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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------
FORM 10-Q
---------
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 001-14049
---------
IMS HEALTH INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1506026
- - ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
200 NYALA FARMS, WESTPORT, CT 06880
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 222-4200
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
TITLE OF CLASS SHARES OUTSTANDING
------------------------ AT JUNE 30, 1999
Common Stock, ------------------
par value $.01 per share 312,823,322
================================================================================
IMS HEALTH INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PAGE(S)
-------
Condensed Consolidated Statements of Income
Three Months Ended June 30, 1999 and 1998 ........................ 3
Six Months Ended June 30, 1999 and 1998 .......................... 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 1999 and 1998 ........................ 5
Six Months Ended June 30, 1999 and 1998 .......................... 5
Condensed Consolidated Statements of Financial Position
June 30, 1999 and December 31, 1998 .............................. 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 .......................... 7
Notes to Condensed Consolidated Financial Statements ............... 8-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................... 19-29
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION ........................................ 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................... 30
SIGNATURES ......................................................... 31
2
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED
JUNE 30,
1999 1998
----------- ---------
OPERATING REVENUE $332,652 $270,496
Operating Costs 142,688 151,362
Selling and Administrative Expenses 104,093 89,639
Depreciation and Amortization 23,116 21,507
Acquired In-Process Research and Development 0 21,900
- - ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME/(EXPENSE) 62,755 (13,912)
- - ------------------------------------------------------------------------------------------------------------------------
Interest Income 1,981 4,771
Interest Expense (2,276) (212)
Gain from Sale of Subsidiary Stock 0 12,777
Gains from Dispositions--Net 8,300 0
Other Income/(Expense)--Net (4,329) (2,477)
- - ------------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 3,676 14,859
- - ------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations, Before Provision for Income Taxes 66,431 947
Provision for Income Taxes (20,257) (13,944)
- - ------------------------------------------------------------------------------------------------------------------------
INCOME/(LOSS) FROM CONTINUING OPERATIONS 46,174 (12,997)
Income from Discontinued Operations, Net of Income Taxes of $6,516 and $16,123
for June 30, 1999 and 1998, respectively 10,617 35,637
- - ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 56,791 $ 22,640
- - ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income/(Loss) from Continuing Operations $0.15 ($0.04)
Income from Discontinued Operations 0.03 0.11
- - ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.18 $0.07
- - ------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income/(Loss) from Continuing Operations $0.15 ($0.04)
Income from Discontinued Operations 0.03 0.11
- - ------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.18 $0.07
- - ------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Basic 314,343,000 326,610,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 5,514,000 9,478,000
Adjustment of Shares Applicable to Exercised Stock Options during the period 122,000 2,086,000
- - ------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 319,979,000 338,174,000
- - ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The second quarter 1998 for the IMS operating units includes the
three months ended May 31, 1998. (See Note 2. Basis of Presentation).
3
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
SIX MONTHS ENDED
JUNE 30,
1999 1998
---------------- ----------------
OPERATING REVENUE $645,894 $511,464
Operating Costs 281,361 270,954
Selling and Administrative Expenses 198,182 170,593
Depreciation and Amortization 48,886 43,201
Acquired In-Process Research and Development 0 21,900
- - --------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 117,465 4,816
- - --------------------------------------------------------------------------------------------------------------------------
Interest Income 3,780 8,869
Interest Expense (2,534) (412)
Gain from Sale of Subsidiary Stock 0 12,777
Gains from Dispositions--Net 16,277 10,415
Other Income/(Expense)--Net (8,236) (5,247)
- - --------------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 9,287 26,402
- - --------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations, Before Provision for Income Taxes 126,752 31,218
Provision for Income Taxes (36,785) (21,224)
- - --------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 89,967 9,994
Income from Discontinued Operations, Net of Income Taxes of $12,639 and $31,519
for June 30, 1999 and 1998, respectively 24,311 72,733
- - --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 114,278 $ 82,727
- - --------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $0.28 $0.03
Income from Discontinued Operations 0.08 0.22
- - --------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.36 $0.25
- - --------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $0.28 $0.03
Income from Discontinued Operations 0.07 0.21
- - --------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.35 $0.24
- - --------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Basic 316,062,000 325,686,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 6,710,000 8,694,000
Adjustment of Shares Applicable to Exercised Stock Options during the period 283,000 3,468,000
- - --------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 323,055,000 337,848,000
- - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The first half of 1998 for the IMS operating units includes the six
months ended May 31, 1998. (See Note 2. Basis of Presentation).
4
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED JUNE 30,
1999 1998
------------------ ----------------
Net Income $ 56,791 $ 22,640
Other Comprehensive Income, Net of Tax:
Foreign Currency Translation Adjustments (10,552) (10,499)
Unrealized Holding Gains on Securities Arising During
the Period (Net of Tax Expense of ($94)
and ($1,690) for 1999 and 1998, respectively) 248 4,478
------------------ ----------------
Total Other Comprehensive Loss (10,304) (6,021)
- - --------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $46,487 $16,619
- - --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
1999 1998
------------------ ----------------
Net Income $ 114,278 $ 82,727
Other Comprehensive Income, Net of Tax:
Foreign Currency Translation Adjustments (31,434) (9,596)
Unrealized Holding (Losses)/Gains on Securities Arising During the Period (Net
of Tax Benefit/(Expense) of $710 and ($1,717) for 1999 and 1998, respectively) (1,884) 4,549
Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax
Benefit of $2,802 and $2,910 for 1999 and 1998, respectively) (7,423) (7,710)
------------------ ----------------
Net Change in Gains/(Losses) on Investments (9,307) (3,161)
------------------ ----------------
Total Other Comprehensive Loss (40,741) (12,757)
- - --------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $73,537 $69,970
- - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The second quarter and first half of 1998 for the IMS operating
units includes the three and six months ended May 31, 1998. (See Note 2. Basis
of Presentation).
The Company has significant investments in non-U.S. countries. Therefore,
changes in the value of foreign currencies affect the Company's Condensed
Consolidated Financial Statements when translated into U.S. dollars. The
currency translation adjustment excludes the impact of the Company's hedging
program. (See Note 7. Financial Instruments with Off-Balance Sheet Risk).
5
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(Dollar amounts in thousands, except per share data)
JUNE 30, DECEMBER 31,
1999 1998
------------------ --------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 150,310 $ 206,390
Accounts Receivable-Net 263,518 324,219
Other Current Assets 106,286 103,868
- - -----------------------------------------------------------------------------------------------------------------------
Total Current Assets 520,114 634,477
- - -----------------------------------------------------------------------------------------------------------------------
SECURITIES AND OTHER INVESTMENTS 94,092 106,276
PROPERTY, PLANT AND EQUIPMENT-NET 170,019 179,151
OTHER ASSETS-NET
Computer Software 169,597 168,994
Goodwill 351,005 363,841
Other Assets 24,076 25,928
- - -----------------------------------------------------------------------------------------------------------------------
Total Other Assets-Net 544,678 558,763
- - -----------------------------------------------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS 265,019 240,708
- - -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,593,922 $ 1,719,375
- - -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short Term Debt $ 109,729 $ 39,169
Accounts Payable 50,190 51,715
Accrued and Other Current Liabilities 235,180 298,625
Accrued Income Taxes 43,027 32,537
Deferred Revenues 124,126 128,272
- - -----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 562,252 550,318
- - -----------------------------------------------------------------------------------------------------------------------
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 28,014 27,577
MINORITY INTERESTS 118,398 116,225
OTHER LIABILITIES 192,062 199,985
- - -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 900,726 894,105
- - -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 693,196 825,270
- - -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,593,922 $1,719,375
- - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The Financial Position at December 31,1998 included the IMS
operating units as of November 30,1998. (See Note 2. Basis of Presentation).
6
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands, except per share data)
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1999 1998
--------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 114,278 $ 82,727
Less Income from Discontinued Operations (24,311) (72,733)
- - ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 89,967 9,994
Reconciliation of Net Income to Net Cash
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization 48,886 43,201
Gains from Sale of Investments, Net (16,435) (10,415)
Write-off of Purchased in Process Research and Development 0 21,900
Restructuring Cost Payments (6,252) (2,083)
Net Decrease in Accounts Receivable 2,149 3,696
Net Increase in Deferred Revenue 9,012 16,673
Gain from Sale of Subsidiary Stock 0 (12,777)
Minority Interests 3,202 4,183
Deferred Income Taxes (3,645) 7,889
Accrued Income Taxes 1,975 6,577
Other Working Capital Items (17,462) (10,479)
- - ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 111,397 78,359
- - ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Investments and Businesses 39,157 23,165
Acquisition and Integration Payments (21,768) 0
Payments for Acquisitions of Businesses (3,100) (2,938)
Cash of Companies Acquired in Stock Purchases 0 9,480
Capital Expenditures (16,465) (13,561)
Additions to Software (28,185) (34,889)
Increase in Other Investments-Net (16,338) (12,604)
Other-Net 1,344 12,031
- - ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (45,355) (19,316)
- - ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (222,651) (7,809)
Proceeds from Exercise of Stock Options 20,180 43,232
Proceeds from the Sale and Issuance of Subsidiary Stock 0 27,128
Dividends Paid (12,660) (9,813)
Proceeds from Employee Stock Purchase Plan 2,947 2,607
Proceeds from Debt Assumed by Nielsen Media Research 0 300,000
Short-Term Borrowings 150,540 0
Short-Term Debt Repayments (79,631) 0
Other 710 (199)
- - ------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN)/ PROVIDED BY FINANCING ACTIVITIES (140,565) 355,146
- - ------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents (12,221) (6,908)
Effect of the elimination of the one month reporting lag 30,664 0
Cash Flow from Discontinued Operations 0 (17,173)
- - ------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (56,080) 390,108
Cash and Cash Equivalents, Beginning of Period 206,390 312,442
- - ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 150,310 $ 702,550
- - ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $ 2,551 $ 412
Cash Paid during the Period for Income Taxes $ 39,634 $ 49,324
Non-Cash Investing Activities:
Stock Issued in Connection with Acquisitions $ -- $ 168,937
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The first half of 1998 for the IMS operating units includes the six
months ended May 31, 1998. (See Note 2. Basis of Presentation).
7
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X under the Securities and
Exchange Act of 1934, as amended. The condensed consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and related notes of IMS Health Incorporated (the "Company"
or "IMS Health") in the 1998 Annual Report on Form 10-K. Accordingly, the
accompanying condensed consolidated financial statements do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments of
a normal recurring nature considered necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented have been included. Certain prior-period amounts have been
reclassified to conform with the 1999 presentation.
NOTE 2. BASIS OF PRESENTATION
This document relates to IMS Health. The Common Stock of IMS Health was
distributed by Cognizant Corporation ("Cognizant", which subsequently changed
its name to Nielsen Media Research Inc., "NMR") to Cognizant's shareholders on
June 30, 1998 (the "Distribution"). The condensed consolidated financial
statements of the Company have been reclassified to reflect Nielsen Media
Research as a discontinued operation for periods up to and including June 30,
1998.
On July 26, 1999, having received the approval of GartnerGroup Inc. ("Gartner")
shareholders and both Boards of Directors, the Company completed the Spin-Off of
the majority of its equity investment in Gartner to IMS Health shareholders (the
"Gartner Spin-Off"). The distribution consisted of 0.1302 shares of Gartner
Class B Common Stock for each share of the Company's Common Stock outstanding on
the July 17 record date, a total of 40,689,648 Gartner Class B shares. (See Note
10. Subsequent Events). Accordingly, the condensed consolidated financial
statements of the Company have been reclassified for all periods presented to
reflect the Gartner equity investment as a discontinued operation (measurement
date July 16, 1999).
IMS Health consists of the market information and decision support services
business for the pharmaceutical and healthcare industries conducted by IMS
Health and various subsidiaries ("IMS") including IMS Health Strategic
Technologies, Inc. ("Strategic Technologies"); ERISCO Managed Care Technologies,
Inc. ("Erisco"); Enterprise Associates, LLC ("Enterprises") and a 61.6% interest
in Cognizant Technology Solutions Corporation ("CTS").
A summary of Gartner and Nielsen Media Research as discontinued operations is as
follows:
RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -------------------------
1999 1998 1999 1998
-------------- --------------- ------------- -----------
Operating Revenue - Nielsen Media Research $ -- $ 97,932 $ -- $193,996
Income Before Provision for Income Taxes - Nielsen
Media Research -- 29,048 -- 57,980
Equity Income and SAB 51 Gains
($5,392 and $13,379 for the three and six month
periods in 1998, respectively) Before Provision for
Income Taxes - Gartner 17,133 22,712 36,950 46,273
========= ======== ======== ========
Income from Discontinued Operations, Net of Income Taxes $ 10,617 $ 35,637 $ 24,311 $ 72,733
========= ======== ======== ========
8
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 2. BASIS OF PRESENTATION (CONTINUED)
Elimination of one month reporting lag in IMS operating entities
Effective in the first quarter of 1999, IMS operating units that previously
reported on a fiscal year ended November 30 revised their reporting period to
conform to the Company's fiscal year ended December 31. The first half results
for 1998 for the IMS operating units include the six months ended May 31. The
$1,040 of net income related to the results of the IMS operating units for the
period December 1 through December 31, 1998 has been recorded directly to
Retained Earnings. In addition, December 1998 included a $3,409 credit which was
recorded as a cumulative translation adjustment. The following table presents
certain selected condensed consolidated IMS operating units financial
information for the one month ended December 31, 1998.
ONE MONTH ENDED
DECEMBER 31, 1998
(UNAUDITED)
---------------------------------------------- --------------------
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
=======
The following table presents selected IMS operating units cash flow information
for the one-month ended December 31, 1998:
ONE MONTH ENDED
DECEMBER 31, 1998
(UNAUDITED)
---------------------------------------------------------- ------------------
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
=======
NOTE 3. DISPOSITIONS
During the second quarter of 1999, the Company recorded $8,300 of pre-tax net
gains due primarily to the sale of investments in Oasis, EDR, One Source and
other investments which were part of Enterprises portfolio. Pre-tax proceeds
from dispositions received during the quarter were $22,875.
During the first quarter of 1999, the Company recorded $7,977 of pre-tax net
gains due primarily to the sale of its investments in Oasis, Pegasus, Aspect,
Internet Securities and Super Systems Japan ("SSJ"). Cash received during the
quarter as a result of dispositions was $16,282. In addition, certain operating
units of PMSI, acquired in the third quarter of 1998, were divested in December
1998, including a publishing and conference operating division in Japan.
9
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 4. ACQUISITIONS
During the first quarter of 1999 the Company acquired 100% of the stock of
PharmaFELAX Kft., a pharmaceutical information company based in Hungary. In
connection with the acquisition, the Company recorded goodwill of $3,100.
Walsh Acquisition
On June 24, 1998, Cognizant acquired Walsh International, Inc. ("Walsh"). The
final purchase price of the acquisition was $193,748, including $167,148 of
common stock, $9,521 for stock options issued and $17,079 of direct acquisition
and integration costs.
Walsh shareholders received 6,454,600 shares of Cognizant common stock issued
from treasury stock, with a market value of $167,148. The direct acquisition and
integration costs consist of severance ($4,876), lease terminations ($2,569) and
other direct acquisition and integration costs ($9,634). These acquisition and
integration costs were incurred as a direct result of the plan to exit certain
activities as part of the overall integration effort (such as severance costs
related to Walsh employees) and certain contractual costs (such as Walsh
leases). Incurred acquisition and integration costs to date are within original
projections. Approximately $156,557 has been recorded as the excess of the
purchase price over the fair value of identifiable net assets (goodwill), which
is being amortized on a straight-line basis over 15 years.
PMSI Acquisition
On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical
Marketing Services Inc. ("PMSI"). The final purchase price of the acquisition
was $103,291, consisting of common stock ($75,292), stock options issued
($5,415) and direct acquisition and integration costs ($22,584).
PMSI received 2,395,926 shares of IMS Health common stock issued from treasury
stock, with a market value of $75,292. The direct acquisition and integration
costs consist of severance ($3,794), lease terminations ($1,623), contract
cancellation ($10,935), and other direct acquisition and integration costs
($6,232). The acquisitions and integration costs were incurred as a direct
result of the formal plan to exit certain activities as part of the overall
integration effort (such as severance costs related to PMSI employees) and
certain contractual cancellation costs (such as PMSI contracts and leases).
$115,275 was recorded as the excess of the purchase price over the fair value of
identifiable net assets (goodwill), which is being amortized on a straight-line
basis over 15 years.
Purchase Price Allocation
In connection with both the Walsh and PMSI acquisitions, the Company made
allocations of the purchase price to acquired in-process research and
development ("IPR&D") amounting to $21,900 in the second quarter of 1998 related
to the Walsh acquisition and $10,900 in the third quarter of 1998 related to the
PMSI acquisition. At the date of the respective acquisitions, the development
of the IPR&D projects had not reached technological feasibility and had no
alternative future uses. Accordingly, these costs were expensed as of the
respective acquisition dates.
In accordance with SEC guidance in connection with acquisitions, the amount
allocated to IPR&D reflects the relative value and contribution of the acquired
IPR&D. Consideration was given to the project's stage of completion, the
complexity of the work completed to date, the difficulty of completing the
remaining development, costs already incurred and the projected cost to complete
the projects. In addition, the Company allocated $29,000 at Walsh and $7,700 at
PMSI to existing core technology, representing computer software that is
currently in use. Such amounts are being amortized over 5 years.
The allocation of the Company's aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with these acquisitions was based primarily on estimates of fair values by an
independent appraisal firm. The allocation is summarized below:
Walsh PMSI Total
-----------------------------------------------------------------------------------------------
In-process R&D write-off $ 21,900 $ 10,900 $ 32,800
Net liabilities assumed (5,009) (28,274) (33,283)
Software/ Core technology 29,000 7,700 36,700
Deferred taxes (8,700) (2,310) (11,010)
Goodwill 156,557 115,275 271,832
-----------------------------------------------------------------------------------------------
Total Purchase Price $ 193,748 $ 103,291 $ 297,039
===============================================================================================
In connection with the PMSI acquisition, the Company evaluated existing IMS
Health product offerings. Based on this strategic assessment, the Company
abandoned certain existing IMS Health software products. The impact of this
decision was to recognize the impairment of certain computer software assets
($36,300), the closure of certain IMS facilities ($800) and the severance of
some IMS employees ($5,600). This resulted in a one-time charge of $43,019
recorded in the third quarter of 1998 as a component of operating income.
10
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 5. INVESTMENT PARTNERSHIP
Two of the Company's subsidiaries have 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 the second quarter of 1997, third-party
investors contributed $100,000 to the partnership in exchange for limited
partnership interests. The assets, liabilities, results of operations and cash
flows of the partnership are included in the Company's consolidated financial
statements because the Company and its subsidiaries maintain a controlling (85%)
interest in the partnership. The third parties' limited partnership interests
are reflected as a minority interest.
NOTE 6. CONTINGENCIES
The Company and its subsidiaries are involved in 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, cash flows or consolidated financial
position when resolved in a future period. The Company has established reserves
for specific liabilities in connection with these matters to the extent the
Company currently deems them to be probable and estimateable. Management does
not expect the ultimate resolution of the foregoing proceedings, litigations and
tax matters will have a material effect on its financial condition, results of
operations or cash flows.
In addition the Company is subject to certain other contingencies not arising in
the ordinary course of business 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 D&B, A.C. Nielsen Company and IMS (the "IRI Action").
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 defendants of Survey Research Group
Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI
when it agreed to be acquired by 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.
On October 15, 1996, 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
11
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 6. CONTINGENCIES - (CONTINUED)
Information Resources Litigation - (continued)
replead within sixty days. The Court denied defendants' motion with respect to
the remaining claims in the complaint. On June 3, 1997, 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, defendants moved for an order dismissing the amended claims.
On December 1, 1997, the court denied the motion and, on December 16, 1997,
defendants filed a supplemental answer denying the remaining material
allegations of the amended complaint. 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 The Dun & Bradstreet
Corporation ("D&B") of shares of Cognizant and ACNielsen Corporation
("ACNielsen"; the parent company of A.C. Nielsen Company) in 1996, D&B,
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 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 D&B 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 which ACNielsen will be able to pay after
giving effect to (i) any plan submitted by such investment bank which 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.
Under the terms of the Distribution Agreement dated October 28, 1996 among D&B,
Cognizant and ACNielsen (the "1996 Distribution Agreement"), as a condition to
the Distribution, IMS Health and Nielsen Media Research are jointly and
severally liable to D&B and ACNielsen for Cognizant's obligations under the 1996
Distribution Agreement.
IMS Health and Nielsen Media Research have agreed that, as between themselves,
IMS Health will assume 75%, and Nielsen Media Research 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. Nielsen
12
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 6. CONTINGENCIES - (CONTINUED)
Information Resources Litigation - (continued)
Media Research's aggregate liability to IMS Health for payments in respect of
the IRI Action and certain other contingent liabilities shall not exceed
$125,000.
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.
Other Contingencies
The Company, Cognizant and D&B have entered into global tax planning initiatives
in the normal course of business. These activities are subject to review by the
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, Cognizant or D&B.
Prior to the Distribution, Cognizant and IMS Health entered into certain
agreements that govern the relationship between Nielsen Media Research and IMS
Health and provide for the allocation of tax, employee benefits and certain
other liabilities and obligations arising from periods prior to the
Distribution. Among other things, the agreements set forth principles to be
applied in allocating certain Distribution-related costs and specify portions of
contingent liabilities including those described below to be shared if certain
amounts are exceeded including certain liabilities to D&B that may arise in
connection with the 1996 Distribution Agreement.
The Company has been informed by D&B that the IRS is currently reviewing D&B's
utilization of certain capital losses during 1989 and 1990. While D&B has not
received an assessment with respect to these transactions, it understands that
the IRS will challenge D&B's position. The Company has estimated that D&B's
total cash liability to the IRS, if an assessment were to be made and the IRS
prevail, would be approximately $435,000 for taxes and accrued interest net of
tax benefit as of June 30, 1999. Under the terms of the 1996 Distribution
Agreement, the Company is liable to pay half of such taxes and interest owed to
the IRS to the extent that D&B's total liabilities exceed $137,000. A portion of
the Company's liability would in turn be shared with Nielsen Media Research
under the Distribution Agreement dated as of June 30, 1998 between IMS Health
and Nielsen Media Research. The Company estimates that its share of the
liability, were the IRS to prevail, would be approximately $139,000. This
liability is included in Other Liabilities.
Management does not believe that these matters will have a material adverse
effect on the Company's consolidated financial position or operating results
when they are resolved in future periods. However, should the IRS issue
assessment notices, payment of the Company's share could have a material adverse
effect on cash flows in the periods in which they are made. The Company believes
that it has more than sufficient funds available from operating cash flows and
committed bank lines to cover any such payment without a material effect on its
liquidity or its financial condition.
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 that
may become payable as a result of certain actions which may be taken by Gartner
that adversely affect the tax-free treatment of the Gartner Spin-Off. However,
the
13
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 6. CONTINGENCIES - (CONTINUED)
Other Contingencies - (continued)
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 highly unlikely that any such
liabilities will be incurred by the Company.
NOTE 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company transacts business in virtually every part of the world and is
subject to risks associated with foreign exchange rates. The Company's objective
is to reduce earnings and cash flow volatility associated with foreign exchange
rates to allow management to focus its attention on its core business
activities. Accordingly, the Company enters into various contracts which change
in value as foreign exchange rates change to protect the value of a portion of
foreign currency revenues and non-functional currency assets and liabilities. By
policy, the Company maintains hedge coverage between minimum and maximum
percentages of its anticipated foreign exchange exposures over the next year.
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 uses a
variety of financial instruments, primarily forward contracts and purchased
currency options, to hedge committed and anticipated foreign currency
denominated revenues. The principal currencies hedged are the Euro, the Japanese
yen and the Swiss franc. The Company also uses forward contracts to hedge
non-functional currency assets and liabilities. The Company does not enter into
foreign currency transactions for speculative purposes.
Gains and losses on contracts hedging anticipated and committed foreign currency
revenues are deferred until such revenues are recognized and offset changes in
the value of such revenues due to fluctuations in currency exchange rates. Gains
and losses on contracts hedging non-functional currency assets and liabilities
are not deferred and are included in other income/(expense)--net. At June 30,
1999, the notional amount of committed foreign currency revenues hedged was
$74,868. In addition, at June 30, 1999, IMS had approximately $127,661 in
foreign exchange forward contracts hedging non-functional currency assets and
liabilities with various expiration dates through July 1999.
NOTE 8. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained For Internal Use." SOP 98-1 provides
guidance on costs to be capitalized, including when capitalization of such costs
should commence. SOP 98-1 applies to costs incurred after its adoption,
including costs for software projects that are in progress at the time of the
adoption. The implementation of SOP 98-1 effective January 1, 1999 did not have
a material effect on the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Accounting For the Costs of Start-up
Activities." SOP 98-5 requires all costs of start-up activities to be expensed
as incurred. SOP 98-5 is effective for financial statements for the years
beginning after December 15, 1998. The implementation of SOP 98-5 effective
January 1, 1999 did not have a material effect on the Company's financial
statements.
14
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
8. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
In July 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date of SFAS
No.133- an amendment of FASB Statement No. 133". Citing concerns about
companies' ability to modify their information systems in time to apply SFAS
133, the FASB delayed its effective date for one year, to fiscal years beginning
after June 15, 2000 (January 1, 2001 for the Company). In June 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Management continues to evaluate the
effects of this pronouncement on the Company's financial statements.
NOTE 9. OPERATIONS BY BUSINESS SEGMENT
The IMS segment consists of IMS, the leading global provider of market
information and decision-support services to the pharmaceutical and healthcare
industries, and Strategic Technologies, the leading provider of automated sales
support technologies to the pharmaceutical industries. In 1999, the IMS segment
includes the Walsh and PMSI businesses acquired during the second and third
quarters of 1998, respectively, which have been integrated into the IMS
operations. Effective in the first quarter of 1999, the IMS operating units
revised their reporting period to conform to the Company's fiscal year ended
December 31. (See Note 2. Basis of Presentation)
The Emerging Markets segment includes Erisco, a leading supplier of
software-based administrative and analytical solutions to the managed care
industry, and Enterprises, the Company's venture capital unit focused on
investments in emerging businesses. In 1998, it included SSJ, a
marketer of financial application software products to the Japanese market,
which was divested in the first quarter of 1999.
CTS delivers life cycle software development, management and maintenance
technology consulting services through the use of a seamless on-site and
offshore project team. These services include application development and
maintenance services, Year 2000 and Eurocurrency compliance services, testing
and quality assurance services and re-hosting and re-engineering services.
15
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 9. OPERATIONS BY BUSINESS SEGMENT - (CONTINUED)
Historical results are restated to reflect Gartner and Nielsen Media Research as
discontinued operations. (See Note 2. Basis of Presentation) The Company
evaluates the performance of its operating segments based on revenue and
operating income.
PERIODS ENDING JUNE 30, 1999
- - -----------------------------------------------------------------------------------------------------------------------
EMERGING
THREE MONTHS: IMS MARKETS CTS (1) TOTAL
- - -----------------------------------------------------------------------------------------------------------------------
Operating Revenue $303,132 $ 11,620 $ 17,900 $332,652
Segment Operating Income 73,173 1,325 3,870 78,368
General Corporate Expenses (2) (15,613)
Interest Income (3) 1,557 250 1,807
Interest Expense (4) (608) (608)
Non-Operating Income/(Expense) - Net
Gains from Dispositions - Net 8,300 8,300
Other Expense - Net (5,823)
- - -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 66,431
Provision for Income Taxes (20,257)
- - -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 46,174
Income from Discontinued Operations, Net of Income Taxes (5) 10,617
- - -----------------------------------------------------------------------------------------------------------------------
Net Income $56,791
- - -----------------------------------------------------------------------------------------------------------------------
SIX MONTHS:
Operating Revenue $588,633 $22,226 $35,035 $645,894
Segment Operating Income 130,721 2,220 7,940 140,881
General Corporate Expenses (2) (23,416)
Interest Income (3) 2,985 526 3,511
Interest Expense (4) (753) (753)
Non-Operating Income/(Expense) - Net
Gains from Dispositions - Net 16,277 16,277
Other Expense - Net (9,748)
- - ----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 126,752
Provision for Income Taxes (36,785)
- - ----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 89,967
Income from Discontinued Operations, Net of Income Taxes (5) 24,311
- - ----------------------------------------------------------------------------------------------------------------------
Net Income $114,278
- - ----------------------------------------------------------------------------------------------------------------------
(See Notes to Operations by Business Segments on next page)
16
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 9. OPERATIONS BY BUSINESS SEGMENT - (CONTINUED)
PERIODS ENDING JUNE 30, 1998
- - ------------------------------------------------------------------------------------------------------------------------
EMERGING
THREE MONTHS: IMS MARKETS CTS (1) TOTAL
------------ ------------ ------------ ------------
Operating Revenue $249,422 $12,580 $ 8,494 $270,496
Segment Operating Income (6) 28,186 103 1,582 29,871
General Corporate Expenses (2) (43,783)
Interest Income (3) 2,270 48 2,318
Interest Expense (4) (196) (196)
Non-Operating Income/(Expense) - Net
Gains from Sale of Subsidiary Stock 12,777 12,777
Gains from Dispositions - Net 0
Other Expense - Net (40)
- - ------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 947
Provision for Income Taxes (13,944)
- - ------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $(12,997)
Income from Discontinued Operations, Net of Income Taxes (5) 35,637
- - ------------------------------------------------------------------------------------------------------------------------
Net Income $ 22,640
- - ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS:
Operating Revenue $472,823 $23,843 $14,798 $511,464
Segment Operating Income/(Loss) (6) 59,112 (101) 2,688 61,699
General Corporate Expenses (2) (56,883)
Interest Income (3) 4,400 80 4,480
Interest Expense (4) (380) (380)
Non-Operating Income/(Expense) - Net
Gains from Sale of Subsidiary Stock 12,777 12,777
Gains from Dispositions - Net 10,415 10,415
Other Expense - Net (890)
- - ------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 31,218
Provision for Income Taxes (21,224)
- - ------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $9,994
Income from Discontinued Operations, Net of Income Taxes (5) 72,733
- - ------------------------------------------------------------------------------------------------------------------------
Net Income $82,727
- - ------------------------------------------------------------------------------------------------------------------------
Notes to Operations by Business Segments:
(1) Excludes intersegment sales in 1999 of $3,598 and $6,889 for the three and
six months presented, respectively. Excludes intersegment sales in 1998 of
$4,173 and $7,907 for the three and six months presented, respectively.
These sales, primarily from CTS to IMS, are recognized as the service is
performed.
(2) General Corporate Expenses in 1999 includes $7,500 related to the Gartner
Spin-Off for the three and six month periods presented. General Corporate
Expenses in 1998 includes charges related to the Distribution of $30,125
and $35,025 for the three and six month periods presented, respectively. In
addition, General Corporate Expenses in 1998 includes one-time Walsh
acquisition costs of $5,000 for both the three and six month periods
presented.
(3) Interest income in 1999 excludes amounts recorded at corporate of $174 and
$269 for the three and six month periods presented, respectively. Interest
income in 1998 excludes amounts recorded at corporate of $2,453 and $4,389
for the three and six month periods presented, respectively.
(4) Interest expense in 1999 excludes amounts recorded at corporate of $1,668
and $1,781 for the three and six month periods presented, respectively.
Interest expense in 1998 excludes amounts recorded at corporate of $16 and
$32 for the three and six month periods presented, respectively.
(5) Income from Discontinued Operations, Net of Income taxes in 1999 relates to
Gartner. Income from Discontinued Operations, Net of Income taxes in 1998
includes $14,549 and $30,641 related to Gartner for the three and six month
periods presented, respectively and $21,088 and $42,093 related to Nielsen
Media Research for the three and six month periods presented, respectively.
(6) The IMS Segment operating income in 1998 includes a one-time in-process
research and development write-off of $21,900 for both the three and six
month periods presented.
17
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 10. SUBSEQUENT EVENTS
Spin-Off of Equity Investment in Gartner
On November 11, 1998 the Company announced that its Board of Directors had
approved a plan to Spin-Off substantially all of its equity ownership of
Gartner. Pursuant to the 1999 Distribution Agreements 40,689,648 shares of
Gartner Class A Common Stock ("Gartner Class A Shares") were converted into an
equal number of shares of Class B Common Stock of Gartner ("Gartner Class B
Shares"). The Gartner Class B Shares are entitled to elect 80% of Gartner's
Board of Directors, but are otherwise identical to Gartner Class A Shares. On
July 16, 1999, the Company's Board of Directors declared a dividend of all such
Gartner Class B Shares to be distributed on July 26, 1999 to holders of the
Company's Common Stock of record as of July 17, 1999. The distribution consisted
of 0.1302 Gartner Class B Shares for each share of the Company's Common Stock.
The Spin-Off was structured as a tax-free distribution and the Company has
received a favorable ruling from the Internal Revenue Service to that effect. On
July 16, 1999 Gartner declared a special cash dividend payable on July 23, 1999
to holders of record on July 16, 1999. IMS Health's portion of the dividend was
approximately $53.0 million, net of taxes.
18
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
This discussion and analysis relates to IMS Health and should be read in
conjunction with the accompanying condensed consolidated financial statements
and related notes. IMS Health consists of the market information and decision
support services business for the pharmaceutical and healthcare industries
conducted by IMS Health and various subsidiaries ("IMS") including IMS Health
Strategic Technologies, Inc. ("Strategic Technologies"); ERISCO Managed Care
Technologies, inc. ("Erisco"); Enterprise Associates, LLC ("Enterprises") and a
61.6% interest in Cognizant Technology Solutions Corporation ("CTS").
Spin-Off of Equity Investment in Gartner
On November 11, 1998 the Company announced that its Board of Directors had
approved a plan to Spin-Off substantially all of its equity ownership of
Gartner. Pursuant to the 1999 Distribution Agreements 40,689,648 Gartner Class A
Shares were converted into an equal number of Gartner Class B Shares. On July
16, 1999, the Company's Board of Directors declared a dividend of all such
Gartner Class B Shares to be distributed on July 26, 1999 to holders of the
Company's Common Stock of record as of July 17, 1999. The distribution consisted
of 0.1302 Gartner Class B Shares for each share of the Company's Common Stock.
The Spin-Off was structured as a tax-free distribution and the Company has
received a favorable ruling from the Internal Revenue Service to that effect. On
July 16, 1999 Gartner declared a special cash dividend payable on July 23, 1999
to holders of record on July 16, 1999. IMS Health's portion of the dividend was
approximately $53.0 million, net of taxes. These cash proceeds will be used in
the third quarter to pay down short term borrowings incurred to fund the
Company's accelerated stock repurchases during the second quarter.
At June 30, 1999, the Company owned approximately 47.6 million Gartner shares.
Approximately 40.6 million shares were distributed to IMS Health shareholders as
described above. The Company intends to monetize its remaining position in
Gartner, consisting of approximately 6.9 million Gartner Class A Shares and
warrants to purchase a further 599,400 Gartner Class A Shares, subject to the
terms of the 1999 Distribution Agreements. The Company's Gartner Class A shares
will be accounted for as an "available for sale" security under SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities". Recognition
of the unrealized gain at the spin date will be recorded as Other Comprehensive
Income and included as a component of equity. Subsequent changes in fair value
from the measurement date of the spin will also be recorded as Other
Comprehensive Income and included as a component of equity. Upon sale of these
securities, the unrealized gain related to those securities at the spin date
will be recognized in Discontinued Operations and any subsequent changes in fair
value will be recognized in Continuing Operations. In connection with the
Gartner Spin-Off, options granted under the Company's plans were adjusted to
recognize the effect of the value of the distribution, thereby slightly
increasing the number of IMS Health shares issuable on exercise.
Walsh Acquisition
On June 24, 1998, Cognizant acquired Walsh International, Inc. ("Walsh").
(See Note 4. Acquisitions)
19
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Walsh Acquisition--(continued)
The severance costs relate to approximately 80 terminated Walsh employees. The
Company has restructured acquired Walsh leases at a lower cost than originally
anticipated and has incurred higher than anticipated severance costs. The
following table displays the status of such activities:
Original Liability Expenditures to June 30, 1999
Estimate Date Adjustments Balance
-------------------------------------------------------------------------------------------------------
Employee Separation $ 4,876 $ (4,489) 1,278 $ 1,665
Lease Terminations 2,569 (256) (1,278) 1,035
Other Direct Costs 9,634 (9,634) 0 0
-------------------------------------------------------------------------------------------------------
Total $17,079 $(14,379) 0 $ 2,700
-------------------------------------------------------------------------------------------------------
PMSI Acquisition
On August 5, 1998, IMS Health acquired certain non-U.S. Assets of Pharmaceutical
Marketing Services Inc. ("PMSI"). (See Note 4. Acquisitions) The severance costs
are related to 63 PMSI employees. As of June 30, 1999, the Company made payments
of $3,342, reducing the workforce by 57. The remaining terminations are
anticipated to be completed during the third quarter of 1999. The following
table displays the status of such activities:
Original Liability Expenditures to June 30, 1999
Estimate Date Balance
---------------------------------------------------------------------------------------
Employee Separation $ 3,794 $ (3,342) $ 452
Lease Terminations 1,623 (669) 954
Contract Cancellations 10,935 (4,259) 6,676
Other Direct Costs 6,232 (6,232) 0
------------------------------------------------------------------------------------
Total $22,584 $(14,502) $ 8,082
------------------------------------------------------------------------------------
20
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Purchase Price Allocation
In connection with both the Walsh and PMSI acquisitions, the Company made
allocations of the purchase price to acquired in-process research and
development ("IPR&D"). Management continues to support the IPR&D efforts that
were underway at the time of the Walsh and PMSI acquisitions. IMS Health is on
target to begin realizing the benefits from these various projects through
product introductions at various launch dates through January 2000. There are
currently no material variations from the underlying projections and assumptions
made at the time of the purchase price allocations.
Elimination of one month reporting lag in IMS operating segment
Effective in the first quarter of 1999, the IMS operating units that previously
reported on a fiscal year ending November 30 revised their reporting period to
conform to the Company's fiscal year ending December 31.
(the "Calendarization"). (See Note 2. Basis of Presentation).
Operations
Revenue for the second quarter increased by 23.0% to $332,652 from $270,496 for
the second quarter of the prior year. Revenue for the first six months increased
26.3% to $645,894 from $511,464 for the comparable period a year ago. Adjusting
the quarter and the first half of 1998 for the Calendarization and the sale of
Super Systems Japan ("SSJ"), revenue increased by 24.7% and 25.1%, respectively.
This increase reflected double-digit constant dollar revenue growth at IMS,
Erisco and CTS as well as the first full year impact of the Walsh and PMSI
acquisitions.
21
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Operating Results - (continued)
The impact of a stronger U.S. dollar decreased reported revenue by less than 1%
for the quarter and first half, including the impact of the Company's hedging
program.
Operating income for the second quarter was $62,755, compared to operating
losses of $13,912 for the second quarter of the prior year. Operating results in
the second quarter of 1999 and 1998 include Year 2000 costs ("Y2K costs") of
$7,923 and $12,330, respectively. Adjusting for Y2K costs; 1999 charges related
to the Gartner Spin-Off ($7,500), the Calendarization, 1998 charges related to
the Distribution ($30,125), the 1998 in-process research and development
write-off ($21,900) and one-time charge ($5,000) related to the Walsh
acquisition, operating income for the second quarter of 1999 increased by 33.5%.
First-half operating income was $117,465 compared with $4,816 for the comparable
period a year ago. First-half operating results in both years include Y2K costs
of $15,800 and $22,301, respectively. Adjusting for Y2K costs, 1999 charges
related to the Gartner Spin-Off ($7,500); the Calendarization, 1998 charges
related to the Distribution ($35,025), the 1998 research and development
write-off ($21,900) and one-time charge ($5,000) related to the Walsh
acquisition, operating income for the first-half of 1999 increased by 35.4%.
Adjusted operating income growth in the second quarter and first half of 1999
outpaced revenue growth primarily due to the Company's ability to leverage its
worldwide resources. The impact of a stronger U.S. dollar impacted adjusted
operating income growth by less than 1% in the second quarter and the first
half, including the impact of the Company's hedging program.
Non-operating income-net for the second quarter was $3,676 compared with $14,859
for the second quarter of the prior year. The decrease is due primarily to a
1998 gains related to the CTS IPO ($12,777).
Non-operating income-net for the first half was $9,287 compared with $26,402.
The decrease is due primarily to 1998 gains related to the CTS IPO ($12,777).
The second quarter 1999 effective tax rate of 30.5% was impacted by a
non-deductible one-time charge of $7,500 related to the Gartner Spin-Off. The
second quarter 1998 effective tax rate was impacted by a portion of the one-time
charge related to the Distribution ($30,125) and the research and development
write-off ($21,900) and one-time charge ($5,000) related to the Walsh
acquisition. Those items did not give rise to a tax benefit. Excluding those
items, the Company's effective tax rate from operations was 27.4% for the second
quarter of 1999 and 1998. The Company's lower effective tax rate is attributable
to numerous global tax planning initiatives. For example, to consolidate certain
of its international operations, in 1999 and 1998 the Company engaged in certain
non-U.S. reorganizations which give rise to tax deductible non-U.S. intangible
assets.
The Company's effective tax rate was 29.0% for the first half of 1999, compared
with an effective tax rate of 68.0% in the comparable period of the prior year.
The first half of 1999 effective tax rate was impacted by a non-deductible
one-time Gartner spin-related charge ($7,500). Excluding the charge related to
the Gartner Spin-Off, the 1998 charges related to the Distribution, the 1998
research and development write-off and one-time charge related to the Walsh
acquisition as noted above, the effective tax rate from operations for the first
half of 1999 and 1998 was 27.4%.
22
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Operating Results - (continued)
Income from continuing operations in the second quarter of 1999 was $46,174,
compared with a loss from continuing operations of $12,997 in the second quarter
of the prior year. Excluding the after-tax impact of Y2K costs and net gains
associated with Enterprises' from both years, charges related to the 1999
Gartner Spin-Off ($7,500), the 1998 CTS IPO gain ($12,777), 1998 charges related
to the Distribution ($30,125) and the 1998 in-process research and development
write-off ($21,900) and a one-time charge ($5,000) related to the Walsh
acquisition, income from continuing operations in the second quarter of 1999
increased 21.1%.
Income from continuing operations for the first half of 1999 was $89,967,
compared with $9,994 in the first half of the prior year. Excluding the
after-tax impact of Y2K and net gains associated with Enterprises' investments
in both years, 1999 charges related to the Gartner Spin-Off, the 1998 CTS IPO
gain, 1998 charges related to the Distribution and the 1998 in-process research
and development write-off and one-time charge related to the Walsh acquisition,
income from continuing operations increased 24.7% in the first half of 1999.
Income from discontinued operations, net of income taxes, in the second quarter
of 1999 was $10,617, compared with $35,637 in the second quarter of the prior
year. Income from discontinued operations net of income taxes represents Gartner
equity income in both years and SAB 51 gains from Gartner and the results of
Nielsen Media Research in 1998.
Income from discontinued operations, net of income taxes, in the first half of
1999 was $24,311, compared with $72,734 in the first half of the prior year.
Income from discontinued operations net of income taxes represents Gartner
equity income in both years and SAB 51 gains from Gartner and the results of
Nielsen Media Research in 1998.
Net income for the second quarter of 1999 was $56,791, an increase of 150.8%
from net income of $22,640 in the second quarter of the prior year.
Net income for the first half of 1999 increased 38.1% to $114,278 from $82,727
in the first half of the prior year.
Basic earnings per share in the second quarter of 1999 were $0.15 compared with
a per share loss of $.04 in the second quarter of the prior year. Excluding the
impact of the previously identified one-time items, basic earnings per share
from continuing operations for the quarter increased 21.4%.
Basic earnings per share in the first half of 1999 were $0.28 compared with $.03
in the first half of the prior year. Excluding the impact of the previously
identified one-time items, basic earnings per share from continuing operations
for the first half of 1999 increased 29.2%.
Diluted earnings per share in the second quarter of 1999 were $0.15 compared
with diluted loss per share of ($.04) in the second quarter of the prior year.
Excluding the impact of the previously identified one-time items, diluted
earnings per share from continuing operations for the quarter increased 30.8%.
Diluted earnings per share in the first half of 1999 were $0.28 compared with
diluted earnings per share of $.03 in the first half of the prior year.
Excluding the impact of the previously identified one-time items, diluted
earnings per share from continuing operations for the first half of 1999
increased 30.4%.
23
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Results by Business Segment
IMS Segment
The IMS segment consists of IMS, the leading global provider of market
information and decision-support services to the pharmaceutical and healthcare
industries, and Strategic Technologies, the leading provider of automated sales
support technologies to the pharmaceutical industries.
Effective in the first quarter of 1999, IMS operating units that previously
reported on a fiscal year ended November 30 revised their reporting period to
conform to the Company's fiscal year ended December 31. (See Note 2. Basis of
Presentation)
IMS Segment revenue for the second quarter of 1999 increased 21.5% to $303,132
from $249,422 in the second quarter of the prior year. Adjusting 1998 revenue
for the Calendarization and the impact of a stronger U.S. dollar, revenue for
the second quarter 1999 increased by 22.7%. Market Research Products increased
7.0% to $99,347, Sales Management Products increased 29.2% to $166,755 and Other
Services increased 38.4% to $37,030. This growth was due primarily to geographic
expansion of Sales Management Products and Services and the first full year
effect of the Walsh and PMSI acquisitions.
Second quarter operating income increased 159.6% to $73,173 from $28,186 in the
prior year. Excluding Y2K costs and the Calendarization, operating income for
1999 increased 25.5%. Adjusted operating income growth outpaced revenue growth
due primarily to the segment's ability to leverage its worldwide resources.
IMS Segment revenue for the first half of 1999 increased 24.5% to $588,633 from
$472,823 in the prior year. Adjusting 1998 revenue for the Calendarization and
the impact of a stronger U.S. dollar, revenue for the second half 1999 increased
by 22.4%. Market Research Products increased 7.5% to $193,137, Sales Management
Products increased 30.1% to $325,565 and Other Services increased 31.6% to
$69,931. This growth was due primarily to geographic expansion of Sales
Management Products and Services and the first full year effect of the Walsh and
PMSI acquisitions.
IMS Segment operating income for the first half of 1999 increased 121.1% to
$130,721 from $59,112 in the first half of the prior year. Excluding Y2K costs
and the impact of the Calendarization, operating income for the first half of
1999 increased 25.6%.
Emerging Markets Segment
The Emerging Markets segment includes Erisco, a leading supplier of
software-based administrative and analytical solutions to the managed care
industry, and Enterprises, the Company's venture capital unit focused on
investments in emerging businesses. In 1998, this segment included SSJ which was
divested in the first quarter of 1999.
Emerging Markets revenue for the second quarter of 1999 decreased 7.6% to
$11,620 from $12,580 in the prior year. This decrease was due primarily to the
absence of revenues from SSJ during 1999. Excluding SSJ, Emerging Markets
revenue for the second quarter of 1999 increased by 20.1%. Operating income
increased to $1,325 in the second quarter from $103 in the second quarter of the
prior year. Excluding SSJ, operating income for the second quarter of 1999
increased 29.8%.
24
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Results by Business Segment - (continued)
Emerging Markets Segment - (continued)
Emerging Markets revenue for the first half of 1999 decreased 6.8% to $22,226
from $23,843 in the prior year. This decrease was due primarily to the absence
of revenues from SSJ during 1999. Excluding SSJ, Emerging Markets revenue
increased by 19.8% in the first half. Emerging markets operating income for the
first half of 1999 increased to $2,220 from a loss of $101 in the first half of
the prior year.
CTS Segment
CTS delivers life cycle software development, management and maintenance
technology consulting services to its customers through the use of a seamless
on-site and offshore project team. These services include application
development and maintenance services, Year 2000 and Eurocurrency compliance
services, testing and quality assurance services and re-hosting and
re-engineering services.
CTS revenue, net of intersegment sales, increased to $17,900 in the second
quarter of 1999 from $8,494 in the prior year. The increase is due to continuing
strong demand for application development, management and maintenance services
and the addition of new customers. Operating income increased to $3,870 from
$1,582 in the second quarter of the prior year.
CTS revenue for the first half of 1999, net of intersegment sales, increased
136.8% to $35,035 from $14,798 in the prior year. CTS operating income for the
first half of 1999 increased 195.4% to $7,940 from $2,688 in the first half of
the prior year.
Condensed Consolidated Statement of Cash Flows
Net Cash provided by operating activities totaled $111,397 for the six months
ended June 30, 1999 compared with $78,359 in 1998. The $33,038 increase is due
primarily to increased income from continuing operations ($79,973) which was
partially offset by the absence of the 1998 IPR&D write-off ($21,900) and higher
other working capital ($6,983). During the month of December 1998, IMS generated
$30,664 of cash, including a significant decrease in accounts receivable
($35,353). As a consequence of the Calendarization, the December 1998 cash flows
from IMS operating units are not included in the Company's first six months net
cash provided by operating activities.
Net Cash used in investing activities totaled $45,355 for the first six months
of 1999 compared with $19,316 used during the comparable period in 1998. The
$26,039 increase in cash used in investing activities is due primarily to
acquisition and integration payments ($21,768).
Net Cash (used in) / provided by financing activities was ($140,565) cash used
for the six months ended June 30, 1999 compared with $355,146 cash provided in
1998. The decrease in cash provided by financing activities of $495,711 was
primarily due to the 1998 proceeds from debt assumed by Nielsen Media Research
($300,000), proceeds from the 1998 CTS IPO ($27,128), increased payments for the
purchase of treasury stock ($214,842) and lower proceeds from the exercise of
stock options ($23,052) which were partially offset by increased proceeds from
short-term debt ($70,909, net of repayments). Short-term borrowings are used
from time to time to temporarily fund the Company's ongoing stock repurchase
program.
25
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Condensed Consolidated Statement of Cash Flows - (continued)
Cash Flow from Discontinued Operations was zero for the first six months of 1999
compared to a use of ($17,173) in the same period of 1998. There was no Cash
Flow from the Gartner Discontinued Operations in 1999 or 1998. Nielsen Media
Research accounted for all of the Discontinued Operations Cash Flow in 1998.
Subsequent to June 30, Gartner declared a Cash Dividend from which the Company
will receive approximately $53 million of after tax Cash Flow from Discontinued
Operations in the third quarter.
The Company's exisiting balances of cash, cash equivalents and marketable
securities, and cash generated from operations and debt capacity are expected to
be more than sufficient to meet the Company's current long-term and short-term
requirements including cash dividends, acquisitions, stock repurchase programs
and other contingencies.
Changes in Financial Position at June 30, 1999 Compared to December 31, 1998
Cash & Cash Equivalents decreased to $150,310 at June 30, 1999 from $206,390 at
December 31, 1998, due primarily to the purchase of treasury stock
($222,651) which was partially offset by cash from operating activities
($111,397) and cash provided by IMS operating units during December 1998
($30,664). (See Note 2. The Basis of Presentation).
Accounts Receivable decreased to $263,518 at June 30, 1999, from $324,219 at
December 31, 1998 due primarily to increased collections. As a result, days
sales outstanding improved to 71 days for the quarter compared to 100 days' for
the year ended December 31, 1998.
Securities and Other Investments decreased to $94,092 at June 30, 1999 from
$106,276 at December 31, 1998 due primarily to the sale of certain Enterprises
investments, partially offset by additional investments.
Net-Assets of Discontinued Operations increased to $265,019 at June 30, 1999,
from $240,708 at December 31, 1998, reflecting after-tax income from
discontinued operations ($24,311).
Short Term Debt increased to $109,729 at June 30, 1999, from $39,169 at December
31, 1998 due primarily to increased borrowings used from time to time to
temporarily fund the Company's ongoing stock repurchase program. The proceeds
from the Gartner dividend will be used in the third quarter to pay down short
term borrowings incurred to fund the Company's accelerated stock repurchases
during the second quarter.
Accrued Liabilities decreased to $235,180 at June 30, 1999, from $298,625 at
December 31, 1998 due primarily to payments related to the PMSI and Walsh direct
acquisition and integration costs and accruals for salaries, wages, bonuses and
other compensation.
Shareholders' Equity decreased to $693,196 at June 30, 1999 from $825,270 at
December 31, 1998, due primarily to the purchase of treasury stock ($222,651),
change in cumulative translation adjustment ($28,031), change in unrealized
gains on investments ($9,307) and dividends paid ($12,660), partially offset by
net income ($114,278) and proceeds from stock option exercises ($20,180). Also
effecting shareholder's equity is the $1,040 of net income related to the
results of the IMS operating units for the period December 1 through December
31, 1998 and a $3,409 cumulative translation adjustment for the same period.
(See Note 2. Basis of Presentation).
Year 2000
Many existing computer systems and software applications use two digits, rather
than four, to record years (for example "98" instead of "1998"). Unless
modified, such systems will not properly record or interpret years after 1999,
which could lead to business disruptions. This is known as the "Year 2000 issue"
("Year 2000").
The Company began to address the Year 2000 issue in 1996. In 1997, the Company
created a Year 2000 Task Force (the "Task Force") to manage overall risks and to
facilitate activities across
26
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Year 2000 - (continued)
the entire Company. CTS, a majority owned subsidiary, is being used to convert
the majority of the systems to allow most internal staff members to focus on the
core business. The Company has also used outside services to assist in
conversion and to assess the progress of its Year 2000 program.
The Task Force developed a conversion methodology that included three phases:
analysis, coding and testing, and testing and implementation. The analysis phase
includes planning, inventory and impact analysis. The coding and testing phase
involves code changes, using conversion rules and criteria and unit testing,
verifying and documenting the results of the conversion. The testing and
implementation phase includes system test across platforms and verification of
data, an acceptance test within the user environment, and implementation or
releasing the systems back into production. This conversion methodology has been
utilized throughout the Company to achieve systems compliance by the Year 2000.
The creation of customer products relies on the receipt of data from external
data suppliers and the Company's ability to convert the data and deliver the
information to its customers. The consolidation of the data is principally
performed at central processing locations. The Company believes central systems
represent approximately 85% of its Year 2000 efforts. The Company operates
central processing facilities in Germany, England, the United States and Japan.
The systems at these sites contained the most lines of code required to undergo
conversion. At June 30, 1999, the Company has completed 99% of Year 2000
conversions at central processing locations.
IMS Health continues to enhance its existing product portfolio and continues to
launch new products. There is an ongoing effort to ensure this software is Year
2000 compliant. In addition, the Company has decided to replace certain
non-compliant software. These new product and replacement projects are on track
to be completed and deployed by the fourth quarter and continue to be under
close scrutiny by the Task Force.
The Company operates local offices in over 90 countries with about half of them
using systems for data collection, panel administration and customized local
requirements. Varied approaches are utilized to ensure Year 2000 compliance. In
some cases, specialized teams from CTS are being used to assist the local
offices with all phases of their system conversions and hardware compliance.
At June 30, 1999, the Company has completed 98% of Year 2000 conversions of
local systems and personal computer applications in the United States and
Europe. The rest of the world is at approximately 96% completion. Year 2000
compliance is expected to be achieved by the end of the third quarter.
The Company's Year 2000 project incorporates administrative operations systems
and software such as accounts receivable, payroll, accounts payable and the
general ledger systems and are 99% compliant.
The Company developed an internal audit program that examines the testing and
effectiveness of controls, assesses the accuracy and completeness of inventories
and reviews the documentation for completeness and accuracy. As of the beginning
of the second quarter, audits and follow-up
27
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Year 2000 - (continued)
audits have occurred in the United States, England, Japan and Germany. The
company performs audits on the local country conversions with the assistance of
CTS and outside consultants. To date approximately 90% of IMS Health revenue has
been audited for Year 2000 compliance. These audits will continue throughout the
world until Year 2000 with several sites revisited to ensure continued
compliance.
The Company engaged TRW to conduct an audit review of the Year 2000 program for
business critical and mission critical systems in sixteen locations. These
audits were conducted in the first half of 1999 and focused on survivability,
preparedness and due diligence in addressing the Year 2000 problem. Any issues
identified as a result of these audits will be addressed in the third quarter.
The Company relies on over 16,000 suppliers of electronic data and has been
proactive in working with these suppliers to determine their Year 2000 readiness
and ability to maintain data flow continuity. A program consisting of seminars,
visits, mailings and telephone calls continues to be administered to track the
status of and assess and address risks associated with Year 2000 readiness by
the Company's key data suppliers.
In some instances, IMS Health receives data from governments and hospitals.
Continued receipt of their data will be a function of their Year 2000
compliance. Based on information from the Company's data sources, Year
2000 compliance information has been incomplete or progress to date has been
unsatisfactory in some areas. The Company assesses risk regarding the readiness
of data sources through testing and the use of a detailed questionnaire
regarding Year 2000 conversion plans in order to verify the supplier's ability
to continue to deliver data. As a contingency, statistically valid methods of
data extrapolation are being developed in the event the supply of data from a
limited number of suppliers is incomplete or found to be unusable. Investigation
of alternate sources are pursued when the risk assessment determines the data
source to have a high risk of impacting the Company's ability to deliver
products and services.
Throughout 1999 the Company's Year 2000 efforts will focus on (i) the testing
the critical components of the Company's systems; (ii) the continued assessment
of supplier readiness to address the Year 2000 conversion; and (iii) finalizing
contingency plans to address unanticipated issues.
External and internal costs of addressing the Year 2000 issue are expensed as
incurred. It is currently estimated that the aggregate cost of the Company's
Year 2000 program will be approximately $75,000 to $80,000. Through June 30,
1999 the Company has incurred $70,541 of which $44,922 was incurred in 1998. The
Company expects to incur between $4,000 and $9,000 during the remainder of 1999.
These estimates do not include the costs of software and systems that are being
replaced or upgraded in the normal course of business.
The cost of addressing the Year 2000 issue and the dates which the Company
currently expects to complete Year 2000 compliance are based on the current best
estimates of management, which are derived utilizing various assumptions
regarding the future events. There can be no guarantee that these estimates will
be achieved, and actual results may differ materially. Specific factors that may
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area of expertise, the
ability to locate and correct all relevant computer codes, and the success of
customers and suppliers in addressing the Year 2000 issue. The
28
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
The Year 2000 - (continued)
Company's plans are dependent on industries out of the Company's direct control
such as utilities and transportation.
The above expectations are subject to uncertainties. For example, if the Company
is unsuccessful in identifying or fixing all Year 2000 problems in its critical
operations, or effected by the inability of its data suppliers or major
customers to continue operations due to such a problem, the Company's results of
operations or financial condition could be materially impacted.
The Year 2000 statements set forth above are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information Readiness Disclosure Act
(P.L. 105-271).
Euro Conversion
On January 1, 1999, 11 member countries of the European Union established fixed
exchange rates between their existing currencies and the European Union's common
currency ("Euro"). The transition period for the introduction of the Euro is
between January 1, 1999 and January 1, 2002.
The Company instituted plans for the introduction of the Euro and has 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
eleven participating countries which may affect the ability of some companies to
price products differently in the various European markets. The Company 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 the Company's product ranges.
IMS Health's expectations regarding the Euro currency issue are forward-looking
statements that involve a number of risks and uncertainties that could cause
actual results to differ materially from the projected results. Factors that may
cause these differences include, but are not limited to, the ability or
willingness of third parties to convert systems in a timely manner and the
actions of governmental agencies or other third parties with respect to Euro
currency issues.
29
IMS HEALTH INCORPORATED
PART II. OTHER INFORMATION -(CONTINUED)
ITEM 5. OTHER INFORMATION
On July 26, 1999, the Company distributed 40,689,648 shares of Class B Common
Stock of Gartner Group Inc. to its shareholders of record on July 17, 1999. (See
Note 10. Subsequent Events and Management's Discussion and Analysis of Financial
Conditions and Results of Operations).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3 Articles of Incorporation and By-laws
.1 Restated Certificate of Incorporation of IMS Health Incorporated dated
May 29,1998.
.2 Certificate of Amendment of Restated Certificate of Incorporation of
IMS Health Incorporated dated March 22, 1999.
.3 Amended and Restated By-laws of Registrant (incorporated by reference
to Exhibit 3.1 to Registrant's Registration Statement on Form 10 filed
June 12, 1998, file number 001-14049).
10 Material Contracts
.1 Distribution Agreement between IMS Health Incorporated and GartnerGroup
Inc., dated June 17, 1999.
.2 Agreement and Plan of Merger between IMS Health Incorporated and
GartnerGroup Inc., dated June 17, 1999.
.3 Amended and Restated 1998 IMS Health Incorporated Employees' Stock
Incentive Plan dated June 17, 1999.
27 Financial Data Schedules
(b) Reports on 8-K:
There were no reports on Form 8-K filed during the quarter ended
June 30, 1999.
30
IMS HEALTH INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMS Health Incorporated
By: /s/ J. MICHAL CONAWAY
-------------------------------------------
J. Michal Conaway
Chief Financial Officer
By: /s/ JAMES C. MALONE
--------------------------------------------
James C. Malone
Senior Vice President - Finance & Controller
Date: August 10, 1999
31