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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 September 30, 2001
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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
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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.)
1499 Post Road, Fairfield, CT 06430
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 319-4700
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200 Nyala Farms, Westport, CT, 06880
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(Former address if changed since last report)
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 September 30, 2001
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Common Stock,
par value $.01 per share 295,517,422
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 September 30, 2001 and 2000 3
Condensed Consolidated Statements of Income
Nine Months Ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of Financial Position
September 30, 2001 and December 31, 2000 6
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000 7-8
Notes to Condensed Consolidated Financial Statements 9-24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 25-39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 40
SIGNATURES 41
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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 PER SHARE DATA)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
---------------------------------
OPERATING REVENUE $328,137 $355,867
Operating Costs 113,909 136,447
Selling and Administrative Expenses 74,933 95,475
Depreciation and Amortization 15,853 23,237
Spin and Related Costs - 31,254
Impairment Charge - Synavant - 115,453
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OPERATING INCOME/(LOSS) 123,442 (45,999)
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Interest Income 3,828 997
Interest Expense (3,742) (6,660)
Realized Loss on Gartner Investment (Note 4) (84,880) (3,102)
(Loss)/Gains from Dispositions - Net (2,969) 6,201
Gain on Issuance of Investees' Stock - Net 3,082 -
Other Expense - Net (6,966) (5,785)
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Non-Operating Expense - Net (91,647) (8,349)
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Income/(Loss) Before Provision for Income Taxes 31,795 (54,348)
Provision for Income Taxes 11,237 (4,069)
TriZetto Equity Loss, Net of Income Tax Benefit of $1,126 for 2001 (1,747) -
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Income/(Loss) from Continuing Operations 41,285 (58,417)
Income from Discontinued Operations (Gartner), Net of Income Taxes of $25,320 for
2001 and $1,198 for 2000 (Note 4) 47,025 2,226
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NET INCOME/(LOSS) $88,310 $(56,191)
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BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income/(Loss) from Continuing Operations $0.14 $(0.20)
Income from Discontinued Operations 0.16 0.01
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BASIC EARNINGS/(LOSS) PER SHARE OF COMMON STOCK $0.30 $(0.19)
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DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income/(Loss) from Continuing Operations $0.14 $(0.20)
Income from Discontinued Operations 0.16 0.01
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DILUTED EARNINGS/(LOSS) PER SHARE OF COMMON STOCK $0.29 $(0.19)
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Weighted Average Number of Shares Outstanding - Basic 296,910,000 295,749,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 4,152,000 -
Adjustment of Shares Outstanding Applicable to Exercised/Cancelled Stock
Options During the Period 193,000 -
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Weighted Average Number of Shares Outstanding - Diluted 301,255,000 295,749,000
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
3
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
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OPERATING REVENUE $992,048 $1,077,791
Operating Costs 361,052 420,625
Selling and Administrative Expenses 253,508 328,164
Depreciation and Amortization 50,362 73,140
Spin and Related Costs - 32,801
Impairment Charge - Synavant - 115,453
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OPERATING INCOME 327,126 107,608
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Interest Income 6,662 3,001
Interest Expense (15,410) (10,027)
Realized Loss on Gartner Investment (Note 4) (84,880) (3,102)
(Loss)/Gains from Dispositions - Net (594) 63,915
Gain on Issuance of Investees' Stock - Net 753 -
Other Expense - Net (14,775) (19,458)
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Non-Operating (Expense)/Income - Net (108,244) 34,329
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Income Before Provision for Income Taxes 218,882 141,937
Provision for Income Taxes (41,680) (67,273)
TriZetto Equity Loss, Net of Income Tax Benefit of $3,599 for 2001 (5,547) -
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Income from Continuing Operations 171,655 74,664
Income from Discontinued Operations (Gartner), Net of Income Taxes of $25,320
for 2001 and $1,198 for 2000 (Note 4) 47,025 2,226
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NET INCOME $218,680 $76,890
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BASIC EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $0.58 $0.25
Income from Discontinued Operations 0.16 0.01
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BASIC EARNINGS PER SHARE OF COMMON STOCK $0.74 $0.26
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DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income from Continuing Operations $0.57 $0.25
Income from Discontinued Operations 0.16 0.01
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DILUTED EARNINGS PER SHARE OF COMMON STOCK $0.73 $0.26
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Weighted Average Number of Shares Outstanding - Basic 295,335,000 297,627,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 4,313,000 1,937,000
Adjustment of Shares Outstanding Applicable to Exercised/Cancelled Stock Options
During the Period 1,607,000 218,000
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Weighted Average Number of Shares Outstanding - Diluted 301,255,000 299,782,000
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
4
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
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2001 2000
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Net Income/(Loss) $88,310 $(56,191)
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation Gains 11,960 4,590
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Losses on Securities Arising During the Period:
Gartner, Inc. Shares Available For Sale (Net of Tax Benefit of $2,576 in 2001
and $889 in 2000) (4,784) (1,652)
Other Investments (Net of Tax Benefit of $3,881 and $15,692 for 2001 and
2000, respectively) (7,207) (29,148)
Less: Reclassification Adjustment for Losses/(Gains) included in Net Income (Net
of Tax Benefit/(Expense) of $740 and $(1,895) for 2001 and 2000, respectively) 9,522 (3,520)
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Change in Unrealized Losses on Investments, Net of Tax (2,469) (34,320)
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Total Other Comprehensive Income/(Loss), Net of Tax 9,491 (29,730)
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Comprehensive Income/(Loss) $97,801 $(85,921)
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NINE MONTHS ENDED
SEPTEMBER 30,
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2001 2000
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Net Income $218,680 $76,890
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation Losses (16,015) (13,915)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) on Securities Arising During the Period:
Gartner, Inc. Shares Available For Sale (Net of Tax (Expense)/Benefit of
$(6,891) in 2001 and $8,748 in 2000) 12,798 (16,247)
Other Investments (Net of Tax Benefit/(Expense) of $4,418 and $(9,246) for 2001
and 2000, respectively) (8,205) 29,736
Less: Reclassification Adjustment for Losses/(Gains) included in Net Income (Net
of Tax Benefit/(Expense) of $5,623 and $(9,675) for 2001 and 2000, respectively) 10,443 (25,007)
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Change in Unrealized Gains/(Losses) on Investments, Net of Tax 15,036 (11,518)
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Total Other Comprehensive Loss, Net of Tax (979) (25,433)
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Comprehensive Income $217,701 $51,457
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
5
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
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ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 240,916 $ 118,593
Accounts Receivable - Net 225,313 230,988
Other Receivable (Note 9) 32,673 41,136
Other Current Assets 88,193 117,001
Net Assets from Discontinued Operations (Note 4) - 60,799
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Total Current Assets 587,095 568,517
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SECURITIES AND OTHER INVESTMENTS 72,422 87,500
TRIZETTO EQUITY INVESTMENT 124,823 137,501
PROPERTY, PLANT AND EQUIPMENT - NET 148,324 145,447
OTHER ASSETS - NET:
Computer Software 126,323 117,688
Goodwill 149,254 144,100
Other Assets 40,985 42,254
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Total Other Assets - Net 316,562 304,042
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TOTAL ASSETS $ 1,249,226 $ 1,243,007
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LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 38,315 $ 45,198
Accrued and Other Current Liabilities 141,016 219,726
Short-Term Debt 307,444 384,281
Accrued Income Taxes 84,909 81,856
Deferred Revenues 78,569 96,095
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Total Current Liabilities 650,253 827,156
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POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 43,651 43,471
OTHER LIABILITIES 107,981 133,498
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TOTAL LIABILITIES 801,885 1,004,125
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COMMITMENTS AND CONTINGENCIES (NOTE 9)
MINORITY INTERESTS 142,573 135,342
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $.01, Authorized 800,000,000 Shares;
Issued 335,045,390 Shares at September 30, 2001 and December 31, 2000 3,350 3,350
Capital in Excess of Par 507,665 596,273
Retained Earnings 961,083 760,140
Treasury Stock, at Cost, 39,527,968 and 43,703,384 Shares at
September 30, 2001 and December 31, 2000, respectively (1,049,426) (1,139,298)
Cumulative Translation Adjustment (122,432) (106,417)
Minimum Pension Liability Adjustment (672) (672)
Unrealized Loss on Gartner, Inc., net of tax benefit - (20,946)
Unrealized Gains on Investments, net of tax expense 5,200 11,110
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TOTAL SHAREHOLDERS' EQUITY 304,768 103,540
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,249,226 $ 1,243,007
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SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
6
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 218,680 $76,890
Less Income from Discontinued Operations (47,025) (2,226)
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Income from Continuing Operations 171,655 74,664
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY/(USED IN)
OPERATING ACTIVITIES:
Impairment Charge-Synavant - 115,453
Depreciation and Amortization 50,362 73,140
Loss/(Gains) from Sale of Investments, Net 594 (63,915)
Gains on Issuance of Investees' Stock (753) -
Realized Loss on Gartner Investment 84,880 3,102
Deferred Income Taxes 749 3,707
TriZetto Equity Loss, Net 5,547 -
Minority Interests in Net Income of Consolidated Companies 15,590 10,868
Change in assets and liabilities, excluding effects from acquisitions and dispositions:
Net Decrease in Accounts Receivable 1,592 176
Net Increase in Prepaid Expenses (6,714) (8,934)
Net (Decrease)/Increase in Accounts Payable (6,112) 2,027
Net (Decrease)/Increase in Accrued and Other Current Liabilities (72,839) 17,680
Net Decrease in Deferred Revenues (15,994) (30,591)
Net (Decrease)/Increase in Accrued Income Taxes (19,964) 35,785
Net Tax Benefit on Stock Option Exercises 26,049 1,083
Payment on Donnelley Tax Contingency (Note 9) - (212,291)
Neilsen Media Research payment received in respect of Donnelley Tax
Contingency (Note 9) 10,530 -
Net Decrease in Benefit Payments - (1,782)
Other Working Capital Items - Net (2,293) 3,076
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Net Cash Provided by Operating Activities 242,879 23,248
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CASH FLOWS (USED IN)/PROVIDED BY INVESTING ACTIVITIES:
Capital Expenditures (23,777) (22,085)
Additions to Computer Software (31,278) (37,832)
Payments for Acquisitions of Businesses, Net of Cash Acquired (14,429) (1,602)
Proceeds from Sale of Investments, Net 2,262 70,245
Proceeds from Sale of IDRAC Holdings Inc., Net 2,640 -
Proceeds from Sale of Gartner Investment 65,207 -
Net Decrease/(Increase) in Other Investments 788 (25,929)
Other Investing Activities - Net (10,043) (7,341)
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Net Cash Used in Investing Activities (8,630) (24,544)
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CASH FLOWS (USED IN)/PROVIDED BY FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (255,921) (198,716)
Proceeds from Exercise of Stock Options 228,042 19,590
Dividends Paid (17,737) (17,866)
Proceeds from Employee Stock Purchase Plan 1,442 1,766
Short-Term Borrowings 30,314 251,122
Short-Term Debt Repayments (107,154) (40,500)
Synavant Dividend - (19,438)
Other Financing Activities - Net 10,382 13
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Net Cash Used in Financing Activities (110,632) (4,029)
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7
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
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2001 2000
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Effect of Exchange Rate Changes (1,294) (4,161)
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Increase/(Decrease) in Cash and Cash Equivalents 122,323 (9,486)
Cash and Cash Equivalents, Beginning of Period 118,593 115,875
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Cash and Cash Equivalents, End of Period $240,916 $106,389
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $17,678 $10,089
Cash Paid during the Period for Income Taxes (Exclusive of payment of
Donnelley Tax Contingency - See Note 9 to the Condensed Consolidated
Financial Statements) $26,830 $37,160
Cash Received from Income Tax Refunds $1,185 $13,165
Non-Cash Investing Activities:
Synavant Spin-Off Dividend - $118,403
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
8
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") 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 businesses include 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 58.6% interest in Cognizant Technology Solutions Corporation ("CTS"),
the Company's venture capital unit - Enterprise Associates LLC ("Enterprises"),
and the Company's interest in TriZetto. IMS Health owned approximately 27% of
TriZetto's common stock as at September 30, 2001, and accounts for its share of
TriZetto on an equity basis.
9
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires the
purchase method of accounting to be used for all business combinations initiated
after June 30, 2001 and establishes specific criteria for the recognition of
intangible assets separately from goodwill. In the event that the Company
acquires goodwill subsequent to June 30, 2001 it will not be amortized. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that goodwill and intangible assets which have indefinite useful lives will not
be amortized but rather will be tested at least annually for impairment. It also
provides that intangible assets that have finite useful lives be amortized.
Under the provisions of SFAS No. 142, any impairment loss identified upon
adoption of this standard is recognized as a cumulative effect of a change in
accounting principle. Any impairment loss incurred subsequent to initial
adoption of SFAS No. 142 is recorded as a charge to current period earnings. The
Company will adopt SFAS No. 142 beginning January 1, 2002 and at that time will
stop amortizing goodwill that resulted from business combinations completed
prior to the adoption of SFAS No. 141. The Company is currently evaluating the
financial impact of adopting these pronouncements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 eliminates the requirement for
discontinued operations to be measured on a net realizable value basis and
future operating losses to be recognized before they occur. Instead, it requires
that assets held for sale be valued at the lower of carrying amount or fair
value less cost to sell. SFAS 144 extends the reporting requirements for
discontinued operations to certain components of an entity. Under the provisions
of SFAS No. 144, spin-offs and exchanges of similar productive assets are
required to be recorded at the lower of carrying value or fair value and such
assets classified as held and used until they are disposed of. Any resultant
impairment loss is required to be recognized when the asset is disposed of. For
assets that are grouped when an entity is developing estimates of future cash
flows, SFAS No. 144 requires that the remaining useful life of the "primary
asset" be used for the entire group. In addition, SFAS No. 144 permits the use
of a probability-weighted approach in developing estimates of future cash flows
used to test for recoverability and in estimating fair value. The Company will
adopt SFAS No. 144 beginning January 1, 2002 and is currently evaluating the
impact of the adoption.
NOTE 4. 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
"Gartner Distribution").
10
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The unrealized gain as of the date of the Gartner Distribution (based on the
then market price per share of $22.75 of Gartner Stock, the price at the time of
the Gartner Distribution) was recorded as Other Comprehensive Loss and included
as a component of Shareholders' Equity. Subsequent changes in the per share
price of Gartner Stock since the date of the Gartner Distribution were also
recorded as Other Comprehensive Income. Upon the sale of these securities, the
unrealized gain measured based on the value of the Gartner shares as of the date
of the Gartner Distribution was recognized in discontinued operations. The
unrealized gains or losses in the market value subsequent to the date of the
Gartner Distribution were recognized in continuing operations as shares were
sold.
During the third quarter of 2001, IMS Health decided to sell, and by August 29,
2001, completed the sale of 1,554,954 shares of Class A common stock of Gartner,
Inc. ("Gartner Shares") to Gartner and its remaining holding in Gartner Shares
to several institutional investors. IMS Health received aggregate proceeds of
$65.2 million, or $9.88 per share, from these sales. IMS Health's original cost
basis in these shares was $77.7 million, or $11.78 per share. These sales divest
IMS Health of its remaining equity interest in Gartner. The sale of shares to
Gartner was part of Gartner's $75 million stock buyback program announced on
July 19, 2001. These sales resulted in a pre-tax realized loss of $12,536
($8,146, net of applicable taxes), which was recorded in two different lines in
the income statement: (1) Income from Discontinued Operations of $72,344
($47,025 net of applicable taxes), to reflect the difference between the fair
market value at the date of the Gartner Spin-Off (July 26, 1999) and the book
value of those shares; (2) a loss from dispositions in continuing operations of
$84,880 which was recorded as Realized Loss on Gartner Investment, to reflect
the difference between the fair market value at the date of the Gartner Spin-Off
and the disposal proceeds.
The amount recorded in the third quarter of 2000 relates to the contribution of
Gartner shares to Synavant as part of the Synavant Spin-Off.
NOTE 5. ACQUISITIONS AND DISPOSITIONS
In January of 2001, the Company exercised its option to purchase the remaining
non-controlling interest in Medicare Audits Ltd. ("Medicare"), a U.K. based
hospital market research firm for a net cash payment of $7,889. In addition, in
July 2001 the Company purchased the remaining interest in GPI
Krankenhausforschung ("GPI"), a German hospital market research firm, for
$4,807. After a preliminary allocation of the purchase price to the assets
acquired, goodwill of $6,724 and $4,505 was recorded on the Medicare and GPI
acquisitions, respectively. Management will complete their final purchase price
allocation by December 31, 2001. The impact of these acquisitions was not
material to the Company's results of operations.
During the first nine months of 2001, the Company recorded $594 of pre-tax net
losses from dispositions. This includes a gain of $1,990 recorded in the first
quarter, resulting from the sale of IDRAC Holdings Inc. ("IDRAC"), a
non-strategic property that provides information on pharmaceutical product
registrations, to a wholly owned subsidiary of Information Holdings Inc.
("IHI"). 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
11
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
revenues during 2001. This additional gain on sale will be recognized when and
if all the conditions for payment have been satisfied. In a separate
transaction, the Company sold a non-exclusive perpetual license to IHI to use
certain data for aggregate cash consideration of approximately $17 million,
which was recognized as revenue upon delivery. The IDRAC gain was offset
primarily by the write down of investments held by Enterprises, the Company's
venture capital unit.
During the first nine months of 2000, the Company recorded $63,915 of pre-tax
net gains from dispositions due primarily to the sale of investments in American
Cellular, Aspect Development Inc., Mercator Software Inc., Viant Corporation and
Verisign Inc., which were part of Enterprises.
As described in Notes 2, 8 and 13, 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 and nine months
ended September 30, 2000, but not for the three and nine months ended September
30, 2001.
NOTE 6. INVESTMENT IN TRIZETTO
Summary financial information for TriZetto for the three and nine months ended
September 30, 2001 is presented below. The amounts shown represent unaudited
consolidated TriZetto operating results, based on publicly available
information.
Three months ended Nine months ended
September 30, 2001 September 30, 2001
---------------------------------------------
Net Sales $ 57,216 $ 156,574
Gross Profit $ 19,424 $ 48,648
Loss from Operations $ (13,698) $ (54,891)
Net Loss $ (11,604) $ (44,519)
The market value of the Company's investment in TriZetto was approximately
$106,857 as at September 30, 2001. The investment in TriZetto is accounted for
under the equity method and is not marked to market. The Company believes that
the decline in market value at September 30, 2001 is temporary in nature and has
not adjusted the carrying value of its investment. Subsequent to September 30,
2001 the market value of the Company's investment in TriZetto has at various
times exceeded the carrying value of the holding.
The issuance by TriZetto of shares of common stock resulted in a loss recorded
in the nine months ended September 30, 2001. The majority of these shares were
issued in a secondary offering which generated proceeds to TriZetto of
approximately $56,000. The remaining shares were issued primarily for an
acquisition by TriZetto in April 2001. The issuance of equity by TriZetto
resulted in the reduction of IMS Health's ownership stake from approximately 33%
on December 31, 2000 to approximately 27% on September 30, 2001. The resulting
loss has been recognized in the income statement within Gain on Issuance of
Investees' Stock - Net, in accordance with Staff Accounting Bulletin ("SAB") No.
51, "Accounting for Sales of Stock by a Subsidiary".
12
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7. IMPAIRMENT CHARGE - SYNAVANT
On July 14, 2000, Synavant entered into a 5-year 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.
Under the terms of the Alliance 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 is limited. Although
Synavant may continue to license and support its existing Cornerstone and
Premiere customers, under the terms of the alliance, it is contractually
obligated to discontinue the future enhancement and development of the
Cornerstone and Premiere products. Synavant management anticipates that these
products will eventually be phased out and replaced by a new generation of joint
solution offerings incorporating Siebel technology.
As a result of this transaction, Synavant management concluded at that time that
significant portions of its software (including acquired technology) and
enterprise-wide goodwill were not recoverable. Under its accounting policy for
capitalized software, Synavant performed a net realizable value analysis to
determine the recoverability of its capitalized software assets. This analysis
resulted in a write-down of $14,553 in the period ended September 30, 2000.
Under its accounting policy for goodwill impairment, Synavant completed a
discounted cash flow analysis on an enterprise wide basis, resulting in a write
down of $100,900 of goodwill in the period ended September 30, 2000. The total
Impairment Charge - Synavant, recorded in the Consolidated Statement of Income,
was $115,453.
The impairment charge has been recorded in the results of the Transaction
Businesses Segment. This charge was recorded by IMS Health as a result of the
Siebel transaction being effected prior to the Synavant Spin-Off . The
impairment charge did not affect the IMS Segment (see Note 13).
NOTE 8. SPIN-OFF OF SYNAVANT
On August 31, 2000, IMS Health completed the spin-off (the "Spin-Off") of
Synavant Inc. ("Synavant"), its wholly owned subsidiary, as an independent
publicly traded company. At the date of the Spin-Off, Synavant was a newly
created Delaware corporation. Prior to the Spin-Off, IMS Health transferred to
Synavant selected assets and liabilities held by IMS Health and its subsidiaries
related to the Synavant business. Synavant's businesses include 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., a wholly owned subsidiary of IMS Health, and a majority
stake in a foreign joint venture.
IMS Health distributed (the "Synavant Distribution") to its shareholders of
record as of the close of business on July 28, 2000 all of the outstanding
shares of common stock, par value $0.01 per share, of Synavant (the "Synavant
Common Stock"). The Synavant Distribution was effected by means of a pro rata
dividend to the IMS Health shareholders of one share of Synavant Common Stock
(together with the associated preferred share purchase right) for every twenty
shares of common stock, par value $0.01 per share, of IMS Health (the "IMS
Common Stock") held. In lieu of
13
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
fractional shares of Synavant Common Stock, each IMS Health shareholder received
a cash payment representing such holder's proportionate interest in the net
proceeds from the sale by the distribution agent for the Synavant Distribution
of the aggregate fractional shares of Synavant Common Stock. The Synavant
Distribution was accounted for as a tax-free pro-rata dividend to IMS Health
shareholders and charged to retained earnings based on the book value of assets
distributed to Synavant as at the date of the Synavant Distribution (August 31,
2000). The final dividend charged to retained earnings totaled $141,442 and was
comprised of assets of $181,059 (including $19,438 of Cash, $43,195 of Accounts
Receivable, $58,450 of Goodwill, $12,939 of Deferred Software and $16,294 of
Property, Plant and Equipment) and liabilities of $39,637 (including $6,735 of
Accounts Payable, $9,404 of Accrued Liabilities and $9,170 of Deferred Revenue).
Historically, the Synavant business was managed as part of the IMS Segment.
Effective with the decision to spin-off Synavant, the business was managed as
part of the Other Transaction Businesses and, accordingly, its results are
included in the Transaction Businesses Segment. Selected historical financial
data for Synavant is included in Note 13.
On August 11, 2000, Synavant obtained a revolving line of credit for $20,000 for
working capital purposes. The line of credit was guaranteed by IMS Health, and
was extended through February 15, 2001, at which time it was replaced with a
similar line of credit with a maturity date of May 15, 2001. This line of credit
was likewise guaranteed by IMS Health. On April 27, 2001, Synavant had this
later line of credit replaced by a new revolving line of credit that is not
guaranteed by IMS Health.
In connection with the Synavant Spin-Off, the Company incurred $31,254 of costs
for the quarter ended September 30, 2000 ($32,801 for the nine months). These
costs include $8,248 for expenses related to reductions in the IMS Health and
corporate administrative workforce. Such costs were calculated pursuant to
ongoing employee protection programs, individual employee contracts or local
minimum statutory requirements. Additionally, a data processing agreement with a
third party for $5,200 will not be used by the Company as a result of the
Company's determination to streamline IMS Health's operations to focus on its
core business. The remaining Synavant Spin and Related Charges relate primarily
to legal, professional and other direct incremental costs.
In connection with the Synavant Spin-Off, holders of stock options to purchase
the Company's common stock did not receive shares in the Synavant Distribution.
Consequently, options granted under the Company's plans were adjusted to
recognize the effect of the Synavant Distribution. The options, as adjusted,
represented an increase in the number of shares issuable when exercised but
maintained the same ratio of the exercise price to the market value per share,
the same aggregate difference between market value and exercise price and the
same vesting provisions, option periods and other terms and conditions as the
options prior to the adjustment. In accordance with the provisions of Emerging
Issues Task Force ("EITF") Statement No. 90-9, no compensation charge was
recorded.
NOTE 9. CONTINGENCIES
The Company and its subsidiaries are involved in various legal proceedings,
claims litigation and
14
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 corporation then known as "The Dun and Bradstreet Corporation"
and now known as "R. H. Donnelley Corporation" ("Donnelley"), A.C. Nielsen
Company and I.M.S. International Inc. (a predecessor of IMS Health) (the "IRI
Action"). At the time of the filing of the complaint, each of the other
defendants was a subsidiary of Donnelley.
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 the defendants of Survey Research
Group Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with
IRI when it agreed to be acquired by the 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, the 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 the defendants' motion with respect to the remaining claims in
the complaint. On June 3, 1997, the 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, the
defendants moved for an order dismissing the amended claims. On December 1,
1997, the court denied the motion and, on December 16, 1997, the defendants
filed a supplemental answer denying the remaining material allegations of the
amended complaint. On December 22, 1999, the 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 Donnelley of shares of
Cognizant Corporation ("Cognizant") and ACNielsen Corporation (the parent
company of A.C. Nielsen Company) in 1996, Donnelley,
15
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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, in the event of an adverse decision, 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 Donnelley 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 ACNielsen will
be able to pay after giving effect to (i) any plan submitted by such investment
bank that 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. 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.
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 Donnelley and ACNielsen for Cognizant's
obligations under the terms of the Distribution Agreement dated October 28, 1996
among Donnelley, 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.
During 1998, Donnelley separated into two companies (the "1998 Donnelley Spin"),
Donnelley and The Dun & Bradstreet Corporation ("D&B I"). As a result, Donnelley
and D&B I are each jointly and severally liable for all Donnelley liabilities
under the Indemnity and Joint Defense Agreement and the 1996 Distribution
Agreement. During 2000, D&B I separated into two companies, Moody's Corporation
("Moody's") and The Dun & Bradstreet Corporation ("D&B II"). Moody's and D&B II
are each jointly and severally liable for all liabilities under the Indemnity
and Joint Defense Agreement and the 1996 Distribution Agreement that were
assumed by D&B I in the 1998 Donnelley Spin.
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.
16
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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 responded to the complaints denying the allegations
contained therein and 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 grant
interim measures (the "Application"). The Application concerns an IMS Health
geographic mapping structure used for the reporting of regional sales data in
Germany which the German courts have ruled is 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 this structure in
its competing regional sales data 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 another 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 structure
could constitute an abuse of a dominant position in contravention of Article 82
of the EC Treaty. In addition, the Commission proposed the granting of interim
measures requiring the Company to license this structure 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.
On July 3, 2001, the Commission announced its decision in these proceedings (the
"Decision") ordering interim measures pending a final decision on the
Application. The Decision required the Company to grant a license of the
geographic mapping structure on commercially reasonable terms without delay to
NDC and to other businesses currently present on the German regional sales data
17
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
market should they request a license. The terms and royalties to be paid for the
license were to be agreed between the Company and the requesting party, and if
agreement could not be reached in a two week period, then the terms and
royalties for the license would be determined by one or more independent experts
agreed to by the parties, or if the parties could not agree, then the Commission
shall appoint one or more experts. The Decision states that the expert(s) shall
communicate its determination to the Commission for approval within two weeks of
being chosen. Finally, the Decision provides for a penalty of 1,000 EUROS
per day should the Company fail to comply with the Decision.
Following issuance of the Decision, NDC and Azyx requested from the Company a
license to the geographic mapping structure. The Company was not able to agree
with NDC or Azyx on the terms and royalties to be paid for the license or the
determination of one or more independent experts. To date, the Commission has
not appointed one or more independent experts.
On August 6, 2001, the Company lodged an appeal to the European Court of First
Instance (the "CFI") requesting the CFI to fully suspend the operation of the
Decision until it has rendered judgment on the appeal. The Company's appeal
seeks the annulment of the Decision in its entirety. On August 10, 2001, the
President of the CFI issued an order provisionally suspending operation of the
Decision until the President had an opportunity to make a final ruling on the
Company's application to suspend the Decision. Following an oral hearing on
September 14, 2001, the President of the CFI ruled on October 26, 2001 in the
Company's favor and suspended the operation of the Decision until the appeal
seeking annulment of the Decision is heard and decided.
The Company intends to vigorously defend the above matters. 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.
OTHER CONTINGENCIES
The Company and its predecessors have entered, and the Company continues to
enter, into global tax planning initiatives in the normal course of their
businesses. 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.
In 1999, the Company was informed by D&B I, acting as agent for Donnelley, that
the IRS was reviewing Donnelley's utilization of certain capital losses during
1989 and 1990. In response, D&B I 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 I paid $349,291 of this amount and the
Company paid $212,291 pursuant to its obligation under the 1996 Distribution
Agreement and the Distribution Agreement between Cognizant (renamed NMR) and the
Company (the "1998 Distribution Agreement"), whereby the Company is in effect
obligated to pay an amount equal to one-half of the tax and interest owed to the
IRS for this matter to the extent the liability exceeds $137,000 (subject to
reimbursement to the Company of a portion of this amount by NMR). In the second
quarter of 2000, Donnelley received a formal assessment from the IRS with
respect to this matter in the amount of $561,582, for additional tax and
interest due, which was satisfied by the payments made by D&B I and the Company
in May 2000. D&B I has advised the Company that,
18
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 1998 Distribution Agreement, NMR is responsible for a portion of
the amount that the Company paid pursuant to the 1996 Distribution Agreement
($41,136 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 matter but refused to pay the remaining
$30,606 based on its interpretation of the applicable agreements. The Company
believes that NMR's position has no merit and plainly contravenes the terms of
the applicable agreements. Accordingly, the Company has a receivable for the
outstanding principle amount due and has now also recorded interest thereon from
January 2, 2001 from NMR in accordance with the terms of the applicable
agreements. 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.
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 Spin-Off 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 on the date of the Synavant Spin-Off 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 any
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
19
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
could materially affect the Company's results of operations, cash flows, or
financial position.
NOTE 10. FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS 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 three and nine months ended
September 30, 2001 were 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 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 September 30, 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 September 30, 2001 due to the high
quality of its customers and their dispersion across many geographic areas.
20
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
LINES OF CREDIT AND LIQUIDITY
The Company had unused available lines of credit of $217.7 million and $179.0
million at September 30, 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 or 44.5 basis points and can be withdrawn
by the banks under certain conditions. The commitment fee associated with the
unused lines of credit is 22.5 basis points per year, increased to 28.75 basis
points if the facilities are less than 50% utilized. The lines of credit are
364-day facilities in place with several banks. The facilities expire on
staggered dates and are renewed each year at the request of the Company
subject to the banks' approval.
At September 30, 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. At September 30, 2001 the working capital deficit has
decreased substantially since the year-end. 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 employee stock 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 operating cash flow requirements and other
commitments.
NOTE 11. 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 2001, the effective tax rate was reduced by the tax benefit at the U.S.
federal rate on the loss from the sale of Gartner Shares recorded in continuing
operations (see Note 4 to the Condensed Consolidated Financial Statements), the
result of the expiration, without adjustment, on September 30, 2001 of the
statute of limitations on certain, previously reserved for Donnelley legacy
transactions (approximately $21,800 recorded in the quarter ended September 30,
2001), and 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 (approximately $11,700 recorded in the quarter ended March 31, 2001),
which resulted from the reassessment of the tax benefits from the reorganization
following new non-U.S. tax legislation enacted at the end of the first quarter
of 2001.
In 2000, the effective tax rate was impacted by the non-deductible write down
of Synavant goodwill, a higher amount of Enterprises' investment gains which
were taxed at a U.S. federal rate of 35.0%, and the costs incurred as a
result of the spin-off of Synavant, a portion of which were non-deductible,
offset by the recognition of certain German trade tax benefits (approximately
$19,400), the recognition of the benefit of certain net operating losses
(NOLs) due to the implementation of global tax planning strategies
(approximately $3,400) and the reversal of previously accrued tax liabilities
(approximately $3,000). The German trade tax benefits of $19,400 resulted
from a favorable final German court decision rendered in the third quarter of
2000 which permitted the utilization of certain pre-existing tax benefits.
The global tax planning
21
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
strategies which permitted the recognition of the benefit of the NOLs 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 of 2000.
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 12. 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.
The Company repurchased approximately 3.3 million shares of outstanding common
stock under this program in the third quarter of 2001 at an average price of
$26.00 per share or a total cost of $85.0 million. For the first nine months the
Company repurchased approximately 9.7 million shares at an average price of
$26.38 per share, or a total cost of $255.9 million. As of September 30, 2001
approximately 18.2 million shares had been repurchased since the inception of
the July 2000 program at a total cost of $462.9 million.
The Company re-issued approximately 0.9 million treasury shares under option
exercises for proceeds of $16.5 million during the third quarter of 2001. For
the nine months ended September 30, 2001, 13.6 million such shares have been
issued for proceeds of $228.0 million.
NOTE 13. 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 September 30, 2001, the Company consisted of the following segments:
1. The IMS Segment, which consists of IMS Health, is a leading global
provider of market information, sales management and decision-support
services to the pharmaceutical and healthcare industries. Historically,
this segment included Synavant, Erisco 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
22
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 $7,011 and $23,455 have been reclassified accordingly for
the three and nine months ended September 30, 2000, respectively. In
addition the IMS Segment includes the Company's venture capital unit,
Enterprises, which is focused on investments in emerging businesses,
and its equity interest in TriZetto.
2. The CTS Segment, which consists of CTS, delivers 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 primary service offerings include application
development and integration, application management and re-engineering
services.
During the three and nine months ended September 30, 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 businesses. The Company spun-off
the Synavant business on August 31, 2000, 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.
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2001: IMS CTS TRANSACTION TOTAL
BUSINESSES (2) CONSOLIDATED
---------------------------------------------------------------------------------------------------------------------
Revenue (1) $287,734 $40,403 - $328,137
Operating Income $114,119 $9,323 - $123,442
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000:
---------------------------------------------------------------------------------------------------------------------
Revenue (1) $282,074 $33,376 $40,417 $355,867
Operating Income/(Loss) (3) $102,305 $7,078 $(155,382) $(45,999)
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001: IMS CTS TRANSACTION TOTAL
BUSINESSES (2) CONSOLIDATED
---------------------------------------------------------------------------------------------------------------------
Revenue (1) $871,245 $120,803 - $992,048
Operating Income $300,540 $26,586 - $327,126
Total Assets at September 30, 2001 (4) (5) $1,110,796 $138,430 - $1,249,226
---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000:
---------------------------------------------------------------------------------------------------------------------
Revenue (1) $822,546 $85,029 $170,216 $1,077,791
Operating Income/(Loss) (3) $254,181 $18,243 $(164,816) $107,608
Total Assets at September 30, 2000 (4) (5) $1,069,241 $95,380 $36,682 $1,201,303
---------------------------------------------------------------------------------------------------------------------
NOTES TO OPERATIONS BY BUSINESS SEGMENTS:
1. Revenue excludes inter-segment sales of $5,099 and $3,731 for September
30, 2001 and 2000, respectively on a quarterly basis. Revenue excludes
inter-segment sales of $13,514 and $10,949 for September 30, 2001 and
2000, respectively on a nine months basis.
23
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. Included in the Transaction Businesses Segment for the nine months
ended September 30, 2000 are revenue and operating losses related to
the Synavant business of approximately $119,700 and ($132,000),
respectively. Residual revenues and results of operations relate
primarily to the Erisco business.
3. Spin and Related Costs in 2000 of $31,254 and $32,801 for the three and
nine months respectively, were previously recorded in General Corporate
Expenses and have now been reallocated to the Transaction Businesses
Segment.
4. Total assets of the IMS Segment include Net Assets of Discontinued
Operations (Gartner) of $0 and $81,060 as of September 30, 2001 and
September 30, 2000, respectively. IMS Segment assets also include the
Company's investment in TriZetto and other Corporate assets.
5. CTS Segment assets include cash and cash equivalents of $79,767 and
$52,837 at September 30, 2001 and September 30, 2000, respectively.
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)
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 businesses include 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 58.6% interest in Cognizant Technology Solutions Corporation ("CTS"),
the Company's venture capital unit - Enterprise Associates LLC ("Enterprises"),
and the Company's interest in TriZetto. IMS Health owned approximately 27% of
TriZetto's common stock as at September 30, 2001, and accounts for its share of
TriZetto under the equity method.
As of September 30, 2001, IMS Health consisted of:
1. The IMS Segment, which consists of IMS Health, is a leading global
provider of market information, sales management and decision-support
services to the pharmaceutical and healthcare industries. Historically,
this segment included Synavant, Erisco 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. In addition, the IMS Segment
includes the Company's venture capital unit, Enterprises, which is
focused on investments in emerging businesses, and its equity interest
in TriZetto.
2. The CTS Segment, which consists of CTS, delivers full life-cycle
solutions to complex software
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)
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
primary service offerings include application development and
integration, application management and re-engineering services.
During the three and nine months ended September 30, 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 businesses. 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
September 30, 2001 presentation.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2000
OPERATING RESULTS
Revenue for the third quarter of 2001 decreased by 7.8% to $328,137 from
$355,867 in the third quarter of the prior year. This decrease is primarily
attributable to the inclusion of Synavant and Erisco revenues in the third
quarter of 2000, partially offset by growth in the IMS and CTS Segments.
Synavant was disposed of in the third quarter of 2000 and Erisco in the fourth
quarter of 2000.
The Company's revenue, excluding the Transaction Businesses Segment, increased
by 4.0% to $328,137 in the third quarter of 2001 from $315,450 for the third
quarter of the prior year. On a constant dollar basis (i.e., a basis that
eliminates currency rate fluctuations) revenue growth was 8.0% in the third
quarter. Sales management products such as Rx Services (including Xponent) in
the U.S. and Europe, the EarlyView and Prescriber Validation Services in the
U.S. and Weekly Data and the new Weekly/GP Pharmacy Data product in Japan were
key sources of revenue growth. Growth at CTS was also a contributor to the
revenue increase as explained 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 16.5% to $113,909 in the
third quarter of 2001 from $136,447 in the third quarter of the prior year due
to operating costs in the third quarter of 2000 for Synavant and Erisco which
are not in the 2001 results, partially offset by increased operating costs
attributable to CTS and the IMS Segment.
The Company's operating costs, excluding the Transaction Businesses Segment in
2000 and technology acceleration costs in 2000 of $2,836, increased by 3.1% to
$113,909 in the third quarter
26
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 from $110,439 for the comparable quarter of 2000. This increase is
largely attributable to an increased number of technical professionals at CTS to
meet the increased demand for services and an increase of 2.6% in the IMS
Segment operating costs to support higher revenues. The low increase for the IMS
Segment reflects the benefits of cost containment programs, notably those
actions taken to reduce costs at the end of 2000 as well as current progress to
optimize the Company's operating costs.
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 third quarter of 2001 by 21.5% to $74,933 from
$95,475 in the third quarter of the prior year due to expenses in the third
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.
The Company's selling and administrative expenses, excluding the Transaction
Businesses Segment and certain legal fees in 2001 and 2000 of $2,336 and
$2,094 respectively, were essentially flat for the third quarter of 2001
($72,597) as compared to the comparable quarter of 2000 ($73,040). Selling,
general and administrative expenses for CTS increased over the same period of
2000 due to increased expense 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 decreased by $2,900 (3.1%)
as a result of the benefits of the restructuring actions taken at the end of
2000 as well as current progress to optimize the Company's infrastructure
costs.
Third quarter depreciation and amortization charges decreased by 31.8% from
$23,237 in 2000 to $15,853 in 2001. This decrease primarily reflects the higher
amortization in 2000 relating to the Transaction Businesses. Excluding the
Transaction Business Segment, depreciation and amortization decreased by 10.2%
from $17,655 in 2000 to $15,853 in 2001. This decrease reflects, in part, the
impact of assets written off at the end of 2000.
In connection with the spin-off of Synavant, the Company incurred $31,254 of
costs for the quarter ended September 30, 2000. These costs included $8,248 for
expenses related to reductions in the IMS and corporate administrative workforce
resulting from consolidation following the Synavant Spin-Off. Additionally, a
data processing agreement with a third party for $5,200 was not used by the
Company as a result of the Company's determination to streamline IMS's
operations to focus on its core business. The remaining Synavant Spin-Off
charges relate primarily to legal, professional and other direct incremental
costs.
In connection with the Siebel alliance more fully described in Note 7 to the
Condensed Consolidated Financial Statements, Synavant assessed the impairment of
its computer software (including acquired technology), goodwill and other
intangible assets and change in intangible assets lives. As a result of this
alliance, Synavant recorded an impairment charge of $115,453 in the third
quarter of 2000, comprised of $14,553 on computer software and $100,900 on
goodwill. The Company was required to record this impairment loss because the
Siebel alliance was signed prior
27
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)
to the Company's spin-off of Synavant. This impairment did not impact the IMS
segment.
Operating income for the third quarter of 2001 was $123,442 compared to a loss
of $45,999 for the comparable quarter of 2000 reflecting the growth in the IMS
and CTS Segments and the recording of the Spin and Related Costs of $31,254 and
the Impairment Charge - Synavant of $115,453 in 2000.
The Company's operating income, excluding the Transaction Businesses Segment
and the one-time Spin and Related Costs, the Impairment Charge - Synavant,
technology acceleration costs in 2000 and certain legal fees in both years,
increased by 10.0% in 2001 (18.0% on a constant dollar basis) to $125,786
from $114,313 in the third quarter of the prior year. This growth is
primarily due to the revenue growth in the IMS Segment, growth of 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 existing worldwide resources.
Net interest income was $86 in the third quarter of 2001 compared with net
interest expense $5,663 in the third quarter of the prior year. This is due to
the lower short-term debt due in 2001 compared to 2000, the impact of steadily
declining interest rates in 2001 and cumulative interest of $2,067 recorded on
the NMR receivable.
During the third quarter of 2001, IMS Health decided to sell and, by
August 29, 2001, completed the sale of 1,554,954 shares of Class A common
stock of Gartner, Inc. ("Gartner Shares") to Gartner and its remaining
holding in Gartner Shares to several institutional investors. IMS Health
received aggregate proceeds of $65.2 million, or $9.88 per share, from these
sales. IMS Health's original cost basis in these shares was $77.7 million, or
$11.78 per share. These sales divest IMS Health of its remaining equity
interest in Gartner. The sale of shares to Gartner was part of Gartner's $75
million stock buyback program announced on July 19, 2001. These sales
resulted in a gross realized loss of $12,536, which was recorded in two
different lines in the income statement: (1) Income from Discontinued
Operations of $72,344 ($47,025 net of applicable taxes), to reflect the
difference between the fair market value at the date of the Gartner Spin-Off
(July 26, 1999) and the book value of those shares; (2) a loss from
dispositions in continuing operations of $84,880 which was recorded as
Realized Loss on Gartner Investment, to reflect the difference between the
fair market value at the date of the Gartner Spin-Off and the disposal
proceeds (see Note 4 to the Condensed Consolidated Financial Statements).
During the third quarter of 2001, the Company recorded $2,969 of pre-tax net
losses from dispositions, relating primarily to the write down of investments
held by the Company's venture capital unit - Enterprises. During the comparable
period for the prior year, the Company recorded $6,201 of pre-tax net gains from
dispositions due primarily to the sale of investments in American Cellular,
Aspect Development Inc., Mercator Software Inc., Viant Corporation and Verisign
Inc., which were part of the Company's investment portfolio.
In the third quarter of 2001, the Company recorded a gain on the issuance of
investees' stock of $3,082. This gain arose primarily from the issuance by CTS
of shares relating to the exercise of
28
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)
employee stock options. The gain for CTS has been recognized in the income
statement, in accordance with Staff Accounting Bulletin ("SAB") No. 51,
"Accounting for Sales of Stock by a Subsidiary".
Other Expense-Net, was $6,966 in the third quarter compared to $5,785 in the
third quarter of the prior year. This relates primarily to minority interest
expense and foreign exchange gains and losses.
The effective tax rate in 2001 reflected the tax benefit at the U.S. federal
rate on the loss from the sale of Gartner Shares recorded in continuing
operations (see Note 4 to Condensed Consolidated Financial Statements), and the
result of the expiration, without adjustment, on September 30, 2001 of the
statute of limitations on certain, previously reserved for Donnelley legacy
transactions (approximately $21,800 recorded in the quarter ended September 30,
2001). The effective rate in 2000 was impacted by the non-deductible write down
of Synavant goodwill, a higher amount of Enterprise gains which were taxed at an
overall rate of 35.0% and the costs incurred as a result of the spin-off of
Synavant, (a portion of which were non-deductible), offset by the recognition of
certain German trade tax benefits (approximately $19,400 recorded in the quarter
ended September 30, 2000). This is described more fully in Note 11 to the
Condensed Consolidated Financial Statements.
The TriZetto equity loss of $1,747 net of income tax benefit and including
amortization of acquired intangibles, has been recorded in the third quarter of
2001. The Company had no investment in TriZetto as of September 30, 2000.
Net income for the third quarter of 2001 was $88,310 compared to a loss of
$(56,191) for the comparable period of the prior year, primarily due to the
increased operating income in 2001 arising from growth in both the IMS and the
CTS Segments and the one-time charges in the quarter ending September 30, 2000
for the Spin and Related Costs and Impairment Charge - Synavant.
Basic earnings per share in the third quarter of 2001 were $0.30 versus losses
of $0.19 in the third quarter of the prior year. Diluted earnings per share in
the third quarter of 2001 were $0.29 compared with losses of $0.19 in the third
quarter of the prior year. The increase in earnings per share was driven
primarily by the increased operating income and the absence of one-time charges
in 2001 referred to above.
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 as well as
consultancy and other related services.
IMS Segment revenue for the third quarter of 2001 increased 2.0% (6.4% on a
constant dollar basis)
29
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)
to $287,734 from $282,074 in the third quarter of the prior year. Sales
Management revenue increased 7.4% (12.6% on a constant dollar basis) to
$181,059. Sales Management revenue growth is primarily due to Xponent in the
United States and Europe, to Weekly Data and the new Weekly/ GP Pharmacy
product in Japan as well as new products such as EarlyView in the U.S. Market
Research revenue decreased 2.4% to $100,782 but increased by 1.6% on a
constant dollar basis. Market Research revenues have been impacted by
pharmaceutical company mergers. Other Services revenue dropped 42.8% to
$5,893. Other Services revenue includes consultancy services which are ad hoc
and less predictable in nature.
IMS Segment operating income for the third quarter increased 11.5% to
$114,119 from $102,305 in the prior year, and excluding certain legal fees in
both years and technology acceleration costs in 2000 operating income grew by
9.0%, or 17.0% on a constant dollar basis. 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 second quarter, net of inter-segment sales, increased
21.1% to $40,403 from $33,376 in the comparable period of the prior year. The
increase resulted primarily from an increase in application management
services. CTS operating income for the third quarter increased 31.7% to
$9,323 in the third quarter of 2001 from $7,078 in the comparable period of
the prior year. 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.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2000
OPERATING RESULTS
Revenue for the first nine months of 2001 decreased by 8.0% to $992,048 from
$1,077,791 in the first nine months of the prior year. This decrease is
primarily attributable to the inclusion of Synavant and Erisco revenues in the
first nine months of 2000, partially offset by growth in the IMS and CTS
Segments. Both Synavant and Erisco were disposed of prior to the beginning of
the first nine months of 2001.
The Company's revenue, excluding the Transaction Businesses Segment, increased
by 9.3% to $992,048 in the first nine months of 2001 from $907,575 for the first
nine months of the prior year. On a constant dollar basis (i.e., a basis that
eliminates currency rate fluctuations) revenue growth was 14.0% in the first
nine months. Sales management products such as Xponent in Europe and the
30
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)
U.S., EarlyView in the U.S. and Weekly Data in Japan were the key sources of
revenue growth. The entire business in Japan shows solid growth performance and
a new product, Weekly GP/Pharma was launched in July in Japan. Growth at CTS was
also a contributor to the revenue increase as explained 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 14.2% to $361,052 in the
first nine months of 2001 from $420,625 in the first nine months of the prior
year due to operating costs in the first nine months 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.
The Company's operating costs, excluding the Transaction Businesses Segment and
technology acceleration charges of $2,836 in 2000, increased by 8.7% to $361,052
in the first nine months of 2001 from $332,306 for the comparable nine months 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
in the IMS Segment to support higher revenues. A 5.2% increase for the IMS
Segment reflects the benefits of cost containment programs, notably those
actions taken to reduce costs at the end of 2000 as well as current progress to
optimize the Company's operating costs.
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 nine months of 2001 by 22.7% to $253,508
from $328,164 in the first nine months of the prior year due to expenses in the
first nine months of 2000 for Synavant and Erisco which are not in the 2001
results, partially offset by increased costs primarily attributable to the CTS
Segment.
The Company's selling and administrative expenses, excluding the Transaction
Businesses Segment and excluding certain legal fees of $2,336 and $2,094 for
2001 and 2000 respectively, increased during the first nine months of 2001 by
1.8% from $246,738 to $251,172. 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 decreased by 3.8% as a result of the benefits of the
restructuring actions taken at the end of 2000 as well as current progress to
optimize the Company's infrastructure costs.
The first nine months depreciation and amortization charges decreased by 31.1%
from $73,140 in 2000 to $50,362 in 2001. This decrease primarily reflects the
higher amortization in 2000 relating to the Transaction Businesses. Excluding
the Transaction Businesses Segment, depreciation and amortization decreased by
1.6% from $51,178 in 2000 to $50,362 in 2001.
In connection with the spin-off of Synavant, the Company incurred $32,801 of
costs for the nine months ended September 30, 2000. These costs include $8,248
for expenses related to reductions in the IMS and corporate administrative
workforce resulting from consolidation following the Synavant Spin-Off.
Additionally, a data processing agreement with a third party for $5,200 will not
31
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)
be used by the Company as a result of the Company's determination to streamline
IMS's operations to focus on its core business. The remaining Spin and Related
Costs were primarily legal, professional and other direct incremental costs.
In connection with the Siebel transaction more fully described in Note 7 to the
Condensed Consolidated Financial Statements, Synavant assessed the impairment of
its computer software (including acquired technology), its goodwill and other
intangible assets and change in tangible asset lives. As a result of this
transaction an impairment charge was recorded in the third quarter of 2000 of
$14,553 for computer software and $100,900 for goodwill. The Company was
required to record this impairment loss due to the Siebel alliance which was
signed prior to the Spin-Off.
Operating income for the first nine months of 2001 increased from $107,608 to
$327,126 reflecting the growth in the IMS and CTS Segments and the one time
charges in 2000 for the Spin and Related Costs and Impairment Charge - Synavant.
The Company's operating income, excluding the Transaction Businesses Segment,
the Spin and Related Costs in 2000 ($32,801), the Impairment Charge -
Synavant in 2000 ($115,453) and the 2000 technology acceleration charge
($2,836) and certain legal fees of $2,336 and $2,094 in 2001 and 2000
respectively, increased by 18.8% in 2001 to $329,463 from $277,353 in the
first nine months of the prior year. This growth is primarily due to the
revenue growth in 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 $8,748 in the first nine months of 2001 compared
with $7,026 in the first nine months of the prior year. This is due to higher
short-term debt due in the first part of 2001 compared to 2000, primarily
offset by the impact of steadily declining interest rates in 2001 and
cumulative interest of $2,067 recorded on the NMR receivable.
During the third quarter of 2001, IMS Health decided to sell and, by
August 29, 2001, completed the sale of 1,554,954 shares of Class A common
stock of Gartner, Inc. ("Gartner Shares") to Gartner and its remaining
holding in Gartner Shares to several institutional investors. IMS Health
received aggregate proceeds of $65.2 million, or $9.88 per share, from these
sales. IMS Health's original cost basis in these shares was $77.7 million, or
$11.78 per share. These sales divest IMS Health of its remaining equity
interest in Gartner. The sale of shares to Gartner was part of Gartner's $75
million stock buyback program announced on July 19, 2001. These sales
resulted in a gross realized loss of $12,536, which was recorded in two
different lines in the income statement: (1) Income from Discontinued
Operations of $72,344 ($47,025 net of applicable taxes), to reflect the
difference between the fair market value at the date of the Gartner Spin-Off
(July 26, 1999) and the book value of those shares; (2) a loss from
dispositions in continuing operations of $84,880 which was recorded as
Realized Loss on Gartner Investment, to reflect the difference between the
fair market value at the date of the Gartner Spin-Off and the disposal
proceeds (see Note 4 to the Condensed Consolidated Financial Statements).
32
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)
During the first nine months of 2001, the Company recorded $594 of pre-tax net
losses from dispositions. This includes a gain of $1,990 recorded in the first
quarter, resulting from the sale of IDRAC Holdings Inc. ("IDRAC"), a
non-strategic property that provides information on pharmaceutical product
registrations, to a wholly owned subsidiary of Information Holdings Inc.
("IHI"). The IDRAC gain was offset primarily by the write down of investments
held by Enterprises, the Company's venture capital unit.
During the first nine months of 2000, the Company recorded $63,915 of pre-tax
net gains from dispositions due primarily to the sale of investments in American
Cellular, Aspect Development Inc., Mercator Software Inc., Viant Corporation and
Verisign Inc., which were part of Enterprises.
In the first nine months of 2001 the Company recorded a net gain on the issuance
of investee's stock of $753. This includes a loss from the issuance by TriZetto
of shares of common stock in the second quarter. The majority of these shares
were included in a secondary offering which generated proceeds to TriZetto of
about $56,000. The remaining shares were issued primarily for an acquisition by
TriZetto in April 2001. The issuance of equity by TriZetto resulted in the
reduction of IMS Health's ownership stake from approximately 33% on December 31,
2000 to approximately 27% on September 30, 2001. This loss was offset by a gain
on the issuance of CTS stock relating to the exercise of employee stock options.
Both the loss for TriZetto and the gain for CTS have been recognized in the
income statement, in accordance with Staff Accounting Bulletin ("SAB") No. 51,
"Accounting for Sales of Stock by a Subsidiary".
Other Expense-Net, decreased in the first nine months to $14,775 from $19,458 in
the first nine months of the prior year, due to the inclusion in 2000 of
non-recurring professional fees. Also included in Other Expense-Net are minority
interest and foreign exchange gains and losses.
In the first nine months of 2001, the effective tax rate was 19.0% compared to
47.4% in the comparable nine months of 2000. In 2001, the Company's effective
tax rate was reduced by the tax benefit at the U.S. federal rate on the loss
from the sale of Gartner Shares recorded in continuing operations (see Note 4 to
Condensed Consolidated Financial Statements), the result of the expiration,
without adjustment, on September 30, 2001 of the statute of limitations on
certain, previously reserved for Donnelley legacy transactions (approximately
$21,800 recorded in the quarter ended September 30, 2001), and 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 (approximately $11,700
recorded in the quarter ended March 31, 2001) which resulted from the
reassessment of the tax benefits from the reorganization following new non-U.S.
tax legislation enacted at the end of the first quarter of 2001.
In 2000, the effective tax rate was impacted by the non-deductible write down of
Synavant goodwill, a higher amount of Enterprises' investment gains which were
taxed at a U.S. federal rate of 35.0%, and the costs incurred as a result of the
spin-off of Synavant, a portion of which were non-deductible, offset by the
recognition of certain German trade tax benefits (approximately $19,400), the
recognition of the benefit of certain net operating losses (NOLs) due to the
implementation of global tax planning strategies (approximately $3,400) and the
reversal of previously accrued tax liabilities (approximately $3,000). The
German trade tax benefits of
33
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)
$19,400 resulted from a favorable final German court decision rendered in the
third quarter of 2000 which permitted the utilization of certain pre-existing
tax benefits. The global tax planning strategies which permitted the recognition
of the benefit of the NOLs 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 of 2000.
The TriZetto Equity Loss of $5,547 net of income tax benefit and including
amortization of acquired intangibles, has been recorded in the first nine months
of 2001. The Company had no investment in TriZetto as of September 30, 2000.
Income from Continuing Operations for the first nine months of 2001 increased
from $74,664 to $171,655 due primarily to improved operating income and the
absence of one-time charges as described above.
Income from Discontinued Operations of $47,025 was recorded for the first nine
months of 2001 versus $2,226 for the same period in 2000. The 2001 income
relates to the disposition of Gartner shares as described in Note 4 to the
Condensed Consolidated Financial Statements. The 2000 income relates to the
contribution of Gartner shares to Synavant as part of the Spin-Off.
Basic earnings per share in the first nine months of 2001 were $0.74 versus
earnings of $0.26 in the first nine months of the prior year. Diluted earnings
per share in the first nine months of 2001 were $0.73 compared with earnings of
$0.26 in the first nine months of the prior year. For basic and diluted earnings
per share, the income from discontinued operations contributes $0.16 and $0.01
in both 2001 and 2000 respectively. The increase in earnings per share (basic
and diluted) was driven primarily by the improved operating income and the
absence of one-time charges in 2001, referred to above.
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 nine months of 2001 increased 5.9% (11.0% on a
constant dollar basis) to $871,245 from $822,546 in the first nine months of the
prior year. Sales Management revenue increased 9.7% (14.0% on a constant dollar
basis) to $537,625. 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 2.3% (7.0% on a constant dollar basis) to
$308,380. The modest growth is due to the impact of some pharmaceutical company
mergers. Other Services revenue decreased 19.0% to $25,241. Other Services
revenue includes services and consultancy revenue and other ad hoc projects. The
nine-month decrease in Other Services revenue
34
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)
is due to the fact that these are ad hoc and less predictable in nature.
IMS Segment operating income for the first nine months increased 18.2% to
$300,540 from $254,176 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 nine months, net of inter-segment sales, increased 42.1% to
$120,803 from $85,029 in the comparable period of the prior year. CTS operating
income for the period increased 45.7% to $26,586 in the first nine months of
2001 from $18,242 in the comparable period of the prior year. The increase
resulted primarily from an increase in application development and integration,
application management, re-engineering and other 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.
CASH FLOWS
Net cash provided by operating activities was $242,879 during the nine months
ended September 30, 2001 as compared to $23,248 during the nine months ended
September 30, 2000. For 2000 this includes a non-recurring payment of
$212,291 to the Internal Revenue Service ("IRS") and for 2001 it includes a
receipt of $10,530 from Nielsen Media Research, Inc. ("NMR") in respect of
the Donnelley tax contingency (described in Note 9 to the Condensed
Consolidated Financial Statements). Excluding the impact of these
non-recurring items, net cash provided by operating activities in 2001 and
2000 would have been $232,349 and $235,539 respectively. The decrease results
primarily from a decrease in accrued and other current liabilities due to
settlement of non-recurring items accrued in the fourth quarter of 2000. This
was partially offset by a higher tax benefit from stock option exercises and
higher operating income.
The Company's investing activities used net cash of $8,630 during the nine
months ended September 30, 2001 as compared to $24,544 for the comparable period
in 2000. The decrease in net cash used in investing activities in 2001 is
primarily due to proceeds received from the sale of Gartner shares partially
offset by reduced proceeds from the sale of investments and higher spending on
acquisitions in 2001, as compared to the prior year.
The Company's financing activities used net cash of $110,632 for the nine months
ended September 30, 2001 as compared to $4,029 for the same period in 2000. The
increase in net cash used in financing activities is primarily due to lower
additional short-term borrowings, higher debt repayments and higher payments for
the purchase of treasury stock, partially offset by a higher level
35
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 cash proceeds from the exercise of stock options in 2001, as compared to the
prior year.
Financing Activities include cash dividends paid of $17,737 and $17,866 for the
nine months ended September 30, 2001 and 2000 respectively. Dividends paid per
share were $0.02 for the quarter ended September 30, 2001.
At September 30, 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 (at September 30, 2001 the working capital deficit has
decreased substantially since the year-end). 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 stock 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 (see Note 10 to the Condensed
Consolidated Financial Statements), 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.
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 September 30, 2001, approximately 18.2 million shares have been
acquired under this program at a total cost of $462.9 million. During the first
nine months of 2001, the Company repurchased approximately 9.7 million shares of
outstanding common stock at a total cost of $255.9 million.
FINANCIAL POSITION
Total Assets increased by $6,219 at September 30, 2001, primarily due to
higher cash and cash equivalent balances (refer to Cash Flows for further
details). These higher balances were partially offset by the absence of Net
Assets from Discontinued Operations following the disposal of the Gartner
shares (see Note 4 to the Condensed Consolidated Financial Statements) and
reduced Securities and Other Investments as a result of disposals, write
downs and mark to market adjustments made in the nine months ended
September 30, 2001.
Total Liabilities at September 30, 2001, decreased by $202,240 due primarily to
a reduced level of short-term borrowings, following increased proceeds from the
exercise of stock options and cash flow from operations. In addition the
decrease in total liabilities was due to reduced Accrued and Other Current
Liabilities, primarily as a result of settlement of non-recurring items and
payment of amounts relating to compensation payments.
Shareholders' Equity increased to $304,768 at September 30, 2001 from $103,540
at December 31, 2000. The increase is primarily due to the net income recorded
for the first nine months of 2001
36
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)
($218,680), the impact of the exercise of stock options ($228,042), the net tax
benefit on the exercise of stock options ($26,049) and a net decrease in
unrealized holding losses ($15,036), partially offset by treasury stock
repurchases ($255,921), adverse exchange rate movements relating mainly to the
Japanese Yen and the Euro ($16,015) and dividends paid ($17,737).
SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires the
purchase method of accounting to be used for all business combinations initiated
after June 30, 2001 and establishes specific criteria for the recognition of
intangible assets separately from goodwill. In the event that the Company
acquires goodwill subsequent to June 30, 2001 it will not be amortized. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that goodwill and intangible assets which have indefinite useful lives will not
be amortized but rather will be tested at least annually for impairment. It also
provides that intangible assets that have finite useful lives be amortized.
Under the provisions of SFAS No. 142, any impairment loss identified upon
adoption of this standard is recognized as a cumulative effect of a change in
accounting principle. Any impairment loss incurred subsequent to initial
adoption of SFAS No. 142 is recorded as a charge to current period earnings. The
Company will adopt SFAS No. 142 beginning January 1, 2002 and at that time will
stop amortizing goodwill that resulted from business combinations completed
prior to the adoption of SFAS No. 141. The Company is currently evaluating the
financial impact of adopting these pronouncements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 eliminates the requirement for
discontinued operations to be measured on a net realizable value basis and
future operating losses to be recognized before they occur. Instead, it requires
that assets held for sale be valued at the lower of carrying amount or fair
value less cost to sell. SFAS 144 extends the reporting requirements for
discontinued operations to certain components of an entity. Under the provisions
of SFAS No. 144, spin-offs and exchanges of similar productive assets are
required to be recorded at the lower of carrying value or fair value and such
assets classified as held and used until they are disposed of. Any resultant
impairment loss is required to be recognized when the asset is disposed of. For
assets that are grouped when an entity is developing estimates of future cash
flows, SFAS No. 144 requires that the remaining useful life of the "primary
asset" be used for the entire group. In addition, SFAS No. 144 permits the use
of a probability-weighted approach in developing estimates of future cash flows
used to test for recoverability and in estimating fair value. The Company will
adopt SFAS No. 144 beginning January 1, 2002, and is currently evaluating the
impact of the adoption.
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
37
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)
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.
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 affect 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; 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; and
terrorist activity, the threat of such activity, and responses to and results of
such activity and threats, including but not limited to effects, domestically
and/or internationally, on the Company, its personnel and facilities, its
customers and suppliers, financial markets and general economic conditions.
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
38
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)
Consolidated Financial Statements and notes thereto for the three and nine month
periods ended September 30, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item is set forth in "Note 10. Financial
Instruments" of Notes to Condensed Consolidated Financial Statements on
pages 20-21.
39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
Information in response to this Item is incorporated by reference to the
information set forth in "Note 9. Contingencies" of Notes to Condensed
Consolidated Financial Statements on pages 14 through 20 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 August 31, 2001 to present under Item 5, Other
Events, disclosure regarding IMS Health's sale of an aggregate of 6,554,954
shares of Gartner, Inc. Class A common stock on August 29, 2001.
40
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: November 2, 2001 James C. Malone
Chief Financial Officer
/s/ Leslye G. Katz
------------------------------------
Date: November 2, 2001 Leslye G. Katz
Vice President & Controller
(Principal Accounting Officer)
41