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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A-2
CURRENT REPORT
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Date of report (date of earliest event reported): June 30, 1998
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Commission file number : 1-14049
IMS HEALTH INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 06-1506026
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(State of Incorporation) (I.R.S. Employer Identification No.)
200 Nyala Farms, Westport, CT 06880
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (203) 222-4200
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Name of each exchange on which
-------------- Each class is to be registered
Common Stock, ------------------------------
par value $.01 per share New York Stock Exchange
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IMS HEALTH INCORPORATED
INDEX TO FORM 8-K/A-2
PAGE(S)
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ITEM 5. OTHER EVENTS 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: Including Financial Review and Notes 3-43
(c) Exhibits
27. Financial Data Schedule
SIGNATURES 45
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ITEM 5. OTHER EVENTS
On January 15, 1998, Cognizant Corporation ("Cognizant") announced a
plan, subject to certain conditions, to separate into two independent,
publicly traded companies ("the Distribution")--IMS Health Incorporated ("IMS
Health" or "the Company") and Nielsen Media Research, Inc. ("Nielsen Media
Research" or "NMR"). The transaction as contemplated in January 1998, was
subject to numerous conditions, including the receipt of a tax ruling, Board
approval relating to the final terms and other regulatory matters.
Concurrent with the consumation of the transaction, Cognizant will change its
name to Nielsen Media Research, Inc. This document relates to IMS Health,
the entity that will be legally spun by Cognizant. Notwithstanding the legal
form of the distribution, whereby Cognizant will 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 separation creates IMS Health as the premier
global provider of information solutions to the pharmaceutical and healthcare
industries, and establishes an independent Nielsen Media Research, the leader
in electronic audience measurement services. IMS Health consists of IMS
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").
Cognizant has received a favorable ruling from the Internal Revenue
Service with respect to the tax-free treatment of the transaction.
Cognizant's Board of Directors on June 15, 1998 approved the final plan,
terms and conditions relating to the separation of the company including a
distribution tax allocation, employee benefits and other agreements and has
authorized management to execute the plan of distribution. The Board of
Directors declared a dividend to shareholders of record as of the close of
business on June 25, 1998 consisting of one share of IMS Health Common Stock
for each share of Cognizant Common Stock. The Distribution is expected to be
effected on or about June 30, 1998.
Pursuant to Accounting Principles Board ("APB") No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect Nielsen Media Research as discontinued operations.
As a result, IMS Health as successor to Cognizant has reflected herein
reclassified MD&A and the financial statements for the three years ended
December 31, 1995, 1996, and 1997, and for the (unaudited) quarters ended
March 31, 1997 and 1998.
In connection with the Distribution, Cognizant borrowed $300 million on
June 24, 1998, which will be used to repay existing intercompany liabilities.
This debt will be the obligation of NMR after the Distribution. In connection
with the Distribution, 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) to be $300 million as of the date of the
Distribution.
ITEM 7. FINANCIAL STATEMENTS; PRO FORMA FINANCIAL STATEMENTS
AND EXHIBITS
(b) FINANCIAL STATEMENTS: INCLUDING FINANCIAL REVIEW AND NOTES
FINANCIAL REVIEW
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH
THREE MONTHS-ENDED MARCH 31, 1997
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
Revenue for the first quarter increased by 5.1% to $240,968 from $229,305
for the first quarter of the prior year. Revenue growth for the quarter was held
down by the absence of revenues from Pilot Software Inc. ("Pilot") 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 14.6%. This increase
reflected double-digit constant dollar revenue growth at IMS, Erisco and CTS.
The impact of a stronger U.S. dollar decreased reported revenue by approximately
6% in the first quarter, including the impact of gains related to the Company's
hedging strategy.
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Operating income for the first quarter decreased by 13.3% to $18,728 from
$21,608 for the first quarter of the prior year. Operating income in the first
quarter includes Year 2000 costs of $9,972, 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 69.1%. Adjusted
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 13% in the first
quarter, including the impact of gains related to the Company's hedging
strategy.
Non-operating income-net for the first quarter was $35,104 compared with
$23,367 for the first quarter of the prior year. This increase is primarily
related to realizing higher gains in 1998 related to Enterprises' investments
($10,415) 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, the Company's share of an in-process
R&D write-off at Gartner of $2,998.
The Company'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.
Income from continuing operations in the first quarter of 1998 was $39,082,
compared with $33,371 in the first quarter of the prior year, an increase of
17.1%. Excluding the items listed above, income from continuing operations
increased 31.9% to $38,695 in 1998 from $29,337 in 1997.
Income from discontinued operations net of income taxes in the first
quarter of 1998 was $21,005, compared with $19,534 in the first quarter of the
prior year. Income from discontinued operations net of income taxes represents
the results of Nielsen Media Research. Excluding the impact of Year 2000
expenses, net of taxes in the first quarter of 1998, income from discontinued
operations increased 19.4% over the comparable period in 1997.
The Company's net income for the first quarter 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, the Company's share of the in-process R&D write-off at Gartner,
and gains associated with the sale of Enterprises' investments, net income
for the quarter increased 22.2%.
Basic earnings per share from continuing operations in the first quarter
increased 20.0% to $.24 from $.20 in 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 41.2%.
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, a leading U.S. provider of automated sales
support technologies to the pharmaceutical industry. IMS revenue for the first
quarter of 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 of 1998 increased by 12.6%. IMS revenue growth benefited from
strong performance of its sales management products, geographic expansion,
excellent growth of its electronic territory management product and strong
revenue growth at Sales Technologies. 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%.
EMERGING MARKETS
Emerging Markets includes Erisco, the premier supplier of software-based
administrative and analytical solutions to the managed care industry; CTS, an
outsourcer of software applications and development services specializing in
Year 2000 conversion 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.
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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, revenue for the first quarter of 1998 increased
48.5%, primarily due to strong growth at CTS and Erisco. Emerging Markets
operating income for the first quarter of 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, 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, in the third quarter, the Company 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 24.9% to $1,059,559 from $1,411,192 in 1996. This
decrease primarily reflects the impact of the Gartner Deconsolidation. Revenue
in 1997 increased by 10.2%, excluding Gartner revenue from both years and the
impact of a stronger U.S. dollar. The increase reflects double-digit revenue
performance at IMS, partially offset by Pilot, which was sold in 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 impact of a stronger U.S. dollar
in 1997 decreased reported revenue by approximately 3%.
Operating costs and selling and administrative expenses in 1997 were
$743,298 compared with $1,058,853 in 1996, a decrease of 29.8%. This decrease
primarily reflects the impact of the Gartner Deconsolidation. Excluding
Gartner expenses from both years and sold business units in 1996, operating
costs and selling and administrative expenses increased 5.2% to $743,298 in
1997 from $706,740 in 1996. This increase reflects the Company's increased
spending on new revenue growth initiatives which contributed to revenue
growth of 10.2% in 1997. The impact of a stronger U.S. dollar in 1997
decreased operating costs and selling and administrative expenses by
approximately 3%.
Operating income in 1997 decreased 6.6% to $227,610 from $243,707 in
1996. This decrease primarily reflects the impact of the Gartner
Deconsolidation. Excluding Gartner operating income in both years and sold
business units in 1996, operating income increased 21.8% to $227,610 in 1997
from $186,871 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
approximately 1%. The sale of Pilot, which had been generating an operating
loss, enabled the Company 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 $9,819 in 1997.
Operating margin in 1997 was 21.5%, compared with 17.3% in 1996. Excluding
Gartner results from both years, and discontinued business units in 1996,
operating margin was 21.7% in 1997 compared with 18.9% in 1996.
Non-operating income-net in 1997 was $94,864, 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. The Company 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).
The Company's consolidated 1997 effective tax rate was 27.4%, compared with
44.0% in 1996. The Company's lower tax rate in 1997 is due to the benefits of
global tax planning strategies.
Income from continuing operations in 1997 was $234,116, compared with
$139,754 in 1996, an increase of 67.5%. This increase principally reflects IMS
operating income growth, 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
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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 Corporation (the "J3 charge") in 1996. Excluding these items,
income from continuing operations increased 21.3% to $216,616 in 1997 from
$178,597 in 1996.
Income from discontinued operations, net of income taxes in 1997 was
$78,234, compared with $55,697 in 1996 an increase of 40.5%. Income from
discontinued operations, net of income taxes represents the results of Nielsen
Media Research. The increase is a result of a reduced tax rate of 27.4% in 1997
from 44.0% in 1996 and growth in Nielsen Media Research. Excluding this item
and Year 2000 expenses net of taxes in 1997, income from discontinued operations
increased 12.1% over the prior year.
Net income in 1997 was $312,350, compared with $195,451 in 1996, an
increase of 59.8%. This increase principally reflects the items noted above in
income from continuing operations and the reduction in the discontinued
operations tax rate. Excluding these items, net income increased 17.6% to
$294,850 in 1997 from $250,805 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, 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 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, a
stronger U.S. dollar in 1997, and sold business units in 1996, operating
income grew 18.2%.
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, the Company's voting
interest in Gartner fell below 50% in September 1997. Accordingly, the Company
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 the
Company'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). Revenue and operating income for
Gartner in 1996 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, the Company 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 36.0% to $409,527 in 1997 from
$639,831 in 1996. This decrease is primarily the result of the Gartner
Deconsolidation. Excluding Gartner and Pilot revenue in both years, 1997
revenue in the United States increased by 18.7%. The increase reflected a
strong performance of core business services by IMS and high revenue growth
at Erisco and CTS through the addition of new customers and new product
introductions.
Revenue in Europe decreased by 16.0% to $425,695 in 1997 from $505,969
in 1996. This decrease is primarily the result of the Gartner
Deconsolidation. Excluding Gartner and Pilot revenue in both years and
exluding the impact of a stronger U.S. dollar, 1997 revenue in Europe
increased by 9.7%. The increase reflects continued growth at IMS. Within its
European region, IMS has a large operation in Germany.
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All other non-U.S. revenue, principally in the Far East and Australia,
decreased 15.5% to $224,337 in 1997 from $265,392 in 1996. The decrease
is primarily the result of the Gartner Deconsolidation and the sale of Pilot.
Excluding Gartner and Pilot revenue in both years and excluding the impact of
a stronger U.S. dollar, all other non U.S. revenue increased by 12.6%. The
region includes a large IMS operation in Japan. 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 12.6% to $1,411,192 from $1,253,688 in 1995.
Revenue growth was held down principally by the one-time impact in 1995 of
conforming fiscal quarters between the Company and Gartner ("the Gartner
fiscal quarter change") and by the impact of sold business units not in the
portfolio in 1996. Excluding these items, revenue growth was 15.7%. The
increase reflected continued high growth at Gartner, principally from the
introduction of new products and delivery options, and double-digit revenue
performance at IMS, partially offset by declining revenue at Pilot. The
impact of a stronger U.S. dollar in 1996 decreased revenue growth for the
Company by approximately 1%.
Operating costs and selling and administrative expenses in 1996 were
$1,058,853, compared with $1,065,090 in 1995, a decrease of 0.6%. Operating
costs and selling and administrative expenses in 1995 include a non-recurring
charge of $87,770 ($48,010, 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 sold 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 13.8% to $1,022,342
in 1996 from $898,039 in 1995, reflecting the Company's increased spending in
new revenue growth initiatives which contributed to revenue growth of 15.7%
in 1996. The impact of a stronger U.S. dollar in 1996 decreased operating
costs and selling and administrative expense growth by less than 1%.
Operating income in 1996 increased 260.5% to $243,707 from $67,609 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 31.5% to $280,218 in 1996
from $213,069 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 3%.
Operating margin in 1996 was 17.3%, compared with 5.4% in 1995. The
increase reflects the impact of the 1995 and 1996 items described above.
Excluding these items in both years, operating margin was 19.9% in 1996,
compared with 17.5% 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.
The Company'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.
Income from continuing operations in 1996 was $139,754, compared with
$41,275 in 1995, an increase of 238.6%. Excluding the after-tax impact of the
items discussed in operating and non-operating income, net income increased
32.5% to $152,378 in 1996, from $114,987 in 1995.
Income from discontinued operations, net of income taxes in 1996 was
$55,697, compared with $47,606 in 1995. The increase is the result of growth in
Nielsen Media Research and the absence of a non-recurring charge in 1995, net of
taxes ($1,258).
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.
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RESULTS BY BUSINESS SEGMENT
IMS
IMS revenue increased 8.3% in 1996 to $904,444 from $835,442 in 1995.
The growth reflects 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 sold 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,
sold 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.
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 reflects 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. Results in 1995
include $16,940 of the 1995 non-recurring charge.
RESULTS BY GEOGRAPHIC AREA
Revenue in the United States increased by 15.4% to $639,831 in 1996 from
$554,518 in 1995. The increase reflected Gartner Group's introduction of new
products and delivery options and new product introductions by IMS, partially
offset by declining revenues at Pilot, the impact of the Gartner fiscal
quarter change and the absence of revenue from sold business units no longer
in the portfolio.
Revenue in Europe increased 9.9% to $505,969 in 1996 from $460,320 in
1995, principally reflecting continued growth at IMS and Gartner Group's
increased subscription services revenue and expansion into new global
markets. Excluding the impact of a stronger U.S. dollar, 1996 revenue in
Europe increased by 11.4%. Excluding the impact of a stronger U.S. dollar,
1996 revenue in Germany increased by 12.9%.
All other non-U.S. revenue increased 11.1% to $265,392 in 1996 from
$238,850 in 1995. Excluding the impact of a stronger U.S. dollar revenue
increased by 12.9%. The non-U.S. revenue growth is due to new product
introductions and geographic expansion by IMS and Gartner. Excluding the
impact of a stronger U.S. dollar, 1996 revenue in Japan increased by 20.6%.
CHANGES IN FINANCIAL POSITION AT MARCH 31, 1998 COMPARED TO DECEMBER 31, 1997
NOTES RECEIVABLE AND OTHER INVESTMENTS decreased to $99,956 at March 31, 1998,
from $109,712 at December 31, 1997, primarily reflecting the sale of certain
Enterprises investments.
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ACCRUED INCOME TAXES decreased to $42,974 at March 31, 1998, from $52,696 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 $312,442 at December 31, 1997 from
$422,963 at December 31, 1996, primarily due to the purchase of 9,074,600 shares
of the Company's common stock and the absence of Gartner's cash balance as a
result of the Gartner Deconsolidation. Offsetting the above were strong
operating cash flows from IMS and Nielsen Media Research and proceeds from
minority interest financing in 1997.
Accounts Receivable-Net decreased to $251,623 at December 31, 1997 from
$409,018 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 $189,384 at December 31,
1997 from $246,644 at December 31, 1996, principally due to the Gartner
Deconsolidation.
Deferred Revenue decreased to $110,768 at December 31, 1997 from $291,716
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 the Company's
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, the Company recorded a pre-tax charge of $87,770 that included an
impairment loss of $39,070 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 $39,070
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 recorded a charge of $19,800, principally related to
the write-off of certain computer software product lines at Pilot. (See Note 3
to the 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. 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
<PAGE>
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 method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts as disclosed
in Note 12 to the 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 the Company with related
proceeds. This statement, which has been adopted by the Company, requires
restatement of all prior period earnings-per-share data presented. (See Note 2
to the 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. This statement, which has been adopted by the Company
requires restatement of all prior periods presented (See Note 2 to the
Consolidated Financial Statements).
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. This
statement, which has been adopted by the Company requires restatement of all
prior periods presented (See Note 20 to the 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. The Company
is in the process of evaluating the disclosure requirements under this standard.
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.
NON-U.S. OPERATING AND MONETARY ASSETS
The Company 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 3% and 1%, respectively. In 1996, foreign currency translation
decreased U.S. dollar revenue growth and operating income growth by
approximately 1% and 3%, respectively.
Non-U.S. monetary assets are maintained in currencies other than the U.S.
dollar, principally in those of 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 $11,215.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, cash and cash equivalents totaled $340,247. At March 31,
1997, cash and cash equivalents totaled $209,341. The increase in cash of
$130,906 was primarily due to the absence in 1998 of payments for the
<PAGE>
purchase of treasury stock ($95,069) and higher proceeds from sale of businesses
and investments ($16,161) and from exercise of stock options ($16,682).
Net cash provided by operating activities totaled $13,907 for the three
months ended March 31, 1998 compared with $27,726 for the comparable period in
1997. The decrease of $13,369 principally reflects a lower increase in deferred
revenues ($14,604), and a net increase in Other Working Capital items ($1,988).
Net cash used in investing activities totaled $11,313 for the three months
ended March 31, 1998 compared with $27,682 for the comparable period in 1997.
The decrease in cash usage of $16,369 is principally due to higher proceeds from
the sale of investments in 1998 as compared with 1997 ($16,161), partially
offset by cash payments for acquisitions for businesses ($2,938).
Net cash provided by / (used in) financing activities totaled $15,663 for
the three months ended March 31, 1998 compared with ($99,083) for the comparable
period in 1997. The increase in cash provided by financing activities of
$114,746 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).
Cash flow from discontinued operations totaled $9,422 for the three months
ended March 31, 1998 compared with $16,808 for the comparable period in 1997.
At December 31, 1997, cash and cash equivalents totaled $312,442. At
December 31, 1996, cash and cash equivalents totaled $422,963 (including
$123,697 of Gartner cash). The decrease in cash of $110,521 was primarily due to
the Gartner Deconsolidation.
Net cash provided by operating activities was $259,465, $257,059 and
$193,044 in 1997, 1996 and 1995, respectively. The increase of $2,406 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 $44,094. The increase of $64,015 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
($54,929), lower increase in deferred revenue ($31,768), higher income tax
payments ($21,416) and payments related to the 1995 non-recurring charge of
($13,096).
Net cash used in investing activities totaled $73,456 for 1997, compared
with $115,686 and $105,184 in 1996 and 1995, respectively. The decrease in cash
usage in 1997 of $42,230 primarily reflected higher proceeds from the sale of
businesses and investments ($43,336) and the absence of purchases of Gartner
common stock ($49,419), offset in part by the absence of net proceeds from
marketable securities ($27,601). The increase in cash usage in 1996 of $10,502
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 $80,609 and ($115,929) in 1996 and 1995, respectively. The
increase in 1997 of cash used in financing activities primarily reflected the
purchase of shares of Cognizant's 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 The Dun & Bradstreet Corporation ("D&B")
as a result of Cognizant's spin-off (the "D&B spin-off") from D&B, 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.
Cash flow from discontinued operations totaled $53,580 for 1997 compared
with $47,694 and $51,725 in 1996 and 1995, respectively.
The Gartner Deconsolidation resulted in the elimination of the Gartner
Group opening cash balances in 1997. Gartner Group cash balance as of December
31, 1996 was $123,697.
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 the Cognizant's outstanding common stock. The stock purchases
<PAGE>
are deemed to be 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 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.
In connection with the Distribution as defined in Item 5, Cognizant
borrowed $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 Company'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 the Company's current 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.
The Company 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. The Company 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 $9,819 in 1997. Based on
current information, the operating income impact of Year 2000 compliance in 1998
is expected to be in the range of $36,000 to $40,000. 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, the Company 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
the company's products. Failures by data suppliers could disrupt the flow of
data used in the Company's products. While the company believes most companies
it deals with are addressing the issue, it is unable to determine the effect,
if any, such failures might have on the Company's business or future results of
operations.
The costs of addressing the Year 2000 issue and the date on which the
Company expects to complete Year 2000 compliance are based on the best estimates
of management, which are derived utilizing various assumptions regarding the
future events. There can be no guarantee that these estimates will be achieved,
and actual results may differ materially. Specific factors that may cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area of expertise, the ability to locate and
correct all relevant computer codes, and the success of customers and suppliers
in addressing the Year 2000 issue.
MARKET RISK
The Company'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, the Company employs established practices
and procedures to manage its exposure to fluctuations in the value of foreign
currencies using a variety of financial instruments.
The Company'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, 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. The principal currencies hedged
are the Japanese yen, Swiss franc, German mark and Italian lira. By policy, the
Company maintains hedge coverage between minimum and maximum percentages
<PAGE>
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 fair value of the Company'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.
The Company 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. The Company 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 the Company are subject to
the discretion of the board of directors of the Company. The Company
anticipates that it will declare a dividend equal to Cognizant's current
annualized dividend of $0.12 per share. Dividend decisions will be based on,
and affected by, a number of factors, including the operating results and
financial requirements of the Company.
IMS HEALTH COMMON STOCK INFORMATION
IMS Health Common Stock has been accepted for listing on the NYSE.
"When-issued" trading of IMS Health Common Stock on the NYSE has commenced
and "regular way" trading on the NYSE is expected to begin on July 1, 1998.
There can be no assurance as to the prices at which IMS Health Common Stock
will trade either before or after the Distribution.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of IMS Health Incorporated
("accounting successor to Cognizant Corporation"):
We have audited the accompanying consolidated statements of financial
position of IMS Health Incorporated ("accounting successor to Cognizant
Corporation") as of December 31, 1997 and 1996, and the related consolidated
statements of income, statement of comprehensive 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 my
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 IMS
Health ("accounting successor to 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".
COOPERS & LYBRAND L.L.P.
New York, New York
February 17, 1998, except for the effect of the
Distribution described in Note 3 for which the
date is June 15, 1998
<PAGE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Income
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
Dollar amounts in thousands, except per share data 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE $ 240,968 $ 229,305 $1,059,559 $1,411,192 $1,253,688
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Costs 119,592 108,700 432,654 599,800 620,407
Selling and Administrative Expenses 80,954 72,686 310,644 459,053 444,683
Depreciation and Amortization 21,694 26,311 88,651 108,632 108,189
Restructuring Expense 0 0 0 0 12,800
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 18,728 21,608 227,610 243,707 67,609
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Income 4,098 3,610 12,749 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 (SAB 51) 7,987 0 14,689 0 0
Gains from Dispositions--Net 10,415 5,436 9,391 200 15,124
Other Expense--Net (2,770) (763) (4,792) (2,465) (17,029)
- ----------------------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 35,104 23,367 94,864 5,853 7,880
- ----------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations,
Before Provision for Income Taxes 53,832 44,975 322,474 249,560 75,489
Provision for Income Taxes (14,750) (11,604) (88,358) (109,806) (34,214)
- ----------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 39,082 33,371 234,116 139,754 41,275
Income from Discontinued Operations, Net of
Income Taxes of $7,927, $6,751, $29,527,$43,764 and
$39,462 for March 31, 1998, 1997 and December 31,
1997, 1996, and 1995, respectively 21,005 19,534 78,234 55,697 47,606
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 60,087 $ 52,905 $ 312,350 $ 195,451 $ 88,881
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
BASIC
INCOME FROM CONTINUING OPERATIONS $0.24 $0.20 $1.42 $0.82 $0.24
INCOME FROM DISCONTINUED OPERATIONS 0.13 0.11 0.47 0.33 0.28
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNING PER SHARE $0.37 $0.31 $1.89 $1.15 $0.52
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED
INCOME FROM CONTINUING OPERATIONS $0.23 $0.20 $1.39 $0.82 $0.24
INCOME FROM DISCONTINUED OPERATIONS 0.13 0.11 0.47 0.33 0.28
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.36 $0.31 $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 Period-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.
<PAGE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
Dollar amounts in thousands, except per share data 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income $60,087 $52,905 $312,350 $195,451 $88,881
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Tax:
Foreign Currency Translation Adjustments Gains/(Losses) 903 (28,835) (65,019) (18,257) 22,275
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) Arising
During the Period (Net of Tax (Expense)/
Benefit of ($27), $3,101, ($5,128), ($17,268)
for March 31, 1998 and 1997, December 31,
1997 and 1996, Respectively.) 71 (6,589) 10,897 36,695 0
Less: Reclassification Adjustment for Gains
Included in Net Income (Net of Tax Benefit
of $2,910 and $7,032 for March 31, 1998
and December 31, 1997, Respectively.) (7,710) 0 (14,942) 0 0
-----------------------------------------------------------------------
Net Unrealized Gains/(Losses) (7,639) (6,589) (4,045) 36,695 0
-----------------------------------------------------------------------
Other Comprehensive Income/(Loss) (6,736) (35,424) (69,064) 18,438 22,275
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $53,351 $17,481 $243,286 $213,889 $111,156
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
--------- ------------
Dollar amounts in thousands, except per share data 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 340,247 $ 312,442 $ 422,963
Accounts Receivable-Net 250,081 251,623 409,018
Other Current Assets 72,094 65,692 99,563
- --------------------------------------------------------------------------------------------------------------------
Total Current Assets 662,422 629,757 931,544
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT IN GARTNER GROUP 212,863 195,695 0
NOTES RECEIVABLE AND OTHER INVESTMENTS 99,956 109,712 117,706
PROPERTY, PLANT AND EQUIPMENT-NET 175,555 178,533 224,578
OTHER ASSETS-NET
Computer Software 102,187 99,175 103,387
Goodwill 91,464 87,430 251,483
Other Assets 80,589 79,009 66,623
- --------------------------------------------------------------------------------------------------------------------
Total Other Assets-Net 274,240 265,614 421,493
- --------------------------------------------------------------------------------------------------------------------
Net Assets from Discontinued Operations 131,176 122,778 98,124
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,556,212 $1,502,089 $1,793,445
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and Notes Payable $ 41,465 $ 44,441 $ 40,047
Accrued and Other Current Liabilities 184,701 189,384 246,644
Accrued Income Taxes 42,974 52,696 56,004
Deferred Revenues 112,944 110,768 291,716
- --------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 382,084 397,289 634,411
- --------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 35,999 38,082 52,008
DEFERRED INCOME TAXES 89,615 92,153 67,738
MINORITY INTERESTS 102,891 101,209 90,635
OTHER LIABILITIES 73,361 71,786 76,040
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 683,950 700,519 920,832
- --------------------------------------------------------------------------------------------------------------------
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 Shares in March 1998 and December 1997
and 171,082,301 Shares in December 1996 1,711 1,711 1,711
Capital in Excess of Par 808,015 808,550 805,170
Retained Earnings 413,643 358,456 65,989
Treasury Stock, at cost, 8,271,396, 9,026,448 and 800,000 Shares
in March 1998, December 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 $1,556,212 $1,502,089 $1,793,445
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
Dollar amounts in thousands 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 60,087 $ 52,905 $312,350 $195,451 $ 88,881
Less Income from Discontinued Operations (21,005) (19,534) (78,234) (55,697) (47,606)
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 39,082 33,371 234,116 139,754 41,275
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 21,694 26,311 88,651 108,632 108,189
Net Gains from Dispositions (10,415) (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) (6,982) (10,641) (18,480)
Non-Recurring Charge -- -- -- -- 87,770
Non-Recurring Charge Payments (955) (2,180) (5,201) (13,096) --
Net Increase in Accounts Receivable 1,543 (76) 5,878 (5,530) (96,632)
Net Increase in Deferred Revenue 2,176 16,780 10,054 22,020 53,788
Equity Income, Net of Taxes (9,181) (8,902) (38,040) -- --
Gain from Sale of Subsidiary Stock (7,987) -- (14,689) -- --
Minority Interests 2,146 156 4,797 11,710 14,696
Deferred Income Taxes 1,973 (16,908) 48,414 (11,299) (13,392)
Net (Decrease) Increase in Accrued Income Taxes (9,722) 385 (18,822) 16,194 (35,994)
Net (Increase) Decrease in Other Working Capital Items (15,056) (13,068) (39,320) (22,869) 32,060
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 13,907 27,276 259,465 257,059 193,044
- ---------------------------------------------------------------------------------------------------------------------------------
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 (5,972) (8,278) (47,020) (57,034) (63,524)
Additions to Computer Software (10,264) (12,132) (49,552) (35,039) (56,267)
Additions to Other Assets (6,898) (3,713) (25,224) (12,921) --
Increase in Other Investments-Net (6,877) (10,768) (10,723) (24,423) (2,455)
Payments for Purchase of Gartner Group Common Stock -- -- -- (49,419) (8,372)
Other (1,529) 205 14,162 58,370 55,209
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (11,313) (27,682) (73,456) (115,686) (105,184)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock -- (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 -- 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) (48) 1,360 62,096 (8,027)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities 15,663 (99,083) (215,198) 80,609 (115,929)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 126 (7,244) (11,215) (3,063) 4,846
Change of Gartner Group to Equity Basis -- (123,697) (123,697) -- --
Cash Flow from Discontinued Operations 9,422 16,808 53,580 47,694 51,725
- ---------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents 27,805 (213,622) (110,521) 266,613 28,502
Cash and Cash Equivalents, Beginning of Period 312,442 422,963 422,963 156,350 127,848
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $340,247 $209,341 $312,442 $422,963 $156,350
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $ 200 $ 450 $ 2,293 $ 1,463 $ 425
Cash Paid during the Period for Income Taxes $ 22,385 $ 19,167 $ 44,094 $ 48,372 $ 26,956
Non-Cash Investing Activities
Stock Issued in Connection with Acquisitions $ 1,412 $ 0 $ 0 $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT)
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Dollar amounts in thousands
- ------------------------------------------------------------------------------------------------------
CAPITAL IN
Three Years Ended DIVISIONAL COMMON EXCESS OF RETAINED TREASURY
December 31, 1998 EQUITY STOCK PAR VALUE EARNINGS STOCK
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 622,253 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------
Net Income 88,881
Net Transfers to The Dun &
Bradstreet Corporation (113,051)
Change in Cumulative
Translation Adjustment
Comprehensive Income
- ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 598,083 -- -- -- --
- ------------------------------------------------------------------------------------------------------
Net Income 129,462
Net Transfers from The Dun &
Bradstreet Corporation 44,880
Change in Cumulative
Translation Adjustment
Comprehensive Income
- ------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 1, 1996 -- $ 1,711 $795,914 -- $ (25,200)
- ------------------------------------------------------------------------------------------------------
Net Income 65,989
Exercise of Stock Options 557
Restricted Stock Plan (41,400) 210
Less: Unearned Portion (210)
Purchase of Stock Options 8,699
Change in Cumulative
Translation Adjustment
Unrealized Gains on Investments
Comprehensive Income
- ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- $ 1,711 $805,170 $ 65,989 $ (25,200)
- ------------------------------------------------------------------------------------------------------
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
Unrealized Loss on Investments--Net
of reclassification adjustment
Comprehensive Income
- ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 -- $ 1,711 $808,550 $358,456 $(323,026)
- ------------------------------------------------------------------------------------------------------
(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 798
Employee Stock Purchase Plan
(47,733) 2,733
In Connection with Acquisition
(25,751) 1,412
Change in Cumulative Translation
Translation Adjustment
Unrealized Loss on Investments--Net
of reclassification adjustment
Comprehensive Income
- ------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 -- $ 1,711 $808,015 $413,643 $(300,250)
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Dollar amounts in thousands
- -------------------------------------------------------------------------------------------------------
Other Comprehensive Income:
---------------------------
CUMULATIVE UNREALIZED
Three Years Ended TRANSLATION GAINS (LOSSES) COMPREHENSIVE
December 31, 1998 ADJUSTMENT ON INCOME TOTAL
INVESTMENTS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $(15,770) $ -- $ 606,483
- -------------------------------------------------------------------------------------------------------
Net Income 88,881 88,881
Net Transfers to The Dun &
Bradstreet Corporation (113,051)
Change in Cumulative
Translation Adjustment 22,275 22,275 22,275
------------
Comprehensive Income $111,156
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 6,505 -- $ 604,588
- -------------------------------------------------------------------------------------------------------
Net Income $129,462 129,462
------------
Net Transfers from The Dun &
Bradstreet Corporation 44,880
Change in Cumulative
Translation Adjustment (16,817) (16,817) (16,817)
------------
Comprehensive Income $112,645
- -------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 1, 1996 $(10,312) -- $762,113
- -------------------------------------------------------------------------------------------------------
Net Income $ 65,989 65,989
Exercise of Stock Options 557
Restricted Stock Plan (41,400) 210
Less: Unearned Portion (210)
Purchase of Stock Options 8,699
Change in Cumulative
Translation Adjustment (1,440) (1,440) (1,440)
Unrealized Gains on Investments 36,695 36,695 36,695
------------
Comprehensive Income $101,244
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ (11,752) $ 36,695 872,613
- -------------------------------------------------------------------------------------------------------
Net Income $312,350 312,350
Cash Dividends ($.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) (65,019) (65,019)
Unrealized Loss on Investments--Net
of reclassification adjustment (4,045) (4,045) (4,045)
------------
Comprehensive Income $243,286
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ (76,771) $ 32,650 $ 801,570
- -------------------------------------------------------------------------------------------------------
(Unaudited)
Net Income 60,087 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 798
Employee Stock Purchase Plan
(47,733) 2,733
In Connection with Acquisition
(25,751) 1,412
Change in Cumulative Translation
Translation Adjustment 903 903 903
Unrealized Loss on Investments--Net
of reclassification adjustment (7,639) (7,639) (7,639)
------------
Comprehensive Income $53,351
- -------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 $ (75,868) $ 25,011 $ 872,262
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
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, subject to certain conditions, to separate into two independent,
publicly traded companies ("the Distribution")--IMS Health Incorporated ("IMS
Health" or "the Company") and Nielsen Media Research, Inc. ("Nielsen Media
Research" or "NMR"). The transaction as contemplated in January 1998, was
subject to numerous conditions, including the receipt of a tax ruling, Board
approval relating to the final terms and other regulatory matters.
Concurrent with the consumation of the transaction, Cognizant will change its
name to Nielsen Media Research, Inc. This document relates to IMS Health, the
entity that will be legally spun by Cognizant. Notwithstanding the legal
form of the distribution, whereby Cognizant will 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 separation creates IMS Health as the premier
global provider of information solutions to the pharmaceutical and healthcare
industries, and establishes an independent Nielsen Media Research, the leader
in electronic audience measurement services. IMS Health consists of IMS
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").
Cognizant has received a favorable ruling from the Internal Revenue
Service with respect to the tax-free treatment of the transaction.
Cognizant's Board of Directors on June 15, 1998 approved the final plan,
terms and conditions relating to the separation of the company including a
tax allocation distribution, employee benefits and other agreements and has
authorized management to execute the plan of distribution. The Board of
Directors declared a dividend to shareholders of record as of the close of
business on June 25, 1998 consisting of one share of IMS Health Common Stock
for each share of Cognizant Common Stock. The Distribution is expected to be
effected on or about June 30, 1998.
Pursuant to Accounting Principles Board ("APB") No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect Nielsen Media Research as discontinued operations.
As a result, IMS Health as successor of Cognizant has reflected herein
reclassified MD&A and the financial statements for the three years ended
December 31, 1995, 1996, and 1997, and for the (unaudited) quarters ended
March 31, 1997 and 1998.
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 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.
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 1. BASIS OF PRESENTATION (CONTINUED)
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 all 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 in management's opinion all significant 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 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.
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Consolidated Financial Statements.
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 he 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. As discussed more fully in Note 3, the consolidated
financial statements for the three month period ended March 31, 1998 and
1997, and as of and for the years ended December 1997, 1996 and 1995, have
been restated to present Nielsen Media Research as discontinued operations.
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 adopted this statement in the first quarter of
1998. Where applicable, earlier periods have been restated to conform with
the standards set forth in SFAS No. 130. The Company's Comprehensive In come
consists of net income, foreign currency translation adjustments and
unrealized holding gains on securities (see Consolidated Statements of
Comprehensive Income).
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. REORGANIZATION AND DISCONTINUED OPERATIONS
On January 15, 1998, Cognizant announced a plan, subject to certain
conditions, to separate into two independent, publicly traded companies--IMS
Health Incorporated and Nielsen Media Research, Inc. The transaction as
contemplated in January 1998, was subject to numerous conditions, including
the receipt of a tax ruling, Board approval relating to the final terms and
other regulatory matters. Concurrent with the consumation of the
transaction, Cognizant will change its name to Nielsen Media Research, Inc.
This document relates to IMS Health, the entity that will be legally spun by
Cognizant. Notwithstanding the legal form of the distribution, whereby
Cognizant will spin off IMS Health, for accounting purposes the transaction
is accounted for as if Cognizant will
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA.
NOTE 3. REORGANIZATION AND DISCONTINUED OPERATIONS (CONTINUED)
spin off Nielsen Media Research. For financial reporting purposes, the
following financial information relates to IMS Health the "accounting
successor" to Cognizant. The separation creates IMS Health as the premier
global provider of information solutions to the pharmaceutical and healthcare
industries, and establishes an independent Nielsen Media Research, the leader
in electronic audience measurement services. IMS Health consists of IMS
International, Inc., Erisco, Inc., Enterprises, Inc., Cognizant Technology
Solutions Corporation, SSJ K.K., and an equity investment in Gartner Group,
Inc.
Cognizant has received a favorable ruling from the Internal Revenue
Service with respect to the tax-free treatment of the transaction.
Cognizant's Board of Directors on June 15, 1998 approved the final plan,
terms and conditions relating to the separation of the company including a
distribution tax allocation, employee benefits and other agreements and has
authorized management to execute the plan of distribution. The Board of
Directors declared a dividend distribution to shareholders of record as of
June 25, 1998 consisting of one share of IMS Health Common Stock for each share
of Cognizant Common Stock. The Distribution is expected to be effected on or
about June 30, 1998.
Pursuant to Accounting Principles Board ("APB") No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect Nielsen Media Research as discontinued operations.
As a result, IMS Health as successor of Cognizant has reflected herein
reclassified MD&A and the financial statements for the three years ended
December 31, 1995, 1996, and 1997, and for the (unaudited) quarters ended
March 31, 1997 and 1998.
In connection with the Distribution, Cognizant borrowed $300 million on
June 24, 1998, which will be used to repay existing intercompany liabilities.
This debt will be the obligation of NMR after the Distribution. In
connection with the Distribution, 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) to be $300 million as of the date of
the Distribution.
Prior to the Distribution, Cognizant and IMS Health have entered into
certain agreements , 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. Among other
things, the agreements set forth principles to be applied in allocating
certain Distribution-related costs and specify portions of contingent
liabilities to be shared if certain amounts are exceeded.
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 Stock currently held by a subsidiary of IMS Health and which IMS
Health has agreed to sell promptly after the Distribution Date).
The Consolidated Financial Statements have been restated to present
Nielsen Media Research as discontinued operations. Summarized data for
discontinued operations is as follows:
Results of Operations
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31, Years Ended December 31,
Dollar amounts in thousands 1998 1997 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenue $ 96,064 $ 86,271 $ 358,594 $ 319,404 $ 288,652
Income Before Provision for
Income Taxes 28,932 26,285 107,761 99,461 87,068
Provision for Income Taxes (7,927) (6,751) (29,527) (43,764) (39,462)
--------------------------------------------------------------------
Income from Discontinued Operations $ 21,005 $ 19,534 $ 78,234 $ 55,697 $ 47,606
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 3. REORGANIZATION AND DISCONTINUED OPERATIONS (CONTINUED)
Net Assets of Discontinued Operations
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
Dollar amounts in thousands 1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Current Assets $ 62,085 $ 64,655 $ 62,918
Property Plant & Equipment 58,023 55,050 44,310
Computer Software 45,724 43,093 35,653
Deferred Charges 17,735 16,299 13,573
Other Assets 21,728 21,112 23,207
Current Liabilties (43,318) (43,921) (35,830)
Other Liabilities (30,801) (33,510) (45,707)
-------------------------------------------
Net Assets of Discontinued
Operations $ 131,176 $ 122,778 $ 98,124
-------------------------------------------
-------------------------------------------
</TABLE>
NOTE 4. INVESTMENT IN GARTNER
In the first quarter of 1998, proceeds from the issuance of shares to
Gartner employees, including associated tax benefits, increased Gartner's equity
by $24,032 and reduced the Company's ownership interest by less than 2% to 47.2%
at March 31, 1998. Accordingly, the Company recognized a pre-tax unrealized
gain on Gartner stock of $7,987 corresponding to the net increase in the value
of its underlying investment in Gartner. In addition, Gartner equity income for
the first quarter includes the Company's share of an in-process R&D write-off at
Gartner of $2,998.
In the third quarter of 1997, the Company's voting interest in Gartner fell
below 50%, principally 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, 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.
Selected financial information regarding the results of operations and
financial position of Gartner is summarized below:
<TABLE>
<CAPTION>
(Unaudited)
Years Ended December 31,
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------
<CAPTION>
(Unaudited)
Years Ended December 31,
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 5. DISPOSITIONS
During the first quarter of 1998, the Company recorded a (unaudited)
$10,415 pre-tax net gain on the sale of its investments in Aspect
Development, Inc., Pegasus Systems Inc., and certain other investments which
were part of Enterprises' portfolio. These sales generated cash proceeds of
$23,165.
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 of 1997, the Company sold Pilot and
recorded a non-cash pre-tax loss of $29,945.
NOTE 6. 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 7. NON-RECURRING CHARGES
In the fourth quarter of 1995, the Company recorded within operating costs
a charge of $87,770. 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
'' ($39,070), the write-off of certain computer software ($19,800), a provision
for postemployment benefits ($7,100) 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 $39,070 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 $19,800, principally related to the write-off of certain
computer software product lines at Pilot.
The provision for postemployment benefits of $7,100 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 8. 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, CASH DECEMBER 31,
CATEGORY 1995 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 9. 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 in 1996 totaled
$24,386. 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 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 in 1995 totaled $10,916.
The results of operations of all purchases are included in the
Consolidated Statements of Income from the date of acquisition. Had the
acquisitions that were made in fiscal 1998, 1996 and 1995 been consummated on
January 1 of the year preceeding 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 10. 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 11. 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 11. FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 February 28, 1998, the notional
amount hedged was $122,000. In addition, at February 28, 1998, IMS had
approximately $46,000 in foreign exchange forward contracts outstanding with
various expiration dates through November 1998. 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 and
all contracts mature in 1998. The estimated fair values of the foreign exchange
risk management contracts were determined based on quoted market prices.
CREDIT CONCENTRATIONS
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its financial
instruments and does not anticipate non-performance by the counterparties. The
Company would not realize a material loss as of December 31, 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 12. 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 12. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
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.
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>
Pension expenses related to the discontinued operations were $1,571,
$2,397, and $2,397 for the years 1997, 1996, and 1995, respectively.
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
(which includes both the Company and Nielsen Media Research) 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>
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%
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 12. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
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. Expenses related to the
discontinued operations were $2,021, $1,797, and $2,340 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 benefit costs totaling $1,200,
$2,619 and $3,447 for the years 1997, 1996 and 1995, respectively. The cost of
postretirement benefit costs for discontinued operations was not significant.
The status of postretirement benefit plans other than pensions at December
31, 1997 and 1996 (which includes both the Company and Nielsen Media Research)
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 13. 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 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 1998 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 13. EMPLOYEE STOCK PLANS (CONTINUED)
offering or change in control occur (see Note 22). 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
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>
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 $0.52
Pro forma $1.72 $1.11 $0.52
Diluted
As reported $1.86 $1.15 $0.52
Pro forma $1.70 $1.11 $0.52
- -----------------------------------------------------------------
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations
As reported $234,116 $139,754 $41,275
Pro forma $206,400 $133,008 $40,514
Earnings Per Share:
Basic from continuing operations
As reported $1.42 $0.82 $0.24
Pro forma $1.25 $0.78 $0.24
Diluted from continuing operations
As reported $1.39 $0.82 $0.24
Pro forma $1.23 $0.78 $0.24
- -----------------------------------------------------------------
</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 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.
Immediately following the D&B Distribution, outstanding awards under the
D&B Key Employees Stock Option Plans held by company employees were canceled 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 13. EMPLOYEE STOCK PLANS (CONTINUED)
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
RANGE OF DECEMBER 31, 1997 REMAINING
EXERCISE NUMBER NUMBER CONTRACTUAL OPTION EXERCISE PRICES
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>
THE OPTIONS OUTSTANDING AT DECEMBER 31, 1997 REFLECTS COGNIZANT OPTIONS WHICH
UNDER TERMS OF THE DISTRIBTUION WILL BE CONVERTED TO IMIS HEALTH OPTIONS ON
JULY 1, 1998 AND INCLUDE 4,107,012 OF OUTSTANDING OPTIONS HELD BY EMPLOYEES
OF NIELSEN MEDIA RESEARCH. THE FORMULA TO CONVERT OPTIONS IS AVERAGE FAIR
MARKET VALUE OF COGNIZANT SHARES FOR FIVE TRADING DAYS BEFORE SPIN-OFF
DIVIDED BY AVERAGE FAIR MARKET VALUE OF THE NEWLY TRADED SHARES FOR FIVE
TRADING DAYS AFTER SPIN-OFF.
NOTE 14. INCOME TAXES
Income / (Loss) from continuing operations before provision for income taxes
consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $124,524 $ 66,164 $ (41,122)
Non-U.S. 197,950 183,396 116,611
- -----------------------------------------------------------------------
$322,474 $249,560 $ 75,489
- -----------------------------------------------------------------------
</TABLE>
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal and State:
Current $ 16,883 $ 16,031 $17,759
Deferred 1,528 25,092 (22,315)
- -----------------------------------------------------------------------
18,411 41,123 (4,556)
Non-U.S.:
Current 57,221 61,660 32,451
Deferred 12,726 7,023 6,319
- -----------------------------------------------------------------------
69,947 68,683 38,770
- -----------------------------------------------------------------------
Total $ 88,358 $109,806 $34,214
- -----------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 14. INCOME TAXES (CONTINUED)
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 $112,866 $87,346 $26,421
State and Local Income Taxes,
net of Federal Tax Benefit 4,683 2,636 4,866
Impact of Non-U.S. Tax
Rates and Credits (802) 3,943 (4,007)
Purchased In-Process R&D Costs -- 11,632 --
Goodwill 1,397 3,709 4,457
Amortization of Intangibles (28,296) -- --
Other (1,490) 540 2,477
- ----------------------------------------------------------------------
Total Taxes $88,358 $109,806 $34,214
- ----------------------------------------------------------------------
</TABLE>
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 $34,224
Intangibles 15,107 --
Postretirement Benefits 2,138 1,310
Non-Recurring Charges 4,146 5,419
Postemployment Benefits 3,923 4,969
Bad Debts 798 746
Other 6,193 9,006
------------------------------------------------------
55,541 55,674
Valuation Allowance (21,826) (29,783)
- -------------------------------------------------------
33,715 25,891
Deferred Tax Liabilities:
Intangibles (40,781) (47,321)
Deferred Revenue (33,322) (14,108)
Marketable Securities (20,522) (17,268)
Depreciation (10,822) (6,086)
Other (13,158) (3,342)
------------------------------------------------------
(118,605) (88,125)
------------------------------------------------------
Net Deferred Tax Liability $(84,890) $(62,234)
------------------------------------------------------
</TABLE>
The 1997 net deferred tax liability consists of a non-current deferred tax
liability of $92,153, offset by a current deferred tax asset of $7,263 included
in Other Current Assets. (See Note 19 to the 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
$478,848 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 15. 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 $19,432, $28,963, and $26,059,
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 operating leases that have remaining noncancelable lease
terms in excess of one year, net of sublease rentals, at December 31, 1997 was:
1998--$20,109; 1999--$20,033; 2000--$19,280; 2001--$20,381; 2002--$17,134 and an
aggregate of $19,563 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 15. COMMITMENTS (CONTINUED)
$28,241, $23,372, and $19,265 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--$25,736; 1999--$24,114; 2000--$12,946; 2001--$6,830 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 16. OTHER TRANSACTIONS WITH AFFILIATES
Prior to the D&B Distribution, 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 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 Distribution Date included in Divisional Equity in the 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>
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 have entered into various
agreements including a D&B Distribution Agreement, D&B Tax Allocation Agreement,
D&B Employee Benefits Agreement, Indemnity and Joint Defense Agreement,
Television Audience Measurement Master Agreement, D&B Intellectual Property
Agreement, D&B Shared Transaction Services Agreement, D&B Data Services
Agreement and D&B 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 17. COGNIZANT CAPITAL STOCK
On February 18, 1997 Cognizant Corporation announced that its board of
directors had authorized a systematic stock repurchase program to buy up to
8,500,000 shares of the 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.
On October 21, 1997 Cognizant Corporation announced that its board of
directors had authorized a second systematic stock repurchase program to buy up
to 10,000,000 shares of the 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.
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% (20% in the
case of an "Institutional Investor" as defined in the Shareholder Rights
Plan) 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 $225 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 June 30, 2008 and are redeemable by the Company at a
price of $.01 per Right under certain circumstances.
NOTE 18. 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 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,
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 18. LITIGATION (CONTINUED)
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 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 the Company have entered into
an Indemnity and Joint Defense Agreement pursuant to which they agreed (i) to
certain arrangements allocating liabilities that may arise out of or in
connection with the IRI Action, and (ii) to conduct a joint defense of such
action. In particular, the Indemnity and Joint Defense Agreement provides that
ACNielsen will assume exclusive liability for liabilities up to 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 terms of the 1996 Distribution Agreement, as a condition to the
Distribution, IMS Health and Nielsen Media Research are required to undertake to
be a jointly and severally liable to D&B and ACNielsen for Cognizant's
obligations under the 1996 Distribution Agreement. IMS Health and Nielsen Media
Research have agreed that, as between themselves, IMS Health will assume 75%,
and Nielsen Media Research will assume 25%, of any payments to be made in
respect of the IRI Action under the Indemnity and Joint Defense Agreement or
otherwise, including any legal fees and expenses related thereto incurred in
1999 or thereafter. IMS Health 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 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 19. SUPPLEMENTAL FINANCIAL DATA
<TABLE>
<CAPTION>
Accounts Receivable--Net:
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Trade $ 204,317 $ 358,572
Less: Allowance for Doubtful Accounts (3,905) (11,697)
Unbilled Receivables 34,232 31,316
Other 16,979 30,827
- ----------------------------------------------------------------------
$ 251,623 $ 409,018
- ----------------------------------------------------------------------
<CAPTION>
Other Current Assets:
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred Income Taxes $ 7,263 $ 5,504
Prepaid Expenses 32,114 45,680
Inventories 26,315 26,103
Marketable Securities -- 22,276
- ----------------------------------------------------------------------
$ 65,692 $ 99,563
- ----------------------------------------------------------------------
<CAPTION>
Property, Plant and Equipment--Net, Carried at Cost, Less Accumulated
Depreciation and Amortization:
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Buildings $ 92,291 $ 101,691
Machinery and Equipment 229,610 294,123
Less: Accumulated Depreciation (162,660) (202,278)
Leasehold Improvements, less:
Accumulated Amortization of
$11,310 and $18,005 12,636 19,222
Land 6,656 11,820
- ----------------------------------------------------------------------
$ 178,533 $ 224,578
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 19. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
Computer Software and Goodwill:
COMPUTER
SOFTWARE GOODWILL
- ----------------------------------------------------------------------
<S> <C> <C>
January 1, 1996 $110,099 $230,888
Additions at Cost 35,039 60,484
Amortization (32,781) (17,094)
Other Deductions, Additions
and Reclassifications (8,970) (22,795)
- ----------------------------------------------------------------------
December 31, 1996 103,387 251,483
Additions at Cost 49,552 1,554
Amortization (32,785) (8,810)
Other Deductions and
Reclassifications (1) (20,979) (156,797)
- ----------------------------------------------------------------------
DECEMBER 31, 1997 $ 99,175 $ 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 $147,501 and $127,462 at
December 31, 1997 and 1996, respectively. Accumulated amortization of Goodwill
was $40,399 and $67,366 at December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Accounts and Notes Payable:
1997 1996
<S> <C> <C>
Trade $21,994 $20,760
Taxes Other Than Income Taxes 13,736 13,714
Notes 458 464
Other 8,253 5,109
- ----------------------------------------------------------------------
$44,441 $40,047
- ----------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
Accrued and Other Current Liabilities:
1997 1996
<S> <C> <C>
Salaries, Wages, Bonuses and
Other Compensation $ 60,159 $ 73,856
Postemployment Benefits 4,073 7,991
Other 125,152 164,797
- ----------------------------------------------------------------------
$189,384 $246,644
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 20. OPERATIONS BY BUSINESS SEGMENT
As described in Note 3, the business segments have been restated to reflect
Nielsen Media Research as a discontinued operation.
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. 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, an
outsourcer of software applications and development services specializing in
Year 2000 conversion 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>
EMERGING
IMS MARKETS (2)(10) TOTAL
---------------------------------------------------
<S> <C> <C> <C>
Three Months Ended March 31, 1998
(Unaudited)
OPERATING REVENUE $223,401 $17,567 $240,968
SEGMENT OPERATING INCOME $ 30,926 $ 902 $ 31,828
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 (9) $ 7,555 $ 7,555
Other- Net $ 2,080
- --------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
Provision for Income Taxes $ 53,832
Provision for Income Taxes $(14,750)
- --------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 39,082
Income from Discontinuted Operations, Net of
Income Taxes $ 21,005
- --------------------------------------------------------------------------------------------------------------
Net Income $ 60,087
- --------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1997
(Unaudited)
OPERATING REVENUE $209,822 $19,483 $229,305
SEGMENT OPERATING INCOME $ 37,316 $(8,808) $ 28,508
General Corporate Expenses (2) (8) $ (6,900)
Interest Income (3) $ 1,097 $ 61 $ 1,158
Interest Expense (4) $ (221) $ (229) $ (450)
Non-Operating Income--Net
Gartner Equity Income $ 15,534
Gains from Dispositions-Net $ 5,436 $ 5,436
Other- Net $ 1,689
Income from Continuing Operations Before
Provision for Income Taxes $ 44,975
- --------------------------------------------------------------------------------------------------------------
Provision for Income Taxes $(11,604)
- --------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 33,371
Income from Discontinuted Operations, Net of
Income Taxes $ 19,534
- --------------------------------------------------------------------------------------------------------------
Net Income $ 52,905
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 20. OPERATIONS BY BUSINESS SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
EMERGING
Year Ended December 31, 1997 IMS GARTNER(1) MARKETS(2)(10) TOTAL
<S> <C> <C> <C> <C>
OPERATING REVENUE $980,521 $ 79,038 $1,059,559
SEGMENT OPERATING INCOME $265,351 $ (9,752) $ 255,599
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
Non-Operating Income--Other--Net 16,560
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
Provision for Income Taxes $ 322,474
Provision for Income Taxes $ (88,358)
Income from Discontinued Operations,
Net of Income Taxes (4) $ 78,234
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 312,350
Segment Depreciation and Amortization $ 76,375 $ 11,139 $ 87,514
Segment Capital Expenditures $ 41,932 $ 4,304 $ 46,236
IDENTIFIABLE ASSETS AT DECEMBER 31, 1997 (6) $855,789 $147,628 $1,003,417
Year Ended December 31, 1996
OPERATING REVENUE $904,444 $424,382 $ 82,366 $1,411,192
Write-Off of Purchased In Process Research &
Development $ 33,233 $33,233
SEGMENT OPERATING INCOME / (Loss) $232,827 $ 60,114 $(12,903) $ 280,038
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 from Continuing Operations Before
Provision for Income Taxes $ 249,560
Provision for Income Taxes $ (109,806)
Income from Discontinued Operations,
Net of Income Taxes (4) $ 55,697
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 195,451
Segment Depreciation and Amortization $ 80,313 $ 15,934 $ 12,181 $ 108,428
Segment Capital Expenditures $ 37,862 $ 15,918 $ 3,254 $ 57,034
IDENTIFIABLE ASSETS AT DECEMBER 31, 1996 (6) $756,966 $497,242 $206,825 $1,461,033
Year Ended December 31, 1995
OPERATING REVENUE $835,442 $337,639 $ 80,607 $1,253,688
Restructuring Expense $ 12,800 $ 12,800
Post-Employment Benefit Expense (7) $ 24,300 $ 8,200 $ 32,500
Non-Recurring Charge (8) $ 53,630 $ 16,940 $ 70,570
SEGMENT OPERATING INCOME / (Loss) $ 89,335 $ 51,180 $(18,366) $ 122,149
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 (16,340)
Gains from Dispositions--Net 4,524 10,600 15,664
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
Provision for Income Taxes $ 75,489
Provision for Income Taxes $ (34,214)
Income from Discontinued Operations,
Net of Income Taxes (5) $ 47,606
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 88,881
Segment Depreciation and Amortization $ 84,641 $ 11,987 $ 11,561 $ 108,189
Segment Capital Expenditures $ 29,935 $ 19,657 $ 2,532 $ 52,124
IDENTIFIABLE ASSETS AT DECEMBER 31, 1995 (6) $768,684 $355,088 $132,568 $1,256,340
</TABLE>
(1) The Company maintained a majority interest in Gartner during 1995 and 1996
and accordingly, reflected Gartner on a consolidated basis. During 1997,
The Company'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. The intersegment sales associated with discontinued
operations were $1,358, $880, $4,365, $2,436 and $707 for March 31, 1998
and 1997 and December 31, 1997, 1996 and 1995, respectively.
(3) Interest income excludes amounts recorded at corporate of $2,006, $2,458,
$8,168, $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.
(5) Income from Discontinued Operations, Net of Income Taxes includes taxes of
$7,928, $6,751, $29,527, $43,764 and $39,462 for for March 31, 1998 and
1997 and December 31, 1997, 1996 and 1995, respectively.
(6) Total Assets include Net Assets of Discontinued Operations of $122,778,
$98,124, and $90,121 for 1997, 1996 and 1995, respectively. Assets of
$375,894, $234,288 and $52,362 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 and Net
Assets of Discontinued Operations (Note 4) and the Company's total assets.
(7) Post-employment benefit expense excluded amounts recorded at corporate of
$666 and $5,132 for 1996 and 1995, respectively.
(8) Non-recurring charge expense excludes amounts recorded at corporate of
$17,200 for 1995
(9) Gains from Dispositions-Net excludes amounts recorded at Corporate of
$2,860 at March 31, 1998.
(10) As described in Note 22, CTS has filed a registration statement with the
SEC with respect to an underwritten offering. The initial public offering,
which closed on June 24, 1998, established CTS as an independent publically
traded company. As such, further separate financial information is
available for this company as a 1933 Act Registrant; included in Note 22 is
selected financial data on CTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 20. OPERATIONS BY BUSINESS SEGMENT (CONTINUED)
FINANCIAL INFORMATION BY COUNTRY:(1)
<TABLE>
<CAPTION>
UNITED STATES UNITED KINGDOM ALL OTHER (3) TOTAL
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
OPERATING REVENUE (2) $409,527 $43,299 $606,733 $1,059,559
LONG-LIVED ASSETS $242,974 $54,028 $134,145 $ 431,147
Year Ended December 31, 1996
Operating Revenue (2) $639,831 $82,727 $688,634 $1,411,192
Long-Lived Assets $430,020 $73,153 $142,898 $ 646,071
Year Ended December 31, 1995
Operating Revenue (2) $554,518 $69,614 $629,556 $1,253,688
Long-Lived Assets $383,685 $65,281 $155,755 $ 604,721
</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.
(3) Included in All others is non U.S. revenue of which $382,396, $423,242
and $390,706 in 1997, 1996 and 1995 respectively is in Europe, with the
largest operation in Germany; and non European revenue of $224,337,
$265,392 and $238,850 in 1997, 1996 and 1995 respectively which includes
the Far East and Australia region, with a large operation in Japan.
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Historical numbers are restated to reflect Nielsen Media Research as
discontinued operations.
<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 $229,305 $251,076 $251,130 $328,048 $1,059,559
OPERATING INCOME $ 21,608 $ 39,355 $ 59,174 $107,473 $ 227,610
INCOME FROM CONTINUING OPERATIONS,
NET OF INCOME TAXES $ 33,371 $ 40,067 $ 57,317 $103,361 $ 234,116
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES $ 19,534 $ 19,988 $ 19,749 $ 18,963 $ 78,234
NET INCOME $ 52,905 $ 60,055 $ 77,066 $122,324 $ 312,350
EARNINGS PER SHARE OF COMMON STOCK
BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.20 $ 0.24 $ 0.35 $ 0.63 $ 1.42
INCOME FROM DISCONTINUED OPERATIONS $ 0.11 $ 0.12 $ 0.12 $ 0.12 $ 0.47
NET INCOME $ 0.31 $ 0.36 $ 0.47 $ 0.75 $ 1.89
DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.20 $ 0.24 $ 0.34 $ 0.61 $ 1.39
INCOME FROM DISCONTINUED OPERATIONS $ 0.11 $ 0.12 $ 0.12 $ 0.12 $ 0.47
NET INCOME $ 0.31 $ 0.36 $ 0.46 $ 0.73 $ 1.86
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 (1) JUNE 30 (1) SEPTEMBER 30 DECEMBER 31 FULL YEAR
<S> <C> <C> <C> <C> <C>
1996
Operating Revenue $293,198 $337,509 $344,365 $436,120 $1,411,192
Operating Income(2) $ 35,439 $ 57,291 $ 34,498 $116,479 $ 243,707
Income from Continuing Operations,
Net of Income Taxes $ 20,096 $ 29,087 $ 25,468 $ 65,103 $ 139,754
Income from Discontinued Operations,
Net of Income Taxes $ 13,181 $ 13,788 $ 14,390 $ 14,338 $ 55,697
Net Income $ 33,277 $ 42,875 $ 39,858 $ 79,441 $ 195,451
Earnings Per Share of Common Stock
Basic
Income from Continuing Operations $ 0.12 $ 0.17 $ 0.15 $ 0.38 $ 0.82
Income from Discontinued Operations $ 0.08 $ 0.08 $ 0.08 $ 0.09 $ 0.33
Net Income $ 0.20 $ 0.25 $ 0.23 $ 0.47 $ 1.15
Diluted
Income from Continuing Operations $ 0.12 $ 0.17 $ 0.15 $ 0.38 $ 0.82
Income from Discontinued Operations $ 0.08 $ 0.08 $ 0.08 $ 0.09 $ 0.33
Net Income $ 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 Cognizant announced the signing of two 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. These acquisitions are separate transactions and
will be accounted for as purchases. 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 transactions have been
independently authorized by Cognizant, Walsh and PMSI boards of directors,
and are subject to approval by Walsh and PMSI shareholders.
Under terms of the Walsh agreement, 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). Currently Walsh has approximately 10.6 million of shares
outstanding. Cognizant issued 3,324,533 shares from treasury stock to
consummate the Walsh acquisition. In connection with the Distribution, Walsh
will become part of IMS Health. The transaction was closed on June 24, 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
NOTE 22. SUBSEQUENT EVENT (UNAUDITED)
The PMSI acquisition will not be completed until after the Distribution
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. PMSI shareholders will receive .3110 shares of IMS Health
common stock per PMSI share (or, based on a Cognizant share price of $46.613,
consideration of approximately $180,000). The number of shares received for
PMSI is subject to a collar adjustment based on the price of IMS Health
common stock during a period prior to the closing of the acquisition. The
Company expects to issue approximately 3,875,000 shares of common stock to
consummate the transaction. The acquisition of PMSI is also subject to the
receipt of regulatory and other required approvals.
On June 19, 1998, CTS filed a final registration statement with the SEC
with respect to its initial public 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 were offered by CTS and 417,000 shares were
offered by Cognizant of the total proceeds, CTS will use approximately $6.5
million to repay intercompany debt. Upon completion of the offering, the
Company is expected to hold approximately 71% of the outstanding stock of CTS
and accordingly, will continue to consolidate CTS results within its
financial statements. The transaction closed on June 24, 1998 and is expected
to result in a significant one-time gain to the Company to be reflected in
the quarter ended June 30, 1998.
Included below is selected financial data on CTS:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Operating Revenue $24,744 $12,032 $7,175
Net Income 1,028 642 461
Depreciation and Amortization 1,358 819 376
Identifiable Assets 18,298 7,827 5,451
</TABLE>
In connection with the Distribution, Cognizant borrowed $300 million on
June 24, 1998, which will be used to repay existing intercompany liabilities.
The Distribution Agreement provides that upon the Distribution, 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) to
be $300 million as of the Distribution Date. This debt will be the obligation
of NMR after the Distribution
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% to 47.2%. In
connection with 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 SAB51 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.
<PAGE>
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating Revenue $1,059,559 $1,411,192 $1,253,688 $995,112 $829,365
Costs and Expenses(1)(2) 831,949 1,167,485 1,186,079 849,899 739,408
Operating Income(1)(2) 227,610 243,707 67,609 145,213 89,957
Non-Operating Income--Net(3) 94,864 5,853 7,880 18,852 25,977
Income from Continuing Operations,
Before Provision for Income Tax 322,474 249,560 75,489 164,065 115,934
Provision For Income Taxes (88,358) (109,806) (34,214) (66,282) (40,461)
Income from Continuing Operations
Before Cumulative Effect
of Accounting Changes 234,116 139,754 41,275 97,783 75,473
Income from Discontinued Operations,
Net of Income Taxes (4) 78,234 55,697 47,606 48,622 33,384
Cumulative Effect of Accounting
Changes, Net of Income Taxes(5) -- -- -- -- (41,143)
Net Income $ 312,350 $ 195,451 $ 88,881 $ 146,405 $ 67,714
Earnings Per Share of Common Stock
Basic
Income from Continuing Operations $ 1.42 $ 0.82 $ 0.24 $ 0.57 $ --
Income from Discontinued Operations,
Net of Income Taxes $ 0.47 $ 0.33 $ 0.28 $ 0.29 $ --
Net Income $ 1.89 $ 1.15 $ 0.52 $ 0.86 $ --
Average Number of Shares Outstanding 165,163,000 169,944,000 169,522,000 169,946,000 --
Diluted
Net Income $ 1.86 $ 1.15 $ .52 -- --
Average Number of Shares Outstanding 167,490,000 170,500,000 171,608,000 -- --
As a % of Operating Revenue:
Operating Income 21.5% 17.3% 5.4% 14.6% 10.8%
Income Before Cumulative Effect
of Accounting Changes 22.1% 9.9% 3.3% 9.8% 9.1%
SHAREHOLDERS' EQUITY $ 801,570 $ 872,613 $ 604,588 $ 606,483 $ 540,833
TOTAL ASSETS $1,502,089 $1,793,445 $1,398,823 $1,305,114 $1,143,386
</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 $87,770 (see Note 7 to the
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
8 to the 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) Income from Discontinued Operations, net of Income Taxes include a tax
provision of $29,527, $43,764, $39,462, $32,801 and $18,014 for 1997, 1996,
1995, 1994 and 1993, respectively.
(5) 1993 includes the impact of $28,303 for the adoption of SFAS No. 112 and
$12,840 for the adoption of SFAS No. 106.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of IMS Health Incorporated
("accounting successor to Cognizant Corporation"):
Our report on the consolidated financial statements of IMS Health
Incorporated ("accounting successor to 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 8-K/A-2 on page 14. In connection
with our audits of such financial statements, we have also audited the
related financial statement schedule set forth on page 45 of this Form 8-K/A-2.
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, except for the
effect of the Distribution
described in Note 3 for
which the date is June 15, 1998
<PAGE>
IMS HEALTH INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1997, 1996 and 1995
(In thousands)
These numbers have been restated to show Nielsen Media Research as a
Discontinued Operation
<TABLE>
<CAPTION>
COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------
Additions
Balance 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 ........................... $11,697 $ 462 $8,254 $ 3,905
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
For the Year Ended December 31, 1996 ........................... $ 8,135 $4,093 $ 531 $11,697
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
For the Year Ended December 31, 1995 ........................... $ 8,195 $2,646 $2,706 $ 8,135
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS; PRO FORMA FINANCIAL STATEMENTS
AND EXHIBITS
(c) EXHIBITS
27. FINANCIAL DATA SCHEDULE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMS Health Incorporated
Date: June 29, 1998 By: /s/ James C. Malone
-----------------------------------------------
James C. Malone
Senior Vice President - Finance & Controller
