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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
-------------------
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2000
--------------
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________ to ____________________
Commission file number 001-14049
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IMS HEALTH INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1506026
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
200 NYALA FARMS, WESTPORT, CT 06880
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 222-4200
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
TITLE OF CLASS SHARES OUTSTANDING
COMMON STOCK, AT JUNE 30, 1998
------------------------ ------------------
par value $.01 per share 297,209,026
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<PAGE>
IMS HEALTH INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE(S)
- - ----------------------------- -------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2000 and 1999 ........................... 2
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2000 and 1999 ........................... 3
Condensed Consolidated Statements of Financial Position
March 31, 2000 and December 31, 1999 ................................. 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 ........................... 5
Notes to Condensed Consolidated Financial Statements .................... 6-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................. 17-26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 27
PART II. OTHER INFORMATION
- - ---------------------------
ITEM 1. LEGAL PROCEEDINGS ............................................... 28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ....................... 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................ 29
SIGNATURES .............................................................. 30
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
---------------- -------------
<S> <C> <C>
OPERATING REVENUE $ 352,523 $ 313,242
Operating Costs 139,809 138,673
Selling and Administrative Expenses 111,877 94,089
Depreciation and Amortization 25,777 25,770
- - ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 75,060 54,710
- - ----------------------------------------------------------------------------------------------------------------------
Interest Income 1,107 1,799
Interest Expense (1,333) (258)
Gains from Dispositions--Net 49,442 7,977
Other Expense--Net (8,708) (3,907)
- - ----------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 40,508 5,611
- - ----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for Income Taxes 115,568 60,321
Provision for Income Taxes (32,716) (16,528)
- - ----------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 82,852 43,793
Income from Discontinued Operations, Net of Income Taxes of $5,168
for March 31, 1999 -- 13,694
- - ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 82,852 $ 57,487
- - ----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.28 $ 0.13
Income from Discontinued Operations -- 0.05
- - ----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.28 $ 0.18
- - ----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.27 $ 0.13
Income from Discontinued Operations -- 0.04
- - ----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.27 $ 0.17
- - ----------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares Outstanding--Basic 299,916,000 317,866,000
Dilutive Effect of Shares Issuable as of Period-End
Under Stock Option Plans 3,869,000 7,933,000
Adjustment of Shares Outstanding Applicable to Exercised
Stock Options during the period 36,000 520,000
- - ----------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 303,821,000 326,319,000
- - ----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
</TABLE>
2
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net Income $ 82,852 $ 57,487
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation Adjustments Losses (9,617) (20,888)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) on Securities Arising During the Period:
Other (Net of Tax Expense/(Benefit) of $32,620 and ($805) for 2000 and 1999,
respectively) 51,992 (2,132)
Gartner Shares Held For Sale (Net of Tax Benefit of $1,209 for 2000) 2,247 --
Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax
Expense of $4,757 and $2,802 for 2000 and 1999, respectively). (12,603) (7,423)
- - -----------------------------------------------------------------------------------------------------------------------
Change in Unrealized Gains/(Losses) on Investments 41,636 (9,555)
- - -----------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income/(Loss), Net of Tax 32,019 (30,443)
- - -----------------------------------------------------------------------------------------------------------------------
Comprehensive Income $114,871 $ 27,044
=======================================================================================================================
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
</TABLE>
The Company has significant investments outside of the United States. Therefore,
changes in the value of foreign currencies affect the Company's Condensed
Consolidated Financial Statements when translated into U.S. dollars. The
currency translation adjustment excludes the offsetting impact of the Company's
hedging program. (See Note 8 to the Condensed Consolidated Financial Statement).
3
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- ----------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 83,019 $ 115,875
Accounts Receivable-Net 288,672 284,679
Other Current Assets 105,175 109,908
Net Assets from Discontinued Operations 99,234 96,988
- - -----------------------------------------------------------------------------------------------------------------
Total Current Assets 576,100 607,450
- - -----------------------------------------------------------------------------------------------------------------
SECURITIES AND OTHER INVESTMENTS 199,719 127,415
PROPERTY, PLANT AND EQUIPMENT-NET 164,313 169,190
OTHER ASSETS-NET:
Computer Software 171,500 174,974
Goodwill 331,933 339,491
Other Assets 39,110 32,236
- - -----------------------------------------------------------------------------------------------------------------
Total Other Assets-Net 542,543 546,701
- - -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,482,675 $ 1,450,756
- - -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 44,689 $ 44,577
Accrued and Other Current Liabilities 155,260 196,375
Short Term Debt 164,955 134,663
Accrued Income Taxes 238,065 211,592
Deferred Revenues 121,731 136,196
- - -----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 724,700 723,403
- - -----------------------------------------------------------------------------------------------------------------
DEFERRED TAXES 38,299 4,726
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 27,330 27,429
OTHER LIABILITIES 73,380 76,617
- - -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 863,709 832,175
- - -----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 126,764 124,875
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $.01, Authorized 800,000,000 Shares;
Issued 335,045,390 Shares at March 31, 2000 and December 31, 1999, 3,350 3,350
respectively
Capital in Excess of Par 738,883 738,993
Retained Earnings 881,332 804,452
Treasury Stock, at Cost, 37,836,364 and 32,901,441 Shares at
March 31, 2000 and December 31, 1999, respectively (1,124,023) (1,013,730)
Cumulative Translation Adjustment (105,852) (96,235)
Unrealized Gains on Gartner Group Shares Held for Sale, Net of Tax 17,812 15,565
Unrealized Gains on Investments, Net of Tax 80,700 41,311
- - -----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 492,202 493,706
- - -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,482,675 $ 1,450,756
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited).
4
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2000 1999
--------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 82,852 $ 57,487
Less Income from Discontinued Operations -- (13,694)
- - -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 82,852 43,793
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization 25,777 25,770
Gains from Sale of Investments, Net (49,442) (7,977)
Benefit Payments (642) (6,968)
Non-Recurring Charge Payments (955) (955)
Net Increase in Accounts Receivable (10,321) (34,170)
Net (Decrease)/Increase in Deferred Revenues (12,332) 2,691
Minority Interests 4,144 3,202
Deferred Income Taxes 2,222 (3,296)
Net Increase in Accrued Income Taxes 24,228 3,061
Net Decrease in Accrued and Other Current Liabilities (36,978) (14,461)
Other Working Capital Items 1,962 (3,619)
- - -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 30,515 7,071
- - -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Investments, Net 58,179 16,282
Acquisition and Integration Payments (4,386) (11,180)
Payments for Acquisition of Businesses -- (3,100)
Capital Expenditures (5,607) (8,545)
Additions to Software (9,294) (13,517)
Net Increase in Other Investments (14,959) (9,719)
Other Investing Activities - Net (3,971) 2,509
- - -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY / (USED) IN INVESTING ACTIVITIES 19,962 (27,270)
- - -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (117,251) (95,354)
Proceeds from Exercise of Stock Options 4,787 13,524
Dividends Paid (5,972) (6,354)
Proceeds from Employee Stock Purchase Plan 1,001 1,983
Short-Term Borrowings 76,383 45,540
Short-Term Debt Repayments (40,500) (38,431)
Other Financing Activities - Net (421) 171
- - -----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (81,973) (78,921)
- - -----------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents (1,360) (1,003)
Effect of Change in Year End of the IMS Operating Units -- 30,664
- - -----------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (32,856) (69,459)
Cash and Cash Equivalents, Beginning of Period 115,875 206,390
- - -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 83,019 $136,931
- - -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $ 1,238 $ 340
Cash Paid during the Period for Income Taxes $ 12,899 $ 21,295
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited).
5
<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 consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X under the Securities and
Exchange Act of 1934, as amended. The condensed consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and related notes of IMS Health Incorporated (the "Company"
or "IMS Health") in the 1999 Annual Report on Form 10-K. Accordingly, the
accompanying condensed consolidated financial statements do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments of
a normal recurring nature considered necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented have been included. Certain prior-period amounts have been
reclassified to conform to the 2000 presentation.
NOTE 2. BASIS OF PRESENTATION
IMS Health is the world's leading provider of information solutions to the
pharmaceutical and healthcare industries. IMS Health operates in 101 countries
and its key products and services include:
o Market research for prescription and over-the-counter pharmaceutical
products;
o Sales management information to optimize sales force productivity;
o Pharmaceutical relationship management solutions for sales and marketing
decision making;
o Technology systems and information services that support managed care
organizations; and
o IT application development, integration and management services.
At March 31, 2000, IMS Health consists of (a) the IMS segment ("IMS"), which
consists of the market information and decision support services business for
the pharmaceutical and healthcare industries conducted by IMS Health and various
subsidiaries including IMS Health Strategic Technologies, Inc. ("Strategic
Technologies"); (b) Emerging Markets, which consists of the operations of ERISCO
Managed Care Technologies, Inc. ("Erisco") and Enterprise Associates LLC
("Enterprises"), the Company's venture capital unit, and (c) a controlling
interest in Cognizant Technology Solutions Corporation ("CTS").
The condensed consolidated financial statements of the Company have been
reclassified for the periods presented to reflect the Gartner Group Inc.
("Gartner") equity investment as a discontinued operation (See Note 3).
NOTE 3. INVESTMENT IN GARTNER GROUP STOCK
On November 11, 1998, the Company announced that its Board of Directors had
approved a plan to spin-off substantially all of its equity ownership of Gartner
(the "Gartner Spin-Off"). As provided for under the Distribution Agreement,
entered into between Gartner and the Company, 40,689,648 Gartner Class A Shares
were converted into an equal number of Gartner Class B Shares. As a result of
the then proposed Gartner Spin-Off, the Company at the time ceased
6
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
recognition of gains in accordance with Securities and Exchange Commission Staff
Accounting Bulletin 51 ("SAB 51") in the fourth quarter of 1998.
On July 16, 1999, subject to Gartner shareholder approval, the IMS Health and
Gartner Boards of Directors approved the final plan, terms and conditions
governing the spin-off of the Company's investment in Gartner. Upon Gartner
shareholder approval, which was obtained on July 16, 1999, in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", the condensed consolidated
financial statements of the Company were reclassified to reflect the Gartner
equity investment as a discontinued operation for the periods presented.
On July 16, 1999, the Company's Board of Directors declared a dividend of all
Gartner Class B Shares, which was distributed on July 26, 1999 to holders of the
Company's Common Stock of record as of July 17, 1999. The transaction was
structured as a tax-free distribution of Gartner stock to IMS Health
shareholders and the Company received a favorable ruling from the Internal
Revenue Service ("IRS"). The distribution consisted of 0.1302 Gartner Class B
Shares for each outstanding share of the Company's Common Stock (the "Gartner
Distribution").
The Company's remaining investment in Gartner consists of 6,909,457 Gartner
Class A Shares and warrants to purchase a further 599,400 Gartner Class A Shares
(at a cost basis of $81,422). Under the terms of the IRS ruling, the Company
must monetize the remaining position in Gartner. Accordingly, the net assets
from discontinued operations in the amount of $99,234 are included in current
assets at March 31, 2000. The Company's Gartner Class A shares have been
accounted for as "available for sale" securities in accordance with the
Financial Accounting Standards Board Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities". The unrealized gain as of the date of the Gartner Distribution
(based on a per share price of $22.75 on Gartner Stock, the price at the time of
the Gartner Distribution) was $51,716 (net of taxes of $27,847), and was
recorded as Other Comprehensive Income and included as a component of
Shareholders' Equity. Subsequent changes in the per share price of Gartner Stock
from the date of the Gartner Distribution to March 31, 2000 (based on a per
share price of $15.75 of Gartner Stock at March 31, 2000) generated an
unrealized loss of $33,904 from the date of the Gartner Distribution(net of
taxes of $18,256), which was also recorded as Other Comprehensive Income and
included as a component of Shareholders' Equity. Upon sale of these securities,
the unrealized gain related to those securities measured based on the value of
the Gartner shares as of the date of the Gartner Distribution will be recognized
in Discontinued Operations. The unrealized gains or losses in the fair value
subsequent to the date of the Gartner Distribution will be recognized in
Continuing Operations as shares are sold. There were no sales of Gartner shares
during the three months ended March 31, 2000.
NOTE 4. DISPOSITIONS
During the first quarter of 2000, the Company recorded $49,442 of pre-tax net
gains due primarily to the sale of investments in American Cellular, Aspect
Development, Inc., Mercator
7
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Software Inc. and Viant Corporation that were part of the Enterprises portfolio.
Cash received, net of costs to dispose, amounted to $58,179 in the quarter.
During the first quarter of 1999, the Company recorded $7,977 of pre-tax net
gains from the sale of investments. This reflects primarily the sale of
Enterprises investments in Oasis, Pegasus Systems Inc., Aspect Development and
Internet Securities offset by the loss on the sale of SSJ K.K. Cash received,
net of costs to dispose, amounted to $16,282 in the quarter.
NOTE 5. INVESTMENTS AND PROPOSED TRANSACTIONS
Allscripts
On February 17, 2000, IMS Health announced a partnership with Allscripts, Inc.
("Allscripts") (NASDAQ:MDRX) to develop and market new Internet-based
information solutions for the pharmaceutical industry. In conjunction with the
partnership agreement IMS Health made a private equity investment of $10,000 to
acquire 214,794 shares of Allscripts common stock. IMS Health's investment in
Allscripts is carried at cost as the disposition of the shares is restricted
since the shares have not been registered under the Securities Act of 1933 and
is classified in "Securities and Other Investments".
Proposed Merger with The TriZetto Group, Inc.
On March 29, 2000, IMS Health and The TriZetto Group, Inc. ("TriZetto")
(NASDAQ:TZIX) announced a merger (the "TriZetto Merger"). TriZetto is a provider
of vertical Internet-enabled application services and business portals for the
healthcare industry. Under the terms of a definitive merger agreement
unanimously approved by the Boards of Directors of both companies, IMS Health
shareholders will receive 0.4655 shares of TriZetto common stock for each share
of IMS Health common stock. The transaction will be accounted for as a reverse
acquisition as the shareholders of IMS Health will own approximately 85% of the
common stock of the combined company upon completion of the merger. IMS Health
will be treated as the acquiring company and TriZetto will be considered to be
the acquired company. The transaction is subject to various conditions including
approval by the shareholders of both corporations and other government agencies.
In addition, the new merged company plans to issue a new series of common stock
that is intended to track the financial performance of the IMS segment's
operating units other than Strategic Technologies, which is intended to be
spun-off to shareholders of the merged companies (see below). In the event IMS
Health terminates the agreement in connection with accepting, approving or
recommending a proposal to acquire IMS Health, IMS Health is to (i) pay a fee of
$202,000 to TriZetto, (ii) reimburse Trizetto for its expenses up to $1,000 and
(iii) grant TriZetto a license to certain Erisco software. In the event IMS
Shareholders do not approve the TriZetto Merger, where the Board has refused to
recommend or changed its recommendation of the TriZetto Merger, IMS Health is to
make the payments described in (i) and (ii) above.
On March 28, 2000, the Company entered into an agreement amending the Rights
Agreement, dated as of June 15, 1998, between the Company and First Chicago
Trust Company of New York in order to render the Preferred Stock Purchase Rights
inapplicable to the proposed merger and other transactions contemplated under
the Agreement and Plan of Reorganization, dated as of March 28, 2000, between
the Company and TriZetto.
8
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
On April 18, 2000 IMS Health and TriZetto jointly announced that they are in
discussions regarding transaction structure options. In a pro-active move
designed to be responsive to shareholders, the two companies are evaluating
potential alternatives.
Proposed Spin-Off of Strategic Technologies
In conjunction with the proposed merger with TriZetto, the Company also
announced plans for a tax-free spin-off distribution of its Strategic
Technologies business (the "Strategic Technologies Distribution"). This will,
following the TriZetto Merger, result in the merged companies being reorganized
into two independent, publicly traded corporations. In 1999, the unaudited
revenues of these businesses which were included in the IMS segment were
approximately $200,000. The transaction is subject to, among other things, final
approval by the Board of Directors and to receipt of an opinion of counsel with
respect to the tax-free treatment of the transaction. Pursuant to a distribution
agreement to be entered into prior to the Strategic Technologies Distribution,
the assets and liabilities relating to each of the two corporations will be
appropriately allocated. The spin-off is expected to be completed during the
third quarter of 2000.
NOTE 6. MINORITY INTERESTS
The Company consolidates the assets, liabilities, results of operations and cash
flows of businesses and investments in which it has control. Third parties'
ownership interests are reflected as minority interests on the Company's
financial statements. Two of the Company's subsidiaries have contributed assets
to, and participate in, a limited partnership. One subsidiary serves as general
partner, and all other partners hold limited partnership interests. The
partnership, which is a separate and distinct legal entity, is in the business
of licensing database assets and computer software. In the second quarter of
1997, third-party investors contributed $100,000 to the partnership in exchange
for minority ownership interests. The Company and its subsidiaries maintain a
controlling (85%) interest in the partnership. Under the terms of the
investment, the third-party investors have a right to take steps that would
result in the termination of the investment on September 30, 2000, which has
been extended from an original date of June 30, 2000. Other than the extension
of the termination date all terms of the agreement remain the same. The Company
intends to negotiate a further extension or to replace the minority interests
with new investors prior to any such termination.
The Company also has a controlling interest in CTS (61.1% of the outstanding
shares representing approximately 94.1% of the voting power at March 31, 2000).
The related minority interest on the Condensed Consolidated Statement of
Financial Position at March 31, 2000 and December 31, 1999 was $19,769 and
$17,611, respectively. Selected unaudited financial data for CTS is included in
Note 10.
NOTE 7. CONTINGENCIES
The Company and its subsidiaries are involved in legal proceedings, claims
litigation and tax matters arising in the ordinary course of business. In the
opinion of management, the outcome of such current legal proceedings, claims
litigation and tax matters, if decided adversely, could have
9
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
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, the Company is subject to certain other contingencies discussed
below:
Information Resources Litigation
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in the
United States District Court for the Southern District of New York, naming as
defendants The Dun and Bradstreet Corporation ("D&B"), A.C. Nielsen Company and
I.M.S. International Inc. (a predecessor of IMS Health) (the "IRI Action").
The complaint alleges various violations of the United States antitrust laws,
including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
latter claims relate to the acquisition by defendants of Survey Research Group
Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI
when it agreed to be acquired by defendants and that the defendants induced SRG
to breach that agreement.IRI's complaint alleges damages in excess of $350,000,
which amount IRI has asked to be trebled under the antitrust laws. IRI also
seeks punitive damages in an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in the
complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an amended and restated
complaint repleading its alleged claim of attempted monopolization in the United
States and realleging its other claims. On August 18, 1997, defendants moved for
an order dismissing the amended claims. On December 1, 1997, the court denied
the motion and, on December 16, 1997, defendants filed a supplemental answer
denying the remaining material allegations of the amended complaint. Discovery
is continuing in this matter.
In light of the potentially significant liabilities which could arise from the
IRI Action and in order to facilitate the distribution by D&B of shares of
Cognizant Corporation ("Cognizant"), and ACNielsen in 1996, D&B, 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
10
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
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.
In 1998, IMS Health was spun-off from Cognizant (the "1998 Spin-Off") which then
changed its name to Nielsen Media Research, Inc. ("NMR"). IMS Health and NMR are
jointly and severally liable to D&B and ACNielsen for Cognizant's obligations
under the terms of the Distribution Agreement dated October 28, 1996 among D&B,
Cognizant and ACNielsen (the "1996 Distribution Agreement"). In connection with
the 1998 Spin-Off, IMS Health and NMR agreed that, as between themselves, IMS
Health will assume 75%, and NMR will assume 25%, of any payments to be made in
respect of the IRI Action under the Indemnity and Joint Defense Agreement or
otherwise, including any legal fees and expenses related thereto incurred in
1999 or thereafter. IMS Health has agreed to be fully responsible for any legal
fees and expenses incurred during 1998. NMR's aggregate liability to IMS Health
for payments in respect of the IRI Action and certain other contingent
liabilities shall not exceed $125,000.
Management of the Company is unable to predict at this time the final outcome of
this matter or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
Other Contingencies
The Company, Cognizant and D&B have entered, and the Company continues to enter,
into global tax planning initiatives in the normal course of their business.
These activities are subject to review by tax authorities. As a result of the
review process, uncertainties exist and it is possible that some of these
matters could be resolved adversely to the Company, Cognizant or D&B.
The Company has been informed by D&B that the IRS is currently reviewing D&B's
utilization of certain capital losses during 1989 and 1990. D&B has advised the
Company that during the second quarter of 2000 it has filed an amended tax
return for these periods which reflects $561,600 of tax and interest due. Under
the terms of the 1996 Distribution Agreement the Company is liable to pay half
of such taxes and interest owed to the IRS to the extent that D&B total
liabilities exceed $137,000. D&B paid approximately $349,300 of this amount in
early May 2000, and the Company expects to pay approximately $212,300 prior to
May 31, 2000, which the Company expects to fund through short term borrowings. A
portion of the Company's liability will in turn be shared with NMR under the
Distribution Agreement between those companies dated June 30, 1998 (the "1998
Distribution Agreement"). NMR is not obligated to pay its share to the Company
until January 2, 2001. The payments are being made to the IRS to stop further
interest from accruing. D&B expects a formal assessment for the additional tax
to be issued by
11
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
the IRS during the second quarter of 2000. D&B has advised the Company that,
notwithstanding the filing and payment, it intends to contest the assessment of
additional tax. The Company estimates that its share of the liability, were the
IRS to prevail, would be approximately $140,000 net of income tax benefit on
interest (approximately $31,300) and NMR's contribution obligations
(approximately $41,000). This liability is included in Accrued Income Taxes at
March 31, 2000.
Accordingly, management does not believe that this matter will have a material
adverse effect on the Company's consolidated financial position or operating
results when it is ultimately resolved in a future period. The Company believes
that it has more than sufficient funds available from operating cash flows and
committed bank lines of credit to cover any such payment without a material
effect on its liquidity or its financial condition. However payment of the
Company's share could have a material adverse effect on cash flows in the period
in which it is made. At March 31, 2000 the Company has committed short term
borrowing arrangements with several banks to provide up to $453,000 of
borrowings, of which $164,955 has been drawn upon.
The Company is the subject of complaints filed with the European Commission (the
"Commission") pursuant to Article 3 of Council Regulation No. 17 of 1972 The
complaints with the Commission were filed by Source Informatics Ltd. (December
1, 1997) NDC Health Information Services (Arizona) Inc. (May 13, 1998), and
Source Informatics S.A/N.V. (February 18, 2000) (which also filed a complaint
with the Belgian Competition Council, where a complaint filed by SmithKline
Beecham is also pending). The EC complaints allege that the Company has been and
continues to engage in certain commercial practices which violate Articles 81
and 82 of the EC Treaty, which relate to agreements or abuses of a dominant
position that adversely affect competition. The Company has responded to the
complaint denying the allegations in the complaint and has provided and
continues to provide information to the Commission pursuant to formal
information requests. No action has been taken by the Commission nor have
hearings been held or scheduled. The Commission may issue interim measures until
a decision is reached, dismiss the complaints, issue a decision prohibiting the
alleged practices, and/or impose fines against the Company. The Company intends
to vigorously defend these matters. 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.
In connection with the Gartner Spin-Off, the Company and Gartner entered into a
Distribution Agreement and an Agreement and Plan of Merger (the "1999
Distribution Agreements"). Pursuant to the 1999 Distribution Agreements, Gartner
agreed to indemnify the Company and its stockholders for additional taxes which
may become payable as a result of certain actions that may be taken by Gartner
that adversely affect the tax-free treatment of the Gartner Spin-Off. However,
the Company may become obligated for certain tax liabilities in the event the
Gartner Spin-Off is deemed to be a taxable transaction as a result of certain
Gartner share transactions that may be undertaken by the Company following the
Gartner Spin-Off. In the opinion of management, it is highly unlikely that any
such liabilities will be incurred by the Company.
12
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
NOTE 8. FINANCIAL INSTRUMENTS
Foreign Exchange Risk Management
The Company transacts business in virtually every part of the world and is
subject to risks associated with changing foreign exchange rates. The Company's
objective is to reduce earnings and cash flow volatility associated with foreign
exchange rates to allow management to focus its attention on its core business
activities. Accordingly, the Company enters into various contracts which change
in value as foreign exchange rates change to protect the value of a portion of
committed foreign currency revenues and non-functional currency assets and
liabilities. The Company's policy is to maintain hedge coverage between minimum
and maximum percentages of its foreign exchange exposures over the next twelve
months, in amounts intended to protect operating income from the effect of
fluctuations in foreign exchange rates. It is the Company's policy to enter into
foreign currency hedging transactions only to the extent necessary to meet its
objectives as stated above. The Company does not enter into foreign currency
transactions for investment or speculative purposes.
The Company uses foreign currency forward contracts to hedge committed foreign
currency denominated revenues. The principal currencies hedged are the Japanese
yen, the Euro and the Swiss franc. The Company also uses foreign currency
forward contracts to hedge non-functional currency assets and liabilities.
Gains and losses on contracts hedging committed foreign currency revenues are
deferred until such revenues are recognized and offset changes in the value of
such revenues. Gains and losses on contracts hedging non-functional currency
assets and liabilities are not deferred and are included in other
income/expense--net. At March 31, 2000, the notional amounts of committed
foreign currency revenues and non-functional currency assets and liabilities
hedged were $163,024 and $72,445 respectively.
Note Receivable - (related party)
At January 3, 2000, the Company held a related party note receivable totalling
$3,558 from Victoria R. Fash, its President and Chief Executive Officer and a
Director. On January 12, 2000, $632 was repaid in cash leaving a principal
amount of $2,926, which is included in Other Assets. The loan accrues interest
at an annual rate of 6.21% with principal and accrued interest due on December
31, 2008 with earlier payment permitted, accelerated payment required, and the
loan forgiven under certain circumstances. The loan is secured by 81,260 shares
of the Company's Common Stock. Total accrued interest as of March 31, 2000 was
$40. Cash used, net of repayment, for this loan is included in other Investing
Activities - Net on the condensed consolidated statement of cash flows.
Credit Concentrations
The Company continually monitors its positions with, and the credit quality of,
the financial institutions which are counterparties to its financial instruments
and does not anticipate non-performance by counterparties. The Company would not
realize a material loss as of March 31, 2000, in the event of non-performance by
any one counterparty. The Company enters into
13
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
transactions only with financial institution counterparties which have a credit
rating of A or better. In addition, the Company limits the amount of credit
exposure with any one institution.
The Company maintains accounts receivable balances ($288,672 and $284,679 net of
allowances for doubtful accounts, at March 31, 2000, and December 31, 1999,
respectively) principally from customers in the pharmaceutical industry. The
Company's trade receivables do not represent significant concentrations of
credit risk at March 31, 2000 due to the high quality of its customers and their
dispersion across many geographic areas.
NOTE 9. INCOME TAX
To consolidate certain of its international operations in 1999 the Company
engaged in certain non-U.S. reorganizations which gave rise to tax deductible
non-U.S. intangible assets. In 2000, the effective tax rate was higher than in
1999 as a result of a higher amount of Enterprise's investment gains which have
been taxed at a US federal rate of 35%, offset by the realization of certain net
operating losses (NOLs) due to the implementation of global tax planning
strategies (approximately $3,000) and the reversal of previously accrued tax
liabilities (approximately $3,000). These planning strategies were developed and
implemented during the first quarter. These NOLs were previously reserved with a
full valuation allowance. The reversal of previously accrued tax liabilities
resulted from the true-up of state and local tax returns and the favorable
resolution of audits in certain foreign tax jurisdictions recognized during the
quarter. While the Company intends to continue to seek global tax planning
initiatives, there can be no assurance that the Company will be able to
successfully implement such initiatives
NOTE 10. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25" ("FIN No. 44"). The interpretation
provides guidance for certain issues relating to stock compensation involving
employees that arose in applying Opinion 25. Among other issues, this
Interpretation clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
provisions of FIN No. 44 are effective July 1, 2000, except for the provisions
regarding modifications to fixed stock option awards which reduce the exercise
price of an award, which apply to modifications made after December 15, 1998.
Provisions regarding modifications to fixed stock option awards to add reload
features apply to modifications made after January 12, 2000. Management
continues to evaluate the effects of Fin No. 44 on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. In July 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No.133- an amendment of FASB
Statement No. 133." Citing concerns about companies' ability to modify their
information systems in time to apply SFAS 133, the FASB delayed its effective
date for one year, to fiscal years beginning after June 15, 2000 (January 1,
2001 for the Company).
14
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Management continues to evaluate the effects of this pronouncement on the
Company's financial statements.
NOTE 11. OPERATIONS BY BUSINESS SEGMENT
Historical results are restated to reflect Gartner as a discontinued operation
(See Note 3).
Operating segments are defined as components of an enterprise about which
financial information is available that is evaluated on a regular basis by the
chief operating decision maker, or decision making groups, in deciding how to
allocate resources to an individual segment and in assessing performance of the
segment. The Company, operating globally in 101 countries, is managed by way of
and delivers information, software and related services principally through the
strategic business segments referenced below.
The chief operating decision makers evaluate the performance and allocate
resources based on revenue and operating income. All intersegment transactions
are excluded from management's analysis of operations by business segment.
The IMS Segment consists of IMS, the leading global provider of market
information, sales management and decision-support services to the
pharmaceutical and healthcare industries, and Strategic Technologies, a leading
provider of automated sales support technologies to the pharmaceutical industry.
As previously indicated in Note 5 to the Condensed Consolidated Financial
Statements the Company is contemplating the spin-off of Strategic Technologies.
The Emerging Markets segment includes the operations of Erisco, a leading
supplier of software-based administrative and analytical solutions to the
managed care industry, and Enterprises, the Company's venture capital unit
focused on investments in emerging businesses. In 1998, this segment included
SSJ, a marketer of financial application software products to the Japanese
market, which was divested in the first quarter of 1999.
CTS delivers high-quality, cost-effective, full life-cycle solutions to complex
IT problems to clients transitioning to e-business through the use of a seamless
on-site and offshore project team. These solutions are comprised of application
development and integration services, application management services, and mass
change services.
15
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
- - -----------------------------------------------------------------------------------------------------------------------
EMERGING
IMS MARKETS CTS TOTAL
---------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenue (1) $316,468 $ 12,491 $ 23,564 $352,523
Segment Operating Income 76,224 1,744 5,123 83,091
General Corporate Expenses (8,031)
Interest Income (2) 602 505 1,107
Interest Expense (3) (416) (416)
Non-Operating Income/(Expense):
Gains from Dispositions - Net (4) 49,299 49,299
Other Expense - Net (3), (4) (9,482)
- - -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for
Income Taxes 115,568
Provision for Income Taxes (32,716)
- - -----------------------------------------------------------------------------------------------------------------------
Net Income $82,852
- - -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1999
- - -----------------------------------------------------------------------------------------------------------------------
Operating Revenue (1) $285,501 10,606 $17,135 $313,242
Segment Operating Income 57,548 895 4,070 62,513
General Corporate Expenses (7,803)
Interest Income (2) 1,428 276 1,704
Interest Expense (3) (145) (145)
Non-Operating Income/(Expense):
Gains from Dispositions 7,977 7,977
Other Expense - Net (2), (3) (3,925)
- - -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision for
Income Taxes 60,321
Provision for Income Taxes (16,528)
- - -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 43,793
Income from Discontinued Operations, Net of Income Taxes (5) 13,694
- - -----------------------------------------------------------------------------------------------------------------------
Net Income $57,487
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Operations by Business Segments:
(1) Excludes intersegment sales of $3,506 and $3,291 for March 31, 2000 and
1999, respectively. These sales, primarily from CTS to IMS, are accounted
for, and recognized as the service is performed.
(2) Interest income excludes amounts recorded at Corporate of $95 for 1999.
This amount has been included in Non-Operating Income Other Expenses-Net.
(3) Interest expense excludes amounts recorded at Corporate of $917 and $113
for March 31, 2000 and 1999, respectively. These amounts have been included
in Non-Operating Income Other Expenses-Net.
(4) Gains from Dispositions - Net excludes gains recorded at Corporate of $143
for 2000. This amount has been included in Non-Operating Income Other
Expenses-Net.
(5) Income from Discontinued Operations, Net of Income Taxes in 1999 is related
to Gartner. Taxes in 1999 were $5,168.
<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 discussion and analysis should be read in conjunction with the accompanying
condensed unaudited consolidated financial statements and related notes.
IMS Health is the world's leading provider of information solutions to the
pharmaceutical and healthcare industries. IMS Health operates in 101 countries
and its key products and services include:
o Market research for prescription and over-the-counter pharmaceutical
products;
o Sales management information to optimize sales force productivity;
o Pharmaceutical relationship management solutions for sales and marketing
decision making;
o Technology systems and information services that support managed care
organizations; and
o IT application development, integration and management services.
At March 31, 2000, IMS Health consists of (a) the IMS segment ("IMS"), which
consists of the market information and decision support services business for
the pharmaceutical and healthcare industries conducted by IMS Health and various
subsidiaries including IMS Health Strategic Technologies, Inc. ("Strategic
Technologies"); (b) Emerging Markets, which consists of the operations of ERISCO
Managed Care Technologies, Inc. ("Erisco") and Enterprise Associates LLC
("Enterprises"), the Company's venture capital unit, and (c) a controlling
interest in Cognizant Technology Solutions Corporation ("CTS").
On July 26, 1999, having received the approval of Gartner Group Inc. ("Gartner")
shareholders and the Boards of Directors of both the Company and Gartner, the
Company completed a spin-off of the majority of its equity investment in Gartner
to IMS Health shareholders (the "Gartner Spin-Off"). The Gartner Spin-Off
consisted of 0.1302 shares of Gartner Class B Common Stock for each share of the
Company's Common Stock outstanding on the July 17, 1999 record date and totaled
40.7 million Gartner Class B shares. The condensed consolidated financial
statements of the Company have been reclassified for the periods presented to
reflect the Gartner equity investment as a discontinued operation. On July 23,
1999, in connection with the Gartner Spin-off, Gartner paid a special cash
dividend. IMS Health's portion of the dividend was $52,877, net of taxes. The
Company's remaining investment in Gartner at March 31, 2000 consists of
6,909,477 Gartner Class A shares and warrants to purchase a further 599,400
Gartner Class A shares. The carrying value of the Gartner investment, after
taxes, was $99,234 at March 31, 2000. (See Note 3 to the Condensed Consolidated
Financial Statements).
PROPOSED TRANSACTIONS
On March 29, 2000, IMS Health and The TriZetto Group Inc, announced a merger. In
conjunction with this proposed merger the Company also announced plans for a
tax-free spin-off distribution of its' Strategic Technologies business (see Note
5 to The Condensed Consolidated Financial Statements).
17
<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
On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical
Marketing Services Inc. ("PMSI"), for $103,921 consisting of IMS Health common
stock, IMS Health stock options issued and accrued acquisition and integration
costs in the amount of $22,584 The Company recognized approximately $116,775 of
goodwill related to the acquisition, which is being amortized on a straight-line
basis over 15 years. As of March 31, 2000, the severance costs, relating to the
termination of 63 PMSI employees, the costs of terminating various leaseholdings
and costs associated with contract cancellations were less than originally
anticipated. However, the Company's other direct costs recognized as a result of
the acquisition, such as direct legal fees and a pre-acquisition contingency in
the amount of $1,500 were greater than originally estimated. The following table
provides the activities since the acquisition with respect to these liabilities:
<TABLE>
<CAPTION>
ORIGINAL LIABILITY EXPENDITURES TO RECLASSIFICATIONS/ MARCH 31, 2000
ESTIMATE DATE ADJUSTMENTS BALANCE
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee Separation $ 3,794 $ (3,689) $ (105) $ --
Lease Terminations 1,623 (774) (849) --
Contract Cancellations 10,935 (7,085) (834) 3,016
Other Direct Costs 6,232 (8,011) 3,288 1,509
- - ----------------------------------------------------------------------------------------------------------
Total $ 22,584 $ (19,559) $ 1,500 $ 4,525
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
IN PROCESS RESEARCH AND DEVELOPMENT
Management currently continues to support the in process research and
development efforts that were underway at the time of the Walsh International
Inc. and PMSI acquisitions in 1998. IMS Health has begun to realize the
estimated benefits from these various projects through product introductions
during 1999 and quarter 1, 2000. There are currently no significant variations
from the underlying revenue projections and estimated net cash flows, estimated
costs to complete and completion dates from those assumptions made at the time
of the purchase price allocations.
OPERATIONS
Revenue for the first quarter of 2000 increased by 12.5% to $352,523 from
$313,242 for the first quarter of the prior year, primarily due to growth at
CTS, the continued rollout of Xponent in Europe, an increasing client base for
the Japanese weekly data services and increased sales of existing products in
North America and IMS's emerging markets, partially offset by a decline in sales
force automation license revenue due to the timing of customer decisions. On a
constant dollar basis revenue growth was 14.5% since the impact of a stronger
U.S. dollar decreased reported revenue by approximately 2%.
The Company's operating cost include internal computer costs, the cost of data
collection and production and costs attributable to personnel involved in
production, data management and the processing and delivery of the Company's
services. The Company's operating costs in the first quarter of 2000 were
$139,809 compared with $138,673 in 1999, an increase of 0.8%. As a percentage of
revenue, operating costs decreased to 39.7% in 2000 from 44.3% in 1999. After
18
<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)
adjusting for the impact of Y2k costs in 1999, operating costs increased by 6.9%
in 2000. The increase was due primarily to the costs related to new products.
The decline in operating costs as a percentage of revenue demonstrates the
Company's operating leverage. The absolute increase was primarily due to the
increased direct costs to support the growth in revenues.
Selling and administrative expenses consist primarily of the cost attributable
to selling and administrative personnel, promotion, communications, management,
finance, administrative and occupancy costs. The Company's selling and
administrative expenses increased by 18.9% to $111,877 in 2000 from $94,089 in
1999. As a percentage of revenue, selling and administrative expenses increased
slightly to 31.7% in 2000 from 30.0% in 1999. The increase in such expenses was
due to continued investment in worldwide sales and marketing functions.
Operating income for the first quarter of 2000 was $75,060, compared to $54,710
for the first quarter of the prior year, an increase of 37.2%. Excluding the
impact of foreign exchange, growth would have been 27.1%. Operating results in
the first quarter of 1999 include Year 2000 costs included in operating costs of
$7,877. Adjusting for these costs, operating income for the first quarter of
2000 increased by 19.9%.
Net Interest expense of $226 has been incurred in the first quarter of 2000
versus net interest income of $1,541 in the first quarter of 1999. This change
has arisen due to a higher level of short term borrowings to fund the Company's
stock repurchase program.
Other expense, net, has increased from $3,907 in the first quarter of 1999 to
$8,708, in the first quarter of 2000. This increase is due to higher spin
related costs and non-capitalizable acquisition costs.
Non-operating income-net for the first quarter of 2000 was $40,508 compared with
$5,611 for the first quarter of the prior year. The increase is due primarily to
higher gains related to the sale of Enterprises investments. (see Note 4 to the
Condensed Consolidated Financial Statements).
For the first quarter of 2000 the effective tax rate was 28.3% compared to 27.4%
for the same quarter of 1999. In both periods the Company's effective tax rate
was reduced as a result of global tax planning initiatives. For example to
consolidate certain of its international operations in 1999 the Company engaged
in certain non-U.S. reorganizations which gave rise to tax deductible non-U.S.
intangible assets. In 2000, the effective tax rate was higher than in 1999 as a
result of a higher amount of Enterprise's investment gains which have been taxed
at the US federal rate of 35%, offset by realization of certain foreign net
operating losses (NOLs) due to the implementation of global tax planning
strategies (approximately $3,000) and the reversal of previously accrued tax
liabilities (approximately $3,000). These planning strategies were developed and
implemented during quarter one. These NOLs were previously reserved with a full
valuation allowance. The reversal of previously accrued tax liabilities resulted
from the true-up of tax returns and the favorable resolution of audits in
certain state and foreign tax jurisdictions during the quarter. While the
company intends to continue to seek global tax planning initiatives, there can
be no assurance that the Company will be able to successfully implement such
initiatives.
19
<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)
Income from continuing operations in the first quarter of 2000 was $82,852,
compared with $43,793 in the first quarter of the prior year. Excluding the
after-tax impact of net gains associated with investments from both years,
higher spin related costs and non-capitalizable acquisition costs in 2000 and
Year 2000 costs in 1999, income from continuing operations in the first quarter
of 2000 increased 16.0%.
Income from discontinued operations in the first quarter of 1999 represents
Gartner equity income.
Net income for the first quarter of 2000 was $82,852, an increase of 44.1% from
net income of $57,487 in the first quarter of the prior year due primarily to
growth in gains from Enterprise Investments and growth in the core business.
Basic earnings per share from continuing operations in the first quarter of 2000
were $0.28 compared with $0.13 in the first quarter of the prior year. Excluding
the impact of the previously identified one-time items, basic earnings per share
from continuing operations for the quarter increased 21.4%. Basic earnings per
share have been favorably impacted by the Company's share repurchase program.
Diluted earnings per share from continuing operations in the first quarter of
2000 were $0.27 compared with $0.13 in the first quarter of the prior year.
Excluding the impact of the previously identified one-time items, diluted
earnings per share from continuing operations for the quarter increased 30.8%.
Diluted earnings per share have been favorably impacted by the Company's share
repurchase program.
RESULTS BY BUSINESS SEGMENT
IMS Segment
The IMS segment consists of IMS, the leading global provider of market
information, sales management and decision-support services to the
pharmaceutical and healthcare industries, and Strategic Technologies, a leading
provider of automated sales support technologies to the pharmaceutical industry.
As previously indicated in Note 5 to the Condensed Consolidated Financial
Statements the Company is contemplating the spin-off of Strategic Technologies.
IMS segment revenue for the first quarter of 2000 increased 10.8% to $316,468
from $285,501 in the first quarter of the prior year, the growth being primarily
due to the strong performance of sales management products and services. Market
research products increased 6.6% to $99,940, sales management products increased
13.6% to $180,484 and Other Services increased 9.5% to $36,041. Sales management
growth was notably attributable to the continued roll out of Xponent in Europe
and the increased clients for the Japanese weekly data service, as well as
continued growth of existing products and services in North America and Emerging
Markets, partially offset by a decline in sales force automation license
revenues due to the timing of customer decisions.
20
<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)
First quarter 2000 operating income increased to $76,224 from $57,548 in the
prior year. Excluding Y2K costs in 1999, operating income for 2000 increased
16.5%. Adjusted operating income growth outpaced revenue growth due primarily to
the segment's ability to leverage its worldwide resources.
Emerging Markets Segment
The Emerging Markets segment currently consists of the operations of Erisco, a
leading supplier of software-based administrative and analytical solutions to
the managed care industry, and Enterprises, which focuses on investments in
venture capital funds.
Emerging Markets operating revenue for the first quarter of 2000 increased 17.8%
to $12,491 from $10,606 in the prior year. Operating income increased to $1,744
in the first quarter from $895 in the first quarter of the prior year. The
continued strong acceptance of Erisco's product Facets(R) in the marketplace is
the main contributor to both revenue and operating income growth.
Non operating gains in the Emerging Markets Segment relate to the dispositions
of Enterprise investments (see Note 4 to the Condensed Consolidated Financial
Statements).
CTS Segment
The Company's ownership interest in CTS was 61.1% at March 31, 2000,
representing 94% of the outstanding voting power.
CTS delivers life cycle software development and maintenance technology
consulting services through the use of a seamless on-site and offshore project
team. These services include application development and maintenance services,
Year 2000 and Euro currency compliance services, testing and quality assurance
services and re-hosting and re-engineering services.
CTS revenue, net of intersegment sales, increased 37.5% to $23,564 in the first
quarter of 2000 from $17,135 in the prior year. The increase is due to
continuing strong demand for application development and maintenance, Euro
currency compliance services, the addition of new customers and further
penetration of its existing client base to generate new project work. Operating
income increased 25.9% to $5,123 in 2000 from $4,070 in the first quarter of the
prior year. The lower rate of increase of operating margin was primarily due to
sales and marketing investment in North America and Europe as well as
infrastructure investment in India to support anticipated growth.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by operating activities totaled $30,515 for the three months
ended March 31, 2000 compared with $7,071 for the comparable period in 1999. The
increase of $23,444 was due primarily to a lower increase in accounts receivable
($23,849), higher accrued income tax and deferred tax accruals ($26,685) and
lower benefit payments ($6,326), partially offset by higher
21
<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)
payments of year-end accrued and other current liabilities ($22,517) and lower
deferred revenues ($15,023).
Net cash provided by investing activities totaled $19,962 for the three months
ended March 31, 2000 compared with a usage of $27,270 for the comparable period
in 1999. The $47,232 increase was primarily due to higher proceeds from the sale
of investments and businesses ($41,897) and lower capital expenditures and
additions to software ($7,161).
Net cash used in financing activities totalled $81,973 for the three months
ended March 31, 2000 compared with $78,921 for the comparable period in 1999.
The increase of $3,052 was primarily due to higher payments for the purchase of
treasury stock ($21,897) and lower proceeds from the exercise of stock options
($8,737), partially offset by increased proceeds from short-term borrowings
($28,774, net of repayments).
Effective in the first quarter of 1999, IMS operating units, which previously
reported on a fiscal year ended November 30, revised their reporting period to
conform to the Company's fiscal year end of December 31. The impact of this
change in year end of the IMS reporting units resulted in an additional $30,664
of cash and cash equivalents in the three months ended March 31, 1999.
Financing Activities include cash dividends paid of $5,972 and $6,354 for March
31, 2000 and 1999, respectively. Dividends paid per share were $.02 for the
quarters ended March 31, 2000, and 1999.
The Company has been informed by D&B that the IRS is currently reviewing D&B's
utilization of certain capital losses during 1989 and 1990. D&B has advised the
Company that during the second quarter of 2000 it has filed an amended tax
return for these periods which reflects $561,600 of tax and interest due. Under
the terms of the 1996 Distribution Agreement the Company is liable to pay half
of such taxes and interest owed to the IRS to the extent that D&B total
liabilities exceed $137,000. D&B paid approximately $349,300 of this amount in
early May 2000 and the Company expects to pay approximately $212,300 prior to
May 31, 2000, which the Company expects to fund through short term borrowings. A
portion of the Company's liability will in turn be shared with NMR under the
Distribution Agreement between those companies dated June 30, 1998 (the "1998
Distribution Agreement"). NMR is not obligated to pay its share to the Company
until January 2, 2001. The payments are being made to the IRS to stop further
interest from accruing. D&B expects a formal assessment for the additional tax
to be issued by the IRS during the second quarter of 2000. D&B has advised the
Company that, notwithstanding the filing and payment, it intends to contest the
assessment of additional tax. The Company estimates that its share of the
liability, were the IRS to prevail, would be approximately $140,000 net of
income tax benefit on interest (approximately $31,300) and NMR's contribution
obligations (approximately $41,000). This liability is included in Accrued
Income Taxes at March 31, 2000.
The Company's existing balances of cash, cash equivalents and marketable
securities, and cash generated from operations and debt capacity are expected to
be more than sufficient to meet the
22
<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)
Company's current long-term and short-term requirements including cash
dividends, acquisitions, stock repurchase programs and other contingencies.
During the first quarter of 2000, the Company repurchased 5.3 million shares of
outstanding common stock at a total cost of $117,251. The shares were
repurchased under the stock repurchase program approved by the Board of
Directors on October 19, 1999, which authorized the repurchase of up to 16
million of the Company's outstanding common stock. As of March 31, 2000,
approximately 10.8 million shares had been repurchased since the inception of
the repurchase program at a total cost of $254,035.
CHANGES IN FINANCIAL POSITION AT MARCH 31, 2000 COMPARED TO DECEMBER 31, 1999
Cash & Cash Equivalents decreased to $83,019 at March 31, 2000, from $115,875 at
December, 1999 ( which includes $40,360 and $42,641 of CTS' cash and cash
equivalents at March 31, 2000 and December 31, 1999, respectively) due primarily
to payments for the purchase of treasury stock ($117,251), partially offset by
proceeds from sale of investments ($58,179) and cash provided by operations
($30,515).
Securities and Other Investments increased to $199,719 at March 31, 2000, from
$127,415 at December 31, 1999, due primarily to The distribution of certain
investments, the Company previously held at cost, from the Venture Capital Funds
to the Company. These investments are marked to market as of March 31, 2000. In
addition, the Company made an investment of $10,000 in Allscripts held at cost.
(see Note 5 to the Condensed Consolidated Financial Statements).
Short Term Debt increased to $164,955 at March 31, 2000, from $134,663 at
December 31, 1999, due primarily to increased borrowings to partially fund the
Company's stock repurchase program. This increase was partially offset by
favorable exchange rates of borrowings in certain foreign jurisdictions.
During the first quarter of 2000, the Company purchased 5.3 million shares of
outstanding common stock at a total cost of $117,251.
Accrued Liabilities decreased to $155,260 at March 31, 2000, from $196,375 at
December 31, 1999 due primarily to payments of accruals for salaries, wages,
bonuses and other compensation and payments related to PMSI direct acquisition
and integration costs.
Accrued Taxes increased to $238,065 at March 31, 2000, from $211,592 at December
31, 1999. The increase of $26,473 reflected taxes accrued in the quarter less
net taxes paid.
Deferred Revenue decreased to $121,731 at March 31, 2000, from $136,196 at
December 31, 1999 due primarily to the amortization of annual subscription,
maintenance and support contracts billed in advance at December 31, 1999.
Deferred Taxes increased to $38,299 at March 31, 2000, from $4,726 at December
31, 1999 due primarily to higher deferred taxes on
unrealized holding gains on marketable securities.
Shareholders' Equity decreased to $492,202 at March 31, 2000 from $493,706 at
December 31, 1999 due primarily to the purchase of treasury stock ($117,251),
change in the cumulative translation adjustment ($9,617) and dividends paid
($5,972) partially offset by net income ($82,852), the change in unrealized
gains on investments ($41,636) and the exercise of stock options ($4,787).
23
<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
The Year 2000 statements set forth below are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information Readiness Disclosure Act.
Many computer systems and software applications use two digits, rather than
four, to record years (for example "98" instead of "1998"). Unless modified,
such systems would not properly record or interpret years after 1999, which
could lead to business disruptions. This was known as the "Year 2000 issue"
("Year 2000"). Assessments of the potential effects of the Year 2000 issue vary
markedly among different companies, governments, consultants and economists
which results in the inability to predict what the actual impact may be. The
Company began to address Year 2000 in 1996. In 1997, the Company created a Year
2000 Task Force (the "Task Force") to manage overall risks and to facilitate
activities across the entire Company. The Task Force, in consultation with
operating personnel, evaluated whether conversion or replacement and enhancement
(i.e. "reengineering") was necessary. CTS was engaged to do work on a
significant portion of conversion and reengineering projects to allow most
internal staff members to focus on the core business. The Company has also used
outside services to assist in conversions, reengineering and the assessment of
progress of its Year 2000 program.
The Task Force developed a conversion methodology that included three phases:
analysis, coding and testing, and testing and implementation. The analysis phase
includes planning, inventory and impact analysis. The coding and testing phase
involves code changes, using conversion rules and criteria and unit testing,
verifying and documenting the results of the conversion. The testing and
implementation phase includes system test across platforms and verification of
data, an acceptance test within the user environment, and implementation or
releasing the systems back into production.
The creation of customer products relies on the receipt of data, including
electronic data, from tens of thousands of external data suppliers in the
healthcare industry and the Company's ability to convert the data and deliver
the information to its customers. The consolidation of the data is principally
performed at central processing locations. The Company believes central systems
represent approximately 85% of its Year 2000 conversion efforts. The Company
operates central processing facilities in Germany, the United Kingdom, the
United States and Japan. The systems at these sites contained the most lines of
code required to undergo conversion. As of December 31, 1999 the Company had
completed its Year 2000 conversion process at central processing locations and
of the local systems and personal computer applications and the Company believes
that its products and infrastructure systems are Year 2000 capable. The systems
continued to function properly without issue throughout the first quarter of
2000.
The Company had been proactive in working with data suppliers to determine their
Year 2000 readiness and ability to maintain the flow of data. Contingency plans
have been developed and statistically valid methods of data extrapolation would
be used in the event the supply of data from a limited number of suppliers was
disrupted, incomplete or found to be unusable. In
24
<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)
addition, alternate sources of data are pursued when the Company determines the
data source to have a high risk of impacting the Company's ability to deliver
products and services.
The Company established an operational Command Center to coordinate the rollover
from 1999 into 2000. On January 1, 2000, there were several hundred employees
on-site or on-call. For each area of the business, specific individuals were
responsible for the development and execution of recovery plans, if deemed
necessary. The rollover did not result in any significant disruptions to the
Company's products or services and the Company's products and infrastructure
systems have been operating without incident. At the time of this Form 10-Q
filing, no Year 2000 event has materially impacted the Company's operations and
the Company has not experienced a disruption in data from its suppliers that
would impact the ability to deliver products and services to our customers.
While the Company continues to believe its critical systems are Year 2000 ready
and that the data flow from its suppliers will not be disrupted by the rollover
there is no guarantee that the Company has identified all potential areas that
might be impacted by the rollover. Areas of potential concern include Year 2000
problems of data suppliers and their internal systems. Since these matters are
out of the Company's control, the magnitude of the impact depends upon the
significance of a particular supplier's data on the Company's products or
services, the speed in which the Company and the supplier can resolve any issues
that may arise and the ability of the Company to execute its contingency plans.
External and internal costs totaling $79,299 to address the Year 2000 issue were
expensed through December 31, 1999. These costs were primarily related to
repairing software. This does not include the costs of software and systems that
are being replaced or enhanced in the normal course of business. The Company did
not accrue any additional costs in the first quarter of 2000 related to Year
2000 and the company does not expect to accrue additional costs related to the
Year 2000 issue.
EURO CONVERSION
On January 1, 1999, 11 member countries of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency ("Euro"). The transition period for the introduction of the Euro
is between January 1, 1999 and January 1, 2002.
The Company instituted plans for the introduction of the Euro and addressed the
related issues, including the conversion of information technology systems,
recalculating currency risk, recalibrating derivatives and other financial
instruments, continuity of contracts, taxation and accounting records and the
increased price transparency resulting from the use of a single currency in
eleven participating countries which may affect the ability of some companies to
price products differently in various European markets. The Company believes
that differences in national market size, data collection requirements and
specific product specifications required
25
<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)
due to the diverse market information needs in the healthcare markets of Europe
will reduce the potential for price harmonization in most of the Company's
product ranges.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, as well as information included in oral
statements or other written statements made or to be made by IMS Health, contain
statements which, in the opinion of IMS Health, may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Litigation Reform Act"). These statements appear in a number of
places in this quarterly report and include, but are not limited to, all
statements relating to plans for future growth and other business development
activities as well as capital expenditures, financing sources, dividends and the
effects of regulation and competition, Year 2000 readiness, Euro conversion and
all other statements regarding the intent, plans, beliefs or expectations of IMS
Health or its directors or officers. Stockholders are cautioned that such
forward-looking statements are not assurances for future performance or events
and involve risks and uncertainties that could cause actual results and
developments to differ materially from those covered in such forward-looking
statements. These risks and uncertainties include, but are not limited to, risks
associated with operating on a global basis, including fluctuations in the value
of foreign currencies relative to the U.S. dollar, and the ability to
successfully hedge such risks; to the extent IMS Health seeks growth through
acquisitions or joint ventures, the ability to identify, consummate and
integrate acquisitions and ventures on satisfactory terms; the ability to
develop new or advanced technologies and systems for their businesses on time
and on a cost-effective basis; the ability to successfully maintain historic
effective tax rates and to achieve estimated corporate overhead levels;
competition, particularly in the markets for pharmaceutical information;
regulatory, legislative and enforcement initiatives, particularly in the area of
medical privacy and tax; the ability to timely and cost-effectively resolve any
problems associated with the Year 2000 and Euro currency issues; the ability to
obtain future financing on satisfactory terms; deterioration in economic
conditions, particularly in the pharmaceutical, healthcare, or other industries
in which customers may operate; conditions in the securities markets which may
effect the value or liquidity of portfolio investments and management's
estimates of lives of assets, recoverability of assets, fair market value,
estimates and liabilities and accrued income tax benefits and liabilities and;
failure of third parties to convert their information technology systems to the
Euro currency in a timely manner and actions of government agencies and other
third parties with respect to Euro currency issues. Consequently, all the
forward-looking statements contained in this Quarterly Report on Form 10-Q are
qualified by the information contained herein, including, but not limited to,
the information contained under this heading and the condensed consolidated
financial statements and notes thereto for the three-month period ended March
31, 2000 and by the material set forth under the headings "Business" and
"Factors that May Affect Future Results" in the Company's Annual Report on Form
10-K for the year ended December 31, 1999. IMS Health is under no obligation to
publicly release any revision to any forward-looking statement contained or
incorporated herein to reflect any future events or occurrences.
26
<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)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item is set forth in "Note 8. Financial
Instruments" of Notes to Condensed Consolidated Financial Statements on pages 12
and 13 hereof.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - -------------------------
Information in response to this Item is set forth in "Note 7. Contingencies" of
Notes to Condensed Consolidated Financial Statements on pages 9 through 12
hereof.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- - -------------------------------------------------
Title of Class: Preferred Stock Purchase Rights
On March 28, 2000, the Company entered into an agreement amending the Rights
Agreement, dated as of June 15, 1998, between the Company and First Chicago
Trust Company of New York in order to render the Preferred Stock Purchase Rights
inapplicable to the proposed merger and other transactions contemplated under
the Agreement and Plan of Reorganization, dated as of March 28, 2000, between
the Company and The TriZetto Group, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -----------------------------------------------------------
The Annual Meeting of Shareholders of IMS Health Incorporated was held on April
10, 2000.
The following nominees for director named in the Proxy Statement dated March 17,
2000, were elected at the Meeting by the votes indicated:
For Withheld
--- --------
John P. Imlay, Jr 227,992,787 9,841,668
Robert J. Kamerschen 227,989,460 9,844,995
H. Eugene Lockhart 227,999,940 9,834,515
The votes in favor of the election of the nominees represent at least 95% of the
shares present at the meeting.
Approval of the appointment of PricewaterhouseCoopers LLP as Independent Public
Accountants was approved by the following vote:
For Against Abstain
--- ------- -------
Number of Shares 237,098,853 292,634 442,968
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- - -----------------------------------------
(a) Exhibits:
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
.1 Agreement and Plan of Reorganization, dated as of March 28, 2000 between The
TriZetto Group Inc. and IMS Health Incorporated (incorporated by reference to
Exhibit 2.1 to the IMS Health Incorporated Report on Form 8-K filed on March 30,
2000, file number 001-14049).
4 Instruments Defining Rights of Security Holders
.1 Amendment No. 1 to the Rights Agreement, dated as of March 28, 2000 between
IMS Health Incorporated and First Chicago Trust Company of New York
10 Material Contracts
.1 Letter Agreements
27 Financial Data Schedules
(b) Reports on 8-K:
The following reports on Form 8-K were filed during the quarter ended
March 31, 2000:
A report on Form 8-K was filed on March 31, 2000 to report under Item 5, Other
Events, and Item 7, Exhibits, the Agreement and Plan of Reorganization, dated as
of March 28, 2000, between The TriZetto Group, Inc. and IMS Health Incorporated.
A report on Form 8-K was filed on April 4, 2000 to present under Item 5, Other
Events, information concerning a participant in the solicitation of proxies in
connection with the vote of shareholders of IMS Health Incorporated on the
merger contemplated in Agreement and Plan of Reorganization, dated as of March
28, 2000, between The TriZetto Group, Inc. and IMS Health Incorporated.
29
<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:
-----------------------------------------------
Date: May 15, 2000 James C. Malone
Chief Financial Officer
----------------------------------------------
Date: May 15, 2000 James C. Malone
Chief Financial Officer
(Principal Financial and Accounting Officer)
AMENDMENT NO. 1 TO THE
RIGHTS AGREEMENT
Amendment No. 1, dated as of March 28, 2000 (this "Amendment"), to
the Rights Agreement, dated as of June 15, 1998 (the "Rights Agreement"),
between IMS Health Incorporated, a Delaware corporation (the "Company"), and
First Chicago Trust Company of New York, as Rights Agent (the "Rights Agent").
WHEREAS, The TriZetto Group, Inc., a Delaware corporation
("TriZetto") and the Company have proposed to enter into an Agreement and Plan
of Reorganization, to be dated as of March 28, 2000 (the "Merger Agreement");
WHEREAS, the Company desires to amend the Rights Agreement to render
the Rights (as defined in the Rights Agreement) inapplicable to the Merger (as
defined in the Merger Agreement) and the other transactions contemplated by the
Merger Agreement;
WHEREAS, the Company deems this Amendment to be necessary and
desirable and in the best interests of the holders of Rights and has duly
approved this Amendment;
WHEREAS, Section 27 of the Rights Agreement permits the Company to
amend the Rights Agreement in the manner provided herein;
WHEREAS, Section 27 of the Rights Agreement provides that the Rights
Agent shall execute this Amendment upon delivery of a certificate from an
appropriate officer of the Company which states that this Amendment is in
compliance with the terms of Section 27 of the Rights Agreement (the "Officer's
Certificate"); and
WHEREAS, the Officer's Certificate is being delivered to the Rights
Agent concurrently with this Amendment;
NOW, THEREFORE, the Company hereby amends the Rights Agreement as
follows:
1. Addition of a new Section 35 which shall read as follows:
"Section 35. Exemption of Specified Transaction. Solely for the
purposes of the transactions contemplated by the Agreement and Plan of
Reorganization, to be dated as of March 28, 2000 (hereinafter referred to as the
"Merger Agreement"), between the Company and The TriZetto Group, Inc., a
Delaware corporation ("TriZetto"), (i) neither TriZetto nor any of its
Affiliates shall be deemed to be an Acquiring Person as a result of the
execution and delivery of the Merger Agreement or the IMS Voting Agreement (as
contemplated by the Merger Agreement) or the consummation of the
<PAGE>
Merger (as contemplated by the Merger Agreement), (ii) the transactions
contemplated by the Merger Agreement, including the Merger, shall not be deemed
to be an event or transaction contemplated by Section 13 hereof, and (iii) a
Distribution Date shall not occur by reason of the approval, execution,
announcement or consummation of the Merger Agreement or the transactions
contemplated thereby. If the Merger Agreement is terminated for any reason in
accordance with its terms or otherwise, this Section 35 shall not apply and
shall have no further force and effect."
2. The Rights Agreement shall not otherwise be supplemented or
amended by virtue of this Amendment, but shall remain in full force and effect
as amended hereby.
<PAGE>
IN WITNESS WHEREOF, the Company and the Rights Agent have executed
this Amendment as of the date and year first written above.
IMS HEALTH INCORPORATED
By: /s/ David Stevens
---------------------------------------
Name: David Stevens
Title: Senior Vice President, General
Counsel and Secretary
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By: /s/ Gerard J. O'Leary
---------------------------------------
Name: Gerard J. O'Leary
Title: Managing Director
[On March 28, 2000, IMS Health entered into letter agreements with its Chairman
and its Chief Executive Officer pursuant to which each of them would receive a
bonus for extraordinary efforts in negotiating a proposed strategic business
combination with TriZetto. Those letter agreements are reproduced below. In
light of the adverse market reaction to the proposed IMS Health-TriZetto merger
announced on March 29, 2000, on April 2, 2000 the Chairman and the Chief
Executive Officer requested IMS Health to terminate these letter agreements as
of that date. The Chairman of the Compensation & Benefits Committee of the Board
of Director's of IMS Health agreed to that request on April 2, 2000, and IMS
Health formalized that agreement by letter agreements dated April 19, 2000 which
are reproduced below.]
IMS HEALTH [LOGO]
Ms. Victoria R. Fash
Chief Executive Officer and President
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
March 28, 2000
Mr. Robert E. Weissman
Chairman of the Board
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
Re: Transaction Completion Incentive
Dear Bob:
The Compensation & Benefits Committee of the Board of Directors of IMS
Health Incorporated (the "Company") has authorized and approved a bonus
arrangement intended to reward you for your extraordinary efforts in negotiating
the proposed strategic business combination between the Company and TriZetto or
such other transaction determined by the Board, in its discretion, to be of
comparable magnitude and benefit to shareholders (the "Transaction"), and to
provide you with a substantial incentive to bring the Transaction to a
successful completion. We believe that the Transaction will greatly strengthen
the Company (combined with its Transaction partner) and confer a great benefit
upon the Company's stockholders.
Therefore, subject to your agreement to the terms of this letter, the
Company hereby provides to you the opportunity to earn a cash bonus (the
"Transaction Completion Incentive") on the terms and conditions set forth as
follows:
(1) You will have the opportunity to earn the Transaction Completion
Incentive if and only if the Board of Directors of the Company has
approved, and the Company has entered into, a definitive agreement,
on or before April 1, 2000, binding the Company and TriZetto (or
such other party determined by the Board to be comparable) to
consummate the Transaction, subject to customary conditions (the
"Transaction Agreement").
(2) If the Transaction is consummated pursuant to the terms of the
Transaction Agreement (as that Agreement may be amended from time to
time, with the approval of the Board of Directors), on or before
December 31, 2000 (the "Expiration Date"), the Company will pay you,
at the time of the closing of the Transaction, a cash amount equal
to $5,500,000.
(3) You will be responsible for payment of Federal income and other
taxes resulting from any payment of the Transaction Completion
Incentive, except to the extent that Section 9(b) (relating to taxes
resulting from golden parachute excise taxes) of your Employment
Agreement, as amended and restated (the "Employment Agreement"),
applies. The Company will withhold from any payment of the
Transaction Completion Incentive any such taxes it is required to
withhold by applicable tax withholding laws and regulations, and you
may direct the Company to withhold additional amounts to pay taxes
calculated at your applicable marginal rates.
(4) In the event of your termination of employment with the Company for
any reason prior to the time the Transaction Completion Incentive
becomes payable and prior to the Expiration Date, other than a
termination by the Company for Cause (as defined in your
<PAGE>
Mr. Robert E. Weissman
March 28, 2000
Page 2
Employment Agreement) or your voluntary termination not for Good
Reason (as defined in your Employment Agreement), the Transaction
Completion Incentive opportunity will neither be canceled nor deemed
earned, but will instead remain outstanding according to its terms.
In the event the Company terminates you for Cause or you voluntarily
terminate employment not for Good Reason prior to the time the
Transaction Completion Incentive becomes payable and prior to the
Expiration Date, the Transaction Completion Incentive will be
immediately canceled. The provisions of this paragraph (4) override
any contrary provisions in your Employment Agreement.
(5) It is understood that your relinquishing the title of Chairman of
the Board of the Company and being appointed Vice Chairman of the
Board of the entity resulting from the Transaction, upon
consummation of the Transaction, will not constitute "Good Reason"
within the meaning of your Employment Agreement.
(6) The Transaction Completion Incentive shall not represent base salary
or annual incentive or annual bonus, for purposes of your Employment
Agreement or otherwise, and shall not be taken into account as
"compensation" for purposes of the Company's Supplemental Executive
Retirement Plan, any calculation of a severance benefit, or other
plans or programs of the Company.
If you are in agreement with the terms and conditions set forth in this
letter, please sign below (and on the duplicate copy of this letter, which
represents one and the same agreement) and return this letter to me within five
days after your receipt.
Sincerely yours,
IMS Health Incorporated
By: /s/ Victoria R. Fash
---------------------------------
Victoria R. Fash
Chief Executive Officer and President
I have read, understand and agree to the terms and conditions set forth in this
letter.
/s/ Robert E. Weissman March 28, 2000
- - --------------------------------- -------------------------------------
Robert E. Weissman Date
[In connection with discussions with another company about a possible strategic
business combination, which discussions were subsequently terminated, IMS Health
entered into a letter agreement dated February 4, 2000 with Mr. Weissman
substantially identical to that set forth above. The February 4 Agreement, which
is no longer in effect, is not reproduced here because of a confidentiality
agreement with that other company.]
<PAGE>
IMS HEALTH [LOGO]
Mr. Robert E. Weissman
Chairman of the Board
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
March 28, 2000
Ms. Victoria R. Fash
Chief Executive Officer and President
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
Re: Transaction Completion Incentive
Dear Vickie:
The Compensation & Benefits Committee of the Board of Directors of IMS
Health Incorporated (the "Company") has authorized and approved a bonus
arrangement intended to reward you for your extraordinary efforts in negotiating
the proposed strategic business combination between the Company and TriZetto or
such other transaction determined by the Board, in its discretion, to be of
comparable magnitude and benefit to shareholders (the "Transaction"), and to
provide you with a substantial incentive to bring the Transaction to a
successful completion. We believe that the Transaction will greatly strengthen
the Company (combined with its Transaction partner) and confer a great benefit
upon the Company's stockholders.
Therefore, subject to your agreement to the terms of this letter, the
Company hereby provides to you the opportunity to earn a cash bonus (the
"Transaction Completion Incentive") on the terms and conditions set forth as
follows:
(1) You will have the opportunity to earn the Transaction Completion
Incentive if and only if the Board of Directors of the Company has
approved, and the Company has entered into, a definitive agreement,
on or before April 1, 2000, binding the Company and TriZetto (or
such other party determined by the Board to be comparable) to
consummate the Transaction, subject to customary conditions (the
"Transaction Agreement").
(2) If the Transaction is consummated pursuant to the terms of the
Transaction Agreement (as that Agreement may be amended from time to
time, with the approval of the Board of Directors), on or before
December 31, 2000 (the "Expiration Date"), the Company will pay you,
at the time of the closing of the Transaction, a cash amount equal
to $5,500,000.
(3) You will be responsible for payment of Federal income and other
taxes resulting from any payment of the Transaction Completion
Incentive, except to the extent that Section 9(b) (relating to taxes
resulting from golden parachute excise taxes) of your Employment
Agreement, as amended and restated (the "Employment Agreement"),
applies. The Company will withhold from any payment of the
Transaction Completion Incentive any such taxes it is required to
withhold by applicable tax withholding laws and regulations, and you
may direct the Company to withhold additional amounts to pay taxes
calculated at your applicable marginal rates.
(4) You agree that if, at the time the Transaction Completion Incentive
becomes payable, there remains any principal or interest outstanding
under the loan from the Company to
<PAGE>
Ms. Victoria R. Fash
March 28, 2000
Page 2
you described in Section 5(g) of your Employment Agreement, you will
pay over to the Company, out of the portion of the Transaction
Completion Incentive remaining after taxes have been withheld
(including taxes in excess of mandatory withholding taxes, if so
directed by you), the amount of such remaining principal or interest
so as to retire the loan. It is understood that you will not be
obligated at that time to retire the loan to the extent that the
remaining principal and interest exceeds the after-tax portion of
the Transaction Completion Incentive. If any event has occurred
prior to payment of the Transaction Completion Incentive whereby the
Company has forgiven your obligation to repay the outstanding
principal and interest under the loan, the amount of principal and
interest forgiven shall represent an offset against the Company's
obligation to pay the Transaction Completion Incentive, so that the
amount of the Transaction Completion Incentive payable to you will
be reduced by the amount of the principal and interest forgiven.
(5) In the event of your termination of employment with the Company for
any reason prior to the time the Transaction Completion Incentive
becomes payable and prior to the Expiration Date, other than a
termination by the Company for Cause (as defined in your Employment
Agreement) or your voluntary termination not for Good Reason (as
defined in your Employment Agreement), the Transaction Completion
Incentive opportunity will neither be canceled nor deemed earned,
but will instead remain outstanding according to its terms
(including the obligation to repay the loan and the loan forgiveness
offset provision specified in paragraph (4)). In the event the
Company terminates you for Cause or you voluntarily terminate
employment for Good Reason prior to the time the Transaction
Completion Incentive becomes payable and prior to the Expiration
Date, the Transaction Completion Incentive will be immediately
canceled. The provisions of this paragraph (5) override any contrary
provisions in your Employment Agreement.
(6) It is understood that your relinquishing the title of Chief
Executive Officer and being appointed Chairman of the Board of the
entity resulting from the Transaction (with duties comparable in all
material respects to those of the Chairman of the company resulting
from the Transaction immediately following consummation thereof)
three years after consummation of the transaction will not
constitute "Good Reason" within the meaning of your Employment
Agreement.
(7) The Transaction Completion Incentive shall not represent base salary
or annual incentive or annual bonus, for purposes of your Employment
Agreement or otherwise, and shall not be taken into account as
"compensation" for purpose of the Company's Supplemental Executive
Retirement Plan, any calculation of a severance benefit, or other
plans or programs of the Company.
<PAGE>
Ms. Victoria R. Fash
March 28, 2000
Page 3
If you are in agreement with the terms and conditions set forth in this
letter, please sign below (and on the duplicate copy of this letter, which
represents one and the same agreement) and return this letter to me within five
days after your receipt.
Sincerely yours,
IMS Health Incorporated
By: /s/ Robert E. Weissman
-------------------------
Robert E. Weissman
Chairman of the Board
I have read, understand and agree to the terms and conditions set forth in this
letter.
/s/ Victoria R. Fash March 28, 2000
- - ---------------------------- -----------------------------
Victoria R. Fash Date
[In connection with discussions with another company about a possible strategic
business combination, which discussions were subsequently terminated, IMS Health
entered into a letter agreement dated February 4, 2000 with Ms. Fash
substantially identical to that set forth above. The February 4 Agreement, which
is no longer in effect, is not reproduced here because of a confidentiality
agreement with that other company.]
<PAGE>
April 19, 2000
IMS HEALTH [LOGO]
Robert E. Weissman
Chairman
IMS HEALTH
200 Nyala Farms
Westport, Connecticut 06880
Tel. 203-222-4242
Fax 203-222-4247
[email protected]
Victoria R. Fash
President and Chief Executive Officer
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
Re: Termination of Transaction Completion Incentive Agreement
Dear Vickie
On February 4, 2000 and March 28, 2000, we entered into Transaction
Completion Incentive Agreements (the "Agreements"), pursuant to which you would
be awarded a cash bonus of $5.5 million upon the closing of a business
consolidation between the Company and [Name] (under the February 4th Agreement)
or The TriZetto Group, Inc. (under the March 28th Agreement) or upon the
consummation of another transaction of comparable magnitude. The purpose of this
letter is to document our subsequent agreement, which was reached between you
and the Chairman of the Compensation & Benefits Committee of the Board of
Directors on April 2, 2000, to terminate the Agreements as of that date.
Please sign your name where indicated below and return one copy of this
letter to the undersigned. Keep the other copy for your records.
Sincerely,
/s/ Robert E. Weissman
ACKNOWLEDGED:
/s/ Victoria R. Fash
- - --------------------------
Victoria R. Fash
ACKNOWLEGED:
/s/ Bernard Puckett
- - --------------------------
Bernard Puckett
Dated: _____________
<PAGE>
April 19, 2000
IMS HEALTH [LOGO]
Victoria R. Fash
President and
Chief Executive Officer
IMS HEALTH
7 Harewood Avenue
London, NWI 6JB, U.K.
Telephone +44-171-393 5141
Fax +44-171-393 5802
[email protected]
Robert E. Weissman
Chairman of the Board
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
Re: Termination of Transaction Completion Incentive Agreement
Dear Bob:
On February 4, 2000 and March 28, 2000, we entered into Transaction
Completion Incentive Agreements (the "Agreements"), pursuant to which you would
be awarded a cash bonus of $5.5 million upon the closing of a business
consolidation between the Company and [Name] (under the February 4th Agreement)
or The TriZetto Group, Inc. (under the March 28th Agreement) or upon the
consummation of another transaction of comparable magnitude. The purpose of this
letter is to document our subsequent agreement, which was reached between you
and the Chairman of the Compensation & Benefits Committee of the Board of
Directors on April 2, 2000, to terminate the Agreements as of that date.
Please sign your name where indicated below and return one copy of this
letter to the undersigned. Keep the other copy for your records.
Sincerely,
/s/ Victoria R. Fash
ACKNOWLEDGED:
/s/ Robert E. Weissman
- - -----------------------------
Robert E. Weissman
ACKNOWLEGED:
/s/ Bernard Puckett
- - -----------------------------
Bernard Puckett
Dated: _____________
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