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IMS HEALTH INCORPORATED
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2001 ANNUAL REPORT TO SHAREHOLDERS
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IMS HEALTH INCORPORATED
2001 ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
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Management's Discussion and Analysis of Results of
Operations and Financial Position......................... 1-14
Statement of Management's Responsibility for Financial
Statements................................................ 15
Report of Independent Accountants........................... 15
Consolidated Financial Statements........................... 16-22
Notes to Consolidated Financial Statements.................. 23-49
Quarterly Financial Data.................................... 50
Five-Year Selected Financial Data........................... 51
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IMS HEALTH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
POSITION
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
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IMS Health Incorporated ("IMS" or the "Company") is a leading global
provider of information solutions to the pharmaceutical and healthcare
industries. IMS operates in more than 100 countries and consists of the
following business segments:
- The IMS Segment is a leading global provider of market information, sales
management and decision-support services to the pharmaceutical and
healthcare industries. Its key products include sales management
information to optimize sales force productivity, marketing effectiveness
research for prescription and over-the-counter pharmaceutical products,
consulting and other services. The IMS Segment is managed on a global
business model with global leaders for the majority of its critical
business processes. In addition, the IMS Segment includes IMS's venture
capital unit, Enterprise Associates, LLC ("Enterprises"), which is focused
on investments in emerging businesses and IMS's 26.8% equity interest in
The TriZetto Group, Inc. ("TriZetto").
- The Cognizant Technology Solutions Corporation ("CTS") Segment delivers
full life-cycle solutions to complex software development and maintenance
problems that companies face as they transition to e-business. These
services are delivered through the use of a seamless on-site and offshore
consulting project team. CTS's primary service offerings include
application development and integration, application management and
re-engineering services. CTS is a publicly traded corporation on the
NASDAQ national market. IMS owned 58.3% of the common shares outstanding
(93.3% of the outstanding voting power) as of December 31, 2001 and 60.5%
as of December 31, 2000. IMS accounts for CTS as a consolidated
subsidiary.
During the years ended December 31, 2000 and 1999, IMS also included:
- The Transaction Businesses Segment, which consisted of:
(a) Synavant, Inc. ("Synavant"), which serves the pharmaceutical industry
by developing and selling pharmaceutical relationship management solutions
that support sales and marketing decision-making; (b) Erisco Managed Care
Technologies, Inc. ("Erisco"), a leading supplier of software-based
administrative and analytical solutions to the managed care industry; and
(c) three small non-strategic software businesses. IMS spun off the
Synavant business on August 31, 2000 (the "Synavant Spin-Off") and sold
Erisco to TriZetto and entered into a strategic alliance with TriZetto on
October 3, 2000. IMS also divested or discontinued the other small
non-strategic software businesses.
On July 26, 1999, IMS completed a spin-off of the majority of its equity
investment in Gartner, Inc. ("Gartner," formerly known as "Gartner
Group, Inc.") to IMS shareholders (the "Gartner Spin-Off"). The Consolidated
Financial Statements of IMS have been reclassified for all periods presented to
reflect the Gartner equity investment as a discontinued operation. During the
third quarter of 2001, IMS sold its remaining investment in Gartner.
The above changes to the business are more fully discussed in Notes 1, 4, 5,
7, 12, 16 and 23 to the Consolidated Financial Statements.
YEAR-ENDED DECEMBER 31, 2001 COMPARED WITH YEAR-ENDED DECEMBER 31, 2000
OPERATING RESULTS
Revenue in 2001 decreased 6.4% to $1,332,923 from $1,424,359 in 2000.
Excluding the $170,385 revenue from the Transaction Businesses Segment, which
was divested in 2000, and excluding the $51,362 adverse impact of a generally
stronger U.S. dollar in 2001 revenue grew 10.6%. This growth resulted primarily
from the success of new products in the IMS Segment, and by robust demand for
CTS's services, partially offset by a slowdown in non-contracted spending in the
IMS Segment.
IMS's operating costs include data processing costs, the costs of data
collection and production, and costs attributable to personnel involved in
production, data management and the processing and delivery of IMS's services.
IMS's operating costs in 2001 were $494,411, compared with $549,259 in 2000, a
decrease of 10.0%. Excluding the $86,179 of operating costs associated with
Transaction Businesses Segment and certain technology acceleration costs in 2000
of $15,240, operating costs grew 10.4%, principally driven by CTS (29.0%
growth), as well as higher data collection and production costs in the IMS
Segment to support revenue growth.
Selling and administrative expenses consist primarily of the costs
attributable to sales, marketing, client service and administration, including
personnel, promotion, communications, management, finance, and occupancy. IMS's
selling and administrative expenses declined 17.3% to $344,100 in 2001 from
$416,006 in 2000. Excluding the Transaction Businesses Segment and certain legal
fees, selling and administrative
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expenses grew at only 3.0%, reflecting the results of cost reduction actions
initiated in the fourth quarter of 2000.
Depreciation and amortization expense declined 24.8%, to $69,178 in 2001
from $92,000 in 2000. Excluding the Transaction Businesses Segment, depreciation
and amortization expense remained relatively constant at $69,178 in 2001
compared with $69,645 in the previous year.
During 2001, IMS undertook a Competitive Fitness Program to assess the
worldwide costs of the IMS Segment and to identify actions to improve cost
efficiencies. All functional areas were examined, including sales, marketing,
client service, data collection, production, and management and administration.
In the fourth quarter, after completing its assessment, IMS recorded Severance,
Impairment and Other Charges of $94,616 primarily in connection with the actions
identified by this project. These actions include a worldwide reduction in
headcount of more than six hundred employees, the closing of certain facilities,
the write-off of certain abandoned software and other assets and the termination
of certain contractual relationships. See Note 8 to the Consolidated Financial
Statements.
During the fourth quarter of 2001, IMS terminated negotiations to dispose of
one of its product lines and decided to retain and continue operating it. In
connection with this terminated transaction, IMS recorded Terminated Transaction
Costs of $6,457, relating primarily to legal and accounting services.
In 2000, in connection with the Synavant Spin-Off, IMS incurred $37,626 of
costs. These costs include $8,813 for expenses related to reductions in the
administrative workforce resulting from consolidation following the Synavant
Spin-Off. Additionally, a data processing agreement with a third party for
$5,200 was no longer used by IMS as a result of IMS's determination to
streamline its operations to focus on its core business and a further data
enhancement contract for $3,600 was similarly no longer used. The remaining
Synavant Spin-Off charges related primarily to legal, professional and other
direct incremental costs.
In addition, in connection with the Siebel alliance, more fully described in
Note 6 to the Consolidated Financial Statements, Synavant assessed the
impairment of its computer software (including acquired technology), goodwill
and other intangible assets and change in intangible asset lives. As a result of
this transaction, Synavant recorded an impairment charge of $115,453 in the
third quarter of 2000, comprised of $14,553 on computer software and $100,900 on
goodwill. IMS recorded this impairment loss because the Siebel alliance was
signed prior to the Synavant Spin-Off. This impairment was recorded in the
Transaction Businesses Segment.
During 2000 IMS assessed its cost structure, directed towards streamlining
its administrative infrastructure costs, leveraging marketing and sales efforts
following the creation of a global key account management program, harmonizing
global production activities, global development, human resources and
communications. In connection with the actions taken to streamline operations,
IMS incurred charges for the impairment of certain assets as well as severance
costs. IMS recorded a Severance, Impairment and Other Charge of $45,689 during
the fourth quarter of 2000, which is more fully described in Note 8 to the
Consolidated Financial Statements.
In the fourth quarter of 2000, IMS incurred a charge of $31,133 relating to
changes in executive management. Of this charge, approximately $23,000 related
to Victoria R. Fash (previously President and Chief Executive Officer) and
Robert E. Weissman (previously Chairman) arising principally from the
acceleration or enhancement of previously existing employee benefits
obligations, including stock options and pensions. This charge also included the
forgiveness of the balance, including accrued interest, due of $3,084 on a loan
made to Ms. Fash during the year, plus an accompanying tax liability of $2,580.
See Note 9 to the Consolidated Financial Statements. The remaining accrual at
December 31, 2001 amounted to approximately $13,400, primarily relating to
long-term pension benefits.
Operating Income in 2001 increased 136.3%, to $324,161 compared with
$137,193 in the prior year, primarily due to the prior year's Transaction
Businesses Segment loss of $171,450. Excluding the Transaction Businesses
Segment, as well as the Severance, Impairment and Other Charges in both years of
$94,616 and $45,689 in 2001 and 2000 respectively, the Terminated Transaction
Costs in 2001 of $6,457, the Executive Management Transition Charge in 2000 of
$31,133, certain technology acceleration costs in 2000 of $15,240, and certain
legal fees of $2,336 and $4,069 in 2001 and 2000 respectively, operating income
grew 5.6%, to $427,570 in 2001 compared with $404,774 in the prior year.
Excluding the unfavorable impact of a generally stronger U.S. dollar in 2001,
operating income grew 14.4%. This was due to the revenue growth in the IMS and
CTS Segments, and to IMS's continuing ability to leverage its resources.
Net interest expense was $9,006 in 2001 and $13,308 in 2000. The decrease of
$4,302 resulted primarily from interest income of $2,755 recorded on the Nielsen
Media Research receivable (see Note 21 to the
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Consolidated Financial Statements) and higher average cash balances during 2001.
The Loss on Gartner Investment amounted to $84,880 in 2001. During the third
quarter of 2001, IMS decided to sell, and by August 29, 2001 completed the sale
of 1,555 shares of Class A common stock of Gartner, Inc. ("Gartner Shares") to
Gartner and its remaining holdings to several institutional investors. IMS
received aggregate proceeds of $65,207, or $9.88 per share, from these sales.
IMS's cost basis in these shares was $77,743, or $11.78 per share. These sales
divested IMS of its remaining equity interest in Gartner. They resulted in a
pre-tax realized loss of $12,536 ($8,146, net of applicable taxes), which was
recorded in two different lines in the Consolidated Statements of Income:
(1) Income from Discontinued Operations, net of $72,344 ($47,025 net of
applicable taxes), to reflect the difference between the fair market value at
the date of the Gartner Spin-Off (July 26, 1999) and the book value of those
shares; (2) a loss from dispositions in continuing operations of $84,880, which
was recorded as Loss on Gartner Investment, to reflect the difference between
the fair market value at the date of the Gartner Spin-Off and the disposal
proceeds. In 2000, IMS recorded a similar loss of $6,896 to reflect the loss on
shares contributed to Synavant as part of the Synavant Spin-Off as well as a
loss on warrants which expired on December 1, 2000. A loss was recognized since
the shares and warrants had a lower market value at the date of the Synavant
Spin-Off or expiration date compared with the value at the date of the Gartner
Spin-Off (July 26, 1999). These transactions resulted in gains within income
from discontinued operations in 2000 of $4,692 net of applicable taxes.
Gains (Losses) from Investments, net amounted to a net loss of $27,642 in
2001, compared to a net gain of $78,139 in the prior year. The 2001 loss is due
primarily to net write-downs of investments within IMS securities portfolios of
$30,213, an impairment loss of $1,955 on CTS's investment in Questra Corporation
in recognition of an other-than-temporary decline in value, partially offset by
a $1,990 gain on the sale of IDRAC Holdings Inc. ("IDRAC"), a non-strategic
property that provides information on pharmaceutical product registrations. The
investment write-down related mainly to a refinement in IMS's estimation
approach for the assessment of other than temporary declines in value of the
venture capital investments. See Notes 5 and 13 to the Consolidated Financial
Statements. Gains in the prior year were due primarily to the sale of
investments in American Cellular, Verisign Inc., Mercator Software Inc., Viant
Corporation, Aspect Development Inc., I2 Technologies, and the partial sale of
IMS's investment in e-Credit, net of selling expenses.
In 2000, IMS recorded a Gain on Sale of Erisco of $84,530 as a result of the
sale of its Erisco business in exchange for an equity interest in TriZetto. See
Note 12 to the Consolidated Financial Statements.
Gain (Loss) on Issuance of Investees' Stock, net resulted in a loss of
$1,490 in 2001 compared with a gain of $9,029 in the prior year, in accordance
with Staff Accounting Bulletin ("SAB") No. 51, "Accounting for Sales of Stock by
a Subsidiary." The net loss in 2001 resulted from a loss on the issuance of
stock by TriZetto of $6,679 primarily in connection with acquisitions, a
secondary offering and stock option exercises, offset by a gain on the issuance
of stock by CTS of $5,189 primarily in connection with stock option exercises
and employee stock purchases. The $9,029 gain in the prior year resulted from
the issuance of stock by TriZetto for an acquisition. As a result of stock
issuances by CTS and TriZetto, IMS's ownership interest in CTS declined from
60.5% to 58.3% and the Company's ownership interest in TriZetto was diluted from
33.2% to 26.8% from December 31, 2000 to December 31, 2001.
Other Expense, net decreased to $17,342 in 2001 from $27,374 in the prior
year. The expense decline was primarily due to net foreign exchange gains of
$4,955 in 2001 compared with net foreign exchange losses of $1,023 in 2000, as
well as a reduction in certain non-recurring legal and professional expenses of
$2,435 in 2001, compared with $8,419 in the prior year.
IMS's 2001 effective tax rate of 20.9% reflects the financial statement
impact of the expiration, without adjustment, on September 30, 2001, of the
statute of limitations on certain previously-reserved-for Donnelley Legacy
transactions (approximately $21,033), and the recognition of additional tax
benefits arising from a 1998 non-U.S. reorganization which gave rise to tax
deductible amortization of non-U.S intangible assets (approximately $14,660),
resulting from the reassessment of the tax benefits from this reorganization
following certain new non-U.S. tax legislation enacted at the end of the first
quarter of 2001. IMS's 2000 effective tax rate of 53.7% reflected principally
the non-deductible U.S. Impairment Charge-Synavant, Spin and Related Costs and
Severance, Impairment and Other Charges (portions of which are non-deductible),
and a reduction in net German deferred tax assets (principally non-U.S.
intangible assets) due to a reduction in the German corporate tax rate from 40%
to 25% ($17,655). These were offset by the recognition of certain German trade
tax benefits on tax deductible amortization of non-U.S. intangible assets
resulting from a favorable German court decision ($19,355), and the recognition
of the tax benefit of certain net operating losses ("NOLs") due to the
implementation of global tax planning strategies
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($10,072). For all periods presented, IMS's effective tax rate was reduced as a
result of global tax planning initiatives. While IMS intends to continue to seek
global tax planning initiatives, there can be no assurance that IMS will be able
to successfully implement such initiatives to reduce or maintain its overall tax
rate.
The TriZetto Equity Loss, net was $6,985 in 2001 and $4,777 in 2000. The
higher loss in 2001 reflects the full-year impact of TriZetto, compared with
only three months in the prior year, partially offset by improved TriZetto
underlying financial results.
Income from Discontinued Operations, net was $47,025 in 2001, compared with
$4,692 in the prior year. The 2001 income resulted from the sale of Gartner
shares in August 2001. The prior-year income reflects a gain on the Gartner
shares contributed to Synavant as part of the Synavant Spin-Off and a gain on
warrants issued prior to the Gartner Spin-Off that expired on December 1, 2000.
These transactions are described above and in Note 4 to the Consolidated
Financial Statements.
RESULTS BY BUSINESS SEGMENT
IMS SEGMENT
IMS Segment revenue increased 3.8% to $1,173,954 in 2001 from $1,131,211 in
2000. Excluding the $51,362 adverse impact of a generally stronger U.S. dollar
in 2001 revenue grew 8.5%. Sales management revenue increased 7.0% (11.0% on a
constant dollar basis, i.e., a basis that eliminates currency rate fluctuations)
to $730,169 due to strong growth in sales management products in North America,
particularly Earlyview, the expansion of Xponent in Europe and the success of
the Weekly Data product in Japan. Market research revenue increased 2.0% (3.0%
constant dollar) to $412,353 (6.5% on a constant dollar basis). Other revenue
includes certain consultancy and other services and decreased 30.1% (22.0%
constant dollar) to $31,432. This decline is primarily due to IMS's exit from
certain small businesses.
IMS Segment operating income was $288,540 in 2001, up 2.1% from $282,514 in
the prior year, as a result of revenue growth as well as cost-containment
actions initiated in the fourth quarter of 2000, in addition to the impact of
the non-recurring expenses discussed above ($103,409 and $96,131 in 2001 and
2000, respectively), partially offset by the unfavorable impact of a generally
stronger U.S. dollar. Excluding these expenses in both years, as well as the
impact of foreign currency movements, IMS Segment operating income grew 12.8%.
CTS SEGMENT
IMS's ownership interest in CTS decreased to 58.3% (representing 93.3% of
the outstanding voting power) at December 31, 2001 from 60.5% at December 31,
2000. This decrease was due to stock option exercises and employee stock
purchases at CTS.
CTS revenue, prior to the elimination of intersegment sales, increased 29.7%
to $177,778 in 2001 from $137,031 in 2000. This increase resulted from higher
application development and integration, application management, reengineering
and other services. CTS operating income increased 36.3% to $35,621 in 2001 from
$26,129 in the prior year. The increase resulted from the revenue growth noted
above, partially offset by the costs of additional technical professionals and
selling and administrative expenses to support the revenue increase.
TRANSACTION BUSINESSES SEGMENT
All of the businesses included in the Transaction Businesses segment were
spun off, divested or discontinued in 2000. Therefore, there are no comparable
operating results in 2001.
RESULTS BY GEOGRAPHIC AREA
Total IMS revenue in the United States declined by 6.1% to $614,108 in 2001
from $653,965 in 2000. The decrease was primarily due to the Transaction
Businesses Segment. Excluding revenue from the Transaction Businesses Segment,
U.S. revenue was $548,329 in 2000 and increased 12.0% in 2001. This increase was
primarily due to new product growth at IMS and robust demand for CTS's services,
partially offset by a slowdown in non-contracted revenue at IMS.
Non-U.S. revenue decreased 6.7% to $718,815 in 2001 from $770,394 in 2000.
Non-U.S. operations include principally Japan, the United Kingdom, Germany,
Italy, France, Australia and other countries within Europe, Latin America and
the Far East. Excluding revenue from the Transaction Businesses Segment,
non-U.S. revenue grew 1.9% in 2001, due to new product growth at IMS in Japan,
Canada, and other countries, partially offset by a slowdown in non-contracted
revenue.
YEAR-ENDED DECEMBER 31, 2000 COMPARED WITH YEAR-ENDED DECEMBER 31, 1999
OPERATING RESULTS
Revenue in 2000 increased 1.9% to $1,424,359 from $1,397,989 in 1999,
primarily due to strong growth in the core business offset by the performance of
the Transaction Businesses Segment. The results of Synavant and Erisco are
included for only eight and nine
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months respectively in 2000 and twelve months in 1999. Included within Synavant,
Strategic Technologies revenue declined in 2000 compared with 1999 for the
periods consolidated. Excluding the Transaction Businesses Segment, revenue
increased 12.9%. This increase reflected constant dollar double-digit revenue
growth at IMS and CTS and is further described in "Results by Business Segment"
below. On a constant dollar basis and excluding the Transaction Businesses
Segment, 2000 revenues increased by 16.4% over 1999.
IMS's operating costs in 2000 were $549,259, compared with $551,099 in 1999,
a decrease of 0.3%. This decrease was due to the fact that the operating costs
for Synavant and Erisco are included for eight and nine months, respectively, in
2000 and twelve months in 1999. During 2000, IMS announced the formation of a
global data processing hub in Plymouth Meeting, Pennsylvania. It is one of the
world's largest computer centers, handling 26 terabytes of data. The hub
provides the technology foundation for IMS's global data processing and new
Internet-based products. During the year, IMS incurred $15,240 of technology
acceleration costs in connection with the development of such products.
Excluding the Transaction Businesses Segment in both years, technology
acceleration costs incurred in 2000, and the impact of Year 2000 remediation
costs in 1999 of $24,558, operating costs increased by 13.1% in 2000. The
operating cost increase was due to an increased number of technical
professionals at CTS to meet the increased demand for services and an increase
in the operating costs of the IMS Segment to support higher revenues and product
launches. Excluding the Transaction Businesses Segment, technology acceleration
costs and the impact of Year 2000 remediation costs discussed above, as a
percentage of revenue, operating costs were relatively flat year-over-year,
demonstrating IMS's operating leverage and ability to grow revenue at a rate
which outpaces cost growth.
IMS's selling and administrative expenses increased by 4.5% to $416,006 in
2000 from $397,924 in 1999. This low rate of increase was due to the inclusion
of selling, general and administrative costs for Synavant and Erisco for eight
and nine months respectively in 2000 versus twelve months in 1999. Excluding the
Transaction Businesses Segment in both years, and certain legal costs of $4,069
incurred in 2000, selling and administrative expenses increased by 8.5%. This
increase in expenses was primarily due to continued investment in CTS sales and
administrative functions and infrastructure. The selling and administrative cost
of the IMS Segment increased by 4.1%, demonstrating IMS's ability to increase
revenue without significantly expanding its existing administrative
infrastructure.
Depreciation and amortization decreased 8.4% to $92,000 in 2000 from
$100,443 in 1999. This reduction was primarily due to the amortization of
goodwill and intangibles of Synavant which was included in 2000 for eight months
and for twelve months in 1999. Excluding the Transaction Businesses Segment,
depreciation and amortization increased by 2.4%.
In 2000, in connection with the Synavant Spin-Off, IMS incurred $37,626 of
costs. These costs included $8,813 for expenses related to reductions in the
administrative workforce resulting from consolidation following the Synavant
Spin-Off. Additionally, a data processing agreement with a third party for
$5,200 was no longer used by IMS as a result of IMS's determination to
streamline its operations to focus on its core business and a further data
enhancement contract for $3,600 was similarly no longer used. The remaining
Synavant Spin-Off charges related primarily to legal, professional and other
direct incremental costs. In 1999 the $9,500 of Spin and Related Costs reflected
direct incremental costs associated with the Gartner Spin-Off.
In addition, in connection with the Siebel Alliance, more fully described in
Note 6 to the Consolidated Financial Statements, Synavant assessed the
impairment of its computer software (including acquired technology), goodwill
and other intangible assets and change in intangible asset lives. As a result of
this transaction, Synavant recorded an Impairment Charge of $115,453 in the
third quarter of 2000, comprised of $14,553 on computer software and $100,900 on
goodwill. IMS recorded this impairment loss because the Siebel alliance was
signed prior to IMS's Synavant Spin-Off. This impairment was recorded in the
Transaction Businesses Segment.
During 2000, IMS assessed its cost structure, directed towards streamlining
its administrative infrastructure costs, leveraging marketing and sales efforts
following the creation of a global key account management program, harmonizing
global production activities, global development, human resources and
communications. In connection with the actions taken to streamline operations,
IMS incurred charges for the impairment of certain assets as well as severance
costs. IMS recorded a Severance, Impairment and Other Charge of $45,689 during
the fourth quarter of 2000. See Note 8 to the Consolidated Financial Statements.
In the fourth quarter of 2000, IMS incurred a charge of $31,133 relating to
changes in executive management. Of this charge, approximately $23,000 related
to Victoria R. Fash (previously President and Chief Executive Officer) and
Robert E. Weissman (previously Chairman) arising principally from the
acceleration or enhancement of previously existing employee benefits
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obligations including stock options and pensions. This charge also included the
forgiveness of the balance, including accrued interest due of $3,084 on a loan
made to Ms. Fash during the year plus an accompanying tax liability of $2,580.
See Note 9 to the Consolidated Financial Statements. The remaining accrual at
December 31, 2001 amounted to approximately $13,400, primarily relating to
long-term pension benefits.
Operating income in 2000 decreased to $137,193 from $339,023 in 1999. This
decline was primarily due to the Synavant impairment charge of $115,453 and Spin
and Related Costs of $37,626 (both of which were included in the Transaction
Businesses Segment), Severance, Impairment and Other Charges of $45,689 and the
Executive Management Transition Charge of $31,133. Adjusting operating income in
both years to exclude the Transaction Businesses Segment, charges in 2000 for
technology acceleration, Severance, Impairment and Other Charges, Executive
Management Transition Costs and certain legal charges and excluding in 1999,
Spin and Related Costs and Year 2000 remediation costs, operating income
increased by 18.6%. Operating income growth outpaced revenue growth primarily
due to IMS's ability to continue to leverage its worldwide resources and improve
operating margins. If the 2000 and 1999 operating margins were adjusted to
exclude the items discussed above, operating margin improved to 32.3% in 2000
from 30.7% in 1999. Operating margin improvements were a result of both
operations and the impact of foreign exchange.
Net interest expense was $13,308 in 2000 versus net interest income of $635
in 1999. This increase in interest expense was due to a higher level of
short-term borrowings to fund IMS's stock repurchase program and the payment of
the Donnelley Legacy Tax Contingency (see Note 21 to the Consolidated Financial
Statements), as well as cash payments to Synavant and Erisco.
The Loss on Gartner Investment reflects a loss on shares contributed to
Synavant and a loss on warrants which expired on December 1, 2000. A loss was
recognized since the shares and warrants had a lower market value at the date of
the Synavant Spin-Off or expiration date compared with the value at the date of
the Gartner Spin-Off (July 26, 1999). These transactions resulted in gains
within income from discontinued operations. The treatment within continuing and
discontinued operations reflects the accounting adopted as of the date of the
Gartner Spin-Off. See Note 4 to the Consolidated Financial Statements.
Gains (Losses) from Investments, net reflected net pre-tax gains of $78,139
in 2000 compared to $25,264 in 1999. The gains were due primarily to the sale of
Enterprise investments, net of selling expenses.
In 2000 the sale of Erisco to TriZetto resulted in a net pre-tax gain of
$84,530. Additionally, due to issuance of stock by TriZetto in connection with
an acquisition in the fourth quarter of 2000, IMS recorded a pre-tax gain of
$9,029.
Other Expense, net increased to $27,374 in 2000 compared to $16,480 in 1999.
This increase was primarily due to non-recurring legal and professional expenses
in 2000, as well as higher minority interest expense relating to the improved
operating results of CTS.
IMS's 2000 effective tax rate of 53.7% reflected principally the
non-deductible U.S. Impairment Charge--Synavant, Spin and Related Costs and
Severance, Impairment and Other Charges (portions of which are non-deductible),
and a reduction in the net German deferred tax assets (principally non-U.S.
intangible assets) due to a reduction in German corporate tax rate from 40% to
25% ($17,655). These are offset by the recognition of certain German trade tax
benefits on tax deductible amortization of non-U.S. intangible assets resulting
from a favorable German court decision ($19,355), and the recognition of the tax
benefit of certain NOL's due to the implementation of global tax planning
strategies ($10,072). The 1999 effective tax rate of 28.1% reflected a
non-deductible one-time Gartner Spin and Related Costs. For all periods
presented, IMS's effective tax rate was reduced as a result of global tax
planning initiatives. For example, to consolidate certain of its international
operations, in 1999 IMS engaged in a non-U.S. reorganization which gave rise to
the recognition of tax deductible amortization of non-U.S. intangible assets.
See Note 17 to the Consolidated Financial Statements. While IMS intends to
continue to seek global tax planning initiatives, there can be no assurance that
IMS will be able to successfully implement such initiatives to reduce or
maintain its overall tax rate.
TriZetto Equity Loss, net was $4,777 in 2000, following the acquisition of a
36.1% share of TriZetto on October 3, 2000.
Income from Discontinued Operations, net was $4,692, compared with $25,695
in 1999. Income from Discontinued Operations, net in 2000 reflects a gain on the
Gartner shares contributed to Synavant as part of the Synavant Spin-Off and a
gain on warrants issued prior to the Gartner Spin-Off that expired on
December 1, 2000. The treatment of the Gartner shares and warrants within
continuing and discontinued operations reflects the accounting adopted as of the
date of the Gartner Spin-Off. See Note 4 to the Consolidated Financial
Statements. Income from Discontinued Operations in 1999 was comprised of Gartner
equity income through July 1999.
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RESULTS BY BUSINESS SEGMENT
IMS SEGMENT
IMS Segment revenue increased 9.1% to $1,131,211 in 2000 from $1,037,025 in
1999. Excluding the impact of foreign currency movements, revenue grew 12.9%.
Sales management revenue increased 13.8% (18.1% on a constant dollar basis) to
$682,149 due to strong growth in sales management products in North America,
particularly Xponent, Xtrend, Earlyview and Sales Territory Products, the
expansion of Xponent in Europe and the success of the Weekly Data product in
Japan. Market research revenue increased 3.0% to $404,091 or 6.5% on a constant
dollar basis. Other revenue decreased 0.8% to $44,971. Other revenue includes
certain consulting and other services. On a constant dollar basis these revenues
grew 0.5%. IMS Segment operating income declined 2.8% in 2000 to $282,514 from
$290,564 in 1999. This decrease in operating income was due to growth in the
core IMS business which was more than offset by a number of one-time charges in
2000, including Severance, Impairment and Other Charges, the Executive
Management Transition Charge and the technology acceleration charge.
Excluding the non-recurring charges in 2000 of $96,131 as well as Year 2000
remediation costs of $24,558 and Gartner Spin-Off costs of $9,500 in 1999
operating income increased by 16.6% to $378,645 in 2000 from $324,622 in 1999.
This strong growth and increasing margins (33.5% in 2000 versus 31.3% in 1999)
reflect operating income growth which outpaced strong revenue growth due
primarily to the segment's ability to leverage its established worldwide
resources, as well as the favorable impact of foreign exchange.
CTS SEGMENT
IMS's ownership interest in CTS decreased to 60.5% (representing 93.9% of
the outstanding voting power) at December 31, 2000 from 61.1% at December 31,
1999. This decrease was due to stock option exercises and employee stock
purchases at CTS.
CTS revenue, prior to the elimination of intersegment sales, increased 54.1%
to $137,031 in 2000 from $88,904 in 1999. CTS operating income increased 57.0%
to $26,129 in 2000 from $16,645 in 1999. The increase resulted primarily from an
increase in application development and integration, application management,
re-engineering and other services partially offset by a decrease in Year 2000
compliance services.
TRANSACTION BUSINESSES SEGMENT
Transaction Businesses Segment revenue decreased 40.6% to $170,385 in 2000
from $286,880 in 1999. This was primarily due to the inclusion of only eight
months of Synavant revenue in 2000 versus twelve months in 1999, and nine months
of Erisco revenues in 2000 versus twelve months in 1999. An increase in Erisco
revenues (software licenses and services) was offset by lower interactive
marketing volumes and lower Synavant software fees.
The Transaction Businesses Segment reported an operating loss in 2000 of
$171,450 compared to operating income of $31,814 in 1999. This was primarily due
to the Synavant impairment charge of $115,453, Spin and Related Costs of $37,626
and the impact of the reduced revenues, explained above, on operating income.
RESULTS BY GEOGRAPHIC AREA
Total IMS revenue in the United States increased by 11.4% to $653,965 in
2000 from $586,826 in 1999. The increase reflected the strong performance of
core business services, new product introductions and strong revenue growth at
CTS through the addition of new customers and transitioning existing customers
from Y2K compliance services. This was partially offset by the spin-off of the
Synavant Business and disposal of Erisco in 2000.
Non-U.S. revenue decreased 5.0% to $770,394 in 2000 from $811,163 in 1999.
Non-U.S. operations include principally Japan, the United Kingdom, Germany,
Italy, France, Australia and other countries within Europe, Latin America and
the Far East. The decrease reflects the inclusion of Synavant revenues for eight
months in 2000 versus twelve months in 1999.
NON-U.S. OPERATING AND MONETARY ASSETS
IMS operates globally, deriving a significant portion of its operating
income from non-U.S. operations. As a result, fluctuations in the value of
foreign currencies relative to the U.S. dollar may increase the volatility of
U.S. dollar operating results. IMS enters into forward foreign currency
contracts to partially offset the effect of currency fluctuations. In 2001,
foreign currency translation decreased U.S. dollar revenue growth by
approximately 4.3%, while the impact on operating income growth was
approximately 8.8%. In 2000, foreign currency translation decreased U.S. dollar
revenue growth by approximately 3.8%, while the impact on operating income
growth was negligible.
Non-U.S. monetary assets are maintained in currencies other than the U.S.
dollar, principally those of the Japanese yen, the Euro and the Swiss franc.
Where monetary assets are held in the functional currency of the local entity,
changes in the value of these currencies relative to the U.S. dollar are charged
or credited to Cumulative Translation Adjustment in the Statements
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of Shareholders' Equity. The effect of exchange rate changes during 2001
decreased the U.S. dollar amount of Cash and Cash Equivalents by $3,555.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents increased $149,793 during 2001 to $268,386 versus
$118,593 in the prior year. The increase was driven by cash generated from
operating activities of $325,305 offset by cash used in investing and financing
activities of $53,281 and $118,676, respectively and a negative foreign exchange
impact on Cash and Cash Equivalents of $3,555. Cash and Cash Equivalents include
amounts at CTS of $84,977 and $61,976 as of December 31, 2001 and 2000,
respectively. The Company owned 58.3% of the common shares outstanding which
represented 93.3% of the voting power at December 31, 2001. To access these Cash
and Cash Equivalents, the Company would have to require CTS to declare and pay a
dividend. Furthermore, a portion of the dividend would be paid to the Minority
Shareholders of CTS.
Net Cash Provided by Operating Activities increased $155,593 during 2001 to
$325,305 versus $169,712 in the prior year. This increase relates primarily to a
$212,291 payment made to the Internal Revenue Service during 2000 for which
there was no comparable payment in 2001 and the receipt during 2001 of $10,530
from Nielsen Media Research, Inc. These amounts relate to the Donnelley Legacy
tax contingency as more fully described in Note 21 to the Consolidated Financial
Statements. Adjusting for the impact of the payment and receipt as described,
cash from operations would have amounted to $314,775 and $382,003 in 2001 and
2000, respectively, or a net decrease in cash provided of $67,228. The most
significant item causing this decrease relates to approximately $32,300 in cash
payments, in settlement of obligations accrued for during 2000 as part of the
Synavant Spin and Related Cost accrual, the Executive Management Charge and the
2000 Severance, Impairment and Other charge that were previously accrued.
Net cash used in investing activities decreased $36,379 to $53,281 from
$89,660 in the prior year. The decrease is attributable to $65,207 in Gartner
proceeds combined with the fact that 2001 was not impacted by three significant
outlays which occurred during 2000 consisting of $32,012 relating to a cash
payment made to Erisco prior to its disposition, $10,679 in payments made on the
Erisco and TriZetto transaction and $27,343 to fund other investments primarily
in Allscripts and Enterprises, as well as other items amounting to $15,608.
Offsetting these amounts were lower proceeds on sales of investments of $82,385
and higher spending on business acquisitions of $32,085.
Net cash used in financing activities increased $44,757 during 2001 to
$118,676 versus $73,919 in the prior year. The increase in cash used is
primarily related to net repayments on debt during 2001 as compared to net
borrowings during 2000 amounting to an increase in net cash outflows of
$293,495. Offsetting this increase in cash outflows, in 2001 IMS paid $108,529
less cash to repurchase shares under its share repurchase program, received
$119,834 more in proceeds from the exercise of employee stock options and was
not impacted by a $19,438 payment made as a result of the Synavant spin-off in
2000.
Financing activities include cash dividends paid of $0.08 per share annually
($0.02 per quarter), which amounted to $23,641 and $23,686 during 2001 and 2000,
respectively. The payment and level of cash dividends by IMS are subject to the
discretion of the Board of Directors of IMS. Any future dividends will be based
on and affected by a number of factors, including the operating results and the
financial requirements of IMS.
STOCK REPURCHASE PROGRAMS
On July 19, 2000 the Board of Directors authorized a stock repurchase
program to buy up to 40,000 shares of IMS's outstanding common stock. As of
December 31, 2001, 20,577 shares have been acquired under this program at a
total cost of $517,129. During 2001, IMS repurchased 12,124 shares at a total
cost of $310,482.
On October 19, 1999 the Board of Directors authorized a stock repurchase
program to buy up to 16,000 shares of IMS's outstanding common stock. This
program was completed in October 2000 at a total cost of $348,730.
On October 20, 1998 the Board of Directors authorized a share repurchase
program to buy up to 16,000 shares of the Company's outstanding common stock.
This program was completed in October 1999 at a total cost of $478,302.
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OTHER INFORMATION
During the fourth quarter of 2001, IMS completed the assessment of its
Competitive Fitness Program. This program was designed to further streamline
operations, increase productivity, and improve client service. IMS recorded
$94,616 of Severance, Impairment and Other Charges relating to the IMS Segment
during the fourth quarter of 2001 as a component of operating income.
The cash portion of the 2001 charge amounted to $64,205, primarily for
severance payments and contract terminations, with the non-cash portion
accounting for $30,411, composed primarily of asset write-offs. Of the cash
portion, $46,348 is expected to be paid during 2002.
The impact on the 1999 cash flow from the "Calendarization" (see Note 20 to
the Consolidated Financial Statements) was $30,664, which represents cash flow
from the IMS operating units for the month of December 1998.
On July 23, 1999 Gartner paid a cash dividend to its holders of record as of
July 16, 1999. IMS's portion of this dividend was $52,877, net of taxes. On
July 23, 1999, Gartner effected a recapitalization and on July 26, 1999 IMS
distributed approximately 40.7 million Gartner Class B Common Stock to its
shareholders. During the third quarter of 2001, IMS completed the sale of its
remaining interest in Gartner resulting in a net loss of $8,146. See Note 4 to
the Consolidated Financial Statements for a further discussion of the sale of
Gartner shares.
IMS has borrowing arrangements with several international banks to provide
lines of credit up to $525,000 at December 31, 2001. Total borrowings under
these lines were $346,463 and $384,281 at December 31, 2001 and 2000,
respectively. In general, the terms of these lines of credit give IMS the option
to borrow at an interest rate equal to LIBOR plus 37.5 basis points for
short-term lines and LIBOR plus 65 basis points for long-term lines. The
weighted average interest rates for the short-term lines were 2.34% and 7.10% at
December 31, 2001 and 2000, respectively. The weighted average interest rates
for the long-term lines were 2.48% at December 31, 2001. The commitment fee
associated with the unused short-term lines of credit is 22.5 basis points per
year, increasing to 28.75 basis points per year if the facilities are less than
50% utilized. Under the long-term lines the commitment fee is 52.5 basis points
per year. The borrowing arrangements require IMS to comply with certain
financial covenants and at December 31, 2001 and 2000, IMS was in compliance
with all such covenants.
During the fourth quarter of 2001, IMS renegotiated with several banks and
entered into three-year lines of credit for borrowings of up to $175,000.
Borrowings under these three-year facilities are short-term in nature; however,
IMS has the ability and the intent to refinance the short-term borrowings
through December 2004 as they come due. As such, at December 31, 2001, the
Company reclassified $150,000 of its then outstanding debt as long-term debt
pursuant to the provisions of Statement of Financial Accounting Standards
("SFAS') No. 6, "Classification of Short-Term Obligations Expected to be
Refinanced." Borrowings under short-term lines were $196,463 and $384,281 at
December 31, 2001 and 2000, respectively. Borrowings have maturity dates of up
to ninety days from their inception. The borrowings were taken out primarily to
support IMS's share repurchase program and to fund the Donnelley Legacy tax
payment further described in Note 21 to the Consolidated Financial Statements.
Financial Reporting Release No. 61 was recently released by the Securities
and Exchange Commission ("SEC") to require all companies to include a discussion
to address, among other things, liquidity, off-balance sheet arrangements,
contractual obligations and commercial commitments. These matters are addressed
throughout this section and in Notes 5, 11, 12, 13 and 18 to the Consolidated
Financial Statements.
CONTRACTUAL OBLIGATIONS
IMS's contractual obligations include facility leases, agreements to
purchase data and telecommunications services and leases of certain computer and
other equipment. At December 31, 2001, the minimum annual payments under these
agreements and other contracts that have initial or remaining non-cancelable
terms in excess of one year are as listed in the following table:
<Table>
<Caption>
DATA AND COMPUTER
OPERATING TELECOMMUNICATION EQUIPMENT
YEAR LEASES(1) SERVICES(2) LEASES(3) TOTAL
- ----------------------------------------------------------------
2002 $19,222 $102,676 $17,599 $139,497
2003 17,107 79,557 13,373 110,037
2004 12,607 47,822 7,316 67,745
2005 9,894 37,133 4,252 51,279
2006 8,710 3,160 579 12,449
Thereafter 9,645 2,490 116 12,251
- ----------------------------------------------------------------
Total $77,185 $272,838 $43,235 $393,258
- ----------------------------------------------------------------
</Table>
(1) Rental expense under real estate operating leases for the years 2001, 2000
and 1999 was $17,176, $18,911 and $26,656 respectively.
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(2) Expense for data and telecommunications services for the years 2001, 2000
and 1999 was $96,727, $85,858 and $73,061 respectively.
(3) Rental expense under computer and other equipment leases was $16,790,
$14,348 and $22,248 for 2001, 2000 and 1999, respectively. These leases are
frequently renegotiated or otherwise changed as advancements in computer
technology produce opportunities to lower costs and improve performance.
IMS may also be required to pay up to $36,720 during 2002 to 2004 as
contingent consideration under the terms of one of its 2001 acquisitions. See
Note 5 to the Consolidated Financial Statements.
Commitments also include "Capital Calls" which are required payments
pursuant to the Enterprises agreements. At December 31, 2001 the Company is
obligated to contribute a maximum of $7,000 to meet capital call requirements
over the remaining life of the Enterprises venture capital investments.
IMS believes that its available funds and the cash flows expected to be
generated from operations will be adequate to satisfy its current and planned
operations and needs for at least the next 12 months. IMS's ability to expand
and grow its business in accordance with current plans, to make acquisitions,
repurchase stock and to meet its long-term capital requirements beyond this
12-month period will depend on many factors, including the rate, if any, at
which its cash flow increases, its ability and willingness to accomplish
acquisitions, repurchase treasury stock and the availability to IMS of public
and private debt and equity financing, including its current ability to secure
bank lines of credit. IMS cannot be certain that additional financing, if
required, will be available on terms favorable to it, if at all.
YEAR 2000
External and internal costs totaling $79,299 to address the Year 2000 issue
were expensed as incurred through December 31, 1999, of which $24,558 was
incurred in 1999. These costs were primarily related to repairing software. This
does not include the costs of software and systems that were replaced or
enhanced in the normal course of business.
MARKET RISK
IMS's primary market risks are the impact of foreign exchange fluctuations
on non-dollar-denominated revenue, the impact of price fluctuations on equity
securities and the impact of interest rate fluctuations on interest expense.
IMS transacts business in more than 100 countries and is subject to risks
associated with changing foreign exchange rates. IMS's objective is to reduce
earnings and cash flow volatility associated with foreign exchange rate changes.
Accordingly, IMS enters into foreign currency forward contracts to minimize the
impact of foreign exchange movements on net income and on the value of
non-functional currency assets and liabilities.
It is IMS's policy to enter into foreign currency transactions only to the
extent necessary to meet its objectives as stated above. IMS does not enter into
foreign currency transactions for investment or speculative purposes. At
December 31, 2001, all foreign currency forward contracts had a term of less
than one year. The principal currencies hedged are the Japanese yen, the Euro
and the Swiss franc.
The fair value of IMS's hedging instruments, estimated at $131,591 at
December 31, 2001, is subject to change as a result of potential changes in
foreign exchange rates. IMS assesses its market risk based on changes in foreign
exchange rates utilizing a sensitivity analysis. The sensitivity analysis
measures the potential loss in fair values based on a hypothetical 10% change in
currency rates. The potential loss in fair value for foreign exchange
rate-sensitive instruments, all of which were forward foreign currency
contracts, based on a hypothetical 10% decrease in the value of the U.S. dollar
or, in the case of non-dollar-related instruments, the currency being purchased,
was $9,112 at December 31, 2001. However, the change in the fair value of
foreign exchange rate-sensitive instruments would likely be offset by a change
in the fair value of the asset or liability being hedged. The estimated fair
values of the foreign exchange risk management contracts were determined based
on quoted market prices.
IMS also invests in equity securities and is subject to equity price risk.
These investments are classified as available for sale and consequently, carried
at fair value, with unrealized gains and losses, net of income taxes, reported
as a component of shareholders' equity. IMS does not hedge this market risk
exposure. IMS assesses its market risk based on changes in market prices
utilizing a sensitivity analysis. The sensitivity analysis measures the
potential loss in fair values based on a hypothetical 10% decrease in the market
price of these securities. A 10% decline in the market price of these equity
securities would cause the fair value of the securities to decrease by $2,716 at
December 31, 2001.
IMS also borrows funds and since the interest rate associated with those
borrowings changes over time, IMS is subject to interest rate risk. IMS has not
hedged this exposure. IMS assesses its market risk based on
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changes in interest rates utilizing a sensitivity analysis. The sensitivity
analysis measures the increase in annual interest expense based on a
hypothetical 1% increase in interest rates, which would have amounted to $3,464
at December 31, 2001.
EURO CONVERSION
On January 1, 1999, 11 member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency ("Euro"). The transition period for the introduction of
the Euro was between January 1, 1999 and January 1, 2002.
IMS instituted plans for the introduction of the Euro and addressed the
related issues, including the conversion of information technology systems,
recalculating currency risk, recalibrating derivatives and other financial
instruments, continuity of contracts, taxation and accounting records and the
increased price transparency resulting from the use of a single currency in the
eleven participating countries which may affect the ability of some companies to
price products differently in various European markets. IMS believes that
differences in national market size, data collection requirements and specific
product specifications required due to the diverse market information needs in
the healthcare markets of Europe will reduce the potential for price
harmonization in most of IMS's product ranges. The introduction of the Euro did
not have a material adverse effect on IMS's results of operations during 2001 or
2000.
FORWARD-LOOKING STATEMENTS
This 2001 Annual Report to Shareholders, as well as information included in
oral statements or other written statements made or to be made by IMS, contain
statements which, in the opinion of IMS, may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this Annual Report and
include, but are not limited to, all statements relating to plans for future
growth and other business development activities as well as capital
expenditures, financing sources, dividends and the effects of regulation and
competition, Euro conversion and all other statements regarding the intent,
plans, beliefs or expectations of IMS or its directors or officers. Stockholders
are cautioned that such forward-looking statements are not assurances for future
performance or events and involve risks and uncertainties that could cause
actual results and developments to differ materially from those covered in such
forward-looking statements. These risks and uncertainties include, but are not
limited to, risks associated with operating on a global basis, including
fluctuations in the value of foreign currencies relative to the U.S. dollar, and
the ability to successfully hedge such risks; to the extent IMS seeks growth
through acquisitions, alliances or joint ventures, the ability to identify,
consummate and integrate acquisitions, alliances and ventures on satisfactory
terms; the ability to develop new or advanced technologies, systems and products
for their businesses on time and on a cost-effective basis including but not
limited to those that use or are related to the Internet; the ability to
identify and implement cost-containment measures; the ability to successfully
maintain historic effective tax rates and to achieve estimated corporate
overhead levels; competition, particularly in the markets for pharmaceutical
information; regulatory, legislative and enforcement initiatives, particularly
in the area of medical privacy and tax; the ability to timely and
cost-effectively resolve any problems associated with the Euro currency issue,
including the possibility of problems with internal data processing systems; the
ability to obtain future financing on satisfactory terms; deterioration in
economic conditions, particularly in the pharmaceutical, healthcare, or other
industries in which IMS's customers may operate; consolidation in the
pharmaceutical industry and the other industries in which IMS's customers
operate; conditions in the securities markets which may affect the value or
liquidity of portfolio investments and management's estimates of lives of
assets, recoverability of assets, fair market value, estimates and liabilities
and accrued income tax benefits and liabilities and related contingencies;
failure of third parties to convert their information technology systems to the
Euro currency in a timely manner and actions of government agencies and other
third parties with respect to Euro currency issues; and terrorist activity, the
threat of such activity, and responses to and results of such activity and
threats, including but not limited to effects, domestically and/or
internationally, on IMS, its personnel and facilities, its customers and
suppliers, financial markets and general economic conditions. Consequently, all
the forward-looking statements contained in this Annual Report to Shareholders
are qualified by the information contained herein, including, but not limited
to, the information contained under this heading and the Consolidated Financial
Statements and Notes thereto and by the material set forth under the headings
"Business" and "Factors that May Affect Future Results" in IMS's Annual Report
on Form 10-K for the year ended December 31, 2001. IMS is under no obligation to
publicly release any revision to any forward-looking statement contained or
incorporated herein to reflect any future events or occurrences.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements.
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Note 2 to the Consolidated Financial Statements includes a summary of the
significant accounting policies and methods used in the preparation of IMS's
Consolidated Financial Statements. Following is a brief discussion of the more
significant accounting policies and methods used by IMS.
Management's discussion and analysis of its results of operations and
financial position are based upon its Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of financial statements in
accordance with these principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses and the related disclosure of contingent assets and liabilities.
On an ongoing basis, IMS evaluates its estimates. The most significant
estimates relate to the allowance for doubtful accounts, inventories,
investments, depreciation of fixed assets including salvage values, carrying
value of intangible assets and computer software, provision for income taxes and
tax assets and liabilities, reserves for severance, pensions and reserves for
employee benefits, contingencies and litigation. IMS bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could vary from the
estimates and assumptions used in the preparation of the accompanying financial
statements.
IMS believes the following critical policies affect its more significant
judgments and estimates used in the preparation of its Consolidated Financial
Statements.
REVENUE RECOGNITION. IMS recognizes revenue as earned, which is over the
service period as the information is delivered or related services are
performed. A substantial portion of IMS's revenue is derived from subscription
based services. Advance payments for services and subscriptions are credited to
deferred revenue and reflected in operating revenue over the subscription term,
which is generally one year.
IMS also derives a portion of its revenues from software licenses which is
recognized upon delivery of the software, when persuasive evidence of an
arrangement exists, the related fees are fixed or determinable and collection of
fees is reasonably assured. Revenues from post-contract customer support
(maintenance) are recognized on a straight-line basis over the term of the
arrangement.
Revenues from time and material service agreements are recognized as the
services are provided. Revenues from fixed price service contracts which relate
primarily to CTS are recognized over the contract term based on the percentage
of costs incurred for services provided during the period compared to the total
estimated costs of services to be provided over the entire arrangement.
Anticipated losses on contracts are recognized immediately. Under the terms of
these contracts, all services provided by IMS through the date of cancellation
are due and payable.
GOODWILL. Goodwill represents the excess purchase price over the fair value
of identifiable net assets of businesses acquired. The Company amortizes
goodwill on a straight-line basis over five to forty years. In accordance with
the provisions of SFAS No. 142 goodwill arising on acquisitions completed since
July 1, 2001 is no longer amortized. IMS periodically reviews the recoverability
of goodwill, not identified with impaired long-lived assets, based on estimated
undiscounted future cash flow from operating activities compared with the
carrying value of goodwill and recognizes any impairment on the basis of such
comparison. The recognition and measurement of goodwill impairment is assessed
at the business unit level. Goodwill may become impaired as a result of several
factors such as increased competition and lower demand for the Company's
products and services.
OTHER LONG-LIVED ASSETS. In accordance with the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," IMS reviews for the impairment of long-lived assets
and certain identifiable intangibles held and used whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In general, this statement requires recognition of an impairment
loss when the sum of undiscounted expected future cash flow is less than the
carrying amount of such assets. Accordingly, IMS recognizes impairment losses on
long-lived assets as a result of its review. The measurement for such impairment
loss is then based on the fair value of the asset measured by its discounted
future cash flows or market value, if more readily determinable.
INCOME TAXES. IMS operates in more than 100 countries around the world and
its earnings are taxed at the applicable income tax rate in each of those
countries. IMS provides for income taxes utilizing the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recorded to reflect the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts at each balance sheet date, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. If it is determined that it is more likely than not that future
tax benefits associated with a deferred tax asset will not be realized, a
valuation allowance is provided. In the event IMS
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were to determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made.
Likewise, should IMS determine that it would not be able to realize all or part
of its net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made. The
effect on deferred tax assets and liabilities of a change in the tax rates is
recognized in income in the period that includes the enactment date. While IMS
intends to continue to seek global tax planning initiatives, there can be no
assurance that IMS will be able to successfully implement such initiatives to
reduce or maintain its overall tax rate. IMS intends to indefinitely reinvest
the undistributed earnings of non-U.S. subsidiaries other than the Indian
earnings of CTS. CTS management currently intends to repatriate all Indian
earnings to the U.S. and has provided deferred U.S. income taxes on all such
Indian undistributed earnings. Deferred tax liabilities for U.S. federal income
taxes have not been recognized for all other undistributed earnings. If such
earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, applicable taxes will be provided for on such amounts.
It is not currently practicable to determine the amount of applicable taxes. See
Note 17 to the Consolidated Financial Statements.
FOREIGN CURRENCY TRANSLATION. IMS has significant investments in non-U.S.
countries. Therefore, changes in the value of foreign currencies affect IMS's
Consolidated Financial Statements when translated into U.S. dollars. Impacts
associated with foreign currency have been more fully discussed in the section
entitled "Market Risk." For all operations outside the United States of America
where IMS has designated the local currency as the functional currency, assets
and liabilities are translated using end-of-period exchange rates; revenues and
expenses are translated using average rates of exchange. For these countries,
currency translation adjustments are accumulated in a separate component of
Shareholders' Equity whereas transaction gains and losses are recognized in
Other Expense, net. For operations in countries that are considered to be highly
inflationary or where the U.S. dollar is designated as the functional currency,
monetary assets and liabilities are translated using end-of-period exchange
rates, whereas non-monetary accounts are translated using historical exchange
rates, and all translation and transaction adjustments are recognized in Other
Expense, net.
INVESTMENTS. IMS carries direct equity investments in private companies and
interests in venture capital entities in the financial statements at cost. On a
quarterly basis IMS makes periodic estimates of the market value of these
investments and reduces the carrying value of the investments if there is an
other-than-temporary decline in their fair value below cost. IMS evaluates the
recoverability of the underlying securities in each venture capital entity on an
individual basis. If the market price of these equity securities declines by a
significant amount there could be a material impact on IMS's financial
statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2001 IMS adopted SFAS No. 133. "Accounting for
Derivative Instruments and Hedging Activities," as amended. Additional
discussion of IMS's derivative and hedging activities is included in Note 14 to
the Consolidated Financial Statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires the purchase method of accounting to
be used for all business combinations initiated after June 30, 2001 and
establishes specific criteria for the recognition of intangible assets
separately from goodwill. IMS adopted SFAS No. 141 on July 1, 2001 and is not
amortizing goodwill acquired subsequent to June 30, 2001. SFAS No. 142 addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
intangible assets which have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. It also provides that
intangible assets that have finite useful lives be amortized. Under the
provisions of SFAS No. 142, any impairment loss identified upon adoption of this
standard is recognized as a cumulative effect of a change in accounting
principle. Any impairment loss incurred subsequent to initial adoption of SFAS
No. 142 is recorded as a charge to current period earnings. IMS will adopt SFAS
No. 142 beginning January 1, 2002 and at that time will stop amortizing goodwill
that resulted from business combinations completed prior to the adoption of SFAS
No. 141. IMS recorded goodwill amortization of $10,316 and $19,120 during 2001
and 2000, respectively. IMS also recorded amortization expense related to equity
method investees of approximately $9,600 and $2,400 in 2001 and 2000,
respectively. IMS has six months from January 1, 2002 to complete the first step
of the transitional goodwill impairment test. IMS is currently evaluating the
financial impact of adoption of SFAS No. 142; however, it does not believe that
there will be a material adverse impact on IMS's financial position, results of
operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 eliminates the
13
<Page>
requirement for discontinued operations to be measured on a net realizable value
basis and future operating losses to be recognized before they occur. Instead,
it requires that assets held for sale be valued at the lower of carrying amount
or fair value less cost to sell. SFAS 144 extends the reporting requirements for
discontinued operations to certain components of an entity. Under the provisions
of SFAS No. 144, spin-offs and exchanges of similar productive assets are
required to be recorded at the lower of carrying value or fair value and such
assets classified as held and used until they are disposed of. Any resultant
impairment loss is required to be recognized when the asset is disposed of. For
assets that are grouped when an entity is developing estimates of future cash
flows, SFAS No. 144 requires that the remaining useful life of the "primary
asset" be used for the entire group. In addition, SFAS No. 144 permits the use
of a probability-weighted approach in developing estimates of future cash flows
used to test for recoverability and in estimating fair value. IMS will adopt
SFAS No. 144 beginning January 1, 2002 and is currently evaluating the impact of
the adoption; however, IMS does not believe that there will be a material
adverse impact on IMS's financial position, results of operations or cash flows.
DIVIDENDS
The payments and level of cash dividends by IMS are subject to the
discretion of the Board of Directors of IMS. For the years ended December 31,
2001 and 2000, IMS declared quarterly dividends of $0.02 per share, or $0.08 per
share on an annual basis. Any future dividends will be based on, and affected
by, a number of factors, including the operating results and financial
requirements of IMS.
IMS HEALTH COMMON STOCK INFORMATION
IMS's common stock is listed on the New York Stock Exchange (symbol "RX").
The number of shareholders of record and shares outstanding on December 31, 2001
and 2000, were 6,056 and 6,607, respectively (not in thousands; refers to actual
number of shareholders) and 294,088 and 291,342, respectively. Approximately 77%
of IMS's shares are held by institutions. The high and low closing stock price
per share during 2001 were $30.20 and $18.99, respectively. The following table
shows the high and low closing stock price per share during the four quarters of
2001 and 2000:
<Table>
<Caption>
PRICE PER
SHARE($)
-----------------------
2001
-----------------------
HIGH LOW
- --------------------------------------------------------------
First Quarter 27.33 22.50
Second Quarter 30.20 24.30
Third Quarter 28.50 23.60
Fourth Quarter 27.60 18.99
- --------------------------------------------------------------
Year 30.20 18.99
- --------------------------------------------------------------
</Table>
<Table>
<Caption>
PRICE PER
SHARE($)
-----------------------
2000(1)
-----------------------
HIGH LOW
- --------------------------------------------------------------
First Quarter 25.86 15.98
Second Quarter 17.56 14.33
Third Quarter 20.75 15.86
Fourth Quarter 28.56 19.94
- --------------------------------------------------------------
Year 28.56 14.33
- --------------------------------------------------------------
</Table>
(1) Share prices for periods prior to the Synavant Spin-Off on August 31, 2000
are adjusted to give effect to the estimated impact of that Spin-Off on IMS
share prices based on the share price of IMS and Synavant immediately prior
and immediately after the Synavant Spin-Off. The 2000 high and low per share
price unadjusted for the Synavant Spin-Off were as follows: $26.50 and
$16.38 in the first quarter and $18.00 and $14.69 in the second quarter,
respectively.
14
<Page>
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
- -------------------------------------------
To the Shareholders of IMS Health Incorporated:
Management is responsible for the preparation of the consolidated financial
statements and related information that are presented in this report. The
consolidated financial statements, which include amounts based on management's
estimates and judgments, have been prepared in conformity with accounting
principles generally accepted in the United States of America. Other financial
information in the report to shareholders is consistent with that in the
consolidated financial statements.
The Company maintains accounting and internal control systems to provide
reasonable assurance at reasonable cost that assets are safeguarded against loss
from unauthorized use or disposition, and that the financial records are
reliable for preparing financial statements and maintaining accountability for
assets. These systems are augmented by written policies, an organizational
structure providing division of responsibilities, careful selection and training
of qualified personnel and a program of internal audits.
The Company engaged PricewaterhouseCoopers LLP, independent accountants, to
audit and render an opinion on the consolidated financial statements in
accordance with auditing standards generally accepted in the United States of
America. These standards include an assessment of the systems of internal
controls and tests of transactions to the extent considered necessary by them to
support their opinion.
The Board of Directors, through its Audit Committee consisting solely of
outside directors of the Company, meets periodically with management, internal
auditors and our independent accountants to ensure that each is meeting its
responsibilities and to discuss matters concerning internal controls and
financial reporting. PricewaterhouseCoopers LLP and the internal auditors each
have full and free access to the Audit Committee.
[LOGO]
David M. Thomas
Chairman, Chief Executive Officer and President
[LOGO]
Nancy E. Cooper
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT
ACCOUNTANTS
- -------------------------------------------
To the Board of Directors and Shareholders of IMS Health Incorporated:
In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of income, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of IMS Health Incorporated and its subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 11, 2002
15
<Page>
IMS HEALTH INCORPORATED
Consolidated Statements of Financial Position
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2001 2000
- ---------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 268,386 $ 118,593
Accounts Receivable, net 228,626 230,988
Other Receivable (Note 21) 33,361 41,136
Other Current Assets 126,472 132,813
Net Assets of Discontinued Operations -- 60,799
- ---------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 656,845 584,329
- ---------------------------------------------------------------------------------------
Securities and Other Investments 51,992 87,500
TriZetto Equity Investment 119,896 137,501
Property, Plant and Equipment, net 149,084 145,447
Computer Software 116,540 117,688
Goodwill 148,597 144,100
Other Assets 124,600 91,596
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,367,554 $ 1,308,161
- ---------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 33,327 $ 45,198
Accrued and Other Current Liabilities 196,215 219,726
Short-Term Debt 196,463 384,281
Accrued Income Taxes 108,941 81,856
Short-Term Deferred Tax Liability 10,684 15,812
Deferred Revenues 89,861 96,095
- ---------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 635,491 842,968
- ---------------------------------------------------------------------------------------
Post-retirement and Post-employment Benefits 44,305 43,471
Long-Term Debt (Note 14) 150,000 --
Other Liabilities 174,373 182,840
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 1,004,169 $ 1,069,279
- ---------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 18 and 21)
MINORITY INTERESTS $ 145,019 $ 135,342
SHAREHOLDERS' EQUITY:
Preferred Stock, Par Value $.01 Per Share,
Authorized--10,000 Shares; Outstanding--None -- --
Series Common Stock, Par Value $.01 Per Share,
Authorized--10,000 Shares; Outstanding--None -- --
Common Stock, Par Value $.01, Authorized 800,000 Shares;
Issued 335,045 Shares in 2001 and 2000, respectively 3,350 3,350
Capital in Excess of Par 504,776 596,273
Retained Earnings 921,925 760,140
Treasury Stock, at cost, 40,957 Shares and 43,703 Shares in
2001 and 2000, respectively (1,078,914) (1,139,298)
Cumulative Translation Adjustment (138,123) (106,417)
Minimum Pension Liability Adjustment (3,746) (672)
Unrealized Loss on Gartner, Inc., net of tax benefit -- (20,946)
Unrealized Gain on Investments, net of tax expense 9,098 11,110
- ---------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 218,366 $ 103,540
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS'
EQUITY $ 1,367,554 $ 1,308,161
- ---------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
16
<Page>
IMS HEALTH INCORPORATED
Consolidated Statements of Income
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2001 2000 1999
- --------------------------------------------------------------------------------------------------
OPERATING REVENUE $1,332,923 $1,424,359 $1,397,989
- --------------------------------------------------------------------------------------------------
Operating Costs 494,411 549,259 551,099
Selling and Administrative Expenses 344,100 416,006 397,924
Depreciation and Amortization 69,178 92,000 100,443
Severance, Impairment and Other Charges 94,616 45,689 --
Terminated Transaction Costs 6,457 -- --
Spin and Related Costs -- 37,626 9,500
Impairment Charge--Synavant -- 115,453 --
Executive Management Transition Charge -- 31,133 --
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 324,161 137,193 339,023
- --------------------------------------------------------------------------------------------------
Interest Income 9,053 4,332 8,225
Interest Expense (18,059) (17,640) (7,590)
Loss on Gartner Investment (Note 4) (84,880) (6,896) --
Gains (Losses) from Investments, net (27,642) 78,139 25,264
Gain on Sale of Erisco -- 84,530 --
Gain (Loss) on Issuance of Investees' Stock, net (Notes 11
and 12) (1,490) 9,029 --
Other Expense, net (Note 11) (17,342) (27,374) (16,480)
- --------------------------------------------------------------------------------------------------
NON-OPERATING INCOME (LOSS), NET (140,360) 124,120 9,419
- --------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 183,801 261,313 348,442
Provision for Income Taxes (38,415) (140,412) (98,076)
TriZetto Equity Loss, net of Income Tax Benefit of $4,504
for 2001 and $3,080 for 2000 (6,985) (4,777) --
- --------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 138,401 116,124 250,366
Income from Discontinued Operations, net of Income Taxes of
$25,320, $2,526 and $12,635 for 2001, 2000 and 1999,
respectively (Note 4) 47,025 4,692 25,695
- --------------------------------------------------------------------------------------------------
NET INCOME $ 185,426 $ 120,816 $ 276,061
- --------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.47 $ 0.39 $ 0.80
Income from Discontinued Operations 0.16 0.02 0.08
- --------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.63 $ 0.41 $ 0.88
- --------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.46 $ 0.39 $ 0.78
Income from Discontinued Operations 0.16 0.02 0.08
- --------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.62 $ 0.40 $ 0.86
- --------------------------------------------------------------------------------------------------
Weighted Average Number of Shares Outstanding--Basic 295,162 296,077 311,976
Dilutive Effect of Shares Issuable as of Period End Under
Stock Option Plans 3,654 2,203 6,065
Adjustment of Shares Outstanding Applicable to Exercised and
Cancelled Stock Options During the Period 1,331 1,758 1,520
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED 300,147 300,038 319,561
- --------------------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
17
<Page>
IMS HEALTH INCORPORATED
Consolidated Statements of Cash Flows
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2001 2000 1999
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 185,426 $ 120,816 $ 276,061
Less Income from Discontinued Operations (47,025) (4,692) (25,695)
- -----------------------------------------------------------------------------------------------
Income from Continuing Operations 138,401 116,124 250,366
Adjustments to reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization 69,178 92,000 100,443
Bad Debt Expense 3,930 3,378 2,143
Deferred Income Taxes (2,342) 45,983 18,085
(Gain) Loss from Investments, net 27,642 (78,139) (25,264)
(Gain) Loss on Issuance of Investees' Stock, net 1,490 (9,029) --
TriZetto Equity Loss, net 6,985 4,777 --
Minority Interests in Net Income of Consolidated Companies 19,466 17,222 14,260
Non-Cash Portion of Severance, Impairment and Other
Charges 30,411 35,341 --
Non-Cash Portion of Executive Management Transition Charge -- 18,951 --
Non-Cash Portion of Synavant Spin and Related Costs -- 1,946 --
Impairment Charge--Synavant -- 115,453 --
Loss on Gartner Investment 84,880 6,896 --
Gain on Sale of Erisco -- (84,530) --
Change in assets and liabilities, excluding effects from
acquisitions and dispositions:
Net (Increase) Decrease in Accounts Receivable (11,243) (34,401) 3,125
Net (Increase) Decrease in Inventory (5,028) 971 (5,128)
Net (Increase) Decrease in Prepaid Expenses (2,393) 10,079 (3,382)
Net (Decrease) Increase in Accounts Payable (10,817) 14,462 (4,745)
Net (Decrease) Increase in Accrued and Other Current
Liabilities (47,941) 11,882 (31,181)
Net (Decrease) Increase in Accrued Severance, Impairment
and Other Charges 28,117 39,129 --
Net (Decrease) Increase in Deferred Revenues (4,400) 6,843 (7,031)
Net (Decrease) Increase in Accrued Income Taxes (31,787) 40,413 41,317
Increase in Pension Assets, net (19,135) (8,894) (1,352)
Net Income Tax Benefit on Stock Option Exercises 28,256 12,631 7,224
Receipts (Payments) on Donnelley Legacy Tax Contingency 10,530 (212,291) --
Other Operating Items, net 11,105 2,515 (11,560)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 325,305 169,712 347,320
- -----------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital Expenditures (34,293) (33,433) (32,989)
Additions to Computer Software (49,858) (50,646) (59,284)
Payments for Acquisitions of Businesses, Net of Cash
Acquired (43,318) (11,233) (38,809)
Proceeds from Sale of Investments, net 1,052 83,437 51,442
Proceeds from Sale of IDRAC Holdings Inc., net 2,862 -- --
Proceeds from Sale of Gartner Investment 65,207 -- --
Cash Payment to Erisco prior to Disposition -- (32,012) --
Erisco and TriZetto Transaction Costs -- (10,679) --
Net (Increase) Decrease in Other Investments 122 (27,343) (19,408)
Other Investing Activities, net 4,945 (7,751) (3,711)
- -----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (53,281) (89,660) (102,759)
- -----------------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
18
<Page>
IMS HEALTH INCORPORATED
Consolidated Statements of Cash Flows (continued)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2001 2000 1999
- -----------------------------------------------------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (310,482) (419,011) (517,030)
Proceeds from Exercise of Stock Options 249,607 129,773 31,453
Dividends Paid (23,641) (23,686) (25,043)
Proceeds from Employee Stock Purchase Plan 2,459 2,087 4,229
Short-Term (Repayments) Borrowings, net (37,823) 255,672 92,242
Synavant Dividend -- (19,438) --
Other Financing Activities, net 1,204 684 (128)
- -----------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (118,676) (73,919) (414,277)
- -----------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes (3,555) (3,415) (4,340)
Impact of change in year end of the IMS Health operating
units -- -- 30,664
Cash Flow Provided by Discontinued Operations -- -- 52,877
- -----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 149,793 2,718 (90,515)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 118,593 115,875 206,390
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 268,386 $ 118,593 $ 115,875
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $ 20,376 $ 14,981 $ 7,491
Cash Paid during the Period for Income Taxes (Exclusive of
payment of $212,291 Donnelley Legacy Tax Contingency in
2000, see Note 21.) $ 36,812 $ 47,925 $ 67,490
Cash Received from Income Tax Refunds $ 4,000 $ 14,438 $ 42,903
Non-Cash Investing Activities:
Dividend of Gartner Class B Shares -- -- $ 134,259
Synavant Spin-Off Dividend -- $ 122,005 --
Equity Investment in TriZetto -- $ 100,650 --
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
19
<Page>
IMS HEALTH INCORPORATED
Consolidated Statements of Shareholders' Equity
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------
<Table>
<Caption>
SHARES
----------------- CAPITAL IN
COMMON TREASURY COMMON EXCESS OF PAR RETAINED TREASURY
STOCK STOCK STOCK VALUE EARNINGS STOCK
- ----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 335,045 16,304 $3,350 $669,853 $686,653 $ (473,810)
- ----------------------------------------------------------------------------------------------------
Net Income from IMS Operations for
the Month of December 1998 1,040
Change in Cumulative Translation
Adjustment (Note 20)
Total Comprehensive Income
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1999 335,045 16,304 $3,350 $669,853 $687,693 $ (473,810)
- ----------------------------------------------------------------------------------------------------
Net Income 276,061
Cash Dividends ($0.08 per share) (25,043)
Stock Dividend of Gartner Shares (134,259)
Prepaid Employee Stock Option Plan
Exercise or Cancellation (245)
Treasury Shares Acquired 18,565 (517,030)
Treasury Stock Reissued Under:
Exercise of Stock Options (1,874) (16,585) 55,262
Restricted Stock Plan 4,028
Less: Unearned Portion 118 (4,028)
Plus: Earned Portion of Grants (63) 3,589
Employee Stock Purchase Plan (149) 4,229
Cumulative Translation Adjustment
Unrealized Gain on Gartner
Securities, net of taxes of
$9,198
Unrealized Gain on Other
Investments, net of amount
realized of $17,388, net of taxes
of $6,562
Total Comprehensive Income
- ----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 335,045 32,901 $3,350 $653,023 $804,452 $ (927,760)
- ----------------------------------------------------------------------------------------------------
<Caption>
OTHER COMPREHENSIVE INCOME
------------------------------------
UNREALIZED MINIMUM
CUMULATIVE GAINS PENSION
TRANSLATION (LOSSES) ON LIABILITY COMPREHENSIVE
ADJUSTMENT INVESTMENTS ADJUSTMENT INCOME TOTAL
- -----------------------------------
BALANCE, DECEMBER 31, 1998 $ (84,149) $ 23,373 $ -- $825,270
- -----------------------------------
Net Income from IMS Operations for
the Month of December 1998 1,040 1,040
Change in Cumulative Translation
Adjustment (Note 20) 3,409 3,409 3,409
-------- --------
Total Comprehensive Income 4,449
- -----------------------------------
BALANCE, JANUARY 1, 1999 $ (80,740) $ 23,373 $ -- $829,719
- -----------------------------------
Net Income 276,061 276,061
Cash Dividends ($0.08 per share) (25,043)
Stock Dividend of Gartner Shares 2,155 (132,104)
Prepaid Employee Stock Option Plan
Exercise or Cancellation (245)
Treasury Shares Acquired (517,030)
Treasury Stock Reissued Under:
Exercise of Stock Options 38,677
Restricted Stock Plan 4,028
Less: Unearned Portion (4,028)
Plus: Earned Portion of Grants 3,589
Employee Stock Purchase Plan 4,229
Cumulative Translation Adjustment (17,650) (17,650) (17,650)
Unrealized Gain on Gartner
Securities, net of taxes of
$9,198 17,081 17,081 17,081
Unrealized Gain on Other
Investments, net of amount
realized of $17,388, net of taxes
of $6,562 17,938 17,938 17,938
-------- --------
Total Comprehensive Income 293,430
- -----------------------------------
BALANCE, DECEMBER 31, 1999 $ (96,235) $ 58,392 $ -- $495,222
- -----------------------------------
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
20
<Page>
IMS HEALTH INCORPORATED
Consolidated Statements of Shareholders' Equity (continued)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------
<Table>
<Caption>
SHARES
------------------- CAPITAL IN
COMMON TREASURY COMMON EXCESS OF PAR RETAINED TREASURY
STOCK STOCK STOCK VALUE EARNINGS STOCK
- -------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
1999 335,045 32,901 $3,350 $653,023 $804,452 $ (927,760)
- -------------------------------------------------------------------------------------------------
Net Income 120,816
Cash Dividends ($0.08
per share) (23,685)
Synavant Spin-Off
Dividend (141,443)
Prepaid Employee Stock
Option (1,998)
Accelerated Stock
Options 3,330
Treasury Shares Acquired 18,989 (419,011)
Treasury Stock Reissued
Under:
Exercise of Stock
Options (7,981) (58,082) 200,487
Restricted Stock Plan (73) 4,899
Employee Stock
Purchase Plan (133) 2,087
Cumulative Translation
Adjustment
Minimum Pension
Liability Adjustment
Unrealized Loss on
Gartner Securities,
net of taxes of
$11,263
Unrealized Loss on Other
Investments--Net of
amount realized of
$23,664, net of taxes
of $18,808
Total Comprehensive
Income
- -------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2000 335,045 43,703 $3,350 $596,273 $760,140 $(1,139,298)
- -------------------------------------------------------------------------------------------------
<Caption>
OTHER COMPREHENSIVE INCOME
--------------------------------------
UNREALIZED MINIMUM
CUMULATIVE GAINS PENSION
TRANSLATION (LOSSES) ON LIABILITY COMPREHENSIVE
ADJUSTMENT INVESTMENTS ADJUSTMENT INCOME TOTAL
- ------------------------
BALANCE, DECEMBER 31,
1999 $ (96,235) $ 58,392 $ -- $495,222
- ------------------------
Net Income 120,816 120,816
Cash Dividends ($0.08
per share) (23,685)
Synavant Spin-Off
Dividend (141,443)
Prepaid Employee Stock
Option (1,998)
Accelerated Stock
Options 3,330
Treasury Shares Acquired (419,011)
Treasury Stock Reissued
Under:
Exercise of Stock
Options 142,405
Restricted Stock Plan 4,899
Employee Stock
Purchase Plan 2,087
Cumulative Translation
Adjustment (10,182) (10,182) (10,182)
Minimum Pension
Liability Adjustment (672) (672) (672)
Unrealized Loss on
Gartner Securities,
net of taxes of
$11,263 (38,027) (38,027) (38,027)
Unrealized Loss on Other
Investments--Net of
amount realized of
$23,664, net of taxes
of $18,808 (30,201) (30,201) (30,201)
-------- --------
Total Comprehensive
Income 41,734
- ------------------------
BALANCE, DECEMBER 31,
2000 $(106,417) $ (9,836) $ (672) $103,540
- ------------------------
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
21
<Page>
IMS HEALTH INCORPORATED
Consolidated Statements of Shareholders' Equity (continued)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------
<Table>
<Caption>
SHARES
------------------- CAPITAL IN
COMMON TREASURY COMMON EXCESS OF PAR RETAINED TREASURY
STOCK STOCK STOCK VALUE EARNINGS STOCK
- -------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2000 335,045 43,703 $3,350 $596,273 $760,140 $(1,139,298)
- -------------------------------------------------------------------------------------------------
Net Income 185,426
Cash Dividends ($0.08
per share) (23,641)
Prepaid Employee Stock
Option (1,691)
Accelerated Stock
Options 2,099
Shares issued in connection
with a prior year acquisition (53) 818
Treasury Shares Acquired 12,124 (310,482)
Treasury Stock Reissued
Under:
Exercise of Stock
Options (14,518) (92,212) 365,018
Restricted Stock Plan (170) 2,571
Employee Stock
Purchase Plan (129) 2,459
Board Deferred Stock
Compensation 307
Cumulative Translation
Adjustment
Minimum Pension
Liability Adjustment
Unrealized Gain on
Gartner Securities,
net of Amount Realized
of $8,148, net of
taxes of $4,388
Unrealized Loss on Other
Investments, Net of
amount realized of
$1,450, net of taxes
of $781
Total Comprehensive
Income
- -------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2001 335,045 40,957 $3,350 $504,776 $921,925 $(1,078,914)
- -------------------------------------------------------------------------------------------------
<Caption>
OTHER COMPREHENSIVE INCOME
--------------------------------------
UNREALIZED MINIMUM
CUMULATIVE GAINS PENSION
TRANSLATION (LOSSES) ON LIABILITY COMPREHENSIVE
ADJUSTMENT INVESTMENTS ADJUSTMENT INCOME TOTAL
- ------------------------
BALANCE, DECEMBER 31,
2000 $(106,417) $ (9,836) $ (672) $103,540
- ------------------------
Net Income 185,426 185,426
Cash Dividends ($0.08
per share) (23,641)
Prepaid Employee Stock
Option (1,691)
Accelerated Stock
Options 2,099
Shares issued in connect
with a prior year acqu 818
Treasury Shares Acquired (310,482)
Treasury Stock Reissued
Under:
Exercise of Stock
Options 272,806
Restricted Stock Plan 2,571
Employee Stock
Purchase Plan 2,459
Board Deferred Stock
Compensation 307
Cumulative Translation
Adjustment (31,706) (31,706) (31,706)
Minimum Pension
Liability Adjustment (3,074) (3,074) (3,074)
Unrealized Gain on
Gartner Securities,
net of Amount Realized
of $8,148, net of
taxes of $4,388 20,946 20,946 20,946
Unrealized Loss on Other
Investments, Net of
amount realized of
$1,450, net of taxes
of $781 (2,012) (2,012) (2,012)
-------- --------
Total Comprehensive
Income 169,580
- ------------------------
BALANCE, DECEMBER 31,
2001 $(138,123) $ 9,098 $(3,746) $218,366
- ------------------------
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
22
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IMS HEALTH INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
IMS Health Incorporated ("IMS" or the "Company") is a leading global
provider of information solutions to the pharmaceutical and healthcare
industries. The Company operates in more than 100 countries.
On August 31, 2000, the Company spun-off the businesses of Synavant, Inc.
("Synavant") by distributing the stock of Synavant to the Company's shareholders
(the "Synavant Spin-Off"). The Synavant businesses include: the pharmaceutical
industry automated sales and marketing support businesses previously operated by
IMS Health Strategic Technologies Inc., and certain other foreign subsidiaries
of the Company; substantially all of the Company's interactive and direct
marketing business, including the business of Clark O'Neill, Inc., which was a
wholly-owned subsidiary of the Company; and a majority stake in a foreign joint
venture. On October 3, 2000, the Company sold Erisco Managed Care
Technologies, Inc. ("Erisco") to The TriZetto Group, Inc. ("TriZetto") in
exchange for an equity interest in TriZetto and entered into a technology and
data alliance with TriZetto. These transactions, together with the divestitures
or discontinuation of three small non-strategic software businesses, have
resulted in a company concentrated on the Company's core data business of
providing market information and decision support services to the pharmaceutical
industry. At December 31, 2001 the Company also owned the venture capital
unit--Enterprise Associates, LLC ("Enterprises") and a 58.3% interest in
Cognizant Technology Solutions Corporation ("CTS"). The Company also owned
approximately 26.8% of TriZetto's common stock as at December 31, 2001 and
accounts for TriZetto under the equity method of accounting.
On January 15, 1999, the Company effected a 2-for-1 stock split. All prior
period share and per share information has been revised accordingly.
On July 26, 1999, the Company completed a spin-off of the majority of its
equity investment in Gartner, Inc. ("Gartner", formerly known as "Gartner
Group Inc.") to the Company's shareholders (the "Gartner Spin-Off"). The
Consolidated Financial Statements of the Company have been reclassified for all
periods presented to reflect the Gartner equity investment as a discontinued
operation. During the third quarter of 2001, the Company sold its remaining
interest in Gartner.
On June 30, 1998, the Company's common stock was distributed by Cognizant
Corporation ("Cognizant"), which subsequently changed its name to Nielsen Media
Research, Inc. ("NMR"), to Cognizant's shareholders (the "Cognizant Spin-Off").
Notwithstanding the form of the Cognizant Spin-Off, the Company was deemed the
"accounting successor" to Cognizant. The consolidated financial statements of
the Company have been reclassified to reflect NMR as a discontinued operation
for periods up to and including June 30, 1998.
The above changes to the business are more fully discussed in Notes 4, 5, 7,
12, 16 and 23.
During the year ended December 31, 2001, the Company consisted of the
following segments:
1. The IMS Segment is a leading global provider of market information,
sales management and decision-support services to the pharmaceutical and
healthcare industries. Its key products include sales management
information to optimize sales force productivity, marketing
effectiveness research for prescription and over-the-counter
pharmaceutical products, consulting and other services. The IMS Segment
is managed on a global business model with global leaders for the
majority of its critical business processes. In addition the IMS Segment
includes the Company's venture capital unit, Enterprises, which is
focused on investments in emerging businesses and IMS's 26.8% equity
interest in TriZetto.
2. The CTS Segment delivers full life-cycle solutions to complex software
development and maintenance problems that companies face as they
transition to e-business. These services are delivered through the use
of a seamless on-site and offshore consulting project team. CTS's
primary service offerings include application development and
integration, application management and re-engineering services. IMS
accounts for CTS as a consolidated subsidiary.
During the years ended December 31, 2000 and 1999, the Company also
included:
3. The Transaction Businesses Segment, which consisted of: (a) Synavant,
which serves the pharmaceutical industry by developing and selling
pharmaceutical relationship management solutions that support sales and
marketing decision-making; (b) Erisco, a leading supplier of
software-based administrative and analytical solutions to the managed
care industry; and (c) three small non-strategic software
23
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businesses. The Company spun off the Synavant business on August 31,
2000 and sold Erisco to TriZetto and entered into a strategic alliance
with TriZetto on October 3, 2000. The Company also divested or
discontinued the other small non-strategic software businesses. See
Notes 7, 12, 16 and 23.
All prior year segment information has been reclassified to conform with the
December 31, 2001 presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The Consolidated Financial Statements of the Company include
the accounts of the Company, its subsidiaries and investments in which the
Company has control. Material intercompany accounts and transactions are
eliminated. Investments in companies over which the Company has significant
influence but not a controlling interest are accounted for under the equity
method of accounting. The Company recognizes in the income statement any gains
or losses related to the issuance of stock by a consolidated subsidiary or an
investment accounted for under the equity method.
CASH AND CASH EQUIVALENTS. Cash and Cash Equivalents include primarily time
and demand deposits in the Company's operating bank accounts. The Company
considers all highly liquid investments with a maturity of 90 days or less at
the time of purchase to be cash equivalents.
SECURITIES AND OTHER INVESTMENTS. Marketable securities, principally
consisting of equity securities, are classified as available-for-sale. Such
securities are carried at fair value, with the unrealized gains and losses, net
of income taxes, reported as a component of shareholders' equity. Any gains or
losses from the sale of these securities are recognized in income using the
specific identification method. Direct equity investments in private companies
and interests in venture capital entities are carried at cost. See Note 13.
The Company periodically evaluates the business prospects and financial
position of each issuer whose securities are held. The Company pays special
attention to those securities whose market values have declined materially for
reasons other than changes in interest rates or other general market conditions.
The Company evaluates the realizable value of the investment, the specific
condition of the issuer and the issuer's ability to comply with the material
terms of the security. Information reviewed may include the recent operational
results and financial position of the issuer, information about its industry,
recent press releases and other information. If evidence does not exist to
support a realizable value equal to or greater than the carrying value of the
investment, and such decline in market value is determined to be other than
temporary, the carrying amount is reduced to its estimated net realizable value,
which becomes the new cost basis. The amount of the reduction is reported as a
realized loss in the period which it is determined. Any recovery of such
reductions in the cost basis of an investment is recognized in income only upon
the sale, repayment or other disposition of the investment.
PROPERTY, PLANT AND EQUIPMENT. Buildings, machinery and equipment are
recorded at cost and depreciated over their estimated useful lives to their
salvage values using principally the straight-line method. Leasehold
improvements are recorded at cost and amortized on a straight-line basis over
the shorter of the term of the lease or the estimated useful life of the
improvement. During 2001, the Company changed the estimated salvage value of two
buildings with a net book value of approximately $43,000 from $0 to
approximately $43,000. The effect of this change in accounting estimate was to
reduce depreciation expense by approximately $700 for the year ended
December 31, 2001 and approximately $1,100 per year in future years. Based on
additional available appraisal information, the Company believes the revised
salvage value represents a more accurate estimate. The change has been accounted
for prospectively. See Note 22.
COMPUTER SOFTWARE. Direct costs incurred in the development of computer
software are capitalized in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." Research and Development costs incurred to
establish technological feasibility of a computer software product are expensed
in the periods in which they are incurred. Capitalization ceases and
amortization starts when the product is available for general release to
customers. Computer software costs are being amortized, on a product by product
basis, over three to seven years. Annual amortization is the greater of the
amount computed using (a) the ratio that gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product, or
(b) the straight-line method over the remaining estimated economic life of the
product. The Company periodically reviews the unamortized capitalized costs of
computer software products based on a comparison of the carrying value of
computer software with its estimated net realizable value and changes in
software technology. The Company recognizes immediately any impairment losses on
capitalized software as a result of its review or upon its decision to
discontinue a product. See Notes 6 and 8.
The Company capitalizes internal-use software costs once certain criteria in
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" have been met.
GOODWILL. Goodwill represents the excess purchase price over the fair value
of identifiable net assets
24
<Page>
of businesses acquired and is amortized on a straight-line basis over five to
forty years. In accordance with the provisions of SFAS 142, goodwill arising on
acquisitions completed since July 1, 2001 is no longer amortized. The Company
periodically reviews the recoverability of goodwill, not identified with
impaired long-lived assets, based on estimated undiscounted future cash flow
from operating activities compared with the carrying value of goodwill and
recognizes any impairment on the basis of such comparison. The recognition and
measurement of goodwill impairment is assessed at the business unit level. See
Notes 6 and 8.
OTHER LONG-LIVED ASSETS. In accordance with the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews for impairment long-lived assets
and certain identifiable intangibles held and used whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In general, this statement requires recognition of an impairment
loss when the sum of undiscounted expected future cash flows is less than the
carrying amount of such assets. Accordingly, the Company recognizes impairment
losses on long-lived assets as a result of its review. The measurement for such
impairment loss is then based on the fair value of the asset measured by its
discounted future cash flows or market value, if more readily determinable.
REVENUE RECOGNITION. The Company recognizes revenue as earned, which is
over the service period as the information is delivered or related services are
performed. Advance payments for services and subscriptions are credited to
deferred revenue and reflected in operating revenue over the subscription term,
which is generally one year. Revenues from software licenses are recognized upon
delivery of the software, when persuasive evidence of an arrangement exists, the
related fees are fixed or determinable and collection of fees is reasonably
assured. Revenues from post-contract customer support (maintenance) are
recognized on a straight-line basis over the term of the arrangement. Revenues
from time and material service agreements are recognized as the services are
provided. Revenues from fixed price service and consulting contracts are
recognized over the contract term based on the percentage of costs incurred for
services provided during the period compared to the total estimated costs of
services to be provided over the entire arrangement. Anticipated losses on
contracts are recognized immediately. Under the terms of these contracts, all
services provided by the Company through the date of cancellation are due and
payable.
FOREIGN CURRENCY TRANSLATION. The Company has significant investments in
non-U.S. countries. Therefore, changes in the value of foreign currencies affect
the Company's Consolidated Financial Statements when translated into U.S.
dollars. For all operations outside the United States of America where the
Company has designated the local currency as the functional currency, assets and
liabilities are translated using end-of-period exchange rates; revenues and
expenses are translated using average rates of exchange. For these countries,
currency translation adjustments are accumulated in a separate component of
Shareholders' Equity whereas transaction gains and losses are recognized in
Other Expense, net. For operations in countries that are considered to be highly
inflationary or where the U.S. dollar is designated as the functional currency,
monetary assets and liabilities are translated using end-of-period exchange
rates, whereas non-monetary accounts are translated using historical exchange
rates, and all translation and transaction adjustments are recognized in Other
Expense, net.
INCOME TAXES. The Company provides for income taxes utilizing the asset and
liability method of accounting for income taxes. Under this method, deferred
income taxes are recorded to reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each balance sheet date, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. If it is determined that it is more likely
than not that future tax benefits associated with a deferred tax asset will not
be realized, a valuation allowance is provided. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income as
an adjustment to income tax expense in the period that includes the enactment
date.
USE OF ESTIMATES. The preparation of financial statements and related
disclosures in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. The most significant estimates are made in the
accounting for: allowance for uncollectible accounts receivable, depreciation
and amortization, carrying value of investments, capitalized software costs,
employee benefit plans, taxes including tax benefits and liabilities, reserves
for severance, contingencies, the fair value of certain assets, salvage values
of property and purchase price allocations.
EARNINGS PER SHARE. Basic earnings per share are calculated by dividing net
income by weighted average common shares outstanding. Diluted earnings per share
are calculated by dividing net income by dilutive potential common shares.
Dilutive potential common shares are calculated in accordance with the treasury
stock method, which assumes that the net proceeds from the
25
<Page>
exercise of all stock options are used to repurchase common stock at market
value. The amount of shares remaining after the net proceeds are exhausted
represent the potentially dilutive effect of the securities.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the 2001 presentation. This includes a reclassification of current
and non-current deferred tax assets and liabilities to reflect them by tax
jurisdiction.
NOTE 3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001 the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. Additional
discussion of the Company's derivative and hedging activities is included in
Note 14.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires the purchase method of accounting to
be used for all business combinations initiated after June 30, 2001 and
establishes specific criteria for the recognition of intangible assets
separately from goodwill. The Company adopted SFAS No. 141 on July 1, 2001 and
is not amortizing goodwill acquired subsequent to June 30, 2001. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
goodwill and intangible assets which have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment. It also
provides that intangible assets that have finite useful lives be amortized.
Under the provisions of SFAS No. 142, any impairment loss identified upon
adoption of this standard is recognized as a cumulative effect of a change in
accounting principle. Any impairment loss incurred subsequent to initial
adoption of SFAS No. 142 is recorded as a charge to current period earnings. The
Company will adopt SFAS No. 142 beginning January 1, 2002 and at that time will
stop amortizing goodwill that resulted from business combinations completed
prior to the adoption of SFAS No. 141. The Company recorded goodwill
amortization of $10,316 and $19,120 during 2001 and 2000, respectively. The
Company also recorded goodwill amortization expense related to equity method
investees of approximately $9,600 and $2,400 in 2001 and 2000, respectively. The
Company has six months from January 1, 2002 to complete the first step of the
transitional goodwill impairment test. The Company is currently evaluating the
financial impact of adoption of SFAS No. 142; however, it does not believe that
there will be a material adverse impact on the Company's financial position,
results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 eliminates the
requirement for discontinued operations to be measured on a net realizable value
basis and future operating losses to be recognized before they occur. Instead,
it requires that assets held for sale be valued at the lower of carrying amount
or fair value less cost to sell. SFAS No. 144 extends the reporting requirements
for discontinued operations to certain components of an entity. Under the
provisions of SFAS No. 144, spin-offs and exchanges of similar productive assets
are required to be recorded at the lower of carrying value or fair value and
such assets classified as held and used until they are disposed of. Any
resultant impairment loss is required to be recognized when the asset is
disposed of. For assets that are grouped when an entity is developing estimates
of future cash flows, SFAS No. 144 requires that the remaining useful life of
the "primary asset" be used for the entire group. In addition, SFAS No. 144
permits the use of a probability-weighted approach in developing estimates of
future cash flows used to test for recoverability and in estimating fair value.
The Company will adopt SFAS No. 144 beginning January 1, 2002 and is currently
evaluating the impact of the adoption; however, the Company does not believe
that there will be a material adverse impact on the Company's financial
position, results of operations or cash flows.
NOTE 4. DISCONTINUED OPERATIONS--INVESTMENT IN GARTNER STOCK
On November 11, 1998, the Company announced that its Board of Directors had
approved to spin-off substantially all of its equity ownership of Gartner. As
provided for under a Distribution Agreement, entered into between Gartner and
the Company, 40,690 Gartner Class A Shares were converted into an equal number
of Gartner Class B Shares. As a result of the then proposed Gartner Spin-Off,
the Company ceased recognition of gains in accordance with Staff Accounting
Bulletin ("SAB") No. 51, "Accounting for Sales of Stock by a Subsidiary," in the
fourth quarter of 1998.
On July 16, 1999, subject to Gartner shareholder approval, the Boards of
Directors of Gartner and the Company approved the final plan, terms and
conditions governing the Gartner Spin-Off. Upon Gartner shareholder approval,
which was obtained on July 16, 1999, in accordance with Accounting Principles
Board ("APB") No. 30, "Reporting the Results of Operations--Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," the financial statements of the Company were
reclassified to reflect the Gartner equity investment as a discontinued
operation for the periods presented.
On July 16, 1999, the Company's Board of Directors declared a dividend of
all Gartner Class B Shares,
26
<Page>
which was distributed on July 26, 1999 to holders of the Company's common stock
of record as of July 17, 1999. The transaction was structured as a tax-free
distribution of Gartner stock to the Company's shareholders and the Company
received a favorable ruling from the Internal Revenue Service ("IRS"). The
distribution consisted of 0.1302 Gartner Class B Shares for each outstanding
share of the Company's common stock (the "Gartner Distribution"). See Note 21.
On July 23, 1999, Gartner paid a cash dividend to its holders of record as
of July 16, 1999. The Company's portion of this dividend was $52,877, net of
taxes and was accounted for as a reduction in the carrying value of the equity
investment. The remaining investment in Gartner Stock subsequent to the Gartner
Distribution was classified as available-for-sale.
The unrealized gain as of the date of the Gartner Distribution (based on the
then market price per share of $22.75 of Gartner Stock, the price at the time of
the Gartner Distribution) was recorded as a component of Other Comprehensive
Income and included as a component of Shareholders' Equity. Subsequent changes
in the per share price of Gartner Stock since the date of the Gartner
Distribution were also recorded as Other Comprehensive Income. Upon the sale of
these securities, the unrealized gain measured based on the value of the Gartner
shares as of the date of the Gartner Distribution was recognized in discontinued
operations. The unrealized gains or losses in the market value subsequent to the
date of the Gartner Distribution were recognized in continuing operations as
shares were sold.
During the third quarter of 2001, the Company decided to sell, and by
August 29, 2001, completed the sale of 1,555 shares of Class A common stock of
Gartner, Inc. ("Gartner Shares") to Gartner and its remaining holding in Gartner
Shares to several institutional investors. The Company received aggregate
proceeds of $65,207 or $9.88 per share, from these sales. The Company's cost
basis in these shares was $77,743 or $11.78 per share. These sales divest the
Company of its remaining equity interest in Gartner. The sale of shares to
Gartner was part of Gartner's $75,000 stock buyback program announced on
July 19, 2001. These sales resulted in a pre-tax realized loss of $12,536
($8,146, net of applicable taxes), which was recorded in two different lines in
the income statement: (1) Income from Discontinued Operations of $72,344
($47,025 net of applicable taxes), to reflect the difference between the fair
market value at the date of the Gartner Spin-Off (July 26, 1999) and the book
value of those shares; (2) a loss from dispositions in continuing operations of
$84,880 which was recorded as a Loss on Gartner Investment, to reflect the
difference between the fair market value at the date of the Gartner Spin-Off and
the disposal proceeds.
There were no sales of Gartner shares during the year ended December 31,
2000. The Company had, however, agreed to contribute 312 Gartner Class A Shares
to Synavant as part of the Synavant Spin-Off described in Note 7. This
contribution had a fair market value of $4,000 at the date of the Synavant
Spin-Off, and resulted in a gross realized gain of $3,424 which was recorded as
income from discontinued operations net of applicable taxes of $1,198, to
reflect the difference between the fair market value at the date of the Gartner
Spin-Off (July 26, 1999) and the book value of those shares; and a loss from
dispositions of $3,102 which was reflected in Loss on Gartner Investment to
reflect the difference between the fair market value at the date of the Gartner
Spin-Off (July 26, 1999) and the date of the Synavant Spin-Off (August 31,
2000). Warrants to purchase a further 599 Gartner Class A Shares expired on
December 1, 2000, and resulted in a realized gain of $3,794 which was recorded
in income from discontinued operations net of applicable taxes of $1,328 to
reflect the fair market value of the warrants at the date of the Gartner
Spin-Off (July 26, 1999), and a loss of $3,794 which was recorded in Loss on
Gartner Investment within results from continuing operations to reflect
expiration of the unexercised warrants on December 1, 2000.
The Company incurred costs of $9,500 in 1999 in connection with the Gartner
distribution.
NOTE 5. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
During 2001, the Company completed five acquisitions with an aggregate cash
purchase price of $43,318. The 2001 acquisitions were; (a) Meridian Research
Vietnam Ltd. (Vietnam), (b) the exercise of the Company's option to purchase the
remaining non-controlling interests in Medicare Audits Limited (U.K.), (c) the
remaining interest in GPI Krankenhaus-forschung Gesellschaft fur
Pharma-informationssysteme mbH (Germany), (d) Cambridge Pharma
Consultancy, Ltd. (U.K. and U.S.) and (e) Medical Data Systems Limited
(Ireland). Under the terms of the earn out within the purchase agreement for one
of the acquisitions, the Company may be required to pay additional amounts as
contingent consideration totaling up to $36,720 based on the achievement of
certain targets during 2002 through 2004. Of the contingent consideration, up to
$13,760 will be recorded as additional goodwill, while up to $22,960 will be
recorded as compensation as earned in accordance with the provisions of Emerging
Issues Task Force ("EITF") Statement No. 95-8, "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination." The maximum contingent consideration payable with respect
to any given year in the earn out period is $12,420. These acquisitions were
recorded under the purchase method of accounting and
27
<Page>
the Company has preliminarily recorded a total of $40,271 in goodwill and
intangible assets, including approximately $16,000 in customer relationships, as
a result of these acquisitions. The intangible assets will be amortized over
periods ranging from five to ten years. Had these acquisitions occurred as of
January 1, 2001 or 2000, the impact on the Company's results of operations would
not have been significant. In accordance with SFAS No. 142, goodwill of
approximately $12,100 has not been amortized, as the acquisitions were completed
subsequent to June 30, 2001.
DISPOSITIONS
In the first quarter of 2001, the Company recorded a pre-tax gain of $1,990
on the sale of IDRAC Holdings Inc. ("IDRAC"), a non-strategic property that
provides information on pharmaceutical product registrations, to a wholly owned
subsidiary of Information Holdings Inc. ("IHI"). This gain is included in Gain
(Loss) from Investments, net in the Consolidated Statements of Income. The
operating results of IDRAC were not significant to the results of operations of
the Company. In a separate transaction, the Company sold a non-exclusive
perpetual license to IHI to use certain data for aggregate cash consideration of
approximately $17 million, which was recognized as revenue upon delivery in
2001.
In the third quarter of 2000, senior management of GIC Gesellschaft fur
Informationstechnologie und Consulting GmbH, formerly a wholly-owned subsidiary
of the Company, and its newly-formed affiliated company, GIC Global Information
Technology and Consulting GmbH (collectively, "GIC") completed a management
buy-out of the Company's data processing center located in Frankfurt, Germany.
Under the terms of the purchase agreement, the aggregate purchase price of
$6,100 was paid to the Company in monthly installments from July 1, 2000 to
August 1, 2001 in the form of data processing and technology solution services
provided by GIC. The Company recognized the fair market value of the services
received and a pre-tax gain of $3,066 in the second half of 2000 in respect to
services rendered by GIC in 2000. The remaining portion of the gain amounting to
$1,493 was recognized in 2001, as services were rendered in accordance with the
agreement. The impact of this transaction was reflected in operating costs in
the Company's Consolidated Statements of Income. Since the completion of the
management buy-out, GIC continued to occupy a sizable portion of space from the
Company under a sublease agreement. During 2001, the sublease arrangement, which
was due to expire in March 2002, was extended for a five-year period ending in
2007. Further, during the third quarter of 2001, the Company agreed to make a
$2,000 loan to GIC's management in order to provide GIC with additional
liquidity to grow the business. The operating costs of the Frankfurt data center
were not material to the Company's consolidated operating results in any of the
periods presented.
As described in Notes 1, 7 and 12, Synavant was spun-off to the Company's
shareholders on August 31, 2000 and Erisco was sold to TriZetto on October 3,
2000. The results of Erisco and Synavant are included in the Consolidated
Statements of Income and Cash Flows through their respective disposition dates.
NOTE 6. IMPAIRMENT CHARGE--SYNAVANT
On July 14, 2000, Synavant entered into a 5-year strategic alliance with
Siebel Systems, Inc. ("Siebel"), a leading provider of e-business applications
software (the "Alliance"). Through the Alliance, the companies intend to jointly
develop, market and sell pharmaceutical and healthcare related versions of
Siebel's e-business software applications.
Under the terms of the Alliance the extent to which Synavant may
independently develop, integrate, market, license or distribute products that
are directly competitive with those packaged and promoted by Siebel is limited.
Although Synavant may continue to license and support its existing Cornerstone
and Premiere customers, under the terms of the Alliance, it is contractually
obligated to discontinue the future enhancement and development of the
Cornerstone and Premiere products. Synavant management anticipates that these
products would eventually be phased out and replaced by a new generation of
joint solution offerings incorporating Siebel technology.
As a result of this transaction, Synavant management concluded at that time
that significant portions of its software (including acquired technology) and
enterprise-wide goodwill were not recoverable. Under its accounting policy for
capitalized software, Synavant performed a net realizable value analysis to
determine the recoverability of its capitalized software assets. This analysis
resulted in a write-down of $14,553 in the period ended September 30, 2000.
Under its accounting policy for goodwill impairment, Synavant completed a
discounted cash flow analysis on an enterprise wide basis, resulting in a write
down of $100,900 of goodwill in the period ended September 30, 2000. The total
Impairment Charge--Synavant, recorded in the Consolidated Statements of Income,
was $115,453. The impairment charge was recorded in the results of the
Transaction Businesses Segment. This charge was recorded by the Company as a
result of the Siebel transaction being effected prior to the Synavant Spin-Off.
See Note 23.
NOTE 7. SPIN-OFF OF SYNAVANT
On August 31, 2000, the Company completed the Synavant Spin-Off as an
independent publicly traded company. Prior to the Synavant Spin-Off, the Company
transferred to Synavant selected assets and liabilities held by the Company and
its subsidiaries related to the
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Synavant business. Synavant's businesses included the pharmaceutical industry
automated sales and marketing support businesses previously operated by IMS
Health Strategic Technologies Inc. and certain other foreign subsidiaries of the
Company, substantially all of the Company's interactive and direct marketing
business, including the business of Clark O'Neill, Inc., a wholly-owned
subsidiary of the Company, and a majority stake in a foreign joint venture.
The Company distributed (the "Synavant Distribution") to its shareholders of
record as of the close of business on July 28, 2000 all of the outstanding
shares of common stock, par value $0.01 per share, of Synavant (the "Synavant
Common Stock"). The Synavant Distribution was effected by means of a pro rata
dividend to the Company shareholders of one share of Synavant Common Stock
(together with the associated preferred share purchase right) for every twenty
shares of common stock, par value $0.01 per share, of the Company (the "IMS
Common Stock") held. In lieu of fractional shares of Synavant Common Stock, each
IMS shareholder received a cash payment representing such holder's proportionate
interest in the net proceeds from the sale by the distribution agent for the
Synavant Distribution of the aggregate fractional shares of Synavant Common
Stock. The Synavant Distribution was accounted for as a tax-free pro-rata
dividend to the Company shareholders and charged to retained earnings based on
the book value of assets distributed to Synavant as at the date of the Synavant
Distribution (August 31, 2000). The final dividend charged to retained earnings
totaled $141,443 and was comprised of assets of $181,080 (including $19,438 of
Cash, $43,195 of Accounts Receivable, $58,450 of Goodwill, $12,939 of Deferred
Software and $16,294 of Property, Plant and Equipment) and liabilities of
$39,637 (including $6,735 of Accounts Payable, $9,404 of Accrued Liabilities and
$9,170 of Deferred Revenue). See Note 16.
In connection with the Synavant Distribution, the Company and Synavant
entered into a Distribution Agreement (the "Distribution Agreement"), providing
for, among other things, certain corporate transactions required to effect the
Distribution and other arrangements between the Company and Synavant subsequent
to the Distribution. In particular, the Distribution Agreement defines the
assets, liabilities and contractual relationships which were allocated to and
assumed by Synavant and those that remained with the Company. This includes the
Company's agreement to indemnify Synavant with respect to certain contingent
liabilities as well as certain indemnification to the Company that Synavant has
agreed to assume under certain circumstances.
In addition to the Distribution Agreement, the Company and Synavant also
entered into other agreements governing the relationship between the Company and
Synavant. These include various Data Rights Agreements, a Tax Allocation
Agreement, an Employee Benefits Agreement, a Data and Telecommunications Service
Agreement, certain Sublease Arrangements, a Corporate Services Agreement, Shared
Transaction Services Agreements, an Information Service Agreement and certain
Credit Support Arrangements. Robert Kamerschen and H. Eugene Lockhart serve on
the Board of Directors of both the Company and Synavant.
Historically, the Synavant business was managed as part of the IMS Segment.
Effective with the decision to spin-off Synavant, the business was managed as
part of the Transaction Businesses Segment and, accordingly, its results are
included in the Transaction Businesses Segment. Selected historical financial
data for Synavant is included in Note 23.
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On August 11, 2000, Synavant obtained a revolving line of credit for $20,000
for working capital purposes. The line of credit was guaranteed by the Company
and was extended through February 15, 2001, at which time it was replaced with a
similar line of credit with a maturity date of May 15, 2001. This line of credit
was likewise guaranteed by the Company. On April 27, 2001, Synavant had this
later line of credit replaced by a new revolving line of credit that is not
guaranteed by the Company. As of December 31, 2001, the Company does not have
any continuing obligations or commitments with respect to Synavant's credit
lines.
In 2000, in connection with the Synavant Spin-Off, the Company incurred
$37,626 of costs. These costs included $8,813 for expenses related to reductions
in the administrative workforce resulting from consolidation following the
Synavant Spin-Off. Additionally, a data processing agreement with a third party
for $5,200 was no longer used by the Company as a result of the Company's
determination to streamline the Company's operations to focus on its core
business and a further data enhancement contract for $3,600 was similarly no
longer used. The remaining Synavant Spin-Off charges related primarily to legal,
professional and other direct incremental costs.
NOTE 8. SEVERANCE, IMPAIRMENT AND OTHER CHARGES
During the fourth quarter of 2001, the Company completed the assessment of
its Competitive Fitness Program. This program was designed to further streamline
operations, increase productivity, and improve client service. In connection
with this program, the Company recorded $94,616 of Severance, Impairment and
Other Charges relating to the IMS Segment during the fourth quarter of 2001 as a
component of operating income.
Approximately $39,653 was charged to expense in the fourth quarter of 2001
related to a worldwide reduction in headcount of more than six-hundred
employees. This included $33,376 of severance benefits that were calculated
pursuant to the terms of established employee protection plans in accordance
with local statutory minimum requirements or individual employee contracts, as
applicable. This also included $6,277 of severance benefits for approximately
one-hundred and seventy five employees that were recorded as part of the
Competitive Fitness Program in accordance with EITF Statement No. 94-3
"Liability Recognition of Certain Employee Termination Benefits and other Costs
to Exit an Activity (including Certain Costs incurred in Restructuring)." No
material cash payments were made against the accrual prior to December 31, 2001.
The Company recorded $15,827 in contract-related charges, including $7,493
in payments to exit data supply and processing contracts and $8,334 related to
onerous lease and other obligations. These costs are incremental and either
relate to existing contractual obligations that do not have any future economic
benefit or represent a contract cancellation penalty. They relate, in part, to
the decision in the fourth quarter to close down or vacate leased facilities in
order to consolidate functions geographically as part of the Competitive Fitness
Program.
Approximately $17,723 was charged to expense in the fourth quarter of 2001
to write down deferred software costs to their net realizable value. These
write-downs resulted from the Company's decision to abandon certain products or
introduce new regional or global platforms. The Company also charged $4,243 of
goodwill to expense in the fourth quarter of 2001 as a result of the decision to
cease product offerings as well as increased competition in certain markets.
Approximately $17,170 of the 2001 charge relates to GIC and resulted from
the Company's decision to exit the GIC relationship and accelerate the
transition of certain data processing functions that are currently rendered by
GIC to the IMS global data center. See Note 5. Of the total GIC charge,
approximately $14,600 is for lease and other asset impairments with the
remaining balance of $2,570 representing contract termination payments to be
made to GIC.
The cash portion of the 2001 charge will amount to $64,205, primarily for
severance payments and contract terminations. The non-cash portion amounts to
$30,411 and is composed primarily of asset write-offs. Approximately $8,800 has
been paid as of December 31, 2001.
During the fourth quarter of 2000, the Company performed a strategic
assessment of its existing cost structure. Based on this assessment, the Company
initiated a plan to streamline its administrative infrastructure, leverage
marketing and sales efforts following the creation of a global key account
management program, harmonize human resources, communications and global
production and development activities. Accordingly, the Company recorded
Severance, Impairment and Other Charges of $45,689 during the fourth quarter of
2000 as a component of operating income. Severance liabilities were calculated
pursuant to the terms of the ongoing employee protection plan, in accordance
with local statutory minimum requirements or individual compensation contracts,
as applicable.
The 2000 charge included cash charges of $10,348, primarily for severance
and contract termination and non-cash charges of $35,341, primarily for asset
write-offs. The asset write-offs included: $8,045 for the other-than-temporary
decline in the value of the Allscripts Healthcare Solutions, Inc. ("Allscripts,"
formerly
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known as "Allscripts, Inc.") investment as described more fully in Note 13;
$3,130 for the surrender of Enterprise warrants; $4,981 for assets which became
redundant as a result of the global data center move to the United States; and
$19,185 as a result of abandoning the existing delivery mechanisms for web-based
or global delivery solutions. This program is substantially complete as of
December 31, 2001.
NOTE 9. EXECUTIVE MANAGEMENT TRANSITION CHARGE
In the fourth quarter of 2000, the Company incurred a charge of $31,133
relating to changes in executive management. Of this charge, approximately
$23,000 relates to Victoria R. Fash (previously President and Chief Executive
Officer) and Robert E. Weissman (previously Chairman) arising principally from
the acceleration or enhancement of previously existing employee benefit
obligations, including stock options and pensions. The Company originally made a
loan to Ms. Fash of $3,558 on January 3, 2000. On January 12, 2000 $632 was
repaid and the loan accrued interest at an annual rate of 6.21%. As a result of
Ms. Fash's negotiated agreement with the Company, the remaining balance on the
loan and accrued interest in the amount of $3,084 were forgiven and the
accompanying income tax liability to Ms. Fash of $2,580 was paid by the Company.
The remaining accrual at December 31, 2001 amounted to approximately $13,400,
primarily relating to long-term pension benefits.
NOTE 10. TERMINATED TRANSACTION COSTS
During fourth quarter of 2001, the Company terminated negotiations to
dispose of one of its product lines and decided to retain and continue operating
it. In connection with this terminated transaction, the Company recorded
Terminated Transaction Costs of $6,457, relating primarily to legal and
accounting services.
NOTE 11. MINORITY INTERESTS
The Company consolidates the assets, liabilities, results of operations and
cash flows of businesses and investments over which it has control. Third
parties' ownership interests are reflected as minority interests on the
Company's financial statements. Two of the Company's subsidiaries contributed
assets to, and participate in, a limited partnership. One subsidiary serves as
general partner, and all other partners hold limited partnership interests. The
partnership, which is a separate and distinct legal entity, is in the business
of licensing database assets and computer software. In 1997, third-party
investors contributed $100,000 to the partnership in exchange for minority
ownership interests. The Company and its subsidiaries maintain a controlling
(88%) interest in the partnership. Under the terms of the partnership
agreements, the third-party investors have the right to take steps that would
result in the liquidation of their partnership interest on June 30, 2003.
The Company also has a controlling interest in CTS (58.3% of the outstanding
shares representing 93.3% of the voting power at December 31, 2001). The related
minority interest included within the Consolidated Statements of Financial
Position at December 31, 2001 and December 31, 2000 was $28,378 and $24,333,
respectively. Selected financial data for CTS is included in Note 23. Minority
interest expense of $19,466, $17,222 and $14,260 was recorded in Other Expense,
net in 2001, 2000 and 1999, respectively. In the year ended December 31, 2001,
the Company recorded a $5,189 gain resulting from the issuance of CTS stock in
connection with stock option exercises and employee stock purchases. This gain
has been recognized in the Consolidated Statements of Income within Gain (Loss)
on Issuance of Investees' Stock, net, in accordance with SAB No. 51.
NOTE 12. INVESTMENTS IN EQUITY INVESTEES AND SUBSIDIARIES
THE TRIZETTO GROUP, INC.
On October 3, 2000 (the "Closing Date"), Elbejay Acquisition Corp. ("Merger
Sub"), a Delaware corporation and a wholly owned subsidiary of TriZetto, a
Delaware corporation, was merged (the "Merger") with and into Erisco, a New York
corporation and a wholly owned subsidiary of the Company pursuant to the
Agreement and Plan of Reorganization dated as of May 16, 2000 (the "Merger
Agreement"), by and among TriZetto, Merger Sub, the Company and Erisco. The
Merger effectuated the Company's sale of Erisco to TriZetto. In consideration,
TriZetto issued 12,143 shares of common stock, par value $0.001 per share (the
"TriZetto Common Stock"), to the Company.
The transaction was accounted for by the Company as a disposition of Erisco
in exchange for the acquisition of a 36.1% interest in TriZetto. The gross
proceeds received by the Company, based on the closing share price of TriZetto
Common Stock on the Nasdaq National Market on October 2, 2000 ($15.125 per
share), were approximately $183,700 and the Company recorded a gain on the sale
of Erisco of $84,530. In connection with the transaction the Company transferred
$32,000 of cash to Erisco prior to disposition to TriZetto. This was funded by
short-term debt and primarily represented the repayment of existing
inter-company liabilities.
As contemplated by the Merger Agreement, following the Merger, Victoria R.
Fash, then President and Chief Executive Officer of the Company, was appointed
to the TriZetto Board of Directors as the Company's director nominee. In
January 2001, David M. Thomas, Chairman and Chief Executive Officer of the
Company,
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was appointed to replace Ms. Fash on the TriZetto Board.
Additionally, as contemplated by the Merger Agreement, the Company and
TriZetto entered into a Stockholder Agreement and a Registration Rights
Agreement. The Stockholder Agreement imposes certain restrictions on the
Company. These restrictions include, without limitation: (i) a standstill
provision restricting the Company from, among other things, acquiring additional
shares of TriZetto Common Stock until the earlier of the fourth anniversary of
the Closing Date, or the date on which a Change of Control (as defined in the
Stockholder Agreement) of TriZetto shall have occurred or TriZetto shall have
publicly announced its willingness to consider a transaction that would
constitute a Change of Control; (ii) a share transfer restriction that prohibits
(subject to certain restrictions) transfers by the company of TriZetto Common
Stock until the earlier of two years after the Closing Date, the date on which
the Company beneficially owns less than 10% of the outstanding TriZetto Common
Stock measured as of the Closing Date, or the date on which a Change of Control
of TriZetto shall have occurred; (iii) a right of first refusal for TriZetto on
transfers by the Company of more than 10% of the outstanding TriZetto Common
Stock measured as of the time of the transfer commencing upon the termination of
the share transfer restriction period described in (ii) above and continuing
until the date on which the Company beneficially owns less than 10% of the
outstanding TriZetto Common Stock measured as of the Closing Date (unless a
Change of Control of TriZetto shall have occurred); and (iv) a right of first
offer for TriZetto on any transfer of TriZetto Common Stock by the Company
commencing upon the termination the share transfer restriction period described
in (ii) above and continuing until the date on which the Company beneficially
owns less than 10% of the outstanding TriZetto Common Stock measured as of the
Closing Date. The Stockholder Agreement also grants the Company, for so long as
the Company beneficially owns more than 10% of the outstanding TriZetto Common
Stock measured as of the Closing Date, (i) the right to designate one
director-nominee to the TriZetto Board of Directors and (ii) consent rights
regarding certain transactions by TriZetto, subject in each case, to earlier
termination of such rights upon the occurrence of certain events. Pursuant to
the Registration Rights Agreement, the Company was granted registration rights
in respect of the shares of TriZetto Common Stock issued to the Company in
connection with the sale of Erisco.
The Company is accounting for its ownership interest in TriZetto under the
equity method and accordingly, records its share of the TriZetto operating
results. At the date of the acquisition, the Company's initial equity investment
in TriZetto in the amount of $136,196 was comprised of the Company's residual
interest in the net assets of Erisco and its proportionate share of the tangible
and identified intangible assets and the liabilities of TriZetto, goodwill and
direct acquisition costs.
In connection with the acquisition of its interest in TriZetto, the Company
made allocations of the purchase price to software, tradename, customer
contracts, and goodwill in the aggregate amounts of $5,819, $3,000, $12,504, and
$95,773 respectively. The intangible assets are being amortized on a
straight-line basis over the following estimates of useful lives:
<Table>
Software....................... 5 years
Tradename...................... 20 years
Customer Contracts............. 10 years
Goodwill....................... 10 years
</Table>
The Company's share of the adjusted operating results of TriZetto for the
year ended December 31, 2001 and for the period from October 3, 2000 to
December 31, 2000 amounted to a loss of $6,985 (net of a deferred tax benefit of
$4,504) and $4,777 (net of a deferred tax benefit of $3,080), respectively.
As the transaction has been accounted for as a non-monetary exchange, the
Company's share of the adjusted operating results of TriZetto excludes the
impact of the amortization of goodwill and other acquired intangibles associated
with TriZetto's acquisition of Erisco (as reflected in its reported operating
results) and includes the amortization of goodwill and acquired intangibles
associated with the Company's acquisition of its interest in TriZetto.
Summary financial information for TriZetto, as of and for the years ended
December 31, 2001 and 2000, is presented in the following table. The amounts
shown represent consolidated TriZetto operating results and financial position,
based on publicly available information.
<Table>
<Caption>
2001 2000
- --------------------------------------------------
Current Assets............... $129,532 $ 53,919
Non-Current Assets........... $261,189 $309,832
Current Liabilities.......... $ 83,387 $ 61,760
Non-Current Liabilities...... $ 26,379 $ 32,561
Revenues..................... $218,172 $ 89,056
Gross Profit................. $ 71,512 $ 14,038
Loss from Operations......... $(78,044) $(48,617)
Net Loss..................... $(61,154) $(42,258)
- --------------------------------------------------
</Table>
The market value of the Company's investment in TriZetto was approximately
$159,314 as at December 31, 2001.
The issuance by TriZetto of shares of common stock resulted in a $6,679
loss, including taxes of $2,618, recorded in the year ended December 31, 2001.
The majority of these shares were issued in a secondary
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offering which generated proceeds to TriZetto of approximately $56,000. The
remaining shares were issued primarily for acquisitions and stock option
exercises. The issuance of equity by TriZetto resulted in the reduction of IMS
Health's ownership stake from approximately 33.2% on December 31, 2000 to
approximately 26.8% on December 31, 2001. The resulting loss has been recognized
in the Consolidated Statements of Income within Gain (Loss) on Issuance of
Investees' Stock, net, in accordance with SAB No. 51.
On December 1, 2000, TriZetto acquired all of the issued and outstanding
capital stock of Resource Information Management Systems, Inc. ("RIMS") for
2,588 shares of TriZetto common stock at an average price of $21.20 per share
and $3,000 cash, as well as the assumption of stock options and an agreement to
issue a certain amount of restricted stock. For the year ended December 31,
2000, the Company recognized a gain of $9,029, including tax of $3,539, in the
income statement related to the issuance of common stock by TriZetto. The gain
reflects the excess of the sales price of the TriZetto stock issued over the
Company's carrying value of TriZetto stock. This stock issuance reduced the
Company's ownership of TriZetto to 33.2% as of December 31, 2000.
Effective October 1, 2000, TriZetto entered into a three-year license
agreement for TriZetto's HealthWeb software which may be renewed for an
additional one-year period. The license fee for the software is $3,000 payable
in three annual installments of $1,000. As of December 31, 2001 $1,000 remained
outstanding and was accrued for by the Company.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
During 2001 CTS recorded revenues from TriZetto of approximately $401 and
payments to TriZetto for commissions and marketing fees of approximately $1,012.
NOTE 13. SECURITIES AND OTHER INVESTMENTS
SECURITIES
Securities and Other Investments include the Company's investments in:
a) publicly traded marketable securities; b) direct equity investments in
private companies, and c) interests in venture capital entities.
Marketable securities, principally consisting of equity securities, are
classified as available-for-sale. Such securities are carried at estimated fair
value, with the unrealized gains and losses, net of income taxes, reported as a
component of shareholders' equity. Typically these securities are distributed to
the Company from venture capital entities it invests in. The cost and estimated
fair value of these securities were $13,159 and $27,155 respectively at
December 31, 2001, and $6,265 and $23,357 respectively at December 31, 2000.
Direct equity investments in private companies and interests in venture
capital entities are carried in the financial statements at cost which was
$24,140 at December 31, 2001 and $60,233 at December 31, 2000. On a quarterly
basis, the Company monitors the realizable value of these investments and makes
appropriate reductions in their carrying values when a decline in value is
deemed to be other-than-temporary. During the fourth quarter of 2001, the
Company reviewed the Enterprises portfolio and re-assessed it as a non-strategic
asset. The Company refined its estimation approach related to its assessment of
the other-than-temporary decline in the fair value of the investments in the
venture capital entities from evaluating the recoverability of the portfolio of
each venture capital entity in the aggregate to evaluating the underlying
securities. After a comprehensive review of the operating results, financial
position and future prospects of the investments made by the entities,
management concluded that the declines in the value of the investments made by
the venture capital entities were other-than-temporary in nature and recorded a
charge of $28,729 for the year ended December 31, 2001, included in Gains
(Losses) from Investments, net in the Consolidated Statements of Income.
During 2001 the Company sold securities from its available-for-sale
portfolio and recorded a pre-tax gain of $1,082, which is included in Gains
(Losses) from Investments, net in the Consolidated Statements of Income. The
Company recorded $78,139 and $25,264 of net pre-tax gains from the disposition
of its available-for-sale securities during 2000 and 1999, respectively. These
amounts were recorded in Gains (Losses) from Investments, net.
OTHER INVESTMENTS
On February 17, 2000, the Company announced an alliance with and strategic
investment in Allscripts to develop and market new Internet-based information
healthcare solutions for the pharmaceutical industry. In conjunction with the
agreement the Company made a private equity investment of $10,000 to acquire 215
shares of Allscripts common stock.
During the fourth quarter of 2000, the Company determined the decline in
value of its investment in Allscripts to be other-than-temporary. As a result,
the Company incurred an impairment charge of $8,045 which was included as part
of the Severance, Impairment and Other Charges described more fully in Note 8.
In addition, during the third and fourth quarters of 2001 the Company determined
that Allscripts had sustained a further other-than-temporary decline and reduced
its carrying basis of Allscripts by an additional $1,258. This amount was
charged to Gains (Losses) from Investments, net in the Consolidated Statements
of Income.
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In June 2000, the Company's CTS subsidiary announced a strategic
relationship with Trident Capital to jointly invest in emerging e-business
service and technology companies. In accordance with this strategy, the Company
invested $1,955 in Questra Corporation ("Questra"), an e-business software and
consulting firm headquartered in Rochester, New York, in return for a 5.8%
equity interest. Trident Capital also independently made a direct investment in
Questra. CTS's investment is being accounted for under the cost method of
accounting.
CTS reviews for impairment certain assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In the fourth quarter of 2001, Questra issued Preferred B shares in
exchange for $19 million of new venture capital financing. Since CTS did not
participate, that reduced its ownership interest in Questra from 5.8% to 2.1%.
Based on the implied fair value of Questra, as measured by the latest round of
financing, and considering the preferential liquidation rights that the
Preferred B shareholders received, CTS has concluded that it will not recover
any of its investment in Questra and has recorded an impairment loss of $1,955
to recognize the other than temporary decline in the value of its investment.
This amount was charged to Gains (Losses) from Investments, net in the
Consolidated Statements of Income.
NOTE 14. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE RISK MANAGEMENT
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
SFAS No. 133." These statements standardize the accounting for derivative
instruments. The Company is required to record all derivative instruments on the
balance sheet at fair value. Derivatives that are not classified as hedges are
adjusted to fair value through earnings. Changes in fair value of the
derivatives that the Company has designated and that qualify as effective hedges
are recorded in either other comprehensive income or earnings. Any ineffective
portion of the Company's derivatives that are classified as hedges is
immediately recognized in earnings. This change in accounting principle did not
have a material impact on the Company's financial position, results of
operations or cash flow.
The Company transacts business in more than 100 countries and is subject to
risks associated with changing foreign exchange rates. The Company's objective
is to reduce earnings and cash flow volatility associated with foreign exchange
rate changes. Accordingly, the Company enters into foreign currency forward
contracts to minimize the impact of foreign exchange movements on net income and
on the value of non-functional currency assets and liabilities.
It is the Company's policy to enter into foreign currency transactions only
to the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for investment or speculative
purposes. At December 31, 2001 all foreign currency forward contracts had a term
of less than one year. The principal currencies hedged are the Japanese yen, the
Euro and the Swiss franc.
The impact of foreign exchange risk management activities on pre-tax income
in 2001, 2000 and 1999 was a net gain of $6,955, $19,535 and $3,239,
respectively. In addition, at December 31, 2001, the Company had approximately
$131,591 in foreign exchange forward contracts outstanding with various
expiration dates through February 2002 hedging non-functional currency assets
and liabilities. Gains and losses on these contracts are not deferred and are
included in the Consolidated Statements of Income in Other Expense, net.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2001, the Company's financial instruments included cash,
cash equivalents, receivables, accounts payable, short-tem debt, including
short-term borrowings reclassified as long-term debt, and foreign currency
forward contracts. At December 31, 2001, the fair values of cash, cash
equivalents, receivables, accounts payable and short-term debt approximated
carrying values due to the short-term nature of these instruments. At
December 31, 2001, the fair value of the Company's foreign currency forward
contracts was $131,591 and all contracts mature in 2002. The estimated fair
values of the forward contracts were determined based on quoted market prices.
CREDIT CONCENTRATIONS
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its financial
instruments and does not anticipate non-performance by the counterparties. The
Company would not realize a material loss as of December 31, 2001 in the event
of non-performance by any one counterparty. The Company enters into transactions
only with financial institution counterparties which have a credit rating of A
or better. In addition, the Company limits the amount of credit exposure with
any one institution.
The Company maintains accounts receivable balances ($228,626 and $230,988,
net of allowances for doubtful accounts, at December 31, 2001 and 2000,
respectively--see Note 22), principally from customers in the pharmaceutical
industry. The Company's trade receivables do not represent significant
concentrations of credit risk at December 31, 2001 due to the high
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quality of its customers and their dispersion across many geographic areas.
LINES OF CREDIT
The Company has borrowing arrangements with several international banks to
provide lines of credit up to $525,000 at December 31, 2001. Total borrowings
under these lines were $346,463 and $384,281 at December 31, 2001 and 2000,
respectively. In general, the terms of these lines of credit give the Company
the option to borrow at an interest rate equal to LIBOR plus 37.5 basis points
for short-term lines and LIBOR plus 65 basis points for long-term lines. The
weighted average interest rates for the short-term lines were 2.34% and 7.10% at
December 31, 2001 and 2000, respectively. The weighted average interest rates
for the long-term lines were 2.48% at December 31, 2001. The commitment fee
associated with the unused short-term lines of credit is 22.5 basis points per
year, increasing to 28.75 basis points per year if the facilities are less than
50% utilized. Under the long-term lines the commitment fee is 52.5 basis points
per year. The borrowing arrangements require the Company to comply with certain
financial covenants and at December 31, 2001 and 2000, the Company was in
compliance with all such covenants.
During the fourth quarter of 2001, the Company renegotiated with several
banks and entered into three-year lines of credit for borrowings of up to
$175,000. Borrowings under these three-year facilities are short-term in nature;
however, the Company has the ability and the intent to refinance the short-term
borrowings through December 2004 as they come due. As such, at December 31,
2001, the Company reclassified $150,000 of its then outstanding debt as
long-term debt pursuant to the provisions of SFAS No. 6, "Classification of
Short-Term Obligations Expected to be Refinanced." Borrowings under short-term
lines were $196,463 and $384,281 at December 31, 2001 and 2000, respectively.
Borrowings have maturity dates of up to ninety days from their inception.
35
<Page>
NOTE 15. PENSION AND POST-RETIREMENT BENEFITS
The status of the Company's defined benefit pension and post-retirement
benefit plans at December 31, 2001 and 2000 is as follows:
<Table>
<Caption>
POST-RETIREMENT
PENSION BENEFITS BENEFITS
- -------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $156,332 $135,325 $ 8,360 $ 7,970
Service cost 7,888 10,249 550 620
Interest cost 9,793 11,703 870 580
Foreign currency exchange loss (2,163) (9,942) -- --
Amendments 1,096 (129) -- --
Curtailment charge (credit) -- 6,502 -- (420)
Special termination benefits -- 158 -- --
Plan participants' contributions 723 687 70 50
Actuarial (gain) loss 4,127 6,975 3,560 (150)
Benefits paid (10,796) (5,196) (320) (290)
- -------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 167,000 156,332 13,090 8,360
- -------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 153,256 163,998 -- --
Actual return on assets (14,207) (2,449) -- --
Foreign currency exchange loss (1,815) (6,000) -- --
Employer contributions 25,164 2,383 250 240
Plan participants' contributions 723 687 70 50
Actual expense paid -- (167) -- --
Benefits paid (10,796) (5,196) (320) (290)
- -------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 152,325 153,256 -- --
- -------------------------------------------------------------------------------------------------------
FUNDED STATUS AT END OF YEAR (14,675) (3,076) (13,090) (8,360)
Unrecognized actuarial (gain) loss 21,951 (10,225) 2,520 (910)
Unrecognized prior service cost (885) (1,599) (70) (200)
Unrecognized net transition asset 256 720 -- --
- -------------------------------------------------------------------------------------------------------
Net amount recognized at end of year 6,647 (14,180) (10,640) (9,470)
- -------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost 38,235 17,438 -- --
Accrued benefit liability (35,648) (33,340) (10,640) (9,470)
Intangible asset 314 437 -- --
Accumulated other comprehensive income 3,746 1,285 -- --
- -------------------------------------------------------------------------------------------------------
Net amount recognized $ 6,647 $(14,180) $(10,640) $(9,470)
- -------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount Rate 6.62% 6.81% 7.25% 7.50%
Expected return on plan assets 8.76% 8.57% n/a n/a
Rate of compensation increase 3.89% 3.92% n/a n/a
- -------------------------------------------------------------------------------------------------------
</Table>
The assumed rate of future increases in per capita cost of covered
healthcare benefits is 9.0% in 2001, decreasing gradually to 5.0% for the year
2010 and remaining constant thereafter. The weighted average discount rates,
expected return on plan assets and rate of compensation increase were 6.72%,
8.64% and 4.05% respectively as of December 31, 1999.
36
<Page>
The components of net periodic benefit cost for 2001, 2000 and 1999 are
summarized as follows:
<Table>
<Caption>
PENSION BENEFITS POST-RETIREMENT BENEFITS
------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999
------------------------------ ------------------------------
Service cost $ 7,888 $10,249 $ 9,781 $ 550 $ 620 $ 720
Interest cost 9,793 11,703 8,973 870 580 530
Expected return on plan assets (12,708) (12,952) (11,639) -- -- --
Prior service cost (credit) (196) (236) (217) (130) (130) (250)
Transition Asset 485 (40) -- -- -- --
Recognized actuarial (gain) loss (208) (684) (501) 130 (10) --
Special termination benefit charge (credit) -- 158 -- -- -- --
Curtailment charge (credit) -- 6,610 -- -- (340) --
- ----------------------------------------------------------------------------------------- ------------------------------
Net periodic benefit cost $ 5,054 $14,808 $ 6,397 $1,420 $ 720 $1,000
- ----------------------------------------------------------------------------------------- ------------------------------
</Table>
During 2001, the Company made a tax deductible contribution to its U.S.
pension plan in the amount of $17,600.
In connection with the Synavant Spin-Off and the sale of Erisco in 2000,
employees of Synavant and Erisco ceased participation in Company-sponsored
pension and post-retirement benefit plans. This was accounted for as a
curtailment. The Company-sponsored defined benefit plan in the United States of
America was amended to provide that affected Synavant and Erisco employees would
be 100% vested in their accrued benefit under the plan. In addition, Synavant
and Erisco employees who met specified age and service criteria at the time of
the respective transactions will be eligible to participate in the Company
sponsored post-retirement medical program as in effect at the time of their
retirement.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $45,235, $43,270 and $10,364 respectively, as of
December 31, 2001 and $48,029, $43,959 and $14,632, respectively, as of
December 31, 2000. Additional executive related pension benefits that were
recognized pursuant to certain employment arrangements at December 31, 2001. The
Company's benefit obligation for these arrangements was $9,540 and an expense of
$1,730 was charged during 2001.
Assumed health care costs trend rates have a significant effect on the
amounts reported for the post-retirement health care plan. A one-percentage-
point change in assumed health care cost trend rates for 2001 would have the
following effects:
<Table>
<Caption>
1-PERCENTAGE 1-PERCENTAGE
INCREASE (DECREASE) POINT INCREASE POINT DECREASE
- --------------------------------------------------------------
Effect on total
service/interest cost for
post-retirement benefits $ 110 ($ 90)
Effect on post-retirement
benefit obligation $1,140 ($970)
</Table>
Certain employees of the Company in the United States of America also are
eligible to participate in the Company-sponsored defined contribution plan. The
Company's businesses make a matching contribution of up to 50% of the employee's
contribution based on specified limits of the employee's salary. The Company's
expense related to this plan was $2,452, $3,248 and $3,108 for the years 2001,
2000 and 1999, respectively.
NOTE 16. EMPLOYEE STOCK PLANS
The Company maintains three Employees' Stock Incentive Plans, which provide
for the grant of stock options, restricted stock and restricted stock units to
eligible employees. At December 31, 2001, there were 50,957 shares of common
stock reserved for issuance under all of Company stock plans of which, 18,823
shares are still available for future grants. These amounts include 18,000
shares from the 2000 Employee Stock Incentive Plan, which the Board of Directors
approved during 2000. Generally, options vest proportionally over three years
and have an exercise price equal to the fair market value of the common stock on
the grant date. Certain grants permit accelerated vesting if specified
performance targets are achieved. Options granted to Company employees must be
exercised five, seven or ten years from the date of grant. The vesting period
and option term for grants to employees is at the discretion of the Compensation
and Benefits Committee of the Board of Directors.
The Company granted 184 restricted stock units in 2001. The grants had a
nominal value of $4,304, a weighted average grant price of $23.41 per share and
vest over a two to four year period.
The Company amended its Employee Stock Purchase Plan for 2001 to allow
employees to purchase a limited amount of common stock at the end of each six
month period at a price equal to the lesser of 85% of fair market value on
(a) the first trading day of the period, or (b) the last trading day of the
period. Fair market value is defined as the average of the high and
37
<Page>
low prices of the shares on the relevant day. The Plan was originally adopted in
1998 with a quarterly purchase period and a price equal to the lesser of 90% of
the fair market value on the first trading day or the last trading day of the
period.
CTS has stock option plans that provide for the grant of stock options to
eligible employees, non-employee Directors and independent contractors. Under
these plans, CTS has 7,638 shares authorized and has 2,271 shares available for
future grants.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires that
companies with stock-based compensation plans either recognize compensation
expense based on the fair value of options granted or continue to apply the
existing accounting rules and disclose pro forma net income and earnings per
share assuming the fair value method had been applied. The Company has chosen to
continue applying APB Opinion No. 25 and related interpretations in accounting
for its plans. In accordance with APB Opinion No. 25, the Company recognized
compensation expense in 2001 of $2,099 for the fixed stock option plans
(primarily relating to vesting acceleration of certain employee stock options
prior to termination) and $4,662 for restricted stock units. Compensation cost
was recognized in 2000 and 1999 of $5,636 and $3,390, respectively, for
restricted stock units and compensation cost related to terminated employees in
2000 was $3,309. If the compensation cost for the Company's stock-based
compensation plans was determined based on the fair value at the grant dates for
awards under those plans, consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below for the years ended December 31:
<Table>
<Caption>
2001 2000 1999
- ------------------------------------------------------------------
Net Income: As reported $185,426 $120,816 $276,061
Pro forma $136,569 $17,894 $228,878
Earnings Per Share:
Basic As reported $0.63 $0.41 $0.88
Pro forma $0.46 $0.06 $0.73
Diluted As reported $0.62 $0.40 $0.86
Pro forma $0.46 $0.06 $0.72
</Table>
Note: The pro forma earnings may not be representative of the effects on net
income and earnings per share in future years. The 2000 pro forma earnings
reflect one-time vesting acceleration in 2000 which had a per share impact of
$0.31 (basic) and $0.30 (diluted).
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share is the estimated fair value at grant date using
the Black-Scholes option pricing model. The following weighted average
assumptions were used for the periods ended December 31:
<Table>
<Caption>
2001 2000 1999
- -----------------------------------------------------------------------
Expected term (years) 2.98 2.98 3.00
Risk-free interest rate 4.1% 6.3% 4.8%
Dividend yield 0.3% 0.3% 0.3%
Expected volatility 38.0% 40.0% 35.0%
</Table>
The weighted average fair values of the Company's stock options granted in
2001, 2000 and 1999 were $7.20, $6.23 and $9.61 per share, respectively.
The fair value of CTS stock options used to compute the Company's pro forma
net income and earnings per share was computed in the same manner with the
following weighted average assumptions for the periods ended December 31:
<Table>
<Caption>
2001 2000 1999
- -----------------------------------------------------------------------
Expected term (years) 3.00 3.90 3.90
Risk-free interest rate 4.3% 6.1% 5.6%
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 78.0% 75.0% 75.0%
</Table>
The weighted average fair values of CTS stock options granted during 2001,
2000 and 1999 were $16.68, $21.71 and $7.45 per share, respectively.
For the period through the Gartner Spin-Off in 1999, the fair value of
Gartner stock options used to compute the Company's pro forma net income and
earnings per share was computed in the same manner with the following weighted
average assumptions for 1999: dividend yield of 0%, expected volatility of 45%,
risk--free interest rate of 4.7%, and expected term of 3.5 years. The weighted
average fair value of Gartner stock options granted in 1999 was $8.91 per share.
Holders of options to purchase the Company's stock did not receive shares as
a result of the Synavant and Gartner Spin-Off in 2000 and 1999, respectively.
Consequently, options granted under the Company's plans were adjusted to
recognize the effects of the distributions and maintain the intrinsic value of
the options. The options, as adjusted, represented a change in the number of
shares issuable when exercised but maintained the same ratio of the exercise
price to the market value per share, the same aggregate difference between
market value and exercise price and the same vesting provisions, option periods
and other terms and conditions as the options prior to the adjustment. In
accordance with EITF Statement No. 90-9, "Changes to Fixed Employee Stock Option
Plans as a Result of Equity Restructuring," no compensation charge was required
for these option adjustments.
38
<Page>
The following table summarizes stock option activity for each of the three
years ended December 31:
<Table>
<Caption>
WEIGHTED
AVERAGE
PER SHARE
STOCK OPTIONS EXERCISE PRICE
- --------------------------------------------------------------------------------------------
Options Outstanding, December 31, 1998 28,860 $21.18
- --------------------------------------------------------------------------------------------
Gartner Spin-Off
Conversion adjustment(1) 4,108 --
Granted 8,646 $34.14
Exercised (1,885) $16.96
Expired/Terminated (4,847) $22.76
- --------------------------------------------------------------------------------------------
Options Outstanding, December 31, 1999 34,882 $21.96
- --------------------------------------------------------------------------------------------
Synavant Spin-Off (3,574) $22.31
Conversion adjustment(1) 1,259 --
Granted 24,924 $18.69
Exercised (8,191) $16.54
Expired/Terminated (3,733) $23.28
- --------------------------------------------------------------------------------------------
Options Outstanding, December 31, 2000 45,567 $20.40
- --------------------------------------------------------------------------------------------
Granted 4,270 $24.25
Exercised (14,566) $16.88
Expired/Terminated (3,137) $24.22
- --------------------------------------------------------------------------------------------
Options Outstanding, December 31, 2001 32,134 $22.14
- --------------------------------------------------------------------------------------------
</Table>
(1) THE CONVERSION ADJUSTMENT RELATES TO THE CONVERSION FACTOR APPLIED TO
EXISTING OPTIONS AS A RESULT OF THE GARTNER AND SYNAVANT SPIN-OFFS IN 1999
AND 2000, RESPECTIVELY.
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2001:
<Table>
<Caption>
WEIGHTED AVERAGE PER SHARE
AS OF DECEMBER 31, 2001 OPTION EXERCISE PRICES
------------------------- REMAINING --------------------------
RANGE OF NUMBER NUMBER CONTRACTUAL
EXERCISE PRICES OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------
$ 9.65-$14.76 174 169 4.1 years $12.66 $12.69
$15.21-$16.83 9,992 7,746 5.4 years $16.20 $16.46
$17.33-$20.52 6,847 3,582 7.3 years $20.39 $20.32
$21.00-$26.99 7,513 3,484 7.1 years $24.25 $24.67
$27.12-$29.90 2,654 2,081 6.8 years $29.10 $29.36
$30.39-$32.76 4,954 3,499 7.0 years $30.42 $30.42
-------------------------
32,134 20,561
- --------------------------------------------------------------------------------------------
</Table>
On January 3, 2000, the Company reduced the vesting period on substantially
all options previously granted with a six-year vesting period to four years. As
a result 4,997 previously unvested options with exercise prices ranging from
$15.93 to $28.95 became exercisable of January 3, 2000. On May 22, 2000 in
connection with the sale of Erisco, the Company accelerated the vesting on 2,738
options and extended the post termination exercise period for certain unvested
options granted prior to 1998.
39
<Page>
CTS stock option activity and related information as of and for the years
ended December 31, 2001, 2000 and 1999 is summarized below:
<Table>
<Caption>
2001 2000 1999
------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PER SHARE PER SHARE PER SHARE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 3,681 $18.90 2,552 $ 8.37 1,370 $ 2.93
Granted, Employee Option Plan -- -- -- -- 122 $13.73
Granted, Directors Option Plan -- -- -- -- 40 $11.16
Granted, 1999 Incentive Comp. Plan 1,542 $31.71 1,408 $37.59 1,277 $12.58
Exercised (666) $ 7.71 (130) $ 6.01 (191) $ 2.88
Cancelled (238) $37.57 (148) $26.43 (66) $ 4.51
Expired (13) $53.70 (1) $12.22 -- --
- ------------------------------------------------------------------------------------------------------------------------
Outstanding--end of year 4,306 $24.08 3,681 $18.90 2,552 $ 8.37
- ------------------------------------------------------------------------------------------------------------------------
Exercisable--end of year 1,191 $13.99 957 $ 5.83 442 $ 3.40
- ------------------------------------------------------------------------------------------------------------------------
</Table>
Options granted under these plans may not be granted at an exercise price
less than fair market value of the underlying shares on the date of grant with
the exception of 98 shares granted in 1998 to the Chairman & CEO at an amount
less than the then current fair market value of the shares on the date of grant.
CTS has recorded the related compensation expense over the vesting period of
these options. All options have a life of ten years, generally vest
proportionally over four years and have an exercise price equal to the fair
market value of the common stock on the grant date.
40
<Page>
NOTE 17. INCOME TAXES
Income (Loss) from continuing operations before provision for income taxes
consisted of:
<Table>
<Caption>
2001 2000 1999
- -------------------------------------------------------------
U.S. $ (280) $ 86,719 $ 98,016
Non-U.S. 184,081 174,594 250,426
- -------------------------------------------------------------
$183,801 $261,313 $348,442
- -------------------------------------------------------------
</Table>
The provision (benefit) for income taxes consisted of:
<Table>
<Caption>
2001 2000 1999
- ---------------------------------------------------------------
U.S. Federal and State:
Current $(2,042) $ 59,022 $60,444
Deferred 501 34,362 3,560
- ---------------------------------------------------------------
$(1,541) $ 93,384 $64,004
- ---------------------------------------------------------------
Non-U.S.:
Current $33,182 $ 23,165 $61,597
Deferred 6,774 23,863 (27,525)
- ---------------------------------------------------------------
$39,956 $ 47,028 $34,072
- ---------------------------------------------------------------
Total $38,415 $140,412 $98,076
- ---------------------------------------------------------------
</Table>
The following table summarizes the significant differences between the U.S.
Federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes.
<Table>
<Caption>
2001 2000 1999
- -----------------------------------------------------------------------
Tax Expense at Statutory Rate 35.0% 35.0% 35.0%
State and Local Income Taxes, net of
Federal Tax Benefit 0.7 1.6 0.1
Pre-Spin Liability (11.4) -- 2.6
Amortizable Non-U.S. Intangibles (8.0) (7.4) (19.5)
Impact of Non-U.S. Tax Rates and Credit (1.8) 2.7 2.1
Non-Deductible Goodwill Amortization 1.6 2.8 1.9
Non-U.S. Tax Liabilities 1.4 0.1 5.3
Non-Deductible U.S. Impairment
Charge--Synavant -- 13.6 --
Utilization of Prior Year Non-U.S.
NOL's -- (3.9) --
Non-Deductible Spin and Related Costs
and Severance, Impairment and Other
Charges -- 1.9 1.0
Impact of Non-U.S. Tax Rate Changes on
Deferred Taxes -- 6.8 2.6
Recognition of Loss on Sale of SSJ -- -- (2.6)
Other, net 3.4 0.5 (0.4)
- -----------------------------------------------------------------------
Total Taxes 20.9% 53.7% 28.1%
- -----------------------------------------------------------------------
</Table>
The Company's 2001 effective tax rate of 20.9% reflects the financial
statement impact of the expiration, without adjustment, on September 30, 2001 of
the statute of limitations on certain previously-reserved-for Donnelley Legacy
transactions (approximately $21,033), and the recognition of additional tax
benefits arising from a 1998 non-U.S. reorganization which gave rise to tax
deductible amortization of non-U.S intangible assets (approximately $14,660),
resulting from the reassessment of the tax benefits from this reorganization
following certain new non-U.S. tax legislation enacted at the end of the first
quarter of 2001. The Company's 2000 effective tax rate of 53.7% reflected
principally the non-deductible U.S. Impairment Charge--Synavant, Spin and
Related Costs and Severance, Impairment and Other Charges (portions of which are
non-deductible), and a reduction in the net German deferred tax assets
(principally non-U.S. intangible assets) due to a reduction in the German
corporate tax rate from 40% to 25% ($17,655). These were offset by the
recognition of certain German trade tax benefits on tax deductible amortization
of non-U.S. intangible assets resulting from a favorable German court decision
($19,355), and the recognition of the tax benefit of certain net operating
losses ("NOLs") due to the implementation of global tax planning strategies
($10,072). The Company's 1999 effective tax rate of 28.1% reflected a
non-deductible one-time Gartner Spin and Related Costs. To consolidate certain
of its international operations, in 1999 the Company engaged in a non-U.S.
reorganization which gave rise to tax deductible amortization of non-U.S.
intangible assets.
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
<Table>
<Caption>
2001 2000
- -------------------------------------------------------------
Deferred Tax Assets:
Non-U.S. Intangibles $ 63,322 $ 74,914
Net Operating Losses 28,518 28,176
Employee Benefits 24,194 15,106
Accrued Liabilities 7,983 6,561
U.S. Intangibles -- 6,284
- -------------------------------------------------------------
124,017 131,041
Valuation Allowance (13,202) (11,718)
- -------------------------------------------------------------
110,815 119,323
- -------------------------------------------------------------
Deferred Tax Liabilities:
Computer Software (36,309) (26,213)
CTS Undistributed Indian Earnings (25,535) (16,822)
Securities and Other Investments (21,056) (37,554)
Deferred Revenue (15,982) (31,882)
Depreciation (10,242) (9,844)
Other (9,843) (5,505)
- -------------------------------------------------------------
(118,967) (127,820)
- -------------------------------------------------------------
Net Deferred Tax Asset (Liability) $ (8,152) $ (8,497)
- -------------------------------------------------------------
</Table>
In connection with the tax-free TriZetto acquisition, the Company has a
deferred tax liability of $30,178 and $35,502 for 2001 and 2000 respectively, on
the difference between the substituted tax basis and the equity investment in
TriZetto in accordance with SFAS No. 109. This deferred tax liability is
included in Securities and Other Investments above.
The 2001 and 2000 net deferred tax liability consists of a current deferred
tax asset of $63,103 and $62,934, a non-current deferred tax asset of $47,063
and $49,342, a current deferred tax liability of $10,684 and $15,812, and a
non-current deferred tax liability included in Other Liabilities of $107,634 and
$104,961, respectively. Also included in Other Liabilities are certain income
tax and other Donnelley Legacy liabilities deemed to be long-term in nature by
the Company ($49,746). See Notes 2, 21 and 22.
41
<Page>
The Company has established a valuation allowance attributable to deferred
tax assets, primarily net operating losses, in certain U.S. state and non-U.S.
tax jurisdictions where, based on available evidence, it is more likely than not
that such assets will not be realized.
The Company intends to indefinitely reinvest the undistributed earnings of
non-U.S. subsidiaries other than the Indian earnings of CTS. CTS management
currently intends to repatriate all Indian earnings to the U.S. and has provided
deferred U.S. income taxes on all such Indian undistributed earnings.
Undistributed earnings of non-U.S. subsidiaries, other than the Indian earnings
of CTS, aggregated approximately $675,700 at December 31, 2001. Deferred tax
liabilities for U.S. federal income taxes have not been recognized for these
undistributed earnings. If such earnings are repatriated in the future, or are
no longer deemed to be indefinitely reinvested, applicable taxes will be
provided for on such amounts. It is not currently practicable to determine the
amount of applicable taxes.
NOTE 18. COMMITMENTS
The Company's contractual obligations include facility leases, agreements to
purchase data and telecommunications services and leases of certain computer and
other equipment. At December 31, 2001, the minimum annual payment under these
agreements and other contracts that have initial or remaining non-cancelable
terms in excess of one year are as listed in the following table:
<Table>
<Caption>
DATA AND COMPUTER
OPERATING TELECOMMUNICATION EQUIPMENT
YEAR LEASES(1) SERVICES(2) LEASES(3) TOTAL
- --------------------------------------------------------------------------------
2002 $19,222 $102,676 $ 17,599 $139,497
2003 17,107 79,557 13,373 110,037
2004 12,607 47,822 7,316 67,745
2005 9,894 37,133 4,252 51,279
2006 8,710 3,160 579 12,449
Thereafter 9,645 2,490 116 12,251
- --------------------------------------------------------------------------------
Total $77,185 $272,838 $ 43,235 $393,258
- --------------------------------------------------------------------------------
</Table>
(1) Rental expense under real estate operating leases for the years 2001, 2000
and 1999 was $17,176, $18,911 and $26,656 respectively.
(2) Expense for data and telecommunications services for the years 2001, 2000
and 1999 was $96,727, $85,858 and $73,061 respectively.
(3) Rental expense under computer and other equipment leases was $16,790,
$14,348 and $22,248 for 2001, 2000 and 1999, respectively. These leases are
frequently renegotiated or otherwise changed as advancements in computer
technology produce opportunities to lower costs and improve performance.
Commitments also include "Capital Calls" which are required payments
pursuant to the Enterprises agreements. At December 31, 2001 the Company is
obligated to contribute a maximum of $7,000 to meet capital call requirements
over the remaining life of the Enterprises venture capital entities.
NOTE 19. IMS HEALTH CAPITAL STOCK
On July 19, 2000 the Board of Directors authorized a stock repurchase
program to buy up to 40,000 shares, marking the fifth consecutive repurchase
program the Company has implemented. Shares acquired through the repurchase
program will be open-market purchases in compliance with Securities and Exchange
Commission Rule 10b-18.
During 2001, the Company repurchased 12,124 shares of outstanding common
stock at a total cost of $310,482. The shares were repurchased under the stock
repurchase programs approved by the Board of Directors on July 19, 2000. As of
December 31, 2001, 20,577 shares had been repurchased since the inception of the
July 2000 program at a total cost of $517,129.
On October 19, 1999 the Board of Directors authorized a stock repurchase
program to buy up to 16,000 of the Company's outstanding common stock. A portion
of this program was intended to offset option exercises. This program was
completed in October 2000 at a total cost of $348,730.
On October 20, 1998 the Board of Directors authorized a stock repurchase
program to buy up to 16,000 shares of the Company's outstanding common stock. A
portion of this program was intended to offset option exercises. This program
was completed in October 1999 at a cost of $478,302.
Under the Company's Restated Certificate of Incorporation as amended, the
Company has authority to issue 820,000 shares with a par value of $.01 per share
of which 800,000 represent shares of common stock, 10,000 represent shares of
preferred stock and 10,000 represent shares of series common stock. The
preferred and series common stock can be issued with varying terms, as
determined by the Board of Directors.
On December 15, 1998, the Company's Board of Directors authorized a 2-for-1
split of its common stock effective January 15, 1999, in the form of a stock
dividend to shareholders of record on December 29, 1998. All share and per share
amounts in the accompanying Consolidated Financial Statements and Notes to
Consolidated Financial Statements have been restated to give effect to the stock
split.
In connection with the Cognizant Spin-Off, the Company entered into a Rights
Agreement designed to protect shareholders of the Company in the event of
unsolicited offers to acquire the Company and the other coercive takeover
tactics which, in the opinion of the Board of Directors, could impair its
ability to represent shareholder interests. Under the Rights Agreement, each
share of the common stock has one-half of one right which trades with the stock
until the right becomes exercisable. Each right entitles the registered holder
to purchase 1/1000 of a share of Series A Junior Participating Preferred Stock,
par value $.01 per share, at a price of $225 per 1/1000 of a share, subject to
adjustment. The rights will generally not be exercisable until a person or group
("Acquiring Person") acquires beneficial ownership of, or commences a tender
offer or exchange offer
42
<Page>
which would result in such person or group having beneficial ownership of 15% or
more of the outstanding common stock (20% in the case of certain institutional
investors).
In the event that any person or group becomes an Acquiring Person, each
right will thereafter entitle its holder (other than the Acquiring Person) to
receive, upon exercise, shares of stock having a market value of two times the
exercise price in the form of the Company's common stock or, where appropriate,
the Acquiring Person's common stock. The Company may redeem the rights, which
expire in June 2008, for $0.01 per right, under certain circumstances.
NOTE 20. ELIMINATION OF ONE-MONTH REPORTING LAG IN IMS HEALTH OPERATING ENTITIES
Effective in the first quarter of 1999, the Company's operating units which
previously reported on a fiscal year ended November 30 revised their reporting
period to conform to the Company's fiscal year end of December 31 (the
"Calendarization"). This revision was made to reflect the results of operations
and financial position of these operating units on a more timely basis,
consistent with business performance, and to increase operating efficiency. The
Company has improved its internal financial systems and work processes, so that
the Company now has the capability to more rapidly collect, consolidate and
report information. As such, the financial statements of the Company's operating
units at December 31, 1998 reflect a twelve-month period ended November 30. The
$1,040 of net income related to the operating results of the Company's operating
units for the period December 1 through December 31, 1998 was recorded directly
to shareholders' equity as an addition to Retained Earnings. In addition,
December 1998 included a $3,409 currency translation adjustment in the period
that was recorded as a reduction of cumulative translation adjustment.
The following table presents the company's operating units condensed
consolidated financial information for the one-month period ended December 31,
1998:
<Table>
<Caption>
ONE MONTH ENDED
DECEMBER 31, 1998
- ----------------------------------------------------
Revenue.......................... $71,754
Operating Income................. 1,137
Income Before Provision for
Income Taxes................... 1,432
Provision for Income Taxes....... (392)
Net Income....................... $ 1,040
- ----------------------------------------------------
Earnings Per Share............... $ 0.003
- ----------------------------------------------------
</Table>
The following table presents the Company's operating units cash flow
information for the one-month period ended December 31, 1998:
<Table>
<Caption>
ONE MONTH ENDED
DECEMBER 31, 1998
- -------------------------------------------------
Net Cash Provided by
Operating Activities.... $30,852
Net Cash Used in Investing
Activities.............. (3,645)
Net Cash Provided by
Financing Activities.... 2,276
Effect of Exchange Rate
Changes on Cash and Cash
Equivalents............. 1,181
- -------------------------------------------------
Increase in Cash and Cash
Equivalents............. $30,664
- -------------------------------------------------
</Table>
NOTE 21. CONTINGENCIES
The Company and its subsidiaries are involved in various legal proceedings,
claims litigation and tax matters arising in the ordinary course of business. In
the opinion of management, the outcome of such current legal proceedings, claims
litigation and tax matters, if decided adversely, could have a material effect
on quarterly or annual operating results or cash flows when resolved in a future
period. However, in the opinion of management, these matters will not materially
affect the Company's consolidated financial position.
In addition, the Company is subject to certain other contingencies discussed
below:
INFORMATION RESOURCES LITIGATION
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the corporation then known as "The Dun and Bradstreet Corporation"
and now known as "R. H. Donnelley Corporation" ("Donnelley"), A.C. Nielsen
Company and I.M.S. International Inc. (a predecessor of IMS Health) (the "IRI
Action"). At the time of the filing of the complaint, each of the other
defendants was a subsidiary of Donnelley.
The complaint alleges various violations of the United States antitrust
laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
latter claims relate to the acquisition by the defendants of Survey Research
Group Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with
IRI when it agreed to be acquired by the defendants and that the defendants
induced SRG to breach that agreement. IRI's complaint alleges damages in excess
of $350,000, which amount IRI has asked to be trebled under the antitrust laws.
IRI also seeks punitive damages in an unspecified amount.
43
<Page>
On October 15, 1996, the defendants moved for an order dismissing all claims
in the complaint. On May 6, 1997, the United States District Court for the
Southern District of New York issued a decision dismissing IRI's claim of
attempted monopolization in the United States, with leave to replead within
sixty days. The Court denied the defendants' motion with respect to the
remaining claims in the complaint. On June 3, 1997, the defendants filed an
answer denying the material allegations in IRI's complaint, and A.C. Nielsen
Company filed a counterclaim alleging that IRI has made false and misleading
statements about its services and commercial activities. On July 7, 1997, IRI
filed an amended and restated complaint repleading its alleged claim of
attempted monopolization in the United States and realleging its other claims.
On August 18, 1997, the defendants moved for an order dismissing the amended
claims. On December 1, 1997, the court denied the motion and, on December 16,
1997, the defendants filed a supplemental answer denying the remaining material
allegations of the amended complaint. On December 22, 1999, the defendants filed
a motion for partial summary judgement seeking to dismiss IRI's non-U.S.
antitrust claims. On July 12, 2000, the court granted the motion dismissing
claims of injury suffered from activities in foreign markets where IRI operated
through subsidiaries or companies owned by joint ventures or "relationships"
with local companies. This ruling is currently on appeal. Discovery is
continuing in this matter.
In light of the potentially significant liabilities which could arise from
the IRI Action and in order to facilitate the distribution by Donnelley of
shares of Cognizant Corporation ("Cognizant") and ACNielsen Corporation (the
parent company of A.C. Nielsen Company) in 1996, Donnelley, ACNielsen and
Cognizant entered into an Indemnity and Joint Defense Agreement pursuant to
which they agreed (i) to certain arrangements allocating liabilities that may
arise out of or in connection with the IRI Action, and (ii) to conduct a joint
defense of such action. In particular, the Indemnity and Joint Defense Agreement
provides that, in the event of an adverse decision, ACNielsen will assume
exclusive liability for liabilities up to a maximum amount to be calculated at
the time such liabilities, if any, become payable (the "ACN Maximum Amount") and
that Cognizant and Donnelley will share liability equally for any amounts in
excess of the ACN Maximum Amount. The ACN Maximum Amount will be determined by
an investment banking firm as the maximum amount ACNielsen will be able to pay
after giving effect to (i) any plan submitted by such investment bank that is
designed to maximize the claims paying ability of ACNielsen without impairing
the investment banking firm's ability to deliver a viability opinion (but which
will not require any action requiring shareholder approval), and (ii) payment of
related fees and expenses. For these purposes, financial viability means the
ability of ACNielsen, after giving effect to such plan, the payment of related
fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as
they become due and to finance the current and anticipated operating and capital
requirements of its business, as reconstituted by such plan, for two years from
the date any such plan is expected to be implemented. On February 19, 2001,
ACNielsen announced that it merged with VNU N.V. Pursuant to the Indemnity and
Joint Defense Agreement, VNU is to be included with ACNielsen for purposes of
determining the ACN Maximum Amount.
In 1998, IMS Health was spun-off from Cognizant (the "1998 Spin-Off") which
then changed its name to Nielsen Media Research, Inc. ("NMR"). IMS Health and
NMR are jointly and severally liable to Donnelley and ACNielsen for Cognizant's
obligations under the terms of the Distribution Agreement dated October 28, 1996
among Donnelley, Cognizant and ACNielsen (the "1996 Distribution Agreement"). In
connection with the 1998 Spin-Off, IMS Health and NMR agreed that, as between
themselves, IMS Health will assume 75%, and NMR will assume 25%, of any payments
to be made in respect of the IRI Action under the Indemnity and Joint Defense
Agreement or otherwise, including any legal fees and expenses related thereto
incurred in 1999 or thereafter. IMS Health agreed to be fully responsible for
any legal fees and expenses incurred during 1998. NMR's aggregate liability to
IMS Health for payments in respect of the IRI Action and certain other
contingent liabilities shall not exceed $125,000.
During 1998, Donnelley separated into two companies (the "1998 Donnelley
Spin"), Donnelley and The Dun & Bradstreet Corporation ("D&B I"). As a result,
Donnelley and D&B I are each jointly and severally liable for all Donnelley
liabilities under the Indemnity and Joint Defense Agreement and the 1996
Distribution Agreement. During 2000, D&B I separated into two companies, Moody's
Corporation ("Moody's") and The Dun & Bradstreet Corporation ("D&B II"). Moody's
and D&B II are each jointly and severally liable for all liabilities under the
Indemnity and Joint Defense Agreement and the 1996 Distribution Agreement that
were assumed by D&B I in the 1998 Donnelley Spin.
Management of the Company is unable to predict at this time the final
outcome of this matter or whether the resolution of this matter could materially
affect the Company's results of operations, cash flows or financial position.
MATTERS BEFORE THE EUROPEAN COMMISSION
The Company is the subject of complaints filed with the European Commission
("EC" or the "Commission") pursuant to Article 3 of Council Regulation No. 17 of
1972. The EC complaints allege that the Company has been and continues to engage
in certain commercial practices that violate Articles 81 and 82 of
44
<Page>
the EC Treaty, which relate to agreements or abuses of a dominant position that
adversely affect competition.
As a result of certain of these complaints, on October 19, 2000, the
Commission initiated formal proceedings against the Company through the adoption
of a statement of objections alleging that certain of the Company's commercial
practices constituted an abuse of a dominant position in contravention of
Article 82 of the EC Treaty. A statement of objections is a preliminary document
that does not represent the Commission's final view on the practices at issue.
Under Commission procedures, the Company has full rights of defense, including
access to the Commission's files, the right to answer the statement of
objections in writing and produce evidence of its own, and the right to request
the opportunity to present its defense at an oral hearing. On February 6, 2001,
the Company filed its written answer to the statement of objections. The
Commission will ultimately determine whether a decision requiring the Company to
end some or all of the contested practices is necessary and may impose fines
against the Company. If such a decision is rendered against the Company, the
Company could appeal that decision before the European Court of First Instance.
The Company intends to vigorously defend this matter.
One of the EC complaints is an application lodged with the Commission by
National Data Corporation ("NDC") on December 19, 2000. This complaint requests
that the Commission initiate a proceeding against the Company for an alleged
infringement of Article 82 of the EC Treaty and grant interim measures (the
"Application"). The Application concerns an IMS Health geographic mapping
structure used for the reporting of regional sales data in Germany, which the
German courts have ruled is copyright protected. The Application requests that
the Commission grant interim relief requiring the Company to grant NDC a
compulsory license to enable NDC to use this structure in its competing regional
sales data service in Germany.
On March 8, 2001, the Commission decided to initiate formal proceedings
against the Company through the adoption of another statement of objections
alleging that the Company's refusal to enter into negotiations with NDC
following NDC's request for a license to use the aforementioned geographic
mapping structure could constitute an abuse of a dominant position in
contravention of Article 82 of the EC Treaty. In addition, the Commission
proposed the granting of interim measures requiring the Company to license this
structure to third parties, including NDC, until the Commission adopts a final
decision on the merits of the case.
On July 3, 2001, the Commission announced its interim decision in these
proceedings (the "Interim Decision") ordering interim measures pending a final
decision on the Application. The Interim Decision required the Company to grant
a license of the geographic mapping structure on commercially reasonable terms
without delay to NDC and to any other competitor currently present on the German
regional sales data market should it request a license. The terms and royalties
to be paid for the license were to be agreed between the Company and the
requesting party, and if agreement could not be reached in a two week period,
then the terms and royalties for the license would be determined by one or more
independent experts agreed to by the parties, or if the parties could not agree,
then the Commission would appoint one or more experts. The Interim Decision
states that the expert(s) shall communicate its determination to the Commission
for approval within two weeks of being chosen. Finally, the Interim Decision
provides for a penalty of 1,000 EUROS per day should the Company fail to comply
with the Interim Decision.
Following issuance of the Interim Decision, NDC and AyzX Deutschland GmbH
("AzyX") requested from the Company a license to the geographic mapping
structure. The Company was not able to agree with NDC or AzyX on the terms and
royalties to be paid for the license or the determination of one or more
independent experts. Before the Commission appointed any independent experts,
the Interim Decision was suspended by the President of the European Court of
First Instance (the "CFI") as noted below.
On August 6, 2001, the Company filed an appeal with the CFI seeking the
annulment of the Interim Decision in its entirety (the "Annulment Appeal") and
requesting that operation of the Interim Decision be suspended until the CFI
renders judgement on the Annulment Appeal. On October 26, 2001, the President of
the CFI ruled in the Company's favor and suspended the operation of the Decision
until the Annulment Appeal is heard and decided. On December 12, 2001, NDC filed
an appeal to the European Court of Justice ("ECJ") seeking annulment of the
October 26 decision against it. The Company has filed its reply to NDC's appeal
and expects the ECJ to rule on the appeal in the coming months. The Company
intends to continue to vigorously assert that its refusal to grant licenses to
its copyright protected geographic mapping structure to its direct competitors
in Germany, competing in the same market for which the copyright exists, is not
in contravention of Article 82 of the EC Treaty.
Management of the Company is unable to predict at this time the final
outcome of the matters described above or whether the resolution of these
matters could materially affect the Company's future results of operations, cash
flows or financial position.
OTHER CONTINGENCIES
Under the terms of the earn out within the purchase agreements for one of
the acquisitions made in 2001, the Company may be required to pay up to
45
<Page>
$36,720 during 2002 to 2004 as contingent consideration. See Note 5.
The Company and its predecessors have entered, and the Company continues to
enter, into global tax planning initiatives in the normal course of their
businesses. These activities are subject to review by tax authorities. As a
result of the review process, uncertainties exist and it is possible that some
of these matters could be resolved adversely to the Company.
In 1999, the Company was informed by D&B I, acting as agent for Donnelley,
that the IRS was reviewing Donnelley's utilization of certain capital losses
during 1989 and 1990. In response, D&B I advised that it intended to file an
amended tax return for these periods and to pay this amount in order to prevent
further interest from accruing. In May 2000, D&B I paid $349,291 of this amount
and the Company paid $212,291 pursuant to its obligation under the 1996
Distribution Agreement and the Distribution Agreement between Cognizant (renamed
NMR) and the Company (the "1998 Distribution Agreement"), whereby the Company is
in effect obligated to pay an amount equal to one-half of the tax and interest
owed to the IRS for this matter to the extent the liability exceeds $137,000
(subject to reimbursement to the Company of a portion of this amount by NMR). In
the second quarter of 2000, Donnelley received a formal assessment from the IRS
with respect to this matter in the amount of $561,582, for additional tax and
interest due, which was satisfied by the payments made by D&B I and the Company
in May 2000. D&B I has advised the Company that, notwithstanding the filing and
payment, it intends to contest the assessment and would also contest the
assessment of amounts, if any, in excess of the amounts paid. The Company had
previously accrued for this liability and, therefore, this payment did not
result in an expense in 2000.
Pursuant to the 1998 Distribution Agreement, NMR is responsible for a
portion of the amount that the Company paid pursuant to the 1996 Distribution
Agreement ($41,136 according to the Company's calculations). NMR was not
obligated to pay its share to the Company until January 2, 2001. In
December 2000, the Company requested reimbursement of this amount from NMR. On
January 2, 2001, NMR made a payment of $10,530 in respect of such matter but
refused to pay the remaining $30,606 based on its interpretation of the
applicable agreements. The Company believes that NMR's position has no merit and
plainly contravenes the terms of the applicable agreements. Accordingly, the
Company has a receivable of $33,361 for the outstanding principal amount due and
has now also recorded interest income thereon of $2,755 from January 2, 2001 in
accordance with the terms of the applicable agreements, reflected as Other
Receivable in the Consolidated Statements of Financial Position. The Company has
commenced arbitration regarding this matter by filing a Demand for Arbitration
with the American Arbitration Association International Center for Dispute
Resolution. The Company believes it will prevail in this matter.
In connection with the Gartner Spin-Off, the Company and Gartner entered
into a Distribution Agreement and an Agreement and Plan of Merger (the "1999
Distribution Agreements"). Pursuant to the 1999 Distribution Agreements, Gartner
agreed to indemnify the Company and its stockholders for additional taxes which
may become payable as a result of certain actions that may be taken by Gartner
that adversely affect the tax-free treatment of the Gartner Spin-Off. However,
the Company may become obligated for certain tax liabilities in the event the
Gartner Spin-Off is deemed to be a taxable transaction as a result of certain
Gartner share transactions that may be undertaken following the Gartner
Spin-Off. In the opinion of management, it is not probable that any such
significant liabilities will be incurred by the Company.
As part of the Synavant Spin-Off, IMS Health and Synavant entered into a
Distribution Agreement. In connection with the Distribution, Synavant will be
jointly and severally liable to the other parties in the 1996 and 1998
Distribution Agreements for the liabilities relating to certain tax matters as
well as those relating to the IRI Action. Under the Synavant Distribution
Agreement, as between IMS Health and Synavant, each will bear 50% of IMS
Health's share of these liabilities (net of the liability borne by NMR) up to a
maximum liability of $9,000 for Synavant. See Note 7. If, contrary to
expectations, the Synavant Spin-Off were not to qualify as tax free under
Section 355 of the Internal Revenue Code, then, in general, a corporate tax
would be payable by the consolidated group, of which IMS Health is a common
parent and Synavant is a member, based on the difference between (x) the fair
market value of the Synavant Common Stock on the date of the Synavant Spin-Off
and (y) the adjusted basis of such Synavant Common Stock. In addition, under the
consolidated return rules, each member of the consolidated group would be
severally liable for such tax liability. IMS Health estimates that the aggregate
tax liability in this regard is not expected to exceed $100,000. Pursuant to the
Tax Allocation Agreement, IMS Health would be liable for the resulting corporate
tax, except as provided in the Distribution Agreement. In the opinion of
management and based on the opinion of tax counsel it is not probable that the
Company will incur any liability.
The Company intends to vigorously defend the matters noted above. The
Company is unable to predict at this time the final outcome of these matters or
whether the resolution of these matters could materially affect the Company's
results of operations, cash flows, or financial position.
46
<Page>
NOTE 22. SUPPLEMENTAL FINANCIAL DATA
ACCOUNTS RECEIVABLE, NET:
<Table>
<Caption>
2001 2000
- ------------------------------------------------------------
Trade and Notes $193,182 $202,344
Less: Allowance for Doubtful Accounts (9,260) (8,016)
Unbilled Receivables 31,268 21,006
Other 13,436 15,654
- ------------------------------------------------------------
At December 31, $228,626 $230,988
- ------------------------------------------------------------
</Table>
OTHER CURRENT ASSETS:
<Table>
<Caption>
2001 2000
- ------------------------------------------------------------
Deferred Income Taxes $ 63,103 $ 62,934
Prepaid Expenses 23,335 21,666
Inventory 34,032 30,307
Cash Due in Respect of Stock Options 4,449 10,961
Other 1,553 6,945
- ------------------------------------------------------------
At December 31, $126,472 $132,813
- ------------------------------------------------------------
</Table>
PROPERTY, PLANT AND EQUIPMENT, NET:
<Table>
<Caption>
ESTIMATED
2001 2000 USEFUL LIVES
- -------------------------------------------------------------------
Buildings $ 84,466 $ 85,020 40-50 years
Machinery and Equipment 209,041 196,719 3-5 years
Less: Accumulated Depreciation (158,280) (150,415)
Leasehold Improvements, less
Accumulated Amortization of
$12,108 and $12,570,
respectively 7,486 7,634
Land 6,371 6,489
- ----------------------------------------------------
At December 31, $149,084 $145,447
- ----------------------------------------------------
</Table>
OTHER ASSETS:
<Table>
<Caption>
2001 2000
- -------------------------------------------------------------
Long-Term Pension Assets $ 45,982 $25,940
Long-Term Deferred Tax Asset 47,063 49,342
Deferred Charges and Other Intangible
Assets 24,997 9,571
Other 6,558 6,743
- -------------------------------------------------------------
At December 31, $124,600 $91,596
- -------------------------------------------------------------
</Table>
COMPUTER SOFTWARE AND GOODWILL:
<Table>
<Caption>
SOFTWARE GOODWILL
- ------------------------------------------------------------
January 1, 2000 $174,974 $339,491
Additions at Cost 50,646 --
Amortization (40,995) (19,120)
Synavant and Erisco dispositions (Notes
7 and 12) (20,091) (69,957)
Impairment Charge--Synavant (Note 6) (14,553) (100,900)
Asset Impairment Charge (Note 8) (24,166) --
Other Deductions, Reclassifications and
Foreign Exchange (8,127) (5,414)
- ------------------------------------------------------------
December 31, 2000 $117,688 $144,100
Additions at Cost 49,858 19,553
Amortization (29,537) (10,316)
Asset Impairment Charge (Note 8) (17,723) (4,243)
Other Deductions, Reclassifications and
Foreign Exchange (3,746) (497)
- ------------------------------------------------------------
December 31, 2001 $116,540 $148,597
- ------------------------------------------------------------
</Table>
Accumulated amortization of computer software was $244,116 and $234,270 at
December 31, 2001 and 2000, respectively. Accumulated amortization of goodwill
was $50,984 and $41,937 at December 31, 2001 and 2000, respectively.
ACCOUNTS PAYABLE:
<Table>
<Caption>
2001 2000
- --------------------------------------------------------------
Trade $16,481 $15,548
Taxes Other than Income Taxes 11,967 19,863
Other 4,879 9,787
- --------------------------------------------------------------
At December 31, $33,327 $45,198
- --------------------------------------------------------------
</Table>
ACCRUED AND OTHER CURRENT LIABILITIES:
<Table>
<Caption>
2001 2000
- ------------------------------------------------------------
Salaries, Wages, Bonuses and Other
Compensation $ 37,039 $ 58,370
Data acquisition 28,267 23,033
Accrued Severance and Other 63,700 39,129
Other 67,209 99,194
- ------------------------------------------------------------
At December 31, $196,215 $219,726
- ------------------------------------------------------------
</Table>
47
<Page>
NOTE 23. OPERATIONS BY BUSINESS SEGMENT
Operating segments are defined as components of an enterprise about which
financial information is available that is evaluated on a regular basis by the
chief operating decision-maker, or decision-making groups, in deciding how to
allocate resources to an individual segment and in assessing performance of the
segment. The Company, operating globally in approximately 100 countries, is
managed by way of and delivers information, software and related services
principally through the strategic business segments referenced below. See
Note 1.
The chief operating decision-makers evaluate the performance and allocate
resources based on revenue and operating income. All inter-segment transactions
are excluded from management's analysis of operations by business segment.
As at December 31, 2001, the Company's reportable segments are as follows:
1. The IMS Segment is a leading global provider of market information,
sales management and decision-support services to the pharmaceutical and
healthcare industries. Its key products include sales management
information to optimize sales force productivity, marketing
effectiveness research for prescription and over-the-counter
pharmaceutical products, consulting and other services. The IMS Segment
is managed on a global business model with global leaders for the
majority of its critical business processes. Corporate expenses, which
were previously not allocated to segments, are now included within the
IMS Segment as the costs principally relate to the management of its
business. Corporate expenses of $30,668 and $32,018 have been
reclassified for the years ended December 31, 2000 and 1999,
respectively. In addition the IMS Segment includes the Company's venture
capital unit, Enterprises, which is focused on investments in emerging
businesses and IMS's 26.8% equity interest in TriZetto.
2. The CTS Segment delivers full life-cycle solutions to complex software
development and maintenance problems that companies face as they
transition to e-business. These services are delivered through the use
of a seamless on-site and offshore consulting project team. CTS's
primary service offerings include application development and
integration, application management and re-engineering services.
During 2000 and 1999, the Company also included:
3. The Transaction Businesses Segment, which consisted of (a) Synavant,
which serves the pharmaceutical industry by developing and selling
pharmaceutical relationship management solutions that support sales and
marketing decision-making; (b) Erisco, a leading supplier of software-
based administrative and analytical solutions to the managed care
industry; and (c) three small non-strategic software businesses. The
Company spun off the Synavant business on August 31, 2000 and sold
Erisco to TriZetto and entered into a strategic alliance with TriZetto
on October 3, 2000. The Company also divested or discontinued the other
small non-strategic software businesses.
<Table>
<Caption>
TRANSACTION TOTAL
IMS CTS BUSINESSES(2) ELIMINATION CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
YEAR END DECEMBER 31, 2001:
Revenue(5) $1,173,954 $177,778 -- $(18,809) $1,332,923
Operating Income (Loss)(1) $ 288,540 $ 35,621 -- -- $ 324,161
Total Assets(3)(4) $1,222,571 $144,983 -- -- $1,367,554
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000:
Revenue(5) $1,131,211 $137,031 $ 170,385 $(14,268) $1,424,359
Operating Income (Loss)(1) $ 282,514 $ 26,129 $(171,450) -- $ 137,193
Total Assets(3)(4) $1,192,348 $109,542 $ 6,271 -- $1,308,161
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
Revenue(5) $1,037,025 $ 88,904 $ 286,880 $(14,820) $1,397,989
Operating Income (Loss)(1) $ 290,564 $ 16,645 $ 31,814 -- $ 339,023
Total Assets(3)(4) $1,153,236 $ 69,011 $ 311,724 -- $1,533,971
- --------------------------------------------------------------------------------------------------------------------
</Table>
NOTES TO OPERATIONS BY BUSINESS SEGMENTS:
1. In 2000, $37,626 of Spin and Related Costs (Synavant), which were
previously recorded in Corporate Expenses, have been reallocated to the
Transaction Businesses Segment and an Executive Management Transition
Charge of $31,133, previously recorded in Corporate Expenses, has been
reallocated to the IMS Segment. In 1999, Spin and Related Costs (Gartner)
of $9,500 were previously recorded in Corporate Expenses and have now
been reallocated to the IMS Segment.
48
<Page>
2. The Transaction Businesses Segment includes Synavant up to the spin-off
date of August 31, 2000, and Erisco up to the date of the sale of
October 3, 2000. Revenues and operating losses for Synavant during this
period amounted to $119,700 and $132,000 respectively. The remaining
revenues and results of operations relate primarily to the Erisco
business.
3. Total assets of the IMS Segment include Net Assets of Discontinued
Operations (Gartner) of $0, $60,799 and $96,988, as of December 31, 2001,
2000 and 1999, respectively. IMS Segment assets also include the
Company's investment in TriZetto of $119,896 and $137,501 as of
December 31, 2001 and 2000 respectively, and certain Corporate assets.
4. CTS segment assets include Cash and Cash Equivalents of $84,977, $61,976
and $42,641 at December 31, 2001, 2000 and 1999, respectively.
5. Eliminations relate to sales from the CTS segment to the IMS segment.
GEOGRAPHIC FINANCIAL INFORMATION:
<Table>
<Caption>
U.S. NON-U.S.(2) TOTAL
- -------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
Revenue(1) $614,108 $718,815 $1,332,923
Long-Lived Assets(3) $433,676 $223,412 $ 657,088
- -------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
Revenue(1) $653,965 $770,394 $1,424,359
Long-Lived Assets(3) $478,426 $188,871 $ 667,297
- -------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
Revenue(1) $586,826 $811,163 $1,397,989
Long-Lived Assets(3) $626,044 $210,404 $ 836,448
- -------------------------------------------------------------------------------------------------
</Table>
(1) REVENUE RELATES TO EXTERNAL CUSTOMERS AND IS PRIMARILY BASED ON THE LOCATION
OF THE CUSTOMER.
(2) NON-U.S. REVENUE IS PRINCIPALLY FROM JAPAN, THE UNITED KINGDOM, GERMANY,
ITALY, FRANCE, AUSTRALIA AND OTHER COUNTRIES WITHIN EUROPE, LATIN AMERICA
AND THE FAR EAST.
(3) LONG-LIVED ASSETS CONSISTS OF: SECURITIES AND OTHER INVESTMENTS; TRIZETTO
EQUITY INVESTMENT; PROPERTY, PLANT AND EQUIPMENT, NET; COMPUTER SOFTWARE;
GOODWILL; DEFERRED CHARGES, NET; OTHER INTANGIBLES, NET AND LONG-TERM
PENSION ASSETS.
FINANCIAL INFORMATION BY KEY PRODUCT LINE:
<Table>
<Caption>
2001 2000 1999
- --------------------------------------------------------------------------------------------------
IMS Segment
Sales management $ 730,169 $ 682,149 $ 599,273
Market research 412,353 404,091 392,423
Other 31,432 44,971 45,329
- --------------------------------------------------------------------------------------------------
Total IMS Segment 1,173,954 1,131,211 1,037,025
CTS Segment(1) 158,969 122,763 74,084
Transaction Businesses Segment -- 170,385 286,880
- --------------------------------------------------------------------------------------------------
Total Revenues $1,332,923 $1,424,359 $1,397,989
- --------------------------------------------------------------------------------------------------
</Table>
(1) AFTER ELIMINATION OF INTERSEGMENT SALES OF $18,809, $14,268 AND $14,820 IN
2001, 2000 AND 1999, RESPECTIVELY.
49
<Page>
QUARTERLY FINANCIAL DATA (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<Table>
<Caption>
THREE MONTHS ENDED
2001 ------------------
MAR-31 JUN-30 SEP-30 DEC-31(1) FULL YEAR
- ---------------------------------------------------------------------------------------------------------------------
Revenue $329,562 $334,349 $328,137 $340,875 $1,332,923
Operating Income (Loss) $ 96,458 $107,207 $123,442 $ (2,946) $ 324,161
Income (Loss) from Continuing Operations,
Net of Income Taxes $ 65,807 $ 64,544 $ 41,285 $(33,235) $ 138,401
Income from Discontinued Operations,
Net of Income Taxes -- -- $ 47,025 -- $ 47,025
Net Income (Loss) $ 65,807 $ 64,544 $ 88,310 $(33,235) $ 185,426
- ---------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income (Loss) from Continuing Operations $ 0.22 $ 0.22 $ 0.14 $ (0.11) $ 0.47
Income from Discontinued Operations $ 0.00 $ 0.00 $ 0.16 $ 0.00 $ 0.16
Net Income (Loss) $ 0.22 $ 0.22 $ 0.30 $ (0.11) $ 0.63
- ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Income (Loss) from Continuing Operations $ 0.22 $ 0.21 $ 0.14 $ (0.11) $ 0.46
Income from Discontinued Operations $ 0.00 $ 0.00 $ 0.16 $ 0.00 $ 0.16
Net Income (Loss) $ 0.22 $ 0.21 $ 0.29 $ (0.11) $ 0.62
- ---------------------------------------------------------------------------------------------------------------------
</Table>
(1) Refer to Notes 8, 10 and 13 for additional information regarding significant
items impacting the Consolidated Statements of Income during the Fourth
Quarter of 2001.
<Table>
<Caption>
THREE MONTHS ENDED
2000 ------------------
MAR-31 JUN-30 SEP-30 DEC-31(1) FULL YEAR
- ---------------------------------------------------------------------------------------------------------------------
Revenue $352,523 $369,401 $355,867 $346,568 $1,424,359
Operating Income (Loss) $ 75,060 $ 78,547 $(45,999) $ 29,585 $ 137,193
Income (Loss) from Continuing Operations,
Net of Income Taxes $ 82,852 $ 50,229 $(58,417) $ 41,460 $ 116,124
Income from Discontinued Operations,
Net of Income Taxes -- -- $ 2,226 $ 2,466 $ 4,692
Net Income (Loss) $ 82,852 $ 50,229 $(56,191) $ 43,926 $ 120,816
- ---------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income (Loss) from Continuing Operations $ 0.28 $ 0.17 $ (0.20) $ 0.14 $ 0.39
Income from Discontinued Operations $ 0.00 $ 0.00 $ 0.01 $ 0.01 $ 0.02
Net Income (Loss) $ 0.28 $ 0.17 $ (0.19) $ 0.15 $ 0.41
- ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Income (Loss) from Continuing Operations $ 0.27 $ 0.17 $ (0.20) $ 0.14 $ 0.39
Income from Discontinued Operations $ 0.00 $ 0.00 $ 0.01 $ 0.01 $ 0.02
Net Income (Loss) $ 0.27 $ 0.17 $ (0.19) $ 0.15 $ 0.40
- ---------------------------------------------------------------------------------------------------------------------
</Table>
50
<Page>
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<Table>
<Caption>
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Revenue $1,332,923 $1,424,359 $1,397,989 $1,186,513 $1,059,559
Costs and Expenses(1) 1,008,762 1,287,166 1,058,966 1,054,029 831,949
- ----------------------------------------------------------------------------------------------------------------------------
Operating Income(1) 324,161 137,193 339,023 132,484 227,610
Non-Operating Income (Loss), net(2) (140,360) 124,120 9,419 52,360 13,955
- ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations, Before Provision For
Income Taxes 183,801 261,313 348,442 184,844 241,565
Provision For Income Taxes (38,415) (140,412) (98,076) (58,780) (55,614)
TriZetto Equity Loss, net of Income Taxes (6,985) (4,777) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 138,401 116,124 250,366 126,064 185,951
Income from Discontinued Operations, net of Income Taxes(3) 47,025 4,692 25,695 94,494 126,399
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 185,426 $ 120,816 $ 276,061 $ 220,558 $ 312,350
- ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share of Common Stock
Income from Continuing Operations $ 0.47 $ 0.39 $ 0.80 $ 0.39 $ 0.57
Income from Discontinued Operations, Net of Income Taxes
Taxes $ 0.16 $ 0.02 $ 0.08 $ 0.29 $ 0.38
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.63 $ 0.41 $ 0.88 $ 0.68 $ 0.95
- ----------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding 295,162 296,077 311,976 324,584 330,326
Diluted Earnings Per Share of Common Stock
Income from Continuing Operations $ 0.46 $ 0.39 $ 0.78 $ 0.38 $ 0.55
Income from Discontinued Operations, Net of Income Taxes $ 0.16 $ 0.02 $ 0.08 $ 0.28 $ 0.38
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.62 $ 0.40 $ 0.86 $ 0.66 $ 0.93
- ----------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 300,147 300,038 319,561 335,770 334,980
As a % of Operating Revenue:
Operating Income(1) 24.3% 9.6% 24.3% 11.2% 21.5%
Income from Continuing Operations, net of Income Taxes(1) 10.4% 8.2% 17.9% 10.6% 17.5%
- ----------------------------------------------------------------------------------------------------------------------------
Cash Dividend Declared Per Common Stock $ 0.08 $ 0.08 $ 0.08 $ 0.03 $ --
- ----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Shareholders' Equity $ 218,366 $ 103,540 $ 495,222 $ 825,270 $ 801,570
Total Assets $1,367,554 $1,308,161 $1,533,971 $1,789,205 $1,516,537
Post-Retirement and Post-Employment Benefits $ 44,305 $ 43,471 $ 27,429 $ 27,577 $ 38,032
Long-Term Debt and Other Liabilities $ 324,373 $ 182,840 $ 163,356 $ 253,261 $ 158,742
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
(1) 2001 includes charges related to Severance, Impairment and Other Charges of
$94,616, and Terminated Transaction Costs of $6,457. 2000 includes charges
related to the Synavant Spin-Off of $37,626, the Synavant related impairment
charge of $115,453, the Executive Management Transition Charge of $31,133
and Severance, Impairment and Other Charges of $45,689. 1999 includes
charges related to the Gartner Spin-Off of $9,500. 1998 includes charges
related to the Cognizant Spin-Off of $35,025 and one-time charges and IPR&D
write-offs related to the Walsh and PMSI acquisitions of $48,019 and
$32,800, respectively.
(2) Non-Operating Income, net in 2001 includes loss on Gartner shares of
$84,880, gains/(losses) from dispositions-net of $27,642 and the SAB No. 51
loss related to issuance of investees' stock of $1,490. Non-Operating
Income, net in 2000 includes the gain on the sale of Erisco of $84,530,
gains from dispositions--net of $78,139, loss on Gartner shares of $6,896
and the SAB No. 51 gain related to the issue of stock by TriZetto of $9,029.
Non-operating Income, net in 1999 includes gains from dispositions-net of
$25,264. Non-operating Income, net in 1998 includes the gain related to the
CTS IPO of $12,777 and gains from dispositions-net of $33,341. Results for
1997 include gains from dispositions-net of $9,391 in non-operating income.
(3) Income from Discontinued Operations, net of Income Taxes includes a tax
provision of $25,320, $2,526, $12,635, $49,303 and $62,271 for 2001, 2000,
1999, 1998 and 1997, respectively.
51
<Page>
IMS HEALTH INCORPORATED
- --------------------------------------------------------------------------------
<Table>
DIRECTORS
- --------------------------------------------------------------------------------------------------------------------
CLIFFORD L. ALEXANDER, JR. (2)(3) H. EUGENE LOCKHART (1)
PRESIDENT PRESIDENT & CHIEF EXECUTIVE OFFICER
ALEXANDER & ASSOCIATES, INC. THE NEW POWER COMPANY
CONSTANTINE L. CLEMENTE (3) GILLES V. J. PAJOT
EXECUTIVE VICE PRESIDENT--CORPORATE EXECUTIVE VICE PRESIDENT AND PRESIDENT,
AFFAIRS, IMS EUROPEAN REGION
SECRETARY AND GENERAL COUNSEL IMS HEALTH INCORPORATED
PFIZER INC.
KATHRYN E. GIUSTI (1) M. BERNARD PUCKETT (2)
PRESIDENT PRIVATE INVESTOR
THE MULTIPLE MYELOMA RESEARCH
FOUNDATION
JOHN P. IMLAY, JR. (2) DAVID M. THOMAS (3)
CHAIRMAN CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
IMLAY INVESTMENTS, INC. PRESIDENT
IMS HEALTH INCORPORATED
ROBERT J. KAMERSCHEN (2)(3) WILLIAM C. VAN FAASEN (1)
FORMER CHAIRMAN & CHIEF EXECUTIVE PRESIDENT & CHIEF EXECUTIVE OFFICER
OFFICER BLUE CROSS & BLUE SHIELD
DIMAC MARKETING CORPORATION OF MASSACHUSETTS
ROBERT J. LANIGAN (1) BOARD COMMITTEES
CHAIRMAN EMERITUS (1) AUDIT COMMITTEE
FORMER CHAIRMAN & CHIEF EXECUTIVE (2) COMPENSATION AND BENEFITS
OFFICER COMMITTEE
OWENS--ILLINOIS, INC. (3) NOMINATING AND
GOVERNANCE COMMITTEE
OFFICERS
- --------------------------------------------------------------------------------------------------------------------
DAVID M. THOMAS ROBERT H. STEINFELD
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND SENIOR VICE PRESIDENT,
PRESIDENT GENERAL COUNSEL AND CORPORATE SECRETARY
GILLES V. J. PAJOT JOHN R. WALSH
EXECUTIVE VICE PRESIDENT VICE PRESIDENT, INVESTOR RELATIONS AND
AND PRESIDENT, IMS EUROPEAN REGION ACTING TREASURER
NANCY E. COOPER LESLYE G. KATZ
SENIOR VICE PRESIDENT AND CHIEF VICE PRESIDENT AND CONTROLLER
FINANCIAL OFFICER
OFFICERS OF OPERATING UNITS
- --------------------------------------------------------------------------------------------------------------------
GARY W. NOON (4) ROGER A. KORMAN WIJEYARAJ A. MAHADEVA
PRESIDENT, IMS U.S. PRESIDENT, IMS CANADA AND CHAIRMAN AND CHIEF EXECUTIVE
LATIN AMERICA OFFICER,
COGNIZANT TECHNOLOGY SOLUTIONS
CORPORATION
SHUNSUKE KEIMATSU MURRAY L. AITKEN (4)
CHAIRMAN, IMS ASIA PACIFIC SENIOR VICE PRESIDENT, IMS GLOBAL
CONSULTING AND SERVICES
(4) DENOTES EXECUTIVE OFFICER
OF THE COMPANY
</Table>
<Page>
[LOGO]
TRANSFER AGENT
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Telephone: (212) 936-5100
CORPORATE OFFICE
1499 Post Road
Fairfield, CT 06430
Telephone: (203) 319-4700
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1301 Avenue of Americas
New York, NY 10019
FORM 10-K
Your Company will file its report to shareholders on Form 10-K with the
Securities and Exchange Commission by March 31, 2002. Many of the 10-K
information requirements are satisfied by this 2001 Annual Report to
Shareholders. However, a copy of the Form 10-K will be available without charge
after March 31, 2002, upon request to the Investor Relations Department at the
Corporate Office address or via E-mail at jwalsh@imshealth.com.
COMMON STOCK INFORMATION
The Company's common stock is listed under the symbol RX on the New York Stock
Exchange.