SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-14049
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 offices) (Zip Code)
Registrant's telephone number, including area code (203) 222-4200
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding
Common Stock, at September 30, 1998
par value $.01 per share 160,156,033
<PAGE>
IMS HEALTH INCORPORATED
INDEX TO FORM 10-Q/A
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, 1998 and 1997 3
Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended September 30, 1998 and 1997 5
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Financial Position (Unaudited)
September 30, 1998 and December 31, 1997 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8-19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20-32
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
<TABLE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)
Three Months Ended
September 30,
----------------------------
<S> <C> <C>
1998 1997
------------------ ------------------
Operating Revenue $ 283,606 $ 251,130
Operating Costs 112,364 106,332
Selling and Administrative Expenses 87,468 65,602
Direct Acquisition Integration Costs 43,019 0
Depreciation and Amortization 25,102 20,022
Acquired In-Process Research and Development 10,900 0
------------------ ------------------
Operating Income 4,753 59,174
Interest Income 7,241 3,141
Interest Expense (335) (89)
Gartner Equity Income 15,970 13,758
Gain from Stock Sale by Gartner 1,459 706
Gains from Dispositions, Net 12,047 3,955
Other Expense - Net (3,441) (212)
------------------ ------------------
Non-Operating Income - Net 32,941 21,259
Income from Continuing Operations,
Before Provision for Taxes 37,694 80,433
Provision for Income Taxes (12,739) (23,116)
------------------ ------------------
Income from Continuing Operations 24,955 57,317
Income from Discontinued Operations, Net of Income Tax Provision
of $8,251 for September 30, 1997 0 19,749
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Net Income $ 24,955 $ 77,066
================== ==================
Earnings Per Share of Common Stock:
Basic
Income from Continuing Operations $ 0.15 $ 0.35
Income from Discontinued Operations 0.00 0.12
------------------ ------------------
Basic Earnings Per Share $0.15 $ 0.47
Diluted
Income from Continuing Operations $0.15 $ 0.34
Income from Discontinued Operations 0.00 0.12
------------------ ------------------
Diluted Earnings Per Share $0.15 $ 0.46
Average Number of Shares Outstanding - Basic 164,051,000 163,146,000
Dilutive Effect of Shares Issuable During the Period Under Stock Option Plans 4,055,000 3,146,000
Adjustment of Shares to Reflect Options Exercised and Cancelled During the Period 734,000 151,000
================== ==================
Average Number of Shares Outstanding - Diluted 168,840,000 166,443,000
================== ==================
<FN>
See accompanying notes to the condensed consolidated financial statements
(unaudited)
</FN>
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)
<TABLE>
Nine Months Ended
September 30,
------------------------
<S> <C> <C>
1998 1997
------------------- ------------------
Operating Revenue $ 795,070 $ 731,511
Operating Costs 391,819 322,797
Selling and Administrative Expenses 244,560 219,520
Depreciation and Amortization 68,303 69,057
Acquired In-Process Research and Development 32,800 0
Direct Acquisition Integration Costs 48,019 0
------------------- ------------------
Operating Income 9,569 120,137
Interest Income 16,110 8,417
Interest Expense (747) (670)
Gartner Equity Income 48,864 44,429
Gain from Stock Sale by Gartner 14,838 706
Gain on Issuance of Subsidiary Stock 12,777 0
Gains from Dispositions, Net 22,462 9,391
Other Expense - Net (8,688) (2,306)
------------------- ------------------
Non-Operating Income - Net 105,616 59,967
Income from Continuing Operations, Before Provision for Taxes 115,185 180,104
Provision for Income Taxes (49,596) (49,349)
------------------- ------------------
Income from Continuing Operations 65,589 130,755
Income from Discontinued Operations, Net of Income Tax Provision of $15,887 and
$22,369 for nine months ended September 30, 1998 and 1997, respectively 42,093 59,271
------------------- ------------------
Net Income $ 107,682 $ 190,026
=================== ==================
Earnings Per Share of Common Stock:
Basic
Income from Continuing Operations $ 0.40 $ 0.79
Income from Discontinued Operations 0.26 0.35
------------------- ------------------
Basic Earnings Per Share $ 0.66 $ 1.14
Diluted
Income from Continuing Operations $ 0.39 $ 0.78
Income from Discontinued Operations 0.25 0.35
------------------- ------------------
Diluted Earnings Per Share $ 0.64 $ 1.13
Average Number of Shares Outstanding - Basic 163,237,000 166,148,000
Dilutive Effect of Shares Issuable During the Period Under Stock Option Plans 3,216,000 1,302,000
Adjustment of Shares to Reflect Options Exercised and Cancelled During the Period 2,110,000 289,000
=================== ==================
Average Number of Shares Outstanding - Diluted 168,563,000 167,739,000
=================== ==================
<FN>
See accompanying notes to the condensed consolidated financial statements
(unaudited)
</FN>
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollar amounts in thousands)
Three Months Ended
September 30,
-------------------------
<S> <C> <C>
1998 1997
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Net Income $ 24,955 $ 77,066
Other Comprehensive Income/(Loss), net of tax:
Foreign Currency Translation Adjustments 175 (2,965)
Unrealized (Losses)/Gains on Securities:
Unrealized Holding (Losses)/Gains Arising During the Period (Net of tax
benefit/(expense) of $502 and ($6,584) in 1998 and 1997, respectively) (1,329) 18,030
Less: reclassification adjustment for gains included in Net Income (Net of tax
Expense of ($2,302) and ($8,033) in 1998 and 1997, respectively) (6,100) (22,488)
------------------ -----------------
Net Unrealized Losses (7,429) (4,458)
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Other Comprehensive Loss (7,254) (7,423)
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Comprehensive Income $ 17,701 $ 69,643
================== =================
</TABLE>
<TABLE>
Nine Months Ended
September 30,
-------------------------
<S> <C> <C>
1998 1997
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Net Income $ 107,682 $ 190,026
Other Comprehensive Income/(Loss), net of tax:
Foreign Currency Translation Adjustments (9,421) (45,449)
Unrealized (Losses)/Gains on Securities:
Unrealized Holding (Losses)/Gains Arising During the Period (Net of tax
benefit/(expense) of $2,440 and ($6,025) in 1998 and 1997, respectively) (6,464) 16,867
Less: Reclassification Adjustment for Realized Gains included in Net Income (net
of tax expenses of ($1,557) and ($8,403) in 1998 and 1997, respectively) (4,126) (23,522)
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Net Unrealized Losses (10,590) (6,655)
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Other Comprehensive Loss (20,011) (52,104)
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Comprehensive Income $ 87,671 $ 137,922
================== =================
<FN>
See accompanying notes to the condensed consolidated financial statements
(unaudited)
</FN>
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
(Dollar amounts in thousands)
<TABLE>
<S> <C> <C>
September 30, December 31,
1998 1997
------------------- --------------------
Assets
Current Assets
Cash and Cash Equivalents $ 312,245 $ 312,442
Accounts Receivable-Net 245,947 251,623
Other Current Assets 73,056 65,692
------------------- --------------------
Total Current Assets 631,248 629,757
------------------- --------------------
Investment in Gartner Group 238,551 195,695
Marketable Securities and Other Investments 104,945 109,712
Property, Plant and Equipment-Net 177,741 178,533
Other Assets-Net
Computer Software 139,718 99,175
Goodwill 352,465 87,430
Other Assets 56,018 79,009
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Total Other Assets-Net 548,201 265,614
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Net Assets from Discontinued Operations 0 122,778
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Total Assets $ 1,700,686 $ 1,502,089
=================== ====================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts and Notes Payable $ 91,800 $ 44,441
Accrued and Other Current Liabilities 269,081 189,384
Accrued Income Taxes 56,707 52,696
Deferred Revenues 145,169 110,768
------------------- --------------------
Total Current Liabilities 562,757 397,289
Postretirement and Postemployment Benefits 44,546 38,082
Deferred Income Taxes 98,756 92,153
Minority Interests 114,811 101,209
Other Liabilities 78,213 71,786
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Total Liabilities 899,083 700,519
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Shareholders' Equity 801,603 801,570
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Total Liabilities and Shareholders' Equity $ 1,700,686 $ 1,502,089
=================== ====================
<FN>
See accompanying notes to the condensed consolidated financial (unaudited).
</FN>
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
Nine Months Ended
September 30,
------------------------------
<S> <C> <C>
1998 1997
------------ -----------------
Cash Flows from Operating Activities:
Net Income $107,682 $ 190,026
Less Income from Discontinued Operations (42,093) (59,271)
------------ -----------------
Income from Continuing Operations 65,589 130,755
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 68,303 69,057
Gains on Issuance of Subsidiary Stock (12,777) 0
Gains from Sale of Investments, Net (22,462) (9,391)
Acquired In-Process Research & Development 32,800 0
Direct Acquisition Integration costs 48,019 0
Postemployment Benefit Payments (2,748) (7,058)
Non-recurring Charge Payments (2,835) (4,278)
Net Decrease in Accounts Receivable 29,790 22,527
Net Increase in Deferred Revenues 14,161 31,490
Gartner Group Equity Income, Net of Taxes (27,884) (25,956)
Gain from Stock Sale by Gartner (14,838) (706)
Minority Interest Expense 7,012 2,690
Deferred Income Taxes 1,118 22,038
Net Increase (Decrease) in Accrued Income Taxes 5,912 (2,440)
Net (Increase) in Other Working Capital Items (33,601) (29,700)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 155,559 199,028
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Cash Flows from Investing Activities:
Payments for Acquisitions of Businesses (2,938) 0
Cash of Companies Acquired in Stock Purchases 11,895 0
Proceeds from Sale of Investments 42,432 43,601
Capital Expenditures (20,375) (34,058)
Additions to Computer Software (45,428) (43,148)
(Increase) Decrease in Investments (20,705) 268
Other 4,369 (3,713)
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Net Used in Investing Activities (30,750) (37,050)
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Cash Flows from Financing Activities:
Payments for Purchase of Treasury Shares (510,867) (302,011)
Proceeds from Exercise of Stock Options 61,638 11,365
Proceeds from Issuance of Subsidiary Stock 27,128 0
Payments of Dividends (14,805) (15,008)
Employee Stock Purchase Plan 3,403 782
Proceeds from Debt assumed by Nielsen Media Research 300,000 0
Minority Interest Financing 0 100,000
Other 33,288 (721)
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Net Cash Used in Financing Activities (100,215) (205,593)
- -----------------------------------------------------------------------------------------------------------------------
Change of Gartner Group to Equity Basis 0 (123,697)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (7,618) (10,169)
Cash Flow from Discontinued Operations (17,173) 31,210
- -----------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (197) (146,271)
Cash and Cash Equivalents, Beginning of Period 312,442 422,963
- ----------------------------------------------------------------------------------------------------- -----------------
Cash and Cash Equivalents, End of Period $312,245 $ 276,692
=======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 747 $ 670
Cash paid during the period for income taxes $ 65,313 $ 61,309
Non-Cash Investing Activities:
Stock Issued in Connection with Acquisitions $243,854 -
<FN>
See accompanying notes to the condensed consolidated financial statements
(unaudited).
</FN>
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 1. Interim Consolidated Financial Statements
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X under the Securities and Exchange
Act of 1934, as amended. The condensed financial statements and related notes
should be read in conjunction with the consolidated financial statements and
related notes of Cognizant Corporation in the 1997 Annual Report on Form 10-K
and IMS Health Incorporated (the "Company" or "IMS Health") on the Form 8K/A-2
filed July 22, 1998. Accordingly, the accompanying condensed consolidated
financial statements do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented have been included. Certain prior-period amounts have been
reclassified to conform with the 1998 presentation.
Note 2. Restatement of Interim Financial Statements
The Company's Form 10-Q/A as of and for the three and nine months ended
September 30, 1998 has been filed for the restatement of the value initially
ascribed to acquired in-process research and development projects relating to
the acquisition of Walsh International Inc and certain non-US assets of
Pharmaceutical Marketing Services Inc. ("PMSI"). The amount originally recorded
was based on the Company's application of the then general methods of allocating
the purchase price and the determination of in-process research and development.
Since that date, however, the SEC has revised the approach for such valuation.
The estimate for the one-time charges for acquired in process research and
development projects for the initial filing was $52,000 (reported as $57,000 in
quarter 2) and $14,200, which has subsequently been reduced to $21,900 and
10,900 for Walsh and PMSI respectively. In addition, based on a third party
appraiser, the Company allocated $29,000 at Walsh and $7,700 at PMSI to existing
core technology, representing computer software that is currently in use, which
is amortized over 5 years. Approximately $156,557 for the Walsh acquisition and
$115,275 for the PMSI acquisition is recorded as the excess of the purchase
price over the fair value of identifiable net assets (goodwill), which is being
amortized on a straight-line basis over 15 years. The restatement does not
affect previously reported net cash flows for the periods. The effect of this
reallocation on previously reported condensed consolidated financial statements
as of and for the three and
nine month periods ended September 30, 1998 is as follows:
<TABLE>
Three months Nine months
.ended September 30, 1998 .ended September 30, 1998
<S> <C> <C> <C> <C>
Statement of Operations: As reported As restated As reported As restated
In-process Research and Development $ 9,200 $ 10,900 $ 66,200 $ 32,800
Depreciation and Amortization $ 24,228 $ 25,102 $ 67,429 $ 68,303
Provision for Income Taxes $ (12,978) $ (12,739) $ (49,835) $ (49,596)
Net Income $ 27,290 $ 24,955 $ 74,917 $ 107,682
Earnings per common share - Basic $ 0.17 $ 0.15 $ 0.46 $ 0.66
Earnings per common share - Diluted $ 0.16 $ 0.15 $ 0.44 0.64
</TABLE>
September 30, 1998
Balance Sheet As reported As restated
Computer Software $ 104,199 $ 139,718
Other Assets $ 69,509 $ 56,018
Goodwill $ 330,162 $ 352,465
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 3. Basis of Presentation
This document relates to IMS Health. The Common Stock of IMS Health was
distributed by Cognizant Corporation ("Cognizant") to its shareholders on June
30, 1998. Simultaneously with the distribution (the "Distribution"), Cognizant
changed its name to Nielsen Media Research, Inc. ("Nielsen Media Research").
Notwithstanding the legal form of the distribution, whereby Cognizant spun off
IMS Health, for accounting purposes the transaction is accounted for as if
Cognizant spun off Nielsen Media Research and IMS Health has been deemed the
"accounting successor" to Cognizant. The separation created IMS Health as the
premier global provider of information solutions to the pharmaceutical and
healthcare industries, and established an independent Nielsen Media Research,
the leader in electronic audience measurement services. IMS Health consists of
the operations of the Company and various operating subsidiaries including
Erisco, Inc. ("Erisco"), Enterprise Associates, Inc. ("Enterprises"), Cognizant
Technology Solutions Corporation ("CTS"), SSJ K.K. ("Super Systems Japan"), and
an equity investment in Gartner Group, Inc.
("Gartner").
Cognizant received a favorable ruling from the Internal Revenue Service with
respect to the tax-free treatment of the Distribution in May 1998. Cognizant's
Board of Directors on June 15, 1998 approved the final plan, terms and
conditions relating to the separation of the company including distribution, tax
allocation, employee benefits and other agreements and 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 was effective June 30, 1998.
In connection with the Distribution, Cognizant borrowed $300 million on June 24,
1998, which was used to repay existing intercompany liabilities. This debt
remained the obligation of Nielsen Media Research following the Distribution. In
connection with the Distribution, Cognizant contributed to IMS Health all cash
in Cognizant's accounts other than (i) cash required by Cognizant (renamed
Nielsen Media Research) to satisfy certain specified obligations and (ii) such
additional cash as was necessary for the net borrowings of Cognizant (renamed
Nielsen Media Research) to equal $300 million as of the Distribution.
Prior to the Distribution, Nielsen Media Research and IMS Health entered into
certain agreements that 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 that may arise 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 (including certain liabilities that may
arise in connection with the 1996 spin-off of Cognizant from The Dun and
Bradstreet Corporation ("D&B")).
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 for periods up to and
including June 30, 1998 and reflects the Distribution which occurred on June 30,
1998.
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 3. Basis of Presentation (continued)
<TABLE>
Summarized data for discontinued operations is as follows (dollar amounts in
thousands):
Results of Operations (Unaudited) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
<S> <C> <C> <C> <C>
---------------------------------------- ---------------------------------------
1998 1997 1998 (1) 1997
--------------------- ------------------ -------------------- ------------------
Operating Revenue - $ 89,911 $ 193,996 $ 263,366
Income Before Provision for Income Taxes - 28,000 57,980 81,640
===================== ================== ==================== ==================
Income from Discontinued Operations, Net of
Income Taxes - $ 19,749 $ 42,093 $ 59,271
===================== ================== ==================== ==================
<FN>
(1) Includes Nielsen Media Research results through the date of the spin.
</FN>
</TABLE>
Net Assets of Discontinued Operations
December 31, 1997
----------------------
Current Assets $ 64,655
Property Plant & Equipment 55,050
Computer Software 43,093
Deferred Charges 16,299
Other Assets 21,112
Current Liabilities (43,921)
Other Liabilities (33,510)
======================
Net Assets of Discontinued Operations $ 122,778
======================
As of September 30, 1998, IMS Health does not have any ownership interest in
Nielsen Media Research.
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 these estimates. Estimates are used for: allowance for uncollectible
accounts receivable, depreciation and amortization, capitalized software costs,
employee benefit plans, taxes, restructuring reserves, preliminary purchase
price allocations and contingencies.
Note 4. Investments
In the third quarter of 1997, the Company's voting interest in Gartner fell
below 50% as a result of the exercise of Gartner employee stock options and
employee stock purchases. Accordingly, effective January 1, 1997, the Company
has deconsolidated Gartner and is accounting for its ownership interest under
the equity basis.
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 ("SAB 51 Gain"). In the third quarter of 1998, proceeds from
the issuance of shares to Gartner employees, including associated tax benefits,
increased Gartner's equity by $5,474 and reduced the Company's ownership
interest by less than 1% to approximately 47% at September 30, 1998.
Accordingly, the Company recognized a pre-tax unrealized gain on Gartner stock
of $1,459 corresponding to the net increase in the value of its underlying
investment in Gartner. In addition, Gartner equity income for the third quarter
includes the Company's share of the pre-tax loss from the sale of Gartner Group
Learning of $932. (See Note 14. Subsequent Events).
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 5. Dispositions
During the third quarter of 1998, the Company recorded a $12,047 pre-tax net
gain principally reflecting the sale of its investments in Aspect Development,
Inc., and MediQual, Inc. which were part of Enterprises portfolio and sale of
stock holdings in CTS (see Note 5 Public Offering of a Subsidiary). These sales
generated cash proceeds of $19,267.
Note 6. Public Offering of a Subsidiary
CTS effected an initial public offering (the "CTS IPO") of 2,917,000 shares of
Class A Common Stock, par value $0.01 per share, of CTS (3,354,550 including the
underwriters' over-allotment option granted by Cognizant) on June 19, 1998. Of
such shares, 2,500,000 were offered by CTS and 417,000 shares were offered by
Cognizant. Of the total proceeds, CTS used approximately $6.5 million to repay
intercompany debt owed to Cognizant. Cognizant's interest in CTS was transferred
to the Company in the Distribution. After the initial offering, the Company held
approximately 67.0% of the outstanding stock of CTS and accordingly, continues
to consolidate CTS results within its financial statements. Any minority
interest is captured on the Statement of Financial Position in the minority
interest line. The initial closing on June 24, 1998 with the Company's allocable
portion of a SAB 51 Gain being $12,777 (the "CTS IPO Gain"). The underwriters'
over-allotment option of 437,550 shares was exercised in full during the third
quarter. The Company recognized a gain of $2,731 from this sale of shares (the
"over allotment gain") and reduced its ownership in CTS to 61.8%. CTS's Class A
Common Stock is listed on the NASDAQ National Market under the symbol "CTSH".
Included below is selected financial data on CTS:
--------------- ----------------------- ----------------------
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
--------------- ----------------------- ----------------------
--------------- ----------------------- ----------------------
Revenue $ 16,401 $ 39,106
--------------- ----------------------- ----------------------
--------------- ----------------------- ----------------------
Net Income 1,699 3,477
--------------- ----------------------- ----------------------
Note 7. Acquisitions
Walsh Acquisition
On June 24, 1998, Cognizant acquired Walsh International Inc. ("Walsh"). The
final purchase price of the acquisition was $193,748, consisting of $167,148 of
common stock, $9,521 of stock options to be issued and $17,079 of accrued
acquisition and integration costs. Under the terms of Walsh acquisition
agreement, Walsh shareholders received .3041 shares of Cognizant common stock
per Walsh per share (or, based on a Cognizant share price of $51.792,
consideration of approximately $167,148). Walsh had 10,612,628 shares
outstanding. Cognizant issued 3,227,300 shares from treasury stock to consummate
the Walsh acquisition. The direct acquisition and integration cost consist of
severance of $4,876, lease terminations of $2,569, and other direct acquisition
and integration costs of $9,634. These direct acquisition and integration costs
are incremental to other costs and were incurred as a direct results of the
acquisition and the formal plan to exit certain activities as part of the
overall integration effort (such as severance costs related to Walsh employees)
and certain contractual costs (such as Walsh leases). Approximately $156,557 is
recorded as the excess of the purchase price over the fair value of identifiable
net assets (goodwill), which is being amortized on a straight-line basis over 15
years.
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 7. Acquisitions - (continued)
PMSI Acquisition
On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical
Marketing Services Inc. ("PMSI"). The final purchase price of the acquisition
was $103,291, consisting of $75,292 of common stock, $5,415 of stock options to
be issued and $22,584 of accrued acquisition and integration costs. Under the
terms of PMSI acquisition agreement, PMSI received 1,197,963 shares of IMS
Health common stock issued from treasury stock, consideration of approximately
$75,292. The acquisition and integration cost consist of severance of $3,794,
lease terminations of $1,623, contract cancellation of $10,935, and other direct
acquisition and integration costs of $6,232. These direct acquisitions and
integration costs are incremental to other costs and were incurred as a direct
results of the formal plan to exit certain activities as part of the overall
integration effort (such as severance costs related to PMSI employees) and
certain contractual cancellation costs (such as PMSI contracts and leases).
Approximately $115,275 is recorded as the excess of the purchase price over the
fair value of identifiable net assets (goodwill), which is being amortized on a
straight-line basis over 15 years.
Purchase Price Allocation
In connection with both the acquisitions, the Company made allocations of the
purchase price to acquired in-process research and development ("IPR&D")
amounting to $21,900 in the second quarter of 1998 related to Walsh acquisition
and $10,900 in the third quarter of 1998 related to PMSI acquisition.
The Securities and Exchange Commission ("the SEC") has recently issued revised
guidance with respect to allocations of IPR&D projects in connection with
acquisitions. In accordance with this guidance, the amount allocated to IPR&D
reflects the relative value and contribution of the acquired IPR&D.
Consideration was given to the project's stage of completion, the complexity of
the work completed to date, the difficulty of completing the remaining
development, costs already incurred and the projected cost to complete the
projects.
In addition, the Company allocated $29,000 at Walsh and $7,700 at PMSI to
existing core technology, representing computer software that will be used. Such
amounts are being amortized over 5 years.
The preliminary allocation of the Company's aggregate purchase price to the
tangible and identifiable intangible assets acquired and liabilities assumed in
connection with these acquisitions were based primarily on estimates of fair
values by an independent appraisal firm. The allocation is summarized below:
Walsh PMSI Total
- ------------------- -------------------- --------------------- ----------------
In-process R&D write-off $ 21,900 $ 10,900 $ 32,800
Net liabilities assumed (5,009) (28,274) (33,283)
Software/ Core technology 29,000 7,700 36,700
Deferred taxes (8,700) (2,310) (11,010)
Goodwill 156,557 115,275 271,832
========================== ============= ===================== ================
Total Purchase Price $ 193,748 $ 103,291 $ 297,039
========================== ============= ===================== ================
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 7. Acquisitions - (continued)
The Company does not believe that the current purchase price allocation, either
related to Walsh or PMSI acquisitions, will differ significantly from this
preliminary purchase price allocation.
At the date of the respective acquisitions, the development of the IPR&D
projects had not yet reached technological feasibility and had no alternative
future uses. Accordingly, these costs were expensed as of the respective
acquisition dates.
In the aggregate, the impact of both the Walsh and PMSI acquisitions on the
results of operations, other than the charges for in-process research and
development, had they occurred on January 1, 1998 or 1997 would be immaterial.
In connection with the PMSI acquisition, the Company commenced an evaluation of
its existing IMS Health product offerings. Based on this strategic assessment,
the Company decided to abandon certain IMS Health existing software products.
The impact of this decision was to recognize the impairment of certain computer
software assets ($36,300), the closure of certain IMS facilities ($800) and the
severance of some IMS employees ($5,600). This resulted in a one-time charge of
$43,019 recorded in the quarter as a one-time acquisition charge as a component
of operating income.
Note 8. Investment Partnership
Two of the Company's subsidiaries have contributed assets to, and participate
in, a limited partnership. One subsidiary serves as general partner, and all
other partners hold limited partnership interests. The partnership, which is a
separate and distinct legal entity, is in the business of licensing database
assets and computer software. In the second quarter of 1997, third-party
investors contributed $100,000 to the partnership in exchange for limited
partnership interests. 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 9. 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
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 9. Litigation - (continued)
Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI
when it agreed to be acquired by defendants and that the defendants induced SRG
to breach that agreement. IRI's complaint alleges damages in excess of $350,000,
which amount IRI has asked to be trebled under the antitrust laws. IRI also
seeks punitive damages in an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in the
complaint. On May 6, 1997 the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an amended and restated
complaint repleading its alleged claim of attempted monopolization in the United
States and realleging its other claims. On August 18, 1997, defendants moved for
an order dismissing the amended claims. On December 1, 1997, the court denied
the motion and, on December 16, 1997, defendants filed a supplemental answer
denying the remaining material allegations of the amended complaint.
In light of the potentially significant liabilities which could arise from the
IRI Action and in order to facilitate the distribution by D&B of shares of
Cognizant and ACNielsen in 1996, D&B, ACNielsen ("ACNielsen"; the parent company
of A.C. Nielsen Company) and Cognizant entered into an Indemnity and Joint
Defense Agreement pursuant to which they agreed (i) to certain arrangements
allocating liabilities that may arise out of or in connection with the IRI
Action, and (ii) to conduct a joint defense of such action. In particular, the
Indemnity and Joint Defense Agreement provides that ACNielsen will assume
exclusive liability for liabilities up to a maximum amount to be calculated at
the time such liabilities, if any, become payable (the "ACN Maximum Amount") and
that Cognizant and D&B will share liability equally for any amounts in excess of
the ACN Maximum Amount. The ACN Maximum Amount will be determined by an
investment banking firm as the maximum amount which ACNielsen will be able to
pay after giving effect to (i) any plan submitted by such investment bank which
is designed to maximize the claims paying ability of ACNielsen without impairing
the investment banking firm's ability to deliver a viability opinion (but which
will not require any action requiring shareholder approval), and (ii) payment of
related fees and expenses. For these purposes, financial viability means the
ability of ACNielsen, after giving effect to such plan, the payment of related
fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as
they become due and to finance the current and anticipated operating and capital
requirements of its business, as reconstituted by such plan, for two years from
the date any such plan is expected to be implemented.
Under the terms of the Distribution Agreement dated October 28, 1996 among D&B,
Cognizant and ACNielsen (the "1996 Distribution Agreement"), as a condition to
the Distribution, IMS Health and Nielsen Media Research are required to
undertake to be a jointly and severally liable to D&B and ACNielsen for
Cognizant's obligations under the 1996 Distribution Agreement. In connection
with the Distribution, 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
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 9. Litigation - (continued)
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 10. Financial Instruments with Off-Balance-Sheet Risk
The Company transacts business in virtually every part of the world and is
subject to risks associated with changing foreign exchange rates. The Company's
objective is to reduce earnings and cash flow volatility associated with foreign
exchange rate changes to allow management to focus its attention on its core
business activities. Accordingly the Company enters into various contracts which
change in value as foreign exchange rates change to protect the value of a
portion of committed and anticipated foreign currency revenues and
non-functional currency assets and liabilities. By policy, the Company maintains
hedge coverage between minimum and maximum percentages of its anticipated
foreign exchange exposures over the next year. The gains and losses on these
hedges offset changes in the value of the related exposures.
It is the Company's policy to enter into foreign currency transactions only to
the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for speculative purposes.
The Company uses forward contracts and purchased currency options to hedge
committed and anticipated foreign currency denominated revenues, respectively.
The principal currencies hedged are the Japanese yen, Swiss franc, German mark
and Italian lira. The Company also uses forward contracts to hedge
non-functional currency assets and liabilities.
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 August 31, 1998, the date of the consolidation of
the Company's international operations, the notional amount hedged was $53,000.
In addition, at August 31, 1998, IMS had approximately $51,000 in foreign
exchange forward contracts outstanding with various expiration dates through
November 1998. 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.
Note 11. Adoption of Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for all fiscal
quarters for all fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 11. Adoption of Statements of Financial Accounting Standards -(continued)
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair-value hedge transactions
in which the Company is hedging changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. For cash-flow hedge transactions, in which the Company is hedging
the variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be recognized in current period earnings. Management is currently
evaluating the effects of this change on the Company's financial statements.
In 1997, the Company adopted Statement of Financial Accounting Standard No. 131
"Disclosures About Segments of an Enterprise and Related Information". As
required, the Company has restated prior period segment results in order to
conform to the new statement. The Company, operating globally in approximately
80 countries, delivers information, software and related services principally
through the strategic business segments referenced below.
The IMS segment represents the Company's operations, which are the leading
global providers of market information, sales management systems and
decision-support services to the pharmaceutical and healthcare industries. The
Emerging Markets segment includes Erisco, a leading supplier of software-based
administrative and analytical solutions to the managed care industry; CTS, a
provider of software application development and maintenance services and Year
2000 and Eurocurrency compliance services; Super Systems Japan, a marketer of
financial application software products to the Japanese market; Enterprises, the
Company's venture capital unit focused on investments in emerging healthcare
businesses; and Pilot Software Inc.("Pilot"), which was sold as of 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 operating income.
<TABLE>
--- ---------------------------------- -- -- -------------------------------------
Period Ended September 30, 1998 Three Months Nine Months
- -------------------------------
--- ---------------------------------- -- -- -------------------------------------
------------ -------------- ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
IMS Emerging Total IMS Emerging Total
Markets (1) Markets (1)
------------ -------------- ------------ ------------ --------------- ------------
Operating Revenue $257,411 $26,195 $283,606 $730,234 $64,836 $795,070
Segment Operating Income (2) $8,922 $3,602 $12,524 $63,035 $6,188 $69,223
General Corporate Expenses (3) $(7,771) $(59,654)
Interest Income (4) $2,806 $257 $3,063 $6,956 $337 $7,293
Interest Expense (5) $(178) $(178) $(558) $(558)
Non-Operating Income/(Expense) - Net
Gartner Equity Income, Net $16,902 $52,794
Gain on Gartner Stock (SAB 51) $1,459 $14,838
Gartner Loss on Sale/R&D write-off $(932) $(3,930)
Gains from Dispositions - Net $10,248 $10,248 $33,440 $33,440
Other Income - Net $2,379 $1,739
------------ --------------- ------------ -------------- --------------- -----------
Income from Continuing Operations Before
Provision for Income Taxes $37,694 $115,185
Provision for Income Taxes $(12,739) $(49,596)
------------ --------------- ------------ -------------- -------------- ------------
Income from Continuing Operations $24,955 $65,589
Income from Discontinued Operations,
Net of Income Taxes $0 $42,093
- -------------------------------------------- ------------ -------------- ------------ ------------ --------------- ------------
Net Income $24,955 $107,682
- -------------------------------------------- ------------ -------------- ------------ ------------ --------------- ------------
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 12. Operations by Business Segment (continued)
<TABLE>
Period Ended September 30, 1997 Three Months Nine Months
- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
--- ---------------------------------- -- -- ------------------------------------
IMS Emerging Total IMS Emerging Total
Markets (1) Markets (1)
------------- -------------- ------------ ------------ -------------- ------------
Operating Revenue $233,196 $17,934 $251,130 $672,382 $59,129 $731,511
Segment Operating Income/(Loss) $63,953 $2,221 $66,174 $157,624 $(16,498) $141,126
General Corporate Expenses $(7,000) $(20,989)
Interest Income (4) $1,321 $46 $1,367 $3,203 $123 $3,326
Interest Expense (5) $(128) $(70) $(198) $(540) $(347) $(887)
Non-Operating Income/(Expense) - Net
Gartner Equity Income $13,758 $44,429
Gain on Gartner Stock (SAB 51) $706 $706
Gains from Dispositions - Net $3,955 $3,955 $9,391 $9,391
Other Income - Net $1,671 $3,002
- ------------------------------------------- ------------- -------------- ------------ -- ------------ -------------- --------------
Income from Continuing Operations
Before Provision for Income Taxes $80,433 $180,104
Provision for Income Taxes $(23,116) $(49,349)
- ------------------------------------------ ------------- -------------- ------------- -------------- ------------- -------------
Income from Continuing Operations $57,317 $130,755
Income from Discontinued Operations,
Net of Income Taxes $19,749 $59,271
- ------------------------------------------- ------------- -------------- ------------ ------------ -------------- ------------
Net Income $77,066 $190,026
- ------------------------------------------- ------------- -------------- ------------ ------------ -------------- ------------
<FN>
Notes to Operations by Business Segments:
(1) Excludes intersegment sales in 1998 of $2,669, and $10,576 for the
three and nine month periods presented, respectively. Excludes intersegment
sales in 1997 of $3,035, and $8,541 for the three and nine month periods
presented, respectively. These sales, primarily from CTS to IMS, are accounted
for on a time and materials basis and recognized as the service is performed.
As discussed in Note 5. Public Offering of a Subsidiary, the initial closing
for the CTS IPO occurred on June 24,1998 and selected financial data on CTS is
provided in that note.
(2) Segment operating income in 1998 includes a one-time in-process research and
development write-off estimate of $10,900 related to the PMSI acquisition. The
one-time in-process research and development write-off related to the Walsh and
PMSI acquisitions for the nine month period presented is $32,800. In addition,
segment operating income in 1998 include direct acquisition integration costs
related to the Walsh and PMSI acquisitions of $43,019, and $48,019 for the three
and nine month periods presented, respectively. (3) General Corporate Expenses
in 1998 include one-time spin-related charges of $35,025 for the nine month
period presented. (4) Interest income in 1998 excludes amounts recorded at
corporate of $4,178 and $8,817 for the three and nine month periods presented,
respectively. Interest income in 1997 excludes amounts recorded at corporate of
$1,774 and $5,091 for the three and nine month periods presented, respectively.
(5) Interest expense in 1998 excludes amounts recorded at corporate of $157 and
$189 for the three and nine month periods presented, respectively. Interest
expense in 1997 excludes amounts recorded at corporate of $109 and $217 for the
three and nine month periods presented, respectively.
</FN>
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 13. Comprehensive Income
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, which the Company adopted in the first quarter of
1998, establishes standards for reporting and displaying comprehensive income
and its components in a full set of general purpose financial statements. Where
applicable, earlier periods have been restated to conform to the standards set
forth in SFAS No. 130. The Company's Comprehensive Income consists of net
income, foreign currency translation adjustments and unrealized holding
gains/(losses) on securities (see Condensed Consolidated Statements of
Comprehensive Income). Accumulated balances of Cumulative Translation
Adjustments and Unrealized Gains/(Losses) on Investments, as of September 30,
1998 are as follows:
<TABLE>
<S> <C> <C> <C>
Cumulative Unrealized Total Other
Translation Gains/(Losses) Comprehensive
Adjustment on Investments (1) Items
---------------------- ----------------------- ----- ----------------------
Balance December 31, 1997 $(76,771) $32,650 $(44,121)
Current Period Change (9,421) (10,590) (20,011)
================================== ====================== ======================= ===== ======================
Balance September 30, 1998 $(86,192) $22,060 $(64,132)
================================== ====================== ======================= ===== ======================
<FN>
(1) Current period change is principally due to the sale of Enterprise
investments in Aspect Development, Inc. and MediQual, Inc.
</FN>
</TABLE>
Note 14. Subsequent Events
On October 20, 1998, the Company announced that its Board of Directors had
authorized a systematic stock repurchase program to buy up to 8.0 million shares
of the Company's outstanding common stock.
On November 11, 1998 the Company announced that its Board of Directors has
approved a plan, in principle, to spin-off substantially all of its equity
ownership of Gartner. The transaction, expected to be completed in the first
half of 1999, is to be structured as a tax-free distribution of Gartner stock to
IMS Health shareholders.
The Company owns approximately 47 million shares of Gartner. Prior to the
spin-off, 40.1 million of these shares will be exchanged for new Class B Common
Stock of Gartner. The Class B Stock will be entitled to elect 80% of Gartner's
Board of Directors, but will otherwise be identical to existing Class A Common
Stock. The exchange will be part of a Gartner recapitalization and requires
approval by Gartner shareholders. The Class B shares will be distributed to the
Company's shareholders in a tax-free distribution, subject to receipt of a
favorable tax ruling from the Internal Revenue Service with respect to the
distribution. The Company intends to monetize its remaining position in Gartner
by the end of 1999. This includes 6.9 million shares and warrants to purchase a
further 600,000 shares.
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 14. Subsequent Events - (continued)
Separately, Gartner announced that, subject to approval by the Internal Revenue
Service of the tax-free treatment of the distribution, it intends to declare a
special one-time cash dividend of $300,000 to its shareholders of record
immediately prior to the spin-off. The Gartner Board of Directors has authorized
a $300,000 open market share repurchase program for up to 20% of its stock
commencing immediately after the spin-off.
The transaction is subject to receipt of a favorable ruling from the Internal
Revenue Service, final approval by the Company's and Gartner Boards of
Directors, and approval by Gartner shareholders.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Dollar amounts in thousands, except per share data)
This document relates to IMS Health Incorporated ("IMS Health"). The Common
stock of IMS Health was distributed by Cognizant Corporation ("Cognizant") to
its shareholders on June 30, 1998. Simultaneously with the distribution (the
"Distribution") Cognizant changed its name to Nielsen Media Research, Inc.
("Nielsen Media Research"). Notwithstanding the legal form of the distribution,
whereby Cognizant spun off IMS Health, for accounting purposes the transaction
is accounted for as if Cognizant spun off Nielsen Media Research, Inc. and IMS
Health has been deemed the "accounting successor" to Cognizant. The separation
created IMS Health as the premier global provider of information solutions to
the pharmaceutical and healthcare industries, and established an independent
Nielsen Media Research, the leader in electronic audience measurement services.
IMS Health consists of operations of the Company and various operating
subsidiaries including Erisco, Inc. ("Erisco"), Enterprise Associates, Inc.
("Enterprises"), Cognizant Technology Solutions Corporation ("CTS"), SSJ K.K.
("Super Systems Japan"), and an equity investment in Gartner Group, Inc.
("Gartner").
Cognizant received a favorable ruling from the Internal Revenue Service with
respect to the tax-free treatment of the transaction in May 1998. Cognizant's
Board of Directors on June 15, 1998 approved the final plan, terms and
conditions relating to the separation of the company including distribution, tax
allocation, employee benefits and other agreements and 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 was effective June 30, 1998.
In connection with the Distribution, Cognizant borrowed $300 million on June 24,
1998, which was used to repay existing intercompany liabilities. This debt
remained the obligation of Nielsen Media Research following the Distribution. In
connection with the Distribution, Cognizant contributed to IMS Health all cash
in Cognizant's accounts other than (i) cash required by Cognizant (renamed
Nielsen Media Research) to satisfy certain specified obligations and (ii) such
additional cash as was necessary for the net borrowings of Cognizant (renamed
Nielsen Media Research) to equal $300 million as of the Distribution.
Prior to the Distribution, Nielsen Media Research and IMS Health entered into
certain agreements that 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 that may arise 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 (including certain liabilities that may
arise in connection with the 1996 spin-off of Cognizant from D&B).
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 for periods up to and
including June 30, 1998 and reflects the Distribution which occurred on June
30,1998.
As of September 30, 1998, IMS Health does not have any ownership interest in
Nielsen Media Research.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
The 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 these estimates. Estimates are used for: allowance for uncollectible
accounts receivable, depreciation and amortization, capitalized software costs,
employee benefit plans, taxes, restructuring reserves, preliminary purchase
price allocations and contingencies.
Public Offering of a Subsidiary
CTS effected an initial public offering (the "CTS IPO") of 2,917,000 shares of
Class A Common Stock, par value $0.01 per share, of CTS (3,354,550 including the
underwriters' over-allotment option granted by Cognizant) on June 19, 1998. Of
such shares, 2,500,000 were offered by CTS and 417,000 shares were offered by
Cognizant. Of the total proceeds, CTS used approximately $6.5 million to repay
intercompany debt owed to Cognizant. Cognizant's interest in CTS was transferred
to the Company in the Distribution. After completion of the offering, the
Company approximately 67.0% of the outstanding stock of CTS and accordingly,
continues to consolidate CTS results within its financial statements. Any
minority interest is captured on the Statement of Financial Position in the
minority interest line. The transaction closed on June 24, 1998 with the
Company's allocable portion of a SAB 51 Gain being $12,777 (the "CTS IPO Gain").
The underwriters' over-allotment option of 437,550 shares was exercised during
the third quarter. The Company recognized a gain of $2,731 from this sale ("over
allotment gain") and reduced its ownership in CTS to 61.8%. CTS's Class A Common
Stock is listed on the NASDAQ National Market under the symbol "CTSH".
Walsh Acquisition
On June 24, 1998 Cognizant acquired Walsh International, Inc. ("Walsh"). The
total purchase price of the acquisition was $193,748, including $167,148 of
common stock, $9,521 of stock options to be issued and $17,079 of accrued
acquisition and integration costs. Under terms of the Walsh acquisition
agreement, Walsh shareholders received .3041 shares of Cognizant Corporation
common stock per Walsh share (or, based on a Cognizant share price of $51.792,
consideration of approximately $167,148). Walsh had 10,612,628 shares
outstanding. Cognizant issued 3,227,300 shares from treasury stock to consummate
the Walsh acquisition. The direct acquisition and integration costs consist of
severance of $4,876 lease terminations of $2,569 and other direct acquisition
and integration costs of $9,634. These direct acquisition and integration costs
are incremental to other costs and were incurred as a direct result of the
formal plan to exit certain activities as part of the overall integration effort
(such as severance costs related to Walsh employees) and certain contractual
cancellation costs (such as Walsh leases). The impact of the acquisition on
results of operations, other than the charge for in-process research and
development, had it occurred January 1, 1998 or 1997 would be immaterial. To
date incurred acquisition and integration costs are within original estimates.
Approximately $156,557 will be recorded as the excess of the purchase price over
the fair value of identifiable net assets, also known as goodwill, which is
being amortized on a straight-line basis over 15 years.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
PMSI Acquisition
IMS Health acquired certain non-U.S. assets of Pharmaceutical Marketing
Services Inc. ("PMSI") on August 5, 1998. The purchase price of the acquisition
was $103,291, including $75,292 of common stock, $5,415 of stock options to be
issued and $22,584 of accrued acquisition integration costs.
Under terms of the PMSI acquisition agreement, PMSI received 1,197,963 shares of
IMS Health common stock, consideration of approximately $75,292. The acquisition
integration costs consist of severance of $3,794, lease terminations of $1,623,
contract cancellation costs of $10,935, and other direct acquisition and
integration costs of $6,232. These direct acquisition integration costs are
incremental to other costs and were incurred as a direct result of the formal
plan to exit certain activities as part of the overall integration effort (such
as severance costs related to PMSI employees) and certain contractual
cancellation costs (such as PMSI contracts and leases). Approximately $115,275
is recorded as the excess of the purchase price over the fair value of
identifiable net assets (goodwill), which is being amortized on a straight-line
basis over 15 years.
Purchase Price Allocation
The Company made allocations of the aggregate purchase price to acquired
in-process research and development ("IPR&D") amounting to $21,900 related to
the Walsh acquisition and $10,900 related to the PMSI acquisition.
The Securities and Exchange Commission (the "SEC") recently issued revised
guidance with respect to allocations of IPR&D projects in connection with
acquisitions. In accordance with this guidance, the amount allocated to IPR&D
reflects the relative value and contribution of the acquired IPR&D.
Consideration was given to the project's stage of completion, the complexity of
the work completed to date, the difficulty of completing the remaining
development, costs already incurred and the projected cost to complete the
projects.
The preliminary allocation of the Company's aggregate purchase price to the
tangible and identifiable intangible assets acquired and liabilities assumed was
based primarily on independent appraisals of estimates of fair value. The
allocation is summarized as follows:
Walsh PMSI Total
In-process R&D write-off $ 21,900 $ 10,900 $ 32,800
Net liabilities assumed (5,009) (28,274) (33,283)
Software/Core technology 29,000 7,700 36,700
Deferred taxes (8,700) (2,310) (11,010)
Goodwill 156,557 115,275 271,832
- ------------------------------ ---------------- ---------------- --------------
Total Purchase Price $ 193,748 $ 103,291 $ 297,039
- ----------------------------- ---------------- ---------------- ---------------
The Company does not believe that the current price allocation, either related
to Walsh or PMSI acquisitions, will differ significantly from this preliminary
purchase price allocation.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
In the aggregate, the impact of both the Walsh and PMSI acquisitions on the
results of operations, other than the one-time charges and the charge for IPR&D,
had it occurred January 1, 1998 or 1997, would be immaterial.
At the date of the respective acquisitions, the development of the IPR&D
projects had not yet reached technological feasibility and had no alternative
future use. Accordingly, these costs were expensed as of the acquisition date.
The projects identified as in-process research and development at Walsh include
enhancement of Walsh's Windows based sales management information system,
enhancement of its pharmaceutical marketing database and development of a
next-stage integrated and enhanced sales management information system. These
projects were identified as underway at Walsh and, at the date of the
acquisition, would require additional effort to establish technological
feasibility. In addition, based on a third party independent appraiser, the
Company allocated $29,000 to existing core technology representing computer
software that is currently in use, which is being amoritzed over 5 years.
The projects identified as in-process and development at PMSI include
significant improvements of PMSI's physician database products in Europe and
Japan and to its pharmacy software system in the United Kingdom. These projects
were identified as being underway at PMSI, at the date of the acquisition, and
would require additional effort to establish technological feasibility. In
addition, based on a third party independent appraiser, the Company allocated
$7,700 to existing core technology representing computer software that is
currently in use, which is being amortized over 5 years.
The amounts assigned to the IPR&D projects were determined by first estimating
the degree of completion of each project and the potential net cash flows from
such projects after commercial introduction. The potential net cash flows
include reductions reflecting the necessary investment in fixed and working
capital and other collateral assets, which include core technology, where
appropriate and a fair return on those assets. A portion of the potential net
cash flows for each project was then attributed to the effort already completed
by Walsh and PMSI by the acquisition date, based upon the estimated degree of
completion. The attributed potential net cash flows for each project were
discounted to present value using a risk-adjusted discount rate.
The discount rates utilized to value the IPR&D projects ranged from 17% to 30%.
Such discount rates took into account the industry risk for the Walsh and PMSI
businesses acquired (as evidenced by the calculated weighted average cost of
capital), technology development risk associated with completing the in-process
projects, and market and commercial risk associated with introducing the new
products/technology. The implied weighted average cost of capital for the
different Walsh and PMSI projects ranged from 12% to 15%.
The degree of completion represents the extent to which the different in-process
projects are complete, as of the acquisition date. The completion percentage
ranged from 53% to 87% for
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
(Dollar amounts in thousands, except per share data)
projects at Walsh and 80% to 90% for projects at PMSI. In the opinion of
management, IMS Health is on target to begin realizing the benefits from these
various projects through product introductions at launch dates ranging from
early 1999 to January 2000.
The Company believes that the assumptions used, including the revenue forecasts
and margin analysis, are reasonable. No assurance can be given, however, that
the underlying assumptions used to estimate expected project sales, development
costs or profitability, or events associated with such projects, will transpire
as estimated. For these reasons, actual results may vary from the projected
results.
Management expects to continue supporting these IPR&D efforts and believes the
Company has a reasonable chance of successfully completing the IPR&D programs.
However, there is risk associated with the completion of the IPR&D projects and
the Company cannot be assured that any will meet with either technological or
commercial success.
If none of these IPR&D projects are successfully developed the sales and
profitability of the Company may be adversely affected in future periods. The
failure of any particular individual project in-process would not materially
impact the Company's financial condition, results of operations or cash flows.
Operating results are subject to uncertain market events and risks, which are
beyond the Company's control, such as trends in technology, government
regulations, market size and growth, and product introduction or other actions
by competitors.
In connection with the PMSI acquisition, the Company commenced an evaluation of
its existing IMS Health product offerings. Based on this strategic assessment,
the Company decided to abandon certain of its existing software products.
The impact of this decision is to recognize the impairment of certain computer
software assets ($36,000), the closure of certain IMS facilities ($800) and the
severance of some IMS employees ($5,600). This resulted in a one-time charge of
$43,019 and is included as a component of operating income.
Investment in Gartner
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, effective January 1, 1997, the Company has
deconsolidated Gartner (the "Gartner Deconsolidation") and is accounting for its
ownership interest under the equity basis. The Company also 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 ("SAB 51 Gain").
Operations
Revenue for the third quarter increased by 12.9% to $283,606 from $251,130 for
the third quarter of the prior year. Year-to-date revenue increased 8.7% to
$795,070 from $731,511 for the comparable period a year ago. Revenue growth for
the quarter and year-to-date was reduced by the absence of revenues from Pilot
Software Inc. ("Pilot") since its divestiture on July 31, 1997 and the impact of
a
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
stronger U.S. dollar. Adjusting for these items, revenue for the third quarter
and year-to-date increased by 18.8% and 15.9%, respectively. 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
5% in the third quarter and 4% year-to-date, including the impact of gains
related to the Company's hedging strategy.
Operating income for the third quarter was $4,753, a decrease of 92.0% from
operating income of $59,174 for the third quarter of the prior year. Operating
income in the third quarter includes Year 2000 compliance costs of $11,780; an
in-process research and development write-off of $10,900 and direct acquisition
integration costs of $43,019 related to the PMSI acquisition.
Year-to-date operating income was $9,569, a decrease of 92.0% from operating
income of $120,137 for the comparable period a year ago. Year-to-date operating
losses include Year 2000 compliance costs of $34,081; one-time spin-related
charges of $35,025; in-process research and development write-offs of $32,800
and direct acquisition integration costs of $48,019 related to the Walsh and
PMSI acquisitions.
Adjusting for these items and the impact of a stronger U.S. dollar, operating
income for the third quarter and year-to-date of 1998 increased by 29.3% and
44.9%, respectively. Adjusted operating income growth outpaced revenue growth
primarily due to the absence of Pilot operating losses since its divestiture on
July 31, 1997.
Non-operating income-net for the third quarter was $32,941compared with $21,259
for the third quarter of the prior year. This increase is primarily related to
realizing certain divestitures and higher gains in 1998 on the sales of
Enterprises' investments of $9,316 compared with 1997 gains of $3,955; the CTS
over allotment gain of $2,731; and recording a higher pre-tax SAB 51 Gain on
Gartner stock of $1,459 compared with the 1997 gain of $706; partially offset by
recording, within Gartner equity income, the Company's share of a loss from the
sale of the Gartner Learning Business of $932.
Year-to-date non-operating income-net was $105,616 compared with $59,967 for the
comparable period a year ago. This increase is primarily related to realizing
higher gains in 1998 on the sale of Enterprises' investments of $19,731 compared
with 1997 gains of $9,391; the CTS IPO Gain of $12,777; the CTS over allotment
gain of $2,731; and recording a pre-tax SAB 51 Gain on Gartner stock of $14,838
compared with the 1997 gain of $706; partially offset by recording, within
Gartner equity income, the Company's share of an in-process research and
development write-off at Gartner of $2,998 and a loss from the sale of the
Gartner Learning Business of $932.
The Company's effective tax rate was 33.8% for the third quarter of 1998,
compared with an effective tax rate of 28.7% in the comparable period of the
prior year. The third quarter 1998 effective tax rate was impacted by the
estimated in-process research and development write-off of $10,900 related to
the PMSI acquisition. This did not give rise to a tax benefit. Excluding these
items, the Company's effective tax rate was 27.4% for the third quarter of 1998.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
Year-to-date the Company's effective tax rate was 43.1%, compared with an
effective tax rate of 27.4% in the comparable period of the prior year.
Excluding the one-time spin-related charges, the estimated in-process research
and development write-offs related to the Walsh and PMSI acquisitions and
certain non-deductible direct acquisition integration costs related to both
acquisitions, the effective tax rate from operations year-to-date was 27.4%.
Income from continuing operations in the third quarter of 1998 was $24,955,
compared with income from continuing operations of $57,317 in the third quarter
of the prior year, a decrease of 56.5%. Excluding the after-tax impact of the
SAB 51 Gain in both years; Enterprise gains in both years; CTS over allotment
gain; Year 2000 compliance costs; and the in-process research and development
write-off and direct acquisition integration costs related to the PMSI
acquisition, income from continuing operations increased 23.2% to $66,569 in
1998.
Year-to-date income from continuing operations was $65,589, compared with
$130,755 of the prior year, a decrease of 49.8%. Excluding the after-tax impact
of gains associated with Enterprises' investments in both years; the SAB 51 Gain
in both years; the CTS over allotment and IPO gains; Year 2000 compliance costs;
the one-time spin-related charges; and the estimated in-process research and
development write-offs and direct acquisition integration costs related to the
Walsh and PMSI acquisitions, income from continuing operations increased 29.3%
to $159,601 in 1998.
Year-to-date income from discontinued operations net of income taxes was $42,093
(which includes six months of Nielsen Media Research 1998 operations), compared
with $59,271 in nine months of the prior year.
The Company's net income for the third quarter of 1998 was $24,955, a decrease
of 67.6% from net income of $77,066 in the third quarter of the prior year.
Excluding the after-tax impact of Year 2000 compliance costs, the one-time
spin-related charges, the estimated in-process research and development
write-offs, the direct acquisition integration costs, the SAB 51 Gain, and the
CTS over allotment gain, and discontinued operations in 1997, net income for the
quarter increased 23.2%
The Company's year-to-date net income decreased 43.3% to $107,682 from $190,026
for the comparable period of the prior year. Excluding the after-tax impact of
Year 2000 compliance costs, the one-time spin-related charges, the estimated
in-process research and development write-offs, the direct acquisition
integration costs, the SAB 51 Gain, gains associated with Enterprises'
investments, the CTS over allotment and IPO gains, and discontinued operations
in both years, year-to-date net income increased 29.3%.
Basic earnings per share from continuing operations in the third quarter of 1998
were $.15 a decrease of 57.1%. Excluding the after-tax impact of the previously
identified one-time items, basic earnings per share for the quarter increased
24.2%.
Diluted earnings per share from continuing operations in the third quarter of
1998 decreased 55.9% to $.15 from $.34 for the comparable period of the prior
year. Excluding the after-tax impact of the previously identified one-time items
diluted earnings per share for the quarter increased 21.9%.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
Year-to-date basic earnings per share from continuing operations decreased 49.4%
to $.40 from $.79 for the comparable period of the prior year. Excluding the
after-tax impact of the previously identified one-time items, year-to-date basic
earnings per share increased 32.4%.
Year-to-date diluted earnings per share from continuing operations decreased
50.0% to $.39 from $.78 for the comparable period of the prior year. Excluding
the after-tax impact of the previously identified one-time items, year-to-date
diluted earnings per share increased 28.4%.
On October 20, 1998, the Company announced that its Board of Directors had
authorized a systematic stock repurchase program to buy up to 8.0 million shares
of the Company's outstanding common stock. This is in addition to the previously
approved program to repurchase 9.3 million shares. As of November 10, 1998 the
Company has purchased 9.2 million shares.
Results by Business Segment
As discussed in Note 11 Operations by Business Segment, in 1997 the Company
adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" which changes the way public companies report information about
segments. As required, the Company has restated the prior period in order to
conform to the 1998 presentation.
The IMS segment represents the Company's principle operations, which are the
leading global providers of market information, sales management systems and
decision-support services to the pharmaceutical and healthcare industries. IMS
revenue for the third quarter of 1998 increased 10.4% to $257,411 from $233,196
in the third quarter of the prior year. Adjusting for the impact of a stronger
U.S. dollar, revenue for the third quarter 1998 increased by 15.4%. IMS revenue
growth benefited from strong performance of its sales management products.
Income from IMS for the third quarter was $8,922, a decrease of 86% from
operating income of $63,953 in the third quarter of the prior year. Operating
income in the third quarter of 1998 includes $11,780 of costs related to Year
2000 compliance; an estimate of in-process research and development write-off of
$10,900 and direct acquisition integration costs of $43,019 related to the PMSI
acquisition. Excluding these costs, costs related to 1997 year 2000 compliance,
and the impact of a stronger U.S. dollar, operating income for the third quarter
of 1998 increased 17.4%.
Year-to-date IMS revenue increased 8.6% to $730,234 from $672,382 of the prior
year. Adjusting for the impact of a stronger U.S. dollar, revenue year-to-date
1998 increased by 13.2%. IMS operating income year-to-date decreased 60.0% to
$63,035 from $157,624 in year-to-date of the prior year. Year-to-date operating
income includes Year 2000 compliance costs of $34,081; one-time spin-related
charges of $35,025; in-process research and development write-offs of $32,800
and direct acquisition integration costs of $48,019 related to the Walsh and
PMSI acquisitions. Excluding these costs, costs related to 1997 year 2000
compliance, and the impact of a stronger U.S. dollar, operating income
year-to-date 1998 increased 17.3%.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
Results by Business Segment (continued)
The Emerging Markets segment includes Erisco, a leading supplier of
software-based administrative and analytical solutions to the managed care
industry; CTS, a provider of software applications development and maintenance
services and Year 2000 and Eurocurrency compliance services; Super Systems
Japan, a marketer of financial application software products to the Japanese
market; Enterprises, the Company's venture capital unit, focused on investments
in emerging healthcare businesses; and Pilot which was sold as of July 31, 1997.
Emerging Markets revenue for the third quarter of 1998 increased 46.1% to
$26,195 from $17,934 in the third quarter of the prior year. This increase was
primarily due to strong growth at CTS. Emerging Markets operating income for the
third quarter of 1998 increased to $3,602 from operating income of $2,221 in the
third quarter of the prior year. This increase was primarily due to the absence
of losses from Pilot since its divestiture and strong performance at CTS.
Year-to-date revenue in Emerging Markets increased 9.7% to $64,836 from $59,129
in the prior year, reflecting the absence of revenues from Pilot since its
divestiture. Excluding the effect of Pilot and the impact of a stronger U.S.
dollar, revenue increased 59.5%.
Year-to-date operating income in Emerging Markets increased to $6,188 compared
to an operating loss of $16,498 for the comparable period of the prior year.
This increase was primarily due to the absence of losses from Pilot since its
divestiture.
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1998 and 1997
Net cash provided by operating activities totaled $155,559 for the nine months
ended September 30, 1998 compared with $199,028 for the comparable period in
1997. The decrease of $43,469 principally reflects lower net income in 1998 and
a lower increase in deferred revenues ($17,329). These decreases were partially
offset by a greater decrease in accounts receivable in 1998 compared with in
1997 ($7,263), and an increase in accrued income taxes in 1998 compared with a
decrease in 1997 ($8,352).
Net cash used in investing activities totaled $30,750 for 1998 compared with
$37,050 for the comparable period in 1997. The decrease of $6,300 is principally
due to lower capital expenditures in 1998 compared to 1997 ($13,683) and cash
received from companies acquired in stock purchases in 1998 ($11,895). These
sources of cash were partially offset by an increase in other investments in
1998 compared with a decrease in 1997 ($20,973).
Net cash used in financing activities totaled $100,215 for the nine months ended
September 30, 1998 compared with $205,593 for the comparable period in 1997. The
reduction in cash usage from financing activities of $105,378 was primarily due
to proceeds from the debt assumed by Nielsen Media Research ($300,000), an
increase in proceeds from the exercise of stock options in 1998 ($61,638), as
compared with 1997 ($11,365) and proceeds from the CTS IPO ($27,128). These
increases were partially offset by the absence of minority interest financing in
1998 ($100,000) and higher cash payments for the purchase of treasury shares in
1998 compared to 1997 ($208,856).
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
Changes in Financial Position at September 30, 1998 Compared to
December 31, 1997
Investment in Gartner Group increased to $238,551 at September 30, 1998, from
$195,695 at December 31, 1997, reflecting principally equity income-net of taxes
($27,884) and a gain on the sale of Gartner stock ($14,838).
Goodwill increased to $352,465 at September 30, 1998, from $87,430 at December
31, 1997, primarily reflecting the Walsh acquisition ($156,557) and the PMSI
acquisition ($115,275).
Assets from Discontinued Operations decreased to $0 at September 30, 1998, from
$122,778 at December 31, 1997, due to the distribution of Nielsen Media
Research.
Accounts and Notes Payable increased to $91,800 at September 30, 1998, from
$44,441 at December 31, 1997, primarily reflecting borrowings in Japan and the
inclusion of the Walsh and PMSI businesses.
Deferred Revenue increased to $145,169 at September 30, 1998, from $110,768 at
December 31, 1997, primarily reflecting higher sales at IMS and the inclusion of
the Walsh and PMSI businesses.
Shareholders' Equity increased to $801,603 at September 30, 1998, from $801,570
at December 31, 1997, primarily reflecting the issuance of stock in connection
with acquisitions ($234,854), the proceeds of bank borrowings net of the
dividend of Nielsen Media Research's net liability ($109,830), net income
($107,682), and proceeds from stock option exercises ($61,638). These increases
were partially offset by cash dividends paid ($14,805), currency translation
adjustments ($9,421) and treasury share repurchases ($510,867).
Adoption of Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal
quarters for all fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is the type of hedge transaction. For fair-value hedge transactions
in which the Company is hedging changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. For cash-flow hedge transactions, in which the Company is hedging
the variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be recognized in current period earnings. Management is currently
evaluating the effects of this change on the Company's financial statements.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
Year 2000
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 began to address the Year 2000 issue in 1996, when it began to
assess the impact on its operations. In 1997, the Company created a Year 2000
Task Force (the "task force") to manage overall risks and to facilitate
activities across the entire Company. CTS, a majority owned subsidiary, is being
used to convert the majority of the systems to allow most internal staff members
to focus on the core business. The Company has also used outside services to
assist in conversion and to assess the progress of its Year 2000 program. The
Company has identified its Year 2000 areas of focus as systems and software for
the creation and delivery of its products and systems and software for its
internal administrative operations.
The task force developed a conversion methodology that included three phases:
analysis, coding and testing, and testing and implementation. The analysis phase
includes planning, inventory and impact analysis. Coding and testing involves
code changes, using conversion rules and criteria and unit testing, verifying
and documenting the results of the conversion. Testing and implementation
includes system test across platforms and verification of data, an acceptance
test within the user environment and implementation or releasing the systems
back into production. This conversion methodology has been communicated
throughout the Company and is being utilized to achieve systems compliance by
the Year 2000.
The creation of customer products relies on the receipt of data from external
data suppliers and the Company's ability to convert the data and deliver the
information to its customers. The consolidation of the data is principally
performed at central processing locations. The Company operates central
processing facilities in Germany, England, United States and Japan. The systems
at these sites contained the most lines of code required to undergo conversion.
The following is a status report of each location as of September 30, 1998:
------------------- --------------------------------- ------------------------
Location % of Line of Code Tested and Target completion date
Implemented to date
------------------ --------------------------------- -------------------------
------------------- --------------------------------- ------------------------
Germany 68% lines of code converted 90% of central systems
schedule for 12/98
target date - balance
Q1 1999
------------------- --------------------------------- ------------------------
------------------- --------------------------------- ------------------------
England 43% lines of code converted 80% of central systems
schedule for 12/98
target date - balance
Q1 1999
------------------- --------------------------------- ------------------------
------------------- --------------------------------- ------------------------
United States 74% lines of code converted 90% of central systems
schedule for 12/98
target date - balance
Q1 1999
----------------- --------------------------------- -------------------------
----------------- --------------------------------- -------------------------
Japan 79% lines of code converted 80% of central systems
schedule for 12/98
target date - balance
Q1 1999
------------------- --------------------------------- -----------------------
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
Year 2000 (continued)
The Company has also developed an internal audit program which examines the
testing and effectiveness of controls, assesses the accuracy and completeness of
inventories and reviews the documentation for completeness and accuracy. As of
September 30, 1998 audits occurred in England and Germany, with a follow up
scheduled for early 1999 and an audit of the United States planned November of
1998.
As part of its Year 2000 conversion, the task force has identified and
prioritized key data suppliers. In order to increase awareness of Year 2000
issues of its data suppliers and customers, the Company has developed a program
consisting of seminars, visits, mailings, and telephone calls.
Due to the Company's reliance on data suppliers it is developing contingency
plans. This includes addressing interfaces and system changes for data with the
Company's systems, identifying stop-gap procedures for a temporary lack of data,
and a plan for statistical extrapolation if necessary.
The Company has a process in place to convert its internal administrative
operations systems and software. These operations include accounts receivable,
payroll, accounts payable and the general ledger systems. The conversions of
these systems will substantially be completed by the end of 1998. Testing is
expected to be completed by the end of the first quarter of 1999.
Throughout 1999 the Company's efforts will; (i) heavily focus on testing of
critical components of the Company's systems; (ii) continue the assessment of
supplier and customer readiness to address the Year 2000 conversion and; (iii)
finalize contingency plans to address unanticipated issues.
External and internal costs of addressing the Year 2000 issue are expensed. It
is currently estimated that the aggregate cost of the Company's Y2K program will
be approximately $65 to $70 million. Through September 30, 1998 the Company has
incurred $43.9 million. These estimates do not include the costs of software and
systems that are being replaced or upgraded in the normal course of business.
The cost of addressing the Year 2000 issue and the date on which the Company
currently expects to complete Year 2000 compliance are based on the current best
estimates of management, which are derived utilizing various assumptions
regarding the future events. There can be no guarantee that these estimates will
be achieved, and actual results may differ materially. Specific factors that may
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area of expertise, the
ability to locate and correct all relevant computer codes, and the success of
customers and suppliers in addressing the Year 2000 issue.
The above expectations are subject to uncertainties. For example, if the Company
is unsuccessful in identifying or fixing all Year 2000 problems in its critical
operations, or effected by the inability of its data suppliers or major
customers to continue operations due to such a problem, the Company's results of
operations or financial condition could be materially impacted.
<PAGE>
IMS HEALTH INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued) (Dollar amounts in thousands, except per share data)
Euro Conversion
On January 1, 1999, certain member countries of the European Union are scheduled
to establish fixed conversion rates between their existing currencies and the
European Union's common currency ("Euro"). The transition period for the
introduction of the Euro will be between January 1, 1999 and January 1, 2002.
The Company has been preparing for the introduction of the Euro and is
currently addressing the many issues involved with its introduction, including
the conversion of information technology systems, recalculating currency risk,
recalibrating derivatives and other financial instruments, strategies concerning
continuity of contracts, and impacts on the processes for preparing taxation and
accounting records, and the increased price transparency resulting from the use
of the single currency in the eleven participating countries, which may affect
the ability of the Company and other companies to price products differently in
the various European markets. Nevertheless, differences in national market size,
data collection requirements and specific product specifications required due to
the diverse market information needs in the Healthcare markets of Europe are
expected to reduce the potential for price harmonization in most product ranges.
IMS Health's expectations regarding the Euro currency issue are forward-looking
statements that involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors that may
cause these differences include, but are not limited to, the ability or
willingness of third parties to convert affected systems in a timely manner; the
ability of the Company to modify its systems and processes in a timely manner;
and the actions of governmental agencies or other third parties with respect to
Euro currency issues.
<PAGE>
IMS HEALTH INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10 Material Contracts:
.1 Distribution Agreement between Cognizant and IMS Health Incorporated dated
as of June 30, 1998. (incorporated by reference to Exhibit 10.1 to the IMS
Health Report on Form 10Q for the quarter ended June 30, 1998, filed
August 14, 1998, file number 001-14049).
.2 Tax Allocation Agreement between Cognizant and IMS Health Incorporated
dated as of June 30, 1998. (incorporated by reference to Exhibit 10.2 to
the IMS Health Report on Form 10Q for the quarter ended June 30, 1998,
filed August 14, 1998, file number 001-14049).
.3 Employee Benefits Agreement between Cognizant Corporation and IMS Health
Incorporated dated as of June 30, 1998. (incorporated by reference to
Exhibit 10.3 to the IMS Health Report on Form 10Q for the quarter ended
June 30, 1998, filed August 14, 1998, file number 001-14049).
.4 Amended and Restated Transition Services Agreement between The Dun &
Bradstreet Corporation, The New Dun & Bradstreet Corporation, Cognizant
Corporation, IMS Health Incorporated, ACNielsen Corporation and Gartner
Group, Inc. dated as of June 30, 1998. (incorporated by reference to
Exhibit 10.4 to the IMS Health Report on Form 10Q for the quarter ended
June 30, 1998, filed August 14, 1998, file number 001-14049).
.5 Undertaking of IMS Health Incorporated dated as of June 29, 1998.
(incorporated by reference to Exhibit 10.5 to the IMS Health Report on
Form 10Q for the quarter ended June 30, 1998, filed August 14, 1998, file
number 001-14049).
.6 Distribution Agreement among Cognizant Corporation, The Dun & Bradstreet
Corporation and ACNielsen Corporation dated as of October 28, 1996
(incorporated by reference to Exhibit 10.1 to Cognizant's Annual Report on
Form 10-K for the year ended December 31, 1996, filed March 27, 1997, file
number 001-12275).
.7 Tax Allocation Agreement among Cognizant Corporation, The Dun & Bradstreet
Corporation and ACNielsen Corporation dated as of October 28, 1996
(incorporated by reference to Exhibit 10.2 to Cognizant's Annual Report on
Form 10-K for the year ended December 31, 1996, filed March 27, 1997, file
number 001-12275).
.8 Employee Benefits Agreement among Cognizant Corporation, The Dun &
Bradstreet Corporation and ACNielsen Corporation dated as of October 28,
1996 (incorporated by reference to Exhibit 10.3 to Cognizant's Annual
Report on Form 10-K for the year ended December 31, 1996, filed March 27,
1997, file number 001-12275).
.9 Indemnity and Joint Defense Agreement among Cognizant Corporation, The Dun
& Bradstreet Corporation and ACNielsen Corporation dated as of October 28,
1996 (incorporated by reference to Exhibit 10.4 to Cognizant's Annual
Report on Form 10-K for the year ended December 31, 1996, filed March 27,
1997, file number 001-12275).
.10 TAM Master Agreement between Cognizant Corporation and ACNielsen
Corporation dated as of October 28, 1996 (incorporated by reference to
Exhibit 10.5 to Cognizant's Annual Report on Form 10-K for the year ended
December 31, 1996, filed March 27, 1997, file number 001-12275).
27 Financial Data Schedules.
(b) Reports on 8-K:
A report on Form 8-K was filed on June 30, 1998 to report under Item 5,
Other Events, 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; and Item 7, Financial Statements to
present the consolidated financial statements and associated notes of the
Company to reflect Nielsen Media as a discontinued operation. A report on
Form 8-K/A was filed on June 30, 1998 to report under Item 5, Other
Events, and Item 7, Financial Statements A report on Form 8-K/A-1 was
filed on July 23, 1998 to report under Item 5, Other Events, and Item 7,
Financial Statements A report on Form 8-K/A-2 was filed on July 23, 1998
to report under Item 5, Other Events, and Item 7, Financial Statements
<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
BY: /s/ J. MICHAL CONAWAY
-----------------------------------------------
J. Michal Conaway
Chief Financial Officer
BY: /s/ JAMES C. MALONE
------------------------------------------------
James C. Malone
Senior Vice President - Finance & Controller
Date: February 24, 1999
<PAGE>
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