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 September 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
Common Stock, at September 30, 1999
par value $.01 per share 307,927,288
IMS HEALTH INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
PAGE(S)
-------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998 3
Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended September 30, 1999 and 1998 5
Nine Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Financial Position
September 30, 1999 and December 31, 1998 6
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 9-21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22-35
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURES 37
2
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)
Three Months Ended
September 30,
1999 1998
-------------------------------
Operating Revenue $348,409 $283,606
Operating Costs 131,298 112,364
Selling and Administrative Expenses 94,865 87,468
Depreciation and Amortization 26,288 25,102
Direct Acquisition Integration Costs 0 43,019
Acquired In-Process Research and Development 0 10,900
- - ----------------------------------------------------------------------------------------------------------------
Operating Income 95,958 4,753
- - ----------------------------------------------------------------------------------------------------------------
Interest Income 2,591 7,241
Interest Expense (2,138) (335)
Gains from Dispositions--Net 4,313 12,047
Other Expense--Net (3,221) (3,441)
- - ----------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 1,545 15,512
- - ----------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 97,503 20,265
Provision for Income Taxes (27,263) (5,479)
- - ----------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 70,240 14,786
Income from Discontinued Operations, Net of Income Taxes of $931 and $7,261
for 1999 and 1998, respectively 1,384 10,169
- - ----------------------------------------------------------------------------------------------------------------
Net Income $ 71,624 $ 24,955
- - ----------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share of Common Stock:
Income from Continuing Operations $0.23 $0.05
Income from Discontinued Operations 0.00 0.03
- - ----------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share of Common Stock $0.23 $0.08
- - ----------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock:
Income from Continuing Operations $0.22 $0.04
Income from Discontinued Operations 0.00 0.03
- - ----------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock $0.22 $0.07
- - ----------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Basic 311,159,000 328,102,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 6,185,000 8,110,000
Adjustment of Shares Applicable to Exercised Stock Options 328,000 1,468,000
- - ----------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 317,672,000 337,680,000
- - ----------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The third quarter of 1998 for the IMS operating units includes the
three months ended August 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)
Nine Months Ended
September 30,
1999 1998
-------------------------------
Operating Revenue $994,303 $795,070
Operating Costs 412,659 391,819
Selling and Administrative Expenses 293,047 244,560
Depreciation and Amortization 75,174 68,303
Direct Acquisition Integration Costs 0 48,019
Acquired In-Process Research and Development 0 32,800
- - ----------------------------------------------------------------------------------------------------------------------------
Operating Income 213,423 9,569
- - ----------------------------------------------------------------------------------------------------------------------------
Interest Income 6,371 16,110
Interest Expense (4,672) (747)
Gain on Sale of Subsidiary Stock 0 12,777
Gains from Dispositions--Net 20,590 22,462
Other Expense--Net (11,457) (8,688)
- - ----------------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 10,832 41,914
- - ----------------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 224,255 51,483
Provision for Income Taxes (64,048) (26,703)
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 160,207 24,780
Income from Discontinued Operations, Net of Income Taxes of $12,635 and $38,780
for 1999 and 1998, respectively 25,695 82,902
- - ----------------------------------------------------------------------------------------------------------------------------
Net Income $185,902 $107,682
- - ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share of Common Stock:
Income from Continuing Operations $0.51 $0.08
Income from Discontinued Operations 0.08 0.25
- - ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share of Common Stock $0.59 $0.33
- - ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock:
Income from Continuing Operations $0.50 $0.07
Income from Discontinued Operations 0.08 0.25
- - ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of Common Stock $0.58 $0.32
- - ----------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Basic 314,431,000 326,474,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 6,810,000 6,432,000
Adjustment of Shares Applicable to Exercised Stock Options 565,000 4,220,000
- - ----------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 321,806,000 337,126,000
- - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The Statement of Income at September 30, 1998 for the IMS operating
units includes the nine months ended August 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
September 30,
1999 1998
----------------------
Net Income $ 71,624 $ 24,955
Other Comprehensive Income, Net of Tax:
Foreign Currency Translation Adjustments Gains 10,301 175
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) on Securities Arising During the Period:
Other (Net of Tax Benefit of $502 for 1998) 4 (1,329)
Gartner (Net of Tax Expense at $10,195 for 1999) 18,934 --
Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax
Expense of $1,410 and $2,302 for 1999 and 1998, respectively) (3,738) (6,100)
- - ---------------------------------------------------------------------------------------------------------------------
Net Change in Unrealized Gains (Losses) on Investments 15,200 (7,429)
- - ---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss), Net of Tax 25,501 (7,254)
- - ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 97,125 $ 17,701
- - ---------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
1999 1998
--------- ---------
Net Income $ 185,902 $ 107,682
Other Comprehensive Income, Net of Tax:
Foreign Currency Translation Adjustments Losses (21,133) (9,421)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) on Securities Arising During the Period:
Other (Net of Tax Benefit of $710 and $2,440 for 1999 and 1998,
respectively) (1,880) (6,464)
Gartner (Net of Tax Expense at $10,195 for 1999) 18,934 --
Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax
Expense of $4,212 and $1,557 for 1999 and 1998, respectively) (11,161) (4,126)
- - ---------------------------------------------------------------------------------------------------------------------
Net Change in Unrealized Gains (Losses) on Investments 5,893 (10,590)
- - ---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Loss, Net of Tax (15,240) (20,011)
- - ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 170,662 $ 87,671
- - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The Statement of Comprehensive Income at September 30, 1998 for the
IMS operating units includes the three and nine months ended August 31, 1998,
respectively. (See Note 2. Basis of Presentation).
In the third quarter and first nine months of 1999, Unrealized Holding Gains
include $18,934 of unrealized gains, net of $10,195 of tax expense, related to
the Company's Gartner Group holdings, classified in Net Assets from Discontinued
Operations. (See Note 2. Basis of Presentation).
The Company has significant investments outside of the U.S. 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 offsetting impact of the Company's hedging program. (See
Note 8. 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)
September 30, December 31,
1999 1998
----------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 230,714 $ 206,390
Accounts Receivable-Net 246,991 324,219
Other Current Assets 106,236 103,868
Net Assets from Discontinued Operations 100,356 240,708
- - --------------------------------------------------------------------------------
Total Current Assets 684,297 875,185
- - --------------------------------------------------------------------------------
Securities and Other Investments 82,455 106,276
Property, Plant and Equipment-Net 170,550 179,151
Other Assets-Net:
Computer Software 174,989 168,994
Goodwill 344,123 363,841
Other Assets 23,915 25,928
- - --------------------------------------------------------------------------------
Total Other Assets-Net 543,027 558,763
- - --------------------------------------------------------------------------------
Total Assets $1,480,329 $1,719,375
- - --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Current Liabilities:
Short Term Debt $ 168,834 $ 39,169
Accounts Payable 48,197 51,715
Accrued and Other Current Liabilities 222,353 298,625
Accrued Income Taxes 81,900 32,537
Deferred Revenues 102,349 128,272
- - --------------------------------------------------------------------------------
Total Current Liabilities 623,633 550,318
- - --------------------------------------------------------------------------------
Post-retirement and Post-employment Benefits 27,943 27,577
Minority Interests 120,628 116,225
Other Liabilities 191,634 199,985
- - --------------------------------------------------------------------------------
Total Liabilities 963,838 894,105
- - --------------------------------------------------------------------------------
Shareholder's Equity:
Common Stock, Par Value $.01,
Authorized 800,000,000 Shares:
Issued 335,045,390 Shares in September 1999
and December 1998 respectively 3,350 3,350
Capital in Excess of Par 732,088 732,014
Retained Earnings 720,413 686,653
Treasury Stock, at Cost, 27,118,102 and
16,303,690 Shares at September 1999 and
December 1998, respectively (866,753) (535,971)
Cumulative Translation Adjustment (101,873) (84,149)
Unrealized Gains on Gartner Group 18,934 0
Unrealized Gains on Investments 10,332 23,373
- - --------------------------------------------------------------------------------
Total Shareholders' Equity 516,491 825,270
- - --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,480,329 $1,719,375
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The Financial Position at December 31,1998 includes 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)
Nine Months Ended September 30,
1999 1998
-------------------------------
Cash Flows from Operating Activities:
Net Income $ 185,902 $ 107,682
Less Income from Discontinued Operations (25,695) (82,902)
- - ------------------------------------------------------------------------------------------------------
Income from Continuing Operations 160,207 24,780
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 75,174 68,303
Gains from Sale of Investments, Net (20,590) (22,462)
Write-off of Purchased In-Process Research and Development 0 32,800
Direct Acquisition Integration Costs 0 48,019
Benefit Payments (10,469) (2,748)
Net Decrease in Accounts Receivable 24,414 29,790
Net (Decrease)/Increase in Deferred Revenues (16,583) 14,161
Gain from Sale of Subsidiary Stock 0 (12,777)
Minority Interests 4,189 7,012
Deferred Income Taxes (2,338) 1,118
Net increase in Accrued Income Taxes 46,006 3,999
Other Working Capital Items (28,252) (36,436)
- - ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 231,758 155,559
- - ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from Sale of Investments 46,759 42,432
Acquisition and Integration Payments (28,248) 0
Payments for Acquisition of Businesses (3,100) (2,938)
Cash of Companies Acquired in Stock Purchases 0 11,895
Capital Expenditures (23,243) (20,375)
Additions to Software (44,496) (45,428)
Net Increase in Other Investments (16,500) (20,705)
Other Investing Activities - Net 8,355 4,369
- - ------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (60,473) (30,750)
- - ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Payments for Purchase of Treasury Stock (359,859) (510,867)
Proceeds from Exercise of Stock Options 22,669 61,638
Proceeds from the Sale and Issuance of Subsidiary Stock 0 27,128
Dividends Paid (18,923) (14,805)
Proceeds from Employee Stock Purchase Plan 3,514 3,403
Proceeds from Debt Assumed by Nielsen Media Research 0 300,000
Short-Term Borrowings 243,443 35,165
Short-Term Debt Repayments (113,306) 0
Other Financing Activities - Net (213) (1,877)
- - ------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (222,675) (100,215)
- - ------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents (7,827) (7,618)
Effect of the elimination of the one-month reporting lag 30,664 0
Cash Flow from Discontinued Operations 52,877 (17,173)
- - ------------------------------------------------------------------------------------------------------
Increase/(Decrease) in Cash and Cash Equivalents 24,324 (197)
Cash and Cash Equivalents, Beginning of Period 206,390 312,442
- - ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 230,714 $ 312,245
- - ------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited). The Statement of Cash Flows for the nine month period ended
September 30, 1998 for the IMS operating units includes the nine months ended
August 31, 1998. (See Note 2. Basis of Presentation).
7
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands, except per share data)
Nine Months Ended September 30,
1999 1998
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash Paid during the Period for Interest $ 4,731 $ 747
Cash Paid during the Period for Income Taxes $ 57,478 $ 65,313
Cash received from Income Tax Refunds $ 42,449 $ 6,832
Non-Cash Investing Activities:
Stock Issued in Connection with Acquisitions -- $243,854
Dividend of Gartner Shares $134,259 --
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited).
8
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 to 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 NMR as a
discontinued operation for periods up to and including June 30, 1998.
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 controlling
interest (approximately 61% of shares outstanding) in Cognizant Technology
Solutions Corporation ("CTS").
On July 26, 1999, having received the approval of Gartner Group Inc. ("Gartner")
shareholders and the Boards of Directors of both the Company and Gartner, the
Company completed a 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, 1999 record date and totaled 40.7
million Gartner Class B shares. 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. (See Note 3. Investment
in Gartner Group Stock).
9
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 2. Basis of Presentation (continued)
A summary of Gartner and Nielsen Media Research as discontinued operations is as
follows:
Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------------------- -------------------------
Operating Revenue - Nielsen Media Research $ -- $ -- $ -- $ 193,996
Income Before Provision for Income Taxes -
Nielsen Media Research -- -- -- 57,980
Equity Income and SAB 51 Gains ($1,459 and
$14,838 for the three and nine month periods in
1998, respectively) Before Provision for Income
Taxes - Gartner 2,315 17,430 38,330 63,702
------------------------- -------------------------
Provision for Income Taxes - Nielsen Media Research -- -- -- (15,887)
Provision for Income Taxes - Gartner (931) (7,261) (12,635) (22,893)
Income from Discontinued Operations $ 1,384 $ 10,169 $ 25,695 $ 82,902
========================= =========================
Elimination of one-month reporting lag in IMS operating entities
Effective in the first quarter of 1999, IMS operating units which 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 1998 third quarter
and year-to-date results for the IMS operating units include the three and nine
months ended August 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 was
recorded as an addition to Retained Earnings. In addition, December 1998
included a $3,409 credit that was recorded as a cumulative translation
adjustment. The following table presents IMS operating units condensed
consolidated financial information for the one month ended December 31, 1998.
One Month Ended
December 31, 1998
--------------------------------------------------------------------------
Revenue $ 71,754
Operating Income 1,137
Income Before Provision for Income Taxes 1,432
Provision for Income Taxes (392)
--------------
Net Income $ 1,040
==============
Earnings Per IMS Health Share $ 0.003
10
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 2. Basis of Presentation (continued)
The following table presents IMS operating units cash flow information for the
one month ended December 31, 1998:
One Month Ended
December 31, 1998
--------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 30,852
Net Cash Used in Investing Activities (3,645)
Net Cash Provided by Financing Activities 2,276
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 1,181
--------------
Increase in Cash and Cash Equivalents $ 30,664
==============
Note 3. Investment in Gartner Group Stock
On November 11, 1998 the Company announced that its Board of Directors had
approved a plan, subject to numerous conditions, to spin-off substantially all
of its equity ownership of Gartner. The transaction was structured as a tax-free
distribution of Gartner stock to IMS Health shareholders and the Company
received a favorable ruling from the Internal Revenue Service ("IRS").
On July 16, IMS Health and Gartner Board of Directors approved the final plan,
terms and conditions governing the spin-off of the Company's investment in
Gartner Group. Accordingly, pursuant to Accounting Principles Board No. 30,
"Reporting the results of Operations - Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occuring Events and
Transactions", the condensed consolidated financial statements of the Company
have been reclassified to reflect Gartner equity investment as a discontinued
operation for all periods presented.
Gartner declared a special cash dividend which was paid on July 23, 1999 to
holders of record on July 16, 1999. IMS Health's portion of the dividend was
$52,877, net of taxes, and is included as Cash from Discontinued Operations in
the Condensed Consolidated Statements of Cash Flow.
On July 16, 1999, the Company's Board of Directors declared a dividend of all
Gartner Class B Shares, which was distributed on July 26, 1999 to holders of the
Company's Common Stock of record as of July 17, 1999. The tax-free distribution
consisted of 0.1302 Gartner Class B Shares for each outstanding share of the
Company's Common Stock (the "Gartner Distribution"). The net assets of the
Gartner discontinued operations at December 31, 1998 were $240,708. Income from
discontinued operations for the nine month period ended September 30, 1999 was
$25,695, net of taxes of $12,635. The allocated value of the Gartner Class B
Shares distributed was $132,104 and was recorded as a reduction of net assets of
discontinued operations and Dividend of Gartner Shares. The allocated
11
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 3. Investment in Gartner Group Stock (continued)
value was calculated from the original cost of the shares and the proportional
allocation of the earnings from past periods, less the net dividend received on
the shares prior to the Distribution.
The Company's remaining investment in Gartner consists of 6,909,457 Gartner
Class A Shares and warrants to purchase a further 599,400 Gartner Class A Shares
(at a cost basis of $81,422). The Company expects to monetize the remaining
position in Gartner. Accordingly, the net assets from discontinued operations
are included in current assets. The Company's Gartner Class A shares have been
accounted for as "available for sale" securities under SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities". The unrealized gain as
of the date of the Gartner Distribution (based on a per share price of $22.75 on
Gartner Stock) was $51,716 (net of taxes of $27,847), and was recorded as Other
Comprehensive Income and included as a component of equity. Subsequent changes
in the per share price of Gartner Stock from the date of the Gartner
Distribution to September 30, 1999 (based on a per share price of $16.00 on
Gartner Stock) generated an unrealized loss of $32,782 (net of taxes of
$17,652), which was also recorded as Other Comprehensive Income and included as
a component of equity. Upon sale of these securities, the unrealized gain
related to those securities measured based on the value of Gartner shares as of
the date of the Gartner Distribution will be recognized in Discontinued
Operations. Gains or losses in the fair value subsequent to the date of the
Gartner Distribution will be recognized in Continuing Operations as shares are
sold.
Holders of options to purchase the Company's stock did not receive shares in the
Gartner Distribution. Consequently, options granted under the Company's plans
were adjusted to recognize the effect of the Gartner Distribution. The options,
as adjusted, represented as increase in the number of shares issuable when
exercised but had the same ratio of the exercise price to the market value per
share, the same aggregate difference between market value and exercise price and
the same vesting provisions, option periods and other terms and conditions as
the options prior to the adjustment. The option adustment was performed in
accordance with the provisions of EITF90-9. Accordingly, no compensation charge
was required for this options adjustment.
Note 4. Dispositions
During the third quarter of 1999, the Company recorded $4,313 of pre-tax net
gains due primarily to the sale of Enterprises investments in TSI International
Software Ltd. and Pegasus Systems Inc. Pre-tax cash received from dispositions
in the quarter amounted to $7,602.
Year-to-date the Company has recorded $20,590 of pre-tax net gains due primarily
to the sale of Super Systems Japan kk ("SSJ") and Enterprises investments in
edata resources Inc., Oacis Healthcare Inc., Pegasus Systems Inc. and TSI
International Software Ltd. Pre-tax cash received year-to-date as a result of
dispositions was $46,759.
Note 5. 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.
12
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 5. Acquisitions (continued)
Walsh Acquisition
On June 24, 1998, Cognizant acquired Walsh International, Inc. ("Walsh"). The
final purchase price was $193,748, including $167,148 of Cognizant common stock,
$9,521 for Cognizant 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 original estimate of
direct acquisition and integration costs consisted 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. The Company incurred higher-than
anticipated severance costs and restructured acquired Walsh leases at a cost
lower than originally anticipated and, as a result, reduced the remaining
liability for acquisition and integration costs and goodwill by $890.
Approximately $155,667 (originally $156,557) 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.
PMSI Acquisition
On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical
Marketing Services Inc. ("PMSI"). The final purchase price was $103,291,
consisting of IMS Health common stock ($75,292), IMS Health 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 original estimate of direct
acquisition and integration costs consisted of severance ($3,794), lease
terminations ($1,623), contract cancellation ($10,935), and other direct
acquisition and integration costs ($6,232). The acquisition 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.
13
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 5. Acquisitions (continued)
In accordance with Securities and Exchange Commission guidance, the amount
allocated to IPR&D reflects the relative value and contribution of the acquired
IPR&D. Consideration was given to the projects' stage of completion, the
complexity of the work completed to date, the difficulty of completing the
remaining development, the costs already incurred and the projected cost to
complete the projects.
In addition, the Company allocated $29,000 in the Walsh businesses and $7,700 in
the PMSI businesses 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 initial allocations, prior to the $890
adjustment to Walsh goodwill referred to above, were:
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 then-existing IMS
Health product offerings. Based on this strategic assessment, the Company
abandoned certain then- existing IMS Health software products. Accordingly, the
Company recognized 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.
Note 6. Minority Interests
The Company consolidates the assets, liabilities, results of operations and cash
flows of businesses in which it maintains a controlling interest. Third parties'
ownership interests are reflected as a minority interest on the Company's
financial statements. 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 minority ownership interests. The Company and its subsidiaries maintain a
controlling (85%) interest in the partnership. The Company also has a
controlling interest in CTS (approximately 61% of the outstanding shares
representing approximately 94.1 % of the voting power) and the related minority
interest at September 30, 1999 was $15,900.
14
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 7. Contingencies
The Company and its subsidiaries are involved in legal proceedings and claims
litigation arising in the ordinary course of business. In addition, the Company
enters into global tax planning and financing strategies and initiatives in the
normal course of business which are subject to review by the tax authorities. In
the opinion of management, the outcome of such current legal proceedings and
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 proceedings,
litigations and tax matters to the extent the Company currently deems them to be
probable and estimatable. Management does not expect the ultimate resolution of
the foregoing 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 as 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.
In 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 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 1996 distribution by The Dun &
Bradstreet Corporation ("D&B") of shares
15
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 7. Contingencies (continued)
of Cognizant and ACNielsen Corporation ("ACNielsen"; the parent company of A.C.
Nielsen Company), 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.
IMS Health and Nielsen Media Research are jointly and severally liable to D&B
and ACNielsen for Cognizant's obligations under the terms of the Distribution
Agreement dated October 28, 1996 among D&B, Cognizant and ACNielsen (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 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
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 herein, to be shared if
certain amounts are exceeded, including certain liabilities to D&B that may
arise in connection with the 1996 Distribution Agreement.
16
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 7. Contingencies (continued)
Cognizant and D&B entered into global tax planning initiatives in the normal
course of their 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 Cognizant or
D&B.
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 $444,000 for taxes and accrued interest, net of
tax benefit, as of September 30, 1999. Under the terms of the 1996 Distribution
Agreement, the Company is liable to pay half of such taxes and interest, net of
tax benefit, 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
$142,000. 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 period in which it is 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. At September 30, 1999, the Company has
committed short-term borrowing arrangements with several banks to provide up to
$350,000 of borrowings.
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
has agreed to indemnify the Company and its stockholders for additional taxes
which may become payable as a result of certain actions that may be taken by
Gartner that adversely affect the tax-free treatment of the Gartner Spin-Off.
However, the Company may become obligated for certain tax liabilities in the
event the Gartner Spin-Off is deemed to be a taxable transaction as a result of
certain Gartner share transactions that may be undertaken following the Gartner
Spin-Off. In the opinion of management, it is highly unlikely that any such
liabilities will be incurred by the Company.
Note 8. 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, to protect the value of a portion of foreign currency
revenues and non-functional currency assets and liabilities, the Company enters
into hedge
17
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 8. Financial Instruments with Off-Balance-Sheet Risk (continued)
agreements which change in value as foreign exchange rates change. By policy,
the Company maintains hedge coverage between minimum and maximum percentages of
its anticipated foreign exchange exposures over the next twelve months, in
amounts intended to protect operating income from the effect on revenues of
fluctuations in currency exchange rates.
It is the Company's policy to enter into foreign currency hedging 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 Company also uses forward contracts to hedge
non-functional currency assets and liabilities. The currencies hedged are
primarily the Euro, the Japanese yen and the Swiss franc. 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 expense--net. At September 30, 1999,
the notional amounts of committed foreign currency revenues and non-functional
currency assets and liabilities hedged were $64,266 and $56,226 respectively.
Note 9. 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 internal use software projects that are in progress at the
time of the adoption. The implementation of SOP 98-1, as of 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, as of January
1, 1999, did not have a material effect on the Company's financial statements.
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. 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). Management continues to evaluate the effects
of SFAS No.133 on the Company's financial statements.
18
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 10. 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, a leading provider of automated sales
support technologies to the pharmaceutical industry. The Walsh and PMSI
businesses acquired in 1998 have been integrated into the IMS segment
operations. Effective in the first quarter of 1999, the IMS segment's operating
units revised their reporting period to conform to the Company's fiscal year
ended December 31 (the "Calendarization"). (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 and maintenance technology
consulting services through the use of a seamless on-site and offshore project
teams. 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.
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.
19
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 10. Operations by Business Segment (continued)
Periods Ended September 30, 1999
- - -------------------------------------------------------------------------------------------------------------------
Emerging
Three Months: IMS Markets CTS Total
--------------------------------------------
Operating Revenue (1) $317,086 $ 12,246 $ 19,077 $348,409
Segment Operating Income 99,418 2,465 4,169 106,052
General Corporate Expenses (2) (10,094)
Interest Income (3) 2,264 327 2,591
Interest Expense (4)
Non-Operating Income/(Expense):
Gains from Dispositions 4,313 4,313
Other Expense - Net (5,359)
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 97,503
Provision for Income Taxes (27,263)
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 70,240
Income from Discontinued Operations, Net of Income Taxes (5) 1,384
- - -------------------------------------------------------------------------------------------------------------------
Net Income $71,624
- - -------------------------------------------------------------------------------------------------------------------
Nine Months:
Operating Revenue (1) $905,719 $ 34,472 $ 54,112 $994,303
Segment Operating Income 230,139 4,685 12,109 246,933
General Corporate Expenses (2) (33,510)
Interest Income (3) 5,249 853 6,102
Interest Expense (4) (753) (753)
Non-Operating Income/(Expense):
Gains from Dispositions 20,590 20,590
Other Expense - Net (15,107)
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 224,255
Provision for Income Taxes (64,048)
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 160,207
Income from Discontinued Operations, Net of Income Taxes (5) 25,695
- - -------------------------------------------------------------------------------------------------------------------
Net Income $185,902
- - -------------------------------------------------------------------------------------------------------------------
(See Notes to Operations by Business Segments on next page)
20
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
(Dollar amounts in thousands, except per share data)
Note 10. Operations by Business Segment (continued)
Periods Ended September 30, 1998
- - -------------------------------------------------------------------------------------------------------------------
Emerging
Three Months: IMS Markets CTS Total
--------------------------------------------
Operating Revenue (1) $257,411 $ 12,463 $ 13,732 $283,606
Segment Operating Income 8,922 1,149 2,453 12,524
General Corporate Expenses (2) (7,771)
Interest Income (3) 2,806 257 3,063
Interest Expense (4) (178) (178)
Non-Operating Income/(Expense):
Gains from Dispositions - Net 10,248 10,248
Other Expense - Net 2,379
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 20,265
Provision for Income Taxes (5,479)
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 14,786
Income from Discontinued Operations, Net of Income Taxes (5) 10,169
- - -------------------------------------------------------------------------------------------------------------------
Net Income $ 24,955
- - -------------------------------------------------------------------------------------------------------------------
Nine Months:
Operating Revenue (1) $730,234 $ 36,306 $ 28,530 $795,070
Segment Operating Income 63,034 1,048 5,141 69,223
General Corporate Expenses (2) (59,654)
Interest Income (3) 6,956 337 7,293
Interest Expense (4) (558) (558)
Non-Operating Income/(Expense):
Gains from Sale of Subsidiary Stock 12,777
Gains from Dispositions - Net 20,663
Other Expense - Net 1,739
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 51,483
Provision for Income Taxes (26,703)
- - -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 24,780
Income from Discontinued Operations, Net of Income Taxes (5) 82,902
- - -------------------------------------------------------------------------------------------------------------------
Net Income $107,682
- - -------------------------------------------------------------------------------------------------------------------
Notes to Operations by Business Segments:
(1) Excludes intersegment sales in 1999 of $3,799 and $10,688 for the three and
nine month periods presented, respectively. Excludes intersegment sales in
1998 of $2,669 and $10,576 for the three and nine month periods presented,
respectively. These sales, primarily from CTS to IMS, are accounted for on
a time and materials basis and recognized as the service is performed.
(2) General Corporate Expenses in 1999 include $2,000 and $9,500 related to the
Gartner Spin-Off for the three and nine month periods presented,
respectively. General Corporate Expenses in 1998 include one-time charges
of $35,025 related to the Distribution for the nine month period presented.
(3) Interest Income in 1999 excludes amounts recorded at Corporate of $269 for
the nine month period presented. Interest Income in 1998 excludes amounts
recorded at Corporate of $4,178 and $8,817 for the three and nine month
periods presented, respectively.
(4) Interest expense in 1999 excludes amounts recorded at Corporate of $2,138
and $3,919 for the three and nine month periods presented, respectively.
Interest expense in 1998 excludes amounts recorded at Corporate of $157 and
$189 for the three and nine month periods presented, respectively.
(5) Income from Discontinued Operations, Net of Income Taxes in 1999 includes
$1,384 and $25,695 related to Gartner for the three and nine month periods
presented, respectively. Income from Discontinued Operations, Net of Income
Taxes in 1998 includes $10,169 and $40,809 related to Gartner for the three
and nine month periods presented, respectively and $42,093 related to NMR
for the nine month period presented.
21
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 unaudited 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 controlling interest (approximately 61% of shares
outstanding) in Cognizant Technology Solutions Corporation ("CTS").
Forward-Looking Statements
This Quarterly Report on Form 10-Q as well as information included in oral
statements or other written statements made or to be made by IMS Health, contain
statements which, in the opinion of IMS Health, may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Litigation Reform Act"). These statements appear in a number of
places in this quarterly report and include, but are not limited to, all
statements relating to plans for future growth and other business development
activities as well as capital expenditures, financing sources, dividends and the
effects of regulation and competition, Y2K readiness and all other statements
regarding the intent, plans, beliefs or expectations of IMS Health or its
directors or officers. Stockholders are cautioned that such forward-looking
statements are not assurances for future performance or events and involve risks
and uncertainties that could cause actual results and developments to differ
materially from those covered in such forward-looking statements. These risks
and uncertainties include, but are not limited to, risks associated with
operating on a global basis, including fluctuations in the value of foreign
currencies relative to the U.S. dollar, and the ability to successfully hedge
such risks; to the extent IMS Health seeks growth through acquisition, the
ability to identify, consummate and integrate acquisitions on satisfactory
terms; the ability to develop new or advanced technologies and systems for their
businesses on schedule and on a cost-effective basis; the ability to
successfully achieve estimated effective tax rates and corporate overhead
levels; competition, particularly in the markets for pharmaceutical information;
regulatory and legislative initiatives, particularly in the area of medical
privacy; the ability to timely and cost-effectively resolve any problems
associated with the Y2K issue; the ability to obtain future financing on
satisfactory terms; deterioration in economic conditions, particularly in the
pharmaceutical, healthcare, or other industries in which customers may operate;
conditions in the securities markets which may effect the value or liquidity of
portfolio investments and management's estimates of lives of assets,
recoverability of assets, fair market value, estimates and liabilities and
accrued income tax benefits and liabilities. Consequently, all the
forward-looking statements contained in this Quarterly Report on Form 10-Q are
qualified by the information contained herein, including, but not limited to,
the information contained under this heading and the condensed consolidated
financial statements and notes thereto for the three and nine month periods
ended September 30, 1999. IMS Health is under no obligation to publicly release
any revision to any forward-looking statement contained or incorporated herein
to reflect any future events or occurrences.
22
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)
Spin-Off of Equity Investment in Gartner
On November 11, 1998 the Company announced that its Board of Directors had
approved a plan, subject to numerous conditions, to spin-off substantially all
of its equity ownership of Gartner. The transaction was structured as a tax-free
distribution of Gartner stock to IMS Health shareholders and the Company
received a favorable ruling from the Internal Revenue Service ("IRS") regarding
the tax-free nature of the proposed transaction.
On July 16, IMS Health and Gartner Board of Directors approved the final plan,
terms and conditions governing the spin-off of the Company's investment in
Gartner Group. Accordingly, pursuant to Accounting Principles Board No. 30,
"Reporting the results of Operations - Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occuring Events and
Transactions", the condensed consolidated financial statements of the Company
have been reclassified to reflect Gartner equity investment as a discontinued
operation for all periods presented. The Gartner spin transaction is discussed
in more detail in Note 3. Investment in Gartner Group Stock.
23
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)
Walsh Acquisition
On June 24, 1998, Cognizant acquired Walsh International, Inc. ("Walsh"). (See
Note 5. Acquisitions). The severance costs included in the final purchase price
are related to approximately 80 terminated Walsh employees. The outstanding
employee separation costs are due to be paid in the fourth quarter of 1999 and
the first quarter of 2000. The Company incurred higher than anticipated
severance costs and restructured acquired Walsh leases at a cost lower than
originally anticipated. To reflect the net reduction in costs, the original
liability estimate, and goodwill, have been reduced by $890. The following table
displays the status of such activities:
Original Liability Expenditures to September 30, 1999
Estimate Date Reclassifications Balance
- - ---------------------------------------------------------------------------------------------------------
Employee Separation $ 4,876 $ (4,602) $ 1,278 $ 1,552
Lease Terminations 2,569 (256) (2,168) 145
Other Direct Costs 9,634 (9,634) 0 0
- - ---------------------------------------------------------------------------------------------------------
Total $ 17,079 $ (14,492) $ (890) $ 1,697
- - ---------------------------------------------------------------------------------------------------------
PMSI Acquisition
On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical
Marketing Services Inc. ("PMSI"). (See Note 5. Acquisitions). The severance
costs included in the final purchase price are related to 63 terminated PMSI
employees. As of September 30, 1999, the severance costs and the costs of
terminating various leaseholdings were lower than originally anticipated.
However, the Company has incurred higher costs related to contract cancellations
and other costs such as legal fees. The following table displays the status of
such activities:
24
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)
Original Liability Expenditures to September 30, 1999
Estimate Date Reclassifications Balance
- - ---------------------------------------------------------------------------------------------------------
Employee Separation $ 3,794 $ (3,342) $ (11) $ 441
Lease Terminations 1,623 (774) (849) 0
Contract Cancellations 10,935 (5,345) 835 6,425
Other Direct Costs 6,232 (6,232) $ 25 25
- - ---------------------------------------------------------------------------------------------------------
Total $ 22,584 $ (15,693) $ 0 $ 6,891
- - ---------------------------------------------------------------------------------------------------------
Purchase Price Allocation
In connection with the Walsh and the PMSI acquisition, the Company made
allocations of the purchase price to acquired in-process research and
development ("IPR&D"). (See Note 5. Acquisitions). Management continues to
support the IPR&D efforts that were underway at the time of the Walsh and PMSI
acquisitions. IMS Health is currently on target to begin realizing the estimated
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.
Operations
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 "Calendarization").
(See Note 2. Basis of Presentation)
Revenue for the third quarter of 1999 increased by 22.8% to $348,409 from
$283,606 for the third quarter of the prior year. Year-to-date revenue increased
25.1% to $994,303 from $795,070 for the comparable period a year ago. Adjusting
the quarter and year-to-date 1998 for the Calendarization and the sale of Super
Systems Japan kk ("SSJ"), revenue increased by 15.8% and 21.7%, respectively.
This increase reflected double-digit constant dollar revenue growth at IMS,
Erisco and CTS and is further described in the Results by Business Segment
discussion (below). The impact of a stronger U.S. dollar decreased reported
revenue by less than 0.5% for the quarter and year-to-date, including the impact
of the Company's hedging program.
Operating income for the third quarter of 1999 was $95,958, compared to $4,753
for the third quarter of the prior year. Operating results in the third quarter
of 1999 and 1998 include Year 2000 costs ("Y2K Costs") of $4,189 and $11,780,
respectively. Adjusting for Y2K Costs, 1999 charges related to the Gartner
Spin-Off ($2,000), the Calendarization ($11,724), the 1998 in-process research
and development write-off ($10,900) and the 1998 direct acquisition and
integration costs related to the PMSI acquisition ($43,019), operating income
for the third quarter of 1999 increased by 24.3%.
Year-to-date operating income was $213,423 compared with $9,569 for the
comparable period a year ago. Year-to-date operating results in 1999 and 1998
include Y2K Costs of $19,989 and $34,081, respectively. Adjusting for Y2K Costs,
1999 charges related to the Gartner Spin-Off ($9,500), the Calendarization
($26,631), 1998 charges related to the Distribution ($35,025), the 1998 research
and development write-off ($32,800) and 1998 direct acquisition and integration
costs ($48,019) related to the Walsh and PMSI acquisitions, year-to-date
operating income for 1999 increased by 30.5%.
25
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)
Operations (continued)
Adjusted operating income growth in the 1999 third quarter and year-to-date
outpaced revenue growth due primarily to the Company's ability to leverage its
worldwide resources. The impact of a stronger U.S. dollar affected operating
income growth by less than 2% in the third quarter and less than 0.5%
year-to-date, including the impact of the Company's hedging program.
Non-operating income-net for the third quarter of 1999 was $1,545 compared with
$15,512 for the third quarter of the prior year. The decrease is due primarily
to reduced gains related to the sale of Enterprise investments ($4,823), reduced
interest income from lower cash balances ($4,650) and increased expense on short
term borrowings ($1,803).
Year-to-date non-operating income-net was $10,832 compared with $41,914 for the
comparable period a year ago. The decrease is due primarily to 1998 gains
related to the CTS IPO ($12,777), reduced gains related to the sale of
Enterprise investments ($1,872), reduced interest income on lower cash balances
($9,739) and increased interest expense on short term borrowings ($3,925).
The third quarter 1999 effective tax rate of 28.0% reflected a non-deductible
one-time charge of $2,000 related to the Gartner Spin-Off. The third quarter
1998 effective tax rate of 27.0% reflected the research and development
write-off related to the PMSI acquisition ($10,900), which did not give rise to
a tax benefit. The Company's effective tax rate is attributable to numerous 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 deductable non-U.S. intangible assets.
The Company's year-to-date effective tax rate of 28.6% reflected a
non-deductible one-time Gartner spin-related charge ($9,500). The 1998
year-to-date effective tax rate of 51.9% reflected non-deductible charges
related to the Distribution ($30,125), the research and development write-off
related to the Walsh and PMSI acquisitions ($32,800) and certain direct
acquisition and integration costs related to both acquisitions, which did not
give rise to a tax benefit.
Income from continuing operations in the third quarter of 1999 was $70,240,
compared with $14,786 in the third quarter of the prior year. Excluding the
after-tax impact of Y2K costs and net gains associated with investments from
both years, charges related to the 1999 Gartner Distribution, the 1998 CTS IPO
gain, 1998 direct acquisition and integration costs related to the PMSI
acquisition and the 1998 in-process research and development write-off, income
from continuing operations in the third quarter of 1999 increased 11.2%.
Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner
Spin-Off on the Company's recurring tax rate of $27.4%, income from continuing
operations for the quarter increased to 16.3%.
Year-to-date income from continuing operations was $160,207 compared with
$24,780 for the comparable period ago. Excluding the after-tax impact of Y2K
costs and net gains associated with investments in both years, 1999 charges
related to the Gartner Spin-Off, the 1998 CTS IPO gain, 1998 charges related to
the Distribution, the 1998 in-process research and development write-off and
1998 direct acquisition and integration costs related to the Walsh and PMSI
acquisitions, year-to-date income from continuing operations increased 15.6%.
Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner
Spin-Off on the Company's recurring tax rate of 27.4%, year-to-date income from
continuing operations increased 21.0%.
Income from discontinued operations, net of income taxes, in the third quarter
of 1999 was $1,384, compared with $10,169 in the third quarter of the prior
year. Income from discontinued operations net of income taxes represents Gartner
equity income through July 1999 and SAB 51 gains from Gartner in 1998.
26
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)
Operations (continued)
Year-to-date income from discontinued operations, net of income taxes, was
$25,695, compared with $82,902 for the comparable period a year ago. Income from
discontinued operations net of income taxes represents Gartner equity income in
both years and SAB 51 gains from Gartner and six months of the results of
Nielsen Media Research in 1998.
Net income for the third quarter of 1999 was $71,624, an increase of 187.0% from
net income of $24,955 in the third quarter of the prior year. Year-to-date net
income increased 72.6% to $185,902 from $107,682 for the comparable period a
year ago.
Basic earnings per share in the third quarter of 1999 were $0.23 compared with
$.05 in the third quarter of the prior year. Excluding the impact of the
previously identified one-time items, at a continuing operations tax rate of
27.4% and 24.1% in 1999 and 1998, respectively, basic earnings per share from
continuing operations for the quarter increased 9.5%. Further, adjusting the
1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's
recurring tax rate of 27.4% basic earnings per share for the quarter increased
21.1%.
Year-to-date basic earnings per share in 1999 were $0.51 compared with $.08 for
the comparable period a year ago. Excluding the impact of the previously
identified one-time items, at a continuing operations tax rate of 27.4% and
24.1% in 1999 and 1998, respectively, year-to-date basic earnings per share from
continuing operations increased 20.0%. Further, adjusting the 1998 tax rate to
mitigate the impact of the Gartner Spin-Off on the Company's recurring tax rate
of 27.4%, year-to-date basic earnings per share increased 25.6%.
Diluted earnings per share in the third quarter of 1999 were $0.22 compared with
$0.04 in the third quarter of the prior year. Excluding the impact of the
previously identified one-time items, at a continuing operations tax rate of
27.4% and 24.1% in 1999 and 1998, respectively, diluted earnings per share from
continuing operations for the quarter increased 15.0%. Further, adjusting the
1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's
recurring tax rate of 27.4%, diluted earnings per share for the quarter
increased 21.1%.
Year-to-date diluted earnings per share in 1999 were $0.50 compared with diluted
earnings per share of $.07 for the comparable period a year ago. Excluding the
impact of the previously identified one-time items, at a continuing operations
tax rate of 27.4% and 24.1% in 1999 and 1998, respectively, year-to-date diluted
earnings per share from continuing operations increased 23.3%. Further,
adjusting the 1998 tax rate to mitigate the impact of the Gartner Spin-Off on
the Company's recurring tax rate of 27.4%, year-to-date diluted earnings per
share increased 26.2%
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, a leading provider of automated sales
support technologies to the pharmaceutical industries.
IMS Segment revenue for the third quarter of 1999 increased 23.2% to $317,086
from $257,411 in the third quarter of the prior year. Adjusting 1998 revenue for
the Calendarization
27
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)
IMS Segment (continued)
revenue for the third quarter 1999 increased by 14%. Market Research Products
increased 10.6% to $108,737, Sales Management Products increased 17.8% to
$170,526 and Other Services increased 11.3% to $37,823. This growth was due
primarily to the strong performance of Sales Management Products and Services,
introduction of new products and expansion in existing markets.
Third quarter 1999 operating income increased to $99,418 from $8,922 in the
prior year. Excluding Y2K costs in both years, the Calendarization and the 1998
direct acquisition and integration costs related to the PMSI acquisition and the
1998 in-process research and development write-off, operating income for 1999
increased 20.3%. Adjusted operating income growth outpaced revenue growth due
primarily to the segment's ability to leverage its worldwide resources.
Year-to-date IMS Segment revenue increased 24.0% to $905,719 from $730,234 in
the prior year. Adjusting for the Calendarization revenue for the first nine
months of 1999 increased by 19%. Market Research Products increased 8.6% to
$301,874, Sales Management Products increased 25.6% to $496,091 and Other
Services increased 23.76% to $107,754. This growth was due primarily to the
strong performance of Sales Management Products and Services, introduction of
new products, expansion in existing markets and the impact of the Walsh and PMSI
acquisitions.
IMS Segment operating income for the first nine months of 1999 increased to
$230,139 from $63,034 in the first nine months of the prior year. Excluding Y2K
costs, the impact of the Calendarization, the 1998 direct acquisition and
integration costs related to the Walsh and PMSI acquisitions and the 1998
in-process research and development write-off, operating income for the first
nine months of 1999 increased 23.4%.
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 third quarter of 1999 decreased 1.7% to $12,246
from $12,463 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 third quarter of 1999 increased by 22.4%. Operating income increased to
$2,465 in the third quarter from $1,149 in the third quarter of the prior year.
Excluding SSJ, operating income for the third quarter of 1999 increased 77.1%.
Emerging Markets revenue for the first nine months of 1999 decreased 5.1% to
$34,472 from $36,306 in the prior year. This decrease was due primarily to the
absence of revenues from SSJ during 1999. Excluding SSJ, year-to-date Emerging
Markets revenue increased by 20.7%. Year-to-date
28
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)
Emerging Markets Segment (continued)
Emerging markets operating income increased to $4,685 from $1,048 for the
comparable period a year ago.
CTS Segment
CTS delivers life cycle software development 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.
CTS revenue, net of intersegment sales, increased to $19,077 in the third
quarter of 1999 from $13,732 in the prior year. The increase is due to
continuing strong demand for application development and maintenance, Euro
currency compliance services, the addition of new customers and further
penetration of its existing client base to generate new project work. Operating
income increased to $4,169 from $2,453 in the third quarter of the prior year.
Year-to-date CTS revenue net of intersegment sales, increased 89.7% to $54,112
from $28,530 in the prior year. Year-to-date CTS operating income increased
135.5% to $12,109 from $5,141 for the comparable period a year ago.
Condensed Consolidated Statement of Cash Flows
Net cash provided by operating activities totaled $231,758 for the nine months
ended September 30, 1999 compared with $155,559 in 1998. The $76,199 increase
was due primarily to increased income from continuing operations ($135,427) and
higher income tax accruals ($42,007), which were partially offset by lower
deferred revenues ($30,744) and the absence of the 1998 IPR&D write-off
($32,800) and direct acquisition and integration costs ($48,019). As a
consequence of accounting for the Calendarization through retained earnings, the
December 1998 cash flows from IMS operating units are not included in the
Company's net cash provided by operating activities for the nine months ended
September 30, 1999. During the month of December 1998, IMS generated $30,664 of
cash, including a significant decrease in accounts receivable ($35,353).
Net cash used in investing activities totaled $60,473 for the first nine months
of 1999 compared with $30,750 used during the comparable period in 1998. The
$29,723 increase was due primarily to 1999 acquisition and integration payments
($28,248) and 1998 cash from companies acquired ($11,895), partially offset by
lower expenditure on other investments ($4,205) and higher proceeds from sale of
investments ($4,327).
Net cash used in financing activities totaled $222,675 for the nine months ended
September 30, 1999 compared with $100,215 used in 1998. The increase of $122,460
was due primarily to 1998 proceeds received from debt assumed by Nielsen Media
Research ($300,000) and the CTS IPO ($27,128) and lower 1999 proceeds from the
exercise of stock options ($38,969), partially offset by lower purchases of
treasury stock ($151,008) and increased proceeds from short-term
29
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)
Condensed Consolidated Statement of Cash Flows (continued)
debt ($94,972, net of repayments). Short-term borrowings have been used to
partially fund the Company's stock repurchase program.
Cash flow from discontinued operations was $52,877 for the first nine months of
1999 compared with an outflow of $17,173 in 1998. The Gartner dividend accounted
for all of the cash flow from discontinued operations in 1999 and Nielsen Media
Research discontinued operations accounted for all of the 1998 cash outflow from
discontinued operations.
The Company's cash, cash equivalents, marketable securities, cash generated from
operations and debt unutilized capacity are expected to be sufficient to meet
the Company's current long-term and short-term requirements including
operations, cash dividends, acquisitions, stock repurchase programs and other
contingencies.
Changes in Financial Position at September 30, 1999 Compared to December 31,
1998
Cash & Cash Equivalents increased to $230,714 at September 30, 1999 from
$206,390 at December, 1998 due primarily to cash generated from operating
activities ($231,758), the Gartner dividend ($52,877), proceeds from the
disposal of investments ($46,759) and cash provided by the IMS operating units
during December 1998 ($30,664), partially offset by payments for the purchase of
treasury stock ($359,859).
Accounts Receivable decreased to $246,991 at September 30, 1999, from $324,219
at December 31, 1998, due primarily to increased collections. Days sales
outstanding improved to 64 days at the end of the quarter compared to 100 days
as of December 31, 1998.
Net Assets of Discontinued Operations decreased to $100,356 at September 30,
1999, from $240,708 at December 31, 1998 reflecting primarily the Gartner
Spin-Off ($132,104) and special cash dividend ($52,877, net of taxes ),
partially offset by the after-tax equity income from Gartner ($25,695) and
unrealized gain in the Gartner shares. (See Note 3. Investment in Gartner Group
Stock)
Securities and Other Investments decreased to $82,455 at September 30, 1999,
from $106,276 at December 31, 1998, due primarily to the net reductions in the
Enterprise portfolio of investments arising from additions, disposals and
marking investments to market value.
Short Term Debt increased to $168,834 at September 30, 1999, from $39,169 at
December 31, 1998, due primarily to increased borrowings to partially fund the
Company's stock re-purchase program. The July receipt of the Gartner dividend
($52,877) was used to pay down short-term borrowing.
30
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)
Changes in Financial Position at September 30, 1999 Compared to December 31,
1998 (continued)
During the third quarter, the Company purchased 5.1 million shares of
outstanding stock for a total cost of $137,208. The Company's third share
repurchase program was completed in October. On October 19, 1999, the Company's
Board of Directors authorized a fourth systematic stock repurchase program of up
to 16 million shares, which is underway.
As of November 12, 1999, the Company had U.S. short term debt of $226,700, an
increase since September 30, which reflects primarily the funding of the share
repurchases thus far in the fourth quarter.
Accrued Liabilities decreased to $222,353 at September 30, 1999, from $298,625
at December 31, 1998 due primarily to payments related to the PMSI and Walsh
accrued direct acquisition and integration costs and a lower level of accruals
for salaries, wages, bonuses and other compensation.
Accrued Taxes increased to $81,900 at September 30, 1999, from $32,537 at
December 31, 1998. The increase of $49,363 reflected a reduction of a tax
receivable included in accrued taxes relating to a tax refund from Germany
received during the quarter.
Deferred Revenue decreased to $102,349 at September 30, 1999, from $128,272 at
December 31, 1998 due primarily to the amortization of annual contracts billed
in advance at December 31, 1998 and the effect of the Calendarization.
Shareholders' Equity decreased to $516,491 at September 30, 1999, from $825,270
at December 31, 1998 due primarily to the purchase of treasury stock ($359,859),
the Gartner Spin-Off ($134,259), change in the cumulative translation adjustment
($21,133) and dividends paid ($18,923), partially offset by net income
($185,902), December equity changes ($4,449) and the change in unrealized gains
on investments ($5,893).
Year 2000
Many 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"). Assessments of the potential effects of the Year 2000 issue vary
markedly among different companies, governments, consultants and economists
which results in the inability to predict what the actual impact may be.
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 the entire Company. The Task Force, in consultation
with operating personnel, evaluated whether conversion or replacement and
enhancement (i.e. "reengineering") was necessary. CTS was engaged to do work on
a significant portion of conversion and reengineering projects to allow most
internal staff members to focus on the core business. The Company has also used
outside services to assist in conversions, reengineering and the assessment of
progress of its Year 2000 program.
31
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)
Year 2000 (continued)
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 substantial systems compliance by the
Year 2000. The reengineering projects followed the same procedures as are used
for new product development including customer requirements, development,
testing and rollout.
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 conversion 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 September 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. As an alternative to conversions and as a result of business
needs for individual products, the Company has decided to replace and enhance
certain non-compliant software. There are only two reengineered systems
remaining to be completed. Core development has been completed for these systems
and they are Y2K enabled. Only country-based customization for these products
remains, with implementation scheduled for the fourth quarter of 1999.
The data in these country-specific customization systems is offered as a
stand-alone product and also feed into other IMS products and services. In the
event there are delays in the rollout of any of these country-specific
reengineered systems, the Company believes the revenue impact will not be
material to the Company as a whole.
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 have been utilized to ensure Year 2000
compliance, including the replacement of localized systems with central systems
and the conversion of the local system. In some cases, specialized teams from
CTS were used to assist the local offices with all phases of their system
conversions and hardware compliance. At September 30, 1999, the Company has
completed 98% of Year 2000 conversions of local systems and personal computer
applications across the world.
32
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)
Year 2000 (continued)
The Company's Year 2000 project incorporates administrative operations systems
and software such as accounts receivable, accounts payable, general ledger and
payroll. These systems are 99% compliant.
The Year 2000 readiness of the Company's customers varies, and the Company is
actively encouraging its customers to prepare their own systems for the
millennium. The Company continues to emphasize the importance for customers of
installing Y2K compliant versions and we anticipate 99% in production by
December 31, 1999. As data and services are often transmitted electronically, to
the extent that there are disruptions in the customer or the Company's internal
operations, the customer may not be able to make normal use of the Company's
products or services. Additional risk includes disruptions in critical services
on which the Company relies such as electricity, telephone systems and banking
services.
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. The Company
continues to audit central systems and local country conversions with the
assistance of CTS and outside consultants. To date over 95% 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. Issues
identified as a result of these audits were initially responded to and necessary
actions as well as contingency planning will continue throughout the end of the
year.
The Company relies on tens of thousands of suppliers of electronic data in the
healthcare industry 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 to assess and
address risks associated with Year 2000 readiness by the Company's key data
suppliers.
The Company assesses risk regarding the readiness of its data suppliers through
the use of detailed questionnaires 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 have been 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 is 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. Some of the Company's data
suppliers could be disrupted due to Year
33
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)
Year 2000 (continued)
2000 problems with their internal systems or circumstances beyond their control,
such as power outages. As these instances are out of the Company's direct
control, the magnitude of the risk depends on the speed in which the Company and
the supplier can mitigate the problem. The Company's most recent assessment
indicates that the primary risk continues to be with hospital information in
certain countries, which the Company believes will not have a material impact on
the consolidated revenues of the Company.
As year end approaches, the Company will continue to focus its Year 2000 efforts
on (i) the implementation of reengineered products and services; (ii) the
continued assessment of supplier readiness to address the Year 2000 conversion;
and (iii) finalizing contingency plans to address unanticipated issues.
The Company is establishing an operational command center to coordinate the
rollover from 1999 into 2000. For each area of the business, specific
individuals are responsible for the development and execution of recovery plans,
if deemed necessary.
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 $76,000 to $80,000. Through September
30, 1999, the Company has incurred $74,730 of which $44,922 was incurred in
1998. The Company expects to incur between $2,000 and $5,000 during the
remainder of 1999. These estimates do not include the costs of software and
systems that are being replaced or enhanced 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. Specific factors that may cause such
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 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).
34
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)
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 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.
35
IMS HEALTH INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10 Material Contracts
.1 First Amendment to the IMS Health Incorporated Savings Plan,
dated as of July 19, 1999.
.2 First Amendment to the IMS Health Incorporated Retirement Plan,
dated as of July 19, 1999.
.3 Amended and Restated 1998 IMS Health Incorporated Employees'
Stock Incentive Plan dated July 20, 1999.
.4.1 IMS Health Incorporated Executive Deferred Compensation Plan,
dated July 20, 1999
.4.2 Selected portions of the Prospectus Supplement, dated September
27, 1999 setting forth certain terms and conditions of the
Executive Deferred Compensation Plan for U.S. employees.
.4.3 Selected portions of the Private Placement Memorandum, dated
September 27, 1999 setting forth certain terms and conditions of
the Executive Deferred Compensation Plan for U.S. employees.
.5 Second Amendment to the IMS Health Incorporated Savings Plan,
dated as of September 1, 1999.
.6 First Amendment to the IMS Health Incorporated Supplemental
Executive Retirement Plan, dated September 1, 1999.
.7 First Amendment to the IMS Health Incorporated Retirement Excess
Plan, dated September 1, 1999.
.8 First Amendment to the IMS Health Incorporated Savings
Equalization Plan, dated September 1, 1999.
27 Financial Data Schedules
(b) Reports on 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1999.
36
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: November 15, 1999
37