030 --
Stockholders' equity............. $ 73,525 $ 86,697 $ 72,954 $ 63,744 $ 58,106 $ 58,274 $110,909
</TABLE>
- -------------------------
(1) PMSI adopted the provisions of Statement of Financial Accounting Standards
No. 128 "Earnings per Share" and accordingly all per share data have been
restated to comply with this standard.
(2) For the six months ended December 31, 1998, includes income per share of
$0.09 from extraordinary item.
(3) As of June 30, 1995 and 1996, includes net current assets of discontinued
operations of $15,032 and $9,276, respectively. As of June 30, 1997 and
December 31, 1997, includes net current assets held for sale of $4,236 and
$611, respectively.
(4) As of June 30, 1995 and 1996, includes total assets of discontinued
operations of $50,032 and $42,871, respectively. As of June 30, 1997 and
December 31, 1997, includes net assets held for sale of $23,033 and $11,897,
respectively.
11
<PAGE> 22
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following tables set forth certain summary unaudited pro forma combined
condensed financial data for Quintiles and PMSI combined, and for Quintiles,
PMSI and ENVOY combined. Quintiles and ENVOY prepare their financial statements
on the basis of a fiscal year beginning on January 1 and ending on December 31,
and PMSI does so on the basis of a fiscal year beginning on July 1 and ending on
June 30. Because the fiscal years of Quintiles, ENVOY and PMSI differ, PMSI's
year ended December 31, 1997 historical operating results are based on PMSI's
last two fiscal quarters of its fiscal year ended June 30, 1997, combined with
the results for the six months ended December 31, 1997. PMSI's nine months ended
September 30, 1998 historical operating results are based on PMSI's last two
fiscal quarters of its fiscal year ended June 30, 1998, combined with the
results for the three months ended September 30, 1998. PMSI's historical
operating results have been adjusted to remove the results of operations of
PMSI's Other Dispositions in order to reflect the ongoing PMSI businesses being
acquired by Quintiles. The pro forma treatment of PMSI's Other Dispositions is
described in the notes to the unaudited pro forma combined condensed financial
data.
Since the number of shares of Quintiles common stock to be issued in the
merger will not be known until the last business day prior to completion of the
merger, the unaudited pro forma combined condensed financial data below assumes
a hypothetical exchange ratio of 0.308, which is based on a hypothetical Average
Trading Price of Quintiles common stock of $50.00.
The unaudited pro forma combined condensed financial data set forth below
is not necessarily indicative of results that would actually have been achieved
if the merger and the merger transaction with ENVOY had been consummated as of
the date indicated, or that may be achieved in the future. This information
should be read in conjunction with the unaudited pro forma combined condensed
financial data, and related notes, and the historical financial statements, and
related notes, of Quintiles, PMSI and ENVOY, which are included or incorporated
by reference in this Proxy Statement/Prospectus. See "Where You Can Find More
Information" on page 98 and the Index to Financial Statements on page F-1.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C>
PRO FORMA COMBINED CONDENSED STATEMENT OF
OPERATIONS DATA:
Net revenue
Quintiles and PMSI pro forma.................. $ 876,391 $ 868,763
Quintiles, PMSI and ENVOY pro forma........... 1,013,996 1,001,526
Income from operations
Quintiles and PMSI pro forma.................. 84,584 85,927
Quintiles, PMSI and ENVOY pro forma........... 81,984 102,959
Income before income taxes and minority interest
Quintiles and PMSI pro forma.................. 82,568 84,875
Quintiles, PMSI and ENVOY pro forma........... 79,703 99,487
Net income available for common shareholders
Quintiles and PMSI pro forma.................. 51,547 56,927
Quintiles, PMSI and ENVOY pro forma........... 42,349 59,886
</TABLE>
12
<PAGE> 23
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C>
Net income per common share
Basic:
Quintiles and PMSI pro forma............... $ 0.66 $ 0.71
Quintiles, PMSI and ENVOY pro forma........ 0.42 0.57
Diluted:
Quintiles and PMSI pro forma............... 0.65 0.70
Quintiles, PMSI and ENVOY pro forma........ $ 0.39 $ 0.54
Weighted average common shares outstanding
Basic:
Quintiles and PMSI pro forma............... 77,799 80,291
Quintiles, PMSI and ENVOY pro forma........ 100,753 104,833
Diluted:
Quintiles and PMSI pro forma............... 79,375 81,864
Quintiles, PMSI and ENVOY pro forma........ 107,980 111,048
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
<S> <C>
PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Cash and cash equivalents
Quintiles and PMSI pro forma.................. $ 154,379
Quintiles, PMSI and ENVOY pro forma........... 176,474
Working capital
Quintiles and PMSI pro forma.................. 258,446
Quintiles, PMSI and ENVOY pro forma........... 271,667
Total assets
Quintiles and PMSI pro forma.................. 1,248,615
Quintiles, PMSI and ENVOY pro forma........... 1,427,665
Long-term debt, including current portion
Quintiles and PMSI pro forma.................. 191,605
Quintiles, PMSI and ENVOY pro forma........... 192,250
Shareholders' equity
Quintiles and PMSI pro forma.................. 663,297
Quintiles, PMSI and ENVOY pro forma........... $ 773,130
</TABLE>
13
<PAGE> 24
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth certain unaudited historical and pro forma
combined per share data of Quintiles and PMSI, as well as equivalent per share
data with respect to one share of PMSI common stock on a pro forma basis for the
merger. This table also reflects certain unaudited per share data for Quintiles,
PMSI and ENVOY combined. You should read the data presented below in conjunction
with the unaudited pro forma combined condensed financial data, and related
notes, and historical financial statements, and related notes, of Quintiles,
PMSI and ENVOY which are incorporated by reference or included elsewhere in this
document. See "Where You Can Find More Information" on page 98 and the Index to
Financial Statements on page F-1.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1997 1998
------------------ -----------------
<S> <C> <C>
Basic net income (loss) per common share:
Quintiles historical........................ $ 0.76 $ 0.77
PMSI pro forma for Other Dispositions (1)... (0.06) 0.50
Quintiles and PMSI pro forma combined (2)... 0.66 0.71
PMSI equivalent pro forma combined (3)...... 0.20 0.22
Quintiles, PMSI and ENVOY pro forma combined
(4)...................................... 0.42 0.57
PMSI equivalent pro forma combined (5)...... 0.13 0.18
Diluted net income (loss) per common share:
Quintiles Historical........................ 0.74 0.76
PMSI pro forma for Other Dispositions (1)... (0.06) 0.49
Quintiles and PMSI pro forma combined (2)... 0.65 0.70
PMSI equivalent pro forma combined (3)...... 0.20 0.22
Quintiles, PMSI and ENVOY pro forma combined
(4)...................................... 0.39 0.54
PMSI equivalent pro forma combined (5)...... $ 0.12 $ 0.17
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Book Value Per Common Share:
Quintiles historical........................ $5.16 $6.06
PMSI historical............................. 4.72 8.90
Quintiles and PMSI pro forma combined (2)... 7.42 8.23
PMSI equivalent pro forma combined (3)...... 2.29 2.53
Quintiles, PMSI and ENVOY pro forma combined
(4)...................................... 6.47 7.09
PMSI and ENVOY equivalent pro forma
combined(5).............................. $1.99 $2.18
</TABLE>
- -------------------------
(1) PMSI's pro forma earnings per share for the year ended December 31, 1997 are
based on PMSI' historical earnings for the six months ended December 31,
1997, combined with PMSI's historical earnings for the last two fiscal
quarters of PMSI's fiscal year ended June 30, 1997. PMSI's pro forma
earnings per share for the nine months ended September 30, 1998 are based on
PMSI's historical earnings for the last two quarters of
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PMSI's fiscal year ended June 30, 1998 combined with PMSI's historical
earnings for the quarter ended September 30, 1998. PMSI's historical
operating results have been adjusted to remove the results of operations of
PMSI's Other Dispositions in order to reflect the ongoing PMSI businesses
being acquired by Quintiles. The pro forma treatment of PMSI's Other
Dispositions is described in the notes to the unaudited pro forma combined
condensed financial data. PMSI's reported historical basic and diluted
income per share from continuing operations was $0.43 and $0.42,
respectively, for the year ended December 31, 1997 and $3.78 and $3.71,
respectively, for the nine months ended September 30, 1998.
(2) Gives pro forma effect to the merger.
(3) Because the number of shares of Quintiles common stock to be issued in the
merger will not be known until the last business day prior to the completion
of the merger, PMSI equivalent per share data cannot be computed at this
time. Hypothetical PMSI equivalent per share amounts are calculated by
multiplying the Quintiles and PMSI pro forma per share amounts by a
hypothetical exchange ratio of 0.308, which is based on a hypothetical
Average Trading Price of Quintiles common stock of $50.00.
(4) Gives pro forma effect to the merger and the ENVOY transaction.
(5) Hypothetical PMSI equivalent per share amounts are calculated by multiplying
the Quintiles, PMSI and ENVOY pro forma per share amounts by a hypothetical
exchange ratio of 0.308, as described above in note (3).
FORWARD LOOKING STATEMENTS
The following statements are or may constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995:
- certain statements, including possible or assumed future results of
operations of PMSI and/or Quintiles, contained in "Summary," "Risk
Factors You Should Consider," "The Merger," "Unaudited Pro Forma Combined
Condensed Financial Data," "About Quintiles," and "About PMSI," including
any statements contained herein regarding the prospects for the services
and products of Quintiles and/or PMSI, the impact of competition, the
proposed integration of the business and management structure for
Quintiles and PMSI;
- any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends," "may," "will,"
"estimate," "continue," or any similar expression; and
- other statements contained herein regarding matters that are not
historical facts.
Forward looking statements represent our judgment about the future and are
not guarantees of our future performance. Because such statements are subject to
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, those
discussed under "Risk Factors You Should Consider." PMSI stockholders are
cautioned not to place undue reliance on such statements, which speak only as of
the date hereof.
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<PAGE> 26
The cautionary statements contained or referred to in this section should
be considered in connection with any subsequent written or oral forward looking
statements that may be issued by Quintiles or PMSI or persons acting on its or
their behalf. Neither Quintiles nor PMSI undertakes any obligation to release
any revisions to or to update publicly any forward looking statements to reflect
events or circumstances after the date of this Proxy Statement/ Prospectus or to
reflect the occurrence of unanticipated events.
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<PAGE> 27
RISK FACTORS YOU SHOULD CONSIDER
In addition to the other information provided or incorporated by reference
in this Proxy Statement/Prospectus, you should consider the following material
risk factors carefully in evaluating whether to vote in favor of the merger. You
should also refer to "Forward Looking Statements" on page 15.
ABOUT THE MERGER
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE PMSI INTO QUINTILES' BUSINESS
Quintiles and PMSI may not achieve the intended benefits of the merger if
Quintiles is unable to integrate PMSI's business with its own successfully.
Quintiles could encounter a number of difficulties as a result of the merger,
such as:
- retaining PMSI's customers;
- maintaining and increasing PMSI's competitive presence in the
pharmaceutical industry;
- continuing to operate PMSI's business efficiently; or
- retaining key PMSI employees.
For example, if PMSI's current customers are uncertain about Quintiles'
commitment to support PMSI's existing products and services, they could cancel
or refuse to renew current contracts. In addition, the combined company may be
unsuccessful in expanding or retaining its competitive position in the
pharmaceutical industry as a result of factors such as its inability to properly
market PMSI's services and products. Furthermore, the successful integration of
PMSI depends on the contribution of certain key PMSI employees. The loss of any
of PMSI's key personnel could result in less efficient business operations for
the combined company and could seriously harm its business.
FLUCTUATIONS IN QUINTILES STOCK PRICE WILL AFFECT THE CONSIDERATION YOU ARE
TO RECEIVE IN THE MERGER
The market price per share of Quintiles common stock at the time the merger
is completed may vary significantly from the date the parties signed the merger
agreement, the date of this Proxy Statement/Prospectus and the date of the
special meeting. These fluctuations may result from changes in the business,
operations, results and prospects of Quintiles, general market conditions,
economic conditions and other factors. For example, between October 1, 1998 and
December 31, 1998, the closing prices of Quintiles common stock ranged from a
high of $56.875 to a low of $41.000. In addition, the stock market generally has
experienced significant price and volume fluctuations from time to time. These
market fluctuations could have a material adverse effect on the market price or
liquidity of Quintiles common stock. The number of Quintiles shares you will
receive in exchange for your PMSI shares will be based on the exchange ratio,
which depends on the Average Trading Price. Fluctuations in the market price of
PMSI will not affect the number of Quintiles shares you will receive in the
merger. PMSI may terminate the merger agreement if the Average Trading Price is
more than $62.325, unless Quintiles agrees that the exchange ratio will be
approximately 0.247. Quintiles may terminate the merger agreement if the Average
Trading Price is less than $41.55, unless PMSI agrees that the exchange ratio
will be
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<PAGE> 28
approximately 0.371. The actual exchange ratio will not be determined until
shortly before completion of the merger.
FLUCTUATIONS IN QUINTILES STOCK PRICE WILL AFFECT THE CONTINGENT VALUE PAYMENTS
The contingent value payments will result in a cash payment with respect to
each share of Quintiles common stock issued to a PMSI stockholder on the 75th
day after the merger if the average closing price of Quintiles common stock for
the 10 trading days randomly selected by the exchange agent from the 20 trading
days prior to that date is less than the Average Trading Price. The contingent
value payments are generally designed to guarantee PMSI stockholders a value of
$15.40 per share for 75 days after the merger with respect to up to one-half of
their shares of PMSI common stock. The market price of Quintiles common stock
may vary significantly from the date of the completion of the merger to the
maturity date of the contingent value payments, which is the 75th day after
completion of the merger. See "-- Fluctuations in Quintiles Stock Price Will
Affect the Consideration You Are to Receive in the Merger" above for a
historical range of stock prices. If the average closing price of Quintiles
common stock for the 10 trading days selected at random by the exchange agent
out of the 20 trading days prior to the contingent value payment maturity date
exceeds or equals the Average Trading Price, the contingent value payments will
have no value. In addition, if the average closing price of the Quintiles common
stock is greater than or equal to the Average Trading Price for any period of 30
consecutive trading days during the 75 days following the closing date of the
merger, the contingent value payments will terminate. In either event, PMSI
stockholders who elected to receive shares of Quintiles common stock on the
maturity date will not receive any cash.
THE MERGER MAY FAIL TO QUALIFY FOR TAX-FREE TREATMENT
We have structured the merger to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986. Although the Internal
Revenue Service has not provided a ruling on the matter, we each will obtain a
legal opinion that the merger qualifies as a tax-free reorganization. These
opinions neither bind the IRS nor prevent the IRS from adopting a contrary
position. If the merger fails to qualify as a tax-free reorganization, you would
recognize gain or loss on each PMSI share surrendered in the amount of the
difference between your basis in such share and the fair market value of the
Quintiles shares and other consideration you receive in exchange for it at the
time of the merger. In addition, even if the merger qualifies as a tax-free
reorganization, there is still a risk you may recognize gain on the transaction
equal to the fair market value of the contingent value payments, and you may be
required to defer the recognition of any loss that you realize on the lapse or
maturity of the contingent value payments. See "The Merger -- Material Federal
Income Tax Considerations."
ABOUT QUINTILES
CHANGES IN OUTSOURCING TRENDS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES
COULD ADVERSELY AFFECT QUINTILES' OPERATING RESULTS
Economic factors and industry trends that affect Quintiles' primary
customers, pharmaceutical and biotechnology companies, also affect Quintiles'
business. For example, the practice of many companies in these industries has
been to hire outside organizations such as Quintiles to conduct large clinical
research and sales and marketing projects. This practice has grown substantially
in the 1990s, and Quintiles has benefited from this trend. If this trend
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<PAGE> 29
were to change and companies in these industries reduced their tendency to
outsource those projects, Quintiles' operations and financial condition could be
materially and adversely affected. In addition, numerous governments have
undertaken efforts to control growing healthcare costs through legislation,
regulation and voluntary agreements with medical care providers and
pharmaceutical companies. If future regulatory cost containment efforts limit
the profits which can be derived on new drugs, Quintiles' customers may reduce
their research and development spending which could reduce the business they
outsource to Quintiles. Quintiles cannot predict the likelihood of any of these
events or the effects they would have on its business, results of operations or
financial condition.
IF COMPANIES QUINTILES ACQUIRES DO NOT PERFORM AS EXPECTED OR IF QUINTILES IS
UNABLE TO MAKE STRATEGIC ACQUISITIONS, QUINTILES' BUSINESS COULD BE ADVERSELY
AFFECTED
A key element of Quintiles' growth strategy depends on its ability to
complete acquisitions that complement or expand its business and successfully
integrate the acquired companies into its operations. If Quintiles is unable to
successfully execute its acquisition strategy, there could be a material adverse
effect on its business, results of operations and financial condition. In the
past, some of Quintiles' acquisitions performed below its expectations in the
short term, but Quintiles experienced no impact to its expectations for its
overall results, due in part to the size of such acquisitions and the
performance of other areas of Quintiles' business. In the future, if Quintiles
is unable to operate the business of an acquired company so that its results
meet Quintiles' expectations, those results could have a negative impact on
Quintiles' results as a whole. The risk that Quintiles' results may be affected
if Quintiles is unable to successfully operate the businesses it acquires may
increase in proportion with (1) the size of the businesses Quintiles acquires,
(2) the lines of business Quintiles acquires and (3) the number of acquisitions
Quintiles completes in any given time period.
In 1998, Quintiles completed 11 acquisitions and announced agreements to
acquire PMSI and ENVOY. The PMSI and ENVOY acquisitions would expand Quintiles'
lines of business and thus involve new risks. ENVOY is the largest acquisition
Quintiles has proposed to date, and PMSI is one of the largest Quintiles has
ever proposed. Quintiles anticipates issuing approximately 28.4 million shares
of its common stock to ENVOY shareholders and shares of its common stock valued
at approximately $200 million to stockholders of PMSI. The final number of
shares issued to PMSI stockholders will be determined by an exchange ratio based
on the average market price of Quintiles' common stock prior to the closing of
the PMSI transaction. On January 21, 1999, Quintiles had approximately 78
million shares of common stock outstanding. If either of these acquisitions, if
completed, fail to meet Quintiles' performance expectations, its results of
operation and financial condition could be materially adversely effected. In
addition, Quintiles is currently reviewing many acquisition candidates and
continually evaluating and competing for new acquisition opportunities. Other
risk factors Quintiles faces as a result of its aggressive acquisition strategy
include the following:
- the ability to achieve anticipated synergies from combined operations;
- integrating the operations and personnel of acquired companies,
especially those in lines of business that differ from Quintiles' current
lines of business;
- the ability of acquired companies to meet anticipated revenue and net
income targets;
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<PAGE> 30
- potential loss of the acquired companies' key employees;
- the possibility that Quintiles may be adversely affected by risk factors
present at the acquired companies, including Year 2000 risks;
- potential losses resulting from undiscovered liabilities of acquired
companies that are not covered by the indemnification Quintiles may
obtain from the sellers;
- the ability to expand the data analyses portion of ENVOY's business, if
the ENVOY acquisition is completed;
- risks of assimilating differences in foreign business practices and
overcoming language barriers (for acquisitions of foreign companies);
- risks particular to the companies Quintiles acquires; and
- risks experienced by companies in general that are involved in
acquisitions.
Due to these risks, Quintiles may not be able to successfully execute its
acquisition strategy.
IF QUINTILES IS UNABLE TO SUCCESSFULLY DEVELOP AND MARKET POTENTIAL NEW
SERVICES, ITS GROWTH COULD BE ADVERSELY AFFECTED
Another key element of Quintiles' growth strategy is the successful
development and marketing of new services which complement or expand its
existing business. If Quintiles is unable to succeed in (1) developing new
services and (2) attracting a customer base for those newly developed services,
it will not be able to implement this element of its growth strategy, and
Quintiles' future business, results of operations and financial condition could
be adversely affected.
For example, as a result of its proposed acquisition of ENVOY, Quintiles is
currently considering expanding its pharmaceutical and healthcare information
and market research services. Providers of these services manipulate healthcare
information to analyze aspects of current healthcare products and procedures for
use in producing new products and services or in analyzing sales and marketing
of existing products. These types of services are also known as data mining.
Quintiles believes that the healthcare information ENVOY processes in its
current business could be utilized to create new data mining services. In
addition to the other difficulties associated with the development of any new
service, Quintiles' ability to develop this line of service may be limited
further by contractual provisions limiting Quintiles' use of the healthcare
information or the legal rights of others that may prevent or impair Quintiles'
use of the healthcare information. Due to these and other limitations, Quintiles
cannot assure you that it will be able to develop this type of service
successfully. Quintiles' inability to develop new products or services or any
delay in the development of them may adversely affect its ability to realize
some of the synergies Quintiles anticipates from the proposed acquisition of
ENVOY.
QUINTILES' RESULTS COULD BE ADVERSELY AFFECTED BY THE POTENTIAL LOSS OR DELAY OF
ITS LARGE CONTRACTS
Most of Quintiles' customers can terminate its contracts upon 15-90 days
notice. In the event of termination, Quintiles' contracts often provide for fees
for winding down the project.
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<PAGE> 31
Still, the loss or delay of a large contract or the loss or delay of multiple
contracts could adversely affect Quintiles' future net revenue and
profitability.
QUINTILES' BACKLOG MAY NOT BE INDICATIVE OF FUTURE RESULTS
Quintiles reports backlog based on anticipated net revenue from uncompleted
projects that a customer has authorized. Quintiles cannot assure you that the
backlog it has reported will be indicative of its future results. A number of
factors may affect Quintiles' backlog, including:
- the variable size and duration of projects (some are performed over
several years);
- the loss or delay of projects; and
- a change in the scope of work during the course of a project.
QUINTILES FACES RISKS CONCERNING THE YEAR 2000 ISSUE
If Quintiles or Its Vendors Do Not Adequately Prepare for the Year 2000
Issue, Quintiles' Operations Could be Disrupted
Quintiles has established a Year 2000 Program to address the Year 2000
issue, which results from computer processors and software failing to process
date values correctly, potentially causing system failures or data corruption.
The Year 2000 issue could cause disruptions of Quintiles' operations, including,
among other things, a temporary inability to process information; receive
information, services or products from third parties; interface with customers
in the performance of contracts; or operate or communicate in some or all of the
regions in which Quintiles does business. Quintiles' computing infrastructure is
based on industry standard systems. Quintiles does not depend on large legacy
systems and does not use mainframes. Rather, the scope of Quintiles' Year 2000
Program includes unique software systems and tools in each of its service
groups, especially its contract research service group, embedded systems in its
laboratory and manufacturing operations, facilities such as elevators and fire
alarms in over 70 offices (which also involve embedded technology) and numerous
supplier and other business relationships. Quintiles has identified critical
systems within each service group and is devoting its resources to address these
items first.
Quintiles' Year 2000 Program is directed by the Year 2000 Executive
Steering Team, which is comprised of its Chief Information Officer and
representatives from regional business units, together with legal, quality
assurance and information technology personnel. Quintiles has established a Year
2000 Program Management Office, staffed by consultants, which develops
procedures and instructions at a centralized level and oversees performance of
the projects that make up the program. Project teams organized by service group
and geographic region are responsible for implementation of the individual
projects.
The framework for Quintiles' Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
Quintiles is in the process of assessing those systems, facilities and business
relationships which it believes may be vulnerable to the Year 2000 issue and
which it believes could impact its operations. Although Quintiles cannot control
whether and how third parties will address the Year 2000 issue, its assessment
also will include a limited evaluation of certain services on which Quintiles is
substantially dependent, and Quintiles plans to develop contingency plans for
possible deficiencies in those services. For example, Quintiles believes that
among its most significant
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third party service providers are physician investigators who participate in
clinical studies conducted through its contract research services; consequently,
Quintiles is developing a specialized process to assess and address Year 2000
issues arising from these relationships. Quintiles does not plan to assess how
its customers, such as pharmaceutical and large biotechnology companies, are
dealing with the Year 2000 issue.
As Quintiles completes the assessment of its systems, Quintiles is
developing plans to renovate, replace or retire them, as appropriate, if they
are affected by the Year 2000 issue. Such plans generally include testing of new
or renovated systems upon completion of the remedial actions. Quintiles will
utilize both internal and external resources to implement these plans.
Quintiles' strategic healthcare communications services are less dependent on
information technology than its other services. With the exception of recent
acquisitions, Quintiles' Year 2000 Program with respect to those services is
substantially complete, with validation expected to be completed in the first
quarter of 1999. Quintiles addressed most systems relating to its healthcare
consulting services in 1998, with completion expected in the first half of 1999.
Quintiles also addressed most of its contract sales systems in 1998, and expects
to have substantially completed this program during mid-1999. Quintiles'
contract research services utilize numerous systems, which it must address
individually on disparate schedules, depending on the magnitude and complexity
of the particular system. Quintiles anticipates that remediation or replacement
of these systems will be substantially complete by mid-1999, with migration
occurring primarily in the second half of the year. Quintiles expects to
complete the core components of its Year 2000 Program before there is a
significant risk that internal Year 2000 problems will have a material impact on
its operations.
If Quintiles' Costs of Addressing the Year 2000 Issue Exceed its Estimates,
Quintiles' Net Income Could Be Adversely Affected
Quintiles estimates that the aggregate costs of its Year 2000 Program will
be approximately $14 million, including costs already incurred. A significant
portion of these costs, approximately $6 million, are not likely to be
incremental costs, but rather will represent the redeployment of existing
resources. This reallocation of resources is not expected to have a significant
impact on Quintiles' day-to-day operations. Quintiles incurred total Year 2000
Program costs of $3.5 million through December 31, 1998, of which approximately
$2.6 million represented incremental expense. Quintiles' estimates regarding the
cost, timing and impact of addressing the Year 2000 issue are based on numerous
assumptions of future events, including the continued availability of certain
resources, its ability to meet deadlines and the cooperation of third parties.
Quintiles cannot guarantee that its assumptions will be correct and that these
estimates will be achieved. Actual results could differ materially from
Quintiles' expectations as a result of numerous factors, including the
availability and cost of personnel trained in this area, unforeseen
circumstances that would cause Quintiles to allocate its resources elsewhere and
similar uncertainties.
Quintiles' Business Could Be Adversely Affected if Year 2000 Issues Are Not
Adequately Addressed In Other Parts of the World or by Companies With Which
Quintiles Does Business
Quintiles faces both internal and external risks from the Year 2000 issue.
If realized, these risks could have a material adverse effect on Quintiles'
business, results of operations or financial condition. Quintiles' primary
internal risk is that its systems will not be Year 2000 compliant on time. The
magnitude of this risk depends on Quintiles' ability to achieve compliance of
both internally and externally developed systems or to migrate to alternate
systems in a timely fashion. The decentralized nature of Quintiles' business may
compound this risk if Quintiles is unable to coordinate efforts across its
global operations on a timely
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basis. Quintiles believes that its Year 2000 Program will successfully address
these risks, however, it cannot guarantee that this program will be completed in
a timely manner. Notwithstanding Quintiles' Year 2000 Program, Quintiles also
faces external risks that may be beyond its control. Quintiles' international
operations and its relationships with foreign third parties create additional
risks for Quintiles, as many countries outside the United States have been less
attuned to the Year 2000 issue. These risks include the possibility that
infrastructural systems, such as electricity, water, natural gas or telephony,
will fail in some or all of the regions in which Quintiles operates, as well as
the danger that the internal systems of Quintiles' foreign suppliers, service
providers and customers will fail. Quintiles' business also requires
considerable travel, and its ability to perform services under its customer
contracts could be negatively affected if air travel is disrupted by the Year
2000 issue.
In addition, Quintiles' business depends heavily on the healthcare
industry, particularly on third party physician investigators. The healthcare
industry, and physicians' groups in particular, to date may not have focused on
the Year 2000 issue to the same degree as some other industries, especially
outside of major metropolitan centers. As a result, Quintiles faces increased
risk that its physician investigators will be unable to provide Quintiles with
the data that it needs to perform under its contracts on time, if at all. Thus,
the clinical study involved could be slowed or brought to a halt. Also, the
failure of Quintiles' customers to address the Year 2000 issue could negatively
impact their ability to utilize Quintiles' services. While Quintiles intends to
develop contingency plans to address certain of these risks, it cannot assure
you that any developed plans will sufficiently insulate Quintiles from the
effects of these risks. Any disruptions resulting from the realization of these
risks would affect Quintiles' ability to perform its services. If Quintiles is
unable to receive or process information, or if third parties are unable to
provide information or services to Quintiles, Quintiles may not be able to meet
milestones or obligations under its customer contracts, which could have a
material adverse effect on its business, results of operations and financial
condition.
Until Quintiles has completed its remediation, testing and deployment
plans, Quintiles believes it is premature to develop contingency plans to
address what would happen if its execution of these plans were to fail to
address the Year 2000 issue.
IF QUINTILES LOSES THE SERVICES OF DENNIS GILLINGS OR OTHER KEY PERSONNEL, ITS
BUSINESS COULD BE ADVERSELY AFFECTED
Quintiles' success substantially depends on the performance, contributions
and expertise of its senior management team, led by Dennis B. Gillings, Ph.D.,
Quintiles' Chairman of the Board of Directors and Chief Executive Officer.
Quintiles maintains key man life insurance on Dr. Gillings in the amount of $3
million. Quintiles' performance also depends on its ability to attract and
retain qualified management and professional, scientific and technical operating
staff, as well as its ability to recruit qualified representatives for its
contract sales services. The departure of Dr. Gillings, or any key executive, or
Quintiles' inability to continue to attract and retain qualified personnel could
have a material adverse effect on its business, results of operations or
financial condition.
QUINTILES' CONTRACT RESEARCH SERVICES CREATE A RISK OF LIABILITY FROM CLINICAL
TRIAL PARTICIPANTS
Quintiles contracts with physicians to serve as investigators in conducting
clinical trials to test new drugs on human volunteers. Such testing creates risk
of liability for personal injury to or death of volunteers, particularly to
volunteers with life-threatening illnesses, resulting
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from adverse reactions to the drugs administered during testing. It is possible
third parties could claim that Quintiles should be held liable for losses
arising from any professional malpractice of the investigators with whom it
contracts or in the event of personal injury to or death of persons
participating in clinical trials. Quintiles does not believe it is legally
accountable for the medical care rendered by third party investigators, and
Quintiles would vigorously defend any such claims. Nonetheless, it is possible
Quintiles could be found liable for those types of losses.
In addition to supervising such tests, Quintiles also owns a number of labs
where Phase I clinical trials are conducted. Phase I clinical trials involve
testing a new drug on a limited number of healthy individuals, typically 20 to
80 persons, to determine the drug's basic safety. Quintiles also could be liable
for the general risks associated with ownership of such a facility. These risks
include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers.
RELAXATION OF GOVERNMENT REGULATION COULD DECREASE THE NEED FOR THE SERVICES
QUINTILES PROVIDES
Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
Quintiles' business involves helping pharmaceutical and biotechnology companies
through the regulatory drug approval process. Any relaxation in regulatory
approval standards could eliminate or substantially reduce the need for
Quintiles' services, and, as a result its business, results of operations and
financial condition could be materially adversely affected. Potential regulatory
changes under consideration in the United States and elsewhere include mandatory
substitution of generic drugs for patented drugs, relaxation in the scope of
regulatory requirements or the introduction of simplified drug approval
procedures. These and other changes in regulation could have an impact on the
business opportunities available to Quintiles.
FAILURE TO COMPLY WITH EXISTING REGULATIONS COULD RESULT IN A LOSS OF REVENUE
Any failure on Quintiles' part to comply with applicable regulations could
result in the termination of ongoing clinical research or sales and marketing
projects or the disqualification of data for submission to regulatory
authorities, either of which could have a material adverse effect on Quintiles.
For example, if Quintiles were to fail to verify that informed consent is
obtained from patient participants in connection with a particular clinical
trial, the data collected from that trial could be disqualified, and Quintiles
could be required to redo the trial under the terms of its contract at no
further cost to its customer, but at substantial cost to Quintiles.
PROPOSED REGULATIONS MAY INCREASE THE COST OF QUINTILES' BUSINESS OR LIMIT ITS
SERVICE OFFERINGS
Certain of Quintiles' current services relate to the diagnosis and
treatment of disease. The confidentiality of patient-specific information and
the circumstances under which such patient-specific records may be released for
inclusion in Quintiles' databases or used in other aspects of Quintiles'
business, are subject to substantial government regulation. Additional
legislation governing the possession, use and dissemination of medical record
information has been proposed at both the state and federal levels. This
legislation may (1) require Quintiles
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to implement security measures that may require substantial expenditures or (2)
limit Quintiles' ability to offer some of its products and services. These and
other changes in regulation could limit Quintiles' ability to offer some of its
products or have an impact on the business opportunities available to Quintiles.
EXCHANGE RATE FLUCTUATIONS MAY AFFECT QUINTILES' RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Quintiles derives a large portion of its net revenue from international
operations; for example, Quintiles derived approximately 51.7% of its 1997 net
revenue from outside the United States, Quintiles' financial statements are
denominated in U.S. dollars; thus, factors associated with international
operations, including changes in foreign currency exchange rates could
significantly affect Quintiles' results of operations and financial condition.
Exchange rate fluctuations between local currencies and the U.S. dollar create
risk in several ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of
Quintiles' foreign operations are generally denominated in local
currencies.
- Foreign Currency Transaction Risk. Quintiles' service contracts may be
denominated in a currency other than the currency in which it incurs
expenses related to such contracts.
Quintiles tries to limit these risks through exchange rate fluctuation
provisions stated in its service contracts, or Quintiles may hedge its
transaction risk with foreign currency exchange contracts or options. Despite
these efforts, Quintiles may still experience fluctuations in financial results
from its operations outside the United States, and Quintiles cannot assure you
that it will be able to favorably reduce its currency transaction risk
associated with its service contracts.
On January 1, 1999, a new currency, the euro, became the legal currency for
11 of the 15 member countries of the European Economic Community. Between
January 1, 1999 and January 1, 2002, governments, companies and individuals may
conduct business in these countries in both the euro and existing national
currencies. On January 1, 2002, the euro will become the sole currency in these
countries. Quintiles is evaluating the impact conversion to the euro will have
on its business. In particular Quintiles is reviewing (1) whether it may have to
change the prices of its services in the different countries because they will
now be denominated in the same currency in each country and (2) whether
Quintiles will have to change the terms of any financial instruments in
connection with its hedging activities described above. Based on current
information and its initial evaluation, Quintiles does not expect the cost of
any necessary corrective action to seriously harm its business. However,
Quintiles will continue to evaluate the impact of these and other possible
effects of the conversion to the euro on its business. Quintiles cannot assure
you that the costs associated with the conversion to the euro will not in the
future seriously harm its business, results of operations or financial
condition.
ABOUT PMSI
INDUSTRY REGULATION
As described above, the pharmaceutical industry is subject to extensive
regulations, including limitations on the prices drug companies may charge. Such
regulations may cause PMSI's pharmaceutical company clients to revise or reduce
their marketing programs. In
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addition, PMSI is directly subject to certain restrictions on the collection and
use of data. While PMSI does not believe that any such current legislation will
have a material adverse effect on its operations, PMSI cannot assure you that
future legislation or regulations will not directly or indirectly restrict the
dissemination of the type of information PMSI gathers and therefore materially
adversely affect PMSI's operations.
DEPENDENCE ON KEY PERSONNEL
PMSI believes that its success to a significant extent has been a result of
the efforts and abilities of its executive officers. The loss of the services of
one or more of these key executives could adversely affect PMSI. PMSI uses
incentives, including competitive compensation and stock arrangements, to
attract and retain key personnel. There can be no assurance, however, that PMSI
will be successful in attracting or retaining key personnel with the requisite
capabilities and experience.
YEAR 2000 RISKS
As discussed above, the Year 2000 issue has the potential to cause system
failures or data corruption. The inability of computer programs to recognize the
correct year could result in major miscalculations. The Year 2000 issue
potentially poses a risk for PMSI from unforeseen problems in PMSI's own
computer systems and from third parties on whom PMSI relies. PMSI has appointed
a task force to review all its systems for the impact of Year 2000.
While PMSI is not dependent on large legacy systems and does not use
mainframes, and many of the systems it does use have been developed to process
date values appropriately, problems could arise if PMSI's major suppliers and/or
customers have not brought their systems into Year 2000 compliance. PMSI's
products and services are heavily dependent on data that is received from
external sources over which PMSI has no control. PMSI believes, based on
information available to it, that such suppliers and customers are, in fact,
either already in compliance or on schedule to achieve compliance by the Year
2000, and that the costs to PMSI associated with addressing this issue will not
be material to PMSI's business or operations. However, failure by suppliers
and/or customers to appropriately address the issue in a timely fashion,
including as a result of problems with other suppliers, could give rise to
unforeseen costs or, even more importantly, result in disruptions and delays in
PMSI's business and/or corruption of the data received and compiled. If PMSI's
customers are not Year 2000 compliant, they may be unable to continue to
purchase PMSI's products and services. The materialization of any of these risks
could have a material adverse effect on the financial condition and results of
operations of PMSI.
ABOUT ENVOY
If the merger with ENVOY is completed, ENVOY will become a subsidiary of
Quintiles. For a brief description of ENVOY, see "About Quintiles -- Recent
Events" (page 73). The following are certain risk factors relating to ENVOY's
business that PMSI stockholders should consider.
ENVOY HAS A LIMITED OPERATING HISTORY AND RECENT LOSSES
The healthcare electronic data interchange, or EDI, and transaction
processing industry is relatively new and ENVOY's operating history is limited.
ENVOY was profitable during
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1998; however, it has experienced substantial losses in recent years, including
a net loss of $9.2 million for 1997 and $22.3 million for 1996. ENVOY had an
accumulated deficit of $49.1 million as of December 31, 1998. To be profitable,
ENVOY must have a successful business strategy, increase revenues, and control
expenses. ENVOY cannot assure that it will be profitable in the future.
RECENT ACQUISITIONS HAVE AFFECTED ENVOY'S RESULTS OF OPERATIONS
ENVOY recently acquired several companies and these acquisitions
significantly expanded ENVOY's business. The accounting treatment of these
acquisitions negatively impacted ENVOY's reported results of operations,
particularly the National Electronic Information Corporation, or NEIC,
acquisition in March 1996 and the Healthcare Data Interchange Corporation, or
HDIC, acquisition in August 1997. The NEIC and HDIC acquisitions are briefly
described below:
NEIC. ENVOY's cost of acquiring NEIC was $94.3 million, which includes
fees, expenses and other costs. ENVOY wrote-off acquired in-process
technology of $8.0 million. Due to the NEIC acquisition, ENVOY is
amortizing $59.6 million of goodwill over three years. This amortization
will adversely affect ENVOY's reported results of operations through March
1999.
HDIC. ENVOY's cost of acquiring HDIC was $36.4 million, plus the
assumption of certain liabilities. Prior to the acquisition of HDIC by
ENVOY, HDIC was the healthcare EDI subsidiary of Aetna U.S. Healthcare
Inc., or AUSHC. In connection with the HDIC acquisition, ENVOY and AUSHC
entered into a ten-year services agreement, in which AUSHC agreed to use
ENVOY as its single source clearinghouse and EDI network for all AUSHC
electronic healthcare transactions. ENVOY recorded approximately $45.9
million of goodwill and identifiable intangible assets. ENVOY is amortizing
$38.8 million of related goodwill over 15 years. Further, ENVOY wrote-off
acquired in-process technology of $6.0 million.
Amortization expense associated with acquisitions was approximately $29.1
million in 1998 and is expected to be $12.3 million in 1999, including $6.0
million in the three months ended March 31, 1999. If ENVOY makes additional
acquisitions, its amortization costs and write-offs of acquired-in-process
technology could increase significantly. The amounts allocated to developed
technology and in-process technology in acquisitions that are accounted for as
purchases are determined based on certain valuations. Such valuations use
estimates of future revenues, expenses, operating profit and cash flows. The
actual revenues, expenses, operating profit and cash flows related to such
acquisitions may be materially different from the estimates.
SUCCESS OF ACQUISITIONS DEPENDS ON MANY FACTORS
ENVOY seeks to acquire companies in the healthcare information business.
The success of ENVOY's acquisition of a given company depends on many factors,
including, the purchase price for the company, whether financing is available
for the acquisition and, if so, the terms of the financing, and the ability of
ENVOY's management to integrate the company into ENVOY's operations. ENVOY's
success in acquiring companies is also dependent on its ability to identify
attractive companies. Many of ENVOY's competitors are also seeking to acquire
companies, which could result in fewer companies for ENVOY to acquire, and
higher prices that ENVOY must pay for any company that it does acquire.
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ACQUISITIONS MAY ADVERSELY AFFECT OPERATIONS
If ENVOY acquires a company, it cannot assure that it will be able to
operate the acquired company profitably. The actual revenues, expenses,
operating results and cash flows related to acquisitions may be materially
different from the estimates developed prior to the acquisition. Certain past
acquisitions of companies by ENVOY have caused temporary declines in customer
service. Such declines were caused by problems, such as computer down time and
inexperienced customer service representatives, that occurred in integrating the
acquired company into ENVOY. Although ENVOY believes that these problems have
been resolved and that it has not been materially adversely affected, ENVOY may
experience similar customer service problems in the future, which could have a
material adverse effect on ENVOY.
ENVOY MAY BE ADVERSELY AFFECTED BY CUSTOMER CONCENTRATION
Primarily as a result of ENVOY's acquisition of HDIC, ENVOY has one
customer, AUSHC, that accounted for 17% of its 1998 revenues and 12% of its 1997
revenues. Before 1997, none of ENVOY's customers accounted for more than 10% of
ENVOY's revenues. When ENVOY acquired HDIC, ENVOY and AUSHC entered into a
ten-year services agreement that requires AUSHC to use ENVOY as its single
source clearinghouse and EDI network for all of AUSHC's electronic healthcare
transactions. The fees under the AUSHC services agreement have been negotiated
for the first three years. The AUSHC services agreement also requires ENVOY to
maintain minimum transaction volumes and services levels and to perform
marketing services that are designed to encourage AUSHC providers to use ENVOY's
services. If either ENVOY or AUSHC fail to comply with a material term of the
services agreement, the other party can terminate the services agreement upon
180 days' notice. ENVOY believes that it is currently complying with all
material terms of the AUSHC services agreement.
ENVOY receives medical EDI transactions from practice management system
vendors and other claims clearinghouses. These vendors and claims clearinghouses
collect transactions from healthcare providers and send ENVOY these transactions
to complete the processing of the transactions with the payors. ENVOY receives
revenue from the payors for processing these transactions and, in turn, pays
rebates to exclusive and preferred vendors based on the volume of transactions
delivered to ENVOY. If consolidation in the healthcare industry results in fewer
vendors and clearinghouses that gather medical EDI transactions from healthcare
providers, then ENVOY's medical EDI business will be more dependent on a smaller
number of vendors and clearinghouses.
To illustrate the foregoing risk, ENVOY currently processes batch
transactions for Medic Computer Systems, a practice management system vendor.
ENVOY and Medic have an exclusive relationship for processing these transactions
through June 1999. ENVOY's revenues for such processing represented 3.5% of
ENVOY's revenues for the year ended December 31, 1998. Medic recently announced
that it has entered into a processing and development agreement with one of
ENVOY's competitors. Subsequently, both ENVOY and Medic have alleged that the
other party has breached the parties' current agreement, and a lawsuit is
pending to resolve the parties' allegations. If ENVOY is not able to resolve the
parties' allegations and maintain a relationship with Medic, or other companies
like Medic, its business may be adversely affected.
As another illustration, before NEIC was acquired by ENVOY, it generated
most of its revenues from five insurance companies who were shareholders of
NEIC. These insurance
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companies have continued to use NEIC's services following ENVOY's acquisition of
NEIC, but they are not required to continue to use NEIC's services in the
future. If one or more of the insurance companies decreases or ceases its use of
NEIC's services, then ENVOY's business could be adversely affected.
YEAR 2000 COMPLIANCE
The Year 2000 issue represents problems associated with the inability of a
computer to recognize dates beyond December 31, 1999. During 1997, ENVOY started
implementing a plan to ensure that its computer systems will not be affected by
the Year 2000 issue. In 1998, ENVOY established a Year 2000 Task Force,
primarily to develop, implement and monitor ENVOY's Year 2000 compliance efforts
and to review that of its customers. In addition, ENVOY engaged a consulting
firm to provide an independent review of ENVOY's Year 2000 compliance efforts
and to assist the Year 2000 Task Force. Some of ENVOY's computer systems are
already able to process dates beyond December 31, 1999, and ENVOY is replacing
or upgrading the remaining systems. ENVOY also has started testing customers,
vendors, suppliers and other third parties to determine whether their computers
will be affected by the Year 2000 issue, and currently expects to complete
testing in June 1999.
ENVOY's total cost for assessing and curing Year 2000 problems is estimated
at $3.0 to $4.0 million, but ENVOY cannot assure that such costs will not be
higher. For example, ENVOY has not yet estimated the Year 2000 costs for periods
after 1999, which may include costs of customer service efforts resulting from
the failure of third parties to be Year 2000 compliant or other problems.
Factors which could impact these estimates include: the availability of
appropriate technology personnel, the rate and magnitude of related labor costs,
the successful identification of all aspects of ENVOY's systems, software and
products that require remediation or replacement, the extent of testing
required, the costs of ENVOY's efforts to assist certain customers in the
remediation of their customized codes, the amount of cost recoveries from such
efforts and the success of third parties in their Year 2000 compliance efforts.
ENVOY is funding these costs with operating cash flows, and will expense costs
as they are incurred. If ENVOY, its customers or other third parties with whom
it does business fail to cure their Year 2000 problems, ENVOY could be adversely
affected.
ENVOY RELIES ON SPECIFIC DATA CENTERS
ENVOY relies on its host computer system to perform real-time EDI
transaction processing. This host computer system is contained in a single data
facility. The host computer system does not have a remote backup data center.
Although the host computer system is insured, if there is a fire or other
disaster at the data facility, ENVOY's business could be materially adversely
affected.
ENVOY also relies on a data center operated by a third party to perform
many of its other healthcare EDI transaction processing services. The facility
is located in Tampa, Florida and is operated by GTE Data Services Incorporated,
with whom ENVOY has contracted for such processing services. ENVOY relies
primarily on this facility to process its batch claims and other medical EDI
transaction sets. ENVOY's contract with GTE requires GTE to maintain continuous
processing capability and a "hot site" disaster recovery system. This contract
expires in December 2003. If the GTE facility's services are disrupted or
delayed, ENVOY's business could be materially adversely affected.
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ENVOY CANNOT PREDICT THE NEED FOR INDEPENDENT HEALTHCARE EDI PROCESSING
ENVOY's business strategy anticipates that providers of healthcare services
and payors will increase their use of electronic processing of healthcare
transactions in the future. The development of the business of electronically
transmitting healthcare transactions is affected, and somewhat hindered, by the
complex nature and types of transactions that must be processed. Furthermore,
while the wide variety of processing forms used by different payors has fostered
the need for healthcare EDI and transaction processing clearinghouses such as
ENVOY to date, if such forms become standardized, through consolidation of
payors or otherwise, then the need for independent third party healthcare EDI
processing could become less prevalent. ENVOY cannot assure that the electronic
processing of healthcare transactions will increase or that its business will
grow.
ENVOY FACES A VARIETY OF COMPETITORS
ENVOY faces different types of competition in the healthcare EDI and
transaction processing business. Some of its competitors are similarly
specialized, such as former regional partners of ENVOY that have direct provider
relationships, and others are involved in more highly developed areas of the
business. In addition, some vendors of provider information management systems
include or may include, in their offered products, their own electronic
transaction processing systems. If electronic transaction processing becomes the
standard method of processing healthcare claims and information, other companies
with stronger capital resources could enter the industry. Many of ENVOY's
current and potential competitors are larger than ENVOY and have greater
resources. Competition from any or all of these sources could force ENVOY to
reduce, or even eliminate, per transaction fees, which could adversely affect
its business.
DIRECT LINKS MAY BYPASS NEED FOR ENVOY'S SERVICES
Some third party payors provide electronic data transmission systems to
healthcare providers, thereby directly linking the payor to the provider. Such
direct links bypass third party processors such as ENVOY. An increase in the use
of direct links between payors and providers would materially adversely affect
ENVOY's business.
ENVOY FACES AN UNCERTAIN REGULATORY ENVIRONMENT
The operations of companies in the healthcare industry are affected by
changes in political, economic and regulatory influences. Federal and state
legislatures periodically consider legislation that would change the federal and
state healthcare programs. Such legislation may include increased government
involvement in healthcare, lower reimbursement rates, or other changes. The
uncertainty surrounding these proposed or actual changes could cause companies
in the healthcare industry to curtail or defer investments in ENVOY's services
and products.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY MAY ADVERSELY AFFECT ENVOY'S BUSINESS
Many healthcare providers and payors are consolidating to create larger
healthcare organizations. This consolidation reduces the number of potential
customers for ENVOY's services, and the increased bargaining power of these
organizations could lead to reductions in the amounts paid for ENVOY's services.
Industry developments are increasing the amount of capitation-based care and
reducing the need for providers to make claims or reimbursements for products or
services. Payors and other healthcare information companies, such as
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billing services and practice management vendors, which currently utilize
ENVOY's services, have developed or acquired transaction processing and
networking capabilities and may cease utilizing ENVOY's services in the future.
The impact of these developments in the healthcare EDI and transaction
processing industry is difficult to predict and could materially adversely
affect ENVOY's business.
NEW HEALTHCARE LEGISLATION COULD RESTRICT ENVOY'S BUSINESS
The Health Insurance Portability and Accountability Act of 1996 requires
the use of standard transactions, standard identifiers, security and other
provisions and instructs the Secretary of Health and Human Services to develop
recommendations regarding the privacy of individually identifiable health
information. On September 11, 1997, the Secretary presented her recommendations,
which, among other things, advise that patient information should not be
disclosed except when authorized by the patient. This Act further establishes an
August 1999 deadline for Congress to enact privacy legislation. If Congress does
not meet this deadline, the Secretary is directed to issue regulations setting
privacy standards to protect information that is transmitted electronically.
Such changes could occur as early as the year 2000 and their impact cannot be
predicted, but such legislation or regulations could materially affect ENVOY's
business. This Act also specifically names clearinghouses as the compliance
facilitators for providers and payors, and permits clearinghouses to convert
non-standard transactions to standard transactions on behalf of their clients.
ENVOY is preparing to comply with the mandated standards within three to six
months after they are published. Whether ENVOY is successful in complying with
these standards may depend on whether providers, payors and others are also
successful in complying with the standards.
In addition, broad-based legislation restricting third party processors
from using, transmitting or disclosing certain patient data without specific
patient consent has recently been introduced in the United States Congress. If
this legislation is adopted, it could prevent third party processors from using,
transmitting or disclosing certain treatment and clinical data. It is difficult
to predict the impact of the legislation described above, but such legislation
could materially adversely affect ENVOY's business.
ENVOY FACES EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES
The market for ENVOY's business is characterized by rapidly changing
technology, evolving industry standards and frequent introduction of new and
enhanced products and services. To succeed, ENVOY must continue to:
- enhance its existing products and services;
- introduce new products and services on a timely and cost-effective basis
to meet evolving customer requirements;
- achieve market acceptance for new products and services; and
- respond to emerging industry standards and other technological changes.
PROTECTING ENVOY'S TECHNOLOGY IS IMPORTANT TO ITS SUCCESS
ENVOY believes that its technology is important to its success and
competitive position. Accordingly, ENVOY devotes substantial resources to the
establishment and protection of the intellectual property rights associated with
its technology. These actions, however, may be inadequate to prevent a third
party from imitating or using ENVOY's technology or asserting certain rights in
ENVOY's technology and intellectual property rights. Additionally, ENVOY's
competitors may independently develop technologies that are substantially
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equivalent or superior to ENVOY's technology. Although ENVOY is currently not
aware of any pending or threatened infringement claims, a third party also may
claim that ENVOY's products and services are infringing on its intellectual
property rights. Such claims could require ENVOY to enter into license
arrangements in order to use such products and services. ENVOY may not be able
to obtain such licenses.
Furthermore, litigation may be necessary to enforce or defend ENVOY's
intellectual property rights or defend against any infringement claims. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on ENVOY's business and financial results.
ENVOY INCREASINGLY DEPENDS ON MEDICAL EDI AND PATIENT STATEMENT TRANSACTION
REVENUES
ENVOY's medical EDI and patient statement transaction revenues constituted
approximately 75% of ENVOY's total revenues in 1998. Although pharmacy EDI
transactions currently represent a majority of ENVOY's total transactions,
pharmacy EDI revenue constituted less than 15% of ENVOY's total revenues in 1998
as a result of lower per transaction prices on pharmacy transactions. In 1998,
the number of transactions processed in ENVOY's pharmacy EDI business grew at
approximately half the rate experienced in ENVOY's other businesses. Because of
the significant penetration and lower per transaction prices already existing in
the more mature pharmacy EDI sector, ENVOY believes that the percentage of total
revenue contributed by its pharmacy EDI business as presently conducted will
continue to decrease. Accordingly, ENVOY will have an increasing dependence on
medical EDI and patient statement transaction revenues. Any decline in growth
rates associated with these businesses could have a material adverse effect on
ENVOY's business and financial results.
ENVOY DEPENDS ON KEY EXECUTIVES
ENVOY's success depends upon the continued contributions of its senior
management and upon its ability to attract, motivate and retain highly skilled
technical, managerial and marketing personnel. The loss of the services of
certain of ENVOY's key executives or technical personnel, or the inability to
hire and retain qualified personnel could have a material adverse effect upon
ENVOY's business and financial results.
ENVOY FACES RISKS CONCERNING UNAUTHORIZED ACCESS TO DATA CENTERS
Unauthorized access to ENVOY's data centers and misappropriation of ENVOY's
proprietary information could have a material adverse effect on ENVOY's business
and financial results. While ENVOY believes its current security measures and
the security measures used by third parties for whom ENVOY processes or
transmits healthcare information are adequate, such unauthorized access or
misappropriation could occur.
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SPECIAL MEETING OF PMSI STOCKHOLDERS
DATE, TIME AND PLACE
The special meeting of PMSI stockholders will be held at 11:00 a.m., local
time, on Monday, March 29, 1999, at The Lotos Club, 5 East 66(th) Street, New
York, New York.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, holders of PMSI common stock will be asked to
consider and vote upon the approval and adoption of the merger agreement by and
among Quintiles, QTRN Acquisition Corp. and PMSI (the "Merger Agreement") with
respect to the merger (the "Merger") of PMSI into QTRN Acquisition Corp., and
such other matters as may properly be brought before the special meeting.
THE PMSI BOARD OF DIRECTORS (THE "PMSI BOARD"), BY UNANIMOUS VOTE OF ALL
DIRECTORS, HAS APPROVED THE MERGER AGREEMENT, THE STOCK OPTION AGREEMENT
BETWEEN QUINTILES AND PMSI (THE "STOCK OPTION AGREEMENT") AND THE
TRANSACTIONS CONTEMPLATED THEREBY, AND RECOMMENDS A VOTE FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
VOTE REQUIRED
The approval and adoption of the Merger Agreement will require the
affirmative vote of the holders of record of a majority of the shares of PMSI
common stock outstanding on February 5, 1999 (the "Record Date").
Holders of record of PMSI common stock as of the Record Date are each
entitled to one vote per share on each matter to be considered at the special
meeting.
As of the Record Date, directors and executive officers of PMSI and their
affiliates beneficially owned and were entitled to vote 744,302 shares of PMSI
common stock (including vested options and options that will vest within 60
days), which represented 6% of the shares of PMSI common stock outstanding on
the Record Date. Each PMSI director and executive officer intends to vote his or
her shares of PMSI common stock for approval and adoption of the Merger
Agreement. See "The Merger -- Interests of Certain Persons in the Merger."
VOTING OF PROXIES
Shares represented by all properly executed proxies received in time for
the special meeting will be voted at the special meeting in the manner specified
by the holders thereof. Properly executed proxies that do not contain voting
instructions will be voted in favor of the Merger Agreement.
PMSI intends to count shares of PMSI common stock present in person at the
special meeting but not voting, and shares of PMSI common stock for which
proxies have been received but with respect to which holders of such shares have
abstained on any matter, as present at the special meeting for purposes of
determining the presence or absence of a quorum for the transaction of business.
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For voting purposes at the special meeting, only shares affirmatively voted
in favor of approval and adoption of the Merger Agreement will be counted as
favorable votes for such approval and adoption. The failure to submit a proxy
(or to vote in person) or the abstention from voting with respect to such
approval and adoption will have the same effect as a vote against approval and
adoption of the Merger Agreement. Absent specific instructions from a PMSI
stockholder, brokers holding shares of PMSI common stock of record are not
permitted to vote those shares on the proposal for the adoption of the Merger
Agreement. Consequently, broker nonvotes will also have the same effect as a
vote against the Merger Agreement
PMSI does not expect that any matter other than the proposal described in
this Proxy Statement/Prospectus will be brought before the special meeting. If,
however, other matters are properly presented for a vote, the persons named as
proxies will vote in accordance with their judgment with respect to those
matters.
The persons named as proxies by a PMSI stockholder may propose and vote for
one or more adjournments of the special meeting to permit further solicitations
of proxies in favor of approval and adoption of the Merger Agreement. No proxy
which is voted against approval and adoption of the Merger Agreement will be
voted in favor of any such adjournment.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form does not preclude a stockholder
from voting in person. A stockholder may revoke a proxy at any time prior to its
exercise by filing with the Secretary of PMSI a duly executed revocation of
proxy, by submitting a duly executed proxy bearing a later date or by appearing
at the special meeting and voting in person. Attendance at the special meeting
without voting will not, in and of itself, constitute revocation of a proxy.
Any such filing by a PMSI stockholder should be sent to the Secretary of
PMSI at Pharmaceutical Marketing Services Inc., 45 Rockefeller Plaza, Suite 912,
New York, New York 10111.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of record of PMSI common stock on the Record Date will be
entitled to notice of, and to vote at, the special meeting. On the Record Date,
12,445,221 shares of PMSI common stock were issued and outstanding and held by
approximately 715 holders of record.
A majority of the shares of PMSI common stock outstanding on the Record
Date must be represented in person or by proxy at the special meeting in order
for a quorum to be present for purposes of voting on approval and adoption of
the Merger Agreement.
SOLICITATION OF PROXIES
PMSI will bear the cost of the solicitation of proxies from its
stockholders, except that Quintiles and PMSI will share equally the cost of
filing, printing and distributing the Registration Statement on Form S-4 (of
which this Proxy Statement/Prospectus is a part) (the "Registration Statement")
and this Proxy Statement/Prospectus.
In addition to solicitation by mail, the directors, officers and employees
of PMSI may solicit proxies from stockholders of PMSI by telephone or telegram
or by other means of
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communication. These persons will not receive additional compensation, but they
may be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation.
PMSI also will make arrangements with brokerage houses and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of stock held of record by such persons, and PMSI will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection with this service.
W.F. Doring & Co. Inc. will assist in PMSI's solicitation of proxies for a
fee not to exceed $5,000, plus reasonable out-of-pocket costs and expenses.
PMSI STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS. IF THE MERGER AGREEMENT IS APPROVED AND ADOPTED BY PMSI'S
STOCKHOLDERS AND THE MERGER IS CONSUMMATED, THE EXCHANGE AGENT (AS
DEFINED BELOW) WILL SEND TRANSMITTAL FORMS AND INSTRUCTIONS FOR THE
EXCHANGE OF SHARES OF PMSI COMMON STOCK.
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THE MERGER
BACKGROUND OF THE MERGER
On December 15, 1997, PMSI completed a series of related transactions (the
"NDC Transactions") with National Data Corporation ("NDC") and Source
Informatics Inc. ("Source") pursuant to which PMSI (1) sold its over-the-counter
business (the "OTC Business") and its interest in a joint venture in the United
States with Source ("Source US") and (2) acquired Source's interest in the joint
venture in Europe ("Source Europe"), cash, shares of PMSI common stock and
approximately 1.1 million shares of NDC common stock. See "About PMSI."
In March 1998, PMSI had entered into a merger agreement with Cognizant
Corporation ("Cognizant") that provided for the merger of PMSI into a subsidiary
of Cognizant in return for which stockholders of PMSI would receive shares of
Cognizant (or, if the merger were to be consummated after the completion of a
planned spin-off by Cognizant of IMS Health Incorporated ("IMS"), then a
division of Cognizant, essentially equivalent shares of both Cognizant and IMS).
In early August 1998, due to regulatory issues raised by the FTC and the
Department of Justice, PMSI, Cognizant and IMS decided to terminate the merger
agreement in favor of a more limited transaction (the "IMS Transaction") in
which PMSI sold its non-US operations (including Source Europe, which it had
acquired from Source in the NDC Transactions) to IMS and received an aggregate
1,197,963 shares of IMS common stock.
As a result of both the IMS Transaction and the NDC Transactions, PMSI
holds substantial cash and investment securities which it intended to monetize
as market conditions permitted. The PMSI Board determined to attempt to find a
favorable method of transferring these assets or equivalent value to the PMSI
stockholders in a tax effective manner.
Immediately after consummation of the IMS Transaction, PMSI received a
number of unsolicited inquiries from potential acquirors. The PMSI Board then
decided to contact certain additional potential acquirors to assess the interest
of third parties in the possible purchase of PMSI. Approximately ten additional
companies were contacted, including Quintiles.
In mid-August 1998, PMSI entered into discussions with one of the companies
that had initially contacted PMSI. That third party indicated an interest in
acquiring for cash just the operating assets of PMSI (i.e., Scott-Levin). In
late August 1998, the third party made an all cash offer to the PMSI Board for
the Scott-Levin business.
After being advised by the PMSI Board that such a transaction would not
achieve the goal of transferring the value of PMSI's non-operating assets into
the hands of PMSI stockholders, the third party commenced discussions regarding
the acquisition of the entire PMSI business.
In mid-September 1998, Dennis Gillings, Chairman of the Board and Chief
Executive Officer of Quintiles, met with Dennis Turner, Chairman and Chief
Executive Officer of PMSI, to discuss various possible collaborations, including
the possibility of acquiring PMSI through a stock merger. Also in mid-September
1998, the third party made an all cash offer for the entire PMSI business.
On September 21, 1998, the PMSI Board met to consider the various business
combinations and other alternatives available to PMSI including declaring a
dividend of the
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cash and investment securities held by PMSI and initiating a stock repurchase
program. The PMSI Board determined that neither of the latter two alternatives
would result in PMSI stockholders receiving as much value for their PMSI common
stock as the transactions under discussion with Quintiles and the other third
party. Accordingly, the PMSI Board requested management of both Quintiles and
the other third party to submit offers by a specified date in late September.
In late September, in response to the PMSI request, Quintiles made an
all-stock offer for PMSI and the third party increased its cash offer for PMSI.
On October 1, 1998, PMSI signed an engagement letter with SG Cowen to act
as exclusive financial advisor in connection with a possible transaction with
Quintiles. On October 2, 1998, after reviewing an all-stock proposal from
Quintiles and the all-cash proposal from the other third party, the PMSI Board
decided to pursue the all cash proposal and advised Quintiles of this decision.
On October 6, 1998, Quintiles advised PMSI that it was prepared to increase its
stock offer for PMSI common stock. On October 12, 1998, Quintiles delivered to
PMSI a letter of intent to acquire (subject to contract) all the outstanding
shares of PMSI common stock in return for one of three alternative forms of per
share consideration. Final valuation of the transaction was subject to
completion of due diligence. The letter of intent included an agreement, through
November 12, 1998, of PMSI to deal exclusively with Quintiles in connection with
the acquisition of PMSI. The PMSI Board authorized negotiations with Quintiles
and Quintiles and PMSI began their respective due diligence reviews. The
negotiations included discussions regarding:
- various means of assuring PMSI stockholders at least a minimum value for
their shares;
- the proposed exchange ratios, and related minimum and maximum thresholds,
given possible fluctuations in the price of Quintiles common stock;
- the scope of representations and warranties to be made by the parties;
- conditions to consummation of a merger, including third party consents;
- possible post-merger consultancy and/or employment arrangements with
certain key employees of PMSI and Scott-Levin;
- treatment of PMSI options; and
- the disposal or monetization of certain assets.
In late October, management representatives of PMSI and Quintiles met a
number of times to discuss deal terms and structure and related issues.
On October 23, 1998, the Quintiles board of directors (the "Quintiles
Board") met to discuss the possibility of a business combination with PMSI.
On November 5, 1998, the PMSI Board met to consider the status of
negotiations with Quintiles including certain conditions to consummating a
merger. The PMSI Board authorized Mr. Turner to continue negotiations and to
work with Quintiles to resolve the outstanding conditions.
On November 5, 1998, the Quintiles Board met to review the status of
negotiations and the terms of the proposed transaction. Throughout November,
management of Quintiles and PMSI worked to resolve business issues.
On December 9, 1998, following approval of the transaction (subject to
certain contingencies) by the Quintiles Board, Quintiles communicated its offer
valued at $15.40 per share of PMSI common stock in exchange for Quintiles common
stock and contingent value
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payments. After receiving the opinion of SG Cowen as to the fairness of the
consideration, the PMSI Board, on December 14, 1998, unanimously approved the
Merger and the Merger Agreement, which was then executed.
On December 16, 1998, Quintiles announced that it had entered into the
agreement with ENVOY to acquire ENVOY. The PMSI Board then requested SG Cowen to
render an opinion regarding the fairness of the consideration to be received in
the Merger by PMSI stockholders in light of the possibility of consummation of
the ENVOY transaction. On February 17, 1999, the PMSI Board received SG Cowen's
opinion of that date, and the PMSI Board again unanimously approved the Merger
and recommended approval of the Merger by the stockholders of PMSI.
PMSI REASONS FOR THE MERGER AND RECOMMENDATION OF PMSI BOARD OF DIRECTORS
The PMSI Board unanimously approved the terms and provisions of the Merger
Agreement, the Stock Option Agreement and the transactions contemplated thereby,
including the Merger, at a meeting held on December 14, 1998. In evaluating the
Merger Agreement and the Stock Option Agreement and arriving at its approval,
the PMSI Board considered a number of factors, including the factors described
below:
1. Since May 1996, PMSI had attempted to create additional stockholder
value by divesting its non-core communications businesses and its minority
position in the Source US joint venture, and acquiring and then selling the
Source Europe prescription database business. While these actions have
focused PMSI as a healthcare information company, they had not yet resulted
in significantly increased stockholder value for a sustained period of time
(PMSI common stock has only traded above its initial public offering price
of $14.00 for brief periods during the two-year period preceding the
execution of the Merger Agreement).
2. After the IMS Transaction, the goal of the PMSI Board was to transfer
the value of PMSI's substantial non-operating assets to its stockholders.
The receipt of unsolicited offers to acquire PMSI's remaining operating
assets led to a search for a merger partner as a means of transferring that
value to PMSI stockholders. The PMSI Board believes that the Per Share
Merger Consideration not only achieves this goal but places a premium
valuation on PMSI common stock.
3. The Merger will provide PMSI stockholders with the opportunity to
have a continuing equity participation in a larger, more diversified
enterprise (a) that operates in the same general business area as PMSI and
that additionally would avail itself of potential synergies arising from
the Merger, (b) that has an equity value that is considerably larger than
PMSI's current equity value and (c) the common stock of which, on a
comparative basis and based on historical results, appears to offer
significantly greater liquidity and has consistently performed well in the
market since Quintiles' initial public offering in April 1994. Moreover,
the PMSI Board considered that the contingent value payments allow
stockholders of PMSI to realize a guaranteed premium over the recent market
price of PMSI common stock on a portion of their shares of PMSI common
stock.
4. The PMSI Board believes that the post-Merger combined business will
provide greater opportunity for the development and commercial exploitation
of PMSI's products and services.
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5. The PMSI Board also considered the results of PMSI's due diligence
review with respect to Quintiles' operations and financial results and SG
Cowen's oral opinion, delivered December 14, 1998, confirmed in writing as
of December 14, 1998, that, as of the date of the Merger Agreement, the
consideration to be received is fair, from a financial point of view, to
the stockholders of PMSI (other than Quintiles and its affiliates).
You should be aware that Dennis Turner, a director and the Chief Executive
Officer of PMSI, and certain other executives of PMSI and Scott-Levin have
interests in the Merger that are in addition to those of stockholders of PMSI
generally. See "The Merger -- Interests of Certain Persons in the Merger."
None of the foregoing factors or group of factors had particular prominence
in the decision of the PMSI Board to approve the Merger Agreement, the Merger,
the Stock Option Agreement and the other transactions contemplated thereby and
none was assigned any specific or relative weight.
FOR THE REASONS STATED ABOVE, THE PMSI BOARD HAS DETERMINED THAT THE
TERMS OF THE MERGER AGREEMENT, THE STOCK OPTION AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, ARE FAIR TO AND
IN THE BEST INTERESTS OF THE STOCKHOLDERS OF PMSI. THE PMSI BOARD, BY
UNANIMOUS VOTE, HAS APPROVED THE MERGER AGREEMENT AND THE STOCK OPTION
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT
PMSI'S STOCKHOLDERS APPROVE AND ADOPT THE MERGER AGREEMENT.
QUINTILES REASONS FOR THE MERGER
The Quintiles Board believes that the Merger is in the best interests of
Quintiles and its shareholders and unanimously approved the Merger Agreement and
the Merger. In reaching this determination, the Quintiles Board considered a
number of factors, including, among others:
- information pertaining to Quintiles' and PMSI's respective businesses,
prospects, historical and projected financial performances, financial
conditions and operations;
- analyses of the respective projected contributions to net revenue,
operating profit and net income of each company;
- reports from management on Quintiles' due diligence investigation of
PMSI; and
- the business, reputation and capabilities of the management of PMSI, as
well as the comparability of the management teams and corporate cultures
of Quintiles and PMSI.
In its deliberations concerning the Merger, the Quintiles Board also
considered various additional risks and uncertainties, including:
- the historical financial performance of PMSI;
- the risk that the public market price of Quintiles common stock might be
adversely affected by the announcement of completion of the Merger;
- the risk that the combined company might not achieve revenue equal to the
sum of the separate companies' anticipated revenues;
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- the risk that Quintiles will not be able to obtain the other benefits
Quintiles seeks from the Merger;
- the cost of the integration of PMSI into Quintiles and its impact on the
results of the combined company after the Merger; and
- other risks described under "Risk Factors You Should Consider" above.
The foregoing discussion of the information and factors considered and
given weight by the Quintiles Board is not intended to be exhaustive. In
reaching the determination to approve the Merger Agreement, in view of the wide
variety of factors considered in connection with its evaluation thereof, the
Quintiles Board did not assign any relative or specific weights to the foregoing
or other factors, and individual directors may have given different weights to
the various factors. The terms of the Merger were the result of arm's-length
negotiations between representatives of PMSI and representatives of Quintiles.
Based upon the consideration of the foregoing factors, the Quintiles Board
unanimously approved the Merger Agreement and the transactions contemplated
thereby as being in the best interest of Quintiles and its shareholders.
OPINION OF PMSI FINANCIAL ADVISORS
Pursuant to an engagement letter dated October 1, 1998, as amended on
February 12, 1999 (the "SG Cowen Engagement Letter"), PMSI retained SG Cowen to
serve as financial advisor to the PMSI Board with respect to the Merger. As part
of this assignment, SG Cowen was asked to render an opinion to the PMSI Board as
to the fairness, from a financial point of view, to the stockholders of PMSI of
the Per Share Merger Consideration to be received by such holders (other than
Quintiles and ENVOY and their affiliates) pursuant to the terms of the Merger
Agreement. SG Cowen rendered an opinion to the PMSI Board dated December 14,
1998 that as of such date, the Per Share Merger Consideration was fair from a
financial point of view to such holders (other than Quintiles and its
affiliates). The PMSI Board requested another opinion in light of the
announcement by Quintiles on December 16, 1998 that it had entered into an
agreement to acquire ENVOY.
On February 17, 1999, SG Cowen delivered certain of its written analyses
and its oral opinion to the PMSI Board, subsequently confirmed in writing as of
the same date, to the effect that, and subject to the various assumptions set
forth therein, as of February 17, 1999, the Per Share Merger Consideration was
fair from a financial point of view, to such holders (other than Quintiles and
ENVOY and their affiliates). THE FULL TEXT OF THE WRITTEN OPINION OF SG COWEN,
DATED FEBRUARY 17, 1999, IS ATTACHED HERETO AS APPENDIX D AND IS INCORPORATED BY
REFERENCE HEREIN. HOLDERS OF PMSI COMMON STOCK ARE URGED TO READ THE OPINION IN
ITS ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS
CONSIDERED AND LIMITS OF THE REVIEW BY SG COWEN. THE SUMMARY OF THE WRITTEN
OPINION OF SG COWEN SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF SUCH OPINION. SG COWEN'S ANALYSES AND OPINION WERE PREPARED
FOR AND ADDRESSED TO THE PMSI BOARD AND ARE DIRECTED ONLY TO THE FAIRNESS, FROM
A FINANCIAL POINT OF VIEW, OF THE PER SHARE MERGER CONSIDERATION AND DO NOT
CONSTITUTE AN OPINION AS TO THE MERITS OF THE MERGER OR A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW TO VOTE ON THE PROPOSED MERGER. THE PER SHARE MERGER
CONSIDERATION WAS DETERMINED THROUGH NEGOTIATIONS BETWEEN PMSI AND QUINTILES AND
NOT PURSUANT TO RECOMMENDATIONS OF SG COWEN.
In arriving at its opinion, SG Cowen has reviewed and considered such
financial and other matters as it deemed relevant, including, among other
things: (i) the Merger Agree-
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ment, dated December 14, 1998; (ii) certain publicly available information for
PMSI and Quintiles, including (a) each of the annual reports of PMSI and
Quintiles filed on Form 10-K for each of the years ended June 30, 1998, 1997 and
1996 for PMSI and the years ended December 31, 1997, 1996 and 1995 for
Quintiles; (b) each of the quarterly reports of PMSI and Quintiles filed on Form
10-Q for each of the quarters ended September 30, 1998 and 1997; (c) the current
report of Quintiles filed on Form 8-K on January 27, 1999 in connection with the
proposed acquisitions of PMSI and ENVOY, as amended by Form 8-K/A filed on
February 17, 1999; (d) the current report of Quintiles filed on Form 8-K on
February 17, 1999 in connection with the historical financial information of
each of PMSI and ENVOY; (e) the Agreement and Plan of Merger, dated as of
December 15, 1998, among Quintiles, QELS Corp. and ENVOY ("ENVOY Agreement");
(f) a press release dated January 26, 1999 reporting financial results for
Quintiles for the fiscal year ended December 31, 1998; and (g) a press release
dated February 10, 1999 reporting financial results for ENVOY for the fiscal
year ended December 31, 1998; (iii) certain internal financial analyses,
financial forecasts, reports and other information concerning PMSI, Quintiles
and ENVOY prepared by the management of PMSI, Quintiles and ENVOY, respectively;
(iv) discussions SG Cowen has had with certain members of the management of each
of PMSI, Quintiles and ENVOY concerning the historical and current business
operations, financial condition and prospects of PMSI, Quintiles and ENVOY and
such other matters SG Cowen deemed relevant; (v) the reported price and trading
histories of the shares of the common stock of PMSI and Quintiles as compared to
the reported price and trading histories of certain publicly traded companies SG
Cowen deemed relevant; (vi) the respective financial condition of PMSI and
Quintiles as compared to the financial condition of certain other companies SG
Cowen deemed relevant; (vii) certain financial terms of the Merger as compared
to the financial terms of selected other business combinations SG Cowen deemed
relevant; and (viii) such other information, financial studies, analyses and
investigations and such other factors that SG Cowen deemed relevant for the
purposes of its opinion.
In conducting SG Cowen's review and arriving at its opinion, SG Cowen has,
with PMSI's consent, assumed and relied, without independent investigation, upon
the accuracy and completeness of all financial and other information provided to
SG Cowen by PMSI, Quintiles and ENVOY, respectively, or which is publicly
available, and SG Cowen has not undertaken any responsibility for the accuracy,
completeness or reasonableness of, or independently to verify, such information,
including assumptions with respect to reserves in connection with any pending
litigation. In addition, SG Cowen has not conducted any physical inspection of
the properties or facilities of PMSI, Quintiles or ENVOY. SG Cowen has further
relied upon the assurance of management of PMSI that they are unaware of any
facts that would make the information provided to SG Cowen incomplete or
misleading in any respect. SG Cowen has, with PMSI's consent, assumed that the
financial forecasts which SG Cowen examined were reasonably prepared by the
respective management of PMSI, Quintiles and ENVOY on bases reflecting the best
currently available estimates and good faith judgments of such management as to
the future performance of PMSI, Quintiles and ENVOY, respectively. With PMSI's
permission, SG Cowen has assumed that the ENVOY Transaction will be accounted
for as a pooling-of-interests. SG Cowen has not made or obtained any independent
evaluations, valuations or appraisals of the assets or liabilities of PMSI,
Quintiles or ENVOY, nor has SG Cowen been furnished with such materials. With
respect to all legal matters relating to PMSI and the Merger, SG Cowen has
relied on the advice of legal counsel to PMSI. SG Cowen expresses no opinion
with respect to any legal matter, including, without limitation, those affecting
Quintiles, the Merger, ENVOY or the ENVOY Transaction.
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SG Cowen's opinion is necessarily based on economic and market conditions
and other circumstances as they exist and can be evaluated by SG Cowen as of the
date thereof. It should be understood that, although subsequent developments may
affect SG Cowen's opinion, SG Cowen does not have any obligation to update,
revise or reaffirm its opinion and SG Cowen expressly disclaims any
responsibility to do so. SG Cowen's opinion does not constitute a recommendation
to any stockholder as to how such stockholder should vote with respect to the
proposed Merger or to take any other action in connection with the Merger or
otherwise. SG Cowen's opinion does not imply any conclusion as to the likely
trading range for Quintiles Common Stock following consummation of the Merger or
otherwise, which may vary depending on numerous factors that generally influence
the price of securities. SG Cowen's opinion is limited to the fairness to the
stockholders of PMSI, from a financial point of view, of the Per Share Merger
Consideration. SG Cowen expresses no opinion with respect to the underlying
business reasons that may support the decision of the PMSI Board to approve, or
PMSI's decision to consummate, the Merger.
For purposes of rendering its opinion, SG Cowen assumed in all respects
material to its analysis, that the representations and warranties of each party
contained in the Merger Agreement and the ENVOY Agreement are true and correct,
that each party will perform all of the covenants and agreements required to be
performed by it under the Merger Agreement and the ENVOY Agreement and that all
conditions to the consummation of the Merger and the ENVOY Transaction will be
satisfied without waiver thereof. SG Cowen has also assumed that all
governmental, regulatory and other consents and approvals contemplated by the
Merger Agreement and the ENVOY Agreement will be obtained and that in the course
of obtaining any of those consents no restrictions will be imposed or waivers
made that would have an adverse effect on the contemplated benefits of the
Merger or the ENVOY Transaction, as the case may be. SG Cowen has also assumed,
with the PMSI Board's permission, that both the Merger and ENVOY Transaction
will be treated as tax-free reorganizations under Section 368(a) of the Internal
Revenue Code of 1986, as amended.
The following is a summary of the principal financial analyses performed by
SG Cowen to arrive at its opinion. Since the receipt of the contingent value
payment is at the option of each stockholder of PMSI, SG Cowen did not make or
obtain any independent valuation or appraisal of the contingent value payment.
SG Cowen expresses no opinion with respect to the fairness to the stockholders
of PMSI from a financial point of view of the contingent value payment. SG Cowen
performed certain procedures, including each of the financial analyses described
below, and reviewed with the management of PMSI the assumptions on which such
analyses were based and other factors, including the historical and projected
financial results of PMSI, Quintiles and ENVOY. No limitations were imposed by
the PMSI Board with respect to the investigations made or procedures followed by
SG Cowen in rendering its opinion.
ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES. To provide contextual data
and comparative market information, SG Cowen compared selected historical
operating and financial data and ratios for PMSI to the corresponding financial
data and ratios of certain other (a) large capitalization health care
information systems and services companies (the "Selected Large Cap HCIS
Companies"); (b) small capitalization health care information systems and
services companies (the "Selected Small Cap HCIS Companies"); and (c) contract
research organizations and contract marketing organizations companies
(collectively, the "Selected CRO/CMO Companies") which SG Cowen deemed
comparable to PMSI. The Selected Large Cap HCIS Companies included: Cerner
Corporation; Eclipsys Corporation; First Consulting Group, Inc.; IDX Systems
Corporation; IMS Health Incorpo-
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rated; Medical Manager Corporation: MedQuist Inc.; National Data Corporation;
QuadraMed Corporation; Shared Medical Systems Corporation and Superior
Consultant Holdings Corporation. The Selected Small Cap HCIS Companies included:
DAOU Systems, Inc.; HCIA Inc.; Health Systems Design Corporation; Healthcare
Recoveries, Inc.; Health Management Systems, Inc.; LanVision Systems, Inc.;
MECON, Inc.; Medirisk, Inc.; Mediware Information Systems, Inc.; Oacis
Healthcare Holdings Corp.; Patient Infosystems, Inc. and Sunquest Information
Systems, Inc. Collectively, the Selected Large Cap HCIS Companies and the
Selected Small Cap HCIS Companies are the Selected HCIS Companies ("Selected
HCIS Companies"). The Selected CRO/CMO Companies included: Applied Analytical
Industries, Inc.; Boron, LePore & Associates, Inc.; Covance Inc.; Dendrite
International, Inc.; Healthworld Corporation; ICON Public Limited Company;
Kendle International Inc.; PAREXEL International, Inc.; Pharmaceutical Product
Development, Inc.; Premier Research Worldwide, Ltd.; Professional Detailing,
Inc.; and Snyder Communications, Inc. Such data and ratios include the market
capitalization of common stock plus total debt less cash and equivalents
("Enterprise Value") of such Selected HCIS Companies and Selected CRO/CMO
Companies as multiples of (i) revenues, earnings before interest expense, income
taxes, depreciation, and amortization ("EBITDA") and earnings before interest
expense and income taxes ("EBIT") for the latest reported twelve month ("LTM")
period; (ii) revenues and EBIT for the estimated 1998 calendar year; and (iii)
revenues and EBIT for the estimated 1999 calendar year. SG Cowen also examined
the ratios of the current prices of the Selected HCIS Companies and the Selected
CRO/CMO Companies to the LTM earnings per share ("EPS"), estimated 1998 calendar
year EPS (as estimated by First Call) and estimated 1999 calendar year EPS (as
estimated by First Call) for these companies.
Such analysis indicated that, for the Selected HCIS Companies, (i) the
median values of Enterprise Value as a multiple of (a) LTM revenues, EBITDA and
EBIT were 1.75 times, 13.4 times and 19.5 times, respectively; (b) estimated
1998 calendar year revenues and EBIT were 1.75 times and 17.8 times,
respectively; and (c) estimated 1999 calendar year revenues and EBIT were 1.40
times and 12.9 times, respectively; and (ii) the median prices per share as a
multiple of LTM EPS and estimated EPS for the 1998 and 1999 calendar years were
35.2 times, 26.4 times and 18.9 times, respectively.
Such analysis indicated that, for the Selected Large Cap HCIS Companies,
(i) the median values of Enterprise Value as a multiple of (a) LTM revenues,
EBITDA and EBIT were 3.01 times, 18.3 times and 24.3 times, respectively; (b)
estimated 1998 calendar year revenues and EBIT were 2.92 times and 18.9 times,
respectively; and (c) estimated 1999 calendar year revenues and EBIT were 2.33
times and 14.0 times, respectively; and (ii) the median prices per share as a
multiple of LTM EPS and estimated EPS for the 1998 and 1999 calendar years were
39.6 times, 31.4 times and 26.8 times, respectively.
Such analysis indicated that, for the Selected Small Cap HCIS Companies,
(i) the median values of Enterprise Value as a multiple of (a) LTM revenues,
EBITDA and EBIT were 1.51 times, 7.9 times and 14.0 times, respectively; (b)
estimated 1998 calendar year revenues and EBIT were 0.89 times and 13.1 times,
respectively; and (c) estimated 1999 calendar year revenues and EBIT were 0.63
times and 9.3 times, respectively; and (ii) the median prices per share as a
multiple of LTM EPS and estimated EPS for the 1998 and 1999 calendar years were
23.5 times, 18.9 times and 14.7 times, respectively.
Such analysis indicated that, for the Selected CRO/CMO Companies, (i) the
median values of Enterprise Value as a multiple of (a) LTM revenues, EBITDA and
EBIT were 2.71 times, 18.1 times and 27.6 times, respectively; (b) estimated
1998 calendar year
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revenues and EBIT were 2.57 times and 22.6 times, respectively; and (c)
estimated 1999 calendar year revenues and EBIT were 2.10 times and 16.9 times,
respectively; and (ii) the median prices per share as a multiple of LTM EPS and
estimated EPS for the 1998 and 1999 calendar years were 39.3 times, 37.3 times
and 27.2 times, respectively.
The corresponding multiples of PMSI's Fiscal Year ended June 30, 1998
revenues, Fiscal Year EBITDA and Fiscal Year EBIT implied by Quintiles' offer
before cost savings and revenue synergies are 3.17 times, 18.1 times and 24.4
times, respectively. The corresponding multiples of estimated 1998 calendar year
revenues and EBIT implied by Quintiles' offer before cost savings and revenue
synergies are 2.93 times and 20.6 times, respectively. The corresponding
multiples of estimated 1999 calendar year revenues and EBIT implied by
Quintiles' offer before cost savings and revenue synergies are 2.48 times and
15.9 times, respectively. The corresponding multiples of Fiscal Year earnings
and estimated 1998 and 1999 calendar year earnings implied by Quintiles' offer
before cost savings and revenue synergies are 68.9 times, 45.7 times and 33.0
times, respectively. In addition, Quintiles' offer represented premiums of 27.7%
and 43.3%, respectively, over the PMSI Common Stock closing price one trading
day and four weeks prior to December 14, 1998.
Although the Selected Companies were used for comparison purposes, none of
such companies is directly comparable to PMSI. Accordingly, an analysis of the
results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Selected HCIS Companies
and the Selected CRO/CMO Companies and other factors that could affect the
public trading value of the Selected HCIS Companies and the Selected CRO/CMO
Companies to which PMSI is being compared, or PMSI.
ANALYSIS OF CERTAIN TRANSACTIONS. SG Cowen reviewed the financial terms,
to the extent publicly available, of (i) thirty-four (34) selected health care
information systems and services transactions (collectively, the "Selected HCIS
Transactions") involving the acquisition of companies in the health care
information systems and services industry, which were announced or completed
since 1996 and which SG Cowen deemed comparable to the Merger; and (ii)
twenty-five (25) selected contract research organization/contract marketing
organization transactions (collectively, the "Selected CRO/CMO Transactions")
involving the acquisition of companies in the contract research and contract
marketing industries, which were announced or completed since 1990 and which SG
Cowen deemed comparable to the Merger. SG Cowen reviewed the Enterprise Value
paid in the Selected HCIS Transactions and the Selected CRO/CMO Transactions as
a multiple of (i) LTM revenues, EBITDA and EBIT; (ii) estimated fiscal year plus
one revenues and EBIT; and (iii) estimated fiscal year plus two revenues and
EBIT. SG Cowen also examined the multiples of equity value paid in the Selected
HCIS Transactions and the Selected CRO/CMO Transactions to LTM, estimated fiscal
year plus one, and estimated fiscal year plus two earnings. In addition, SG
Cowen reviewed the premium of the offer price over the trading prices one
trading day and four weeks prior to the announcement date of the Selected HCIS
Transactions and Selected CRO/CMO Transactions.
Such analyses indicated that, (i) on the basis of the Enterprise Value
paid, the Selected HCIS Transactions had a median valuation of (a) 3.71 times
LTM revenues, 20.5 times LTM EBITDA and 29.4 times LTM EBIT; (b) 4.10 times
estimated fiscal year plus one revenues and 24.5 times estimated fiscal year
plus one EBIT; and (c) 3.19 times estimated fiscal year plus two revenues and
16.9 times estimated fiscal year plus two EBIT; (ii) on the basis of equity
value paid, the Selected HCIS Transactions had a median valuation of (a) 35.9
times LTM earnings; (b) 36.6 estimated times fiscal year plus one earnings; and
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<PAGE> 55
(c) 28.2 times estimated fiscal year plus two earnings; and (iii) the median
premiums by which offer prices exceeded the closing stock prices one trading day
and four weeks prior to the announcement date of the Selected HCIS Transactions
were 24.5% and 56.2%, respectively.
Such analyses indicated that, (i) on the basis of the Enterprise Value
paid, the Selected CRO/CMO Transactions had a median valuation of (a) 2.40 times
LTM revenues, 19.5 times LTM EBITDA and 36.8 times LTM EBIT; (b) 3.85 times
estimated fiscal year plus one revenues and 11.7 times estimated fiscal year
plus one EBIT; and (c) 3.26 times estimated fiscal year plus two revenues and
9.2 times estimated fiscal year plus two EBIT; (ii) on the basis of equity value
paid, the Selected CRO/CMO Transactions had a median valuation of (a) 21.4 times
LTM earnings; (b) 23.2 times estimated fiscal year plus one earnings; and (c)
43.9 times estimated fiscal year plus two earnings; and (iii) the median
premiums by which offer prices exceeded the closing stock prices one trading day
and four weeks prior to the announcement date of the Selected CRO/CMO
Transactions were 24.0% and 32.3%, respectively. The estimated fiscal year plus
one and estimated fiscal year plus two revenue and earnings multiples are higher
than the LTM revenue and LTM earnings multiple based, in part, that estimated
fiscal year plus one and estimated fiscal year plus two multiples were derived
from a limited number of estimated results for the acquired companies in the
Selected CRO/CMO Transactions.
The corresponding multiples of PMSI's fiscal year ended June 30, 1998
("Fiscal Year") revenues, Fiscal Year EBITDA and Fiscal Year EBIT implied by
Quintiles' offer before cost savings and synergies are 3.17 times, 18.1 times
and 24.4 times, respectively. The corresponding multiples of estimated 1998
calendar year revenues and EBIT implied by Quintiles' offer before cost savings
and synergies are 2.93 times and 20.6 times, respectively. The corresponding
multiples of estimated 1999 calendar year revenues and EBIT implied by
Quintiles' offer before cost savings and synergies are 2.48 times and 15.9
times, respectively. The corresponding multiples of Fiscal Year earnings and
1998 and 1999 calendar year earnings implied by Quintiles' offer before cost
savings and synergies are 68.9 times, 45.7 times and 33.0 times, respectively.
In addition, Quintiles' offer represented premiums of 27.7% and 43.3%,
respectively, over PMSI Stock closing price one trading day and four weeks prior
to December 14, 1998.
Although the Selected HCIS Transactions and Selected CRO/CMO Transactions
were used for comparison purposes, none of such transactions is directly
comparable to the Merger, and none of the companies in such transactions is
directly comparable to PMSI or Quintiles. Accordingly, an analysis of the
results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the companies involved and
other factors that could affect the acquisition value of such companies or PMSI
to which they are being compared.
DISCOUNTED CASH FLOW ANALYSIS. SG Cowen estimated the range of values for
PMSI Common Stock based upon the discounted present value of the projected
after-tax cash flows of PMSI for the calendar years ended December 31, 1998
through December 31, 2002, and of the terminal value of PMSI at December 31,
1998, based upon multiples of 2002 EBIT. After-tax cash flow was calculated by
taking projected EBIT and subtracting from such amount projected taxes, capital
expenditures, changes in working capital and changes in other assets and
liabilities and adding back projected depreciation and amortization. This
analysis was based upon certain assumptions described by, projections supplied
by and discussions held with the management of PMSI. In performing this
analysis, SG Cowen utilized discount
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<PAGE> 56
rates ranging from 15.0% to 25.0%, which were selected based on a number of
criteria, including the estimated industry weighted average cost of capital and
as a way to account for the risk inherent in the business. SG Cowen utilized
terminal multiples of EBIT ranging from 12.0 times to 16.0 times, these
multiples representing the general range of multiples of EBIT for the Selected
HCIS Companies and Selected CRO/CMO Companies. Utilizing this methodology,
PMSI's value per share ranged from $13.45 to $16.57 per share.
PRO FORMA OWNERSHIP ANALYSIS OF THE COMBINED COMPANY. SG Cowen analyzed
pro forma ownership in the combined company by holders of PMSI Common Stock. SG
Cowen's analysis concluded that holders of PMSI Common Stock would own
approximately 4.9% of the combined company, assuming the ENVOY Transaction does
not close. Assuming the ENVOY Transaction does close, SG Cowen's analysis
concluded that holders of PMSI Common Stock would own approximately 3.6% of the
combined company.
CONTRIBUTION ANALYSIS. SG Cowen analyzed the respective contributions of
estimated 1999 calendar year revenues, EBIT and net income of PMSI and Quintiles
to the combined company based upon the historical and projected financial
results of PMSI, Quintiles and ENVOY provided by managements of PMSI, Quintiles
and ENVOY, respectively, excluding the possible effect of revenue synergies in
the Merger. This analysis showed that PMSI would contribute to the combined
company 1.4% of revenues, 2.0% of EBIT, and 3.4% of net income for calendar year
1999, assuming the ENVOY Transaction does not close. Assuming the ENVOY
Transaction does close, this analysis showed that PMSI would contribute to the
combined company 1.3% of the revenues, 1.5% of EBIT, and 2.6% of net income for
calendar 1999.
PRO FORMA EARNINGS ANALYSIS OF THE COMBINED COMPANY. SG Cowen analyzed the
potential effect of the Merger on the combined company for Quintiles' fiscal
year ending December 31, 1999. This analysis was based on: (a) projections for
PMSI provided by PMSI's management; (b) projections for Quintiles provided by
Quintiles' management; (c) projections for ENVOY provided by ENVOY's management;
and (d) an implied $15.40 per share purchase price for PMSI. Assuming the ENVOY
Transaction does not close, the analysis concluded that the Merger would be
$0.022 dilutive to Quintiles, including cost savings but excluding revenue
synergies, to Quintiles' projected EPS for the year ending December 31, 1999.
Assuming the ENVOY Transaction does close, the analysis concluded the Merger
would be $0.016 dilutive to Quintiles, including cost savings but excluding
revenue synergies, to Quintiles' projected EPS for the year ending December 31,
1999.
STOCK TRADING HISTORY. SG Cowen reviewed the historical market prices and
trading volumes of PMSI Common Stock from December 9, 1998 to February 12, 1999
and Quintiles Common Stock from December 9, 1998 to February 12, 1999. This
information was presented solely to provide the PMSI Board with background
information regarding the stock prices of PMSI and Quintiles over the period
indicated.
The summary set forth above does not purport to be a complete description
of all the analyses performed by SG Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. SG Cowen did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, notwithstanding the separate factors summarized above, SG
Cowen believes, and has advised the PMSI Board, that its analyses must be
considered as a whole and that
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<PAGE> 57
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
process underlying its opinion. In performing its analyses, SG Cowen made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of PMSI,
Quintiles and ENVOY. These analyses performed by SG Cowen are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses or securities may actually be sold.
Accordingly, such analyses and estimates are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of PMSI, Quintiles, ENVOY, SG Cowen or any other
person assumes responsibility if future results are materially different from
those projected. As mentioned above, the analyses supplied by SG Cowen and its
opinion were among several factors taken into consideration by the PMSI Board in
making its decision to enter into the Agreement and should not be considered as
determinative of such decision.
SG Cowen was selected by the PMSI Board as its financial advisor, and to
render an opinion to the PMSI Board, because SG Cowen is a nationally recognized
investment banking firm and because, as part of its investment banking business,
SG Cowen is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of its business, SG Cowen and its affiliates actively trade the
debt and equity securities of PMSI, Quintiles and ENVOY for its own account and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities. SG Cowen and its affiliates in the
ordinary course of business have from time to time provided, and in the future
may continue to provide, commercial and investment banking services to PMSI,
Quintiles and ENVOY, including providing financial advisory services on previous
transactions with PMSI, and have received fees for the rendering of such
services. SG Cowen is familiar with PMSI, having provided financial advisory
services to PMSI in the past. Previous transactions with PMSI in which SG Cowen
has provided financial advisory services include implementing a shareholder
rights plan and serving as financial advisor on the acquisition of Source Europe
and simultaneous divestiture of PMSI's interest in Source Informatics Inc.,
together with PMSI's OTC physician survey business, and the sale of PMSI's
non-U.S. assets to IMS Health Incorporated. SG Cowen received customary fees for
rendering such services.
Pursuant to the SG Cowen Engagement Letter, PMSI has agreed to pay certain
fees to SG Cowen for its financial advisory services provided in connection with
the Merger. If the Merger is consummated, SG Cowen will be entitled to receive a
transaction fee of $2,000,000. PMSI has paid SG Cowen a fee of $700,000 in
consideration for SG Cowen's rendering its opinion on December 14, 1998 which
shall be credited against the transaction fee. In addition, PMSI will pay SG
Cowen an incremental fee of $350,000 in consideration for SG Cowen's rendering
its opinion as of February 17, 1999. Additionally, PMSI has agreed to reimburse
SG Cowen for its out-of-pocket expenses, including attorneys' fees, and has
agreed to indemnify SG Cowen against certain liabilities, including liabilities
under the federal securities laws. The terms of the fee arrangement with SG
Cowen, which are customary in transactions of this nature, were negotiated at
arm's length between PMSI and SG Cowen, and the PMSI Board was aware of such
arrangement, including the fact that a significant portion of the aggregate fee
payable to SG Cowen is contingent upon consummation of the Merger.
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<PAGE> 58
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employment and Consulting Agreements
It is anticipated that, after consummation of the Merger, certain employees
of PMSI and Scott-Levin, including certain senior officers, will be employed by
or enter into consulting arrangements with QTRN Acquisition Corp. or Quintiles.
It is a condition to closing of the Merger that Quintiles have entered into an
employment agreement with Joy Scott, Chief Executive Officer of Scott-Levin. In
addition, it is anticipated that Dennis Turner, PMSI's Chairman and Chief
Executive Officer, and Warren Hauser, Vice President, Secretary and General
Counsel of PMSI, will enter into consulting arrangements with Quintiles.
Termination Payments
The Merger will constitute a "change in control" within the meaning of
certain employment agreements between PMSI and its executive officers.
Mr. Turner. Pursuant to his employment agreements with PMSI and PMSI
Limited, its U.K. subsidiary, Dennis Turner is entitled to aggregate payments of
approximately $2.5 million if his employment is terminated without cause within
two years following a "change in control." Such payments consist of (1) an
amount equal to three times his then current annual salary plus the annual bonus
that would be payable upon achievement of his performance targets (whether or
not such targets are achieved); and (2) payment in respect of unused vacation
time and the cash value of other benefits, to the extent not continued for a
period of three years following termination. Mr. Turner may elect to receive
such payments either in a lump sum or in installments over a three-year period.
Ms. Scott. Pursuant to her employment agreement with PMSI, Joy Scott is
entitled to aggregate payments of approximately $1.3 million if her employment
is terminated without cause within two years following a "change in control."
Such payments consist of (1) three times her then current annual salary plus the
annual bonus that would be payable upon achievement of her performance targets
(whether or not such targets are achieved); and (2) payment in respect of unused
vacation time and the cash value of other benefits, to the extent not continued
for a period of three years following termination. Ms. Scott may elect to
receive such payments either in a lump sum or in installments over a two-year
period.
Mr. Hauser. Pursuant to his employment agreement with PMSI, Warren Hauser
is entitled to aggregate payments of approximately $800,000 if his employment is
terminated without cause within two years following a "change in control." Such
payments consist of (1) two times his then current annual salary plus the annual
bonus that would be payable upon achievement of his performance targets (whether
or not such targets are achieved); and (2) payment in respect of unused vacation
time and the cash value of other benefits, to the extent not continued for a
period of two years following termination. Mr. Hauser may elect to receive such
payments either in a lump sum or in installments over a two-year period.
Performance and Success Bonuses
Messrs. Turner and Hauser, Ms. Scott and Raymund Davies, the Chief
Financial Officer of PMSI, are entitled to performance bonuses aggregating $1.4
million, of which $975,000 would be paid to Mr. Turner. These bonuses are
contingent on the successful consummation of the Merger.
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Stock Options
Pursuant to the terms of the Merger Agreement, as of the Effective Time of
the Merger (as defined below under "-- Effective Time of the Merger"), all
vested and unvested options to purchase PMSI common stock will become options to
acquire Quintiles common stock and contingent value payments on the same terms
and conditions as were applicable to such PMSI options. Each such PMSI option
will thereafter represent the right to purchase the number of shares of
Quintiles common stock (and, until the seventy-fifth (75th) day after the
Merger, contingent value payments, if any) that the holder would have had the
right to receive if he or she had exercised such option in full immediately
prior to the Effective Time of the Merger. See "The Merger Agreement -- Effect
on Employee Benefits, Stock Plans and Stock Options."
Because the Merger constitutes a "change in control" within the meaning of
the relevant PMSI option agreements, options to purchase an aggregate of 139,500
shares of PMSI common stock, with a weighted average exercise price of $9.61,
will vest immediately in full at the Effective Time of the Merger. Assuming a
price of $15.40 per share of PMSI common stock, the aggregate spread of such
accelerated options would be approximately $0.81 million, or an average of $5.79
per accelerated option. PMSI options subject to acceleration are held by
directors and executive officers of PMSI as follows:
<TABLE>
<CAPTION>
NUMBER ASSUMED
HOLDER OF OPTIONS AGGREGATE SPREAD
- ------ ---------- ----------------
<S> <C> <C>
Dennis M.J. Turner.................................... 60,000 $369,000
Joy Scott............................................. 26,300 $152,270
Warren J. Hauser...................................... 5,700 $ 28,830
Directors, as a group (excluding executive
officers)........................................... 46,000 $248,380
</TABLE>
Retention Arrangements
The payment of "retention arrangements" to certain Scott-Levin executives
and managers in an aggregate dollar value of approximately $2.95 million has
been approved by the PMSI Board and Quintiles. Of the total amount, $800,000 in
cash will be paid to Ms. Scott. The remainder will be paid to a group of senior
employees in the form of options which will be granted at an exercise price
equal to the fair market value of Quintiles common stock on the grant date. One
third of these options will vest at the first anniversary of the change of
control and the remaining two thirds will vest at the second anniversary thereof
assuming the employee is still employed by Scott-Levin, Quintiles or a
subsidiary of Quintiles, as the case may be. PMSI and Quintiles have agreed
that, upon consummation of the Merger and the assumption by QTRN Acquisition
Corp. of this obligation, the retention arrangements will be payable to the
employees in the form of options to purchase shares of Quintiles common stock.
INDEMNIFICATION AND INSURANCE
Quintiles has agreed to indemnify all persons subject to indemnity pursuant
to PMSI's and its subsidiaries' respective constituent documents (including,
without limitation, the directors and executive officers of PMSI) to the fullest
extent permissible under such constituent documents. Quintiles has also agreed
to maintain the directors' and officers' liability insurance currently in effect
for a period of three years following the Effective Time of
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<PAGE> 60
the Merger for the benefit of the directors and officers of PMSI. See "The
Merger Agreement -- Certain Covenants and Agreements."
BENEFICIAL OWNERSHIP TABLE
Set forth below is certain information with respect to the beneficial
ownership of PMSI common stock as of February 5, 1999 by (1) each executive
officer of PMSI, (2) each director of PMSI, (3) each beneficial owner of more
than 5% of PMSI common stock and (4) all executive officers and directors as a
group. Unless otherwise noted, each of the stockholders named below has sole
voting and investment power with respect to the shares shown as being owned
beneficially by him or her.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME SHARES OWNED OUTSTANDING
- ---- ------------ -------------
<S> <C> <C>
Carolyne K. Davis................................... 28,000(1) *
Robert J. Frattaroli................................ 100,000(1) *
Carlos A. Gonzalez.................................. 4,000(1) *
Frederick W. Kyle................................... 74,000(1) *
Robert A. Schwed.................................... 4,000(1) *
Dennis M.J. Turner.................................. 424,902(2) 3.3
Raymund M. Davies................................... 16,900 *
Joy Scott........................................... 60,200(3) *
Warren J. Hauser.................................... 32,300(4) *
Welsh, Carson, Anderson & Stowe V, L.P.(5).......... 746,215 6.0
All executive officers and directors as a group (9
persons).......................................... 744,302(6) 6.7
</TABLE>
- -------------------------
* Less than 1%
(1) Represents shares issuable upon the exercise of currently vested stock
options and options that will vest within the next 60 days.
(2) Includes (a) 290,000 shares issuable upon the exercise of currently vested
stock options and options that will vest within the next 60 days, (b) 55,952
shares owned by Mr. Turner and (c) 78,950 shares owned by a trust
administered for the benefit of Mr. Turner's family over which the trustee
has voting power.
(3) Includes 59,700 shares issuable upon exercise of currently vested stock
options and options that will vest within the next 60 days.
(4) Includes 27,800 shares issuable upon the exercise of currently vested stock
options and options that will vest within the next 60 days.
(5) Address: 320 Park Avenue, New York, New York 10022.
(6) Includes the shares set forth as being issuable upon the exercise of
currently vested stock options and options that will vest within the next 60
days.
FORM OF THE MERGER
If the holders of PMSI common stock approve the Merger and the Merger
Agreement and all other conditions to the Merger are satisfied or waived, where
permissible, PMSI will be merged with and into QTRN Acquisition Corp., with QTRN
Acquisition Corp. being the surviving corporation after the Merger. QTRN
Acquisition Corp.'s articles of incorporation, bylaws, directors and officers
will remain in place. The date on which the closing of the Merger will occur is
referred to in this Proxy Statement/Prospectus as the "Closing Date."
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Quintiles and PMSI anticipate that the Closing Date will occur as promptly as
practicable after the special meeting.
CONSIDERATION FOR THE MERGER
The Merger Agreement provides that, at the Effective Time of the Merger,
each share of PMSI common stock issued and outstanding immediately prior to the
Effective Time of the Merger (other than any shares owned by PMSI, Quintiles or
QTRN Acquisition Corp.) will be converted into the right to receive, at the
election of the holder thereof either:
(1) on the Closing Date, the fraction of a share of Quintiles common
stock calculated by dividing $15.40 by the Average Trading Price (the
"Exchange Ratio"); or
(2) (a) on the Closing Date, the fraction of a share of Quintiles common
stock calculated by dividing the Exchange Ratio in half;
(b) at any time on or prior to the 75th day following the Closing
Date (the "Maturity Date"), as specified by the stockholder,
the fraction of a share of Quintiles common stock calculated by
dividing the Exchange Ratio in half; and
(c) on the Maturity Date, a contingent value payment, subject to
the conditions described below and in Appendix B.
The Average Trading Price is the average of the closing prices per share of
Quintiles common stock on The Nasdaq Stock Market for the 10 trading days ending
on the trading day that is two days immediately preceding the Closing Date. A
contingent value payment represents the right to receive a cash payment on the
75th day after the Closing Date for each share of Quintiles common stock
received by a PMSI stockholder on the Maturity Date. Such payment will equal the
amount, if any, by which the Average Trading Price exceeds the average of the
closing prices per share of Quintiles common stock for 10 trading days selected
at random by the Exchange Agent (as defined below) on the Maturity Date out of
the 20 trading days ending with the last trading day immediately preceding the
Maturity Date (the "CVP Average Trading Price"). A PMSI stockholder who elects
to receive Quintiles shares under (2)(b) above prior to the 75th day after the
Closing Date forfeits the right to receive contingent value payments with
respect to such shares. See "The Contingent Value Payments."
The Per Share Merger Consideration generally is intended to provide a
fraction of a share of Quintiles common stock valued at $15.40 in exchange for
each share of PMSI common stock, based upon the Average Trading Price.
Accordingly, a higher Average Trading Price would result in a smaller fraction
of a share of Quintiles common stock constituting the Per Share Merger
Consideration. For example, if the Average Trading Price were equal to $50 per
share, the Per Share Merger Consideration would be equal to 0.308 shares of
Quintiles common stock. An Average Trading Price greater than $50 would result
in fewer than 0.308 shares of Quintiles common stock constituting the Per Share
Merger Consideration and an Average Trading Price less than $50 would result in
more than 0.308 shares of Quintiles common stock constituting the Per Share
Merger Consideration. In addition, the contingent value payments are intended to
guarantee such $15.40 value per share for 75 days with respect to up to half of
the PMSI shares exchanged in the merger.
If the Average Trading Price exceeds $61.325, PMSI may terminate the Merger
Agreement unless Quintiles agrees that the Exchange Ratio will be 0.247091857.
If the Average Trading Price is less than $41.55, Quintiles may terminate the
Merger Agreement
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unless PMSI agrees that the Exchange Ratio will be 0.370637786. See "The Merger
Agreement -- Conditions to the Merger."
In lieu of fractional shares of Quintiles common stock, Quintiles shall pay
an amount in cash equal to the product of (1) the fractional share interests to
which a PMSI stockholder (after taking into account all shares of PMSI common
stock held immediately prior to the Effective Time of the Merger by such
stockholder) would otherwise be entitled and (2) the Average Trading Price.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Articles of Merger
with the Secretary of State of North Carolina and the Certificate of Merger with
the Secretary of State of Delaware, or at such other time on the Closing Date as
is permissible in accordance with applicable law and as is specified in the
Articles of Merger (or Certificate of Merger in Delaware) (the "Effective Time
of the Merger"). These filings will be made as soon as practicable after
satisfaction or, if permissible, waiver of, the conditions to the Merger.
PROCEDURES FOR EXCHANGE OF PMSI STOCK CERTIFICATES
The conversion of PMSI common stock into Quintiles common stock and
contingent value payments will occur automatically at the Effective Time of the
Merger. Any shares of PMSI common stock owned immediately prior to the Effective
Time of the Merger by PMSI, Quintiles or QTRN Acquisition Corp. will be
cancelled.
As soon as practicable after the Effective Time of the Merger, Quintiles
will deposit with a United States bank or trust company (the "Exchange Agent"),
for the benefit of holders of shares of PMSI common stock, certificates
representing the shares of Quintiles common stock issuable pursuant to the
Merger, in accordance with the Merger Agreement. The Exchange Agent will deliver
the certificates representing shares of Quintiles common stock upon surrender
for exchange of certificates representing shares of PMSI common stock.
As soon as reasonably practicable after the Effective Time of the Merger,
the Exchange Agent will send a letter of transmittal to each former PMSI
stockholder, together with instructions with respect to the surrender of
certificates previously representing PMSI common stock to be exchanged for, at
the election of the stockholder, either: (1) certificates representing all of
the shares of Quintiles common stock issuable immediately to such stockholder or
(2) certificates representing half of the shares of Quintiles common stock
issuable immediately to such stockholder, with certificates representing the
remaining half of the shares and the contingent value payments to be issued or
paid, as the case may be, on or prior to the Maturity Date. The letter of
transmittal also will include instructions for PMSI stockholders who elect to
defer receipt of half their Quintiles shares to specify, on or prior to the
Maturity Date, the time of issuance of such shares.
YOU SHOULD NOT FORWARD PMSI COMMON STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL YOU HAVE RECEIVED A LETTER OF TRANSMITTAL.
Upon surrender of a certificate to the Exchange Agent, together with an
executed letter of transmittal, a PMSI stockholder will be entitled to receive,
in accordance with the stockholder's election, either (1) a certificate
representing that number of whole shares of Quintiles common stock which that
stockholder has the right to receive in respect of the surrendered certificate
and cash in lieu of any fractional shares or (2)(a) a certificate
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representing half of that number of shares of Quintiles common stock (rounded up
to the nearest whole share) which that stockholder has the right to receive in
respect of that certificate and cash in lieu of any fractional shares, (b) a
certificate representing the other half of that number of shares of Quintiles
common stock (rounded down to the nearest whole share) which that stockholder
has the right to receive in respect of that certificate (to be received at the
time or times specified by the stockholder) and (c) a contingent value payment,
in each case as described above under "-- Consideration for the Merger." The
PMSI certificates surrendered will be canceled.
In the event of a transfer of ownership of PMSI common stock which is not
registered in PMSI's transfer records, a certificate representing the proper
number of shares of Quintiles common stock may be issued to a transferee if the
certificate is presented to the Exchange Agent, together with all documents
required to evidence and effect the transfer, as well as proof that all transfer
taxes have been paid.
Holders of certificates previously representing PMSI common stock will not
be paid (1) dividends or distributions with a record date on or after the
Effective Time of the Merger on the shares of Quintiles common stock into which
such shares have been converted or (2) cash in lieu of fractional shares of
Quintiles common stock, until such certificates are surrendered to the Exchange
Agent for exchange. Subject to applicable law, when such certificates are
surrendered, any unpaid dividends and any cash in lieu of fractional shares of
Quintiles common stock payable as described above will be paid without interest.
PMSI stockholders who elect to receive contingent value payments will not
need to take any further action with respect to the contingent value payments
but are subject to the restrictions on transferability of the contingent value
payments and the limitation on short-selling or other manipulative conduct in
violation of federal securities law. PMSI stockholders who receive shares of
Quintiles common stock at the Maturity Date, also will receive cash or a check
for the value, if any, of the contingent value payments. The check will be
mailed to the stockholders at the address previously provided to the Exchange
Agent. See "The Contingent Value Payments."
All shares of Quintiles common stock and contingent value payments issued
and made upon conversion of shares of PMSI common stock, together with any cash
issued in lieu of any fractional shares of Quintiles common stock, shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of PMSI common stock.
ANTICIPATED ACCOUNTING TREATMENT
Quintiles will treat the Merger as a "purchase" of a business in accordance
with generally accepted accounting principles. Under this method of accounting,
the assets and liabilities of PMSI will be recorded at their fair market value,
and the aggregate Merger consideration paid by Quintiles, including any direct
costs of acquisition, over such fair market value will be accounted for as
goodwill. PMSI's revenues and expenses will be included in Quintiles'
consolidated financial statements after the Effective Time of the Merger.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax consequences
of the Merger to the PMSI stockholders. This discussion is based on the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated
thereunder, administra-
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tive interpretations and judicial precedents as of the date of this Proxy
Statement/Prospectus, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax considerations discussed
below. This discussion does not address all aspects of U.S. federal income
taxation that may be material to PMSI stockholders in connection with the Merger
in light of such stockholders, particular status or circumstances, including,
without limitation, PMSI stockholders who are (1) foreign persons, (2) insurance
companies, (3) tax-exempt entities, (4) retirement plans, (5) dealers in
securities, (6) persons whose shares of PMSI common stock were acquired pursuant
to the exercise of employee stock options or otherwise as compensation, (7)
persons subject to the alternative minimum tax and (8) persons in whose hands
the PMSI common stock does not represent a capital asset. The discussion below
does not address the effect of any applicable state, local or foreign tax laws,
or the effect of any federal tax laws other than federal income tax laws. The
parties will not request a ruling from the IRS in connection with any federal
income tax consequences of the Merger.
YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISORS CONCERNING THE U.S.
FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN
LIGHT OF YOUR PARTICULAR TAX CIRCUMSTANCES AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL AND OTHER TAX LAWS.
QUALIFICATION AS A REORGANIZATION
PMSI will receive an opinion from its tax counsel, Reboul, MacMurray,
Hewitt, Maynard & Kristol, and Quintiles will receive an opinion from its tax
counsel, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.,
(collectively, the "Tax Opinions") that the Merger will qualify as a
reorganization within the meaning of Section 368 of the Code. The Tax Opinions
will be based on certain assumptions, including the assumption regarding
"continuity of interest" described below, and upon representations as to certain
factual matters made by PMSI, Quintiles and QTRN Acquisition Corp. Such
representations, if incorrect, could jeopardize the conclusions reached in the
Tax Opinions. The Tax Opinions neither bind the IRS nor preclude the IRS from
adopting a contrary position. An opinion of counsel only represents such
counsel's best legal judgment and has no binding effect or official status of
any kind, and no assurance can be given that contrary positions will not be
taken by the IRS or a court considering the issues.
CONTINUITY OF INTEREST
In order for the Merger to qualify as a reorganization, among other
requirements, the PMSI stockholders must exchange a substantial portion of the
proprietary interests in PMSI for a proprietary interest in Quintiles. The IRS
takes the position for advance ruling purposes that this "continuity of
interest" requirement is satisfied in a potential reorganization if the value of
the acquiring corporation's stock received in the reorganization by the acquired
corporation's shareholders equals or exceeds 50% of the total consideration paid
for the stock of the acquired corporation in the potential reorganization. The
courts have ruled that the continuity of interest requirement has been satisfied
where the acquiring corporation's stock received in the reorganization accounts
for as little as 38% of the total consideration paid for the stock of the
acquired corporation in the potential reorganization.
Based on the foregoing, the continuity of interest requirement will be
satisfied in the Merger if the value at the Effective Time of the Merger of the
Quintiles common stock issued in the Merger equals or exceeds the amount of any
cash and the fair market value of any
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other property received by PMSI stockholders in exchange for their PMSI common
stock. If the value at the Effective Time of the Merger of the Quintiles common
stock issued in the Merger is less than the amount of any cash and the fair
market value of any other property received by PMSI stockholders in exchange for
their PMSI common stock, the Merger will not satisfy the IRS's advance ruling
guidelines regarding continuity of interest but may still qualify as a
reorganization.
Pursuant to the Merger Agreement, the consideration paid to a PMSI
stockholder in exchange for his or her PMSI common stock will consist of, at the
election of the PMSI stockholder, solely Quintiles common stock or a combination
of Quintiles common stock and contingent value payments. A PMSI stockholder who
elects to receive a combination of Quintiles common stock and contingent value
payments will receive half his or her Quintiles common stock at the Closing and
the remainder at the maturity of the contingent value payments. Such a PMSI
stockholder will have the right to receive all or a portion of the Quintiles
common stock the receipt of which would otherwise be deferred until the maturity
of the contingent value payments before such maturity but will be required, in
such event, to forfeit all or a portion of his or her contingent value payments.
The right to receive additional Quintiles common stock at the maturity of the
contingent value payments should not be treated as separate consideration
received in the Merger. In addition, PMSI stockholders will receive cash in lieu
of fractional shares. Quintiles and PMSI each have represented to its counsel
that no other amounts of cash or property will be paid to any PMSI stockholder
in exchange for PMSI common stock.
The Tax Opinions assume that the fair market value of the contingent value
payments plus the amount of cash paid in lieu of fractional shares will not
exceed 50% of the total value of the consideration received by PMSI stockholders
in exchange for their PMSI common stock. It is possible that the IRS may
consider the amount of any cash paid at the maturity of the contingent value
payments rather than the fair market value of the contingent value payments in
determining whether the continuity of interest requirement has been satisfied.
The Tax Opinions therefore also assume that the total amount of cash paid at the
maturity of the contingent value payments plus the amount of cash paid in lieu
of fractional shares will not exceed 50% of the total value of the consideration
received by PMSI stockholders in exchange for their PMSI common stock. Provided
the fair market value of the contingent value payments (and, alternatively, the
total amount of cash paid at the maturity of the contingent value payments) plus
the amount of cash paid in lieu of fractional shares does not exceed 60% of the
total value of the consideration received by PMSI stockholders in exchange for
their PMSI common stock, the Merger should qualify as a reorganization but there
can be no assurances that the IRS will not challenge the qualification of the
Merger as a reorganization.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER FOR PMSI STOCKHOLDERS
Assuming that the Merger qualifies as a reorganization, the tax
consequences of the Merger for PMSI stockholders will depend on the tax
treatment of the contingent value payments. The law regarding the federal income
tax treatment of a right to receive a contingent amount of additional cash
consideration in a reorganization, such as the Merger, is uncertain, and you are
urged to consult your own tax advisor regarding the tax treatment of the
contingent value payments.
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The IRS may treat the contingent value payments as other property received
in exchange for a PMSI stockholder's PMSI common stock. Assuming the contingent
value payments are so treated, the material federal income tax consequences for
a PMSI stockholder as a result of the Merger are as follows:
(1) A PMSI stockholder who elects to receive solely Quintiles common
stock in exchange for his or her PMSI common stock will recognize no gain
or loss on the exchange of his or her PMSI shares for Quintiles common
stock.
(2) A PMSI stockholder who elects to receive a combination of Quintiles
common stock and contingent value payments will recognize gain on the
exchange of his or her PMSI common stock for Quintiles common stock and the
contingent value payments in an amount equal to the lesser of (a) the fair
market value of the contingent value payments and (b) the gain realized
with respect to all of his or her PMSI common stock exchanged in the
Merger. Such gain will be capital gain provided that such PMSI common stock
was held as a capital asset at the Effective Time of the Merger and the
receipt of the contingent value payments does not have the effect of the
distribution of a dividend to the PMSI stockholder. No loss may be
recognized by any such stockholder.
(3) The receipt by a PMSI stockholder of cash in lieu of a fractional
share will be treated as if the PMSI stockholder had received the
fractional share and then received cash in redemption of that share,
resulting in the recognition of gain or loss equal to the difference
between the amount of cash received in lieu of the fractional share and the
PMSI stockholder's basis in the fractional share interest. Such gain or
loss will be treated as capital gain or loss provided that such share of
PMSI common stock was held as a capital asset at the Effective Time of the
Merger and the receipt of cash in lieu of the fractional share does not
have the effect of the distribution of a dividend to the PMSI stockholder.
(4) The tax basis of Quintiles common stock received by a PMSI
stockholder in the Merger (including fractional share interests for which
cash is received) will equal the tax basis of that stockholder in the PMSI
common stock surrendered by that stockholder in the Merger, decreased by
the amount of any cash received in lieu of fractional share interests in
Quintiles common stock and by the fair market value of any contingent value
payments received by that stockholder and increased by the amount of any
gain recognized by such stockholder in the Merger.
(5) The holding period of the Quintiles common stock received by a PMSI
stockholder in the Merger (including fractional share interests) will
include the period during which the stockholder held the PMSI common stock
surrendered in the Merger, assuming such PMSI common stock is held as a
capital asset at the Effective Time of the Merger.
(6) A PMSI stockholder who elects to receive both Quintiles common stock
and contingent value payments will acquire a tax basis in the contingent
value payments equal to their fair market value at the Effective Time of
the Merger.
(7) The federal income tax treatment of the lapse of a contingent value
payment or the receipt of payments made on a contingent value payment
depends upon the characterization of the contingent value payments for
federal income tax purposes. In Revenue Ruling 88-31, 1988-1 C.B. 302, the
IRS treated rights similar to the contingent value payments as cash
settlement put options. The following discussion assumes that the
contingent value payments will be treated as cash settlement put options
with
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respect to shares of Quintiles common stock. If the contingent value
payments lapse without payment, a PMSI stockholder holding a contingent
value payment will realize a loss equal to his or her basis in the
contingent value payment. This loss will be a capital loss, provided the
Quintiles common stock to which the contingent value payment relates is or
would be a capital asset in the hands of the PMSI stockholder. If a PMSI
stockholder holding a contingent value payment receives a payment on the
maturity of the contingent value payments, he or she will realize gain or
loss equal to the difference between his or her basis in the contingent
value payments and the amount of cash and the fair market value of any
Quintiles common stock received. Such gain or loss will be capital gain or
loss, provided the Quintiles common stock to which the contingent value
payments relate is or would be a capital asset in the hands of the PMSI
stockholder.
(8) A PMSI stockholder will be required to recognize any gain realized
upon the maturity of the contingent value payments. The recognition of any
loss realized upon a lapse or maturity of the contingent value payments may
be required to be deferred pursuant to the application of the straddle
rules of Code Section 1092. The straddle rules generally apply where a
taxpayer owns stock and an "option" with respect to the stock or an
interest in "substantially similar or related property other than stock."
If the contingent value payments are treated as cash settlement put
options, they will be treated as options for purposes of the straddle
rules. In addition, Treasury Regulations issued under Section 1092 provide
that arrangements designed to guarantee a shareholder against a decline in
the value of his or her stock constitute interests in "substantially
similar or related property other than stock" for purposes of applying the
straddle rules. If the contingent value payments are treated as having an
ascertainable fair market value and therefore as other property received in
exchange for a PMSI stockholder's PMSI common stock, they may be subject to
the straddle rules as substantially similar or related property other than
stock even if the contingent value payments are not treated as cash
settlement put options. As a result, a PMSI stockholder may recognize any
loss realized at the lapse or maturity of the contingent value payments
only to the extent such loss exceeds any unrecognized gain with respect to
the Quintiles common stock. Any unrecognized loss could be carried forward
and recognized when the Quintiles common stock is sold or otherwise
disposed of in a taxable transaction. Similarly, if a PMSI stockholder were
to sell the Quintiles common stock at a loss before the maturity of the
contingent value payments, he or she would only be able to recognize such
loss to the extent it exceeded any unrecognized gain with respect to the
contingent value payments.
Alternatively, the contingent value payments may be treated as contractual
rights without an ascertainable fair market value. If the contingent value
payments were so treated, PMSI stockholders would not recognize any gain or loss
on the receipt of the contingent value payments. Instead, each PMSI stockholder
who elects to receive contingent value payments would recognize gain at the
maturity of the contingent value payments equal to the lesser of (a) the cash
received and (b) the gain realized with respect to all of his or her PMSI common
stock exchanged in the Merger. Such gain would be capital gain provided that
such PMSI common stock were held as a capital asset at the Effective Time of the
Merger and the receipt of cash did not have the effect of the distribution of a
dividend to the PMSI stockholder. No loss would be recognized by any such
stockholder.
AMENDMENT OF PMSI RIGHTS AGREEMENT
PMSI has amended the PMSI Rights Agreement (as defined below in "Comparison
of Rights of Holders of Quintiles Common Stock and PMSI Common Stock") to
provide that
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neither the approval, execution or delivery of the Merger Agreement or the Stock
Option Agreement, nor the consummation of the transactions contemplated thereby,
will cause the PMSI Rights (as defined below in "Comparison of Rights of Holders
of Quintiles Common Stock and PMSI Common Stock") issued and outstanding to
become exercisable pursuant to the PMSI Rights Agreement.
REGULATORY APPROVALS REQUIRED
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (the
"HSR Act") requires both Quintiles and PMSI to furnish certain information and
materials to the Antitrust Division of the Department of Justice and the FTC and
requires a waiting period to expire or be terminated before the Merger can be
completed. This waiting period may be extended by requests for additional
information. On December 22, 1998, PMSI and Quintiles both filed the required
notification and report forms with the Antitrust Division and FTC. The waiting
period expired on January 21, 1999.
STOCK EXCHANGE LISTING; DELISTING AND DEREGISTRATION OF PMSI COMMON STOCK
It is a condition to the Merger that any shares of Quintiles common stock
issuable in the Merger be authorized for listing on The Nasdaq Stock Market,
subject to official notice of issuance. If the Merger is consummated, the PMSI
common stock will cease to be listed on The Nasdaq Stock Market. In addition,
PMSI will deregister the PMSI common stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, accordingly, will no longer be
required to file periodic reports pursuant to the Exchange Act.
NO APPRAISAL RIGHTS
PMSI stockholders are not entitled to appraisal rights in connection with
the Merger.
RESALE OF QUINTILES COMMON STOCK AFTER THE MERGER
Shares of Quintiles common stock issued pursuant to the Merger will not be
subject to any restrictions on transfer arising under the Securities Act, as
amended (the "Securities Act"), except for shares issued to any PMSI stockholder
who may be deemed to be an "affiliate" of PMSI for purposes of Rule 145 under
the Securities Act. This Proxy Statement/ Prospectus does not cover resales of
Quintiles common stock received by any person who may be deemed to be such an
affiliate.
Persons who may be deemed to be affiliates of PMSI generally include
individuals or entities that control, are controlled by, or are under common
control with PMSI, and generally include the executive officers and directors of
PMSI. Affiliates may not sell their shares of Quintiles common stock acquired in
connection with the Merger, except pursuant to an effective registration
statement under the Securities Act covering such shares or in compliance with
Rule 145 under the Securities Act (or Rule 144 under the Securities Act in the
case of persons who become affiliates of Quintiles) or another applicable
exemption from the registration requirements of the Securities Act. In general,
Rule 145 under the Securities Act provides that, for one year following the
Effective Time of the Merger, a former affiliate of PMSI (together with certain
related persons) would be entitled to sell shares of Quintiles common stock
acquired in connection with the Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144 under the Securities Act. Additionally, the number of
shares to be sold by such
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affiliate (together with certain related persons and certain persons acting in
concert) within any three-month period for purposes of Rule 145 under the
Securities Act may not exceed the greater of 1% of the outstanding shares of
Quintiles common stock or the average weekly trading volume of such shares
during the four calendar weeks preceding such sale. Rule 145 under the
Securities Act will remain available to affiliates of PMSI if Quintiles timely
files reports under the Exchange Act with the SEC. One year after the Effective
Time of the Merger, a former affiliate of PMSI will be able to sell such shares
of Quintiles common stock without being subject to such manner of sale or volume
limitations, provided that Quintiles is current with its Exchange Act report
filings and such person is not then an affiliate of Quintiles. Two years after
the Effective Time of the Merger, such affiliate will be able to sell such
shares of Quintiles common stock without any restrictions so long as such
affiliate is not and has not been for at least three months prior to the date of
such sale an affiliate of Quintiles.
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THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement,
which is incorporated by reference in its entirety and attached to this Proxy
Statement/Prospectus as Appendix A.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary mutual representations and
warranties of Quintiles and QTRN Acquisition Corp., on the one hand, and PMSI,
on the other hand, relating to, among other things: (a) corporate organization
and similar corporate matters; (b) capitalization; (c) corporate authorization,
execution, delivery, performance and enforceability of the Merger Agreement and
the Stock Option Agreement and related matters; (d) documents filed by each of
PMSI and Quintiles with the SEC and the accuracy of information contained
therein; (e) the accuracy of information supplied by each of PMSI and Quintiles
in connection with the Registration Statement and this Proxy Statement/
Prospectus; (f) the absence of material adverse changes; (g) compliance with
applicable laws and the absence of material litigation; (h) votes required for
the Merger; (i) ownership of stock of the other party; and (j) brokers' and
finders' fees.
The Merger Agreement also contains additional representations and
warranties of PMSI relating to, among other things: (a) subsidiaries; (b) labor
matters and matters relating to retirement and other employee plans and to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (c)
filing of tax returns, payment of taxes and tax status of certain assets; (d)
title to properties; (e) environmental matters; (f) certain contracts and debt
instruments; (g) the delivery of an opinion of a financial adviser; (h)
ownership and validity of intellectual property rights and Year 2000 compliance;
(i) unanimous PMSI Board approval of the Merger; (j) the inapplicability of
Section 203 of the Delaware General Corporations Law (the "DGCL"), relating to
business combinations with interested stockholders, to the Merger Agreement and
related agreements and transactions; (k) amendment of or exercise of certain
rights under the PMSI Rights Agreement; and (l) no investment company status.
None of the representations and warranties survive the Effective Time of
the Merger.
CERTAIN COVENANTS AND AGREEMENTS
Conduct of Business Pending Merger
Pursuant to the Merger Agreement, PMSI has agreed (except as permitted by
Quintiles or as otherwise expressly contemplated by the Merger Agreement) to
carry on its business in the ordinary course consistent with past practice and
to (1) use its and its subsidiaries' respective reasonable efforts to preserve
substantially intact its and their current business organizations, (2) keep
available the services of its and their current officers and employees and (3)
preserve its and their relationships with customers, suppliers, licensors,
licensees, advertisers, distributors and others having significant business
dealings with it and them. PMSI has also agreed that, pending the Merger,
neither it nor any of its subsidiaries will:
- declare dividends or make distributions on its capital stock (excluding
dividends and distributions by any wholly owned domestic subsidiary to
its parent), split, combine or reclassify such capital stock or authorize
the issuance or issue any securities in lieu of or in substitution for
shares of capital stock or acquire shares of capital stock of PMSI
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or any subsidiary or securities convertible into or exercisable for such
capital stock (excluding the redemption of PMSI's outstanding 6 1/4%
Convertible Subordinated Debentures due 2003 (the "Debentures") as
required by the Merger Agreement);
- amend the PMSI Certificate of Incorporation, the PMSI By-Laws or
comparable documents of any subsidiary or amend or terminate the PMSI
Rights Agreement;
- acquire or agree to acquire any business;
- subject to certain limited exceptions, sell, lease, license, mortgage or
otherwise encumber or dispose of any assets having a value in excess of
$100,000 individually or $250,000 in the aggregate;
- subject to certain limited exceptions, (1) incur indebtedness or
guarantee obligations, issue debt securities or warrants, enter into
"keep well" agreements or enter into any arrangement having the economic
effect of any of the foregoing, (2) make any loans, advances, capital
contributions or investments, (3) invest or hold cash or cash equivalents
in instruments with a maturity date exceeding 90 days or (4) use any cash
outside the ordinary course of business of Scott-Levin;
- acquire or agree to acquire assets, other than inventory in the ordinary
course of business consistent with past practice, or make capital
expenditures, except capital expenditures contemplated by PMSI's capital
budget and other capital expenditures which do not exceed $100,000 in the
aggregate;
- subject to certain limited exceptions, satisfy any claims, liabilities or
obligations, except (1) liabilities or obligations in the ordinary course
of business consistent with past practice or in accordance with their
terms as in effect on the date of the Merger Agreement and other
liabilities and obligations not exceeding $100,000 individually or
$250,000 in the aggregate or (2) litigation claims to the extent
permitted in the Merger Agreement;
- waive, release, grant, or transfer any rights of material value or modify
or change in any material respect any existing material license, lease,
contract or other document, other than in the ordinary course of business
consistent with past practices;
- adopt a plan of complete or partial liquidation;
- authorize any dissolution, merger, consolidation, restructuring,
recapitalization or reorganization;
- enter into or amend any collective bargaining agreement;
- change any material accounting principle, except as required by generally
accepted accounting principles;
- settle any litigation, other than settlements that do not provide for
injunctive relief and where the amount paid does not exceed $50,000
individually or $250,000 for all such settlements;
- enter into transactions with affiliates;
- subject to certain limited exceptions, transfer intellectual property
rights;
- enter into or amend agreements granting exclusive rights with respect to
its products or technology; or
- authorize, or commit or agree to take, any of the foregoing actions.
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No Solicitation
The Merger Agreement provides that neither PMSI nor any of its subsidiaries
will (whether directly or indirectly through advisors, agents or other
intermediaries), nor will PMSI or any of its subsidiaries authorize or permit
any of its or their officers, directors, agents, representatives or advisors to:
(a) solicit, initiate or take any action knowingly to encourage or
facilitate the submission of inquiries, proposals or offers from any person
(other than QTRN Acquisition Corp. or Quintiles) relating to (1) any
acquisition or purchase of 15% or more of the consolidated assets of PMSI
and its subsidiaries or of over 15% of any class of equity securities of
PMSI or any of its subsidiaries, (2) any tender offer (including a self
tender offer) or exchange offer that if consummated would result in any
Person (as defined under "-- Termination Fee and Expense Reimbursement"
below) beneficially owning 15% or more of any class of equity securities of
PMSI or any of its significant subsidiaries, (3) any merger, consolidation,
business combination, sale of substantially all assets, recapitalization,
liquidation, dissolution or similar transaction involving PMSI or any of
its subsidiaries whose assets, individually or in the aggregate, constitute
more than 15% of the consolidated assets of PMSI other than the
transactions contemplated by the Merger Agreement, or (4) any other
transaction the consummation of which would or could reasonably be expected
to impede, interfere with, prevent or materially delay the Merger
(collectively, "Transaction Proposals"), or agree to or endorse any
Transaction Proposal, or
(b) enter into or participate in any discussions or negotiations
regarding any of the foregoing, or furnish to any other person any
information with respect to its business, properties or assets or any of
the foregoing, or otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by any other
person (other than QTRN Acquisition Corp. or Quintiles) to do or seek any
of the foregoing; provided, however, that PMSI is not prohibited (either
directly or indirectly through advisors, agents or other intermediaries)
from (1) furnishing information pursuant to an appropriate confidentiality
letter (no less favorable to PMSI in any material respect than the
confidentiality agreement between PMSI and Quintiles) concerning PMSI and
its businesses, properties or assets to a third party who has made an
unsolicited bona fide written Transaction Proposal, (2) engaging in
discussions or negotiations with such a third party who has made an
unsolicited bona fide written Transaction Proposal, (3) following receipt
of an unsolicited bona fide written Transaction Proposal, taking and
disclosing to its stockholders a position contemplated by Rule 14d-9 or
Rule 14e-2(a) under the Exchange Act or otherwise making disclosure to its
stockholders, (4) following receipt of an unsolicited bona fide written
Transaction Proposal, failing to make or withdrawing or modifying its
recommendation of the Merger Agreement or the Stock Option Agreement and
the transactions contemplated thereby and/or (5) taking any action required
to be taken by PMSI pursuant to an order (other than an order that has been
reversed, withdrawn or stayed) by any court of competent jurisdiction, but
in each case referred to in the foregoing clauses (1) through (5) only to
the extent that the PMSI Board shall have concluded in good faith on the
basis of written advice from outside counsel that the failure to take such
action would be contrary to the fiduciary duties of the PMSI Board to the
stockholders of PMSI under applicable law; provided, further, that PMSI has
agreed in the Merger Agreement that, to the extent that it may do so
without acting in a manner contrary to its fiduciary duties under
applicable law, the PMSI Board will advise Quintiles promptly prior to the
taking of any such action
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and, in addition, if the PMSI Board receives a Transaction Proposal, then
PMSI shall promptly inform Quintiles of the material terms and conditions
of such proposal and the identity of the person making it.
Except as described below, the PMSI Board may not:
- fail to make or withdraw or modify, or propose to withdraw or modify, in
a manner adverse to Quintiles, the PMSI Board's approval or
recommendation of the Merger and the Merger Agreement;
- approve or recommend, or propose to approve or recommend, any Transaction
Proposal; or
- cause PMSI to enter into any agreement (including, without limitation,
any letter of intent) with respect to any Transaction Proposal.
If, after consultation with and based upon the written advice of outside
legal counsel, the PMSI Board determines in good faith that it is necessary to
do so in order to comply with its fiduciary duties to the PMSI stockholders
under applicable law, the PMSI Board may approve or recommend a Superior
Proposal (as defined below) or cause PMSI to enter into an agreement with
respect to a Superior Proposal, but in each case only (1) after providing
reasonable written notice to Quintiles (a "Notice of Superior Proposal")
advising Quintiles that the PMSI Board has received a Superior Proposal,
specifying the terms and conditions of such Superior Proposal and identifying
the person making such Superior Proposal and (2) if, within three business days
of its receipt of the Notice of Superior Proposal, Quintiles does not make an
offer which the PMSI Board, after consultation with its financial advisors,
determines is superior to such Superior Proposal. The term "Superior Proposal"
means any Transaction Proposal that the PMSI Board determines in its good faith
judgment (after consultation with a financial advisor of nationally recognized
reputation) to be more favorable to PMSI's stockholders than the Merger,
including as part of such determination, that, as to any cash consideration to
be paid pursuant to the Superior Proposal, the person making the Superior
Proposal has all requisite funds on hand or has provided customary financing
commitments for the requisite funds.
Indemnification of PMSI Officers and Directors
Quintiles has agreed to indemnify all persons who, prior to the Merger, are
eligible for indemnification pursuant to the PMSI Certificate of Incorporation
or By-Laws (or comparable governing documents of any PMSI subsidiary), which
includes PMSI's officers and directors. This indemnification covers all losses,
claims, damages, costs, expenses, liabilities or judgments or amounts paid in
settlement of or in connection with any claim, action, suit, proceeding or
investigation based in whole or in part out of the fact that such person is or
was a director, officer or employee of PMSI or any of its subsidiaries and
pertaining to any matter existing or occurring at or prior to the Effective Time
of the Merger, whether asserted before or after such time (the "Indemnified
Liabilities"), as well as Indemnified Liabilities relating to the Merger
Agreement and the transactions contemplated thereby. The Merger Agreement limits
the Indemnified Liabilities to the extent of the indemnification rights provided
under the PMSI Certificate of Incorporation and By-Laws or similar governing
documents of any PMSI subsidiary.
Quintiles has agreed to maintain liability insurance coverage for PMSI's
officers and directors on comparable terms to PMSI's existing policy for three
years following the Effective Time of the Merger. Quintiles will not be required
to spend each year more than
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150% of the annual premium paid by PMSI on the date of the Merger Agreement,
which PMSI represents is $208,000. Certain additional amounts may be required to
be paid by QTRN Acquisition Corp.
CONDITIONS TO THE MERGER
Each party's obligation to effect the Merger is subject to the satisfaction
or waiver (if permissible), at or prior to the Merger, of the following
conditions:
- Stockholder Approval. The stockholders of PMSI shall have approved and
adopted the Merger Agreement and approved the Merger.
- HSR Act and Other Approvals. Waiting periods (and any extensions
thereof) applicable to the Merger under the HSR Act and other applicable
laws shall have been terminated or shall have expired.
- No Orders. No order issued by any governmental entity or court of
competent jurisdiction, whether federal, state or foreign, or other legal
restraint that materially restricts, prevents or prohibits the
consummation of the Merger shall be in effect. If any such restraint
exists, the parties must use all reasonable efforts to cause it to be
vacated or lifted.
- Effectiveness of Registration Statement. The Registration Statement
shall have become effective and shall not be the subject of any stop
order or proceedings seeking a stop order, and any material state
securities laws applicable to the registration and qualification of the
Quintiles securities issuable or required to be reserved pursuant to the
Merger Agreement shall have been complied with.
- Nasdaq Listing. The shares of Quintiles common stock issuable or
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on The Nasdaq Stock Market upon official
notice of issuance.
- Other Approvals. Other than the filing of Merger documents under North
Carolina and Delaware law, all authorizations, consents, waivers, orders
or approvals required to be obtained, and all filings, notices or
declarations required to be made, by PMSI or Quintiles prior to the
consummation of the Merger and the other transactions contemplated by the
Merger Agreement shall have been obtained from, and made with, all
required governmental entities, except for such authorizations, consents,
waivers, orders, approvals, filings, notices or declarations the failure
to obtain or make would not have a material adverse effect with respect
to Quintiles.
- Tax Opinions. PMSI and Quintiles each must receive an opinion from its
own tax counsel that the Merger will qualify for U. S. federal income tax
purposes as a tax-free reorganization.
In addition, each company's obligation to effect the Merger is subject to
the satisfaction by the other party of the following conditions:
- Representations and Warranties. Each of the representations and
warranties of the other party contained in the Merger Agreement that is
qualified as to "materiality," "Material Adverse Change" or "Material
Adverse Effect" (as defined in the Merger Agreement) shall be true and
correct, and each of the other representations and warranties of the
other party contained in the Merger Agreement shall be true and correct
in all material respects, in each case as of the Closing Date as though
made on
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and as of the Closing Date, except (1) for changes specifically permitted
by the Merger Agreement and (2) that those representations and warranties
which address matters only as of a particular date shall have been true
and correct as of such date.
- Performance of Agreements and Covenants. The other party shall have
performed in all material respects all obligations required to be
performed by it prior to the Effective Time of the Merger.
The obligation of Quintiles and QTRN Acquisition Corp. to effect the Merger
is subject to satisfaction of the following additional conditions:
- No Litigation. There shall not be pending or threatened by any
governmental authority, any suit, action or proceeding, (1) challenging
or seeking to restrain or prohibit the consummation of the Merger or any
of the other transactions contemplated by the Merger Agreement or the
Stock Option Agreement or seeking to obtain any material amount of
damages, (2) seeking to prohibit or limit the ownership or operation by
PMSI or Quintiles or any of their respective affiliates of any material
portion of their business or assets or to dispose of or hold separate any
material portion of their business or assets, as a result of the Merger
or any of the other transactions contemplated by the Merger Agreement or
the Stock Option Agreement, (3) seeking to impose limitations on the
ability of Quintiles to acquire or hold, or exercise full rights of
ownership of, any shares of the common stock of QTRN Acquisition Corp.
including, without limitation, the right to vote such common stock or (4)
seeking to prohibit Quintiles or any of its subsidiaries from effectively
controlling in any material respect the business or operations of PMSI
and its subsidiaries taken as a whole. No suit, action or proceeding by
any other person shall be pending that seeks any of the relief or
remedies described in clauses (1) through (4) of the immediately
preceding sentence as to which there is a reasonable possibility of
success or that otherwise could reasonably be expected to have a material
adverse effect with respect to Quintiles or PMSI.
- Third Party Approvals. All consents, waivers or approvals identified by
the parties or required to be obtained from third parties under
contracts, agreements or similar instruments to which PMSI or any of its
subsidiaries is a party, or by which any of them is bound, in connection
with the Merger and the other transactions contemplated by the Merger
Agreement shall have been obtained, except to the extent that the failure
to obtain such consents, waivers or approvals would not, in the
aggregate, result in violations, defaults (with or without notice or
lapse of time or both), rights of termination, cancellation or
acceleration, or losses of benefit that would have a Material Adverse
Effect with respect to Quintiles or PMSI.
- Rights Agreement. No triggering event shall have occurred with respect
to the PMSI Rights. The PMSI Board must have the right to redeem the PMSI
Rights, and the PMSI Rights shall not have become nonredeemable and shall
not become nonredeemable upon consummation of the Merger.
- Employment Agreements. Quintiles must receive employment agreements
executed by certain PMSI employees.
- Key Man Life Insurance. PMSI shall have obtained and maintained key man
life insurance for Joy Scott in the amount of $5 million with all
proceeds payable to PMSI.
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TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time of the Merger, whether before or after approval by the PMSI stockholders:
(1) by mutual written consent of Quintiles and PMSI;
(2) by either Quintiles or PMSI if (a) any governmental authority shall
have taken any final, nonappealable action permanently enjoining,
restraining or otherwise prohibiting the Merger, (b) the Merger shall not
have been consummated on or before May 15, 1999 (other than due to the
failure of the party seeking to terminate the Merger Agreement to perform
its obligations thereunder) or (c) the holders of a majority of the
outstanding shares of PMSI common stock fail to approve the Merger, the
Merger Agreement and the consummation of the transactions contemplated
thereby at the special meeting;
(3) by Quintiles, if PMSI or the PMSI Board shall have (a) withdrawn,
modified or amended in any respect adverse to Quintiles its approval or
recommendation of the Merger Agreement or any of the transactions
contemplated thereby (provided that a communication by PMSI that contains
only the information required by Rule 14d-9(e) under the Exchange Act will
not be deemed to be such a modification or amendment or an action described
under (e) below), (b) failed as promptly as practicable after the
Registration Statement is declared effective to mail this Proxy
Statement/Prospectus to the PMSI stockholders or failed to include such
recommendation therein, (c) recommended any Transaction Proposal from a
person other than Quintiles or any of its affiliates, (d) resolved to do
any of the foregoing or (e) in response to the commencement of any tender
offer or exchange offer for more than 15% of the outstanding shares of PMSI
common stock, not recommended rejection of such tender offer or exchange
offer;
(4) by PMSI, if, in compliance with the requirements described under
"-- No Solicitation," the PMSI Board has approved or recommended a Superior
Proposal;
(5) by PMSI, if the Average Trading Price is more than $62.325, unless
within 24 hours after PMSI notifies Quintiles of its intent to terminate
the Merger Agreement for this reason, Quintiles agrees in writing that the
Exchange Ratio will be 0.247091857; or
(6) by Quintiles, if the Average Trading Price is less than $41.55,
unless within 24 hours after Quintiles notifies PMSI of its intent to
terminate the Merger Agreement for this reason, PMSI agrees in writing that
the Exchange Ratio will be 0.370637786.
TERMINATION FEE AND EXPENSE REIMBURSEMENT
PMSI has agreed to pay Quintiles a fee of $8 million in cash upon the
occurrence of either of the following events:
(1) the Merger Agreement is terminated in accordance with its terms
(except as a result of the action of a governmental authority described in
subclause (2)(a) under "-- Termination" above) and either of the following
shall have occurred:
(A) prior to such termination, any corporation (including PMSI or
any of its subsidiaries or affiliates), partnership, person, other
entity or "group" (as referred to in Section 13(d)(3) of the Exchange
Act) other than Quintiles, Sub or any of
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their respective affiliates (collectively, "Persons"), shall have become
the beneficial owner of more than 15% of the outstanding shares of PMSI
common stock; or
(B) (x) prior to such termination, any Person shall have made, or
proposed, communicated or disclosed in a manner which is or otherwise
becomes public a bona fide intention to make a Transaction Proposal (as
defined under "-- No Solicitation" above), including by making such a
Transaction Proposal, and (y) on or prior to September 15, 1999, PMSI
either consummates with a Person a transaction the proposal of which
would otherwise qualify as a Transaction Proposal or enters into a
definitive agreement with a Person with respect to a transaction the
proposal of which would otherwise qualify as a Transaction Proposal
(whether or not such Person is the Person referred to in clause (x)
above); or
(2) the Merger Agreement is terminated as described in clause (3) or (4)
under "-- Termination" above.
In addition, PMSI has agreed that, in any case in which a fee is payable as
provided above, PMSI shall promptly reimburse Quintiles and QTRN Acquisition
Corp. for documented reasonable out-of-pocket expenses incurred by either of
them in connection with the Merger Agreement and the Stock Option Agreement,
including reasonable accounting, investment banking and legal fees and expenses;
provided that the amount of such reimbursement shall not exceed $1 million in
the aggregate.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties in writing at any time
before or after approval thereof by PMSI's stockholders; provided that after
such approval, no amendment of the Merger Agreement may be effected that by law
requires further approval by PMSI's stockholders without the further approval of
such stockholders. The parties may extend the time for performance of any
obligation under the Merger Agreement or waive any inaccuracies in the
representations and warranties contained in the Merger Agreement (or other
documents delivered in connection therewith) at any time prior to the Effective
Time of the Merger by written agreement. In addition, the parties may waive
compliance with any agreements or conditions in the Merger Agreement in writing,
provided that after the PMSI stockholders approve the Merger Agreement, no such
condition or agreement may be waived that by law would require further approval
of the PMSI stockholders to amend without obtaining such approval.
EXPENSES
Except as described under "-- Termination Fee and Expense Reimbursement"
above, the parties to the Merger Agreement have agreed that all costs and
expenses incurred in connection with the Merger Agreement and the Stock Option
Agreement will be paid by the party incurring such expenses, except that the
cost of filing, printing and distributing the Registration Statement and this
Proxy Statement/Prospectus will be borne equally by Quintiles and PMSI.
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EFFECT ON EMPLOYEE BENEFITS, STOCK PLANS AND STOCK OPTIONS
Benefit Plans
From and after the Effective Time of the Merger, Quintiles shall accord to
all employees of PMSI and its subsidiaries that become Continuing Employees (as
defined below) those benefits that Quintiles normally makes available to its
employees under Quintiles' employee benefit plans (as defined in Section 3(3) of
ERISA), in each case as if such Continuing Employee had been employed by
Quintiles for the length of time such Continuing Employee has been employed by
PMSI (provided no such amount of time shall be credited for purposes of the
vesting or other provisions of any option, other than Converted Options (as
defined below), granted to any such Continuing Employee to purchase shares of
Quintiles common stock). A "Continuing Employee" means a full-time employee of
PMSI or its subsidiaries, other than Scott-Levin, immediately following the
Effective Time of the Merger, unless specifically excluded by PMSI in a written
notice to Quintiles at least five days prior to the Closing Date.
Stock Options
As of the Effective Time of the Merger, each vested and unvested option to
purchase shares of PMSI common stock shall be deemed to constitute an option to
acquire, on the same terms and conditions as were applicable under such PMSI
option, the number of shares of Quintiles common stock and contingent value
payments which the holder of such PMSI option would have been entitled to
receive pursuant to the Merger if such holder had exercised such PMSI option in
full immediately prior to the Effective Time of the Merger (utilizing the
Exchange Ratio) (a "Converted Option"). The exercise price per share shall be
adjusted to equal (1) the aggregate exercise price for the shares of PMSI common
stock purchasable pursuant to each PMSI option divided by (2) the number of full
shares of Quintiles common stock deemed purchasable pursuant to such PMSI
option. Incentive stock options shall be further adjusted to the extent
necessary to comply with the Code. After the Maturity Date, any contingent value
payments issuable pursuant to unexercised options will be invalid, and such
options will be exercisable only for shares of Quintiles common stock. If a
Converted Option is exercised on or prior to the Maturity Date, upon the sale of
any shares of Quintiles common stock received in the exercise, any contingent
value payments due pursuant to such shares sold shall be invalid. Quintiles has
agreed to file, at the Effective Time of the Merger, a registration statement
covering the shares of Quintiles common stock and contingent value payments
subject to such options.
EFFECT ON DEBT
PMSI issued a notice of redemption for all of its outstanding Debentures on
the terms and conditions specified under the indenture governing the Debentures
(the "Debt Redemption"). The Debt Redemption was completed on February 1, 1999.
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THE STOCK OPTION AGREEMENT
The following is a summary of the material terms of the Stock Option
Agreement, a conformed copy of which is attached as Appendix C to this Proxy
Statement/Prospectus and incorporated herein by reference.
Concurrently with the execution and delivery of the Merger Agreement, and
as a condition and inducement to Quintiles to enter into the Merger Agreement,
Quintiles and PMSI entered into the Stock Option Agreement pursuant to which
PMSI granted Quintiles an option to purchase up to an aggregate of 2,466,947
shares of PMSI common stock (subject to adjustments under certain circumstances)
at a price per share of $12.00 (the "Stock Option Agreement").
EXERCISE OF THE OPTION
The option is exercisable only upon the occurrence of a "Purchase Event,"
which is defined in the Stock Option Agreement to mean the termination of the
Merger Agreement under any circumstance which would entitle Quintiles to receive
the termination fee described above under "The Merger Agreement -- Termination
Fee and Expense Reimbursement;" provided, however, that a Purchase Event shall
occur upon the occurrence of an event described in clause (1)(B)(x) under "The
Merger Agreement -- Termination Fee and Expense Reimbursement" above
notwithstanding that an event described under clause (1)(B)(y) thereof has not
occurred.
ADJUSTMENT OF NUMBER OF SHARES
The number and type of securities subject to the option and the exercise
price of the option will be adjusted for any change in the PMSI common stock by
reason of a stock dividend, split-up, recapitalization, combination, exchange of
shares or similar transaction, such that Quintiles will receive (upon exercise
of the option) the same number and type of securities as if the option had been
exercised immediately prior to the occurrence of such event (or the record date
therefor). The number of shares of PMSI common stock subject to the option will
also be adjusted in the event PMSI issues additional shares of PMSI common stock
such that the number of shares of PMSI common stock subject to the option
represents 19.9% of the PMSI common stock then outstanding, without giving
effect to shares subject to or issued pursuant to the option.
SUBSTITUTE OPTION
In the event PMSI enters into any agreement to (1) merge or consolidate
with any person other than Quintiles or one of its subsidiaries such that PMSI
is not the surviving corporation, (2) permit any person other than Quintiles or
one of its subsidiaries to merge into PMSI and PMSI is the surviving
corporation, but, in connection with such merger, the PMSI common stock is
exchanged for any other securities or other property or the outstanding shares
of PMSI common stock prior to such merger represent less than 50% of the
outstanding PMSI common stock following such merger, or (3) sell or otherwise
transfer all or substantially all of its assets to a person other than Quintiles
or one of its subsidiaries, the option will be converted into an option (the
"Substitute Option") to purchase securities of either the acquiring person, a
person that controls the acquiring person or PMSI (if PMSI is the surviving
entity), in all cases at the option of Quintiles. The Substitute Option would be
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subject to immediate exercise by Quintiles at a price and subject to conditions
specified in the Stock Option Agreement.
REGISTRATION RIGHTS
Quintiles has certain rights to request registration of any shares of PMSI
common stock purchased pursuant to the option under the securities laws if
necessary for Quintiles to be able to sell such shares.
LIMITATION OF PROFITS
If, as a result of the termination of the Merger Agreement, Quintiles'
Total Profit (as defined below) would exceed $9 million, Quintiles, at its sole
discretion, shall take any of the following actions, or a combination thereof,
to reduce its actually realized Total Profit to $9 million: (1) reduce the
number of shares subject to the option, (2) deliver to PMSI for cancellation
shares of PMSI common stock (or other securities into which the shares
underlying the option are converted or exchanged) or (3) pay cash to PMSI.
"Total Profit" means: (1) the aggregate amount of Net Proceeds (as defined
below), plus (2) all amounts received by Quintiles on the transfer of the
option, plus (3) all equivalent amounts with respect to the Substitute Option,
plus (4) any termination fee received by Quintiles under the Merger Agreement
(see "The Merger Agreement -- Termination Fee and Expense Reimbursement" above),
minus (5) the aggregate of the amount of cash paid to PMSI as a result of this
limitation on Total Profit and the value of shares of PMSI (or other securities)
previously delivered to PMSI. "Net Proceeds" is the aggregate proceeds of a sale
or disposition of the shares issued upon exercise of the option in excess of the
amount paid by Quintiles to exercise the option multiplied by the number of
shares included in such sale or disposition. Notwithstanding the limitation
described in this paragraph, if a court finally adjudicates that Quintiles'
Total Profit is unenforceable, then Quintiles' Net Proceeds under the option
shall be limited to the largest amount enforceable.
EFFECT OF STOCK OPTION AGREEMENT
The Stock Option Agreement is intended to increase the likelihood that the
Merger will be consummated on the terms set forth in the Merger Agreement and
could increase the cost to a third party of acquiring PMSI. Consequently, the
Stock Option Agreement may have the effect of discouraging persons who now or
prior to the Effective Time of the Merger might be interested in acquiring all
of or a significant interest in PMSI from considering or proposing such an
acquisition, even if such persons were prepared to offer higher consideration
per share for PMSI common stock than that implicit in the Per Share Merger
Consideration.
TERMINATION
The option will terminate and be of no further force and effect upon the
earliest to occur of (i) the Effective Time of the Merger, (ii) 12 months after
the first occurrence of a Purchase Event or (iii) termination of the Merger
Agreement prior to the occurrence of a Purchase Event.
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THE CONTINGENT VALUE PAYMENTS
The following is a summary of the material terms of the contingent value
payments. This summary is qualified in its entirety by reference to Section
2.01(b) of the Merger Agreement, a copy of which is attached as Appendix A
hereto, and Exhibit A to the Merger Agreement, which is attached as Appendix B
to this Proxy Statement/Prospectus.
PAYMENT AT MATURITY DATE
On the Maturity Date, Quintiles will pay to each PMSI stockholder who
receives shares of Quintiles common stock on the Maturity Date (a "Holder"), for
each share of Quintiles common stock then received, a contingent value payment
in cash equal to the amount, if any, by which the Average Trading Price exceeds
the CVP Average Trading Price. For example, if the Average Trading Price were
equal to $50 and the CVP Average Trading Price were equal to $48, a contingent
value payment would represent the right to receive $2 in cash with respect to
each share of Quintiles common stock received. The closer the CVP Average
Trading Price is to the Average Trading Price, the less cash a contingent value
payment will be worth.
If a PMSI stockholder elects to receive the deferred Quintiles common stock
prior to the Maturity Date, no contingent value payments will be paid with
respect to those shares.
The "Maturity Date" will be 75 days after the Closing Date.
DETERMINATION THAT NO AMOUNT IS PAYABLE WITH RESPECT TO THE CONTINGENT VALUE
PAYMENTS
If the CVP Average Trading Price exceeds or equals the Average Trading
Price, there will be no amount payable under the contingent value payments. In
addition, if the average closing price per share of Quintiles common stock is
greater than or equal to the Average Trading Price for any period of 30
consecutive trading days between the Closing Date and the Maturity Date, there
will be no amount payable with respect to the contingent value payments on the
Maturity Date and the contingent value payments will terminate immediately.
PAYMENT IN THE EVENT OF CERTAIN BUSINESS COMBINATION TRANSACTIONS
Quintiles will notify the holders of contingent value payments if Quintiles
common stock is no longer listed on Nasdaq as the result of any merger,
consolidation, sale, conveyance or other change of control transaction. As
promptly as practicable after the closing of a transaction described in the
previous sentence, Quintiles will pay to each Holder, for each share of
Quintiles common stock to be received by such Holder on the Maturity Date, a
contingent value payment in cash equal to the amount, if any, by which the CVP
Average Trading Price exceeds the average of the closing prices per share of
Quintiles common stock for the 10 trading days ending with the last trading day
immediately preceding the closing date of the transaction.
ANTIDILUTION
In the event Quintiles subdivides or combines the outstanding shares of
Quintiles common stock, Quintiles will adjust the contingent value payment, if
any, payable pursuant to the Merger Agreement. Quintiles will notify each Holder
upon any such adjustment.
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NO TRANSFERABILITY
The contingent value payments are not transferable, except by the laws of
descent and distribution or in connection with a transfer of a PMSI
stockholder's entire right to receive Per Share Merger Consideration in
accordance with the Merger Agreement. Any attempt to transfer, sell, exchange or
otherwise dispose of a contingent value payment or any beneficial interest in a
contingent value payment will have no force or effect.
TRADING/LISTING
The contingent value payments will be uncertificated. Quintiles will not
list the contingent value payments for trading on any securities market or
exchange.
LIMITATION ON SHORT SELLING
A Holder shall lose his or her right to any contingent value payment if, at
any time during the 20 trading days preceding the Maturity Date, (1) such
Holder's "short position" in Quintiles common stock (as determined in accordance
with Rule 14e-4(a) under the Exchange Act, but without taking into account the
contingent value payments) exceeds such Holder's "long position" in Quintiles
common stock (as determined in accordance with Rule 14e-4(a) under the Exchange
Act) or (2) such Holder takes any action to manipulate the market price of
Quintiles common stock which would cause a violation of Section 9 of the
Exchange Act. Quintiles may require Holders to deliver reasonably satisfactory
evidence of their short and long positions in Quintiles common stock during this
20-trading day period as a precondition to its obligation to make any contingent
value payment. This prohibition will not apply to any Holder that is a nominee
or trustee for multiple ultimate beneficial owners. Rather, the short and long
positions of such ultimate beneficial owners will determine the right of such
Holder to receive the contingent value payment otherwise attributable to such
ultimate beneficial owner.
ABOUT QUINTILES
GENERAL INFORMATION
Quintiles is a market leader in providing full-service contract research,
sales, marketing and health care policy consulting and health information
management services to the global pharmaceutical, biotechnology, medical device
and health care industries. Supported by its extensive information technology
capabilities, Quintiles provides a broad range of contract services to help its
clients reduce the length of time from the beginning of development to peak
sales of a new drug or medical device. Quintiles' contract research services
include a full range of development services focused on helping its clients
through the development and regulatory approval of a new drug or medical device.
Quintiles' contract sales services, including sales and specialized marketing
support services, focus on helping its clients achieve commercial success for a
new product or medical device. Quintiles also offers healthcare policy research
and management consulting which emphasize improving the quality, availability
and cost-effectiveness of healthcare.
Quintiles' principal offices are located at 4709 Creekstone Drive,
Riverbirch Building, Suite 200, Durham, North Carolina 27703-8411.
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CERTAIN INFORMATION INCORPORATED BY REFERENCE
Certain information relating to principal stockholders and security
ownership of management, executive compensation, various benefit plans
(including share option plans), certain relationships and related transactions
and other related matters as to Quintiles is set forth in Quintiles' Annual
Report on Form 10-K for the year ended December 31, 1997, incorporated herein by
reference. Stockholders of PMSI desiring a copy of such document may contact
Quintiles by mail at 4709 Creekstone Drive, Riverbirch Building, Suite 200,
Durham, North Carolina 27703-8411 or by telephone at (919) 998-2000 as indicated
under "Where You Can Find More Information" on page 98.
RECENT EVENTS
On January 5, 1999, Quintiles announced the completion of its previously
announced acquisition of substantial assets of Hoechst Marion Roussel's Kansas
City-based Drug Innovation and Approval facility and the opening of a Kansas
City contract research facility.
On December 15, 1998, Quintiles entered into an Agreement and Plan of
Merger (the "ENVOY Agreement") with QELS Corp., a Tennessee corporation and a
wholly-owned subsidiary of Quintiles ("Merger Sub") and ENVOY Corporation, a
Tennessee corporation ("ENVOY"), which provides for Merger Sub to merge with and
into ENVOY (the "ENVOY Transaction") in a pooling of interests transaction.
ENVOY is a leading provider of EDI and transaction processing services to
participants in the health care market, including pharmacies, physicians,
hospitals, dentists, billing services, commercial insurance companies, managed
care organizations, state and federal governmental agencies and others. ENVOY
provides healthcare EDI services on a real-time and batch-processing basis by
utilizing proprietary computer and telecommunications software and
microprocessor technology. ENVOY is one of the largest processors of electronic
real-time pharmacy and commercial third-party payor batch transactions in the
United States based upon annual transaction volume. Through its recently
completed business combinations with the ExpressBill Companies, ENVOY believes
that it has the largest patient statement processing and printing services
business in the United States, processing more than 160 million patient
statements annually. ENVOY's transaction network, which processed approximately
1.2 billion transactions in 1998, consisted of approximately 200,000 physicians,
36,000 pharmacies, 42,000 dentists, 4,600 hospitals and 865 payors, including
approximately 47 Blue Cross Blue Shield Plans, 59 Medicare Plans and 40 Medicaid
Plans as of December 31, 1998. ENVOY Common Stock trades on The Nasdaq Stock
Market under the symbol "ENVY."
The principal executive offices of ENVOY are located at Two Lakeview Place,
15 Century Boulevard, Suite 600, Nashville, Tennessee 37214 and its telephone
number is (615) 335-3700.
Under the ENVOY Agreement, each outstanding share of ENVOY common stock,
par value $0.01 per share ("ENVOY Common Stock") and each outstanding share of
ENVOY Series B Convertible Preferred Stock, liquidation preference $10.75 per
share ("ENVOY Preferred Stock") would be exchanged for 1.166 shares of Quintiles
common stock. At December 14, 1998, 21,574,795 shares of ENVOY Common Stock and
2,800,000 shares of ENVOY Preferred Stock were outstanding and ENVOY had 3.5
million shares subject to outstanding stock options which, as a result of the
ENVOY Transaction will become exercisable for shares of Quintiles common stock.
The ENVOY Transaction is expected to be
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tax-free to ENVOY shareholders. Consummation of the ENVOY Transaction is subject
to certain conditions, including the approval of the ENVOY Transaction by the
shareholders of Quintiles and of ENVOY and the receipt of required regulatory
approvals, including the expiration of the applicable waiting period under the
HSR Act. Prior to the meeting of the ENVOY shareholders, the ENVOY Agreement may
be terminated by Quintiles if Quintiles' stock price rises above $71.50 per
share or by ENVOY if Quintiles' stock price falls below $40.00 per share for a
specified period. Upon completion, Quintiles will nominate three ENVOY members
for election to Quintiles' Board of Directors.
In connection with the ENVOY Agreement, the directors and holders of ENVOY
Preferred Stock (together, the "ENVOY Shareholders") entered into a Stock Voting
Agreement with Quintiles, (the "Stock Voting Agreement") whereby the ENVOY
Shareholders agreed to vote their ENVOY Common and Preferred Stock (constituting
approximately 16% of the total outstanding capital stock of ENVOY) in favor of
the ENVOY Transaction.
The foregoing descriptions of the ENVOY Agreement and the Stock Voting
Agreement, and the transactions contemplated thereby, do not purport to be
complete and are qualified in their entirety by reference to the ENVOY Agreement
and the Stock Voting Agreement, which are attached as exhibits to Quintiles'
Current Report on Form 8-K dated December 17, 1998, incorporated herein by
reference.
ABOUT PMSI
GENERAL
PMSI was formed in 1991 by carving out the pharmaceutical services business
from Walsh International Inc. ("Walsh") and consummating a public offering of
PMSI common stock. PMSI provides a range of information and market research
services to pharmaceutical and healthcare companies in the United States to
enable them to optimize the performance of their sales and marketing activities.
Prior to August 5, 1998, it also provided information services for similar
purposes in Europe and Japan. Most of PMSI's services are generated from its own
proprietary databases containing unique pharmaceutical, managed care, healthcare
market and medical prescriber data.
On December 15, 1997, PMSI completed the series of NDC Transactions with
Source, a spin-off of Walsh with which PMSI had entered into the Source US and
Source Europe joint ventures, and NDC. Pursuant to the NDC Transactions, PMSI
(i) sold the OTC Business and its interest in Source US to NDC in return for
approximately 1.1 million shares of common stock of NDC and $6.5 million in cash
and (ii) acquired from Source (a) the operations of Source Europe, (b) $9
million in cash and (c) approximately 920,000 shares of PMSI common stock owned
by Source, partially in return for forgiveness by PMSI of loans to Source.
On August 5, 1998, PMSI sold its non-US operating assets, with the
exception of its Source prescription data and PMSI targeting businesses in
Belgium, to IMS in return for which PMSI received 1,197,963 shares of IMS common
stock. IMS has since exercised its option to acquire the PMSI Belgian business
and PMSI has disposed of Source-Belgium in a separate transaction.
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Through its Scott-Levin subsidiary in the United States, PMSI provides a
range of pharmaceutical and healthcare information and market research services.
The services are comprised of proprietary database services, syndicated market
research audits, managed care and governmental information services and added
value services, including strategic studies and surveys, consulting service and
software solutions. Scott-Levin has implemented state-of-the-art data access and
integration technology and internet capabilities for virtually all services.
PMSI's principal offices are located at: 45 Rockefeller Plaza, Suite 912,
New York, New York 10111.
PROPRIETARY HEALTHCARE DATABASES
The foundation of Scott-Levin's business is a variety of proprietary
databases. Through self-administered surveys, Scott-Levin maintains various
comprehensive databases that contain information collected from physicians on
their diagnoses, prescribing activities; the incidence of, and response to,
direct selling and other promotion activities; information regarding healthcare
legislation and key influencers in the United States; a managed care database,
detailing cost containment measures imposed by United States managed care
organizations ("MCOs") that influence or restrict physicians' prescribing
activities, which also covers formularies, administrators and the physicians
affiliated with the MCOs.
Pursuant to a contract with NDC, Scott-Levin obtains prescription
information which NDC collects from approximately 35,000 pharmacies located
across the United States. Scott-Levin creates projected state and national data
on product level prescription movement from which, among other things, it
generates the Source Prescription Audit.
Scott-Levin does not hold any identifiable individual patient data, except
data collected directly from the patient, which is held with the patients'
permission.
SYNDICATED MARKET RESEARCH AUDITS
Scott-Levin's marketing research audits are generated from databases
containing information collected by questionnaire, diary or personal interview,
dispensed prescriptions and secondary research. The results of the audits are
delivered in hard copy or through PC-based data delivery systems. These audits
include the Source Prescription Audit, which analyzes pharmaceutical product
consumption; Physician Drug And Diagnosis Audit, which analyzes the
pharmaceuticals prescribed by physicians relative to the associated diagnosis;
the Personal Selling Audit ("PSA"), which analyzes the effectiveness of the
client company's sales activities compared with those of its competitors; the
Hospital Personal Selling Audit, which complements the PSA by monitoring and
analyzing sales activity in the hospital environment; the Physician Meeting And
Event Audit, which assesses the impact of this promotional activity on
subsequent attendee prescribing; the HIV Therapy Audit, which provides a
projectable database tracking physicians who treat HIV, and HIV positive
patients; and the Direct-To-Consumer Advertising Audit, designed to evaluate and
measure the impact of direct-to-consumer advertising on physicians and
consumers.
MANAGED CARE INFORMATION AND GOVERNMENTAL INFORMATION SERVICES
Scott-Levin provides a range of services derived from its managed care
database, including the Integrated Managed Care Profiles service, which enables
pharmaceutical companies to identify, target and prioritize those MCOs that are
most relevant to their own
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specific pharmaceutical products. Additionally, Scott-Levin has developed
information services that identify the influences of federal and state
governments on pharmaceutical prescribing and dispensing. An example of these
services is Stateline, a PC-based database product which provides pharmaceutical
companies with detailed information on the health policies of each of the 50
states and the District of Columbia and on the government officials involved in
shaping these policies.
ADDED VALUE SERVICES
Scott-Levin provides pharmaceutical companies in the United States with a
range of added value and research services that are used (1) to study specific
issues and trends in the marketplace and the broader health care industry, (2)
to evaluate the effectiveness of marketing programs, (3) to analyze in depth
particular components of a product marketing program at any stage of its
implementation, and (4) for consultancy on optimizing company strategy, sales
and marketing activities and product commercialization.
MARKETING AND SALES
PMSI employs marketing, sales and client service professionals in its
Scott-Levin subsidiary. Many members of PMSI's sales and marketing staff have
substantial pharmaceutical and information technology industry experience.
Sales to the pharmaceutical or information services industry accounted for
substantially all of PMSI's revenue in fiscal 1998. Virtually every major US
pharmaceutical company is a customer of PMSI. PMSI also provides certain
information services to the financial services industry. For the year ended June
30, 1998, PMSI's ten largest customers were responsible for 38.7% of its
revenue, with no one customer accounting for 10% or more. Although PMSI's
business is dependent upon its relationships within the healthcare and
pharmaceutical industries and the prospects of those industries, PMSI's business
would not be materially adversely affected by the loss of any single customer.
COMPETITION
PMSI's information services in the United States have been systematically
established over sixteen years, however, their market position may be affected
in the future by competitors' efforts to create or acquire enhanced databases or
to develop and market new information products and services. PMSI has
competitors that are significantly larger with substantially greater resources
than PMSI, including, but not limited to, IMS and NDC.
ACQUISITION AND DIVESTMENT STRATEGY
PMSI was built through a series of strategic acquisitions that have
positioned it to provide comprehensive information services to the
pharmaceutical and healthcare industries in major world markets.
On August 5, 1998 PMSI announced that it had completed the sale of all of
its non-US operating assets, with the exception of its Source prescription data
and PMSI targeting businesses in Belgium, to IMS for consideration of 1,197,963
shares of IMS common stock. IMS was granted an option to purchase either or both
of the Belgian businesses within a three-month period and has exercised its
option with respect to PMSI-Belgium. PMSI has disposed of Source-Belgium in a
separate transaction.
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PMSI sold IMR, its French point of sale marketing business, on March 31,
1998. This was the last remaining business to be sold as a result of PMSI's
decision in May 1996 to discontinue its non-database segment. The business was
sold for consideration of approximately $3.2 million in cash. The assets sold
included cash and cash equivalents of $1.2 million. A net loss on sale of this
business of $16.9 million, after selling costs and before a tax benefit of $8.8
million, has been reflected in the statement of operations for the year ended
June 30, 1998.
For the period through December 15, 1997, PMSI jointly exploited, through a
long-term agreement, a database of prescription data (the "Source Database")
created and maintained by Source US. On December 15, 1997, PMSI completed the
NDC Transactions. Pursuant to the NDC Transactions, PMSI acquired Source Europe
for consideration of $8.4 million in the form of the cancellation of amounts
advanced to Source under a line of credit of $6.4 million and direct costs of
$2.0 million. Source Europe is a developing business involved in building
databases of information from prescriptions dispensed in the UK, Germany,
France, Belgium and Italy and in developing the software technology to support,
access and generate information from such databases. This information enables
pharmaceutical companies to measure and analyze product performance at a
detailed geographical level, namely small groups of physicians or at the
individual physician level and thereby to improve sales force productivity.
Source Europe was subsequently sold to IMS in the IMS Transaction.
On July 30, 1997 PMSI sold its Dutch and US-based international publishing
and communications operations to Excerpta Medica, the medical communications
division of Elsevier Science, for $9 million, resulting in a net gain on sale of
approximately $3 million. The sale of these businesses formed part of the
program of divestitures of non-core businesses announced by PMSI in May 1996.
PMSI previously acquired 80% of the common stock of Mediphase Limited
("Mediphase"), a specialist software and information company in the United
Kingdom that has developed and markets retail pharmacy dispensary management
software. As a condition of purchase, PMSI obtained the right to acquire the
remaining 20% of the common stock between July 1997 and July 1999, based upon
the number of Mediphase systems installed at certain dates. The minority
interest in Mediphase was acquired during July 1997 for $1.7 million. Mediphase
was subsequently sold to IMS in the IMS Transaction.
BACKLOG
As of June 30, 1998, PMSI (including the business sold to IMS) had
contracts running through 2003 of $48.0 million of which $29.0 million are for
contracts to be completed by June 30, 1999. Included in the total backlog, is
$24.2 million for contracts to be completed by Scott-Levin. As of June 30, 1997,
PMSI (including the businesses sold to NDC) had contracts running through 2001
of $103 million of which $45 million were for contracts to be completed by June
30, 1998.
INDUSTRY REGULATION
The pharmaceutical industry is subject to extensive regulations in the
countries in which PMSI operates. A number of governments have enacted
regulations limiting the prices pharmaceutical companies may charge for drugs.
While PMSI believes that cost containment measures that may be adopted by
government agencies will cause pharmaceutical companies to seek more effective
means of marketing their products (which will benefit PMSI in the medium and
long term), such governmental regulation has caused pharmaceutical compa-
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nies to revise or reduce their marketing programs. These cost containment
measures, together with pharmaceutical companies' desire to increase market
share or improve their research pipelines, have caused both vertical and
horizontal integration and several significant mergers.
In addition to pharmaceutical industry regulation, PMSI is directly subject
to certain restrictions on the collection and use of data. In the United States,
certain states have enacted legislation prohibiting the use of personally
identifiable prescription drug information without consent. Because PMSI does
not generally receive information regarding the identity of patients, PMSI
believes that such state legislation will have no material adverse effect on its
business. There can be no assurance that future legislation or regulations will
not directly or indirectly restrict the dissemination of information regarding
physicians or prescriptions. Such legislation, if enacted, could have a material
adverse effect on the operations of PMSI.
The Market Research Code of Conduct, a pharmaceutical industry-promulgated
code of conduct to which PMSI adheres, provides that the identity of the
individual researched may never be disclosed to the company sponsoring such
research without such individual's consent. PMSI supplies only aggregated
statistics to the sponsoring company when information is generated from market
research databases. As recommended by the board of directors of the
Pharmaceutical Manufacturer's Association, the PMSI databases do not contain
patient names, thus preserving confidentiality. Data provided at the physician
level is obtained from prescribing activity by product or therapy class over a
given period. Pharmaceutical companies receive information as to the projected
prescribing levels of particular physicians. PMSI does not hold any identifiable
individual patient data, except on a temporary basis with the patients' prior
permission for follow-up research and disease management purposes.
EMPLOYEES
As of September 30, 1998, PMSI's operations had approximately 239 full-time
employees, of which 215 are employed by Scott-Levin. There are no collective
bargaining agreements in effect with employees of PMSI. PMSI considers its
relationships with its employees to be good.
PROPERTIES
PMSI currently leases or subleases space in two locations in the United
States, including its principal office facilities in Newtown, Pennsylvania.
PMSI's usage of such facilities aggregates approximately 35,100 square feet for
which the aggregate lease rentals are $578,000 per annum under a lease expiring
in 2002. In connection with the IMS Transaction, PMSI transferred approximately
30,000 square feet of office and warehouse facilities in the Netherlands that
PMSI owned with a recorded cost of approximately $4.5 million. PMSI has the
right to receive proceeds from the sale of this property in excess of $2
million.
LEGAL PROCEEDINGS
PMSI is not a party to any outstanding material legal proceedings.
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PMSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion is derived from PMSI's Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 1998 and Annual Report on Form
10-K for the fiscal year ended June 30, 1998 that have been filed with the SEC.
OVERVIEW
The following discussion and analysis contains "forward looking"
statements, within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, that involve risks and uncertainties. PMSI's actual
results may differ significantly from the results discussed in the "forward
looking" statements.
Much of PMSI's business is based upon proprietary databases, computer
technology and product know-how, and assets that are generally difficult,
time-consuming or costly for third parties to duplicate. PMSI's strategy is to
take advantage of its operating leverage and grow the business by increasing the
market penetration of existing products and services, by developing products and
services for different national markets, and by creating new information
services from data in the PMSI databases or from linking such data with data
from third parties to meet the evolving information needs of the pharmaceutical
and healthcare industry.
The net income for the six months ended December 31, 1998 reflects the
continued extensive disposal program undertaken by PMSI over the past fifteen
months. On August 5, 1998, PMSI announced that it had completed the sale of all
of its non-US operating assets, with the exception of its Source prescription
database and PMSI targeting businesses in Belgium, to IMS for consideration of
1,197,963 shares of IMS common stock. This disposal followed the sale of PMSI's
Dutch and US-based international publishing business, its interest in the Source
US and the OTC Business and IMR S.A., its French point of sale marketing
business ("IMR") in the year to June 30, 1998.
The operating results reported below for the six months ended December 31,
1998 include the US based Scott-Levin business, a leading provider of market
research and managed care information services principally to the pharmaceutical
industry in the US and Belgium subsidiaries (which have since been disposed of).
REVENUE
Revenue for PMSI's first half of fiscal 1999 decreased to $18.4 million
from $41.7 million for the corresponding period of 1998, representing a decrease
of 56%. This reduction was the result of PMSI's divestiture program.
Revenue for the year ended June 30, 1998 was $78.0 million, a decrease of
$20.5 million (21%), compared with revenue for the year ended June 30, 1997. The
reduction in reported revenues resulted from the sale of PMSI's international
publishing business in July 1997 and its interest in the Source US joint venture
and OTC businesses in the US in December 1997. In the year ended June 30, 1997
revenues from the divested businesses totaled $37.3 million. These divestments
offset revenue growth in PMSI's ongoing businesses, in particular Scott-Levin in
the US and PMSI's targeting business in Japan, both of which contributed revenue
growth of more than 20% compared with the prior year. Currency exchange rate
movements negatively impacted the year's revenue by $2.3 million, or 3%.
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Revenue for the year ended June 30, 1997 was $98.5 million, an increase of
$5.5 million (6%) over revenue for the year ended June 30, 1996. Revenues grew
significantly in the United States market research and database businesses,
Japanese information services and UK market research division. This growth was
partially offset by the revenue reduction of $1.0 million, due to the divestment
of poorly performing database businesses at the end of fiscal 1996 and during
1997. Currency exchange rate movements when compared to 1996 rates, principally
in Japan and the Netherlands, negatively impacted the year's revenue by $3.5
million, or 4%.
PRODUCTION COSTS
Production costs during the first half of fiscal 1999 decreased to $7.1
million (39% of revenue) from $22.0 million (52% of revenue) for the comparable
six months of fiscal 1998. This reduction was the result of PMSI's extensive
divestiture program.
PMSI's production costs include the costs of data collection, outside
supplies and services, internal computer costs and the costs attributable to
personnel involved in the production of PMSI's products and services.
Production costs for the year ended June 30, 1998 were $43.7 million (56%
of revenue), compared to $54.5 million (55% of revenue) for the year ended June
30, 1997. The decrease in costs of $10.8 million is attributable to the sale of
PMSI's international publishing business in July 1997 and its interest in Source
US joint venture and OTC businesses in the US in December 1997. In fiscal 1997,
production costs of $23.1 million were attributable to these businesses. As a
percentage of revenue production costs have increased due to the
disproportionately high costs associated with the further development of the
Source Europe business.
Production costs for the year ended June 30, 1997 were $54.5 million (55%
of revenue), compared to $51.6 million (55% of revenue) for the year ended June
30, 1996. The 6% increase in costs was primarily attributable to revenue growth
and new product development in Japan and Europe.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") costs during the first half of
fiscal 1999 decreased to $14.1 million (77% of revenue) from $16.1 million (39%
of revenue) for the comparable six months of fiscal 1998. The six months to
December 31, 1998 costs include $2.9 million of non-recurring costs relating to
the sale of the non-U.S. businesses to IMS. These costs included closure and
termination costs, asset write-off, relating to certain support functions no
longer needed following the disposal, together with transaction bonuses.
SG&A expenses were $34.2 million (44% of revenues) for the year ended June
30, 1998 as compared to $34.8 million (35% of revenues) for the year ended June
30, 1997. The reduction in SG&A was due to the sale of PMSI's international
publishing business and its interest in the Source US and the OTC Business in
the US, while the increase in expenses as a percentage of revenue is
attributable to the inclusion of the Source Europe business from December 15,
1997 for which a high level of sales and marketing costs were required to
develop the business.
SG&A expenses were $34.8 million (35% of revenues) for the year ended June
30, 1997 as compared to $34.2 million (37% of revenues) for the same period in
1996. The reduction
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in general and administrative expenses as a percentage of sales is attributable
to the implementation of improved cost controls in the US and the divestment of
poorly performing database businesses with disproportionately high general and
administrative expenses.
IN-PROCESS RESEARCH & DEVELOPMENT WRITE-OFF
The acquisition of Source Europe during the quarter ended December 31, 1997
resulted in a one-time charge of $12.0 million for the write-off of in-process
research and development ("IPR&D").
The acquired IPR&D related to Source Europe's then current development
projects, in five countries, to create complex software-based projection
methodologies for prescription data. Each projection methodology had been
customized to adapt to each country's unique characteristics regarding data
collection, manipulation, validation, zone definition, prescription mix,
pharmacy volume weights, and dynamic rounding. The five countries are Germany,
United Kingdom, Italy, Belgium and France.
AMORTIZATION OF INTANGIBLE ASSETS
Acquired databases, software and other purchased intangibles are valued at
their fair value at the date of acquisition and are amortized over periods of up
to five years. Goodwill is amortized on a straight-line basis over periods
between 5 and 40 years. The cost of updating and maintaining databases is
expensed as incurred, as is the cost of developing software for internal use,
which has not reached technological feasibility.
In PMSI's consolidated financial statements, amortization has been recorded
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Databases............................................... $ 126 $ 6 $ --
Software................................................ 247 205 436
Goodwill................................................ 1,639 1,522 1,160
------ ------ ------
Total......................................... $2,012 $1,733 $1,596
====== ====== ======
</TABLE>
For the year ended June 30, 1998, compared to the same period in fiscal
1997, goodwill amortization decreased due to the sale of PMSI's international
publishing business, while software amortization increased due to the
amortization of completed technology recognized on the acquisition of the Source
Europe business.
For the year ended June 30, 1997, compared to the same period in 1996,
database, software and goodwill amortization decreased due to the effects of the
charge for the impairment of long lived assets recorded during fiscal 1996.
IMPAIRMENT OF ASSETS HELD FOR SALE
An impairment charge of $14.7 million was made in the second quarter of
fiscal 1998 in respect of IMR, PMSI's French point of sale business. During the
third quarter of fiscal 1998 this business was divested.
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IMPAIRMENT OF LONG-LIVED ASSETS AND RESTRUCTURING COSTS
In the third-quarter of fiscal 1996, PMSI recorded a $2.4 million
write-down in the value of long-lived assets, primarily goodwill and databases
pursuant to the adoption of FAS 121, "Accounting for the Impairment of Long
Lived Assets and Long Lived Assets to be Disposed Of." In addition, PMSI
recorded $2.3 million of restructuring costs. These charges were primarily
related to the disposal of two database businesses that did not meet performance
expectations.
TRANSACTION COSTS
Transaction costs during the first half of fiscal 1999 of $0.8 million,
relating to the proposed sale of PMSI to Quintiles, have been incurred. These
costs relate to fees paid to PMSI's investment bankers and legal advisors.
Transaction costs of $1.1 million, relating to the proposed sale of all of
PMSI to Cognizant (now IMS), were expensed during the third and fourth quarters
of the year ended June 30, 1998. These principally related to fees for PMSI's
investment bankers.
GAIN OF SALE OF OPERATIONS, NET OF LOSS
On August 5, 1998, PMSI announced that it had completed the sale of all of
its non-US operating assets, with the exception of its Source prescription
database and PMSI targeting businesses in Belgium, to IMS for consideration of
1,197,963 shares of IMS common stock, resulting in a profit before tax of $52.8
million reflected in the statement of operations for the six months ended
December 31, 1998.
Sales of the Source US, the OTC Business, the international publishing
business and IMR were completed during the year ended June 30, 1998, resulting
in a net pre-tax gain of $34.1 million. The individual components of the pretax
gain were as follows:
1. On July 1, 1997 PMSI sold its Dutch and US-based international
publishing and communications operations to Excerpta Medica, the medical
communications division of Elsevier Science, for approximately $9 million
in cash, resulting in a pre-tax gain on sale of $2.6 million.
2. The sale of PMSI's interest in Source US and the OTC Business was
completed during the second quarter of fiscal 1998, resulting in a pre-tax
gain of $33.6 million.
3. The sale of IMR, PMSI's French point of sale marketing business, was
completed during the third quarter of fiscal 1998 and PMSI incurred a
pre-tax loss on sale of $2.1 million in the year.
INTEREST AND OTHER INCOME
PMSI invests its excess cash with major banks, and cash equivalents and
marketable securities in a professionally managed fund.
Interest income and other income for the first half of fiscal 1999 was $9.7
million, an increase of $7.7 million over the equivalent period in fiscal 1998.
This increase was mainly due to the gain of $6.0 million on sale of marketable
securities.
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For the year ended June 30, 1998, PMSI's interest and other income was $5.7
million, compared with $3.3 million for the year ended June 30, 1997. The
increased interest income and other income was principally attributable to a
realized gain amounting to $1.7 million on the sale by PMSI of NDC shares during
the third quarter of fiscal 1998 and, to a lesser extent, increased returns on
the higher balance available for investment following the receipt of proceeds
from businesses divested in the period.
For the year ended June 30, 1997, PMSI's interest income was $3.3 million,
compared to $2.5 million for the same period in 1996, mainly due to an increased
return on PMSI's investments.
INTEREST EXPENSE
Interest expense for the first half of fiscal 1999 was $1.9 million, a
decrease of $0.4 million compared with the equivalent period in fiscal 1998.
This decrease was the result of the partial redemption of long-term debt in the
quarter ended September 30, 1998.
For the year ended June 30, 1998, PMSI's interest expense was $4.6 million,
compared with $3.5 million for the year ended June 30, 1997. The interest
expense was lower in fiscal 1997 due to the allocation of enterprise interest to
discontinued operations for part of the year.
For the year ended June 30, 1997, PMSI's interest expense was $3.5 million,
compared to $2.6 million for the same period in 1996 due to the allocation of
enterprise interest to discontinued operations for a full year in 1996 but only
for part of fiscal 1997.
INCOME TAX PROVISION
The effective income tax rates for the six months ended December 31, 1998
and 1997 were 13% and 77%, respectively. The 1998 rate was negatively impacted
by non-deductible operating losses incurred in countries where a benefit could
not be taken, and by the favorable impact of the release of a $1.9 million state
tax provision, which is no longer required, and the gain on sale of operations
of $52.8 million which had an associated tax charge of $7.0 million. The 1997
effective tax rate was negatively impacted by the non-deductible write-off of
in-process research and development costs.
The tax provisions of $1.2 million, $2.7 million and $5.7 million for the
years ended June 30, 1996, 1997 and 1998, respectively, reflect taxes payable in
respect of profitable foreign and domestic operations.
The effective income tax rate for the year ended June 30, 1998 was 106%.
This overall rate was due to PMSI's inability to recognize deferred tax assets
in European jurisdictions where it made substantial losses while incurring
significant taxes on profits earned in the US and Japan, non-deductible goodwill
amortization and non-recurring items, including an additional provision for
taxes of $1.5 million for probable liabilities arising from tax audits in
progress. The full liability assessed by the tax authorities as a result of the
audits was approximately $3 million and, at the request of the tax authorities,
PMSI deposited approximately $3 million into an escrow account pending the
outcome of its appeal. The escrow amount was included in other assets at June
30, 1998.
During fiscal 1998, PMSI recognized a tax benefit of $8.8 million on the
sale of IMR, and provisions for tax on a $33.6 million gain on the sale of the
Source US joint venture and the OTC Business and a $1.7 million gain on the sale
of NDC shares.
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PMSI recognizes deferred tax assets in situations where it is more likely
than not that PMSI will benefit in the future from temporary differences between
book and taxable income. A valuation allowance has been made against a
significant part of the net operating losses established in the current year,
due to the expectation of further statutory tax losses in certain foreign
jurisdictions.
During the period ended September 30, 1998, PMSI redeemed $19.7 million of
PMSI's 6 1/4% Debentures at an aggregate cost of $17.2 million. As a result of
the early redemption, PMSI recognized an after-tax extraordinary gain of $1.2
million.
DISCONTINUED OPERATIONS
Following the decision to divest its non-database segment, a $5.7 million
loss on disposal was recorded by PMSI during fiscal 1996. This, together with
the net loss for the period through March 31, 1996 of $3.2 million, were
classified as the "loss from discontinued operations, net" in the 1996 statement
of operations.
During fiscal 1997, PMSI recorded a further net charge for the loss on
disposal of discontinued operations of $9.9 million. This arose from changes to
the original estimates of net proceeds and income expected to be generated
during the disposal period.
PMSI sold IMR on March 31, 1998 (see "About PMSI -- Acquisition and
Divestment Strategy"). Prior to that sale, the results of this business were
included within operating income from continuing operations as "income from
assets held for sale." Its net assets, together with the remaining accrual for
the loss expected to be generated on disposition, are recorded in the balance
sheet as "net current assets held for sale" and "net assets held for sale."
CURRENCY FLUCTUATIONS
As an international company prior to the IMS Transaction, PMSI has been
affected by fluctuations in foreign currency exchange rates. Although most of
PMSI's services are priced in the local currency of the business unit providing
the service, the effects of foreign currency fluctuations are mitigated by the
fact that expenses of foreign subsidiaries are incurred in the same currency as
sales. The reported net income of foreign subsidiaries will be affected by
changes in the exchange rates of foreign currencies against the United States
dollar. The foreign currency risk applicable to PMSI's operations has not been
hedged.
QUARTERLY RESULTS
The production costs of PMSI's pharmaceutical information services (which
are expensed as incurred) have a relatively high fixed direct cost component
because of the relatively constant cost of maintaining the databases from which
the services are derived. Once these fixed costs are covered, a higher gross
margin is achieved on incremental revenues. PMSI's overall gross profit margin
in any quarter and any improvement in such margin over time will therefore be
highly dependent on the relative gross profit margins of PMSI's various products
and services that contribute to revenue in such quarter and the relative revenue
growth rates for such products and services.
Historically, quarter to quarter comparisons of PMSI's results of
operations have not necessarily been indicative of these trends, principally as
a result of: (1) timing of acquisitions and divestments to create the PMSI
business; (2) revenue reductions resulting from product
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changes or discontinuations in the post-acquisition period; (3) cost of
investing in the turnaround or profit improvement of certain acquired
businesses; (4) write downs of asset values; and (5) the investment in new
products and services.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, PMSI's cash, cash equivalents and marketable
securities totaled $228.3 million, an increase of $116.4 million from the $111.9
million balance at June 30, 1998. The increase is primarily due to the sale of
non-US businesses to IMS for common stock of IMS valued at $71.3 million on
August 5, 1998 and the $73.0 million of cash received from the forward sale
arrangement discussed below, less partial redemption of PMSI's Debentures.
On October 14, 1998, PMSI entered into a forward sale arrangement with CIBC
Oppenheimer ("CIBC") pursuant to which PMSI transferred all of the IMS common
stock received in the IMS Transaction, in exchange for a note payable of $73.0
million. The 1,197,963 shares of IMS common stock are being held by CIBC as
collateral against PMSI's delivery obligation on August 12, 1999. The IMS shares
are included in marketable securities and have been valued at $73.0 million. The
current liabilities include $73.0 million representing the note payable.
During the period between August 26 and September 21, 1998, PMSI redeemed
$19.7 million of its 6 1/4% Debentures at an aggregate cost of $17.2 million. As
a result of this redemption, PMSI had $49.3 million of 6 1/4% Debentures
outstanding at December 31, 1998. The outstanding balance of 6 1/4% Debentures
was redeemed on February 1, 1999.
During the year ended June 30, 1998, cash and cash equivalents and
short-term marketable securities increased due to the switch from long-term to
short-term marketable securities and proceeds from the businesses divested in
the period. At June 30, 1998, PMSI's cash and cash equivalents and marketable
securities totaled $111.9 million and its current ratio was 2.4:1. The current
ratio at June 30, 1997 was 2.9:1.
PMSI anticipates that existing cash, cash equivalents and marketable
securities, together with internally generated funds, will provide PMSI with the
resources that are needed to satisfy its capital expenditures and working
capital requirements in fiscal 1999 and subsequent years.
YEAR 2000
The Year 2000 issue arises from computer processors' and software programs'
failure to process data correctly because of their inability to recognize the
correct year. This problem has the potential to cause system failures or data
corruption that could seriously disrupt PMSI's operations both as a provider and
as a recipient of data.
PMSI is not dependent on large legacy systems and does not use mainframes.
Many of the specially developed systems PMSI uses have been designed within the
past few years and will process date values appropriately.
PMSI has a Year 2000 Task Force appointed to evaluate PMSI's operations on
an internal level as well as the perspective of its customers and as a customer
of PMSI's suppliers. The on-going evaluation covers all systems that PMSI feels
may be significantly threatened by the Year 2000 issue including all computer
systems, programs and applications. PMSI expects to complete any necessary
actions in 1999. While PMSI currently does not
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believe that the costs associated with addressing Year 2000 issues will be
material to PMSI's financial statements, business or operations, PMSI's
assessment of Year 2000 issues is ongoing and there can be no assurance that
such issues or the costs of addressing them will not have a material impact on
PMSI's financial statements, business or operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed above, PMSI entered into a forward sale arrangement with CIBC
in connection with the planned liquidation of the IMS shares. The forward sale
was entered into to mitigate PMSI's exposure to fluctuations in the share price
of the IMS shares. This arrangement gives rise to a credit risk due to possible
non-performance by the counterparty.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
FAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing standards.
PMSI will be required to adopt SFAS for the year ended June 30, 1999. Currently
PMSI is evaluating this standard but does not expect it to impact materially on
PMSI's consolidated financial statements disclosures.
In February 1998, FASB issued FAS No. 132, Employer's Disclosures about
Pension and Other Postretirement Benefits ("SFAS 132"). SFAS 132 standardizes
the disclosure requirements for pensions and other postretirement benefits and
amends SFAS 87, "Employers' Accounting for Pensions," SFAS 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The statement does not change the
existing measurement or recognition provisions of SFAS Nos. 87, 88 or 106, and
is effective for the fiscal years beginning after December 15, 1997. Therefore,
PMSI will be required to adopt SFAS 132 for the year ended June 30, 1999. PMSI
is in the process of evaluating the disclosure requirements under this standard
and does not believe it will have a significant impact.
In June 1997, FASB issued FAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which changes the way public
companies report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers and the material countries in which the
entity holds assets and reports revenues. This statement is effective for
financial statements for periods beginning after December 15, 1997. PMSI is
currently evaluating the disclosure requirements under this standard and does
not believe it will have a significant impact.
COMPARISON OF THE RIGHTS OF HOLDERS OF
QUINTILES COMMON STOCK AND PMSI COMMON STOCK
Upon consummation of the Merger, the stockholders of PMSI, a Delaware
corporation, will become stockholders of Quintiles, a North Carolina
corporation. The rights of such stockholders will be governed by North Carolina
law, including the North Carolina Business Corporation Act (the "NCBCA"), and by
the Amended and Restated Articles of Incorpo-
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ration (the "Articles of Incorporation") and Bylaws of Quintiles. Delaware law,
including the DGCL, and the Certificate of Incorporation and By-Laws of PMSI
will no longer apply.
It is not practical to compare all of the differences between applicable
North Carolina and Delaware laws and between the governing documents of
Quintiles and PMSI. Nevertheless, the following provides a summary of certain of
those differences that may significantly affect the rights of PMSI stockholders.
PMSI stockholders should consult with their own legal counsel with respect to
specific differences and changes in their rights as stockholders which will
result from the proposed Merger.
AUTHORIZED CAPITAL STOCK; BLANK CHECK STOCK PROVISIONS
Quintiles' Articles of Incorporation authorize 200,000,000 shares of
Quintiles common stock, all of the same class. The Quintiles Board has proposed
an amendment to the Quintiles Articles of Incorporation which would increase the
number of shares of authorized common stock from 200,000,000 to 500,000,000.
Quintiles shareholders are scheduled to vote on such amendment at a special
meeting of shareholders to be held on March 30, 1999. The Articles of
Incorporation also authorizes 25,000,000 shares of preferred stock, $0.01 par
value, and grants broad authority to the Quintiles Board of Directors to
determine the voting powers, designations, preferences and rights of classes or
series of such preferred stock without shareholder approval. Quintiles has no
preferred stock outstanding as of the date of this Proxy Statement/Prospectus.
Subject to the rights of any preferred stock issued in the future, as determined
by the Quintiles Board or otherwise provided under North Carolina law, each
holder of Quintiles common stock is entitled to such dividends, if any, as may
be declared by the Quintiles Board. Each holder of Quintiles common stock has
one vote per share on all matters on which holders of Quintiles common stock are
entitled to vote. In the event of the liquidation, dissolution or winding up of
Quintiles, holders of Quintiles common stock are entitled to receive on a pro
rata basis any assets remaining after provision for payment of creditors and
after payment of any liquidation preference to holders of Quintiles preferred
stock.
The total number of shares of all classes of stock that PMSI has authority
to issue under the PMSI Charter is 30,000,000 shares, of which 25,000,000
represent shares of PMSI common stock and 5,000,000 represent shares of PMSI
Preferred Stock, $0.01 par value per share ("PMSI Preferred Stock"). As of the
date of this Proxy Statement/Prospectus, there are no shares of PMSI Preferred
Stock outstanding.
Subject to any preferential rights of any PMSI Preferred Stock created by
the PMSI Board, each holder of PMSI common stock is entitled to such dividends,
if any, as may be declared from time to time by the PMSI Board. Each holder of
PMSI common stock is entitled to one vote for each share of PMSI common stock
held of record on the applicable record date on all matters submitted to a vote
of stockholders. In the event of liquidation, dissolution or winding up of PMSI,
holders of PMSI common stock are entitled to receive on a pro rata basis any
assets remaining after provision for payment of creditors and after payment of
any liquidation preferences to holders of PMSI Preferred Stock.
The authorized preferred stock of Quintiles and PMSI is available for
issuance from time to time in one or more series at the discretion of the board
of directors of that company without stockholder approval. The board of each
company has the authority to prescribe for each series of preferred stock (1)
the number of shares in that series, (2) the voting rights (if any) to which
such shares in that series are entitled, (3) the consideration for such shares
in that series and (4) the designations, powers, preferences and relative,
participating,
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optional or other special rights, and such qualifications, limitations or
restrictions of the shares in that series. Depending upon the rights of such
preferred stock, the issuance of preferred stock could have an adverse effect on
holders of common stock by delaying or preventing a change in control of the
company, making removal of the present management of the company more difficult
or resulting in restrictions upon the payment of dividends and other
distributions to the holders of its common stock.
SIZE OF THE BOARD OF DIRECTORS
Under North Carolina law, although changes in the number of directors in
general must be approved by a majority of the outstanding shares, the board of
directors may (1) increase or decrease the number of directors by not more than
30% during any 12-month period or (2) fix the exact number of directors within a
stated range set forth in the articles of incorporation or bylaws. Quintiles'
Articles of Incorporation set a range for board size from nine to 15 members,
and the Bylaws permit a majority of the directors to approve changes in board
size within that range. The Quintiles Board currently consists of 13 directors.
The PMSI Board currently consists of seven directors, and the PMSI By-Laws
provide that the number of directors shall be not less than one nor more than
15.
CLASSIFIED BOARD OF DIRECTORS
A classified board of directors is one to which a certain number, but not
all, of the directors are elected on a rotating basis each year. A North
Carolina corporation may classify its board into two, three or four classes.
Changing the board of directors, and thus control of a corporation, is lengthier
and more difficult with a classified board. The Quintiles Board currently is
divided into three classes, each serving three year terms.
The PMSI Board is not classified.
CUMULATIVE VOTING
Cumulative voting permits a stockholder to cumulate his total stockholder
votes for a single candidate in an election of directors. Cumulative voting
could increase the chances that a minority shareholder could designate a member
to the board. Under North Carolina law, the right to cumulative voting depends
upon the date of incorporation and a corporation's status as a public or private
company. Quintiles' stockholders are not entitled to cumulate their votes.
Under Delaware law, a corporation's charter may provide for cumulative
voting. The PMSI Charter has no such provision.
REMOVAL OF BOARD OF DIRECTORS; FILLING VACANCIES
Pursuant to Quintiles' Articles of Incorporation, the stockholders can
remove a director only with the approval of two-thirds of the voting power of
all shares entitled to vote in the election of directors, except that where a
director was elected by the holders of one class or series of stock, or a group
of such class or series, only the members of that voting group may vote to
remove him. Quintiles' Articles of Incorporation further specify that only the
Board of Directors may fill vacancies on the Board.
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The PMSI By-Laws provide that newly-created directorships and director
vacancies shall be filled by a majority of directors then in office, even if
less than a quorum, or a sole remaining director. The PMSI By-Laws also provide
that any director of PMSI may be removed, with or without cause, by the holders
of a majority of the shares then entitled to vote at an election of directors.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Quintiles' Articles of Incorporation require the approval of at least
two-thirds of the stockholders entitled to vote on an amendment to the Articles
of Incorporation. If, however, the proposed amendment is approved by a majority
of the disinterested members of the Quintiles' Board, then the amendment will
only require the majority approval of the stockholders, or such greater
percentage as required under North Carolina law. A disinterested director is
defined as a member of the Quintiles Board who (1) is not affiliated with a
control person, was not nominated by a control person and was already on the
Quintiles Board when a control person acquired its controlling interest or (2)
is a successor to a disinterested director who is not affiliated with a control
person, is not nominated by a control person and who is recommended by a
majority of disinterested directors on the Quintiles Board.
Quintiles' Bylaws may be amended or repealed by two-thirds of the shares
entitled to vote on an election of directors. The Bylaws also permit the
Quintiles Board to amend or repeal the Bylaws, except that (1) a bylaw adopted,
amended, or repealed by the shareholders may not be readopted, amended or
repealed by the Quintiles Board unless they are authorized to do so by the
Articles of Incorporation or a bylaw adopted by the shareholders; (2) a bylaw
that fixes higher quorum or voting requirements for the Quintiles Board may not
be adopted by less than the majority of the directors in office and may not
later be amended by a vote or quorum less than that required by the applicable
bylaw; and (3) if a bylaw fixing higher voting or quorum requirements was
originally adopted by the shareholders, only the shareholders may amend it
unless the Bylaws otherwise permit its amendment or repeal by the Quintiles
Board.
Any amendment to the PMSI Charter requires the approval of a majority of
the outstanding stock entitled to vote. The PMSI By-Laws may be amended by a
majority of the entire PMSI Board at any regular or special meeting of such
board of directors or by the affirmative vote of a majority of the outstanding
stock of PMSI entitled to vote thereon, provided, however, that notice of such
amendment shall be contained in the notice of such meeting of stockholders or
the board of directors, as the case may be.
Under Section 242(b)(2) of the DGCL, the holders of the outstanding shares
of a class of PMSI stock shall be entitled to vote as a class on a proposed
amendment to the PMSI Charter, whether or not otherwise entitled to vote
thereon, if, among other things, the amendment would increase or decrease the
aggregate number of authorized shares of such class.
POWER TO CALL SPECIAL MEETINGS OF STOCKHOLDERS
Quintiles' Bylaws provide that a special meeting of the stockholders may be
called solely by the Board, the chairman of the Board, the president or the
holders of 25% or more of the voting power of the outstanding shares of
Quintiles stock.
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A special meeting of stockholders of PMSI may be called by the chairman of
the Board, the president, any vice president, the secretary or any assistant
secretary of PMSI or by any such officer upon the written request of the
stockholders owning a majority of the capital stock of PMSI issued and
outstanding and entitled to vote at such meeting.
ADVANCE NOTICE OF MAKING NOMINATIONS AT MEETINGS OR FOR RAISING BUSINESS
Quintiles' Bylaws set forth a procedure for stockholder nominations of
directors. A Quintiles stockholder entitled to vote generally in elections of
directors may nominate a person for election as a director at a meeting of the
stockholders only pursuant to a written notice sent to the Secretary of
Quintiles (1) not less than 50 nor more than 90 days prior to any annual meeting
of Quintiles stockholders or (2) not later than the 10th business day following
the date the notice of a special meeting of stockholders called for the purpose
of the election of directors is first distributed. Quintiles' Bylaws require
written notice of an annual or special meeting of stockholders to be given to
each stockholder of record entitled to vote at the meeting no more than 60 days
nor less than 10 days prior to the meeting. Only business within the stated
purpose(s) described in the meeting notice may be conducted at a special meeting
of Quintiles stockholders. The Quintiles Bylaws require any stockholder who
wishes to bring business before a meeting of Quintiles stockholders to provide
written notice to Quintiles not more than 90 nor less than 50 days before the
meeting.
The PMSI Charter and PMSI By-Laws do not contain any provision that sets
forth the procedure for nominating persons for election to the PMSI Board. Under
the PMSI By-Laws, written notice of any annual or special meeting of
stockholders shall be given to each person entitled to vote at the meeting no
less than 10 nor more than 60 days before the date of such meeting. Although any
notice of a special meeting of the stockholders of PMSI is required to state
briefly the purpose or purposes of such special meeting, no provision that
limits the business of any meeting of the stockholders of PMSI to matters
contained in the notice of such meeting is included in either the PMSI Charter
or PMSI By-Laws.
STOCKHOLDER ACTION WITHOUT MEETING
Under the NCBCA, stockholders may act without a meeting if a consent in
writing to such action is signed by all stockholders entitled to vote.
The Quintiles Bylaws provide that any action which may be taken at a
meeting of the shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken is signed by all of the persons who
would be entitled to vote upon such action at a meeting and as delivered to
Quintiles to be included in the minutes or to be kept as part of the corporate
records.
The PMSI By-Laws provide that any action required or permitted to be taken
at an annual or special meeting of the stockholders of PMSI may be taken without
a meeting, without prior notice and without a vote, if a consent in writing
setting forth the action so taken is signed by the holders of the outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
North Carolina has two primary anti-takeover statutes, the Shareholder
Protection Act and the Control Share Acquisition Act, which govern the
stockholder approval required for
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certain business combinations. As permitted by North Carolina law, Quintiles has
opted-out of both these provisions. Instead, Quintiles' Articles of
Incorporation provide that, in the absence of more restrictive requirements
under applicable law, any business combination must be approved by either: (1)
if at least two-thirds of the full Quintiles Board has approved the business
combination, the affirmative vote of the shareholders holding at least a
majority of the shares issued and outstanding and entitled to vote thereon, or
(2) a supermajority of the shares, consisting of at least two-thirds of the
shares entitled to vote thereon, and a majority of a quorum of the Quintiles
Board (but less than two-thirds of the full Quintiles Board).
A "fair price" provision in Quintiles' Articles of Incorporation
complements this supermajority voting requirement. Under this provision, where a
business combination is approved by a supermajority of the stockholders and a
majority of a quorum, but less than two-thirds, of the full Quintiles Board,
stockholders who do not vote to approve the transaction can elect to sell their
shares to the company for cash at a "fair price," as determined by a specified
formula.
Business combinations that trigger the supermajority voting requirements
generally include mergers, dispositions of all or substantially all of the
corporation's assets, and transactions involving control persons, including
combinations with control persons, other combination transactions entered into
at the behest of control persons or other transactions which would have the
result of increasing a person's control of the corporation. A control person
includes any person or entity which, together with its affiliates, owns or
controls at least 10% of any class of Quintiles equity (or securities
convertible into equity), excluding those persons who obtained that level of
control prior to January 1, 1994.
Section 203 of the DGCL ("Section 203") governs the stockholder approval
requirements for a Delaware corporation in certain business combination
transactions. The terms of Section 203 apply to PMSI since it is a Delaware
corporation. Pursuant to Section 203 with certain exceptions, a Delaware
corporation may not engage in any of a broad range of business combinations,
such as mergers, consolidations and sales of assets, with an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless (1) the transaction that results in the person
becoming an interested stockholder or the business combination is approved by
the board of directors of the corporation before the person becomes an
interested stockholder, (2) upon consummation of the transaction which results
in the stockholder becoming an interested stockholder, the interested
stockholder owns 85% or more of the voting stock of the corporation outstanding
at the time the transaction commenced, excluding shares owned by persons who are
directors and also officers and shares owned by certain employee stock plans or
(3) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
holders of at least two-thirds of the corporation's outstanding voting stock,
excluding shares owned by the interested stockholder, at a meeting of
stockholders. Under Section 203, an "interested stockholder" is defined as any
person, other than the corporation and any direct or indirect majority-owned
subsidiary, that is (1) the owner of 15% or more of the outstanding voting stock
of the corporation or (2) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder.
Section 203 does not apply to a corporation that so provides in an amendment to
its certificate of incorporation or by-laws passed by a majority of its
outstanding shares at any time. Such stockholder action does not become
effective for 12 months following its adoption
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and would not apply to persons who were already interested stockholders at the
time of the amendment. The PMSI Charter does not exclude PMSI from the
restrictions imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The provisions of Section 203 may encourage companies interested in
acquiring PMSI to negotiate in advance with the PMSI Board, because the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the stockholder becoming an interested stockholder. Such provisions
also may have the effect of preventing changes in the PMSI Board. It is further
possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
INDEMNIFICATION AND LIMITATION OF LIABILITY
North Carolina law permits a corporation to indemnify its directors,
officers, employees or agents under either or both a statutory or non-statutory
scheme of indemnification. Under the statutory scheme, a corporation may, with
certain exceptions, indemnify a director, officer, employee or agent of the
corporation who was, is, or is threatened to be made, a party to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative, because of the fact that such person was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. This indemnity may include the obligation to
pay any judgment, settlement, penalty, fine (including an excise tax assessed
with respect to an employee benefit plan) and reasonable expenses incurred in
connection with the proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(1) conducted himself in good faith, (2) reasonably believed (a) that any action
taken in his official capacity with the corporation was in the best interest of
the corporation or (b) that in all other cases his conduct at least was not
opposed to the corporation's best interest, and (3) in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. Whether
a director has met the requisite standard of conduct for the type of
indemnification set forth above is determined by the corporation's board of
directors, a committee of directors, special legal counsel or the stockholders
in accordance with the statute. A corporation may not indemnify a director under
the statutory scheme in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation or in
connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
In addition to, and separate and apart from the indemnification described
above under the statutory scheme, North Carolina law permits a corporation to
indemnify or agree to indemnify any of its directors, officers, employees or
agents against liability and expenses (including attorneys' fees) in any
proceeding (including proceedings brought by or on behalf of the corporation)
arising out of their status as such or their activities in such capacities,
except for any liabilities or expenses incurred on account of activities that
were, at the time taken, known or believed by the person to be clearly in
conflict with the best interests of the corporation.
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Quintiles' Bylaws provide for indemnification to the fullest extent
permitted under North Carolina law, provided, however, that Quintiles will
indemnify any person seeking indemnification in connection with a proceeding
initiated by such person only if such proceeding was authorized by the Board of
Directors. Accordingly, Quintiles may indemnify its directors, officers, and
employees in accordance with either the statutory or non-statutory standard.
In addition, North Carolina law requires a corporation, unless its articles
of incorporation provide otherwise, to indemnify a director or officer who has
been wholly successful, on the merits or otherwise, in the defense of any
proceeding to which such director or officer was a party. Unless prohibited by
the articles of incorporation, a director or officer also may make application
and obtain court-ordered indemnification if the court determines that such
director or officer is fairly and reasonably entitled to such indemnification.
Finally, North Carolina law provides that a corporation may purchase and
maintain insurance on behalf of an individual who is or was a director, officer,
employee or agent of the corporation against certain liabilities incurred by
such persons, whether or not the corporation is otherwise authorized under North
Carolina law to indemnify such party. Quintiles currently maintains directors'
and officers' insurance policies covering its directors and officers.
As permitted by North Carolina law, Quintiles' Articles of Incorporation
limits the personal liability of directors for monetary damages for breaches of
duty as a director, provided that, under North Carolina law, such limitation
will not apply to (1) acts or omissions that the director at the time of the
breach knew or believed were clearly in conflict with Quintiles' best interests,
(2) any liability for unlawful distributions under North Carolina law, (3) any
transaction from which the director derived an improper personal benefit or (4)
acts or omissions occurring prior to the date the provision became effective.
The DGCL permits a corporation to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by them in
connection with any pending, threatened or completed action or proceeding in
which a director, officer, employee or agent of the corporation is a party by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
if such person has acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
or her conduct was unlawful. However, in connection with actions by or in the
right of the corporation, such indemnification is not permitted if such person
has been adjudged liable to the corporation unless the court determines that,
under all the circumstances, such person is nevertheless fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. Further, the
DGCL provides that expenses incurred in defending any action or proceeding may
be paid by the corporation in advance of the final disposition upon receipt of
an undertaking by or on behalf of the director or officer to repay the amount if
it is ultimately determined that the director or officer is not entitled to be
indemnified by the corporation.
The DGCL also permits a corporation to purchase and maintain insurance on
behalf of its directors, officers, employees and agents against any liability
which may be asserted against, or incurred by, such persons in their capacity as
directors, officers, employees or agents of the corporation whether or not the
corporation would have the power under the DGCL to indemnify such individuals
against such liabilities. PMSI maintains such insurance. The DGCL further
provides that the statutory provisions are not exclusive of any other rights
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to which those seeking indemnification are entitled under any by-law, agreement,
stockholder vote or otherwise.
The PMSI Charter and the PMSI By-Laws provide that no person shall be
personally liable to PMSI or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing shall not
eliminate or limit the liability of a director (1) for any breach of the
director's duty of loyalty, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) under Section
174 of the DGCL or (4) for any transaction from which the director derived an
improper benefit; provided, further, that if the DGCL is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the personal liability of a director of PMSI shall be eliminated
or limited to the fullest extent permitted by the DGCL, as amended from time to
time.
DIVIDENDS AND REPURCHASE OF SHARES
North Carolina law dispenses with the concepts of par value of shares as
well as statutory definitions of capital, surplus and similar terms.
Under North Carolina law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and redemptions or
repurchases of its shares) if it would result in either: (1) the corporation
being unable to pay its debts when they become due or (2) the corporation's
assets being less that the sum of its liabilities plus any preferential
liquidation rights of stockholders. A director of a North Carolina corporation
may be personally liable to the corporation to the extent that the amount of the
distribution exceeds such permissible amounts if it is established that he did
not perform his duties as a director in good faith with reasonable care in a
manner which he believes to be in the best interests of the corporation. A
director held liable for unlawful distributions is entitled to contribution from
other directors voting in favor of the distribution and reimbursement from each
stockholder of the amount which the stockholder accepted with knowledge the
distribution was unlawful.
Under the DGCL, the directors of a corporation may declare dividends (1)
out of the corporation's surplus (as defined in the DGCL) or (2) in the absence
of a surplus, out of the corporation's net profits for that and/or the preceding
fiscal year, provided, that if the capital of the corporation has diminished for
any reason to less than the aggregate of the capital represented by all the
outstanding capital stock of the corporation having preference upon the
distribution of assets, then no dividends may be declared upon net profits until
such deficiency is repaired.
DISSENTERS' APPRAISAL RIGHTS
Under North Carolina law, a stockholder of a corporation participating in
certain major corporate transactions may, under varying circumstances be
entitled to appraisal rights, pursuant to which such stockholder may receive
cash in the amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction. In North
Carolina, appraisal rights are also available for certain amendments to a
corporation's articles of incorporation.
Under Delaware law, a stockholder of a corporation that is not listed on a
national exchange or The Nasdaq Stock Market and whose stock is held of record
by less than 2,000 holders may be entitled to the appraised value of his or her
stock in such corporation if the
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corporation is to be merged into another corporation and the stockholders are
required to accept consideration other than stock in the surviving corporation.
The stockholder must vote against the merger and satisfy certain other
requirements in order to have the chancery court determine the fair value of
such stockholder's shares (without giving effect to the merger.)
RIGHTS PLAN
Quintiles does not have a stockholder rights plan. By contrast, PMSI has a
stockholder rights plan.
On December 30, 1997, the PMSI Board authorized and declared a dividend of
one right (a "PMSI Right") for each outstanding share of PMSI common stock
outstanding on January 9, 1998 (the "PMSI Right Record Date"). The PMSI Board
also authorized the issuance of one PMSI Right with respect to each share of
PMSI common stock that shall become outstanding between the PMSI Right Record
Date and the earliest of (1) the PMSI Rights Distribution Date (as defined
below), (2) the date on which the PMSI Rights are redeemed by PMSI and (3)
January 8, 2008 (the "PMSI Final Expiration Date"). "PMSI Rights Distribution
Date" is defined as the earlier to occur of (1) 10 days following a public
announcement that a person or group of associated or affiliated persons (an
"Acquiring Person") have acquired beneficial ownership of 15% or more of the
outstanding shares of PMSI common stock or (2) 10 business days (or such later
date as may be determined by action of the PMSI Board prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of PMSI
common stock.
When exercisable, each PMSI Right entitles the registered holder to
purchase from PMSI one-third of a share of PMSI common stock, at a price of
$60.00, subject to adjustment (the "PMSI Purchase Price"). The PMSI Rights are
exercisable, if at all, on or prior to the PMSI Final Expiration Date. The
description and terms of the PMSI Rights are set forth in a Rights Agreement,
dated as of January 28, 1998 (the "PMSI Rights Agreement"), between PMSI and
Harris Trust Company of New York, as rights agent.
The PMSI Rights Agreement provides that, until the PMSI Rights Distribution
Date (or earlier redemption or expiration of the PMSI Rights), the PMSI Rights
will be transferred with and only with the PMSI common stock. Until the PMSI
Rights Distribution Date (or earlier redemption or expiration of the PMSI
Rights), new PMSI common stock certificates issued after the PMSI Rights Record
Date upon transfer or new issuances of PMSI common stock will contain a notation
incorporating the PMSI Rights Agreement by reference. Until the PMSI Rights
Distribution Date (or earlier redemption or expiration of the PMSI Rights), the
surrender for transfer of any certificates for shares of PMSI common stock
outstanding as of the PMSI Rights Record Date, even without such notation of a
summary of PMSI Rights, will also constitute the transfer of the PMSI Rights
associated with the shares of PMSI common stock represented by such certificate.
As soon as practicable following the PMSI Rights Distribution Date, separate
certificates evidencing the PMSI Rights ("PMSI Right Certificates") will be
mailed to holders of record of the PMSI common stock as of the close of business
on the PMSI Rights Distribution Date and such separate PMSI Right Certificates
alone will evidence the PMSI Rights.
The PMSI Purchase Price payable, and the number and kinds of shares of PMSI
capital stock or other securities or property issuable, upon exercise of the
PMSI Rights are subject to
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adjustment from time to time to prevent dilution (1) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the PMSI
common stock, (2) upon the grant to holders of the PMSI common stock of certain
rights or warrants to subscribe for or purchase PMSI common stock at a price, or
securities convertible into PMSI common stock with a conversion price, less than
the then-current market price of the PMSI common stock or (3) upon the
distribution to holders of the PMSI common stock of evidence of indebtedness or
assets (excluding regular periodic cash dividends or dividends payable in PMSI
common stock) or of subscription rights or warrants (other than those referred
to above).
The PMSI Rights are also subject to adjustment in the event of a stock
split of the PMSI common stock or a stock dividend on the PMSI common stock
payable in shares of PMSI common stock or subdivisions, consolidations or
combinations of the PMSI common stock occurring, in any such case, prior to the
PMSI Rights Distribution Date.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, each holder of a PMSI Right, other than PMSI Rights
beneficially owned by the Acquiring Person (which will thereupon become void),
will thereafter have the right to receive upon exercise of a PMSI Right and
payment of the PMSI Purchase Price, that number of shares of PMSI common stock
having a market value of two times the PMSI Purchase Price.
In the event that, after a person or group has become an Acquiring Person,
PMSI is acquired in a merger or other business combination transaction or 50% or
more of its consolidated assets or earning power are sold, proper provision will
be made so that each holder of a PMSI Right (other than PMSI Rights beneficially
owned by an Acquiring Person which will have become void) will thereafter have
the right to receive, upon the exercise thereof at the then current exercise
price of the PMSI Right, that number of shares of common stock of the person
with whom PMSI has engaged in the foregoing transaction (or its parent), which
number of shares at the time of such transaction will have a market value of two
times the exercise price of the PMSI Right.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
shares of PMSI common stock or the occurrence of an event described in the prior
paragraph, the PMSI Board may exchange the PMSI Rights (other than PMSI Rights
owned by such person or group which will have become void), in whole or in part,
at an exchange ratio of one share of PMSI common stock (or of a share of a class
or series of PMSI's preferred stock having equivalent rights, preferences and
privileges), for two PMSI Rights (subject to adjustment).
With certain exceptions, no adjustment in the PMSI Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such PMSI Purchase Price. No fractional shares of PMSI common stock will be
issued (other than fractions which are integral multiples of one-third of a
share of PMSI common stock) and in lieu thereof, an adjustment in cash will be
made based on the market price of the PMSI common stock on the last trading day
prior to the date of exercise.
At any time prior to the earlier of (1) the tenth business day after an
Acquiring Person becomes such and (2) the PMSI Final Expiration Date, the PMSI
Board may redeem the PMSI Rights in whole, but not in part, at a price of $0.01
per PMSI Right (hereinafter referred to in this description of PMSI Rights as
the "PMSI Redemption Price"). The
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redemption of the PMSI Rights may be made effective at such time, on such basis
and with such conditions as the PMSI Board in its sole discretion may establish.
Immediately upon any redemption of the PMSI Rights, the right to exercise
the PMSI Rights will terminate and the only right of the holders of PMSI Rights
will be to receive the PMSI Redemption Price.
PMSI may amend any provision of the PMSI Rights that it deems desirable
without the approval of the holders of PMSI Rights, except that after an
Acquiring Person has become such, any such amendment may not adversely affect
the interests of holders of the PMSI Rights.
Until a PMSI Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of PMSI including, without limitation, the right to vote
or to receive dividends.
FUTURE SHAREHOLDER PROPOSALS
If the Merger is consummated, the PMSI stockholders will become
shareholders of Quintiles. Pursuant to Rule 14a-8 promulgated under the Exchange
Act, Quintiles shareholders may present proposals for inclusion in the Quintiles
proxy statement for consideration at the next annual meeting of its shareholders
by submitting their proposals to Quintiles in a timely manner. PMSI stockholders
who become shareholders of Quintiles may first present proposals for inclusion
in the Quintiles proxy statement for its 2000 annual meeting, as the date for
inclusion in the proxy statement for the 1999 annual meeting has already passed.
Any such proposal must comply with Rule 14a-8.
LEGAL MATTERS
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., has issued a
legal opinion concerning the legality of the shares and contingent value
payments of Quintiles to be issued to PMSI stockholders. Smith Anderson also
will deliver an opinion to Quintiles concerning certain federal income tax
consequences of the Merger. Smith Anderson lawyers own in the aggregate
approximately 4,200 shares of Quintiles stock. In addition, Reboul, MacMurray,
Hewitt, Maynard & Kristol will deliver an opinion to PMSI concerning certain
federal income tax consequences of the Merger.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Quintiles'
consolidated financial statements included in its Current Report on Form 8-K
dated January 27, 1999, as set forth in their report, which is incorporated by
reference in this Proxy Statement/Prospectus. Quintiles' consolidated financial
statements are incorporated by reference in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The consolidated balance sheets as of June 30, 1998 and 1997 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1998 of PMSI and its
subsidiaries appearing in this Proxy Statement/ Prospectus, have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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Representatives of PricewaterhouseCoopers LLP, PMSI's independent
accountants, are expected to be present at the special meeting, will have the
opportunity to make a statement at the special meeting if they desire to do so
and are expected to be available to respond to appropriate questions.
WHERE YOU CAN FIND MORE INFORMATION
Quintiles and PMSI file reports, proxy statements and other information
with the SEC. You may read and copy any of these materials at the SEC's public
reference room in Washington, D.C., New York, New York and Chicago, Illinois.
You may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. You also can find Quintiles', PMSI's and
ENVOY's SEC filings on the SEC's web site at http://www.sec.gov or from
commercial document retrieval services. Reports, proxy statements and other
information with respect to Quintiles, PMSI and ENVOY are also available for
inspection at the office of The Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006.
The SEC allows Quintiles to "incorporate by reference" in this Proxy
Statement/ Prospectus the information Quintiles files with the SEC. This means
that Quintiles can disclose important information to you by referring you to
those documents. Any information Quintiles incorporates by reference is
considered part of this Proxy Statement/Prospectus, and any information it later
files with the SEC will automatically update and supersede the information in
this Proxy Statement/Prospectus.
Quintiles incorporates by reference in this prospectus and refer you to the
documents listed below (File No. 000-23520):
1. Quintiles' Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
2. Quintiles' Quarterly Reports of Form 10-Q for the fiscal quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998;
3. Quintiles' Current Reports on Form 8-K dated February 2, 1998,
February 4, 1998, February 26, 1998, February 26, 1998 (as amended March
20, 1998 on Form 8-K/A), March 20, 1998, April 22, 1998, July 22, 1998,
October 21, 1998, December 16, 1998, December 17, 1998, January 27, 1999
(as amended on February 17 on Form 8-K/A), January 27, 1999 and February
17, 1999;
4. The description of Quintiles common stock contained in its
Registration Statement on Form 8-A, filed with the SEC on February 28, 1994
and amended on April 11, 1994; and
5. All other documents Quintiles files with the SEC pursuant to Section
13(a), 13(c) or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and before the end of this offering.
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You may request a copy of these filings, at no cost, by writing or
telephoning Quintiles at the following:
Investor Relations
Attention: Greg Connors
Quintiles Transnational Corp.
4709 Creekstone Drive
Riverbirch Building, Suite 200
Durham, North Carolina 27703-8411
(919) 998-2000
In order to obtain timely delivery prior to the special meeting, please
make your requests for documents by March 17, 1999. If you request any
incorporated documents from Quintiles, they will be mailed to you by first class
mail, or another equally prompt means, within one business day after your
request is received.
You should also note that the SEC considers this Proxy Statement/Prospectus
to be part of a registration statement filed with the SEC (Registration No.
333-72545). Since this Proxy Statement/Prospectus omits certain portions of the
information provided in the registration statement, we also refer you to that
document.
Quintiles has supplied the information contained in this Proxy
Statement/Prospectus relating to Quintiles, and PMSI has supplied the
information relating to PMSI.
Any statement contained in a document incorporated, or deemed to be
incorporated, by reference herein or contained in this Proxy
Statement/Prospectus shall be deemed to be modified or superseded for purposes
of this Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is, or is deemed
to be, incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement/Prospectus.
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LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Acquiring Person..................... 95
Average Trading Price................ 2
Code................................. 53
Continuing Employees................. 68
"continuity of interest"
requirement........................ 54
Converted Option..................... 68
CVP Average Trading Price............ 51
Debentures........................... 61
Debt Redemption...................... 68
DGCL................................. 60
Effective Time of the Merger......... 52
ERISA................................ 60
Exchange Act......................... 58
Exchange Agent....................... 52
Exchange Ratio....................... 51
FASB................................. 86
HSR Act.............................. 58
Indemnified Liabilities.............. 63
IMS.................................. 36
IMS Transaction...................... 36
IPR&D................................ 81
Material Adverse Effect.............. 64
Maturity Date........................ 51
MCOs................................. 75
Mediphase............................ 77
Merger............................... 33
Merger Agreement..................... 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NCBCA................................ 86
NDC Transactions..................... 36
Notice of Superior Proposal.......... 63
OTC Business......................... 36
PMSI Right........................... 95
PMSI................................. 1
PMSI Final Expiration Date........... 95
PMSI Purchase Price.................. 95
PMSI Redemption Price................ 96
PMSI Right Record Date............... 95
PMSI Rights Agreement................ 95
PMSI Right Certificates.............. 95
PMSI Rights Distribution Date........ 95
PSA.................................. 75
Quintiles............................ 1
Registration Statement............... 34
retention arrangements............... 4
Securities Act....................... 58
Source............................... 36
Source Database...................... 77
Source Europe........................ 36
Source US............................ 36
Stock Option Agreement............... 33
Superior Proposal.................... 63
Transaction Proposals................ 62
Walsh................................ 74
</TABLE>
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<PAGE> 111
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
OF QUINTILES, PMSI AND ENVOY
Introduction to Unaudited Pro Forma Combined Condensed
Financial Data......................................... F-3
Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1998..................................... F-5
Notes to Unaudited Pro Forma Combined Condensed Balance
Sheet as of September 30, 1998......................... F-6
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Nine Months Ended September 30,
1998................................................... F-10
Notes to Unaudited Pro Forma Combined Condensed Statement
of Operations for the Nine Months Ended September 30,
1998................................................... F-11
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1997........ F-13
Notes to Unaudited Pro Forma Combined Condensed Statement
of Operations for the Year Ended December 31, 1997..... F-14
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
OF QUINTILES AND ENVOY
Introduction to Unaudited Pro Forma Combined Condensed
Financial Data......................................... F-16
Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1998..................................... F-17
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Nine Months Ended September 30,
1998................................................... F-18
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Nine Months Ended September 30,
1997................................................... F-19
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Three Years Ended December 31,
1997................................................... F-20
PHARMACEUTICAL MARKETING SERVICES INC.
Report of Independent Accountants......................... F-23
Consolidated Balance Sheets as of June 30, 1997 and
1998................................................... F-24
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1997 and 1998........................... F-25
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1996, 1997 and 1998............... F-26
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997 and 1998........................... F-27
Notes to Consolidated Financial Statements................ F-29
Report of Independent Accountants on Financial Statement
Schedule............................................... F-48
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts for
the Years Ended June 30, 1996, 1997 and 1998.......... F-49
All financial statement schedules not mentioned above are
omitted for the reason that they are not required or are not
applicable, or the information is included in the
Consolidated Financial Statements or the Notes thereto.
</TABLE>
F-1
<PAGE> 112
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Consolidated Statements of Operations for the Three and
Six Months Ended December 31, 1998 and 1997
(unaudited)............................................ F-50
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended December 31, 1998 and 1997
(unaudited)............................................ F-51
Consolidated Balance Sheets as of December 31, 1998
(unaudited)............................................ F-52
Consolidated Statement of Cash Flows for the Six Months
Ended December 31, 1998 and 1997 (unaudited)........... F-53
Notes to Consolidated Financial Statements (unaudited).... F-55
</TABLE>
F-2
<PAGE> 113
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data and
explanatory notes are presented to show the impact on the historical financial
position and results of operations of Quintiles assuming the proposed business
combinations of Quintiles and PMSI, which is to be accounted for using the
purchase method of accounting, and Quintiles and ENVOY, which is to be accounted
for using the pooling of interests method of accounting, had occurred as
discussed below. PMSI prepares its financial statements on the basis of a fiscal
year ending on June 30. ENVOY's year end is December 31. Quintiles' year end is
December 31. To reflect PMSI results on a calendar year basis consistent with
Quintiles, PMSI's historical operating results for the year ended December 31,
1997 are based on PMSI's last two fiscal quarters of its fiscal year ended June
30, 1997, combined with the results of the six months ended December 31, 1997.
PMSI's operating results for the nine months ended September 30, 1998 are based
on PMSI's last two fiscal quarters of its fiscal year ended June 30, 1998 and
the three-month period ended September 30, 1998.
In the PMSI business combination, each share and share option of PMSI
common stock outstanding at the consummation of the purchase will be converted
into the right to receive a fraction of a share of Quintiles common stock that
is equal to $15.40 divided by the average closing price of the Quintiles common
stock during the 10 trading days ending on the day that is two days prior to the
consummation of the PMSI purchase. Quintiles will pay cash in lieu of fractional
shares. Since the number of shares to be issued in the PMSI business combination
will not be known until the last business day prior to its completion, the
unaudited pro forma combined condensed financial data assumes a hypothetical
exchange ratio of 0.308, which is based on a hypothetical Quintiles common stock
Average Trading Price of $50.00.
In the ENVOY business combination, each outstanding share of ENVOY common
stock and ENVOY Series B convertible preferred stock will be exchanged for 1.166
shares of Quintiles common stock. Based on a total of approximately 24,374,000
shares of ENVOY common stock and preferred stock outstanding on December 14,
1998, Quintiles would issue approximately 28,421,000 shares of Quintiles common
stock in the merger. Quintiles will pay cash in lieu of fractional shares.
Quintiles will also convert any remaining unexercised ENVOY stock options into
Quintiles stock options at the exchange ratio.
The unaudited pro forma combined condensed balance sheet reflects the
combined historical balance sheets of Quintiles, PMSI and ENVOY at September 30,
1998. The unaudited pro forma combined condensed statements of operations for
the year ended December 31, 1997 and for the nine months ended September 30,
1998 reflect the combined historical operating results of Quintiles, PMSI
(prepared as discussed in paragraph one above) and ENVOY for such periods.
The pro forma adjustments related to the unaudited pro forma combined
condensed balance sheet have been computed assuming the transactions were
consummated at the end of the most recent period for which a balance sheet is
presented. The pro forma adjustments related to the unaudited pro forma combined
condensed statements of operations have been computed assuming the transactions
were consummated at the beginning of the most recent fiscal period presented.
As applicable, the unaudited pro forma combined condensed financial data
reflect preliminary purchase price allocations related to the PMSI business
combination. Estimates
F-3
<PAGE> 114
relating to the fair value of certain assets and liabilities have been made as
more fully described in the notes to the unaudited pro forma combined condensed
financial data. The final purchase price allocation will be made on the basis of
appraisals and evaluations once the purchase is consummated and, therefore, the
actual purchase price allocation is likely to differ from that reflected in the
unaudited pro forma combined condensed financial data.
The unaudited pro forma combined condensed operating results presented do
not reflect any incremental direct costs, potential cost savings or revenue
enhancements which may result from the consolidation of certain operations of
Quintiles and PMSI, Quintiles and ENVOY, or Quintiles, PMSI and ENVOY.
Therefore, the unaudited pro forma combined condensed statements of operations
may not be indicative of the results of past or future operations. No assurances
can be given with respect to the ultimate level of cost savings and/or revenue
enhancements which may be realized following consummation of the proposed
transactions.
The historical financial data of PMSI shown in the unaudited pro forma
combined condensed financial data and explanatory notes reflect the impact on
the historical results of operations of certain operations sold by PMSI prior to
the consummation of the purchase. The pro forma portfolio changes reflect the
elimination of the results of operations of these disposed businesses. PMSI's
disposals of its (i) non-US operating assets, sold on December 3, 1998 and
August 5, 1998; (ii) IMR, sold on March 31, 1998; (iii) Source US and the OTC
businesses, sold on December 15, 1997; (iv) and Bugamor Publishing, sold on July
30, 1997, are collectively referred to as "Other Dispositions."
The Other Dispositions occurred prior to September 30, 1998 and,
accordingly, have been excluded from the September 30, 1998 unaudited PMSI
historical balance sheet, except for the December 3, 1998 disposal, which
disposal is not material to the September 30, 1998 unaudited PMSI historical
balance sheet. The unaudited pro forma combined condensed statements of
operations exclude the results of operations of the Other Dispositions for the
year ended December 31, 1997 and the nine months ended September 30, 1998 as if
the Other Dispositions had occurred at the beginning of the most recent fiscal
period presented.
The unaudited pro forma combined condensed financial data are not
necessarily indicative of the results that would have been obtained had the
business combinations occurred on the date indicated. The unaudited pro forma
combined condensed financial data should be read in conjunction with the related
historical financial statements and notes thereto of Quintiles, PMSI and ENVOY
incorporated by reference or included in this Proxy Statement/Prospectus.
F-4
<PAGE> 115
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUINTILES,
QUINTILES PMSI AND
AND PMSI ENVOY
HISTORICAL PRO FORMA PRO HISTORICAL PRO FORMA PRO
QUINTILES PMSI ADJUSTMENTS FORMA ENVOY ADJUSTMENTS FORMA
--------- -------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 88,499 $ 42,330 $ 23,550(2),(4) $ 154,379 $ 22,095 $ -- $ 176,474
Accounts receivable and
unbilled services.......... 295,425 5,388 -- 300,813 44,429 -- 345,242
Investments.................. 44,448 97,306 -- 141,754 -- -- 141,754
Prepaid expenses............. 26,931 -- -- 26,931 1,471 -- 28,402
Other current assets......... 10,738 1,806 -- 12,544 4,751 -- 17,295
-------- -------- -------- ---------- -------- -------- ----------
Total current assets....... 466,041 146,830 23,550 636,421 72,746 -- 709,167
Property and equipment........ 353,095 3,992 -- 357,087 45,785 -- 402,872
Less accumulated
depreciation................. 113,939 2,290 -- 116,229 26,887 -- 143,116
-------- -------- -------- ---------- -------- -------- ----------
239,156 1,702 -- 240,858 18,898 -- 259,756
Intangibles and other assets:
Intangibles.................. 71,369 9,214 103,880(1) 184,463 82,416 -- 266,879
Investments.................. 59,514 20,435 -- 79,949 268 -- 80,217
Deferred income taxes........ 68,683 162 -- 68,845 -- -- 68,845
Deposits and other assets.... 33,189 5,590 (700)(2) 38,079 4,722 -- 42,801
-------- -------- -------- ---------- -------- -------- ----------
232,755 35,401 103,180 371,336 87,406 -- 458,742
-------- -------- -------- ---------- -------- -------- ----------
Total assets............... $937,952 $183,933 $126,730 $1,248,615 $179,050 $ -- $1,427,665
======== ======== ======== ========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Lines of credit.............. $ 366 $ -- $ -- $ 366 $ -- $ -- $ 366
Accounts payable and accrued
expenses................... 118,819 16,290 12,510(1) 147,619 26,702 20,000(6) 194,321
Credit arrangements,
current.................... 13,519 20 -- 13,539 84 -- 13,623
Unearned income.............. 120,827 7,781 -- 128,608 1,596 -- 130,204
Income taxes and other
current liabilities........ 14,843 -- 73,000(4) 87,843 11,143 -- 98,986
-------- -------- -------- ---------- -------- -------- ----------
Total current
liabilities.............. 268,374 24,091 85,510 377,975 39,525 20,000 437,500
Long-term liabilities:
Credit arrangements, less
current portion............ 153,879 15 -- 153,894 561 -- 154,455
Long-term obligations........ 24,172 49,325 (49,325)(2) 24,172 -- -- 24,172
Deferred income taxes and
other liabilities.......... 26,580 40 2,657(1) 29,277 9,131 -- 38,408
-------- -------- -------- ---------- -------- -------- ----------
204,631 49,380 (46,668) 207,343 9,692 -- 217,035
-------- -------- -------- ---------- -------- -------- ----------
Total liabilities.......... 473,005 73,471 38,842 585,318 49,217 20,000 654,535
Shareholders' equity:
Preferred stock.............. -- -- -- -- 41,300 (41,300)(5) --
Common stock and additional
paid-in-capital............ 356,059 79,997 118,353(1) 554,409 135,258 41,300(5) 730,967
Retained earnings
(deficit).................. 112,379 29,398 (29,398)(1) 112,379 (46,725) (20,000)(6) 45,654
Other equity................. (3,491) 1,067 (1,067)(1) (3,491) -- -- (3,491)
-------- -------- -------- ---------- -------- -------- ----------
Total shareholders'
equity................... 464,947 110,462 87,888 663,297(3) 129,833 (20,000) 773,130
-------- -------- -------- ---------- -------- -------- ----------
Total liabilities and
shareholders' equity..... $937,952 $183,933 $126,730 $1,248,615 $179,050 $ -- $1,427,665
======== ======== ======== ========== ======== ======== ==========
</TABLE>
F-5
<PAGE> 116
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The unaudited pro forma combined condensed balance sheet is based on the
following adjustments and related assumptions.
The PMSI business combination will be accounted for as a purchase, and as
such, the final purchase price allocations will be made on the basis of
appraisals and evaluations once the purchase is consummated and, therefore, the
actual purchase price allocation is likely to differ from that reflected in the
unaudited pro forma combined condensed balance sheet.
The ENVOY business combination will be accounted for as a pooling of
interests.
NOTE 1
The pro forma preliminary purchase allocation to record the PMSI business
combination is summarized below:
<TABLE>
<S> <C>
Shares of PMSI common stock outstanding.................... 12,407,121 (a)
Exchange ratio............................................. 0.308 (b)
-----------
Shares of Quintiles common stock assumed issued............ 3,821,393
===========
Share options of PMSI common stock outstanding............. 1,439,700 (a)
Exchange Ratio............................................. 0.308 (b)
-----------
Share options of Quintiles common stock assumed issued..... 443,428
===========
Consideration paid to PMSI shareholders for:
Quintiles common stock................................... $ 191,070 (c)
Quintiles common stock options........................... 7,280 (d)
-----------
Subtotal.............................................. 198,350
Non-recurring transaction costs............................ 12,510 (e)
-----------
Aggregate purchase price................................... 210,860
Less: historical net assets acquired....................... (110,462)
-----------
Premium to allocate........................................ $ 100,398
===========
Adjustments to fair value of net assets acquired:
Elimination of PMSI historical goodwill.................. $ (9,214)(f)
Intangible asset acquired -- software.................... 6,900 (g)
Goodwill................................................. 106,194 (g)
-----------
Total Intangibles..................................... 103,880
Elimination of PMSI original debt issuance costs......... (700) Note 2
Non-recurring costs incurred............................. (125) Note 2
Deferred tax liability................................... (2,657)(h)
-----------
$ 100,398
===========
</TABLE>
- -------------------------
(a) Outstanding on September 30, 1998.
(b) Using a hypothetical exchange ratio, based on an assumed Quintiles common
stock Average Trading Price of $50.00, each share and share option of PMSI
common stock outstanding at the consummation of the purchase will be
converted into the right to
F-6
<PAGE> 117
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET -- (CONTINUED)
receive 0.308 of a share of Quintiles common stock. In addition, all vested
and unvested options to purchase PMSI common stock will become options to
acquire Quintiles common stock based on the same exchange ratio. Under the
terms of the PMSI business combination, PMSI shareholders (and option
holders if options are exercised) may elect to defer receipt of half of the
Quintiles common stock to which they are entitled. If this election is
made, as more fully disclosed in the Proxy Statement/Prospectus, the
shareholder will also be entitled to receive a contingent value payment
related to the deferred shares under specified conditions. Such payment
would relate to a decline in price of Quintiles common stock for 75 days
subsequent to closing of the combination, as defined. Any payments made
would be charged to shareholders' equity.
(c) Based upon assumed Quintiles common stock Average Trading Price of $50.00.
(d) The estimated fair value using a Black-Scholes option pricing model based
on the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0%
Risk-free interest rate 4.53%
Expected volatility 40%
Expected life (in years from vest) 1
</TABLE>
(e) Non-recurring transaction costs (as currently estimated by management)
consisting of severance (approximately $2.9 million), direct transactions
costs (approximately $4.8 million), consideration for the affirmation and
revision of a preacquisition contingency of PMSI (approximately $4.5
million) and other costs related to the integration of the PMSI business
(approximately $.3 million).
(f) Elimination of the unamortized goodwill of $9,214 recorded by PMSI in
conjunction with its acquisition of Scott-Levin.
(g) The final determination of adjustments to assets and liabilities will be
made based upon the fair values as of the consummation of the purchase and
after appraisals and evaluations are complete. The final amounts are likely
to differ from the estimates provided herein.
(h) Deferred income taxes are based on the intangible software asset
acquired($6,900) using a 38.5% tax rate.
The excess of the purchase price over the historical value of the net
assets acquired was allocated first to identifiable intangible assets with the
remainder recorded as goodwill. Quintiles' Executive Management along with its
outside advisors and the management of PMSI and Scott-Levin performed a review
to identify intangible assets and determine the value, if any, of such assets.
This review resulted in the identification of proprietary software and
proprietary databases (collectively, "software") as intangible assets that would
provide future benefit to the combined companies. The value of the proprietary
software was determined to be incidental and related totally to the proprietary
software's purpose, which was to facilitate the utilization of the proprietary
databases. Based upon the estimated replacement cost, the value of the
proprietary software was estimated to be $6.9 million of the excess of the
purchase price. The value of the proprietary databases was determined to be
dependent on the data with which they are populated. The value of the data is
limited to the period in which it relates. Once more recent data are available,
the value of the prior data is minimal. Based on the age of the data contained
in the proprietary databases, no additional value was ascribed to the identified
intangible asset, software. With software as the only
F-7
<PAGE> 118
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET -- (CONTINUED)
identified intangible asset, the remainder of the excess of the purchase price
was allocated to goodwill.
Quintiles' Executive Management and Board of Directors view this
acquisition as highly strategic, acknowledge the strong value of goodwill and
believe 30 years is an appropriate life for the goodwill. In reaching this
conclusion regarding the goodwill life, Executive Management and the Board of
Directors considered a number of factors. First, Scott-Levin provides
healthcare-related market research services, an industry that has evolved over
the past 35 years and which serves a stable client base, pharmaceutical
companies. Second, Scott-Levin bears a highly respected brand name and operates
in a specialized market with few competitors and significant barriers to entry.
Third, Scott-Levin will form the foundation for Quintiles to expand into the
healthcare informatics industry, an area that management believes will add value
to the Company's existing services and provide opportunities for future growth.
NOTE 2
As a condition to closing of the PMSI purchase, on February 1, 1999 PMSI
completed the redemption of all its outstanding 6.25% Convertible Subordinated
Debentures ($49,325 at September 30, 1998). Management estimates $125 in
non-recurring costs will be incurred in connection with the redemption. In
addition, original debt issuance costs of approximately $700 will be
written-off.
NOTE 3
Reconciliation of change in Shareholders' equity:
<TABLE>
<S> <C>
Beginning balance -- Quintiles.............................. $464,947
Add: Common stock and additional paid-in-capital.......... 198,350
--------
Ending Balance -- Pro Forma Quintiles and PMSI.............. $663,297
========
</TABLE>
NOTE 4
On October 14, 1998, PMSI entered into a forward sale arrangement with CIBC
Oppenheimer ("CIBC") pursuant to which PMSI transfers all of the IMS Health
common stock received in its transaction with IMS Health, receives aggregate
proceeds of $73.0 million and places the 1,197,963 shares of IMS Health common
stock with CIBC as collateral against PMSI's delivery obligation on August 12,
1999. Accordingly, cash and other current liabilities have been increased $73.0
million on a pro forma basis.
NOTE 5
To reflect that each outstanding share of ENVOY common stock and ENVOY
Series B convertible preferred stock will be exchanged for 1.166 shares of
Quintiles common stock. Based on a total of approximately 24,374,000 shares of
ENVOY common stock and preferred stock outstanding on December 14, 1998,
Quintiles would issue approximately 28,421,000
F-8
<PAGE> 119
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET -- (CONTINUED)
shares of Quintiles common stock in the merger. Quintiles will pay cash in lieu
of fractional shares.
NOTE 6
To accrue non-recurring transaction costs (as currently estimated by
management), consisting of financial advisor fees (approximately $17.0 million),
accounting and legal fees (approximately $1.5 million) and other direct
transaction costs, such as filing fees, proxy solicitation and proxy printing
and distribution (approximately $1.5 million) which are anticipated to be
incurred in connection with the ENVOY transaction.
F-9
<PAGE> 120
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUINTILES
AND
PRO FORMA PMSI
HISTORICAL PORTFOLIO PMSI HISTORICAL PRO FORMA PRO HISTORICAL
PMSI CHANGES(1) PRO FORMA QUINTILES ADJUSTMENTS FORMA ENVOY
---------- ---------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................ $47,170 $(26,786) $20,384 $848,379 $ -- $868,763 $132,763
Costs and expenses:
Direct........................... 25,373 (17,549) 7,824 444,369 -- 452,193 58,875
General and administrative....... 29,065 (17,468) 11,597 274,925 (386)(2) 286,136 29,728
Depreciation and amortization.... 1,182 (651) 531 40,431 3,545(2) 44,507 26,948
Transaction costs................ 1,151 (1,151) -- -- -- --
Research and development......... -- -- -- -- -- -- 1,963
Other............................ 93 (93) -- -- -- -- --
------- -------- ------- -------- ------- -------- --------
56,864 (36,912) 19,952 759,725 3,159 782,836 117,514
------- -------- ------- -------- ------- -------- --------
Income (loss) from operations...... (9,694) 10,126 432 88,654 (3,159) 85,927 15,249
Other income (expense), net........ 8,165 (48) 8,117 (1,917) (7,252)(3)(4) (1,052) (637)
Gain on sale of operations, net.... 50,711 (50,711) -- -- -- -- --
------- -------- ------- -------- ------- -------- --------
58,876 (50,759) 8,117 (1,917) (7,252) (1,052) (637)
------- -------- ------- -------- ------- -------- --------
Income (loss) before income
taxes............................ 49,182 (40,633) 8,549 86,737 (10,411) 84,875 14,612
Income taxes....................... 3,573 (67) 3,506 27,823 (3,381)(4)(5) 27,948 11,653
------- -------- ------- -------- ------- -------- --------
Income before extraordinary
gain(3).......................... $45,609 $(40,566) $ 5,043 $ 58,914 $(7,030) $ 56,927 $ 2,959
======= ======== ======= ======== ======= ======== ========
Basic income before extraordinary
gain per share................... $ 0.77 $ 0.71
======== ========
Diluted income before extraordinary
gain per share................... $ 0.76 $ 0.70
======== ========
Shares used in computing income
before extraordinary gain per
share:
Basic............................ 76,476 80,291
Diluted.......................... 77,987 81,864
<CAPTION>
QUINTILES
PMSI AND
PRO FORMA ENVOY
ADJUSTMENTS(6) PRO FORMA
-------------- ----------
<S> <C> <C>
Net revenue........................ $ -- $1,001,526
Costs and expenses:
Direct........................... -- 511,068
General and administrative....... (1,783)(7) 314,081
Depreciation and amortization.... -- 71,455
Transaction costs................ -- --
Research and development......... -- 1,963
Other............................ -- --
------- ----------
(1,783) 898,567
------- ----------
Income (loss) from operations...... 1,783 102,959
Other income (expense), net........ (1,783)(7) (3,472)
Gain on sale of operations, net.... -- --
------- ----------
(1,783) (3,472)
------- ----------
Income (loss) before income
taxes............................ -- 99,487
Income taxes....................... -- 39,601
------- ----------
Income before extraordinary
gain(3).......................... $ -- $ 59,886
======= ==========
Basic income before extraordinary
gain per share................... $ 0.57
==========
Diluted income before extraordinary
gain per share................... $ 0.54
==========
Shares used in computing income
before extraordinary gain per
share:
Basic............................ 104,833
Diluted.......................... 111,048
</TABLE>
F-10
<PAGE> 121
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS ACTUAL)
NOTE 1
Pro forma portfolio changes are intended to adjust the PMSI portfolio of
businesses, removing results of operations of Other Dispositions to reflect the
ongoing businesses being acquired by Quintiles. Accordingly, these adjustments
to the results of operations for the nine months ended September 30, 1998,
principally affect:
a. the elimination of the operating results of PMSI's non-US operating
assets, which were sold on December 3, 1998 and August 5, 1998;
b. the elimination of the loss from assets held for sale of IMR, which
was sold on March 31, 1998;
c. the elimination of the net gain on the sale of IMR and PMSI's
remaining non-US operating assets;
d. the elimination of non-recurring transaction costs associated with
the sale of IMR and PMSI's remaining non-US operating assets.
NOTE 2
The pro forma purchase accounting adjustments related to the PMSI business
combination are summarized as follows:
<TABLE>
<S> <C>
Depreciation and amortization expense:
To eliminate PMSI historical goodwill amortization........ $ (531)
Amortization of incremental intangible assets............. 3,690
------
$3,159
======
</TABLE>
The identifiable intangible asset (software) is being amortized on a
straight-line basis over five years and goodwill is being amortized on a
straight-line basis over thirty years.
PMSI historical depreciation expense ($386) has been reclassified to be
consistent with the classification used by Quintiles.
F-11
<PAGE> 122
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 -- (CONTINUED)
NOTE 3
The pro forma presentation assumes PMSI's $69.0 million 6.25% Convertible
Subordinated Debentures due 2003, 100% outstanding at January 1, 1998, would
have been redeemed for cash at January 1, 1998. The pro forma interest income is
calculated assuming $69.0 million invested at the average interest rate earned
by Quintiles during the period (approximately 5.3%). The pro forma impact is as
follows:
<TABLE>
<S> <C>
Eliminate interest income on cash used for redemption....... $(2,760)
Eliminate interest expense.................................. 3,132
-------
$ 372
=======
</TABLE>
In its historical statements of operations, PMSI reported an extraordinary
gain of $1,154 from the repurchase of the Subordinated Debentures which is not
reflected in the pro forma combined condensed statement of operations.
NOTE 4
To eliminate the gain of $7,624 (and resulting income tax expense of
$3,126) recorded related to the sale of NDC shares.
NOTE 5
Unless otherwise disclosed, income tax expense on pro forma adjustments
(excluding goodwill amortization expense) is reflected using a 38.5% tax rate.
NOTE 6
Non-recurring transaction costs of approximately $20 million (as currently
estimated by management), consisting of financial advisor fees (approximately
$17.0 million) accounting and legal fees (approximately $1.5 million) and other
direct transaction costs such as filing fees, proxy solicitation, and proxy
printing and distribution (approximately $1.5 million), are anticipated to be
incurred in connection with the ENVOY transaction. Such costs will be expensed
by Quintiles upon closing of the combination. Such costs have not been reflected
in the unaudited pro forma combined condensed statement of operations.
NOTE 7
For the nine months ended September 30, 1998, ENVOY historical transaction
related costs ($1,783) have been reclassified as other income (expense) to be
consistent with the classification used by Quintiles.
F-12
<PAGE> 123
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA QUINTILES
HISTORICAL PORTFOLIO PMSI HISTORICAL PRO FORMA AND PMSI HISTORICAL
PMSI CHANGES(1) PRO FORMA QUINTILES ADJUSTMENTS PRO FORMA ENVOY
---------- ---------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................ $ 91,677 $(68,186) $23,491 $852,900 $ -- $876,391 $137,605
Costs and expenses:
Direct........................... 49,640 (38,768) 10,872 448,920 -- 459,792 64,247
General and administrative....... 32,923 (20,996) 11,927 277,238 (362)(2) 288,803 32,734
Depreciation and amortization.... 1,566 (858) 708 37,930 4,574(2) 43,212 34,432
In-process R&D writeoff.......... 12,046 (12,046) -- -- -- -- 6,600
Impairment of assets held for
sale........................... 15,333 (15,333) -- -- -- -- --
Income from assets held for
sale........................... (486) 486 -- -- -- -- --
Research and development......... -- -- -- -- -- -- 2,192
-------- -------- ------- -------- ------- -------- --------
111,022 (87,515) 23,507 764,088 4,212 791,807 140,205
-------- -------- ------- -------- ------- -------- --------
Income (loss) from operations...... (19,345) 19,329 (16) 88,812 (4,212) 84,584 (2,600)
Other income (expense):
Interest income.................. 3,849 -- 3,849 8,472 (3,588)(3) 8,733 1,312
Interest expense................. (4,283) 129 (4,154) (8,764) 4,154(3) (8,764) (1,577)
Other............................ -- -- -- (1,985) -- (1,985) --
Gain on sale of operations, net
of loss........................ 36,239 (36,239) -- -- -- -- --
-------- -------- ------- -------- ------- -------- --------
35,805 (36,110) (305) (2,277) 566 (2,016) (265)
-------- -------- ------- -------- ------- -------- --------
Income (loss) before income taxes
and minority interest............ 16,460 (16,781) (321) 86,535 (3,646) 82,568 (2,865)
Minority interest.................. (29) 29 -- -- -- -- --
Income taxes....................... 10,848 (10,366) 482 30,852 (313)(4) 31,021 6,333
-------- -------- ------- -------- ------- -------- --------
Income (loss) from continuing
operations(1).................... $ 5,641 $ (6,444) $ (803) $ 55,683 $(3,333) $ 51,547 $ (9,198)
======== ======== ======= ======== ======= ======== ========
Basic income from continuing
operations per share............. $ 0.76 $ 0.66
Diluted income from continuing
operations per share............. $ 0.74 $ 0.65
Shares used in computing income
from continuing operations per
share:
Basic............................ 73,739 77,799
Diluted.......................... 75,275 79,375
<CAPTION>
QUINTILES
PMSI AND
PRO FORMA ENVOY
ADJUSTMENTS(5) PRO FORMA
-------------- ----------
<S> <C> <C>
Net revenue........................ $ -- $1,013,996
Costs and expenses:
Direct........................... -- 524,039
General and administrative....... -- 321,537
Depreciation and amortization.... -- 77,644
In-process R&D writeoff.......... -- 6,600
Impairment of assets held for
sale........................... -- --
Income from assets held for
sale........................... -- --
Research and development......... -- 2,192
-------- ----------
-- 932,012
-------- ----------
Income (loss) from operations...... -- 81,984
Other income (expense):
Interest income.................. -- 10,045
Interest expense................. -- (10,341)
Other............................ -- (1,985)
Gain on sale of operations, net
of loss........................ -- --
-------- ----------
-- (2,281)
-------- ----------
Income (loss) before income taxes
and minority interest............ -- 79,703
Minority interest.................. -- --
Income taxes....................... -- 37,354
-------- ----------
Income (loss) from continuing
operations(1).................... $ -- $ 42,349
======== ==========
Basic income from continuing
operations per share............. $ 0.42
Diluted income from continuing
operations per share............. $ 0.39
Shares used in computing income
from continuing operations per
share:
Basic............................ 100,753
Diluted.......................... 107,980
</TABLE>
F-13
<PAGE> 124
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS ACTUAL)
NOTE 1
Pro forma portfolio changes are intended to adjust the PMSI portfolio of
businesses, removing results of operations of Other Dispositions to reflect the
ongoing businesses being acquired by Quintiles. Accordingly, these adjustments
to the results of operations for the year ended December 31, 1997, principally
affect:
a. the elimination of non-recurring charges associated with the
write-off of in-process research and development related to the acquisition
of Source Europe, which was acquired on December 15, 1997, and subsequently
sold on December 3, 1998.
b. the elimination of the operating results of PMSI's non-US operating
assets, which were sold on December 3, 1998 and August 5, 1998;
c. the elimination of the impairment of assets held for sale associated
with PMSI's decision to dispose of IMR, which was sold on March 31, 1998;
d. the elimination of operating results of Source US and the OTC
Business, which were sold on December 15, 1997;
e. the elimination of the operating results of Bugamor Publishing, which
was sold on July 30, 1997;
f. the elimination of the gain on the sale of Source US, the OTC
Business and Bugamor Publishing.
In its historical statement of operations, PMSI reported a loss from
discontinued operations of $9.9 million which is not reflected in the pro forma
combined condensed statement of operations.
NOTE 2
The pro forma purchase accounting adjustments related to the PMSI business
combination are summarized as follows:
<TABLE>
<S> <C>
Depreciation and amortization expense:
To eliminate PMSI historical goodwill amortization........ $ (708)
Amortization of incremental intangible asset.............. 4,920
------
$4,212
======
</TABLE>
The identifiable intangible asset (software) is being amortized on a
straight-line basis over five years and goodwill is being amortized on a
straight-line basis over thirty years.
PMSI historical depreciation expense ($362) has been reclassified to be
consistent with the classification used by Quintiles.
F-14
<PAGE> 125
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED)
NOTE 3
The pro forma presentation assumes PMSI's $69.0 million 6.25% Convertible
Subordinated Debentures due 2003, 100% outstanding at January 1, 1997, would
have been redeemed for cash at January 1, 1997. The pro forma interest income is
calculated assuming $69.0 million invested at the average interest rate earned
by Quintiles during this period (approximately 5.2%). The pro forma impact is as
follows:
<TABLE>
<S> <C>
Eliminate interest income on cash used for redemption....... $(3,588)
Eliminate interest expense incurred by continuing
operations................................................ 4,154
-------
$ 566
=======
</TABLE>
NOTE 4
Income tax expense on pro forma adjustments (excluding goodwill
amortization expense) is reflected using a 38.5% tax rate.
NOTE 5
Non-recurring transaction costs of approximately $20 million (as currently
estimated by management), consisting of financial advisor fees (approximately
$17.0 million), accounting and legal fees (approximately $1.5 million) and other
direct transaction costs such as filing fees, proxy solicitation and proxy
printing and distribution (approximately $1.5 million), are anticipated to be
incurred in connection with the ENVOY transaction. Such costs will be expensed
by Quintiles upon closing of the combination. Such costs have not been reflected
in the unaudited pro forma combined condensed statement of operations.
F-15
<PAGE> 126
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data and
explanatory notes are presented to show the impact on the historical financial
position and results of operations of Quintiles assuming the proposed business
combination of Quintiles and ENVOY, which is to be accounted for using the
pooling of interests method of accounting, had occurred. ENVOY's year end is
December 31. Quintiles' year end is December 31.
In the ENVOY business combination, each outstanding share of ENVOY common
stock and ENVOY Series B convertible preferred stock will be exchanged for 1.166
shares of Quintiles common stock. Based on a total of approximately 24,374,000
shares of ENVOY common stock and preferred stock outstanding on December 14,
1998, Quintiles would issue approximately 28,421,000 shares of Quintiles common
stock. Quintiles will pay cash in lieu of fractional shares. Quintiles also will
convert any remaining unexercised ENVOY stock options into Quintiles stock
options at the exchange ratio.
The unaudited pro forma combined condensed balance sheet reflects the
combined historical balance sheets of Quintiles and ENVOY at September 30, 1998.
The unaudited pro forma combined condensed statements of operations for the
years ended December 31, 1997, 1996 and 1995 and for the nine months ended
September 30, 1998 and 1997 reflect the combined historical operating results of
Quintiles and ENVOY for such periods.
The unaudited pro forma combined condensed results presented do not reflect
any incremental direct costs, potential cost savings or revenue enhancements
which may result from the consolidation of certain operations of Quintiles and
ENVOY. Therefore, the unaudited pro forma combined condensed statements of
operations may not be indicative of the results of past or future operations. No
assurances can be given with respect to the ultimate level of cost savings
and/or revenue enhancements which may be realized following consummation of the
proposed transaction.
The unaudited pro forma combined condensed financial data are not
necessarily indicative of the results that would have been obtained had the
business combination occurred on the dates indicated. The unaudited pro forma
combined condensed financial data should be read in conjunction with the related
historical financial statements and notes thereto of Quintiles and ENVOY
incorporated by reference in this Proxy Statement/Prospectus.
F-16
<PAGE> 127
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 88,499 $ 22,095 $ -- $ 110,594
Accounts receivable and unbilled
services................................. 295,425 44,429 -- 339,854
Investments................................ 44,448 -- -- 44,448
Prepaid expenses........................... 26,931 1,471 -- 28,402
Other current assets....................... 10,738 4,751 -- 15,489
-------- -------- ----------- ----------
Total current assets..................... 466,041 72,746 -- 538,787
Property and equipment....................... 353,095 45,785 -- 398,880
Less accumulated depreciation................ 113,939 26,887 -- 140,826
-------- -------- ----------- ----------
239,156 18,898 -- 258,054
Intangibles and other assets
Intangibles................................ 71,369 82,416 -- 153,785
Investments................................ 59,514 268 -- 59,782
Deferred income taxes...................... 68,683 -- -- 68,683
Deposits and other assets.................. 33,189 4,722 -- 37,911
-------- -------- ----------- ----------
232,755 87,406 -- 320,161
-------- -------- ----------- ----------
Total assets............................. $937,952 $179,050 $ -- $1,117,002
======== ======== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit............................ $ 366 $ -- $ -- $ 366
Accounts payable and accrued expenses...... 118,819 26,702 20,000(1) 165,521
Credit arrangements, current............... 13,519 84 -- 13,603
Unearned income............................ 120,827 1,596 -- 122,423
Income taxes and other current
liabilities.............................. 14,843 11,143 -- 25,986
-------- -------- ----------- ----------
Total current liabilities................ 268,374 39,525 20,000 327,899
Long-term liabilities:
Credit arrangements, less current
portion.................................. 153,879 561 -- 154,440
Long-term obligations...................... 24,172 -- -- 24,172
Deferred income taxes and other
liabilities.............................. 26,580 9,131 -- 35,711
-------- -------- ----------- ----------
204,631 9,692 -- 214,323
-------- -------- ----------- ----------
Total liabilities........................ 473,005 49,217 20,000 542,222
Shareholders' equity:
Preferred stock............................ -- 41,300 (41,300)(2) --
Common stock and additional
paid-in-capital.......................... 356,059 135,258 41,300(2) 532,617
Retained earnings (deficit)................ 112,379 (46,725) (20,000)(1) 45,654
Other equity............................... (3,491) -- -- (3,491)
-------- -------- ----------- ----------
Total shareholders' equity............... 464,947 129,833 (20,000) 574,780
-------- -------- ----------- ----------
Total liabilities and shareholders'
equity................................. $937,952 $179,050 $ -- $1,117,002
======== ======== =========== ==========
</TABLE>
- -------------------------
(1) To accrue non-recurring transaction costs (as currently estimated by
management), consisting of financial advisor fees (approximately $17.0
million), accounting and legal fees (approximately $1.5 million) and other
direct transaction costs such as filing fees, proxy solicitation and proxy
printing and distribution (approximately $1.5 million), which are
anticipated to be incurred in connection with the ENVOY transaction.
(2) To reflect that each outstanding share of ENVOY common stock and ENVOY
Series B convertible preferred stock will be exchanged for 1.166 shares of
Quintiles common stock. Based on a total of approximately 24,375,000 shares
of the ENVOY common stock and preferred stock outstanding on December 14,
1998, Quintiles would issue approximately 28,421,000 shares of Quintiles
common stock in the merger. Quintiles will pay cash in lieu of fractional
shares.
F-17
<PAGE> 128
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS(1) PRO FORMA
--------- -------- -------------- ---------
<S> <C> <C> <C> <C>
Net revenue.................... $848,379 $132,763 $ -- $981,142
Costs and expenses:
Direct....................... 444,369 58,875 -- 503,244
General and administrative... 274,925 29,728 (1,783)(2) 302,870
Depreciation and
amortization.............. 40,431 26,948 -- 67,379
Research and development..... -- 1,963 -- 1,963
-------- -------- -------- --------
759,725 117,514 (1,783) 875,456
-------- -------- -------- --------
Income from operations......... 88,654 15,249 1,783 105,686
Other expense, net............. (1,917) (637) (1,783)(2) (4,337)
-------- -------- -------- --------
Income before income taxes..... 86,737 14,612 -- 101,349
Income taxes................... 27,823 11,653 -- 39,476
-------- -------- -------- --------
Net income..................... $ 58,914 $ 2,959 $ -- $ 61,873
======== ======== ======== ========
Basic net income per share..... $ 0.77 $ 0.61
======== ========
Diluted net income per share... $ 0.76 $ 0.58
======== ========
Shares used in computing net
income per share:
Basic........................ 76,476 101,018
Diluted...................... 77,987 107,171
</TABLE>
- -------------------------
(1) Non-recurring transaction costs of approximately $20 million (as currently
estimated by management), consisting of financial advisor fees
(approximately $17.0 million), accounting and legal fees (approximately $1.5
million) and other direct transaction costs such as filing fees, proxy
solicitation and proxy printing and distribution (approximately $1.5
million), are anticipated to be incurred in connection with the ENVOY
transaction. Such costs will be expensed by Quintiles upon closing of the
business combination with ENVOY. Such costs have not been reflected in the
unaudited pro forma combined condensed statement of operations.
(2) For the nine months ended September 30, 1998, ENVOY historical transaction
related costs have been reclassified as other income (expense) to be
consistent with the classification used by Quintiles.
F-18
<PAGE> 129
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue.......................... $608,436 $ 97,625 $-- $706,061
Costs and expenses:
Direct............................. 321,376 45,852 -- 367,228
General and administrative......... 196,922 23,175 -- 220,097
In-process R&D writeoff............ -- 6,600 -- 6,600
Depreciation and amortization...... 26,751 25,013 -- 51,764
Research and development........... -- 1,689 -- 1,689
-------- -------- --- --------
545,049 102,329 -- 647,378
-------- -------- --- --------
Income (loss) from operations........ 63,387 (4,704) -- 58,683
Other (expense) income, net.......... (2,000) 143 -- (1,857)
-------- -------- --- --------
Income (loss) before income taxes.... 61,387 (4,561) -- 56,826
Income taxes......................... 22,525 3,327 -- 25,852
-------- -------- --- --------
Net income (loss).................... $ 38,862 $ (7,888) $-- $ 30,974
======== ======== === ========
Basic net income per share........... $ 0.53 $ 0.32
======== ========
Diluted net income per share......... $ 0.52 $ 0.30
======== ========
Shares used in computing net income
per share:
Basic.............................. 73,283 96,085
Diluted............................ 74,967 103,956
</TABLE>
F-19
<PAGE> 130
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue.......................... $852,900 $137,605 $-- $990,505
Costs and expenses:
Direct............................. 448,920 64,247 -- 513,167
General and administrative......... 277,238 32,734 -- 309,972
Depreciation and amortization...... 37,930 34,432 -- 72,362
In-process R&D writeoff............ -- 6,600 -- 6,600
Research and development........... -- 2,192 -- 2,192
-------- -------- --- --------
764,088 140,205 -- 904,293
-------- -------- --- --------
Income (loss) from operations........ 88,812 (2,600) -- 86,212
Other income (expense):
Interest income.................... 8,472 1,312 -- 9,784
Interest expense................... (8,764) (1,577) -- (10,341)
Other.............................. (1,985) -- -- (1,985)
-------- -------- --- --------
(2,277) (265) -- (2,542)
-------- -------- --- --------
Income (loss) before income taxes.... 86,535 (2,865) -- 83,670
Income taxes......................... 30,852 6,333 -- 37,185
-------- -------- --- --------
Net income (loss) available for
common shareholders................ $ 55,683 $ (9,198) $-- $ 46,485
======== ======== === ========
Basic net income per share........... $ 0.76 $ 0.48
Diluted net income per share......... $ 0.74 $ 0.45
Shares used in computing net income
per share:
Basic.............................. 73,739 96,693
Diluted............................ 75,275 103,881
</TABLE>
F-20
<PAGE> 131
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue....................... $600,100 $ 90,572 $ -- $690,672
Costs and expenses:
Direct.......................... 308,886 43,500 -- 352,386
General and administrative...... 206,251 24,631 -- 230,882
Depreciation and amortization... 25,681 25,497 -- 51,178
Non-recurring costs............. 15,431 -- 4,664(1) 20,095
In-process R&D writeoff......... -- 8,700 -- 8,700
Merger and facility integration
costs........................ -- 4,664 (4,664)(1) --
EMC losses...................... -- 540 -- 540
Research and development........ -- 1,779 -- 1,779
-------- -------- ------- --------
556,249 109,311 -- 665,560
-------- -------- ------- --------
Income (loss) from operations..... 43,851 (18,739) -- 25,112
Other income (expense):
Interest income................. 7,206 1,032 -- 8,238
Interest expense................ (9,716) (2,872) -- (12,588)
Non-recurring transaction
costs........................ (17,118) -- -- (17,118)
Other........................... 18 -- -- 18
-------- -------- ------- --------
(19,610) (1,840) -- (21,450)
-------- -------- ------- --------
Income (loss) before income
taxes........................... 24,241 (20,579) -- 3,662
Income taxes...................... 14,808 1,717 -- 16,525
-------- -------- ------- --------
Net income (loss)................. 9,433 (22,296) -- (12,863)
Non-equity dividend............... (1,785) (14,921) -- (16,706)
-------- -------- ------- --------
Net income (loss) available for
common shareholders............. $ 7,648 $(37,217) $ -- $(29,569)
======== ======== ======= ========
Basic net income (loss) per
share........................... $ 0.11 $ (0.33)
Diluted net income (loss) per
share........................... $ 0.11 $ (0.33)
Shares used in computing net
income (loss) per share:
Basic........................... 69,148 88,409
Diluted......................... 71,785 88,409
</TABLE>
- -------------------------
(1) For the twelve months ended December 31, 1996, ENVOY historical merger and
facility integration costs represent one-time acquisition costs, and as
such, have been reclassified as non-recurring costs to be consistent with
the classification used by Quintiles.
F-21
<PAGE> 132
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue........................... $368,056 $34,197 $ -- $402,253
Costs and expenses:
Direct.............................. 192,899 18,967 -- 211,866
General and administrative.......... 126,969 11,156 -- 138,125
Depreciation and amortization....... 17,586 2,725 -- 20,311
Non-recurring costs................. 4,702 -- -- 4,702
Research and development............ -- 1,466 -- 1,466
-------- ------- -------- --------
342,156 34,314 -- 376,470
-------- ------- -------- --------
Income (loss) from operations......... 25,900 (117) -- 25,783
Other income (expense):
Interest income..................... 2,562 380 -- 2,942
Interest expense.................... (3,846) (659) -- (4,505)
Other............................... 39 -- -- 39
-------- ------- -------- --------
(1,245) (279) -- (1,524)
-------- ------- -------- --------
Income (loss) before income taxes..... 24,655 (396) -- 24,259
Loss in investee...................... -- 1,776 -- 1,776
Income taxes.......................... 9,310 (50) -- 9,260
-------- ------- -------- --------
Income (loss) from continuing
operations.......................... 15,345 (2,122) -- 13,223
Non-equity dividend................... (719) -- -- (719)
-------- ------- -------- --------
Income (loss) from continuing
operations available for common
shareholders(1)..................... $ 14,626 $(2,122) $ -- $ 12,504
======== ======= ======== ========
Basic income from continuing
operations per share................ $ 0.23 $ 0.16
======== ========
Diluted income from continuing
operations per share................ $ 0.23 $ 0.15
======== ========
Shares used in computing income from
continuing operations per share:
Basic............................... 63,171 80,357
Diluted............................. 64,946 82,717
</TABLE>
- ---------------
(1) In its historical statements of operations, ENVOY reported a loss from
discontinued operations of $2.4 million which is not reflected in the pro
forma combined condensed statement of operations.
F-22
<PAGE> 133
REPORT OF INDEPENDENT ACCOUNTANTS
STAMFORD, CONNECTICUT
AUGUST 14, 1998, EXCEPT FOR NOTE 21,
AS TO WHICH THE DATE IS
SEPTEMBER 2, 1998.
To the Board of Directors and Stockholders of
Pharmaceutical Marketing Services Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Pharmaceutical Marketing Services Inc. and Subsidiaries ("PMSI") as of June 30,
1997 and 1998 and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of PMSI's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
F-23
<PAGE> 134
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE NUMBERS)
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................... $ 32,414 $ 42,315
Marketable securities............................... 24,738 50,097
Accounts receivable, principally trade (less
allowance for doubtful accounts of $388 and $538,
respectively).................................... 27,442 21,332
Work-in-process..................................... 3,798 1,489
Prepaid expenses and other current assets........... 4,905 9,866
Net current assets held for sale.................... 4,236 --
-------- --------
Total current assets........................... 97,533 125,099
Marketable securities................................. 7,384 19,444
Property and equipment, net........................... 11,761 9,548
Goodwill, net......................................... 25,303 22,063
Other assets, net..................................... 6,424 10,204
Net assets held for sale.............................. 18,797 --
-------- --------
Total assets................................... $167,202 $186,358
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt................ $ 407 $ 61
Accounts payable.................................... 5,036 5,730
Accrued liabilities (including employee compensation
and benefits of $3,234 and $5,429,
respectively).................................... 10,507 23,499
Unearned income..................................... 17,373 22,087
-------- --------
Total current liabilities...................... 33,323 51,377
Long-term debt........................................ 69,552 69,114
Other liabilities..................................... 583 7,761
-------- --------
Total liabilities.............................. 103,458 128,252
-------- --------
Commitments and contingencies
Stockholders' equity, common stock, $0.01 par value,
25,000,000 shares authorized and 13,199,475 and
13,314,975 shares issued, respectively.............. 132 133
Paid-in capital....................................... 87,179 88,199
Treasury stock at cost, 0 and 918,254 shares,
respectively........................................ -- (8,494)
Accumulated deficit................................... (20,029) (20,332)
Cumulative translation adjustment..................... (3,534) (7,170)
Unrealized gain (loss) on investments, net of income
tax (benefits) provisions of $(4) and $4,010,
respectively........................................ (4) 5,770
-------- --------
Total stockholders' equity..................... 63,744 58,106
-------- --------
Total liabilities and stockholders' equity..... $167,202 $186,358
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 135
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue........................................... $ 93,027 $ 98,485 $ 77,966
Production costs.................................. (51,605) (54,457) (43,663)
Selling, general and administrative expenses...... (34,208) (34,847) (34,243)
In-process research and development write-off..... -- -- (12,046)
Amortization of intangible assets................. (2,012) (1,733) (1,596)
Income from assets held for sale.................. -- 76 (281)
Impairment of long-lived assets................... (2,368) -- --
Impairment of assets held for sale................ -- -- (14,735)
Restructuring costs............................... (2,314) -- --
Transaction costs................................. -- -- (1,151)
-------- -------- --------
Operating income (loss)........................... 520 7,524 (29,749)
Gain on sale of operations, net of loss........... -- -- 34,106
Interest and other income......................... 2,503 3,299 5,677
Interest expense.................................. (2,633) (3,490) (4,632)
-------- -------- --------
Income from continuing operations before income
taxes........................................... 390 7,333 5,402
Income tax provision.............................. (1,156) (2,655) (5,705)
Minority interest................................. 57 (17) --
-------- -------- --------
Income (loss) from continuing operations.......... (709) 4,661 (303)
Discontinued operations:
Loss from discontinued operations, net............ (8,915) (9,914) --
-------- -------- --------
Net loss..................................... $ (9,624) $ (5,253) $ (303)
======== ======== ========
Basic and diluted earnings (loss) per share:
Continuing operations........................... $ (0.05) $ 0.35 $ (0.02)
Discontinued operations, net.................... (0.68) (0.75) --
-------- -------- --------
Net loss per share........................... $ (0.73) $ (0.40) $ (0.02)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 136
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED TREASURY STOCK
--------------- CUMULATIVE GAIN (LOSS) ON ----------------
NO. OF PAID-IN ACCUMULATED TRANSLATION INVESTMENTS NO. OF PAID-IN
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT NET OF TAX SHARES CAPITAL
------ ------ ------- ----------- ----------- -------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30,
1995................. 13,085 $131 $86,176 $ (5,152) $ 5,544 $ (2) -- $ --
Net loss............... -- -- -- (9,624) -- -- -- --
Stock options
exercised............ 84 1 747 -- -- -- -- --
Change in unrealized
loss on marketable
securities, net of
income tax benefit of
$30.................. -- -- -- -- -- (45) -- --
Foreign currency
translation.......... -- -- -- -- (4,822) -- -- --
------ ---- ------- -------- ------- ------ ---- -------
Balance June 30,
1996................. 13,169 132 86,923 (14,776) 722 (47) -- --
Net loss............... -- -- -- (5,253) -- -- -- --
Stock options
exercised............ 30 -- 256 -- -- -- -- --
Change in unrealized
loss on marketable
securities, net of
income tax provision
of $29............... -- -- -- -- -- 43 -- --
Foreign currency
translation.......... -- -- -- -- (4,256) -- -- --
------ ---- ------- -------- ------- ------ ---- -------
Balance June 30,
1997................. 13,199 132 87,179 (20,029) (3,534) (4) -- --
Net loss............... -- -- -- (303) -- -- -- --
Stock options
exercised............ 116 1 1,020 -- -- --
Treasury stock......... -- -- -- -- -- -- (918) (8,494)
Change in unrealized
gain (loss) on
investments, net of
income tax provision
of $4,014............ -- -- -- -- -- 5,774 -- --
Foreign currency
translation.......... -- -- -- -- (3,636) -- -- --
------ ---- ------- -------- ------- ------ ---- -------
Balance June 30,
1998................. 13,315 $133 $88,199 $(20,332) $(7,170) $5,770 (918) $(8,494)
====== ==== ======= ======== ======= ====== ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 137
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net loss......................................... $ (9,624) $(5,253) $ (303)
Loss from discontinued operations................ 8,915 9,914 --
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization.................... 3,372 3,715 3,289
Loss (gain) on disposal of businesses, net....... -- 773 (34,106)
Deferred taxes................................... (789) 953 (6,560)
Minority interest share of net income (loss)..... (57) 17 --
Restructuring costs.............................. 2,314 -- --
Impairment of long-lived assets.................. 2,368 -- --
Impairment of assets held for sale............... -- -- 14,735
In-process research and development write-off.... -- -- 12,046
Change in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable.............................. (5,716) 881 999
Work-in-process.................................. (781) (986) 898
Prepaid expenses and other assets................ (822) 3,471 (934)
Accounts payable and accrued liabilities......... (6,221) (561) 161
Unearned income.................................. 5,156 3,199 (741)
Other liabilities................................ 200 5 98
-------- ------- --------
Total adjustments............................. (976) 11,467 (10,115)
-------- ------- --------
Net cash (used in) provided by operating
activities....................................... (1,685) 16,128 (10,418)
-------- ------- --------
Cash flows provided by (used in) investing
activities:
Capital expenditures............................. (2,166) (4,592) (2,138)
Proceeds from disposal of fixed assets........... 115 66 5
Proceeds from businesses disposed, net of selling
costs......................................... -- 4,285 15,793
Cash consideration advanced to Source Europe
under a line of credit........................ -- -- (6,433)
Cash acquired in Source Europe................... -- -- 9,942
Sale (purchase) of marketable securities, net.... (5,743) 2,610 3,685
Acquisition and contingent purchase price
payments...................................... (624) (2,799) (2,159)
-------- ------- --------
Net cash provided by (used in) investing
activities....................................... (8,418) (430) 18,695
-------- ------- --------
(continued on next page)
</TABLE>
F-27
<PAGE> 138
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) financing
activities:
Net proceeds from options exercised.............. $ 748 $ 256 $ 1,021
Repayments of long-term debt and capital lease
obligations................................... (245) (195) (262)
-------- ------- --------
Net cash provided by financing activities.......... 503 61 759
Effect of discontinued operations and assets held
for sale......................................... (2,038) 5,838 2,160
Effect of exchange rate movements.................. (3,521) (1,852) (1,295)
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (15,159) 19,745 9,901
Cash and cash equivalents at beginning of period... 27,828 12,669 32,414
-------- ------- --------
Cash and cash equivalents at end of period......... $ 12,669 $32,414 $ 42,315
======== ======= ========
Supplemental information:
Cash paid during the period for:
Interest......................................... $ 4,474 $ 4,521 $ 4,345
Income taxes..................................... $ 1,381 $ 1,694 $ 8,430
======== ======= ========
Supplemental disclosure of non-cash investing and
financing activities:
Fair value of assets acquired.................... $ 19,104
PMSI shares received............................. 8,494
In-process research and development.............. 12,046
Completed technology acquired.................... 1,363
--------
Liabilities assumed.............................. $ 41,007
========
Cancellation of amounts due from Source
Europe under a line of credit.................... $ (6,433)
========
National Data Corporation shares received.......... $ 35,328
========
Capital leases................................... $ 40 $ 802 $ 262
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 139
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. Pharmaceutical Marketing Services Inc. ("PMSI") provides a
range of information services to pharmaceutical and healthcare companies in the
United States, Europe and Japan to enable them to optimize their sales and
marketing performance in a value driven environment. The services are comprised
of targeting information services, prescription database services and added
value services. Most of PMSI's information services are generated from its own
proprietary databases containing unique prescription, managed care, healthcare
market and medical prescriber data. On August 5, 1998, PMSI entered into a
transaction whereby it sold substantially all of its non-US operations (see Note
20).
BASIS PRESENTATION AND PRINCIPLES OF CONSOLIDATION. The consolidated
financial statements comprise the accounts of PMSI and its subsidiaries. The
consolidated financial statements have been restated where applicable for
discontinued operations (see Note 19). The accompanying notes present amounts
related to continuing operations only. All intercompany balances and
transactions have been eliminated.
CASH EQUIVALENTS. Cash equivalents consist primarily of highly liquid
investments with a maturity of three months or less at the date of acquisition.
MARKETABLE SECURITIES. PMSI accounts for its marketable securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("FAS 115").
As required by FAS 115, management determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and re-evaluates such determination at each balance sheet date. Debt
securities for which PMSI does not have the intent or ability to hold to
maturity are classified as available-for-sale, along with any investment in
equity securities. Available-for-sale securities are carried at fair value, as
determined by the quoted market value at the balance sheet date, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At June 30, 1998, PMSI had no investments that qualified
as trading or held to maturity.
WORK IN PROCESS. Work in process consists of unbilled costs incurred on
behalf of clients, principally outside vendor costs attributable to PMSI's
products and services.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. All
maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method. Furniture, office
equipment and computer equipment are depreciated over five years and automobiles
over four years. Leasehold improvements are amortized over the shorter of their
useful lives or the terms of the respective leases. Buildings are depreciated
over their estimated useful lives ranging from twenty to thirty years.
On disposal, costs and accumulated depreciation are removed from the
financial statements and gains (losses) are recognized in the statement of
operations.
GOODWILL. Under the purchase method of accounting, the excess of the
purchase price of businesses acquired over the fair value of net tangible and
intangible assets at the dates of
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PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition has been assigned to goodwill. The net assets and results of
operations of the acquisitions have been included in the consolidated financial
statements of PMSI from their respective dates of purchase. Goodwill is
amortized on a straight-line basis over periods between five and forty years.
PMSI assesses the recoverability of goodwill, on a subsidiary by subsidiary
basis, by determining whether amortization of goodwill can be recovered through
undiscounted future cash flows based on projected net income, excluding goodwill
amortization, of the respective subsidiary. Impairment is measured by discounted
future cash flows based on projected net income, excluding goodwill
amortization, using a discount rate reflecting PMSI's cost of funds.
DATABASES. Acquired databases have been valued at their estimated fair
values at the dates of acquisition. Databases are amortized using straight-line
and accelerated methods over periods of up to five years. Costs associated with
maintenance and updating of databases are expensed as incurred.
SOFTWARE ACQUIRED. Computer software of businesses acquired is recorded at
its fair value at the date of acquisition. This software is amortized on a
straight-line basis over its useful life, which is estimated to be two to five
years.
FOREIGN CURRENCY. The balance sheets and results of operations of PMSI's
subsidiaries that operate outside the United States are measured using local
currency as the functional currency.
Assets and liabilities have been translated into United States dollars at
the rates of exchange at the balance sheet date. Translation gains and losses
arising from the use of differing exchange rates from year to year are included
in the cumulative translation adjustment on the balance sheet. Revenues and
costs are translated into United States dollars at the average rate during the
period.
Transaction gains and losses are recognized in the statement of operations
as incurred. For the periods presented these amounts were not material.
REVENUE RECOGNITION. Revenue is recognized on delivery of a product or as
the service is rendered. Subscription-type revenue is recognized over the life
of the subscription. Prebillings for products that have not been delivered or
for services not yet rendered are classified as unearned income until the
earnings process is complete.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject PMSI to concentrations of credit risk consist principally of cash and
cash equivalents, marketable securities and trade receivables. PMSI invests its
excess cash with major banks and cash equivalents and marketable securities in a
professionally managed fund. At June 30, 1998, marketable securities included
903,950 shares of common stock of National Data Corporation ("NDC") with a fair
value of $39,548,000. PMSI's customer base principally comprises companies
within the pharmaceutical industry. Although PMSI's receivables are concentrated
in the pharmaceutical industry, the concentration of credit risk is limited due
to the credit worthiness of the customers. PMSI does not require collateral from
its customers.
F-30
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PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES. Federal, foreign and state income taxes in the consolidated
financial statements have been computed on a stand-alone return basis according
to the fiscal and legal structure under which the various tax paying entities
operate. Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of assets and liabilities and
financial reporting amounts at each year-end.
EARNINGS/LOSS PER SHARE. In 1998, PMSI adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). Previously
reported earnings per share amounts have been restated to comply with FAS 128.
Basic earnings (loss) per share amounts are calculated by dividing income (loss)
amounts by the weighted average number of common shares outstanding. Diluted
earnings (loss) per share amounts are calculated by dividing income (loss)
amounts by the weighted average number of common shares outstanding increased,
if dilutive, by the effects of potentially dilutive common shares which includes
stock options and convertible debentures. Dilutive potential common shares are
calculated in accordance with the treasury stock method.
USE OF ESTIMATES IN THE PREPARATION OF THE 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, the 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. The most significant estimates
that affect the financial statements are those related to goodwill and deferred
tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of certain of
PMSI's financial instruments including cash and cash equivalents, accounts
payable and other accrued liabilities approximates fair value due to their short
maturities. The fair value of PMSI's debentures is based on quoted market
prices.
ALLOCATION OF INTEREST TO DISCONTINUED OPERATIONS. Enterprise interest is
allocated to discontinued operations in proportion to net assets.
2. TRANSACTIONS WITH SOURCE
Effective as of December 31, 1991, Walsh International Inc. ("Walsh")
transferred to PMSI all the assets and liabilities of the PMSI business in
exchange for shares of PMSI common stock. In connection with the transfer, PMSI
and Walsh entered into two long-term license agreements permitting the use by
PMSI of certain Walsh proprietary databases. In addition, PMSI and Walsh entered
into further agreements, covering data processing, administrative and management
services and subleasing of certain facilities for various periods of time, all
subject to renewal terms. During fiscal year 1996, Walsh separated into two
independent companies ("the spin-off"); Walsh International Inc. and Source
Informatics Inc. ("Source") and the agreements were assigned from Walsh to
Source. All agreements were terminated effective December 15, 1997 upon the sale
of certain assets to NDC. The principal agreements and terms were as follows:
ALPHA (PRESCRIPTION) DATABASE LICENSE AGREEMENT. Source had granted PMSI
an exclusive license to use its US databases for a period of five years through
December 2001, with an option to renew for two additional 5-year periods. The
license fee amounts paid to
F-31
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PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Source in the years ended June 30, 1996 and 1997 and for the period ended
December 15, 1997 in respect of this agreement were $3,094,000, $3,126,000 and
$1,728,000, respectively.
DATA PROCESSING AGREEMENT. PMSI contracted for Source to provide specific
data processing services in the US. In the years ended June 30, 1996 and 1997
and for the period ended December 15, 1997 costs incurred by PMSI in connection
with the data processing agreement totaled $3,353,000, $5,395,000 and
$3,041,000, respectively. These costs are included in production costs.
FACILITIES AGREEMENT. PMSI sublet space from Source in the US. The net
cost to PMSI in the years ended June 30, 1996 and 1997 and for the period ended
December 15, 1997 totaled $545,000, $29,000 and $45,000, respectively. Such
amounts have been included in selling, general and administrative expenses.
MANAGEMENT AND EXECUTIVE SERVICES AGREEMENT. Source provided
administrative, management and executive services to PMSI in the US which
resulted in a net cost to PMSI of $2,319,000, $977,000 and $542,000 in the years
ended June 30, 1996 and 1997 and for the period ended December 15, 1997,
respectively. These costs are included in selling, general and administrative
expenses.
At June 30, 1998 there were no amounts receivable or payable from/to
Source. At June 30, 1997, PMSI had a net current receivable from Source of
$1,646,000, which was included in other current assets. Source held 831,144
shares or 6.3% of PMSI's Common Stock at June 30, 1997 which represented the
remaining shares that were transferred to Source in the "spin-off" of the Source
businesses from Walsh. These shares, together with a further 87,110 shares, were
transferred to PMSI as part of the assets acquired on the purchase of the Source
Europe companies from Source on December 15, 1997 (see Note 3).
3. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS. The consolidated financial statements comprise various
business operations and entities that have been acquired by PMSI. These
acquisitions have been accounted for as purchases. Accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair value
at the dates of acquisition. The results of operations are included in the
consolidated financial statements from the respective dates of acquisition.
SOURCE INFORMATICS EUROPEAN HOLDINGS LLC
On December 15, 1997, PMSI acquired Source Informatics European Holdings
L.L.C. and its subsidiaries ("Source Europe") from Source for consideration of
$8.4 million in the form of the cancellation of amounts advanced to Source under
a line of credit of $6.4 million and direct costs of $2.0 million.
Source Europe is a developing business involved in building databases of
information from prescriptions dispensed in the UK, Germany, France, Belgium and
Italy and in developing the software technology to support, access and generate
information from such databases. This information enables pharmaceutical
companies to measure and analyze product performance at a detailed geographical
level, namely small groups of physicians or at the individual physician level
and thereby improve salesforce productivity. Currently, the
F-32
<PAGE> 143
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
businesses are at various stages of development, but revenues are being
generated at an increasing level as more products begin to be delivered to
clients throughout Europe.
The excess of the purchase price over the fair value of the net assets
acquired of $13.4 million was allocated to in-process research and development
and completed technology as follows:
<TABLE>
<S> <C>
In-Process Research & Development........................... $12,046
Completed Technology........................................ $ 1,363
-------
$13,409
-------
</TABLE>
Included in the assets acquired in Source Europe were 918,254 shares of
common stock of PMSI with a fair value on December 15, 1997 of $8.5 million.
These shares were placed in treasury upon acquisition during the second
quarter of fiscal 1998.
Presented below are summarized unaudited pro forma results as if the
acquisition of Source Europe had occurred on July 1, 1996 and July 1, 1997. The
pro forma results include pro forma adjustments, relate principally to the
amortization of completed technology and the elimination of inter-company
transactions.
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Revenue............................................... $ 98,892 $ 79,502
Net loss.............................................. $(26,198) $(14,152)
Net loss per share.................................... $ (1.97) $ (1.11)
</TABLE>
MEDIPHASE LIMITED
On July 1, 1994, PMSI acquired 80% of the common stock of Mediphase
Limited, a specialist software and information company in the United Kingdom.
During the year ended June 30, 1998, PMSI purchased the remaining 20% of the
common stock of Mediphase Limited for $1.7 million.
IMR FINANCE
During 1993, PMSI purchased an 80% holding in IMR Finance, a French
corporation. The owners of the minority interest had the option to require PMSI
to purchase their holding based on a multiple of projected pre-tax earnings.
During May 1997, the minority shareholders exercised their option, and PMSI
purchased the remaining 20% of the outstanding share capital of IMR Finance. The
purchase price of $2.6 million has been accounted for in net assets held for
sale.
F-33
<PAGE> 144
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DIVESTITURES
On December 15, 1997, PMSI sold to NDC (i) the Company's interest in the US
joint operating venture with Source ("Source US") and (ii) its OTC Physician
Database business in the US. PMSI received 1,084,950 registered shares of common
stock of NDC, with a market value on December 15, 1997 of $35.3 million, plus
$6.5 million in cash. This resulted in a pre-tax gain of $33.6 million.
PMSI sold IMR (see Note 18), its French point of sale marketing business on
March 31, 1998. This was the last remaining business to be sold as a result of
PMSI's decision in the third quarter of fiscal 1996 to discontinue its
non-database segment. The business was sold for consideration of approximately
$3.2 million in cash. The assets sold included cash and cash equivalents of $1.2
million.
On July 1, 1997, PMSI sold its Dutch and US-based international publishing
and communications operations to Excerpta Medica, the medical communications
division of Elsevier Science for approximately $9 million, resulting in a net
gain on sale of $2.6 million.
During the third quarter of fiscal 1997, Marketing Resources International
Limited in the United Kingdom and Patient Programs in the US were divested by
PMSI for $0.4 million. The total revenue and operating loss from these
businesses included in the consolidated statement of operations for the year
ended June 30, 1996 were $0.7 million and $1.0 million, respectively. The total
revenue and operating loss for the year ended June 30, 1997 were $1.1 million
and $1.0 million, respectively.
F-34
<PAGE> 145
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. MARKETABLE SECURITIES
Marketable securities consisted of the following as of June 30, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
FAIR VALUE AT UNREALIZED
AMORTIZED COST OF BALANCE GAINS
NAME OF ISSUER AND EACH ISSUE AT SHEET DATA AT (LOSSES), NET
TITLE OF EACH ISSUE JUNE 30, JUNE 30, AT JUNE 30,
- ------------------- ----------------- ----------------- -------------
1997 1998 1997 1998 1997 1998
------- ------- ------- ------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Equity Securities.............. $ -- $30,319 $ -- $40,109 $-- $9,790
Corporate debt securities...... 41,486 47,925 41,482 47,909 (4) (16)
Debt securities issued by the
U.S. Treasury and other U.S.
government corporations and
agencies..................... 4,121 400 4,121 400 -- --
Debt securities issued by
foreign governments.......... 4,228 2,059 4,226 2,060 (2) 1
------- ------- ------- ------- --- ------
$49,835 $80,703 $49,829 $90,478 $(6) $9,775
======= ======= ======= ======= === ======
MATURITIES
- -----------
Cash equivalents(1)............ $17,708 $20,942 $17,707 $20,937 $(1) $ (5)
Short-term investments(2)...... 24,742 40,313 24,738 50,097 (4) 9,784
Due after one year through
three years.................. 7,385 19,448 7,384 19,444 (1) (4)
------- ------- ------- ------- --- ------
$49,835 $80,703 $49,829 $90,478 $(6) $9,775
======= ======= ======= ======= === ======
</TABLE>
- -------------------------
(1) Maturities of three months or less at acquisition.
(2) Short-term investments include debt securities with maturities greater than
3 months and equity securities.
For the years ended June 30, 1996 and 1997, gross realized gains and losses
were not significant. Gross realized gains for the year ended June 30, 1998 were
$1.7 million, and were included in interest and other income within the
consolidated statement of operations. In computing realized gains and losses,
PMSI compares the cost of its investments on a specific identification basis.
Such cost includes the direct cost to acquire the securities adjusted for the
amortization of any discount or premium.
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<PAGE> 146
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and 1998 comprised the following
(in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Land and buildings including leasehold improvements......... $ 5,546 $ 6,187
Furniture and office equipment.............................. 2,528 3,077
Computer equipment.......................................... 7,756 4,936
Automobiles................................................. 321 425
------- -------
16,151 14,625
Less accumulated depreciation and amortization.............. (4,390) (5,077)
------- -------
$11,761 $ 9,548
======= =======
</TABLE>
Depreciation and amortization charged to operations for the years ended
June 30, 1996, 1997 and 1998 were $1,342,000, $1,981,000 and $1,461,000,
respectively.
6. GOODWILL
Goodwill at June 30, 1997 and 1998 comprised the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Goodwill on acquisition..................................... $34,752 $29,175
Accumulated amortization.................................... (9,449) (7,112)
------- -------
$25,303 $22,063
======= =======
</TABLE>
The decrease in goodwill on acquisition is a result of the sale of the
Bugamor and Medialert businesses.
Amortization charged to operations for the years ended June 30, 1996, 1997
and 1998 was $1,639,000, $1,522,000 and $1,160,000, respectively.
F-36
<PAGE> 147
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER ASSETS
Other assets at June 30, 1997 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Software................................................ $ 5,206 $ 6,381
Acquired databases...................................... 21,539 22,193
-------- --------
26,745 28,574
Less accumulated amortization........................... (26,324) (26,671)
-------- --------
421 1,903
Debenture financing costs............................... 1,302(1) 1,070(1)
Deposits................................................ 766 4,432
Deferred taxes.......................................... 723 452
Investments............................................. 1,670 725
Deferred charges........................................ 422 455
Note receivable from Walsh.............................. 1,120(2) 1,167(2)
-------- --------
$ 6,424 $ 10,204
======== ========
</TABLE>
- -------------------------
(1) Debenture financing costs are being amortized over the life of the
debentures. The amortization charge for the years ended June 30, 1996, 1997
and 1998 was $232,000.
(2) Represents an interest free note receivable of $1,200,000 due from Walsh in
June 1999 relating to the Scriptrac acquisition. The note receivable was
recorded initially at its present value and as a result of accretion, the
balance at June 30, 1998 is $1,167,000.
Amortization of acquired databases and software charged to operations for
the years ended June 30, 1996, 1997 and 1998 was $373,000, $211,000 and
$436,000, respectively.
8. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Debentures(1)............................................... $69,000 $69,000
Other long-term debt(2)..................................... 959 175
------- -------
69,959 69,175
Less current portion........................................ (407) (61)
------- -------
$69,552 $69,114
======= =======
</TABLE>
- -------------------------
(1) On February 3, 1993, PMSI completed an offering of an aggregate $69 million
Convertible Subordinated Debentures due in 2003. The debentures, issued at
par, bear annual interest at 6 1/4% and are convertible into Common Stock of
PMSI at a conversion price of $20 per share, subject to adjustments for
certain events. The current
F-37
<PAGE> 148
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the debentures at June 30, 1998, based on quoted market prices, was
$66,240,000.
(2) Capital lease obligations (see Note 13).
9. STOCK OPTIONS AND RESTRICTED STOCK PURCHASE PLAN
A Stock Option and Restricted Stock Purchase Plan (the "Plan") was
established on August 17, 1991 for employees, officers and directors of PMSI or
any of its subsidiaries. The number of stock options authorized by the Plan is
2,250,000. The Plan provides for the granting of "non-qualified stock options"
and "incentive stock options" to acquire Common Stock of PMSI and/or the
granting of rights to purchase Common Stock. The terms and conditions of
individual option agreements may vary, subject to the following guidelines: (i)
the option price of incentive stock options may not be less than market value on
the date of grant; the option price of non-qualified options may be less than
market value on the date of grant, (ii) the term of all incentive stock options
may not exceed ten years from the date of grant; the term of non-qualified stock
options may exceed ten years, (iii) no options may be granted after August 17,
2001, and (iv) in general, options vest evenly over a period of five years from
the date of issue.
A Non-Employee Directors' Stock Option Plan (the "Director's Plan") was
adopted on May 27, 1993. The Directors' Plan provides for the granting of
non-qualified stock options to purchase shares of PMSI's Common Stock. The terms
and conditions of individual option agreements may vary, subject to the
following guidelines: (i) the option exercise price will be equal to 100% of the
fair market value of the Common Stock on the date of grant, (ii) the term of the
stock options may not exceed ten years from the date of grant, (iii) in general,
options vest evenly over a period of three years from the date of issue, (iv)
the total number of shares of Common Stock that may be subject to options
pursuant to the Directors' Plan is 120,000, subject to automatic adjustments
following certain events, and (v) no options may be granted after May 27, 2003.
Additional information relating to the Plan and the Director's Plan is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at July 1, 1995, 1996 and
1997....................................... 1,786,400 1,848,200 1,903,750
Options granted.............................. 234,250 392,200 458,600
Options exercised............................ (84,050) (30,200) (115,050)
Options lapsed............................... (88,400) (306,450) (253,400)
---------- ---------- ----------
Options outstanding at June 30............... 1,848,200 1,903,750 1,993,900
========== ========== ==========
Options exercisable at June 30............... 980,700 1,150,610 1,229,300
========== ========== ==========
Option prices per share:
Granted.................................... $8-$14 $9-$10 $9
Exercised.................................. $8-$10 $8-$9.50 $8-$10.75
Outstanding................................ $8-$22 $8-$22 $8-$22
</TABLE>
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PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The exercise price of options granted during the years ended June 30, 1996,
1997 and 1998 equaled the market price of PMSI's common stock on the date of the
grant. As of June 30, 1998, the Plan and the Directors' Plan had 76,900 and
40,000 shares of common stock, respectively, available for future grants.
10. ACCOUNTING FOR STOCK-BASED COMPENSATION
PMSI has elected to continue to use the intrinsic value based method to
account for all of its employee stock-based compensation plans. Under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," PMSI has recorded no
compensation costs related to its stock option plans for the years ended June
30, 1996, 1997 and 1998.
Pursuant to SFAS 123, "Accounting for Stock-Based Compensation," PMSI is
required to disclose the pro-forma effects on net loss and net loss per share
data as if PMSI had elected to use the fair value approach to account for all
its stock-based compensation plans. Had compensation cost for PMSI's plans been
determined consistent with the fair value approach enumerated in SFAS No. 123,
PMSI's net loss and net loss per share for the years ended June 30, 1996, 1997
and 1998 would have changed as indicated below (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Net loss:
As reported......................................... $(9,624) $(5,253) $ (303)
Pro-forma........................................... (9,726) (5,556) (747)
Net loss per share:
As reported......................................... $ (0.73) $ (0.40) $(0.02)
Pro-forma........................................... (0.74) (0.42) (0.05)
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal years 1996, 1997 and 1998; risk-free
interest rate of 6%; expected life of 6 years; 41% expected volatility and no
dividends. The weighted average fair value of options granted during the years
ended June 30, 1996, 1997 and 1998 were $13.34, $9.38 and $9.02.
Since option grants vest over several years and additional grants are
expected in the future, the pro-forma results noted above are not likely to be
representative of the effects on future years of the application of the fair
value based method.
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<PAGE> 150
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of PMSI's Plan and the Directors' Plan as of June
30, 1997 and 1998 and changes during the years ended on those dates is as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
-------------------------- --------------------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Fixed options
Outstanding at beginning of year... 1,848,200 $11.77 1,903,750 $11.02
Granted.......................... 392,200 9.38 458,600 9.02
Exercised........................ (30,200) 8.48 (115,050) 9.07
Cancelled........................ (306,450) 13.43 (253,400) 12.32
--------- ---------
Outstanding at end of year.... 1,903,750 11.02 1,993,900 10.49
========= =========
Options exercisable at end of
year........................ 1,150,610 11.35 1,229,300 11.06
========= =========
</TABLE>
A summary of information regarding the outstanding options and those
exercisable at June 30, 1998 is given in the following tables:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE NUMBER OF REMAINING
PRICE OPTIONS CONTRACTUAL LIFE OF NUMBER OF OPTIONS
($) OUTSTANDING OPTIONS OUTSTANDING (YRS) EXERCISABLE
-------- ----------- ------------------------- -----------------
<S> <C> <C> <C>
8.40 533,900 3.17 533,900
8.75 112,000 6.67 92,000
9.00 525,500 9.35 138,000
9.38 24,000 9.50 0
9.50 348,200 7.90 96,900
13.50 202,800 6.65 121,000
14.00 36,000 3.58 36,000
15.00 15,000 3.92 15,000
15.25 67,500 4.29 67,500
15.75 15,000 4.95 15,000
18.50 12,000 4.33 12,000
22.00 102,000 3.58 102,000
--------- ---- ---------
1,993,900 6.34 1,229,300
========= ==== =========
</TABLE>
F-40
<PAGE> 151
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. TAXES
The components of the income tax (provision) benefit for the years ended
June 30, 1996, 1997 and 1998 are comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
U.S. income tax (provision) benefit.................. $(1,666) $ 9 $(8,363)
Foreign tax provision................................ (279) (1,711) (3,902)
Deferred income tax (provision) benefit.............. 789 (953) 6,560
------- ------- -------
$(1,156) $(2,655) $(5,705)
======= ======= =======
</TABLE>
The domestic and foreign components of income before income taxes were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Domestic............................................... $1,153 $4,022 $13,184
Foreign................................................ (763) 3,311 (7,782)
------ ------ -------
$ 390 $7,333 $ 5,402
====== ====== =======
</TABLE>
The provision for income taxes differs from that computed using the 35%
statutory federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Provision based on federal statutory rate............ $ (133) $(2,493) $(1,891)
Goodwill and other non-deductible items.............. (304) (301) (1,149)
Foreign earnings and dividends taxed at different
rates.............................................. (538) 1,124 (254)
Tax refund claims, audit issues & other matters...... -- 833 (1,490)
State tax, net of federal benefit.................... (135) (149) (2,148)
Purchase accounting adjustments...................... (1,182) -- --
Disposal of assets held for sale..................... -- -- 3,078
Valuation of temporary differences................... 848 (2,386) (990)
All other, net....................................... 288 717 (861)
------- ------- -------
Consolidated effective tax rate...................... $(1,156) $(2,655) $(5,705)
======= ======= =======
</TABLE>
An additional provision for taxes was recorded during the second quarter of
the fiscal year of $1.5 million for probable liabilities arising from tax audits
in progress. The full liability assessed by the tax authorities was
approximately $3.0 million which, at the request of the tax authorities, PMSI
paid into an escrow account during the third quarter of fiscal 1998 pending the
outcome of an appeal. The escrow amount was included in other assets at June 30,
1998.
F-41
<PAGE> 152
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at June 30, 1997 and 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------ --------
<S> <C> <C>
Current assets (liabilities):
Accrued liabilities....................................... $1,655 $ 2,427
Foreign tax credits....................................... -- --
Net operating losses...................................... -- 13,563
Prepaid and other current assets.......................... 212 2,768
Bad debts................................................. 130 115
------ --------
1,997 18,873
Valuation allowance....................................... (405) (14,082)
------ --------
Net current assets..................................... 1,592 4,791
------ --------
Non-current assets (liabilities):
Fixed assets & intangibles................................ (200) 496
Net operating losses...................................... 4,113 226
Other liabilities......................................... 222 88
------ --------
4,135 810
Valuation allowance....................................... (3,412) (358)
------ --------
Net non-current assets................................. 723 452
------ --------
Deferred taxes, net.................................... $2,315 $ 5,243
====== ========
</TABLE>
As of June 30, 1998, there was available for foreign income tax purposes
net operating loss carryforwards of approximately $45,096,000 which expire as
follows: 1999: $199,000, 2000: $146,000, 2001: $357,000, 2002: $2,343,000 and
thereafter: $42,051,000.
The undistributed earnings of foreign subsidiary companies for which
deferred U.S. income taxes have not been provided at June 30, 1997 and June 30,
1998 because of permanent reinvestment of earnings in the operations of those
subsidiaries, amounted to $15,272,000 and $1,041,000, respectively. It is not
practicable to estimate the amount of tax that might be payable on the eventual
remittance of such earnings. On remittance, certain foreign countries impose
withholding taxes. The amount of withholding taxes that would be payable on
remittance of the entire amount of such undistributed earnings would approximate
$3,727,000 and $206,000 at June 30, 1997 and June 30, 1998, respectively.
12. EMPLOYEE BENEFIT PLANS
Subsidiaries of PMSI in the United Kingdom, Holland, Japan and the United
States have defined contribution pension or profit sharing plans covering
substantially all their employees. The total costs associated with these plans
for the years ended June 30, 1996, 1997 and 1998 were $729,000, $1,245,000 and
$1,007,000, respectively.
F-42
<PAGE> 153
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. LEASE OBLIGATIONS & OTHER COMMITMENTS
Various PMSI subsidiaries lease certain property and equipment. Obligations
under long-term non-cancelable lease agreements expiring at various dates have
the following aggregate approximate annual minimum rentals (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1999........................................................ $120 $2,060
2000........................................................ 83 1,702
2001........................................................ 11 1,430
2002........................................................ -- 1,121
After 2002.................................................. -- 832
---- ------
214 $7,145
======
Less amount representing interest........................... (39)
----
Present value of minimum lease payments..................... 175
Current portion............................................. (61)
----
$114
====
</TABLE>
Operating lease rental expense for the years ended June 30, 1996, 1997 and
1998 was $1,471,000, $1,559,000 and $1,676,000, respectively. Included in
furniture, fixtures and equipment are assets subject to capitalized leases with
an original cost of $337,000 (1997: $1,332,000) and accumulated amortization of
$166,000 (1997: $351,000).
14. GEOGRAPHIC DATA
The following table presents certain financial information by geographic
area (in thousands):
AS OF AND FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE
REVENUES INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
United States................................. $37,052 $ 7,221 $ 26,976
Europe and Pacific............................ 40,914 (3,837) 48,339
General corporate............................. -- (33,133) 111,043
------- -------- --------
Total.................................... $77,966 $(29,749) $186,358
======= ======== ========
</TABLE>
AS OF AND FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE
REVENUES INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
United States................................. $47,555 $9,552 $ 32,142
Europe and Pacific............................ 50,930 2,887 74,694
General corporate............................. -- (4,915) 60,366
------- ------ --------
Total.................................... $98,485 $7,524 $167,202
======= ====== ========
</TABLE>
F-43
<PAGE> 154
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF AND FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE
REVENUES INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
United States................................. $41,421 $5,566 $ 28,023
Europe and Pacific............................ 51,256 1,508 56,614
General corporate............................. 350 (6,554) 45,900
------- ------ --------
Total.................................... $93,027 $ 520 $130,537
======= ====== ========
</TABLE>
15. SUPPLEMENTAL OPERATIONS STATEMENT DATA
Advertising costs are charged to costs and expensed as incurred and for the
years ended June 30, 1996, 1997 and 1998 amounted to $1,308,000, $1,391,000 and
$893,000, respectively.
16. RESTRUCTURING COSTS
During the third quarter of fiscal 1996, following the completion of a
strategic review of PMSI's operations, PMSI recorded a $2.3 million ($1.3
million after tax) restructuring charge for elimination of non-core product
lines. These products were unprofitable and there was no assurance of future
profitability. The charge related primarily to the write-off of prepaid data
acquisition expenses and severance payments. The $2.3 million charge included
estimated cash payments of $1.5 million and non-cash asset write-offs of $0.8
million. The balance of the restructuring liability as of June 30, 1996 was $0.9
million, which was fully utilized during fiscal year 1997.
17. IMPAIRMENT
During the third quarter of fiscal 1996, following the completion of a
strategic review of PMSI's entire operations, management concluded that, as well
as divesting the non-database businesses, the value of certain long-lived assets
recorded in its balance sheet could not be recovered, based upon a discounted
cash flow analysis, due to changes in market conditions. Therefore, in
accordance with Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," and PMSI's existing accounting policy, PMSI recorded a pre-tax charge of
$2.4 million ($1.6 million after tax). This principally related to the write-off
of goodwill and capitalized database costs arising on the acquisition of
database businesses now being exited.
18. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
During the third quarter of fiscal 1996, PMSI announced its decision to
develop its business as a focused information services provider to the
pharmaceutical and healthcare industries and that its European marketing and
communication businesses would be divested. These businesses, comprising the
non-database segment of PMSI's operations, were accounted for as discontinued
operations and, accordingly, their operations through divestment have been
segregated in the accompanying statements of operations.
F-44
<PAGE> 155
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the second quarter of fiscal 1997, PMSI recorded an additional net
charge for the loss on disposal of the discontinued operations of $9.9 million.
The charge was based upon PMSI's quarterly review of the assumptions used in
determining the estimated loss relating to the discontinued operations. This
further charge was principally the result of revisions to the original estimates
of expected net proceeds from the remaining businesses to be sold. The estimated
proceeds from the French point of sale marketing business, IMR, were reduced by
$9.6 million following an independent valuation report commissioned as part of
the process of preparing the memorandum of sale. A net increase in the estimated
loss on sale of the remainder of the discontinued businesses accounted for a
$0.3 million charge due to changes in estimated sale proceeds. All discontinued
businesses were sold during the measurement period except IMR.
Summary operating results of the discontinued operations for the years
ended June 30, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
-----------------
1996 1997
------- -------
<S> <C> <C>
Results of discontinued operations:
Revenue..................................................... $44,849 $ --
Income (loss) from operations:
Income (loss) before taxes.................................. (2,288) --
Income tax provision........................................ (917) --
------- -------
Loss from discontinued operations........................... (3,205) --
Loss on disposal of discontinued operations, net of taxes of
$1,236 and $0, respectively............................... (5,710) (9,914)
------- -------
Loss from discontinued operations........................... $(8,915) $(9,914)
======= =======
</TABLE>
The operating loss from discontinued operations for the nine months to
March 31, 1997, when the measurement period ended, was $1.3 million net of
income taxes.
At the end of the measurement period and at June 30, 1997, IMR was the only
operation that had not been sold and in accordance with EITF 90-6, its net
assets, together with the remaining accrual for the loss expected to be
generated on disposition, were reclassified to net current assets held for sale
and net assets held for sale in the balance sheet at June 30, 1997. IMR's
operating result for the fourth quarter of fiscal 1997 was recorded in operating
income as a separate item "income from assets held for sale." The revenues
attributable to assets held for sale in the fourth quarter of fiscal 1997 and in
the year ended June 30, 1998 were $5.2 million and $8.8 million, respectively.
On March 31, 1998, PMSI divested IMR for consideration of approximately
$3.2 million in cash. The assets sold included cash and cash equivalents of $1.2
million. A net charge of $8.0 million relating to IMR is reflected in the
statement of operations for the year ended June 30, 1998. This comprises a
pre-tax loss on sale in the third quarter (after selling costs) of $2.1 million,
an impairment charge of $14.7 million in the second quarter and a total tax
benefit of $8.8 million.
F-45
<PAGE> 156
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. INCOME (LOSS) PER SHARE
PMSI has adopted the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Basic per share amounts are computed using the weighted average number of shares
of Common Stock outstanding. Diluted per share amounts include common equivalent
shares, where dilutive, (using the treasury stock method) from stock options and
convertible debt. The prior periods presented have been restated applying SFAS
128.
For the years ended June 30, 1996 and 1998, the effects of common stock
equivalents on the per share amounts were anti-dilutive and accordingly such
amounts were excluded from the computations. For the year ended June 30, 1997,
the effects of common stock equivalents or per share amounts were not material.
These calculations are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding:
Shares used in computing basic earnings per
share........................................ 13,123,998 13,186,564 12,771,195
Assumed exercise of in the money stock
options...................................... 980,700 1,283,950 1,543,600
Less assumed buy-back under the treasury stock
method....................................... (706,082) (1,173,193) (1,185,368)
---------- ---------- ----------
Shares used in computing diluted earnings per
share if the result is dilutive.............. 13,398,616 13,297,321 13,129,427
========== ========== ==========
</TABLE>
Options to purchase 887,500, 607,800 and 450,300 shares of common stock at
prices ranging from $13.50 to $22.00 were outstanding at June 30, 1996, 1997 and
1998, respectively, but were not included in the computation of diluted earnings
per share amounts for those years because the options exercise price was greater
than the average market price of the common shares.
The convertible debentures have not been assumed converted for the diluted
earnings per share as the effect would be anti-dilutive. Had the convertible
debentures been included, the number of shares would have increased by 3,450,000
for each of the years ended June 30, 1996, 1997 and 1998. The reduced interest
expense would have had a favorable impact on net income (loss) of $2,588,000 for
each of these years.
20. SALE OF NON-US OPERATING ASSETS
On August 5, 1998, PMSI announced that it had completed the sale of its
non-US operations, with the exception of its Source and PMSI targeting
businesses in Belgium, to IMS Health Incorporated ("IMS Health") for
consideration of 1,197,963 shares of IMS Health common stock. IMS Health has an
option to purchase PMSI's businesses in Belgium within a three-month period.
F-46
<PAGE> 157
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 1998, the total assets and total liabilities of the non-US
operations totaled $48.4 million and $33.8 million, respectively. Total revenues
for the year ended June 30, 1998 from the non-US operations totaled $40.9
million.
This transaction superseded the merger agreement signed with Cognizant
Corporation ("Cognizant") on March 23, 1998, whereby IMS Health (as assignee of
Cognizant) would have acquired all outstanding shares of PMSI common stock.
21. RETIREMENT OF DEBENTURES
Between September 2, 1998 and September 15, 1998, PMSI redeemed an
aggregate amount of $14.7 million of its 6.25% Convertible Subordinated
Debentures due in 2003. The debentures were redeemed at 87% of the principal
amount with interest accrued through the date of redemption.
22. STOCKHOLDER RIGHTS PLAN
On December 30, 1997, the Board of Directors of PMSI adopted a stockholder
rights plan (the "Rights Plan") and declared a distribution of one common share
purchase right (a "Right") for each outstanding share of common stock, $0.01 par
value (the "Common Shares"), of PMSI. The distribution was payable to the
stockholders of record on January 9, 1998. The Rights will automatically trade
with PMSI's common stock. Additional Rights are issuable upon subsequent
issuances of common stock by PMSI so long as the Rights Plan is in effect.
The Rights are not currently exercisable but become exercisable upon the
earlier of (i) ten days following the first public announcement that a person or
group, which did not beneficially own 5% of the common stock as of December 30,
1997, has acquired beneficial ownership of 15% or more of PMSI's common stock,
and (ii) ten business days following the announcement of an offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of PMSI's common stock.
Once exercisable, the holder will be entitled to buy from PMSI one-third
( 1/3) of a Common Share of PMSI at a price of $60 per one-third of a Common
Share or in certain circumstances to buy at the Rights exercise price a number
of shares of PMSI's common stock having a market value of twice the exercise
price of each Right or, if PMSI is acquired in a merger or a business
combination, to buy at the Rights exercise price a number of shares of common
stock of an acquiring company having a market value of twice the exercise price
of each Right. At PMSI's option the Rights are redeemable prior to becoming
exercisable for $0.001 per Right. The Rights expire on the close of business on
the tenth anniversary of the Rights Agreement.
F-47
<PAGE> 158
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Stamford, Connecticut
August 14, 1998
The Board of Directors and Stockholders of
Pharmaceutical Marketing Services Inc.
Our report on the consolidated financial statements of Pharmaceutical
Marketing Services Inc. is included on Page F-22 of this Proxy
Statement/Prospectus. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in the index on Page F-1 of this Proxy Statement/Prospectus.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
F-48
<PAGE> 159
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------------------- ------------ ---------- ---------- -----------
ADDITIONS:
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTIONS PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts:
June 30, 1996.......... $ 415,000 207,000 -- (222,000) $ 400,000
June 30, 1997.......... $ 400,000 246,000 -- (258,000) $ 388,000
June 30, 1998.......... $ 388,000 461,000 -- (311,000) $ 538,000
Valuation allowance
for deferred tax
assets:
June 30, 1996.......... $2,576,000 -- -- (1,145,000) $ 1,431,000
June 30, 1997.......... $1,431,000 2,386,000 -- -- $ 3,817,000
June 30, 1998.......... $3,817,000 1,200,000 13,240,000 (3,817,000) $14,440,000
</TABLE>
F-49
<PAGE> 160
FINANCIAL STATEMENTS
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue............................... $ 7,516 $ 21,573 $ 18,386 $ 41,666
Production costs...................... (3,422) (11,141) (7,112) (21,980)
Selling, general and administrative
expenses............................ (3,227) (7,809) (14,140) (16,091)
In-process research and development
write off........................... -- (12,046) -- (12,046)
Amortization of intangible assets..... (201) (342) (471) (684)
Impairment of assets held for sale.... -- (14,735) -- (14,735)
Income (loss) from assets held for
sale................................ -- 410 -- (188)
Transaction costs..................... (800) -- (800) --
-------- -------- -------- --------
Operating income (loss)............... (134) (24,090) (4,137) (24,058)
Gain on sale of operations............ -- 33,608 52,844 36,239
Interest and other income............. 1,967 1,091 9,671 1,962
Interest expense...................... (916) (1,164) (1,868) (2,330)
-------- -------- -------- --------
Income before income taxes and
extraordinary item.................. 917 9,445 56,510 11,813
Income tax provision.................. (574) (9,254) (7,591) (9,149)
-------- -------- -------- --------
Net income before extraordinary
item................................ 343 191 48,919 2,664
Extraordinary gain on redemption of
debt, net of tax of $1,009.......... -- -- 1,154 --
-------- -------- -------- --------
Net income..................... $ 343 $ 191 $ 50,073 $ 2,664
======== ======== ======== ========
Earnings per share:
Basic --
Income before extraordinary
item........................... $ 0.03 $ 0.01 $ 3.94 $ 0.20
Extraordinary item............... -- -- 0.09 --
-------- -------- -------- --------
Net income..................... $ 0.03 $ 0.01 $ 4.03 $ 0.20
======== ======== ======== ========
Diluted --
Income before extraordinary
item........................... $ 0.03 $ 0.01 $ 3.16 $ 0.20
Extraordinary item............... -- -- 0.09 --
-------- -------- -------- --------
Net income..................... $ 0.03 $ 0.01 $ 3.25 $ 0.20
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 161
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS
DECEMBER 31 ENDED DECEMBER 31
------------- ------------------
1998 1997 1998 1997
---- ------ -------- -------
<S> <C> <C> <C> <C>
Net income........................................... $343 $ 191 $50,073 $2,664
---- ------ ------- ------
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of tax
of $20, $353, $20 and $960, respectively........ 29 (509) 29 (1,381)
Unrealized gains on investments:
Unrealized holding (losses) gains arising during
period net of tax of $27, $1,508, $3,294 and
$1,458, respectively.......................... (38) 2,171 (4,739) 2,171
Less: reclassification adjustment for gains
included in net income, net of tax of $28, $0,
$2,467 and $0, respectively................... 41 -- 3,550 --
---- ------ ------- ------
Other comprehensive income (loss).................... 32 1,662 (1,160) 790
---- ------ ------- ------
Comprehensive income................................. $375 $1,853 $48,913 $3,454
==== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 162
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 77,562
Marketable securities..................................... 115,073
Accounts receivable, principally trade.................... 7,272
Work-in-process........................................... 740
Prepaid expenses and other current assets................. 265
--------
Total current assets................................... 200,912
Marketable securities....................................... 35,630
Property and equipment, net................................. 1,350
Goodwill, net............................................... 9,013
Other assets, net........................................... 6,803
--------
Total assets........................................... $253,708
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 49,355
Note payable.............................................. 73,026
Accounts payable.......................................... 389
Accrued liabilities....................................... 10,397
Unearned income........................................... 9,632
--------
Total current liabilities.............................. 142,799
Long-term debt.............................................. --
Other liabilities........................................... --
--------
Total liabilities...................................... 142,799
--------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares
authorized, and 13,337,175 shares issued............... 133
Paid-in capital........................................... 88,452
Treasury stock at cost -- 918,254 shares.................. (8,494)
Retained earnings......................................... 29,741
Cumulative translation adjustment......................... 49
Unrealized gain on investments, net of income tax charge
of $716................................................ 1,028
--------
Total stockholders' equity............................. 110,909
--------
Total liabilities and stockholders' equity............. $253,708
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 163
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income................................................ $50,073 $ 2,664
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 923 1,710
Profit on disposal of database and US businesses, net..... -- (36,239)
Profit on disposal of non-US businesses, net.............. (52,844) --
Gain on redemption of debentures.......................... (2,163) --
Profit on sale of marketable securities................... (6,017) --
In-process research and development write-off............. -- 12,046
Impairment of assets held for sale........................ -- 14,735
Change in operating assets and liabilities, net of effect of
acquisitions and disposals:
Accounts receivable....................................... 1,338 (2,484)
Work-in-process........................................... 37 1,028
Prepaid expenses and other assets......................... 519 904
Accounts payable and accrued liabilities.................. (1,901) 10,942
Unearned income........................................... 221 466
Other liabilities......................................... (40) (19)
------- --------
Total adjustments...................................... (59,927) 3,089
------- --------
Net cash provided by (used in) operating activities......... (9,854) 5,753
------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures...................................... (116) (1,031)
Proceeds from businesses disposed, net of associated
selling expenses....................................... (1,831) 12,546
Cash consideration advanced to Source Europe under a line
of credit.............................................. -- (6,433)
Sale (purchase) of marketable securities, net............. (8,609) (1,075)
Acquisition and contingent purchase price payments........ -- (2,159)
Cash received on acquisition of Source Europe............. -- 9,942
------- --------
Net cash provided by (used in) investing activities......... (10,556) 11,790
------- --------
Cash flows provided by (used in) financing activities:
Net proceeds from options exercised....................... 253 515
Repayments of long-term debt and capital lease
obligations............................................ (17,226) (210)
Note payable.............................................. 73,026 --
------- --------
Net cash provided by (used in) financing activities......... 56,053 305
------- --------
Effect of assets held for sale.............................. -- 3,385
Effect of exchange rate movements........................... (396) (869)
------- --------
Net increase in cash and cash equivalents................... 35,247 20,364
Cash and cash equivalents at beginning of period............ 42,315 32,414
------- --------
Cash and cash equivalents at end of period.................. $77,562 $ 52,778
======= ========
(Continued)
</TABLE>
F-53
<PAGE> 164
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
------- --------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing
activities:
IMS Health Incorporated shares received................... $71,279 $ --
Cost of assets sold or disposed for consideration other
than cash.............................................. 13,806 --
Fair value of assets acquired............................. -- 19,104
PMSI shares received...................................... -- 8,494
In-process research and development....................... -- 12,046
Completed technology acquired............................. -- 1,363
Cancellation of amounts due from Source Europe under a
line of credit......................................... -- (6,433)
National Data Corporation shares received................. -- 35,328
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 165
1. INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying statements of operations for the three and six months
ended December 31, 1998 and 1997, the statements of cash flows for the six
months ended December 31, 1998 and 1997, the balance sheet as of December 31,
1998 and the related information of Pharmaceutical Marketing Services Inc.
("PMSI") included in these notes to the financial statements are unaudited. In
the opinion of management, the interim financial information reflects all
adjustments (consisting only of items of a normal recurring nature, except for
items related to the proposed merger, the sale of the non-US businesses and the
extraordinary item associated with the early redemption of PMSI's 6 1/4%
Convertible Subordinated Debentures ("6 1/4% Debentures")), necessary for the
fair presentation of the financial position, results of operations and cash
flows for the periods presented. The results of continuing operations for the
three and six months ended December 31, 1998 are not necessarily indicative of
the results to be expected for the entire fiscal year.
These interim financial statements should be read in conjunction with
PMSI's audited consolidated financial statements and related notes thereto, as
of June 30, 1997 and 1998 and for each of the three years in the period ended
June 30, 1998 included elsewhere herein.
2. COMPREHENSIVE INCOME
Effective July 1, 1998, PMSI adopted the provisions of Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income."
Comprehensive income represents the change in net assets of a company as a
result of non-owner transactions. Comprehensive income for the three months
ended September 30, 1998 (which is not included herein) has been adjusted by
$7.1 million to reflect realized gains included in net income.
3. INCOME PER SHARE
PMSI has adopted the Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). In accordance with SFAS 128, basic per share
amounts are computed using the weighted average number of shares of Common Stock
outstanding. Diluted per share amounts include common equivalent shares, where
dilutive (using the treasury stock method), from stock options and convertible
debt. The prior periods presented have been restated applying SFAS 128.
For all periods presented amounts used in both basic earnings per share and
diluted earnings per share are the amounts as stated below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding:
Shares used in computing basic
earnings per share.................. 12,409,653 13,106,463 12,408,040 13,163,206
Assumed exercise of in the money stock
options............................. 1,472,900 1,196,900 1,472,900 1,196,900
Less assumed buy-back under the
treasury stock method............... (1,204,920) (1,010,169) (975,847) (965,075)
Assumed conversion of debentures...... 2,466,250 3,450,000 2,828,668 3,450,000
---------- ---------- ---------- ----------
Shares used in computing diluted
earnings per share if the result is
dilutive............................ 15,143,883 16,743,194 15,733,761 16,845,031
========== ========== ========== ==========
</TABLE>
F-55
<PAGE> 166
Options to purchase 323,100 shares of Common Stock at prices ranging from
$11.13 to $22.00 were outstanding at December 31, 1998 but were not included in
the computation of diluted earnings per share for the three and six months ended
December 31, 1998 because the options exercise price was greater than the
average market price of the common shares.
Reduced interest expense for the assumed conversion of 6 1/4% Debentures
would have had a favorable impact on net income of $470,129 and $1,015,469 for
the three months and six months ended December 31, 1998, respectively. Such
amounts for the three and six months ended December 31, 1997 would have been
$647,000 and $1,294,000, respectively. In computing diluted per share amounts
for the three months ended December 31, 1998 and 1997, and the six months ended
December 31, 1997, the assumed conversion of the 6 1/4% Debentures was excluded
because the effect was anti-dilutive.
4. INCOME TAXES
The effective income tax rates for the quarters ended December 31, 1998 and
1997 were 63% and 98%, respectively. The 1998 rate was negatively impacted by
non-deductible operating losses incurred in countries where a benefit could not
be taken. The 1997 effective tax rate was negatively impacted by the
non-deductible write off of in-process research and development costs.
The effective income tax rates for the six months ended December 31, 1998
and 1997 were 13% and 77%, respectively. The effective income tax rates for the
six months ended December 31, 1998 and 1997 were also affected by the items
noted above plus the release in 1998 of a $1.9 million state tax provision,
which is no longer required, and the gain on the sale of operations of $52.8
million which had an associated tax charge of $7.0 million.
5. EXTRAORDINARY ITEM
During the period ended September 30, 1998, PMSI redeemed $19.7 million of
the 6 1/4% Debentures at an aggregate cost of $17.2 million. As a result of the
early redemption, PMSI recognized an after-tax extraordinary gain of $1.2
million.
6. GOODWILL
PMSI assesses the recovery of its goodwill by determining whether
amortization of goodwill can be recovered through expected net future cash flows
(undiscounted and without interest charges). Impairment is measured based on the
present value of estimated expected future net cash flows using a discount rate
reflecting PMSI's cost of funds.
7. SALE OF OPERATIONS
On August 5, 1998, PMSI announced that it had completed the sale of all of
its non-US operating assets, with the exception of its Source prescription
database and PMSI targeting businesses in Belgium, to IMS Health Incorporated
("IMS Health") for consideration of 1,197,963 shares of IMS Health common stock.
The resulting pre-tax profit from this transaction totaled $52.8 million which
is included in the statement of operations for the quarter ended September 30,
1998. The transaction is more fully described in PMSI's Form 8-K filed August
18, 1998, as amended. IMS Health exercised its option to acquire the PMSI
Belgian subsidiary and the Source Belgian subsidiary was disposed of during the
period ended December 31, 1998.
F-56
<PAGE> 167
8. OTHER EVENTS DURING THE QUARTER
On October 14, 1998, PMSI entered into a forward sale arrangement with CIBC
Oppenheimer ("CIBC") pursuant to which PMSI transferred all of the IMS Health
common stock received in the transaction in exchange for a note payable of $73.0
million. The 1,197,963 shares of IMS Health common stock are being held by CIBC
as collateral against PMSI's delivery obligation on August 12, 1999.
ON December 14, 1998, PMSI and Quintiles Transnational Corp. ("Quintiles")
(NASDAQ:QTRN) announced jointly that they had signed a definitive merger
agreement whereby PMSI would be merged into Quintiles and stockholders of PMSI
would receive shares of Quintiles common stock, $0.01 par value, in exchange for
their shares of common stock, $0.01 par value, of PMSI valued at $15.40 per
share. The transaction has been approved by PMSI's board of directors and
remains subject to approval by PMSI's stockholders and clearance by the SEC of
PMSI's Proxy Statement.
The 6 1/4% Debentures were redeemed for face value on February 1, 1999.
F-57
<PAGE> 168
APPENDIX A
MERGER AGREEMENT
<PAGE> 169
MERGER AGREEMENT
DATED AS OF DECEMBER 14, 1998
BY AND AMONG
QUINTILES TRANSNATIONAL CORP.,
QTRN ACQUISITION CORP.,
AND
PHARMACEUTICAL MARKETING SERVICES INC.
A-1
<PAGE> 170
MERGER AGREEMENT, dated as of December 14, 1998, by and among Quintiles
Transnational Corp., a North Carolina corporation ("Parent"), QTRN Acquisition
Corp., a North Carolina corporation and a direct wholly owned subsidiary of
Parent ("Sub"), and Pharmaceutical Marketing Services Inc., a Delaware
corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have determined that the merger of the Company with and into Sub (the "Merger"),
upon the terms and subject to the conditions set forth in this Agreement, would
be fair and in the best interests of their respective stockholders;
WHEREAS, such Boards of Directors have approved the Merger, pursuant to
which each share of common stock, par value $.01 per share, of the Company (the
"Company Common Stock", which term also refers to and includes, unless the
context otherwise requires, the associated Rights, as defined in Section 8.04)
issued and outstanding immediately prior to the Effective Time of the Merger (as
defined in Section 1.03), other than shares owned directly by the Company,
Parent or Sub, will be converted into the right to receive, at the election of
each holder of Company Common Stock, either (i) common stock, par value $.01 per
share, of Parent ("Parent Common Stock") or (ii) Parent Common Stock and a
Contingent Value Payment (individually a "CVP" and collectively the "CVPs"),
pursuant to the terms and conditions of the CVPs as described in Exhibit A
hereto;
WHEREAS, the Merger and this Agreement require the vote of the holders of a
majority of the outstanding shares of the Company Common Stock for the approval
thereof (the "Company Stockholder Approval");
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition of Parent's willingness to enter into this Agreement, Parent and
the Company are entering into a stock option agreement, dated as of the date
hereof, in the form of Exhibit B hereto (the "Stock Option Agreement"), pursuant
to which the Company is granting Parent an option to purchase shares of Company
Common Stock;
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement and the Stock Option
Agreement, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the North Carolina Business
Corporation Act (the "NCBA") and the Delaware General Corporation Law (the
"DGCL"), the Company shall be merged with and into Sub at the Effective Time of
the Merger. At the Effective Time of the Merger, the separate existence of the
Company shall cease, and QTRN Acquisition Corp. shall continue as the surviving
corporation.
A-2
<PAGE> 171
SECTION 1.02. CLOSING. Unless this Agreement shall have been terminated
and the transactions herein contemplated shall have been abandoned pursuant to
Section 7.01, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "Closing") will take place
at 10:00 a.m. on the first business day after satisfaction of the conditions set
forth in Article VI (or as soon as practicable thereafter following satisfaction
or waiver of the conditions set forth in Article VI) (the "Closing Date"), at
the offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.,
2500 First Union Capitol Center, Raleigh, North Carolina 27602, unless another
date, time or place is agreed to in writing by the parties hereto.
SECTION 1.03. EFFECTIVE TIME OF THE MERGER. Upon the Closing, the parties
shall file with the Secretary of State of the State of North Carolina and the
Secretary of State of the State of Delaware articles (or certificate in
Delaware) of merger (the "Articles of Merger") executed in accordance with the
relevant provisions of the NCBCA and the DGCL and shall make all other filings
or recordings required under the NCBCA and the DGCL. The Merger shall become
effective at such time on the Closing Date as the Articles of Merger are duly
filed with the Secretary of State of the State of North Carolina and the
Secretary of State of the State of Delaware, or at such other time on the
Closing Date as is permissible in accordance with the NCBCA and the DGCL and as
Sub and the Company shall agree should be specified in the Articles of Merger
(the time the Merger becomes effective being the "Effective Time of the
Merger").
SECTION 1.04. EFFECTS OF THE MERGER. The Merger shall have the effects
set forth in the applicable provisions of the NCBCA and the DGCL. As used
herein, "Surviving Corporation" shall mean and refer to QTRN Acquisition Corp.,
at and after the Effective Time of the Merger, as the surviving corporation in
the Merger.
SECTION 1.05. ARTICLES OF INCORPORATION; BY-LAWS. (a) At the Effective
Time of the Merger, and without any further action on the part of the Company or
Sub, the articles of incorporation of Sub as in effect immediately prior to the
Effective Time of the Merger shall be the articles of incorporation of the
Surviving Corporation at the Effective Time of the Merger until thereafter
amended as provided therein or by applicable law, except that the name of Sub in
such articles of incorporation will be changed to be Quintiles Scott-Levin, Inc.
(b) At the Effective Time of the Merger, and without any further action on
the part of the Company or Sub, the by-laws of Sub as in effect immediately
prior to the Effective Time of the Merger shall be the by-laws of the Surviving
Corporation at the Effective Time of the Merger until thereafter changed or
amended as provided therein or by applicable law.
SECTION 1.06. DIRECTORS. The directors of Sub immediately prior to the
Effective Time of the Merger shall be the directors of the Surviving Corporation
at the Effective Time of the Merger, until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified, as
the case may be.
SECTION 1.07. OFFICERS. The officers of Sub immediately prior to the
Effective Time of the Merger shall be the officers of the Surviving Corporation
at the Effective Time of the Merger, until the earlier of their resignation or
removal or until their respective successors are duly elected or appointed and
qualified, as the case may be.
A-3
<PAGE> 172
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
SECTION 2.01. EFFECT ON CAPITAL STOCK. As of the Effective Time of the
Merger, by virtue of the Merger and without any action on the part of the
Company, Sub or any holder of any shares of Company Common Stock or any shares
of capital stock of Sub:
(a) Cancellation of Treasury Stock and Parent-Owned Company Common
Stock. Each share of Company Common Stock that is owned by the Company,
Parent or Sub shall automatically be cancelled and retired and shall cease
to exist, and no cash, Parent Common Stock, CVPs or other consideration
shall be delivered or deliverable in exchange therefor.
(b) Conversion of Company Common Stock. Subject to Section 2.02(e),
each issued and outstanding share of Company Common Stock (other than
shares cancelled pursuant to Section 2.01(a)) shall be converted into the
right to receive, at the election of the holder thereof, either (i) on the
Closing Date, that fraction of a fully paid and nonassessable share of
Parent Common Stock determined by dividing Fifteen Dollars and Forty Cents
($15.40) by the "Average Trading Price" (the "Exchange Ratio") or (ii) (A)
on the Closing Date, that fraction of a fully paid and nonassessable share
of Parent Common Stock determined by dividing the Exchange Ratio in half
and (B) at any time on or prior to the Maturity Date (as defined in Exhibit
A), as specified by such holder, that fraction of a fully paid and
nonassessable share of Parent Common Stock determined by dividing the
Exchange Ratio in half and (C) on the Maturity Date, on the terms but
subject to the further conditions described in Exhibit A and the following
two sentences, a CVP (the consideration described in each of subparagraphs
2.01(b)(i) and 2.01(b)(ii) herein is individually referred to as the "Per
Share Merger Consideration"). For each share of Parent Common Stock
received by a former holder of Company Common Stock on the Maturity Date,
Parent shall pay to such holder, on the terms but subject to the further
conditions set forth in Exhibit A, cash equal to the amount, if any, as
determined by Parent, by which the Average Trading Price exceeds the CVP
Average Trading Price (as defined in Exhibit A). Shares of Parent Common
Stock received by a former holder of Company Common Stock prior to the
Maturity Date shall not give rise to any entitlement to a CVP. For purposes
of this Agreement, "Average Trading Price" shall mean the average of the
closing prices per share of the Parent Common Stock on the Nasdaq National
Market (or such United States exchange on which the Parent Common Stock is
then listed) for the aggregate of ten (10) trading days ending on the day
which is two (2) days immediately preceding the Closing Date.
(c) Cancellation and Retirement of Company Common Stock. As of the
Effective Time of the Merger, all shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time of the Merger shall no
longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any
such shares of Company Common Stock (collectively, the "Certificates")
shall, to the extent such Certificate represents such shares, cease to have
any rights with respect thereto, except the right to receive the Parent
Common Stock and CVPs (and cash in lieu of fractional shares) to be issued
or paid in consideration therefor upon surrender of such certificate in
accordance with Section 2.02.
A-4
<PAGE> 173
SECTION 2.02. EXCHANGE OF CERTIFICATES.
(a) Exchange Agent. As of the Effective Time of the Merger, Parent shall
enter into an agreement with a bank or trust company organized under the laws of
the United States or any state thereof with capital, surplus and undivided
profits of at least Five Hundred Million Dollars ($500,000,000) as may be
designated by Parent (and acceptable to the Company) (the "Exchange Agent")
which shall provide that Parent shall deposit, or cause to be deposited, with
the Exchange Agent, for the benefit of holders of the Certificates, for exchange
in accordance with this Article II, certificates representing the shares of
Parent Common Stock (such certificates for shares of Parent Common Stock,
together with any dividends or distributions with respect thereto with a record
date on or after the Effective Time of the Merger and any cash payable in lieu
of any fractional shares of Parent Common Stock, being hereinafter referred to
as the "Exchange Fund"), issuable pursuant to Section 2.01 in exchange for
outstanding shares of Company Common Stock.
(b) Exchange Procedures. Parent shall use commercially reasonable efforts
to cause the Exchange Agent to mail, as soon as reasonably practicable after the
Effective Time of the Merger, to each holder of record of Certificates
immediately prior to the Effective Time of the Merger whose shares were
converted pursuant to Section 2.01(b), (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent, and which shall be in such form and have such other provisions as Parent
may reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for, at the election of such holder, either (A)
certificates representing all of the shares of Parent Common Stock issuable
immediately to such holder or (B) certificates representing half of the shares
of Parent Common Stock issuable immediately to such holder, with certificates
representing the remaining half of the shares of Parent Common Stock issuable to
such holder and the CVPs to be issued or paid, as the case may be, on or prior
to the Maturity Date. The Letter of Transmittal shall also include instructions
for former holders of Certificates who elect to receive Per Share Merger
Consideration in accordance with Section 2.01(b)(ii) to specify the time of
issuance of Parent Common Stock pursuant to Section 2.01(b)(ii)(B). Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
such letter of transmittal, duly executed, the holder of such Certificate, in
accordance with its election, shall be entitled to receive in exchange therefor
either (x) a certificate representing that number of whole shares of Parent
Common Stock which such holder has the right to receive in respect of the
Certificate surrendered pursuant to the provisions of this Article II (after
taking into account all shares of Company Common Stock then held by such holder)
and cash in lieu of any fractional shares of Parent Common Stock as contemplated
by Section 2.02(e) (such certificate and cash in lieu of any fractional shares
to be issued and paid immediately) or (y) (A) a certificate representing half of
that number of whole shares of Parent Common Stock which such holder has a right
to receive in respect of the Certificate surrendered pursuant to the provisions
of this Article II (after taking into account all shares of Company Common Stock
then held by such holder) and cash in lieu of any fractional shares of Parent
Common Stock as contemplated by Section 2.02(e), (B) a certificate representing
the remaining whole shares of Parent Common Stock which such holder has a right
to receive (such certificate to be issued at the time or times specified by such
holder) and (C) a CVP, and the Certificate so surrendered shall forthwith be
cancelled. In the event of a transfer of ownership of shares of Company Common
Stock which is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of Parent Common Stock may
be issued to a transferee if the Certificate is presented to the Exchange Agent,
accompanied by all
A-5
<PAGE> 174
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.02, each Certificate shall be deemed at any time
after the Effective Time of the Merger to represent only the Parent Common Stock
and CVPs into which the shares of Company Common Stock represented by such
Certificate have been converted as provided in this Article II and the right to
receive upon such surrender cash in lieu of any fractional shares of Parent
Common Stock as contemplated by this Section 2.02.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date on or
after the Effective Time of the Merger shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Parent Common Stock
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.02(e), in each case until the
surrender of such Certificate in accordance with this Article II. Subject to the
effect of applicable laws, following surrender of any such Certificate there
also shall be paid to the holder of the certificate representing whole shares of
Parent Common Stock issued in exchange therefor without interest (i) at the time
of such surrender, the amount of any cash payable in lieu of a fractional share
of Parent Common Stock to which such holder is entitled pursuant to Section
2.02(e) and the amount of any dividends or other distributions with a record
date on or after the Effective Time of the Merger theretofore paid (but withheld
pursuant to the immediately preceding sentence) with respect to such whole
shares of Parent Common Stock, and (ii) at the appropriate payment date, the
amount of any dividends or other distributions with a record date on or after
the Effective Time of the Merger but prior to such surrender and a payment date
subsequent to such surrender payable with respect to such whole shares of Parent
Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock and CVPs issued and made upon conversion of shares of
Company Common Stock in accordance with the terms hereof, and all cash paid
pursuant to Sections 2.02(c) and 2.02(e), shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of Company Common
Stock (including with respect to the Rights), and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock which were outstanding prior
to the Effective Time of the Merger. If, after the Effective Time of the Merger,
Certificates are presented to the Surviving Corporation for any reason, they
shall be cancelled and exchanged as provided in this Article II.
(e) No Fractional Shares.
(i) No certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a stockholder of Parent. In lieu
of such issuance of fractional shares, Parent shall pay each holder of
Certificates an amount in cash equal to the product obtained by multiplying
(a) the fractional share interest to which such holder (after taking into
account all shares of Company Common Stock held immediately prior to the
Effective Time of the Merger by such holder) would otherwise be entitled by
(b) the Average Trading Price.
(ii) As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Certificates with respect to any
fractional share interests, the Exchange Agent shall make available such
amounts to such holders of Certificates, subject to and in accordance with
the terms of Section 2.02(c).
A-6
<PAGE> 175
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
deposited with the Exchange Agent pursuant to this Section 2.02 which remains
undistributed to the holders of the Certificates for six months after the
Effective Time of the Merger shall be delivered to Parent, upon demand, and any
holders of Certificates prior to the Merger who have not theretofore complied
with this Article II shall thereafter look only to Parent and only as general
creditors thereof for payment of their claim for Parent Common Stock, cash in
lieu of fractional shares of Parent Common Stock and any dividends or
distributions with respect to Parent Common Stock to which such holders may be
entitled.
(g) No Liability. None of Parent, Sub, the Company or the Exchange Agent
shall be liable to any person in respect of any shares of Parent Common Stock
(or dividends or distributions with respect thereto) or cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Certificates shall not have been
surrendered prior to three years after the Effective Time of the Merger, or
immediately prior to such earlier date on which any Parent Common Stock, any
cash in lieu of fractional shares of Parent Common Stock or any dividends or
distributions with respect to Parent Common Stock would otherwise escheat to or
become the property of any Governmental Entity (as defined in Section 3.01(d)),
any such Parent Common Stock or cash shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund as directed by Parent on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Parent. The Exchange Fund may be invested by the Exchange Agent, as directed by
Parent, in (i) obligations of or guaranteed by the United States, (ii)
commercial paper rated A-1, P-1 or A-2, P-2, and (iii) time deposits with,
including certificates of deposits issued by, any office located in the United
States of any bank or trust company organized under Federal law or under the law
of any state of the United States or of the District of Columbia and that has
capital, surplus and undivided profits of at least Five Hundred Million Dollars
($500,000,000), and any net earnings with respect thereto shall be paid to
Parent as and when requested by Parent. If for any reason (including losses) the
Exchange Fund is inadequate to pay the amounts to which holders of shares of
Company Common Stock shall be entitled, Parent shall be liable for and shall
deposit in the Exchange Fund sufficient funds to make the required payments.
SECTION 2.03. TREATMENT OF OPTIONS. (a) At the Effective Time of the
Merger, each outstanding option to purchase Company Common Stock (a "Company
Stock Option") issued pursuant to the Company's Non-Employee Directors' Stock
Option Plan (the "Director Plan") or the Company's Stock Option and Restricted
Stock Purchase Plan (the "Option Plan" and, collectively with the Director Plan,
the "Company Stock Plans"), whether vested or unvested, shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Stock Option, those shares of Parent Common Stock
and CVPs which the holder of such Company Stock Option would have been entitled
to receive pursuant to the Merger if such holder had exercised such option in
full immediately prior to the Effective Time of the Merger (utilizing the
Exchange Ratio as set forth in Section 2.01 of this Agreement), at a price per
share equal to (y) the aggregate exercise price for the shares of Company Common
Stock purchasable pursuant to such Company Stock Option divided by (z) the
number of full shares of Parent Common Stock deemed purchasable pursuant to such
Company Stock Option (a "Converted Option"); provided, however, that in the case
of any option to which Section 421 of the Code applies by
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reason of its qualification under Section 422 of the Code ("incentive stock
options"), the option price, the number of shares of Parent Common Stock
purchasable pursuant to such option and the terms and conditions of exercise of
such option shall be determined in order to comply with Section 424(a) of the
Code. If the relevant Company Stock Option is not exercised prior to the
Maturity Date (as defined in Exhibit A), any CVPs due pursuant thereto shall
terminate and become null and void. If the relevant Company Stock Option is
exercised, in whole or in part prior to the Maturity Date (as defined in Exhibit
A), upon the sale of any shares of Parent Common Stock received upon the
exercise of the relevant Company Stock Option, the CVPs due pursuant to such
shares sold shall terminate and become null and void.
(b) As soon as practicable after the Effective Time of the Merger, Parent
shall deliver to the holders of Company Stock Options appropriate notices
setting forth such holders' rights pursuant to the Company Stock Plans and the
agreements evidencing the grants of such Company Stock Options shall continue in
effect on the same terms and conditions (subject to adjustments required by this
Section 2.03 after giving effect to the Merger and the provisions set forth
above and until otherwise determined). If necessary, Parent shall comply with
the terms of the Company Stock Plans and ensure, to the extent required by, and
subject to the provisions of, the Company Stock Plans, that Company Stock
Options that qualified as incentive stock options prior to the Effective Time of
the Merger continue to qualify as incentive stock options after the Effective
Time of the Merger.
(c) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery upon
exercise of Company Stock Options. At the Effective Time of the Merger, Parent
shall file a registration statement on Form S-8, as the case may be (or any
successor or other appropriate forms), or another appropriate form, with respect
to the shares of Parent Common Stock and CVPs subject to such options and shall
use its reasonable efforts to maintain the effectiveness of such registration
statement or registration statements (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as such options remain
outstanding. With respect to those individuals who subsequent to the Merger will
be subject to the reporting requirements under Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), where applicable, Parent
shall administer the Company Stock Plans in a manner that complies with Rule
16b-3 promulgated under the Exchange Act to the extent the Company Stock Plans
complied with such rule prior to the Merger.
SECTION 2.04. TREATMENT OF DEBT SECURITIES. (a) Provided that this
Agreement shall not have been terminated in accordance with Section 7.01 hereof,
the Company shall issue a notice of redemption for all of the Company's
outstanding 6 1/4% Convertible Subordinated Debentures due 2003 (the
"Debentures") at such price and on such other terms and conditions as are
specified for the redemption of all of the Debentures under the indenture (the
"Indenture) in effect therefor (the "Debt Redemption"), with the Debt Redemption
to occur on February 1, 1999 (the "Redemption Date"). Prior to the Effective
Time of the Merger and in any event not later than one business day prior to the
Redemption Date, the Company shall deposit with the Trustee (as defined in the
Indenture) an amount in cash sufficient to redeem the Debentures in full,
together with interest accrued thereon to the Redemption Date. The Company
covenants and agrees that, subject to the terms and conditions of this
Agreement, including but not limited to the conditions in the Debt Redemption,
it will redeem the Debentures on the Redemption Date.
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(b) All mailings to the holders of the Debentures in connection with the
Debt Redemption shall be subject to the prior review, comment and approval of
Parent (which approval shall not be unreasonably withheld or delayed).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as
set forth in the disclosure schedule (each section of which qualifies the
correspondingly numbered representation and warranty only) of the Company
attached hereto (the "Company Disclosure Schedule"), the Company represents and
warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. Each of the Company and
each of its Subsidiaries (as defined in Section 3.01(b)) is duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized and has the requisite corporate power and authority
to carry on its business as now being conducted. Each of the Company and
each of its Subsidiaries is duly qualified or licensed to do business and
is in good standing in each jurisdiction (domestic or foreign) in which the
nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) could not reasonably be expected to have a Material Adverse
Effect (as defined in Section 8.04) with respect to the Company. The
Company has made available to Parent complete and correct copies of the
Company's Amended Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), and the Company's Amended and Restated
By-laws, as amended (the "By-Laws"), as currently in effect and identified
on Section 3.01(a) of the Company Disclosure Schedule. The Company has made
available to Parent and Sub complete and correct copies of the certificates
of incorporation and by-laws (or other organizational documents) of each of
the Company's Subsidiaries, in each case as amended to the date of this
Agreement.
(b) Subsidiaries. The only direct or indirect subsidiaries (as defined
in Section 8.04) of the Company are those listed in Section 3.01(b) of the
Company Disclosure Schedule (collectively, the "Subsidiaries"). All of the
outstanding shares of capital stock of each subsidiary of the Company have
been validly issued and are fully paid and nonassessable and, except as
disclosed in Section 3.01(b) of the Company Disclosure Schedule, are owned
(of record and beneficially) by the Company, by another wholly owned
subsidiary of the Company or by the Company and another such wholly owned
subsidiary, free and clear of all pledges, claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens"). Except for the ownership interests set forth in
Section 3.01(b) of the Company Disclosure Schedule, the Company does not
own, directly or indirectly, any capital stock or other ownership interest
in any corporation, partnership, limited liability company, business
association, joint venture or other entity.
(c) Capital Structure. The authorized capital stock of the Company
consists of 25,000,000 shares of Company Common Stock, par value $.01 per
share, and 5,000,000 shares of preferred stock, par value $.01 per share
("Company Preferred Stock"). As of the close of business on September 30,
1998, there were: (i) 12,396,721 shares of Company Common Stock issued and
outstanding; (ii) 918,254 shares of Company
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Common Stock held in the treasury of the Company or held by Subsidiaries;
(iii) 2,370,000 shares of Company Common Stock reserved for issuance upon
exercise of Company Stock Options available for grant pursuant to the
Company Stock Plans; and (iv) 2,450,000 shares of Company Common Stock
issuable upon conversion of currently outstanding Debentures. As of the
close of business on September 30, 1998, there were 1,993,900 shares of
Company Common Stock issuable upon exercise of awarded but unexercised
Company Stock Options, with an exercise price per each awarded but
unexercised Company Stock Option as is set forth in Section 3.01(c)(iii) of
the Company Disclosure Schedule. Except as set forth above, as of the close
of business on September 30, 1998, there were no shares of capital stock or
other equity securities of the Company issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are,
and all shares which may be issued pursuant to the Company Stock Plans and
the Debentures will be, when issued, duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights. All securities
issued by the Company were issued in compliance in all material respects
with all applicable federal and state securities laws and all applicable
rules and regulations promulgated thereunder. Other than the Debentures,
there are no outstanding bonds, debentures, notes or other indebtedness or
debt securities of the Company having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any
matters on which stockholders of the Company may vote (collectively,
"Voting Debt"). Except as set forth above and except pursuant to the Stock
Option Agreement, there are no outstanding securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of any
kind to which the Company or any of its Subsidiaries is a party or by which
any of them is bound obligating the Company or any of its Subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock or other equity or voting securities of
the Company or of any of its Subsidiaries or obligating the Company or any
of its Subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement
or undertaking. Other than the Stock Option Agreement and except as
disclosed in Section 3.01(c) of the Company Disclosure Schedule, (i) there
are no outstanding contractual obligations, commitments, understandings or
arrangements of the Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire or make any payment in respect of any shares of
capital stock of the Company or any of its Subsidiaries and (ii) to the
knowledge of the Company, there are no irrevocable proxies with respect to
shares of capital stock of the Company or any of its Subsidiaries. Except
as set forth in Section 3.01(c) of the Company Disclosure Schedule, there
are no agreements or arrangements pursuant to which the Company is or could
be required to register shares of Company Common Stock or other securities
of the Company or any of its Subsidiaries under the Securities Act of 1933,
as amended (the "Securities Act"), or other agreements or arrangements with
or, to the knowledge of the Company, among any securityholders of the
Company or any of its Subsidiaries with respect to securities of the
Company or any of its Subsidiaries.
Since September 30, 1998, except as disclosed in Section 3.01(c) of the
Company Disclosure Schedule, the Company has not (A) issued or permitted to
be issued any shares of capital stock, or securities exercisable for or
convertible into shares of capital stock, of the Company or any of its
Subsidiaries, other than (1) pursuant to the Stock Option Agreement, (2)
the grant of any employee stock options prior to the date of this Agreement
pursuant to the Company Stock Plans, (3) the issuance of Company Common
Stock upon exercise of the options granted pursuant to the Company Stock
Plans prior to the date of this Agreement and (4) upon conversion of
Debentures
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outstanding on such date; (B) repurchased, redeemed or otherwise acquired,
directly or indirectly through one or more Subsidiaries, any shares of
capital stock of the Company or any of its Subsidiaries; or (C) declared,
set aside, made or paid to the stockholders of the Company or any of its
Subsidiaries dividends or other distributions on the outstanding shares of
capital stock of the Company or any of its Subsidiaries (excluding
dividends declared, set aside, made or paid by wholly owned Subsidiaries to
the Company or any wholly owned Subsidiaries).
(d) Authority; Noncontravention. The Company has the requisite
corporate power and authority to enter into each of this Agreement and the
Stock Option Agreement and, subject to the Company Stockholder Approval in
the case of this Agreement, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of each of this Agreement
and the Stock Option Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Company,
subject, in the case of this Agreement, to the Company Stockholder
Approval. This Agreement and the Stock Option Agreement have been duly
executed and delivered by the Company and (assuming due authorization,
execution and delivery by Parent and Sub) constitute valid and binding
obligations of the Company, enforceable against the Company in accordance
with their respective terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing. Except as set forth in
Section 3.01(d) of the Company Disclosure Schedule (and except for the
"Repurchase Rights" of holders of the Debentures), the execution and
delivery of each of this Agreement and the Stock Option Agreement does not,
and the consummation by the Company of the transactions contemplated by
each of this Agreement and the Stock Option Agreement and compliance by the
Company with the provisions hereof and thereof will not, conflict with, or
result in any breach or violation of, or any default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of, or a "put" right with respect
to any obligation under, or to a loss of a material benefit under, or
result in the creation of any Lien under, (i) the Certificate of
Incorporation or By-laws or the comparable charter or organizational
documents of any of the Company's Subsidiaries, (ii) any loan or credit
agreement, note, note purchase agreement, bond, mortgage, indenture, lease
or any other contract, agreement, instrument, permit, concession, franchise
or license to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries or any of their respective
properties or assets are bound or (iii) subject to the governmental filings
and other matters referred to in the following sentence, any judgment,
order, decree, statute, law, ordinance, rule, regulation or arbitration
award applicable to the Company or any of its Subsidiaries or their
respective properties or assets, other than, in the case of clauses (ii)
and (iii), any such conflicts, breaches, violations, defaults, rights,
losses or Liens that individually or in the aggregate could not reasonably
be expected to have a Material Adverse Effect with respect to the Company.
No consent, approval, order or authorization of, or registration,
declaration or filing with, or notice to, any international organization,
the government of the United States of America, any other nation or any
political subdivision thereof, whether state, provincial, local or
otherwise, or any court, administrative agency or commission or other
governmental authority, regulatory body or agency, domestic or foreign (a
"Governmental Entity"), or any other third party is required by or with
respect to the Company or any of its Subsidiaries in connection with
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the execution and delivery of this Agreement and the Stock Option Agreement
by the Company or the consummation by the Company of the transactions
contemplated hereby and thereby or the performance by the Company of its
obligations hereunder or thereunder, except for (i) such filings, if any,
in connection with or compliance with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the National
Association of Securities Dealers (the "NASD"), the provisions of the DGCL,
the provisions of the NCBCA, the Securities Act of 1933, as amended (the
"Securities Act"), Section 4043 of ERISA and the Exchange Act as may be
required in connection with this Agreement and the Stock Option Agreement
and the transactions contemplated hereby and thereby, (iii) the filing of
the Articles of Merger with the Secretary of State of the State of North
Carolina and the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business and (iv) such other consents,
approvals, orders, authorizations, registrations, declarations, filings or
notices the failure of which to make or obtain, individually or in the
aggregate, could not reasonably be expected to (x) prevent or materially
delay consummation of the Merger or the transactions contemplated hereby or
performance of the Company's obligations hereunder or under the Stock
Option Agreement or (y) have a Material Adverse Effect with respect to the
Company.
(e) SEC Documents; Undisclosed Liabilities. The Company has filed with
the Securities and Exchange Commission (the "SEC") all reports, schedules,
forms, statements and other documents required pursuant to the Securities
Act and the Exchange Act since July 1, 1995 (collectively, and in each case
including all exhibits and schedules thereto and documents incorporated by
reference therein, the "SEC Documents"). Except as set forth in Section
3.01(e) of the Company Disclosure Schedule, as of their respective dates,
the SEC Documents complied as to form in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable
to such SEC Documents. As of their respective dates, (i) none of the SEC
Documents (including any and all financial statements included therein)
filed pursuant to the Securities Act or any rule or regulation thereunder
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein not misleading and (ii) none of the SEC Documents
(including any and all financial statements included therein) filed
pursuant to the Exchange Act or any rule or regulation thereunder contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Except to the extent that information contained in any SEC
Document has been revised or superseded by a later filed SEC Document, none
of the SEC Documents (including any and all financial statements included
therein) contains any untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The consolidated financial statements of the
Company included in all SEC Documents filed since July 1, 1995 (the "SEC
Financial Statements") and the unaudited consolidated quarterly financial
statements for the period ending September 30, 1998 which have been
provided to Parent (the "Interim Financial Statements") comply as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles
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(except, in the case of unaudited consolidated quarterly financial
statements, as permitted by Form 10-Q of the SEC), applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto). The SEC Financial Statements and the Interim Financial Statements
fairly present the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited quarterly statements, to normal
recurring audit adjustments). Except as disclosed in Section 3.01(e) of the
Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) required by generally accepted
accounting principles to be recognized or disclosed on a consolidated
balance sheet of the Company and its Subsidiaries or in the notes thereto,
except (i) liabilities reflected in the unaudited consolidated balance
sheet of the Company as of September 30, 1998 or the notes thereto set
forth in the Interim Financial Statements (the "Interim Balance Sheet"),
(ii) liabilities disclosed in any Recent SEC Document and (iii) liabilities
incurred since September 30, 1998 in the ordinary course of business
consistent with past practice.
(f) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in (i)
the registration statement of Parent on Form S-4 to be filed with the SEC
in connection with the issuance of Parent securities in the Merger (the
"Form S-4") will, at the time the Form S-4 is filed with the SEC, at any
time it is amended or supplemented or at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) the Proxy
Statement will, at the date it is first mailed to the Company's
stockholders or at the time of the Stockholders Meeting (as defined in
Section 5.01(c)), contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they are made, not misleading. The Proxy Statement will comply
as to form in all material respects with the requirements of the Exchange
Act and the rules and regulations promulgated thereunder, except that no
representation is made by the Company with respect to statements made or
incorporated by reference therein based on information supplied in writing
by Parent or Sub specifically for inclusion or incorporation by reference
therein.
(g) Absence of Certain Changes or Events. Except as disclosed in
Section 3.01(g) of the Company Disclosure Schedule or in the Recent SEC
Documents (as defined in Section 8.04), since June 30, 1998, each of the
Company and each of its Subsidiaries has conducted its business only in the
ordinary course consistent with past practice, and there is not and has not
been since June 30, 1998: (i) any Material Adverse Change (as defined in
Section 8.04) with respect to the Company; (ii) any material change by the
Company in its accounting methods, principles or practices, except as
required by concurrent changes in generally accepted accounting principles,
(iii) any material reevaluation by the Company of any of its assets,
including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the
ordinary course, (iv) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to any of the Company's capital stock, (v) any condition, event or
occurrence which individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect with respect to the Company or
give rise to a Material Adverse Change with respect to
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the Company; (vi) any action or failure to act which, if it had been taken
or not taken after the execution of this Agreement, would have required the
consent of Parent pursuant to this Agreement; or (vii) any condition, event
or occurrence which, individually or in the aggregate, could reasonably be
expected to prevent or materially delay the ability of the Company to
consummate the transactions contemplated by this Agreement or the Stock
Option Agreement or perform its obligations hereunder or thereunder.
(h) Litigation; Labor Matters; Compliance with Laws.
(i) Except as disclosed in Section 3.01(h)(i) of the Company
Disclosure Schedule or in the Recent SEC Documents, there is (1) no
suit, action, arbitration or proceeding pending, and (2) to the
knowledge of the Company, no suit, action, arbitration or proceeding
threatened against or investigation pending, in each case with respect
to the Company or any of its Subsidiaries that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect with respect to the Company or prevent or materially delay the
ability of the Company to consummate the transactions contemplated by
this Agreement or the Stock Option Agreement or to perform its
obligations hereunder or thereunder, nor is there any judgment, decree,
citation, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries
which, individually or in the aggregate, has or could reasonably be
expected to have a Material Adverse Effect with respect to the Company
or prevent or materially delay the ability of the Company to consummate
the transactions contemplated by this Agreement or the Stock Option
Agreement or to perform its obligations hereunder or thereunder. To the
knowledge of the Company, except as disclosed in Section 3.01(h)(i) of
the Company Disclosure Schedule or in the Recent SEC Documents, there is
no reasonable basis for any action, suit, arbitration or proceeding
that, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect with respect to the Company or prevent or
materially delay the ability of the Company to consummate the
transactions contemplated by this Agreement or the Stock Option
Agreement or to perform its obligations hereunder or thereunder.
(ii) Section 3.01(h)(ii) of the Company Disclosure Schedule
contains an accurate list of all of the Company's and each Subsidiary's
employees, showing for each his or her department and 1998 and 1999
annual salary and bonus. Except as disclosed in Section 3.01(h)(ii) of
the Company Disclosure Schedule or in the Recent SEC Documents, (1)
neither the Company nor any of its Subsidiaries is a party to, or bound
by, any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization; (2) to the
knowledge of the Company, neither the Company nor any of its
Subsidiaries is the subject of any proceeding asserting that it or any
of its Subsidiaries has committed an unfair labor practice or seeking to
compel it to bargain with any labor organization as to wages or
conditions of employment; (3) there is no strike, work stoppage or other
similar labor dispute involving it or any of its Subsidiaries pending
or, to its knowledge, threatened; (4) no grievance is pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries which, individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect with respect to the
Company; (5) to the knowledge of the Company, the Company and each of
its Subsidiaries is in compliance with all applicable laws (domestic and
foreign), agreements, contracts, and policies relating
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to employment, employment practices, wages, hours and terms and
conditions of employment except for failures so to comply, if any, that
individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect with respect to the Company; (6) the
Company and each of its Subsidiaries has complied in all material
respects with its payment obligations to all bonuses, benefits and other
compensation due and payable to such employees under any policy,
practice, agreement, plan, program of the Company or any of its
Subsidiaries or any statute or other law; (7) neither the Company nor
any of its Subsidiaries is liable for any severance pay, retention bonus
or other payments to any employee or former employee arising from the
transactions contemplated hereunder, termination of employment or
otherwise under any compensation, benefit or severance policy, practice,
agreement, plan, or program of the Company or any of its Subsidiaries,
nor to the knowledge of the Company will the Company or any of its
Subsidiaries have any liability which exists or arises, or may be deemed
to exist or arise, under any applicable law or otherwise, as a result of
or in connection with the transactions contemplated hereunder or as a
result of the termination by the Company or any of its Subsidiaries of
any persons employed by the Company or any of its Subsidiaries on or
prior to the Effective Time of the Merger, excluding any such payment or
liability which does not exceed $25,000 (or does exceed $25,000 solely
as a result of statutory regulations governing severance payments)
individually or $250,000 in the aggregate with all such other payments
not disclosed in Section 3.01(h)(ii) of the Company Disclosure Schedule;
and (8) the Company and each of its Subsidiaries is in compliance with
its obligations pursuant to the Worker Adjustment and Retraining
Notification Act of 1988 ("WARN"), to the extent applicable, and all
other employee notification and bargaining obligations arising under any
collective bargaining agreement or statute.
(iii) Each of the Company and each of its Subsidiaries holds all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities which are material to the operation of the
businesses of the Company and its Subsidiaries, taken as a whole (the
"Company Permits"). The Company and its Subsidiaries are in compliance
with the terms of the Company Permits, except where the failure so to
comply, individually or in the aggregate, would not have a Material
Adverse Effect with respect to the Company. Except as disclosed in
Section 3.01(h)(iii) of the Company Disclosure Schedule, the businesses
of the Company and its Subsidiaries are not being conducted in violation
of any law (domestic or foreign), ordinance or regulation of any
Governmental Entity, except for possible violations which, individually
or in the aggregate, do not and could not reasonably be expected to have
a Material Adverse Effect with respect to the Company.
(iv) Except as disclosed in Section 3.01(h)(iv) of the Company
Disclosure Schedule, each of the Company and each of its Subsidiaries
have in the past duly complied, and are presently duly complying, with
all applicable laws (whether statutory or otherwise), rules,
regulations, orders, judgments or decrees (the "Laws") of all
Governmental Entities, including, without limitation, privacy and data
protection Laws of any Governmental Entity, except where the failure to
have so complied or to be presently complying would neither have a
Material Adverse Effect with respect to the Company nor constitute
violations of criminal laws that could subject the Company or any
Subsidiary to criminal liability. Neither the
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Company nor any Subsidiary has received any notification of or has any
knowledge of any asserted material failure by it to comply with any of
such Laws.
(i) Employee Benefit Plans.
(i) Section 3.01(i) of the Company Disclosure Schedule contains a
true and complete list of each "employee benefit plan" (within the
meaning of section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")), governmental plan or government-mandated
or arrangement providing for pension or welfare or other employee
benefits for which contributions are required under any applicable Law
("Governmental Plans"), stock purchase, stock option, severance,
employment, change-in-control, fringe benefit, collective bargaining,
bonus, incentive, deferred compensation and all other employee benefit
plans, agreements, programs, policies or other arrangements relating to
employment, benefits or entitlements, whether or not subject to ERISA
(including any funding mechanism therefor now in effect or required in
the future as a result of the transactions contemplated by this
Agreement or otherwise), whether formal or informal, oral or written,
legally binding or not under which any employee or former employee of
the Company or any of its Subsidiaries has any present or future right
to benefits or under which the Company or any of its Subsidiaries has
any present or future liability. All such plans, agreements, programs,
policies and arrangements are herein collectively referred to as the
"Company Plans."
(ii) With respect to each Company Plan, the Company has delivered
to Parent a current, accurate and complete copy (or, to the extent no
such copy exists, an accurate description) thereof and, to the extent
applicable, (A) any related trust agreement, annuity contract or other
funding instrument; (B) the most recent determination letter; (C) the
current summary plan description and other written communications by the
Company to its employees concerning the extent of the benefits provided
under a Company Plan; and (D) for the most recent year (i) the Form 5500
and attached schedules; (ii) audited financial statements; (iii)
actuarial valuation reports; and (iv) attorney's response to an
auditor's request for information.
(iii) (A) Each Company Plan has been established and administered
in material compliance with its terms and with the applicable provisions
of ERISA, the Code and other applicable laws, rules and regulations
(including the applicable laws, rules and regulations of any foreign
jurisdiction); (B) each Company Plan which is intended to be qualified
within the meaning of Section 401(a) of the Code is so qualified and,
except for the Scott-Levin 401(k) and Profit Sharing Plan, has received
a favorable determination letter as to its qualification and nothing has
occurred, whether by action or failure to act, which would cause the
loss of such qualification; (C) with respect to any Company Plan, no
actions, suits or claims (other than routine claims for benefits in the
ordinary course) are pending or, to the knowledge of the Company,
threatened, no facts or circumstances exist which could give rise to any
such actions, suits or claims and the Company will promptly notify
Parent in writing of any pending claims or, to the knowledge of the
Company, any threatened claims arising between the date hereof and the
Effective Time of the Merger; (D) neither the Company nor, to the
knowledge of the Company, any other party has engaged in a prohibited
transaction, as such term is defined under Section 4975 of the Code or
ERISA Section 406, which would subject the Company or Parent or its
Subsidiaries to any material taxes, penalties or
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other liabilities under the Code or ERISA; (E) no event has occurred and
no condition exists that would subject the Company, either directly or
by reason of its affiliation with any member of its "Controlled Group"
(defined as any organization which is a member of a controlled group of
organizations within the meaning of Sections 414(b), (c), (m) or (o) of
the Code), to any material tax, fine or penalty imposed by ERISA, the
Code or other applicable laws, rules and regulations (including the
applicable laws, rules and regulations of any foreign jurisdiction); (F)
all insurance premiums required to be paid and all contributions
required to be made under the terms of any Company Plan, the Code, ERISA
or other applicable laws, rules and regulations (including the
applicable laws, rules and regulations of any foreign jurisdiction) as
of the Effective Time of the Merger have been or will be timely paid or
made prior thereto and adequate reserves have been provided for on the
Company's balance sheet for any premiums (or portions thereof) and for
all benefits attributable to service on or prior to the Effective Time
of the Merger; (G) except for the Source Informatics America, PMSI
Scott-Levin and Walsh America 401(k) Retirement Plan, each Company Plan
with respect to which a Form 5500 has been filed, no material change has
occurred with respect to the matters covered by the most recent Form
since the date thereof; and (H) no Company Plan provides for an increase
in benefits on or after the Effective Time of the Merger.
(iv) No Company Plan is subject to Title IV of ERISA, and no
Company Plan is a multiemployer plan as defined in Section 4001(A)(3) of
ERISA. The Company has never been required to contribute to or sponsored
any multiemployer plan or any plan subject to Title IV of ERISA.
(v) Except as set forth in Section 3.01(i)(v) of the Company
Disclosure Schedule, no Company Plan exists which could result in the
payment to any Company employee of any money or other property or rights
or accelerate or provide any other rights or benefits to any Company
employee as a result of the transactions contemplated by this Agreement,
whether or not such payment would constitute a parachute payment within
the meaning of Section 280G of the Code.
(vi) (i) Each Company Plan which is intended to meet the
requirements for tax-favored treatment under Subchapter B of Chapter 1
of Subtitle A of the Code meets such requirements; and (ii) the Company
has received a favorable determination from the Internal Revenue Service
with respect to any trust intended to be qualified within the meaning of
Section 501(c)(9) of the Code.
(vii) Except as provided in Section 3.01(i)(vii) of the Company
Disclosure Schedule, no independent contractor or other contract
employee has participated or is entitled to participate in any Company
Plan.
(viii) The Employee Stock Purchase Plan approved by the Board of
Directors of the Company on December 30, 1997 (the "Employee Stock
Purchase Plan") has not been put into effect and no person, including
any employee of the Company or any of its Subsidiaries, has purchased or
has any right to purchase any shares of capital stock of the Company
thereunder.
(j) Taxes.
(i) Except as disclosed in Section 3.01(j) of the Company
Disclosure Schedule: (A) the Company and each of its Subsidiaries, and
any consolidated,
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combined, unitary or aggregate group of which the Company or any of its
Subsidiaries is or has been a member has timely filed all Tax Returns
required to be filed by it, or requests for extensions to file such Tax
Returns have been timely filed, granted and have not expired; (B) all
such Tax Returns are complete and correct in all material respects; (C)
the Company and each of its Subsidiaries, and any consolidated,
combined, unitary or aggregate group of which the Company or any of it
Subsidiaries is or has been a member, has paid all Taxes due or has
provided adequate reserves in its financial statements (other than in
respect of deferred taxes) for any Taxes that have not been paid; (D) no
material claim for unpaid Taxes has been asserted by a Tax authority or
has become a lien against the property of the Company or any of its
Subsidiaries (other than with respect to Taxes not yet due and payable)
or is being asserted against the Company or any of its Subsidiaries; (E)
no audit or other proceeding with respect to any Taxes due from or with
respect to the Company or any of its Subsidiaries or any Tax Return
filed by the Company or any of its Subsidiaries is being conducted by
any governmental or Tax authority and the Company and its Subsidiaries
have not received notification in writing that any such audit or other
proceeding with respect to Taxes or any Tax Return is pending; (F) no
extension of the statute of limitations on the assessment of any Taxes
has been granted by the Company or any of its Subsidiaries; and (G)
neither the Company nor any of its Subsidiaries is subject to liability
for Taxes of any Person (other than the Company or its Subsidiaries),
including, without limitation, liability arising from the application of
Treasury Regulation section 1.1502-6 or any analogous provision of
state, local or foreign law, or as a transferee or successor, by
contract, or otherwise. As used herein, "Taxes" shall mean all taxes of
any kind, including, without limitation, those on or measured by or
referred to as income, gross receipts, sales, use, ad valorem,
franchise, profits, license, withholding, payroll, employment, social
security, transfer, net worth, excise, severance, stamp, occupation,
premium, value added, property or windfall profits taxes, customs,
duties or similar fees, assessments or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or
additional amounts imposed by any governmental authority, domestic or
foreign. As used herein, "Tax Return" shall mean any return, report or
statement required to be filed with any governmental authority with
respect to Taxes.
(ii) Except as disclosed in Section 3.01(j)(ii) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries
holds any indebtedness of Parent or any of its Subsidiaries.
(iii) Except as disclosed in Section 3.01(j)(iii) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries nor
any other Person on behalf of the Company or any of its Subsidiaries has
agreed to or is required to make (or has pending any application to
make) any adjustments pursuant to Section 481(a) of the Code or any
similar provision of state, local or foreign law by reason of a change
in accounting method initiated by the Company or any of its
Subsidiaries.
(iv) Except as set forth in Section 3.01(j)(iv) of the Company
Disclosure Schedule, none of the assets of the Company of any of its
Subsidiaries is (i) property required to be treated as being owned by
another person pursuant to the provisions of Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended and in effect immediately
prior to the enactment of the Tax Reform Act of 1986,
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or (ii) "tax-exempt use property" within the meaning of Section
168(h)(1) of the Code.
(v) None of the issued and outstanding Company Common Stock is
subject to a "substantial risk of forfeiture" within the meaning of
Section 83 of the Code.
(k) Properties. Except as disclosed in Section 3.01(k) of the Company
Disclosure Schedule, the Company or one of its Subsidiaries (i) has good
and marketable title to all the properties and assets (A) reflected in the
Interim Balance Sheet as being owned by the Company or one of its
Subsidiaries (other than any such properties or assets sold or disposed of
since September 30, 1998 in the ordinary course of business consistent with
past practice) and (B) acquired after September 30, 1998 which are material
to the Company's business on a consolidated basis, in each case free and
clear of all Liens, except statutory Liens securing payments not yet due
and such Liens as do not materially affect the use of the properties or
assets subject thereto or affected thereby or otherwise materially impair
business operations at such properties and (ii) is the lessee of all
leasehold estates (x) reflected in the Interim Balance Sheet and (y)
acquired after September 30, 1998 which are material to its business on a
consolidated basis (except for leases that have expired by their terms
since the date thereof) and is in possession of the properties purported to
be leased thereunder, and each such lease is in full force and effect and
constitutes a legal, valid and binding obligation of, and is legally
enforceable against, the respective parties thereto (except as affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding
in equity or at law) and an implied covenant of good faith and fair
dealing), and there is no default thereunder by the lessee or, to the
Company's knowledge, the lessor that, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect with respect
to the Company. The Company has not received written notice and does not
otherwise have knowledge of any pending, threatened or contemplated
condemnation proceeding affecting any premises owned or leased by the
Company or any of its Subsidiaries or any part thereof or of any sale or
other disposition of any such owned or leased premises or any part thereof
in lieu of condemnation.
(l) Environmental Matters. Except as could not reasonably be expected
to result in any liability under or relating to Environmental Laws (as
defined in Section 8.04) to the Company or any of its Subsidiaries which,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect with respect to the Company:
(i) each of the Company and each of its Subsidiaries holds and is,
and has been, in compliance with all Environmental Permits (as defined
in Section 8.04), and each of the Company and each of its Subsidiaries
is, and has been, otherwise in compliance with all Environmental Laws
and, to the knowledge of the Company, there are no conditions that might
prevent or interfere with such compliance in the future;
(ii) neither the Company nor any of its Subsidiaries has received
any written Environmental Claim or has knowledge of any other
Environmental Claim or threatened Environmental Claim;
(iii) neither the Company nor any of its Subsidiaries has entered
into any consent decree, order or agreement under or relating to any
Environmental Law;
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(iv) there are no past (including, without limitation, with respect
to assets or businesses formerly owned, leased or operated by the
Company or any of its Subsidiaries) or present actions, activities,
events, conditions or circumstances, including without limitation the
release, threatened release, emission, discharge, generation, treatment,
storage or disposal of Hazardous Materials, that could reasonably be
expected to give rise to liability of the Company or any of its
Subsidiaries under any Environmental Laws; and
(v) no modification, revocation, reissuance, alteration, transfer,
or amendment of the Environmental Permits, or any review by, or approval
of, any third party of the Environmental Permits is required in
connection with the execution or delivery of this Agreement or the
consummation of the transactions contemplated hereby or the continuation
of the business of the Company or any of its Subsidiaries following such
consummation.
(m) Contracts; Debt Instruments.
(i) Neither the Company nor any of its Subsidiaries is, or has
received any notice or has any knowledge that any other party is, or by
virtue of the transactions contemplated hereby, will be, in default in
any respect under any contract, agreement, commitment, arrangement,
lease, policy or other instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any such subsidiary
is bound, except for those defaults which could not reasonably be
expected, either individually or in the aggregate, to have a Material
Adverse Effect with respect to the Company; and, to the knowledge of the
Company, there has not occurred any event, nor will this transaction by
its terms cause the occurrence of any event, that with the lapse of time
or the giving of notice or both would constitute such a default.
(ii) The Company has made available to Parent (x) true and correct
copies (or accurate English translations) of all loan or credit
agreements, notes, bonds, mortgages, indentures and other agreements and
instruments pursuant to which any indebtedness (as defined in section
8.04) of the Company or any of its Subsidiaries in an aggregate
principal amount in excess of $500,000 is outstanding or may be incurred
and (y) accurate information regarding the respective principal amounts
currently outstanding thereunder.
(iii) Except as set forth in Section 3.01(m)(iii) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to or bound by any non-competition agreement or any other
agreement nor is there any judgment, decree, injunction, rule or order
of any Governmental Authority or arbitrator outstanding against the
Company or any of its Subsidiaries, that, following the Effective Time
of the Merger, would impose any material restriction on the ability of
Parent or any of its subsidiaries, now or hereafter acquired, (including
the Company and its Subsidiaries) to conduct any of the businesses
currently conducted by any of them or which purports to limit or
restrict in any material respect the manner in which, or the geographic
area in which, Parent or any of its subsidiaries (including the Company
and its Subsidiaries) is entitled to conduct all or any material portion
of the business of Parent, the Company or any of their subsidiaries.
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(iv) Except as set forth in Section 3.01(m)(iv) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to or bound by any agreement which, pursuant to the requirements
of Form 10-K under the Exchange Act, would be required to be filed as an
exhibit to an Annual Report on Form 10-K of the Company, except
agreements included or incorporated by reference as exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998 or any Recent SEC Document.
(v) Set forth in Section 3.01(m)(v) of the Company Disclosure
Schedule are all: (a)(i) data supply and data processing contracts
involving payments by the Company and its Subsidiaries in excess of
$250,000 on an annualized basis, (ii) customer contracts between the
Company or any of its Subsidiaries and third parties involving payments
by customers exceeding $250,000 per annum; (b) contracts between the
Company or any of its Subsidiaries, on the one hand, and any of their
respective directors, officers, employees or affiliates or any former
directors, officers, employees or affiliates, on the other hand
involving payments in excess of $75,000 per annum; (c) joint venture
and/or agreements and development agreements to which the Company or any
of its Subsidiaries is a party; and (d) contracts between the Company or
any of its Subsidiaries, on the one hand, and any of National Data
Corporation, IMS Health Incorporated, or Source Informatics Inc., on the
other hand.
(vi) Section 3.01(m)(vi) of the Company Disclosure Schedule lists
all charter client and partner client agreements to or by which the
Company or any of its Subsidiaries was a party or bound immediately
prior to August 5, 1998, all of which have been transferred to IMS
Health Incorporated.
(vii) As of the date hereof, with respect to each of its current
customers, and as of the date of the Effective Time of the Merger with
respect to at least all of its current customers who accounted for at
least 90% of the Company's revenue for the quarter ended September 30,
1998, except as disclosed in Section 3.01(m)(vii) of the Company
Disclosure Schedule, the Company has no knowledge that any such customer
intends to terminate or otherwise modify its relationship with the
Company or its Subsidiaries or to decrease or limit the services
rendered or products sold by the Company or its Subsidiaries.
(n) Brokers. Except as disclosed in Section 3.01(n) of the Company
Disclosure Schedule, no broker, investment banker, financial advisor or
other person, whose fees and expenses will be paid by the Company (pursuant
to fee agreements which have been provided to Parent), is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated by this Agreement or the
Stock Option Agreement based upon arrangements made by or on behalf of the
Company. The Company agrees to indemnify Parent and Sub and to hold Parent
and Sub harmless from and against any and all claims, liabilities or
obligations with respect to any other fee, commission or expense asserted
by any person on the basis of any act or statement alleged to have been
made by the Company or any of its affiliates.
(o) Opinion of Financial Advisor. The Company has received as of the
date of this Agreement the opinion of SG Cowen Securities Corporation to
the effect that, as of such date, the Per Share Merger Consideration is
fair, from a financial point of view, to the holders of Company Common
Stock (other than Parent and its affiliates).
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(p) Board Recommendation; State Antitakeover Law. The Board of
Directors of the Company, at a meeting duly called and held, has by
unanimous vote of those directors present (i) determined that this
Agreement and the Stock Option Agreement and the transactions contemplated
hereby and thereby, including the Merger, taken together, are fair to and
in the best interests of the stockholders of the Company, approved the
Stock Option Agreement for the purposes of Section 203(a)(i) of the DGCL
and has taken all other actions necessary on the part of the Company to
render the restrictions on business combinations contained in Section 203
of the DGCL inapplicable to this Agreement, the Merger and the Stock Option
Agreement and (ii) resolved to declare the Merger "advisable" and to
recommend that the holders of the shares of Company Common Stock adopt this
Agreement and the transactions contemplated herein, including the Merger.
(q) Required Company Vote. The Company Stockholder Approval, being the
affirmative vote of a majority of the outstanding shares of the Company
Common Stock, is the only vote of the holders of any class or series of the
Company's securities necessary to approve this Agreement, the Merger and
the other transactions contemplated hereby. There is no vote of the holders
of any class or series of the Company's securities necessary to approve the
Stock Option Agreement.
(r) Intellectual Property.
(i) Except as otherwise noted in Section 3.01(r)(i) of the Company
Disclosure Schedule, the Company or one of its Subsidiaries owns or has
the right to use all Intellectual Property material to the operation of
the business of the Company and its Subsidiaries as currently conducted
or to products or services currently under development by the Company or
any of its Subsidiaries (collectively, "Material Intellectual
Property"), and has the right to use, license, sublicense or assign the
same without liability to, or any requirement of consent from, any other
person or party; in this regard, to the knowledge of the Company, no
facts or circumstances exist which would affect the validity,
subsistence or existence of any Material Intellectual Property. Except
as set forth in Section 3.01(r)(i) of the Company Disclosure Schedule,
all Material Intellectual Property is either owned by the Company or its
Subsidiaries free and clear of all Liens or is used pursuant to an
agreement or license and each such agreement or license is valid and
enforceable and in full force and effect and neither the Company nor any
of its Subsidiaries is in default under or in breach of any such license
or agreement and, to the knowledge of the Company, none of the licensors
is in default under or in breach of any such license or agreement.
Unless otherwise noted in Section 3.01(r)(i) of the Company Disclosure
Schedule, (i) none of the Material Intellectual Property infringes or
otherwise conflicts with any proprietary or other right of any person or
party; (ii) there is no pending or threatened litigation, adversarial
proceeding, administrative action or other challenge or claim relating
to any of the Material Intellectual Property; (iii) there is no
outstanding judgment, order, writ, injunction or decree relating to any
of the Material Intellectual Property; (iv) there is currently no
infringement by any third party of any of the Material Intellectual
Property; and (v) the Material Intellectual Property owned, used or
possessed by the Company or its Subsidiaries is sufficient and adequate
to conduct the business of the Company and its Subsidiaries to the full
extent as such business is currently conducted.
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(ii) Except as otherwise noted in Section 3.01(r)(ii) of the
Company Disclosure Schedule, each of the Company and each of its
Subsidiaries has taken reasonable steps to protect, maintain and
safeguard their Material Intellectual Property, including any Material
Intellectual Property for which improper or unauthorized disclosure
would impair its value or validity, and has executed appropriate
nondisclosure agreements and made appropriate filings and registrations
in connection with the foregoing.
(iii) The Company or one of its Subsidiaries is the sole and
exclusive owner of all Software (which term includes, without
limitation, all computer programs, whether in source code or object code
form, algorithms, edit controls, methodologies, applications, flow
charts and any and all systems documentation (including, but not limited
to, data entry and data processing procedures, report generation and
quality control procedures), logic and designs for all programs, and
file layouts and written narratives of all procedures used in the coding
or maintenance of the foregoing) that is required to conduct the
businesses of the Company and its Subsidiaries to the full extent such
businesses are currently conducted. Set forth in Section 3.01(r)(iii)(a)
of the Company Disclosure Schedule is a true and complete list of all
Software owned by the Company or any of its Subsidiaries. Except as set
forth in Section 3.01(r)(iii)(b) of the Company Disclosure Schedule, all
of the Software owned by the Company or any of its Subsidiaries is Year
2000 Compliant (as defined in Section 8.04). Notwithstanding anything to
the contrary set forth in this Section 3.01(r)(iii), the term "Software"
does not include any software used or held for use by the Company or its
Subsidiaries and not owned by the Company or its Subsidiaries, including
but not limited to any software licensed or leased by third parties to
the Company or its Subsidiaries and commonly available "shrink wrap"
software copyrighted by third parties (collectively, the "Third Party
Software"). All of the Third Party Software required to conduct the
businesses of the Company and its Subsidiaries to the full extent such
businesses are currently conducted is used pursuant to an agreement or
license and each such agreement or license is valid and enforceable and
in full force and effect and neither the Company nor any of its
Subsidiaries is in default under or in breach of any such license or
agreement and, to the knowledge of the Company, none of the licensors is
in default under or in breach of any such license or agreement. To the
Company's knowledge, except as set forth in Section 3.01(r)(iii)(c) of
the Company Disclosure Schedule, all of the Third Party Software is Year
2000 Compliant.
(iv) The Company or one of its Subsidiaries is the sole and
exclusive owner of all Databases (which term includes, without
limitation, all databases, documentation and written narratives of all
procedures used in connection with the collection, processing and
distribution of data contained in the databases) that are required to
conduct the businesses of the Company and its Subsidiaries to the full
extent such businesses are currently conducted. The Databases, together
with the Third Party Databases (as defined below), contain that data
heretofore used by the Company and its Subsidiaries in the operation of
their respective businesses. Set forth in Section 3.01(r)(iv)(a) of the
Company Disclosure Schedule is a true and complete list of all Databases
owned by the Company or any of its Subsidiaries. Except as set forth in
Section 3.01(r)(iv)(b) of the Company Disclosure Schedule, the Databases
are Year 2000 Compliant. Notwithstanding anything to the contrary set
forth in this Section 3.1(r)(iv), the term "Databases" does not include
any databases used or held for use by the Company and its Subsidiaries
and not owned
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by the Company and its Subsidiaries, including, but not limited to, any
databases licensed or leased by third parties to the Company and
databases generally available to the public (collectively, the "Third
Party Databases"). All of the Third Party Databases required to conduct
the businesses of the Company and its Subsidiaries to the full extent
such businesses are currently conducted are used pursuant to an
agreement or license and each such agreement or license is valid and
enforceable and in full force and effect and neither the Company nor any
of its Subsidiaries is in default under or in breach of any such license
or agreement and, to the knowledge of the Company, none of the licensors
is in default under or in breach of any such license or agreement. To
the Company's knowledge, except as set forth in Section 3.01(r)(iv)(d)
of the Company Disclosure Schedule, all of the Third Party Databases are
Year 2000 Compliant.
(v) Except as set forth in Section 3.01(r)(v) of the Company
Disclosure Schedule, to the knowledge of the Company, no confidential or
trade secret information of the Company or any of its Subsidiaries has
been provided to any party except subject to written confidentiality
agreements.
(s) Ownership of Parent Common Stock. Neither the Company nor, to its
knowledge, any of its affiliates or associates (as such terms are defined
under the Exchange Act), (i) beneficially owns, directly or indirectly, or
(ii) is a party to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, in each case, shares
of capital stock of Parent which in the aggregate represent 5% or more of
the outstanding shares of such capital stock.
(t) Rights Agreement.
(i) The Rights Agreement has been amended so as to provide that
neither Parent nor Sub will become an "Acquiring Person" or a "Principal
Party" and that no "Triggering Event", "Section 14 Event," "Shares
Acquisition Date" or "Distribution Date" (as such terms are defined in
the Rights Agreement) will occur as a result of the public announcement
of or approval, execution or delivery of this Agreement or the Stock
Option Agreement or the public announcement of or consummation of the
Merger or the acquisition of shares of Company Common Stock by Parent
pursuant to the Stock Option Agreement.
(ii) The Board of Directors of the Company has not exercised its
option to exchange the Rights for shares of Company Common Stock as set
forth in Section 25 of the Rights Agreement.
(iii) The Company has taken all actions necessary with respect to
all of the outstanding Rights so that, immediately prior to and after
the Effective Time of the Merger, (A) neither Company nor Parent or Sub
will have any obligations under the Rights or the Rights Agreement and
(B) the holders of the Rights will have no rights under the Rights or
the Rights Agreement, including without limitation the right to exercise
the Rights set forth in Section 8 of the Rights Agreement.
(u) Investment Company Act of 1940. The Company is not and prior to the
Effective Time of the Merger will not be an "investment company", "unit
investment trust", "management company", "closed-end company", "open-end
company", "face-amount certificate company" or an entity "controlled" by an
"investment company" that is required to be registered under Section 8 of
the United States Investment Company Act of 1940, as amended.
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SECTION 3.02. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB. Parent
and Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent and Sub
is duly organized, validly existing and in good standing under the laws of
the State of North Carolina and has the requisite corporate power and
authority to carry on its business as now being conducted. Each of Parent
and Sub is duly qualified or licensed to do business and is in good
standing in each jurisdiction (domestic or foreign) in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) could not reasonably be expected to have a Material Adverse
Effect with respect to Parent. Parent has made available to the Company
complete and correct copies of the articles of incorporation and by-laws of
Parent and of Sub.
(b) Capital Structure.
(i) As of the date of this Agreement, the authorized capital stock
of Parent consists of 200,000,000 shares of Parent Common Stock,
25,000,000 shares of preferred stock, par value $.01 per share, of
Parent (the "Parent Preferred Stock"). As of the close of business on
June 30, 1998, there were: (i) 75,612,627 shares of Parent Common Stock
issued and outstanding; (ii) 2,435,843 shares of Parent Common Stock
reserved for issuance upon exercise of stock options available for grant
pursuant to Parent's stock option and stock purchase plans (such plans,
collectively, the "Parent Stock Plans"); (iii) 5,152,560 shares of
Parent Common Stock issuable upon exercise of awarded but unexercised
stock options; (iv) 3,474,250 shares of Parent Common Stock issuable
upon conversion of outstanding 4 1/4% Convertible Subordinated Notes due
2000 (the "Parent Notes") and (v) no shares of Parent Preferred Stock
outstanding. Except as set forth above, as of the close of business on
June 30, 1998 there were no shares of capital stock or other equity
securities of Parent issued, reserved for issuance or outstanding. All
outstanding shares of capital stock of Parent are, and all shares which
may be issued as described above will be, when issued, duly authorized,
validly issued, fully paid and nonassessable and not subject to
preemptive rights. Except for the Parent Notes, at the time of the
execution of this Agreement, there are no outstanding bonds, debentures,
notes or other indebtedness or debt securities of Parent having the
right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which stockholders of Parent
may vote. Except as set forth above or in Section 3.02(b) of the
disclosure schedule delivered by Parent and Sub to the Company at the
time of the execution of this Agreement (the "Parent Disclosure
Schedule"), there are no outstanding securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of
any kind to which Parent is a party or by which it is bound obligating
Parent to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or other equity or voting
securities of Parent or obligating Parent to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. There are no outstanding
contractual obligations, commitments, understandings or arrangements of
Parent to repurchase, redeem or otherwise acquire or make any payment in
respect of any shares of capital stock of Parent.
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(ii) From June 30, 1998 to the date of this Agreement, except as
set forth in Section 3.02(b) of the Parent Disclosure Schedule, Parent
did not (A) issue or permit to be issued any shares of capital stock, or
securities exercisable for or convertible into shares of capital stock,
of Parent, other than pursuant to or as permitted by the terms of the
Parent Stock Plans; (B) repurchase, redeem or otherwise acquire,
directly or indirectly through one or more subsidiaries, any shares of
capital stock of Parent; or (C) declare, set aside, make or pay to the
stockholders of Parent dividends or other distributions on the
outstanding shares of capital stock of Parent.
(iii) The authorized capital stock of Sub consists of 1,000 shares
of common stock, par value $.01 per share, all of which have been
validly issued, are fully paid and nonassessable and are owned by
Parent, free and clear of any Lien.
(iv) As of the Closing Date, all the issued and outstanding shares
of the common stock of Sub will be owned by Parent free and clear of any
Lien.
(c) Authority; Noncontravention. Parent and Sub have all requisite
corporate power and authority to enter into each of this Agreement and the
Stock Option Agreement and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of each of this Agreement
and the Stock Option Agreement by Parent and Sub and the consummation by
Parent and Sub of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate action on the part of
Parent and Sub. This Agreement and the Stock Option Agreement have been
duly executed and delivered by each of Parent and Sub, as applicable, and
(assuming due authorization, execution and delivery by the Company)
constitute valid and binding obligations of Parent and Sub, as applicable,
enforceable against them in accordance with their terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity
or at law) and an implied covenant of good faith and fair dealing. The
execution and delivery of each of this Agreement and the Stock Option
Agreement does not, and the consummation by Parent and Sub of the
transactions contemplated by this Agreement and compliance by Parent and
Sub, as applicable, with the provisions of this Agreement and the Stock
Option Agreement will not, conflict with, or result in any breach or
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration
of, or a "put" right with respect to any obligation under, or to a loss of
a material benefit under, or result in the creation of any Lien under, (i)
the articles of incorporation or by-laws of Parent, Sub or any other
subsidiary of Parent, (ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or any other contract, agreement, instrument,
permit, concession, franchise or license to which Parent, Sub or any other
subsidiary of Parent is a party or by which any of their respective
properties or assets are bound or (iii) subject to the governmental filings
and other matters referred to in the following sentence, any judgment,
order, decree, statute, law, ordinance, rule, regulation or arbitration
award applicable to Parent, Sub or any other subsidiary of Parent or their
respective properties or assets, other than, in the case of clauses (ii)
and (iii), any such conflicts, breaches, violations, defaults, rights,
losses or Liens that individually or in the aggregate could not reasonably
be expected to have a Material Adverse Effect with respect to Parent. No
consent, approval, order or authorization of, or registration, declaration
or filing with, or notice to, any Governmental Entity or any other third
party is required by or with
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respect to Parent or Sub in connection with the execution and delivery of
this Agreement or the Stock Option Agreement by Parent and Sub, as
applicable, or the consummation by Parent and Sub of any of the
transactions contemplated hereby or thereby, except for (i) such filings,
if any in connection with or compliance with the HSR Act, the NASD, the
provisions of the DGCL, the provisions of the NCBCA, the Securities Act,
Section 4043 of ERISA and the Exchange Act as may be required in connection
with this Agreement, the Stock Option Agreement and the transactions
contemplated hereby and thereby, (ii) such other consents, approvals,
orders, authorizations, registrations, declarations, filings or notices as
may be required under the "takeover" or "blue sky" laws of various states
and (iii) such other consents, approvals, orders, authorizations,
registrations, declarations, filings or notices the failure of which to
make or obtain, individually or in the aggregate, could not reasonably be
expected to (x) prevent or materially delay consummation of the Merger or
the other transactions contemplated hereby or performance of Parent's and
Sub's obligations hereunder or under the Stock Option Agreement or (y) have
a Material Adverse Effect with respect to Parent.
(d) Parent SEC Documents; Undisclosed Liabilities. Except as set forth
in Section 3.02(d) of the Parent Disclosure Schedule, Parent has filed with
the SEC all reports, schedules, forms, statements and other documents
required to be filed by it pursuant to the Securities Act and the Exchange
Act since November 1, 1996 (collectively, and in each case including all
exhibits and schedules thereto and documents incorporated by reference
therein, the "Parent SEC Documents"). Except as set forth in Section
3.02(d) of the Parent Disclosure Schedule, as of their respective dates,
the Parent SEC Documents complied as to form in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Parent SEC Documents, and none of the Parent SEC
Documents (including any and all financial statements included therein) as
of such dates contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. Except as set forth in Section
3.02(d) of the Parent Disclosure Schedule, except to the extent that
information contained in any Parent SEC Document has been revised or
superseded by a later filed Parent SEC Document, none of the Parent SEC
Documents (including any and all financial statements included therein)
contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. Except as disclosed in Section 3.02(d) of the
Parent Disclosure Schedule, the consolidated financial statements of Parent
included in all Parent SEC Documents filed since November 1, 1996 (the
"Parent SEC Financial Statements") comply as to form in all material
respects with applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles (except, in the
case of unaudited consolidated quarterly financial statements, as permitted
by Form 10-Q of the SEC), applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position of Parent and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited quarterly statements, to normal recurring year-end audit
adjustments).
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(e) Information Supplied. None of the information supplied or to be
supplied by Parent or Sub for inclusion or incorporation by reference in
(i) the Form S-4 will, at the time the Form S-4 is filed with the SEC, at
any time it is amended or supplemented or at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) the Proxy
Statement will, at the date it is first mailed to the Company's
stockholders or at the time of the Stockholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading.
The Form S-4 will comply as to form in all material respects with the
requirements of the Securities Act and the rules and regulations
promulgated thereunder, except that no representation is made by Parent or
Sub with respect to statements made or incorporated by reference therein
based on information supplied in writing by the Company specifically for
inclusion or incorporation by reference therein.
(f) Absence of Certain Changes or Events. Except as disclosed in
Section 3.02(f) of the Parent Disclosure Schedule, since December 31, 1997,
there is not and has not been: (i) any Material Adverse Change with respect
to Parent; (ii) any condition, event or occurrence which, individually or
in the aggregate, could reasonably be expected to have a Material Adverse
Effect or give rise to a Material Adverse Change with respect to Parent; or
(iii) any condition, event or occurrence which, individually or in the
aggregate, could reasonably be expected to prevent or materially delay the
ability of Parent and Sub to consummate the transactions contemplated by
this Agreement or the Stock Option Agreement or perform its obligations
hereunder or thereunder.
(g) Litigation; Compliance with Laws.
(i) Except as disclosed in Section 3.02(g)(i) of the Parent
Disclosure Schedule or in the Parent SEC Documents, there is (1) no
suit, action, arbitration or proceeding pending, and (2) to the
knowledge of Parent, no suit, action, arbitration or proceeding
threatened against or investigation pending, in each case with respect
to Parent or any of its subsidiaries that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect with respect to Parent or prevent or materially delay the ability
of Parent and Sub to consummate the transactions contemplated by this
Agreement or to perform their obligations hereunder and under the Stock
Option Agreement nor is there any judgment, decree, citation,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against Parent or any of its subsidiaries which,
individually or in the aggregate, has or could reasonably be expected to
have a Material Adverse Effect with respect to the Parent or prevent or
materially delay the ability of the Parent to consummate transactions
contemplated by this Agreement or the Stock Option Agreement or to
perform its obligations hereunder or thereunder. To the knowledge of
Parent, except as disclosed in Section 3.02(g)(i) of the Parent
Disclosure Schedule or in any SEC Document filed by Parent prior to the
date of this Agreement with respect to any period ending, or date
occurring, after December 31, 1997, there is no reasonable basis for any
action, suit, arbitration or proceeding that, individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect with respect to Parent or prevent or materially delay the ability
of Parent or Sub to consummate the transactions contemplated by
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this Agreement or the Stock Option Agreement or to perform their
obligations hereunder or thereunder.
(ii) Except as disclosed in Section 3.02(g)(ii) of the Parent
Disclosure Schedule, the businesses of Parent and its subsidiaries are
not being conducted in violation of any law (domestic or foreign),
ordinance or regulation of any Governmental Entity, except for possible
violations which, individually or in the aggregate, do not and could not
reasonably be expected to have a Material Adverse Effect with respect to
Parent.
(h) Brokers. No broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated
by this Agreement or the Stock Option Agreement based upon arrangements
made by or on behalf of Parent or Sub. Parent agrees to indemnify the
Company and to hold the Company harmless from and against any and all
claims, liabilities or obligations with respect to any other fee,
commission or expense asserted by any person on the basis of any act or
statement alleged to have been made by Parent or its affiliates.
(i) Interim Operations of Sub. Sub was formed on November 4, 1998
solely for the purpose of engaging in the transactions contemplated hereby,
has engaged in no other business activities and has conducted its
operations only as contemplated hereby.
(j) Required Vote. This Agreement has been approved by Parent, as the
sole stockholder of Sub. No other vote of holders of any class or series of
securities of Parent or Sub is necessary to approve this Agreement, the
Merger, the Stock Option Agreement and the transactions contemplated hereby
and thereby.
(k) Ownership of Company Common Stock. Except as contemplated by the
Stock Option Agreement, neither Parent nor, to its knowledge, any of its
affiliates or associates (as such terms are defined under the Exchange
Act), (i) beneficially owns, directly or indirectly, or (ii) is a party to
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of, in each case, shares of capital stock of
the Company, which in the aggregate represent 5% or more of the outstanding
shares of such capital stock.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER
SECTION 4.01. CONDUCT OF BUSINESS.
(a) Conduct of Business by the Company. During the period from the date
of this Agreement to the Effective Time of the Merger (except as otherwise
expressly contemplated by the terms of this Agreement), and except as
approved by Parent, the Company shall, and shall cause each of its
Subsidiaries to, act and carry on its and their respective businesses in
the ordinary course of business consistent with past practice and use its
and their respective reasonable efforts to preserve substantially intact
its and their current business organizations, keep available the services
of its and their current officers and employees and preserve its and their
relationships with customers, suppliers, licensors, licensees, advertisers,
distributors and others having significant business dealings with it and
them. Without limiting the generality of the foregoing, during the
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period from the date of this Agreement to the Effective Time of the Merger,
the Company shall not, and shall not permit any of its Subsidiaries to:
(i) (x) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by a direct or indirect wholly owned
domestic Subsidiary to its parent, (y) split, combine or reclassify any
capital stock of the Company or any of its Subsidiaries or issue or
authorize the issuance of any other securities in respect of, in lieu of
or in substitution for shares of capital stock of the Company or any of
its Subsidiaries, or (z) purchase, redeem or otherwise acquire any
shares of capital stock of the Company or any of its Subsidiaries or any
other securities thereof (other than the Debentures as contemplated by
Section 2.04) or any rights, warrants or options to acquire any such
shares or other securities;
(ii) authorize for issuance, issue, deliver, sell, pledge or
otherwise encumber any shares of its capital stock, any other voting
securities or any securities convertible into, or any rights, warrants
or options to acquire, any such shares, voting securities or convertible
securities or any other securities or equity equivalents (including
without limitation stock appreciation rights), other than the issuance
of Company Common Stock upon the exercise of Company Stock Options
awarded prior to the date of this Agreement but unexercised on the date
of this Agreement in accordance with their present terms;
(iii) (A) amend the Certificate of Incorporation or By-Laws or
comparable charter or organizational documents of any Subsidiary, or (B)
amend or terminate the Rights Agreement;
(iv) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial portion of the stock or assets of, or by
any other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division thereof;
(v) other than as set forth in Section 4.01(a)(v) of the Company
Disclosure Schedule with respect to the disposition of certain assets,
sell, lease, license, mortgage or otherwise encumber or subject to any
Lien or otherwise dispose of any of its properties or assets other than
any such properties or assets the value of which do not exceed $100,000
individually and $250,000 in the aggregate, except sales of inventory in
the ordinary course of business consistent with past practice;
(vi) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities
or warrants or other rights to acquire any debt securities of the
Company or any of its Subsidiaries, guarantee any debt securities of
another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter
into any arrangement having the economic effect of any of the foregoing,
except for short-term borrowings incurred in the ordinary course of
business consistent with past practice and intercompany indebtedness
between the Company and its wholly-owned Subsidiaries or between such
wholly owned Subsidiaries, or (B) make any loans, advances or capital
contributions to, or investments in, any other person, other than to the
Company or any direct or indirect wholly owned Subsidiary, or (C) invest
or hold cash or cash equivalents in instruments with a
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maturity date exceeding 90 days, (D) or use any cash outside the
ordinary course of the PMSI Scott-Levin, Inc. business except as set
forth on Schedule 4.01(a)(vi).
(vii) acquire or agree to acquire any assets, other than inventory
in the ordinary course of business consistent with past practice, or
make or agree to make any capital expenditures, except capital
expenditures that either are contemplated (with respect to both nature
and amount) by the Company's capital budget for the fiscal year ending
June 30, 1999 (a true and correct copy of which is included in Schedule
4.01(a)(vii) of the Company Disclosure Schedule) or do not exceed
$100,000 in the aggregate;
(viii) other than as set forth in Section 4.01(c)(viii) of the
Company Disclosure Schedule, pay, discharge or satisfy any claims
(including claims of stockholders), liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
except for the payment, discharge or satisfaction of (x) liabilities or
obligations in the ordinary course of business consistent with past
practice or in accordance with their terms as in effect on the date
hereof and other liabilities and obligations not exceeding $100,000
individually or $250,000 in the aggregate, or (y) claims settled or
compromised to the extent permitted by Section 4.01(a)(xii), or waive,
release, grant, or transfer any rights of material value or modify or
change in any material respect any existing material license, lease,
contract or other document, other than in the ordinary course of
business consistent with past practice;
(ix) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution,
merger, consolidation, restructuring, recapitalization or
reorganization;
(x) enter into or amend any collective bargaining agreement;
(xi) change any material accounting principle used by it, except as
required by generally accepted accounting principles;
(xii) settle or compromise any litigation or claim (whether or not
commenced prior to the date of this Agreement), other than settlements
or compromises of litigation or claims that neither provide for
injunctive or similar relief that could be material to the business or
operations of the Company or any of its Subsidiaries nor require
payments (after giving effect to insurance proceeds actually received or
reasonably believed by management of the Company to be receivable) in
settlement or compromise exceeding $50,000 provided that the aggregate
amount paid in connection with the settlement or compromise of all such
litigation matters shall not exceed $250,000;
(xiii) engage in any transaction with, or enter into any agreement,
arrangement, or understanding with, directly or indirectly, any of the
Company's affiliates, including, without limitation, any transactions,
agreements, arrangements or understandings with any affiliate or other
Person covered under Item 404 of SEC Regulation S-K that would be
required to be disclosed under such Item 404, other than such
transactions of the same general nature, scope and magnitude as are
disclosed in the Company SEC Documents;
(xiv) other than as set forth in Section 4.01(a)(xiv) of the
Company Disclosure Schedule, transfer to any person or entity any rights
to its Intellectual Property,
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other than the provision of data or the granting of end-user licenses in
the ordinary course of business consistent with past practice to
customers of the Company or its Subsidiaries;
(xv) enter into or amend any agreement pursuant to which any other
party is granted exclusive marketing or other exclusive rights of any
type or scope with respect to any of its products or technology; or
(xvi) authorize, or commit or agree to take, any of the foregoing
actions.
(b) Changes in Employment Arrangements. Other than as set forth in
Section 4.01(b) of the Company Disclosure Schedule, neither the Company nor
any of its Subsidiaries shall (i) adopt or amend (except as may be required
by law) any Company Plan for the benefit or welfare of any employee,
officer, director or former director, officer or employee other than
increases for individuals (other than executive officers and directors) in
the ordinary course of business consistent with past practice, increase the
compensation or fringe benefits of any director, officer, employee or
former director, officer or employee or pay any benefit not required by any
existing plan, arrangement or agreement or (ii) take any action to
implement the Employee Stock Purchase Plan.
(c) Severance. Except as contemplated by the proviso to the immediately
preceding paragraph (b), neither the Company nor any of its Subsidiaries
shall grant any new or modified severance or termination arrangement or
increase or accelerate any benefits payable under its severance or
termination pay policies in effect on the date hereof.
(d) WARN. Neither the Company nor any of its Subsidiaries shall
effectuate a "plant closing" or "mass layoff," as those terms are defined
in WARN, or similar restructuring affecting in whole or in part any site of
employment, facility, operating unit or employee of the Company or any of
its Subsidiaries, without notifying Parent and Sub in advance and without
complying with the notice requirements and other provisions of WARN or any
applicable foreign laws or regulations.
(e) Tax Elections. Other than as set forth in Section 4.01(e) of the
Company Disclosure Schedule, except as consistent with past practice,
neither the Company nor any of its Subsidiaries shall make any tax election
or settle or compromise any federal, state, local or foreign tax liability.
(f) Tax-Free Reorganization Treatment. No party shall, and none shall
permit any of its subsidiaries to, intentionally take or cause to be taken
any action which would disqualify the Merger as a "reorganization" within
the meaning of Section 368(a) of the Code.
(g) Nominee Shares. The Company shall cause any person who owns any
shares of capital stock of any of the Company's Subsidiaries, whether in
trust or pursuant to any other nominee arrangement with the Company or any
of its Subsidiaries, to transfer, effective not later than the Effective
Time of the Merger, all right, title and interest in and to such shares to
Parent or any person designated by Parent.
(h) Other Actions. Neither the Company nor Parent shall, or shall
permit any of their respective subsidiaries to (i) intentionally take any
action or fail to take any action that, if taken or not taken on or prior
to the date of this Agreement, would have resulted in any of its
representations and warranties set forth in this Agreement being untrue in
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any material respect other than the possible issuance of securities by
Parent after the date of this Agreement, or (ii) intentionally take any
action that would or reasonably might be expected to result in any of the
conditions to the Merger set forth in Article VI not being satisfied or in
a violation of any provision of the Stock Option Agreement. The Company and
Parent shall promptly advise the other party orally and in writing of (x)
any action or failure to act of the type set forth in clause (i) above, (y)
the failure by such party to comply with any covenant, condition or
agreement hereunder or under the Stock Option Agreement and (z) any event
which could reasonably be expected to cause the conditions set forth in
Article VI not being satisfied; provided, however, that no such notice
shall affect the representations, warranties, covenants and agreement of
the parties or the conditions to their obligations hereunder.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. PREPARATION OF FORM S-4 AND PROXY STATEMENT; STOCKHOLDER
MEETING. (a) Promptly following the date of this Agreement, the Company shall
prepare the Proxy Statement, and Parent shall prepare and file (or cause to be
prepared and filed) with the SEC the Form S-4 in which the Proxy Statement will
be included. Parent and the Company shall each use its reasonable efforts to
have the Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing. The Company will use its reasonable efforts to
cause the Proxy Statement to be mailed to the Company's stockholders as promptly
as practicable after the Form S-4 is declared effective under the Securities
Act. Parent shall also take any action (other than qualifying to do business in
any state in which it is not now so qualified or filing a general consent to
service of process) required to be taken under any applicable state securities
laws in connection with the registration and qualification of the Parent
securities to be issued in the Merger, and the Company shall furnish all
information relating to the Company and its stockholders as may be reasonably
requested in connection with any such action. The information provided and to be
provided by Parent, Sub and the Company, respectively, (i) for use in the Form
S-4, at the time the Form S-4 becomes effective, shall be true and accurate in
all material respects and shall not omit to state a material fact required to be
stated therein or necessary to make such information not misleading and (ii) for
use in the Proxy Statement, on the date the Proxy Statement is mailed to the
Company's stockholders and on the date of the Stockholders Meeting referred to
below, shall be true and correct in all material respects and shall not omit to
state any material fact required to be stated therein or necessary in order to
make such information, in the light of the circumstances under which the
statements therein were made, not misleading, and the Company and Parent each
agree to correct any information provided by it for use in the Form S-4 and/or
the Proxy Statement which shall have become false or misleading.
(b) All mailings to the Company's stockholders in connection with the
Merger, including the Proxy Statement, shall be subject to the prior review,
comment and approval of Parent (such approval not to be unreasonably withheld or
delayed).
(c) The Company will, as promptly as practicable following the date of this
Agreement and in consultation with Parent, duly call, give notice of, convene
and hold a meeting of its stockholders (the "Stockholders Meeting") for the
purpose of adopting this Agreement and the transactions contemplated by this
Agreement to the extent required by the DGCL. The Company will, through its
Board of Directors, recommend to its stockholders approval of the
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foregoing matters, as set forth in Section 3.01(p); provided, however, that the
Board of Directors of the Company may fail to make or withdraw or modify such
recommendation, but only to the extent that the Board of Directors of the
Company shall have concluded in good faith on the basis of written advice from
outside counsel that the failure to take such action would be contrary to the
fiduciary duties of the Board of Directors of the Company to the stockholders of
the Company under applicable law. Any such recommendation, together with a copy
of the opinion referred to in Section 3.01(o), shall be included in the Proxy
Statement. The Company will use its best efforts to hold such meeting as soon as
practicable after the Form S-4 shall have been declared effective.
SECTION 5.02. ACCESS TO INFORMATION; CONFIDENTIALITY. (a) Each of the
Company and Parent shall, and shall cause its respective subsidiaries, officers,
employees, counsel, financial advisors and other representatives to, afford to
the other party and its representatives reasonable access during normal business
hours, during the period prior to the Effective Time of the Merger, to its
properties, books, contracts, commitments, personnel and records, and, during
such period, each of the Company and Parent shall, and shall cause its
respective subsidiaries, officers, employees and representatives to, furnish
promptly to the other party (i) a copy of each report, schedule, registration
statement and other document filed by it during such period pursuant to the
requirements of Federal or state securities laws and (ii) all other information
concerning its business, properties, financial condition, operations and
personnel as such other party may from time to time reasonably request. Each of
the Company and Parent will hold, and will cause its respective directors,
officers, employees, accountants, counsel, financial advisors and other
representatives and affiliates to hold, any nonpublic information in confidence
to the extent required by, and in accordance with, the provisions of the
confidentiality agreement, dated October 13, 1998, between Parent and the
Company (the "Confidentiality Agreement"), which Confidentiality Agreement
(except for Section 2 thereof) shall continue in full force and effect following
the execution and delivery of this Agreement.
(b) No investigation pursuant to this Section 5.02 or otherwise shall
affect any representations or warranties of the parties herein or the conditions
to the obligations of the parties hereto.
SECTION 5.03. REASONABLE EFFORTS. Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties agrees to use its
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with the other parties in doing,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective, in the most expeditious manner practicable,
the Merger and the other transactions contemplated by this Agreement, including
(i) obtaining all consents, approvals, waivers, licenses, permits or
authorizations as are required to be obtained (or, which if not obtained, would
result in an event of default, termination or acceleration of any agreement or
any put right under any agreement) under any applicable law or regulation or
from any Governmental Entities or third parties in connection with the
transactions contemplated by this Agreement, (ii) defending any lawsuits or
other proceedings challenging this Agreement and (iii) accepting and delivering
additional instruments necessary to consummate the transactions contemplated by
this Agreement. The parties agree that each of Parent and Sub, on the one hand,
and the Company, on the other hand, shall have the opportunity to negotiate and
consult directly with all applicable Governmental Entities and third parties in
connection with their consideration of the transactions contemplated by this
Agreement. Notwithstanding anything in this Section 5.03 to the contrary,
neither party shall be required to: (i) expend material sums of money or
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grant material financial or other accommodations to any party, (ii) divest any
material operations or (iii) set aside any material assets in order to satisfy
the terms of this Section 5.03.
SECTION 5.04. INDEMNIFICATION. (a) From and after the Effective Time of
the Merger, Parent and the Surviving Corporation shall indemnify, defend and
hold harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time of the Merger, eligible for
indemnification pursuant to the Certificate of Incorporation and By-Laws of the
Company or the comparable charter or organizational documents of any Subsidiary
(the "Indemnified Parties") against (i) all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in settlement of or
in connection with any claim, action, suit, proceeding or investigation based in
whole or in part on or arising in whole or in part out of the fact that such
person is or was a director, officer or employee of the Company or any of its
Subsidiaries, pertaining to any matter existing or occurring at or prior to the
Effective Time of the Merger, whether asserted or claimed prior to, or at or
after, the Effective Time of the Merger (the "Indemnified Liabilities") and (ii)
all Indemnified Liabilities based in whole or in part on, or arising in whole or
in part out of, or pertaining to this Agreement or the transactions contemplated
hereby, in each case to the extent the Company or such Subsidiary would have
been permitted under the Certificate of Incorporation and By-laws, or such other
constituent organizational documents, as the case may be, to indemnify such
person. Nothing contained herein shall limit any rights to indemnification which
any Indemnified Party may have under any indemnification agreement or the
Certificate of Incorporation or By-Laws or the constituent organizational
documents of any Subsidiary. In the event any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Parties (whether
arising before or after the Effective Time of the Merger), (i) any counsel
retained by the Indemnified Parties for any period after the Effective Time of
the Merger shall be reasonably satisfactory to Parent and the Surviving
Corporation (it being understood that Reboul, MacMurray, Hewitt, Maynard &
Kristol is acceptable to Parent and the Surviving Corporation); (ii) after the
Effective Time of the Merger, Parent or the Surviving Corporation shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; and (iii) after the Effective Time
of the Merger, the Surviving Corporation will cooperate in the defense of any
such matter, provided that the Surviving Corporation shall not be liable for any
settlement of any claim effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under this Section 5.04, upon learning of any such claim,
action, suit, proceeding or investigation, shall notify Parent and the Surviving
Corporation (but the failure so to notify Parent or the Surviving Corporation
shall not relieve them from any liability which they may have under this Section
5.04 except to the extent such failure materially prejudices Parent and the
Surviving Corporation), and shall deliver to Parent and the Surviving
Corporation the undertaking, if any, required by Section 145(e) of the DGCL.
Parent and the Surviving Corporation shall be liable for the fees and expenses
hereunder with respect to only one law firm to represent the Indemnified Parties
as a group with respect to each such matter unless there is, under applicable
standards of professional conduct, a conflict between the positions of any two
or more Indemnified Parties that would preclude or render inadvisable joint or
multiple representation of such parties.
(b) Parent shall cause to be maintained in effect for three years from the
Effective Time of the Merger directors' and officers' liability insurance
coverage covering persons who are directors and officers of the Company on the
date of this Agreement, with respect to matters occurring prior to the Effective
Time of the Merger, and containing terms and conditions
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which are not less advantageous to such persons than the policies of the Company
in effect on the date hereof (the "Company Insurance"); provided that Parent
shall not be required to spend annually in excess of 150% of the annual premium
for the Company Insurance paid by the Company as of the date of this Agreement
(the "Current Premium"), which Current Premium the Company represents is Two
Hundred Eight Thousand Dollars ($208,000) per annum; provided, further, that if
Parent would be required to spend annually in excess of 150% of the Current
Premium to obtain insurance having terms not less advantageous than the Company
Insurance, the Surviving Corporation will be required to spend up to such amount
to maintain or procure as much insurance coverage as can be procured for such
premium.
SECTION 5.05. PUBLIC ANNOUNCEMENTS. Neither Parent and Sub, on the one
hand, nor the Company, on the other hand, will issue any press release or public
statement with respect to the transactions contemplated by this Agreement and
the Stock Option Agreement, including the Merger, without the other party's
prior consent (such consent not to be unreasonably withheld or delayed), except
as may be required by applicable law, court process or by obligations pursuant
to any agreement with any securities exchange or quotation system on which
securities of the disclosing party are listed or quoted. In addition to the
foregoing, Parent, Sub and the Company will consult with each other before
issuing, and provide each other the opportunity to review and comment upon, any
such press release or other public statements with respect to such transactions.
The parties agree that the initial press release or releases to be issued with
respect to the transactions contemplated by this Agreement shall be mutually
agreed upon prior to the issuance thereof.
SECTION 5.06. NO SOLICITATION. (a) Neither the Company nor any of its
Subsidiaries shall (whether directly or indirectly through advisors, agents or
other intermediaries), nor shall the Company or any of its Subsidiaries
authorize or permit any of its or their officers, directors, agents,
representatives or advisors to, (a) solicit, initiate or take any action
knowingly to encourage or facilitate the submission of inquiries, proposals or
offers from any person (other than Sub or Parent) relating to (i) any
acquisition or purchase of 15% or more of the consolidated assets of the Company
and its Subsidiaries or of over 15% of any class of equity securities of the
Company or any of its Subsidiaries, (ii) any tender offer (including a self
tender offer) or exchange offer that if consummated would result in any Person
(as defined in Section 8.02) beneficially owning 15% or more of any class of
equity securities of the Company or any of its significant Subsidiaries, (iii)
any merger, consolidation, business combination, sale of substantially all
assets, recapitalization, liquidation, dissolution or similar transaction
involving the Company or any of its Subsidiaries whose assets, individually or
in the aggregate, constitute more than 15% of the consolidated assets of the
Company other than the transactions contemplated by this Agreement, or (iv) any
other transaction the consummation of which would or could reasonably be
expected to impede, interfere with, prevent or delay the Merger (collectively,
"Transaction Proposals"), or agree to or endorse any Transaction Proposal, or
(b) enter into or participate in any discussions or negotiations regarding any
of the foregoing, or furnish to any other person any information with respect to
its business, properties or assets or any of the foregoing, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage,
any effort or attempt by any other person (other than Sub or Parent) to do or
seek any of the foregoing; provided, however, that the foregoing shall not
prohibit the Company (either directly or indirectly through advisors, agents or
other intermediaries) from (i) furnishing information pursuant to an appropriate
confidentiality letter (which letter shall not be less favorable to the Company
in any material respect than the Confidentiality Agreement) concerning the
Company and its businesses, properties or assets to a third party who has made
an unsolicited bona fide written
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Transaction Proposal, (ii) engaging in discussions or negotiations with such a
third party who has made an unsolicited bona fide written Transaction Proposal,
(iii) following receipt of an unsolicited bona fide written Transaction
Proposal, taking and disclosing to its stockholders a position contemplated by
Rule 14d-9 or Rule 14e-2(a) under the Exchange Act or otherwise making
disclosure to its stockholders, (iv) following receipt of an unsolicited bona
fide written Transaction Proposal, failing to make or withdrawing, modifying or
amending its recommendation referred to in Section 3.01(p), and/or (v) taking
any action required to be taken by the Company pursuant to an order by any court
of competent jurisdiction (other than an order that has been reversed, withdrawn
or stayed), but in each case referred to in the foregoing clauses (i) through
(v) only to the extent that the Board of Directors of the Company shall have
concluded in good faith on the basis of written advice from outside counsel that
the failure to take such action would be contrary to the fiduciary duties of the
Board of Directors of the Company to the stockholders of the Company under
applicable law; provided, further, that, to the extent that it may do so without
acting in a manner contrary to its fiduciary duties under applicable law, the
Board of Directors of the Company shall advise Parent promptly prior to the
taking of any such action and, in addition, if the Board of Directors of the
Company receives a Transaction Proposal, then the Company shall promptly inform
Parent of the material terms and conditions of such proposal and the identity of
the person making it. The Company and each of its Subsidiaries will immediately
cease and cause its officers, directors, employees, affiliates, advisors, agents
and other intermediaries to cease any and all existing activities, discussions
or negotiations with any parties conducted heretofore with respect to any of the
foregoing, and shall use its reasonable efforts to cause any such parties in
possession of confidential information about the Company that was furnished by
or on behalf of the Company to return or destroy all such information in the
possession of any such party or in the possession of any agent or advisor of any
such party.
(b) Except as set forth in this Section 5.06(b), the Board of Directors of
the Company shall not (i) fail to make or withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Parent, the approval or
recommendation of the Merger and this Agreement by the Board of Directors of the
Company, (ii) approve or recommend, or propose to approve or recommend, any
Transaction Proposal or (iii) cause the Company to enter into any agreement
(including, without limitation, any letter of intent) with respect to any
Transaction Proposal. Notwithstanding the foregoing, if the Board of Directors
of the Company, after consultation with and based upon the written advice of
outside legal counsel, determine in good faith that it is necessary to do so in
order to comply with its fiduciary duties to the stockholders of the Company
under applicable law, the Board of Directors of the Company may approve or
recommend a Superior Proposal (as defined below) or cause the Company to enter
into an agreement with respect to a Superior Proposal, but in each case only (i)
after providing reasonable written notice to Parent (a "Notice of Superior
Proposal") advising Parent that the Board of Directors of the Company has
received a Superior Proposal, specifying the terms and conditions of such
Superior Proposal and identifying the person making such Superior Proposal and
(ii) if Parent does not make within three business days of Parent's receipt of
the Notice of Superior Proposal, an offer which the Board of Directors of the
Company, after consultation with its financial advisors, determines is superior
to such Superior Proposal. The term "Superior Proposal" means any Transaction
Proposal that the Board of Directors of the Company determines in its good faith
judgment (after consultation with a financial advisor of nationally recognized
reputation) to be more favorable to the Company's stockholders than the Merger,
including as part of such determination, that, as to any cash consideration to
be paid pursuant to the Superior Proposal, the person making the
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Superior Proposal has all requisite funds on hand or has provided customary
financing commitments for the requisite funds.
SECTION 5.07. BENEFIT MATTERS. From and after the Effective Time of the
Merger, Parent shall accord to all employees of the Company and its Subsidiaries
that become Continuing Employees benefits that Parent normally makes available
to its employees under Parent employee benefit plans (as defined in Section 3(3)
of ERISA), in each case as if such Continuing Employee had been employed by
Parent for the length of time such Continuing Employee has been employed by the
Company (provided no such amount of time shall be credited for purposes of the
vesting or other provisions of any option, other than Converted Options, granted
to any such Continuing Employee to purchase shares of Parent Common Stock).
SECTION 5.08. NASDAQ LISTING. Parent shall use all reasonable efforts to
cause the shares of Parent Common Stock to be issued in the Merger and the
shares of Parent Common Stock to be reserved for issuance upon exercise or
conversion of Company Stock Options to be approved for listing on the Nasdaq
National Market System, subject to official notice of issuance.
SECTION 5.09. TAKEOVER STATUTE. If any "fair price", "moratorium",
"control share acquisition", "interested shareholder" or other similar
anti-takeover statute or regulation is or may become applicable to the Merger or
the other transactions contemplated by this Agreement or the Stock Option
Agreement, each of Parent and the Company and their respective boards of
directors shall grant such approvals and take such actions as are necessary so
that such transactions may be consummated as promptly as practicable on the
terms contemplated by this Agreement or the Stock Option Agreement, as the case
may be, or the Merger and otherwise act to eliminate or minimize the effects of
such statute or regulation on such transactions.
SECTION 5.10. SUPPLEMENTAL DISCLOSURE. The Company shall give prompt
written notice to Parent, and Parent shall give prompt written notice to the
Company, of (i) the occurrence, or non-occurrence, of any event the occurrence,
or nonoccurrence, of which would be likely to cause (x) any representation or
warranty contained in this Agreement to be untrue or inaccurate or (y) any
covenant, condition or agreement contained in this Agreement not to be complied
with or satisfied and (ii) any failure of the Company or Parent, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 5.10 shall not have any effect for the
purpose of determining the satisfaction of the conditions set forth in Article
VI of this Agreement or otherwise limit or affect the remedies available
hereunder to any party.
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ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01. CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger and the
other transactions contemplated herein shall be subject to the satisfaction on
or prior to the Closing Date of the following conditions, any or all of which
may be waived, in whole or in part, to the extent permitted by applicable law:
(a) Effectiveness of Form S-4. The Form S-4 shall have been declared
effective by the SEC under the Securities Act. No stop order suspending the
effectiveness of the Form S-4 shall have been issued by the SEC and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company or Parent, threatened by the SEC. Any material "blue sky"
and other state securities laws applicable to the registration and
qualification of the Parent securities issuable or required to be reserved
for issuance pursuant to this Agreement shall have been complied with.
(b) Stockholder Approval. The Company Stockholder Approval shall have
been obtained.
(c) No Order. No Governmental Entity or federal, state or foreign court
of competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which materially restricts, prevents or prohibits
consummation of the Merger or any transaction contemplated by this
Agreement; provided, however, that the parties shall use all reasonable
efforts to cause any such decree, judgment, injunction or other order to be
vacated or lifted.
(d) HSR Act and Other Waiting Periods. The applicable waiting period
under the HSR Act shall have expired or been terminated and all other
waiting periods specified under applicable laws, and all extensions
thereof, the passing of which is legally required prior to the consummation
of the Merger, shall have expired or been terminated.
(e) NASDAQ Listing. The shares of Parent Common Stock issuable to
stockholders of the Company in accordance with this Agreement shall have
been authorized for listing on the Nasdaq National Market upon official
notice of issuance.
(f) Other Approvals. Other than the filing of merger documents in
accordance with the NCBCA and DGCL, all authorizations, consents, waivers,
orders or approvals required to be obtained, and all filings, notices or
declarations required to be made, by the Company and Parent prior to the
consummation of the Merger and the other transactions contemplated
hereunder shall have been obtained from, and made with, all required
Governmental Entities except for such authorizations, consents, waivers,
orders, approvals, filings, notices or declarations the failure to obtain
or make which would not have a Material Adverse Effect with respect to
Parent.
SECTION 6.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND SUB. The
obligations of Parent and Sub to effect the Merger and the transactions
contemplated in this Agreement are also subject to the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Company contained in this Agreement that is qualified as
to "materiality,"
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"Material Adverse Change" or "Material Adverse Effect" shall be true and
correct, each of the other representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects and the Company Disclosure Schedule and each of the schedules
attached to this Agreement shall be true and correct in all material
respects, in each case as of the Closing Date as though made on and as of
the Closing Date, except (i) for changes specifically permitted by this
Agreement and (ii) that those representations and warranties which address
matters only as of a particular date shall have been true and correct as of
such date. Parent shall have received a certificate of the chief executive
officer and chief financial officer of the Company to such effect.
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing Date. Parent shall have received a certificate of the
chief executive officer and chief financial officer of the Company to that
effect.
(c) No Litigation. There shall not be pending or threatened by any
Governmental Entity any suit, action or proceeding (i) challenging or
seeking to restrain or prohibit the consummation of the Merger or any other
transaction contemplated by this Agreement or the Stock Option Agreement or
seeking to obtain from the Company, Sub or Parent or any of their
respective affiliates any material amount of damages, (ii) seeking to
prohibit or limit the ownership or operation by Parent or the Company or
any of their respective affiliates of any material portion of their
business or assets or to dispose of or hold separate any material portion
of their business or assets, as a result of the Merger or any other
transaction contemplated by this Agreement or the Stock Option Agreement,
(iii) seeking to impose limitations on the ability of Parent to acquire or
hold, or exercise full rights of ownership of, any shares of the common
stock of the Surviving Corporation, including, without limitation, the
right to vote such common stock on all matters properly presented to the
stockholders of the surviving corporation or (iv) seeking to prohibit
Parent or any of its Subsidiaries from effectively controlling in any
material respect the business or operations of the Company and its
Subsidiaries taken as a whole. No suit, action or proceeding by any other
person shall be pending that seeks any of the relief or remedies described
in clauses (i) through (iv) of the immediately preceding sentence as to
which there is a reasonable possibility of success or that otherwise could
reasonably be expected to have a Material Adverse Effect with respect to
Parent or the Company.
(d) Third Party Approvals. All consents, waivers or approvals required
to be obtained from third parties under contracts, agreements or similar
instruments to which the Company or any of its Subsidiaries is a party, or
by which any of them is bound, in connection with the Merger and the other
transactions contemplated hereby shall have been obtained, except to the
extent that the failure to obtain such consents, waivers or approvals would
not, in the aggregate, result in violations, defaults (with or without
notice or lapse of time or both), rights of termination, cancellation or
acceleration, or losses of benefit that would have a Material Adverse
Effect with respect to the Company or Parent.
(e) Rights Agreement. None of the events described in Section 8,
Section 14 or Section 25, or the second sentence of Section 3(a) of the
Rights Agreement shall have occurred. The right of the Board of Directors
of the Company to redeem the Rights pursuant to Section 24 of the Rights
Agreement shall be in effect and the Rights shall
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not have become nonredeemable and shall not become nonredeemable upon
consummation of the Merger.
(f) Employment Agreements. The Employment Agreements identified on
Schedule 6.02(f), substantially in the form of Exhibit C attached hereto
(collectively, the "Employment Agreements") shall have been executed and
delivered to Parent.
(g) Tax Opinion. Parent shall have received an opinion of Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.C., counsel to Parent,
in form and substance reasonably satisfactory to Parent, to the effect that
the Merger will qualify as a reorganization within the meaning of Section
368 of the Code. The issuance of such opinion shall be conditioned on the
receipt by such counsel of representation letters from each of Parent, Sub
and the Company and in each case, in form and substance reasonably
satisfactory to Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.C. The specific provisions of each such representation letter shall be
in form and substance reasonably satisfactory to such counsel, and each
such representation letter shall be dated on or before the date of such
opinion and shall not have been withdrawn or modified in any material
respect.
(h) Key Man Life Insurance. The Company shall have obtained and
maintain in full force and effect key man life insurance on the life of Joy
Scott, in form and substance reasonably satisfactory to Parent, in the
amount of Five Million Dollars ($5,000,000) with all proceeds payable to
the Company.
SECTION 6.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligation of the Company to effect the Merger and the other transactions
contemplated in this Agreement are also subject to the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Parent and Sub contained in this Agreement that is qualified
as to "materiality," "Material Adverse Change" or "Material Adverse Effect"
shall be true and correct, and each of the other representations and
warranties of Parent and Sub contained in this Agreement shall be true and
correct in all material respects, in each case as of the Closing Date as
though made on and as of the Closing Date, except (i) for changes
specifically permitted by this Agreement and (ii) that those
representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date. The Company
shall have received a certificate of a duly authorized officer of Parent
and Sub to such effect.
(b) Agreements and Covenants. Parent and Sub shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or
prior to the Closing Date. The Company shall have received a certificate of
a duly authorized officer of Parent and Sub to that effect.
(c) Tax Opinion. The Company shall have received an opinion of Reboul,
MacMurray, Hewitt, Maynard & Kristol, counsel to the Company, in form and
substance reasonably satisfactory to the Company, to the effect that the
Merger will qualify as a reorganization within the meaning of Section 368
of the Code. The issuance of such opinion shall be conditioned on the
receipt by such counsel of representation letters from each of Parent, Sub,
and the Company, in each case, in form and substance reasonably
satisfactory to Reboul, MacMurray, Hewitt, Maynard & Kristol. The specific
provisions of each such representation letter shall be in form and
substance
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reasonably satisfactory to such counsel, and each such representation
letter shall be dated on or before the date of such opinion and shall not
have been withdrawn or modified in any material respect.
(d) Bringdown Opinion of Financial Advisor. The Company shall have
received a bringdown of the SG Cowen Securities Corporation opinion dated
as of December 14, 1998, to the effect that as of a date within ten (10)
days prior to the mailing of the Company's Proxy Statement to the Company's
stockholders in connection with the Merger, the Per Share Merger
Consideration is fair, from a financial point of view, to the holders of
Company Common Stock (other than Parent and its affiliates).
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.01. TERMINATION. This Agreement may be terminated and abandoned
at any time prior to the Effective Time of the Merger, whether before or after
the Company Stockholder Approval:
(a) by mutual written consent of Parent and the Company; or
(b) by either Parent or the Company if any Governmental Entity shall
have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become final and
nonappealable; or
(c) by the Company if the Merger shall not have been consummated on or
before May 15, 1999 (other than due to the failure of the Company to
perform its obligations under this Agreement required to be performed at or
prior to the Effective Time of the Merger), or by Parent if the Merger
shall not have been consummated on or before May 15, 1999 (other than due
to the failure of Parent to perform its obligations under this Agreement
required to be performed at or prior to the Effective Time of the Merger);
or
(d) by either Parent or the Company if at the duly held meeting of the
stockholders of the Company (including any adjournment thereof) held for
the purpose of voting on the Merger, this Agreement and the consummation of
the transactions contemplated hereby, the holders of a majority of the
outstanding shares of Company Common Stock shall not have approved the
Merger, this Agreement and the consummation of the transactions
contemplated hereby; or
(e) by Parent, if the Company or its Board of Directors shall have (1)
withdrawn, modified or amended in any respect adverse to Parent its
approval or recommendation of this Agreement or any of the transactions
contemplated herein (it being understood that a communication by the
Company that contains only the information described in Rule 14d-9(e) under
the Exchange Act shall not be deemed to be such a modification or amendment
or an action described in clause (5) below), (2) failed as promptly as
practicable after the Form S-4 is declared effective to mail the Proxy
Statement to its stockholders or failed to include in such statement such
recommendation, (3) recommended any Transaction Proposal from a person
other than Parent or any of its affiliates, (4) resolved to do any of the
foregoing or (5) in response to the commencement of any
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tender offer or exchange offer for more than 15% of the outstanding shares
of Company Common Stock, not recommended rejection of such tender offer or
exchange offer; or
(f) by the Company, if, pursuant to and in compliance with Section 5.06
hereof, the Board of Directors of the Company has approved or recommended a
Superior Proposal; or
(g) by the Company upon written notice to the Parent prior to 10:00 a.m.
on the day scheduled for the Stockholders Meeting set forth in the proxy
material mailed to the Company's stockholders, if the Average Trading Price
is more than $62.325; provided that the Company shall not be entitled to
terminate this Agreement pursuant to this paragraph (g) if, within
twenty-four (24) hours after the Company notifies Parent in writing of any
such proposed termination, Parent agrees in writing that the Exchange Ratio
shall be equal to 0.247091857; or
(h) by Parent upon written notice to the Company prior to 10:00 a.m. on
the day scheduled for the Stockholders Meeting set forth in the proxy
material mailed to the Company's stockholders, if the Average Trading Price
is less than $41.55; provided that Parent shall not be entitled to
terminate this Agreement pursuant to this paragraph (h) if, within
twenty-four (24) hours after the Parent notifies the Company of any such
proposed termination, the Company agrees in writing that the Exchange Ratio
shall be equal to 0.370637786.
SECTION 7.02. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Parent, Sub or the Company, other than the
provisions of Section 3.01(n), Section 3.02(h), the last sentence of Section
5.02(a) (and the provisions of the Confidentiality Agreement referred to
therein, other than Section 2 thereof), this Section 7.02, Section 8.02, Section
8.07 and Section 8.08. Nothing contained in this Section shall relieve any party
for any breach of the representations, warranties, covenants or agreements set
forth in this Agreement (including, without limitation, liability for damages as
a result of any such breach that gives rise to an inability to satisfy any of
the conditions to Closing set forth in Article VI).
SECTION 7.03. AMENDMENT. This Agreement, including the Schedules hereto,
may be amended at the sole discretion and agreement of all of the parties hereto
at any time before or after any required approval of matters presented in
connection with the Merger by the stockholders of the Company; provided,
however, that after any such approval, there shall be made no amendment that by
law requires further approval by such stockholders without the further approval
of such stockholders. This Agreement, including the Schedules hereto, may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
SECTION 7.04. EXTENSION; WAIVER. At any time prior to the Effective Time
of the Merger, the parties hereto may (a) extend the time for the performance of
any of the obligations or other acts of the other parties, (b) waive any
inaccuracies in the representations and warranties contained in this Agreement
or in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 7.03, waive compliance with any of the agreements or
conditions contained in this Agreement. Any agreement on the part of a party to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of such rights. No
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single or partial exercise of any right, remedy, power or privilege hereunder
shall preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege. Any waiver shall be effective only in
the specific instance and for the specific purpose for which given and shall not
constitute a waiver to any subsequent or other exercise of any right, remedy,
power or privilege hereunder.
SECTION 7.05. PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR
WAIVER. A termination of this Agreement pursuant to Section 7.01, an amendment
of this Agreement pursuant to Section 7.03 or an extension or waiver pursuant to
Section 7.04 shall, in order to be effective, require in the case of Parent, Sub
or the Company, action by its Board of Directors or the duly authorized designee
of its Board of Directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time of the Merger and
all such representations and warranties will be extinguished on consummation of
the Merger and neither the Company, Parent, Sub, nor any officer, director or
employee or stockholder of any of them shall be under any liability whatsoever
with respect to any such representation or warranty after such time. This
Section 8.01 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time of the Merger.
SECTION 8.02. FEES AND EXPENSES. (a) (i) If this Agreement shall have
been terminated in accordance with its terms (except pursuant to Section
7.01(b)) and either of the following shall have occurred: (A) prior to such
termination, any corporation (including the Company or any of its Subsidiaries
or affiliates), partnership, person, other entity or "group" (as referred to in
Section 13(d)(3) of the Exchange Act) other than Parent, Sub or any of their
respective affiliates (collectively, "Persons"), shall have become the
beneficial owner of more than 15% of the outstanding shares of Company Common
Stock; or (B)(x) prior to such termination, any Person shall have made, or
proposed, communicated or disclosed in a manner which is or otherwise becomes
public a bona fide intention to make a Transaction Proposal (including by making
such a Transaction Proposal) and (y) on or prior to September 15, 1999, the
Company either consummates with a Person a transaction the proposal of which
would otherwise qualify as a Transaction Proposal under Section 5.06 or enters
into a definitive agreement with a Person with respect to a transaction the
proposal of which would otherwise qualify as a Transaction Proposal under
Section 5.06 (whether or not such Person is the Person referred to in clause (x)
above); or (ii) if this Agreement is terminated pursuant to (A) Section 7.01(e)
or (B) Section 7.01(f); then the Company shall, (1) in the case of clauses
(a)(i)(A) and (a)(ii)(A) above, promptly, but in no event later than one
business day after the termination of this Agreement, (2) in the case of clause
(a)(i)(B) above, promptly, but in no event later than one business day after an
event specified in subclause (y) thereof shall have occurred, and (3) in the
case of clause (a)(ii)(B) above, prior to (and as a precondition to) termination
under Section 7.01(f) pay Parent a fee of $8,000,000 in cash which fee shall be
payable in same day funds. No termination of this Agreement at a time when a fee
is reasonably expected to be payable pursuant to this Section 8.02(a) following
termination of this Agreement shall be effective until such fee is paid.
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(b) In addition, in any case in which a fee is payable pursuant to
paragraph (a) above, the Company shall promptly reimburse Parent and Sub for
documented reasonable out-of-pocket expenses incurred by either of them in
connection with this Agreement and the Stock Option Agreement, including
reasonable accounting, investment banking and legal fees and expenses; provided
that the amount of such reimbursement shall not exceed $1,000,000 in the
aggregate.
(c) Except as provided otherwise in paragraphs (a) and (b) above, all costs
and expenses incurred in connection with this Agreement and the Stock Option
Agreement and the transactions contemplated hereby and thereby shall be paid by
the party incurring such expenses, except that the cost of filing, printing and
distributing the Proxy Statement and the Form S-4 shall be borne equally by
Parent and the Company.
SECTION 8.03. NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, sent by overnight courier (providing proof of
delivery) or transmitted by confirmed facsimile to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Parent or Sub, to
Quintiles Transnational Corp.
4709 Creekstone Drive
Riverbirch Building, Suite 200
Durham, North Carolina 27703
Attention: General Counsel
Fax Number: (919) 941-9113
with a copy to:
Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
2500 First Union Capitol Center
Raleigh, North Carolina 27602
Attention: Gerald F. Roach, Esq.
Fax Number: (919) 821-6800
(b) if to the Company, to
Pharmaceutical Marketing Services Inc.
45 Rockefeller Plaza, Suite 912
New York, New York 10111
Attention: General Counsel
Fax Number: (212) 841-5760
with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, NY 10111
Attention: Robert A. Schwed, Esq.
Fax Number: (212) 841-5725
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SECTION 8.04. DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "Continuing Employees" means all persons who are actively employed
on a full-time basis by the Company or its Subsidiaries immediately
following the Effective Time of the Merger, other than such persons who are
actively employed on a full-time basis by the Company or any of its
Subsidiaries other than PMSI Scott-Levin, Inc., if any, as may be
identified in writing by Parent to the Company not less than five business
days prior to the Closing Date;
(c) "Environmental Claim" means any written or oral notice, claim,
demand, action, suit, complaint, proceeding or other communication by any
person alleging liability or potential liability (including without
limitation liability or potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resource damages,
property damage, personal injury, fines or penalties) arising out of,
relating to, based on or resulting from (A) the presence, discharge,
emission, release or threatened release of any Hazardous Materials at any
location, whether or not owned, leased or operated by the Company or any of
its Subsidiaries, (B) circumstances forming the basis of any violation or
alleged violation of any Environmental Law or Environmental Permit or (C)
otherwise relating to obligations or liabilities under any Environmental
Laws;
(d) "Environmental Laws" means all applicable foreign, federal, state,
provincial and local statutes, rules, regulations, ordinances, orders,
decrees and common or civil law relating in any manner to contamination,
pollution or protection of human health or the environment, including
without limitation the Comprehensive Environmental Response, Compensation
and Liability Act, the Solid Waste Disposal Act, the Clean Air Act, the
Clean Water Act, the Toxic Substances Control Act, the Occupational Safety
and Health Act, the Emergency Planning and Community-Right-to-Know Act, the
Safe Drinking Water Act, all as amended, and similar state and foreign
laws;
(e) "Environmental Permits" means all permits, licenses, registrations
and other governmental authorizations required under Environmental Laws for
the Company and its Subsidiaries to conduct their operations and
businesses;
(f) "Hazardous Materials" means all hazardous or toxic substances,
wastes, materials or chemicals, petroleum (including crude oil or any
fraction thereof) and petroleum products, friable asbestos and
asbestos-containing materials, pollutants, contaminants and all other
materials, and substances regulated pursuant to, or that could reasonably
be expected to provide the basis of liability under, any Environmental Law;
(g) "indebtedness" means, with respect to any person, without
duplication, (A) all obligations of such person for borrowed money, or with
respect to deposits or advances of any kind to such person, (B) all
obligations of such person evidenced by bonds, debentures, notes or similar
instruments, (C) all obligations of such person under conditional sale or
other title retention agreements relating to property purchased by such
person, (D) all obligations of such person issued or assumed as the
deferred purchase price of property or services (excluding obligations of
such person to creditors for raw materials, inventory, services and
supplies incurred in the ordinary course of such person's business), (E)
all capitalized lease obligations of such person, (F) all obligations of
others secured by any Lien on property or assets owned or acquired by such
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person, whether or not the obligations secured thereby have been assumed,
(G) all obligations of such person under interest rate or currency hedging
transactions (valued at the termination value thereof), (H) all letters of
credit issued for the account of such person and (I) all guarantees and
arrangements having the economic effect of a guarantee of such person of
any indebtedness of any other person;
(h) "Intellectual Property" means all rights, privileges and priorities
provided under federal, state, foreign and multinational law relating to
intellectual property, whether registered or unregistered, including,
without limitation, all (i)(a) inventions, discoveries, processes,
formulae, designs, methods, techniques, procedures, concepts, developments,
technology, and confidential information, new and useful improvements
thereof and know-how relating thereto, whether or not patented or eligible
for patent protection; (b) copyrights and copyrightable works, including
computer applications, programs, Software, Databases and related items; (c)
trademarks, service marks, trade names, brand names, product names,
corporate names, logos and trade dress, the goodwill of any business
symbolized thereby, and all common-law rights relating thereto; and (d)
trade secrets, data and other confidential information; and (ii) all
registrations, applications, recordings, and licenses or other similar
agreements related to the foregoing;
(i) "knowledge" means, with respect to any matter, (i) in the case of
Parent, the knowledge of any director or executive officer of Parent after
due inquiry into such matter and (ii) in the case of the Company, the
knowledge of Messrs. Turner, Davies, Hauser and Ms. Scott after due inquiry
into such matter;
(j) "Material Adverse Change" means, when used with respect to the
Company or Parent, any change that, either individually or in the aggregate
with all other such changes, is materially adverse to the Company or
Parent, as the case may be, and their respective subsidiaries taken as a
whole;
(k) "Material Adverse Effect" means, when used with respect to the
Company or Parent, any change, effect, event or occurrence that, either
individually or in the aggregate with all other such changes, effects,
events and occurrences, either (a) is materially adverse to the business,
properties, financial condition or results of operations of the Company or
Parent, as the case may be, and their respective subsidiaries taken as a
whole, or (b) will be materially adverse to the business, properties,
financial condition or results of operations of Parent and its subsidiaries
(including the Surviving Corporation) taken as a whole following the
Effective Time of the Merger;
(l) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity;
(m) "Recent SEC Documents" means any SEC Documents filed by the Company
prior to the date of this Agreement with respect to any period ending, or
any date occurring, on or after June 30, 1998; and
(n) "Rights" means the rights to acquire one-third of a share of Company
Common Stock pursuant to the Rights Agreement;
(o) "Rights Agreement" means the Rights Agreement dated as of January
28, 1998 between the Company and Harris Trust Company of New York;
(p) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests
of which is sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are
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no such voting interests, 50% or more of the equity interests of which) is
owned directly or indirectly by such first person; and
(q) "Year 2000 Compliant" means, when used with respect to any software
or database, that such software or database will operate accurately and,
without interruption, accept, possess and in all manner retain full
functionality when referring to, or involving, any year or date in the
twentieth or twenty-first centuries.
SECTION 8.05. INTERPRETATION. When a reference is made in this Agreement
to a Section, Exhibit or Schedule, such reference shall be to a Section of, or
an Exhibit or Schedule to, this Agreement unless otherwise indicated. The table
of contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
SECTION 8.06. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 8.07. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This
Agreement and the other agreements referred to herein constitute the entire
agreement, and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement. All exhibits and schedules referred to in this Agreement, including
without limitation the Company Disclosure Schedule, are intended to be and
hereby are specifically made a part of this Agreement. This Agreement, other
than Section 5.04, is not intended to confer upon any person other than the
parties any rights or remedies.
SECTION 8.08. GOVERNING LAW. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by, and construed
in accordance with, the laws of the State of North Carolina, without regard to
the choice of law principles thereof.
SECTION 8.09. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties hereto without the
prior written consent of the other parties hereto. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 8.10. ENFORCEMENT. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement.
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
QUINTILES TRANSNATIONAL CORP.
By: /s/ JAMES L. BIERMAN
-----------------------------------
Name: James L. Bierman
Title: Sr. Vice President
QTRN ACQUISITION CORP.
By: /s/ JAMES L. BIERMAN
-----------------------------------
Name: James L. Bierman
Title: Sr. Vice President
PHARMACEUTICAL MARKETING
SERVICES INC.
By: /s/ WARREN J. HAUSER
-----------------------------------
Name: Warren J. Hauser
Title: Vice President
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APPENDIX B
TERMS OF CONTINGENT VALUE
PAYMENTS
EXHIBIT A
The amount of the CVP, if any, due pursuant to Section 2.01(b) of the
Merger Agreement shall be calculated as follows:
ARTICLE I
SECTION 1.01. DEFINITIONS. For all purposes of this Exhibit defined terms
shall have the meanings prescribed in the Merger Agreement, except as otherwise
expressly provided below or unless the context otherwise requires:
"CVP Average Trading Price" means the average of the closing prices per
share of Parent Common Stock on the Nasdaq National Market (or such United
States exchange on which the Parent Common Stock is then listed) for 10 trading
days selected at random by the Exchange Agent, on the Maturity Date, out of the
20 trading days ending with the last trading day immediately preceding the
Maturity Date.
"Extraordinary Event Price" means the average of the closing prices per
share of Parent Common Stock on the Nasdaq National Market (or such United
States exchange on which the Parent Common Stock is then listed) for the 10
trading days ending with the last trading day immediately preceding the closing
date of the Extraordinary Event.
"Extraordinary Event" means any merger, consolidation, sale, conveyance or
other change of control transaction as a result of which the Parent Common Stock
is no longer listed on the Nasdaq National Market (or such United States
exchange on which the Parent Common Stock was listed immediately prior to such
merger, consolidation, sale, conveyance or other change of control transaction).
"Holder" means a holder of a Certificate who has made a valid election
pursuant to Section 2.02(b) of the Merger Agreement to receive shares of Parent
Common Stock and CVPs on the Maturity Date.
"Maturity Date" means 75 days after the Closing Date.
"Termination Event" shall occur if the average closing prices per day per
share of Parent Common Stock on the Nasdaq National Market (or such United
States exchange on which the Parent Common Stock is then listed) is greater than
or equal to the Average Trading Price for any period of 30 consecutive trading
days between the Closing Date and the Maturity Date (not inclusive of the
Closing Date).
ARTICLE II
SECTION 2.01. TITLE AND TERMS. (a) Subject to Section 2.01(b) hereof,
Parent shall pay to each Holder on the Maturity Date, for each share of Parent
Common Stock to be received by such Holder on the Maturity Date, a CVP in cash
equal to the amount, if any, as
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determined by Parent, by which (i) the Average Trading Price exceeds (ii) the
CVP Average Trading Price.
(b) If Parent determines, on the Maturity Date or otherwise, that a
Termination Event has occurred, no CVP shall be payable hereunder or under
Section 2.01(b) of the Merger Agreement. Parent shall promptly give to the
Holders notice of such determination which, absent manifest error, shall be
final and binding on Parent and the Holders. Upon the occurrence of a
Termination Event, all rights to any CVP under Section 2.01(b) of the Merger
Agreement or this Exhibit shall terminate and become null and void and the
Holders thereof shall have no further rights with respect hereto or thereto. The
failure to give such notice or any defect therein shall not affect the validity
of such determination.
(c) Subject to Section 2.01(b) hereof, if, on or before the Maturity Date,
an Extraordinary Event has occurred, Parent shall promptly give to the Holders
notice of such Event. Parent shall pay to each Holder, as promptly as
practicable after the closing date of the Extraordinary Event (and in lieu of
any payment under Section 2.01(a) hereof), for each share of Parent Common Stock
to be received by such Holder on the Maturity Date, a CVP in cash equal to the
amount, if any, as determined by Parent, by which (i) the Average Trading Price
exceeds (ii) the Extraordinary Event Price.
(d) In the event Parent shall in any manner subdivide (by stock split,
stock dividend or otherwise) or combine (by reverse stock split or otherwise)
the number of outstanding shares of Parent Common Stock, Parent shall
appropriately adjust the CVP, if any, payable pursuant to Section 2.01(b) of the
Merger Agreement and this Exhibit. Whenever an adjustment is made as provided in
this Section 2.01(d), Parent shall (i) promptly prepare a certificate setting
forth such adjustment and a brief statement of the facts accounting for such
adjustment and (ii) mail a brief summary thereof to each Holder. Such adjustment
absent manifest error shall be final and binding on Parent and the Holders.
SECTION 2.02. PAYMENT. Payment of any CVP due pursuant to Section 2.01(b)
of the Merger Agreement and this Exhibit shall be made only to Holders on the
Maturity Date at the office or agency of Parent maintained for that purpose in
the Borough of Manhattan, The City of New York, and at any other office or
agency maintained by Parent for such purpose. Such payment shall be made in such
coin or currency of the United States of America as at the time is legal tender
for the payment of public and private debts; provided, however, Parent may pay
such amounts by its check payable in such money.
SECTION 2.03. PERSONS DEEMED OWNERS. (a) For all purposes under the
Merger Agreement, the owner of any right or title to or interest in a CVP is
that person who is registered as a Holder pursuant to Section 2.02(b) of the
Merger Agreement, and neither Parent nor any agent of Parent shall be affected
by any notice to the contrary.
(b) All parties to the Merger Agreement have agreed, and each Holder by his
acceptance of Parent Common Stock has agreed, that the right or title to or
interest in any CVP is non-transferable and non-exchangeable, other than a
transfer by the law of descent and distribution or a transfer in connection with
a transfer of a person's entire right to receive the Per Share Merger
Consideration in accordance with the fourth sentence of Section 2.02(b) of the
Merger Agreement, and any attempt to transfer, sell, exchange or otherwise
dispose of such right, title or interest or any beneficial interest therein
(except as aforesaid) shall have no force or effect.
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ARTICLE III
SECTION 3.01. LIMITATION ON SHORT SELLING AND MANIPULATIVE CONDUCT. (a) A
Holder shall lose its right to any CVP if at any time during the 20 trading days
preceding the Maturity Date either (i) such Holder's "short position" in Parent
Common Stock (determined in accordance with Rule 14e-4(a) under the Exchange
Act, but without taking into account the CVPs) exceeds such Holder's "long
position" in Parent Common Stock (determined in accordance with Rule 14e-4(a)
under the Exchange Act) or (ii) such Holder takes any action to manipulate the
stock price of Parent Common Stock which would constitute a violation of Section
9 of the Exchange Act. As a precondition to its obligation to make any CVP,
Parent may request, and any Holder shall be required to deliver to Parent,
reasonably satisfactory evidence of such Holder's short positions and long
positions in Parent Common Stock during such 20 trading day period and a
representation that such Holder did not engage in any manipulative conduct as
set forth in Section 3.01(a)(ii) hereof.
(b) For purposes of this Section 3.01, a Holder that is a nominee or
trustee for multiple ultimate beneficial holders shall be disregarded and the
short positions and long positions of each ultimate beneficial owner shall
determine the right of such Holder to receive the CVP otherwise attributable to
such ultimate beneficial owner.
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APPENDIX C
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of December 14, 1998 (the "Agreement"), by
and between Pharmaceutical Marketing Services Inc., a Delaware corporation
("Issuer"), and Quintiles Transnational Corp., a North Carolina corporation
("Grantee").
WHEREAS, Grantee, Issuer and QTRN Acquisition Corp., a North Carolina
corporation and a wholly-owned subsidiary of Grantee ("Sub"), are concurrently
herewith entering into a Merger Agreement, dated as of the date hereof (the
"Merger Agreement"; capitalized terms not defined herein shall have the meanings
set forth in the Merger Agreement), providing for, among other things, the
merger of Issuer with and into Sub with Sub as the surviving corporation (the
"Merger"); and
WHEREAS, as a condition to Grantee's willingness to enter into the Merger
Agreement, Grantee has requested that Issuer agree, and Issuer has agreed, to
grant Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, Issuer and Grantee agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 2,466,947 (as adjusted as set forth herein) shares (the "Option Shares")
of Common Stock, par value $.01 per share, of Issuer (the "Issuer Common Stock")
at a cash purchase price per Option Share equal to $12.00 (the "Purchase
Price").
2. EXERCISE OF OPTION. (a) If not in material breach of the Merger
Agreement, Grantee may exercise the Option, in whole or in part, at any time or
from time to time following the occurrence of a Purchase Event (as defined
below) provided that, except as otherwise provided herein, the Option shall
terminate and be of no further force and effect upon the earliest to occur of
(i) the Effective Time of the Merger, (ii) 12 months after the first occurrence
of a Purchase Event or (iii) termination of the Merger Agreement prior to the
occurrence of a Purchase Event. Notwithstanding the termination of the Option,
Grantee shall be entitled to purchase those Option Shares with respect to which
it has exercised the Option pursuant to this Section 2(a) in accordance with the
terms hereof prior to the termination of the Option. The termination of the
Option shall not affect any rights hereunder which by their terms extend beyond
the date of such termination.
(b) As used herein, a "Purchase Event" means the termination of the Merger
Agreement under any circumstance which would entitle Grantee or Issuer to
receive any fee from Issuer pursuant to Section 8.02(a) of the Merger Agreement,
provided, however, that the termination of the Merger Agreement (except pursuant
to Section 7.01(b) thereof) after the occurrence of any event described in
Section 8.02(a)(i)(B)(x) thereof shall constitute a Purchase Event hereunder
whether or not any event described in Section 8.02(a)(i)(B)(y) of the Merger
Agreement shall have occurred.
(c) In the event Grantee wishes to exercise the Option, it shall send to
Issuer a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of Option Shares it intends to
purchase pursuant to such exercise and (ii) a place and date not earlier than
three business days nor later than 20 business days from the
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Notice Date for the closing of such purchase (the "Closing"; and the date of
such Closing, the "Closing Date"); provided that the Closing shall be held only
if (A) such purchase would not otherwise violate or cause the violation of
applicable law (including the HSR Act) and (B) no statute, rule, regulation,
decree, order or injunction shall have been promulgated, enacted, entered into,
or enforced by any Governmental Entity which prohibits delivery of the Option
Shares, whether temporary, preliminary or permanent; provided, however, that the
parties hereto shall use their best efforts to have any such decree, order or
injunction vacated or reversed. If the Closing cannot be consummated by reason
of a restriction set forth in clause (A) or (B) above, notwithstanding the
provisions of Section 2(a), the Closing Date shall be within 20 business days
following the elimination of such restriction.
3. PAYMENT AND DELIVERY OF CERTIFICATES. (a) On each Closing Date, Grantee
shall pay to Issuer in immediately available funds by wire transfer to a bank
account designated by Issuer an amount equal to the Purchase Price multiplied by
the Option Shares to be purchased on such Closing Date.
(b) At each Closing, simultaneously with the delivery of immediately
available funds as provided in Section 3(a), Issuer shall deliver to Grantee a
certificate or certificates representing the Option Shares to be purchased at
such Closing, which Option Shares shall be free and clear of all Liens, and
Grantee shall deliver to Issuer a letter agreeing that Grantee shall not offer
to sell or otherwise dispose of such Option Shares in violation of applicable
law or the provisions of this Agreement. If at the time of issuance of any
Option Shares pursuant to an exercise of all or part of the Option hereunder,
Issuer shall not have redeemed the Rights, or shall have issued any similar
securities, then each Option Share issued pursuant to such exercise shall also
represent a corresponding Right or new rights with terms substantially the same
as and at least as favorable to Grantee as are provided under the Rights
Agreement or any similar agreement then in effect.
(c) Certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND PURSUANT
TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF DECEMBER 14, 1998. A COPY
OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON
RECEIPT BY THE ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if Grantee shall have delivered
to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel
in form and substance reasonably satisfactory to Issuer and its counsel, to the
effect that such legend is not required for purposes of the Securities Act; (ii)
the reference to restrictions pursuant to this Agreement in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Option Shares evidenced by certificate(s) containing such reference have
been sold or transferred in compliance with the provisions of this Agreement
under circumstances that do not require the retention of such reference; and
(iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) are both satisfied.
4. AUTHORIZED STOCK. Issuer hereby represents and warrants to Grantee that
Issuer has taken all necessary corporate and other action to authorize and
reserve and to permit it to
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issue, and, at all times from the date hereof until the obligation to deliver
Issuer Common Stock upon the exercise of the Option terminates, will have
reserved for issuance, upon exercise of the Option, shares of Issuer Common
Stock necessary for Grantee to exercise the Option, and Issuer will take all
necessary corporate action to authorize and reserve for issuance all additional
shares of Issuer Common Stock or other securities which may be issued pursuant
to Section 6 upon exercise of the Option. The shares of Issuer Common Stock to
be issued upon due exercise of the Option, including all additional shares of
Issuer Common Stock or other securities which may be issuable upon exercise of
the Option pursuant to Section 6, upon issuance pursuant hereto, shall be duly
and validly issued, fully paid and nonassessable, and shall be delivered free
and clear of all Liens, including any preemptive rights of any stockholder of
Issuer.
5. PURCHASE NOT FOR DISTRIBUTION. Grantee hereby represents and warrants
to Issuer that any Option Shares or other securities acquired by Grantee upon
exercise of the Option or Substitute Option (as defined below) will not be taken
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
6. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC. (a) In the event of any
change in Issuer Common Stock by reason of a stock dividend, split-up,
recapitalization, combination, exchange of shares or similar transaction, the
type and number of shares or securities subject to the Option, and the Purchase
Price therefor, shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction, so that Grantee shall receive
upon exercise of the Option the number and class of shares or other securities
or property that Grantee would have received in respect of Issuer Common Stock
if the Option had been exercised immediately prior to such event or the record
date therefor, as applicable. If any additional shares of Issuer Common Stock
are issued after the date of this Agreement, the number of shares of Issuer
Common Stock subject to the Option shall be adjusted so that, after such
issuance, it equals 19.9% of the number of shares of Issuer Common Stock then
issued and outstanding, without giving effect to any shares subject to or issued
pursuant to the Option.
(b) In the event that Issuer shall enter into an agreement (i) to
consolidate with or merge into any person, other than Grantee or one of its
subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Grantee or one of
its subsidiaries, to merge into Issuer and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the shares of Issuer
Common Stock outstanding immediately prior to the consummation of such merger
shall be changed into or exchanged for stock or other securities of Issuer or
any other person or cash or any other property, or the shares of Issuer Common
Stock outstanding immediately prior to the consummation of such merger shall
after such merger represent less than 50% of the outstanding voting securities
of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provisions so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of Grantee, of either (I) the Acquiring Corporation
(as defined below) or (II) any person that controls the Acquiring Corporation
(any such person specified in clause (I) or (II) being referred to as
"Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the Option; provided
that the exercise price therefor and number of shares subject thereto shall be
as set forth in this
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Section 6; provided, further, that the Substitute Option shall be exercisable
immediately upon issuance without the occurrence of a Purchase Event with
respect to the Substitute Option; and provided, further, that if the terms of
the Substitute Option cannot, for legal reasons, be the same as the Option
(subject to the variations described in the foregoing provisos), such terms
shall be as similar as possible and in no event less advantageous to Grantee.
Substitute Option Issuer shall also enter into an agreement with Grantee in
substantially the same form as this Agreement (subject to the variations
described in the foregoing provisos), which shall be applicable to the
Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares of
Substitute Common Stock (as defined below) as is equal to the Assigned Value (as
defined below) multiplied by the number of shares of Issuer Common Stock for
which the Option was theretofore exercisable, divided by the Average Price (as
defined below), rounded up to the nearest whole share. The exercise price per
share of Substitute Common Stock of the Substitute Option (the "Substitute
Option Price") shall then be equal to the Purchase Price multiplied by a
fraction in which the numerator is the number of shares of Issuer Common Stock
for which the Option was theretofore exercisable and the denominator is the
number of shares of Substitute Common Stock for which the Substitute Option is
exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the aggregate of the shares of outstanding Substitute
Common Stock but for the limitation in the first sentence of this Section 6(e),
Substitute Option Issuer shall make a cash payment to Grantee equal to the
excess of (i) the value of the Substitute Option without giving effect to the
limitation in the first sentence of this Section 6(e) over (ii) the value of the
Substitute Option after giving effect to the limitation in the first sentence of
this Section 6(e). This difference in value shall be determined by a nationally
recognized investment banking firm selected by Grantee.
(f) Issuer shall not enter into any transaction described in Section 6(b)
unless the Acquiring Corporation and any person that controls the Acquiring
Corporation assume in writing all the obligations of Issuer hereunder and take
all other actions that may be necessary so that the provisions of this Agreement
are given full force and effect (including, without limitation, any action that
may be necessary so that the holders of the other shares of common stock issued
by Substitute Option Issuer are not entitled to exercise any rights comparable
to the Rights by reason of the issuance or exercise of the Substitute Option and
the shares of Substitute Common Stock are otherwise in no way distinguishable
from or have lesser economic value than other shares of common stock issued by
Substitute Option Issuer (other than any diminution in value resulting from the
fact, if applicable, that the shares of Substitute Common Stock are restricted
securities, as defined in Rule 144 under the Securities Act or any successor
provision)).
(g) For purposes of this Agreement, the following terms have the following
meanings:
(1) "Acquiring Corporation" means (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving corporation and (iii) the transferee of all or substantially all
of Issuer's assets.
(2) "Assigned Value" means the highest of (w) the price per share of
Issuer Common Stock at which a tender offer or exchange offer for Issuer
Common Stock has
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been made after the date hereof and prior to the consummation of the
consolidation, merger or sale referred to in Section 6(b), (x) the price
per share to be paid by any third party or the consideration per share to
received by holders of Issuer Common Stock, in each case pursuant to the
agreement with Issuer with respect to the consolidation, merger or sale
referred to in Section 6(b), (y) the highest bid price per share for Issuer
Common Stock quoted on the Nasdaq National Market (or if such Issuer Common
Stock is not quoted thereon, the highest bid price per share as quoted on
the principal trading market on which such shares are traded as reported by
a recognized source) during the 12-month period immediately preceding the
consolidation, merger or sale referred to in Section 6(b) and (z) in the
event the transaction referred to in Section 6(b) is a sale of all or
substantially all of Issuer's assets, an amount equal to (i) the sum of the
price paid in such sale for such assets (including assumed liabilities) and
the current market value of the remaining assets of Issuer, as determined
by a nationally recognized investment banking firm selected by Grantee
divided by (ii) the number of shares of Issuer Common Stock outstanding at
such time. In the event that a tender offer or exchange offer is made for
Issuer Common Stock or an agreement is entered into for a merger or
consolidation involving consideration other than cash, the value of the
securities or other property issuable or deliverable in exchange for Issuer
Common Stock shall be determined by a nationally recognized investment
banking firm selected by Grantee.
(3) "Average Price" means the average closing sales price per share of a
share of Substitute Common Stock quoted on the New York Stock Exchange
("NYSE") (or if such Substitute Common Stock is not quoted on the NYSE, the
highest bid price per share as quoted on the Nasdaq National Market or, if
the shares of Substitute Common Stock are not quoted thereon, on the
principal trading market on which such shares are traded as reported by a
recognized source) for the twenty trading days immediately preceding the
fifth business day prior to the consolidation, merger or sale in question,
but in no event higher than the closing price of the shares of Substitute
Common Stock on the day preceding such consolidation, merger or sale;
provided that if Substitute Option Issuer is Issuer, the Average Price
shall be computed with respect to a share of common stock issued by Issuer,
the person merging into Issuer or by any company which controls such
person, as Grantee may elect.
(4) "Substitute Common Stock" means the shares of capital stock (or
similar equity interest) with the greatest voting power in respect of the
election of directors (or persons similarly responsible for the direction
of the business and affairs) of the Substitute Option Issuer.
7. REGISTRATION RIGHTS. (a) Issuer shall, if requested by Grantee or any
owner of Option Shares (collectively with Grantee, the "Owners") at any time and
from time to time within three years of the first exercise of the Option, as
expeditiously as possible prepare and file up to two registration statements
under the Securities Act if such registration is necessary in order to permit
the sale or other disposition of any or all shares of securities that have been
acquired by or are issuable to such Owners upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by such
Owners, including a "shelf" registration statement under Rule 415 under the
Securities Act or any successor provision, and Issuer shall use its best efforts
to qualify such shares or other securities under any applicable state securities
laws. Issuer shall use all reasonable efforts to cause each such registration
statement to become effective, to obtain all consents or waivers of other
parties which are required therefor and to keep such registration statement
effective
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for such period not in excess of 180 days from the day such registration
statement first becomes effective as may be reasonably necessary to effect such
sale or other disposition. The obligations of Issuer hereunder to file a
registration statement and to maintain its effectiveness may be suspended for
one or more periods of time not exceeding 30 days in the aggregate if the Board
of Directors of Issuer shall have determined that the filing of such
registration statement or the maintenance of its effectiveness would require
disclosure of nonpublic information that would materially and adversely affect
Issuer. Any registration statement prepared and filed under this Section 7, and
any sale covered thereby, shall be at Issuer's expense except for underwriting
discounts or commissions, brokers' fees and the fees and disbursements of
Owners' counsel related thereto. The Owners shall provide all information
reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder.
(b) If during the time period referred to in the first sentence of
subsection (a) of this Section 7 Issuer effects a registration under the
Securities Act of Issuer Common Stock for its own account or for any other
stockholders of Issuer (other than on Form S-4 or Form S-8, or any successor
form), it shall allow the Owners the right to participate in such registration,
and such participation shall not affect the obligation of Issuer to effect two
registration statements for the Owners under this Section 7; provided that, if
the managing underwriters of such offering advise Issuer in writing that in
their opinion the number of shares of Issuer Common Stock requested to be
included in such registration exceeds the number which can be sold in such
offering, Issuer shall include the shares requested to be included therein by
the Owners pro rata with the shares intended to be included therein by Issuer.
(c) In connection with any registration pursuant to this Section 7, Issuer
and the Owners shall provide each other and any underwriter of the offering with
customary representations, warranties, covenants, indemnification and
contribution in connection with such registration. Issuer shall indemnify and
hold harmless (i) Owner, its affiliates and its officers and directors and (ii)
each underwriter and each person who controls any underwriter (collectively, the
"Underwriters") within the meaning of the Securities Act or the Exchange Act
((i) and (ii) being referred to as "Indemnified Parties") against any losses,
claims, damages, liabilities or expenses to which the Indemnified Parties may
become subject, insofar as such losses, claims, damages, liabilities (or actions
in respect thereof) and expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained or
incorporated by reference in any registration statement filed pursuant to this
paragraph, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Issuer shall
not be liable in any such case to the extent that any such loss, liability,
claim, damage or expense arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any such
documents in reliance upon and in conformity with written information furnished
to the Issuer by the Indemnified Parties expressly for use or incorporation by
reference therein. As used in this Agreement, "person" shall have the meaning
specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act. Owner and the
Underwriters shall indemnify and hold harmless the Issuer, its affiliates and
its officers and directors against any losses, claims, damages, liabilities or
expenses to which the Company, its affiliates and its officers and directors may
become subject, insofar as such losses, claims, damages, liabilities (or actions
in respect thereof) and expenses arise out of or are based upon any untrue
statement of any material fact contained or incorporated by reference in any
registration statement filed pursuant to this paragraph, or arise our of or are
based upon the
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omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Issuer by Owner
or the Underwriters, as applicable, specifically for use or incorporation by
reference therein.
8. LISTING. If Issuer Common Stock or any other securities to be acquired
upon exercise of the Option are then listed on the Nasdaq National Market or
other securities market, Issuer, upon the request of any Owner, will promptly
make any filing necessary to list the shares of Issuer Common Stock or other
securities to be acquired upon exercise of the Option on such system or market
and will use its best efforts to obtain approval of such listing as soon as
practicable.
9. LIMITATION OF GRANTEE PROFIT. (a) Notwithstanding any other provision
herein, in no event shall Grantee's Total Profit (as defined below) exceed
$9,000,000, and, if it otherwise would exceed such amount, Grantee, at its sole
discretion, shall either (i) reduce the number of shares subject to the Option,
(ii) deliver to Issuer for cancellation shares of Issuer Common Stock (or other
securities into which such Option Shares are converted or exchanged), (iii) pay
cash to Issuer, or (iv) any combination of the foregoing, so that Grantee's
actually realized Total Profit shall not exceed $9,000,000 after taking into
account the foregoing actions.
(b) For purposes of this Agreement, "Total Profit" shall mean: (i) the
aggregate amount of (A) Net Proceeds, plus (B) all amounts received by Grantee
on the transfer of the Option, plus (C) all equivalent amounts with respect to
the Substitute Option, plus (D) all amounts received by Grantee pursuant to
Section 8.02(a) and (b) of the Merger Agreement, minus (ii) the aggregate of (A)
all amounts of cash previously paid to Issuer pursuant to this Section 9 and (B)
the value of the Option Shares (or other securities) previously delivered to
Issuer for cancellation pursuant to this Section 9. "Net Proceeds" shall mean
the aggregate proceeds of such sale or disposition in excess of the product of
the Purchase Price multiplied by the number of such Option Shares (or securities
into which such shares are converted or exchanged) included in such sale or
disposition.
(c) Notwithstanding any other provision of this Agreement, nothing in this
Agreement shall affect the ability of Grantee to receive, nor relieve Issuer's
obligation to pay, any payment provided for in Section 8.02(a) or (b) of the
Merger Agreement; provided that if and to the extent the Total Profit received
by Grantee would exceed $9,000,000, following receipt of such payment, Grantee
shall be obligated to comply with the terms of Section 9(a) within 30 days of
the latest of (i) the date of receipt of such payment, (ii) the date of receipt
of the Net Proceeds, (iii) the date of receipt of net cash from disposition of
the Option and (iv) the date of receipt of equivalent amounts pursuant to the
sale of the Substitute Option or shares of Substitute Common Stock (or other
securities into which such Substitute Common Stock is converted or exchanged).
(d) For purposes of Section 9(a) and clause (ii) of Section 9(b), the value
of any Option Shares delivered to Issuer shall be the Assigned Value of such
Option Shares and the value of any Substitute Common Stock delivered to Issuer
shall be the Highest Closing Price of such Substitute Common Stock. "Highest
Closing Price" means the highest closing sales price for shares of Substitute
Common Stock quoted on the NYSE (or if the Substitute Common Stock is not quoted
on the NYSE, the highest bid price per share as quoted on the National
Association of Securities Dealers Automated Quotations System or, if the shares
of
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Substitute Common Stock are not quoted thereon, on the principal trading market
on which such shares are traded as reported by a recognized) during the
six-month period preceding the issuance of the Substitute Option.
(e) Notwithstanding anything in this Agreement or the Merger Agreement to
the contrary, if a court shall finally adjudicate that Grantee's Total Profit is
unenforceable, then Net Proceeds shall be limited to the largest amount
enforceable, whether such amount is $9,000,000, $7,000,000, $5,000,000,
$4,000,000, $3,000,000 or $2,000,000. All Net Proceeds in excess of such
limitation shall be remitted to Issuer upon receipt.
10. LOSS, THEFT, ETC. OF AGREEMENT. This Agreement (and the Option granted
hereby) are exchangeable, without expense, at the option of Grantee, upon
presentation and surrender of this Agreement at the principal office of Issuer
for other Agreements providing for Options of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Issuer Common Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any other Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction
or mutilation of this Agreement, and (in the case of loss, theft or destruction)
of reasonably satisfactory indemnification, and upon surrender and cancellation
of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement
of like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer, whether
or not the Agreement so lost, stolen, destroyed or mutilated shall at any time
be enforceable by anyone.
11. MISCELLANEOUS. (a) Expenses. Except as otherwise provided in Section
7 hereof or in the Merger Agreement, each of the parties hereto shall bear and
pay all costs and expenses incurred by it or on its behalf in connection with
the transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties hereto.
(c) Entire Agreement; No Third-Party Beneficiary; Severability. Except as
otherwise set forth in the Merger Agreement, this Agreement, together with the
Merger Agreement, (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof and (b) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder. If any
term, provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction or a federal or state regulatory agency to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that the Option does not permit Grantee to acquire
the full number of shares of Issuer Common Stock (or Substitute Common Stock) as
provided in Section 2, as adjusted pursuant to Section 6, it is the express
intention of Issuer to allow Grantee to acquire such lesser number of shares as
may be permissible without any amendment or modification hereof.
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(d) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA WITHOUT REGARD TO ANY
APPLICABLE CONFLICTS OF LAW RULES.
(e) Descriptive Headings. The descriptive headings contained herein are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
If to Grantee to:
Quintiles Transnational Corp.
4709 Creekstone Drive
Riverbirch Building, Suite 200
Durham, NC 27703
Attention: General Counsel
Telecopier No.: (919) 941-9113
with a copy to:
Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
2500 First Union Capitol Center
Raleigh, NC 27601
Attention: Gerald F. Roach, Esq.
Telecopier No.: (919) 821-6800
If to Issuer to:
Pharmaceutical Marketing Services Inc.
45 Rockefeller Plaza, Suite 912
New York, NY 10111
Attention: General Counsel
Telecopier No.: (212) 841-5760
with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, NY 10111
Attention: Robert A. Schwed, Esq.
Telecopier No.: (212) 841-5725
(g) Counterparts. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
both parties need not sign the same counterpart.
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(h) Assignment. Grantee may assign this Agreement in whole to any
affiliate of Grantee at any time. Except as provided in the next sentence,
Grantee may not, without the prior written consent of Issuer (which shall not be
unreasonably withheld), assign this Agreement to any other person. Upon the
occurrence of a Purchase Event, Grantee may sell, transfer, assign or otherwise
dispose of, in whole at any time, its rights and obligations hereunder. In the
case of any sale, transfer, assignment or disposition of this Option, Issuer
shall do all things reasonably necessary to facilitate such transaction. This
Agreement shall not be assignable by Issuer except by operation of law. Subject
to the preceding sentence, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors and
assigns.
(i) Representations and Warranties. The representations and warranties
contained in Sections 3.01(a) and 3.02(a) of the Merger Agreement, and, to the
extent they relate to this Stock Option Agreement, in Sections 3.01(c),(d), (p),
(q) and (t) and 3.02(c) of the Merger Agreement, are incorporated herein by
reference.
(j) Further Assurances. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
(k) Specific Performance. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief and
other equitable relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized as
of the day and year first written above.
PHARMACEUTICAL MARKETING SERVICES INC.
By: /s/ WARREN J. HAUSER
-----------------------------------
Name: Warren J. Hauser
Title: Vice President
QUINTILES TRANSNATIONAL CORP.
By: /s/ JAMES L. BIERMAN
-----------------------------------
Name: James L. Bierman
Title: Senior Vice President
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APPENDIX D
OPINION OF S G COWEN SECURITIES CORPORATION
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February 17, 1999
Board of Directors
Pharmaceutical Marketing Services Inc.
45 Rockefeller Plaza
Suite 912
New York, NY 10011
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of Pharmaceutical Marketing Services Inc. ("the
Company") Common Stock, par value $0.01 ("Company Common Stock"), of the
Consideration (as defined below) to be received by such holders pursuant to the
terms of that certain Merger Agreement, dated as of December 14, 1998 (the
"Transaction Agreement"), by and among the Company, Quintiles Transnational
Corp. ("Transaction Partner") and QTRN Acquisition Corp. We previously rendered
an opinion to you dated December 14, 1998 that as of such date, the
Consideration (as hereinafter defined) to be received by the holders of Company
Common Stock (other than Transaction Partner and affiliates) in the Transaction
(as hereinafter defined) was fair, from a financial point of view, to such
holders. You have requested this opinion in light of the announcement by the
Transaction Partner on December 16, 1998 that it has entered into an agreement
to acquire (the "ENVOY Transaction") ENVOY Corporation ("ENVOY"). The
Transaction Agreement provides, among other things, that each issued and
outstanding share of Company Common Stock shall be converted (the "Transaction")
into the right to receive at the election of each holder of Company Common Stock
either (i) on the closing date, that fraction of a fully paid and nonassessable
share of common stock, $0.01 par value, of the Transaction Partner (the
"Transaction Partner Common Stock") determined by dividing fifteen dollars and
forty cents ($15.40) by the Average Trading Price (as defined below) (the
"Exchange Ratio") or (ii) (a) on the closing date, that fraction of a fully paid
and nonassessable share of Transaction Partner Common Stock determined by
dividing the Exchange Ratio in half and (b) at any time on or prior to the
maturity date, as specified by such holder, that fraction of a fully paid and
nonassessable share of Transaction Partner Common Stock determined by dividing
the Exchange Ratio in half and (c) on the maturity date, a Contingent Value
Payment with respect to shares of Transaction Partner Common Stock received on
the maturity date (collectively, the "Consideration"). The Average Trading Price
is the average of the closing prices per share of the Transaction Partner Common
Stock for the aggregate of ten (10) trading days ending on the day which is two
(2) days immediately preceding the closing date of the Transaction. The terms
and conditions of the Transaction are more fully set forth in the Transaction
Agreement.
SG Cowen Securities Corporation ("SG Cowen"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of our business, we and our affiliates actively trade the debt
and equity securities of the Company, Transaction Partner and ENVOY for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
We are acting as exclusive financial advisor to the Board of Directors of
the Company in connection with the Transaction and will receive a fee from the
Company for our services
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Pharmaceutical Marketing Services Inc.
February 17, 1999
Page 2
pursuant to the terms of our engagement letter with the Company, dated as of
October 1, 1998, as amended on February 12, 1999 (the "Engagement Letter"), a
significant portion of which is contingent upon the consummation of the
Transaction. We will also receive a fee for providing this opinion. SG Cowen and
its affiliates in the ordinary course of business have from time to time
provided, and in the future may continue to provide, commercial and investment
banking services to the Company, Transaction Partner and ENVOY, including
providing financial advisory services on previous transactions with the Company,
and have received fees for the rendering of such services.
In connection with our opinion, we have reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things: (i) the Transaction Agreement, dated December 14, 1998; (ii) certain
publicly available information for the Company and Transaction Partner,
including (a) each of the annual reports of the Company and Transaction Partner
filed on Form 10-K for each of the years ended June 30, 1998, 1997 and 1996 for
the Company and the years ended December 31, 1997, 1996 and 1995 for the
Transaction Partner; (b) each of the quarterly reports of the Company and
Transaction Partner filed on Form 10-Q for each of the quarters ended September
30, 1998 and 1997; (c) the current report of Transaction Partner filed on Form
8-K on January 27, 1999 in connection with the proposed acquisitions of the
Company and Envoy, as amended by Form 8-K/A filed on February 17, 1999; (d) the
current report of Transaction Partner filed on Form 8-K on February 17, 1999 in
connection with the historical financial information of each of the Company and
ENVOY; (e) the Agreement and Plan of Merger, dated as of December 15, 1998,
among Transaction Partner, QELS Corp. and ENVOY ("ENVOY Agreement"); (f) a press
release dated January 26, 1999 reporting financial results for the Transaction
Partner for the fiscal year ended December 31, 1998; and (g) a press release
dated February 10, 1999 reporting financial results for ENVOY for the fiscal
year ended December 31, 1998; (iii) certain internal financial analyses,
financial forecasts, reports and other information concerning each of the
Company, Transaction Partner and ENVOY prepared by the management of the
Company, Transaction Partner and ENVOY, respectively; (iv) discussions we have
had with certain members of the management of each of the Company, Transaction
Partner and ENVOY concerning the historical and current business operations,
financial condition and prospects of each of the Company, Transaction Partner
and ENVOY and such other matters we deemed relevant; (v) the reported price and
trading histories of the shares of the common stock of the Company and
Transaction Partner as compared to the reported price and trading histories of
certain publicly traded companies we deemed relevant; (vi) the respective
financial condition of the Company and Transaction Partner as compared to the
financial condition of certain other companies we deemed relevant; (vii) certain
financial terms of the Transaction as compared to the financial terms of
selected other business combinations we deemed relevant; and (viii) such other
information, financial studies, analyses and investigations and such other
factors that we deemed relevant for the purposes of this opinion.
In conducting our review and arriving at our opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to us
by the Company, Transaction Partner and ENVOY, respectively, or which is
publicly available, and we have not undertaken any
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Pharmaceutical Marketing Services Inc.
February 17, 1999
Page 3
responsibility for the accuracy, completeness or reasonableness of, or
independently to verify, such information, including assumptions with respect to
reserves in connection with any pending litigation. In addition, we have not
conducted any physical inspection of the properties or facilities of the
Company, Transaction Partner or ENVOY. We have further relied upon the assurance
of management of the Company that they are unaware of any facts that would make
the information provided to us incomplete or misleading in any respect. We have,
with your consent, assumed that the financial forecasts which we examined were
reasonably prepared by the respective management of the Company, Transaction
Partner and ENVOY on bases reflecting the best currently available estimates and
good faith judgments of such management as to the future performance of the
Company, Transaction Partner and ENVOY, respectively. With your permission, we
have assumed that the ENVOY Transaction will be accounted for as a
pooling-of-interests. We have not made or obtained any independent evaluations,
valuations or appraisals of the assets or liabilities of the Company,
Transaction Partner or ENVOY, nor have we been furnished with such materials.
With your permission, we have assumed that both the Transaction and the ENVOY
Transaction will be treated as tax free reorganizations under Section 368(a) of
the Internal Revenue Code of 1986, as amended. With respect to all legal matters
relating to the Company and the Transaction, we have relied on the advice of
legal counsel to the Company. We express no opinion with respect to any legal
matters, including, without limitation, those affecting the Transaction Partner,
the Transaction, ENVOY or the ENVOY Transaction. Our services to the Company in
connection with the Transaction have been comprised of rendering an opinion as
to the fairness, from a financial point of view, of the Consideration to be
received in connection with the Transaction. Our opinion is necessarily based
upon economic and market conditions and other circumstances as they exist and
can be evaluated by us on the date hereof. It should be understood that although
subsequent developments may affect our opinion, we do not have any obligation to
update, revise or reaffirm our opinion and we expressly disclaim any
responsibility to do so.
For purposes of rendering our opinion, we have assumed in all respects
material to our analysis, that the representations and warranties of each party
contained in the Transaction Agreement and the ENVOY Agreement are true and
correct, that each party will perform all of the covenants and agreements
required to be performed by it under the Transaction Agreement and the ENVOY
Agreement and that all conditions to the consummation of the Transaction and the
ENVOY Transaction will be satisfied without waiver thereof. We have also assumed
that all governmental, regulatory and other consents and approvals contemplated
by the Transaction Agreement and the ENVOY Agreement will be obtained and that
in the course of obtaining any of those consents no restrictions will be imposed
or waivers made that would have an adverse effect on the contemplated benefits
of the Transaction or the ENVOY Transaction, as the case may be.
It is understood that this letter is intended for the benefit and use of
the Board of Directors of the Company in its consideration of the Transaction
and may not be used for any other purpose or reproduced, disseminated, quoted or
referred to at any time, in any manner or for any purpose without our prior
written consent; provided, however, that this letter may be reproduced in its
entirety in any proxy statement relating to a proposed Transaction filed by the
Company under the Securities Exchange Act of 1934, as amended, and distributed
to
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Pharmaceutical Marketing Services Inc.
February 17, 1999
Page 4
stockholders in accordance therewith, provided that it will be reproduced in
such proxy statement in full, and any description of or reference to SG Cowen or
summary of this letter in such proxy statement will be in a form acceptable to
SG Cowen and its counsel; and provided, further, that if the proxy statement is
incorporated or becomes part of a registration statement filed under the
Securities Act of 1933, as amended (the "33 Act"), SG Cowen's consent to the
reproduction of this letter therein as an exhibit or otherwise shall not be
deemed or constitute an admission or acknowledgment that SG Cowen or any of its
affiliates is within the class of persons whose consent is required under
Section 7 of the 33 Act or the rules and regulations promulgated thereunder.
This letter does not constitute a recommendation to any stockholder as to
how such stockholder should vote with respect to the Transaction or to take any
other action in connection with the Transaction or otherwise. We are not
expressing any opinion as to what the value of the common stock of the
Transaction Partner actually will be when issued to the Company's stockholders'
pursuant to the Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to effect the Transaction or the Transaction Partner's decision to
effect the ENVOY Transaction. Furthermore, we express no view as to the price or
trading range for shares of the common stock of the Transaction Partner
following the consummation of the Transaction or the ENVOY Transaction.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date hereof,
the Consideration to be received by the holders of Company Common Stock (other
than Transaction Partner and ENVOY and their affiliates) in the Transaction is
fair, from a financial point of view, to such holders.
Very truly yours,
SG COWEN SECURITIES CORPORATION
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APPENDIX E
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PHARMACEUTICAL MARKETING SERVICES INC.
IN CONNECTION WITH A
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 29, 1999
AT THE LOTOS CLUB, 5 EAST 66th STREET,
NEW YORK, NEW YORK
The undersigned stockholder of Pharmaceutical Marketing Services Inc.
("PMSI"), hereby appoints Dennis M. J. Turner, Frederick W. Kyle and Warren J.
Hauser, and each of them, as lawful attorneys and proxies, with several power of
substitution, for and in the name of the undersigned to represent and vote, as
designated below, all shares of the common stock, par value $.01 per share, of
PMSI which the undersigned is entitled to vote at the Special Meeting of
Stockholders of PMSI to be held on March 29, 1999, at 11:00 a.m. local time, or
any adjournment, rescheduling or postponement thereof.
1. To approve and adopt the Merger Agreement, dated as of
December 14, 1998, by and among Quintiles Transnational Corp.,
QTRN Acquisition Corp. and PMSI.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To transact such other business that may properly come before
the special meeting or any adjournments or postponements
thereof.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE> 237
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN. IF NO
INSTRUCTIONS TO VOTE ARE INDICATED HEREON, THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED "FOR" PROPOSAL 1 AND IN THE DISCRETION OF THE PROXY HOLDERS AS TO
ALL OTHER MATTERS.
The undersigned hereby revokes all proxies heretofore given with respect to the
matters covered hereby.
PLEASE DATE AND SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS
HEREON.
Date: ________________________________, 1999
____________________________________________
Signature
(If stock is held jointly, each joint
owner must sign. When signing as
attorney-in-fact, executor, administrator,
trustee, guardian, corporate officer or
partner, please give full title of the
capacity in which you are acting, and where
more than one executor, etc. is named, a
majority must sign. If a corporation, please
sign full corporate name by an authorized
officer. If a partnership, please sign full
partnership name by an authorized person.)
