================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------
FORM 10-Q
-------------------
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 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
---------
IMS HEALTH INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1506026
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
200 NYALA FARMS, WESTPORT, CT 06880
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 222-4200
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
TITLE OF CLASS SHARES OUTSTANDING
------------------------ AT JUNE 30, 2000
COMMON STOCK, ------------------
par value $.01 per share 297,199,007
================================================================================
<PAGE>
IMS HEALTH INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE(S)
-------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Income
Three Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Income
Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Financial Position
June 30, 2000 and December 31, 1999 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 7
Notes to Condensed Consolidated Financial Statements 8-23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 24-36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 36-37
SIGNATURES 38
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
---------------------------------
<S> <C> <C>
OPERATING REVENUE $ 369,401 $ 332,652
Operating Costs 145,917 142,688
Selling and Administrative Expenses 120,812 104,093
Depreciation and Amortization 24,125 23,116
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 78,547 62,755
-----------------------------------------------------------------------------------------------------------------------
Interest Income 897 1,981
Interest Expense (2,034) (2,276)
Gains from Dispositions--Net 8,272 8,300
Other Expense--Net (4,965) (4,329)
-----------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 2,170 3,676
-----------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 80,717 66,431
Provision for Income Taxes (30,488) (20,257)
-----------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 50,229 46,174
Income from Discontinued Operations, Net of Income Taxes of $6,516
for 1999 -- 10,617
-----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 50,229 $ 56,791
-----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.17 $ 0.15
Income from Discontinued Operations 0.00 0.03
-----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.17 $ 0.18
-----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.17 $ 0.15
Income from Discontinued Operations 0.00 0.03
-----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.17 $ 0.18
-----------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares Outstanding--Basic 297,236,000 314,343,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 600,000 5,514,000
Adjustment of Shares Outstanding Applicable to Exercised Stock Options during the
period 9,000 122,000
-----------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 297,845,000 319,979,000
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED). THE OPERATIONS BY BUSINESS SEGMENT NOTE (NOTE 12) PROVIDES
OPERATING RESULTS FOR THE CORE IMS BUSINESS AND CTS SEGMENTS EXCLUDING THE
TRANSACTION BUSINESSES AS DEFINED IN NOTE 2.
3
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
OPERATING REVENUE $ 721,924 $ 645,894
Operating Costs 285,725 281,361
Selling and Administrative Expenses 232,689 198,182
Depreciation and Amortization 49,903 48,886
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 153,607 117,465
-----------------------------------------------------------------------------------------------------------------------
Interest Income 2,004 3,780
Interest Expense (3,367) (2,534)
Gains from Dispositions--Net 57,714 16,277
Other Expense--Net (13,673) (8,236)
-----------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 42,678 9,287
-----------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 196,285 126,752
Provision for Income Taxes (63,204) (36,785)
-----------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 133,081 89,967
Income from Discontinued Operations, Net of Income Taxes of $12,639
for 1999 -- 24,311
-----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 133,081 $ 114,278
-----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.45 $ 0.28
Income from Discontinued Operations 0.00 0.08
-----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.45 $ 0.36
-----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $ 0.44 $ 0.28
Income from Discontinued Operations 0.00 0.07
-----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.44 $ 0.35
-----------------------------------------------------------------------------------------------------------------------
Number of Shares Outstanding--Basic 298,576,000 316,062,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 2,287,000 6,710,000
Adjustment of Shares Outstanding Applicable to Exercised Stock Options during the
period 48,000 283,000
-----------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 300,911,000 323,055,000
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED). THE OPERATIONS BY BUSINESS SEGMENT NOTE (NOTE 12) PROVIDES
OPERATING RESULTS FOR THE CORE IMS BUSINESS AND CTS SEGMENTS EXCLUDING THE
TRANSACTION BUSINESSES AS DEFINED IN NOTE 2.
4
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Net Income $ 50,229 $ 56,791
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation Adjustments Losses (8,888) (10,552)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains on Securities Arising During the Period:
Other (Net of Tax Expense of $3,710 and $94 for 2000 and 1999, respectively) 6,892 248
Gartner Shares Held For Sale (Net of Tax Benefit of $9,068 for 2000) (16,842) --
Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax
Expense of $4,783 for 2000) (8,884) --
--------------------------------------------------------------------------------------------------------------------------
Change in Unrealized (Losses)/Gains on Investments, Net of Tax (18,834) 248
--------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Loss, Net of Tax (27,722) (10,304)
--------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 22,507 $ 46,487
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Net Income $ 133,081 $ 114,278
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation Adjustments Losses (18,505) (31,434)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) on Securities Arising During the Period:
Other (Net of Tax Expense/(Benefit) of $36,330 and ($710) for 2000 and 1999,
respectively) 58,884 (1,884)
Gartner Shares Held For Sale (Net of Tax Benefit of $7,859 for 2000) (14,595) --
Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax
Expense of $9,540 and $2,802 for 2000 and 1999, respectively) (21,487) (7,423)
-----------------------------------------------------------------------------------------------------------------------
Change in Unrealized Gains/(Losses) on Investments Net of Tax 22,802 (9,307)
-----------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income/(Loss), Net of Tax 4,297 (40,741)
-----------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 137,378 $ 73,537
=======================================================================================================================
</TABLE>
See accompanying Notes to the Condensed Consolidated Financial Statements
(unaudited)
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 9 to the Condensed Consolidated Financial Statement).
5
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) (DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-----------------------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 103,148 $ 115,875
Accounts Receivable-Net 282,559 284,679
Other Receivable (see note 8) 41,136 --
Other Current Assets 107,814 109,908
Net Assets from Discontinued Operations (see note 3) 82,392 96,988
-------------------------------------------------------------------------------------------------------------------
Total Current Assets 617,049 607,450
-------------------------------------------------------------------------------------------------------------------
SECURITIES AND OTHER INVESTMENTS 197,554 127,415
PROPERTY, PLANT AND EQUIPMENT-NET 161,245 169,190
OTHER ASSETS-NET:
Computer Software 171,984 174,974
Goodwill 324,810 339,491
Other Assets 34,685 32,236
Note and Interest Receivable from Related Party (see note 9) 2,966 --
-------------------------------------------------------------------------------------------------------------------
Total Other Assets-Net 534,445 546,701
-------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,510,293 $ 1,450,756
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 43,556 $ 44,577
Accrued and Other Current Liabilities 165,574 196,375
Short Term Debt 334,601 134,663
Accrued Income Taxes 62,571 211,592
Deferred Revenues 110,557 136,196
-------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 716,859 723,403
-------------------------------------------------------------------------------------------------------------------
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 27,499 27,429
DEFERRED TAXES 55,035 4,726
OTHER LIABILITIES 73,240 76,617
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 872,633 832,175
-------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 128,045 124,875
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $.01, Authorized 800,000,000 Shares; Issued 335,045,390
Shares at June 30, 2000 and December 31, 1999, respectively 3,350 3,350
Capital in Excess of Par 738,866 738,993
Retained Earnings 925,610 804,452
Treasury Stock, at Cost, 37,846,383 and 32,901,441 Shares at
June 30, 2000 and December 31, 1999, respectively (1,123,149) (1,013,730)
Cumulative Translation Adjustment (114,740) (96,235)
Unrealized Gains on Gartner Group Holdings, net of tax 970 15,565
Unrealized Gains on Investments, net of tax 78,708 41,311
-------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 509,615 493,706
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,510,293 $ 1,450,756
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited).
6
<PAGE>
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 133,081 $ 114,278
Less Income from Discontinued Operations -- (24,311)
---------------------------------------------------------------------------------------------------------
Income from Continuing Operations 133,081 89,967
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization 49,903 48,886
Gains from Sale of Investments, Net (57,714) (16,277)
Benefit Payments (1,634) (6,252)
Non-Recurring Charge Payments (955) (1,910)
Net (Increase)/Decrease in Accounts Receivable (9,762) 2,149
Net (Decrease)/Increase in Deferred Revenues (22,003) 9,012
Minority Interests 7,038 3,202
Deferred Income Taxes 20,641 (3,645)
Net Increase in Accrued Income Taxes 21,246 1,975
Net Decrease in Accrued and Other Current Liabilities (19,200) (9,141)
Other Working Capital Items (765) (6,569)
---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 119,876 111,397
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Investments, Net 66,734 39,157
Acquisition and Integration Payments (4,588) (21,768)
Payments for Acquisition of Business -- (3,100)
Capital Expenditures (13,051) (16,465)
Additions to Computer Software (21,139) (28,185)
Net Increase in Other Investments (16,710) (16,338)
Other Investing Activities - Net (10,630) 1,344
---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 616 (45,355)
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (119,623) (222,651)
Proceeds from Exercise of Stock Options 6,326 20,180
Dividends Paid (11,923) (12,660)
Proceeds from Employee Stock Purchase Plan 1,608 2,947
Payment on D&B Tax Contingency (212,291) --
Short-Term Borrowings 245,588 150,540
Short-Term Debt Repayments (40,500) (79,631)
Other Financing Activities - Net (420) 710
---------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (131,235) (140,565)
---------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1,984) (12,221)
Effect of Change in Year End of the IMS Operating Units -- 30,664
---------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (12,727) (56,080)
Cash and Cash Equivalents, Beginning of Period 115,875 206,390
---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 103,148 $ 150,310
---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $ 3,324 $ 2,551
Cash Paid during the Period for Income Taxes (Exclusive of payment of D&B Tax
Contingency--See Note 8 to the Condensed Consolidated Financial Statements.) $ 27,254 $ 39,634
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
(unaudited).
7
<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 over 100
countries.
At June 30, 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; (b) a controlling interest in Cognizant Technology Solutions
Corporation ("CTS") and (c) the segment containing (i) the pharmaceutical
industry automated sales and marketing support business of IMS Health Strategic
Technologies, Inc. ("Strategic Technologies"), substantially all of IMS Health's
interactive and direct marketing business, including the business of
Clark-O'Neill, Inc. ("Clark-O'Neill"), and a majority stake in a foreign joint
venture (collectively, "Synavant") (ii) ERISCO Managed Care Technologies, Inc.
("Erisco") and (iii) three small non-strategic software businesses ((i), (ii)
and (iii), collectively, the "Transaction Businesses"). The Company intends to
spin-off or divest of all businesses in the Transaction Businesses segment (see
Note 6).
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).
Effective in the first quarter of 1999, IMS operating units which previously
reported on a fiscal year ended November 30 revised their reporting period to
conform to the Company's fiscal year ended December 31.
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
8
<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 at June 30, 2000 consists of
6,909,457 Gartner Class A Shares and warrants to purchase a further 599,400
Gartner Class A Shares (at an original cost basis of $81,422). Under the terms
of the IRS ruling, the Company must monetize the remaining position in Gartner
to maintain the tax free nature of the Gartner Spin-off. Accordingly, the net
assets from discontinued operations in the amount of $82,392 are included in
current assets at June 30, 2000. As the Company intends to dispose of these
remaining securities 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 the then
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 June 30, 2000 (based on a per share price of $12.00 of
Gartner Stock at June 30, 2000) generated an unrealized loss of $50,746 since
the date of the Gartner Distribution (net of taxes of $27,325), 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 six months ended June 30,
2000. Approximately $4,000 (at fair market value) of Gartner Class A Shares will
be contributed to Synavant as part of the pending spin-off described in note 6.
NOTE 4. DISPOSITIONS
During the second quarter of 2000, the Company recorded $8,272 of pre-tax net
gains due primarily to the sale of marketable investments in Viant Corporation,
Verisign, Inc. and
9
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Mercator Software, Inc. that were part of the Company's investment portfolio.
Cash received, net of costs to dispose, amounted to $8,555 in the quarter.
During the first six months of 2000, the Company recorded $57,714 of pre-tax net
gains due primarily to the sale of investments in American Cellular, Aspect
Development, Inc., Mercator Software, Inc., Viant Corporation and Verisign, Inc.
that were part of the Company's investment portfolio. Cash received, net of
costs to dispose, amounted to $66,734 in the six month period.
NOTE 5. SECURITIES AND OTHER INVESTMENTS
ALLSCRIPTS
On February 17, 2000, IMS Health announced an alliance with Allscripts, Inc.
("Allscripts") (NASDAQ:MDRX) to develop and market new Internet-based
information solutions for the pharmaceutical industry. In conjunction with the
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 included
in "Securities and Other Investments".
OTHER INVESTMENTS
Amounts for Equity Securities are included in the Condensed Consolidated
Statements of Financial Position as Securities and Other Investments. Securities
and Other Investments include the Company's private equity investments in
venture capital partnerships. Such investments are carried at cost. During the
six months ended June 30, 2000 the venture capital partnerships distributed
shares to the Company in US Interactive Inc. Verisign, Inc., ICGE and IPIX.
These were distributed at historical cost and, upon distribution, these shares
became available for sale and have accordingly been marked to market.
NOTE 6. PENDING TRANSACTIONS
STRATEGIC ALLIANCE AND SALE OF ERISCO TO THE TRIZETTO GROUP, INC.
On May 16, 2000, IMS Health and The TriZetto Group, Inc. ("TriZetto")
(NASDAQ:TZIX) jointly announced a strategic alliance under which TriZetto will
acquire Erisco in exchange for TriZetto common stock. TriZetto is a provider of
vertical Internet-enabled applications services and business portals for the
healthcare industry. IMS Health and TriZetto will also enter a technology and
data alliance. The transaction supersedes the merger of the two companies
previously announced on March 29, 2000, which has been terminated by the consent
of both companies' Boards of Directors.
The transaction is structured with a collar between a $21 TriZetto stock price,
below which IMS Health receives approximately 12.1 million TriZetto shares, and
a $29 TriZetto stock price, above which IMS Health receives approximately 8.8
million shares. Based on TriZetto's closing price on June 30, 2000, of $16.19,
IMS Health would receive approximately 12.1 million shares of TriZetto common
stock, valuing Erisco at approximately $196,000. The final exchange ratio will
be determined by TriZetto's average daily price for the 15 trading days ending
on the third
10
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
day prior to the closing date, which is expected in the third quarter or early
fourth quarter of 2000.
The Company expects to record a gain on the sale of Erisco, considering that IMS
Health will maintain an approximately 24% - 36% of TriZetto's common stock based
on the final exchange ratio discussed above. After this transaction, IMS will
account for its share of TriZetto on an equity basis.
The revenue, operating income, and net assets for Erisco at June 30, 2000 were
not significant to IMS Health. This business has been managed together with the
other businesses pending sale or distribution. Accordingly its results are
included in the Transaction Business segment (see Note 12). Erisco together with
Synavant make up substantially all of the Transaction Business segment.
SPIN-OFF OF SYNAVANT
IMS Health intends to spin-off (the "Distribution") the pharmaceutical industry
automated sales and marketing support business of IMS Health Strategic
Technologies, Inc. and certain other foreign subsidiaries of IMS Health,
substantially all of IMS Health's interactive and direct marketing business,
including the business of Clark-O'Neill, Inc., and a majority stake in a foreign
joint venture (collectively the "Synavant Business"). These businesses had
previously been managed within and reported as part of the Company's IMS
operating segment. On July 19, 2000, the Board of Directors approved the
Distribution and declared a dividend of one share of Synavant Common Stock for
every 20 shares of IMS Health Common Stock subject to certain conditions
including the effectiveness of the Registration Statement on Form 10 relating to
the Synavant Common Stock payable to IMS Health shareholder's of record on July
28, 2000.
Prior to the Distribution, IMS Health will convey the assets and stock of
entities that compose the Synavant Business as well as cash and certain
securities to Synavant, a newly formed Delaware corporation and a wholly owned
subsidiary of IMS Health.
The shares of Synavant will then be distributed to the shareholders of IMS
Health. IMS Health shareholders will receive one share of Synavant common stock
for every 20 shares of IMS Health common stock, payable to IMS Health
shareholders of record at the close of business on July 28, 2000.
The Synavant Business has been managed together with the other business pending
sale or distribution. Accordingly its results are included in the Transaction
Business segment (see Note 12).
On July 14, 2000, Synavant entered into a strategic alliance with Siebel
Systems, Inc. (see Note 13).
Prior to the Distribution, IMS Health and Synavant plan to enter into a
Distribution Agreement providing for, among other things, certain corporate
transactions required to effect the Distribution and other arrangements between
IMS Health and Synavant subsequent to the Distribution. In particular, the
Distribution Agreement will define the assets, liabilities and contractual
relationships which are being assumed by Synavant and those which will remain
11
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
with IMS Health. This includes IMS Health's agreement to indemnify Synavant with
respect to certain contingent liabilities, including certain of those described
in Note 8. The agreement is expected to provide that IMS Health and Synavant
each will bear a prescibed portion of IMS Health's share of these liabilities
(net of the liability borne by NMR) up to a maximum liability of $10,000 for
Synavant.
For the purposes of governing certain of the ongoing relationships between
Synavant and IMS Health after the Distribution and to provide for an orderly
transition, Synavant and IMS Health plan to enter into various additional
agreements including a Tax Allocation Agreement, Employee Benefits Agreement,
sublease arrangements, Corporate Services Agreement, Shared Transaction Services
Agreements, and a Data and Telecommunication Services Agreement. In addition,
Synavant and IMS Health will enter into agreements licensing certain data rights
related to the Xponent and Pharbase information databases.
The Company expects to receive an opinion from outside counsel that the
Distribution should qualify under Section 355 of the Internal Revenue Code and
be tax-free to IMS Health and to IMS Health stockholders for U.S. federal income
tax purposes, except for any tax payable because of any cash IMS Health
stockholders may receive in lieu of a fractional share of Synavant common stock.
As an opinion of counsel does not bind the IRS or the courts, the IRS may
challenge positions taken on an opinion of counsel and could assert claims,
which could be material in amount, in connection with the Distribution. Outside
counsel, however, is expected to be of the opinion that if the matter were
litigated as a result of an assertion by the IRS that the Distribution should be
taxable, the taxpayers should prevail.
If the Distribution were not to qualify under Section 355 of the Internal
Revenue Code, then, in general, a corporate tax would be payable by the
consolidated group, of which IMS Health is a common parent and Synavant is a
member, based on the difference between (x) the fair market value of the
Synavant Common Stock and (y) the adjusted basis of such Synavant Common Stock.
In addition, under the consolidated return rules, each member of the
consolidated group would be severally liable for such tax liability. IMS Health
estimates that the aggregate tax liability in this regard would be approximately
$100,000. Pursuant to the Tax Allocation Agreement, IMS Health will be liable
for the resulting corporate tax, except as provided in the Distribution
Agreement.
NOTE 7. 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 (88%) interest in the partnership. Under the terms of the
investment, as of June 30, the third-party investors had a right to take steps
that would result in
12
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
the termination of the investment on September 30, 2000. On July 31, 2000, in
conjunction with IMS Health contributing additional assets to the partnership,
the investors agreed to extend the term of their investment until June 30, 2003,
at which time they have the right to take steps to terminate their investment.
The Company also has a controlling interest in CTS (60.8% of the outstanding
shares representing approximately 93.9% of the voting power at June 30, 2000).
The related minority interest on the Condensed Consolidated Statement of
Financial Position at June 30, 2000 and December 31, 1999 was $20,286 and
$17,611, respectively. Selected unaudited financial data for CTS is included in
Note 12.
NOTE 8. 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 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
13
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
denied the motion and, on December 16, 1997, defendants filed a supplemental
answer denying the remaining material allegations of the amended complaint. On
December 22, 1999, defendants filed a motion for partial summary judgement
seeking to dismiss IRI's non-U.S. antitrust claims. On July 12, 2000, the court
granted the motion dismissing claims of injury suffered from activities in
foreign markets where IRI operated through subsidiaries or companies owned by
joint ventures or "relationships" with local companies. 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 Corporation (the parent
company of A.C. Nielsen Company) in 1996, D&B, ACNielsen and Cognizant entered
into an Indemnity and Joint Defense Agreement pursuant to which they agreed (i)
to certain arrangements allocating liabilities that may arise out of or in
connection with the IRI Action, and (ii) to conduct a joint defense of such
action. In particular, the Indemnity and Joint Defense Agreement provides that
ACNielsen will assume exclusive liability for liabilities up to a maximum amount
to be calculated at the time such liabilities, if any, become payable (the "ACN
Maximum Amount") and that Cognizant and D&B will share liability equally for any
amounts in excess of the ACN Maximum Amount. The ACN Maximum Amount will be
determined by an investment banking firm as the maximum amount which ACNielsen
will be able to pay after giving effect to (i) any plan submitted by such
investment bank which is designed to maximize the claims paying ability of
ACNielsen without impairing the investment banking firm's ability to deliver a
viability opinion (but which will not require any action requiring shareholder
approval), and (ii) payment of related fees and expenses.
For these purposes, financial viability means the ability of ACNielsen, after
giving effect to such plan, the payment of related fees and expenses and the
payment of the ACN Maximum Amount, to pay its debts as they become due and to
finance the current and anticipated operating and capital requirements of its
business, as reconstituted by such plan, for two years from the date any such
plan is expected to be implemented.
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 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.
14
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 challenging D&B's
utilization of certain capital losses during 1989 and 1990. D&B has advised the
Company that it filed an amended tax return for these periods which reflects
$561,582 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. In May 2000,
D&B paid $349,291 of this amount, and the Company paid $212,291, which the
Company funded through short term borrowings. A portion (approximately $41,000)
of the Company's obligation 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. Accordingly, the receivable has been accounted for as a
short term asset. The payments were made to the IRS to stop further interest
from accruing. D&B received a formal assessment for the additional tax from 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 and
would also contest the assessment of amounts, if any, in excess of the amounts
paid. The Company estimates that its share of the liability that was paid is
approximately $140,000 net of income tax benefit on interest (approximately
$31,300) and NMR's contribution obligations (approximately $41,000).
In light of accruals and payments made in respect of these matters, management
does not believe that these matters will have a material adverse effect on the
Company's consolidated financial position or operating results when they are
ultimately resolved in future periods.
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.
15
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 following the Gartner
Spin-Off. In the opinion of management, it is highly unlikely that any such
significant liabilities will be incurred by the Company.
As described in Note 6, prior to the Distribution, IMS Health and Synavant plan
to enter into a Distribution Agreement. In connection with the Distribution,
Synavant will be jointly and severally liable to the other parties in the prior
Distribution Agreements for the liabilities relating to certain tax matters as
well as those relating to the IRI Action. Under the Distribution Agreement, as
between IMS Health and Synavant, it is expected that each will bear a prescribed
portion of IMS Health's share of these liabilities (net of the liability borne
by NMR) up to a maximum liability of $10,000 for Synavant.
NOTE 9. 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 June 30, 2000, the notional amounts of committed foreign currency
revenues and non-functional currency assets and liabilities hedged were $112,874
and $44,475 respectively.
16
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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. The balance outstanding at June 30, 2000 was
$2,996. 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 June 30, 2000, in the event of non-performance by
any one counterparty. The Company enters into transactions only with financial
institution counterparties which have a credit rating of A or better. In
addition, the Company limits the amount of credit exposure with any one
institution.
The Company maintains accounts receivable balances ($282,559 and $284,679 net of
allowances for doubtful accounts, at June 30, 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 June 30, 2000 due to the high quality of its customers and their
dispersion across many geographic areas.
SHORT-TERM BORROWINGS / LINES OF CREDIT
Borrowings under short-term lines of credit were $334,601 and $134,663 at June
30, 2000 and December 31, 1999 respectively. The borrowings were taken out
mainly to support the Company's share repurchase program and more recently to
fund the D&B tax payment further described in Note 8. The borrowings are
repayable within 364 days from inception and have maturity dates through August
15, 2000. The weighted average rates of interest for the borrowings were 6.2%
and 0.9% at June 30, 2000 and December 31, 1999, respectively. There are no
significant debt covenants associated with the Company's short-term borrowings.
The Company had unused available lines of credit of $148,106 and $273,273 at
June 30, 2000 and December 31, 1999 respectively. In general, the terms of these
lines of credit give the Company the option to borrow at an interest rate equal
to LIBOR plus 37.5 basis points and can be withdrawn by the bank under certain
conditions. The commitment fee associated with the unused lines of credit is
22.5 basis points per year, increased to 28.85 basis points if the facilities
are less than 50% utilized.
17
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10. 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 U.S. federal rate of 35%, offset by the recognition in 2000 of
certain net operating losses (NOLs) due to the implementation of global tax
planning strategies (approximately $2,800) and the reversal of previously
accrued tax liabilities (approximately $3,000). These tax planning strategies
were developed and implemented during the first quarter of 2000. 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 first quarter. Pending German legislation calls for the
reduction of the German corporate tax rate from 40% to 25%. The potential impact
to the Company is a reduction in the deferred income tax assets by approximately
$18,000. The Company is evaluating potential strategies to mitigate the impact
of this rate change.
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 11. 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. Management does not believe
FIN No. 44 will have any material impact on the Company's financial statements.
In December 1999 the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No 101 "Revenue Recognition in Financial Statements" ("SAB
No 101"). SAB No 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. On June 26, 2000, the SEC staff issued SAB 101B to provide
registrants with additional time to implement guidance contained in SAB 101. SAB
101B delays the implementation date of SAB No 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company
believes its revenue recognition policies are compliant with the SEC staff's
views.
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
18
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
date for one year, to fiscal years beginning after June 15, 2000 (January 1,
2001 for the Company). Management does not believe that adoption of this
statement will have a material impact on the Company's financial statements.
NOTE 12. 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 more than 100 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.
Effective for the quarter ended June 30, 2000 the Company has realigned it's
business segments to reflect the change in management approach which has arisen
as a result of the pending transactions (see Note 6). This change will allow
focus on the core IMS Business. Historical Segmental information has been
restated to give effect to the new segment grouping. The revised segments are as
follows:
1. 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. Historically, this segment
included Synavant and three small non-strategic software companies that are
now included in the Transaction Businesses segment.
2. The CTS Business Segment delivers full life cycle solutions to complex
software development problems and maintenance problems that companies face
as they transition to eBusiness. These services are delivered through the
use of a seamless on-site and offshore consulting project team. The
Company's primary service offerings include application development and
integration, application management, re-engineering and mass change.
3. The Transaction Businesses Segment includes Synavant, which serves the
pharmaceutical industry by developing and selling pharmaceutical
relationship management solutions that support sales and marketing decision
making; Erisco, a leading supplier of software-based administrative and
analytical solutions to the managed care industry and three small
non-strategic software companies. As indicated in Note 6, the Company
intends to spin-off the Synavant business. The Company also intends to
divest three other small non-strategic software businesses. As indicated in
Note 6, the Company intends to sell Erisco to TriZetto and enter into a
strategic alliance with TriZetto. Historically, Erisco was managed as part
of the Emerging Markets Segment. The remaining piece of the historical
Emerging Markets Segment is Enterprises, the Company's venture capital unit
focused on investments in emerging businesses. Enterprises is now being
managed within general corporate activities.
19
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIODS ENDED JUNE 30, 2000
---------------------------------------------------------------------------------------------------------------
THREE MONTHS: IMS CTS TRANSACTION TOTAL
BUSINESSES
--------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenue (1),(2), $ 276,620 $ 28,089 $ 64,692 $ 369,401
Segment Operating Income (loss) (1) 88,610 6,041 (6,144) 88,507
General Corporate Expenses (3) (9,960)
Interest Income 334 542 21 897
Interest Expense (5) (289) (38) (327)
Non-Operating Income/(Expense):
Gains from Dispositions - Net 8,272
Other Expense - Net (5) (6,672)
---------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Provision
for Income Taxes 80,717
Provision for Income Taxes (30,488)
---------------------------------------------------------------------------------------------------------------
Net Income $ 50,229
---------------------------------------------------------------------------------------------------------------
SIX MONTHS:
Operating Revenue (1),(2),(7) $ 540,471 $ 51,653 $ 129,800 $ 721,924
Segment Operating Income (loss)(1),(7) 168,319 11,164 (7,885) 171,598
General Corporate Expenses (3) (17,991)
Interest Income 915 1,047 42 2,004
Interest Expense (5) (670) (73) (743)
Non-Operating Income/(Expense):
Gains from Dispositions - Net 57,714
Other Expense - Net (5) (16,297)
---------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Provision
for Income Taxes 196,285
Provision for Income Taxes (63,204)
---------------------------------------------------------------------------------------------------------------
Net Income $ 133,081
---------------------------------------------------------------------------------------------------------------
Total Identifiable Assets at June 30, 2000(8) $ 721,015 $ 83,048 $ 306,579 $ 1,110,642
---------------------------------------------------------------------------------------------------------------
</TABLE>
The IMS and CTS segment combined total revenues were $304,709 and $592,124 for
the three and six month periods ended in 2000. The combined operating incomes
after corporate expenses and excluding Synavant Spin-off costs, totaled $86,238
and $163,037 for the three and six month periods ended in 2000. These results
reflect those of the core IMS business as further described in the Management
Discussion and Analysis and Press Release.
20
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIODS ENDED JUNE 30, 1999
----------------------------------------------------------------------------------------------------------
THREE MONTHS: IMS CTS TRANSACTION TOTAL
BUSINESSES
-------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenue (1), (2) $ 249,618 $ 17,900 $ 65,134 $ 332,652
Segment Operating Income (1) 70,770 3,870 3,728 78,368
General Corporate Expenses (3) (15,613)
Interest Income (4) 1,643 250 1,893
Interest Expense (5) (633) (61) (694)
Non-Operating Income/(Expense):
Gains from Dispositions - Net 8,300
Other Expense - Net (4), (5) (5,823)
----------------------------------------------------------------------------------------------------------
Income from Continuing
Operations Before Provision 66,431
for Income Taxes
Provision for Income Taxes (20,257)
----------------------------------------------------------------------------------------------------------
Income from Continuing
Operations $ 46,174
Income from Discontinued Operations, Net of
Income Taxes (6) 10,617
----------------------------------------------------------------------------------------------------------
Net Income $ 56,791
----------------------------------------------------------------------------------------------------------
SIX MONTHS:
Operating Revenue (1),(2) $ 483,820 $ 35,035 $ 127,039 $ 645,894
Segment Operating Income (1) 126,776 7,940 6,162 140,878
General Corporate Expenses (3) (23,413)
Interest Income (4) 2,791 526 194 3,511
Interest Expense (5) (631) (122) (753)
Non-Operating Income/(Expense):
Gains from Dispositions - Net 16,277
Other Expense - Net (4), (5) (9,748)
----------------------------------------------------------------------------------------------------------
Income from Continuing Operations before
Provision for Income Taxes 126,752
Provision for Income Taxes (36,785)
----------------------------------------------------------------------------------------------------------
Income from Continuing Operations 89,967
Income from Discontinued Operations, Net of
Income Taxes (6) 24,311
----------------------------------------------------------------------------------------------------------
Net Income $ 114,278
----------------------------------------------------------------------------------------------------------
Total Identifiable Assets at June 30, 1999(8) $ 736,734 $ 56,373 $ 314,921 $ 1,108,028
----------------------------------------------------------------------------------------------------------
</TABLE>
The IMS and CTS segment combined total revenues were $267,518 and $518,855 for
the three and six months of 1999. The combined operating incomes after corporate
expenses and excluding year 2000 remediation costs and Gartner Spin costs
totaled $74,450 and $134,603 for the three and six month periods of 1999. These
results reflect those of the core IMS business as further described in the
Management Discussion and Analysis and Press Release.
21
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Notes to Operations by Business Segments:
(1) The IMS and CTS segment combined total revenues of $304,709 and $592,124
for the three and six month periods ended in 2000 compared to $267,518 and
$518,855 for the comparable periods of 1999. The combined operating incomes
after corporate expenses and excluding year 2000 remediation costs, total
$86,238 and $163,037 for the three and six month periods ended in 2000
compared to $74,450 and $134,603 for the same periods of 1999. These
results reflect those of the core IMS business as further described in the
Management Discussion and Analysis and Press Release.
(2) Operating revenue excludes intersegment sales in 2000 of $3,712 and $7,218
for the three and six months presented, respectively. Operating revenue in
1999 excludes intersegment sales of $3,598 and $6,889 for the three and six
months presented, respectively. These sales, primarily from CTS to IMS, are
recognized as the service is performed.
(3) General Corporate Expenses in 2000 includes $1,547 incremental Synavant
Spin-Off costs for the three and six months periods presented,
respectively. In 1999 such expenses include $7,500 incremental Gartner
Spin-off costs in the three and six months.
(4) Interest income in 1999 excludes amounts recorded at corporate of $88 and
$269 for the three and six month periods presented, respectively. These
amounts have been included in Non-Operating Income Expense Other
Expenses-Net.
(5) Interest expense in 2000 excludes amounts recorded at corporate of $1,707
and $2,624 for the three and six month periods presented, respectively.
Interest expense in 1999 excludes amounts recorded at corporate of $1,582
and $1,781 for the three and six month periods presented, respectively.
These amounts have been included in Non-Operating Income Expense Other
Expense-Net.
(6) Income from Discontinued Operations, Net of Income taxes in 1999 relates to
Gartner. Taxes for the three and six month periods were $6,516 and $12,639
respectively.
(7) Included in the Transaction Businesses are revenue and operating loss
related to the Synavant Businesses of approximately $93,000 and ($10,000)
respectively for the six months ended in 2000. A significant part of
residual results of operations relate to the Erisco business.
(8) Total assets include Net Assets of Discontinued Operations of $82,392 and
$265,019 as of June 30, 2000 and June 30, 1999, respectively. Assets of
$317,259 and $220,875 as of June 30, 2000 and June 30, 1999, respectively,
include Cash and Cash Equivalents, Investments, and Property, Plant and
Equipment not identified with business segments and represent the
reconciling items between total indentifiable assets and net assets of
discontinued operations and the Company's total assets.
NOTE 13. SUBSEQUENT EVENTS
SYNAVANT STRATEGIC ALLIANCE
On July 14, 2000, Synavant entered into a strategic alliance with Siebel
Systems, Inc. ("Siebel"), a leading provider of eBusiness applications software.
Through the alliance, the companies intend to jointly develop, market and sell
pharmaceutical and healthcare related versions of Siebel's eBusiness software
applications.
As part of the strategic alliance, Synavant and Siebel entered into (1) a Value
Added Industry Remarketer Agreement (the "Reseller Agreement"), (2) a Siebel
Alliance Program Master Agreement (the "Alliance Agreement"), and (3) a license
of certain Siebel software for Synavant internal use. Pursuant to the Reseller
Agreement, Siebel appointed Synavant as a non-exclusive distributor of certain
Siebel Licensed software. Under this arrangement, Synavant has the right to
distribute and sublicense Siebel software products to companies in the life
sciences industry world-wide in conjunction with Synavant own proprietary
software and services. As part of the arrangement, Siebel and Synavant share in
the sublicensing and maintenance fees generated from the licensing of the Siebel
software. Under the terms of the agreement, Synavant will pay Siebel a license
fee of $2.5 million.
Additionally, the Reseller Agreement limits the extent to which Synavant may
independently develop, integrate, market, license or distribute products that
are directly competitive with those packaged and promoted by Siebel. Synavant
may, however, continue to license and support its existing Cornerstone and
Premiere customers. The Reseller Agreement contemplates a five year term for the
alliance, however the parties may, under certain circumstances, extend the
agreement for an additional two years on the same terms as the existing
agreement. It also contains certain provisions that would allow for early
termination in the event certain contractual requirements are not met.
22
<PAGE>
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Alliance Agreement complements the Reseller Agreement and establishes a
framework for the joint marketing efforts by Synavant and Siebel to such life
sciences companies. Under this arrangement Synavant will be a Siebel Strategic
Software Partner throughout the world to serve the life sciences market.
Synavant will be permitted to use the Siebel logos and marks as part of the
joint marketing effort in its promotional materials.
In connection with the Siebel alliance, the Synavant has agreed that it will
suspend the future enhancement and development of its current sales force
automation software products (subject to existing customer contractual
obligations) and to share revenues from the licensing of such products to
certain new customers after a specified time period, ranging from the date of
the arrangement to six months. As a result of this transaction, Synavant
believes all or a significant portion of its computer software (including
acquired technology), and a portion of its goodwill and other intangible assets
related to the Synavant business may not be recoverable and amortization periods
of these intangible assets may be reduced. At June 30, 2000, intangibles of the
Synavant business were approximately $180,000. Synavant has begun to assess the
financial impact of this transaction with respect to determining the amount of
any impairment loss and possible change in intangible asset lives. Synavant will
account for any impairment loss in the quarter ended September 30, 2000. Any
changes to the amortization period of intangible assets will be accounted for
prospectively.
In connection with the Siebel agreement, Synavant is also currently evaluating
the status of all development projects currently in progress at Synavant,
including the acquired in process technology in connection with the 1998 Walsh
acquisition. While no definitive decision has been made to discontinue any
development project, it is likely that, as a direct result of the Siebel
transaction, certain projects, including one remaining Walsh project, may now be
discontinued or significantly curtailed.
STOCK REPURCHASE PROGRAM
On July 19, 2000 the Board of Directors authorized a systematic stock repurchase
program to buy up to 40 million shares, marking the fifth consecutive repurchase
program the Company has implemented. Shares acquired through the repurchase
program will be open-market purchases in compliance with Securities and Exchange
Commission Rule 10b-18.
23
<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 over 100
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 June 30, 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; (b) a controlling interest in Cognizant Technology Solutions
Corporation ("CTS") and (c) the segment containing (i) the pharmaceutical
industry automated sales and marketing support business of IMS Health Strategic
Technologies, Inc. ("Strategic Technologies"), substantially all of IMS Health's
interactive and direct marketing business, including the business of
Clark-O'Neill, Inc. ("Clark-O'Neill"), and a majority stake in a foreign joint
venture collectively the "Synavant Business", (ii) ERISCO Managed Care
Technologies, Inc. ("Erisco"), and (iii) three small non-strategic software
businesses ((i), (ii) and (iii), collectively the "Transaction Businesses").
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 totalled
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 June 30, 2000 consists of 6,909,457
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 $82,392
at June 30, 2000. (See Note 3 to the Condensed Consolidated Financial
Statements). As part of the pending spin-off of Synavant, approximately $4,000
(at fair market value) of Gartner Class A shares will be contributed to
Synavant.
24
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PENDING TRANSACTIONS
IMS Health intends to spin-off certain businesses to be called Synavant (see
Note 6 to the Condensed Consolidated Financial Statements). The Company has also
announced a strategic alliance under which The TriZetto Group, Inc. will acquire
Erisco and will enter a technology and data alliance (see Note 6 to The
Condensed Consolidated Financial Statements). These transactions, together with
the planned divestitures of three small non strategic software businesses will
result in a company concentrated on IMS's core data business of providing market
information and decision support services to the pharmaceutical industry.
IMS Health and TriZetto will enter a technology and data alliance to (a)
accelerate implementation of the Company's internet strategy through TriZetto's
HealthWeb technology; and (b) facilitate developments of new products. IMS will
own approximately 24% - 36% of TriZetto on completion of the transaction. After
this transaction, IMS will account for its share of Trizetto on an equity basis.
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 June 30, 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/ JUNE 30, 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 (7,540) (834) 2,561
Other Direct Costs 6,232 (8,011) 3,288 1,509
------------------------------------------------------------------------------------------------------------
Total $ 22,584 $(20,014) $ 1,500 $ 4,070
------------------------------------------------------------------------------------------------------------
</TABLE>
IN PROCESS RESEARCH AND DEVELOPMENT
Since the acquisition of PMSI and Walsh International Inc., both in 1998, all
the in process research and development products (IPR&D) that were underway at
the time of the acquisitions have reached technological feasibility at the level
of cost anticipated in the original valuations.
Revenues and profitability of these products subsequent to their release have
been in line with the original expectations incorporated within the calculation
of the IPR&D charges. In connection with the Siebel agreement (see note 13 to
the Condensed Consolidated Financial Statements) the Company is also currently
evaluating the status of all development projects currently in progress
including the acquired in process technology in connection with the Walsh
acquisition. While no definitive decision has been made to discontinue any
development project it is likely that as a direct result of the Siebel
transaction certain projects including the one remaining Walsh project, may now
be discontinued or significantly curtailed.
SYNAVANT STRATEGIC ALLIANCE
On July 14, 2000, Synavant entered into a strategic alliance with Siebel, a
leading provider of eBusiness applications software (see Note 13 to the
Condensed Consolidated Financial Statements). As a result of this transaction,
Synavant believes all or a significant portion of its computer software
(including acquired technology), and a portion of its goodwill and other
intangible assets may be reduced. At June 30, 2000, intangibles of the Synavant
business were approximately $180,000. Synavant has begun to assess the financial
impact of this transaction with respect to determining the amount of any
impairment loss and possible change in intangible asset lives. Synavant will
account for impairment loss in the quarter ended September 30, 2000. Any changes
to the amortization period of intangible assets will be accounted for
prospectively.
25
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999.
OPERATIONS
Revenue for the second quarter of 2000 increased by 11.0% to $369,401 from
$332,652 in the second quarter of the prior year. On a constant dollar basis
revenue growth was 13.7% for the second quarter. This growth is primarily
attributable to the IMS businesses in Europe and North America and CTS, which
was partially offset by a decline in Strategic Technologies' sales force
automation license revenues arising from postponed customer purchasing decisions
in the U.S. as well as lower legacy system sales. Strategic Technologies
expected that several customer decisions to acquire products and services would
be made in the first half of 2000. These postponed customer decisions resulted
in a decline in revenue in the second quarter of 2000.
IMS Health revenue, excluding the Transaction Businesses segment, for the second
quarter, increased by 13.9% to $304,709 in 2000 from $267,518 for the second
quarter of the prior year. On a constant dollar basis such revenue growth was
16.4% for the second quarter. This is primarily due to the continued rollout of
Xponent in Europe, an increasing client base for the Japanese weekly data
services, increased sales of Xponent in North America helped by the strength in
the pharmaceutical industry and growth at CTS.
Operating costs for the Company 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 increased by 2.3% to $145,917 in 2000
from $142,688 in the second quarter of the prior year. This is primarily due to
the inclusion in the second quarter of 1999 of Year 2000 remediation costs
($7,923) and costs related to the Gartner Spin-Off of ($7,500). Excluding these
costs and those for the pending Synavant Spin-Off ($1,547) expensed in the
second quarter of 2000, operating costs increased by 13.4%. This increase is
primarily due to increased operating costs in CTS due to an increased number of
technical professionals to meet the increased demand for services and a 12.8%
increase in the costs of the Transactions Businesses segment to support
revenues.
IMS Health operating costs, excluding the Transaction Business Segment and costs
for Year 2000 remediation and Synavant and Gartner Spin-offs, for the second
quarter of 2000 increased by 13.5% to $113,353 from $99,874 for the comparable
quarter of 1999. This increase is due to CTS and the IMS business segment. The
latter has a 9% increase in such costs, notably attributable to investment in
internet strategy initiatives, including i-squared.
Selling and administrative expenses consist primarily of the costs attributable
to selling and administrative personnel, promotion, communications, management,
finance, administrative and occupancy costs. The Company's selling and
administrative expenses increased during the second quarter of 2000 by 16.1% to
$120,812 from $104,093 in the second quarter of the prior year. This is due
primarily to increased infrastructure investments made by CTS to support the
company's expected revenue growth and due to higher service costs for Strategic
Technologies related to a larger installed customer base as well as investment
in sales forces within the IMS business segment.
IMS Health selling and administrative expenses, excluding the Transaction
Businesses segment, increased during the second quarter by 13.4%. The increase
in such expenses was due to continued investment in CTS sales and administrative
infrastructure as well as investment in
26
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
IMS segment world-wide sales and marketing functions, notably in North America
and global sales forces.
Operating income for the second quarter of 2000 increased by 25.2% to $78,547
from $62,755 in the second quarter of the prior year. Excluding Year 2000
remediation costs and Gartner and Synavant Spin costs, the increase was 2.5%,
the growth in the IMS Segment and CTS being partially offset by lower
profitability in the Transaction Businesses segment due to lower revenues and
higher expenses as described above.
IMS Health operating income, excluding the Transaction Businesses segment and
the non recurring costs mentioned above, increased by 15.8% in 2000 to $86,238
from $74,450 in the second quarter of the prior year. This growth is primarily
due to the revenue growth in North America, Europe, Japan and CTS and the slower
growth in operating and selling and administrative expenses. Operating income
growth outpaced revenue growth primarily due to the ability to leverage it's
worldwide resources.
Net Interest expense of $1,137 has been incurred in the second quarter of 2000
compared with net interest expense of $295 in the second quarter of the prior
year. This increase in expense is due to a higher level of short term borrowings
since December 31, 1999 to fund the Company's stock repurchase program and
payment of the D&B tax contingency.
Gains from Dispositions, net, were essentially unchanged at $8,272 in the second
quarter of 2000, compared to $8,300 in the second quarter of the prior year.
Other expense, net, has increased in the second quarter to $4,965 from $4,329 in
the second quarter of the prior year. This increase is due to the expense in the
second quarter of 2000 of merger and acquisition costs.
The consolidated effective tax rate for the second quarter, including the impact
of operations included in the Transaction Business Segment, was 37.8% compared
to 30.5% in the comparable period of the prior year. In the second quarter of
2000, the effective tax rate was further impacted primarily by Enterprise gains
taxed at a rate of 35%, and taxes related to deemed dividends from non-US
subsidiaries taxed at the U.S. rate.
Income from continuing operations in the second quarter of 2000 increased by
8.8% to $50,229 from $46,174 in the second quarter of the prior year. IMS Health
income from continuing operations, excluding the Transaction Businesses segment
and other non recurring items and disposition gains explained above, increased
16.8% in the second quarter of 2000. This increase is due primarily due to the
improved operating income from the IMS segment and CTS, described in the results
by business segment.
Income from discontinued operations net of income taxes of $6,516 in the second
quarter of 1999 was $10,617. This represents Gartner equity income. There are no
discontinued operations in 2000 following the Gartner Spin-off in 1999.
27
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the second quarter of 2000 decreased by 11.6% to $50,229 from
$56,791 in the second quarter of the prior year.
IMS Health net income, excluding the Transaction Businesses segment and the one
time costs previously identified, increased by 16.8% due primarily to the
increased operating income explained above.
Basic earnings per share from continuing operations in the second quarter of
2000 increased by 13.3% at $0.17 compared with $0.15 in the second quarter of
the prior year. Excluding the impact of the previously identified one-time
items, the second quarter basic earnings per share from recurring operations for
the quarter showed no movement.
IMS Health basic earnings per share, excluding the Transaction Businesses
segment and non recurring items described above, increased by 26.7% to $0.19
from $0.15.
Diluted earnings per share from continuing operations in the second quarter of
2000 increased by 13.3% to $0.17 compared with $0.15 in the second quarter of
the prior year. Excluding the impact of the previously identified one-time items
and disposition gains the second quarter diluted earnings per share from
recurring operations for the quarter was $0.17 in both 2000 and 1999.
IMS Health diluted earnings per share, excluding the Transaction Businesses
segment and non recurring gains and costs described above, increased in 2000 by
26.7% to $0.19 from $0.15.
RESULTS BY BUSINESS SEGMENT
IMS SEGMENT
The IMS Segment consists of IMS, the leading global provider of sales management
market information and decision-support services to the pharmaceutical and
healthcare industries. Historically, this segment included the Synavant Business
and three small non-strategic software companies that are now included in the
Transaction Businesses segment.
IMS Segment revenue for the second quarter increased 10.8% to $276,620 from
$249,618 in the second quarter of the prior year. Sales Management Products
increased 15.2% to $167,498, Market Research Products increased 5.5% to $98,961,
and Other Services decreased 2.2% to $10,161. Sales Management product growth is
primarily due to Xponent in the United States and Europe and also the weekly
data product launched at the end of 1999 in Japan. Other Services revenue
includes consultancy services which can be ad hoc and less predictable in
nature. This quarterly decrease is due to the timing of such ad hoc revenues. On
a year to date basis other service revenue has increased by 22.8%.
IMS operating income for the second quarter increased 25.2% to $88,610 from
$70,770 in the prior year. Excluding Year 2000 remediation costs in 1999, second
quarter operating income increased 12.6%. Adjusted operating income growth
outpaced revenue growth due primarily to the segment's ability to leverage its
established world-wide resources.
28
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
TRANSACTION BUSINESSES SEGMENT
The Transaction Businesses segment includes Synavant, a leading provider of
support technologies to the pharmaceutical industry, Erisco, a leading provider
of application software and services to the healthcare industry and three small
non-strategic software companies. As indicated in Note 6 to the Condensed
Consolidated Financial Statements, the Company intends to spin-off Synavant. The
Company also intends to divest three other small non-strategic software
businesses. As indicated in Note 6 to the Condensed Consolidated Financial
Statements, the Company intends to sell Erisco to TriZetto and enter into a
strategic alliance with TriZetto.
Transaction Businesses revenue for the second quarter of 2000 decreased 0.7% to
$64,692 from $65,134 in the comparable quarter of the prior year. An increase in
the interactive marketing services revenues and Erisco software license revenues
was partially offset by a decline in Strategic Technologies' sales force
automation license revenues arising from postponed customer purchasing decisions
in the U.S. as well as lower legacy system sales. Strategic Technologies
expected that several customer decisions to acquire products and services would
be made in the first half of 2000. These postponed customer decisions resulted
in a decline in revenue in the second quarter of 2000.
The Transaction Business reported an operating loss of $6,144 in the second
quarter of 2000 compared to an operating income of $3,728 in the second quarter
of the prior year. This is primarily due to the increased service costs for
Strategic Technologies related to a larger installed customer base and lower
revenues described above. The increase in costs outpaced revenue growth.
CTS SEGMENT
CTS delivers life cycle software development, management and maintenance
technology consulting services through the use of a seamless on-site and
offshore project team. These services include application development and
maintenance services, Year 2000 and Eurocurrency compliance services, testing
and quality assurance services and re-hosting and re-engineering services.
CTS revenue, net of inter-segment sales, increased to $28,089 in the second
quarter of 2000 from $17,900 in the comparable period of the prior year. The
increase is due to continuing strong demand for application development,
management and maintenance services and the addition of new customers. Operating
income increased to $6,041 in the second quarter of 2000 from $3,870 in the
comparable period of the prior year due to a shift toward higher margin customer
services.
SIX MONTHS ENDED JUNE 30, 2000 VERSUS SIX MONTHS ENDED JUNE 30, 1999
OPERATIONS
Revenue for the six month period increased by 11.8% in 2000 to $721,924 from
$645,894 for the comparable period a year ago. On a constant dollar basis
revenue growth was 14.1% for the six month period. The increase is primarily due
to the continued rollout of Xponent in Europe, an increasing client base for the
Japanese weekly data services, increased sales of existing products in North
America and IMS's emerging markets and growth at CTS. This is partially offset
by a decline in Strategic Technologies revenues due to U.S. sales force
automation license revenues arising from postponed customer decisions and legacy
system sales. Strategic Technologies expected that several customer decisions to
acquire products and services would be made in the
29
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
first half of 2000. These postponed customer decisions resulted in a decline in
revenue in the first half of 2000.
IMS Health revenue for the first six months as of 2000, excluding the
Transaction Businesses segment, increased 14.1%, to $592,124 from $518,855. On a
constant dollar basis this revenue growth was 16.2%. This increase is primarily
due to the continued rollout of Xponent in Europe, an increasing client base for
the Japanese weekly data services, increased sales of Xponent in North America
helped by the strength in the pharmaceutical industry and growth at CTS.
Operating costs for the six month period increased by 1.6% in 2000 to $285,725
from $281,361 for the comparable period of the prior year. Excluding Year 2000
remediation costs in 1999 ($15,800), costs related to the Gartner Spin-Off in
1999 ($7,500) and costs relating to the Synavant Spin-Off in 2000 ($1,547),
operating costs in 2000 increased by 10.1%. The absolute increase in operating
costs was primarily due to the increased direct costs to support the increase in
demand for its services, notably at CTS, Strategic Technologies, as well as
investment in a number of internet initiatives including i-squared.
IMS Health operating costs, excluding the Transaction Businesses and the one
time costs described above, increased by 9.3%. This is due to CTS and the
investment in a number of internet initiatives.
Selling and administrative expenses increased during the six month period by
17.4% to $232,689 in 2000 from $198,182 for the comparable period in the prior
year. This increase is due to increased service costs for the installed user
client base of Strategic Technologies as well as investment in CTS
infrastructures and in global and U.S. sales and marketing functions.
IMS Health selling and administrative expenses, excluding the Transaction
Businesses segment, increased during the second quarter by 17.0%. The increase
in such expenses was due to investment in CTS infrastructures and in global and
U.S. sales and marketing functions.
Operating income for the six month period increased by 30.8% to $153,607 in 2000
from $117,465 for the comparable period in the prior year. Excluding Year 2000
remediation costs in 1999 and Gartner and Synavant Spin costs, operating income
for the six month period increased by 10.2% due to strong growth in the CTS and
IMS business segments partially offset by the Transaction Businesses.
IMS Health operating income, excluding the Transaction Businesses segment and
non recurring costs described above, increased by 21.1% to $163,037 in 2000 from
$134,603 in the second quarter of the prior year.
Net interest expense for the six month period increased to $1,363 in 2000
compared to a net interest income of $1,246 in the comparable period of the
prior year. This increase in interest expense is due to a higher level of short
term borrowings to fund the Company's stock repurchase program.
Gains from Dispositions, net, for the six month period increased to $57,714 from
$16,277 in the prior year. The increase is due to higher gains related to the
sale of Enterprises investments. (See Note 4 to the Condensed Consolidated
Financial Statements).
30
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Other expense, net, for the six month period increased to $13,673 from $8,236 in
the comparable period of the prior year. This increase is due primarily to
non-capitalizable acquisition costs.
The effective tax rate for the six month period was 32.2% compared to 29.0% for
the same period in 1999. The Company's effective tax rate reflects the results
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 U.S,
federal rate of 35%, offset by the recognition in 2000 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 $2,800). These tax planning strategies were developed
and implemented during the first quarter of 2000. 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. Pending German legislation calls for the reduction of the German
corporate tax rate from 40% to 25%. The potential impact to the Company when
enacted, is a reduction in the deferred income tax assets by approximately
$18,000. The Company is evaluating potential strategies to mitigate the impact
of this rate change.
Income from continuing operations for the six month period was $133,081 in 2000
compared to $89,967 for the comparable period of the prior year. Excluding Year
2000 costs in 1999, higher spin related costs, the after-tax impact of net gains
associated with investments from both years, and non-capitalizable acquisition
costs in 2000, income from continuing operations in the six month period
increased 3.8% in 2000 due to increases notably in IMS North America, IMS
Emerging Markets, IMS Japan and CTS offset in part by a decline in profitability
in Strategic Technologies whereby postponed client decisions have meant cost
growth has outpaced revenue growth for the six months.
IMS Health income from continuing operations, excluding the Transaction
Businesses segment and the non recurring items and gains described above,
increased 20.5% for the reasons described above.
Income from discontinued operations, net of income taxes of $12,639 for the six
month period in 1999 was $24,311. This represents Gartner equity income. There
are no discontinued operations in 2000 following the Gartner Spin off in 1999.
Net income over the six months increased 16.5% to $133,081 in 2000 from $114,278
for the comparable period in the prior year. Excluding Year 2000 costs in 1999,
costs related to the Gartner and Synavant Spin-Offs, discontinued operations,
and net gains from dispositions from both years, adjusted net income increased
by 3.9% primarily due to the decline in operating income for Strategic
Technologies.
IMS Health net income, excluding the Transaction Businesses segment and other
one time items and gains described above, increased 20.5%. This increase is
primarily due to growth in the IMS Health core business operating income
described above.
Basic earnings per share from continuing operations for the six month period
have increased by 60.7% to $0.45 in 2000 from $0.28 in the comparable period of
the prior year. Excluding the impact of the previously identified one-time
items, over the six month period, basic earnings per
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<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
share from recurring operations for the quarter increased 9.7% to $0.34 from
$0.31 in the comparable period of the prior year.
IMS Health basic earnings per share, excluding the Transaction Businesses
segment and one time items described above, increased for the six month period
by 29.6% to $0.35 in 2000 from $0.27 for the comparable period of the prior
year.
Diluted earnings per share for the six month period have increased 57.1% to
$0.44 from $0.28 for the comparable period of the prior year. Diluted earnings
per share from continuing operations for the six month period, excluding the
impact of the previously identified one-time items increased by 13.3% to $0.34
in 2000 from $0.30 for the comparable period of the prior year.
IMS Health diluted earnings per share, excluding the Transaction Businesses
segment and other one time items described above, increased for the six month
period by 29.6% to $0.35 in 2000 from $0.27 for the comparable period of the
prior year.
RESULTS BY BUSINESS SEGMENT
IMS SEGMENT
IMS Segment revenue for the first six months of the year increased 11.7% to
$540,471 in 2000 from $483,820 in the prior year. This increase was 14.0% on a
constant dollar basis. Sales Management Products increased 15.0% to $321,359,
Market Research Products increased 5.8% to $198,250, and Other Services
increased 22.8% to $20,862. Sales Management product growth has increased due to
the strong growth of Xponent in the U.S. and Europe as well as the weekly data
product in Japan.
IMS Segment operating income for the six month period increased 32.8% to
$168,319 in 2000 from $126,776 in the comparable period of the prior year.
Excluding Year 2000 remediation costs in 1999, operating income for the first
six months increased 18.1%.
TRANSACTION BUSINESSES SEGMENT
Transaction Businesses revenue for the first six months of 2000 increased 2.2%
to $129,800 from $127,039 in the first six months of the prior year. An increase
in the interactive marketing services revenues and Erisco revenues (software
licenses and services) was partially offset by a decline in Strategic
Technologies' sales force automation license revenues arising from postponed
customer purchasing decisions in the U.S. as well as lower legacy system sales.
Strategic Technologies expected that several customer decisions to acquire
products and services would be made in the first half of 2000. These postponed
customer decisions resulted in a decline in revenue in the first half of 2000.
The Transaction Business reported an operating loss for the first six months of
2000 of $7,885 compared to an operating income of $6,162 in the first six months
of the prior year. This is primarily due to the increased service costs for
Strategic Technologies related to a larger installed customer base. These costs
outpaced revenue growth.
32
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CTS SEGMENT
CTS revenue for the six month period, net of intersegment sales, increased 47.4%
to $51,653 from $35,035 in the comparable period of the prior year. CTS
operating income for the six month period increased 40.6% to $11,164 in 2000
from $7,940 in the comparable period of the prior year.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by operating activities totaled $119,876 for the six months
ended June 30, 2000 compared with net cash provided of $111,397 for the
comparable period in 1999. The increase of $8,479 was due primarily to higher
net income, changes in accrued and deferred taxes ($43,557) and a reduction in
benefit payments of ($4,618) partially offset by a reduction in deferred
revenues of ($31,015) and a decrease in accrued and other current liabilities of
($10,059).
Net cash provided by investing activities totaled $616 for the six months ended
June 30, 2000 compared with a usage of $45,355 for the comparable period in
1999. The $51,372 increase was primarily due to higher proceeds from the sale of
investments and businesses ($27,577), a reduction in acquisition & integration
payments of ($17,180) and a decrease in capital expenditures and additions to
software of ($10,460).
Net cash used in financing activities totaled $131,235 for the six months ended
June 30, 2000 compared with a usage of $140,565 for the comparable period in
1999. The decrease in cash used in financing activities of $9,330 was primarily
due to a decrease in payments for the purchase of treasury stock of ($103,028)
and an increase in proceeds from short-term borrowings of ($134,179, net of
repayments). This was partially offset by the payment of the D&B tax contingency
($212,291) and a reduction in proceeds from exercise of stock options ($13,854).
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 six months ended June 30, 1999.
Financing Activities include cash dividends paid of $11,923 and $12,660 for the
six months ended June 30, 2000 and 1999 respectively. Dividends paid per share
were $0.02 for the quarters ended June 30, 2000 and March 31, 2000.
The Company has been informed by D&B that the IRS is challenging D&B's
utilization of certain capital losses during 1989 and 1990. D&B has advised the
Company that it filed an amended tax return for these periods which reflects
$561,582 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. In May 2000,
D&B paid $349,291 of this amount, and the Company paid $212,291, which the
Company funded through short term borrowings. A portion (approximately $41,000)
of the Company's obligation 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 and has been accounted for as a short-term receivable. The
payments were made to the IRS to stop further interest from accruing. D&B
received a formal assessment for the additional tax from 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 and would also contest
the assessment of amounts, if any, in excess of the amounts paid. The Company
estimates that its
33
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
share of the liability that was paid is approximately $140,000 net of income tax
benefit on interest (approximately $31,300) and NMR's contribution obligations
(approximately $41,000).
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 Company's current long-term and short-term
requirements including cash dividends, acquisitions, stock repurchase programs
and other contingencies.
During the first six months of 2000, the Company repurchased 5.5 million shares
of outstanding common stock at a total cost of $119,623. 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 June 30, 2000,
approximately 10.9 million shares had been repurchased since the inception of
the October 1999 repurchase program at a total cost of $256,404.
On July 19, 2000 the Board of Directors authorized a systematic stock repurchase
program to buy up to 40 million shares, marking the fifth consecutive repurchase
program the Company has implemented. Shares acquired through the repurchase
program will be open-market purchases in compliance with Securities and Exchange
Commission Rule 10b-18. To June 30, 2000 the Company has acquired over 19% of
its initial share capitalization.
CHANGES IN FINANCIAL POSITION AT JUNE 30, 2000 COMPARED TO DECEMBER 31, 1999
CASH & CASH EQUIVALENTS decreased to $103,148 at June 30, 2000, from $115,875 at
December 31, 1999 (which includes $45,209 and $42,641 of CTS' cash and cash
equivalents at June 30, 2000 and December 31, 1999, respectively) due primarily
to payments for the D&B tax contingency ($212,291) and the purchase of treasury
stock ($119,623), partially offset by net short-term borrowing ($205,088) and
the proceeds from sale of investments ($66,734).
OTHER RECEIVABLES increased to $41,136 at June 30, 2000 from $0 at December 31,
1999 to reflect the Receivable from Neilsen Media Research (NMR) for the D&B tax
contingency (see note 8 to the Condensed Consolidated Financial Statements).
SECURITIES AND OTHER INVESTMENTS increased to $197,554 at June 30, 2000, from
$127,415 at December 31, 1999, due primarily to the distribution of certain
investments, which the Company previously held at cost, from the Venture Capital
Funds to the Company. These investments are marked to market as of June 30,
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 $334,601 at June 30, 2000, from $134,663 at
December 31, 1999, due primarily to increased borrowings to partially fund the
Company's stock repurchase program and the D&B tax contingency.
During the first half of 2000, the Company purchased 5.5 million shares of
outstanding common stock at a total cost of $119,623.
ACCRUED AND OTHER CURRENT LIABILITIES decreased to $165,574 at June 30, 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.
34
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCRUED INCOME TAXES decreased to $62,571 at June 30, 2000, from $211,592 at
December 31, 1999. The decrease reflected net taxes paid less taxes accrued in
the six month period.
DEFERRED REVENUES decreased to $110,557 at June 30, 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 $55,035 at June 30, 2000, from $4,726 at December
31, 1999 due primarily to higher deferred taxes on unrealized holding gains on
marketable securities.
SHAREHOLDERS' EQUITY increased to $509,615 at June 30, 2000 from $493,706 at
December 31, 1999 due primarily to net income ($133,081), the change in
unrealized gains on investments ($22,802) and the exercise of stock options
($6,326) and partially offset by the purchase of treasury stock ($119,623),
change in the cumulative translation adjustment ($18,505) and dividends paid
($11,923).
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 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, 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,
alliances or joint ventures, the ability
35
<PAGE>
IMS HEALTH INCORPORATED
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
to identify, consummate and integrate acquisitions, alliances and ventures on
satisfactory terms; the ability to develop new or advanced technologies, systems
and products for their businesses on time and on a cost-effective basis
including but not limited to those that use or are related to the Internet and,
with respect to the Synavant Business, developing applications in connection
with the Siebel alliance; the ability to successfully maintain historic
effective tax rates and to achieve the Siebel alliance; 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 and, with respect to the
Synavant Business, those that would limit the ability to deliver pharmaceutical
prescription samples through the mail; the ability to timely and
cost-effectively resolve any problems associated with the Euro currency issue;
the ability to obtain future financing on satisfactory terms; deterioration in
economic conditions, particularly in the pharmaceutical, healthcare, or other
industries in which customers may operate; consolidation in the pharmaceutical
industry and the other industries in which IMS Health's customers 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 and six month period ended June 30, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item is set forth in "Note 9. Financial
Instruments" of Notes to Condensed Consolidated Financial Statements on pages
16.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information in response to this Item is set forth in "Note 8. Contingencies" of
Notes to Condensed Consolidated Financial Statements on pages 13 through 16
hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 Financial Data Schedules
(b) Reports on 8-K:
36
<PAGE>
The following reports on Form 8-K were filed during the quarter ended June 30,
2000:
A report on Form 8-K was filed on May 17, 2000 to present under Item 5, Other
Events, and Item 7, Exhibits, the Agreement and Plan of Reorganization, dated as
of May 16, 2000, among The TriZetto Group, Inc., Elbejay Acquisition Corp., IMS
Health Incorporated and ERISCO Managed Care Technologies, Inc.
37
<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: August 14, 2000 James C. Malone
Chief Financial Officer
---------------------------------------------
Date: August 14, 2000 James C. Malone
Chief Financial Officer
(Principal Financial and Accounting Officer)
38
