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 MARCH 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-14049
IMS HEALTH INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 06-1506026
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(State of Incorporation) (I.R.S. Employer
Identification No.)
200 Nyala Farms, Westport, CT 06880
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(Address of principal executive (Zip Code)
offices)
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 March 31, 2001
Common Stock, -----------------
par value $.01 per share 294,648,885
IMS HEALTH INCORPORATED
INDEX TO FORM 10-Q
PAGE(S)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000 3
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Financial Position
March 31, 2001 and December 31, 2000 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 6-7
Notes to Condensed Consolidated Financial Statements 8-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATING RESULTS 19-26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
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2
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)
THREE MONTHS ENDED
MARCH 31,
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2001 2000
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OPERATING REVENUE $ 329,562 $ 352,523
Operating Costs 124,614 139,809
Selling and Administrative Expenses 89,866 111,877
Depreciation and Amortization 18,624 25,777
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OPERATING INCOME 96,458 75,060
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Interest Income 1,164 1,107
Interest Expense (6,235) (1,333)
Gains from Dispositions - Net 1,400 49,442
Gain on Issuance of CTS Stock 733 --
Other Expense - Net (6,479) (8,708)
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Non-Operating (Expense)/Income - Net (9,417) 40,508
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Income Before Provision for Income Taxes 87,041 115,568
Provision for Income Taxes (18,677) (32,716)
TriZetto Equity Loss, Net of Income Tax Benefit of
$1,648 for 2001 (2,557) --
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NET INCOME $ 65,807 $ 82,852
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BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.22 $ 0.28
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DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.22 $ 0.27
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Weighted Average Number of Shares Outstanding - Basic 293,139,000 299,916,000
Dilutive Effect of Shares Issuable as of Period-End
Under Stock Option Plans 5,739,000 3,869,000
Adjustment of Shares Outstanding Applicable to
Exercised/Cancelled Stock Options During the Period 1,044,000 36,000
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Weighted Average Number of Shares Outstanding - Diluted 299,922,000 303,821,000
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
3
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
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Net Income $ 65,807 $ 82,852
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation (Losses) (20,126) (9,617)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding (Losses)/Gains on Securities Arising
During the Period:
Other (Net of Tax Benefit/(Expense) of $897 and
$(32,620) for 2001 and 2000, respectively) (4,918) 51,992
Gartner, Inc. Shares Held For Sale (Net of Tax
Benefit of $368 in 2001 and Tax Expense of $1,209 in
2000) (684) 2,247
Less: Reclassification Adjustment for Losses/(Gains)
included in Net Income (Net of Tax Benefit of $875 and
$4,757 for 2001 and 2000, respectively) 1,625 (12,603)
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Change in Unrealized (Losses)/Gains on Investments, Net of Tax (3,977) 41,636
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Total Other Comprehensive (Loss)/Income, Net of Tax (24,103) 32,019
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Comprehensive Income $ 41,704 $ 114,871
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
4
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) (DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
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ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 157,163 $ 118,593
Accounts Receivable - Net 239,079 230,988
Other Receivable (Note 6) 30,606 41,136
Other Current Assets 99,579 117,001
Net Assets from Discontinued Operations (Note 3) 60,112 60,799
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Total Current Assets 586,539 568,517
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SECURITIES AND OTHER INVESTMENTS 79,752 87,500
TRIZETTO EQUITY INVESTMENT 133,342 137,501
PROPERTY, PLANT AND EQUIPMENT - NET 143,746 145,447
OTHER ASSETS - NET:
Computer Software 113,115 117,688
Goodwill 148,396 144,100
Other Assets 41,474 42,254
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Total Other Assets - Net 302,985 304,042
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TOTAL ASSETS $ 1,246,364 $ 1,243,007
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LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 33,258 $ 45,198
Accrued and Other Current Liabilities 165,705 219,726
Short-Term Debt 399,381 384,281
Accrued Income Taxes 86,185 81,856
Deferred Revenues 91,579 96,095
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Total Current Liabilities 776,108 827,156
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POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 43,199 43,471
OTHER LIABILITIES 133,018 133,498
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TOTAL LIABILITIES 952,325 1,004,125
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COMMITMENTS AND CONTINGENCIES (NOTE 6)
MINORITY INTERESTS 135,247 135,342
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $.01, Authorized 800,000,000
Shares; Issued 335,045,390 Shares at March 31, 2001 and
December 31, 2000, respectively 3,350 3,350
Capital in Excess of Par 538,807 596,273
Retained Earnings 820,066 760,140
Treasury Stock, at Cost, 40,396,505 and 43,703,384 Shares
at March 31, 2001 and December 31, 2000, respectively (1,062,403) (1,139,298)
Cumulative Translation Adjustment (126,543) (106,417)
Minimum Pension Liability Adjustment (672) (672)
Unrealized Loss on Gartner, Inc., net of tax benefit (21,630) (20,946)
Unrealized Gains on Investments, net of tax expense 7,817 11,110
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TOTAL SHAREHOLDERS' EQUITY 158,792 103,540
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,246,364 $ 1,243,007
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
5
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 65,807 $ 82,852
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and Amortization 18,624 25,777
Gains from Sale of Investments, Net (1,400) (49,442)
Gain on Issuance of CTS Stock (733) --
Deferred Income Taxes 11,212 2,222
TriZetto Equity Loss, Net 2,557 --
Minority Interests in Net Income of Consolidated
Companies 4,768 4,144
Net Tax Benefit on Stock Option Exercises 12,181 198
Change in assets and liabilities, excluding effects from
acquisitions and dispositions:
Net Increase in Accounts Receivable (21,432) (10,321)
Net (Increase)/Decrease in Prepaid Expenses (5,696) 1,519
Net (Decrease)/Increase in Accounts Payable (10,558) 2,407
Net Decrease in Accrued and Other Current Liabilities (54,139) (36,978)
Net Increase/(Decrease) in Deferred Revenues 3,286 (12,332)
Net (Decrease)/Increase in Accrued Income Taxes (14,352) 24,030
Neilsen Media Research payment received in respect of
D&B Tax Contingency (Note 6) 10,530 --
Net Decrease in Benefit Payments -- (642)
Other Working Capital Items - Net 1,758 (2,919)
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Net Cash Provided by Operating Activities 22,413 30,515
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CASH FLOWS (USED IN)/PROVIDED BY INVESTING ACTIVITIES:
Capital Expenditures (7,109) (5,607)
Additions to Computer Software (6,052) (9,294)
Payments for Acquisitions of Businesses (8,454) (4,386)
Proceeds from Sale of Investments, Net -- 58,179
Proceeds from Sale of IDRAC Holdings Inc. 5,370 --
Net Increase/(Decrease) in Other Investments 205 (14,959)
Other Investing Activities - Net 5,763 (3,971)
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Net Cash (Used in)/Provided by Investing Activities (10,277) 19,962
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CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (91,224) (117,251)
Proceeds from Exercise of Stock Options 111,866 4,787
Dividends Paid (5,881) (5,972)
Proceeds from Employee Stock Purchase Plan -- 1,001
Short-Term Borrowings 45,418 76,383
Short-Term Debt Repayments (30,319) (40,500)
Other Financing Activities - Net (1,176) (421)
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Net Cash Provided by/(Used in) Financing Activities 28,684 (81,973)
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Effect of Exchange Rate Changes (2,250) (1,360)
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Increase/(Decrease) in Cash and Cash Equivalents 38,570 (32,856)
Cash and Cash Equivalents, Beginning of Period 118,593 115,875
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Cash and Cash Equivalents, End of Period $ 157,163 $ 83,019
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6
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
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2001 2000
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $ 8,960 $ 1,238
Cash Paid during the Period for Income Taxes $ 8,473 $12,899
Cash Received from Income Tax Refunds $ 70 $ 8,420
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
7
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND 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") included in the 2000 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 current period presentation. The results of
operations for interim periods are not necessarily indicative of the results
expected for the full year.
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 approximately
100 countries and its key products include:
o Sales management information to optimize sales force productivity;
o Market research for prescription and over-the-counter pharmaceutical
products; and
o IT application development, integration and management services.
On August 31, 2000, IMS Health spun-off the businesses of Synavant, Inc.
("Synavant") by distributing the stock of Synavant to IMS Health's shareholders
(the "Synavant Spin-Off"). The Synavant business includes the pharmaceutical
industry automated sales and marketing support businesses previously operated by
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., which was a
wholly-owned subsidiary of IMS Health; and a majority stake in a foreign joint
venture. On October 3, 2000, the Company sold Erisco Managed Care Technologies,
Inc. ("Erisco") to The TriZetto Group, Inc. ("TriZetto") in exchange for an
equity interest in TriZetto and entered into a technology and data alliance with
TriZetto. These transactions, together with the divestitures or discontinuation
of three small non-strategic software businesses, have resulted in a company
concentrated on IMS Health's core data business of providing market information
and decision support services to the pharmaceutical industry, together with the
Company's 60.17% interest in Cognizant Technology Solutions Corporation ("CTS"),
Enterprise Associates LLC ("Enterprises"), the Company's venture capital unit,
and the Company's interest in TriZetto. IMS Health owns approximately 33% of
TriZetto's common stock as at March 31, 2001, and accounts for its share of
TriZetto on an equity basis.
8
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3. INVESTMENT IN GARTNER, INC. ("GARTNER") 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"). 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 Company's remaining investment in Gartner at March 31, 2001 consists of
6,597,292 Gartner Class A Shares (at an original cost basis of $77,745). 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 $60,112 are
included in current assets at March 31, 2001. These shares have been accounted
for as an available for sale investment. The Company has classified its
investment in Gartner as a current asset as it intends to dispose of it in the
short-term if it recovers its cost, but has the ability to hold the investment
on a long-term basis.
Following a decline in the market value of Gartner stock below cost for the
first time in late 2000, the Company performed, and continues to perform, a
periodic assessment in accordance with its policy to determine whether an
other-than-temporary decline had occurred. The Company evaluated the
recoverability of the investment by reviewing recent information related to the
industry and the operating results and financial position of Gartner and by
considering the Company's ability and intent to hold the investment on a short
or long-term basis if need be. The Company concluded that evidence existed to
support the recoverability of its carrying value, that there were no events or
changes in circumstances specifically relating to Gartner, that the underlying
business fundamentals are strong and that the decline in the market value is
consistent with the historical volatility of the stock and is attributable to
the general market conditions. Accordingly, the Company concluded that the
decline in market value of the Gartner stock, reflected as Unrealized Loss on
Gartner Shares, within Shareholders' Equity, as of March 31, 2001 was temporary
and has not adjusted the cost basis of its investment.
NOTE 4. ACQUISITIONS AND DISPOSITIONS
During the first quarter of 2001, the Company exercised its option to purchase
the remaining interest in Medicare Audits Ltd. ("Medicare"), a U.K. based
hospital research firm for a net cash payment of $7,889. After a preliminary
allocation of the purchase price to the assets acquired, goodwill of $6,724 was
recorded.
In addition, during the first quarter of 2001, the Company recorded $1,400 of
pre-tax net gains. This includes a gain of $1,990 resulting from the sale of
IDRAC Holdings Inc. ("IDRAC"), a non-strategic property, which provides
information on pharmaceutical product registrations. The operating results of
IDRAC were not significant to the results of operations of the Company. In
accordance with the IDRAC sales agreement, the Company is entitled to
additional consideration of up to $4.9 million, which is contingent upon
IDRAC achieving a specified level of revenues during 2001. This gain will be
recognized once the conditions for payment have been satisified.
During the first quarter of 2000, the Company recorded $49,442 of pre-tax net
gains due primarily to the sale of investments in American Cellular, Aspect
Development Inc., Mercator Software Inc.,
9
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
and Viant Corporation that were part of the Enterprises portfolio.
As described in Note 2 and Note 10, Synavant was spun-off to the Company's
shareholders on August 31, 2000 and Erisco was sold to TriZetto on October 3,
2000. As such, the results of Erisco and Synavant are included in the Condensed
Consolidated Statements of Income and Cash Flows for the three months ended
March 31, 2000, but not for the three months ended March 31, 2001.
NOTE 5. INVESTMENT IN TRIZETTO
Summary financial information for TriZetto for the three months ended March 31,
2001 is presented below. The amounts shown represent consolidated TriZetto
operating results, unaudited, based on publicly available information.
Net Sales $ 46,039
Gross Profit $ 12,112
Loss from Operations $ (23,026)
Net Loss $ (17,934)
The market value of the Company's investment in TriZetto was approximately
$169,241 as at March 31, 2001. The investment in TriZetto is accounted for
on an equity basis and is not marked to market.
NOTE 6. CONTINGENCIES
The Company and its subsidiaries are involved in various 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
10
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the antitrust laws. IRI also seeks punitive damages in an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in the
complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an amended and restated
complaint repleading its alleged claim of attempted monopolization in the United
States and realleging its other claims. On August 18, 1997, defendants moved for
an order dismissing the amended claims. On December 1, 1997, the court denied
the motion and, on December 16, 1997, defendants filed a supplemental answer
denying the remaining material allegations of the amended complaint. 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. On February 19, 2001,
ACNielsen announced that it merged with VNU N.V. Pursuant to the Indemnity and
Joint Defense Agreement, VNU is to be included with ACNielsen for purposes of
determining the ACN Maximum Amount.
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
11
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
MATTERS BEFORE THE EUROPEAN COMMISSION
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 that 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 complaints
denying the allegations contained therein and has provided information to the
Commission pursuant to formal information requests.
On October 19, 2000, the Commission initiated formal proceedings against the
Company through the adoption of a statement of objections alleging that certain
of the Company's commercial practices constituted an abuse of a dominant
position in contravention of Article 82 of the EC Treaty. A statement of
objections is a preliminary document that does not represent the Commission's
final view on the practices at issue. Under Commission procedures, the Company
has full rights of defense, including access to the Commission's files, the
right to answer the statement of objections in writing and produce evidence of
its own, and the right to request the opportunity to present its defense at an
oral hearing. On February 6, 2001, the Company filed its written answer to the
statement of objections. The Commission will ultimately determine whether a
decision requiring the Company to end some or all of the contested practices is
necessary and may impose fines against the Company. If such a decision is
rendered against the Company, the Company could appeal that decision before the
European Court of First Instance.
On December 19, 2000, National Data Corporation ("NDC") lodged an application
with the Commission requesting that the Commission initiate a proceeding against
the Company for an alleged infringement of Article 82 of the EC Treaty and
granting interim measures (the "Application"). The Application concerns certain
IMS Health geographic mapping structures used for the reporting of regional
pharmaceutical sales data in Germany which the German courts have ruled are
copyright protected. The Application requests that the Commission grant interim
relief requiring the Company to grant NDC a compulsory license to enable NDC to
use these structures in
12
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
its competing service in Germany. The Company filed preliminary comments to the
Application and has provided information to the Commission pursuant to certain
formal information requests.
On March 8, 2001, the Commission decided to initiate formal proceedings against
the Company through the adoption of a new statement of objections alleging that
the Company's refusal to enter into negotiations with NDC following NDC's
request for a license to use the aforementioned geographic mapping structures
could constitute an abuse of a dominant position in contravention of Article 82
of the EC Treaty. In addition, the Commission has proposed the granting of
interim measures requiring the Company to license these structures to third
parties, including NDC, until the Commission adopts a final decision on the
merits of the case. On April 2, 2001, the Company filed its written answer to
the new statement of objections and on April 6, 2001, the Company attended an
oral hearing before the Commission where it presented its defense of this
matter. The Commission will ultimately determine whether a decision requiring
the Company to license the geographic mapping structures to its German
competitors is necessary.
The Company intends to vigorously defend both matters before the European
Commission. Management of the Company is unable to predict at this time the
final outcome of these matters or whether the resolution of these matters could
materially affect the Company's results of operations, cash flows, or financial
position.
D&B TAX MATTERS
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.
In 1999, the Company was informed by D&B that the IRS was reviewing D&B's
utilization of certain capital losses during 1989 and 1990. In response, D&B
advised that it intended to file an amended tax return for these periods and to
pay this amount in order to prevent further interest from accruing. In May 2000,
D&B paid $349,291 of this amount and the Company paid $212,291 pursuant to its
obligation under the 1996 Distribution Agreement, whereby the Company is
obligated to pay one-half of the tax and interest owed to the IRS for this
matter to the extent the liability exceeds $137,000. In the second quarter of
2000, D&B received a formal assessment from the IRS with respect to this matter
in the amount of $561,582, for additional tax and interest due. 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 had previously accrued for this
liability and, therefore, this payment did not result in an expense in 2000.
Pursuant to the Distribution Agreement between Cognizant (renamed Nielsen Media
Research ("NMR")) and the Company (the "1998 Distribution Agreement"), NMR is
responsible for a portion of the amount that the Company paid pursuant to the
1996 Distribution Agreement (approximately $41,000 according to the Company's
calculations). NMR was not obligated to pay its share to the Company until
January 2, 2001. In December 2000, the Company requested reimbursement of this
amount from NMR. On January 2, 2001, NMR made a payment of $10,530 in respect of
such
13
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
matter but refused to pay the remaining $30,606 based on its interpretation of
the 1998 Distribution Agreement. The Company believes that NMR's position has no
merit and plainly contravenes the terms of the 1998 Distribution Agreement.
Accordingly, the Company has accrued for the contemplated payment from NMR and
has recorded an account receivable. In accordance with the 1998 Distribution
Agreement, the Company has commenced arbitration regarding this matter by filing
a Demand for Arbitration with the American Arbitration Association International
Center for Dispute Resolution. The Company believes it will prevail in this
matter.
OTHER CONTINGENCIES
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 not probable that any such
significant liabilities will be incurred by the Company.
As part of the Synavant Spin-Off, IMS Health and Synavant entered into a
Distribution Agreement. In connection with the Distribution, Synavant will be
jointly and severally liable to the other parties in the 1996 and 1998
Distribution Agreements for the liabilities relating to certain tax matters as
well as those relating to the IRI Action. Under the Synavant Distribution
Agreement, as between IMS Health and Synavant, each will bear 50% of IMS
Health's share of these liabilities (net of the liability borne by NMR) up to a
maximum liability of $9,000 for Synavant. If, contrary to expectations, the
Synavant Distribution were not to qualify as tax free 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 is not expected to
exceed $100,000. Pursuant to the Tax Allocation Agreement, IMS Health would be
liable for the resulting corporate tax, except as provided in the Distribution
Agreement. In the opinion of management and based on the opinion of tax counsel
it is not probable that the Company will incur this liability.
The Company intends to vigorously defend the matters noted above. The Company is
unable to predict at this time the final outcome of these matters or whether the
resolution of these matters could materially affect the Company's results of
operations, cash flows, or financial position.
NOTE 7. FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS
14
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No. 133". These statements standardize the
accounting for derivative instruments. The Company is required to record all
derivative instruments on the balance sheet at fair value. Derivatives that are
not classified as hedges are adjusted to fair value through earnings. Changes in
fair value of the derivatives that the Company has designated and that qualify
as effective hedges are recorded in either other comprehensive income or
earnings. Any ineffective portion of the Company's derivatives that are
classified as hedges is immediately recognized in earnings. The cumulative
effect of the change in accounting principles recorded on January 1, 2001 as
well as the impact on the quarter ended March 31, 2001 was not material to the
Company's results of operations, financial positions or cash flows.
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 changes
in 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 reduce the income
statement impact of exchange rate volatility. The Company's policy is to
maintain coverage between minimum and maximum percentages of its estimated
foreign exchange exposures over the next year. The gains and losses on these
hedges are designed to offset changes in the value of the underlying exposures.
It is the Company's policy to enter into foreign currency derivative contracts
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.
CREDIT CONCENTRATIONS
The Company continually monitors its positions with, and the credit quality of,
the financial institutions which are counterparties to its financial instruments
and does not anticipate non-performance by counterparties. The Company would not
realize a material loss as of March 31, 2001, 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 principally from customers in
the pharmaceutical industry. The Company's trade receivables do not represent
significant concentrations of credit risk at March 31, 2001 due to the high
quality of its customers and their dispersion across many geographic areas.
LINES OF CREDIT AND LIQUIDITY
The Company had unused available lines of credit of $162,307 and $178,975 at
March 31, 2001 and December 31, 2000 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 banks under
certain conditions. The commitment fee associated with the unused lines of
credit
15
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
is 22.5 basis points per year, increased to 28.85 basis points if the facilities
are less than 50% utilized.
At March 31, 2001 and December 31, 2000 the Company's Total Current Liabilities
exceeded its Total Current Assets primarily as a result of management's decision
to maintain short-term borrowings instead of longer term debt instruments. This
allows the Company to achieve lower borrowing costs while providing flexibility
to repay debt with cash flow from operations, proceeds from the exercise of
stock options and the liquidation of equity holdings. Based on estimated future
cash flows from operations, the ability to monetize Enterprises' investments
upon distribution from venture capital partnerships, cash from future option
exercises, the investment in CTS as well as the Company's ability to obtain
additional lines of credit and debt and to utilize existing lines of credit, the
Company believes it will have sufficient cash and other resources to fund its
short and long term business plans, including its current short term
obligations, its stock repurchase program and its operations.
NOTE 8. INCOME TAX
The Company operates in approximately 100 countries around the world and its
earnings are taxed at the applicable income tax rate in each of these countries.
In the quarter ended March 31, 2001, the Company's tax rate was reduced by
approximately $10,200, primarily from the recognition of additional tax
benefits arising from a 1998 non-U.S. reorganization which gave rise to tax
deductible non-U.S. intangible assets. This change in estimate results from
the reassessment of the benefits from the reorganization following new
non-U.S. tax legislation enacted at the end of the first quarter of 2001.
In the quarter ended March 31, 2000, the Company's effective tax rate was
impacted by a higher amount of Enterprise's investment gains, which were taxed
at a U.S. federal rate of 35%, offset by the realization of certain net
operating losses ("NOLs") due to the implementation of global tax planning
strategies (approximately $3,000) and the reversal of previously accrued tax
liabilities (approximately $3,000). These 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 of 2000.
While the Company intends to seek global tax planning initiatives, there can be
no assurance that the Company will be able to successfully implement such
initiatives.
NOTE 9. IMS HEALTH CAPITAL STOCK
On July 19, 2000 the Board of Directors authorized a 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 are
open-market purchases in compliance with Securities and Exchange Commission Rule
10b-18.
During the first three months of 2001, the Company repurchased approximately 3.5
million shares of outstanding common stock under this program, at a total cost
of $91,224. As of March 31, 2001,
16
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
approximately 12 million shares had been repurchased since the inception of the
July 2000 program at a total cost of $297,871.
The Company has re-issued approximately 6.7 million treasury shares under option
exercises for proceeds of $111,866.
NOTE 10. OPERATIONS BY BUSINESS SEGMENT
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 approximately 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 inter-segment transactions
are excluded from management's analysis of operations by business segment.
As at March 31, 2001, the Company consisted of the following segments:
1. The IMS Segment, which consists of IMS Health, a 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 included
in the Transaction Businesses Segment. The IMS Segment is managed on a global
business model with global leaders for the majority of its critical business
processes. Corporate expenses which were previously not allocated to
segments, are now included with the IMS segment as the costs principally
relate to management of the IMS business. Corporate expenses of $8,031 in the
quarter ended March 31, 2000 have been reclassified accordingly.
2. The CTS Segment, which delivers high quality, cost-effective, full life-cycle
solutions to complex software development and maintenance problems that
companies face as they transition to e-business. These services are delivered
through the use of a seamless on-site and offshore consulting project team.
CTS's solutions include application development and integration, application
management and re-engineering services.
Additionally, during the quarter ended March 31, 2000, the Company also
included:
The Transaction Businesses Segment, which consisted of 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. The Company spun-off the Synavant business on August 31,
2000, and sold Erisco to TriZetto and entered into a strategic alliance with
TriZetto on October 3, 2000. The Company also divested or discontinued the other
small non-strategic software businesses.
17
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, IMS CTS TRANSACTION TOTAL
2001: BUSINESSES (2) CONSOLIDATED
--------------------------------------------------------------------------------------
Revenue (1) $289,577 $39,985 - $329,562
Operating Income $88,069 $8,389 - $96,458
Total Assets at March 31, 2001 $1,134,569 $111,795 - $1,246,364
(3) (4)
--------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2000:
--------------------------------------------------------------------------------------
Revenue (1) $263,851 $23,564 $65,108 $352,523
Operating Income (Loss) $71,672 $5,123 ($1,735) $75,060
Total Assets at March 31, 2000 $1,103,114 $72,809 $306,749 $1,482,672
(3) (4)
--------------------------------------------------------------------------------------
NOTES TO OPERATIONS BY BUSINESS SEGMENTS:
1. Revenue excludes inter-segment sales of $3,418 and $3,506 for March 31,
2001 and 2000, respectively.
2. Included in the Transaction Businesses Segment for the three months ended
March 31, 2000 are revenue and operating losses related to the Synavant
business of approximately $46,000 and ($4,000), respectively. Residual
revenues and results of operations relate primarily to the Erisco
business.
3. Total assets include Net Assets of Discontinued Operations of $60,112 and
$99,234 as of March 31, 2001 and March 31, 2000, respectively.
4. CTS segment assets include cash and cash equivalents of $60,966 and
$40,360 at March 31, 2001 and March 31, 2000, respectively.
18
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
This discussion and analysis should be read in conjunction with the accompanying
unaudited Condensed Consolidated Financial Statements and related notes.
IMS Health Incorporated (the "Company" or "IMS Health") is the world's leading
provider of information solutions to the pharmaceutical and healthcare
industries. IMS Health operates in approximately 100 countries and its key
products include:
o Sales management information to optimize sales force productivity;
o Market research for prescription and over-the-counter pharmaceutical
products; and
o IT application development, integration and management services.
On August 31, 2000, IMS Health spun-off the businesses of Synavant, Inc.
("Synavant") by distributing the stock of Synavant to IMS Health's shareholders
(the "Synavant Spin-Off"). The Synavant business includes the pharmaceutical
industry automated sales and marketing support businesses previously operated by
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., which was a
wholly-owned subsidiary of IMS Health; and a majority stake in a foreign joint
venture. On October 3, 2000, the Company sold Erisco Managed Care Technologies,
Inc. ("Erisco") to The TriZetto Group, Inc. ("TriZetto") in exchange for an
equity interest in TriZetto and entered into a technology and data alliance with
TriZetto. These transactions, together with the divestitures or discontinuation
of three small non-strategic software businesses, have resulted in a company
concentrated on IMS Health's core data business of providing market information
and decision support services to the pharmaceutical industry, together with the
Company's 60.17% interest in Cognizant Technology Solutions Corporation ("CTS"),
Enterprise Associates LLC ("Enterprises"), the Company's venture capital unit,
and the Company's interest in TriZetto. IMS Health owns approximately 33% of
TriZetto's common stock as at March 31, 2001, and accounts for its share of
TriZetto on an equity basis.
As of March 31, 2001, IMS Health consisted of:
1. The IMS Segment, which consists of IMS Health, a 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 included in the Transaction Businesses Segment. The IMS Segment is
managed on a global business model with global leaders for the majority of
its critical business processes. Corporate expenses which were previously
not allocated to segments, are now included with the IMS segment as the
costs principally relate to management of the IMS business.
2. The CTS Segment, which delivers high quality, cost-effective, full life
cycle solutions to complex software development and maintenance problems
that companies face as they transition to e-business. These services are
delivered through the use of a seamless on-site and offshore consulting
project team. The Company's solutions include application development
19
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
and integration, application management and re-engineering services.
Additionally, during the quarter ended March 31, 2000, the Company also
included:
3. The Transaction Businesses Segment which consisted of: 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. The Company spun-off the
Synavant business on August 31, 2000 and sold Erisco to TriZetto on
October 3, 2000. The Company also divested or discontinued the other small
non-strategic software businesses.
All prior year segment information has been reclassified to conform with the
March 31, 2001 presentation.
OPERATING RESULTS
Revenue for the first quarter of 2001 decreased by 6.5% to $329,562 from
$352,523 in the first quarter of the prior year. This decrease is primarily
attributable to the inclusion of Synavant and Erisco revenues in the first
quarter of 2000. Both were disposed of prior to the beginning of the first
quarter of 2001.
IMS Health revenue, excluding the Transaction Businesses Segment, increased by
14.7% to $329,562 in the first quarter of 2001 from $287,415 for the first
quarter of the prior year. On a constant dollar basis (i.e. a basis that
eliminates currency rate fluctuations) revenue growth was 19.8% in the first
quarter. This increase in revenue is primarily due to an increasing client base
for the Japanese weekly data services, increased sales of Xponent resulting from
the strength in the pharmaceutical industry and growth at CTS, as described
below.
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 decreased by 10.9% to $124,614 in the
first quarter of 2001 from $139,809 in the first quarter of the prior year due
to operating costs in the first quarter of 2000 for Synavant and Erisco which
are not in the 2001 results, partially offset by increased costs attributable to
CTS and the IMS Segment.
IMS Health operating costs, excluding the Transaction Businesses Segment in
2001, increased by 14.8% to $124,614 in the first quarter of 2001 from $108,515
for the comparable quarter of 2000. This increase is attributable to an
increased number of technical professionals at CTS to meet the increased demand
for services and an increase of 7.9% in the IMS Segment to support higher
revenues. The low increase for the IMS Segment reflects the benefits of cost
containment programs.
Selling and administrative expenses consist primarily of the costs attributable
to selling and administrative personnel, promotion, communications, management,
finance, administration and occupancy. The Company's selling and administrative
expenses decreased during the first quarter
20
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of 2001 by 19.7% to $89,866 from $111,877 in the first quarter of the prior year
due to expenses in the first quarter of 2000 for Synavant and Erisco which are
not in the 2001 results, partially offset by increased costs primarily
attributable to the CTS Segment.
IMS Health selling and administrative expenses, excluding the Transaction
Businesses Segment, increased during the first quarter of 2001 by 6.1% from
$84,733 to $89,866. The increase was primarily due to expenses incurred to
expand CTS's sales and marketing activities and increased infrastructure
expenses to support CTS's revenues. The IMS Segment selling and administrative
costs increased by only 1.1% as a result of cost containment.
First quarter depreciation and amortization charges decreased by 27.8% from
$25,777 in 2000 to $18,624 in 2001. This decrease primarily reflects the higher
amortization in 2000 relating to the Transaction Businesses.
Operating income for the first quarter of 2001 increased by 28.5% reflecting the
growth in the IMS and CTS segments. In the first quarter of 2000 the IMS segment
profits offset losses made by the Transaction Businesses.
IMS Health operating income, excluding the Transaction Businesses Segment,
increased by 25.6% in 2001 to $96,458 from $76,795 in the first quarter of the
prior year. This growth is primarily due to the revenue growth in all geographic
regions of the IMS segment and CTS and the slower growth in operating and
selling and administrative expenses. Operating income growth outpaced revenue
growth primarily due to the Company's ability to leverage its worldwide
resources.
Net interest expense was $5,071 in the first quarter of 2001, compared with net
interest expense of $226 in the first quarter of the prior year. This increase
in expense is due to a higher level of short term borrowings to fund the
Company's stock repurchase program and payment of the legacy D&B tax contingency
made in May 2000.
Gains from Dispositions, Net, were $1,400 in the first quarter of 2001,
compared to $49,442 in the first quarter of the prior year. During the first
quarter of 2001 the Company disposed of IDRAC Holdings Inc. ("IDRAC"), a
non-strategic property providing information on pharmaceutical product
registration recording a gain of $1,990. In accordance with the IDRAC sales
agreement, the Company is entitled to additional consideration of up to $4.9
million, which is contingent upon IDRAC achieving a specified level of
revenues during 2001. This gain will be recognized once the conditions for
payment have been satisfied. In 2000, the Company recorded $49,442 of pre-tax
net gains due primarily to the sale of investments in American Cellular,
Aspect Developments Inc., Mercator Software Inc., and Viant Corporation that
were part of the Enterprises portfolio.
A $733 gain on the issuance of CTS stock, relating to the exercise of stock
options, was recorded in the first quarter of 2001. This gain has been
recognized in accordance with Staff Accounting Bulletin ("SAB") No. 51,
Accounting for Sales of Stock by a Subsidiary.
Other Expense-Net, decreased in the first quarter to $6,479 from $8,708 in the
first quarter of the prior year due to the inclusion in 2000 of non-recurring
professional fees.
In the first quarter of 2001, the effective tax rate was 21.5% compared to 28.3%
in the comparable quarter of 2000. This is more fully described in Note 8 to the
Condensed Consolidated Financial
21
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Statements.
The TriZetto equity loss, net, of $2,557 has been recorded in the first quarter
of 2001. The Company had no investment in TriZetto as of March 31, 2000.
Net income for the first quarter of 2001 decreased by 20.6% from $82,852 to
$65,807, primarily due to the reduction in gains from dispositions which
offset growth in the core business.
Basic earnings per share in the first quarter of 2001 were $0.22 versus earnings
of $0.28 in the first quarter of the prior year. The decline was driven
primarily by the reduction in gains from dispositions, offsetting growth in
the core business.
Diluted earnings per share in the first quarter of 2001 were $0.22 compared with
earnings of $0.27 in the first quarter of the prior year. The decline is
attributable to the above mentioned items.
RESULTS BY BUSINESS SEGMENT
IMS SEGMENT
The IMS Segment consists of IMS Health, the world's leading provider of
information solutions to the pharmaceutical and healthcare industries. Key
products and services integral to customer day-to-day operations include market
research for prescription and over-the-counter pharmaceutical products and sales
management information to optimize sales force productivity.
IMS Segment revenue for the first quarter of 2001 increased 9.8% (15.2% on a
constant dollar basis) to $289,577 from $263,851 in the first quarter of the
prior year. Sales Management revenue increased 14.6% (20.0% on a constant dollar
basis) to $176,348. Sales Management revenue growth is primarily due to Xponent
in the United States and Europe and also to the weekly data product in Japan.
Market Research revenue increased 5.4% to $104,606, and Other Services revenue
decreased 19.4% to $8,623. Other Services revenue includes consultancy services
which are ad hoc and less predictable in nature, and the quarterly decrease in
Other Services revenue is due to the timing of such ad hoc revenues.
IMS Segment operating income for the first quarter increased 22.9% to $88,069
from $71,672 in the prior year. Operating income growth outpaced revenue growth
due primarily to the segment's ability to leverage its established worldwide
resources.
Corporate expenses which were previously not allocated to segments, are now
included with the IMS segment as the costs principally relate to management of
the IMS business.
CTS SEGMENT
CTS revenue for the quarter, net of inter-segment sales, increased 69.7% to
$39,985 from $23,564 in the comparable period of the prior year. CTS operating
income for the period increased 63.8% to $8,389 in the first quarter of 2001
from $5,123 in the comparable period of the prior year. The
22
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
increase resulted primarily from an increase in application development and
integration, application management, re-engineering and other services partially
offset by a decrease in Year 2000 compliance services. The significant
revenue growth has driven the improvement at the operating income level.
TRANSACTION BUSINESSES SEGMENT
All of the Transaction Businesses Segment was spun-off, divested or discontinued
in 2000 and, therefore, there are no comparable operating results in 2001.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NET CASH PROVIDED BY OPERATING ACTIVITIES totaled $22,413 for the three months
ended March 31, 2001, compared with net cash provided of $30,515 for the
comparable period in 2000. The decrease in cash generated is primarily due to
payment of accruals for bonuses, other compensation and amounts related to
one-time charges recorded in 2000 and payments for accrued income tax
liabilities, partially offset by the partial payment made by Neilsen Media
Research ("NMR") in respect of the legacy D&B Tax Contingency (see Note 6 to the
Condensed Consolidated Financial Statements). The movements in Accounts Payable
and Accrued and Other Current Liabilities includes decreases in these balances
of $18,341 due to non-recurring activities.
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES totaled ($10,277) for the
three months ended March 31, 2001 compared with cash provided of $19,962 for
the comparable period in 2000. This decrease primarily reflects reduced
Proceeds from Sale of Investments, Net (a net decrease of $37,645) together
with higher payments for acquisitions, principally relating to Medicare
Audits Ltd. ("Medicare"), a U.K. based hospital research firm ($8,454).
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES generated an inflow of
$28,684 for the three months ended March 31, 2001, compared with a usage of
$81,973 for the comparable period in 2000. This was due primarily to higher
proceeds from the exercise of stock options ($107,079) and lower payments for
the purchase of treasury stock ($26,027), partially offset by lower proceeds
(net of repayments) from short-term borrowings ($20,784).
Financing Activities include cash dividends paid of $5,881 and $5,972 for the
three months ended March 31, 2001 and 2000 respectively. Dividends paid per
share were $0.02 for the quarter ended March 31, 2001.
At March 31, 2001 and December 31, 2000, the Company's Total Current
Liabilities exceed its Total Current Assets primarily as a result of
management's decision to maintain short-term borrowings instead of longer
term debt instruments. This strategy allows the Company to achieve lower
borrowing costs while providing flexibility to repay debt with cash flow from
operations and proceeds from the exercise of stock options and the
liquidation of equity holdings. Based on estimated future cash flows from
operations, the ability to monetize Enterprises' investments upon
distribution from venture capital partnerships, cash from future stock option
exercises, the investment in Cognizant Technology Solutions as well as the
Company's ability to obtain additional lines of credit and debt and to
utilize existing lines of credit (see Note 7), the Company believes it
23
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
will have sufficient cash and other resources to fund its short and long term
business plans, including its current short term obligations, its stock
repurchase program and its operations.
On July 19, 2000 the Board of Directors authorized a 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 are
open-market purchases in compliance with Securities and Exchange Commission Rule
10b-18. As of March 31, 2001, approximately 12 million shares have been acquired
under this program at a total cost of $297,871. During the first quarter of
2001, the Company repurchased approximately 3.5 million shares of outstanding
common stock at a total cost of $91,224.
CHANGES IN FINANCIAL POSITION AT MARCH 31, 2001 COMPARED TO DECEMBER 31, 2000
CASH & CASH EQUIVALENTS increased to $157,163 at March 31, 2001 from $118,593 at
December 31, 2000 (which includes $60,966 and $61,976 of CTS's cash and cash
equivalents at March 31, 2001 and December 31, 2000, respectively). This
increase is due primarily to cash generated by operating activities.
ACCOUNTS RECEIVABLE - NET increased to $239,079 at March 31, 2001 from $230,988
at December 31, 2000 due to strong revenue growth at IMS and CTS, partially
offset by the impact of a generally stronger U.S. dollar. Day's Sales
Outstanding ("DSO") increased to 65 days, from 60 at December 31, 2000. The
March 31, 2001 DSO represents a 7 day improvement compared to March 31, 2000
(excluding the Transaction Businesses).
OTHER RECEIVABLE decreased to $30,606 at March 31, 2001 from $41,136 at December
31, 2000 as a result of a partial payment made by NMR for NMR's share of the
legacy D&B Tax Contingency (See Note 6 to the Condensed Consolidated Financial
Statements).
OTHER CURRENT ASSETS decreased to $99,579 at March 31, 2001 from $117,001 at
December 31, 2000. The decrease was primarily due to lower deferred income tax
balances as a result of the reclassification of certain deferred tax assets
(approximately $8,000) to accrued income taxes, the deferred provision for
income taxes (approximately $3,000) and lower cash due from brokers for stock
option exercises ($9,779). These decreases were partially offset by higher
prepayments ($4,876).
SECURITIES AND OTHER INVESTMENTS decreased to $79,752 at March 31, 2001 from
$87,500 at December 31, 2000 due primarily to mark to market adjustments as a
result of the impact of volatile market conditions on investments previously
distributed from the venture capital fund partnerships to the Company.
TRIZETTO EQUITY INVESTMENT decreased to $133,342 at March 31, 2001 from $137,501
at December 31, 2000 due to IMS's share of TriZetto's net loss for the first
quarter of 2001.
COMPUTER SOFTWARE decreased to $113,115 on March 31, 2001 from $117,688 at
December 31, 2000 principally due to amortization charges ($8,058),
24
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
partially offset by investment in new products.
GOODWILL increased to $148,396 at March 31, 2001 from $144,100 at December 31,
2001 due primarily to additions relating principally to the acquisition
of Medicare, offset by amortization charges.
ACCOUNTS PAYABLE decreased to $33,258 at March 31, 2001 from $45,198 at December
31, 2000 principally due to reduced sales and payroll tax liabilities ($9,359).
ACCRUED AND OTHER CURRENT LIABILITIES decreased to $165,705 at March 31, 2001
from $219,726 at December 31, 2000. The decrease is primarily due to payments of
accruals for salaries, wages, bonuses and other compensation payments. The
decrease also reflects the payment of non-recurring items.
SHORT-TERM DEBT increased to $399,381 at March 31, 2001 from $384,281 at
December 31, 2000, due primarily to the funding of the Company's share
repurchase program ($91,224), which was partially offset by Proceeds from
Exercise of Stock Options ($111,866).
ACCRUED INCOME TAXES increased to $86,185 at March 31, 2001 from $81,856 at
December 31, 2000. The increase is due to the increase in provision for
income taxes, net of income tax payments made during the quarter, and the
reclassification of certain tax assets from deferred income taxes.
DEFERRED REVENUES decreased to $91,579 at March 31, 2001 from $96,095 at
December 31, 2000, principally due primarily to the amortization of annual
subscription, maintenance and support contracts billed in advance at December
31, 2000.
SHAREHOLDERS' EQUITY increased to $158,792 at March 31, 2001 from $103,540 at
December 31, 2000. The increase is primarily due to the net income recorded for
the first quarter of 2001 ($65,807) and the net impact of the exercise of stock
options ($111,866), partially offset by treasury stock repurchases ($91,224),
adverse exchange rate movements relating mainly to the Japanese Yen ($20,126),
dividends paid ($5,881) and a net increase in unrealized holding losses
($3,977).
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
25
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. 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 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; the ability to successfully maintain historic effective tax
rates and to achieve estimated corporate overhead levels; competition,
particularly in the markets for pharmaceutical information; regulatory,
legislative and enforcement initiatives, particularly in the area of medical
privacy and tax; the ability to timely and cost-effectively resolve any problems
associated with the Euro currency issue, including the possibility of problems
with internal data processing systems; the ability to obtain future financing on
satisfactory terms; deterioration in economic conditions, particularly in the
pharmaceutical, healthcare, or other industries in which IMS Health's 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
month period ended March 31, 2001 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, 2000. IMS
Health is under no obligation to publicly release any revision to any
forward-looking statement contained or incorporated herein to reflect any future
events or occurrences.
26
IMS HEALTH INCORPORATED
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item is set forth in "Note 7. Financial
Instruments" of Notes to Condensed Consolidated Financial Statements on pages
14-16.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information in response to this Item is set forth in "Note 6. Contingencies" of
Notes to Condensed Consolidated Financial Statements on pages 10 through 14
hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on 8-K:
A report on Form 8-K was filed on January 16, 2001 to present under Item 5,
Other Events, disclosure regarding (i) the resignations of Robert E. Weissman
and Victoria R. Fash from their positions as members of the Board of Directors
of the Company and their positions as Vice Chairmen and (ii) certain charges
related to changes in management the Company expected to record in the fourth
quarter of fiscal 2000.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMS Health Incorporated
By: /s/ James C. Malone
--------------------------------------
Date: May 15, 2001 James C. Malone
Chief Financial Officer
/s/ Wendy J. Timmins
--------------------------------------
Date: May 15, 2001 Wendy J. Timmins
Vice President & Controller
(Principal Accounting Officer)
29