<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1998
REGISTRATION NO. 1-14049
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10/A-2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
EXCHANGE ACT OF 1934
IMS HEALTH INCORPORATED
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
DELAWARE 06-1506026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 NYALA FARMS
WESTPORT, CONNECTICUT 06880
(Address of principal executive offices) (Zip Code)
</TABLE>
------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(203) 222-4200
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
- - -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
ITEM 1. BUSINESS.
The information required by this item is contained under the sections "IMS
HEALTH Business", "IMS HEALTH (Accounting Successor to Cognizant) Management's
Discussion and Analysis of Financial Condition and Results of Operations", "Risk
Factors--Risks Relating to IMS HEALTH and Nielsen Media Research" and "--Risks
Relating to IMS HEALTH" and "Forward-Looking Statements" of, and in the
Cognizant Corporation Consolidated Financial Statements in, the Information
Statement dated June 17, 1998 included herewith as Exhibit 99.1 (the
"Information Statement") and such sections are incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION.
The information required by this item is contained under the sections "IMS
HEALTH (Accounting Successor to Cognizant) Selected Financial Data", "IMS HEALTH
(Accounting Successor to Cognizant) Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Risk Factors--Risks Relating to
IMS HEALTH and Nielsen Media Research" and "--Risks Relating to IMS HEALTH" and
"Forward-Looking Statements" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 3. PROPERTIES.
The information required by this item is contained under the section "IMS
HEALTH Business-- Properties" of the Information Statement and such section is
incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained under the section "IMS
HEALTH Security Ownership by Certain Beneficial Owners and Management" of the
Information Statement and such section is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item is contained under the sections "IMS
HEALTH Management and Executive Compensation--IMS HEALTH Board of Directors" and
"--IMS HEALTH Executive Officers" of the Information Statement and such sections
are incorporated herein by reference.
ITEM 6. EXECUTIVE COMPENSATION.
The information required by this item is contained under the section "IMS
HEALTH Management and Executive Compensation" of the Information Statement and
such section is incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained under the section
"Relationship Between IMS HEALTH and Nielsen Media Research After the
Distribution" of the Information Statement and such section is incorporated
herein by reference.
ITEM 8. LEGAL PROCEEDINGS.
The information required by this item is contained under the section "IMS
HEALTH Business-- Legal Proceedings", "Risk Factors--Risks Relating to IMS
HEALTH and Nielsen Media Research" and "--Risks Relating to IMS HEALTH" and
"Forward-Looking Statements" of the Information Statement and such section is
incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is contained under the sections "The
Distribution--Listing and Trading of IMS HEALTH Common Stock and Nielsen Media
Research Common Stock", "Relationship
2
<PAGE>
Between IMS HEALTH and Nielsen Media Research After the Distribution--Employee
Benefits Agreement", "Dividend Policies", "IMS HEALTH Management and Executive
Compensation" and "Description of IMS HEALTH Capital Stock" of the Information
Statement and such sections are incorporated herein by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On February 4, 1998, as part of its original incorporation, the Registrant
issued 100 shares of its common stock, for a total consideration of $10,000, to
Cognizant Corporation, which is and will be the Registrant's sole stockholder
until the Distribution Date as defined and described in the section "The
Distribution" of the Information Statement, and such section is incorporated
herein by reference. Subsequent to the Distribution, Cognizant Corporation
(which will change its name to Nielsen Media Research, Inc.) will hold no
capital stock of the Registrant.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The information required by this item is contained under the section
"Description of IMS HEALTH Capital Stock" of the Information Statement and such
section is incorporated herein by reference, except for the information under
the caption "IMS HEALTH Rights Plan", which is not incorporated by reference
herein as the IMS HEALTH preferred share purchase rights and shares of Series A
Junior Participating Preferred Stock described under such caption will be
registered separately on a Registration Statement on Form 8-A.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this item is contained under the section
"Description of IMS HEALTH Capital Stock-- Indemnification and Limitation of
Liability for Directors and Officers" of the Information Statement and such
section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is identified in the sections "Index
to Financial Statements-- Cognizant Corporation", "--IMS Health Incorporated"
and "--Gartner Group, Inc." and contained in the sections "Financial
Statements--Cognizant Corporation", "--IMS Health Incorporated" and "--Gartner
Group, Inc." of the Information Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
The information required by this item is contained in (i) the "Index to
Financial Statements" on page F-1 of the Information Statement and such
information is incorporated herein by reference, and (ii) Schedule II--
"Valuation and Qualifying Accounts" to this Registration Statement.
3
<PAGE>
(b) Exhibits
The following documents are filed as exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of IMS Health Incorporated*
3.2 Amended and Restated By-laws of IMS Health Incorporated*
4.1 Specimen Common Stock certificate*
10.1 Form of Distribution Agreement between Cognizant Corporation and IMS Health Incorporated*
10.2 Form of Tax Allocation Agreement between Cognizant Corporation and IMS Health Incorporated*
10.3 Form of Employee Benefits Agreement between Cognizant Corporation and IMS Health Incorporated*
10.4 Form of Amended and Restated Transition Services Agreement between The Dun & Bradstreet Corporation, The
New Dun & Bradstreet Corporation, Cognizant Corporation, IMS Health Incorporated, ACNielsen Corporation
and Gartner Group, Inc.*
10.5 Form of Undertaking of IMS Health Incorporated*
21 List of Subsidiaries of IMS Health Incorporated*
27 Financial Data Schedule of IMS Health Incorporated*
99.1 Information Statement dated June 17, 1998+
99.2 Chairman's Letter to Stockholders of Cognizant Corporation+
99.3 Form of Rights Agreement between IMS Health Incorporated and First Chicago Trust Company of New York, as
Rights Agent*
</TABLE>
- - ------------------------
* Previously filed
+ Filed herewith
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
IMS Health Incorporated
By: /s/ Kenneth S. Siegel
------------------------------------------
Name: Kenneth S. Siegel
Title: Senior Vice President,
General Counsel and Secretary
</TABLE>
Date: June 17, 1998
5
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM 10 RELATING TO CERTAIN OF THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS PRELIMINARY
INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES.
<PAGE>
EXHIBIT 99.1
SUBJECT TO COMPLETION OR AMENDMENT, DATED JUNE 17, 1998
INFORMATION STATEMENT
------------------
IMS HEALTH INCORPORATED
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
NIELSEN MEDIA RESEARCH, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to holders of common stock, par value $0.01
per share (the "Cognizant Common Stock"), of Cognizant Corporation ("Cognizant")
of all outstanding shares of common stock, par value $0.01 per share (the "IMS
HEALTH Common Stock"), of IMS Health Incorporated ("IMS HEALTH"). As of
, 1998, Cognizant will have contributed to IMS HEALTH all or
substantially all of those businesses comprising the IMS HEALTH Business (as
defined below), which accounted for approximately 75% of Cognizant's revenues
and 68% of its operating income in 1997. See "IMS HEALTH Business".
Shares of IMS HEALTH Common Stock will be distributed to holders of
Cognizant Common Stock of record as of the close of business on , 1998
(the "Record Date"). Each such holder will receive one share of IMS HEALTH
Common Stock for every share of Cognizant Common Stock held on the Record Date.
Share certificates representing shares of IMS HEALTH Common Stock will be mailed
on , 1998 or as promptly as practicable thereafter. No consideration
will be paid by Cognizant's stockholders for shares of IMS HEALTH Common Stock.
Prior to the date hereof, there has not been any established trading market for
the IMS HEALTH Common Stock, although a "when-issued" market is expected to
develop prior to the Distribution. Application will be made for listing the
shares of IMS HEALTH Common Stock on the New York Stock Exchange (the "NYSE")
under the symbol "RX". See "The Distribution--Listing and Trading of IMS HEALTH
Common Stock and Nielsen Media Research Common Stock".
After the Distribution, Cognizant's only remaining business will be the
Nielsen Media Research Business (as defined below), and, therefore, in
connection with the Distribution, Cognizant will change its name to Nielsen
Media Research, Inc. See "Nielsen Media Research Business". The symbol under
which shares of Cognizant Common Stock (which on and after the Distribution Date
will be known as "Nielsen Media Research Common Stock") will trade on the NYSE
will become "NMR". See "The Distribution--Listing and Trading of IMS HEALTH
Common Stock and Nielsen Media Research Common Stock".
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY RECIPIENTS OF IMS HEALTH COMMON STOCK AND CONTINUING
HOLDERS OF NIELSEN MEDIA RESEARCH COMMON STOCK.
------------------------
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE NOT
ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
Stockholders of Cognizant with inquiries related to the Distribution should
contact First Chicago Trust Company of New York, the Distribution Agent for the
Distribution, at 1-800-519-3111 or the Vice President-- Investor Relations of
Cognizant at (203) 222-4238.
The date of this Information Statement is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION AND RELATED MATTERS........................................... 1
INFORMATION STATEMENT SUMMARY.............................................................................. 3
FORWARD-LOOKING STATEMENTS................................................................................. 13
RISK FACTORS............................................................................................... 14
THE DISTRIBUTION........................................................................................... 20
RELATIONSHIP BETWEEN IMS HEALTH AND NIELSEN MEDIA RESEARCH AFTER THE DISTRIBUTION.......................... 25
DIVIDEND POLICIES.......................................................................................... 30
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) CAPITALIZATION.............................................. 31
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) SELECTED FINANCIAL DATA..................................... 32
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS....... 33
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF
FINANCIAL POSITION....................................................................................... 39
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................................ 41
IMS HEALTH BUSINESS........................................................................................ 52
IMS HEALTH MANAGEMENT AND EXECUTIVE COMPENSATION........................................................... 61
IMS HEALTH SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 70
DESCRIPTION OF IMS HEALTH CAPITAL STOCK.................................................................... 72
NIELSEN MEDIA RESEARCH CAPITALIZATION...................................................................... 80
NIELSEN MEDIA RESEARCH SELECTED FINANCIAL DATA............................................................. 81
NIELSEN MEDIA RESEARCH UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS............................... 82
NIELSEN MEDIA RESEARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................................... 85
NIELSEN MEDIA RESEARCH BUSINESS............................................................................ 90
NIELSEN MEDIA RESEARCH MANAGEMENT AND EXECUTIVE COMPENSATION............................................... 98
NIELSEN MEDIA RESEARCH SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................... 104
DESCRIPTION OF NIELSEN MEDIA RESEARCH CAPITAL STOCK........................................................ 105
AVAILABLE INFORMATION...................................................................................... 114
REPORTS OF IMS HEALTH...................................................................................... 114
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE DISTRIBUTION AND RELATED MATTERS
Q1: WHAT IS THE DISTRIBUTION?
A: The Distribution is the method by which Cognizant Corporation will be
separated into two publicly traded companies: (i) IMS HEALTH, the leading
global provider of information solutions to the pharmaceutical and
healthcare industries and (ii) Nielsen Media Research, the leader in
television audience measurement services in North America. Pursuant to the
Distribution, Cognizant will distribute to its stockholders in a tax-free
dividend one share of IMS HEALTH Common Stock for each share of Cognizant
Common Stock held. Immediately after the Distribution, Cognizant's
stockholders will still own all of Cognizant's current businesses, but they
will own them as two separate investments rather than as a single
investment.
Q2: WHAT IS IMS HEALTH?
A: IMS HEALTH is a new company the businesses of which will include: IMS, the
leading global supplier of information and decision-support services to the
pharmaceutical and healthcare industries; Erisco, a leading supplier of
software-based administrative and analytical solutions to the managed care
industry; Enterprises, a venture capital unit principally focused on
investments in emerging healthcare businesses; Cognizant Technology
Solutions, a provider of software application development and maintenance
services and Year 2000 and Eurocurrency compliance services; and an equity
investment in Gartner Group, the leading supplier of research and analysis
to the information technology industry.
Q3: WHAT IS NIELSEN MEDIA RESEARCH?
A: Nielsen Media Research is the leading source of television audience
measurement services in North America, providing audience estimates for
national and local television programming sources, including broadcast
networks, cable networks, syndicators and local television stations. Since
after the Distribution Cognizant's only business will be the Nielsen Media
Research business, at the time of the Distribution Cognizant will change its
name to Nielsen Media Research, Inc.
Q4: WHY IS COGNIZANT SEPARATING ITS BUSINESSES?
A: Cognizant believes that separating its businesses in the Distribution will
allow IMS HEALTH and Nielsen Media Research to pursue opportunities that
will improve their competitive position, enhance their valuation and create
wealth for stockholders. Cognizant believes the separation will enhance
management focus on the businesses, allowing corporate policies and
strategies to be tailored to particular needs. Cognizant also believes the
separation will facilitate IMS HEALTH's ability to pursue acquisition and
growth opportunities and will lead to better investor understanding of the
different businesses.
Q5: HAS COGNIZANT DONE THIS BEFORE?
A: Cognizant is experienced in effecting spin-off transactions, as Cognizant
itself is the product of a spin-off from The Dun & Bradstreet Corporation in
November 1996. Since that spin-off, Cognizant has made significant progress
in pursuing its strategic goals and objectives, and the proposed spin-off
will allow it to continue that progress.
Q6: WHAT IS THE TAX EFFECT OF THE DISTRIBUTION?
A: The Distribution is the most tax-efficient means of separating Cognizant's
businesses. Cognizant has received a ruling from the Internal Revenue
Service that for Federal income tax purposes the Distribution of the shares
of IMS HEALTH Common Stock to Cognizant stockholders will be tax-free to
Cognizant and its stockholders.
1
<PAGE>
Q7: WHAT WILL COGNIZANT STOCKHOLDERS RECEIVE IN THE DISTRIBUTION?
A: In the Distribution, Cognizant stockholders will receive one share of IMS
HEALTH Common Stock, and an associated Right under IMS HEALTH's Shareholder
Rights Plan, for each share of Cognizant Common Stock they own. Immediately
after the Distribution, Cognizant's stockholders will still own their shares
of Cognizant Common Stock and the same stockholders will still own all of
Cognizant's businesses, but they will own them as two separate investments
rather than as a single investment. After the Distribution, certificates
representing the "old" Cognizant Common Stock will represent such
stockholders' interests in the Nielsen Media Research business and
certificates representing IMS HEALTH Common Stock stockholders receive in
the Distribution will represent their interests in the IMS HEALTH
businesses.
Q8: WHAT HAPPENS TO COGNIZANT SHARES AFTER THE DISTRIBUTION?
A: Shares of Cognizant Common Stock will represent ownership of the Nielsen
Media Research business after the Distribution. Cognizant stock certificates
will still be valid after Cognizant changes its name to Nielsen Media
Research, Inc.
Q9: WHAT DOES A COGNIZANT STOCKHOLDER NEED TO DO NOW?
A: Cognizant stockholders do not need to take any action. The approval of the
Cognizant stockholders is not required to effect the Distribution and
Cognizant is not seeking a proxy from any stockholders. COGNIZANT
STOCKHOLDERS SHOULD NOT SEND IN THEIR COGNIZANT SHARE CERTIFICATES.
Cognizant stockholders will automatically receive their shares of IMS HEALTH
Common Stock when the Distribution is effected.
Q10:WHERE CAN COGNIZANT STOCKHOLDERS GET MORE INFORMATION?
A: Cognizant stockholders with additional questions related to the Distribution
should contact First Chicago Trust Company of New York, the Distribution
Agent for the Distribution, at Mail Suite 4694, P.O. Box 2536, Jersey City,
NJ 06303-2536, 1-800-519-3111. Questions may also be directed to the Vice
President--Investor Relations of Cognizant at 200 Nyala Farms, Westport,
Connecticut 06880, (203) 222-4238.
2
<PAGE>
INFORMATION STATEMENT SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
INFORMATION STATEMENT. THIS SUMMARY IS INCLUDED FOR CONVENIENCE ONLY AND SHOULD
NOT BE CONSIDERED COMPLETE. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
INFORMATION STATEMENT. IN THIS INFORMATION STATEMENT, UNLESS THE CONTEXT
OTHERWISE REQUIRES, "COGNIZANT" REFERS TO COGNIZANT CORPORATION PRIOR TO THE
DISTRIBUTION DATE AND "NIELSEN MEDIA RESEARCH" REFERS TO COGNIZANT'S SUBSIDIARY
WITH THAT NAME PRIOR TO THE DISTRIBUTION AND TO THE RENAMED COGNIZANT ON AND
AFTER THE DISTRIBUTION DATE. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE
DEFINED ELSEWHERE IN THIS INFORMATION STATEMENT.
BUSINESSES OF COGNIZANT, IMS HEALTH AND NIELSEN MEDIA RESEARCH
<TABLE>
<S> <C>
Cognizant.................... Cognizant is a Delaware corporation that began operating as
an independent public company on November 1, 1996 as a
result of its spin-off from The Dun & Bradstreet Corporation
("D&B"). Prior to that spin-off, Cognizant was owned by D&B.
Cognizant primarily is engaged in the integration of
information and technology to create business insight. In
the Distribution, Cognizant will be separated into two
publicly traded companies, IMS HEALTH and Nielsen Media
Research.
IMS HEALTH................... IMS HEALTH is a newly created Delaware corporation, the
businesses of which will focus on information solutions to
the pharmaceutical and healthcare industries. Covering over
90 countries with over 7,200 employees worldwide, IMS
HEALTH's businesses will include those of I.M.S.
International, Inc. ("IMS"), the leading global supplier of
market information and decision-support services to the
pharmaceutical and healthcare industries; Erisco, Inc.
("Erisco"), a leading supplier of software-based
administrative and analytical solutions to the managed care
industry; Cognizant Enterprises, Inc. ("Enterprises"), a
venture capital unit focused on investments in emerging
healthcare businesses; Cognizant Technology Solutions
Corporation ("CTS"), a provider of software application
development and maintenance services and Year 2000 and
Eurocurrency compliance services; SSJ K.K. ("Super Systems
Japan"), an entity based in Japan which markets financial
application software products and services tailored for the
Japanese market; and an equity investment in Gartner Group,
Inc. ("Gartner"), the leading supplier of research and
analysis to the information technology industry
(collectively, the "IMS HEALTH Business").
Robert E. Weissman is currently Chairman and Chief Executive
Officer of Cognizant and Chairman and Chief Executive
Officer of IMS HEALTH. Mr. Weissman will resign from such
positions at Cognizant effective upon the Distribution Date;
however, he will continue as a director of Cognizant (which
will be renamed Nielsen Media Research, Inc. as described
below) after the Distribution. The Board of Directors of IMS
HEALTH will be composed of certain persons who are currently
directors of Cognizant. See "IMS HEALTH Management and
Executive Compensation--IMS HEALTH Board of Directors". In
addition to Mr. Weissman, the other executive officers of
IMS HEALTH will be drawn from the current management of
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Cognizant or its subsidiaries. See "IMS HEALTH Management
and Executive Compensation--IMS HEALTH Executive Officers".
Nielsen Media Research....... Nielsen Media Research is the leading source of television
audience measurement services in North America. As a result
of the Distribution, the television audience measurement
services business of Nielsen Media Research (the "Nielsen
Media Research Business") will remain with Cognizant, and at
the time of the Distribution, Cognizant will change its name
to Nielsen Media Research, Inc.
William G. Jacobi is currently Chairman of Nielsen Media
Research and will be the Chairman of Nielsen Media Research
after the Distribution. John A. Dimling is currently
President and Chief Operating Officer of Nielsen Media
Research and will be President and Chief Executive Officer
of Nielsen Media Research after the Distribution. The
directors of Nielsen Media Research will be composed of
certain persons who are currently directors of Cognizant and
certain persons who are not currently directors of
Cognizant. See "Nielsen Media Research Management and
Executive Compensation--Nielsen Media Research Board of
Directors". In addition to Mr. Dimling, the other executive
officers of Nielsen Media Research will be drawn primarily
from the current management of Nielsen Media Research. See
"Nielsen Media Research Management and Executive
Compensation--Nielsen Media Research Executive Officers".
THE DISTRIBUTION
Form of Transaction;
Basis of Presentation...... The Distribution is the method by which Cognizant will be
separated into two publicly traded companies, IMS HEALTH and
Nielsen Media Research. In the Distribution, Cognizant will
distribute to its stockholders shares of IMS HEALTH Common
Stock, which will represent a continuing interest in
Cognizant's healthcare information and related businesses to
be conducted by IMS HEALTH. After the Distribution,
Cognizant's only business will be the Nielsen Media Research
television audience measurement services business, and the
shares of Cognizant Common Stock held by Cognizant
stockholders will represent a continuing ownership interest
in that business. At the time of the Distribution, Cognizant
will change its name to Nielsen Media Research, Inc. From
and after the Distribution Date, Cognizant Common Stock will
therefore become "Nielsen Media Research Common Stock".
Stockholders should note that notwithstanding the legal form
of the Distribution described above whereby Cognizant
expects to spin off IMS HEALTH, because of the relative
significance of the IMS HEALTH Business to Cognizant, IMS
HEALTH will be treated as the "accounting successor" to
Cognizant for financial reporting purposes. Therefore, the
historical financial information for IMS HEALTH included
herein is that of Cognizant and does not currently reflect
the separation of the IMS HEALTH Business from the Nielsen
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Media Research Business which will occur through the
Distribution. Upon approval of the plan of Distribution, the
historical financial statements of IMS HEALTH as accounting
successor to Cognizant will be restated to present Nielsen
Media Research as a "discontinued operation" for accounting
purposes.
The Distribution is subject to, and requires approval of,
the Cognizant Board of Directors of the plan of the
Distribution as well as of material terms of any
distribution, tax sharing, employee benefits, or other
similar agreements pursuant to which assets and liabilities
are allocated as part of the Distribution.
Shares to be Distributed..... The Distribution will be made to holders of record as of the
close of business on the Record Date of issued and
outstanding shares of Cognizant Common Stock. Each holder of
Cognizant Common Stock on the Record Date will receive as a
dividend one share of IMS HEALTH Common Stock for every
share of Cognizant Common Stock held. Based on the
shares of Cognizant Common Stock outstanding as of
, 1998, the Distribution would consist of
shares of IMS HEALTH Common Stock.
The Board of Directors of IMS HEALTH will adopt a
stockholder rights plan (the "IMS HEALTH Rights Plan") prior
to the Distribution. Certificates evidencing shares of IMS
HEALTH Common Stock issued in the Distribution will
therefore represent the same number of IMS HEALTH Rights (as
defined below) issued under the IMS HEALTH Rights Plan. See
"Description of IMS HEALTH Capital Stock--IMS HEALTH Rights
Plan". Unless the context otherwise requires, references
herein to the IMS HEALTH Common Stock include the related
IMS HEALTH Rights.
Cognizant stockholders will not have to make any payment or
surrender or exchange certificates representing shares of
Cognizant Common Stock in order to receive their pro rata
share of the Distribution. No vote of holders of Cognizant
Common Stock is required or sought in connection with the
Distribution.
Record Date.................. The Record Date is , 1998. In order to be
entitled to receive shares of IMS HEALTH Common Stock in the
Distribution, holders of shares of Cognizant Common Stock
must be stockholders as of the close of business on the
Record Date.
Distribution Date............ The "Distribution Date" is presently expected to be on or
about June 30, 1998.
Distribution Agent........... First Chicago Trust Company of New York will be the
Distribution Agent (the "Distribution Agent") for the
Distribution.
Federal Income Tax
Consequences of the
Distribution............... Cognizant has received a ruling from the Internal Revenue
Service to the effect that the Distribution will be tax-free
for Federal income tax purposes. Cognizant stockholders will
apportion their tax basis in Cognizant Common Stock held
immediately before the Distribution Date among such
Cognizant Common Stock (which will represent each such
stockholder's interest in Nielsen Media Research after the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Distribution) and IMS HEALTH Common Stock received in the
Distribution, based on the relative fair market values of
the Cognizant Common Stock and the IMS HEALTH Common Stock
as of the Distribution Date. Cognizant will provide
appropriate information to each holder of record of
Cognizant Common Stock as of the close of business on the
Record Date concerning the basis allocation. See "The
Distribution--Federal Income Tax Consequences of the
Distribution".
Stock Exchange Listing and
Trading.................... Prior to the date hereof, there has not been any established
trading market for the IMS HEALTH Common Stock. Application
will be made for listing the shares of IMS HEALTH Common
Stock on the NYSE under the symbol "RX", and trading is
expected to commence on a "when-issued" basis prior to the
Distribution Date. On the first NYSE trading day following
the Distribution Date, "when-issued" trading in respect of
the IMS HEALTH Common Stock will end and "regular-way"
trading will begin. See "The Distribution--Listing and
Trading of IMS HEALTH Common Stock and Nielsen Media
Research Common Stock".
Nielsen Media Research Common Stock (I.E. the "old"
Cognizant Common Stock) will continue to trade on the NYSE
after the Distribution Date, but the symbol under which it
trades will change from "CZT" to "NMR". However, because of
the significant changes that will take place to Cognizant as
a result of the Distribution, the trading market for Nielsen
Media Research Common Stock after the Distribution may be
significantly different from that for Cognizant Common Stock
prior to the Distribution. See "The Distribution-- Listing
and Trading of IMS HEALTH Common Stock and Nielsen Media
Research Common Stock".
Relationship Between
IMS HEALTH and
Nielsen Media Research
After the Distribution..... After the Distribution, neither IMS HEALTH nor Nielsen Media
Research will have any ownership interest in the other,
except as set forth under "Relationship Between IMS HEALTH
and Nielsen Media Research After the Distribution", and each
of IMS HEALTH and Nielsen Media Research will be an
independent public company. IMS HEALTH and Cognizant (which
will become Nielsen Media Research at the time of the
Distribution) will enter into certain agreements governing
the relationship between IMS HEALTH and Nielsen Media
Research subsequent to the Distribution and providing for
the allocation of tax, employee benefits and certain other
assets and liabilities and obligations arising from periods
prior to the Distribution, including contingent liabilities
relating to certain litigation. In addition, there will be
individuals on the Boards of Directors of IMS HEALTH and
Nielsen Media Research who will also serve on the Board of
Directors of the other company. See "Relationship Between
IMS HEALTH and Nielsen Media Research After the
Distribution".
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Certain Indebtedness and
Minority-Interest
Financing.................. In connection with the Distribution, Cognizant will borrow
$300 million, the proceeds of which will be used to repay
existing intercompany indebtedness to certain entities
included in IMS HEALTH. This debt will be an obligation of
Nielsen Media Research after the Distribution. Upon or soon
after the Distribution, IMS HEALTH intends to borrow $50
million in short-term debt. IMS HEALTH also will retain $100
million in pre-existing minority-interest financing. See
"The Distribution--Nielsen Media Research and IMS HEALTH
Indebtedness and Minority-Interest Financing".
Dividend Policies............ The payment and level of cash dividends by IMS HEALTH and
Nielsen Media Research after the Distribution will be
subject to the discretion of the IMS HEALTH Board of
Directors and the Nielsen Media Research Board of Directors,
respectively. Based on preliminary discussions with the IMS
HEALTH Board of Directors, it is anticipated that IMS HEALTH
will initially pay a dividend equal to Cognizant's current
annualized dividend of $0.12 per share. Nielsen Media
Research does not anticipate paying a dividend in the near
future. Dividend decisions will be based on, and affected
by, a number of factors, including the respective operating
results and financial requirements of IMS HEALTH and Nielsen
Media Research on a stand-alone basis as well as applicable
legal and contractual restrictions. See "Dividend Policies".
Antitakeover Provisions...... At the time of the Distribution, the Restated Certificate of
Incorporation and Amended and Restated By-laws of each of
IMS HEALTH and Nielsen Media Research will contain
provisions that may have the effect of discouraging an
acquisition of control of IMS HEALTH or Nielsen Media
Research, respectively, not approved by their respective
Board of Directors. Such provisions may also have the effect
of discouraging third parties from making proposals
involving an acquisition or change of control of IMS HEALTH
or Nielsen Media Research, although such proposals, if made,
might be considered desirable by a majority of the
stockholders of IMS HEALTH or Nielsen Media Research, as the
case may be. Such provisions could further have the effect
of making it more difficult for third parties to cause the
replacement of the Board of Directors of IMS HEALTH or
Nielsen Media Research. These provisions have been designed
to enable each of IMS HEALTH and Nielsen Media Research to
develop its businesses and foster its long-term growth
without disruptions caused by the threat of a takeover not
deemed by its Board of Directors to be in the best interest
of IMS HEALTH or Nielsen Media Research, as the case may be,
and their respective stockholders. Certain provisions of the
Distribution Agreement to be entered into between IMS HEALTH
and Cognizant (which will change its name to Nielsen Media
Research, Inc. at the time of the Distribution) may also
have the effect of discouraging third parties from making
proposals involving an acquisition or change of control of
IMS HEALTH or Nielsen Media Research. See "Relationship
Between IMS HEALTH and Nielsen Media Research After the
Distribution--Distribution Agreement".
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
At the time of the Distribution, each of IMS HEALTH and
Nielsen Media Research will have stockholder rights plans.
These stockholder rights plans are designed to protect
stockholders in the event of an unsolicited offer or other
takeover tactics which, in the opinion of the relevant Board
of Directors, could impair its ability to represent
stockholder interests. The provisions of the stockholder
rights plans may render an unsolicited takeover of IMS
HEALTH or Nielsen Media Research, as the case may be, more
difficult or less likely to occur or might prevent such a
takeover. See "Description of IMS HEALTH Capital Stock--IMS
HEALTH Rights Plan" and "Description of Nielsen Media
Research Common Stock--Nielsen Media Research Rights Plan".
Each of IMS HEALTH and Nielsen Media Research will be
subject to provisions of Delaware corporate law which may
restrict certain business combination transactions. See
"Description of IMS HEALTH Capital Stock--Delaware General
Corporation Law" and "Description of Nielsen Media Research
Capital Stock--Delaware General Corporation Law".
See also "Description of IMS HEALTH Capital
Stock--Provisions of IMS HEALTH Restated Certificate of
Incorporation and Amended and Restated By-laws Affecting
Change in Control" and "Description of Nielsen Media
Research Capital Stock--Provisions of Nielsen Media Research
Restated Certificate of Incorporation and Amended and
Restated By-laws Affecting Change in Control".
Risk Factors................. Stockholders should carefully consider the matters discussed
under the section entitled "Risk Factors" in this
Information Statement.
Recent Developments.......... On March 23, 1998, Cognizant announced the signing of
definitive agreements to acquire Walsh International Inc.
("Walsh"), which develops and markets leading-edge sales
force automation systems for pharmaceutical companies, and
Pharmaceutical Marketing Services Inc. ("PMSI"), which
provides information services to pharmaceutical and
healthcare companies in the U.S., Europe and Japan
(collectively, the "Acquisitions").
Under terms of the agreements, Walsh shareholders will
receive .3041 shares of Cognizant Common Stock per Walsh
share (or, based on a Cognizant share price of $51.792,
consideration of approximately $166,900,000), and PMSI
shareholders will receive .2800 shares of Cognizant Common
Stock per PMSI share (or, based on a Cognizant share price
of $51.792, consideration of approximately $179,600,000).
The total purchase price of the Walsh acquisition is
currently estimated at $193,000,000, including $166,900,000
of common stock, $11,900,000 of stock options to be issued
and $14,200,000 of accrued acquisition and integration costs
(principally severance and lease terminations).
The aggregate purchase price, excluding debt assumed, of the
PMSI acquisition is currently estimated at $235,200,000,
including $179,600,000 of common stock, $16,400,000 of stock
options to be
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
issued, and $39,200,000 of accrued acquisition and
integration costs (principally severance, lease terminations
and cancellations of duplicate and other contracts, all
related to PMSI). The estimated aggregate purchase price of
each of the Acquisitions is subject to adjustment as
described below.
The number of shares of Cognizant Common Stock to be issued
in connection with each of the Acquisitions is subject to a
collar adjustment based on the price of Cognizant Common
Stock during a period prior to the closing of each
Acquisition. Currently Walsh and PMSI have approximately
10.6 million and approximately 12.4 million shares
outstanding, respectively. Cognizant expects to issue
approximately 3.2 million shares from treasury stock to
consummate the Walsh acquisition. The PMSI acquisition will
not be completed until after the Record Date and therefore,
PMSI stockholders will receive, in lieu of Cognizant Common
Stock, IMS HEALTH Common Stock pursuant to a formula
designed to recalibrate the collar computations based on the
relative value of IMS HEALTH to the total value of IMS
HEALTH and Nielsen Media Research following the
Distribution. If the Walsh acquisition is not completed
prior to the Record Date, Walsh shareholders will also
receive IMS HEALTH Common Stock pursuant to a similar
formula. The Acquisitions, which have been independently
authorized by the Cognizant, Walsh and PMSI Boards of
Directors, are subject to approval by Walsh and PMSI
shareholders and customary closing conditions. The
acquisition of PMSI is also subject to the receipt of
regulatory and other required approvals. Cognizant has
received all the necessary regulatory approvals for the
acquisition of Walsh. Each of the Acquisitions is an
independent transaction and neither is conditioned upon the
consummation of the other or upon the consummation of the
Distribution. In connection with the Distribution, Walsh and
PMSI will become part of IMS HEALTH.
On April 9, 1998, CTS filed a registration statement with
the Securities and Exchange Commission (the "SEC") with
respect to an underwritten offering of 2,917,000 shares of
Class A Common Stock, par value $0.01 per share, of CTS
(3,354,550 if the underwriters' over-allotment option
granted by Cognizant is exercised in full). Of such shares,
2,500,000 are to be offered by CTS and 417,000 shares are to
be offered by Cognizant. Following the offering, Cognizant
will own 66.7% of the outstanding common stock of CTS and
approximately 95.3% of the combined voting power of CTS's
outstanding common stock. The initial offering price is
estimated to be between $11.00 and $13.00 per share. A
portion of the proceeds to be received by CTS in the
offering will be used to repay an intercompany balance. The
transaction is expected to result in a significant one-time
gain to the selling stockholder. The registration statement
has not become effective under the Securities Act of 1933,
as amended (the "Securities Act"). If the offering is not
completed prior to the Distribution Date, IMS HEALTH will be
the selling stockholder in the offering. See "IMS HEALTH
Business--Recent Developments".
</TABLE>
* * *
9
<PAGE>
This Information Statement is being furnished by Cognizant solely to provide
information to stockholders of Cognizant who will receive IMS HEALTH Common
Stock in the Distribution and who will continue to own Nielsen Media Research
Common Stock immediately after the Distribution. It is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
Cognizant, IMS HEALTH or Nielsen Media Research. The information contained in
this Information Statement is believed by Cognizant and IMS HEALTH to be
accurate with respect to Cognizant, IMS HEALTH and Nielsen Media Research as of
the date set forth on the cover. Changes may occur after that date, and
Cognizant, IMS HEALTH and Nielsen Media Research will not update the information
except in the normal course of their respective public disclosure practices.
10
<PAGE>
IMS HEALTH
(ACCOUNTING SUCCESSOR TO COGNIZANT)
SUMMARY FINANCIAL DATA
Notwithstanding the legal form of the Distribution, whereby Cognizant
expects to spin off IMS HEALTH, for accounting purposes the transaction is
accounted for as if Cognizant will spin off Nielsen Media Research. For
financial reporting purposes, the following financial information relates to IMS
HEALTH, the accounting successor to Cognizant. The financial data as of and for
all years ended December 31, are the audited financial statements of Cognizant,
which statements for 1997, 1996 and 1995 are contained elsewhere in this
Information Statement. The financial data as of and for the three months ended
March 31, 1998 and 1997 are unaudited. The historical financial information set
forth below relates to Cognizant. See "The Distribution--Form of Transaction;
Basis of Presentation". The following financial data should also be read in
conjunction with, and is qualified in its entirety by, the information set forth
under "IMS HEALTH (Accounting Successor to Cognizant) Selected Financial Data"
and "IMS HEALTH (Accounting Successor to Cognizant) Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Cognizant's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AND AS OF MARCH 31, YEAR ENDED AND AS OF DECEMBER 31,
------------------------------ -----------------------------------------------
1998 1997 1997(1) 1996(2) 1995(3) 1994(4)
-------------- -------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenue(6)................... $ 337,032 $ 315,576 $1,418,153 $1,730,596 $1,542,340 $1,257,415
Income Before Cumulative Effect of
Accounting Changes................... $ 60,087 $ 52,905 $ 312,350 $ 195,451 $ 88,881 $ 146,405
Earnings Per Share of Common Stock on
Income Before Cumulative Effect of
Accounting Changes--Basic............ $ 0.37 $ 0.31 $ 1.89 $ 1.15 $ 0.52 $ 0.86
Earnings Per Share of Common Stock on
Income Before Cumulative Effect of
Accounting Changes--Diluted.......... $ 0.36 $ 0.31 $ 1.86 $ 1.15 $ 0.52 $ 0.85
BALANCE SHEET DATA:
Total Assets........................... $1,630,331 $1,405,430 $1,579,520 $1,874,982 $1,442,090 $1,331,038
Long-Term Debt......................... $ 2,813 $ 3,463 $ 2,912 $ 3,736 $ 10,485 $ 15,484
<CAPTION>
1993(5)
-----------
<S> <C>
<S> <C>
INCOME STATEMENT DATA:
Operating Revenue(6)................... $1,039,259
Income Before Cumulative Effect of
Accounting Changes................... $ 108,857
Earnings Per Share of Common Stock on
Income Before Cumulative Effect of
Accounting Changes--Basic............ $ --
Earnings Per Share of Common Stock on
Income Before Cumulative Effect of
Accounting Changes--Diluted.......... $ --
BALANCE SHEET DATA:
Total Assets........................... $1,158,764
Long-Term Debt......................... $ 5,374
</TABLE>
- - ------------------------
(1) Income before Cumulative Effect of Accounting Changes in 1997 includes an
unrealized gain on its investment in Gartner of $10,664 and gains from
dispositions-net of $6,818.
(2) Income before Cumulative Effect of Accounting Changes in 1996 includes a
one-time acquisition-related charge of $32,778 related to Gartner's
acquisition of J3 Learning Corporation and gains from dispositions-net of
$112.
(3) Income before Cumulative Effect of Accounting Changes in 1995 includes a
non-recurring charge of $49,268, an incremental provision of postemployment
benefits of $17,778, restructuring expense of $7,002 and gains from
dispositions-net of $8,269.
(4) Income before Cumulative Effect of Accounting Changes in 1994 includes
restructuring expense of $7,957 and a gain from disposition of $12,806.
(5) Income before Cumulative Effect of Accounting Changes in 1993 includes
restructuring expense of $46,408 and a gain from disposition of $13,676.
(6) Operating Revenue for the three months ended March 31, 1998 and 1997 and the
year ended December 31, 1997 reflects Gartner on the equity method of
accounting; accordingly no Gartner revenue is reflected. Operating Revenue
for the years ended December 31, 1996, 1995, 1994 and 1993 reflects Gartner
on a consolidated basis.
11
<PAGE>
NIELSEN MEDIA RESEARCH SUMMARY FINANCIAL DATA
The following data are qualified in their entirety by the financial
statements of Nielsen Media Research and other information contained elsewhere
in this Information Statement. The financial data as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995, have been
derived from the audited financial statements of Nielsen Media Research
contained elsewhere in this Information Statement. The financial data as of
March 31, 1998 and 1997, and December 31, 1994 and 1993, for the three months
ended March 31, 1998 and 1997 and for the years ended December 31, 1994 and
1993, are unaudited. The historical financial statements of Nielsen Media
Research contained in this Information Statement are presented as if Nielsen
Media Research were a separate entity for all periods presented. The following
financial data should be read in conjunction with the information set forth
under "Nielsen Media Research Selected Financial Data" and "Nielsen Media
Research Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Nielsen Media Research's Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Information Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AND AS OF MARCH 31, YEAR ENDED AND AS OF DECEMBER 31,
---------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenue.................. $ 96,064 $ 86,271 $ 358,594 $ 319,404 $ 288,652 $ 250,303 $ 209,894
Net Income......................... $ 14,246 $ 12,730 $ 52,475 $ 47,605 $ 40,412 $ 30,115 $ 19,661
Earnings Per Share of Common
Stock--Basic..................... $ 0.09 $ 0.07 $ 0.32 $ 0.28 $ 0.24 $ 0.18 $ --
Earnings Per Share of Common
Stock--Diluted................... $ 0.09 $ 0.07 $ 0.32 $ 0.28 $ 0.24 $ 0.18 $ --
BALANCE SHEET DATA:
Total Assets....................... $ 199,645 $ 178,598 $ 192,434 $ 170,331 $ 134,521 $ 138,842 $ 97,831
Long-Term Debt..................... $ -- $ -- $ -- $ -- $ 78 $ 244 $ 411
</TABLE>
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This Information Statement and other materials filed or to be filed by
Cognizant (which will become Nielsen Media Research at the time of the
Distribution) and IMS HEALTH with the SEC, as well as information included in
oral statements or other written statements made or to be made by Cognizant and
IMS HEALTH, contain statements which, in the opinion of Cognizant and IMS
Health, may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act").
While Cognizant and IMS HEALTH believe that the Litigation Reform Act may be
applicable to the Distribution, they have been advised that the position of the
Staff of the Division of Corporation Finance of the SEC is that the Litigation
Reform Act is not applicable to the Distribution. These statements appear in a
number of places in this document 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 and the effects of
regulation and competition, the terms of the Distribution and all other
statements regarding the intent, plans, beliefs or expectations of the parties
or their directors or officers. Stockholders are cautioned that such
forward-looking statements are not assurances of 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 or Nielsen Media
Research seek growth through acquisition, the ability to identify and consummate
acquisitions on satisfactory terms; the ability to develop new or advanced
technologies and systems for their businesses 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 and audience measurement services; regulatory and legislative
initiatives, particularly in the area of medical privacy; the ability to timely
and cost-effectively resolve any problems associated with the Year 2000 issue;
leverage and debt service (including sensitivity to fluctuations in interest
rates); compliance with covenants in loan agreements; the ability to obtain
future financing on satisfactory terms; deterioration in economic conditions,
particularly in the pharmaceutical, healthcare, media, or other industries in
which customers operate; conditions in the securities markets which may affect
the value or liquidity of portfolio investments; and the final allocation of
assets and liabilities between IMS HEALTH and Nielsen Media Research.
Consequently, all the forward-looking statements contained in this Information
Statement are qualified by the information contained or incorporated herein,
including, but not limited to, the information contained under this heading and
in "Information Statement Summary--The Distribution--Recent Developments", "Risk
Factors", "The Distribution", "IMS HEALTH (Accounting Successor to Cognizant)
Capitalization", "IMS HEALTH (Accounting Successor to Cognizant) Management's
Discussion and Analysis of Financial Condition and Results of Operations", "IMS
HEALTH Business", "Nielsen Media Research Capitalization", "Nielsen Media
Research Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Nielsen Media Research Business". Neither Cognizant (which
will become Nielsen Media Research at the time of the Distribution) nor IMS
HEALTH has any obligation to publicly release any revision to any
forward-looking statement contained or incorporated herein to reflect any future
events or occurrences.
13
<PAGE>
RISK FACTORS
RISKS RELATING TO IMS HEALTH AND NIELSEN MEDIA RESEARCH
POTENTIAL TAXATION
Cognizant has received a ruling from the Internal Revenue Service to the
effect that, among other things, the Distribution will qualify as a tax-free
spin-off under Section 355 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code").
The Internal Revenue Service ruling is based on certain factual
representations made by Cognizant. If such factual representations were
incorrect in a material respect, such ruling could become invalid. Cognizant is
not aware of any facts or circumstances which would cause such representations
to be incorrect in a material respect. Each of Cognizant (which will become
Nielsen Media Research at the time of the Distribution) and IMS HEALTH will
agree in the Distribution Agreement to certain restrictions on its future
actions to provide further assurances that Section 355 of the Internal Revenue
Code will apply to the Distribution. See "Relationship Between IMS HEALTH and
Nielsen Media Research After the Distribution".
If the Distribution were not to qualify under Section 355 of the Internal
Revenue Code, then, in general, a corporate tax (which would be very
substantial) would be payable by the consolidated group, of which Cognizant is
the common parent. In addition, under the consolidated return rules, each member
of the consolidated group would be jointly and severally liable for such tax
liability. If the Distribution occurred and it were not to qualify under Section
355 of the Internal Revenue Code, the resulting tax liability would have a
material adverse effect on the financial position, results of operations and
cash flows of each of IMS HEALTH and Nielsen Media Research. Cognizant estimates
that the aggregate shared tax liability in this regard of IMS HEALTH and Nielsen
Media Research would be in the range of approximately $2.5 to $3.0 billion. See
"The Distribution--Federal Income Tax Consequences of the Distribution".
Moreover, if the Distribution were not to qualify under Section 355 of the
Internal Revenue Code, each Cognizant stockholder receiving shares of IMS HEALTH
Common Stock in the Distribution would be treated as if such stockholder had
received a taxable distribution in an amount equal to the fair market value of
the IMS HEALTH Common Stock received. See "The Distribution--Federal Income Tax
Consequences of the Distribution".
YEAR 2000
Many existing computer systems and software applications use two digits,
rather than four, to record years. Unless modified, such systems will not
properly record or interpret years after 1999, which could lead to business
disruptions (the "Year 2000 issue"). Each of IMS HEALTH and Nielsen Media
Research depends on systems and software both for its internal operations as
well as for the receipt of data used in its information products and the
transmission of those products to its customers. Cognizant began to address the
Year 2000 issue in 1996. IMS HEALTH and Nielsen Media Research expect to
complete upgrading or replacing affected programs during 1998, with testing to
be done during 1999.
In addition, IMS HEALTH and Nielsen Media Research are communicating with
their customers and data suppliers to assess their ability to address the Year
2000 issue. Failures by customers to be Year 2000 compliant could hinder their
ability to make use of IMS HEALTH's and Nielsen Media Research's products.
Failures by data suppliers could disrupt the flow of data used in IMS HEALTH's
and Nielsen Media Research's products. While IMS HEALTH and Nielsen Media
Research believe most companies they deal with are addressing the issue, they
are unable to determine the effect, if any, such failures might have on their
respective businesses or future results of operations.
14
<PAGE>
The costs of addressing the Year 2000 issue and the date on which each of
IMS HEALTH and Nielsen Media Research expects to complete Year 2000 compliance
are based on their respective best estimates, which were derived utilizing
numerous assumptions of future events. There can be no guarantee that these
estimates will be achieved, and actual results may differ materially. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area of expertise,
the ability to locate and correct all relevant computer codes, and the success
of customers and suppliers in addressing the Year 2000 issue.
CERTAIN ANTITAKEOVER PROVISIONS
At the time of the Distribution, the Restated Certificate of Incorporation
and Amended and Restated By-laws of each of IMS HEALTH and Nielsen Media
Research will contain provisions that may have the effect of discouraging an
acquisition of control of IMS HEALTH or Nielsen Media Research, respectively,
not approved by their respective Board of Directors. Such provisions may also
have the effect of discouraging third parties from making proposals involving an
acquisition or change of control of IMS HEALTH or Nielsen Media Research,
although such proposals, if made, might be considered desirable by a majority of
the stockholders of IMS HEALTH or Nielsen Media Research, as the case may be.
Such provisions could further have the effect of making it more difficult for
third parties to cause the replacement of the Board of Directors of IMS HEALTH
or Nielsen Media Research. These provisions have been designed to enable each of
IMS HEALTH and Nielsen Media Research to develop its businesses and foster its
long-term growth without disruptions caused by the threat of a takeover not
deemed by its Board of Directors to be in the best interests of IMS HEALTH or
Nielsen Media Research, as the case may be, and their stockholders. Certain
provisions of the Distribution Agreement may also have the effect of
discouraging third parties from making proposals involving an acquisition or
change of control of IMS HEALTH or Nielsen Media Research. See "Relationship
Between IMS HEALTH and Nielsen Media Research After the
Distribution--Distribution Agreement".
At the time of the Distribution, each of IMS HEALTH and Nielsen Media
Research will have a stockholder rights plan. These stockholder rights plans are
designed to protect stockholders in the event of an unsolicited offer and other
takeover tactics which, in the opinion of the relevant Board of Directors, could
impair its ability to represent stockholder interests. The provisions of these
stockholder rights plans may render an unsolicited takeover of IMS HEALTH or
Nielsen Media Research, as the case may be, more difficult or less likely to
occur or might prevent such a takeover. See "Description of IMS HEALTH Capital
Stock--IMS HEALTH Rights Plan" and "Description of Nielsen Media Research
Capital Stock-- Nielsen Media Research Rights Plan".
Each of IMS HEALTH and Nielsen Media Research will be subject to the
provisions of Delaware corporate law which may restrict certain business
combination transactions. See "Description of IMS HEALTH Capital Stock--Delaware
General Corporation Law" and "Description of Nielsen Media Research Capital
Stock--Delaware General Corporation Law".
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, among other things, various violations of the antitrust laws
and damages in excess of $350 million, which amount IRI has asked to be trebled
under the antitrust laws. IRI also seeks punitive damages in an unspecified
amount. In light of the potentially significant liabilities which could arise
from the IRI Action and in order to facilitate the D&B spin-off (as defined
below) in 1996, D&B, ACNielsen Corporation ("ACNielsen") and Cognizant entered
into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint Defense
Agreement") pursuant to which ACNielsen agreed to be responsible for any
potential liabilities which may ultimately be incurred by D&B or Cognizant as a
result of such action, up to a maximum amount to be determined by an independent
investment bank if and when
15
<PAGE>
any such liabilities are incurred. The determination of such maximum amount will
be based on ACNielsen's ability to satisfy such liabilities and remain
financially viable, subject to certain assumptions and limitations. However,
Cognizant and D&B have agreed that to the extent that ACNielsen is unable to
satisfy any such liabilities in full and remain financially viable, Cognizant
and D&B will each be responsible for 50% of the difference between the amount,
if any, which may be payable as a result of such litigation and the maximum
amount which ACNielsen is then able to pay as determined by such investment
bank. Under the terms of the Distribution Agreement dated as of October 28,
1996, among Cognizant, D&B and ACNielsen (the "1996 Distribution Agreement"),
pursuant to which shares of Cognizant and ACNielsen were distributed to the
stockholders of D&B (the "D&B spin-off"), as a condition to the Distribution,
IMS HEALTH and Nielsen Media Research are required to undertake to be jointly
and severally liable to D&B and ACNielsen for Cognizant's obligations under the
1996 Distribution Agreement. However, pursuant to the 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 has 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 million.
Management of Nielsen Media Research and IMS HEALTH are unable to predict at
this time the final outcome of the IRI Action or whether the resolution of such
matter could materially affect Nielsen Media Research's or IMS HEALTH's
respective results of operations, cash flows or financial position.
RISKS RELATING TO IMS HEALTH
ABSENCE OF PRIOR TRADING MARKET FOR THE IMS HEALTH COMMON STOCK
Prior to the date hereof, there has not been any established trading market
for IMS HEALTH Common Stock. Application will be made to list the shares of IMS
HEALTH Common Stock on the NYSE under the symbol "RX", and trading is expected
to commence on a "when-issued" basis prior to the Distribution Date. See "The
Distribution--Listing and Trading of IMS HEALTH Common Stock and Nielsen Media
Research Common Stock".
CHANGES IN TRADING PRICES OF IMS HEALTH COMMON STOCK
There can be no assurance as to the prices at which the IMS HEALTH Common
Stock will trade before, on or after the Distribution Date. Until the IMS HEALTH
Common Stock is fully distributed and an orderly market develops in the IMS
HEALTH Common Stock, the price at which such stock trades may fluctuate
significantly and may be lower or higher than the price that would be expected
for a fully distributed issue. Prices for the IMS HEALTH Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for IMS HEALTH Common Stock, (ii)
developments affecting the businesses of IMS HEALTH generally and the impact of
those factors referred to below in particular, (iii) investor perception of IMS
HEALTH and (iv) general economic and market conditions. Management expects that
the market will characterize IMS HEALTH Common Stock as a healthcare information
systems and services stock, which category of stock has historically experienced
relatively greater price volatility than broader market indices.
NON-UNITED STATES OPERATIONS
IMS HEALTH operates globally, deriving 61% of its revenues and 79% of its
operating income in 1997 from non-U.S. operations. As a result, fluctuations in
the value of foreign currencies relative to the U.S. dollar may increase the
volatility of U.S. dollar-denominated operating results. IMS HEALTH's geographic
expansion in emerging markets such as Eastern Europe, Africa and Asia Pacific is
expected to continue. Emerging markets tend to be considerably less stable than
established markets which may
16
<PAGE>
further contribute to volatility in operating results. In addition, IMS HEALTH
is subject to the usual risks inherent in carrying on business in certain
countries outside the U.S., including possible nationalization, expropriation,
price controls or other restrictive government actions. Management believes that
the risk of nationalization or expropriation is reduced because its basic
service is the delivery of information, rather than the production of products
which require manufacturing facilities or use of natural resources.
ACQUISITIONS
Although an important aspect of IMS HEALTH's business strategy is growth
through acquisitions, there can be no assurance that management of IMS HEALTH
will be able to identify and consummate acquisitions on satisfactory terms.
Furthermore, every acquisition will entail some degree of uncertainty and risk,
and even if consummated, may not produce the operating results or increases in
value over time which were expected at the time of acquisition.
On March 23, 1998, Cognizant announced the signing of definitive agreements
to acquire Walsh and PMSI. Although they have been approved by the Boards of
Directors of Cognizant, Walsh and PMSI, the Acquisitions are still subject to
the approval of the Walsh and PMSI shareholders and customary closing
conditions. The acquisition of PMSI is also subject to the receipt of regulatory
and other required approvals. Cognizant has received all the necessary
regulatory approvals for the acquisition of Walsh. In addition, while management
of IMS HEALTH believes that these acquisitions will enhance IMS HEALTH's ability
to compete globally in the healthcare sales and marketing services industry,
there can be no assurance that such expectations will materialize.
TECHNOLOGY
IMS HEALTH competes in businesses which demand or sell sophisticated
information systems, software and other technology. The types of systems which
IMS HEALTH's businesses require or sell can be expected to be subject to
refinements as such systems and underlying technologies are upgraded and
advanced, and there can be no guarantee that as various systems and technologies
become outdated, IMS HEALTH will be able to replace them, to replace them as
quickly as IMS HEALTH's competition or to develop and market new and better
products and services in the future on a cost-effective basis.
GARTNER GROUP, INC.
The IMS HEALTH Business will include IMS HEALTH's ownership of a significant
block of the outstanding shares of Gartner, a publicly traded provider of
research and analysis of the computer hardware, software, communications and
related technology industries. In the third quarter of 1997, IMS HEALTH's voting
interest in Gartner fell below 50% based upon the exercise of Gartner employee
stock options and employee stock purchases. Accordingly, as of September 30,
1997, IMS HEALTH deconsolidated Gartner and is accounting for its ownership
interest on the equity basis. Gartner's common stock has historically traded at
higher multiples than market averages and has generally experienced greater
price volatility than the market as a whole. It can be expected that variations
in the market value of the Gartner shares held by IMS HEALTH will have an impact
on the trading prices of IMS HEALTH Common Stock. Gartner's results of
operations may also be subject to the various factors described in Gartner's
reports filed with the SEC from time to time.
PRICE CONTROLS
A number of countries in which IMS HEALTH operates have enacted regulations
limiting the prices pharmaceutical companies may charge for drugs. IMS HEALTH
believes that such cost containment measures will cause pharmaceutical companies
to seek more effective means of marketing their products (which will benefit IMS
HEALTH in the medium and long term). However, such governmental regulation may
cause pharmaceutical companies to revise or reduce their marketing programs in
the near term.
17
<PAGE>
PRIVACY LEGISLATION
Certain of the data services provided by IMS HEALTH relate to the diagnosis
and treatment of disease. The use of patient-specific information is anticipated
to be an increasingly important tool in the design, development and marketing of
pharmaceuticals. To protect privacy, no individual patient is identified in any
IMS HEALTH database. Recently, there have been a number of regulatory and
legislative initiatives in the area of medical privacy at the federal, state and
foreign government levels. Most of these initiatives seek to place restrictions
on the use and disclosure of patient-identifiable information without consent
and consequently would not apply to the IMS HEALTH Business. However, there can
be no assurance that future initiatives would not adversely affect IMS HEALTH's
ability to generate or assemble data or to develop or market current or future
products and services.
RISKS RELATING TO NIELSEN MEDIA RESEARCH
COMPETITION
In the past, Nielsen Media Research's ratings systems have been criticized
by various participants in the television industry. Such criticism, in part, has
increased the likelihood of additional competition in its business. In
particular, a television ratings project funded by the Committee on Nationwide
Television Audience Measurement ("CONTAM") and designed and operated by
Statistical Research, Inc. ("SRI"), is operating a 500 household sample in
Philadelphia as a national television ratings laboratory. SRI's Philadelphia
sample has provided limited program level data, although SRI has recently
announced plans to provide more complete program level data from a subset of the
sample in early 1998. Funding has been contributed primarily by the three major
broadcast networks, ABC, CBS, and NBC. During 1996, ABC, CBS, and NBC together
through CONTAM contributed $10 million (in addition to the $30 million they
contributed in 1994) in funding for the completion of the Philadelphia test. In
addition to the other three major networks, Fox Broadcasting as well as four
cable networks, fifteen major advertising agencies and buying services, one
program syndicator and five of the nation's largest advertisers have agreed to
support and participate in the testing phase. Some of these companies have
contributed to the funding of SRI and SRI is actively seeking financial support
from major media companies for a national ratings service. The Philadelphia
sample is viewed by some as a test market for a national ratings service. In
addition, the NBC and CBS broadcast television networks have asked SRI for a
business plan for the creation of a national measurement system that could
provide an alternative to the Nielsen Television Index service.
On the local level, ADCOM offers individual cable system measurement. It is
currently collecting and issuing local cable measurement data in Jacksonville,
Florida. Arbitron continues to develop its passive people meter technology and
is believed to be testing this technology for possible use in the television
audience measurement business. Indirectly, on both a national and local basis,
competition stems from other marketing research services offering product
movement and television audience data and services.
In Canada, BBM, an established media research organization, has joined with
Taylor Nelson/AGB, a U.K.-based media research company, and announced plans to
provide a competing metered service in Vancouver. BBM, alone or with Taylor
Nelson/AGB, could offer other competitive services in Canada.
Nielsen Media Research's Monitor-Plus service has significant competition
from Competitive Media Reports, a subsidiary of VNU, a Netherlands-based media
company, which has long been the major participant in this market. See "Nielsen
Media Research Business--Competition".
TECHNOLOGY
Nielsen Media Research operates in businesses which require sophisticated
information systems, software and other technology. The technology underlying
the media industry continues to undergo rapid change and Nielsen Media Research
will need to develop and refine techniques for data collection to accommodate
such changes, including digital television, interactive television transmission
and Internet
18
<PAGE>
usage. There can be no guarantee that Nielsen Media Research will be able to
develop and refine new techniques for data collection or that it will be able to
do so as quickly or cost-effectively as its competition.
INDEBTEDNESS
In connection with the Distribution, Cognizant will borrow $300 million, the
proceeds of which will be used by Nielsen Media Research to repay existing
intercompany indebtedness to certain entities included in IMS HEALTH. Such
intercompany indebtedness represents primarily demand notes that are payable on
two days' notice. The proceeds of these demand loans have been used by Cognizant
for general corporate purposes, including its share repurchase program. This
debt will be an obligation of Nielsen Media Research after the Distribution.
After the Distribution, Nielsen Media Research will be more leveraged than
Cognizant was prior to such transaction and will have indebtedness that is
significant in relation to its stockholders' equity.
While management believes Nielsen Media Research's cash flow will be
sufficient to service its debt and to reinvest in its business, a substantial
portion of Nielsen Media Research's cash flow (an after tax amount equal to
approximately 22% of its 1997 cash flow before financing activities) will be
dedicated to payments of interest on debt, thereby reducing funds available for
other purposes such as investment in new technologies necessary to perform in
the emerging television environment. Covenants in the credit facility or other
financing agreements relating to such debt may restrict Nielsen Media Research's
ability to dispose of assets, incur additional indebtedness, repay other
indebtedness, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures or
engage in other corporate activities. In addition, Nielsen Media Research's
ability to obtain additional financing on favorable terms may be impaired in the
future by reason of such indebtedness.
CAPITAL EXPENDITURES; ACCESS TO CAPITAL AS AN INDEPENDENT COMPANY
Nielsen Media Research maintains an active investment program to enhance
existing services and develop new services in response to technological and
marketplace changes. Nielsen Media Research will need to make significant
capital expenditures over the next several years, particularly in light of the
rapid technological changes affecting its business. Prior to the Distribution,
Nielsen Media Research has relied on Cognizant for various financial and
administrative services. After the Distribution, Nielsen Media Research will be
an independent entity responsible for financing its own operations. To the
extent that Nielsen Media Research needs additional funding to finance its
operations and capital expenditures, no assurance can be given that Nielsen
Media Research will be able to access the capital markets or otherwise obtain
necessary financing in the future, or that any such financing can be obtained in
a timely manner or on commercially favorable terms.
EFFECT OF DISTRIBUTION ON TRADING MARKET OF NIELSEN MEDIA RESEARCH COMMON
STOCK
Nielsen Media Research Common Stock (I.E. the "old" Cognizant Common Stock)
will continue to trade on the NYSE after the Distribution, but the symbol under
which it trades will change from "CZT" to "NMR". However, because of the
significant changes that will take place to Cognizant as a result of the
Distribution, the trading market for Nielsen Media Research Common Stock after
the Distribution may be significantly different from that for Cognizant Common
Stock prior to the Distribution. The market may view Nielsen Media Research as a
"new" company after the Distribution, and due to its smaller size, it may not be
the subject of significant research analyst coverage. There can be no assurance
as to the prices at which the Nielsen Media Research Common Stock will trade
before, on or after the Distribution Date, and until an orderly market develops
in the Nielsen Media Research Common Stock, the price at which it trades may
fluctuate significantly. Prices for Nielsen Media Research Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for Nielsen Media Research Common
Stock, (ii) developments affecting the businesses of Nielsen Media Research
including the impact of the factors referred to above, (iii) investor perception
of Nielsen Media Research and (iv) general economic and market conditions.
19
<PAGE>
THE DISTRIBUTION
INTRODUCTION
On January 15, 1998, the Board of Directors of Cognizant approved in
principle a plan to distribute IMS HEALTH Common Stock to all holders of
outstanding Cognizant Common Stock. The Distribution is subject to, and requires
the approval of, the Cognizant Board of Directors of the plan of the
Distribution as well as of the material terms of any distribution, tax sharing,
employee benefits and other similar agreements pursuant to which assets and
liabilities are allocated as part of the Distribution. In June 1998, the
Cognizant Board of Directors formally approved the Distribution and declared a
dividend payable to each holder of record at the close of business on the Record
Date of one share of IMS HEALTH Common Stock for each share of Cognizant Common
Stock held by such holder as of the close of business on the Record Date.
Cognizant has received a tax ruling from the Internal Revenue Service to the
effect that, among other things, the receipt by Cognizant stockholders of the
IMS HEALTH Common Stock in the Distribution will be tax-free to such
stockholders and Cognizant for Federal income tax purposes. On or before the
Distribution Date, Cognizant will deliver all of the outstanding shares of IMS
HEALTH Common Stock to the Distribution Agent for transfer and distribution to
the holders of record of Cognizant Common Stock as of the close of business on
the Record Date. The Distribution is expected to be made on or about June 30,
1998.
Questions relating to the Distribution prior to the Distribution Date or
relating to transfers of IMS HEALTH Common Stock after the Distribution Date
should be directed to: First Chicago Trust Company of New York, Mail Suite 4694,
P.O. Box 2536, Jersey City, NJ 06303-2536, 1-800-519-3111.
REASONS FOR THE DISTRIBUTION
The Board of Directors of Cognizant believes that the Distribution is in the
best interests of Cognizant and Cognizant's stockholders and that the separation
of IMS HEALTH will provide each of IMS HEALTH and Nielsen Media Research with
greater managerial, operational and financial flexibility to respond to changing
market conditions in their different business environments. The discussion of
the reasons for the Distribution set forth herein includes forward-looking
statements that are based upon numerous assumptions with respect to the trading
characteristics of the IMS HEALTH Common Stock and the Nielsen Media Research
Common Stock, the ability of IMS HEALTH management to successfully take
advantage of growth and acquisition opportunities and the ability of Nielsen
Media Research to successfully operate as a stand-alone company. Many of such
factors are discussed above under the captions "Forward-Looking Statements" and
"Risk Factors".
MANAGEMENT CONSIDERATIONS. At present, the Nielsen Media Research Business
and the IMS HEALTH Business are conducted as separate operating groups under the
direction of Cognizant. The Distribution should be beneficial to each of
Cognizant's operating groups, because it will enable the management of each
group to design and advance corporate policies and strategies that are based
primarily on the business characteristics of the group and to concentrate its
financial resources wholly on its own operations.
The Distribution will also permit each of IMS HEALTH and Nielsen Media
Research to design incentive compensation programs that relate more directly to
its own business characteristics and performance and will provide each company
with a "pure play" publicly traded equity security for use in its compensation
programs.
FACILITATE GROWTH OF IMS HEALTH. IMS HEALTH intends to pursue acquisition
and growth opportunities in its business areas. Such acquisitions and growth may
be pursuant to transactions in which
20
<PAGE>
IMS HEALTH Common Stock is offered in exchange for the stock of the target, or
may be pursuant to cash acquisitions financed through the sale of capital stock
of IMS HEALTH. In either event, management of Cognizant believes that the
Distribution will facilitate such acquisition and growth strategy because it
believes that the IMS HEALTH Common Stock will generally trade at higher
price-earnings multiples than those at which Cognizant Common Stock has
historically traded. Such higher multiples would make such stock a more
attractive acquisition currency for IMS HEALTH to deliver, and, to the extent
such stock is perceived to be a high-growth stock, a generally more attractive
investment opportunity for the typical seller of a business in IMS HEALTH's
industries.
INVESTOR UNDERSTANDING. Investors should be able to evaluate better the
financial performance of each of IMS HEALTH and Nielsen Media Research and their
respective strategies, thereby enhancing the likelihood that each will achieve
appropriate market valuation. In addition, each of the businesses will be better
able to focus its public relations efforts on cultivating the public image it
desires. In connection with the Distribution, the healthcare businesses will be
able to adopt the name "IMS HEALTH", which will provide them with a clearly
defined public identity.
FORM OF TRANSACTION; BASIS OF PRESENTATION
The Distribution is the method by which Cognizant will be separated into two
publicly traded companies, IMS HEALTH and Nielsen Media Research. In the
Distribution, Cognizant will distribute to its stockholders shares of IMS HEALTH
Common Stock, which will represent a continuing interest in Cognizant's
healthcare information and related businesses to be conducted by IMS HEALTH.
After the Distribution, Cognizant's only business will be the Nielsen Media
Research television audience measurement services business, and the shares of
Cognizant Common Stock held by Cognizant stockholders will represent a
continuing ownership interest in that business. At the time of the Distribution,
Cognizant will change its name to Nielsen Media Research, Inc. From and after
the Distribution Date, Cognizant Common Stock will therefore become "Nielsen
Media Research Common Stock".
Stockholders should note that notwithstanding the legal form of the
Distribution described above, because of the relative significance of the IMS
HEALTH Business to Cognizant, IMS HEALTH will be treated as the "accounting
successor" to Cognizant for financial reporting purposes. Therefore, the
historical financial information for IMS HEALTH included herein is that of
Cognizant and does not currently reflect the separation of the IMS HEALTH
Business from the Nielsen Media Research Business which will occur through the
Distribution. Upon approval of the plan of Distribution, the historical
financial statements of IMS HEALTH as accounting successor to Cognizant will be
restated to present Nielsen Media Research as a "discontinued operation" for
accounting purposes.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution will be made on the Distribution Date to stockholders of
record of Cognizant at the close of business on the Record Date. Based on the
shares of Cognizant Common Stock outstanding as of , 1998,
the Distribution would consist of shares of IMS HEALTH Common Stock.
Prior to the Distribution Date, Cognizant will deliver all outstanding shares of
IMS HEALTH Common Stock to the Distribution Agent for distribution. The
Distribution Agent will mail, on or about the Distribution Date, certificates
representing the shares of IMS HEALTH Common Stock to Cognizant stockholders of
record as of the close of business on the Record Date. Cognizant stockholders
will not be required to pay for shares of IMS HEALTH Common Stock received in
the Distribution, or to surrender or exchange certificates representing shares
of Cognizant Common Stock in order to receive shares of IMS HEALTH Common Stock.
No vote of Cognizant stockholders is required or sought in connection with the
Distribution.
21
<PAGE>
IN ORDER TO BE ENTITLED TO RECEIVE SHARES OF IMS HEALTH COMMON STOCK IN THE
DISTRIBUTION, COGNIZANT STOCKHOLDERS MUST BE STOCKHOLDERS AT THE CLOSE OF
BUSINESS ON THE RECORD DATE.
The Board of Directors of IMS HEALTH will adopt a stockholder rights plan
prior to the Distribution. Certificates evidencing shares of IMS HEALTH Common
Stock issued in the Distribution will therefore represent the same number of IMS
HEALTH Rights issued under the IMS HEALTH Rights Plan. See "Description of IMS
HEALTH Capital Stock--IMS HEALTH Rights Plan". Unless the context otherwise
requires, references herein to the IMS HEALTH Common Stock include the related
IMS HEALTH Rights.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Cognizant has received a ruling letter from the Internal Revenue Service to
the effect that, among other things, the Distribution will qualify as a tax-free
spin-off under Section 355 of the Internal Revenue Code. Under Section 355 of
the Internal Revenue Code, in general:
1. Holders of Cognizant Common Stock will not recognize any income,
gain or loss as a result of the Distribution.
2. Holders of Cognizant Common Stock will apportion the tax basis of
their Cognizant Common Stock between such Cognizant Common Stock and IMS
HEALTH Common Stock received by such holder in the Distribution in
proportion to the relative fair market values of such stock on the
Distribution Date. Cognizant will provide appropriate information to each
holder of record of Cognizant Common Stock as of the close of business on
the Record Date concerning the basis allocation.
3. The holding period for the IMS HEALTH Common Stock received in the
Distribution by holders of Cognizant Common Stock will include the period
during which such holder held the Cognizant Common Stock with respect to
which the Distribution was made, provided that such Cognizant Common Stock
is held as a capital asset by such holder on the Distribution Date.
4. The Distribution will not be treated as a taxable disposition of IMS
HEALTH by Cognizant.
Current Treasury regulations require each holder of Cognizant Common Stock
who receives IMS HEALTH Common Stock pursuant to the Distribution to attach to
his or her Federal income tax return for the year in which the Distribution
occurs a detailed statement setting forth such data as may be appropriate in
order to show the applicability of Section 355 of the Internal Revenue Code to
the Distribution. Cognizant will convey the appropriate information to each
holder of record of Cognizant Common Stock as of the close of business on the
Record Date.
The Internal Revenue Service ruling is based on certain factual
representations made by Cognizant. If such factual representations were
incorrect in a material respect, such ruling could become invalid. Cognizant is
not aware of any facts or circumstances which would cause such representations
to be incorrect in a material respect. In the Distribution Agreement, each of
Cognizant and IMS HEALTH will agree to certain restrictions on its future
actions to provide further assurances that Section 355 of the Internal Revenue
Code will apply to the Distribution. See "Relationship Between IMS HEALTH and
Nielsen Media Research After the Distribution". If the Distribution were not to
qualify under Section 355 of the Internal Revenue Code, then, in general, a
corporate tax (which, as noted below, would be very substantial) would be
payable by the consolidated group, of which Cognizant is the common parent,
based upon the difference between (x) the fair market value of the IMS HEALTH
Common Stock and (y) the adjusted basis of such IMS HEALTH Common Stock. In
addition, under the consolidated return rules, each member of the consolidated
group would be jointly and severally liable for such tax liability. If the
22
<PAGE>
Distribution occurred and it were not to qualify under Section 355 of the
Internal Revenue Code, the resulting tax liability would have a material adverse
effect on the financial position, results of operations and cash flows of each
of IMS HEALTH and Nielsen Media Research. Cognizant estimates that the aggregate
shared tax liability in this regard of IMS HEALTH and Nielsen Media Research
would be in the range of approximately $2.5 to $3.0 billion.
Furthermore, if the Distribution were not to qualify as a tax-free spin-off,
each Cognizant stockholder receiving shares of IMS HEALTH Common Stock in the
Distribution would be treated as if such stockholder had received a taxable
distribution in an amount equal to the fair market value of IMS HEALTH Common
Stock received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Cognizant's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in Cognizant Common Stock
to the extent the amount received exceeds such stockholder's share of earnings
and profits and (iii) a capital gain to the extent the amount received exceeds
the sum of the amount treated as a dividend and the stockholder's basis.
The foregoing summary of the anticipated Federal income tax consequences of
the Distribution is for general information only. COGNIZANT STOCKHOLDERS SHOULD
CONSULT THEIR OWN ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
DISTRIBUTION, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL
TAX LAWS.
LISTING AND TRADING OF IMS HEALTH COMMON STOCK AND NIELSEN MEDIA RESEARCH COMMON
STOCK
Prior to the date hereof, there has not been any established trading market
for IMS HEALTH Common Stock. Application will be made to list the shares of IMS
HEALTH Common Stock on the NYSE under the symbol "RX", and trading is expected
to commence on a "when-issued" basis at least two days prior to the Record Date.
On the first NYSE trading day following the Distribution Date, "when-issued"
trading in respect of the IMS HEALTH Common Stock will end and "regular-way"
trading will begin.
There can be no assurance as to the prices at which the IMS HEALTH Common
Stock will trade before, on or after the Distribution Date. Until the IMS HEALTH
Common Stock is fully distributed and an orderly market develops in the IMS
HEALTH Common Stock, the price at which it trades may fluctuate significantly
and may be lower or higher than the price that would be expected for a fully
distributed issue. Prices for the IMS HEALTH Common Stock will be determined in
the marketplace and may be influenced by many factors, including (i) the depth
and liquidity of the market for IMS HEALTH Common Stock, (ii) developments
affecting the businesses of IMS HEALTH generally including the impact of the
factors referred to in "Risk Factors" above, (iii) investor perception of IMS
HEALTH and (iv) general economic and market conditions.
Shares of IMS HEALTH Common Stock distributed to Cognizant stockholders will
be freely transferable, except for shares of IMS HEALTH Common Stock received by
persons who may be deemed to be "affiliates" of IMS HEALTH under the Securities
Act. Persons who may be deemed to be affiliates of IMS HEALTH after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, IMS HEALTH, and may include
certain officers and directors of IMS HEALTH, as well as principal stockholders
of IMS HEALTH. Persons who are affiliates of IMS HEALTH will be permitted to
sell their shares of IMS HEALTH Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption for the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(1) of the Securities Act or Rule 144 thereunder.
Nielsen Media Research Common Stock (I.E., the "old" Cognizant Common Stock)
will continue to trade on the NYSE after the Distribution, but the symbol under
which it trades will change from "CZT" to "NMR". However, because of the
significant changes that will take place to Cognizant as a result of the
Distribution, the trading market for Nielsen Media Research Common Stock after
the Distribution may be
23
<PAGE>
significantly different from that for Cognizant Common Stock prior to the
Distribution. The market may view Nielsen Media Research as a "new" company
after the Distribution, and due to its smaller size, it may not be the subject
of significant research analyst coverage. There can be no assurance as to the
prices at which Nielsen Media Research Common Stock will trade before, on or
after the Distribution Date, and until an orderly market develops in the Nielsen
Media Research Common Stock, the price at which it trades may fluctuate
significantly. Prices for Nielsen Media Research Common Stock will be determined
in the marketplace and may be influenced by many factors, including (i) the
depth and liquidity of the market for Nielsen Media Research Common Stock, (ii)
developments affecting the businesses of Nielsen Media Research including the
impact of the factors referred to in "Risk Factors" above, (iii) investor
perception of Nielsen Media Research and (iv) general economic and market
conditions.
NIELSEN MEDIA RESEARCH AND IMS HEALTH INDEBTEDNESS AND MINORITY-INTEREST
FINANCING
In connection with the Distribution, Cognizant will borrow $300 million, the
proceeds of which will be used to repay existing intercompany indebtedness to
certain entities included in IMS HEALTH. This debt will be an obligation of
Nielsen Media Research after the Distribution. The borrowing is expected to bear
interest at prevailing market interest rates and to have a term of 7 to 10
years. IMS HEALTH will retain $100 million in pre-existing minority-interest
financing.
24
<PAGE>
RELATIONSHIP BETWEEN IMS HEALTH
AND NIELSEN MEDIA RESEARCH AFTER THE DISTRIBUTION
IMS HEALTH is wholly owned by Cognizant and the results of operations of
entities that are or will be its subsidiaries have been included in Cognizant's
consolidated financial statements and results of operations. After the
Distribution, Cognizant (to be renamed Nielsen Media Research, Inc.) will not
have any ownership interest in IMS HEALTH, and IMS HEALTH will be an independent
public company. In addition, after the Distribution, IMS HEALTH will not have
any ownership interest in Nielsen Media Research (other than 800,000 shares of
Nielsen Media Research Common Stock which IMS HEALTH will own as a result of
Cognizant Common Stock currently held by a subsidiary of IMS HEALTH and which
IMS HEALTH has agreed to sell promptly after the Distribution Date, and Nielsen
Media Research will be an independent public company. Furthermore, except as
described below, all contractual relationships existing prior to the
Distribution between Cognizant (to be renamed Nielsen Media Research, Inc.) and
IMS HEALTH will be terminated except for contracts specifically set forth in a
schedule to the Distribution Agreement.
Prior to the Distribution, Cognizant (which will become Nielsen Media
Research) and IMS HEALTH will enter into certain agreements as described below,
which will govern the relationship between Nielsen Media Research and IMS HEALTH
subsequent to the Distribution and provide for the allocation of tax, employee
benefits and certain other liabilities and obligations arising from periods
prior to the Distribution. Copies of the forms of such agreements are filed as
exhibits to the Registration Statement of IMS HEALTH in respect of the
registration of the IMS HEALTH Common Stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). In addition, Cognizant (which will become
Nielsen Media Research) will file a Current Report on Form 8-K in connection
with the Distribution, and the agreements will be filed as exhibits to the Form
8-K. Such agreements may be amended by Cognizant prior to the Distribution Date.
In addition, there will be individuals on the Boards of Directors of IMS HEALTH
and Nielsen Media Research who will also serve on the Board of Directors of the
other company. See "IMS HEALTH Management and Executive Compensation--Board of
Directors" and "Nielsen Media Research Management and Executive
Compensation--Board of Directors".
The following description summarizes the material terms of such agreements,
but is qualified by reference to the texts of such agreements, which are
incorporated herein by reference.
DISTRIBUTION AGREEMENT
Cognizant and IMS HEALTH will enter into the Distribution Agreement
providing for, among other things, certain corporate transactions required to
effect the Distribution and other arrangements between Nielsen Media Research
and IMS HEALTH subsequent to the Distribution.
In particular, the Distribution Agreement defines the assets and liabilities
which are being allocated to and assumed by IMS HEALTH and those which will
remain with Nielsen Media Research. The Distribution Agreement also defines what
constitutes the "IMS HEALTH Business" and what constitutes the "Nielsen Media
Research Business".
Pursuant to the Distribution Agreement, Cognizant is obligated to transfer
or cause to be transferred all its right, title and interest in the assets
comprising the IMS HEALTH Business and other assets not specifically included in
the Nielsen Media Research Business to IMS HEALTH and IMS HEALTH is obligated to
transfer or cause to be transferred all its right, title and interest in the
assets comprising the Nielsen Media Research Business to Cognizant. All assets
are being transferred without any representation or warranty, "as is-where is",
and the relevant transferee bears the risk that any necessary consent to
transfer is not obtained. Each party also agrees to exercise its respective
commercially reasonable efforts promptly to obtain any necessary consents and
approvals and to take such actions as may be reasonably necessary or desirable
to carry out the purposes of the Distribution Agreement and the other agreements
summarized below.
25
<PAGE>
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross indemnities designed to allocate generally, effective as
of the Distribution Date, financial responsibility for the liabilities arising
out of or in connection with (i) the businesses conducted by Nielsen Media
Research and certain other liabilities formerly within Cognizant to Nielsen
Media Research and (ii) all other liabilities, including liabilities of the IMS
HEALTH Business, to IMS HEALTH. For a discussion of such businesses, see "IMS
HEALTH Business" and "Nielsen Media Research Business". The Distribution
Agreement provides for the allocation generally of the financial responsibility
for the liabilities arising out of or in connection with former businesses,
including those formerly conducted by or associated with Cognizant or IMS
HEALTH, to IMS HEALTH. The Distribution Agreement also allocates between IMS
HEALTH and Nielsen Media Research contingent liabilities related to certain
prior business transactions.
Pursuant to the terms of the 1996 Distribution Agreement, as a condition to
the Distribution, IMS HEALTH and Nielsen Media Research are required to
undertake to be jointly and severally liable to D&B and ACNielsen for any
liabilities arising thereunder. The Distribution Agreement allocates between IMS
HEALTH and Nielsen Media Research the financial responsibility for such
liabilities. Among other things, 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 has 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 referred to in the previous paragraph shall not exceed $125 million.
In addition, the Distribution Agreement provides that on the Distribution
Date, Cognizant will contribute to IMS HEALTH all cash in Cognizant's accounts
other than (i) cash required by Cognizant (to be renamed Nielsen Media Research)
to satisfy certain specified obligations and (ii) such additional cash as is
necessary for the net borrowings of Cognizant (to be renamed Nielsen Media
Research) (excluding the items referred to in clause (i)) to be $300 million as
of the Distribution Date.
The Distribution Agreement includes provisions governing the administration
of certain insurance programs and the procedures for making claims. The
Distribution Agreement also allocates the right to proceeds and the obligation
to satisfy deductibles under certain insurance policies.
In the event that any transfers contemplated by the Distribution Agreement
are not effected on or prior to the Distribution Date, the parties will be
required to cooperate to effect such transfers as promptly as practicable
following the Distribution Date, and pending any such transfers, to hold any
asset not so transferred in trust for the use and benefit of the party entitled
thereto (at the expense of the party entitled thereto), and to retain any
liability not so transferred for the account of the party by whom such liability
is to be assumed.
The Distribution Agreement provides that Cognizant (which will become
Nielsen Media Research) and IMS HEALTH will comply with and otherwise not take
action inconsistent with each representation and statement made to the Internal
Revenue Service in connection with Cognizant's request for a ruling letter as to
certain tax aspects of the Distribution. Each of Cognizant and IMS HEALTH agrees
to maintain its status as a company engaged in the active conduct of a trade or
business, as defined in Section 355(b) of the Internal Revenue Code, until the
second anniversary of the Distribution Date. Neither Nielsen Media Research nor
IMS HEALTH expects this limitation to inhibit its financing or other activities
or its ability to respond to unanticipated developments. Under the Distribution
Agreement, Cognizant (which will become Nielsen Media Research) agrees that
until two years after the Distribution Date it will not (i) merge or consolidate
with another corporation, (ii) liquidate or partially liquidate, (iii) sell or
transfer all or substantially all of its assets, (iv) redeem or repurchase its
stock (except in certain limited circumstances), or (v) take any other action
which would result in one or more persons acquiring a 50 percent or greater
interest in Cognizant, unless, prior to taking such action, it obtains a written
opinion
26
<PAGE>
of a law firm or a supplemental ruling from the Internal Revenue Service that
such action will not affect the tax-free treatment of the Distribution. As a
result of the representations in the request for a ruling letter and the
covenants in the Distribution Agreement, the acquisition of control of each of
Nielsen Media Research and IMS HEALTH prior to the second anniversary of the
Distribution Date may be more difficult or less likely to occur because of the
potential substantial liability associated with a breach of such representations
or covenants. The Distribution Agreement provides that if a party fails to
comply with the obligations described above or takes or fails to take any action
and such failure, act or omission contributes to a determination that the
Distribution is not tax-free to Cognizant, IMS HEALTH or their stockholders,
such party must indemnify the other party and its stockholders from any taxes
arising therefrom.
Under the Distribution Agreement, each of Cognizant and IMS HEALTH agrees to
provide to the other party, subject to certain conditions, access to certain
corporate records and information and to provide or cause to be provided certain
services on such terms as are set forth in a Transition Services Agreement
between such parties.
The Distribution Agreement also provides that, except as otherwise set forth
therein or in any related agreement, all costs or expenses incurred and for
which invoices have been submitted on or prior to the Distribution Date in
connection with the Distribution will be charged to and paid by Cognizant.
Except as set forth in the Distribution Agreement or any related agreement, all
costs and expenses incurred or for which invoices are submitted after the
Distribution Date in connection with the Distribution will be charged to and
paid by IMS HEALTH. IMS HEALTH will agree to be liable for any claims arising
from or based upon (i) the Acquisitions and any filings with the SEC related
thereto and (ii) "controlling person" liability relating to the Registration
Statement on Form 10 filed with the SEC by IMS HEALTH. Except as set forth in
the Distribution Agreement or any related agreement, each party shall bear its
own costs and expenses incurred after the Distribution Date.
TAX ALLOCATION AGREEMENT
Cognizant and IMS HEALTH will enter into a Tax Allocation Agreement under
which IMS HEALTH will pay any taxes, or receive any refunds or credits of taxes,
shown as due on a U.S. federal, state or local income or franchise tax return
for a taxable period beginning prior to the Distribution Date (including the
current taxable period to the extent such taxes, refunds or credits are
attributable to the portion of such taxable period up to and including the
Distribution Date). Any subsequent adjustment of such taxes shall be allocated
to IMS HEALTH if such adjustment relates to the IMS HEALTH Business and to
Nielsen Media Research if such adjustment relates to the Nielsen Media Research
Business, except that any adjustment of such taxes attributable to tax items or
positions initially determined by Cognizant's corporate office shall be
allocated to IMS HEALTH.
All taxes other than U.S. federal, state and local income and franchise
taxes will be the responsibility of IMS HEALTH if they are attributable to the
IMS HEALTH Business and of Nielsen Media Research if they are attributable to
the Nielsen Media Research Business.
For taxable periods beginning on or after the Distribution Date (and the
portion of the current taxable period beginning after the Distribution Date),
IMS HEALTH and Nielsen Media Research will be responsible for their own taxes.
EMPLOYEE BENEFITS AGREEMENT
Cognizant and IMS HEALTH will enter into an Employee Benefits Agreement (the
"Employee Benefits Agreement"), which allocates responsibility for certain
employee benefits matters on and after the Distribution Date.
The Employee Benefits Agreement provides that IMS HEALTH will adopt a new
defined benefit pension plan for employees of the IMS HEALTH Business ("IMS
HEALTH Employees") and former
27
<PAGE>
employees of the IMS HEALTH Business who terminated employment on or prior to
the Distribution Date ("IMS HEALTH Retirees") and that Nielsen Media Research
will continue to sponsor Cognizant's current plan for the benefit of employees
of the Nielsen Media Research Business ("Nielsen Media Research Employees") and
former employees of the Nielsen Media Research Business who terminated
employment on or prior to the Distribution Date ("Nielsen Media Research
Retirees"). Assets and liabilities of the current Cognizant pension plan that
are attributable to IMS HEALTH Employees and IMS HEALTH Retirees will be
transferred to the new IMS HEALTH plan.
In addition, IMS HEALTH will adopt a new savings plan for IMS HEALTH
Employees and IMS HEALTH Retirees, and Nielsen Media Research will continue to
sponsor its savings plan for the benefit of Nielsen Media Research Employees and
Nielsen Media Research Retirees. The account balances of IMS HEALTH Employees
and IMS HEALTH Retirees will be transferred to the new IMS HEALTH plan.
IMS HEALTH will adopt new nonqualified supplemental pension plans for the
benefit of IMS HEALTH Employees and IMS HEALTH Retirees, and Nielsen Media
Research will retain the liability for benefits under Cognizant's nonqualified
supplemental pension plans with respect to Nielsen Media Research Employees and
Nielsen Media Research Retirees.
The Employee Benefits Agreement also provides that Nielsen Media Research
will continue to sponsor its welfare plans for Nielsen Media Research Employees
and Nielsen Media Research Retirees. As of the Distribution Date, IMS HEALTH
will adopt welfare plans for the benefit of IMS HEALTH Employees and IMS HEALTH
Retirees. Each of IMS HEALTH and Nielsen Media Research will provide retiree
welfare benefits, where applicable, to its own employees and retirees.
Nielsen Media Research and IMS HEALTH will each generally retain the
severance liabilities of their respective employees who terminated employment
prior to the Distribution Date.
With respect to equity-based plans, the Employee Benefits Agreement provides
generally that unexercised Cognizant stock options held by Nielsen Media
Research Employees as of the Distribution Date will be adjusted to reflect the
Distribution. The number of shares of Nielsen Media Research Common Stock
covered by each adjusted stock option will be determined by (i) multiplying the
number of shares of Cognizant Common Stock covered by the unexercised Cognizant
stock option by a fraction, the numerator of which is the average of the Daily
Average Trading Prices per share of Cognizant Common Stock for the five
consecutive trading days immediately preceding the first date on which Cognizant
Common Stock is traded ex-dividend, and the denominator of which is the average
of the Daily Average Trading Prices per share of Nielsen Media Research Common
Stock for the five consecutive trading days starting on the first date on which
Nielsen Media Research Common Stock is traded ex-dividend (the "Nielsen Media
Research Ratio"), and (ii) rounding down the result to a whole number of shares.
The Daily Average Trading Price of a given stock on a given day means the
average of the high and low trading prices for such stock on such date. The
exercise price per share of an adjusted Cognizant stock option will be
determined by dividing the exercise price per share of an unexercised Cognizant
stock option by the Nielsen Media Research Ratio. The adjustment of the
Cognizant stock options will not result in a compensation charge to Cognizant or
Nielsen Media Research.
Unexercised Cognizant stock options held by IMS HEALTH Employees as of the
Distribution Date will in general be canceled and replaced with options that are
exercisable into shares of IMS HEALTH Common Stock. The number of shares of IMS
HEALTH Common Stock covered by each replacement stock option will be determined
by (i) multiplying the number of shares of Cognizant Common Stock covered by the
canceled Cognizant stock option by a fraction, the numerator of which is the
average of the Daily Average Trading Prices per share of Cognizant Common Stock
for the five consecutive trading days immediately preceding the first date on
which Cognizant Common Stock is traded ex-dividend, and the denominator of which
is the average of the Daily Average Trading Prices per share of IMS HEALTH
Common Stock for the five consecutive trading days starting on the first date on
which IMS HEALTH Common Stock is traded regular way (the "IMS HEALTH Ratio"),
and (ii) rounding down the result to a
28
<PAGE>
whole number of shares. The exercise price per share of a replacement stock
option will be determined by dividing the exercise price per share of the
canceled Cognizant stock option by the IMS HEALTH Ratio. Except as otherwise
provided in the applicable plans, all other terms of the replacement stock
options will remain substantially identical to the terms of the canceled
Cognizant stock options. The issuance of the replacement stock options will not
result in a compensation charge to IMS HEALTH.
All limited stock appreciation rights will be adjusted or converted in
substantially the same manner as the unexercised Cognizant stock options. See
"Cognizant Management and Executive Compensation-- Option Grants on Cognizant
Common Stock to Cognizant Executives in Last Fiscal Year" and "IMS HEALTH
Management and Executive Compensation--Option Grants on Cognizant Common Stock
to Executives in Last Fiscal Year".
With respect to restricted stock, IMS HEALTH restricted stock received by
Nielsen Media Research Employees in the Distribution shall be forfeited and each
such individual shall receive a number of additional shares of Nielsen Media
Research restricted stock, determined by multiplying the number of shares of
forfeited IMS HEALTH restricted stock by the Nielsen Media Research Ratio and
the reciprocal of the IMS HEALTH Ratio, having the same terms as the Cognizant
restricted stock from which they arose.
Cognizant restricted stock held by IMS HEALTH Employees and IMS HEALTH
restricted stock received by IMS HEALTH Employees in the Distribution shall be
forfeited and such individuals shall receive replacement IMS HEALTH restricted
stock equal to (i) the number of shares of forfeited IMS HEALTH restricted stock
plus (ii) the number of shares of forfeited Cognizant restricted stock
multiplied by the IMS HEALTH Ratio and the reciprocal of the Nielsen Media
Research Ratio, such replacement IMS HEALTH restricted stock to have the same
terms as the Cognizant restricted stock from which they arose.
From and after the Distribution Date, Nielsen Media Research shall continue
to sponsor an Employee Stock Purchase Plan. IMS HEALTH shall adopt the IMS
HEALTH Employee Stock Purchase Plan for the benefit of IMS HEALTH Employees.
As of the Distribution Date, IMS HEALTH Employees will generally cease
participation in Cognizant's employee benefit plans, and IMS HEALTH will
generally recognize, among other things, their respective employees' past
service with Cognizant under their respective employee benefit plans. Except as
specifically provided therein, nothing in the Employee Benefits Agreement
restricts Nielsen Media Research's or IMS HEALTH's ability to amend or terminate
any of their respective employee benefit plans after the Distribution Date.
AMENDED AND RESTATED TRANSITION SERVICES AGREEMENT
Cognizant, IMS HEALTH, D&B, The New Dun & Bradstreet Corporation ("New
D&B"), AC Nielsen and Gartner Group, Inc. ("Gartner") will enter into an Amended
and Restated Transition Services Agreement pursuant to which such parties have
agreed to certain basic terms governing the provision by New D&B to the other
parties of insurance and risk management services for a transitional period
after the Distribution Date. The Amended and Restated Transition Services
Agreement amends and restates in its entirety the Transition Services Agreement
dated as of October 28, 1996 among Cognizant, D&B and ACNielsen entered into in
connection with the D&B spin-off and includes Gartner as a party to such
agreement.
OVERLAPPING DIRECTORS
After the Distribution Date, there will be individuals on the Boards of
Directors of IMS HEALTH and Nielsen Media Research who will also serve on the
Board of Directors of the other company. Robert E. Weissman and M. Bernard
Puckett will serve on the Boards of Directors of both companies. See "IMS
29
<PAGE>
HEALTH Management and Executive Compensation--Board of Directors" and "Nielsen
Media Research Management and Executive Compensation--Board of Directors".
DIVIDEND POLICIES
IMS HEALTH
The payment and level of cash dividends by IMS HEALTH after the Distribution
will be subject to the discretion of the Board of Directors of IMS HEALTH. Based
on preliminary discussions with the IMS HEALTH Board of Directors, it is
anticipated that IMS HEALTH will initially pay a dividend equal to Cognizant's
current annualized dividend of $0.12 per share. Future dividend decisions will
be based on, and affected by, a number of factors, including the operating
results and financial requirements of IMS HEALTH on a stand-alone basis.
NIELSEN MEDIA RESEARCH
The payment and level of cash dividends by Nielsen Media Research after the
Distribution will be subject to the discretion of the Board of Directors of
Nielsen Media Research. Nielsen Media Research currently intends to retain
future earnings for the development of its business and does not anticipate
paying cash dividends in the near future. Future dividend decisions will be
based on, and affected by, a number of factors, including the operating results
and financial requirements of Nielsen Media Research on a stand-alone basis as
well as applicable legal and contractual restrictions. There can be no assurance
that any dividends will be declared or paid.
30
<PAGE>
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) CAPITALIZATION
Notwithstanding the legal form of the Distribution, whereby Cognizant
expects to spin off IMS HEALTH, for accounting purposes the transaction is
accounted for as if Cognizant will spin off Nielsen Media Research. For
financial reporting purposes, the following financial information relates to IMS
HEALTH, the accounting successor to Cognizant.
The following table sets forth the capitalization of IMS HEALTH at March 31,
1998 on a historical basis, and at March 31, 1998 on a pro forma basis as
adjusted to give effect to the Distribution and the transactions contemplated
thereby. Accordingly, the table does not reflect the proposed acquisition of
Walsh and PMSI. The historical financial information set forth below relates to
Cognizant. See "The Distribution--Form of Transaction; Basis of Presentation".
The following data is qualified in its entirety by the consolidated financial
statements of Cognizant and other information contained elsewhere in this
Information Statement. See "Risk Factors".
<TABLE>
<CAPTION>
IMS HEALTH
(AT MARCH 31, 1998)
(UNAUDITED)
-------------------------
<S> <C> <C>
HISTORICAL PRO FORMA
----------- ------------
<CAPTION>
($ AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash and Cash Equivalents............................................................... $ 340,247 640,247(1)
----------- ------------
Long-Term Debt.......................................................................... 2,352 2,352
Minority Interests...................................................................... 102,891 102,891
Shareholders' Equity:...................................................................
Preferred Stock, par value $.01 per share,
authorized -- 10,000,000 shares:
outstanding -- none................................................................. -- --
Series Common Stock, par value $.01 per share, authorized -- 10,000,000 shares:
outstanding -- none................................................................. -- --
Common Stock, par value $.01 per share, authorized -- 400,000,000 shares:
issued -- 171,120,069 shares (Historical) and 162,848,673 (Pro forma)............... 1,711 1,628(3)
Capital Surplus......................................................................... 808,015 507,848(3)
Retained Earnings....................................................................... 413,643 583,110(1)(2)
Cumulative Translation Adjustment....................................................... (75,868) (76,511)(2)
Unrealized Gains on Investments......................................................... 25,011 25,011
Treasury Stock -- 8,271,396 shares (Historical) and 0 shares (Pro forma)................ (300,250) -- (3)
----------- ------------
Total Equity........................................................................ 872,262 1,041,086
----------- ------------
Total Capitalization................................................................ $ 977,966 $ 1,146,329
----------- ------------
----------- ------------
</TABLE>
SUMMARY OF SIGNIFICANT PRO FORMA CAPITALIZATION ASSUMPTIONS
The capitalization table presented above gives effect to the Distribution
Agreement and the transactions contemplated thereby. See "Relationship Between
IMS HEALTH and Nielsen Media Research After the Distribution--Distribution
Agreement." The Distribution Agreement is to be entered into by Cognizant and
IMS HEALTH prior to the Distribution and is subject to approval by Cognizant's
Board of Directors. The assumptions upon which this capitalization table is
based therefore remain to be finalized and do not necessarily reflect all the
factors that may affect the capitalization of IMS HEALTH at the time of the
Distribution.
(1) In connection with the Distribution, Cognizant will borrow $300 million,
which will be used to repay existing intercompany liabilities. This debt
will be the obligation of Nielsen Media Research after the Distribution. The
adjustment is reflected as an increase in cash and cash equivalents
resulting from the proceeds of the debt.
(2) This adjustment reflects the dividend of the net assets of the Nielsen Media
Research Business in connection with the Distribution.
(3) The adjustment reflects the recapitalization of IMS HEALTH including the
elimination of treasury stock which will be treasury shares of Nielsen Media
Research after the Distribution.
31
<PAGE>
IMS HEALTH
(ACCOUNTING SUCCESSOR TO COGNIZANT)
SELECTED FINANCIAL DATA
Notwithstanding the legal form of the Distribution, whereby Cognizant
expects to spin off IMS HEALTH, for accounting purposes the transaction is
accounted for as if Cognizant will spin off Nielsen Media Research. For
financial reporting purposes, the following financial information relates to IMS
HEALTH, the accounting successor to Cognizant. The financial data as of and for
all years ended December 31, are from the audited financial statements of
Cognizant, which statements for 1997, 1996 and 1995 are contained elsewhere in
this Information Statement. The financial data as of and for the three months
ended March 31, 1998 and 1997 are unaudited. The historical financial
information set forth below relates to Cognizant. See "The Distribution--Form of
Transaction; Basis of Presentation". The following financial data should also be
read in conjunction with the information set forth under "IMS HEALTH (Accounting
Successor to Cognizant) Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Cognizant's Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Information Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED AND
AS OF
MARCH 31, YEAR ENDED AND AS OF DECEMBER 31,
------------------------ ---------------------------------------------------------
1998 1997 1997(1) 1996(2) 1995(3) 1994(4) 1993(5)
----------- ----------- --------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenue(6)........ $ 337,032 $ 315,576 $1,418,153 $1,730,596 $1,542,340 $1,257,415 $1,039,259
Income before Cumulative
Effect of Accounting
Changes................... $ 60,087 $ 52,905 $ 312,350 $ 195,451 $ 88,881 $ 146,405 $ 108,857
Earnings Per Share of Common
Stock on Income before
Cumulative Effect of
Accounting
Changes--Basic............ $ 0.37 $ 0.31 $ 1.89 $ 1.15 $ 0.52 $ 0.86 $ --
Earnings Per Share of Common
Stock on Income before
Cumulative Effect of
Accounting Changes--
Diluted................... $ 0.36 $ 0.31 $ 1.86 $ 1.15 $ 0.52 $ 0.85 $ --
BALANCE SHEET DATA:
Total Assets................ $1,630,331 $1,405,430 $1,579,520 $1,874,982 $1,442,090 $1,331,038 $1,158,764
Long-Term Debt.............. $ 2,813 $ 3,463 $ 2,912 $ 3,736 $ 10,485 $ 15,484 $ 5,374
</TABLE>
- - ------------------------
(1) Income before Cumulative Effect of Accounting Changes in 1997 includes an
unrealized gain on its investment in Gartner of $10,664 and gains from
dispositions-net of $6,818.
(2) Income before Cumulative Effect of Accounting Changes in 1996 includes a
one-time acquisition-related charge of $32,778 related to Gartner's
acquisition of J3 Learning Corporation and gains from dispositions-net of
$112.
(3) Income before Cumulative Effect of Accounting Changes in 1995 includes a
non-recurring charge of $49,268, an incremental provision of postemployment
benefits of $17,778, restructuring expense of $7,002 and gains from
dispositions-net of $8,269.
(4) Income before Cumulative Effect of Accounting Changes in 1994 includes
restructuring expense of $7,957 and a gain from disposition of $12,806.
(5) Income before Cumulative Effect of Accounting Changes in 1993 includes
restructuring expense of $46,408 and a gain from disposition of $13,676.
(6) Operating Revenue for the three months ended March 31, 1998 and 1997 and the
year ended December 31, 1997 reflects Gartner on the equity method of
accounting; accordingly no Gartner revenue is reflected. Operating Revenue
for the years ended December 31, 1996, 1995, 1994 and 1993 reflects Gartner
on a consolidated basis.
32
<PAGE>
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) UNAUDITED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS
Notwithstanding the legal form of the Distribution, whereby Cognizant
expects to spin off IMS HEALTH, for accounting purposes the transaction is
accounted for as if Cognizant will spin off Nielsen Media Research. For
financial reporting purposes, the following financial information relates to IMS
HEALTH, the accounting successor to Cognizant. The historical Consolidated
Statement of Income for IMS HEALTH is from the historical (pre-Distribution)
Consolidated Statement of Income of Cognizant. The Unaudited Consolidated Pro
Forma Statement of Income for IMS HEALTH for the three months ended March 31,
1998 and the years ended December 31, 1997, 1996 and 1995 present the results of
operations of IMS HEALTH and material pro forma adjustments necessary for this
purpose.
The Unaudited Consolidated Pro Forma Statement of Income and Statement of
Financial Position of IMS HEALTH should be read in conjunction with the
historical consolidated financial statements of Cognizant contained elsewhere in
this Information Statement. The pro forma data are for informational purposes
only and may not necessarily reflect future results of operations and or what
the results of operations would have been had IMS HEALTH been operated as a
separate entity.
As described under "The Distribution--Form of Transaction; Basis of
Presentation", for financial reporting purposes, IMS HEALTH will be treated as
the "accounting successor" to Cognizant. Therefore, the historical financial
information for IMS HEALTH included herein is that of Cognizant. The following
tables set forth the IMS HEALTH historical Consolidated Statement of Income for
the three months ended March 31, 1998, and years ended December 31, 1997, 1996
and 1995, giving effect, on a pro forma basis, to Nielsen Media Research as a
discontinued operation as of the beginning of the periods presented, although
not yet required to be reflected in the historical financial statements. The IMS
HEALTH historical Unaudited Condensed Consolidated Pro Forma Statement of
Financial Position as of March 31, 1998 gives effect to Nielsen Media Research
as a discontinued operation. Upon approval of the plan of Distribution, the
historical financial statements of IMS HEALTH as accounting successor to
Cognizant will be restated to present Nielsen Media Research as a "discontinued
operation" for accounting purposes.
The Distribution requires approval by the Cognizant Board of Directors of
the plan of the Distribution as well as material terms of any distribution, tax
sharing, employee benefits, or other similar agreements pursuant to which assets
and liabilities are allocated as part of the Distribution.
33
<PAGE>
IMS HEALTH
(ACCOUNTING SUCCESSOR TO COGNIZANT)
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF INCOME(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA) IMS HEALTH
HISTORICAL PRO FORMA PRO FORMA
IMS HEALTH ADJUSTMENTS(2) HISTORICAL
------------ -------------- -------------
<S> <C> <C> <C>
OPERATING REVENUE $ 337,032 $ (96,064) $ 240,968
Operating Costs and Selling and Administrative Expense 263,739 (63,193) 200,546
Depreciation and Amortization 28,816 (7,122) 21,694
------------ -------------- -------------
OPERATING INCOME 44,477 (25,749) 18,728
Gartner Equity Income 15,574 -- 15,574
Other Non-Operating Income--Net 22,713 (3,183) 19,530
Non-Operating Income--Net(3) 38,287 (3,183) 35,104
------------ -------------- -------------
Income from Continuing Operations Before Provision for
Income Taxes 82,764 (28,932) 53,832
Provision for Income Taxes 22,677 (7,927) 14,750
------------ -------------- -------------
Income from Continuing Operations 60,087 (21,005) 39,082
Income From Discontinued Operations--Net of Income Taxes -- 21,005 21,005
------------ -------------- -------------
NET INCOME $ 60,087 0 $ 60,087
------------ -------------- -------------
------------ -------------- -------------
BASIC EARNINGS PER SHARE CONTINUING OPERATIONS $ 0.37 $ (0.13) $ 0.24
BASIC EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.13 0.13
------------ -------------- -------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.37 $ 0.00 $ 0.37
------------ -------------- -------------
------------ -------------- -------------
DILUTED EARNINGS PER SHARE CONTINUING OPERATIONS $ 0.36 $ (0.13) $ 0.23
DILUTED EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.13 0.13
------------ -------------- -------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.36 $ 0.00 $ 0.36
------------ -------------- -------------
------------ -------------- -------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Average Number of Shares Outstanding--Basic................. 162,406,000 162,406,000
---------- ----------
Average Number of Shares Outstanding--Diluted............... 167,282,000 167,282,000
---------- ----------
---------- ----------
</TABLE>
See Summary of Adjustments to Unaudited Consolidated Pro Forma Statements of
Income, on page 38.
34
<PAGE>
IMS HEALTH
(ACCOUNTING SUCCESSOR TO COGNIZANT)
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF INCOME(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA) IMS HEALTH
HISTORICAL PRO FORMA PRO FORMA
IMS HEALTH ADJUSTMENTS(2) HISTORICAL
------------ -------------- -------------
<S> <C> <C> <C>
OPERATING REVENUE $1,418,153 $ (358,594) $ 1,059,559
Operating Costs and Selling and Administrative Expense 965,497 (222,199) 743,298
Depreciation and Amortization 117,314 (28,663) 88,651
------------ -------------- -------------
OPERATING INCOME 335,342 (107,732) 227,610
------------ -------------- -------------
Gartner Equity Income 65,120 -- 65,120
Other Non-Operating Income--Net 29,773 (29) 29,744
Non-Operating Income--Net(3) 94,893 (29) 94,864
------------ -------------- -------------
Income from Continuing Operations Before Provision for
Income Taxes 430,235 (107,761) 322,474
Provision for Income Taxes 117,885 (29,527) 88,358
------------ -------------- -------------
Income from Continuing Operations 312,350 (78,234) 234,116
Income From Discontinued Operations--Net of Income Taxes -- 78,234 78,234
------------ -------------- -------------
NET INCOME $ 312,350 $ 0 $ 312,350
------------ -------------- -------------
------------ -------------- -------------
BASIC EARNINGS PER SHARE CONTINUING OPERATIONS $ 1.89 $ (0.47) $ 1.42
BASIC EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.47 0.47
------------ -------------- -------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 1.89 $ 0.00 $ 1.89
------------ -------------- -------------
------------ -------------- -------------
DILUTED EARNINGS PER SHARE CONTINUING OPERATIONS $ 1.86 $ (0.47) $ 1.39
DILUTED EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.47 0.47
------------ -------------- -------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 1.86 $ 0.00 $ 1.86
------------ -------------- -------------
------------ -------------- -------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC................. 165,163,000 165,163,000
AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED............... 167,490,000 167,490,000
</TABLE>
See Summary of Adjustments to Unaudited Consolidated Pro Forma Statements of
Income, on page 38.
35
<PAGE>
IMS HEALTH
(ACCOUNTING SUCCESSOR TO COGNIZANT)
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF INCOME(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA) IMS HEALTH
HISTORICAL PRO FORMA PRO FORMA
IMS HEALTH ADJUSTMENTS(2) HISTORICAL
------------ -------------- -------------
<S> <C> <C> <C>
OPERATING REVENUE $1,730,596 $ (319,404) $ 1,411,192
Operating Costs and Selling and Administrative Expense 1,253,567 (194,714) 1,058,853
Depreciation and Amortization 133,861 (25,229) 108,632
------------ -------------- -------------
OPERATING INCOME 343,168 (99,461) 243,707
Non-Operating Income--Net(3) 5,853 -- 5,853
------------ -------------- -------------
Income from Continuing Operations Before Provision for
Income Taxes 349,021 (99,461) 249,560
Provision for Income Taxes 153,570 (43,764) 109,806
------------ -------------- -------------
Income from Continuing Operations 195,451 (55,697) 139,754
Income From Discontinued Operations--Net of Income Taxes -- 55,697 55,697
------------ -------------- -------------
NET INCOME $ 195,451 $ 0 $ 195,451
------------ -------------- -------------
------------ -------------- -------------
BASIC EARNINGS PER SHARE CONTINUING OPERATIONS $ 1.15 $ (0.33) $ 0.82
BASIC EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.33 0.33
------------ -------------- -------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 1.15 $ 0.00 $ 1.15
------------ -------------- -------------
------------ -------------- -------------
DILUTED EARNINGS PER SHARE CONTINUING OPERATIONS $ 1.15 $ (0.33) $ 0.82
DILUTED EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.33 0.33
------------ -------------- -------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 1.15 $ 0.00 $ 1.15
------------ -------------- -------------
------------ -------------- -------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC................. 169,944,000 169,944,000
AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED............... 170,500,000 170,500,000
</TABLE>
See Summary of Adjustments to Unaudited Consolidated Pro Forma Statements of
Income, on page 38.
36
<PAGE>
IMS HEALTH
(ACCOUNTING SUCCESSOR TO COGNIZANT)
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF INCOME(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA) IMS HEALTH
HISTORICAL PRO FORMA PRO FORMA
IMS HEALTH ADJUSTMENTS(2) HISTORICAL
------------ -------------- -------------
<S> <C> <C> <C>
OPERATING REVENUE $1,542,340 $ (288,652) $ 1,253,688
Operating Costs and Selling and Administrative Expense 1,242,331 (177,241) 1,065,090
Depreciation and Amortization 132,532 (24,343) 108,189
Restructuring Expense 12,800 -- 12,800
------------ -------------- -------------
OPERATING INCOME 154,677 (87,068) 67,609
Non-Operating Income--Net(3) 7,880 -- 7,880
------------ -------------- -------------
Income from Continuing Operations Before Provision for
Income Taxes 162,557 (87,068) 75,489
Provision for Income Taxes 73,676 (39,462) 34,214
------------ -------------- -------------
Income from Continuing Operations 88,881 (47,606) 41,275
Income From Discontinued Operations--Net of Income Taxes -- 47,606 47,606
------------ -------------- -------------
NET INCOME $ 88,881 $ 0 $ 88,881
------------ -------------- -------------
------------ -------------- -------------
BASIC EARNINGS PER SHARE CONTINUING OPERATIONS $ 0.52 $ (0.28) $ 0.24
BASIC EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.28 0.28
------------ -------------- -------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.52 $ 0.00 $ 0.52
------------ -------------- -------------
------------ -------------- -------------
DILUTED EARNINGS PER SHARE CONTINUING OPERATIONS $ 0.52 $ (0.28) $ 0.24
DILUTED EARNINGS PER SHARE DISCONTINUED OPERATIONS -- 0.28 0.28
------------ -------------- -------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.52 $ 0.00 $ 0.52
------------ -------------- -------------
------------ -------------- -------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC................. 169,522,000 169,522,000
AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED............... 171,608,000 171,608,000
</TABLE>
See Summary of Adjustments to Unaudited Consolidated Pro Forma Statements of
Income, on page 38.
37
<PAGE>
SUMMARY OF ADJUSTMENTS TO UNAUDITED CONSOLIDATED
PRO FORMA STATEMENTS OF INCOME
(1) As described in Note 22 to Cognizant's Consolidated Financial Statements
included elsewhere in this Information Statement, on March 23, 1998
Cognizant entered into two separate definitive agreements to acquire Walsh
and PMSI. As these acquisitions do not either individually or in the
aggregate meet the "significant subsidiary test" for purposes of pro forma
disclosures, they have not been reflected in the above tables.
(2) The pro forma adjustments reflect Nielsen Media Research revenue, operating
expense, operating income, non-operating income and provision for income
taxes for the three months ended March 31, 1998 and the years ended December
31, 1997, 1996 and 1995 as a discontinued operation, although not yet
required to be reflected in the historical financial statements. As such,
these amounts do not reflect certain adjustments made in the preparation of
the Nielsen Media Research audited separate financial statements included
elsewhere in this Information Statement. Such adjustments include primarily
a tax provision for Nielsen Media Research on a separate company basis and
the allocation of corporate overhead expense.
(3) Non-Operating Income--Net does not include a pro forma adjustment to reflect
the impact of interest income for all periods presented related to the
proceeds from the repayment of existing intercompany liabilities to IMS
HEALTH of $300 million. Interest income related to the proceeds from the
repayment of existing intercompany liabilities to IMS HEALTH of $300
million, at an assumed annual interest rate of 5.25%, would be $15.75
million per year and $3.94 million per quarter. See Nielsen Media Research
Unaudited Consolidated Pro Forma Statement of Income included elsewhere in
this Information Statement for the related impact of interest expense on the
$300 million of third-party debt.
38
<PAGE>
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) UNAUDITED CONDENSED
CONSOLIDATED PRO FORMA STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------------------------
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA) IMS HEALTH
HISTORICAL PRO FORMA PRO FORMA
IMS HEALTH ADJUSTMENTS(2) HISTORICAL(3)
------------ -------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents........................................ $ 344,251 $ (4,004) $ 340,247
Accounts Receivable--Net......................................... 303,047 (52,966) 250,081
Other Current Assets............................................. 77,209 (5,115) 72,094
------------ -------------- -------------
Total Current Assets......................................... 724,507 (62,085) 662,422
------------ -------------- -------------
Investment in Gartner Group...................................... 212,863 -- 212,863
Notes Receivable and Other Investments........................... 100,707 (751) 99,956
Property, Plant and Equipment--Net............................... 233,578 (58,023) 175,555
Other Assets--Net
Computer Software.............................................. 147,911 (45,724) 102,187
Goodwill....................................................... 91,464 -- 91,464
Other Assets................................................... 119,301 (38,712) 80,589
------------ -------------- -------------
Total Other Assets--Net.......................................... 358,676 (84,436) 274,240
------------ -------------- -------------
Net Assets of Discontinued Operations............................ 0 131,176 131,176
------------ -------------- -------------
Total Assets..................................................... $1,630,331 $ (74,119) $ 1,556,212
------------ -------------- -------------
------------ -------------- -------------
Liabilities and Shareholders' Equity
Accrued Liabilities.............................................. $ 203,264 $ (18,563) $ 184,701
Other Current Liabilities........................................ 222,138 (24,755) 197,383
Current Liabilities.............................................. 425,402 (43,318) 382,084
Minority Interests............................................... 102,891 -- 102,891
Other Liabilities................................................ 229,776 (30,801) 198,975
------------ -------------- -------------
Total Liabilities................................................ 758,069 (74,119) 683,950
------------ -------------- -------------
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock, Par Value $.01 Per Share, Authorized--
10,000,000 Shares; Outstanding--None
Series Common Stock, Par Value $.01 Per Share,
Authorized--10,000,000 Shares; Outstanding--None
Common Stock, Par Value $.01, Authorized--400,000,000 Shares;
Issued--171,120,069 Shares..................................... 1,711 -- 1,711
Capital in Excess of Par......................................... 808,015 -- 808,015
Retained Earnings................................................ 413,643 -- 413,643
Treasury Stock, at Cost, 8,271,396............................... (300,250) -- (300,250)
Cumulative Translation Adjustment................................ (75,868) -- (75,868)
Unrealized Gains on Investments.................................. 25,011 -- 25,011
------------ -------------- -------------
Total Shareholders' Equity....................................... 872,262 -- 872,262
------------ -------------- -------------
Total Liabilities and Shareholders' Equity....................... $1,630,331 $ (74,119) $ 1,556,212
------------ -------------- -------------
------------ -------------- -------------
</TABLE>
See Summary of Adjustments to Unaudited Consolidated Pro Forma Statement
of Financial Position, on page 40.
39
<PAGE>
SUMMARY OF ADJUSTMENTS TO UNAUDITED CONSOLIDATED
PRO FORMA STATEMENT OF FINANCIAL POSITION
(1) As described in Note 22 to Cognizant's Consolidated Financial Statements
included elsewhere in this Information Statement, on March 23, 1998
Cognizant entered into merger agreements to acquire each of Walsh and PMSI.
As these acquisitions do not, either individually or in the aggregate, meet
the "significant subsidiary test" for purposes of pro forma disclosures,
they are not reflected in the above tables.
(2) The pro forma adjustments reflect Nielsen Media Research assets and
liabilities for the period ended March 31, 1998 as a discontinued operation,
although not yet required to be presented in the historical financial
statements. As such, these amounts do not reflect certain adjustments made
in the preparation of the Nielsen Media Research audited financial
statements included elsewhere in this Information Statement. Such
adjustments include accrued tax and deferred tax accounts for Nielsen Media
Research on a separate company basis.
(3) In connection with the Distribution, adjustments will be made that are not
included in IMS HEALTH's pro forma historical balances for the period ended
March 31, 1998. These pro forma adjustments are reflected in the IMS HEALTH
Capitalization Table on page 31.
40
<PAGE>
IMS HEALTH (ACCOUNTING SUCCESSOR TO COGNIZANT) MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AS DESCRIBED UNDER "THE DISTRIBUTION--FORM OF TRANSACTION; BASIS OF
PRESENTATION", FOR FINANCIAL REPORTING PURPOSES, IMS HEALTH WILL BE TREATED AS
THE "ACCOUNTING SUCCESSOR" TO COGNIZANT. THEREFORE, THE HISTORICAL FINANCIAL
INFORMATION FOR IMS HEALTH INCLUDED HEREIN, AND MANAGEMENT'S DISCUSSION AND
ANALYSIS THEREOF SET FORTH BELOW, ARE THOSE OF COGNIZANT. THE FOLLOWING HAS BEEN
TAKEN FROM COGNIZANT'S 1997 ANNUAL REPORT TO SHAREHOLDERS AND THEREFORE INCLUDES
THE NIELSEN MEDIA RESEARCH BUSINESS FROM WHICH THE IMS HEALTH BUSINESS IS BEING
SEPARATED IN THE DISTRIBUTION. FOR A DISCUSSION OF THE HISTORICAL FINANCIAL
RESULTS OF NIELSEN MEDIA RESEARCH AS THOUGH IT WERE A STAND-ALONE ENTITY, SEE
"NIELSEN MEDIA RESEARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" INCLUDED ELSEWHERE IN THIS INFORMATION
STATEMENT.
On January 15, 1998, Cognizant announced a plan to separate into two
independent, publicly traded companies--IMS HEALTH and Nielsen Media Research.
The transaction is subject to final approval by Cognizant's Board of Directors.
IMS HEALTH consists of I.M.S. International, Inc. ("IMS"), Erisco, Inc.
("Erisco"), Cognizant Enterprises, Inc. ("Enterprises"), Cognizant Technology
Solutions Corporation ("CTS"), SSJ K.K. ("Super Systems Japan"), and an equity
investment in Gartner Group, Inc. ("Gartner").
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Revenue for the first quarter of 1998 increased by 6.8% to $337,032 from
$315,576 for the first quarter of the prior year. Revenue growth for the quarter
was held down by the absence of Pilot Software, Inc. ("Pilot") revenues since
its divestiture and the impact of a stronger U.S. dollar. Adjusting for these
items revenue for the first quarter of 1998 increased by 13.7%. This increase
reflected double-digit constant dollar revenue growth at IMS and Nielsen Media
Research. The impact of a stronger U.S. dollar decreased reported revenue by
approximately 4% in the first quarter, including the impact of gains related to
IMS HEALTH's hedging strategy.
Operating income for the first quarter of 1998 decreased by 7.1% to $44,477
from $47,887 for the first quarter of the prior year. Operating income in the
first quarter includes Year 2000 costs of $13,157, and one-time spin-related
charges of $4,900. Adjusting for these items and the impact of a stronger U.S.
dollar, operating income for the first quarter of 1998 increased by 36.5%.
Operating income growth outpaced revenue growth primarily due to the absence of
Pilot operating losses since its divestiture. The impact of a stronger U.S.
dollar decreased reported operating income by approximately 5% in the first
quarter, including the impact of gains related to IMS HEALTH's hedging strategy.
Non-operating income-net for the first quarter of 1998 was $38,287 compared
with $23,373 for the first quarter of the prior year. This increase is primarily
related to realizing higher gains in 1998 related to Enterprises' investments
($13,600) as compared with 1997 ($5,436) and recording a pre-tax unrealized gain
on Gartner stock of $7,987 corresponding to the net increase in the value of the
Company's investment in Gartner ("SAB 51 Gain"), partially offset by recording,
within Gartner equity income, IMS HEALTH's share of an in-process R&D write-off
at Gartner of $2,998.
IMS HEALTH's effective tax rate was 27.4% for the first quarter of 1998,
compared with an effective tax rate of 25.8% in the comparable period of the
prior year.
IMS HEALTH's net income for the first quarter of 1998 increased 13.6% to
$60,087 from $52,905 in the first quarter of the prior year. Excluding the
after-tax impact of Year 2000 costs, the one-time spin-related charges, the SAB
51 Gain, IMS HEALTH's share of the in-process R&D write-off at Gartner, and
gains associated with the sale of Cognizant Enterprises' investments, net income
for the quarter increased 22.2%.
41
<PAGE>
Basic earnings per share for the first quarter of 1998 increased 19.4% to
$.37 from $.31 for the first quarter of the prior year. Excluding the after-tax
impact of the items in the preceding paragraph, basic earnings per share for the
quarter increased 27.6%.
IMS
IMS is the leading global provider of market information and
decision-support services to the pharmaceutical and healthcare industries. IMS
revenue for the first quarter 1998 increased 6.5% to $223,401 from $209,822 in
the first quarter of the prior year. Adjusting for the impact of a stronger U.S.
dollar, revenue for the first quarter 1998 increased by 12.6%. IMS revenue
growth benefited from strong performance of its sales management products,
geographic expansion and excellent growth of its electronic territory management
product. IMS operating income for the first quarter of 1998 decreased 17.1% to
$30,926 from $37,316 in the first quarter of the prior year. Operating income in
the first quarter of 1998 includes $9,972 of costs related to Year 2000.
Excluding these costs and the impact of a stronger U.S. dollar, operating income
for the first quarter of 1998 increased 17.2%.
NIELSEN MEDIA RESEARCH
Nielsen Media Research is the leading provider of television audience
measurement services, both nationally and locally, in the United States and
Canada. Nielsen Media Research revenue for the first quarter 1998 increased
11.4% to $96,064 from $86,271 in the first quarter of the prior year. Nielsen
Media Research achieved continuing growth from new metered markets, additional
cable networks and its local Hispanic and Monitor Plus measurement services.
Nielsen Media Research operating income for the first quarter 1998 decreased
2.0% to $25,749 from $26,279 in the first quarter of the prior year. Operating
income in the first quarter of 1998 includes $3,185 of costs related to Year
2000. Excluding these costs, operating income for the first quarter of 1998
increased 10.1%.
EMERGING MARKETS
Emerging Markets includes Erisco, the premier supplier of software-based
administrative and analytical solutions to the managed care industry; CTS, a
provider of software application development and maintenance services
specializing in Year 2000 and Eurocurrency compliance services; Super Systems
Japan, a marketer of financial application software products to the Japanese
market; Enterprises, IMS HEALTH's venture capital unit, focused on investments
in emerging healthcare businesses; and Pilot, which was sold on July 31, 1997.
Emerging Markets revenue for the first quarter 1998 decreased 9.8% to
$17,567 from $19,483 in the first quarter of the prior year. This decrease was
primarily due to the absence of revenues from Pilot since its divestiture.
Excluding the effect of Pilot and the impact of a stronger U.S. dollar, revenue
for the first quarter 1998 increased 50.9%, primarily due to strong growth at
CTS and Erisco. Emerging Markets operating income for the first quarter 1998
increased to $902 from an operating loss of $8,808 in the first quarter of the
prior year. This increase was primarily due to the absence of losses from Pilot
since its divestiture.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
In September 1997, Cognizant's voting interest in Gartner fell below 50% as
a result of the exercise of Gartner employee stock options and employee stock
purchases. Accordingly, in the third quarter, Cognizant deconsolidated Gartner
(the "Gartner Deconsolidation") as of January 1, 1997 and is accounting for its
ownership interest on the equity basis.
Revenue in 1997 decreased 18.1% to $1,418,153 from $1,730,596 in 1996. This
decrease primarily reflects the impact of the Gartner Deconsolidation. Revenue
in 1997 increased by 10.7%, excluding Gartner revenue from both years and the
impact of a stronger U.S. dollar. The increase reflects double-digit revenue
performance at IMS and Nielsen Media Research, partially offset by Pilot, which
was sold in
42
<PAGE>
the third quarter of 1997. IMS revenue growth benefited from strong performance
of its core business services, geographic expansion and excellent growth of its
electronic territory management product. The growth at Nielsen Media Research
was driven by the addition of new cable and broadcast customers, new products
and services, and continued service expansion to existing customers. The impact
of a stronger U.S. dollar in 1997 decreased reported revenue by approximately
2.0%.
Operating costs and selling and administrative expenses in 1997 were
$965,497 compared with $1,253,567 in 1996, a decrease of 23.0%. This decrease
primarily reflects the impact of the Gartner Deconsolidation. Excluding Gartner
expenses from both years and discontinued business units in 1996, operating
costs and selling and administrative expenses increased 7.1% to $965,497 in 1997
from $901,454 in 1996. This increase reflects Cognizant's increased spending on
new revenue growth initiatives which contributed to revenue growth of 10.7% in
1997. The impact of a stronger U.S. dollar in 1997 decreased operating costs and
selling and administrative expenses by approximately 2.0%.
Operating income in 1997 decreased 2.3% to $335,342 from $343,168 in 1996.
This decrease primarily reflects the impact of the Gartner Deconsolidation.
Excluding Gartner operating income in both years and discontinued business units
in 1996, operating income increased 17.1% to $335,342 in 1997 from $286,332 in
1996. Operating income growth outpaced revenue growth primarily due to IMS's
ability to leverage its resources. The impact of a stronger U.S. dollar in 1997
decreased reported operating income by less than 1.0%. The sale of Pilot, which
had been generating an operating loss, enabled Cognizant to redeploy resources
to strategic technology investments, including the initiative to accelerate Year
2000 compliance. The impact on operating income of Year 2000 compliance was
$12,500 in 1997.
Operating margin in 1997 was 23.6%, compared with 19.8% in 1996. Excluding
Gartner results from both years, and discontinued business units in 1996,
operating margin was 23.6% in 1997 compared with 21.9% in 1996.
Non-operating income-net in 1997 was $94,893, compared with $5,853 in 1996.
The increase was due principally to recording $65,120 of Gartner equity income
in 1997 as a result of the Gartner Deconsolidation. Cognizant also recognized a
pre-tax unrealized gain on its investment in Gartner ("SAB 51 Gain") of $14,689
(included as a separate line in the income statement) corresponding to the net
increase in the underlying value of its investment in Gartner. In addition,
non-operating income-net for 1997 includes gains of $39,336 related to the
disposition of Enterprises' investment in WEFA Group, Inc. and a portion of its
investment in TSI International, Inc. and Aspect Development, Inc., and a
$29,945 loss on the sale of Pilot (included in gains from dispositions-net).
Cognizant's consolidated 1997 effective tax rate was 27.4%, compared with
44.0% in 1996. Cognizant's lower tax rate in 1997 is due to the benefits of
global tax planning strategies.
Net income in 1997 was $312,350, compared with $195,451 in 1996, an increase
of 59.8%. This increase principally reflects gains from dispositions-net and SAB
51 gains in 1997 and a reduction in the tax rate from 44.0% in 1996 to 27.4% in
1997 due to global tax-planning actions. It also reflects a one-time after-tax
acquisition-related charge of $32,778 for in-process research and development
costs associated with Gartner's acquisition of J3 Learning Corportion (the "J3
charge") in 1996. Excluding these items, net income increased 17.9% to $294,850
in 1997 from $250,079 in 1996.
RESULTS BY BUSINESS SEGMENT
IMS
The IMS segment consists of IMS, the leading global provider of market
information and decision-support services to the pharmaceutical and healthcare
industries, and Sales Technologies, Inc. ("Sales Technologies"), a leading U.S.
provider of automated sales support technologies to the pharmaceutical industry.
IMS revenue increased 8.4% in 1997 to $980,521 from $904,444 in 1996. This
growth reflected strong performance of core business services, new product
introductions, geographic expansion and strong revenue growth at Sales
Technologies. Excluding the impact of a stronger U.S. dollar, revenue growth was
43
<PAGE>
11.4%. Operating income grew 14.0% to $265,351 in 1997 from $232,827 in 1996 due
to the factors described above. Operating income growth outpaced revenue growth
primarily due to IMS's ability to leverage its resources. Excluding the impact
of Year 2000 compliance and a stronger U.S. dollar in 1997, and discontinued
business units in 1996, operating income grew 18.2%.
NIELSEN MEDIA RESEARCH
Nielsen Media Research is the leading provider of television audience
measurement services, both nationally and locally, in the United States and
Canada. Nielsen Media Research revenue increased 12.3% in 1997 to $358,594 from
$319,404 in 1996. Revenue growth resulted from additional cable customers,
entrance into three new metered markets, an increase in the level of special
analyses and the continued growth of the Hispanic service. 1997 operating income
for the Nielsen Media Research segment was $107,732, compared with $99,461 in
1996, an increase of 8.3%. Excluding the impact of Year 2000 compliance,
operating income increased 11.0% to $110,413 in 1997, from $99,461 in 1996.
GARTNER
Gartner is the world's leading independent provider of research and analysis
on the computer hardware, software, communications and related information
technology industries. As discussed earlier, Cognizant's voting interest in
Gartner fell below 50% in September 1997. Accordingly, Cognizant has
deconsolidated Gartner and is accounting for its ownership interest on the
equity basis as of January 1, 1997. In 1997, the income statement impact of
Cognizant's ownership interest appears in non-operating income-net as Gartner
equity income and as a pre-tax unrealized gain on Gartner stock (included as a
separate line in the income statement). 1996 revenue and operating income for
Gartner were $424,382 and $60,114, respectively. Operating income was adversely
affected by the J3 charge. Excluding this item, operating income was $93,347.
EMERGING MARKETS
The Emerging Markets segment consists of Erisco, CTS, Enterprises, Pilot and
Super Systems Japan. In the third quarter, Cognizant sold Pilot and recorded a
non-cash pre-tax loss of $29,945. The segment had a 4.0% decrease in 1997
revenue to $79,038 from $82,366 in 1996, reflecting the sale of Pilot. Erisco,
CTS and Super Systems Japan posted high revenue growth through the addition of
new customers and new product introductions. The 1997 operating loss for the
segment was $9,752, compared with $12,903 in 1996, reflecting the sale of Pilot.
RESULTS BY GEOGRAPHIC AREA
Revenue in the United States decreased by 20.1% to $759,070 in 1997 from
$950,526 in 1996. This decrease is primarily the result of the Gartner
Deconsolidation. Excluding Gartner revenue in both years, 1997 revenue in the
United States increased by 12.0.%. The increase reflected Nielsen Media
Research's addition of new customers and service expansions; and new product
introductions and a strong performance of core business services by IMS,
partially offset by Pilot. Non-U.S. revenue decreased 15.5% to $659,083 in 1997
from $780,070 in 1996. The decrease is primarily the result of the Gartner
Deconsolidation. Excluding Gartner revenue in both years, 1997 revenue for
non-U.S. increased by 4.9%, and rose 9.4%, excluding the impact of a stronger
U.S. dollar. The non-U.S. revenue growth is due to new product introductions and
geographic expansion by IMS.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue in 1996 increased 12.2% to $1,730,596 from $1,542,340 in 1995.
Revenue growth was held down principally by the one-time impact in 1995 of
conforming fiscal quarters between Cognizant and Gartner ("the Gartner fiscal
quarter change") and by the impact of discontinued business units not in the
portfolio in 1996. Excluding these items, revenue growth was 14.8%. The increase
reflected continued high
44
<PAGE>
growth at Gartner, principally from the introduction of new products and
delivery options, and double-digit revenue performance at IMS and Nielsen Media
Research, partially offset by declining revenue at Pilot. The growth at Nielsen
Media Research was driven by the addition of new cable and broadcast customers,
new products and services and continued service expansion to existing customers.
The impact of a stronger U.S. dollar in 1996 decreased revenue growth for
Cognizant by approximately 1%.
Operating costs and selling and administrative expenses in 1996 were
$1,253,567, compared with $1,242,331 in 1995, an increase of 0.9%. Operating
costs and selling and administrative expenses in 1995 include a non-recurring
charge of $90,070 ($49,268 after-tax) for costs principally associated with
asset impairments, software write-offs and contractual obligations that have no
future economic benefit; an incremental provision for postemployment benefit
expense of $32,500 ($17,778 after tax); the Gartner fiscal quarter change and
the impact of discontinued business units not in the portfolio in 1996.
Operating costs and selling and administrative expenses in 1996 also include the
J3 charge. Excluding the above-mentioned 1995 and 1996 items, operating costs
and selling and administrative expenses increased 13.4% to $1,217,056 in 1996
from $1,072,980 in 1995, reflecting Cognizant's increased spending in new
revenue growth initiatives which contributed to revenue growth of 14.8% in 1996.
The impact of a stronger U.S. dollar in 1996 decreased operating costs and
selling and administrative expense growth by approximately 1%.
Operating income in 1996 increased 121.9% to $343,168 from $154,677 in 1995.
The increase reflects the impact of the 1995 and 1996 items discussed above, as
well as 1995 restructuring expense of $12,800 ($7,002 after-tax). Excluding
these 1995 and 1996 items, operating income increased 25.5% to $379,679 in 1996
from $302,438 in 1995. Operating income growth outpaced revenue growth,
primarily due to Gartner's ability to take advantage of economies of scale and
IMS's ability to leverage its resources. The impact of a stronger U.S. dollar in
1996 decreased operating income growth by approximately 2%.
Operating margin in 1996 was 19.8%, compared with 10.0% in 1995. The
increase reflects the impact of the 1995 and 1996 items described above.
Excluding these items in both years, operating margin was 21.9% in 1996,
compared with 20.1% in 1995.
Non-operating income-net in 1996 was $5,853, compared with $7,880 in 1995, a
decrease of 25.7%. The decrease was due principally to lower disposition gains
in 1996, partially offset by lower minority interest expense related to Gartner
due to the J3 charge, and the impact in 1996 of a foreign exchange hedge gain.
Cognizant's consolidated 1996 effective tax rate was 44.0%, compared with
45.3% in 1995. The tax rates were computed on a separate-company basis.
Net income in 1996 was $195,451, compared with $88,881 in 1995, an increase
of 119.9%. Excluding the after-tax impact of the items discussed in operating
and non-operating income, net income increased 28.0% to $208,075 in 1996, from
$162,593 in 1995.
RESULTS BY BUSINESS SEGMENT
IMS
IMS revenue increased 8.3% in 1996 to $904,444 from $835,422 in 1995. The
growth reflected strong performance of core business services, new product
introductions and geographic expansion at IMS; and strong revenue growth at
Sales Technologies. Excluding the impact of a stronger U.S. dollar in 1996 and
discontinued business units in both years, revenue growth was 11.2%. Operating
income grew 160.6% to $232,827 in 1996 from $89,335 in 1995. The increase was
primarily due to the absence in 1996 of: $53,630 of the 1995 non-recurring
charge, $24,300 of the 1995 incremental provision for postemployment benefits
expense, and 1995 restructuring expense of $12,800. Excluding these items,
discontinued business units in 1996, and the impact of a stronger U.S. dollar,
operating income growth was 21.3%. Operating income growth outpaced revenue
growth primarily due to IMS's ability to leverage its resources.
45
<PAGE>
NIELSEN MEDIA RESEARCH
Nielsen Media Research revenue increased 10.7% in 1996 to $319,404 from
$288,652 in 1995. Revenue growth resulted from the expansion of network
schedules, increased demand for special analyses, addition of cable customers
and entrance into two new metered markets. 1996 operating income for the segment
was $99,461, compared with $87,068 in 1995, an increase of 14.2%. The increase
was due, in part, to the absence in 1996 of $2,300 of the 1995 non-recurring
charge. Excluding this item, operating income growth for Nielsen Media Research
was 11.3%, reflecting the revenue factors described above.
GARTNER
Gartner, a majority-owned subsidiary in 1995 and 1996, had 1996 revenue of
$424,382, up 25.7% from $337,639 in 1995. Revenue growth was held down by the
impact of a Gartner fiscal quarter change. Excluding this impact, revenue growth
was 31.9%. This growth principally reflected strong gains from symposium events,
consulting and technology-based training businesses.
Operating income for Gartner increased 17.5% to $60,114 in 1996 from $51,180
in 1995. This growth was held down by the J3 charge. In addition, 1995 results
include $8,200 of the incremental provision for postemployment benefits expense
and the impact of the Gartner fiscal quarter change. Excluding these items,
operating income grew 67.2% to $93,347 in 1996 from $55,818 in 1995. The growth
in operating income was primarily due to revenue growth and Gartner's ability to
take advantage of economies of scale.
EMERGING MARKETS
Emerging Markets had a 2.2% increase in 1996 revenue to $82,366 from $80,607
in 1995. The increase reflected strong growth at CTS and the addition of new
customers at Erisco and Super Systems Japan, partially offset by declining
revenue at Pilot. The 1996 operating loss for the segment was $12,903, compared
with $18,366 in 1995. The 1996 operating loss was due to Pilot. 1995 results
include $16,940 of the 1995 non-recurring charge.
RESULTS BY GEOGRAPHIC AREA
Revenue in the United States increased by 13.9% to $950,526 in 1996 from
$834,786 in 1995. The increase reflected Gartner's introduction of new products
and delivery options, Nielsen Media Research's addition of new customers and
service expansions; and new product introductions by IMS, partially offset by
declining revenue at Pilot, the impact of the Gartner fiscal quarter change and
the absence of revenue from discontinued business units no longer in the
portfolio. Non-U.S. revenue increased 10.3% to $780,070 in 1996 from $707,554 in
1995, principally reflecting expansion into new global markets at IMS and
Gartner's increased subscription services revenue and geographic expansion.
Excluding the 1996 and 1995 items discussed previously and the impact of a
stronger U.S. dollar, non-U.S. revenue growth was 11.8%.
CHANGES IN FINANCIAL POSITION AT MARCH 31, 1998 COMPARED TO DECEMBER 31, 1997
Notes Receivable and Other Investments decreased to $100,707 at March 31,
1998, from $109,712 at December 31, 1997, primarily reflecting the sale of
certain Enterprise investments.
Accrued Income Taxes decreased to $48,335 at March 31, 1998, from $57,549 at
December 31, 1997, primarily reflecting tax payments during 1998, partially
offset by the first quarter 1998 tax provision.
CHANGES IN FINANCIAL POSITION AT DECEMBER 31, 1997 COMPARED WITH DECEMBER 31,
1996
Cash and Cash Equivalents decreased to $318,435 at December 31, 1997 from
$428,520 at December 31, 1996, primarily due to the purchase of 9,074,600 shares
of Cognizant Common Stock and the absence of Gartner's cash balance as a result
of the Gartner Deconsolidation. Offsetting the above were
46
<PAGE>
strong operating cash flows from IMS and Nielsen Media Research and proceeds
from minority interest financing in 1997.
Accounts Receivable-Net decreased to $303,609 at December 31, 1997 from
$453,791 at December 31, 1996, principally due to the Gartner Deconsolidation.
Investment in Gartner Group of $195,695 at December 31, 1997 represents the
accounting for Gartner on an equity basis, compared with consolidating Gartner
results in 1996.
Goodwill decreased to $87,430 at December 31, 1997 from $251,483 at December
31, 1996, principally due to the Gartner Deconsolidation and the sale of Pilot.
Accrued and Other Current Liabilities decreased to $212,944 at December 31,
1997 from $266,932 at December 31, 1996, principally due to the Gartner
Deconsolidation.
Deferred Revenue decreased to $111,921 at December 31, 1997 from $292,970 at
December 31, 1996, principally due to the Gartner Deconsolidation.
Minority Interests increased to $101,209 at December 31, 1997 from $90,635
at December 31, 1996, principally due to minority interest financing offset by
the Gartner Deconsolidation.
Shareholders' Equity decreased to $801,570 at December 31, 1997 from
$872,613 at December 31, 1996, principally due to the purchase of Cognizant
Common Stock, payment of dividends and the change in cumulative translation
adjustment, partially offset by net income.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In 1995, Cognizant recorded a pre-tax charge of $90,070 that included an
impairment loss of $40,570 related to long-lived assets for which management,
having the authority to approve such business decisions, committed to a plan to
discontinue certain product lines and dispose of certain real property.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" requires that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, this statement
requires recognition of an impairment loss when the sum of undiscounted expected
future cash flows is less than the carrying amount of such assets. The
measurement for such impairment loss is then based on the fair value of the
asset. While SFAS No. 121 affected the measurement of the impairment charge
noted above, it had no effect on the timing of recognition of the impairment.
The 1995 charge principally reflected an impairment loss of $40,570
reflecting the revaluation of certain fixed assets, administrative and
production systems and other intangibles that were replaced or no longer used.
In addition, Cognizant recorded a charge of $20,300, principally related to the
write-off of certain computer software product lines at Pilot. (See Note 3 to
the Cognizant Consolidated Financial Statements.)
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 "Accounting for Stock-Based Compensation", which requires that
companies with stock-based compensation plans either recognize compensation
expense based on the fair value of options granted or continue to apply the
existing accounting rules and disclose pro forma net income and earnings per
share assuming the fair value method had been applied. Cognizant has chosen to
continue applying Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for the fixed stock option plans. If compensation cost for
Cognizant's stock-based compensation plans had been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method of SFAS No. 123, Cognizant's net income and earnings per share
47
<PAGE>
would have been reduced to the pro forma amounts as disclosed in Note 12 to the
Cognizant Consolidated Financial Statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
simplifies existing computational guidelines, revises disclosure requirements
and increases the comparability of earnings-per-share data on an international
basis. Basic earnings per common share are based on the weighted average number
of common shares outstanding in each year. Diluted earnings per common share
assume that outstanding common shares were increased by shares issuable upon
exercise of those stock options for which market price exceeds exercise price,
less shares which could have been purchased by Cognizant with related proceeds.
This statement, which has been adopted by Cognizant, requires restatement of all
prior period earnings-per-share data presented. (See Note 2 to the Cognizant
Consolidated Financial Statements.)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for periods beginning after
December 15, 1997. Cognizant is in the process of determining its preferred
disclosure format.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which changes the way public companies
report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. This statement is effective for
financial statements for periods beginning after December 15, 1997. Management
has decided to early adopt this Statement. (See Note 19 to the Cognizant
Consolidated Financial Statements.)
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions And Other Postretirement Benefits", which changes current
financial statement disclosure requirements from those required under SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The statement does not change the
existing measurement or recognition provisions of SFAS Nos. 87, 88 or 106, and
is effective for the fiscal years beginning after December 15, 1997. Cognizant
is in the process of evaluating the disclosure requirements under this standard.
RESTRUCTURING
In 1995, Cognizant recorded a $12,800 restructuring provision, primarily to
write off software for product lines that were discontinued at Sales
Technologies, a unit of IMS.
NON-U.S. OPERATING AND MONETARY ASSETS
Cognizant operates globally, deriving a significant portion of its operating
income from non-U.S. operations. As a result, fluctuations in the value of
foreign currencies relative to the U.S. dollar may increase the volatility of
U.S. dollar operating results. In 1997, foreign currency translation decreased
U.S. dollar revenue growth and operating income growth by approximately 2% and
1%, respectively. In 1996, foreign currency translation decreased U.S. dollar
revenue growth and operating income growth by approximately 1% and 2%,
respectively.
Non-U.S. monetary assets are maintained in currencies other than the U.S.
dollar, principally in Switzerland, Japan and Spain. Changes in the value of
these currencies relative to the U.S. dollar are charged or credited to
shareholders' equity. The effect of exchange rate changes during 1997 decreased
the U.S. dollar amount of cash and cash equivalents by $11,222.
48
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $35,969 for the three
months ended March 31, 1998 compared with $58,537 for the comparable period in
1997. The decrease of $22,568 principally reflects a lower increase in deferred
revenues ($15,276), and a net increase in Other Working Capital items ($5,432).
Net cash used in investing activities totaled $25,946 for the three months
ended March 31, 1998 compared with $37,383 for the comparable period in 1997.
The decrease in cash usage of $11,437 is principally due to higher proceeds from
the sale of investments in 1998 as compared with 1997 ($16,161), partially
offset by payments for acquisitions of businesses ($2,938).
Net cash provided by / (used in) financing activities totaled $15,663 for
the three months ended March 31, 1998 compared with ($99,311) for the comparable
period in 1997. The increase in cash provided by financing activities of
$114,974 was primarily due to the purchase of treasury shares in 1997 ($95,069)
and higher proceeds from the exercise of stock options in 1998 ($17,833), as
compared with 1997 ($1,151).
At December 31, 1997, cash and cash equivalents totaled $318,435. At
December 31, 1996, cash and cash equivalents totaled $428,520 (including
$123,697 of Gartner cash). The decrease in cash of $110,085 was primarily due to
the Gartner Deconsolidation.
Net cash provided by operating activities was $357,014, $352,023 and
$288,539 in 1997, 1996 and 1995, respectively. The increase of $4,991 in
operating activities in 1997 primarily reflected increased cash from operations,
improved collections of accounts receivable, the absence in 1997 of
restructuring payments, and a lower level of postemployment benefit and
non-recurring charge payments. These increases were partially offset by payment
of income taxes in 1997 of $72,827. The increase of $63,484 in net cash provided
by operating activities in 1996 primarily reflected increased cash from
operations, improved collections of accounts receivable and lower postemployment
benefit payments, partially offset by lower other working capital items
($75,459), lower deferred revenue ($30,512), higher income tax payments
($21,416) and payments related to the 1995 non-recurring charge of ($13,125).
Net cash used in investing activities totaled $240,679 for 1997, compared
with $158,065 and $148,169 in 1996 and 1995, respectively. The increase in cash
usage in 1997 of $82,614 primarily reflected the change in Gartner to an equity
basis ($123,697), the absence of net proceeds from marketable securities
($27,601) offset in part by higher proceeds from the sale of businesses and
investments ($43,336) and the absence of purchases of Gartner common stock
($49,419). The increase in cash usage in 1996 of $9,896 primarily reflected the
purchase of Gartner common stock, higher payments for acquisitions and equity
investments, offset in part by higher net proceeds for marketable securities and
lower additions to computer software.
Net cash (used in)/provided by financing activities totaled ($215,198) for
1997, compared with $80,531 and ($116,095) in 1996 and 1995, respectively. The
increase in 1997 of cash used in financing activities primarily reflected the
purchase of shares of Cognizant Common Stock ($324,767) and dividend payments
($19,883); partially offset by minority interest financing $100,000 and proceeds
from exercise of stock options $26,409.
The increase in 1996 cash provided by financing activities principally
reflected a net amount transferred from D&B as a result of Cognizant's
separation from D&B in the D&B spin-off, compared with net transfers to D&B in
1995 and long-term liabilities assumed with the D&B spin-off related to prior
business transactions, offset in part by the payment of short-term debt assumed
with the D&B spin-off. The increase in cash usage in 1995 of $10,035 primarily
reflected short and long-term debt payments, included in Other financing
activities.
On February 18, 1997, Cognizant announced that its board of directors had
authorized a systematic stock repurchase program to buy up to 8,500,000 shares
of Cognizant's outstanding common stock. The stock repurchases are held in
treasury and reissued upon exercise of employee stock options. This program was
completed on September 5, 1997 at a total cost of $299,737.
49
<PAGE>
On October 21, 1997, Cognizant announced that its board of directors had
authorized a second systematic stock repurchase program to buy up to 10,000,000
shares of Cognizant's outstanding common stock. A portion of this program is
intended to cover option exercises. Through December 31, 1997, 574,600 shares
have been acquired at a total cost of $22,756.
Cognizant's existing balances of cash, cash equivalents and marketable
securities, and cash generated from operations and debt capacity are expected to
be sufficient to meet Cognizant's long-term and short-term cash requirements
including dividends, acquisitions and the stock repurchase programs.
YEAR 2000
Many existing computer systems and software applications use two digits,
rather than four, to record years, e.g., "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.
Cognizant depends on systems and software both for its internal operations
as well as for the receipt of data used in its information products and the
transmission of those products to its customers. Cognizant began to address the
Year 2000 issue in 1996. It expects to complete upgrading or replacing affected
programs during 1998, with testing to be done during 1999. The operating income
impact of Year 2000 compliance was $12,500 in 1997. Based on current
information, the operating income impact of Year 2000 compliance in 1998 is
expected to be in the range of $50,000 to $55,000. Year 2000 compliance
expenditures for 1999, the final year of the project, are in the process of
being determined; however, they are expected to be significantly less than in
1998. These costs are being expensed as incurred.
In addition, Cognizant is communicating with its customers and data
suppliers to assess their ability to address the Year 2000 issue. Failures by
customers to be Year 2000 compliant could hinder their ability to make use of
Cognizant's products. Failures by data suppliers could disrupt the flow of data
used in Cognizant's products. While Cognizant believes most companies it deals
with are addressing the issue, it is unable to determine the effect, if any,
such failures might have on Cognizant's business or future results of
operations.
The costs of addressing the Year 2000 issue and the date on which Cognizant
expects to complete Year 2000 compliance are based on the best estimates of
Cognizant management, which were derived utilizing various assumptions regarding
future events. There can be no guarantee that these estimates will be achieved,
and actual results may differ materially. Specific factors that may cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area of expertise, the ability to locate and
correct all relevant computer codes, and the success of customers and suppliers
in addressing the Year 2000 issue.
MARKET RISK
Cognizant's primary market risks are the impact of foreign exchange
fluctuations on non-dollar-denominated revenue and price fluctuations on equity
securities.
In the normal course of business, Cognizant employs established practices
and procedures to manage its exposure to fluctuations in the value of foreign
currencies using a variety of financial instruments.
Cognizant's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention on its
core business activities. Accordingly, Cognizant enters into various contracts
which change in value as foreign exchange rates change to protect the value of a
portion of committed and anticipated foreign currency revenues and
non-functional currency assets and liabilities. The principal currencies hedged
are the Japanese yen, Swiss franc, German mark and Italian lira. By policy,
Cognizant maintains
50
<PAGE>
hedge coverage between minimum and maximum percentages of its anticipated
foreign exchange exposures over the next year. The gains and losses on these
hedges offset changes in the value of the related exposures.
It is Cognizant's policy to enter into foreign currency transactions only to
the extent necessary to meet its objectives as stated above. Cognizant does not
enter into foreign currency transactions for speculative purposes.
The fair value of Cognizant's hedging instruments are subject to change as a
result of potential changes in foreign exchange rates. The potential loss in
fair value for foreign exchange rate-sensitive instruments, based on a
hypothetical 10% decrease in the value of U.S. dollar or, in the case of
non-dollar-related instruments, the currency being purchased, was $2,600 at
December 31, 1997. The estimated fair values of the foreign exchange risk
management contracts were determined based on quoted market prices.
Cognizant also invests in marketable securities and is subject to equity
price risk. These investments are classified as available for sale and
consequently, carried at fair value, with unrealized gains and losses, net of
income taxes, reported as a component of shareholders' equity. Cognizant does
not hedge this market risk exposure. A 10% decline in the market price of these
equity securities would cause the fair value of the securities to decrease by
$4,800 at December 31, 1997.
DIVIDENDS
The payment and level of cash dividends by Cognizant are subject to the
discretion of the Board of Directors of Cognizant. Although Cognizant has
declared and anticipates that it will declare quarterly dividends in the range
of 5% to 8% of net earnings, dividend decisions will be based on, and affected
by, a number of factors, including the operating results and financial
requirements of Cognizant.
51
<PAGE>
IMS HEALTH BUSINESS
AS DESCRIBED UNDER "THE DISTRIBUTION--FORM OF TRANSACTION; BASIS OF
PRESENTATION", FOR FINANCIAL REPORTING PURPOSES, IMS HEALTH WILL BE TREATED AS
THE "ACCOUNTING SUCCESSOR" TO COGNIZANT. THEREFORE, THE HISTORICAL FINANCIAL
INFORMATION INCLUDED HEREIN WITH RESPECT TO IMS HEALTH IS THAT OF COGNIZANT.
HOWEVER, WHILE THE FOLLOWING DESCRIPTION OF THE IMS HEALTH BUSINESS IS DERIVED
FROM THE COGNIZANT FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, IT INCLUDES
ADDITIONAL INFORMATION ON THE IMS HEALTH BUSINESS AND IT DOES NOT INCLUDE A
DESCRIPTION OF THE NIELSEN MEDIA RESEARCH BUSINESS FROM WHICH THE IMS HEALTH
BUSINESS IS BEING SEPARATED IN THE DISTRIBUTION. FOR A DESCRIPTION OF THE
NIELSEN MEDIA RESEARCH BUSINESS, SEE "NIELSEN MEDIA RESEARCH BUSINESS" INCLUDED
ELSEWHERE IN THIS INFORMATION STATEMENT.
I.M.S. INTERNATIONAL
GENERAL
IMS provides information and decision-support services to the pharmaceutical
and healthcare industries worldwide. These services broadly include market
research services, sales management services, and other professional, software,
direct marketing and research and development services. IMS provides information
services covering 94 countries and maintains offices in 74 countries on six
continents, with 64% of total revenue generated outside the United States in
1997. In 1997, IMS continued its expansion in developing markets in Eastern
Europe, Asia and Sub-Saharan Africa. Revenue in 1997 increased by 16% over 1996
in these developing markets.
MARKET RESEARCH SERVICES
Market research services represented approximately 41% of IMS's worldwide
revenue in 1997. The principal market research services are syndicated
pharmaceutical, medical, hospital, promotional, prescription and self-medication
audits. Market research services are utilized by clients for various strategic
and tactical purposes, including analyzing market shares, therapeutic
prescribing trends and price movements at the national and subnational levels.
The information reported in these services is generated or derived from data
collected primarily from pharmaceutical manufacturers, pharmaceutical
wholesalers, pharmacies, hospitals and doctors. Market research services are
delivered to clients via hardcopy reports, CD-ROMs, computer on-line services
and magnetic media for use in client computer systems. IMS's principal market
research services are as follows:
- PHARMACEUTICAL AUDITS. These audits measure the sale of pharmaceutical
products into pharmacies, supplemented in some countries by data collected
from prescribing physicians, retail chains and discount stores. These
audits contain data projected to national estimates, showing product sales
by therapeutic class broken down by package size and dosage form. IMS
publishes pharmaceutical audits in over 84 countries.
- MEDICAL AUDITS. These audits are based on information collected from
panels of practicing physicians and contain projected national estimates
of the number of consultations for each diagnosed disease with details of
the therapy prescribed. These audits also analyze the use physicians make
of individual drugs by listing the diseases for which they are prescribed,
the potential therapeutic action the physician is expecting, other drugs
prescribed at the same time, and estimates of the total number of drugs
used for each disease. IMS publishes medical audits in over 47 countries.
- HOSPITAL AUDITS. These audits contain data projected to national estimates
and show the sale of pharmaceutical products to hospitals by therapeutic
class. Related reports provide audits of laboratory diagnostic supplies,
hospital supplies, and hospital records. IMS publishes hospital audits for
37 countries.
- PROMOTIONAL AUDITS. These audits measure pharmaceutical promotion for a
particular market, including sales-force promotion and journal and mail
advertising, based on information received
52
<PAGE>
from panels of physicians and from monitoring medical journals and direct
mail. IMS publishes promotional reports for 27 countries.
- PRESCRIPTION AUDITS. These audits analyze the rate at which drugs move out
of the pharmacy and into the hands of the consumer, and measure both what
is prescribed by physicians and what is actually dispensed at the
pharmacy. IMS publishes prescription audits in over 13 countries.
- SELF-MEDICATION REPORTS. These reports provide detailed product movement,
market share and pricing information for over-the-counter, personal care
and patient care products. IMS publishes self-medication reports in 22
countries.
- OTHER MARKET RESEARCH REPORTS. These include managed care reports which
offer an array of information to quantify the effects of managed care on
the pharmaceutical and healthcare industry; personal care reports which
measure the sale of healthcare accessories, wound care and dietetic aids;
and veterinary reports which analyze the animal care pharmaceutical
market. IMS has developed, in certain countries, disease and treatment
information at the patient level (which information is not identifiable to
any individual patient) that gives participants in the healthcare industry
new insights into the treatment of diseases. The availability, scope and
frequency of the foregoing reports vary on a country-by-country basis.
SALES MANAGEMENT SERVICES
Sales management services represented approximately 45% of IMS's worldwide
revenue in 1997. Sales management services include sales territory reports,
prescription tracking reports, call reporting services and doctor profiling
services. These reports are customized for each pharmaceutical client and are
used principally by pharmaceutical manufacturers to measure and forecast the
effectiveness and efficiency of sales representatives and to target the
marketing and sales efforts of a client's salesforce. IMS's principal sales
management services are as follows:
- SALES TERRITORY REPORTING SERVICES. Sales territory reporting is the
principal sales management service offered by IMS to its pharmaceutical
clients. Sales territory reports can be precisely tailored for each
client, and measure the sales of a client's own products and those of
competitors within specified geographical configurations. These reports
are designed to provide marketing and sales managers with a reliable
measurement of each salesperson's activity and effectiveness in his or her
sales territory, and therefore are used by clients, among other things,
for determining sales force compensation. Data reported for multiple
territories are used for applications such as resource allocation,
territory alignment, market analyses and distribution management.
Depending on the particular market, sales territory reports are available
to clients on a weekly, monthly or quarterly basis. In the United States,
sales territory reports from IMS's DDD service allow pharmaceutical
clients to track the flow of their products and those of their competitors
to various levels of geography and channels of distribution. The DDD
database contains a virtual census of sales of pharmaceutical products
through all distribution channels, including direct sales by
pharmaceutical manufacturers and indirect sales through drug wholesalers,
mail order distributors, warehousing chains and other market participants.
IMS provides sales territory reporting services in 34 countries.
- PRESCRIPTION TRACKING REPORTING SERVICES. Prescription tracking reporting
services are designed to monitor prescription activity and to track the
movement of pharmaceutical products out of pharmacies. Prescription
tracking services are used by pharmaceutical companies to facilitate
product marketing at the prescriber level. In the United States, the
Xponent service monitors prescription activity at the retail pharmacy and
mail order outlet level, and uses a patented statistical methodology to
project the prescription activity of over one million individual
prescribers on a monthly basis. In Europe, IMS has begun rolling out
Xtrend, a prescription database service. The Xtrend database is built from
prescription data collected from retail pharmacies and coding centers
which are linked to the geographical area in which the prescription was
written, and where permissible under local data privacy laws, to
individual prescribers. Xtrend is currently available in
53
<PAGE>
the United Kingdom, Germany, Belgium, and the Netherlands, and is expected
to be launched in Italy, Spain, and France in 1998. In order to protect
patient privacy, IMS does not collect any data with patient-identifiable
information.
- CALL REPORTING SERVICES. Call reporting services further assist
pharmaceutical companies in the management of their sales forces. IMS's
call reporting services aid a pharmaceutical client's sales
representatives and management to record, assess, and organize their call
activity to physicians and other healthcare providers. IMS provides call
reporting services in over 10 countries.
Sales management services are made available to clients and their sales
representatives and management via hardcopy reports, CD-ROMs, computer on-line
services, and magnetic media for use in client computer systems. IMS's data
delivery systems assist clients in maximizing efficiency by aiding in the
setting of sales targets and calculation of sales bonuses; giving fast access to
sales data and permitting more sophisticated analyses; improving call reporting;
and improving communication between sales management and their sales forces. In
the United States, IMS has launched Xplorer, a customized client-server decision
support system that allows a client to store large amounts of data at its own
site and integrate its own internal sales and marketing data with IMS data and
other external data. IMS also provides clients with customized data warehouse
tools. In 1997, IMS released Xplorer.Web, which is a web-type browser front-end
to the Xplorer system.
VALUE-ADDED SERVICES
The remaining 14% of IMS's 1997 revenue was derived primarily through
professional consulting, software, direct marketing, and research and
development services. IMS provides pharmaceutical and other clients with a range
of value-added services that are used (i) to study specific issues and trends in
the pharmaceutical marketplace and the healthcare industry, (ii) to evaluate the
effectiveness of marketing programs, (iii) to analyze components of a product
marketing program at any stage of its implementation, and (iv) for consultancy
in optimizing strategy, marketing programs and product commercialization. These
services are as follows:
- IMS GLOBAL SERVICES. IMS's Global Services unit is based in the United
Kingdom and provides global level information services and strategic
solutions to pharmaceutical clients operating on a multinational level.
Global Services' core service offering, MIDAS, is a multinational
integrated data analysis tool and on-line system which harnesses IMS's
worldwide databases and is used by the pharmaceutical industry to assess
world-wide pharmaceutical information. MIDAS gives clients on-line access
to IMS-compiled pharmaceutical, medical and chemical statistics. Using
MIDAS, clients are able to select information from the national databases
compiled by IMS and produce statistical reports in the format the client
requires. IMS Global Services also publishes various in-depth reviews of
the worldwide pharmaceutical marketplace and provides custom market
research services.
- PROFESSIONAL CONSULTING SERVICES. IMS's professional consulting services
are provided to assist clients in the analysis and evaluation of market
trends, strategies and tactics, and to assist in the development and
implementation of customized software applications and data warehouse
tools. In the United States, IMS provides professional consulting services
through its divisions The Plymouth Group and the Decision Support
Consulting Group. The Plymouth Group provides a range of custom market
research and consulting services on the pharmaceutical and healthcare
marketplace. The Decision Support Consulting Group assists clients in
designing customized decision support systems based on a variety of
cutting-edge technologies which enable clients to optimize IMS data more
rapidly and effectively in their decision-making process. Outside of the
United States, a variety of consulting services is generally offered on a
country-by-country basis.
- SOFTWARE SERVICES. IMS's software services include the development,
licensing and implementation of healthcare information systems, including
electronic sales territory management systems provided by IMS's Sales
Technologies, Inc. ("Sales Technologies") operating unit. Sales
Technologies is
54
<PAGE>
a leading provider in the United States of automated sales support
technologies to the pharmaceutical industry. Sales Technologies' core
product, Cornerstone, is a software suite which provides pharmaceutical
salespeople with a comprehensive tool that supports key selling
requirements, including profiling, targeting, activity reporting, team
selling and sample management. In October 1997, Sales Technologies entered
into a joint venture agreement with Valuation, Ltd. ("Valuation") whereby
Valuation will be the exclusive value-added reseller of Cornerstone in
Europe. IMS's Amfac/Chemdata business unit is a significant provider of
pharmacy dispensing and point-of-sales software systems to retail
pharmacies in Australia.
- DIRECT MARKETING SERVICES. IMS engages in the direct marketing businesses
in the United States. Clark-O'Neill, Inc. ("Clark-O'Neill"), a
wholly-owned subsidiary, represents the core of IMS's direct marketing
business. Clark-O'Neill's services include sample distribution,
pharmaceutical field force support services, publication circulation
management, direct mail, telemarketing projects utilizing physicians and
other healthcare professionals, and other customized promotion programs.
- RESEARCH AND DEVELOPMENT SERVICES. IMS's research and development services
provide clients with information and workstation tools intended to improve
the effectiveness and speed of clinical research and subsequent regulatory
approvals. IMS's regulatory affairs database, IDRAC, covers the European
Union and the United States and guides users through the drug development
and registration process. IMS also owns a 40% equity interest in DataEdge,
an information provider to the pharmaceutical industry on clinical trial
design and implementation.
DATA SUPPLIERS
Over the past four decades, IMS has developed strong relationships with its
data suppliers in each market in which it operates. As the supply of
pharmaceutical data is critical to IMS's business, IMS devotes significant human
and financial resources to its data collection efforts and in many cases has
historical connections with the trade associations and professional associations
involved. In the United States, IMS America and Clark-O'Neill each have been
designated as database licensees by the American Medical Association ("AMA") for
use and sublicensing of the AMA's physician database.
CUSTOMERS
Sales to the healthcare industry accounted for substantially all of IMS's
revenue in 1997. All major pharmaceutical companies are customers of IMS, and
many of the companies subscribe to reports and services in several countries.
IMS's customer base is broad in scope and enables it to avoid dependence on any
single customer. None of IMS's customers accounted for more than 10% of its
gross revenues in 1997.
COMPETITION
While no competitor provides the geographical reach or breadth of IMS's
services, IMS does have competition in each of the countries in which it
operates from other information services companies, as well as the in-house
capabilities of its customers. Generally, competition has arisen on a
country-by-country basis. In the United States, certain of IMS's sales
management services, including its sales territory reports, representing
approximately 60% of the annual revenue of the IMS America unit, compete with
the services of National Data Corp. Quality, completeness and speed of delivery
of information services and products are the principal methods of competition in
IMS's market.
ERISCO, INC.
Erisco has been a leading provider of application software and services
serving the healthcare industry for over two decades. Erisco's legacy system
solutions, ClaimFacts and GroupFacts, were designed to help indemnity insurance
carriers, third party administrators and self-administered corporations manage
the administration of group health and life insurance products.
55
<PAGE>
Erisco's primary offering, Facets, is a client/server system which
integrates advanced technology with clinical information to help managed care
organizations ("MCOs") provide high-quality, cost-effective solutions in their
marketplace. Primary markets include health maintenance organizations, preferred
provider organizations, Blue Cross/Blue Shield organizations, managed-indemnity
carriers and specialized MCOs.
Erisco's strategic growth will come from Facets sales to the MCO market.
Ongoing change in healthcare has had a significant impact on this market
segment, resulting in the migration of plan members from indemnity-oriented
plans to managed care. By the year 2000, managed health plan membership in the
U.S. is estimated to surpass the 100,000,000 mark. Erisco believes that market
growth and the limitations of aging information systems will increase the demand
for sophisticated managed care applications.
Within the high-growth managed care market segment, Erisco competes with
three other information systems vendors -- HBOC/Amisys, Computer Sciences
Corporation and Health Systems Design. Competition is principally based on
reputation, functionality, ease of use and service.
Erisco also extends its Facets business solution through a service bureau
offering for low-volume customers, and through alliances with strategic,
complementary systems partners, and systems integration and implementation
consultants.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
SERVICES
CTS delivers high-quality, cost-effective, full life cycle solutions to
complex software development and maintenance problems. Its services include the
following:
- APPLICATION DEVELOPMENT SERVICES. CTS develops new applications for IBM
mainframe, client/server architectures and other emerging technology
environments. CTS follows either of two approaches including (i) full life
cycle application development in which CTS assumes total start-to-finish
responsibility and accountability for analysis, design, implementation and
testing of systems, and (ii) cooperative development in which CTS's
employees work with a customer's in-house information technology ("IT")
personnel to analyze, design, implement and test new systems.
- APPLICATION MAINTENANCE SUPPORT SERVICES. CTS provides services to ensure
that a customer's legacy software systems are operational and responsive
to end-users' changing needs. In doing so, CTS is often able to introduce
process enhancements and improve service levels to customers requesting
modifications and on-going support.
- YEAR 2000 COMPLIANCE SERVICES. With the year 2000 approaching, computer
software systems that were not designed to process dates correctly in the
next century are expected to fail. Organizations rely on mission-critical
software systems and must either repair the problem presented by the Year
2000 issue or replace legacy systems. CTS uses its proprietary Year 2000
toolset and methodology, Century Transition Services 2000, to provide a
cost-effective total solution for all phases of a Year 2000 compliance
project. The Century Transition Services 2000 methodology covers the
entire life cycle of a Year 2000 compliance project and comprises a seven
step process: (i) inventory preparation, (ii) impact analysis, (iii)
strategy and design, (iv) code change and data migration, (v) unit, system
and acceptance testing, (vi) implementation and (vii) post-implementation
support. The Century Transition Services 2000 toolset covers a wide array
of common programming languages and environments including many
client/server environments. CTS is thus able to provide complete solutions
across a larger portion of customers' systems.
- EUROCURRENCY COMPLIANCE SERVICES. The upcoming monetary union of the
European Community presents a significant opportunity for CTS as computer
systems which deal with any European denominated currency will need to be
modified to handle local currency and Eurocurrency transactions. CTS has
begun to address the Eurocurrency compliance problem and has established
56
<PAGE>
a dedicated practice to focus on this problem. CTS believes that portions
of its Year 2000 toolset and methodology can be extended to efficiently
address the European currency compliance needs of customers.
- TESTING AND QUALITY ASSURANCE SERVICES. Testing and quality assurance is a
critical aspect of any software development activity. CTS works with
customers to better define the quality assurance processes which are in
use by the customers' in-house IT departments. CTS utilizes its quality
assurance expertise to ensure better quality software through fundamental
process improvements.
- RE-HOSTING AND RE-ENGINEERING SERVICES. Through CTS's re-hosting and
re-engineering service offerings, CTS works with customers to migrate
systems based on legacy computing environments to newer,
open-systems-based platforms and client/server architectures.
CUSTOMERS
CTS began operations in 1994 as an in-house technology development center
for D&B, the former parent of Cognizant, and has only served third-party
customers for a limited time. While CTS has increased the percentage of revenues
generated from third parties, 41.8% of CTS's 1997 revenue was generated from
Cognizant and its current affiliates and an additional 31.9% of CTS's 1997
revenue was generated from companies previously affiliated with D&B. During
1997, CTS's five largest third-party customers (which include certain former
affiliates) accounted for 36.6% of revenues. CTS believes that demand for Year
2000 compliance services will diminish after the Year 2000, as many solutions
are implemented and tested. A core element of CTS's growth strategy is to use
the business relationships it has developed and the knowledge of its customers'
computer systems obtained in providing Year 2000 services to generate additional
projects for these customers. There can be no assurance, however, that CTS will
be successful in generating demand for other services from its Year 2000
customers.
COMPETITION
The IT services market includes a large number of participants, is subject
to rapid changes and is highly competitive. In certain markets in which CTS
competes, such as the Year 2000 compliance market, there are no significant
barriers to entry. Many of CTS's competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
CTS. The principal competitive factors affecting the markets for CTS's services
include (i) performance and reliability, (ii) quality of technical support,
training and services, (iii) responsiveness to customer needs, (iv) reputation,
experience and financial stability and (v) competitive pricing of services.
COGNIZANT ENTERPRISES, INC.
Enterprises invests in emerging and established businesses, primarily in the
health care information industry. It invests as a limited partner in Information
Partners Capital Fund, Information Associates, L.P. and Information Associates
II, L.P., venture capital limited partnerships, as well as through direct
investments.
SSJ K.K.
Super Systems Japan, an entity based in Japan, markets financial application
software products and services tailored for the Japanese market.
FOREIGN OPERATIONS
As indicated above, IMS HEALTH and its subsidiaries engage in a significant
portion of their business outside of the United States. IMS HEALTH's foreign
operations are subject to the usual risks inherent in carrying on business
outside of the United States, including fluctuation in relative currency values,
possible nationalization, expropriation, price controls and other restrictive
government actions.
57
<PAGE>
IMS HEALTH believes that the risk of nationalization or expropriation is reduced
because its products are software, services and information, rather than the
production of products which require manufacturing facilities or the use of
natural resources.
INTELLECTUAL PROPERTY
IMS HEALTH owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business. Management believes that the "IMS" name and related names,
marks and logos are of material importance to IMS HEALTH. IMS HEALTH is licensed
to use certain technology and other intellectual property rights owned and
controlled by others, and similarly, other companies are licensed to use certain
technology and other intellectual property rights owned and controlled by IMS
HEALTH. The technology and other intellectual property rights licensed by IMS
HEALTH are of importance to its business, although management of IMS HEALTH
believes that IMS HEALTH's business, as a whole, is not dependent upon any one
intellectual property or group of such properties.
The names of IMS HEALTH's and its subsidiaries' products and services
referred to herein are trademarks, service marks, registered trademarks or
registered service marks owned by or licensed to IMS HEALTH or one of its
subsidiaries.
EMPLOYEES
As of December 31, 1997, IMS HEALTH had approximately 7,200 employees in
approximately 70 countries. Of these, approximately 2,500 are located in the
United States, and none of these is represented by labor unions. In the
Netherlands, Italy, Spain, France and Germany, IMS has Workers' Councils, which
are a legal requirement in those countries. IMS has also established a European
Workers' Council as required under European Union regulations. IMS HEALTH
believes that, generally, relations with its employees are good and have been
maintained in a normal and customary manner.
PROPERTIES
IMS HEALTH's real property is geographically distributed to meet sales and
operating requirements worldwide. Most of IMS HEALTH's properties are leased
from third parties. IMS HEALTH's properties are generally considered to be both
suitable and adequate to meet current operating requirements and virtually all
space is being utilized.
STRATEGY
IMS HEALTH believes that the expanding need for efficient quality healthcare
will generate increasing demand for healthcare information services. IMS
HEALTH's strategy is to capitalize on the significant new growth opportunities
in the industry by expansion of its core business through internal investment
and carefully targeted acquisitions in its areas of strength.
Key areas for internal investment and development include:
- New product and service innovations, such as the launch of the Xtrend
prescription tracking service in Europe;
- Market extension, by introducing existing products to new markets through
IMS HEALTH's global distribution channels;
- Geographic expansion, including building upon IMS HEALTH's initial
presence in China, India and Poland and planned expansion in Sri Lanka,
Nepal, Zimbabwe and Kenya; and
- Expansion beyond the traditional customer base to provide new products and
services within the healthcare industry.
58
<PAGE>
Acquisitions are expected to help drive future growth. However, acquisitions
will be measured against clearly defined criteria:
- Target companies should be within the healthcare information services
market; and
- Target companies should be logical extensions of IMS HEALTH's businesses
into related areas.
RECENT DEVELOPMENTS
On March 23, 1998, Cognizant announced the signing of definitive agreements
to acquire Walsh, which develops and markets leading-edge sales force automation
systems for pharmaceutical companies, and PMSI, which provides information
services to pharmaceutical and healthcare companies in the U.S., Europe and
Japan. Under terms of the agreements, Walsh shareholders will receive .3041
shares of Cognizant Common Stock per Walsh share (or, based on a Cognizant share
price of $51.792, consideration of approximately $167 million), and PMSI
shareholders will receive .2800 shares of Cognizant Common Stock per PMSI share
(or, based on a Cognizant share price of $51.792, consideration of approximately
$180 million). The number of shares of Cognizant Common Stock to be issued in
connection with each of the Acquisitions is subject to a collar adjustment based
on the price of Cognizant Common Stock during a period prior to the closing of
the Acquisitions. Currently Walsh and PMSI have approximately 10.6 million and
approximately 12.4 million shares outstanding, respectively. Cognizant expects
to issue approximately 3.2 million shares from treasury stock to consummate the
Walsh acquisition. The PMSI acquisition will not be completed until after the
Record Date and therefore, PMSI stockholders will receive, in lieu of Cognizant
Common Stock, IMS HEALTH Common Stock pursuant to a formula designed to
recalibrate the collar computations based on the relative value of IMS HEALTH to
the total value of IMS HEALTH and Nielsen Media Research following the
Distribution. If the Walsh acquisition is not completed prior to the Record
Date, Walsh shareholders will also receive IMS HEALTH Common Stock pursuant to a
similar formula. The Acquisitions, which have been independently authorized by
the Cognizant, Walsh and PMSI Boards of Directors, are subject to approval by
Walsh and PMSI shareholders and customary closing conditions. The acquisition of
PMSI is also subject to the receipt of regulatory and other required approvals.
Cognizant has received all the necessary regulatory approvals for the
acquisition of Walsh. Each of the Acquisitions is an independent transaction and
neither is conditioned upon the consummation of the other or upon the
consummation of the Distribution. Following the Distribution, Walsh and PMSI
will be part of IMS HEALTH.
On April 9, 1998, CTS filed a registration statement with the SEC with
respect to an underwritten offering of 2,917,000 shares of Class A Common Stock,
par value $0.01 per share, of CTS (3,354,550 if the underwriters' over-allotment
option granted by Cognizant is exercised in full). Of such shares, 2,500,000 are
to be offered by CTS and 417,000 shares are to be offered by Cognizant.
Following the offering, Cognizant will own 66.7% of the outstanding common stock
of CTS and approximately 95.3% of the combined voting power of CTS's outstanding
common stock and, accordingly, will continue to consolidate CTS results within
its financial statements. The initial offering price is estimated to be between
$11.00 and $13.00 per share. The transaction is expected to result in a
significant one-time gain to Cognizant. A portion of the proceeds to be received
by CTS in the offering will be used to repay an intercompany balance. The
registration statement has not become effective under the Securities Act. If the
offering is not completed prior to the Distribution Date, IMS HEALTH will be the
selling stockholder in the offering.
LEGAL PROCEEDINGS
IMS HEALTH and its subsidiaries are involved in legal proceedings and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of all current proceedings, claims and litigation, if
decided adversely, could have a material effect on quarterly or annual operating
results or cash flows when resolved in a future period. However, in the opinion
of management, these matters will not materially affect IMS HEALTH's
consolidated financial position.
In addition, on July 29, 1996, 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.
59
<PAGE>
The complaint, as subsequently amended, 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
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 million, which amount IRI
has asked to be trebled under the antitrust laws. IRI also seeks punitive
damages in an unspecified amount. By notice of motion dated 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 on the motion to dismiss. The Court dismissed 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 and counterclaims.
Defendants denied all material allegations of the complaint. In addition, A.C.
Nielsen Company asserted counterclaims against IRI alleging that IRI has made
false and misleading statements about A.C. Nielsen Company's services and
commercial activities and that such conduct constitutes a violation of Section
43(a) of the Lanham Act and unfair competition. A.C. Nielsen Company seeks
injunctive relief and damages.
On July 7, 1997, IRI filed an amended complaint seeking to replead the claim
of attempted monopolization in the United States, which had been dismissed by
the Court in its May 6, 1997 decision. By notice of motion dated August 18,
1997, defendants moved for an order dismissing the amended claim. On December 1,
1997, the Court denied defendants' motion.
In light of the potentially significant liabilities which could arise from
the IRI Action and in order to facilitate the 1996 Distribution, D&B, ACNielsen
(the parent company of A.C. Nielsen Company) and Cognizant entered into the
Indemnity and Joint Defense Agreement pursuant to which they agreed (i) to
certain arrangements allocating IRI 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 IRI Liabilities up to 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
is able to pay after giving effect to (i) any plan submitted by such investment
bank which is designed to maximize the claims paying ability of ACNielsen
without impairing the investment banking firm's ability to deliver a viability
opinion (but which will not require any action requiring shareholder approval),
and (ii) payment of related fees and expenses. For these purposes, financial
viability means the ability of ACNielsen, after giving effect to such plan, the
payment of related fees and expenses and the payment of the ACN Maximum Amount,
to pay its debts as they become due and to finance the current and anticipated
operating and capital requirements of its business, as reconstituted by such
plan, for two years from the date any such plan is expected to be implemented.
Under the terms of the 1996 Distribution Agreement, as a condition to the
Distribution, IMS HEALTH and Nielsen Media Research are required to undertake to
be jointly and severally liable to D&B and ACNielsen for Cognizant's obligations
under the 1996 Distribution Agreement. However, pursuant to the 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 has 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
million.
Management of IMS HEALTH is unable to predict at this time the final outcome
of this matter or whether the resolution of this matter could materially affect
IMS HEALTH's results of operations, cash flows or financial position.
60
<PAGE>
IMS HEALTH MANAGEMENT AND EXECUTIVE COMPENSATION
Robert E. Weissman is currently Chairman and Chief Executive Officer of
Cognizant and Chairman and Chief Executive Officer of IMS HEALTH. Mr. Weissman
will resign from such positions at Cognizant effective upon the Distribution
Date, but will remain a director of Cognizant after the Distribution. The Board
of Directors of IMS HEALTH will be composed of certain persons who are currently
directors of Cognizant. See "--IMS HEALTH Board of Directors". In addition to
Mr. Weissman, the other executive officers of IMS HEALTH will be drawn from the
current management of Cognizant or its subsidiaries, and they will resign from
their positions at Cognizant effective upon the Distribution. See "--IMS HEALTH
Executive Officers".
IMS HEALTH BOARD OF DIRECTORS
Immediately after the Distribution, IMS HEALTH expects to have a Board of
Directors composed of nine directors (including all eight members of the Board
of Directors of Cognizant).
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of IMS
HEALTH following the Distribution, including information as to service with
Cognizant, if applicable.
<TABLE>
<CAPTION>
POSITIONS DIRECTOR
WITH OF COGNIZANT PRINCIPAL OCCUPATION OTHER
NAME COGNIZANT SINCE DURING LAST FIVE YEARS AGE* DIRECTORSHIPS
- - ------------------------ ------------- --------------- ------------------------ ----- ------------------------
<S> <C> <C> <C> <C> <C>
Clifford L. Alexander, Director 1996 President, Alexander & 64 The Dun & Bradstreet
Jr. Associates, Inc., Corporation; MCI
Washington, DC Communications
(consulting firm Corporation; Dreyfus
specializing in Third Century Fund;
workforce Dreyfus General Family
inclusiveness), 1/81 to of Funds; Dreyfus
present. Premier Family of Funds;
Mutual of America Life
Insurance Company;
American Home Products
Corp.; TLC Beatrice
International Holdings,
Inc.
Victoria R. Fash Executive -- Executive Vice President 46 Orion Capital
Vice and Chief Financial Corporation; Ligand
President Officer of Cognizant Pharmaceuticals
and 9/96 to present; Incorporated
Chief Chairman and Chief
Financial Executive Officer of
Officer IMS, 12/97 to present;
Senior Vice President--
Business Strategy, The
Dun & Bradstreet
Corporation, Wilton, CT
(information services),
4/95 to 10/96; Vice
President-- Business
Operations Planning,
5/94 to 4/95; Assistant
to the President, 9/91
to 5/94.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
POSITIONS DIRECTOR
WITH OF COGNIZANT PRINCIPAL OCCUPATION OTHER
NAME COGNIZANT SINCE DURING LAST FIVE YEARS AGE* DIRECTORSHIPS
- - ------------------------ ------------- --------------- ------------------------ ----- ------------------------
<S> <C> <C> <C> <C> <C>
John P. Imlay, Jr. Director 1996 Chairman, Imlay 61 Gartner Group, Inc.;
Investments, Inc., Metromedia International
Atlanta, GA (private Group
venture capital
investments), 1990 to
present; Chairman, Dun &
Bradstreet Software
Services, Inc., Atlanta,
GA (software company),
3/90 to 11/96; Principal
Executive Officer, 3/90
to 1/93; President, 3/90
to 3/92.
Robert Kamerschen Director 1996 Chairman and Chief 62 ADVO, Inc.; Micrografx,
Executive Officer, ADVO, Inc.
Inc., Windsor, CT
(direct mail marketing
services), 11/88 to
present.
Robert J. Lanigan Director 1996 Limited Partner, 69 The Dun & Bradstreet
Palladium Equity Corporation; Owens-
Partners, New York, NY Illinois, Inc.;
(private investment Transocean Offshore,
firm), 6/97 to present, Inc.; Sonat Inc.;
Chairman Emeritus, Chrysler Corporation
Owens-Illinois, Inc.,
Toledo, OH (glass,
plastics and other
packaging products),
1/92 to present;
Chairman of the Board
4/84 to 10/91; Chief
Executive Officer, 1/84
to 9/90.
H. Eugene Lockhart Director 1996 President, Retail 48 Niagara Mohawk Power
Banking Division, Corp.; RJR Nabisco
BankAmerica Corporation, Holdings Corp.
San Francisco, CA
(financial services),
5/97 to present;
President and Chief
Executive Officer,
MasterCard International
Inc., Purchase, NY
(credit card company),
3/94 to 4/97; Executive
Vice President, First
Manhattan Consulting
Group, New York, NY
(banking consulting
firm), 9/92 to 2/94;
Chief Executive Officer,
UK Banking and Group
Operations, Midland Bank
plc, London, England,
1986 to 1993.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
POSITIONS DIRECTOR
WITH OF COGNIZANT PRINCIPAL OCCUPATION OTHER
NAME COGNIZANT SINCE DURING LAST FIVE YEARS AGE* DIRECTORSHIPS
- - ------------------------ ------------- --------------- ------------------------ ----- ------------------------
<S> <C> <C> <C> <C> <C>
M. Bernard Puckett Director 1996 Private Investor, 1/96 53 P-Com, Inc.; R.R.
to present; President Donnelley & Sons
and Chief Executive Company; Oacis
Officer, Mobile Healthcare Holdings
Telecommunication Corp.
Technologies Corp.;
Jackson, MS
(telecommunications),
5/95 to 1/96; President,
Chief Operating Officer,
1/94 to 5/95; Senior
Vice President-Corporate
Strategy and
Development,
International Business
Machines Corporation,
Armonk, NY (computers),
7/93 to 12/93; General
Manager of Applications
Solutions, 1/91 to 7/93.
William C. Van Faasen Director 1998 President and Chief 49 BankBoston Corporation
Executive Officer, Blue
Cross and Blue Shield of
Massachusetts, Boston,
MA (health insurance),
9/92 to present.
Robert E. Weissman Chairman and 1996 Chairman and Chief 57 State Street Boston
Chief Executive Officer, Corporation; Gartner
Executive Cognizant, 9/96 to Group, Inc.
Officer, present; Chairman and
Director Chief Executive Officer,
The Dun & Bradstreet
Corporation, Wilton, CT
(information services)
4/95 to 10/96; President
and Chief Executive
Officer 1/94 to 3/95;
President and Chief
Operating Officer 1/85
to 12/93.
</TABLE>
- - ------------------------
* As of March 13, 1998
DIRECTORS' COMPENSATION
The Board of Directors of Cognizant has approved a director compensation
program for IMS HEALTH. It is anticipated that the Board of Directors of IMS
HEALTH will adopt and implement such program as described below prior to, on or
shortly after the Distribution Date.
If such program is adopted and implemented, each non-employee director will
receive a 1998 retainer of $12,500; thereafter, the retainer will be paid at an
annual rate of $25,000. Each non-employee director who is the Chairman of a
Committee of the Board of Directors will be paid an additional retainer of
$1,500 for 1998 and $3,000 annually thereafter. A fee of $1,000 will be paid to
each non-employee director for every Board or Committee meeting attended.
Directors who are employed by IMS HEALTH shall receive no retainers or meeting
fees.
Unexercised options to acquire Cognizant Common Stock held by non-employee
directors of IMS HEALTH as of the Distribution Date will be cancelled and
replaced with options that are exercisable into
63
<PAGE>
shares of IMS HEALTH Common Stock (except in the case of unexercised options
held by M. Bernard Puckett, which will be cancelled and replaced with options
exercisable for IMS HEALTH Common Stock and options exercisable for NMR Common
Stock, in proportion to the relative value of share of IMS HEALTH Common Stock
and NMR Common Stock immediately after the Distribution). On the second
anniversary of the date a non-employee director commences service on the Board
of Directors, and on each anniversary thereafter, a non-employee director will
receive option grants for shares of IMS HEALTH Common Stock. Such options will
vest in accordance with a schedule set by the Compensation and Benefits
Committee of the IMS HEALTH Board of Directors at the time of grant. The
exercise price per share of all options granted will be not less than 100% of
the Fair Market Value (as hereinafter defined) of a share on the date of grant.
For purposes of these and the following provisions, Fair Market Value of a share
on a given date means the average of the high and low trading prices of such
share on such date.
Each non-employee director may elect to have all or a specified part of the
retainer and fees deferred until he or she ceases to be a director. Deferred
amounts may be credited to the account of the directors as deferred cash, which
bears interest at prescribed rates, or as deferred share units in an amount
equal to the amount of deferred compensation divided by the Fair Market Value of
a share of IMS HEALTH Common Stock on the date the compensation would otherwise
have been paid. Deferred share units are credited with dividend equivalents.
Deferred amounts and accrued interest and dividend equivalents are paid in the
form of cash or stock, as appropriate, on the first business day of the calendar
year following the date of the director's termination of service on the IMS
HEALTH Board of Directors.
COMMITTEES OF THE IMS HEALTH BOARD OF DIRECTORS
Prior to the Distribution, the IMS HEALTH Board of Directors will establish
Audit, Executive, Compensation and Benefits, and Nominating Committees and
designate specific functions and areas of oversight as to such committees. No
final determination has yet been made as to the memberships of such standing
committees.
IMS HEALTH EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
<TABLE>
<CAPTION>
NAME, POSITION WITH IMS HEALTH AND AGE* BIOGRAPHICAL DATA
- - -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Robert E. Weissman, 57.................................. See information under "IMS HEALTH Board of Directors".
Chairman and Chief Executive Officer
Victoria R. Fash, 46.................................... See information under "IMS HEALTH Board of Directors".
President and Chief Operating Officer
Alan J. Klutch, 53...................................... Senior Vice President--Finance of Cognizant 9/96 to
Senior Vice President--Finance present; Vice President--Financial Planning, D&B, 10/84
to 10/96.
Kenneth S. Siegel, 42................................... Senior Vice President and General Counsel of Cognizant
Senior Vice President, General Counsel and Secretary 1/97 to present; Secretary of Cognizant 7/97 to present;
Partner, Baker & Botts, L.L.P., 9/94 to 1/97; Partner,
O'Sullivan Graev & Karabell, 7/87 to 9/94.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
NAME, POSITION WITH IMS HEALTH AND AGE* BIOGRAPHICAL DATA
- - -------------------------------------------------------- --------------------------------------------------------
<S> <C>
James C. Malone, 49..................................... Senior Vice President--Finance and Controller of
Senior Vice President--Finance and Controller Cognizant, 12/96 to present; Vice President-- Finance of
Cognizant, 9/96 to 12/96; Assistant Vice President, D&B,
2/95 to 10/96; Vice President and Controller, The Reuben
H. Donnelley Corporation (a subsidiary of D&B), 1990 to
2/95.
Leslye G. Katz, 43...................................... Vice President and Treasurer of Cognizant, 9/96 to
Vice President and Treasurer present; Senior Vice President and Chief Financial
Officer, The Reuben H. Donnelley Corporation, 9/92 to
9/96.
Craig S. Kussman, 39.................................... Vice President--Corporate Development of Cognizant,
Vice President--Corporate Development 10/97 to present; Vice President-- Mergers and
Acquisitions of Cognizant, 9/96 to 10/97; Assistant Vice
President, D&B, 5/91 to 9/96.
</TABLE>
- - ------------------------
* As of March 13, 1998
65
<PAGE>
COMPENSATION OF IMS HEALTH EXECUTIVE OFFICERS
The following table discloses the compensation paid by Cognizant for
services rendered to Cognizant in 1997 to IMS HEALTH's Chief Executive Officer
and to each of the persons who are anticipated to be one of the three other most
highly compensated executive officers of IMS HEALTH following the Distribution.
During the period presented, the individuals were compensated in accordance with
Cognizant's plans and policies.
SUMMARY COMPENSATION TABLE
FOR SERVICES WITH COGNIZANT
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------------
AWARDS PAYOUTS
------------------------ -----------------
ANNUAL COMPENSATION (G)
----------------------------------------- (F) SECURITIES (H)
(A) RESTRICTED UNDERLYING LONG-TERM
NAME AND PRINCIPAL (C) (D) (E) STOCK OPTIONS/ INCENTIVE
POSITION WITH (B) SALARY BONUS(1) OTHER ANNUAL AWARD(S)(3) SARS(4) PAYOUTS
IMS HEALTH YEAR ($) ($) COMPENSATION(2)($) ($) (#) ($)
- - ---------------------- --------- --------- --------- ------------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert E. Weissman.... 1997 750,000 1,007,100 1,006 0 0 0
Chairman and Chief
Executive Officer
Victoria R. Fash...... 1997 375,000 349,128 0 268,938 0 0
President and Chief
Operating Officer
Alan J. Klutch........ 1997 325,000 303,473 0 0 0 0
Senior Vice
President-
Finance
Kenneth S. 1997 325,000 235,025 127,388 0 190,000 0
Siegel(6)...........
Senior Vice
President, General
Counsel and
Secretary
James C. Malone....... 1997 240,625 167,850 0 136,538 0 0
Senior Vice
President--Finance
and Controller
<CAPTION>
(A) (I)
NAME AND PRINCIPAL ALL OTHER
POSITION WITH COMPENSATION(5)
IMS HEALTH ($)
- - ---------------------- -----------------
<S> <C>
Robert E. Weissman.... 72,568
Chairman and Chief
Executive Officer
Victoria R. Fash...... 19,655
President and Chief
Operating Officer
Alan J. Klutch........ 22,637
Senior Vice
President-
Finance
Kenneth S. 4,800
Siegel(6)...........
Senior Vice
President, General
Counsel and
Secretary
James C. Malone....... 8,212
Senior Vice
President--Finance
and Controller
</TABLE>
- - ------------------------
(1) The 1997 bonus awards were earned in 1997 and paid in 1998.
(2) The amount shown for Mr. Weissman represents reimbursement for taxes paid by
him with respect to company-directed travel and certain other expenses. The
amount shown for Mr. Siegel includes reimbursement of relocation expenses in
connection with his joining Cognizant and related tax obligations. The value
of certain personal benefits is not included since it does not exceed
$50,000 for any named executive officer.
(3) The amounts shown for Ms. Fash and Mr. Malone represents the dollar value of
restricted stock on the date of the grant. This grant was a special one-time
award and will vest one year following the date of the award. Dividends are
paid at the rate established from time to time for Cognizant Common Stock.
(4) All the options in this table are without tandem stock appreciation rights,
except for the Limited SARs described under the "Option/SAR Grants in Last
Fiscal Year" table below. In addition, Ms. Fash received a grant of options
for 6,500 shares (after adjustment for a reverse stock split) (without
tandem stock appreciation rights) of Cognizant's subsidiary Cognizant
Technology Solutions Corporation, as described under the table "Option
Grants/SAR Grants in Last Fiscal Year to Purchase Cognizant Common Stock".
(5) The amounts shown represent aggregate annual company contributions for the
account of each named executive officer under the Cognizant Corporation
Savings Plan ("Savings Plan") and Savings Benefit Equalization Plan
("SBEP"), plans which are open to employees of Cognizant and certain
subsidiaries. The Savings Plan is a tax-qualified defined contribution plan
and the SBEP is a non-qualified plan which provides a benefit to
participants in the Savings Plan equal to the amount of company
contributions that would have been made to the participant's Savings Plan
accounts but for certain Federal tax laws.
(6) Mr. Siegel joined Cognizant on January 31, 1997. The salary and bonus
amounts provided above have been annualized for the full year 1997.
66
<PAGE>
OPTION GRANTS ON COGNIZANT COMMON STOCK TO IMS HEALTH EXECUTIVES IN LAST FISCAL
YEAR
The following table provides information on fiscal year 1997 grants of
options to the named IMS HEALTH executives to purchase shares of Cognizant
Common Stock. Options to acquire Cognizant Common Stock will be replaced by
options to acquire IMS HEALTH Common Stock. See "Relationship Between IMS HEALTH
and Nielsen Media Research After the Distribution--Employee Benefits Agreement".
OPTION GRANTS/SAR GRANTS IN LAST FISCAL YEAR TO PURCHASE COGNIZANT COMMON STOCK
<TABLE>
<CAPTION>
(B)
NUMBER OF (C)
SECURITIES % OF TOTAL (F)
UNDERLYING OPTIONS/SARS (D) GRANT DATE
OPTIONS/SARS GRANTED TO EXERCISE OR (E) PRESENT
(A) GRANTED(1) EMPLOYEES IN BASE PRICE EXPIRATION VALUE(2)
NAME (#) FISCAL YEAR ($/SHARE) DATE ($)
- - ------------------------------------------------- ------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Robert E. Weissman............................... 0 NA NA NA NA
Victoria R. Fash(3).............................. 0 NA NA NA NA
Alan J. Klutch................................... 0 NA NA NA NA
Kenneth S. Siegel(4)............................. 190,000 4.8% $ 33.0625 01/30/07 $ 1,678,032
James C. Malone.................................. 0 NA NA NA NA
</TABLE>
- - ------------------------
(1) The amount shown represents a non-qualified stock option, without tandem
stock appreciation rights ("SARs"), granted in 1997. The option may not be
exercised for at least one year after grant and may then be exercised in
installments of one-sixth of the grant amount each year until they are 100%
vested. Payment must be made in full upon exercise in cash or Cognizant
Common Stock. The option holder may elect to have shares of Cognizant Common
Stock issuable upon exercise withheld by Cognizant to pay withholding taxes
due. The option shown includes Limited SARs in tandem with the option.
Limited SARs are exercisable only if and to the extent that the related
option is exercisable and are exercisable only during the 30-day period
following the acquisition of at least 20% of the outstanding Cognizant
Common Stock pursuant to a tender or exchange offer not made by Cognizant.
Each Limited SAR permits the holder to receive cash equal to the excess over
the related option exercise price or the highest price paid pursuant to a
tender or exchange offer for Cognizant Common Stock which is in effect at
any time during the 60 days preceding the date upon which the Limited SAR is
exercised. Limited SARs can be exercised regardless of whether Cognizant
supports or opposes the offer.
(2) Grant date present value is based on the Black-Scholes option valuation
model, which makes the following material assumptions for the January 31,
1997 grant: an expected stock-price volatility factor of 25%, a risk-free
rate of return of 6.23%, an annual dividend yield of 0.30%, an assumed time
of exercise of 4.5 years from grant date, and a reduction of approximately
15.4% to reflect the probability of forfeiture due to termination prior to
vesting. These assumptions may or may not be fulfilled. The amount shown
cannot be considered predictions of future value. In addition, the option
will gain value only to the extent the stock price exceeds the option
exercise price during the life of the option.
(3) In 1997, Ms. Fash was granted options for 6,500 shares (after adjustment for
a reverse stock split) of Class A Common Stock of Cognizant's subsidiary,
CTS, in her capacity as a director of CTS. This grant represents 1.2% of the
total CTS options granted in 1997. The options' exercise price approximates
fair market value on the date of grant and they expire on December 31, 2007.
The options become exercisable in 8.75 years, except that accelerated
vesting occurs on the first and second anniversary of an initial public
offering or controlling interest sale of CTS. The potential realizable value
of this grant assuming annual rates of appreciation of the Class A Common
Stock, from the grant date until the expiration date, of 5% and 10% is
calculated at $51,105 and $108,031, respectively.
(4) Mr. Siegel joined Cognizant on January 31, 1997.
AGGREGATE COGNIZANT OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
COGNIZANT OPTION VALUES
The following table provides information on option exercises in 1997 by the
named executives of IMS HEALTH and the value of each such executive's
unexercised in-the-money options to acquire Cognizant Common Stock at December
31, 1997. See also "Relationship Between IMS HEALTH and Nielsen Media Research
After the Distribution--Employee Benefits Agreement".
67
<PAGE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
(E)
VALUE OF
UNEXERCISED,
(D) IN-THE-MONEY
NUMBER OF SECURITIES COGNIZANT
UNDERLYING UNEXERCISED OPTIONS/SARS
COGNIZANT OPTIONS/SARS AT AT
(B) (C) FISCAL
SHARES ACQUIRED VALUE FISCAL YEAR-END(2)(#) YEAR-END(3)($)
(A) ON EXERCISE(1) REALIZED -------------------------- -----------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- - ------------------------- ----------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Weissman....... Effective Date Options 0 0 162,499 812,501 $1,767,177
SUBSTITUTE OPTIONS 3,256 $ 6,756 473,122 49,985 $7,160,966
15,813 $ 32,809
26,545 $ 430,483
Victoria R. Fash(4)...... Effective Date Options 0 $ 0 66,666 333,334 $ 724,993
SUBSTITUTE OPTIONS 0 $ 0 24,678 9,939 $ 300,235
Alan J. Klutch........... Effective Date Options 0 $ 0 37,499 187,501 $ 407,802
SUBSTITUTE OPTIONS 3,256 $ 6,756 97,120 9,456 $1,491,515
2,119 $ 4,397
7,803 $ 126,542
2,697 $ 39,256
Kenneth S. Siegel(5)..... Stock Options 0 $ 0 0 190,000 $ 0
James C. Malone.......... Effective Date Options 8,334 $ 80,476 26,615 183,085 $ 299,920
1,666 $ 16,087
SUBSTITUTE OPTIONS 953 $ 11,891 2,925 2,952 $ 32,241
958 $ 9,546
982 $ 14,293
985 $ 9,017
<CAPTION>
(A)
NAME UNEXERCISABLE
- - ------------------------- -------------
<S> <C>
Robert E. Weissman....... $ 8,835,948
$ 546,848
Victoria R. Fash(4)...... $ 3,625,007
$ 109,811
Alan J. Klutch........... $ 2,039,073
$ 103,451
Kenneth S. Siegel(5)..... $ 2,125,625
James C. Malone.......... $ 2,043,461
$ 31,681
</TABLE>
- - ------------------------
(1) Effective Date Options reflect Cognizant option grants for 1996. Substitute
Options were issued in substitution of D&B options that were canceled as of
the date of the D&B spin-off.
(2) No SARs were outstanding at December 31, 1997.
(3) The values shown equal the difference between the exercise price of
unexercised in-the-money options and the fair market value of the underlying
Cognizant Common Stock at December 31, 1997. Options are in-the-money if the
fair market value of the Cognizant Common Stock exceeds the exercise price
of the option.
(4) The value at year-end of in-the-money options held by Ms. Fash for shares of
Class A Common Stock of CTS, a subsidiary of Cognizant, none of which are
presently exercisable, was zero.
(5) Mr. Siegel joined Cognizant on January 31, 1997.
COGNIZANT RETIREMENT BENEFITS
The following table sets forth the estimated aggregate annual benefits
payable under the Cognizant Retirement Plan, the Cognizant Corporation
Supplemental Executive Retirement Plan and the Cognizant Retirement Excess Plan
to persons in the specified average final compensation and credited service
classifications upon retirement at age 65. Amounts shown in the table include
U.S. Social Security benefits and benefits payable under predecessor plans of
D&B which would be deducted in calculating benefits payable under these plans.
These aggregate annual retirement benefits do not increase as a result of
additional credited service after 15 years.
68
<PAGE>
Benefits vest after five years of credited service and are calculated at 5%
of average final compensation per year for the first 10 years of credited
service, and 2% per year for the next five years, up to a maximum of 60% of
average final compensation after 15 years of credited service.
<TABLE>
<CAPTION>
ESTIMATED AGGREGATE ANNUAL RETIREMENT BENEFITS
----------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE ASSUMING CREDITED SERVICE OF:
FINAL ----------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS
- - ------------- ---------- ---------- ---------- ----------
$ 550,000 $ 330,000 $ 330,000 $ 330,000 $ 330,000
700,000 420,000 420,000 420,000 420,000
850,000 510,000 510,000 510,000 510,000
1,000,000 600,000 600,000 600,000 600,000
1,300,000 780,000 780,000 780,000 780,000
1,600,000 960,000 960,000 960,000 960,000
1,900,000 1,140,000 1,140,000 1,140,000 1,140,000
</TABLE>
The number of years of credited service for Mr. Weissman and Ms. Fash are 18
and 6, respectively.
Compensation, for the purpose of determining retirement benefits, consists
of base salary, annual bonuses, commissions and overtime pay. Severance pay,
income derived from equity-based awards, contingent payments and other forms of
special remuneration are excluded. The bonuses included in the Summary
Compensation Table above were not paid until the year following the year in
which they were accrued and expensed; therefore, compensation for purposes of
determining retirement benefits varies from the Summary Compensation Table
amounts in that bonuses expensed in the previous year but paid in the current
year are part of retirement compensation in the current year and any unpaid
current year's bonuses accrued and included in the Summary Compensation Table
are not part of retirement compensation in that year. For 1997, compensation for
purposes of determining retirement benefits for Mr. Weissman and Ms. Fash was
$875,000 and $418,333, respectively.
Average final compensation is defined as the highest average annual
compensation during five consecutive twelve-month periods in the last ten
consecutive twelve-month periods of the participant's credited service.
Participants vest in their accrued retirement benefit upon completion of five
years' service. The benefits shown in the table above are calculated on a
straight-life annuity basis.
Retirement benefits for Messrs. Klutch, Siegel and Malone are determined
solely under the Cognizant Retirement Plan and the Retirement Excess Plan. Under
these plans, Cognizant contributes 6% of the participant's compensation monthly
to the participant's cash balance in the plan. The cash balance earns monthly
investment credits based on the yield on 30-year Treasury bonds from time to
time. These plans also include a minimum monthly benefit for certain employees
who had attained age 50 and had earned 5 years of service as of October 31,
1996, including Mr. Klutch. The minimum benefit is equal to the excess of (i)
1.7% of final average compensation multiplied by years of credited service not
in excess of 25, plus 1.0% of average final compensation multiplied by years of
credited service in excess of 25, over (ii) 1.7% of the primary Social Security
insurance benefits multiplied by years of credited service not in excess of 25,
plus 0.5% of the primary Social Security insurance benefits multiplied by years
of credited service in excess of 25. The estimated annual benefits upon
retirement at age 65 for Messrs. Klutch and Malone are $202,828 and $49,103,
respectively, based upon their respective credited service to date for these
plans of 23.5 and 14 years. In 1997, Mr. Siegel was not eligible to participate
in the Cognizant Retirement Plan and the Cognizant Retirement Excess Plan.
LIMITED SARS
Cognizant Limited SARs held by IMS HEALTH executive officers will be
converted into Limited SARs of IMS HEALTH which will have the terms described
for Cognizant Limited SARs in footnote 1 under the caption "--Option Grants on
Cognizant Common Stock to IMS HEALTH Executives in Last
69
<PAGE>
Fiscal Year" above. See "Relationship Between IMS HEALTH and Nielsen Media
Research After the Distribution--Employee Benefits Agreement".
IMS HEALTH SECURITY OWNERSHIP BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All the outstanding shares of IMS HEALTH Common Stock are currently held by
Cognizant. The following table sets forth the number of shares of IMS HEALTH
Common Stock that are expected to be beneficially owned after the Distribution
by each of the IMS HEALTH directors, by each of the executive officers named in
the IMS HEALTH Summary Compensation Table above, by all such directors and
executive officers as a group and by each person known by IMS HEALTH to
beneficially own more than 5% of the outstanding shares of Cognizant Common
Stock at May 31, 1998 ("5% Owners"). Stock ownership information is based on (i)
the number of shares of Cognizant Common Stock held by directors and executive
officers as of May 31, 1998, (ii) the number of shares held by 5% Owners, based
upon a Schedule 13G filed with the SEC by such 5% Owners and (iii) one share of
IMS HEALTH Common Stock being distributed for every share of Cognizant Common
Stock. See "The Distribution" and "IMS HEALTH Management and Executive
Compensation--Compensation of IMS HEALTH Executive Officers". Information
regarding shares subject to options reflects shares of Cognizant Common Stock
subject to options as of May 31, 1998 and exercisable within 60 days thereafter
and represents the number of shares of IMS HEALTH Common Stock which would be
obtained in the Distribution if the Cognizant stock options were exercised prior
to the Record Date. Unexercised Cognizant stock options held by IMS HEALTH
employees as of the Distribution Date will be converted into options that are
exercisable into shares of IMS HEALTH Common Stock based upon a conversion
formula to be calculated after the Distribution Date. See "Relationship Between
IMS HEALTH and Nielsen Media Research After the Distribution--Employee Benefits
Agreement". All directors and executive officers as a group beneficially owned
less than one percent of the outstanding shares of Cognizant Common Stock
outstanding on May 31, 1998 and are expected to own less than one percent of the
shares of IMS HEALTH Common Stock outstanding as of the Distribution Date. The
mailing address for each of the IMS HEALTH directors and executive officers
listed herein is 200 Nyala Farms, Westport, Connecticut 06880.
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO OPTIONS
NUMBER OF SHARES EXERCISABLE WITHIN 60
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED DAYS
- - ------------------------------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
Clifford L. Alexander, Jr.......................................... 4,198(1) 1,166
Victoria R. Fash(2)................................................ 8,804(3) 92,125
John P. Imlay, Jr.................................................. 10,898(1) 1,166
Robert Kamerschen.................................................. 7,398(1) 1,166
Alan J. Klutch..................................................... 12,206 134,619
Robert J. Lanigan.................................................. 7,998(1)(4) 1,166
H. Eugene Lockhart................................................. 1,198(1) 1,166
James C. Malone.................................................... 3,301 22,040
M. Bernard Puckett................................................. 4,498(1) 1,166
Kenneth S. Siegel.................................................. 0 31,666
William C. Van Faasen.............................................. 1,156(5) 0
Robert E. Weissman................................................. 176,593 460,830
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO OPTIONS
NUMBER OF SHARES EXERCISABLE WITHIN 60
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED DAYS
- - ------------------------------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
All Directors and Executive Officers as a Group(6)................. 238,287 837,628
FMR Corporation.................................................... 18,355,768(7)(8) 0
82 Devonshire Street
Boston, MA 02109
</TABLE>
- - ------------------------
(1) Includes 898 shares of restricted stock granted under the Non-Employee
Directors' Stock Incentive Plan, which shares are scheduled to vest on
November 15, 2001.
(2) Ms. Fash also owns 3,250 shares (after adjustment for a reverse stock split)
of restricted Class A Common Stock of CTS, purchased pursuant to the CTS
Restricted Stock Purchase Plan. These restricted shares vest upon the
occurrence of an initial public offering of CTS, and represent less than 1%
of the outstanding shares of CTS.
(3) Includes 6,500 shares of restricted stock granted under the Key Employees'
Stock Incentive Plan, which shares are scheduled to vest on October 21,
1998.
(4) These shares are held in two revocable trusts (one trust holding 5,900
shares and the other 1,200 shares) for the benefit of Mr. Lanigan in which
he is the settlor and sole beneficial owner and over which he has sole
investment control.
(5) Includes 556 shares of restricted stock granted under the Non-Employee
Directors' Stock Incentive Plan, which shares are scheduled to vest on April
21, 2003.
(6) Includes all shares beneficially owned regardless of the nature of
ownership.
(7) Represents 11.32% of the total outstanding Cognizant Common Stock on
December 31, 1997.
(8) FMR Corporation ("FMR Corp.") and its wholly owned subsidiaries, Fidelity
Management & Research Company ("Fidelity") and Fidelity Management Trust
Company ("FMTC"), jointly filed a Schedule 13G with the SEC on February 14,
1998. This Schedule 13G shows that Fidelity, a registered investment
adviser, beneficially owned at December 31, 1997, 17,116,190 shares of
Cognizant Common Stock. Edward C. Johnson, 3rd, Chairman of FMR Corp., FMR
Corp. and the registered investment companies advised by Fidelity each has
sole dispositive power (but no voting power) over such shares. Voting power
with respect to such shares resides with the respective Boards of Trustees
of each of the Fidelity Funds. Mr. Johnson and FMR Corp. each has sole
dispositive power over 1,239,578 shares of Cognizant Common Stock held by
FMTC, a bank as defined under the Securities Act which serves as investment
manager for institutional accounts, sole voting power over 749,378 of such
shares and no voting power over 490,200 of such shares.
71
<PAGE>
DESCRIPTION OF IMS HEALTH CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that IMS HEALTH has
authority to issue under its Restated Certificate of Incorporation is
420,000,000 shares of which 400,000,000 shares represent shares of IMS HEALTH
Common Stock, 10,000,000 shares represent shares of Preferred Stock (the "IMS
HEALTH Preferred Stock") and 10,000,000 shares represent shares of Series Common
Stock (the "IMS HEALTH Series Common Stock"). Based on shares of
Cognizant Common Stock outstanding as of , 1998, and a distribution
ratio of one share of IMS HEALTH Common Stock for every one share of Cognizant
Common Stock, shares of IMS HEALTH Common Stock would be distributed to
holders of Cognizant Common Stock on the Distribution Date.
IMS HEALTH COMMON STOCK
Subject to any preferential rights of any IMS HEALTH Preferred Stock or IMS
HEALTH Series Common Stock created by the Board of Directors of IMS HEALTH, each
outstanding share of IMS HEALTH Common Stock will be entitled to such dividends,
if any, as may be declared from time to time by the Board of Directors of IMS
HEALTH. See "Dividend Policies--IMS HEALTH". Each outstanding share is entitled
to one vote on all matters submitted to a vote of stockholders. In the event of
liquidation, dissolution or winding up of IMS HEALTH, holders of IMS HEALTH
Common Stock are entitled to receive on a pro rata basis any assets remaining
after provision for payment of creditors and after payment of any liquidation
preferences to holders of IMS HEALTH Preferred Stock and IMS HEALTH Series
Common Stock.
IMS HEALTH PREFERRED STOCK AND IMS HEALTH SERIES COMMON STOCK
Each of the authorized IMS HEALTH Preferred Stock and the authorized IMS
HEALTH Series Common Stock is available for issuance from time to time in one or
more series at the discretion of the IMS HEALTH Board of Directors without
stockholder approval. The IMS HEALTH Board of Directors has the authority to
prescribe for each series of IMS HEALTH Preferred Stock or IMS HEALTH Series
Common Stock it establishes the number of shares in that series, the voting
rights (if any) to which such shares in that series are entitled, the
consideration for such shares in that series and the designation, powers,
preference and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions of the shares in that series.
Depending upon the rights of such IMS HEALTH Preferred Stock or IMS HEALTH
Series Common Stock, as applicable, the issuance of IMS HEALTH Preferred Stock
or IMS HEALTH Series Common Stock, as applicable, could have an adverse effect
on holders of IMS HEALTH Common Stock by delaying or preventing a change in
control of IMS HEALTH, making removal of the present management of IMS HEALTH
more difficult or resulting in restrictions upon the payment of dividends and
other distributions to the holders of IMS HEALTH Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Delaware law does not require stockholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the IMS HEALTH Common Stock remained listed on the NYSE,
require stockholder approval of certain issuances equal to or exceeding 20% of
the then outstanding voting power or then outstanding number of shares of IMS
HEALTH Common Stock. These additional shares may be used for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions. Under terms of the agreements
relating to the Acquisitions and subject to Walsh and PMSI shareholder approval,
Walsh shareholders will receive .3041 shares of Cognizant Common Stock per Walsh
share outstanding and PMSI shareholders will receive .2800 shares of Cognizant
Common Stock per PMSI share outstanding. The number of shares of Cognizant
Common Stock to be issued in connection with each of the Acquisitions is subject
to a collar
72
<PAGE>
adjustment based on the price of Cognizant Common Stock during a period prior to
the closing of each Acquisition. Cognizant expects to issue approximately 6.7
million shares from treasury stock to consummate the Acquisitions. In the event
the Acquisitions are not completed prior to the Record Date, Walsh and PMSI
shareholders will receive, in lieu of Cognizant Common Stock, IMS HEALTH Common
Stock pursuant to a formula designed to recalibrate the collar computations
based on the relative value of IMS HEALTH to the total value of IMS HEALTH and
Nielsen Media Research following the Distribution. In addition, IMS HEALTH will
be required to issue IMS HEALTH Common Stock with a value between $550,000 and
$4,400,000 within the next five years as part of the consideration for a
previous acquisition. IMS HEALTH currently does not have any other plans to
issue additional shares of IMS HEALTH Common Stock, IMS HEALTH Preferred Stock
or IMS HEALTH Series Common Stock other than in connection with employee
compensation plans. See, however, "Risk Factors--Risks Relating to IMS
HEALTH--Acquisitions".
One of the effects of the existence of unissued and unreserved IMS HEALTH
Common Stock, IMS HEALTH Preferred Stock and IMS HEALTH Series Common Stock may
be to enable the Board of Directors of IMS HEALTH to issue shares to persons
friendly to current management, which issuance could render more difficult or
discourage an attempt to obtain control of IMS HEALTH by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of
IMS HEALTH's management and possibly deprive the stockholders of opportunities
to sell their shares of IMS HEALTH Common Stock at prices higher than prevailing
market prices. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of IMS HEALTH pursuant to the
operation of the IMS HEALTH Rights Plan, which is discussed below.
IMS HEALTH RIGHTS PLAN
On , 1998 the Board of Directors of IMS HEALTH declared a
dividend of one preferred share purchase right (an "IMS HEALTH Right") for each
outstanding share of IMS HEALTH Common Stock. The dividend will be payable on
, 1998 (the "IMS HEALTH Record Date") to Cognizant, which will be the
sole stockholder of record on the IMS HEALTH Record Date. Each IMS HEALTH Right
entitles the registered holder to purchase from IMS HEALTH one one-thousandth of
a share of Series A Junior Participating IMS HEALTH Preferred Stock, par value
$.01 per share (the "IMS HEALTH Participating Preferred Stock"), of IMS HEALTH
at a price of $ per one one-thousandth of a share of IMS HEALTH
Participating Preferred Stock (as the same may be adjusted, hereinafter referred
to as the "IMS HEALTH Participating Preferred Stock Purchase Price"), subject to
adjustment. The description and terms of the IMS HEALTH Rights are set forth in
an IMS HEALTH Rights Agreement dated as of , 1998, as the same may be
amended from time to time (the "IMS HEALTH Rights Agreement"), between IMS
HEALTH and First Chicago Trust Company of New York, as the IMS HEALTH Rights
Agent (the "IMS HEALTH Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (with certain
exceptions, hereinafter referred to in this description of IMS HEALTH Rights, an
"IMS HEALTH Acquiring Person") have acquired beneficial ownership of 15% or more
(20% or more in the case of an "Institutional Investor" as defined in the IMS
HEALTH Rights Plan") of the outstanding shares of IMS HEALTH Common Stock or
(ii) 10 business days (or such later date as may be determined by action of the
Board of Directors prior to such time as any person or group of affiliated
persons becomes an IMS HEALTH Acquiring Person) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of the outstanding shares of IMS HEALTH Common Stock (the
earlier of such dates hereinafter referred to in this description of IMS HEALTH
Rights as the "IMS HEALTH Rights Distribution Date"), the IMS HEALTH Rights will
be evidenced by the certificates representing IMS HEALTH Common Stock.
73
<PAGE>
The IMS HEALTH Rights Agreement provides that, until the IMS HEALTH Rights
Distribution Date (or earlier redemption or expiration of the IMS HEALTH
Rights), the IMS HEALTH Rights will be transferred with and only with the IMS
HEALTH Common Stock. Until the IMS HEALTH Rights Distribution Date (or earlier
redemption or expiration of the IMS HEALTH Rights), IMS HEALTH Common Stock
certificates will contain a notation incorporating the IMS HEALTH Rights
Agreement by reference. Until the IMS HEALTH Rights Distribution Date (or
earlier redemption or expiration of the IMS HEALTH Rights), the surrender for
transfer of any certificates for shares of IMS HEALTH Common Stock will also
constitute the transfer of the IMS HEALTH Rights associated with the shares of
IMS HEALTH Common Stock represented by such certificate. As soon as practicable
following the IMS HEALTH Rights Distribution Date, separate certificates
evidencing the IMS HEALTH Rights ("IMS HEALTH Rights Certificates") will be
mailed to holders of record of the IMS HEALTH Common Stock as of the close of
business on the IMS HEALTH Rights Distribution Date and such separate IMS HEALTH
Rights Certificates alone will evidence the IMS HEALTH Rights.
The IMS HEALTH Rights are not exercisable until the IMS HEALTH Rights
Distribution Date. The IMS HEALTH Rights will expire on , 2008
(hereinafter referred to in this description of IMS HEALTH Rights as the "IMS
HEALTH Final Expiration Date"), unless the IMS HEALTH Final Expiration Date is
advanced or extended or unless the IMS HEALTH Rights are earlier redeemed or
exchanged by IMS HEALTH, in each case as described below.
The IMS HEALTH Participating Preferred Stock Purchase Price payable, and the
number of shares of IMS HEALTH Participating Preferred Stock or other securities
or property issuable, upon exercise of the IMS HEALTH Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the IMS
HEALTH Participating Preferred Stock, (ii) upon the grant to holders of the IMS
HEALTH Participating Preferred Stock of certain rights or warrants to subscribe
for or purchase IMS HEALTH Participating Preferred Stock at a price, or
securities convertible into IMS HEALTH Participating Preferred Stock with a
conversion price, less than the then-current market price of the IMS HEALTH
Participating Preferred Stock or (iii) upon the distribution to holders of the
IMS HEALTH Participating Preferred Stock of evidences of indebtedness or assets
(excluding regular periodic cash dividends or dividends payable in IMS HEALTH
Participating Preferred Stock) or of subscription rights or warrants (other than
those referred to above).
The IMS HEALTH Rights are also subject to adjustment in the event of a stock
dividend on the IMS HEALTH Common Stock payable in shares of IMS HEALTH Common
Stock or subdivisions, consolidations or combinations of the IMS HEALTH Common
Stock occurring, in any such case, prior to the IMS HEALTH Rights Distribution
Date.
Shares of IMS HEALTH Participating Preferred Stock purchasable upon exercise
of the IMS HEALTH Rights will not be redeemable. Each share of IMS HEALTH
Participating Preferred Stock will be entitled, when, as and if declared, to a
minimum preferential quarterly dividend payment of $10 per share but will be
entitled to an aggregate dividend of 1,000 times the dividend declared per share
of IMS HEALTH Common Stock. In the event of liquidation, dissolution or winding
up of IMS HEALTH, the holders of the IMS HEALTH Participating Preferred Stock
will be entitled to a minimum preferential liquidation payment of $100 per share
(plus any accrued but unpaid dividends) but will be entitled to an aggregate
payment of 1,000 times the payment made per share of IMS HEALTH Common Stock.
Each share of IMS HEALTH Participating Preferred Stock will have 1,000 votes,
voting together with the IMS HEALTH Common Stock. Finally, in the event of any
merger, consolidation or other transaction in which shares of IMS HEALTH Common
Stock are converted or exchanged, each share of IMS HEALTH Participating
Preferred Stock will be entitled to receive 1,000 times the amount received per
share of IMS HEALTH Common Stock. These rights are protected by customary
antidilution provisions.
Because of the nature of the IMS HEALTH Participating Preferred Stock's
dividend, liquidation and voting rights, the value of the one one-thousandth
interest in a share of IMS HEALTH Participating
74
<PAGE>
Preferred Stock purchasable upon exercise of each IMS HEALTH Right should
approximate the value of one share of IMS HEALTH Common Stock.
In the event that any person or group of affiliated or associated persons
becomes an IMS HEALTH Acquiring Person, each holder of an IMS HEALTH Right,
other than IMS HEALTH Rights beneficially owned by the IMS HEALTH Acquiring
Person (which will thereupon become void), will thereafter have the right to
receive upon exercise of an IMS HEALTH Right and payment of the IMS HEALTH
Participating Preferred Stock Purchase Price, that number of shares of IMS
HEALTH Common Stock having a market value of two times the IMS HEALTH
Participating Preferred Stock Purchase Price.
In the event that, after a person or group has become an IMS HEALTH
Acquiring Person, IMS HEALTH is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold, proper provision will be made so that each holder of an IMS
HEALTH Right (other than IMS HEALTH Rights beneficially owned by an IMS HEALTH
Acquiring Person which will have become void) will thereafter have the right to
receive, upon the exercise thereof, that number of shares of common stock of the
person with whom IMS HEALTH has engaged in the foregoing transaction (or its
parent), which number of shares at the time of such transaction will have a
market value of two times the IMS HEALTH Participating Preferred Stock Purchase
Price.
At any time after any person or group becomes an IMS HEALTH Acquiring Person
and prior to the acquisition by such person or group of 50% or more of the
outstanding shares of IMS HEALTH Common Stock or the occurrence of an event
described in the prior paragraph, the Board of Directors of IMS HEALTH may
exchange the IMS HEALTH Rights (other than IMS HEALTH Rights owned by such
person or group which will have become void), in whole or in part, at an
exchange ratio of one share of IMS HEALTH Common Stock, or a fractional share of
IMS HEALTH Participating Preferred Stock of equivalent value (or of a share of a
class or series of IMS HEALTH's Preferred Stock having similar rights,
preferences and privileges), per IMS HEALTH Right (subject to adjustment).
With certain exceptions, no adjustment in the IMS HEALTH Participating
Preferred Stock Purchase Price will be required until cumulative adjustments
require an adjustment of at least 1% in such IMS HEALTH Participating Preferred
Stock Purchase Price. No fractional shares of IMS HEALTH Participating Preferred
Stock will be issued (other than fractions which are integral multiples of one
one-thousandth of a share of IMS HEALTH Participating Preferred Stock, which
may, at the election of IMS HEALTH, be evidenced by depositary receipts) and in
lieu thereof, an adjustment in cash will be made based on the market price of
the IMS HEALTH Participating Preferred Stock on the last trading period to the
date of exercise.
At any time prior to the time an IMS HEALTH Acquiring Person becomes such,
the Board of Directors of IMS HEALTH may redeem the IMS HEALTH Rights in whole,
but not in part, at a price of $.01 per IMS HEALTH Right (hereinafter referred
to in this description of IMS HEALTH Rights as the "IMS HEALTH Right Redemption
Price"). The redemption of the IMS HEALTH Rights may be made effective at such
time, on such basis and with such conditions as the Board of Directors in its
sole discretion may establish. Immediately upon any redemption of the IMS HEALTH
Rights, the right to exercise the IMS HEALTH Rights will terminate and the only
right of the holders of IMS HEALTH Rights will be to receive the IMS HEALTH
Right Redemption Price.
For so long as the IMS HEALTH Rights are then redeemable, IMS HEALTH may,
except with respect to the IMS HEALTH Right Redemption Price, amend the IMS
HEALTH Rights in any manner. After the IMS HEALTH Rights are no longer
redeemable, IMS HEALTH may, except with respect to the IMS HEALTH Right
Redemption Price, amend the IMS HEALTH Rights in any manner that does not
adversely affect the interests of holders of the IMS HEALTH Rights.
Until an IMS HEALTH Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of IMS HEALTH, including, without limitation,
the right to vote or to receive dividends.
75
<PAGE>
A copy of the form of IMS HEALTH Rights Agreement will be filed as an
exhibit to the Registration Statement on Form 10 of IMS HEALTH in respect of the
registration of the IMS HEALTH Common Stock under the Exchange Act. A copy of
the IMS HEALTH Rights Agreement is available free of charge from IMS HEALTH. The
summary description of the IMS HEALTH Rights set forth above does not purport to
be complete and is qualified in its entirety by reference to the IMS HEALTH
Rights Agreement, as the same may be amended from time to time, which is hereby
incorporated herein by reference.
CERTAIN EFFECTS OF THE IMS HEALTH RIGHTS AGREEMENT
The IMS HEALTH Rights Agreement is designed to protect stockholders of IMS
HEALTH in the event of unsolicited offers to acquire IMS HEALTH and other
coercive takeover tactics which, in the opinion of the Board of Directors of IMS
HEALTH, could impair its ability to represent stockholder interests. The
provisions of the IMS HEALTH Rights Agreement may render an unsolicited takeover
of IMS HEALTH more difficult or less likely to occur or might prevent such a
takeover, even though such takeover may offer IMS HEALTH's stockholders the
opportunity to sell their stock at a price above the prevailing market rate and
may be favored by a majority of the stockholders of IMS HEALTH.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of IMS HEALTH authorized at the time of the
Distribution will have any preemptive right to subscribe to any securities of
IMS HEALTH of any kind or class.
DELAWARE GENERAL CORPORATION LAW
The terms of Section 203 of the General Corporation Law of the State of
Delaware (the "DGCL") apply to IMS HEALTH since it is a Delaware corporation.
Pursuant to Section 203, with certain exceptions, a Delaware corporation may not
engage in any of a broad range of business combinations, such as mergers,
consolidations and sales of assets, with an "interested stockholder" for a
period of three years from the time that such person became an interested
stockholders unless (a) the transaction that results in the person's becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (b) upon consummation of the transaction which results in the
stockholder becoming an interested stockholder, the interested stockholder owns
85% or more of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are directors and
also officers and shares owned by certain employee stock plans or (c) on or
after the time the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by holders
of at least two-thirds of the corporation's outstanding voting stock, excluding
shares owned by the interested stockholder, at a meeting of stockholders. Under
Section 203, an "interested stockholder" is defined as any person, other than
the corporation and any direct or indirect majority-owned subsidiary, that is
(a) the owner of 15% or more of the outstanding voting stock of the corporation
or (b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder. Section 203 does
not apply to a corporation that so provides in an amendment to its certificate
of incorporation or by-laws passed by a majority of its outstanding shares, but
such stockholder action does not become effective for 12 months following its
adoption and would not apply to persons who were already interested stockholders
at the time of the amendment. IMS HEALTH's Restated Certificate of Incorporation
does not exclude IMS HEALTH from the restrictions imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage companies interested in acquiring IMS HEALTH to
76
<PAGE>
negotiate in advance with IMS HEALTH's Board of Directors, because the
stockholder approval requirement would be avoided if the Board of Directors
approves either the business combination or the transaction which results in the
stockholder becoming an interested stockholder. Such provisions also may have
the effect of preventing changes in the Board of Directors of IMS HEALTH. It is
further possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
PROVISIONS OF IMS HEALTH RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND
RESTATED BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the IMS HEALTH Restated Certificate of Incorporation
and Amended and Restated By-laws may delay or make more difficult unsolicited
acquisitions or changes of control of IMS HEALTH. It is believed that such
provisions will enable IMS HEALTH to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests of IMS
HEALTH and its stockholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control of IMS HEALTH, although such proposals, if
made, might be considered desirable by a majority of IMS HEALTH's stockholders.
Such provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current Board of Directors of IMS
HEALTH. These provisions include (i) the availability of capital stock for
issuance from time to time at the discretion of the Board of Directors (see
"--Authorized but Unissued Capital Stock"), (ii) prohibitions against
stockholders calling a special meeting of stockholders or acting by written
consent in lieu of a meeting, (iii) requirements for advance notice for raising
business or making nominations at stockholders' meetings, (iv) the ability of
the Board of Directors to increase the size of the board and to appoint
directors to newly created directorships, (v) a classified Board of Directors
and (vi) higher than majority requirements to make certain amendments to the
By-laws and Certificate of Incorporation. These provisions are present in the
Restated Certificate of Incorporation or Amended and Restated By-laws of
Cognizant.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The IMS HEALTH Restated Certificate of Incorporation and Amended and
Restated By-laws provide that stockholder action can be taken only at an annual
or special meeting and cannot be taken by written consent in lieu of a meeting.
The IMS HEALTH Restated Certificate of Incorporation and Amended and Restated
By-laws also provide that special meetings of the stockholders can be called
only by the Chief Executive Officer of IMS HEALTH or by a vote of the majority
of the Board of Directors. Furthermore, the By-laws of IMS HEALTH provide that
only such business as is specified in the notice of any such special meeting of
stockholders may come before such meeting.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The By-laws of IMS HEALTH establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of stockholders and
for nominations by stockholders of candidates for election as directors at an
annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of stockholders as has been
brought before the meeting by, or at the direction of, the Chairman of the Board
of Directors, or by a stockholder of IMS HEALTH who is entitled to vote at the
meeting who has given to the Secretary of IMS HEALTH timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. The chairman of such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, the
Chairman of the Board of Directors, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
directors of IMS HEALTH.
77
<PAGE>
To be timely, a stockholder's notice of business to be brought before an
annual meeting and nominations of candidates for election as directors at any
annual meeting shall be delivered to the Secretary of IMS HEALTH at the
principal executive offices of IMS HEALTH not less than 70 days nor more than 90
days prior to the first anniversary of the preceding year's annual meeting;
PROVIDED, HOWEVER, that in the event that the date of the annual meeting is
advanced by more than 20 days, or delayed by more than 70 days, from such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the ninetieth day prior to such annual meeting and not later
than the close of business on the later of the seventieth day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made.
To be timely, a stockholder's notice of nominations of persons for election
to the Board of Directors may be made at such a special meeting of stockholders
if the stockholder's notice shall be delivered to the Secretary of IMS HEALTH at
the principal executive offices of IMS HEALTH not earlier than the ninetieth day
prior to such special meeting and not later than the close of business on the
later of the seventieth day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
The notice of any nomination for election as a director must set forth the
name and address of, and the class and number of shares of IMS HEALTH held by,
the stockholder who intends to make the nomination and the beneficial owner, if
any, on whose behalf the nomination is being made; the name and address of the
person or persons to be nominated; a representation that the stockholder is a
holder of record of stock of IMS HEALTH entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; such other information regarding
each nominee proposed by such stockholder as would have been required to be
included in a proxy statement filed pursuant to the proxy rules of the SEC had
each nominee been nominated, or intended to be nominated, by the Board of
Directors; and the consent of each nominee to serve as a director if so elected.
NUMBER OF DIRECTORS; FILLING OF VACANCIES; REMOVAL
The IMS HEALTH Restated Certificate of Incorporation and Amended and
Restated By-laws provide that newly created directorships resulting from an
increase in the authorized number of directors (or any vacancy) may be filled by
a vote of a majority of directors then in office. Accordingly, the Board of
Directors of IMS HEALTH may be able to prevent any stockholder from obtaining
majority representation on the Board of Directors by increasing the size of the
board and filling the newly created directorships with its own nominees. If any
applicable provision of the DGCL expressly confers power on stockholders to fill
such a directorship at a special meeting of stockholders, such a directorship
may be filled at such meeting only by the affirmative vote of at least 80% in
voting power of all shares of IMS HEALTH entitled to vote generally in the
election of directors, voting as a single class. Directors may be removed only
for cause, and only by the affirmative vote of at least 80% in voting power of
all shares of IMS HEALTH entitled to vote generally in the election of
directors, voting as a single class.
CLASSIFIED BOARD OF DIRECTORS
The IMS HEALTH Restated Certificate of Incorporation provides for IMS
HEALTH's Board of Directors to be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one third of IMS
HEALTH's Board of Directors will be elected each year. See "IMS HEALTH
Management and Executive Compensation--IMS HEALTH Board of Directors".
78
<PAGE>
IMS HEALTH believes that a classified board will help to assure the
continuity and stability of its Board of Directors, and its business strategies
and policies as determined by its Board of Directors, because a majority of the
directors at any given time will have prior experiences as directors of IMS
HEALTH. This provision should also help to ensure that IMS HEALTH's Board of
Directors, if confronted with an unsolicited proposal from a third party that
has acquired a block of IMS HEALTH's voting stock, will have sufficient time to
review the proposal and appropriate alternatives and to seek the best available
result for all stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of IMS HEALTH's Board of
Directors until the second annual stockholders meeting following the date the
acquiror obtains the controlling stock interest, could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of IMS HEALTH and could thus increase the
likelihood that incumbent directors will retain their positions.
AMENDMENTS TO THE AMENDED AND RESTATED BY-LAWS
The IMS HEALTH Restated Certificate of Incorporation provides that the
affirmative vote of the holders of at least 80% in voting power of all the
shares of IMS HEALTH entitled to vote generally in the election of directors,
voting together as a single class, shall be required in order for the
stockholders to alter, amend or repeal any provision of the Amended and Restated
By-laws which is to the same effect as provisions contained in the Restated
Certificate of Incorporation relating to (i) the amendment of the Amended and
Restated By-laws, (ii) the classified Board of Directors and the filling of
director vacancies and (iii) calling and taking actions at meetings of
stockholders and prohibiting stockholders from taking action by written consent.
AMENDMENTS TO THE RESTATED CERTIFICATE OF INCORPORATION
The IMS HEALTH Restated Certificate of Incorporation requires the
affirmative vote of the holders of at least 80% in voting power of all the
shares of IMS HEALTH entitled to vote generally in the election of directors,
voting together as a single class, to alter, amend or repeal provisions of the
Restated Certificate of Incorporation relating to (i) the amendment of the
Restated Certificate of Incorporation and/or the Amended and Restated By-laws,
(ii) the classified Board of Directors and the filling of director vacancies and
(iii) calling and taking actions at meetings of stockholders and prohibiting
stockholders from taking action by written consent.
INDEMNIFICATION AND LIMITATION OF LIABILITY FOR DIRECTORS AND OFFICERS
The IMS HEALTH Restated Certificate of Incorporation provides that IMS
HEALTH shall indemnify directors and officers to the fullest extent permitted by
the laws of the State of Delaware. The IMS HEALTH Restated Certificate of
Incorporation also provides that a director of IMS HEALTH shall not be liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the DGCL as the same exists or may
hereafter be amended.
The indemnification rights conferred by the Restated Certificate of
Incorporation of IMS HEALTH are not exclusive of any other right to which a
person seeking indemnification may otherwise be entitled. IMS HEALTH will also
provide liability insurance for the directors and officers for certain losses
arising from claims or charges made against them, while acting in their
capacities as directors or officers.
79
<PAGE>
NIELSEN MEDIA RESEARCH CAPITALIZATION
The following table sets forth the capitalization of Nielsen Media Research
at March 31, 1998 on a historical basis, and at March 31, 1998 on a pro forma
basis, as adjusted to give effect to the Distribution and the transactions
contemplated thereby. Accordingly, the table does not reflect the proposed
acquisitions of Walsh and PMSI. The following data are qualified in their
entirety by the consolidated financial statements of Nielsen Media Research and
other information contained elsewhere in this Information Statement. See "Risk
Factors".
<TABLE>
<CAPTION>
NIELSEN MEDIA RESEARCH
(AT MARCH 31, 1998)
(UNAUDITED)
-----------------------
<S> <C> <C>
HISTORICAL PRO FORMA
---------- -----------
<CAPTION>
($ AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Cash and Cash Equivalents...................................................... $ 4,004 $ 4,004
---------- -----------
---------- -----------
Long-Term Debt................................................................. -- 300,000(1)
Divisional/Shareholders' Equity:
Divisional Equity............................................................ 107,137 -- (2)
Preferred Stock, par value $.01 per share, authorized -- 10,000,000 shares;
outstanding -- none........................................................ -- --
Series Common Stock, par value $.01 per share, authorized -- 10,000,000
shares;
outstanding -- none........................................................ -- --
Common Stock, par value $.01 per share, authorized -- 400,000,000 shares;
issued -- 171,120,069 shares (Pro forma)................................... 1,711(2)
Capital Surplus................................................................ -- (1)(2)
Retained Earnings/Deficit...................................................... -- (150,179)(1)(2)(3)
Cumulative Translation Adjustment.............................................. -- 643(2)
Treasury Stock -- 0 shares (Actual) and 8,271,396 shares (Pro forma)........... (45,038)(2)(3)
---------- -----------
Total Equity............................................................. 107,137 (192,863)
---------- -----------
Total Capitalization..................................................... $ 107,137 $ 107,137
---------- -----------
---------- -----------
</TABLE>
SUMMARY OF SIGNIFICANT PRO FORMA CAPITALIZATION ASSUMPTIONS
The capitalization table presented above gives effect to the Distribution
Agreement and the transactions contemplated thereby. See "Relationship Between
IMS HEALTH and Nielsen Media Research After the Distribution--Distribution
Agreement." The Distribution Agreement is to be entered into by Cognizant and
IMS HEALTH prior to the Distribution and is subject to approval by Cognizant's
Board of Directors. The assumptions upon which this capitalization table is
based therefore remain to be finalized and do not necessarily reflect all the
factors that may affect the capitalization of Nielsen Media Research at the time
of Distribution.
(1) In connection with the Distribution, Cognizant will borrow $300 million,
which will be used to repay intercompany liabilities. This debt will be the
obligation of Nielsen Media Research after the Distribution. The adjustment
is reflected as an increase in long-term debt.
(2) This adjustment reflects the recapitalization of Nielsen Media Research in
connection with the Distribution.
(3) The cost basis of the shares of treasury stock on a pro forma basis reflects
an allocation of the historical cost of such treasury shares to Nielsen
Media Research.
80
<PAGE>
NIELSEN MEDIA RESEARCH SELECTED FINANCIAL DATA
The following data are qualified in their entirety by the financial
statements of Nielsen Media Research and other information contained elsewhere
in this Information Statement. The financial data as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995, have been
derived from the audited financial statements of Nielsen Media Research
contained elsewhere in this Information Statement. The financial data as of
March 31, 1998 and 1997, and December 31, 1994 and 1993, for the three months
ended March 31, 1998 and 1997 and for the years ended December 31, 1994 and
1993, are unaudited. The historical financial statements of Nielsen Media
Research contained in this Information Statement are presented as if Nielsen
Media Research were a separate entity for all periods presented. The following
financial data should be read in conjunction with the information set forth
under "Nielsen Media Research Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Nielsen Media Research's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Information
Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AND AS OF
MARCH 31, YEAR ENDED AND AS OF DECEMBER 31,
---------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenue..................... $ 96,064 $ 86,271 $ 358,594 $ 319,404 $ 288,652 $ 250,303 $ 209,894
Net Income............................ $ 14,246 $ 12,730 $ 52,475 $ 47,605 $ 40,412 $ 30,115 $ 19,661
Earnings Per Share of Common
Stock--Basic........................ $ 0.09 $ 0.07 $ 0.32 $ 0.28 $ 0.24 $ 0.18 $ --
Earnings Per Share of Common
Stock--Diluted...................... $ 0.09 $ 0.07 $ 0.32 $ 0.28 $ 0.24 $ 0.18 $ --
BALANCE SHEET DATA:
Total Assets.......................... $ 199,645 $ 177,200 $ 192,434 $ 170,331 $ 134,521 $ 138,842 $ 97,831
Long-Term Debt........................ $ -- $ -- $ -- $ -- $ 78 $ 244 $ 411
</TABLE>
81
<PAGE>
NIELSEN MEDIA RESEARCH UNAUDITED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
The historical Consolidated Statement of Income for Nielsen Media Research
has been derived from the historical (pre-Distribution) Consolidated Statement
of Income of Cognizant and is presented as if Nielsen Media Research had been
operated as a separate entity. The Unaudited Consolidated Pro Forma Statement of
Income of Nielsen Media Research for the year ended December 31, 1997 presents
the results of operations of Nielsen Media Research and all material pro forma
adjustments necessary for this purpose.
The Unaudited Consolidated Pro Forma Statement of Income and Statement of
Financial Position of Nielsen Media Research should be read in conjunction with
the historical consolidated financial statements of Nielsen Media Research
contained elsewhere in this Information Statement. The pro forma data are for
informational purposes only and may not necessarily reflect future results of
operations or what the results of operations would have been had Nielsen Media
Research been operated as a separate entity.
The following tables set forth the Nielsen Media Research historical
Consolidated Statement of Income for the year ended December 31, 1997 and the
three months ended March 31, 1998, giving effect to the impact of interest
expense as of the beginning of the period presented related to the anticipated
borrowing by Cognizant of $300 million of third-party debt in connection with
the repayment of existing intercompany liabilities to IMS HEALTH. The Nielsen
Media Research Unaudited Condensed Consolidated Pro Forma Statement of Financial
Position as of March 31, 1998 gives effect to the anticipated borrowing of $300
million of third party debt. This debt will be an obligation of Nielsen Media
Research after the Distribution.
NIELSEN MEDIA RESEARCH UNAUDITED CONSOLIDATED
PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
PRO FORMA
NIELSEN MEDIA PRO FORMA NIELSEN MEDIA
RESEARCH ADJUSTMENTS RESEARCH
-------------- ----------- --------------
<S> <C> <C> <C>
($ AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
OPERATING REVENUE.................................................... $ 358,594 $ 0 $ 358,594
-------------- ----------- --------------
Operating Costs and Selling and Administrative Expense............... 239,670 0 239,670
Depreciation and Amortization........................................ 28,663 0 28,663
-------------- ----------- --------------
OPERATING INCOME..................................................... 90,261 0 90,261
-------------- ----------- --------------
Non-Operating Income--Net............................................ 0 (19,300)(1) (19,300)
-------------- ----------- --------------
Income Before Provision for Income Taxes............................. 90,261 (19,300) 70,961
Provision for Income Taxes........................................... (37,786) 8,080 (29,706)
-------------- ----------- --------------
NET INCOME........................................................... $ 52,475 $ (11,220) $ 41,255
-------------- ----------- --------------
-------------- ----------- --------------
BASIC EARNINGS PER SHARE OF COMMON STOCK............................. $ 0.32 $ (0.07) $ 0.25
DILUTED EARNINGS PER SHARE OF COMMON STOCK........................... $ 0.32 $ (0.08)(2) $ 0.24
Average Number of Shares Outstanding--Basic.......................... 165,163,000 -- 165,163,000
Average Number of Shares Outstanding--Diluted........................ 165,664,990 175,355,183
</TABLE>
See Summary of Adjustments to Unaudited Consolidated Pro Forma Statements of
Income.
82
<PAGE>
NIELSEN MEDIA RESEARCH UNAUDITED CONSOLIDATED PRO FORMA
STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
PRO FORMA
NIELSEN MEDIA PRO FORMA NIELSEN MEDIA
RESEARCH ADJUSTMENTS RESEARCH
------------- ----------- -------------
<S> <C> <C> <C>
($ AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
OPERATING REVENUE................................................ $ 96,064 $ $ 96,064
------------- ----------- -------------
Operating Costs and Selling and Administrative Expense........... 67,625 67,625
Depreciation and Amortization.................................... 7,122 7,122
------------- ----------- -------------
OPERATING INCOME................................................. 21,317 -- 21,317
------------- ----------- -------------
Non-Operating Income--Net........................................ 3,185 (4,800)(1) (1,615)
------------- ----------- -------------
Income Before Provision for Income Taxes......................... 24,502 (4,800) 19,702
------------- ----------- -------------
Provision for Income Taxes....................................... (10,256) 2,001 (8,255)
------------- ----------- -------------
NET INCOME....................................................... $ 14,246 $ (2,799) $ 11,447
------------- ----------- -------------
------------- ----------- -------------
BASIC EARNINGS PER SHARE OF COMMON STOCK......................... $ 0.09 $ (0.02) $ 0.07
DILUTED EARNINGS PER SHARE OF COMMON STOCK....................... $ 0.09 $ (0.02)(2) $ 0.07
</TABLE>
<TABLE>
<S> <C> <C> <C>
Average Number of Shares Outstanding--Basic........ 162,406,000 162,406,000
Average Number of Shares Outstanding--Diluted...... 163,321,842 171,670,784
</TABLE>
SUMMARY OF ADJUSTMENTS TO UNAUDITED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
(1) Non-Operating Income--Net includes the impact of interest expense as of the
beginning of the period presented related to $300 million of debt at an
assumed annual interest rate of 6.4%. Each 1/8% variance in the actual
interest rate will result in an increase or decrease in interest expense of
$375,000 for the year ended December 31, 1997 and $94,000 for the three
months ended March 31, 1998.
(2) Diluted Earnings Per Share of Common Stock for the year ended December 31,
1997 includes the impact ($0.01) of the conversion of Cognizant stock
options held by Nielsen Media Research Employees into Nielsen Medica
Research stock options in accordance with the methodology described under
"Relationship Between IMS HEALTH and Nielsen Media Research After the
Distribution--Employee Benefits Agreement". The impact for the three months
ended March 31, 1998 is less than $0.01.
83
<PAGE>
NIELSEN MEDIA RESEARCH UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
PRO FORMA
NIELSEN NIELSEN
MEDIA PRO FORMA MEDIA
RESEARCH ADJUSTMENTS RESEARCH
----------- ----------- -----------
<S> <C> <C> <C>
Assets
Current Assets
Cash and Cash Equivalents........................................... $ 4,004 $ -- $ 4,004
Accounts Receivable--Net............................................ 52,966 -- 52,966
Other Current Assets................................................ 5,115 -- 5,115
----------- ----------- -----------
Total Current Assets.................................................. 62,085 -- 62,085
----------- ----------- -----------
Property, Plant and Equipment--Net.................................... 58,023 -- 58,023
Computer Software..................................................... 45,724 -- 45,724
Intangibles........................................................... 12,085 -- 12,085
Other Assets.......................................................... 21,728 -- 21,728
----------- ----------- -----------
Total Assets.......................................................... $ 199,645 $ -- $ 199,645
----------- ----------- -----------
----------- ----------- -----------
Liabilities and Divisional Equity
Current Liabilities................................................... $ 43,539 $ -- $ 43,539
Long-Term Debt........................................................ -- 300,000(1) 300,000
Other Liabilities..................................................... 48,969 -- 48,969
----------- ----------- -----------
Total Liabilities..................................................... 92,508 300,000 392,508
Divisional/Shareholders' Equity....................................... 107,137 (107,137)(2) --
Other Divisional Equity............................................. -- -- --
Preferred Stock, par value $.01 per share, authorized-- 10,000,000
shares; outstanding--none......................................... -- -- --
Series Common Stock, par value $.01 per share,
authorized--10,000,000 shares; outstanding--none.................. -- -- --
Common Stock, par value $.01 per share, authorized-- 400,000,000
shares; outstanding--162,848,673 shares........................... -- 1,711(2) 1,711
Capital Surplus....................................................... -- -- --
Retained Earnings..................................................... -- (150,179)(2) (150,179)
Cumulative Translation Adjustment..................................... -- 643(2) 643
Treasury Stock--8,271,396 shares...................................... -- (45,038)(2) (45,038)
----------- ----------- -----------
Total Equity.................................................... 107,137 (300,000) (192,863)
----------- ----------- -----------
----------- ----------- -----------
Total Liabilities and Divisional/Shareholders' Equity................. $ 199,645 $ 0 $ 199,645
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SUMMARY OF ADJUSTMENTS TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT
OF FINANCIAL POSITION
(1) Long-term debt reflects the borrowing by Cognizant of $300 million to repay
intercompany liabilities. This debt will be an obligation of Nielsen Media
Research after the Distribution.
(2) Divisional/Shareholders' Equity reflects the recapitalization of Nielsen
Media Research in connection with the Distribution.
84
<PAGE>
NIELSEN MEDIA RESEARCH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
DOLLAR AMOUNTS IN THOUSANDS
On January 15, 1998, Cognizant announced a plan to separate into two
independent, publicly traded companies--Nielsen Media Research and IMS HEALTH.
The Distribution is subject to final approval by the Cognizant Board of
Directors and obtaining a ruling from the Internal Revenue Service with respect
to the tax-free treatment of the transaction. See Notes 1 and 8 to the Nielsen
Media Research Consolidated Financial Statements.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Nielsen Media Research revenue for the first three months of 1998 increased
11.4% to $96,064 from $86,271. Continuing revenue growth resulted from new
metered markets, additional cable networks and the local Hispanic and
Monitor-Plus measurement services.
Operating costs and selling and administrative expenses for the first three
months of 1998 were $67,625 compared with $57,728 in 1997, an increase of 17.1%.
The increase reflects higher costs related to Year 2000 and increased investment
in the business, including the establishment of new metered markets.
Operating income for the first three months of 1998 were $21,317 compared
with $21,910 in 1997, a decline of 2.7%. The decline resulted primarily from
Year 2000 expenses offset by the revenue growth factors noted above. Excluding
the Year 2000 expenses of 3,185, operating income would have increased 11.8%.
Operating margin during the first three months of 1998 was 22.2%, compared
with 25.4% in 1997. Excluding the Year 2000 expense mentioned above, 1997
operating margin for the first three months of 1998 was 25.5%.
Non-operating income--net of $3,185 for the first three months of 1998
included gains from the disposition of investments.
The consolidated effective tax rate of Nielsen Media Research was 41.9% for
the first three months of 1998 and 1997. The tax rates were computed on a
separate-company basis.
Net income for the first three months of 1998 was $14,246, compared with
$12,730 for the first three months of 1997, an increase of 11.9%.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Nielsen Media Research revenue increased 12.3% in 1997 to $358,594 from
$319,404 in 1996. Revenue growth resulted from additional cable customers,
entrance into three new metered markets, an increase in the level of special
analyses and the continued growth of the Hispanic service.
Operating costs and selling and administrative expenses in 1997 were
$239,670, compared with $212,214 in 1996, an increase of 12.9%. The increase
reflects higher costs related to increased investment in the business, including
the opening of new metered markets and expanded Hispanic services.
Operating income in 1997 was $90,261 compared with $81,961 in 1996, an
increase of 10.1%. The increase resulted primarily from the factors noted above,
partially offset by Year 2000 expenses of $2,681. Excluding the Year 2000
expenses, operating income would have increased 13.4%.
Operating margin in 1997 was 25.2%, compared with 25.7% in 1996. Excluding
the Year 2000 expenses mentioned above, 1997 operating margin was 25.9%.
Nielsen Media Research's consolidated 1997 and 1996 effective tax rate was
41.9%. The tax rates were computed on a separate-company basis.
85
<PAGE>
Net income in 1997 was $52,475, compared with $47,605 in 1996, an increase
of 10.2%.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue increased 10.7% in 1996 to $319,404 from $288,652 in 1995. Revenue
growth resulted from the expansion of network schedules, increased demand for
custom analyses, addition of cable customers and entrance into two new metered
markets.
Operating costs and selling and administrative expenses in 1996 were
$212,214, compared with $194,741 in 1995, an increase of 9.0%. Operating costs
and selling and administrative expenses in 1995 include a non-recurring charge
of $2,300. Excluding this charge, the increase was 10.3%. The higher operating
costs and selling and administrative expenses were the result of additional
costs related to increased investments in the business, including expanded
metered markets and cable operations.
Operating income in 1996 increased 17.8% to $81,961 from $69,568 in 1995.
Included in the 1995 results were $2,300 of non-recurring charges. Excluding
these charges, the 1996 operating income growth rate was 14.0%. The increase was
the result of the factors mentioned above.
Operating margin in 1996 was 25.7%, compared with 24.1% in 1995. The 1995
margin includes $2,300 of non-recurring charges. Excluding these charges, the
operating margin was 24.9%.
Nielsen Media Research's consolidated effective tax rate was 41.9%, in 1996
and 1995. The tax rates were computed on a separate-company basis.
Net income in 1996 was $47,605, compared with $40,412 in 1995, an increase
of 17.8%.
CHANGES IN FINANCIAL POSITION AT DECEMBER 31, 1997 COMPARED WITH DECEMBER 31,
1996
Accounts Receivable-Net increased to $51,986 at December 31, 1997 from
$44,773 at December 31, 1996, principally due to higher receivables from
increased revenues from cable customers and new metered markets.
Property, Plant and Equipment increased to $55,050 at December 31, 1997 from
$44,310 at December 31, 1996, principally due to equipment purchases for metered
markets.
Computer Software increased to $43,093 at December 31, 1997 from $35,653 at
December 31, 1996, principally due to software related to the transition from
mainframe to client server technology.
Unbilled Accounts Receivable (included in Other Assets) decreased to $12,566
at December 31, 1997 from $15,547 at December 31, 1996, principally due to the
timing of contract billings.
Accounts Payable increased to $14,355 at December 31, 1997 from $6,876 at
December 31, 1996, principally due to the timing of payments.
Deferred Income Taxes increased to $34,394 at December 31, 1997 from $29,379
at December 31, 1996, principally due to the future tax impact arising from
computer software additions.
Divisional Equity increased to $101,583 at December 31, 1997 from $99,353 at
December 31, 1996, principally due to net income of $52,475, partially offset by
transfers to Cognizant of $51,107.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In 1995, Nielsen Media Research recorded a pre-tax charge of $2,300 that
included an impairment loss of $500 related to long-lived assets for which
management, having the authority to approve such business decisions, committed
to a plan to replace certain production systems.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" requires that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, this statement
requires recognition of an impairment loss when the sum of undiscounted expected
future cash flows is less than the carrying
86
<PAGE>
amount of such assets. The measurement for such impairment loss is then based on
the fair value of the asset. While SFAS No. 121 affected the measurement of the
impairment charge noted above, it had no effect on the timing of recognition of
the impairment.
The 1995 charge principally reflected an impairment loss related to the
revaluation of certain production systems which were replaced or no longer used
and the write-down of an equity investment.
In October 1995, the Financial Accounting Standards Board (``FASB") issued
SFAS No. 123 ``Accounting for Stock-Based Compensation", which requires that
companies with stock-based compensation plans either recognize compensation
expense based on the fair value of options granted or continue to apply the
existing accounting rules and disclose pro forma net income and earnings per
share assuming the fair value method had been applied. Nielsen Media Research
has chosen to continue applying Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. If
compensation cost for Nielsen Media Research's stock-based compensation plans
had been determined based on the fair value at the grant dates for awards under
those plans, consistent with the method of SFAS No. 123, Nielsen Media
Research's net income and earnings per share would have been reduced to the pro
forma amounts as disclosed in Note 5 to the Nielsen Media Research Consolidated
Financial Statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
simplifies existing computational guidelines, revises disclosure requirements
and increases the comparability of earnings-per-share data on an international
basis. Basic earnings per common share are based on the weighted average number
of common shares outstanding in each year. Diluted earnings per common share
assume that outstanding common shares were increased by shares issuable upon
exercise of those stock options for which market price exceeds exercise price,
less shares which could have been purchased by Nielsen Media Research with
related proceeds. This statement has been adopted by Nielsen Media Research.
(See Note 2 to the Nielsen Media Research Consolidated Financial Statements.)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for periods beginning after
December 15, 1997. Nielsen Media Research is in the process of evaluating the
disclosure requirements under this standard.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which changes the way public companies
report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. This statement is effective for
periods beginning after December 15, 1997. Nielsen Media Research is in the
process of evaluating the disclosure requirements under this standard.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions And Other Postretirement Benefits", which changes current
financial statement disclosure requirements from those required under SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The statement does not change the
existing measurement or recognition provisions of SFAS Nos. 87, 88 or 106, and
is effective for periods beginning after December 15, 1997. Nielsen Media
Research is in the process of evaluating the disclosure requirements under this
standard.
In March 1998, the American Institute of Certified Public Accountants 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 and when capitalization of such costs should commence.
Nielsen Media Research is evaluating the impact of this SOP on its financial
position and
87
<PAGE>
results of operations and will be required to implement SOP 98-1 for the fiscal
year ended December 31, 1999.
NON-U.S. OPERATING AND MONETARY ASSETS
Nielsen Media Research operates in the U.S. and Canada. Approximately 3% of
Nielsen Media Research's revenues and 4% of operating income in 1997 were
derived from Canadian operations. As a result, fluctuations in the value of the
Canadian dollar relative to the U.S. dollar do not significantly affect Nielsen
Media Research's results of operations.
Non-U.S. monetary assets are maintained in Canadian dollars. Changes in the
value of this currency relative to the U.S. dollar are charged or credited to
Divisional Equity. The effect of exchange rate changes during 1997 was not
material.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $4,004 and $10,081 at March 31, 1998 and
1997, respectively, a decrease of $6,077.
Net cash provided by operating activities was $21,481 and $28,295 for the
three months ended March 31, 1998 and 1997, respectively. The decrease of $6,814
in cash provided by operating activities compared to the prior period primarily
reflected an increase in other working capital.
Net cash used in investing activities totaled $14,944 for the three months
ended March 31, 1998 compared with $9,685 in the prior period. The increase of
$5,259 primarily reflected an increase in additions to computer software.
Net cash used in financing activities was $8,530 for the three months ended
March 31, 1998 compared with $14,061 in the prior period. The decrease of $5,531
in cash used in financing activities compared to the prior period reflected a
decrease in the net transfers to Cognizant.
Cash and cash equivalents totaled $5,993 and $5,557 at December 31, 1997 and
1996, respectively. The increase in cash and cash equivalents of $436 was
primarily due to increased cash flow from operations, offset, in part, by
increased cash used in investing activities and transfers to Cognizant.
Net cash provided by operating activities was $94,392, $64,667 and $90,273
in 1997, 1996 and 1995, respectively. The increase of $29,725 in cash provided
by operating activities in 1997 primarily reflected a lower increase in accounts
receivable, an increase in accounts payable and an increase in postretirement
benefits, offset, in part, by a lower increase in deferred income taxes. The
decrease of $25,606 in net cash provided by operating activities in 1996
primarily reflected a higher level of accounts receivable and a decrease in
postretirement benefits, offset, in part, by an increase in deferred income
taxes.
Net cash used in investing activities totaled $42,842 for 1997, compared
with $40,785 and $30,899 in 1996 and 1995, respectively. The increase of $2,057
in cash used in investing activities in 1997 primarily reflected an increase in
capital expenditures and an increase in additions to computer software. The
increase of $9,886 in cash used in investing activities in 1996 primarily
reflected an increase in capital expenditures and an increase in additions to
intangibles.
Net cash used in financing activities totaled $51,107 for 1997, compared
with $19,069 and $58,755 in 1996 and 1995, respectively. The increase of $32,038
of cash used in financing activities in 1997 reflected an increase in the net
transfers to Cognizant/D&B. The decrease of $39,686 of cash used in financing
activities in 1996 reflected a decrease in the net transfer to Cognizant/D&B.
On February 18, 1997 Cognizant announced that its Board of Directors had
authorized a systematic stock repurchase program to buy up to 8.5 million shares
of Cognizant's outstanding common stock. The stock purchases are held in
Treasury and reissued upon exercise of employee stock options. This program was
completed on September 5, 1997 at a total cost of $299,737.
88
<PAGE>
On October 21, 1997 Cognizant announced that its Board of Directors had
authorized a second systematic stock repurchase program to buy up to 10 million
shares of Cognizant's outstanding common stock. A portion of this program is
intended to cover option exercises. Through December 31, 1997, 574,600 shares
have been acquired at a total cost of $22,756. Nielsen Media Research's
management has not decided the extent to which Nielsen Media Research will
continue this stock repurchase program after the Distribution.
Nielsen Media Research's existing balances of cash and cash equivalents and,
cash generated from operations and debt capacity are expected to be sufficient
to meet Nielsen Media Research's long-term and short-term cash requirements
including continued investment in the business.
YEAR 2000
Many existing computer systems and software applications use two digits,
rather than four, to record years, e.g., "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".
Nielsen Media Research depends on systems and software both for its internal
operations as well as for the receipt of data used in its information products
and the transmission of those products to its customers. Nielsen Media Research
began to address the Year 2000 issue in 1996. It expects to complete upgrading
or replacing substantially all affected programs during 1998, with testing to be
done during 1999. The operating income impact of Year 2000 compliance in 1997
was $2,681. Based on current information, the operating income impact of Year
2000 compliance in 1998 is expected to be in the range of $8,000 to $9,000. Year
2000 compliance expenditures for 1999 are in the process of being determined;
however, the costs are expected to be less than in 1998. These costs are being
expensed as incurred.
In addition Nielsen Media Research is communicating with its customers and
data suppliers to assess their ability to address the Year 2000 issue. Failures
by customers to be Year 2000 compliant could hinder their ability to make use of
Nielsen Media Research's products. Failures by data suppliers could disrupt the
flow of data used in Nielsen Media Research's products. While Nielsen Media
Research believes most companies it deals with are addressing the issue, it is
unable to determine the effect, if any, such failures might have on Nielsen
Media Research's business or future results of operations.
The costs of addressing the Year 2000 issue and the date on which Nielsen
Media Research expects to complete Year 2000 compliance are based on the best
estimates of Nielsen Media Research management, which were derived utilizing
various assumptions regarding future events. There can be no guarantee that
these estimates will be achieved and actual results may differ materially.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area of
expertise, the ability to locate and correct all relevant computer codes, and
the success of customers and suppliers in addressing the Year 2000 issue.
DIVIDENDS
The payment and level of cash dividends by Nielsen Media Research are
subject to the discretion of the Board of Directors of Nielsen Media Research.
Nielsen Media Research currently intends to retain future earnings for the
development of its business and does not anticipate paying cash dividends in the
near future. Future dividend decisions will be based on, and affected by, a
number of factors, including the operating results and financial requirements of
Nielsen Media Research on a stand-alone basis. There can be no assurance that
any dividends will be declared or paid.
89
<PAGE>
NIELSEN MEDIA RESEARCH BUSINESS
GENERAL
Nielsen Media Research conducts television audience measurement and related
services in the United States and, through a wholly owned subsidiary, Nielsen
Media Research, Ltd., in Canada.
Nielsen Media Research estimates television audience size and demographics
and reports this and related information to advertisers, advertising agencies,
program syndicators, broadcast networks, cable networks, cable operators,
television stations, station representatives and others in order to increase the
effectiveness of television advertising and programming. This syndicated
information is offered on a subscription basis. Custom or ad-hoc analyses of the
data are also offered to subscribers. The information is used by subscribers to
buy, sell, plan and price television time and to make programming and scheduling
decisions.
In 1997, advertisers spent approximately $42 billion in the United States on
national and local television advertising, according to McCann-Erickson
Worldwide, to bring a variety of programs and advertising messages to
approximately 98 million U.S. television households. This underscores the need
for television stations, networks, advertisers, advertising agencies and others
to understand how many households and what types of people are reached by such
programming.
Nielsen Media Research estimates television audiences and reports data in
the United States primarily through these services: Nielsen Television Index,
Nielsen Syndication Services, Nielsen Homevideo Index, Nielsen Station Index,
Nielsen Hispanic Television Index and Nielsen Hispanic Station Index. In Canada,
Nielsen Media Research measures television audiences and reports data through
national and local market people meter services.
Nielsen Media Research also offers services that enable advertisers to
manage their media spending by linking television ratings to commercial
occurrences, and that provide information to the expanding interactive media
industry.
NATIONAL SERVICES
Through its U.S. national services, Nielsen Media Research serves the
television audience measurement needs of 6 national television broadcast
networks, 46 national and regional cable networks, more than 100 program
syndicators, and more than 150 national advertising agencies and advertisers.
Audience measurement data are collected nationally through Nielsen People Meters
installed in over 5,000 randomly selected households across the U.S. Audience
estimates are produced and delivered to subscribers daily. People meters not
only collect television set tuning data (which channel the set is tuned to) but
also the demographics of the audience (who in the household is watching).
Three national services are offered in the United States:
- NIELSEN TELEVISION INDEX (NTI) provides daily audience total and
demographic estimates for all national broadcast network television
programs to broadcast networks and agencies. This service was established
in 1950.
- NIELSEN HOMEVIDEO INDEX (NHI) - NATIONAL provides audience estimates of
cable and pay cable television. This service was established in 1980.
- NIELSEN SYNDICATION SERVICES (NSS) provides reports and services on both
the local and national levels to the program syndication segment of the
television industry. This service was established in 1985.
90
<PAGE>
LOCAL SERVICES
Nielsen Media Research's local services serve the television audience
measurement needs of more than 1,000 television stations, more than 150 local
cable operators and syndicators, and over 2,000 national, regional and local
advertising agencies and advertisers in over 200 local television markets
throughout the United States. Nielsen Media Research currently provides metered
service in 38 of the nation's largest markets representing about 59% of
television households in the United States. Six additional markets are scheduled
to be metered during 1998, bringing the total number of local metered markets to
44. Television set tuning data are collected electronically using a Nielsen
Media Research set meter. Household audience (as opposed to persons) estimates
are delivered daily to subscribers. In these markets, written diaries are used,
during designated measurement periods, to collect audience demographic estimates
for integration with the metered tuning data. Diaries are used in the balance of
local markets to collect both tuning and persons-viewing information during
designated periods.
Two local services are offered in the United States:
- NIELSEN STATION INDEX (NSI) provides local market television audience
measurement to stations and agencies throughout the U.S. This service was
established in 1954.
- NIELSEN HOMEVIDEO INDEX (NHI) - LOCAL provides audience measurement
services for more than 150 local cable operators.
U.S. HISPANIC SERVICES
Hispanic Services provide both national and local television audience
measurement of U.S. Hispanic households.
- NIELSEN HISPANIC TELEVISION INDEX (NHTI) provides viewing estimates of
national Hispanic audiences. Begun in November 1992, the NHTI service
remains the first and only metered national Hispanic audience measurement
service. Based on a sample of 800 Hispanic households across the U.S., it
uses the same methodology as the other national services (the Nielsen
People Meter) to collect Hispanic audience data.
- NIELSEN HISPANIC STATION INDEX (NHSI) uses a language-stratified sample to
reflect the unique characteristics of each local Hispanic market. The NHSI
service provides advertisers, agencies, networks and syndicators viewing
information in more than a dozen television markets with significant
Hispanic population. The data are collected using a people meter
methodology in the Los Angeles market and a variety of set meter and diary
methodologies in the remaining markets.
CANADIAN SERVICES
In Canada, Nielsen Media Research has offered national people meter service
since 1989 to Canadian national and regional broadcasters, cable networks,
agencies and advertisers. Nielsen Media Research has also provided local people
meter service in Canada's two largest English-language markets, Toronto (since
1995) and Vancouver (begun in the fall of 1997) to local broadcasters, agencies
and advertisers.
OTHER SERVICES
- MONITOR-PLUS. Nielsen Media Research's Monitor-Plus service links
television ratings to commercial occurrence data and tracks "share of
spending" and "share of voice" (the proportion of all television
advertising within a product category attributable to a brand or
advertiser, as expressed in rating points) by company, by brand, and by
product category across fifteen monitored media. These include print,
outdoor, radio and free-standing inserts as well as television, for which
it also reports at the creative execution and campaign level. This service
offers the data and tools necessary for advertisers and their agencies to
actively manage their media spending by enabling them to
91
<PAGE>
understand their own performance and that of their competitors. Customers
use the data to determine competitive advertising trends and performance
within markets of interest. The media also use this service for sales
planning and targeting.
In January 1997, Monitor-Plus expanded service to 75 markets from 50,
thereby matching the coverage of its principal competitor and market
leader Competitive Media Reports. Monitor-Plus plans to deploy new digital
data collection and processing technology in 1998.
- NEW MEDIA SERVICES (NMS) is a successor to a service formed in 1980 that
provides custom research and start-up services for newly developed
syndicated products, both national and local. This includes measurement
performance of non-traditional research such as place-based media and out-
of-home studies. The automated tracking of the use of video news releases
and the measuring of media exposure in airports and in-flight are two more
examples of NMS research services.
- NIELSEN INTERACTIVE SERVICES. In 1995, Nielsen Media Research formed a
separate service to develop research products and services for the
Internet and other interactive media.
During 1995, Nielsen Media Research entered into a strategic relationship
with Internet Profiles Corporation ("I/Pro") to jointly market and brand
two Internet measurement tools: Netline (formerly I/COUNT), which monitors
Web site usage and I/AUDIT, which audits and verifies audience usage and
characteristics.
In addition, separate from its agreement with I/Pro, Nielsen Media
Research plans to establish a panel to monitor computer usage and activity
in households. The panel will provide high quality research to computer
and Internet industry participants (media, advertisers, agencies, hardware
manufacturers, software developers, etc.). Roll-out of the service is
planned for 1998. Additional offerings in the interactive/Internet area
include the Nielsen CommerceNet Internet Demographics Study (a twice per
year study that profiles the size and audience composition of on-line
users) and the Home Technology Report, a survey that provides data on
consumer interest and use of various technologies in the home.
DATA COLLECTION
PEOPLE METER. The heart of the Nielsen Media Research national and Hispanic
services in the United States and all services in Canada is an electronic
measurement system called the Nielsen People Meter. These meters are placed in a
sample of 5,000 households in the U.S., 850 U.S. Hispanic households and over
2,000 households in Canada, randomly selected and recruited by Nielsen Media
Research. A set meter is installed on each television set in a national sample
home along with a device to record who is watching the television. Each member
of the household is assigned a personal viewing button identified by name or
symbol on the people meter that the viewer can use to enter his or her viewing
status. Household members are instructed to record their viewing on a television
set in a household whenever they are watching or listening to that set. Each
button is linked to the age and gender of a person in the household. Additional
buttons on the meter enable visitors to a sample household to record when they
watch television by entering their age and gender and pushing a visitor button.
The Nielsen Media Research metering system stores half minute by half minute
records of television receiver tuning activity and of people meter audience data
entries in sample households. The U.S. tuning records are automatically
transmitted by phone to Nielsen Media Research's central computer facility in
Dunedin, Florida where the data are matched with program line-up information and
processed to create ratings estimates.
SET METER. In 38 of the largest local markets in the U.S., a set metering
system provides household television ratings information on a daily basis. In
each of these markets, approximately 400-550 households (or approximately 19,000
households across the U.S.) are recruited to participate in a sample distinct
from the national people meter sample. Electronic meters are attached to each
television set in each sample
92
<PAGE>
home. Homes recruited for local samples are not equipped with people meter
attachments, so that the information is limited to identification of the program
to which the set is tuned. The metered market samples of television households
are used to obtain audience estimates with measurable reliability of television
programs for stations which originated in or are assigned for reporting purposes
to Nielsen Media Research's Designated Market Areas ("DMAs").
DIARIES. In addition to set meters, Nielsen Media Research uses diaries in
local markets (over 200 DMAs in the U.S.) to collect viewing data during at
least four designated measurement periods each year. Diary measurement is used
to collect viewing information (both tuning and demographics) from sample homes
in every local television market across the United States in November, February,
May and July (known as "sweeps" months) of each year. The diary provides
audience (both tuning and demographics) data in the smaller non-metered markets
and demographic data for the metered markets. In addition to the four sweeps
months, in some larger markets diaries are used to provide viewer information in
as many as three additional months (October, January, and March). Diaries
returned to Nielsen Media Research are examined and edited using established
procedures. Audience estimates are then computed separately for each quarter
hour of viewing recorded in the diary.
INVESTMENTS
Nielsen Media Research maintains an active investment program to enhance
existing services and develop new services in response to the rapidly changing
media marketplace, as well as to develop the technology necessary to succeed in
the emerging television environment. The majority of the investment effort and
spending is dedicated to improving the quality and efficiency of existing
services; realizing the full potential of those services by adding new,
value-added or derivative products, especially new software products; developing
a next-generation data collection capability and infrastructure; and creating
new services and businesses.
Nielsen Media Research's most significant investment initiatives include the
local service diary sample expansion; new client-server based data processing
and delivery software development; the Universal Metering Initiative ("UMI");
and new business development, notably Nielsen Interactive Services and New
Millennium.
In March 1996, Nielsen Media Research announced plans to implement a
significant increase in the size of its diary samples. Beginning in May 1996,
diary samples were increased by 10% and by an additional 5% in October 1996.
During 1997, Nielsen Media Research increased diary samples by an additional 35%
in 88 markets where stations financially supported the increase.
Since 1992, Nielsen Media Research has continued to make significant
investments to transition itself to a new flexible client/server architecture
for data collection, processing and delivery. These investments are designed to
provide Nielsen Media Research with reengineered and more capable data
collection and processing systems, and to provide customers with flexible and
high value Windows-TM--based software products.
As part of its UMI program, Nielsen Media Research is developing a
next-generation metering system, known as the Active/Passive, or "A/P", metering
system, to enable measurement of program viewing in the emerging digital
television environment. This new system uses codes, which are imperceptible to
the viewer, inserted in the audio and/or video portions of programs and
commercials that can be detected by metering equipment installed in the sample
households. The system also has a passive signature-recognition back-up
capability. This encoding approach builds upon Nielsen Media Research's
experience in developing and using its highly successful program video code
technology used in today's analog television environment, which has received
permanent authorization from the Federal Communications Commission (the "FCC").
There can be no assurance, however, that the coding used by the new system will
be adopted by the television industry, be approved by the FCC, or be compatible
with signal compression techniques implemented by the industry in the future.
93
<PAGE>
In December 1997, Nielsen Media Research purchased approximately 5% of the
outstanding shares in I/Pro.
New Millennium is an agency buying system that Nielsen Media Research
believes will be superior in design and concept to any existing or anticipated
competitive product. It is being designed to give advertising agencies the
ability to perform pre-buy analyses, track negotiations and scheduling of ad
time, evaluate overall performance in terms of delivery and cost, and finally,
perform the reconciliation and subsequent accounting functions. By automating
tasks now done manually at agencies, the system may substantially reduce agency
costs. To date, the first of seven planned modules, Spot TV, has been built.
In January 1998, Nielsen Media Research announced the development of a new
metering system to track television viewing within Microsoft Corporation's
Windows 98-TM-. This new technology, developed jointly by Nielsen Media Research
and Microsoft engineers, will be used to capture audience for those sample
households where television programming is viewed using this Microsoft operating
system.
COMPETITION
Nielsen Media Research has maintained a strong leadership position in
relation to its competitors. Arbitron, a former competitor, discontinued its
local syndicated broadcast and cable television ratings service as of December
31, 1993.
A television ratings project funded by the CONTAM and designed and operated
by SRI, is operating a 500 household sample in Philadelphia as a national
television ratings laboratory. SRI's Philadelphia sample has yet to provide
program level data, although SRI has recently announced plans to provide program
level data from a subset of the sample in early 1998. Funding has been
contributed primarily by the three major broadcast networks, ABC, CBS, and NBC.
During 1996, ABC, CBS, and NBC together through CONTAM contributed $10 million
(in addition to the $30 million they contributed in 1994) in funding for the
completion of the Philadelphia test. In addition to the other three major
networks, Fox Broadcasting as well as four cable networks, fifteen major
advertising agencies and buying services, one program syndicator and five of the
nation's largest advertisers have agreed to support and participate in the
testing phase. Some of these companies have contributed to the funding of SRI
and SRI is actively seeking financial support from major media companies for a
national ratings service. The Philadelphia sample is viewed by some as a test
market for a national ratings service. In addition, the NBC and CBS broadcast
television networks have asked SRI for a business plan for the creation of a
national measurement system that could provide an alternative to the Nielsen
Television Index service.
On the local level, ADCOM offers individual cable system measurement. It is
currently collecting and issuing local cable measurement data in Jacksonville,
Florida. Arbitron continues to develop its passive people meter technology and
could use this to re-enter the television audience measurement business.
Indirectly, on both a national and local basis, competition stems from other
marketing research services offering product movement and television audience
data and services.
In Canada, BBM, an established media research organization, has joined with
Taylor Nelson/AGB, a U.K.-based media research company, and announced plans to
provide a competing metered service in Vancouver. BBM, alone or with Taylor
Nelson/AGB, could offer other competitive services in Canada.
Monitor-Plus has significant competition from Competitive Media Reports, a
subsidiary of VNU, a Netherlands-based media company, which has long been the
major participant in this market.
INTELLECTUAL PROPERTY
Nielsen Media Research owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business. Management believes that the "Nielsen Media Research" name and
94
<PAGE>
related names, marks and logos are of material importance to Nielsen Media
Research. Nielsen Media Research is licensed to use certain technology and other
intellectual property rights owned and controlled by others, and similarly,
other companies are licensed to use certain technology and other intellectual
property rights owned and controlled by Nielsen Media Research.
Pursuant to the Intellectual Property Agreement dated as of October 28, 1996
between Cognizant, D&B and ACNielsen (the "D&B IP Agreement"), Nielsen Media
Research has exclusive and unrestricted rights to the "Nielsen Media Research"
name worldwide; however, Nielsen Media Research's use of the "Nielsen" name,
standing alone and as part of a name describing new products and services to be
offered, is subject to certain limitations. In addition, the D&B IP Agreement
provided for the establishment of a limited liability company jointly owned by
Cognizant and ACNielsen, into which certain trademarks incorporating or relating
to the "Nielsen" name in various countries were assigned. This company is
obligated to license such trademarks on a royalty-free basis to Nielsen Media
Research or ACNielsen for use in a manner consistent with the D&B IP Agreement
and for purposes of conducting their respective businesses, and is responsible
for preserving the quality of those trademarks and minimizing any risk of
possible confusion. Pursuant to the TAM Master Agreement dated as of October 28,
1996 between Cognizant and ACNielsen, Cognizant granted a non-exclusive license
to ACNielsen to use certain trademarks, technology and related intellectual
property rights in the conduct of the television audience measurement business
outside of the United States and Canada for a period of five years. This
agreement does not restrict Nielsen Media Research from doing business outside
the United States and Canada.
The technology and other intellectual property rights licensed by Nielsen
Media Research are of importance to its business, although management of Nielsen
Media Research believes that, with the exception of the trademarks incorporating
or relating to the "Nielsen" name, the business, as a whole, is not dependent
upon any one intellectual property or group of such properties.
The names of Nielsen Media Research's and its subsidiaries' products and
services referred to herein are trademarks, service marks, registered trademarks
or registered service marks owned by or licensed to Nielsen Media Research or
one of its subsidiaries.
EMPLOYEES
As of December 31, 1997, Nielsen Media Research had approximately 3,300
full-time equivalent employees in the United States and Canada. Of these,
approximately 3,200 are located in the United States, and none of these are
represented by labor unions. Nielsen Media Research believes that, generally,
relations with its employees are good and have been maintained in a normal and
customary manner.
PROPERTIES
Nielsen Media Research's real property is geographically distributed to meet
sales and operating requirements. Nielsen Media Research owns its major
processing facility in Dunedin, Florida. Its other properties are leased from
third parties. Nielsen Media Research's properties are generally considered to
be both suitable and adequate to meet current operating requirements and
virtually all space is being utilized.
STRATEGY
Nielsen Media Research's strategic goal is to be the acknowledged worldwide
leader in satisfying the media industry's needs for high quality information
which defines the value of media, and services which enable its customers and
the marketplace to operate more effectively.
Nielsen Media Research's strategy has two components: first, to realize the
potential of its existing businesses, both national and local; and second, to
optimize its market strengths and capabilities into realizing new opportunities
in adjacent markets and new businesses.
95
<PAGE>
- Nielsen Media Research intends to realize the potential of its core
businesses by enhancing quality in its operations, enhancing productivity,
anticipating environmental and marketplace changes and competitive
threats, responding with fast moving and flexible capabilities and
decision support solutions, adding derivative products and services, and
providing value-added solutions. Central to this strategy are its
investments in data collection and processing technology, as well as in
data and sample quality.
- Nielsen Media Research intends to optimize its capabilities and
infrastructure into new high-potential opportunities by providing services
that not only enable its customers to make better decisions but allow them
to better anticipate their own futures. Nielsen Media Research's most
significant initiatives in this area include Monitor-Plus, Nielsen
Interactive Services and New Millennium.
LEGAL PROCEEDINGS
Nielsen Media Research and its subsidiaries are involved in legal
proceedings and litigation arising in the ordinary course of business. In the
opinion of management, the outcome of all current proceedings, claims and
litigation, if decided adversely, could have a material effect on quarterly or
annual operating results or cash flows when resolved in a future period.
However, in the opinion of management, these matters will not materially affect
Nielsen Media Research's consolidated financial position.
In addition, on July 29, 1996, 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 complaint, as subsequently amended, 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
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 million, which amount IRI
has asked to be trebled under the antitrust laws. IRI also seeks punitive
damages in an unspecified amount. By notice of motion dated 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 on the motion to dismiss. The Court dismissed 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 and counterclaims.
Defendants denied all material allegations of the complaint. In addition, A.C.
Nielsen Company asserted counterclaims against IRI alleging that IRI has made
false and misleading statements about A.C. Nielsen Company's services and
commercial activities and that such conduct constitutes a violation of Section
43(a) of the Lanham Act and unfair competition. A.C. Nielsen Company seeks
injunctive relief and damages.
On July 7, 1997, IRI filed an amended complaint seeking to replead the claim
of attempted monopolization in the United States, which had been dismissed by
the Court in its May 6, 1997 decision. By notice of motion dated August 18,
1997, defendants moved for an order dismissing the amended claim. On December 1,
1997, the Court denied defendants' motion.
In light of the potentially significant liabilities which could arise from
the IRI Action and in order to facilitate the 1996 Distribution, D&B, ACNielsen
(the parent company of A.C. Nielsen Company) and Cognizant entered into the
Indemnity and Joint Defense Agreement pursuant to which they agreed (i) to
certain arrangements allocating IRI 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 IRI Liabilities up to ACN Maximum
96
<PAGE>
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 is able to
pay after giving effect to (i) any plan submitted by such investment bank which
is designed to maximize the claims paying ability to ACNielsen without impairing
the investment banking firm's ability to deliver a viability opinion (but which
will not require any action requiring shareholder approval), and (ii) payment of
related fees and expenses. For these purposes, financial viability means the
ability of ACNielsen, after giving effect to such plan, the payment of related
fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as
they become due and to finance the current and anticipated operating and capital
requirements of its business, as reconstituted by such plan, for two years from
the date any such plan is expected to be implemented.
Under the terms of the 1996 Distribution Agreement, as a condition to the
1996 Distribution, IMS HEALTH and Nielsen Media Research are required to
undertake to be jointly and severally liable to D&B and ACNielsen for
Cognizant's obligations under the 1996 Distribution Agreement. However, pursuant
to the 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 has 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 million.
Management of Nielsen Media Research is unable to predict at this time the
final outcome of this matter or whether the resolution of this matter could
materially affect Nielsen Media Research's results of operations, cash flows or
financial position.
97
<PAGE>
NIELSEN MEDIA RESEARCH MANAGEMENT AND EXECUTIVE COMPENSATION
William G. Jacobi is currently Chairman of Nielsen Media Research and will
be non-executive Chairman of the Board of Directors of Nielsen Media Research
after the Distribution. John A. Dimling is currently President and Chief
Operating Officer of Nielsen Media Research and will be President and Chief
Executive Officer of Nielsen Media Research after the Distribution. The Board of
Directors of Nielsen Media Research will be composed of certain persons who are
currently directors of Cognizant and certain persons who are not currently
directors of Cognizant. In addition to Mr. Dimling, the other executive officers
of Nielsen Media Research will be drawn primarily from the current management of
Nielsen Media Research and Cognizant.
NIELSEN MEDIA RESEARCH BOARD OF DIRECTORS
Immediately after the Distribution, Nielsen Media Research expects to have a
Board of Directors composed of seven directors.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of Nielsen
Media Research following the Distribution, including information as to service
with Cognizant, if applicable.
<TABLE>
<CAPTION>
DIRECTOR OF
POSITIONS WITH COGNIZANT PRINCIPAL OCCUPATION DURING
NAME COGNIZANT SINCE LAST FIVE YEARS AGE*
- - ---------------------------- ------------------ ------------ -------------------------------------------- ---------
<S> <C> <C> <C> <C>
John A. Dimling............. President and -- President and Chief Operating Officer, 59
Chief Operating Nielsen Media Research, 7/93 to present.
Officer of Nielsen
Media Research
William G. Jacobi........... Chairman of -- Chairman, Nielsen Media Research, 11/96 to 54
Nielsen Media present; Chairman, IMS, 2/95 to 12/97;
Research Executive Vice President, Cognizant, 9/96 to
12/97; Senior Vice President, The Dun &
Bradstreet Corporation, Wilton, CT
(information services), 7/93 to 10/96;
President and Chief Operating Officer,
Nielsen Media Research, 1/91 to 7/93.
M. Bernard Puckett Director 1996 Private Investor, 1/96 to present; President 53
and Chief Executive Officer, Mobile
Telecommunication Technologies Corp.;
Jackson, MS (telecommunications), 5/95 to
1/96; President, Chief Operating Officer,
1/94 to 5/95; Senior Vice President--
Corporate Strategy and Development,
International Business Machines Corporation,
Armonk, NY (computers), 7/93 to 12/93;
General Manager of Applications Solutions,
1/91 to 7/93.
Robert E. Weissman Chairman and Chief 1996 Chairman and Chief Executive Officer, 57
Executive Officer, Cognizant, 9/96 to present; Chairman and
Director Chief Executive Officer, The Dun &
Bradstreet Corporation, Wilton, CT
(information services), 4/95 to 10/96;
President and Chief Executive Officer, 1/94
to 3/95; President and Chief Operating
Officer, 1/85 to 12/93.
<CAPTION>
OTHER
NAME DIRECTORSHIPS
- - ---------------------------- ------------------
<S> <C>
John A. Dimling.............
William G. Jacobi...........
M. Bernard Puckett P-Com, Inc.; R.R.
Donnelley & Sons
Company; Oacis
Healthcare
Holdings Corp.;
Cognizant
Corporation
Robert E. Weissman State Street
Boston
Corporation;
Gartner Group,
Inc.; Cognizant
Corporation.
</TABLE>
- - ------------------------
* As of March 13, 1998
In addition to the directors named above, Nielsen Media Research expects
that James R. Craigie, Peter A. Lund and Michael D. Moore, will be directors of
Nielsen Media Research after the Distribution. Mr. Craigie is currently
Executive Vice President of Kraft Foods, Inc. and President of the Beverage and
98
<PAGE>
Desserts Division of that company and has held such positions since 1994 and
1998, respectively. Mr. Lund was President and Chief Executive Officer of CBS
Inc. from 1995 until 1997. Mr. Moore is currently Executive Vice President,
Media Development for the MacManus Group and has held such position since 1998.
DIRECTOR'S COMPENSATION
Under the director compensation program of Nielsen Media Research, each
non-employee director other than Mr. Jacobi will receive a 1998 retainer of
$12,500; thereafter, the retainer will be paid at an annual rate of $25,000.
Each non-employee director who is the Chairman of a Committee of the Board of
Directors will be paid an additional retainer of $1,500 for 1998 and $3,000
annually thereafter. A fee of $1,000 will be paid to each non-employee director
for every Board or Committee meeting attended. Directors who are employed by
Nielsen Media Research will receive no retainers or meeting fees. As non-
executive Chairman of the Board of Directors, Mr. Jacobi will receive an annual
retainer of $300,000, commencing with his retirement as an employee of IMS
HEALTH in February 1999.
Each non-employee director may elect to have all or a specified part of the
retainer and fees deferred until he or she ceases to be a director. Deferred
amounts may be credited to the account of the directors as deferred cash, which
bears interest at prescribed rates, or as deferred share units in an amount
equal to the amount of deferred compensation divided by the Fair Market Value
(as defined below) of a share of Nielsen Media Research Common Stock on the date
the compensation would otherwise have been paid. Deferred share units are
credited with dividend equivalents. Fair Market Value is the average of the high
and low trading prices of the Nielsen Media Research Common Stock on the date of
determination. Deferred amounts and accrued interest and dividend equivalents
are paid in the form of cash or stock, as appropriate, on the first business day
of the calendar year following the date of the director's termination of service
on the Board of Directors.
COMMITTEES OF THE NIELSEN MEDIA RESEARCH BOARD OF DIRECTORS
Nielsen Media Research's Board of Directors has established Audit and
Compensation and Benefits Committees and designated specific functions and areas
of oversight as to such committees. However, no final determination has yet been
made as to the memberships of such standing committees after the Distribution.
99
<PAGE>
NIELSEN MEDIA RESEARCH EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
<TABLE>
<CAPTION>
NAME, POSITION WITH NIELSEN MEDIA RESEARCH AND AGE* BIOGRAPHICAL DATA
- - -------------------------------------------------------- --------------------------------------------------------
<S> <C>
John A. Dimling, 59..................................... See information under "Nielsen Media Research Board of
President and Chief Executive Officer Directors".
Thomas W. Young, 59..................................... Executive Vice President and Chief Financial Officer,
Executive Vice President and Chief Financial Officer 2/98 to present; employee of D&B, 11/96-2/98; Senior
Vice President and Controller, D&B, 4/92 to 10/96.
Barry P. Cook, 53....................................... Senior Vice President and Chief Research Officer, 11/90
Senior Vice President and Chief Research Officer to present.
Stuart J. Goldshein, 51................................. Assistant Controller, Cognizant, 11/96 to present;
Vice President and Controller Assistant Controller, D&B, 1991 to 10/96.
Stephen J. Boatti, 48................................... Associate General Counsel, Cognizant, 11/96 to present;
Senior Vice President, Chief Legal Officer and Secretary Associate General Counsel, D&B, 1993 to 10/96.
Robert A. Lane, 38...................................... Vice President--Finance and Planning, 7/92 to present.
Vice President and Treasurer
Anita M. Rubino, 41..................................... Vice President--Human Resources, 5/94 to present; Vice
Senior Vice President and Chief Human Resources Officer President--Organizational Development, Marketing
Information Services Division, D&B, 5/93-5/94.
John A Loftus, 55....................................... Vice President--Communications, 4/90 to present.
Senior Vice President and Chief Communication Officer
</TABLE>
- - ------------------------
* As of March 13, 1998
COMPENSATION OF NIELSEN MEDIA RESEARCH EXECUTIVE OFFICERS
The following table discloses the compensation paid by Cognizant for
services rendered to Cognizant in 1997 of Nielsen Media Research's Chief
Executive Officer and to each of the persons who are currently anticipated to be
one of the four other most highly compensated executive officers of Nielsen
Media Research following the Distribution. During the period presented, the
individuals were compensated in accordance with Cognizant's plans and policies.
100
<PAGE>
SUMMARY COMPENSATION TABLE
FOR SERVICES WITH COGNIZANT
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
AWARDS PAYOUTS
----------------------- -----------
ANNUAL COMPENSATION (G)
---------------------------------------- (F) SECURITIES (H)
RESTRICTED UNDERLYING LONG-TERM
(A) (C) (D) (E) STOCK OPTIONS/ INCENTIVE
NAME AND PRINCIPAL POSITION WITH (B) SALARY BONUS(1) OTHER ANNUAL AWARD(S) SARS PAYOUTS
NIELSEN MEDIA RESEARCH YEAR ($) ($) COMPENSATION ($) (#) ($)
- - ----------------------------------- --------- --------- --------- ------------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Dimling.................... 1997 303,000 181,662 0 0 0 0
President and Chief Executive
Officer
Thomas W. Young (3)................ 1997 0 0 0 0 0 0
Executive Vice President and Chief
Financial Officer
Barry P. Cook...................... 1997 212,167 109,165 0 0 0 0
Senior Vice President and Chief
Research Officer
Stuart J. Goldshein................ 1997 211,500 105,746 0 0 0 0
Vice President and Controller
Stephen J. Boatti.................. 1997 188,100 98,226 0 0 0 0
Senior Vice President, Chief Legal
Officer and Secretary
<CAPTION>
(I)
(A) ALL OTHER
NAME AND PRINCIPAL POSITION WITH COMPENSATION(2)
NIELSEN MEDIA RESEARCH ($)
- - ----------------------------------- ----------------
<S> <C>
John A. Dimling.................... 19,682
President and Chief Executive
Officer
Thomas W. Young (3)................ 0
Executive Vice President and Chief
Financial Officer
Barry P. Cook...................... 11,454
Senior Vice President and Chief
Research Officer
Stuart J. Goldshein................ 10,508
Vice President and Controller
Stephen J. Boatti.................. 9,585
Senior Vice President, Chief Legal
Officer and Secretary
</TABLE>
- - ------------------------
(1) The 1997 bonus award was earned in 1997 and paid in 1998.
(2) The amounts shown represent aggregate annual company contributions for the
account of each named executive officer under the Cognizant Corporation
Savings Plan ("Savings Plan") and Savings Benefit Equalization Plan
("SBEP"), plans which are open to employees of Cognizant and certain
subsidiaries. The Savings Plan is a tax-qualified defined contribution plan
and the SBEP is a non-qualified plan which provides a benefit to
participants in the Savings Plan equal to the amount of company
contributions that would have been made to the participant's Savings Plan
accounts but for certain Federal tax laws.
(3) Mr. Young was not employed by Cognizant during 1997.
OPTION GRANTS ON COGNIZANT COMMON STOCK TO NIELSEN MEDIA RESEARCH EXECUTIVES
IN LAST FISCAL YEAR
The following table provides information on fiscal year 1997 grants of
options to the named Nielsen Media Research executives to purchase shares of
Cognizant Common Stock. Options to acquire Cognizant Common Stock become options
to purchase Nielsen Media Research Common Stock. See "Relationship Between IMS
HEALTH and Nielsen Media Research After the Distribution--Employee Benefits
Agreement".
101
<PAGE>
OPTION GRANTS/SAR GRANTS IN LAST FISCAL YEAR
TO PURCHASE COGNIZANT COMMON STOCK
<TABLE>
<CAPTION>
(B) (C)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/ (D)
UNDERLYING SARS EXERCISE (F)
OPTIONS/SARS GRANTED TO OR (E) GRANT DATE
(A) GRANTED EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME (#) FISCAL YEAR ($/SHARE) DATE ($)
- - ------------------------------------------ ------------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
John A. Dimling........................... 0 NA NA NA NA
Thomas W. Young........................... 0 NA NA NA NA
Barry P. Cook............................. 0 NA NA NA NA
Stuart J. Goldshein....................... 0 NA NA NA NA
Stephen J. Boatti......................... 0 NA NA NA NA
</TABLE>
AGGREGATE COGNIZANT OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
COGNIZANT OPTION VALUES
The following table provides information on option exercises in 1997 by the
named executives of Nielsen Media Research and the value of each such
executive's unexercised options to acquire Cognizant Common Stock at December
31, 1997. See also, "Relationship Between IMS HEALTH and Nielsen Media Research
After the Distribution--Employee Benefits Agreement".
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(D) (E)
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
(B) UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES (C) OPTIONS/SARS AT FISCAL OPTIONS/SARS
ACQUIRED VALUE YEAR-END(2)(#) AT FISCAL YEAR-END(3)($)
(A) ON EXERCISE(1) REALIZED ---------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ------------------- ----------------- --------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Dimling Effective Date 1,667 $ 16,462 28,015 190,085 $ 304,683 $ 2,067,175
Options 8,333 $ 82,288
Substitute Options 4,989 $ 80,907 36,252 5,241 $ 516,425 $ 57,341
5,514 $ 80,258
7,599 $ 157,963
Thomas W. Young(4) Effective Date 0 $ 0 0 0 $ 0 $ 0
Options 0 $ 0 0 0 $ 0 $ 0
Substitute Options
Barry P. Cook Effective Date 0 $ 0 13,333 66,667 $ 144,996 $ 725,004
Options 0 $ 0 16,982 2,646 $ 216,682 $ 28,947
Substitute Options
Stuart J. Goldshein Effective Date 0 $ 0 12,332 61,868 $ 134,111 $ 676,640
Options 0 $ 0 13,856 4,430 $ 151,389 $ 48,463
Substitute Options
Stephen J. Boatti Effective Date 0 $ 0 11,333 56,667 $ 123,246 $ 616,254
Options 0 $ 0 30,237 4,431 $ 442,278 $ 48,478
Substitute Options
</TABLE>
- - ------------------------
(1) Effective Date Options reflect Cognizant option grants for 1996. Substitute
Options were issued in substitution of D&B Options that were canceled as of
the date of the D&B spin-off.
(2) No SARs were outstanding at December 31, 1997.
(3) The values shown equal the difference between the exercise price of
unexercised in-the-money options and the fair market value of the underlying
Cognizant Common Stock at December 31, 1997. Options are in-the-money if the
fair market value of the Cognizant Common Stock exceeds the exercise price
of the option.
(4) Mr. Young was not employed by Cognizant during 1997.
102
<PAGE>
COGNIZANT RETIREMENT BENEFITS
Retirement benefits for the named Nielsen Media Research executive officers
are determined under the Cognizant Retirement Plan and the Cognizant Retirement
Excess Plan. Under these plans, Cognizant contributes 6% of the participant's
compensation monthly to the participant's cash balance in the plan. The cash
balance earns monthly investment credits based on the yield on 30-year Treasury
bonds from time to time. These plans also include a minimum monthly benefit for
certain employees who had attained age 50 and had earned 5 years of service as
of October 31, 1996, including Messrs. Dimling and Cook. The minimum benefit is
equal to the excess of (i) 1.7% of final average compensation multiplied by
years of credited service not in excess of 25, plus 1.0% of average final
compensation multiplied by years of credited service in excess of 25, over (ii)
1.7% of the primary Social Security insurance benefits multiplied by years of
credited service not in excess of 25, plus 0.5% of the primary Social Security
insurance benefits multiplied by years of credited service in excess of 25. The
estimated annual benefits upon retirement at age 65 for Messrs. Dimling, Cook,
Goldshein and Boatti are $82,974, $27,830, $41,152 and $29,123, respectively,
based upon their respective credited service to date for these plans of 12, 7,
12 and 11 years. In 1997, Mr. Young was not eligible to participate in the
Cognizant Retirement Plan and the Cognizant Retirement Excess Plan.
103
<PAGE>
NIELSEN MEDIA RESEARCH SECURITY OWNERSHIP BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
After the Distribution, shares of Cognizant Common Stock will be shares of
Nielsen Media Research Common Stock. The following table sets forth the number
of shares of Cognizant Common Stock, beneficially owned by each of the persons
expected to be directors of Nielsen Media Research after the Distribution, each
of the executive officers named in the Nielsen Media Research Summary
Compensation Table above, by all such directors and executive officers as a
group and by each person known to Cognizant to beneficially own more than 5% of
the outstanding shares of Cognizant Common Stock at December 31, 1997 (the "5%
Owners"). Stock ownership information is based upon (i) the number of shares of
Cognizant Common Stock held by such directors and executive officers as of
December 31, 1997, and (ii) the number of shares of Cognizant Common Stock held
by 5% Owners based upon a Schedule 13G filed by such 5% Owners with the SEC.
Information regarding shares subject to options reflects shares of Cognizant
Common Stock subject to options as of December 31, 1997 and exercisable within
60 days thereafter, all of which (except as provided in the next sentence) will
be converted into options that are exercisable into shares of Nielsen Media
Research Common Stock. See "Relationship Between IMS HEALTH and Nielsen Media
Research After the Distribution--Employee Benefits Agreement". Options to
acquire Cognizant Common Stock held by Messrs. Weissman and Puckett, both of
whom will become IMS HEALTH directors in connection with the Distribution, and
certain options to acquire Cognizant Common Stock held by Mr. Jacobi, will not
be converted into options to acquire Nielsen Media Research Common Stock but
rather will be converted into options to acquire IMS HEALTH Common Stock based
on a conversion formula to be calculated after the Distribution Date. The
information in the following table does not reflect the conversion of options to
acquire Cognizant Common Stock. See "Relationship Between IMS HEALTH and Nielsen
Media Research After the Distribution--Employee Benefits Agreement". Unless
otherwise stated, the indicated persons have sole voting and investment power
over the shares listed. All persons expected to be directors and executive
officers of Nielsen Media Research after the Distribution as a group owned less
than one percent of the Cognizant Common Stock on December 31, 1997 and are
expected to own less than one percent of the Nielsen Media Research Common Stock
as of the Distribution Date. The mailing address for each of the Nielsen Media
Research directors and executive officers listed herein is 299 Park Avenue, New
York, New York 10171.
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO OPTIONS
NUMBER OF SHARES EXERCISABLE WITHIN 60
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED DAYS
- - ------------------------------------------------------------------ -------------------- ------------------------
<S> <C> <C>
Stephen J. Boatti................................................. 732 41,570
Barry P. Cook..................................................... 639 30,315
James R. Craigie.................................................. 0 0
John A. Dimling................................................... 1,903 64,267
Stuart J. Goldshein............................................... 873 26,388
William G. Jacobi................................................. 6,742 149,266
Peter A. Lund..................................................... 0 0
Michael D. Moore.................................................. 0 0
M. Bernard Puckett................................................ 4,498(1) 1,166
Robert E. Weissman................................................ 122,964 635,621
Thomas W. Young................................................... 0 0
FMR Corporation................................................... 18,355,768(2)(3) --
82 Devonshire Steet
Boston, MA 02109
</TABLE>
- - ------------------------
(1) Includes 898 shares of restricted stock granted under the Non-Employee
Directors' Stock Incentive Plan, which shares are scheduled to vest on
November 15, 2001.
104
<PAGE>
(2) Represents 11.32% of the total outstanding Cognizant Common Stock on
December 31, 1997.
(3) FMR Corporation ("FMR Corp.") and its wholly owned subsidiaries, Fidelity
Management & Research Company ("Fidelity") and Fidelity Management Trust
Company ("FMTC"), jointly filed a Schedule 13G with the SEC on February 14,
1998. This Schedule 13G shows that Fidelity, a registered investment
adviser, beneficially owned at December 31, 1997, 17,116,190 shares of
Cognizant Common Stock. Edward C. Johnson, 3rd, Chairman of FMR Corp., FMR
Corp. and the registered investment companies advised by Fidelity each has
sole dispositive power (but no voting power) over such shares. Voting power
with respect to such shares resides with the respective Boards of Trustees
of each of the Fidelity Funds. Mr. Johnson and FMR Corp. each has sole
dispositive power over 1,239,578 shares of Cognizant Common Stock held by
FMTC, a bank as defined under the Securities Act which serves as investment
manager for institutional accounts, sole voting power over 749,378 of such
shares and no voting power over 490,200 of such shares.
DESCRIPTION OF NIELSEN MEDIA RESEARCH CAPITAL STOCK
Since after the Distribution the capital stock of Cognizant held by
Cognizant stockholders will represent a continuing ownership interest in the
Nielsen Media Research Business, the following summary of Cognizant's current
capital stock structure describes Nielsen Media Research's capital structure
from and after the Distribution.
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that Nielsen Media
Research has authority to issue under its Restated Certificate of Incorporation
is 420,000,000 shares of which 400,000,000 shares represent shares of Nielsen
Media Research Common Stock, 10,000,000 shares represent shares of Preferred
Stock (the "Nielsen Media Research Preferred Stock") and 10,000,000 shares
represent shares of Series Common Stock (the "Nielsen Media Research Series
Common Stock").
NIELSEN MEDIA RESEARCH COMMON STOCK
Subject to any preferential rights of any Nielsen Media Research Preferred
Stock or Nielsen Media Research Series Common Stock created by the Board of
Directors of Nielsen Media Research, each outstanding share of Nielsen Media
Research Common Stock will be entitled to such dividends, if any, as may be
declared from time to time by the Board of Directors of Nielsen Media Research.
See "Dividend Policies--Nielsen Media Research". Each outstanding share is
entitled to one vote on all matters submitted to a vote of stockholders. In the
event of liquidation, dissolution or winding up of Nielsen Media Research,
holders of Nielsen Media Research Common Stock are entitled to receive on a pro
rata basis any assets remaining after provision for payment of creditors and
after payment of any liquidation preferences to holders of Nielsen Media
Research Preferred Stock and Nielsen Media Research Series Common Stock.
NIELSEN MEDIA RESEARCH PREFERRED STOCK AND NIELSEN MEDIA RESEARCH SERIES COMMON
STOCK
Each of the authorized Preferred Stock and the authorized Series Common
Stock of Nielsen Media Research is available for issuance from time to time in
one or more series at the discretion of the Nielsen Media Research Board of
Directors without stockholder approval. The Nielsen Media Research Board of
Directors has the authority to prescribe for each series of Nielsen Media
Research Preferred Stock or Nielsen Media Research Series Common Stock it
establishes the number of shares in that series, the voting rights (if any) to
which such shares in that series are entitled, the consideration for such shares
in that series and the designation, powers, preference and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions of the shares in that series. Depending upon the
rights of such Preferred Stock or Series Common Stock, as applicable, the
issuance of Nielsen Media Research Preferred Stock or Nielsen Media Research
Series Common Stock, as applicable, could have an adverse effect on holders of
Nielsen Media Research Common Stock by delaying or preventing a change in
control
105
<PAGE>
of Nielsen Media Research, making removal of the present management of Nielsen
Media Research more difficult or resulting in restrictions upon the payment of
dividends and other distributions to the holders of Nielsen Media Research
Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Delaware law does not require stockholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the Nielsen Media Research Common Stock remained listed on the
NYSE, require stockholder approval of certain issuances equal to or exceeding
20% of the then outstanding voting power or then outstanding number of shares of
Nielsen Media Research Common Stock. These additional shares may be used for a
variety of corporate purposes, including future public offerings to raise
additional capital or to facilitate corporate acquisitions. Under terms of the
agreements relating to the Acquisitions and subject to Walsh and PMSI
shareholder approval, Walsh shareholders will receive .3041 shares of Cognizant
Common Stock per Walsh share outstanding and PMSI shareholders will receive
.2800 shares of Cognizant Common Stock per PMSI share outstanding. The number of
shares of Cognizant Common Stock to be issued in connection with each of the
Acquisitions is subject to a collar adjustment based on the price of Cognizant
Common Stock during a period prior to the closing of the Acquisitions. The PMSI
acquisition will not be completed until after the Record Date and therefore,
PMSI stockholders will receive, in lieu of Cognizant Common Stock, IMS HEALTH
Common Stock pursuant to a formula designed to recalibrate the collar
computations based on the relative value of IMS HEALTH to the total value of IMS
HEALTH and Nielsen Media Research following the Distribution. If the Walsh
acquisition is not completed prior to the Record Date, Walsh shareholders will
also receive IMS HEALTH Common Stock pursuant to a similar formula. Cognizant
expects to issue approximately 3.2 million shares from treasury stock to
consummate the Walsh acquisition. Nielsen Media Research currently does not have
any other plans to issue additional shares of Nielsen Media Research Common
Stock, Nielsen Media Research Preferred Stock or Nielsen Media Research Series
Common Stock other than in connection with employee compensation plans.
One of the effects of the existence of unissued and unreserved Nielsen Media
Research Common Stock, Nielsen Media Research Preferred Stock and Nielsen Media
Research Series Common Stock may be to enable the Board of Directors of Nielsen
Media Research to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of Nielsen Media Research by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of Nielsen Media Research's
management and possibly deprive the stockholders of opportunities to sell their
shares of Nielsen Media Research Common Stock at prices higher than prevailing
market prices. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of Nielsen Media Research
pursuant to the operation of the Nielsen Media Research Rights Plan, which is
discussed below.
NIELSEN MEDIA RESEARCH RIGHTS PLAN
Nielsen Media Research plans to continue the Cognizant Rights Plan pursuant
to which a dividend of one preferred share purchase right (a "Nielsen Media
Research Right") for each outstanding share of Nielsen Media Research Common
Stock was declared. Each Nielsen Media Research Right entitles the registered
holder to purchase from Nielsen Media Research one one-thousandth of a share of
Series A Junior Participating Nielsen Media Research Preferred Stock, par value
$0.01 per share (the "Nielsen Media Research Participating Preferred Stock"), of
Nielsen Media Research at a price of $210 per one one-thousandth of a share of
Nielsen Media Research Participating Preferred Stock (as the same may be
adjusted, hereinafter referred to as the "Nielsen Media Research Participating
Preferred Stock Purchase Price"), subject to adjustment. The description and
terms of the Nielsen Media Research Rights are set forth in a Rights Agreement
dated as of October 15, 1996, as the same may be amended from time to time (the
"Nielsen Media Research Rights Agreement"), between Cognizant as predecessor to
Nielsen Media
106
<PAGE>
Research and First Chicago Trust Company of New York, as the Nielsen Media
Research Rights Agent (the "Nielsen Media Research Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (with certain
exceptions, hereinafter referred to in this description of Nielsen Media
Research Rights, a "Nielsen Media Research Acquiring Person") have acquired
beneficial ownership of 15% or more of the outstanding shares of Nielsen Media
Research Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group of affiliated persons becomes a Nielsen Media Research Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the outstanding
shares of Nielsen Media Research Common Stock (the earlier of such dates
hereinafter referred to in this description of Nielsen Media Research Rights as
the "Nielsen Media Research Rights Distribution Date"), the Nielsen Media
Research Rights will be evidenced by the certificates representing Nielsen Media
Research Common Stock.
The Nielsen Media Research Rights Agreement provides that, until the Nielsen
Media Research Rights Distribution Date (or earlier redemption or expiration of
the Nielsen Media Research Rights), the Nielsen Media Research Rights will be
transferred with and only with the Nielsen Media Research Common Stock. Until
the Nielsen Media Research Rights Distribution Date (or earlier redemption or
expiration of the Nielsen Media Research Rights), Nielsen Media Research Common
Stock certificates will contain a notation incorporating the Nielsen Media
Research Rights Agreement by reference. Until the Nielsen Media Research Rights
Distribution Date (or earlier redemption or expiration of the Nielsen Media
Research Rights), the surrender for transfer of any certificates for shares of
Nielsen Media Research Common Stock will also constitute the transfer to the
Nielsen Media Research Rights associated with the shares of Nielsen Media
Research Common Stock represented by such certificate. As soon as practicable
following the Nielsen Media Research Rights Distribution Date, separate
certificates evidencing the Nielsen Media Research Rights ("Nielsen Media
Research Rights Certificates") will be mailed to holders of record of the
Nielsen Media Research Common Stock as of the close of business on the Nielsen
Media Research Rights Distribution Date and such separate Nielsen Media Research
Rights Certificates alone will evidence the Nielsen Media Research Rights.
The Nielsen Media Research Rights will expire on October 23, 2006
(hereinafter referred to in this description of Nielsen Media Research Rights as
the "Nielsen Media Research Final Expiration Date"), unless the Nielsen Media
Research Final Expiration Date is advanced or extended or unless the Nielsen
Media Research Rights are earlier redeemed or exchanged by Nielsen Media
Research, in each case as described below.
The Nielsen Media Research Participating Preferred Stock Purchase Price
payable, and the number of shares of Nielsen Media Research Participating
Preferred Stock or other securities or property issuable, upon exercise of the
Nielsen Media Research Rights are subject to adjustment from time to time to
prevent dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Nielsen Media Research Participating
Preferred Stock, (ii) upon the grant to holders of the Nielsen Media Research
Participating Preferred Stock of certain rights or warrants to subscribe for or
purchase Nielsen Media Research Participating Preferred Stock at a price, or
securities convertible into Nielsen Media Research Participating Preferred Stock
with a conversion price, less than the then-current market price of the Nielsen
Media Research Participating Preferred Stock or (iii) upon the distribution to
holders of the Nielsen Media Research Participating Preferred Stock of evidences
of indebtedness or assets (excluding regular periodic cash dividends or
dividends payable in Nielsen Media Research Participating Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The Nielsen Media Research Rights are also subject to adjustment in the
event of a stock dividend on the Nielsen Media Research Common Stock payable in
shares of Nielsen Media Research Common Stock
107
<PAGE>
or subdivisions, consolidations or combinations of the Nielsen Media Research
Common Stock occurring, in any such case, prior to the Nielsen Media Research
Rights Distribution Date.
Shares of Nielsen Media Research Participating Preferred Stock purchasable
upon exercise of the Nielsen Media Research Rights will not be redeemable. Each
share of Nielsen Media Research Participating Preferred Stock will be entitled,
when, as and if declared, to a minimum preferential quarterly dividend payment
of $10 per share but will be entitled to an aggregate dividend of 1,000 times
the dividend declared per share of Nielsen Media Research Common Stock. In the
event of liquidation, dissolution or winding up of Nielsen Media Research, the
holders of the Nielsen Media Research Participating Preferred Stock will be
entitled to a minimum preferential liquidation payment of $100 per share (plus
any accrued but unpaid dividends) but will be entitled to an aggregate payment
of 1,000 times the payment made per share of Nielsen Media Research Common
Stock. Each share of Nielsen Media Research Participating Preferred Stock will
have 1,000 votes, voting together with the Nielsen Media Research Common Stock.
Finally, in the event of any merger, consolidation or other transaction in which
shares of Nielsen Media Research Common Stock are converted or exchanged, each
share of Nielsen Media Research Participating Preferred Stock will be entitled
to receive 1,000 times the amount received per share of Nielsen Media Research
Common Stock. These rights are protected by customary antidilution provisions.
Because of the nature of the Nielsen Media Research Participating Preferred
Stock's dividend, liquidation and voting rights, the value of the one
one-thousandth interest in a share of Nielsen Media Research Participating
Preferred Stock purchasable upon exercise of each Nielsen Media Research Right
should approximate the value of one share of Nielsen Media Research Common
Stock.
In the event that any person or group of affiliated or associated persons
becomes a Nielsen Media Research Acquiring Person, each holder of a Nielsen
Media Research Right, other than Nielsen Media Research Rights beneficially
owned by the Nielsen Media Research Acquiring Person (which will thereupon
become void), will thereafter have the right to receive upon exercise of a
Nielsen Media Research Right and payment of the Nielsen Media Research
Participating Preferred Stock Purchase Price, that number of shares of Nielsen
Media Research Common Stock having a market value of two times the Nielsen Media
Research Participating Preferred Stock Purchase Price.
In the event that, after a person or group has become a Nielsen Media
Research Acquiring Person, Nielsen Media Research is acquired in a merger or
other business combination transaction or 50% or more of its consolidated assets
or earning power are sold, proper provision will be made so that each holder of
a Nielsen Media Research Right (other than Nielsen Media Research Rights
beneficially owned by a Nielsen Media Research Acquiring Person which will have
become void) will thereafter have the right to receive, upon the exercise
thereof, that number of shares of common stock of the person with whom Nielsen
Media Research has engaged in the foregoing transaction (or its parent), which
number of shares at the time of such transaction will have a market value of two
times the Nielsen Media Research Participating Preferred Stock Purchase Price.
At any time after any person or group becomes a Nielsen Media Research
Acquiring Person and prior to the acquisition by such person or group of 50% or
more of the outstanding shares of Nielsen Media Research Common Stock or the
occurrence of an event described in the prior paragraph, the Board of Directors
of Nielsen Media Research may exchange the Nielsen Media Research Rights (other
than Nielsen Media Research Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one share of Nielsen
Media Research Common Stock, or a fractional share of Nielsen Media Research
Participating Preferred Stock of equivalent value (or of a share of a class or
series of Nielsen Media Research's Preferred Stock having similar rights,
preferences and privileges), per Nielsen Media Research Right (subject to
adjustment).
With certain exceptions, no adjustment in the Nielsen Media Research
Participating Preferred Stock Purchase Price will be required until cumulative
adjustments require an adjustment of at least 1% in such Nielsen Media Research
Participating Preferred Stock Purchase Price. No fractional shares of Nielsen
108
<PAGE>
Media Research Participating Preferred Stock will be issued (other than
fractions which are integral multiples of one one-thousandth of a share of
Nielsen Media Research Participating Preferred Stock, which may, at the election
of Nielsen Media Research, be evidenced by depositary receipts) and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Nielsen Media Research Participating Preferred Stock on the last trading period
to the date of exercise.
At any time prior to the time a Nielsen Media Research Acquiring Person
becomes such, the Board of Directors of Nielsen Media Research may redeem the
Nielsen Media Research Rights in whole, but not in part, at a price of $0.01 per
Nielsen Media Research Right (hereinafter referred to in this description of
Nielsen Media Research Rights as the "Nielsen Media Research Right Redemption
Price"). The redemption of the Nielsen Media Research Rights may be made
effective at such time, on such basis and with such conditions as the Board of
Directors in its sole discretion may establish. Immediately upon any redemption
of the Nielsen Media Research Rights, the right to exercise the Nielsen Media
Research Rights will terminate and the only right of the holders of Nielsen
Media Research Rights will be to receive the Nielsen Media Research Right
Redemption Price.
For so long as the Nielsen Media Research Rights are then redeemable,
Nielsen Media Research may, except with respect to the Nielsen Media Research
Right Redemption Price, amend the Nielsen Media Research Rights in any manner.
After the Nielsen Media Research Rights are no longer redeemable, Nielsen Media
Research may, except with respect to the Nielsen Media Research Right Redemption
Price, amend the Nielsen Media Research Rights in any manner that does not
adversely affect the interests of holders of the Nielsen Media Research Rights.
Until a Nielsen Media Research Right is exercised, the holder thereof, as
such, will have no rights as a stockholder of Nielsen Media Research, including,
without limitation, the right to vote or to receive dividends.
The summary description of the Nielsen Media Research Rights set forth above
does not purport to be complete and is qualified in its entirety by reference to
the Nielsen Media Research Rights Agreement, as the same may be amended from
time to time.
CERTAIN EFFECTS OF THE NIELSEN MEDIA RESEARCH RIGHTS AGREEMENT
The Nielsen Media Research Rights Agreement is designed to protect
stockholders of Nielsen Media Research in the event of unsolicited offers to
acquire Nielsen Media Research and other coercive takeover tactics which, in the
opinion of the Board of Directors of Nielsen Media Research, could impair its
ability to represent stockholder interests. The provisions of the Nielsen Media
Research Rights Agreement may render an unsolicited takeover of Nielsen Media
Research more difficult or less likely to occur or might prevent such a
takeover, even though such takeover may offer Nielsen Media Research's
stockholders the opportunity to sell their stock at a price above the prevailing
market rate and may be favored by a majority of the stockholders of Nielsen
Media Research.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of Nielsen Media Research authorized at the
time of the Distribution will have any preemptive right to subscribe to any
securities of Nielsen Media Research of any kind or class.
DELAWARE GENERAL CORPORATION LAW
The terms of Section 203 of the DGCL apply to Nielsen Media Research since
it is a Delaware corporation. Pursuant to Section 203, with certain exceptions,
a Delaware corporation may not engage in any of a broad range of business
combinations, such as mergers, consolidations and sales of assets, with an
"interested stockholder" for a period of three years from the time that such
person became an interested stockholders unless (a) the transaction that results
in the person's becoming an interested stockholder or
109
<PAGE>
the business combination is approved by the board of directors of the
corporation before the person becomes an interested stockholder, (b) upon
consummation of the transaction which results in the stockholder becoming an
interested stockholder, the interested stockholder owns 85% or more of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also officers
and shares owned by certain employee stock plans or (c) on or after the time the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by holders of at least two-thirds of
the corporation's outstanding voting stock, excluding shares owned by the
interested stockholder, at a meeting of stockholders. Under Section 203, an
"interested stockholder" is defined as any person, other than the corporation
and any direct or indirect majority-owned subsidiary, that is (a) the owner of
15% or more of the outstanding voting stock of the corporation or (b) an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder. Section 203 does
not apply to a corporation that so provides in an amendment to its certificate
of incorporation or by-laws passed by a majority of its outstanding shares, but
such stockholder action does not become effective for 12 months following its
adoption and would not apply to persons who were already interested stockholders
at the time of the amendment. Nielsen Media Research's Restated Certificate of
Incorporation does not exclude Nielsen Media Research from the restrictions
imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage companies interested in acquiring Nielsen Media
Research to negotiate in advance with Nielsen Media Research's Board of
Directors, because the stockholder approval requirement would be avoided if the
Board of Directors approves either the business combination or the transaction
which results in the stockholder becoming an interested stockholder. Such
provisions also may have the effect of preventing changes in the Board of
Directors of Nielsen Media Research. It is further possible that such provisions
could make it more difficult to accomplish transactions which stockholders may
otherwise deem to be in their best interests.
PROVISIONS OF NIELSEN MEDIA RESEARCH RESTATED CERTIFICATE OF INCORPORATION AND
AMENDED AND RESTATED BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the Nielsen Media Research Restated Certificate of
Incorporation and Amended and Restated By-laws may delay or make more difficult
unsolicited acquisitions or changes of control of Nielsen Media Research. It is
believed that such provisions will enable Nielsen Media Research to develop its
business in a manner that will foster its long-term growth without disruption
caused by the threat of a takeover not deemed by its Board of Directors to be in
the best interests of Nielsen Media Research and its stockholders. Such
provisions could have the effect of discouraging third parties from making
proposals involving an unsolicited acquisition or change of control of Nielsen
Media Research, although such proposals, if made, might be considered desirable
by a majority of Nielsen Media Research's stockholders. Such provisions may also
have the effect of making it more difficult for third parties to cause the
replacement of the current Board of Directors of Nielsen Media Research. These
provisions include (i) the availability of capital stock for issuance from time
to time at the discretion of the Board of Directors (see "--Authorized but
Unissued Capital Stock"), (ii) prohibitions against stockholders calling a
special meeting of stockholders or acting by written consent in lieu of a
meeting, (iii) requirements for advance notice for raising business or making
nominations at stockholders' meetings, (iv) the ability of the Board of
Directors to increase the size of the board and to appoint directors to newly
created directorships, (v) a classified Board of Directors and (vi) higher than
majority requirements to make certain amendments to the By-laws and Certificate
of Incorporation.
110
<PAGE>
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Nielsen Media Research Restated Certificate of Incorporation and Amended
and Restated By-laws provide that stockholder action can be taken only at an
annual or special meeting and cannot be taken by written consent in lieu of a
meeting. The Nielsen Media Research Restated Certificate of Incorporation and
Amended and Restated By-laws also provide that special meetings of the
stockholders can be called only by the Chief Executive Officer of Nielsen Media
Research or by a vote of the majority of the Board of Directors. Furthermore,
the By-laws of Nielsen Media Research provide that only such business as is
specified in the notice of any such special meeting of stockholders may come
before such meeting.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The By-laws of Nielsen Media Research establish an advance notice procedure
for stockholder proposals to be brought before an annual meeting of stockholders
and for nominations by stockholders of candidates for election as directors at
an annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of stockholders as has been
brought before the meeting by, or at the direction of, the Chairman of the Board
of Directors, or by a stockholder of Nielsen Media Research who is entitled to
vote at the meeting who has given to the Secretary of Nielsen Media Research
timely written notice, in proper form, of the stockholder's intention to bring
that business before the meeting. The chairman of such meeting has the authority
to make such determinations. Only persons who are nominated by, or at the
direction of, the Chairman of the Board of Directors, or who are nominated by a
stockholder who has given timely written notice, in proper form, to the
Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of Nielsen Media Research.
To be timely, a stockholder's notice of business to be brought before an
annual meeting and nominations of candidates for election as directors at any
annual meeting shall be delivered to the Secretary of Nielsen Media Research at
the principal executive offices of Nielsen Media Research not less than 70 days
nor more than 90 days prior to the first anniversary of the preceding year's
annual meeting; PROVIDED, HOWEVER, that in the event that the date of the annual
meeting is advanced by more than 20 days, or delayed by more than 70 days, from
such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the ninetieth day prior to such annual meeting and
not later than the close of business on the later of the seventieth day prior to
such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made.
To be timely, a stockholder's notice of nominations of persons for election
to the Board of Directors may be made at such a special meeting of stockholders
if the stockholder's notice shall be delivered to the Secretary of Nielsen Media
Research at the principal executive offices of Nielsen Media Research not
earlier than the ninetieth day prior to such special meeting and not later than
the close of business on the later of the seventieth day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.
The notice of any nomination for election as a director must set forth the
name and address of, and the class and number of shares of Nielsen Media
Research held by, the stockholder who intends to make the nomination and the
beneficial owner, if any, on whose behalf the nomination is being made; the name
and address of the person or persons to be nominated; a representation that the
stockholder is a holder of record of stock of Nielsen Media Research entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; such other
information regarding each nominee proposed by such stockholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the SEC had
111
<PAGE>
each nominee been nominated, or intended to be nominated, by the Board of
Directors; and the consent of each nominee to serve as a director if so elected.
NUMBER OF DIRECTORS; FILLING OF VACANCIES; REMOVAL
The Nielsen Media Research Restated Certificate of Incorporation and Amended
and Restated By-laws provide that newly created directorships resulting from an
increase in the authorized number of directors (or any vacancy) may be filled by
a vote of a majority of directors then in office. Accordingly, the Board of
Directors of Nielsen Media Research may be able to prevent any stockholder from
obtaining majority representation on the Board of Directors by increasing the
size of the board and filling the newly created directorships with its own
nominees. If any applicable provision of the DGCL expressly confers power on
stockholders to fill such a directorship at a special meeting of stockholders,
such a directorship may be filled at such meeting only by the affirmative vote
of at least 80% in voting power of all shares of Nielsen Media Research entitled
to vote generally in the election of directors, voting as a single class.
Directors may be removed only for cause, and only by the affirmative vote of at
least 80% in voting power of all shares of Nielsen Media Research entitled to
vote generally in the election of directors, voting as a single class.
CLASSIFIED BOARD OF DIRECTORS
The Nielsen Media Research Restated Certificate of Incorporation provides
for Nielsen Media Research's Board of Directors to be divided into three classes
of directors serving staggered three-year terms. As a result, approximately one
third of Nielsen Media Research's Board of Directors will be elected each year.
See "Nielsen Media Research Management and Executive Compensation--Nielsen Media
Research Board of Directors."
Nielsen Media Research believes that a classified board will help to assure
the continuity and stability of its Board of Directors, and its business
strategies and policies as determined by its Board, because a majority of the
directors at any given time will have prior experiences as directors of Nielsen
Media Research. This provision should also help to ensure that Nielsen Media
Research's Board of Directors, if confronted with an unsolicited proposal from a
third party that has acquired a block of Nielsen Media Research's voting stock,
will have sufficient time to review the proposal and appropriate alternatives
and to seek the best available result for all stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of Nielsen Media Research's
Board of Directors until the second annual stockholders meeting following the
date the acquiror obtains the controlling stock interest, could have the effect
of discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of Nielsen Media Research and could thus increase
the likelihood that incumbent directors will retain their positions.
AMENDMENTS TO THE AMENDED AND RESTATED BY-LAWS
The Nielsen Media Research Restated Certificate of Incorporation provides
that the affirmative vote of the holders of at least 80% in voting power of all
the shares of Nielsen Media Research entitled to vote generally in the election
of directors, voting together as a single class, shall be required in order for
the stockholders to alter, amend or repeal any provision of the Amended and
Restated By-laws which is to the same effect as provisions contained in the
Restated Certificate of Incorporation relating to (i) the amendment of the
Amended and Restated By-laws, (ii) the classified Board of Directors and the
filling of director vacancies and (iii) calling and taking actions at meetings
of stockholders and prohibiting stockholders from taking action by written
consent.
112
<PAGE>
AMENDMENTS TO THE RESTATED CERTIFICATE OF INCORPORATION
The Nielsen Media Research Restated Certificate of Incorporation requires
the affirmative vote of the holders of at least 80% in voting power of all the
shares of Nielsen Media Research entitled to vote generally in the election of
directors, voting together as a single class, to alter, amend or repeal
provisions of the Restated Certificate of Incorporation relating to (i) the
amendment of the Restated Certificate of Incorporation and/or the Amended and
Restated By-laws, (ii) the classified Board of Directors and the filling of
director vacancies and (iii) calling and taking actions at meetings of
stockholders and prohibiting stockholders from taking action by written consent.
INDEMNIFICATION AND LIMITATION OF LIABILITY FOR DIRECTORS AND OFFICERS
The Nielsen Media Research Restated Certificate of Incorporation provides
that Nielsen Media Research shall indemnify directors and officers to the
fullest extent permitted by the laws of the State of Delaware. The Nielsen Media
Research Restated Certificate of Incorporation also provides that a director of
Nielsen Media Research shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the DGCL as the same exists or may hereafter be amended.
The indemnification rights conferred by the Restated Certificate of
Incorporation of Nielsen Media Research are not exclusive of any other right to
which a person seeking indemnification may otherwise be entitled. Nielsen Media
Research will also provide liability insurance for the directors and officers
for certain losses arising from claims or charges made against them, while
acting in their capacities as directors or officers.
113
<PAGE>
AVAILABLE INFORMATION
IMS HEALTH has filed with the SEC a Registration Statement on Form 10 with
respect to the shares of IMS HEALTH Common Stock to be received by the
stockholders of Cognizant in the Distribution. This Information Statement does
not contain all of the information set forth in the Form 10 Registration
Statement and the exhibits thereof, to which reference is hereby made.
Statements made in this Information Statement as to the contents of any
contract, agreement or other documents referred to herein are not necessarily
complete. With respect to each such contract, agreement or other documents filed
as an exhibit to the Form 10 Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The Form
10 Registration Statement and the exhibits thereto may be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the SEC at
Seven World Trade Center, Suite 1300, New York, New York 10048 and in the
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60662.
In addition, copies of the Form 10 Registration Statement and related documents
may be obtained through the SEC Internet address at http://www.sec.gov.
REPORTS OF IMS HEALTH
After the Distribution, IMS HEALTH will be required to comply with the
reporting requirements of the Exchange Act and, in accordance therewith, to file
reports, proxy statements and other information with the SEC.
After the Distribution, such reports, proxy statements and other information
may be inspected and copied at the public reference facilities of the SEC listed
above and obtained by mail from the SEC as described above. Application will be
made for listing the shares of IMS HEALTH Common Stock on the NYSE and, when
such shares of IMS HEALTH Common Stock commence trading on the NYSE, such
reports, proxy statements and other information will be available for inspection
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
Additionally, IMS HEALTH will be required to provide annual reports,
containing audited financial statements, to its stockholders in connection with
its annual meetings of stockholders.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
COGNIZANT CORPORATION (1)
Report of Independent Accountants.......................................................................... F-2
Financial Statements:
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997 (unaudited) and the
Three Years Ended December 31, 1997...................................................................... F-3
Consolidated Statements of Financial Position as of March 31, 1998 (unaudited) and
December 31, 1997 and 1996............................................................................... F-4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) and
the Three Years Ended December 31, 1997.................................................................. F-5
Consolidated Statements of Shareholders' Equity ........................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Five-Year Selected Financial Data (Unaudited).............................................................. F-33
Report of Independent Accountants ......................................................................... F-34
Schedule II -- Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995...... F-35
IMS HEALTH INCORPORATED
Report of Independent Accountants.......................................................................... F-36
Statement of Financial Position as of March 31, 1998....................................................... F-37
Notes to Financial Statement............................................................................... F-38
NIELSEN MEDIA RESEARCH, INC.
Report of Independent Accountants.......................................................................... F-39
Financial Statements:
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997 (unaudited) and the
Three Years Ended December 31, 1997...................................................................... F-40
Consolidated Statements of Financial Position as of March 31, 1998 (unaudited) and December 31, 1997 and
1996..................................................................................................... F-41
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) and
the Three Years Ended December 31, 1997.................................................................. F-42
Consolidated Statements of Divisional Equity for the Three Months Ended March 31, 1998 (unaudited) and the
Three Years Ended December 31, 1997...................................................................... F-43
Notes to Consolidated Financial Statements................................................................. F-44
Financial Statement Schedule:
Report of Independent Accountants.......................................................................... F-58
Schedule II -- Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995...... F-59
GARTNER GROUP, INC. (2)
Report of Independent Auditors ............................................................................ F-60
Report of Independent Accountants ......................................................................... F-61
Financial Statements:
Consolidated Balance Sheets of September 30, 1997 and 1996................................................. F-62
Consolidated Statements of Operations for the Fiscal Years Ended September 30, 1997, 1996 and 1995......... F-63
Consolidated Statements of Changes in Stockholders' Equity................................................. F-64
Consolidated Statements of Cash Flows...................................................................... F-65
Notes to Consolidated Financial Statements................................................................. F-66
</TABLE>
- - ------------------------
(1) Because of the significance to Cognizant of the IMS HEALTH Business to be
distributed to Cognizant stockholders in the Distribution, IMS HEALTH will
be the accounting successor to Cognizant from a financial reporting
perspective. See Note 20 to the Cognizant Consolidated Financial Statements.
(2) Gartner is a significant investee of Cognizant.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Cognizant Corporation:
We have audited the accompanying consolidated statements of financial
position of Cognizant Corporation as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cognizant
Corporation as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, in 1995,
the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
February 17, 1998
F-2
<PAGE>
COGNIZANT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
1998 1997 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING REVENUE.............. $ 337,032 $ 315,576 $ 1,418,153 $ 1,730,596 $ 1,542,340
-------------- -------------- -------------- -------------- --------------
Operating Costs................ 166,784 147,959 597,199 746,781 753,466
Selling and Administrative
Expenses..................... 96,955 86,786 368,298 506,786 488,865
Depreciation and
Amortization................. 28,816 32,944 117,314 133,861 132,532
Restructuring Expense.......... 0 0 12,800
-------------- -------------- -------------- -------------- --------------
OPERATING INCOME............... 44,477 47,887 335,342 343,168 154,677
-------------- -------------- -------------- -------------- --------------
Interest Income................ 4,098 3,616 12,775 9,456 10,325
Interest Expense............... (200) (450) (2,293) (1,338) (540)
Gartner Equity Income.......... 15,574 15,534 65,120 0 0
Gain from Sale of Subsidiary
Stock (SAB51)................ 7,987 0 14,689 0 0
Gains from Dispositions--
Net.......................... 13,600 5,436 9,391 200 15,124
Other Expense--Net............. (2,772) (763) (4,789) (2,465) (17,029)
-------------- -------------- -------------- -------------- --------------
Non-Operating Income-- Net..... 38,287 23,373 94,893 5,853 7,880
-------------- -------------- -------------- -------------- --------------
Income Before Provision for
Income Taxes................. 82,764 71,260 430,235 349,021 162,557
Provision for Income Taxes..... (22,677) (18,355) (117,885) (153,570) (73,676)
-------------- -------------- -------------- -------------- --------------
NET INCOME..................... $ 60,087 $ 52,905 $ 312,350 $ 195,451 $ 88,881
-------------- -------------- -------------- -------------- --------------
BASIC EARNINGS PER SHARE OF
COMMON STOCK................. $ .37 $ .31 $ 1.89 $ 1.15 $ .52
-------------- -------------- -------------- -------------- --------------
DILUTED EARNINGS PER SHARE OF
COMMON STOCK................. $ .36 $ .31 $ 1.86 $ 1.15 $ .52
-------------- -------------- -------------- -------------- --------------
Average Number of Shares
Outstanding--Basic........... 162,406,000 169,770,000 165,163,000 169,944,000 169,522,000
Dilutive Effect of Shares
Issuable as of Year-End Under
Stock Option Plans........... 4,276,000 178,000 1,667,000 187,000 2,061,000
Adjustment of Shares Applicable
to Exercised Stock Options
and Restricted Stock......... 600,000 14,000 660,000 369,000 25,000
-------------- -------------- -------------- -------------- --------------
Average Number of Shares
Outstanding--Diluted......... 167,282,000 169,962,000 167,490,000 170,500,000 171,608,000
-------------- -------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
COGNIZANT CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents............................................ $ 344,251 $ 318,435 $ 428,520
Accounts Receivable--Net............................................. 303,047 303,609 453,791
Other Current Assets................................................. 77,209 72,368 112,151
------------ ------------ -----------
Total Current Assets 724,507 694,412 994,462
------------ ------------ -----------
INVESTMENT IN GARTNER GROUP.......................................... 212,863 195,695 0
------------ ------------ -----------
NOTES RECEIVABLE AND OTHER INVESTMENTS............................... 100,707 109,712 117,706
------------ ------------ -----------
PROPERTY, PLANT AND EQUIPMENT--NET................................... 233,578 233,583 268,888
------------ ------------ -----------
Other Assets--Net....................................................
Computer Software.................................................... 147,911 142,268 139,040
Goodwill............................................................. 91,464 87,430 251,483
Other Assets......................................................... 119,301 116,420 103,403
------------ ------------ -----------
Total Other Assets--Net 358,676 346,118 493,926
------------ ------------ -----------
TOTAL ASSETS......................................................... $ 1,630,331 $ 1,579,520 $ 1,874,982
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and Notes Payable........................................... $ 59,630 $ 58,796 $ 46,923
Accrued and Other Current Liabilities................................ 203,264 212,944 266,932
Accrued Income Taxes................................................. 48,335 57,549 63,416
Deferred Revenues.................................................... 114,173 111,921 292,970
------------ ------------ -----------
Total Current Liabilities 425,402 441,210 670,241
------------ ------------ -----------
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS........................... 47,915 49,927 60,269
DEFERRED INCOME TAXES................................................ 108,373 113,749 105,074
MINORITY INTERESTS................................................... 102,891 101,209 90,635
OTHER LIABILITIES.................................................... 73,488 71,855 76,150
------------ ------------ -----------
TOTAL LIABILITIES.................................................... $ 758,069 $ 777,950 $ 1,002,369
------------ ------------ -----------
------------ ------------ -----------
COMMITMENTS AND CONTINGENCIES........................................
SHAREHOLDERS' EQUITY.................................................
Preferred Stock, Par Value $.01 Per Share, Authorized--
10,000,000 Shares; Outstanding--None...............................
Series Common Stock, Par Value $.01 Per Share, Authorized--
10,000,000 Shares; Outstanding--None...............................
Common Stock, Par Value $.01 Per Share, Authorized-- 400,000,000
Shares; Issued 171,120,069, 171,120,069 and 171,082,301 Shares in
1998, 1997 and 1996, respectively.................................. 1,711 1,711 1,711
Capital Surplus...................................................... 808,015 808,550 805,170
Retained Earnings.................................................... 413,643 358,456 65,989
Treasury Stock, at cost, 8,039,396, 9,026,448 and 800,000 Shares in
1998, 1997 and 1996, respectively.................................. (300,250) (323,026) (25,200)
Cumulative Translation Adjustment.................................... (75,868) (76,771) (11,752)
Unrealized Gains on Investments...................................... 25,011 32,650 36,695
------------ ------------ -----------
TOTAL SHAREHOLDERS' EQUITY........................................... 872,262 801,570 872,613
------------ ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 1,630,331 $ 1,579,520 $ 1,874,982
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
COGNIZANT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLAR AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income..................................................... $ 60,087 $ 52,905 $ 312,350 $ 195,451 $ 88,881
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.............................. 28,816 32,944 117,314 133,861 132,532
Net Gains from Dispositions................................ (13,600) (5,436) (9,391) (200) (15,124)
Write-Off of Purchased In-Process Research and
Development.............................................. -- -- -- 33,233 --
Restructuring Provisions................................... -- -- -- -- 12,800
Restructuring Payments..................................... -- -- -- (11,515) (15,544)
Postemployment Benefit Expense............................. -- -- -- 666 37,632
Postemployment Benefit Payments............................ (1,391) (3,157) (7,129) (11,045) (18,480)
Non-Recurring Charge....................................... -- -- 90,070
Non-Recurring Charge Payments.............................. (955) (2,180) (5,255) (13,125) --
Net Increase in Accounts Receivable........................ 579 450 (1,378) (19,576) (83,035)
Net Increase in Deferred Revenue........................... 2,245 17,521 9,973 23,276 53,788
Equity Income, Net of Taxes................................ (9,181) (8,902) (38,040) -- --
Gain from Sale of Subsidiary Stock (SAB 51)................ (7,987) -- (14,689) -- --
Minority Interests......................................... 2,146 156 4,797 11,710 14,696
Deferred Income Taxes...................................... 1,460 (13,012) 38,562 16,566 (13,392)
Net (Decrease) Increase in Accrued Income Taxes............ (9,210) (1,144) (21,352) 23,606 (35,994)
Net (Increase) Decrease in Other Working Capital Items..... (17,040) (11,608) (28,749) (30,885) 39,709
--------- --------- --------- --------- ---------
Net Cash Provided by Operating Activities...................... 35,969 58,537 357,014 352,023 288,539
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities of Marketable Securities.............. -- -- -- 193,392 40,338
Payments for Marketable Securities............................. -- -- -- (165,791) (70,546)
Payments for Acquisitions of Businesses........................ (2,938) -- -- (24,386) (10,916)
Proceeds from Sale of Businesses and Investments............... 23,165 7,004 44,901 1,565 11,349
Capital Expenditures........................................... (12,691) (14,778) (71,894) (74,963) (77,032)
Additions to Computer Software................................. (15,415) (15,726) (66,673) (49,395) (70,565)
Additions to Other Assets...................................... (9,254) (5,644) (32,905) (19,187) (4,694)
Increase in Other Investments--Net............................. (8,092) (10,693) (16,705) (24,423) (8,232)
Payments for Purchase of Gartner Group Common Stock............ -- -- -- (49,419) (8,372)
Other.......................................................... (721) 2.454 26,294 54,542 50,501
--------- --------- --------- --------- ---------
Net Cash Used in Investing Activities.......................... (25,946) (37,383) (116,982) (158,065) (148,169)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock........................ 0 (95,069) (324,767) -- --
Proceeds from Exercise of Stock Options........................ 17,833 1,151 26,409 557 --
Dividends Paid................................................. (4,900) (5,117) (19,883) -- --
Proceeds from Employee Stock Purchase Plan..................... 2,733 0 1,683 -- --
Other Stock Transactions with Employees........................ -- -- -- 14,377 5,149
Proceeds from Issuance of Purchased Stock Options.............. -- -- -- 8,699 --
Net Transfers from (to) The Dun & Bradstreet Corporation....... -- -- -- 44,880 (113,051)
Minority Interest Financing.................................... -- -- 100,000 -- --
Payment of Short-Term Debt..................................... -- -- -- (50,000) --
Other.......................................................... (3) (276) 1,360 62,018 (8,193)
--------- --------- --------- --------- ---------
Net Cash (Used in) Provided by Financing Activities............ 15,663 (99,311) (215,198) 80,531 (116,095)
--------- --------- --------- --------- ---------
Change of Gartner Group to Equity Basis........................ -- (123,697) (123,697) -- --
Effect of Exchange Rate Changes on Cash and Cash Equivalents... 130 (7,244) (11,222) (3,074) 4,846
--------- --------- --------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents............... 25,816 (209,098) (110,085) 271,415 29,121
Cash and Cash Equivalents, Beginning of Year................... 318,435 428,520 428,520 157,105 127,984
--------- --------- --------- --------- ---------
Cash and Cash Equivalents, End of Year......................... $ 344,251 $ 219,422 $ 318,435 $ 428,520 $ 157,105
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest....................... $ 200 $ 255 $ 2,293 $ 1,463 $ 425
Cash Paid during the Period for Income Taxes................... $ 30,728 $ 21,524 $ 72,827 $ 48,372 $ 26,956
NON-CASH INVESTING ACTIVITIES:
Stock Issued in Connection with Acquisition.................... $ 1,412 -- -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
COGNIZANT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
UNREALIZED
CUMULATIVE GAINS
DIVISIONAL COMMON CAPITAL RETAINED TREASURY TRANSLATION (LOSSES) ON
EQUITY STOCK SURPLUS EARNINGS STOCK ADJUSTMENT INVESTMENTS
---------- ----------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............ $ 622,253 $ -- $ -- $ -- $ -- $ (15,770) $ --
---------- ----------- --------- ----------- --------- ----------- -----------
Net Income.......................... 88,881
Net Transfers to The Dun &
Bradstreet Corporation............ (113,051)
Change in Cumulative Translation
Adjustment........................ 22,275
---------- ----------- --------- ----------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1995.......... 598,083 -- -- -- -- 6,505 --
---------- ----------- --------- ----------- --------- ----------- -----------
Net Income.......................... 129,462
Net Transfers from The Dun &
Bradstreet Corporation............ 44,880
Change in Cumulative Translation
Adjustment........................ (16,817)
---------- ----------- --------- ----------- --------- ----------- -----------
BALANCE, NOVEMBER 1, 1996........... -- 1,711 795,914 -- (25,200) (10,312) --
---------- ----------- --------- ----------- --------- ----------- -----------
Net Income.......................... 65,989
Exercise of Stock Options
(18,467).......................... 557
Restricted Stock Plan (6,286)....... 210
Less: Unearned Portion.......... (210)
Purchase of Stock Options
(2,692,700)....................... 8,699
Change in Cumulative Translation
Adjustment........................ (1,440)
Unrealized Gains on
Investments--Net.................. 36,695
---------- ----------- --------- ----------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1996.......... -- 1,711 805,170 65,989 (25,200) (11,752) 36,695
---------- ----------- --------- ----------- --------- ----------- -----------
Net Income.......................... 312,350
Cash Dividends ($.12 per share)..... (19,883)
Exercise of Stock Options
(37,768).......................... 1,151
Treasury Stock Reissued Under:
Exercise of Stock Options
(818,925)....................... 2,187 25,258
Restricted Stock Plan (41,400).... 1,741
Less: Unearned Portion.......... (1,741)
Plus: Earned Portion............ 42
Employee Stock Purchase Plan
(46,645)........................ 1,683
Treasury Shares Acquired
(9,133,418)....................... (324,767)
Change in Cumulative Translation
Adjustment........................ (65,019)
Unrealized Loss on
Investments--Net.................. (4,045)
---------- ----------- --------- ----------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ -- $ 1,711 $ 808,550 $ 358,456 $(323,026) $ (76,771) $ 32,650
---------- ----------- --------- ----------- --------- ----------- -----------
UNAUDITED
Net Income.......................... 60,087
Cash Dividends...................... (4,900)
Treasury Stock Reissued Under:
Exercise of Stock Options
(675,558)....................... (535) 17,833
Restricted Stock Plan (6,010)..... 297
Less: Unearned Portion.......... (297)
Plus: Earned Portion of
Grants........................ 798
Employee Stock Purchase Plan
(47,733)........................ 2,733
Issued in Connection with
Acquisition (25,571).............. 1,412
Change in Cumulative Translation
Adjustment........................ 903
Unrealized Gains on Investments..... (7,639)
---------- ----------- --------- ----------- --------- ----------- -----------
BALANCE, MARCH 31, 1998 $ -- $ 1,711 $ 808,015 $ 413,643 $(300,250) $ (75,868) $ 25,011
---------- ----------- --------- ----------- --------- ----------- -----------
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE, JANUARY 1, 1995............ $ 606,483
---------
Net Income.......................... 88,881
Net Transfers to The Dun &
Bradstreet Corporation............ (113,051)
Change in Cumulative Translation
Adjustment........................ 22,275
---------
BALANCE, DECEMBER 31, 1995.......... 604,588
---------
Net Income.......................... 129,462
Net Transfers from The Dun &
Bradstreet Corporation............ 44,880
Change in Cumulative Translation
Adjustment........................ (16,817)
---------
BALANCE, NOVEMBER 1, 1996........... 762,113
---------
Net Income.......................... 65,989
Exercise of Stock Options
(18,467).......................... 557
Restricted Stock Plan (6,286)....... 210
Less: Unearned Portion.......... (210)
Purchase of Stock Options
(2,692,700)....................... 8,699
Change in Cumulative Translation
Adjustment........................ (1,440)
Unrealized Gains on
Investments--Net.................. 36,695
---------
BALANCE, DECEMBER 31, 1996.......... 872,613
---------
Net Income.......................... 312,350
Cash Dividends ($.12 per share)..... (19,883)
Exercise of Stock Options
(37,768).......................... 1,151
Treasury Stock Reissued Under:
Exercise of Stock Options
(818,925)....................... 27,445
Restricted Stock Plan (41,400).... 1,741
Less: Unearned Portion.......... (1,741)
Plus: Earned Portion............ 42
Employee Stock Purchase Plan
(46,645)........................ 1,683
Treasury Shares Acquired
(9,133,418)....................... (324,767)
Change in Cumulative Translation
Adjustment........................ (65,019)
Unrealized Loss on
Investments--Net.................. (4,045)
---------
BALANCE, DECEMBER 31, 1997 $ 801,570
---------
UNAUDITED
Net Income.......................... 60,087
Cash Dividends...................... (4,900)
Treasury Stock Reissued Under:
Exercise of Stock Options
(675,558)....................... 17,298
Restricted Stock Plan (6,010)..... 297
Less: Unearned Portion.......... (297)
Plus: Earned Portion of
Grants........................ 798
Employee Stock Purchase Plan
(47,733)........................ 2,733
Issued in Connection with
Acquisition (25,571).............. 1,412
Change in Cumulative Translation
Adjustment........................ 903
Unrealized Gains on Investments..... (7,639)
---------
BALANCE, MARCH 31, 1998 $ 872,262
---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 1. BASIS OF PRESENTATION
Cognizant Corporation (the "Company") integrates information and technology
to create business insight. The Company includes I.M.S. International, Inc.
("IMS"), Nielsen Media Research, Inc. ("Nielsen Media Research"), Erisco Inc.
("Erisco"), Cognizant Technology Solutions Corporation ("CTS"), Cognizant
Enterprises, Inc. ("Enterprises"), SSJ K.K. ("Super Systems Japan"), and Pilot
Software, Inc. ("Pilot"), which was divested in July 1997. During 1997, the
Company's voting interest in Gartner Group, Inc. ("Gartner") fell below 50% due
principally to Gartner stock option exercises. Accordingly, the Company has
deconsolidated its investment in Gartner and accounted for its interest on an
equity basis for the year-ended December 31, 1997. The prior years' financial
statements, however, continue to account for Gartner as a consolidated
subsidiary.
On November 1, 1996 (the "D&B Distribution Date"), The Dun & Bradstreet
Corporation ("D&B") distributed to its shareholders all of the outstanding
shares of common stock of the Company, then a wholly-owned subsidiary of D&B
(the "D&B Distribution"). In the D&B Distribution, holders of D&B common stock
received one share of the Company's common stock for every share of D&B common
stock held.
These financial statements reflect the financial position, results of
operations and cash flows of the Company as if it were a separate entity for all
periods presented. D&B's historical basis in the assets and liabilities of the
Company has been carried over.
The financial statements for 1996 and 1995 also include allocations of
certain D&B corporate headquarters assets (including prepaid pension assets),
liabilities (including pension and postretirement benefits) and expenses
(including cash management, legal, accounting, tax, employee benefits, insurance
services, data services and other D&B corporate overhead) relating to the
Company's businesses that were transferred to the Company from D&B. Management
believes these allocations are reasonable. However, the financial information
included herein for 1996 and 1995 may not necessarily reflect the financial
position, results of operations, and cash flows had the Company been a separate
entity.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements of the Company include
the accounts of the Company and its subsidiaries after elimination of all
material intercompany accounts and transactions. Investments in companies over
which the Company has significant influence but not a controlling interest are
accounted for under the equity method of accounting. The Company recognizes as
income any gains or losses related to the sale or issuance of stock by a
consolidated subsidiary or a company accounted for under the equity basis. The
financial statements of IMS and its affiliates reflect a fiscal year ending
November 30 to facilitate timely reporting of the Company's financial results.
UNAUDITED INTERIM FINANCIAL INFORMATION. The accompanying interim
consolidated balance sheet as of March 31, 1998 and the consolidated statements
of operations and cash flows for the three months ended March 31, 1997 and 1998
together with the related disclosures and amounts set forth in the notes are
unaudited but include all adjustments, consisting of only normal recurring
adjustments, which the Company considers necessary to present fairly, in all
material respects, the consolidated financial position, the consolidated results
of operations and cash flows for the three months ended March 31, 1997 and 1998.
Results for the three months ended March 31, 1997 and 1998 are not necessarily
indicative of results for the entire year.
F-7
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS. The Company considers all highly liquid investments with
a maturity of 90 days or less at the time of purchase to be cash equivalents.
MARKETABLE SECURITIES. The Company values all marketable securities that
mature in more than 90 days at amortized cost (which approximates market value)
as it is management's intent to hold these instruments to maturity. Other
marketable securities, principally consisting of equity securities, are
classified as available-for-sale. Such securities are carried at fair value,
with the unrealized gains and losses, net of income taxes, reported as a
component of shareholders' equity.
PROPERTY, PLANT AND EQUIPMENT. Buildings and machinery and equipment are
depreciated over their estimated useful lives using principally the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of the term of the lease or the estimated useful life of
the improvement.
COMPUTER SOFTWARE. Direct costs incurred in the development of computer
software are capitalized in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed". Costs incurred to establish technological
feasibility of a computer software product are expensed in the periods in which
they are incurred. Capitalization ceases and amortization starts when the
product is available for general release to customers. Computer software costs
are being amortized, on a product by product basis, generally over three to five
years. Annual amortization is the greater of the amount computed using (a) the
ratio that gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product, or (b) the straight-line
method over the remaining estimated economic life of the product. At each
balance sheet date, the Company reviews the recoverability of the unamortized
capitalized costs of computer software products by comparing the carrying value
of computer software with its estimated net realizable value.
GOODWILL. Goodwill represents the excess purchase price over the fair value
of identifiable net assets of businesses acquired and is amortized on a
straight-line basis over seven to forty years. At each balance sheet date, the
Company reviews the recoverability of goodwill, not identified with impaired
long-lived assets, based on estimated undiscounted future cash flow from
operating activities compared with the carrying value of goodwill and recognizes
any impairment on the basis of such comparison. The recognition and measurement
of goodwill impairment is assessed at the business unit level.
OTHER ASSETS. Other intangibles result from acquisitions and database
development and are included in other assets. Other intangibles are being
amortized, using principally the straight-line method, over three to seven
years.
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in
1995. This statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In general, this statement requires recognition of an
impairment loss when the sum of undiscounted expected future cash flow is less
than the carrying amount of such assets. The measurement for such impairment
loss is then based on the fair value of the asset. See Note 6 to the Cognizant
Consolidated Financial Statements.
F-8
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION. The Company recognizes revenue as earned, which is
over the contract period or as the information is delivered or related services
are performed. Amounts billed for service and subscriptions are credited to
deferred revenues and reflected in operating revenue over the subscription term,
which is generally one year. Software license revenue is recognized upon
delivery of the software and documentation when there are no significant
remaining related obligations. Revenue from post-contract customer support
(maintenance) is recognized on a straight-line basis over the term of the
contract.
FOREIGN CURRENCY TRANSLATION. The Company has significant investments in
non-U.S. countries. Therefore, changes in the value of foreign currencies affect
the Company's consolidated financial statements when translated into U.S.
dollars.
For all operations outside the United States where the Company has
designated the local currency as the functional currency, assets and liabilities
are translated using end-of-period exchange rates; revenues and expenses are
translated using average rates of exchange. For these countries, currency
translation adjustments are accumulated in a separate component of shareholders'
equity whereas realized transaction gains and losses are recognized in other
expense--net. For operations in countries that are considered to be highly
inflationary, where the U.S. dollar is designated as the functional currency,
monetary assets and liabilities are translated using end-of-period exchange
rates, non-monetary accounts are translated using historical exchange rates, and
all translation and transaction adjustments are recognized in other
expense--net.
INCOME TAXES. Prior to the D&B Distribution, the Company was included in
the Federal and certain state and non-U.S. income tax returns of D&B. The
provision for income taxes in the Company's financial statements has been
calculated on a separate-company basis. Income taxes paid on behalf of the
Company by D&B, prior to the D&B Distribution, are included in Divisional
Equity.
DIVISIONAL EQUITY. Divisional Equity includes historical investments and
advances from D&B prior to the D&B Distribution, including net transfers to/from
D&B, third-party liabilities paid on behalf of the Company by D&B and amounts
due to/from D&B for services and other charges, as well as current-period income
through the D&B Distribution Date.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. Estimates are used for, but
not limited to, the accounting for: allowance for uncollectible accounts
receivable, depreciation and amortization, capitalized software costs, employee
benefit plans, taxes, restructuring reserves and contingencies.
EARNINGS PER SHARE. In 1997, the Company adopted SFAS No. 128, "Earnings
Per Share". Previously reported earnings per share amounts have been restated.
Basic earnings per share are calculated by dividing net income by weighted
average common shares. Diluted earnings per share are calculated by dividing net
income by dilutive potential common shares. Dilutive potential common shares are
calculated in accordance with the Treasury stock method, which assumes that
proceeds from the exercise of all options are used to repurchase common stock at
market value. The amount of shares remaining after the proceeds are exhausted
represent the potentially dilutive effect of the securities. The computation
includes the weighted average number of shares of D&B common stock outstanding
through the D&B Distribution
F-9
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Date, reflecting the one-for-one distribution ratio, and the weighted average
number of shares of Cognizant common stock outstanding since the D&B
Distribution.
CONCENTRATIONS OF CREDIT RISK. IMS maintains accounts receivable balances
($228,284 and $237,279 at December 31, 1997 and 1996, respectively), principally
from customers in the pharmaceutical industry.
RECLASSIFICATIONS. Certain prior-year amounts have been reclassified to
conform with the current period presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income", which requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for periods beginning
after December 15, 1997. The Company is in the process of determining its
preferred disclosure format.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions And Other Postretirement Benefits", which changes current
financial statement disclosure requirements from those required under SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The statement does not change the
existing measurement or recognition provisions of SFAS Nos. 87, 88 or 106, and
is effective for the fiscal years beginning after December 15, 1997. The Company
is in the process of evaluating the disclosure requirements under this standard.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition",
which provides guidance on when and in what amounts revenue should be recognized
for the licensing, selling, leasing or marketing of computer software. This
statement is effective for the periods beginning after December 15, 1997. The
Company has determined that the impact of the adoption of this standard will not
have a material effect on its financial statements.
NOTE 3. INVESTMENT IN GARTNER
In the third quarter of 1997, the Company's voting interest in Gartner fell
below 50% as a result of the exercise of Gartner employee stock options and
employee stock purchases. Accordingly, the Company has deconsolidated Gartner
and is accounting for its ownership interest on the equity basis.
The Company has restated the first and second quarter Statements of Income
to reflect the change to equity accounting as of January 1, 1997. Generally
accepted accounting principles do not permit the restatement of prior-year
financial results.
During the third and fourth quarters of 1997, the proceeds from the issuance
of shares to Gartner employees, including associated tax benefits, increased
Gartner's equity and reduced the Company's ownership interest by slightly less
than 2%. This reduction in ownership was partially offset by an increase in
Gartner treasury stock. As a result, the Company recognized, as a separate line
on the income statement, within other income/expense-net, a pre-tax unrealized
gain on its investment in Gartner ("SAB 51 Gain") of $14,689 corresponding to
the net increase in the underlying value of its investment in Gartner.
F-10
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 3. INVESTMENT IN GARTNER (CONTINUED)
Selected financial information regarding the results of operations and
financial position of Gartner is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(UNAUDITED)
Condensed Income Statement Information
Operating Revenue..................................................... $ 548,539 $ 423,565
Operating Income...................................................... $ 126,239 $ 61,624
Income Before Provision for Taxes..................................... $ 134,385 $ 65,803
Net Income............................................................ $ 79,732 $ 23,987
Condensed Balance Sheet Information
Current Assets........................................................ $ 439,356 $ 325,904
Non-current Assets.................................................... $ 237,284 $ 133,031
Current Liabilities................................................... $ 338,087 $ 273,616
Non-current Liabilities............................................... $ 3,933 $ 2,871
</TABLE>
NOTE 4. DISPOSITIONS
During 1997, the Company recorded a $39,336 pre-tax gain on the sale of its
investment in WEFA Group, Inc. and a portion of its investment in TSI
International, Inc. and Aspect Development, Inc. These investments, which were
part of Enterprises' portfolio, generated cash proceeds of $43,601.
Additionally, in the third quarter, the Company sold Pilot and recorded a
non-cash pre-tax loss of $29,945.
NOTE 5. INVESTMENT PARTNERSHIP
Three of the Company's subsidiaries have contributed assets to, and
participate in, a limited partnership. One subsidiary serves as general partner,
and all other partners hold limited partnership interests. The partnership,
which is a separate and distinct legal entity, is in the business of licensing
database assets and computer software. In the second quarter of 1997,
third-party investors contributed $100,000 to the partnership in exchange for
limited partnership interests. For financial reporting purposes, the assets,
liabilities, results of operations and cash flows of the partnership are
included in the Company's consolidated financial statements because the Company
and its subsidiaries maintain a controlling (84%) interest in the partnership.
The third-parties' investments in this partnership are reflected in minority
interests.
NOTE 6. NON-RECURRING CHARGES
In the fourth quarter of 1995, the Company recorded within operating costs a
charge of $90,070. This charge primarily reflected an impairment loss in
connection with the adoption of the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
($40,570), the write-off of certain computer software ($20,300), a provision for
postemployment
F-11
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 6. NON-RECURRING CHARGES (CONTINUED)
benefits ($7,400) under the Company's severance plan and an accrual for
contractual obligations that have no future economic benefits ($21,800).
SFAS No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In connection with
this review, the Company recorded an impairment loss of $40,570 reflecting the
revaluation of certain fixed assets, administrative and production systems and
other intangibles that were replaced or no longer used. In addition, the Company
recognized a charge of $20,300, principally related to the write-off of certain
computer software product lines at Pilot.
The provision for postemployment benefits of $7,400 represented the cost of
workforce reductions. The accrual for contractual obligations that have no
future economic benefits of $21,800 related to the acquisition of certain
information and other services that were no longer used by the Company.
This 1995 non-recurring charge evolved from D&B's annual budget and
strategic planning process, which included a review of D&B's underlying cost
structure, products and services and assets used in the business. Based upon
such analysis, management, having the authority to approve such business
decisions, committed in December 1995 to a plan to discontinue certain product
lines and dispose of certain other assets, resulting in the charge. These
decisions were not reversed or modified as a result of D&B's reorganization plan
relating to the D&B Distribution, which was reviewed and, subject to certain
conditions, approved by the Board of Directors of D&B on January 9, 1996.
NOTE 7. RESTRUCTURING
In 1995, the Company recorded a $12,800 restructuring provision primarily to
write-off software for product lines that were discontinued at Sales
Technologies. All restructuring actions were completed in 1996.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
CATEGORY 1995 CASH ITEMS 1996
- - --------------------------------------------------------- ------------ ---------- ------------
<S> <C> <C> <C>
Real Estate Cost Reductions.............................. $ 1,059 $ (1,059) $ --
Discontinued Production and Data Collection Systems and
Products................................................ 4,400 (4,400)
Other.................................................... 6,056 (6,056) --
------------ ---------- ------------
Total.................................................... $ 11,515 $ (11,515) $ --
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
NOTE 8. ACQUISITIONS
In 1996 and 1995, the Company acquired various companies in separate
transactions that were accounted for as purchases.
The aggregate cash purchase price of such acquisitions totaled $24,386 in
1996. The largest acquisition during 1996 was Gartner's acquisition of J3
Learning Corporation ("J3"), a leading provider of software educational
materials for corporate and individual training. Gartner acquired all of the
outstanding shares of J3 for consideration of $8,000 in cash, approximately
$35,400 in Gartner Group Class A Common Stock, and options to purchase Gartner
Group Class A Common Stock, which had a value of $1,300. Operating
F-12
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 8. ACQUISITIONS (CONTINUED)
costs and selling and administrative expenses in 1996 include a one-time
acquisition related charge of $33,233 for in-process research and development
costs associated with J3.
The aggregate purchase price of such acquisitions totaled $10,916 in 1995.
The results of operations of all purchases are included in the Consolidated
Statements of Income from the date of acquisition. Had the acquisitions made in
1995 and 1996 been consummated on January 1 of the year preceding the year of
acquisition, the results of these acquired operations would not have had a
significant impact on the Company's consolidated results of operations for any
of the years presented.
NOTE 9. MARKETABLE SECURITIES AND OTHER INVESTMENTS
Amounts included below are classified in the consolidated statements of
financial position as marketable securities and other investments. Cash
equivalents have been excluded from these disclosures.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1996
-------------------- --------------------
FAIR FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Debt Securities of States and Other Subdivisions of the U.S.
Government........................................................... -- -- $ 23,317 $ 23,317
Equity Securities...................................................... $ 3,491 $ 48,463 4,357 58,320
--------- --------- --------- ---------
Total.................................................................. $ 3,491 $ 48,463 $ 27,674 $ 81,637
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE 10. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE RISK MANAGEMENT
The Company transacts business in virtually every part of the world and is
subject to risks associated with changing foreign exchange rates. The Company's
objective is to reduce earnings and cash flow volatility associated with foreign
exchange rate changes to allow management to focus its attention on its core
business activities. Accordingly, the Company enters into various contracts
which change in value as foreign exchange rates change to protect the value of a
portion of committed and anticipated foreign currency revenues and
non-functional currency assets and liabilities. By policy, the Company maintains
hedge coverage between minimum and maximum percentages of its anticipated
foreign exchange exposures over the next year. The gains and losses on these
hedges offset changes in the value of the related exposures.
It is the Company's policy to enter into foreign currency transactions only
to the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for speculative purposes.
The Company uses forward contracts and purchased currency options to hedge
committed and anticipated foreign currency denominated revenues, respectively.
The principal currencies hedged are the Japanese yen, Swiss franc, German mark
and Italian lira. The Company also uses forward contracts to hedge
non-functional currency assets and liabilities.
F-13
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED)
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. At December 31, 1997, the Company had
unrealized deferred gains of $2,768 related to foreign currency hedge
transactions. Deferred amounts to be recognized can change with market
conditions and will substantially be offset by changes in the value of the
related hedged transactions. The impact of foreign exchange risk management
activities on operating income in 1997 was a net gain of $15,617. Gains and
losses on contracts hedging non-functional currency assets and liabilities are
not deferred and are included in current income in other income/expense--net.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997, the Company's financial instruments included cash,
cash equivalents, receivables, accounts payable and foreign exchange risk
management contracts. At December 31, 1997, the fair values of cash, cash
equivalents, receivables and accounts payable approximated carrying values due
to the short-term nature of these instruments. At December 31, 1997, the
notional amounts of the Company's risk management contracts were $212,000
(currency options $137,000; forward contracts $75,000) and all contracts will
mature in 1998. The estimated fair values of the foreign exchange risk
management contracts were determined based on quoted market prices, and
approximate carrying value.
CREDIT CONCENTRATIONS
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its financial
instruments and does not anticipate non-performance by the counterparties. The
Company would not realize a material loss as of December 31, 1997 in the event
of non-performance by any one counterparty. The Company enters into transactions
only with financial institution counterparties which have a credit rating of A
or better. In addition, the Company limits the amount of credit exposure with
any one institution.
IMS maintains accounts receivable balances ($228,284 and $237,279 at
December 31, 1997 and 1996, respectively), principally from customers in the
pharmaceutical industry. The Company's trade receivables do not represent
significant concentrations of credit risk at December 31, 1997 due to the high
quality of its customers and their dispersion across many geographic areas.
NOTE 11. PENSION AND POSTRETIREMENT BENEFITS
PENSION PLANS. The Company has a defined benefit pension plan covering all
employees in the United States in certain of the Company's businesses. The plan
is a cash balance pension plan under which 6% of creditable compensation plus
interest is credited to eligible employee retirement accounts on a monthly
basis. At the time of retirement, the vested employee's account balance is
actuarially converted into an annuity. Pension costs are determined actuarially
and are funded to the extent allowable under the Internal Revenue Code.
Supplemental plans in the United States are maintained to provide retirement
benefits in excess of levels allowed by ERISA. The Company's non-U.S.
subsidiaries provide retirement benefits for employees consistent with local
practices, primarily using defined benefit or termination indemnity plans.
F-14
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 11. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
Consolidated pension costs are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
U.S. Plans--D&B Allocation....................................... $ -- $ 2,230 $ 1,241
U.S. Plans--Post Distribution.................................... 2,145 291 --
Non-U.S. Plans................................................... 4,837 4,364 4,078
--------- --------- ---------
Total Pension Cost............................................... $ 6,982 $ 6,885 $ 5,319
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of net periodic pension cost for 1997 (1996 and 1995 are
unavailable) are summarized as follows:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Service Cost...................................................................... $ 9,959
Interest Cost..................................................................... 10,503
Actual Return on Plan Assets...................................................... (20,357)
Net Amortization and Deferral..................................................... 6,877
----------
Net Periodic Pension Cost......................................................... $ 6,982
----------
----------
</TABLE>
In addition, during 1996 the Company recognized a pension curtailment gain
of $1,895 relating to a reduced level of participation in the Company's
supplemental plan and workforce reductions.
The status of all defined benefit pension plans at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
FUNDED UNFUNDED
------------------------ ----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Fair Value of Plan Assets....................................... $ 157,643 $ 151,724 $ -- $ --
----------- ----------- ---------- ----------
Actuarial Present Value of Accumulated Benefit Obligation:
Vested........................................................ (112,663) (120,602) (5,607) (4,857)
Nonvested..................................................... (1,900) (1,611) -- (296)
----------- ----------- ---------- ----------
Accumulated Benefit Obligation.................................. (114,563) (122,213) (5,607) (5,153)
Effect of Projected Future Salary Increases..................... (11,650) (12,088) (9,534) (7,100)
----------- ----------- ---------- ----------
Projected Benefit Obligation.................................... (126,213) (134,301) (15,141) (12,253)
----------- ----------- ---------- ----------
Plan Assets in Excess of (Less Than) Projected Benefit
Obligation.................................................... 31,430 17,423 (15,141) (12,253)
Unrecognized Net (Gain) Loss.................................... (11,306) 3,652 3,135 478
Unrecognized Prior Service Cost (Credit)........................ (6,476) (6,547) 639 833
Unrecognized Net Transition (Asset) Obligation.................. (1,818) (1,226) 49 49
Adjustment to Recognize Minimum Liability....................... -- -- -- (123)
----------- ----------- ---------- ----------
Prepaid (Accrued) Pension Cost.................................. $ 11,830 $ 13,302 $ (11,318) $ (11,016)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
F-15
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 11. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
The weighted average expected long-term rate of return on pension plan
assets was 9.28%, 9.31% and 9.82% for 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, the projected benefit obligation was determined
using weighted average discount rates of 7.56% and 7.59%, respectively, and
weighted average rates of increase in future compensation levels of 4.66% and
4.59%, respectively. Plan assets are invested in diversified portfolios that
consist primarily of equity and debt securities.
Certain employees of the Company in the United States also are eligible to
participate in the Company-sponsored defined contribution plan. The Company's
businesses make a matching contribution of up to 50% of the employee's
contribution based on specified limits of the employee's salary. The Company's
expense related to this plan was $4,666, $4,075 and $3,178 for the years 1997,
1996 and 1995, respectively.
POSTRETIREMENT BENEFITS. In addition to providing pension benefits, the
Company provides various healthcare and life insurance benefits for retired
employees. Employees at certain businesses of the Company in the United States
become eligible for these benefits if they reach normal retirement age while
working for the Company. Certain of the Company's subsidiaries outside the
United States have postretirement benefit plans, although most participants are
covered by government-sponsored or administered plans. The cost of
Company-sponsored postretirement benefit plans outside the U.S. is not
significant.
The Company has recorded postretirement benefits costs totaling $1,200,
$2,619 and $3,447 for the years 1997, 1996 and 1995, respectively.
The status of postretirement benefit plans other than pensions at December
31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Active Employees--Eligible............................................ $ (8,110) $ (8,350)
Active Employees--Not Yet Eligible.................................... (6,830) (6,530)
---------- ----------
Accumulated Postretirement Benefit Obligation......................... (14,940) (14,880)
Unrecognized Net Loss................................................. 540 300
Unrecognized Prior Service Credit..................................... (2,110) (850)
---------- ----------
Accrued Postretirement Benefit Cost................................... $ (16,510) $ (15,430)
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997 and 1996 the accumulated postretirement benefit
obligation was determined using a discount rate of 7.0% and 7.5%, respectively.
The assumed rate of future increases in per capita cost of covered healthcare
benefits is 7.3% in 1998, decreasing gradually to 5.0% for the year 2021 and
remaining constant thereafter. Increasing the assumed healthcare cost trend rate
by one percentage point in each year would increase the accumulated
postretirement benefit obligation by $2,007 and would increase annual aggregate
service and interest costs by $257.
NOTE 12. EMPLOYEE STOCK PLANS
The Company has a Key Employees Stock Incentive Plan which provides for the
grant of stock options and restricted stock to eligible employees. In addition
it provides an opportunity for the purchase of stock
F-16
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 12. EMPLOYEE STOCK PLANS (CONTINUED)
options with a prepayment equal to ten percent of the exercise price, with the
remaining payment due when the options are exercised. All options have a life of
ten years, vest proportionally over six years and have an exercise price equal
to the fair market value of the common stock on the grant date.
The Company adopted an Employee Stock Purchase Plan in 1997 which allows
eligible employees to purchase a limited amount of common stock at the end of
each quarter at a price equal to the lesser of 90% of fair market value on (a)
the first trading day of the quarter, or (b) the last trading day of the
quarter. Fair market value is defined as the average of the high and low prices
of the shares on the relevant day.
Gartner has several stock option and stock purchase plans. The exercise
price of options granted under the plans is equal to the fair market value at
the date of grant of Gartner stock. Options outstanding and exercisable were
15,496,068 and 6,670,813, respectively, at December 31, 1997, at prices ranging
from $0.02 to $35.38 per share.
In July 1997, CTS adopted a Key Employees Stock Option Plan which provides
for the grant of stock options to eligible employees. Options granted under this
plan may not be granted at an exercise price less than fair market value of the
underlying shares on the date of grant. All such options become exercisable in
April 2006 with certain acceleration provisions of the vesting period to 25% per
year over four years from the grant date should an initial public offering or
change in control occur. At December 31, 1997, 800,500 options were outstanding
at a weighted average exercise price of $2.50 per share. None were exercisable.
CTS also has a Key Employees' Restricted Stock Purchase Plan which allows
eligible employees to purchase a limited amount of restricted common stock at
the time of grant at a price equal to the fair market value on the effective
date of the award. At December 31, 1997, 175,000 shares have been purchased at
an average exercise price of $2.50. The restrictions lapse should an initial
public offering or change in control occur.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which requires that companies with stock-based compensation plans
either recognize compensation expense based on the fair value of options granted
or continue to apply the existing accounting rules and disclose pro forma net
income and earnings per share assuming the fair value method had been applied.
The Company has chosen to continue applying Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans, consistent with the
F-17
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 12. EMPLOYEE STOCK PLANS (CONTINUED)
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C> <C>
Net Income As reported........................................... $ 312,350 $ 195,451 $ 88,881
Pro forma............................................. $ 284,634 $ 188,705 $ 88,120
Earnings Per Share:
Basic As reported........................................... $ 1.89 $ 1.15 $ .52
Pro forma............................................. $ 1.72 $ 1.11 $ .52
Diluted As reported........................................... $ 1.86 $ 1.15 $ .52
Pro forma............................................. $ 1.70 $ 1.11 $ .52
</TABLE>
- - ------------------------
Note: The pro forma disclosures shown above are not representative of the
effects on net income and earnings per share in future years.
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option pricing model. The following
weighted-average assumptions were used for 1997, 1996 and 1995: dividend yield
of 0.3%; expected volatility of 25%; a risk-free interest rate of 5.9%; and an
expected term of 4.5 years. The weighted average fair value of the Company's
stock options granted in 1997, 1996 and 1995 are $13.12, $9.76 and $7.61,
respectively.
The fair value of Gartner stock options used to compute the Company's pro
forma net income and earnings per share disclosures was computed in the same
manner with the following weighted-average assumptions for 1997, 1996 and 1995:
dividend yield of 0%; expected volatility of 40%; a risk-free interest rate of
6.0%; and an expected term of 3.5 years. The weighted average fair value of
Gartner stock options granted in 1997, 1996 and 1995 are $10.12, $11.80 and
$5.82, respectively.
F-18
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 12. EMPLOYEE STOCK PLANS (CONTINUED)
Immediately following the D&B Distribution, outstanding awards under the D&B
Key Employees Stock Option Plans held by company employees were cancelled and
replaced by substitute awards under the Company's Key Employees Stock Incentive
Plan. The substitute awards had the same ratio of the exercise price per option
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 they replaced.
At December 31, 1997, outstanding options for Cognizant common stock held by
Company employees, including the substitute awards mentioned above, totaled
21,922,390, of which 4,386,181 had vested and were exercisable. The option
prices range from $22.99 to $44.47 per share and are exercisable over periods
ending no later than 2007. At December 31, 1996, outstanding options for
Cognizant common stock held by Company employees totaled 20,226,749, of which
2,168,714 had vested and were exercisable. The option prices ranged from $22.99
to $35.31 per share.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -----------------
<S> <C> <C>
Options Outstanding,
November 1, 1996................................................................. 3,340,778 $ 31.13
Granted........................................................................... 14,209,500 $ 33.37
Purchased......................................................................... 2,702,700 $ 33.37
Exercised......................................................................... (18,467) $ 30.17
Expired........................................................................... (7,762) $ 33.75
------------ ------
Options Outstanding,
December 31, 1996................................................................ 20,226,749 $ 33.00
------------ ------
Granted........................................................................... 3,878,237 $ 42.35
Exercised......................................................................... (856,693) $ 30.78
Expired........................................................................... (1,325,903) $ 33.19
------------ ------
Options Outstanding,
December 31, 1997................................................................ 21,922,390 $ 34.75
------------ ------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
DECEMBER 31, 1997 -------------------------------------
------------------------ REMAINING OPTION EXERCISE PRICES
RANGE OF NUMBER NUMBER CONTRACTUAL ------------------------
EXERCISE PRICES OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE
- - ----------------------------------------------- ------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$40.00 - $44.47................................ 3,095,250 0 9.8 years $ 44.25 $ 44.25
$37.56 - $38.88................................ 338,000 0 9.5 years $ 37.58 $ 37.58
$30.31 - $35.31................................ 17,285,856 3,368,490 7.7 years $ 33.43 $ 33.50
$22.99 - $29.91................................ 1,203,284 1,017,691 4.5 years $ 28.07 $ 27.75
------------ ----------
21,922,390 4,386,181
------------ ----------
------------ ----------
</TABLE>
F-19
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 13. INCOME TAXES
Income before provision for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
U.S.......................................................................... $ 230,717 $ 162,128 $ 43,495
Non-U.S...................................................................... 199,518 186,893 119,062
---------- ---------- ----------
$ 430,235 $ 349,021 $ 162,557
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Federal and State:
Current....................................................................... $ 55,647 $ 53,489 $ 57,596
Deferred...................................................................... (8,437) 31,178 (23,871)
---------- ---------- ----------
47,210 84,667 33,725
---------- ---------- ----------
Non-U.S.:
Current....................................................................... 57,949 61,880 33,632
Deferred...................................................................... 12,726 7,023 6,319
---------- ---------- ----------
70,675 68,903 39,951
---------- ---------- ----------
Total......................................................................... $ 117,885 $ 153,570 $ 73,676
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes the significant differences between the U.S.
Federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Tax Expense at Statutory Rate.................................................. $ 150,582 $ 122,157 $ 56,895
State and Local Income Taxes, net of Federal Tax Benefit....................... 13,704 12,729 13,079
Non-U.S. Taxes................................................................. (623) 2,939 (3,684)
Purchased In-Process R&D Costs................................................. -- 11,632 --
Goodwill....................................................................... 1,396 3,709 4,457
Amortization of Intangibles.................................................... (48,612) -- --
Other.......................................................................... 1,438 404 2,929
---------- ---------- ---------
Total Taxes.................................................................... $ 117,885 $ 153,570 $ 73,676
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-20
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 13. INCOME TAXES (CONTINUED)
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Operating Losses...................................................................... $ 23,236 $ 34,225
Intangibles........................................................................... 31,552 --
Postretirement Benefits............................................................... 6,009 5,274
Non-Recurring Charges................................................................. 4,073 5,440
Postemployment Benefits............................................................... 3,923 4,969
Bad Debts............................................................................. 1,599 2,488
Other................................................................................. 4,706 9,006
----------- -----------
75,098 61,402
Valuation Allowance..................................................................... (21,826) (29,784)
----------- -----------
53,272 31,618
----------- -----------
Deferred Tax Liabilities:
Intangibles........................................................................... (66,322) (67,818)
Deferred Revenue...................................................................... (37,274) (16,966)
Marketable Securities................................................................. (20,522) (17,268)
Depreciation.......................................................................... (17,522) (12,223)
Other................................................................................. (14,535) (7,442)
----------- -----------
(156,175) (121,717)
----------- -----------
Net Deferred Tax Liability.............................................................. $ (102,903) $ (90,099)
----------- -----------
----------- -----------
</TABLE>
The 1997 net deferred tax liability consists of a non-current deferred tax
liability of $113,749, offset by a current deferred tax asset of $10,846
included in Other Current Assets. (See Note 18 to the Cognizant Consolidated
Financial Statements.)
The Company has established a valuation allowance attributable to deferred
tax assets in certain U.S. state and non-U.S. tax jurisdictions where, based on
available evidence, it is more likely than not that such assets will not be
realized.
Undistributed earnings of non-U.S. subsidiaries aggregated approximately
$479,960 at December 31, 1997. Deferred tax liabilities have not been recognized
for these undistributed earnings because it is the Company's intention to
permanently reinvest such undistributed earnings outside the U.S. If such
earnings are repatriated in the future, or are no longer deemed to be
permanently reinvested, applicable taxes will be provided for on such amounts.
It is not currently practicable to determine the amount of applicable taxes.
NOTE 14. COMMITMENTS
Certain of the Company's operations are conducted from leased facilities,
which are under operating leases. Rental expense under real estate operating
leases for the years 1997, 1996 and 1995 was $28,298, $37,805, and $34,997,
respectively. The totals include $387 and $446 in 1996, and 1995 respectively,
for facilities usage charged by D&B or an affiliate. The minimum annual rental
expense for real estate
F-21
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 14. COMMITMENTS (CONTINUED)
operating leases that have remaining noncancelable lease terms in excess of one
year, net of sublease rentals, at December 31, 1997 was: 1998--$27,896;
1999--$26,849; 2000--$25,901; 2001--$24,522; 2002-- $18,639 and an aggregate of
$24,411 thereafter.
The Company also leases or participates in leases of certain computer and
other equipment under operating leases. These leases are frequently renegotiated
or otherwise changed as advancements in computer technology produce
opportunities to lower costs and improve performance. Rental expense under
computer and other equipment leases was $30,286, $25,304, and $21,864 for 1997,
1996 and 1995, respectively. At December 31, 1997, the minimum annual rental
expense for computer and other equipment under operating leases that have
remaining noncancelable lease terms in excess of one year was: 1998--$27,069;
1999--$24,977; 2000--$13,425; 2001--$6,836 and 2002--$5,898.
The Company has agreements with various third parties to purchase certain
data processing and telecommunications services, extending beyond one year. At
December 31, 1997, the purchases covered by these agreements aggregated:
1998--$13,578; 1999--$13,638; and 2000--$5,880.
NOTE 15. OTHER TRANSACTIONS WITH AFFILIATES
Prior to the D&B Distribution, D&B provided certain centralized services
(see Note 1 to the Cognizant Consolidated Financial Statements) to the Company.
Expenses related to these services were allocated to the Company based on
utilization of specific services or, where not estimable, based on assets
employed by the Company in proportion to D&B's total assets. Management believes
these allocation methods are reasonable. These allocations (including data
service charges beginning in 1995) were $107,200 and $116,900 in 1996 and 1995,
respectively, and are included in operating costs and selling and administrative
expenses in the Consolidated Statements of Income. Amounts due to D&B for these
expenses are included in Divisional Equity.
Net transfers to or from D&B, included in Divisional Equity, include
advances and loans from affiliates, net cash transfers to or from D&B,
third-party liabilities paid on behalf of the Company by D&B, amounts due to or
from D&B for services and other charges, and income taxes paid on behalf of the
Company by D&B. No interest has been charged on these transactions. The weighted
average balance due from D&B was $466,938, and $452,693 for 1996 and 1995,
respectively.
The activity in the net transfers from (to) D&B account for the periods
through the D&B Distribution Date included in Divisional Equity in the Cognizant
Consolidated Statements of Shareholders' Equity is summarized as follows:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
D&B Services and Other Charges........................................................ $ 111,806 $ 121,673
Loans and Advances--Net............................................................... 137,639 44,917
U.S. Income Taxes..................................................................... 35,434 57,596
Cash Transfers--Net................................................................... (239,999) (337,237)
----------- ------------
Net Transfers from (to) D&B........................................................... $ 44,880 $(113,051)
----------- ------------
----------- ------------
</TABLE>
F-22
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 15. OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
In connection with the D&B Distribution, the Company received 800,000 shares
of new D&B common stock and 266,666 shares of ACNielsen Corporation
("ACNielsen") common stock. In December 1996 the Company sold such shares to D&B
and ACNielsen, at fair market value, for $18,560 and $3,967, respectively. In
addition, the Company assumed $69,000 of liabilities (included in Other
Liabilities) which are subject to adjustment in accordance with the D&B
Distribution Agreement, related to certain prior business transactions, and
$50,000 of short-term debt, which was repaid in December 1996.
For purposes of governing certain of the ongoing relationships between the
Company, D&B and ACNielsen after the D&B Distribution and to provide for an
orderly transition, the Company, D&B and ACNielsen entered into various
agreements including a Distribution Agreement, Tax Allocation Agreement,
Employee Benefits Agreement, Indemnity and Joint Defense Agreement, Television
Audience Measurement Master Agreement, Intellectual Property Agreement, Shared
Transaction Services Agreement, Data Services Agreement and Transition Services
Agreement. Among other things, the agreements set forth principles to be applied
in allocating certain D&B Distribution-related costs and specify portions of
contingent liabilities to be shared if certain amounts are exceeded.
NOTE 16. CAPITAL STOCK
On February 18, 1997 the Company announced that its board of directors had
authorized a systematic stock repurchase program to buy up to 8,500,000 shares
of the Company's outstanding common stock. The stock purchases are held in
Treasury and reissued upon exercise of employee stock options. This program was
completed on September 5, 1997 at a total cost of $299,737.
On October 21, 1997 the Company announced that its board of directors had
authorized a second systematic stock repurchase program to buy up to 10,000,000
shares of the Company's outstanding common stock. A portion of this program is
intended to cover option exercises. Through December 31, 1997, 574,600 shares
have been acquired at a total cost of $22,756.
Under a Shareholder Rights Plan adopted by the Board of Directors, each
certificate for a share of the Company's common stock also represents one
Preferred Share Purchase Right (a "Right"). In the event a person or group (an
"Acquiring Person") acquires beneficial ownership of, or commences or announces
an intention to make a tender offer for more than 15% of the outstanding shares
of common stock, each Right entitles the holder to purchase one one-thousandth
of a share of Series A Junior Participating Preferred Stock at $210 per each one
one-thousandth of a share (the "Purchase Price"). In the event a person or group
becomes an Acquiring Person, or the Company is acquired in a merger or other
business combination or 50% or more of its assets or earning power are sold,
each holder of a Right (other than an Acquiring Person) has the right to receive
common stock of the Company or the entity that engaged in such transaction, as
applicable, which has a market value of two times the Purchase Price. The
Rights, which do not have voting rights and are subject to adjustment in certain
circumstances, expire on October 23, 2006 and are redeemable by the Company at a
price of $.01 per Right under certain circumstances.
NOTE 17. LITIGATION
The Company and its subsidiaries are involved in legal proceedings and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings
F-23
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 17. LITIGATION (CONTINUED)
and litigation, if decided adversely, could have a material effect on quarterly
or annual operating results or cash flows when resolved in a future period.
However, in the opinion of management, these matters will not materially affect
the Company's consolidated financial position.
In addition, on July 29, 1996, Information Resources, Inc. ("IRI") filed a
complaint in the United States District Court for the Southern District of New
York, naming as defendants D&B, A.C. Nielsen Company and IMS (the"IRI Action").
The complaint alleges various violations of the United States antitrust
laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
latter claims relate to the acquisition by defendants of Survey Research Group
Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI
when it agreed to be acquired by defendants and that the defendants induced SRG
to breach that agreement.
IRI's complaint alleges damages in excess of $350,000, which amount IRI has
asked to be trebled under the antitrust laws. IRI also seeks punitive damages in
an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997 the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to 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.
In connection with the IRI Action, D&B, ACNielsen Corporation ("ACNielsen")
(the parent company of A.C. Nielsen Company) and the Company have entered into
an Indemnity and Joint Defense Agreement (the "Indemnity and Joint Defense
Agreement") pursuant to which they agree (i) to certain arrangements allocating
potential liabilities ("IRI 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 IRI Liabilities up to a maximum amount to be
calculated at the time such liabilities, if any, become payable (the "ACN
Maximum Amount"), and that the Company 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
is 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
F-24
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 17. LITIGATION (CONTINUED)
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.
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.
NOTE 18. SUPPLEMENTAL FINANCIAL DATA
ACCOUNTS RECEIVABLE--NET:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Trade..................................................................................... $ 250,899 $ 401,224
Less: Allowance for Doubtful Accounts..................................................... (7,199) (15,470)
Unbilled Receivables...................................................................... 41,291 35,383
Other..................................................................................... 18,618 32,654
---------- ----------
$ 303,609 $ 453,791
---------- ----------
---------- ----------
</TABLE>
OTHER CURRENT ASSETS:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Deferred Income Taxes...................................................................... $ 10,846 $ 14,975
Prepaid Expenses........................................................................... 35,059 48,531
Inventories................................................................................ 26,463 26,369
Marketable Securities...................................................................... -- 22,276
--------- ----------
$ 72,368 $ 112,151
--------- ----------
--------- ----------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT--NET, CARRIED AT COST, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Buildings............................................................................... $ 113,845 $ 118,122
Machinery and Equipment................................................................. 355,624 402,424
Less: Accumulated Depreciation.......................................................... (260,400) (287,200)
Leasehold Improvements, less: Accumulated Amortization of $14,095 and $20,199........... 16,879 23,282
Land.................................................................................... 7,635 12,260
----------- -----------
$ 233,583 $ 268,888
----------- -----------
----------- -----------
</TABLE>
F-25
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 18. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
COMPUTER SOFTWARE AND GOODWILL:
<TABLE>
<CAPTION>
COMPUTER
SOFTWARE GOODWILL
---------- -----------
<S> <C> <C>
January 1, 1996.......................................................................... $ 137,700 $ 230,888
Additions at Cost........................................................................ 49,395 60,484
Amortization............................................................................. (39,802) (17,094)
Other Deductions, Additions and Reclassifications........................................ (8,253) (22,795)
---------- -----------
December 31, 1996........................................................................ 139,040 251,483
Additions at Cost........................................................................ 58,707 1,554
Amortization............................................................................. (42,426) (8,810)
Other Deductions and Reclassifications (1)............................................... (13,053) (156,797)
---------- -----------
DECEMBER 31, 1997........................................................................ $ 142,268 $ 87,430
---------- -----------
---------- -----------
</TABLE>
- - ------------------------
(1) The significant decrease in Goodwill during 1997 is primarily related to the
deconsolidation of Gartner.
Accumulated amortization of Computer Software was $180,106 and $150,481 at
December 31, 1997 and 1996, respectively. Accumulated amortization of Goodwill
was $40,399 and $67,366 at December 31, 1997 and 1996, respectively.
ACCOUNTS AND NOTES PAYABLE:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Trade....................................................................................... $ 33,708 $ 25,763
Taxes Other Than Income Taxes............................................................... 16,377 15,587
Notes....................................................................................... 458 464
Other....................................................................................... 8,253 5,109
--------- ---------
$ 58,796 $ 46,923
--------- ---------
--------- ---------
</TABLE>
The Company has short-term borrowing arrangements with several banks to
provide up to $39,400 of borrowings at December 31, 1997. None of these
arrangements had material commitment fees or compensating balance requirements.
ACCRUED AND OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Salaries, Wages, Bonuses and Other Compensation........................................... $ 68,717 $ 78,676
Postemployment Benefits................................................................... 4,073 7,995
Other..................................................................................... 140,154 180,261
---------- ----------
$ 212,944 $ 266,932
---------- ----------
---------- ----------
</TABLE>
F-26
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 19. OPERATIONS BY BUSINESS SEGMENT
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information". The Company has adopted SFAS No. 131 for
the year ended December 31, 1997, and as required has restated the prior years
in order to conform to the 1997 presentation. The Company, operating globally in
approximately 80 countries, delivers information, software and related services
principally through these strategic business segments referenced below.
IMS is the leading global provider of market information and
decision-support services to the pharmaceutical and healthcare industries.
Nielsen Media Research is the leading provider of television audience
measurement services, both nationally and locally, in the United States and
Canada.
Gartner is the world's leading independent provider of research and analysis
on the computer hardware, software, communications and related information
technology (IT) industries. The company's subscribers receive research and
analysis about significant IT industry development and trends.
Emerging Markets includes Erisco, the premier supplier of software-based
administrative and analytical solutions to the managed care industry; CTS, a
provider of software application development and maintenance services
specializing in Year 2000 and Eurocurrency compliance services; Super Systems
Japan, a marketer of financial application software products to the Japanese
market; Enterprises, the Company's venture capital unit, focused on investments
in emerging healthcare businesses; and Pilot, which was sold on July 31, 1997.
The accounting policies of these reportable segments are the same as those
described for the consolidated entity. The Company evaluates the performance of
its operating segments based on revenue and income from operations.
<TABLE>
<CAPTION>
NIELSEN MEDIA EMERGING
IMS RESEARCH MARKETS (2) TOTAL
---------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
OPERATING REVENUE.......................................... $ 223,401 $ 96,064 $ 17,567 $ 337,032
SEGMENT OPERATING INCOME................................... $ 30,926 $ 25,749 $ 902 $ 57,577
General Corporate Expenses (2) (8)......................... $ (13,100)
Interest Income (3)........................................ $ 2,060 -- $ 32 $ 2,092
Interest Expense (4)....................................... $ (184) -- -- $ (184)
Non-Operating Income--Net..................................
Gartner Equity Income.................................... $ 15,574
Gain on Gartner Stock (SAB 51)........................... $ 7,987
Gains from Dispositions--Net............................. $ 3,185 $ 7,555 $ 13,600
Other--Net............................................... $ (782)
----------
Income Before Provision for Income Taxes................... $ 82,764
Provision for Income Taxes................................. $ (22,677)
----------
Net Income................................................. $ 60,087
----------
----------
</TABLE>
F-27
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 19. OPERATIONS BY BUSINESS SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
NIELSEN MEDIA EMERGING
IMS RESEARCH MARKETS (2) TOTAL
---------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
OPERATING REVENUE.......................................... $ 209,822 $ 86,271 $ 19,483 $ 315,576
SEGMENT OPERATING INCOME................................... $ 37,316 $ 26,279 $ (8,808) $ 54,787
General Corporate Expenses................................. $ (6,900)
Interest Income (3)........................................ $ 1,097 -- $ 61 $ 1,158
Interest Expense........................................... $ (221) -- $ (229) $ (450)
Non-Operating Income--Net..................................
Gartner Equity Income.................................... $ 15,534
Gains from Dispositions--Net............................. $ 5,436 $ 5,436
Other--Net............................................... $ 1,695
----------
Income Before Provision for Income Taxes................... $ 71,260
Provision for Income Taxes................................. $ (18,355)
----------
Net Income................................................. $ 52,905
----------
----------
</TABLE>
<TABLE>
<CAPTION>
NIELSEN EMERGING
IMS MEDIA RESEARCH GARTNER(1) MARKETS(2) TOTAL
---------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
OPERATING REVENUE.................................... $ 980,521 $ 358,594 $ 79,038 $ 1,418,153
SEGMENT OPERATING INCOME............................. $ 265,351 $ 107,732 $ (9,752) $ 363,331
General Corporate Expenses........................... (27,989)
Interest Income (3).................................. 4,441 140 4,581
Interest Expense (4)................................. (679) (109) (788)
Non-Operating Income--Net Gartner Equity Income
(1)................................................ 65,120
Gains from Dispositions--Net....................... 9,391 9,391
Other--Net......................................... 16,589
---------- --------------- ----------- ----------- ------------
Income Before Provision for Income Taxes............. $ 430,235
Provision for Income Taxes........................... $ (117,885)
Net Income........................................... $ 312,350
Segment Depreciation and Amortization................ $ 76,375 $ 28,663 $ 11,139 $ 116,177
Segment Capital Expenditures......................... $ 41,932 $ 24,874 $ 4,304 $ 71,110
IDENTIFIABLE ASSETS AT DECEMBER 31, 1997 (5)......... $ 855,789 $ 182,642 $ 147,628 $ 1,186,059
---------- --------------- ----------- ----------- ------------
---------- --------------- ----------- ----------- ------------
</TABLE>
F-28
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
NIELSEN EMERGING
YEAR ENDED DECEMBER 31, 1996 IMS MEDIA RESEARCH GARTNER(1) MARKETS(2) TOTAL
- - ----------------------------------------------------- ---------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE.................................... $ 904,444 $ 319,404 $ 424,382 $ 82,366 $ 1,730,596
Write-Off of Purchased In Process Research &
Development........................................ $ 33,233 $ 33,233
SEGMENT OPERATING INCOME............................. $ 232,827 $ 99,461 $ 60,114 $ (12,903) $ 379,499
General Corporate Expenses........................... (36,331)
Interest Income (3).................................. 3,597 3,982 221 7,800
Interest Expense (4)................................. (1,043) (295) (1,338)
Non-Operating Expense--Other--Net.................... (809)
Gains from Dispositions--Net......................... 200 200
---------- --------------- ----------- ----------- ------------
Income Before Provision for Income Taxes............. $ 349,021
Provision for Income Taxes........................... $ (153,570)
Net Income........................................... $ 195,451
Segment Depreciation and Amortization................ $ 80,313 $ 25,229 $ 15,934 $ 12,181 $ 133,657
Segment Capital Expenditures......................... $ 37,862 $ 17,929 $ 15,918 $ 3,254 $ 74,963
IDENTIFIABLE ASSETS AT DECEMBER 31, 1996 (5)......... $ 756,966 $ 152,307 $ 497,242 $ 206,825 $ 1,613,340
---------- --------------- ----------- ----------- ------------
---------- --------------- ----------- ----------- ------------
YEAR ENDED DECEMBER 31, 1995
- - -----------------------------------------------------
OPERATING REVENUE.................................... $ 835,442 $ 288,652 $ 337,639 $ 80,607 $ 1,542,340
Restructuring Expense................................ $ 12,800 $ 12,800
Post-Employment Benefit Expense (6).................. $ 24,300 $ 8,200 $ 32,500
Non-Recurring Charge (7)............................. $ 53,630 $ 2,300 $ 16,940 $ 72,870
SEGMENT OPERATING INCOME............................. $ 89,335 $ 87,068 $ 51,180 $ (18,366) $ 209,217
General Corporate Expenses........................... (54,540)
Interest Income (3).................................. 6,005 2,761 330 9,096
Interest Expense (4)................................. (499) (41) (540)
Non-Operating Expense--Other--Net.................... (15,800)
Gains from Dispositions--Net......................... 4,524 10,600 15,124
---------- --------------- ----------- ----------- ------------
Income Before Provision for Income Taxes............. $ 162,557
Provision for Income Taxes........................... $ (73,676)
Net Income........................................... $ 88,881
Segment Depreciation and Amortization................ $ 84,641 $ 24,343 $ 11,987 $ 11,561 $ 132,532
Segment Capital Expenditures......................... $ 29,935 $ 13,508 $ 19,657 $ 2,532 $ 65,632
IDENTIFIABLE ASSETS AT DECEMBER 31, 1995 (5)......... $ 768,684 $ 124,535 $ 355,088 $ 132,568 $ 1,380,875
---------- --------------- ----------- ----------- ------------
---------- --------------- ----------- ----------- ------------
</TABLE>
- - ------------------------------
(1) Cognizant maintained a majority interest in Gartner during 1995 and 1996 and
accordingly, reflected Gartner on a consolidated basis. During 1997,
Cognizant's voting interest in Gartner fell below 50%. Gartner's results for
1997 are therefore reflected as Gartner Equity Income and included in
Non-Operating Income--Net.
(2) Intersegment sales of $3,734, $2,385, $11,092, $8,877 and $7,929 in March
31, 1998 and 1997 and December 31, 1997, 1996 and 1995, respectively,
consisting primarily of sales from CTS to IMS and Nielsen Media Research,
have been excluded. These sales are accounted for on a time and materials
basis and recognized as the service is performed.
(3) Interest income excludes amounts recorded at corporate of $2,006, $2,458,
$8,194, $1,656 and $1,229 for March 31, 1998 and 1997 and December 31, 1997,
1996 and 1995, respectively.
(4) Interest expense excludes amounts recorded at corporate of $16 and $1,505
for March 31, 1998 and December 31, 1997, respectively.
(5) Assets of $393,461, $261,642 and $61,215 at December 31, 1997, 1996 and
1995, respectively, include cash and cash equivalents, investment in Gartner
and Property, Plant and Equipment not identified with business segments and
represent the reconciling items between total identifiable assets shown and
the Cognizant's total assets.
(6) Post-employment benefit expense excludes amounts recorded at corporate of
$666 and $5,132 for 1996 and 1995, respectively.
(7) Non-recurring charge expense excludes amounts recorded at corporate of
$17,200 for 1995.
(8) General corporate expenses in 1998 include $4,900 of one-time spin-related
charges.
F-29
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
FINANCIAL INFORMATION BY COUNTRY:
<TABLE>
<CAPTION>
UNITED STATES(1) ALL OTHER TOTAL
---------------- ---------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
-------- ---------- ------------
OPERATING REVENUE (2)................................................. $ 759,070 $ 659,083 $ 1,418,153
LONG-LIVED ASSETS..................................................... $ 363,478 $ 190,657 $ 554,135
-------- ---------- ------------
Year Ended December 31, 1996..........................................
-------- ---------- ------------
Operating Revenue (2)................................................. $ 950,526 $ 780,070 $ 1,730,596
Long-Lived Assets..................................................... $ 554,795 $ 192,472 $ 747,267
-------- ---------- ------------
Year Ended December 31, 1995..........................................
-------- ---------- ------------
Operating Revenue (2)................................................. $ 834,786 $ 707,554 $ 1,542,340
Long-Lived Assets..................................................... $ 488,730 $ 198,554 $ 687,284
-------- ---------- ------------
-------- ---------- ------------
</TABLE>
- - ------------------------
(1) The above table reflects the deconsolidation of Gartner and the sale of
Pilot, in 1997.
(2) Revenue relates to external customers and is primarily attributable to the
country of domicile.
NOTE 20. REORGANIZATION PLAN
On January 15, 1998, the Company announced a plan to separate into two
independent, publicly traded companies--IMS HEALTH and Nielsen Media Research
(the "Cognizant Distribution"). The transaction, which has been structured as a
tax-free dividend of one share of IMS HEALTH common stock for each share of
Cognizant common stock, is targeted for completion by the middle of 1998.
Concurrent with the transaction, Cognizant Corporation will change its name to
Nielsen Media Research, Inc. The separation would create IMS HEALTH as the
premier global provider of information solutions to the pharmaceutical and
healthcare industries, and establish an independent Nielsen Media Research, the
leader in television audience measurement services. Because of the significance
to Cognizant of the IMS HEALTH business to be distributed to Cognizant
stockholders in the Cognizant Distribution, IMS HEALTH will be the successor to
Cognizant from a financial reporting perspective. The Cognizant Distribution is
subject to, and requires final approval of, the Company's board of directors of
the plan of the Cognizant Distribution as well as of the material terms of any
distribution, tax sharing, employee benefits and other similar agreements
pursuant to which assets and liabilities are allocated as part of the Cognizant
Distribution.
F-30
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 (1) JUNE 30 (1) SEPTEMBER 30 DECEMBER 31 FULL YEAR
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1997
OPERATING REVENUE.......................... $ 315,576 $ 338,260 $ 341,041 $ 423,276 $ 1,418,153
OPERATING INCOME........................... $ 47,887 $ 66,701 $ 87,163 $ 133,591 $ 335,342
NET INCOME................................. $ 52,905 $ 60,055 $ 77,066 $ 122,324 $ 312,350
BASIC EARNINGS PER SHARE OF COMMON STOCK... $ 0.31 $ 0.36 $ 0.47 $ 0.75 $ 1.89
DILUTED EARNINGS PER SHARE OF COMMON
STOCK.................................... $ 0.31 $ 0.36 $ 0.46 $ 0.73 $ 1.86
------------ ----------- ------------ ------------ ------------
1996
Operating Revenue.......................... $ 370,019 $ 415,703 $ 424,188 $ 520,686 $ 1,730,596
Operating Income (2)....................... $ 58,978 $ 81,912 $ 60,195 $ 142,083 $ 343,168
Net Income................................. $ 33,277 $ 42,875 $ 39,858 $ 79,441 $ 195,451
Basic Earnings Per Share of Common Stock... $ 0.20 $ 0.25 $ 0.23 $ 0.47 $ 1.15
Diluted Earnings Per Share of Common
Stock.................................... $ 0.20 $ 0.25 $ 0.23 $ 0.47 $ 1.15
------------ ----------- ------------ ------------ ------------
</TABLE>
- - ------------------------
(1) 1997 quarterly results have been restated to reflect the deconsolidation of
Gartner.
(2) Includes a one-time acquisition-related charge of $33,233 related to
Gartner's acquisition of J3 Learning Corporation in the third quarter.
NOTE 22. SUBSEQUENT EVENT (UNAUDITED)
On March 23, 1998 the Company announced it has signed two definitive
agreements to acquire Walsh International Inc. ("Walsh") and Pharmaceutical
Marketing Services Inc. ("PMSI"), subject to regulatory approval. These
acquisitions are separate transactions and will be accounted for as purchases.
The transactions have been independently authorized by the Cognizant, Walsh and
PMSI boards of directors, and are subject to approval by Walsh and PMSI
shareholders. Under terms of the agreements, Walsh shareholders will receive
.3041 shares of Cognizant Corporation common stock per Walsh share (or, based on
a Cognizant share price of $51.792, consideration of approximately $167,000),
and PMSI shareholders will receive .2800 shares of Cognizant Corporation common
stock per PMSI share (or, based on a Cognizant share price of $51.792,
consideration of approximately $180,000). The number of shares of Cognizant
Corporation common stock to be issued in connection with each of the
acquisitions is subject to a collar adjustment based on the price of Cognizant
Corporation common stock during a period prior to the closing of the
acquisitions. A one-time, non-cash charge to write-off in-process research and
development is expected, in the range of $110,000 to $125,000 for both
acquisitions combined. The Company expects to issue approximately 6,700,000
shares from treasury stock to consummate these transactions. In connection with
the Cognizant Distribution, Walsh and PMSI will become part of IMS HEALTH.
During the first quarter, the Company acquired ChinaMetrik, Inc., a privately
held company that measures the pharmaceutical market in China. As part of the
consideration, 25,751 shares of Cognizant Common Stock were issued. This
acquisition is not material to Cognizant.
F-31
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 23. GAIN ON SALE OF SUBSIDIARY STOCK (UNAUDITED)
During the first quarter of 1998, the proceeds from the issuance of shares
to Gartner employees, including associated tax benefits, increased Gartner's
equity and reduced the Company's ownership interest from 48.0% to 47.2%. In
connection with the exercise of stock options and the purchase of stock by
Gartner employees, Gartner issued 1,549,156 shares of stock at a weighted
average price per share of $6.16 for total cash proceeds of $9,547.
Consequently, the Company recognized a SAB 51 gain of $7,987 corresponding to
the net increase in the underlying value of the investment in Gartner. Deferred
taxes on the SAB 51 gain have been provided in the provision for income taxes.
F-32
<PAGE>
COGNIZANT CORPORATION
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
FOR YEARS ENDED AND AS OF DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating Revenue.................. $ 1,418,153 $ 1,730,596 $ 1,542,340 $ 1,257,415 $ 1,039,259
Costs and Expenses(1)(2)........... 1,082,811 1,387,428 1,387,663 1,030,780 897,909
-------------- -------------- -------------- -------------- ------------
Operating Income(1)(2)............. 335,342 343,168 154,677 226,635 141,350
Non-Operating Income--Net(3)....... 94,893 5,853 7,880 18,853 25,982
-------------- -------------- -------------- -------------- ------------
Income Before Provision for Income
Tax.............................. 430,235 349,021 162,557 245,488 167,332
Provision For Income Taxes......... (117,885) (153,570) (73,676) (99,083) (58,475)
-------------- -------------- -------------- -------------- ------------
Income Before Cumulative Effect of
Accounting Changes................. 312,350 195,451 88,881 146,405 108,857
Cumulative Effect of Accounting
Changes, Net of Income Taxes(4).... -- -- -- -- (41,143)
-------------- -------------- -------------- -------------- ------------
Net Income........................... $ 312,350 $ 195,451 $ 88,881 $ 146,405 $ 67,714
Basic Earnings Per Share of Common
Stock.............................. $ 1.89 $ 1.15 $ 0.52 $ 0.86 $ --
-------------- -------------- -------------- -------------- ------------
Basic Average Number of Shares
Outstanding........................ 165,163,000 169,944,000 169,522,000 169,946,000 --
-------------- -------------- -------------- -------------- ------------
Diluted Earnings Per Share of Common
Stock.............................. $ 1.86 $ 1.15 $ 0.52 $ 0.85 $ --
-------------- -------------- -------------- -------------- ------------
Diluted Average Number of Shares
Outstanding........................ 167,490,000 170,500,000 171,608,000 171,700,000 $ --
-------------- -------------- -------------- -------------- ------------
As a % of Operating Revenue:
Operating Income................... 23.6% 19.8% 10.0% 18.0% 13.6%
Income Before Cumulative Effect of
Accounting Changes............... 22.0% 11.3% 5.8% 11.6% 10.5%
-------------- -------------- -------------- -------------- ------------
SHAREHOLDERS' EQUITY................. $ 801,570 $ 872,613 $ 604,588 $ 606,483 $ 540,833
-------------- -------------- -------------- -------------- ------------
TOTAL ASSETS......................... $ 1,579,520 $ 1,874,982 $ 1,442,090 $ 1,331,038 $ 1,158,764
-------------- -------------- -------------- -------------- ------------
</TABLE>
- - ------------------------
(1) 1996 includes a one-time acquisition-related charge of $33,233 related to
Gartner's acquisition of J3 Learning Corporation.
(2) 1995 includes a non-recurring charge of $90,070 (see Note 6 to the Cognizant
Consolidated Financial Statements) and an incremental provision for
postemployment benefits of $32,500. Also includes restructuring expense of
$12,800, $7,957, and $46,408 in 1995, 1994 and 1993, respectively (See Note
7 to the Cognizant Consolidated Financial Statements).
(3) Non-Operating Income in 1997 includes Gartner equity income of $65,120, SAB
51 gains of $14,689, and gains from dispositions--net of $9,391. Results for
prior years include gains from dispositions--net of $200, $15,124, $21,473
and $21,022 in non-operating income in 1996, 1995, 1994 and 1993,
respectively.
(4) 1993 includes the impact of $28,303 for the adoption of SFAS No. 112 and
$12,840 for the adoption of SFAS No. 106.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of Cognizant Corporation:
Our report on the consolidated financial statements of Cognizant Corporation
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, is included in this Form 10 on page F-2 of the
Information Statement. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule set
forth on page F-35 of this Form 10.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
February 17, 1998
F-34
<PAGE>
COGNIZANT CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COL. A COL. B COL. C COL. D COL. E
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) OF PERIOD
- - -------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the Year Ended December 31, 1997.......... $ 15,470 $ 790 $ 9,061 $ 7,199
----------- ----------- ------ -----------
----------- ----------- ------ -----------
For the Year Ended December 31, 1996.......... $ 11,446 $ 4,993 $ 969 $ 15,470
----------- ----------- ------ -----------
----------- ----------- ------ -----------
For the Year Ended December 31, 1995.......... $ 10,839 $ 3,310 $ 2,703 $ 11,446
----------- ----------- ------ -----------
----------- ----------- ------ -----------
</TABLE>
NOTE:
(a) Primarily represents the deconsolidation of Gartner Group and the recovery
of accounts in 1997; and the charge-off of uncollectible accounts for which
a reserve was provided in 1996 and 1995.
F-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of IMS Health Incorporated:
We have audited the accompanying statement of financial position of IMS
Health Incorporated, a wholly-owned subsidiary of Cognizant Corporation, as of
March 31, 1998. This financial statement is the responsibility of the management
of IMS Health Incorporated. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of financial position. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit of the statement of financial
position provides a reasonable basis for our opinion.
In our opinion, the statement of financial position referred to above
presents fairly, in all material respects, the financial position of IMS Health
Incorporated as of March 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
April 1, 1998
F-36
<PAGE>
IMS HEALTH INCORPORATED
STATEMENT OF FINANCIAL POSITION
MARCH 31, 1998
ASSETS
<TABLE>
<S> <C>
Cash............................................................................... $ 10,000
---------
Total Assets....................................................................... $ 10,000
---------
---------
</TABLE>
LIABILITIES AND SHAREHOLDER EQUITY
<TABLE>
<S> <C>
Common Stock, par value $0.01 per share; authorized--100 shares; issued and
outstanding-- 100 shares......................................................... $ 1
Capital Surplus.................................................................... $ 9,999
---------
Total Liabilities and Shareholder Equity........................................... $ 10,000
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statement.
F-37
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO FINANCIAL STATEMENT
NOTE 1. ORGANIZATION
On February 3, 1998, IMS Health Incorporated (the "Company") was
incorporated under the General Corporation Law of the State of Delaware. The
Company has the authority under its Certificate of Incorporation to issue 100
shares of common stock, par value $0.01 per share (the "Common Stock"), one
hundred shares of which were issued to Cognizant Corporation ("Cognizant") for
$10,000 on February 4, 1998. The Company has no assets other than cash and has
not commenced operations. The Company's activities to date have been solely
related to its incorporation.
NOTE 2. PROPOSED REORGANIZATION
On January 15, 1998, the Board of Directors of Cognizant approved in
principle a plan to distribute the Common Stock of IMS Health Incorporated to
all holders of outstanding shares of common stock of Cognizant (the
"Distribution"). The Distribution is subject to final approval by Cognizant's
Board of Directors and obtaining a ruling from the Internal Revenue Service with
respect to the tax-free treatment of the transaction. After the Distribution,
the Company will operate as an independent company that will focus on
information solutions to the pharmaceutical and healthcare industries. The
Company's principal businesses will include those of I.M.S. International, Inc.,
Erisco, Inc., Cognizant Enterprises, Inc., Cognizant Technology Solutions
Corporation, SSJ K.K. and an equity investment in Gartner Group, Inc. In
connection with the Distribution, application will be made by the Company to
list its Common Stock on the New York Stock Exchange.
NOTE 3. RESTATED CERTIFICATE OF INCORPORATION
Prior to the date of the Distribution, the Company will file a Restated
Certificate of Incorporation which will authorize the issuance of 420,000,000
shares of all classes of stock of which 10,000,000 shares will represent shares
of preferred stock, par value $.01 per share ("Preferred Stock"), 400,000,000
shares will represent shares of Common Stock, and 10,000,000 shares will
represent shares of Series Common Stock, par value $.01 per share ("Series
Common Stock").
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of Nielsen Media Research, Inc.:
We have audited the accompanying consolidated statements of financial
position of Nielsen Media Research, Inc. (a wholly-owned subsidiary of Cognizant
Corporation) as of December 31, 1997 and 1996, and the related consolidated
statements of income, divisional equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nielsen Media
Research, Inc. as of December 31, 1997 and 1996, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
March 30, 1998
F-39
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE.............. $ 96,064 $ 86,271 $ 358,594 $ 319,404 $ 288,652
-------------- -------------- -------------- -------------- --------------
Operating Costs................ 47,194 39,253 164,516 146,981 133,059
Selling and Administrative
Expenses..................... 20,431 18,475 75,154 65,233 61,682
Depreciation and
Amortization................. 7,122 6,633 28,663 25,229 24,343
-------------- -------------- -------------- -------------- --------------
Operating Income............... 21,317 21,910 90,261 81,961 69,568
-------------- -------------- -------------- -------------- --------------
Other Income................... 3,185 -- -- -- --
-------------- -------------- -------------- -------------- --------------
INCOME BEFORE PROVISION FOR
INCOME TAXES................. 24,502 21,910 90,261 81,961 69,568
-------------- -------------- -------------- -------------- --------------
Provision for Income Taxes..... (10,256) (9,180) (37,786) (34,356) (29,156)
-------------- -------------- -------------- -------------- --------------
NET INCOME..................... $ 14,246 $ 12,730 $ 52,475 $ 47,605 $ 40,412
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
BASIC EARNINGS PER SHARE OF
COMMON STOCK................. $ 0.09 $ 0.07 $ .32 $ .28 $ .24
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
DILUTED EARNINGS PER SHARE OF
COMMON STOCK................. $ 0.09 $ 0.07 $ .32 $ .28 $ .24
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Average Number of Shares
Outstanding--Basic........... 162,406,000 169,770,000 165,163,000 169,944,000 169,522,00
Dilutive Effect of Shares
Issuable as of Balance Sheet
Date Under Stock Option
Plans........................ 721,084 10,792 287,323 59,170 --
Adjustment of Shares Applicable
to Exercise of Stock
Options...................... 194,758 10,053 214,667 -- --
-------------- -------------- -------------- -------------- --------------
Average Number of Shares
Outstanding--Diluted......... 163,321,842 169,790,845 165,664,990 170,003,170 169,522,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-40
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1998 1997 1996
---------- ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents.................................................. $ 4,004 $ 5,993 $ 5,557
Accounts Receivable--Net................................................... 52,966 51,986 44,773
Other Current Assets....................................................... 5,115 4,551 5,145
---------- ------------ ----------
Total Current Assets................................................... 62,085 62,530 55,475
---------- ------------ ----------
PROPERTY, PLANT AND EQUIPMENT--NET......................................... 58,023 55,050 44,310
COMPUTER SOFTWARE.......................................................... 45,724 43,093 35,653
INTANGIBLES................................................................ 12,085 10,649 11,686
OTHER ASSETS............................................................... 21,728 21,112 23,207
---------- ------------ ----------
TOTAL ASSETS............................................................... $ 199,645 $ 192,434 $ 170,331
---------- ------------ ----------
---------- ------------ ----------
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES
Accounts Payable........................................................... $ 18,165 $ 14,355 $ 6,876
Accrued and Other Current Liabilities...................................... 18,690 23,629 20,398
Accrued Income Taxes....................................................... 5,455 5,475 4,810
Deferred Revenues.......................................................... 1,229 1,153 1,254
---------- ------------ ----------
Total Current Liabilities.............................................. 43,539 44,612 33,338
---------- ------------ ----------
POSTRETIREMENT BENEFITS.................................................... 11,916 11,845 8,261
DEFERRED INCOME TAXES...................................................... 37,053 34,394 29,379
---------- ------------ ----------
TOTAL LIABILITIES.......................................................... 92,508 90,851 70,978
---------- ------------ ----------
COMMITMENTS AND CONTINGENCIES
TOTAL DIVISIONAL EQUITY.................................................... 107,137 101,583 99,353
---------- ------------ ----------
TOTAL LIABILITIES AND DIVISIONAL EQUITY.................................... $ 199,645 $ 192,434 $ 170,331
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
----------- ----------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income......................................... $ 14,246 $ 12,730 $ 52,475 $ 47,605 $ 40,412
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization.................. 7,122 6,633 28,663 25,229 24,343
(Increase) Decrease in Accounts Receivable..... (980) 526 (7,213) (14,022) 13,597
Increase in Accounts Payable................... 3,810 1,714 7,479 896 2,201
Increase (Decrease) in Postretirement
Benefits..................................... 72 1,292 3,543 (6,183) 9,380
Deferred Income Taxes.......................... 2,859 4,410 5,585 10,473 (4,058)
Increase (Decrease) in Accrued Income Taxes.... (20) 1,073 665 728 1,029
(Increase) Decrease in Other Working Capital
Items........................................ (5,628) (83) 3,195 (59) 3,369
----------- ----------- ---------- ---------- ----------
Net Cash Provided by Operating Activities.......... 21,481 28,295 94,392 64,667 90,273
----------- ----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures............................... (6,719) (6,500) (24,874) (17,929) (13,508)
Additions to Computer Software..................... (5,151) (3,594) (17,121) (14,356) (14,298)
Additions to Intangibles........................... (2,356) (1,931) (7,681) (6,266) (3,011)
Other.............................................. (718) 2,340 6,834 (2,234) (82)
----------- ----------- ---------- ---------- ----------
Net Cash Used in Investing Activities.............. (14,944) (9,685) (42,842) (40,785) (30,899)
----------- ----------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Transfers to Cognizant/D&B..................... (8,530) (14,061) (51,107) (19,069) (58,755)
----------- ----------- ---------- ---------- ----------
Net Cash Used in Financing Activities.............. (8,530) (14,061) (51,107) (19,069) (58,755)
----------- ----------- ---------- ---------- ----------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents...................................... 4 (25) (7) (11) --
----------- ----------- ---------- ---------- ----------
(Decrease) Increase in Cash and Cash Equivalents... (1,989) 4,524 436 4,802 619
Cash and Cash Equivalents, Beginning of Period..... 5,993 5,557 5,557 755 136
----------- ----------- ---------- ---------- ----------
Cash and Cash Equivalents, End of Period........... $ 4,004 $ 10,081 $ 5,993 $ 5,557 $ 755
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
CONSOLIDATED STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------
1998 1997 1996 1995
----------- --------- --------- ---------
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD..................... $ 101,583 $ 99,353 $ 70,874 $ 87,893
Net Income....................................... 14,246 52,475 47,605 40,412
Net Transfers to Cognizant/D&B................... (8,530) (51,107) (19,069) (58,755)
Change in Unrealized Gains on Investments........ -- -- -- 1,324
Change in Cumulative Translation Adjustment...... (162) 862 (57) --
----------- --------- --------- ---------
BALANCE, END OF PERIOD........................... $ 107,137 $ 101,583 $ 99,353 $ 70,874
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 1. BASIS OF PRESENTATION
On January 15, 1998, Cognizant Corporation ("Cognizant") announced a plan to
separate into two independent, publicly traded companies--Nielsen Media
Research, Inc. ("Nielsen Media Research"), and IMS Health Incorporated ("IMS
HEALTH") (the "Cognizant Distribution"). The transaction, which has been
structured as a tax-free dividend of one share of IMS HEALTH common stock for
each share of Cognizant Corporation common stock, is targeted for completion by
mid-1998. Concurrent with the transaction, Cognizant Corporation will change its
name to Nielsen Media Research, Inc. Although Nielsen Media Research, Inc. will
be the same corporate legal entity as Cognizant Corporation, except as
specifically included or disclosed in these consolidated financial statements,
or specified in agreements between Nielsen Media Research and IMS HEALTH,
Nielsen Media Research will be indemnified by IMS Health for liabilities of
Cognizant incurred before the date of the Cognizant Distribution.
The separation will create IMS HEALTH as the premier global provider of
information solutions to the pharmaceutical and healthcare industries, and
establish an independent Nielsen Media Research, the leader in television
audience measurement services. The Cognizant Distribution is subject to final
approval by Cognizant's Board of Directors and obtaining a ruling from the
Internal Revenue Service with respect to the tax-free treatment of the
transaction.
As used in the accompanying consolidated financial statements, the term
"Nielsen Media Research" or "the Company" refers to the operations of the
television audience measurement business, the term "IMS HEALTH" refers to the
operations of the pharmaceutical and healthcare information business, and the
term "Cognizant" refers to the pre-Cognizant Distribution consolidated entity
which operates both businesses. The term "D&B" refers to Cognizant's former
parent.
On November 1, 1996 (the "D&B Distribution Date"), The Dun Bradstreet
Corporation ("D&B") distributed to its shareholders all of the outstanding
shares of common stock of Cognizant, then a wholly-owned subsidiary of D&B (the
"D&B Distribution"). In the D&B Distribution, holders of D&B common stock
received one share of Cognizant common stock for every share of D&B common stock
held.
The consolidated financial statements have been prepared using Cognizant's
historical basis in the assets and liabilities and historical results of
operations related to the Company's business.
The consolidated financial statements generally reflect the financial
position, results of operations, and cash flows of the Company as if it were a
separate entity for all periods presented. The consolidated financial statements
include allocations of certain Cognizant corporate headquarters assets
(including prepaid pension assets) and liabilities (including pension and
postretirement benefits) and an allocation of Cognizant corporate and other
expenses (including cash management, legal, accounting, tax, employee benefits,
insurance services, data services and other corporate overhead) relating to the
Company's business for the year ended December 31, 1997 and for the two months
ended December 31, 1996 and corresponding D&B corporate and other expenses for
the ten months ended October 31, 1996 and for the year ended December 31, 1995
(the "Respective Periods"). Management believes these allocations are
reasonable. However, the financial information included herein may not
necessarily reflect the consolidated financial position, results of operations,
and cash flows of the Company in the future or what they would have been if the
Company had been a separate entity during the periods presented.
For purposes of governing certain of the ongoing relationships between the
Company and IMS HEALTH after the Cognizant Distribution and to provide for
orderly transition, the Company and IMS
F-44
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 1. BASIS OF PRESENTATION (CONTINUED)
HEALTH will enter into various agreements including a Distribution Agreement,
Tax Allocation Agreement, Employee Benefits Agreement, Intellectual Property
Agreement, Shared Transaction Services Agreement, Data Services Agreement and
Transition Services Agreement. Summaries of these agreements are set forth
elsewhere in this Information Statement.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements of the Company include
the accounts of the Company and its subsidiaries after elimination of all
material intercompany accounts and transactions.
UNAUDITED INTERIM FINANCIAL INFORMATION. The accompanying interim
consolidated balance sheet as of March 31, 1998 and the consolidated statements
of operations and cash flows for the three months ended March 31, 1997 and 1998
together with the related disclosures and amounts set forth in the notes are
unaudited but include all adjustments, consisting of only normal recurring
adjustments, which the Company considers necessary to present fairly, in all
material respects, the consolidated financial position, the consolidated results
of operations and cash flows for the three months ended March 31, 1997 and 1998.
Results for the three months ended March 31, 1997 and 1998 are not necessarily
indicative of results for the entire year.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
a maturity of 90 days or less at the time of purchase to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT. Buildings and machinery and equipment are
depreciated over their estimated useful lives of 40 and 3 to 5 years,
respectively, using the straight-line method. Leasehold improvements are
amortized on a straight-line basis over the shorter of the term of the lease or
the estimated useful life of the improvement.
COMPUTER SOFTWARE. Certain direct costs incurred in the development of
computer software for external use or to meet the internal needs of the Company
are capitalized. Computer software costs incurred to establish technological
feasibility or in the preliminary project stage of development are expensed in
the periods in which they are incurred. Capitalization ceases and amortization
starts when a computer software product is available for general release to
customers or when the computer software project is placed in service.
Amortization on a computer software product is computed using the greater of (a)
the ratio of a product's current gross revenues to the total of current and
expected gross revenues or (b) the straight-line method computed by dividing the
capitalized costs by the estimated economic life of a product over three to five
years. The costs of computer software developed for internal use are amortized
on a straight-line basis over three to five years. At each balance sheet date
the Company reviews the recoverability of the unamortized capitalized costs of
computer software by comparing the carrying value of computer software with the
estimated net realizable value.
INTANGIBLES. Intangibles primarily result from the deferral of direct costs
related to the installation of meters in markets in which customer contracts
preexist. Intangibles are amortized, using the straight-line method, over the
life of the contracts, which are generally five years.
LONG-LIVED ASSETS. Long-lived assets and certain identifiable intangibles
held and used by an entity are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying
F-45
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amount of an asset may not be recoverable. Recognition of an impairment loss is
recognized when the sum of undiscounted expected future cash flows is less than
the carrying amount of such assets. The measurement for such impairment loss is
then based on the fair value of the asset.
REVENUE RECOGNITION. The Company recognizes subscription revenue as earned,
which is generally pro rata over a one-year period, or as the information is
delivered or related services are performed. For certain metered market
contracts with fixed payment terms, revenue is recognized on a straight-line
basis over the contract period, which is generally five years. The difference
between the amount recognized as revenue and the amount billed for service is
recorded as unbilled receivables.
FOREIGN CURRENCY TRANSLATION. The Company has operations in Canada. Changes
in the value of the Canadian dollar (the functional currency) affect the
Company's consolidated financial statements when translated into U.S. dollars.
For operations in Canada, assets and liabilities are translated using
end-of-period exchange rates; revenues and expenses are translated using average
rates of exchange. Currency translation adjustments are accumulated in a
separate component of Divisional Equity, whereas realized transaction gains and
losses are recognized in current income.
INCOME TAXES. The Company has been included in the Federal and certain
state and Canadian income tax returns of Cognizant and D&B for the Respective
Periods. The provision for income taxes in the Company's consolidated financial
statements has been calculated on a separate-company basis. Income taxes paid on
behalf of the Company by Cognizant and D&B for the Respective Periods are
included in Divisional Equity. Effective after the Cognizant Distribution, the
Company will file separate income tax returns.
DIVISIONAL EQUITY. Divisional Equity includes historical investments and
advances from Cognizant and D&B, including net transfers to/from Cognizant and
D&B, third-party liabilities paid on behalf of the Company by Cognizant and D&B
and amounts due to/from Cognizant and D&B for services and other charges, as
well as current-period income through the Respective Periods.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. Estimates are used for, but
not limited to, the accounting for: allowance for uncollectible accounts
receivable, depreciation and amortization, capitalized software costs, employee
benefit plans, taxes and contingencies.
EARNINGS PER SHARE. In 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Basic earnings per
share are calculated by dividing net income by weighted average common shares.
Diluted earnings per share are calculated by dividing net income by dilutive
potential common shares. Dilutive potential common shares are calculated in
accordance with the treasury stock method, which assumes that proceeds from the
exercise of all Nielsen Media Research employee options are used to repurchase
common stock at market value. The amount of shares remaining after the proceeds
are exhausted represent the potentially dilutive effect of the options. In 1997,
the computation represents the weighted average number of shares of Cognizant.
The computation in 1996
F-46
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and 1995 includes the weighted average number of D&B shares outstanding,
reflecting the one-for-one distribution ratio and the weighted average number of
shares of Cognizant common stock outstanding during the Respective Periods.
CONCENTRATIONS OF CREDIT RISK. The Company maintains trade accounts
receivable and unbilled receivable balances ($66,207 and $62,266 at December 31,
1997 and 1996, respectively), principally from customers in the television media
industry.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income", which requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for periods beginning
after December 15, 1997. The Company is in the process of evaluating the
disclosure requirements under this standard.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which changes the way public companies
report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. This statement is effective for
periods beginning after December 15, 1997. The Company is in the process of
evaluating the disclosure requirements under this standard.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions And Other Postretirement Benefits", which changes current
financial statement disclosure requirements from those required under SFAS No.
87, "Employers' Accounting for Pensions"; SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits"; and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The statement does not change the
existing measurement or recognition provisions of SFAS Nos. 87, 88 or 106, and
is effective for periods beginning after December 15, 1997. The Company is in
the process of evaluating the disclosure requirements under this standard.
In March 1998, the American Institute of Certified Public Accountants 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 and when capitalization of such costs should commence.
Nielsen Media Research is evaluating the impact of this SOP on its financial
position and results of operations and will be required to implement SOP 98-1
for the fiscal year ended December 31, 1999.
NOTE 3. FINANCIAL INSTRUMENTS
At December 31, 1997, the Company's financial instruments included cash,
cash equivalents, receivables, and accounts payable. At December 31, 1997, the
fair values of cash, cash equivalents, trade receivables and accounts payable
approximated carrying values because of the short-term nature of these
instruments.
The Company's trade receivables do not represent significant concentrations
of credit risk at December 31, 1997 due to the high quality of its customers.
F-47
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 4. PENSION AND POSTRETIREMENT BENEFITS
At the date of the Cognizant Distribution (the "Cognizant Distribution
Date"), the Company will assume responsibility for pension and postretirement
benefits for active employees and retirees of the Company. An allocation of
assets and liabilities for such benefits has been included in the consolidated
financial statements.
U.S. BENEFIT PLANS. The Company participates in Cognizant's defined benefit
pension plan covering all eligible employees in the United States. The plan is a
cash balance pension plan under which 6% of creditable compensation plus
interest is credited to eligible employee's retirement accounts on a monthly
basis. At the time of retirement, the vested employee's account balance is
actuarially converted into an annuity. Prior to the D&B Distribution, the
Company participated in the D&B defined benefit pension plan. Accordingly, the
Company has recorded pension expense, as allocated in the Respective Periods by
Cognizant and D&B, totaling $1,571, $2,397, and $2,397 for the years 1997, 1996,
and 1995, respectively.
Certain employees of the Company in the United States also have been
eligible to participate in the Cognizant and D&B-sponsored defined contribution
plans during the Respective Periods. The Company makes a matching contribution
of up to 50% of the employee's contribution based on specified limits of the
employee's salary. The Company's expense related to these plans was $2,021,
$1,797 and $2,340 for the years 1997, 1996 and 1995, respectively.
NON-U.S. BENEFIT PLANS. The Company's subsidiary in Canada provides
retirement benefits for eligible employees through defined benefit plans. The
projected benefit obligations and accrued pension cost for these funded and
unfunded plans at December 31, 1997 and 1996 and the pension costs for these
plans for the years 1997, 1996 and 1995, respectively, were not significant.
POSTRETIREMENT BENEFITS. In addition to providing pension benefits,
Cognizant and D&B provide various healthcare and life insurance benefits for
retired Company employees. Employees in the United States become eligible for
these benefits if they reach normal retirement age while working for the
Company. The Company accounts for the plans as multi-employer plans. The cost of
postretirement benefit plans as allocated by Cognizant and D&B during the
respective periods was not significant.
F-48
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 5. EMPLOYEE STOCK PLANS
Under Cognizant's Key Employees Stock Incentive Plan (the ``Plan") certain
employees of the Company are eligible for the grant of stock options and
restricted stock. These awards are granted at the market value on the date of
grant. Immediately following the D&B Distribution, outstanding stock option
awards under the D&B Key Employee Stock Option Plans held by Company employees
were canceled and replaced by substitute awards under the Plan. At December 31,
1997 outstanding options for Cognizant common stock held by Company employees
totaled 4,107,012, of which 1,006,740 had vested and were exercisable. The
option prices range from $22.99 to $44.47 per share.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Options Outstanding
November 1, 1996.................................................................. 687,231 $ 31.35
Granted............................................................................ 3,602,800 $ 33.38
Exercised.......................................................................... --
Expired............................................................................ --
----------
Options Outstanding
December 31, 1996 4,290,031 $ 33.05
Granted............................................................................ 231,487 $ 36.03
Exercised.......................................................................... (139,932) $ 30.29
Expired............................................................................ (274,574) $ 32.98
Options Outstanding
December 31, 1997................................................................. 4,107,012 $ 33.32
</TABLE>
F-49
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 5. EMPLOYEE STOCK PLANS (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
DECEMBER 31, 1997 -----------------------------------------
----------------------- REMAINING OPTION EXERCISE PRICES
RANGE OF NUMBER NUMBER CONTRACTUAL ------------------------
EXERCISE PRICES OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE
- - ----------------------------------------------- ----------- ---------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$42.4375-$44.4687.............................. 70,000 0 10 $ 42.805 --
$34.4837-$37.5625.............................. 234,333 152,477 8 $ 35.185 $ 34.807
$31.4369-$33.3750.............................. 3,593,442 675,688 9 $ 33.309 $ 33.082
$22.9891-$29.9135.............................. 209,237 178,575 6 $ 28.195 $ 27.900
----------- ----------
4,107,012 1,006,740
</TABLE>
Immediately following the Cognizant Distribution Date, outstanding awards
under the Plan held by Company employees will be adjusted or replaced by
substitute awards in accordance with the Plan. The adjusted or substitute awards
will have the same ratio of the exercise price per option 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 they replace.
In October 1995, the FASB issued SFAS No. 123, ``Accounting for Stock-Based
Compensation", which requires that companies with stock-based compensation plans
either recognize compensation expense based on the fair value of options granted
or continue to apply the existing accounting rules and disclose pro forma net
income and earnings per share assuming the fair value method had been applied.
The Company has chosen to continue applying Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards to Company
employees under those plans, consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Net Income
As reported....................................................................... $ 52,475 $ 47,605 $ 40,412
Pro forma......................................................................... $ 49,059 $ 46,660 $ 40,408
Earnings Per Share:
Basic/Diluted
As reported....................................................................... $ .32 $ .28 $ .24
Pro forma......................................................................... $ .30 $ .27 $ .24
</TABLE>
- - ------------------------
Note: The pro forma disclosures shown above are not representative of the
effects on net income and earnings per share in future years.
The fair value of the stock options used to compute the Company's pro forma
net income and earnings per share disclosures is based on an allocation of the
estimated value of the Cognizant and D&B stock options at grant date using the
Black-Scholes option pricing model. The following assumptions were used for
Cognizant options granted in 1997 and 1996: dividend yield of 0.3%; expected
volatility of 25%; a weighted average risk-free interest rate of 5.9%; and an
expected term of 4.5 years. The following assumptions were used for D&B options
granted in 1995: dividend yield of 4.7%; expected volatility of
F-50
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 5. EMPLOYEE STOCK PLANS (CONTINUED)
15%; expected term of 5 years and a weighted average risk-free interest rate of
6.1%. The weighted average fair value of the Cognizant and D&B stock options
granted in 1997, 1996 and 1995 are $11.46, $10.31 and $6.68, respectively.
NOTE 6. INCOME TAXES
Income before provision for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Pretax Income.................................................................... $ 90,261 $ 81,961 $ 69,568
</TABLE>
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
U.S. Federal
Current.......................................................................... $ 23,600 $ 16,735 $ 23,984
Deferred......................................................................... 4,674 8,764 (3,397)
--------- --------- ---------
28,274 25,499 20,587
--------- --------- ---------
U.S. State & Local and Other
Current.......................................................................... 8,601 7,148 9,231
Deferred......................................................................... 911 1,709 (662)
--------- --------- ---------
9,512 8,857 8,569
--------- --------- ---------
Total............................................................................ $ 37,786 $ 34,356 $ 29,156
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table summarizes the significant differences between the U.S.
Federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax Expense at Statutory Rate.................................................... $ 31,591 $ 28,686 $ 24,349
State and Local Income Taxes, net of Federal Tax Benefit......................... 6,053 5,355 4,563
Other............................................................................ 142 315 244
--------- --------- ---------
Total Taxes...................................................................... $ 37,786 $ 34,356 $ 29,156
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-51
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 6. INCOME TAXES (CONTINUED)
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Postretirement Benefits................................................................. $ 4,428 $ 3,177
Bad Debts............................................................................... 1,735 1,743
Other................................................................................... 151 285
---------- ----------
6,314 5,205
Deferred Tax Liabilities:
Computer Software and Intangibles....................................................... (25,524) (20,498)
Unbilled Revenue........................................................................ (3,952) (2,858)
Postretirement Benefits................................................................. (3,418) (3,064)
Depreciation............................................................................ (5,879) (6,136)
Other................................................................................... (477) 0
---------- ----------
(39,250) (32,556)
---------- ----------
Net Deferred Tax Liability.............................................................. $ (32,936) $ (27,351)
---------- ----------
---------- ----------
</TABLE>
NOTE 7. LEASE COMMITMENTS
Certain of the Company's operations are conducted from leased facilities
under operating leases. Rental expense under real estate operating leases for
the years 1997, 1996 and 1995 was $8,866, $8,842, and $8,938, respectively. The
approximate minimum annual rental expense for real estate operating leases that
have remaining noncancelable lease terms in excess of one year, net of sublease
rentals, at December 31, 1997 was: 1998 -- $7,787; 1999 -- $6,816; 2000 --
$6,621; 2001 -- $4,141; 2002 -- $1,505 and an aggregate of $4,848 thereafter.
The Company also leases or participates in leases of certain computer and
other equipment under operating leases. These leases are frequently renegotiated
or otherwise changed as advancements in computer technology produce
opportunities to lower costs and improve performance. Rental expense under
computer and other equipment leases was $2,045, $1,932, and $2,599 for 1997,
1996 and 1995, respectively. At December 31, 1997, the minimum annual rental
expense for computer and other equipment under operating leases that have
remaining noncancelable lease terms in excess of one year was: 1998 -- $1,333;
1999 -- $863; 2000 -- $479 and 2001 -- $6.
Prior to the Cognizant Distribution Date, the Company will assume certain
Cognizant leases or enter into sublease agreements with IMS HEALTH, an affiliate
or third parties for certain leased facilities, computer and other equipment,
which principally are a continuation of existing lease commitments at market
rates. These commitments are included in the amounts disclosed above.
NOTE 8. OTHER TRANSACTIONS WITH AFFILIATES
Cognizant and D&B (pre-D&B Distribution) have used a centralized cash
management system to finance their operations. Cash deposits from most of the
Company's businesses are transferred to Cognizant and were transferred to D&B
(pre-D&B Distribution) on a daily basis. Cognizant and D&B (pre-D&B
Distribution) funded the Company's disbursement bank accounts as required. No
interest has
F-52
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 8. OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
been charged on these transactions. Cash and cash equivalents in the
accompanying consolidated financial statements represent remaining balances in
the Company's accounts.
Cognizant and D&B provided certain centralized services (see Note 1 to the
Consolidated Financial Statements) to the Company. Expenses related to these
services were allocated to the Company based on utilization of specific services
or, where not estimable, based on revenue of the Company in proportion to
Cognizant's and D&B's consolidated revenue. Management believes these allocation
methods are reasonable. These allocations were $34,146, $34,676 and $30,353 in
1997, 1996 and 1995, respectively, and are included in operating costs and
selling and administrative expenses in the Consolidated Statements of Income.
Amounts due to Cognizant and D&B for these allocated expenses are included in
Divisional Equity.
Net transfers to or from Cognizant and D&B, included in Divisional Equity,
include advances and loans from affiliates, net cash transfers to or from
Cognizant and D&B, third-party liabilities paid on behalf of the Company by
Cognizant and D&B, amounts due to or from Cognizant and D&B for services and
other charges, and income taxes paid on behalf of the Company by Cognizant and
D&B during the Respective Periods. No interest has been charged on these
transactions. The weighted average balance due from Cognizant and D&B was
$334,329, $342,319 and $275,471 for 1997, 1996 and 1995, respectively.
The activity in the net transfers to Cognizant and D&B account for the
periods through the respective Distribution Dates included in Divisional Equity
in the Consolidated Statements of Divisional Equity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cognizant/D&B Services and Other Charges.............................. $ (37,738) $ (38,870) $ (35,090)
Loans and Advances--Net............................................... 12,151 (28,980) (6,683)
U.S. Income Taxes..................................................... (23,600) (16,735) (23,984)
Cash Transfers--Net................................................... 100,294 103,654 124,512
------------ ------------ ------------
Net Transfers to Cognizant/D&B........................................ $ 51,107 $ 19,069 $ 58,755
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
For purposes of governing certain of the ongoing relationships between the
Company and IMS HEALTH after the Cognizant Distribution and to provide for an
orderly transition, the Company and IMS HEALTH will enter into various
agreements including a Distribution Agreement, Tax Allocation Agreement,
Employee Benefits Agreement, Intellectual Property Agreement, Shared Transaction
Services Agreement, Data Services Agreement and Transition Services Agreement.
Among other things, the agreements will set forth principles to be applied in
allocating certain Cognizant Distribution-related costs and specify portions of
contingent liabilities (including certain contingent liabilities arising from
the D&B Distribution) to be shared if certain amounts are exceeded.
NOTE 9. CAPITAL STOCK
Under a Shareholder Rights Plan (the "Rights Plan") adopted by the Cognizant
Board of Directors, each certificate for a share of Cognizant's common stock
also represents one Preferred Share Purchase Right (a ``Right"). In the event a
person or group (an ``Acquiring Person") acquires beneficial ownership
F-53
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 9. CAPITAL STOCK (CONTINUED)
of, or commences or announces an intention to make a tender offer for more than
15% of the outstanding shares of common stock, each Right entitles the holder to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock at $210 per each one one-thousandth of a share (the ``Purchase
Price"). In the event a person or group becomes an Acquiring Person, or
Cognizant is acquired in a merger or other business combination or 50% or more
of its assets or earning power are sold, each holder of a Right (other than an
Acquiring Person) has the right to receive common stock of Cognizant or the
entity that engaged in such transaction, as applicable, which has a market value
of two times the Purchase Price. The Rights, which do not have voting rights and
are subject to adjustment in certain circumstances, expire on October 23, 2006
and are redeemable by Cognizant at a price of $0.01 per Right under certain
circumstances. The Company intends to continue this Rights Plan.
NOTE 10. LITIGATION
The Company and its subsidiaries are involved in legal proceedings and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings and litigation, if
decided adversely, could have a material adverse effect on quarterly or annual
operating results or cash flows when resolved in a future period. However, in
the opinion of management, these matters will not materially affect the
Company's consolidated financial position.
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, a unit of Cognizant (the "IRI
Action"). The complaint alleges, among other things, various violations of the
antitrust laws and 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 connection with the D&B Distribution, D&B, ACNielsen
Corporation ("ACNielsen") and Cognizant entered into an Indemnity and Joint
Defense Agreement (the "Indemnity and Joint Defense Agreement") pursuant to
which ACNielsen agreed to be responsible for any potential liabilities which may
ultimately be incurred by D&B or Cognizant as a result of such action, up to a
minimum amount to be determined by an independent investment bank if and when
any such liabilities are incurred. The determination of such maximum amount will
be based on ACNielsen's ability to satisfy such liabilities and remain
financially viable, subject to certain assumptions and limitations. However,
Cognizant and D&B agreed that to the extent that ACNielsen is unable to satisfy
any such liabilities in full and remain financially viable, Cognizant and D&B
will each be responsible for 50% of the difference between the amount, if any,
which may be payable as a result of such litigation and the maximum amount which
ACNielsen is then able to pay as determined by such investment bank. Under the
terms of the D&B Distribution Agreement, dated October 28, 1996, among
Cognizant, D&B and ACNielsen (the "1996 Distribution Agreement"), pursuant to
which shares of Cognizant and ACNielsen were distributed to the stockholders of
D&B as a condition to the Cognizant Distribution, Nielsen Media Research and IMS
HEALTH are required to undertake to be jointly and severally liable to D&B and
ACNielsen. However, pursuant to the 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 ongoing legal fees and expenses related
thereto incurred in 1999 or thereafter. IMS HEALTH has 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
F-54
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 10. LITIGATION (CONTINUED)
exceed $125 million. Management is unable to predict at this time the final
outcome of the IRI Action or whether the resolution of such matter could
materially affect Nielsen Media Research's results of operations, cash flows or
financial position.
NOTE 11. SUPPLEMENTAL FINANCIAL DATA
ACCOUNTS RECEIVABLE--NET:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Trade....................................................................................... $ 53,641 $ 46,719
Less: Allowance for Doubtful Accounts....................................................... (3,294) (3,773)
Other....................................................................................... 1,639 1,827
--------- ---------
$ 51,986 $ 44,773
--------- ---------
--------- ---------
</TABLE>
OTHER CURRENT ASSETS:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred Income Taxes.......................................................................... $ 1,458 $ 2,028
Prepaid Expenses............................................................................... 3,093 3,117
--------- ---------
$ 4,551 $ 5,145
--------- ---------
--------- ---------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT--NET, CARRIED AT COST, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Buildings................................................................................. $ 13,413 $ 13,360
Machinery and Equipment................................................................... 134,155 111,372
Less: Accumulated Depreciation............................................................ (98,325) (85,506)
Leasehold Improvements, less: Accumulated Amortization of $2,597 and $1,886............... 4,243 4,059
Land...................................................................................... 1,564 1,025
---------- ----------
$ 55,050 $ 44,310
---------- ----------
---------- ----------
</TABLE>
F-55
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 11. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
COMPUTER SOFTWARE AND INTANGIBLES
<TABLE>
<CAPTION>
COMPUTER
SOFTWARE INTANGIBLES
----------- -----------
<S> <C> <C>
January 1, 1996........................................................................... $ 27,601 $ 12,299
Additions at Cost......................................................................... 14,356 6,266
Amortization.............................................................................. (7,021) (4,599)
Other Deductions and Reclassifications.................................................... 717 (2,280)
----------- -----------
December 31, 1996......................................................................... 35,653 11,686
Additions at Cost......................................................................... 17,121 7,681
Amortization.............................................................................. (9,641) (4,934)
Other Deductions and Reclassifications.................................................... (40) (3,784)
----------- -----------
December 31, 1997......................................................................... $ 43,093 $ 10,649
----------- -----------
----------- -----------
</TABLE>
Accumulated Amortization of Computer Software was $32,605 and $23,019 at
December 31, 1997 and 1996, respectively.
Accumulated Amortization of Intangibles was $22,773 and $34,309 at December
31, 1997 and 1996, respectively.
OTHER ASSETS:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Unbilled Receivables........................................................................ $ 12,566 $ 15,547
Pension Assets.............................................................................. 8,546 7,660
--------- ---------
$ 21,112 $ 23,207
--------- ---------
--------- ---------
</TABLE>
ACCOUNTS PAYABLE:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Trade........................................................................................ $ 11,714 $ 5,003
Taxes Other Than Income Taxes................................................................ 2,641 1,873
--------- ---------
$ 14,355 $ 6,876
--------- ---------
--------- ---------
</TABLE>
ACCRUED AND OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Salaries, Wages, Bonuses and Other Compensation............................................. $ 13,386 $ 4,820
Other....................................................................................... 10,243 15,578
--------- ---------
$ 23,629 $ 20,398
--------- ---------
--------- ---------
</TABLE>
F-56
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
SEPTEMBER DECEMBER
MARCH 31, JUNE 30, 30, 31, FULL YEAR
----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1997
OPERATING REVENUE...................... $ 86,271 $ 87,184 $ 89,911 $ 95,228 $ 358,594
OPERATING INCOME....................... $ 21,910 $ 22,980 $ 24,267 $ 21,104 $ 90,261
NET INCOME............................. $ 12,730 $ 13,351 $ 14,099 $ 12,295 $ 52,475
BASIC EARNINGS PER SHARE OF
COMMON STOCK......................... $ 0.07 $ 0.08 $ 0.09 $ 0.08 $ 0.32
DILUTED EARNINGS PER SHARE OF
COMMON STOCK......................... $ 0.07 $ 0.08 $ 0.09 $ 0.08 $ 0.32
1996
Operating Revenue...................... $ 76,821 $ 78,194 $ 79,823 $ 84,566 $ 319,404
Operating Income....................... $ 19,164 $ 20,246 $ 21,322 $ 21,229 $ 81,961
Net Income............................. $ 11,134 $ 11,763 $ 12,387 $ 12,321 $ 47,605
Basic Earnings Per Share of Common
Stock................................ $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
Diluted Earnings Per Share of Common
Stock................................ $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
</TABLE>
NOTE 13. INVESTMENTS (UNAUDITED)
In the first quarter of 1998, the Company realized a gain of $3,185 (which
is included in the caption "Other Income" for the three months ended March 31,
1998) on the sale of an investment in Aspect Development, Inc. The proceeds on
the sale were $3,339.
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of Nielsen Media Research, Inc.
Our report on the consolidated financial statements of Nielsen Media Research,
Inc. as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, is included in this Form 10 on page F-39 of the
Information Statement. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule set
forth on page F-59 of this Form 10.
In our opinion, the financial statement schedule referred to above when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
March 30, 1998
F-58
<PAGE>
NIELSEN MEDIA RESEARCH, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- - ----------------------------------------------------- ----------- ----------- ----------- -----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- - ----------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the Year Ended December 31, 1997............... $ 3,773 $ 328 $ 807 $ 3,294
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
For the Year Ended December 31, 1996............... $ 3,311 $ 900 $ 438 $ 3,773
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
For the Year Ended December 31, 1995............... $ 2,644 $ 664 $ (3) $ 3,311
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Gartner Group, Inc.:
We have audited the accompanying consolidated balance sheets of Gartner
Group, Inc. and its subsidiaries as of September 30, 1997 and 1996 and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The consolidated financial statements of Gartner Group, Inc. and its
subsidiaries for the year ended September 30, 1995 were audited by other
auditors whose report, dated November 1, 1995, except as to the Dataquest
acquisition discussed in Note 3, which is as of January 25, 1996 and the stock
split discussed in Note 10, which is as of March 29, 1996, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Gartner Group, Inc. and its subsidiaries as of September 30, 1997 and 1996 and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Stamford, Connecticut
October 31, 1997
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GARTNER GROUP, INC.:
In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows for the year ended September 30, 1995
present fairly, in all material respects, the results of operations and cash
flows of Gartner Group, Inc. and its subsidiaries, for the year ended September
30, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Gartner
Group, Inc. for any period subsequent to September 30, 1995.
PRICE WATERHOUSE LLP
Stamford, Connecticut
November 1, 1995, except as to the Dataquest
acquisition discussed in Note 3, which is as of
January 25, 1996 and the stock split discussed
in Note 10, which is as of March 29, 1996
F-61
<PAGE>
GARTNER GROUP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 142,415 $ 96,755
Marketable securities................................................................... 28,639 30,054
Fees receivable, net of allowances of $5,340 and $4,460................................. 205,760 143,762
Deferred commissions.................................................................... 23,019 17,539
Prepaid expenses and other current assets............................................... 25,775 22,040
---------- ----------
Total current assets.................................................................. 425,608 310,150
Long-term marketable securities......................................................... 17,691 3,047
Property, equipment and leasehold improvements, net..................................... 44,102 32,818
Intangible assets, net.................................................................. 132,195 93,144
Other assets............................................................................ 25,716 4,949
---------- ----------
Total assets.......................................................................... $ 645,312 $ 444,108
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................................................ $ 85,411 $ 60,527
Commissions payable..................................................................... 16,979 15,148
Accrued bonuses payable................................................................. 15,722 16,781
Deferred revenues....................................................................... 254,071 198,952
---------- ----------
Total current liabilities............................................................. 372,183 291,408
---------- ----------
Long-term deferred revenues............................................................. 3,259 2,465
Commitments and contingencies
Stockholders' equity:
Preferred stock:
$.01 par value, authorized 2,500,000 shares; none issued or outstanding............... -- --
Common stock:
$.0005 par value, authorized 200,000,000 shares of Class A Common Stock and 1,600,000
shares of Class B Common Stock; issued 108,334,601 shares of Class A Common
(102,697,739 in 1996) and 0 shares of Class B Common Stock (1,600,000 in 1996)........ 54 52
Additional paid-in capital.............................................................. 179,017 134,711
Cumulative translation adjustment....................................................... (1,098) (2,965)
Accumulated earnings.................................................................... 105,138 32,008
Treasury stock, at cost, 11,624,805 and 11,370,594 shares............................... (13,241) (13,571)
---------- ----------
Total stockholders' equity............................................................ 269,870 150,235
---------- ----------
Total liabilities and stockholders' equity............................................ $ 645,312 $ 444,108
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
F-62
<PAGE>
GARTNER GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
REVENUES:
Advisory and measurement................................................... $ 396,219 $ 306,542 $ 235,867
Learning................................................................... 21,314 12,219 1,301
Other, principally consulting and conferences.............................. 93,706 75,911 57,978
---------- ---------- ----------
Total revenues........................................................... 511,239 394,672 295,146
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of services and product development................................... 202,815 152,982 112,675
Selling, general and administrative........................................ 173,610 144,473 119,626
Acquisition-related charges................................................ -- 34,898 --
Depreciation............................................................... 11,758 9,064 6,399
Amortization of intangibles................................................ 6,443 3,815 3,906
Nonrecurring charges....................................................... -- -- 8,800
---------- ---------- ----------
Total costs and expenses................................................. 394,626 345,232 251,406
---------- ---------- ----------
Operating income............................................................. 116,613 49,440 43,740
Minority interest............................................................ -- 25 98
Interest income, net......................................................... 7,260 3,665 2,271
---------- ---------- ----------
Income before provision for income taxes..................................... 123,873 53,130 46,109
Provision for income taxes................................................... 50,743 36,692 20,948
---------- ---------- ----------
Net income............................................................... $ 73,130 $ 16,438 $ 25,161
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER COMMON SHARE:
Primary.................................................................... $ .71 $ .17 $ .27
---------- ---------- ----------
---------- ---------- ----------
Fully diluted.............................................................. $ .71 $ .17 $ .26
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary.................................................................... 102,459 98,612 94,762
---------- ---------- ----------
---------- ---------- ----------
Fully diluted.............................................................. 102,751 98,854 95,212
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements
F-63
<PAGE>
GARTNER GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
PREFERRED COMMON PAID-IN TRANSLATION ACCUMULATED TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
----------- ----------- ----------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at September 30, 1994......... $ 0 $ 50 $ 59,709 $ 250 $ 7,699 $ (13,821) $ 53,887
Net income............................ -- -- -- -- 25,161 -- 25,161
Issuance of 1,838,902 shares of Class
A Common Stock upon exercise of
stock options....................... -- 1 1,259 -- -- -- 1,260
Issuance of 345,644 shares of Class A
Common Stock from purchases by
employees........................... -- 0 1,659 -- -- -- 1,659
Issuance from treasury stock of
172,594 shares of Class A Common
Stock............................... -- -- 1,410 -- -- 3 1,413
Purchase of 152,624 of Class A Common
Stock............................... -- -- -- -- -- (17) (17)
Tax benefits of stock transactions
with employees...................... -- -- 9,241 -- -- -- 9,241
Net transfers to D&B by Dataquest..... -- -- -- -- (15,603) -- (15,603)
Cumulative translation adjustment..... -- -- -- (2,750) -- -- (2,750)
----------- ----------- ----------- ----------- ------------ --------- ------------
Balance at September 30, 1995......... 0 51 73,278 (2,500) 17,257 (13,835) 74,251
Net income............................ -- -- -- -- 16,438 -- 16,438
Issuance of 3,036,403 shares of Class
A Common Stock upon exercise of
stock options....................... -- 1 5,752 -- -- -- 5,753
Issuance of 199,648 shares of Class A
Common Stock from purchases by
employees........................... -- 0 2,407 -- -- -- 2,407
Issuance from treasury stock of
117,470 shares of Class A Common
Stock from purchases by employees... -- -- 2,140 -- -- 264 2,404
Tax benefits of stock transactions
with employees...................... -- -- 29,415 -- -- -- 29,415
Net transfers to D&B by Dataquest..... -- -- -- -- (1,687) -- (1,687)
Cumulative translation adjustment..... -- -- -- (465) -- -- (465)
Acquisition of Dataquest, Inc......... -- -- (15,000) -- -- -- (15,000)
Acquisition of J3 Learning, Inc....... -- 0 36,719 -- -- -- 36,719
----------- ----------- ----------- ----------- ------------ --------- ------------
Balance at September 30, 1996......... 0 52 134,711 (2,965) 32,008 (13,571) 150,235
Net income............................ -- -- -- -- 73,130 -- 73,130
Issuance of 4,036,862 shares of Class
A Common Stock upon exercise of
stock options....................... -- 2 13,594 -- -- -- 13,596
Issuance from treasury stock of
195,721 shares of Class A Common
Stock from purchases by employees... -- -- 5,883 -- -- 330 6,213
Conversion of 1,600,000 shares of
Class B Common Stock into Class A
Common Stock........................ -- 0 -- -- -- -- 0
Tax benefits of stock transactions
with employees...................... -- -- 36,833 -- -- -- 36,833
Net share settlement of 449,932 shares
of Class A Common Stock received on
forward purchase agreement.......... -- -- -- -- -- 0 0
Net cash settlement paid on forward
purchase agreement.................. -- -- (12,004) -- -- -- (12,004)
Cumulative translation adjustment..... -- -- -- 1,867 -- -- 1,867
----------- ----------- ----------- ----------- ------------ --------- ------------
Balance at September 30, 1997......... $ 0 $ 54 $ 179,017 $ (1,098) $ 105,138 $ (13,241) $ 269,870
----------- ----------- ----------- ----------- ------------ --------- ------------
----------- ----------- ----------- ----------- ------------ --------- ------------
</TABLE>
See notes to consolidated financial statements
F-64
<PAGE>
GARTNER GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................................................... $ 73,130 $ 16,438 $ 25,161
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of intangibles.................................... 18,201 12,879 9,703
Acquisition-related charges..................................................... -- 34,898 --
Provision for doubtful accounts................................................. 3,421 3,295 1,862
Equity in losses of minority owned company...................................... 202 -- --
Deferred revenues............................................................... 41,750 35,800 25,479
Deferred tax expense (benefit).................................................. 1,554 (1,394) (2,690)
Pre-acquisition tax benefit applied to reduce goodwill.......................... 275 517 1,257
Minority interest............................................................... -- (25) (98)
Provision for nonrecurring charges.............................................. -- -- 8,800
Payments for nonrecurring charges............................................... (724) (7,691) (408)
Changes in assets and liabilities, net of effects of acquisitions:
Increase in fees receivable..................................................... (60,378) (31,779) (10,136)
Increase in deferred commissions................................................ (4,262) (1,154) (4,216)
Increase in prepaid expenses and other current assets........................... (7,915) (1,995) (1,138)
(Increase) decrease in other assets............................................. (2,707) 116 (242)
Increase in accounts payable and accrued liabilities............................ 23,782 2,277 10,001
Increase in commissions payable................................................. 1,785 2,160 1,248
(Decrease) increase in accrued bonuses payable.................................. (957) 1,347 2,383
--------- --------- ---------
Cash provided by operating activities............................................. 87,157 65,689 66,966
--------- --------- ---------
INVESTING ACTIVITIES:
Payment for businesses acquired (excluding cash acquired)....................... (33,306) (46,176) (9,749)
Investments in unconsolidated subsidiaries...................................... (9,089) (750) (180)
Addition of property, equipment and leasehold improvements...................... (21,513) (15,614) (18,183)
Proceeds from disposal of property, equipment and leasehold improvements........ -- -- 11,826
Marketable securities purchased, net............................................ (13,229) (4,268) (24,783)
Loans to Officers............................................................... (7,163) -- --
Other investing................................................................. -- -- (341)
--------- --------- ---------
Cash used for investing activities................................................ (84,300) (66,808) (41,410)
--------- --------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations.............. -- (6,725) (5,825)
Issuance of common stock and warrants........................................... 13,596 5,753 1,260
Proceeds from Employee Stock Purchase Plan offering............................. 5,883 4,547 3,069
Tax benefits of stock transactions with employees............................... 36,833 29,415 9,241
Distributions of capital between Dataquest and its former parent................ -- (1,687) (15,731)
Net cash settlement on forward purchase agreement............................... (12,004) -- --
Sale (purchase) of treasury stock............................................... 330 264 (14)
--------- --------- ---------
Cash provided by (used for) financing activities.................................. 44,638 31,567 (8,000)
--------- --------- ---------
Net increase in cash and cash equivalents......................................... 47,495 30,448 17,556
Effect of exchange rates on cash and cash equivalents............................. (1,835) (274) 220
Cash and cash equivalents, beginning of period.................................... 96,755 66,581 48,805
--------- --------- ---------
Cash and cash equivalents, end of period.......................................... $ 142,415 $ 96,755 $ 66,581
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................................ -- $ 437 $ 225
Income taxes.................................................................... $ 6,597 $ 8,463 $ 7,265
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock and options issued in connection with J3 acquisition...................... -- $ 36,719 --
</TABLE>
See notes to consolidated financial statements
F-65
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Gartner Group, Inc. ("GGI" or the "Company") and its
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. Minority interest represents the minority
shareholder's proportionate share of the equity in businesses owned less than
100%. The results of operations for acquisitions of companies accounted for
using the purchase method have been included in the Consolidated Statements of
Operations beginning on the effective date of acquisition. The Company's
investments in 20% to 50% owned companies in which it has the ability to
exercise significant influence over operating and financial policies are
accounted for on the equity method. Investments of less than 20% are carried at
cost.
REVENUE AND COMMISSION EXPENSE RECOGNITION. Revenues from advisory,
measurement and learning ("AML") contracts are recognized as services and
products are delivered, and as the Company's obligation to the client is
completed over the contract period, generally twelve months. The Company's
policy is to record at the time of signing of an AML contract the fees
receivable and related deferred revenues, for the full amount of the contract
billable on that date. All such contracts are non-cancelable and non-refundable,
except for government contracts which have a 30-day cancellation clause, but
have not produced material cancellations to date. All contracts are billable
upon signing, absent special terms granted on a limited basis from time to time.
The Company also records the related commission obligation upon the signing of
the contract and amortizes the corresponding deferred commission expense over
the contract period in which the related revenues are earned and amortized to
income. Other revenues consist principally of revenues recognized as earned from
consulting services and conferences.
CASH EQUIVALENTS AND MARKETABLE SECURITIES. Marketable securities that
mature within three months of purchase are considered cash equivalents.
Investments with maturities of more than three months are classified as
marketable securities. Marketable securities are considered "held-to-maturity"
and valued at amortized cost, which approximates market. It is management's
intent to hold all investments to maturity.
INVENTORIES. Inventories, which consist primarily of finished goods
relating to the Company's learning business (technology-based training
products), are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis. Inventories consist primarily of material costs, and
are included in the balance sheet caption "Prepaid and other current assets."
Inventories were $2.1 million and $1.3 million at September 30, 1997 and 1996,
respectively.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Property, equipment and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful lives of the asset or the remaining term of the related leases.
SOFTWARE DEVELOPMENT COSTS. Under Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," capitalization of computer software development
costs is to begin upon the establishment of technological feasibility, limited
to the net realizable value of the software product, and cease when the software
product is available for general release to clients. Until these products reach
technological feasibility, all costs related to development efforts are charged
to expense. Software development costs, subsequent to technological feasibility
and prior to general release, were not material and have been expensed.
F-66
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS. Intangible assets include goodwill, non-compete
agreements, tradenames and other intangibles. Goodwill represents the excess of
the purchase price of acquired businesses over the estimated fair value of the
tangible and identifiable intangible net assets acquired. Amortization is
recorded using the straight-line method over periods ranging from seven to
thirty years. These amounts have been and are subject to adjustment in
accordance with the provisions of the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109") (see Note 9. Income
Taxes). Non-compete agreements are being amortized on a straight-line basis over
the period of the agreement ranging from three to five years. Tradenames and
other intangibles are amortized using the straight-line method over their
estimated useful lives ranging from four to thirty years. At the end of each
quarter, the Company reviews the recoverability of all intangibles based on
estimated undiscounted future cash flows from operating activities compared with
the carrying value of the intangible asset. Should the aggregate of such future
cash flows be less than the carrying value, a writedown would be required,
measured by the difference between the discounted future cash flows (or another
acceptable method for determining fair value) and the carrying value of the
intangible.
FOREIGN CURRENCY TRANSLATION. All assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at fiscal year-end exchange rates.
Income and expense items are translated at average exchange rates prevailing
during the fiscal year. The resulting translation adjustments are recorded as a
component of stockholders' equity.
INCOME TAXES. Income taxes are provided using the asset and liability
method in accordance with FAS 109. Deferred tax assets and liabilities are
recognized based on differences between the book and tax bases of assets and
liabilities using presently enacted tax rates. The provision for income taxes is
the sum of the amount of income tax paid or payable for the year as determined
by applying the provisions of enacted tax laws to taxable income for that year
and the net changes during the year in the Company's deferred tax assets and
liabilities.
Undistributed earnings of subsidiaries outside of the U.S. amounted to
approximately $4.2 million and will either be indefinitely reinvested or
remitted substantially free of tax. Accordingly, no material provision has been
made for taxes that may be payable upon remittance of such earnings, nor is it
practicable to determine the amount of this liability. The Company credits
Additional paid-in capital for realized tax benefits arising from stock
transactions with employees. The tax benefit on a non-qualified stock option is
equal to the tax effect of the difference between the market price of a share of
the Company's common stock on the exercise and grant dates. To the extent the
Company incurs employment taxes as a direct result of the exercise of such stock
options, this cost is charged to Additional paid-in capital.
COMPUTATIONS OF NET INCOME PER SHARE OF COMMON STOCK. Primary and fully
diluted net income per share of common stock is computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. The computation includes the weighted
average number of shares issued in connection with the Dataquest, Inc.
("Dataquest") acquisition (see Note 3. Acquisitions), on December 1, 1995, as if
they had been issued at the beginning of fiscal 1996 and fiscal 1995. The
warrant issued in connection with the Dataquest acquisition has been excluded
from primary and fully diluted weighted average shares outstanding for fiscal
1995 due to its anti-dilutive effect.
F-67
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION. In October 1995, Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS
123") was issued. This statement defines a fair value based method of accounting
for an employee stock option. Companies may, however, elect to adopt this new
accounting rule through a pro forma disclosure option, while continuing to use
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." As permitted by FAS 123, the Company has adopted the disclosure
provisions and continues accounting for its employee stock compensation plans
under APB 25 (see Note 12 for the fair value disclosures required under FAS
123).
RECENTLY ISSUED ACCOUNTING STANDARDS. In February 1997, Statement of
Financial Accounting Standard No. 128, "Earnings per Share", was issued. The
statement sets forth guidance on the presentation of earnings per share and
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if all common stock equivalents were
exercised (similar to fully diluted earnings per share under APB Opinion No.
15). If the new standard was in effect during fiscal 1997, basic net income per
common share for the fiscal year ended September 30, 1997 would have been $0.77
and diluted net income per common share would have been $0.71. The Company is
required to adopt the new standard in the first quarter of fiscal 1998.
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income ("FAS 130") and "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), were issued. FAS 130
establishes standards for reporting and disclosure of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders which is currently not required. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is required to adopt both new standards in the first
quarter of fiscal 1999.
EXPENSE ALLOCATIONS. Prior to the Company's acquisition of Dataquest,
Dataquest was a wholly-owned subsidiary of The Dun and Bradstreet Corporation
("D&B"). D&B provided certain services to and incurred certain costs on behalf
of its wholly-owned subsidiaries and divisions. These costs, which included
employee benefit and executive compensation programs, payroll processing and
administration, general treasury services and various business insurance
coverages, were allocated on a pro rata basis to Dataquest when it was a
wholly-owned subsidiary of D&B and were $0.3 and $1.9 million during the fiscal
years 1996 and 1995, respectively. The costs of D&B's general corporate
overheads were not allocated, as such costs related to Dataquest were deemed to
be immaterial.
DISTRIBUTIONS OF CAPITAL BETWEEN DATAQUEST AND ITS FORMER PARENT. Dataquest
transfers to D&B included historical investments and advances from D&B, as well
as current period income or losses, net transfers to/ from D&B, and current
income taxes payable or receivable.
F-68
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS. Most of the Company's financial
instruments, including cash, marketable securities, trade receivables and
payables and accruals, are short-term in nature. Accordingly, the carrying
amount of the Company's financial instruments approximates its fair value.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash,
marketable securities and fees receivable. The Company invests its cash
primarily in a diversified portfolio of highly-rated municipal and government
bonds. Concentrations of credit risk with respect to fees receivables are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across many different industries and geographic
regions.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosures, if any, of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS. Certain reclassifications have been made in the prior
years financial statements to conform with the fiscal 1997 presentation.
2. RELATED PARTIES
D&B, an investor in Information Partners Capital Fund, L.P. ("the Fund"),
provided a portion of the financing in connection with the acquisition of the
Company in October 1990. In April 1993, D&B acquired a majority of the
outstanding voting securities of the Company in transactions among the Company,
D&B and persons and entities associated with the Fund. On November 1, 1996, D&B
transferred ownership of its Class A and Class B Common Stock of the Company to
Cognizant Corporation ("Cognizant"), a spin-off of D&B and an independent public
company. At the date of transfer, these shares represented approximately 51% of
the Company's outstanding common stock. During fiscal 1997, Cognizant's
ownership of the Company's outstanding common stock fell below 50%.
On June 4, 1997, with the Board of Directors approval, the Company provided
loans totaling $7.2 million to certain Officers to facilitate the purchase of
common stock arising out of the exercise of stock options. The loan proceeds
were not used to fund the option exercise price of the common stock acquired.
The loans are full recourse obligations to the Officers and are also secured by
shares of the Company's common stock held by the Officers. The loans bear
interest at an annual rate of 6.14% and mature on June 3, 1999. The principal
amount of the loans totaling $7.2 million are included in Other assets on the
September 30, 1997 Consolidated Balance Sheet.
3. ACQUISITIONS
On December 1, 1995, the Company acquired all the outstanding shares of
Dataquest, a wholly-owned subsidiary of D&B, for consideration of $15.0 million
in cash, 3,000,000 shares of Class A Common Stock with an approximate fair
market value of $60.0 million, and a five year warrant to purchase 600,000
shares of Class A Common Stock at $16.42 per share. Dataquest is a provider of
information technology ("IT") market research and consulting for the IT vendor
manufacturer and financial communities which complements the Company's end user
focus. The Company has accounted for the acquisition as a transfer and
F-69
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
exchange between companies under common control and the 3,000,000 shares have
been assumed to be outstanding for all periods presented. Accordingly, the
accounts of Dataquest have been combined with the Company's at historical cost
in a manner similar to a pooling of interests. Transaction costs of $1.7 million
relating to the acquisition have been included in acquisition-related charges in
the Consolidated Statement of Operations for fiscal 1996.
Combined and separate results of GGI and Dataquest during the periods
preceding the merger were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1995
-----------------------------------
<S> <C> <C> <C>
GGI DATAQUEST COMBINED
---------- ----------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Total revenues................................................................ $ 76,005 $ 20,469 $ 96,474
Net income.................................................................... $ 10,570 $ 923 $ 11,493
---------- ----------- ----------
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1995
-----------------------------------
GGI
----------
DATAQUEST COMBINED
---------- -----------
<S> <C> <C> <C>
Total revenues................................................................ $ 229,152 $ 65,994 $ 295,146
Net income (loss)............................................................. $ 25,539 $ (378) $ 25,161
</TABLE>
There were no intercompany transactions between the two companies for the
periods presented.
On July 31, 1996, the Company acquired all of the outstanding shares of J3
Learning Corporation ("J3") for consideration of approximately $8.0 million in
cash, 1,065,290 shares of Class A Common Stock which had an approximate fair
market value of $35.4 million and options to purchase Class A Common Stock which
had a value of $1.3 million. J3 publishes, markets and distributes software
educational materials for corporate and individual training. The acquisition was
accounted for by the purchase method, and the purchase price has been allocated
to the assets acquired and liabilities assumed, based upon the estimated fair
values at the date of acquisition. The excess purchase price over the fair value
of amounts assigned to the net tangible assets acquired was $51.1 million. Of
such amount, $32.2 million was expensed at acquisition as purchased in-process
research and development costs and is included in acquisition-related charges in
the Consolidated Statement of Operations for fiscal 1996, and the remaining
excess purchase price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
(YEARS) AMOUNT
------------- ---------
<S> <C> <C>
Existing title library.................................................................. 4 $ 1,900
Tradename............................................................................... 12 4,200
Goodwill................................................................................ 12 12,787
---------
$ 18,887
---------
---------
</TABLE>
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the acquisition of J3 had occurred at the
beginning of fiscal 1995 and does not purport to be
F-70
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
indicative of what would have occurred had the acquisition been made as of that
date or of results which may occur in the future (in thousands, except per share
data):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Total revenues............................................................................ $ 401,329 $ 310,150
Net income................................................................................ $ 11,749 $ 16,360
Net income per common share............................................................... $ 0.12 $ 0.17
</TABLE>
On August 1, 1997, the Company acquired all of the outstanding shares of
Datapro Information Services, Inc. ("Datapro"), a unit of the McGraw-Hill
Companies for consideration of approximately $25 million in cash. Datapro is a
provider of information on product specifications and pricing, product
comparisons, technology reports, market overviews, case studies and user ratings
surveys. Datapro's services and products provide feature and side-by-side
comparisons of computer hardware, software and communications products. The
acquisition was accounted for by the purchase method, and the purchase price has
been allocated to the assets acquired and liabilities assumed, based upon the
estimated fair values at the date of acquisition. The excess purchase price over
the fair value of amounts assigned to the net tangible assets acquired was $33.5
million and has been recorded as goodwill which is being amortized over 30
years. In addition, $2.5 million of the purchase price was allocated to a
non-compete agreement which is being amortized over 4 years. If the acquisition
of Datapro had occurred at the beginning of fiscal 1996, consolidated total
revenues would have been $536.6 million and $431.4 for fiscal 1997 and 1996,
respectively. This revenue does not purport to be indicative of what would have
occurred had the acquisition been made as of that date or of total revenues
which may occur in the future. The pro forma effect on the Company's fiscal 1997
and 1996 net income and net income per common share is not material.
During fiscal 1997 and 1996, the Company completed additional acquisitions
for consideration of $8.1 and $23.2 million in cash, respectively. These
acquisitions have been accounted for under the purchase method and substantially
all of the purchase price has been assigned to goodwill. The results of these
acquired operations individually and collectively, had they occurred at the
beginning of fiscal 1997, 1996 or 1995 are not material.
During fiscal 1997 and 1996 the Company made several investments totaling
$7.1 million and $0.9 million, respectively, that are accounted for on the cost
method. The Company also made an investment totaling $1.9 million in 1997 that
is accounted for on the equity method. These investments totaled $9.4 million
and $0.9 million and are included in Other assets on the Consolidated Balance
Sheets as of September 30, 1997 and 1996, respectively.
In October 1997, the Company acquired a 32% membership interest in Jupiter
Communications, LLC ("Jupiter") for $8.0 million in cash. Jupiter is a provider
of analyst-based research and strategic planning services to the consumer
Internet and interactive industry.
F-71
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NONRECURRING CHARGES
During fiscal 1995, Dataquest closed certain operations of its subsidiary in
Japan for a $0.6 million pre-tax charge, and initiated workforce reduction
actions resulting in a pre-tax charge of $8.2 million. These charges were
recorded as a nonrecurring charge in the Consolidated Statement of Operations.
5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, are carried at cost less
accumulated depreciation and amortization, and consist of the following (in
thousands):
<TABLE>
<CAPTION>
USEFUL SEPTEMBER 30,
LIFE --------------------
(YEARS) 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Furniture and equipment........................................................ 3-8 $ 25,568 $ 19,801
Computer equipment............................................................. 2-3 56,979 34,843
Leasehold improvements......................................................... 2-15 19,257 14,293
--------- ---------
101,804 68,937
Less--accumulated depreciation and amortization................................ (57,702) (36,119)
--------- ---------
$ 44,102 $ 32,818
--------- ---------
--------- ---------
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets, net, are carried at cost less accumulated amortization,
and consist of the following (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION SEPTEMBER 30,
PERIOD ---------------------
(YEARS) 1997 1996
------------- ---------- ---------
<S> <C> <C> <C>
Goodwill.................................................................... 7-30 $ 138,537 $ 97,535
Non-compete agreements...................................................... 3-5 3,462 --
Tradenames.................................................................. 12 6,978 6,200
Title library............................................................... 4 1,900 1,900
---------- ---------
150,877 105,635
Less--accumulated amortization.............................................. (18,682) (12,491)
---------- ---------
$ 132,195 $ 93,144
---------- ---------
---------- ---------
</TABLE>
7. COMMITMENTS
The Company leases various facilities, furniture and computer equipment
under lease arrangements expiring between fiscal 1998 and 2010.
F-72
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS (CONTINUED)
Future minimum annual payments under operating lease agreements as of
September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
- - -------------------------------------------------------------------------------------------------------
<S> <C>
1998................................................................................................... $ 12,346
1999................................................................................................... 10,326
2000................................................................................................... 9,312
2001................................................................................................... 7,743
2002................................................................................................... 6,220
Thereafter............................................................................................. 52,350
---------
Total minimum lease payments........................................................................... $ 98,297
---------
---------
</TABLE>
Rental expense for operating leases, net of sublease income, was $16.8,
$11.0 and $10.4 million for the fiscal years ended September 30, 1997, 1996 and
1995, respectively. The Company has commitments with two facilities management
companies for printing, copying, mail room and other related services. The
minimum annual obligations under these service agreements are $3.8 million for
fiscal 1998 and 1999, $1.3 million for fiscal 2000, and $0.4 million for fiscal
2001.
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. The Company believes the outcome of all current
proceedings, claims and litigation will not have a material effect on the
Company's financial position or results of operations when resolved in a future
period.
8. LONG-TERM OBLIGATIONS
The Company has available two unsecured credit lines with The Bank of New
York and Chase Manhattan Bank for $5.0 million and $25.0 million, respectively.
Borrowings under The Bank of New York line accrue interest charges at LIBOR plus
2%. Alternatively, the rate shall be the higher of the prime commercial lending
rate of the bank or the Federal Funds Rate plus 1/2 of 1% in the event LIBOR is
unavailable. The Chase Manhattan Bank line carries an interest rate equal to
either the prime rate of Chase Manhattan Bank, LIBOR plus 2.5% for periods of
30, 60 or 90 days as the Company may choose, or a "fixed option" rate. There are
no commitment fees associated with these lines. These lines may be canceled by
the banks at any time without prior notice or penalty. No borrowings were
outstanding under either line at September 30, 1997 and 1996.
Letters of credit are issued by the Company in the ordinary course of
business. The Company had outstanding letters of credit with Chase Manhattan
Bank of $4.0 million and $2.0 million with The Bank of New York at September 30,
1997.
F-73
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
Following is a summary of the components of income before provision for
income taxes (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- --------- ---------
U.S............................................................................. $ 93,758 $ 40,650 $ 38,588
Non-U.S......................................................................... 30,115 12,480 7,521
---------- --------- ---------
Consolidated.................................................................... $ 123,873 $ 53,130 $ 46,109
---------- --------- ---------
---------- --------- ---------
</TABLE>
The provision for income taxes on the above income consists of the following
components (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Current tax expense:
U.S. federal................................................................... $ 797 $ 1,775 $ 9,282
State and local................................................................ 1,872 2,178 2,051
Foreign........................................................................ 8,208 3,164 1,807
--------- --------- ---------
Total current.................................................................... 10,877 7,117 13,140
--------- --------- ---------
Deferred tax expense (benefit):
U.S. federal................................................................... 434 58 (1,967)
State and local................................................................ 912 (1,347) (678)
Foreign........................................................................ 208 (105) (45)
--------- --------- ---------
Total deferred................................................................... 1,554 (1,394) (2,690)
--------- --------- ---------
Total current and deferred....................................................... 12,431 5,723 10,450
--------- --------- ---------
Benefit of stock transactions with employees credited to additional paid-in
capital........................................................................ 38,037 30,452 9,241
Benefit of purchased tax benefits credited to goodwill........................... 275 517 1,257
--------- --------- ---------
Total provision for income taxes................................................. $ 50,743 $ 36,692 $ 20,948
--------- --------- ---------
--------- --------- ---------
</TABLE>
Current and long-term deferred tax assets and liabilities are comprised of
the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Depreciation................................................................................. $ 895 $ 749
Expense accruals for book purposes........................................................... 6,992 8,528
Loss and credit carryforwards................................................................ 9,380 9,698
Other........................................................................................ 1,706 1,767
--------- ---------
Gross deferred tax asset..................................................................... 18,973 20,742
--------- ---------
Intangible assets............................................................................ (3,383) (1,919)
Other........................................................................................ (858) (895)
--------- ---------
Gross deferred tax liability................................................................. (4,241) (2,814)
--------- ---------
Valuation allowance.......................................................................... (4,962) (6,580)
--------- ---------
Net deferred tax asset....................................................................... $ 9,770 $ 11,348
--------- ---------
--------- ---------
</TABLE>
F-74
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Current and long-term net deferred tax assets are $5.1 million and $4.7
million as of September 30, 1997 and $8.8 million and $2.5 million as of
September 30, 1996, respectively, and are included in Prepaid and other current
assets and Other assets, respectively, in the Consolidated Balance Sheets.
The valuation allowance relates to domestic and foreign tax loss
carryforwards. The net decrease in the valuation allowance of approximately $1.6
million in the current year results primarily from the utilization of foreign
tax loss carryforwards. The tax benefit from such tax loss carryforwards was
$1.7, $1.0 and $1.7 million for fiscal years 1997, 1996 and 1995, respectively.
Approximately $1.8 million and $1.4 million of the valuation allowance would
reduce goodwill and additional paid-in capital, respectively, upon subsequent
recognition of any related tax benefits.
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate are:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Statutory tax rate........................................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................................................ 4.5 5.3 5.4
Foreign income taxed at a different rate.................................................. 0.6 1.5 (0.7)
Non-deductible goodwill and direct acquisition costs...................................... 0.9 0.9 2.1
Non-taxable interest income............................................................... (0.9) (1.3) (1.7)
Exempt foreign trading gross receipts..................................................... (1.0) -- --
Other items............................................................................... 1.9 1.6 5.4
--- --- ---
Effective rate without write-off of purchased in-process research and development costs... 41.0 43.0 45.5
Non-deductible write-off of purchased in-process research and development costs........... -- 26.1 --
--- --- ---
Effective tax rate........................................................................ 41.0% 69.1% 45.5%
--- --- ---
--- --- ---
</TABLE>
As of September 30, 1997, the Company had U.S. federal tax loss
carryforwards of $10.0 million which will expire in eleven to fifteen years and
state and local tax loss carryforwards of $35.4 million the majority of which
will expire in four to five years. The U.S. federal tax loss carryforwards are
subject to limitations on their use under the Internal Revenue Code. In
addition, the Company has foreign tax loss carryforwards of $6.6 million, of
which $1.1 million will expire within three to four years, and $5.5 million can
be carried forward indefinitely.
10. CAPITAL STOCK AND STOCK REPURCHASE PROGRAM
The Company effected two-for-one stock splits of its Class A and Class B
Common Stock by means of stock dividends in March 1996, June 1995 and August
1994. All earnings per share and share data presented herein have been restated
retroactively to reflect such splits. As of September 30, 1997, the Company has
recorded the conversion of all Class B Common Stock into Class A Common Stock on
a one for one basis, pursuant to a provision of the Articles of Incorporation
which requires conversion when the Class B Common Stockholder's voting equity
falls below a certain ownership percentage after considering all exercisable
options and warrants outstanding. Class A Common Stock stockholders are entitled
to one vote per share on all matters to be voted by stockholders, other than the
election of directors. Prior to the
F-75
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCK REPURCHASE PROGRAM (CONTINUED)
conversion of the Class B Common Stock, Class B Common stockholders had certain
preferential voting rights with respect to the election of members of the Board
of Directors.
During fiscal 1997, the Company entered into a series of forward purchase
agreements on its common stock. These agreements are settled at the Company's
option on a net basis in either shares of its own common stock or in cash. To
the extent that the market price of the Company's common stock on a settlement
date is higher (lower) than the forward purchase price, the net differential is
received (paid) by the Company. As of September 30, 1997, an agreement in place
cover approximately $36.9 million or 1,350,068 shares of the Company's stock
having forward purchase prices established at $27.31 per share. If the market
priced portion of this agreement was settled based on the September 30, 1997
market price of the Company's common stock ($30.00 per share), the Company would
be entitled to receive approximately 100,081 shares. During fiscal 1997, two
settlements resulted in the Company receiving 449,932 shares of common stock
(recorded in Treasury stock at no cost) and paying approximately $12.0 million
in cash (recorded as a reduction of Additional paid-in capital).
11. EMPLOYEE STOCK PURCHASE PLANS
In January 1993, the Company adopted an employee stock purchase plan (the
"1993 Employee Stock Purchase Plan"), and reserved an aggregate of 4,000,000
shares of Class A Common Stock for issuance under this plan. The plan permits
eligible employees to purchase Class A Common Stock through payroll deductions,
which may not exceed 10% of an employee's compensation (or $21,250 in any
calendar year), at a price equal to 85% of Class A Common Stock price as
reported by NASDAQ at the beginning or end of each offering period, whichever is
lower. During fiscal 1997, 195,721 shares were issued from treasury stock at an
average purchase price of $31.76 per share in connection with this plan. At
September 30, 1997, 2,272,316 shares were available for offering under the plan.
12. STOCK OPTIONS AND WARRANTS
Under the terms of the 1991 Stock Option Plan, (the "Option Plan"), the
Board of Directors may grant non-qualified and incentive stock options,
entitling employees to purchase shares of the Company's common stock at the fair
market value determined by the Board on the date of grant. The Board can
determine the date on which options vest and become exercisable. A total of
22,800,000 shares of Class A Common Stock were reserved for issuance under the
plan. At September 30, 1997 and 1996 2,955,416 and 4,152,381 options were
available for grant, respectively.
In January 1993, the Company adopted a stock option plan for directors (the
"1993 Director Option Plan") and reserved an aggregate of 1,200,000 shares of
Class A Common Stock for issuance under this plan. The plan provided for the
automatic grant of 120,000 options to purchase shares of Class A Common Stock to
each non-employee director upon first becoming a director on or after February
1, 1993, and the automatic grant of an option to purchase an additional 24,000
options to purchase shares of Class A Common Stock annually based on continuous
service as a director. In January 1996, the plan was amended to provide for the
automatic grant of 15,000 options to purchase shares of Class A Common Stock to
each non-employee director upon first becoming a director and the automatic
grant of an option to purchase an additional 3,000 options to purchase shares of
Class A Common Stock annually based on continuous service as a director. The
exercise price of each option granted under the plan is equal to the fair value
of the Class A Common Stock at the date of grant. Options granted are subject to
cumulative yearly vesting over a three year period after the date of grant and
the number of shares to be granted under the amended
F-76
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
terms will not be adjusted for any future stock splits. At September 30, 1997
and 1996, 621,000 and 648,000 options were available for grant, respectively.
In October 1994, the Board of Directors and stockholders of the Company
approved the adoption of a Long-Term Stock Option Plan ("the 1994 Long-Term
Plan") and the reservation of an aggregate of 7,200,000 shares of Class A Common
Stock for issuance thereunder. The purpose of the plan is to provide senior
personnel long-term equity participation in the Company as an incentive to
promote the long-term success of the Company. The exercise price of each option
granted under the plan is equal to the fair value of the Class A Common Stock at
the date of grant. All options granted under the plan vest and become fully
exercisable five years following the date of grant, based on continued
employment, and have a term of ten years from the date of grant assuming
continued employment. Vesting and exercisability accelerates upon achievement of
certain financial performance targets determined by the Board of Directors. If
all financial performance targets are met in accordance with parameters as set
by the Board in its sole discretion, 25% of the shares granted become
exercisable on the first anniversary date following the date of grant and, if
subsequent financial performance targets are met for both the first and second
fiscal years following the date of grant, a second 25% become exercisable three
years following the date of grant. If financial performance targets are met
consecutively for all three fiscal years following the date of grant, a third
25% become exercisable on the fourth anniversary date following the date of
grant and the final 25% become exercisable on the fifth anniversary following
the date of grant. Failure to achieve the specified target or targets for any
one fiscal year or consecutive fiscal years can be remedied by achievement of
the cumulative target in a succeeding fiscal year or years. Based on fiscal year
1995, 1996 and 1997 performance, 1,597,500 options were exercisable on September
30, 1997. An additional 1,543,750 options became exercisable on October 10,
1997. At September 30, 1997 and 1996, 810,000 and 750,000 shares were available
for grant, respectively.
In October 1996, the Company adopted the 1996 Long-Term Stock Option Plan
("the 1996 Long-Term Plan"). Under the terms of the plan, the Board of Directors
may grant non-qualified and incentive options, entitling employees to purchase
shares of the Company's common stock at the fair market value at the date of
option grant. An aggregate of 1,800,000 shares of Class A Common Stock were
reserved for issuance under this plan. All options granted under the plan vest
and become fully exercisable six years following the date of grant, based on
continued employment, and have a term of ten years from the date of grant
assuming continued employment. Vesting and exercisability accelerates upon
achievement of certain financial performance targets determined by the Board of
Directors. If all financial performance targets are met in accordance with
parameters as set by the Board in its sole discretion, 25% of the shares granted
become exercisable on the third anniversary date following the date of grant
and, if subsequent financial performance targets are met for both the first and
second years following the date of grant, a second 25% become exercisable four
years following the date of grant. If financial performance targets are met
consecutively for all three years following the date of grant, a third 25%
become exercisable on the fifth anniversary date following the date of grant and
the final 25% become exercisable on the sixth anniversary following the date of
grant. Based on fiscal year 1997 performance, 451,250 options will be
exercisable on February 24, 2000. At September 30, 1997, 25,000 options to
purchase common stock were available for grant.
On April 4, 1997, the Company repriced certain stock options granted from
October 1995 through January 1997 under the 1991 Option Plan and the 1994
Long-Term Plan. In total, options to purchase 1,647,000 shares of common stock
were repriced at an exercise price of $23.875 per share. The original vesting
schedules and expiration dates associated with these stock options were also
amended to coincide
F-77
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
with the stock option repricing date. These amounts have been included as
granted and canceled options during fiscal 1997 in the summary activity table
shown below.
A summary of stock option activity under the plans and agreement through
September 30, 1997 follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES UNDER AVERAGE
OPTION PRICE
------------ ---------
<S> <C> <C>
Outstanding at September 30, 1994........................................................ 12,806,072 $ 1.540
Granted................................................................................ 8,707,672 $ 7.860
Exercised.............................................................................. (1,838,902) $ 0.811
Canceled............................................................................... (548,688) $ 3.653
------------ ---------
Outstanding at September 30, 1995........................................................ 19,126,154 $ 4.439
Granted................................................................................ 3,665,506 $ 21.943
Exercised.............................................................................. (3,036,403) $ 1.994
Canceled............................................................................... (968,660) $ 9.809
------------ ---------
Outstanding at September 30, 1996........................................................ 18,786,597 $ 6.922
Granted................................................................................ 5,694,814 $ 23.023
Exercised.............................................................................. (4,036,862) $ 3.385
Canceled............................................................................... (2,623,199) $ 26.416
------------ ---------
Outstanding at September 30, 1997........................................................ 17,821,350 $ 11.462
------------ ---------
------------ ---------
</TABLE>
Options for the purchase of 3,492,390 and 4,295,277 shares were exercisable
at September 30, 1997 and 1996, respectively.
Shares purchased under the terms of the plans are subject to repurchase by
the Company at the fair market value of the shares as determined by the Board of
Directors at the repurchase date based on the circumstances as outlined in the
option agreements.
The following table summarizes information about stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
RANGE OF NUMBER NUMBER EXERCISE CONTRACTUAL
EXERCISE PRICES OUTSTANDING EXERCISABLE PRICE LIFE (YEARS)
- - --------------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
$ 0.02--.94 1,299,751 965,191 $ 0.57 1.9
$ 1.13--4.83 2,495,746 1,066,786 $ 2.87 3.3
$ 5.03--9.50 7,130,592 522,312 $ 7.25 6.9
$10.28--13.88... 564,268 342,650 $ 12.27 7.7
$16.63--21.09... 5,059,046 545,796 $ 19.93 9.0
$25.15--35.38... 1,271,947 49,655 $ 28.91 9.5
</TABLE>
A warrant expiring December 1, 2000 to purchase 600,000 shares of Class A
Common Stock at $16.42 per share is held by Cognizant. The warrant was issued in
connection with the acquisition of Dataquest.
The Company has chosen to continue applying APB No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined
F-78
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
based on the fair value at the grant dates under those plans, consistent with
the method prescribed under FAS 123, the Company's net income and net income per
common share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
<S> <C> <C> <C>
1997 1996
--------- ---------
Net income......................................................... As reported $ 73,130 $ 16,438
Pro forma $ 62,497 $ 10,616
Net income per common share........................................ As reported $ 0.71 $ 0.17
Pro forma..... $ 0.61 $ 0.11
</TABLE>
The pro forma disclosures shown above reflect options granted after fiscal
1995 and are not likely to be representative of the effects on net income and
net income per common share in future years.
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share disclosures is the estimated fair value at grant
date using the Black-Scholes option pricing model. The following
weighted-average assumptions were used for stock options granted or modified:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------
<S> <C> <C>
1997 1996
------------ ---------
Expected life (in years)................................................................. 2.4-6.4 2.4-6.4
Expected volatility...................................................................... .40 .38
Risk free interest rate.................................................................. 6.00%-6.09% 6.00%
Expected dividend yield.................................................................. 0.00% 0.00%
</TABLE>
The weighted average fair values of the Company's stock options granted in
1997 and 1996 are $12.32 and $5.56, respectively.
13. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
The Company has a savings and investment plan covering substantially all
domestic employees. The Company contributes amounts to this plan based upon the
level of employee contributions.
In addition, the Company also contributes fixed and discretionary amounts
based on employee participation and attainment of operating margins specified by
the Board. Amounts expensed in connection with the plan totaled $4.6, $3.2, and
$2.0 million for the years ended September 30, 1997, 1996 and 1995,
respectively.
14. GEOGRAPHIC DATA
The Company's consolidated total revenues are generated primarily through
direct sales to clients by domestic and international sales forces, a network of
independent international distributors, and to a lesser extent by international
joint venture partners. The Company defines "Europe Revenues" as revenues
attributable to clients located in England and the European region and "Other
International Revenues" as revenues attributable to all other areas located
outside of the United States.
European identifiable tangible assets consist primarily of the assets of the
European subsidiaries and include the accounts receivable balances carried
directly by the subsidiaries located in England, France and Germany. All other
European customer receivables are maintained by and therefore are included as
identifiable assets of the U.S. operations.
F-79
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. GEOGRAPHIC DATA (CONTINUED)
Summarized information by geographic location is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
United States:
Revenues................................................................... $ 333,038 $ 253,451 $ 184,615
Operating income........................................................... $ 62,884 $ 26,359 $ 33,600
Identifiable tangible assets............................................... $ 407,262 $ 282,201 $ 222,262
Europe:
Revenues................................................................... $ 121,971 $ 98,789 $ 71,946
Operating income........................................................... $ 36,800 $ 15,968 $ 5,330
Identifiable tangible assets............................................... $ 73,974 $ 50,564 $ 36,474
Other International:
Revenues................................................................... $ 56,230 $ 42,432 $ 38,585
Operating income........................................................... $ 16,929 $ 7,113 $ 4,810
Identifiable tangible assets............................................... $ 27,654 $ 18,199 $ 8,481
</TABLE>
Excluding acquisition-related and nonrecurring charges, operating income in
the United States was $61.3, and $41.8 million for the fiscal years ended
September 30, 1996 and 1995, respectively.
F-80
<PAGE>
GARTNER GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SELECTED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS DATA
A summary of Selected Consolidated Balance Sheets and Statements of
Operations data is set forth below (in thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS DATA STATEMENTS OF OPERATIONS DATA
----------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL
GROSS FEES DEFERRED AML OTHER FISCAL YEAR
RECEIVABLE REVENUES REVENUE REVENUES REVENUES
----------- ---------- ---------- --------- -----------
Balance at September 30, 1994........................ $ 105,940 $ 136,911
Billings............................................. 322,169 234,065 $ 36,163 $ 52,211
Acquisition balances................................. 997 243 --
Cash collections..................................... (313,257) -- -- --
AML revenue amortization............................. -- (201,005) 201,005 --
Other service revenue amortization................... -- (5,767) -- 5,767
----------- ---------- ---------- --------- -----------
Balance at September 30, 1995........................ 115,849 164,447 $ 237,168 $ 57,978 $ 295,146
----------- ---------- ---------- --------- -----------
----------- ---------- ---------- --------- -----------
Billings............................................. 420,037 340,476 $ 22,071 $ 67,432
Acquisition balances................................. 3,976 1,663 -- --
Cash collections..................................... (391,640) -- -- --
AML revenue amortization............................. -- (296,690) 296,690 --
Other service revenue amortization................... -- (8,479) -- 8,479
----------- ---------- ---------- --------- -----------
Balance at September 30, 1996........................ 148,222 201,417 $ 318,761 $ 75,911 $ 394,672
----------- ---------- ---------- --------- -----------
----------- ---------- ---------- --------- -----------
Billings............................................. 574,588 452,271 $ 18,160 $ 80,723
Acquisition balances................................. 4,297 15,998 -- --
Cash collections..................................... (516,007) -- -- --
AML revenue amortization............................. -- (399,373) 399,373 --
Other service revenue amortization................... -- (12,983) -- 12,983
----------- ---------- ---------- --------- -----------
Balance at September 30, 1997........................ $ 211,100 $ 257,330 $ 417,533 $ 93,706 $ 511,239
----------- ---------- ---------- --------- -----------
----------- ---------- ---------- --------- -----------
</TABLE>
For a description of the Company's revenue recognition policies, see Note
1--Significant Accounting Policies. AML revenues shown above of $417.5, $318.8,
and $237.2 million for fiscal years 1997, 1996 and 1995, respectively, are
recognized as services and products are delivered, and as the Company's
obligation to the client is completed over the contract period. Included in AML
revenues are catch-up adjustments also shown above for the fiscal years 1997,
1996 and 1995 of $18.2, $22.1, and $36.2 million, respectively, to account for
certain renewals. Catch-up adjustments occur when there is a lag between the
month that a contract expires and the month that it is renewed. The Company
continues to provide services for a certain period of time after expiration,
based on the Company's historical experience that most clients who do not renew
prior to expiration do so on a retroactive basis. The Company recognizes no
revenues, however, during this period. When a client renews the service on a
retroactive basis, the Company records the previously unrecognized revenue as a
catch-up adjustment.
F-81
<PAGE>
EXHIBIT 99.2
, 1998
To all Cognizant Stockholders:
On , 1998, the Board of Directors of Cognizant Corporation
declared a dividend of shares of IMS Health Incorporated to achieve the
reorganization of Cognizant as two separate companies.
If you are a stockholder of Cognizant as of the close of business on
, 1998, the record date for the dividend, certificates representing
shares in IMS HEALTH will be mailed to you automatically. For each share of
Cognizant you hold, you will receive one share of IMS HEALTH.
Stock certificates representing your shares in IMS HEALTH will be sent to
you on or about , 1998. The Cognizant certificates you currently
hold will represent your investment in the "new" Nielsen Media Research, Inc.,
which is the new name for the former Cognizant Corporation.
Shares of IMS HEALTH will trade "regular way" on the New York Stock Exchange
beginning , 1998. The symbol for IMS HEALTH will be "RX" and the
symbol for the "new" Nielsen Media Research will be changed to "NMR".
Detailed information on the reorganization plan and the businesses of IMS
HEALTH and Nielsen Media Research is contained in the accompanying document,
which we urge you to read carefully.
The Board believes the reorganization will enhance management focus on each
business and allow the two companies to pursue opportunities that will improve
their competitive position, enhance their valuation and create wealth for
stockholders.
Sincerely,
Robert E. Weissman
Chairman and Chief Executive Officer
Cognizant Corporation
