SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 001-14049
IMS HEALTH INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 06-1506026
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(State of Incorporation) (I.R.S. Employer Identification No.)
200 Nyala Farms, Westport, CT 06880
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 222-4200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding
-------------- At June 30, 2001
Common Stock, ----------------
par value $.01 per share 297,884,037
IMS HEALTH INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE(S)
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Income
Three Months Ended June 30, 2001 and 2000 3
Condensed Consolidated Statements of Income
Six Months Ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2001 and 2000 5
Condensed Consolidated Statements of Financial Position
June 30, 2001 and December 31, 2000 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000 7-8
Notes to Condensed Consolidated Financial Statements 9-21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATING RESULTS 22-33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 34
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 35
SIGNATURES 36
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
JUNE 30,
------------------------------
2001 2000
------------- -------------
OPERATING REVENUE $ 334,349 $ 369,401
Operating Costs 122,548 145,917
Selling and Administrative Expenses 88,709 120,812
Depreciation and Amortization 15,885 24,125
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OPERATING INCOME 107,207 78,547
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Interest Income 1,670 897
Interest Expense (5,433) (2,034)
Gains from Dispositions - Net 975 8,272
Loss on Issuance of Investees' Stock - Net (3,062) --
Other Expense - Net (1,330) (4,965)
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Non-Operating (Expense)/Income - Net (7,180) 2,170
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Income Before Provision for Income Taxes 100,027 80,717
Provision for Income Taxes (34,240) (30,488)
TriZetto Equity Loss, Net of Income Tax Benefit of $802 for 2001 (1,243) --
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NET INCOME $ 64,544 $ 50,229
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BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.22 $ 0.17
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DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.21 $ 0.17
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Weighted Average Number of Shares Outstanding - Basic 295,914,000 297,236,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 5,047,000 600,000
Adjustment of Shares Outstanding Applicable to Exercised/Cancelled Stock Options
During the Period 1,303,000 9,000
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Weighted Average Number of Shares Outstanding - Diluted 302,264,000 297,845,000
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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)
SIX MONTHS ENDED
JUNE 30,
------------------------------
2001 2000
------------- -------------
OPERATING REVENUE $ 663,911 $ 721,924
Operating Costs 247,162 285,725
Selling and Administrative Expenses 178,575 232,689
Depreciation and Amortization 34,509 49,903
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OPERATING INCOME 203,665 153,607
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Interest Income 2,834 2,004
Interest Expense (11,668) (3,367)
Gains from Dispositions - Net 2,375 57,714
Loss on Issuance of Investees' Stock - Net (2,329) --
Other Expense - Net (7,809) (13,673)
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Non-Operating (Expense)/Income - Net (16,597) 42,678
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Income Before Provision for Income Taxes 187,068 196,285
Provision for Income Taxes (52,917) (63,204)
TriZetto Equity Loss, Net of Income Tax Benefit of $2,450 for 2001 (3,800) --
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NET INCOME $ 130,351 $ 133,081
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BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.44 $ 0.45
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DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.43 $ 0.44
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Weighted Average Number of Shares Outstanding - Basic 294,534,000 298,576,000
Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 4,644,000 2,287,000
Adjustment of Shares Outstanding Applicable to Exercised/Cancelled Stock Options
During the Period 2,050,000 48,000
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Weighted Average Number of Shares Outstanding - Diluted 301,228,000 300,911,000
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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
JUNE 30,
---------------------------
2001 2000
---------------------------
Net Income $ 64,544 $ 50,229
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation Losses (7,849) (8,888)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) on Securities Arising During the Period:
Gartner, Inc. Shares Held For Sale (Net of Tax (Expense)/Benefit of $(9,836) in
2001 and $9,068 in 2000) 18,266 (16,842)
Other Investments (Net of Tax Expense of $2,111 and $3,710 for 2001 and 2000,
respectively) 3,920 6,892
Less: Reclassification Adjustment for Gains included in Net Income (Net of
Tax (Expense) of $(379) and $(4,783) for 2001 and 2000, respectively) (704) (8,884)
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Change in Unrealized Gains/(Losses) on Investments, Net of Tax 21,482 (18,834)
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Total Other Comprehensive Income/(Loss), Net of Tax 13,633 (27,722)
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Comprehensive Income $ 78,177 $ 22,507
========================================================================================================================
SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
---------------------------
Net Income $ 130,351 $ 133,081
Other Comprehensive Income, Net of Taxes:
Foreign Currency Translation Losses (27,975) (18,505)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) on Securities Arising During the Period:
Gartner, Inc. Shares Held For Sale (Net of Tax (Expense)/Benefit of $(9,467) in
2001 and $7,859 in 2000) 17,582 (14,595)
Other Investments (Net of Tax Benefit/(Expense) of $537 and $(36,330) for 2001
and 2000, respectively) (998) 58,884
Less: Reclassification Adjustment for Losses/(Gains) included in Net Income (Net of
Tax Benefit/(Expense) of $496 and $(9,540) for 2001 and 2000, respectively) 921 (21,487)
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Change in Unrealized Gains on Investments, Net of Tax 17,505 22,802
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Total Other Comprehensive (Loss)/Income, Net of Tax (10,470) 4,297
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Comprehensive Income $ 119,881 $ 137,378
========================================================================================================================
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)
JUNE 30, DECEMBER 31,
2001 2000
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ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 179,476 $ 118,593
Accounts Receivable - Net 252,309 230,988
Other Receivable (Note 7) 30,606 41,136
Other Current Assets 87,607 117,001
Net Assets from Discontinued Operations (Note 4) 72,569 60,799
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Total Current Assets 622,567 568,517
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SECURITIES AND OTHER INVESTMENTS 84,496 87,500
TRIZETTO EQUITY INVESTMENT 127,371 137,501
PROPERTY, PLANT AND EQUIPMENT - NET 141,550 145,447
OTHER ASSETS - NET:
Computer Software 117,836 117,688
Goodwill 146,415 144,100
Other Assets 39,863 42,254
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Total Other Assets - Net 304,114 304,042
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TOTAL ASSETS $ 1,280,098 $ 1,243,007
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LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 40,475 $ 45,198
Accrued and Other Current Liabilities 149,292 219,726
Short-Term Debt 331,184 384,281
Accrued Income Taxes 74,826 81,856
Deferred Revenues 86,996 96,095
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Total Current Liabilities 682,773 827,156
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POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 44,397 43,471
OTHER LIABILITIES 132,261 133,498
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TOTAL LIABILITIES 859,431 1,004,125
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COMMITMENTS AND CONTINGENCIES (NOTE 7)
MINORITY INTERESTS 141,340 135,342
SHAREHOLDERS' EQUITY:
Common Stock, Par Value $.01, Authorized 800,000,000 Shares;
Issued 335,045,390 Shares at June 30, 2001 and December 31, 2000, respectively 3,350 3,350
Capital in Excess of Par 514,180 596,273
Retained Earnings 878,706 760,140
Treasury Stock, at Cost, 37,161,353 and 43,703,384 Shares at
June 30, 2001 and December 31, 2000, respectively (989,514) (1,139,298)
Cumulative Translation Adjustment (134,392) (106,417)
Minimum Pension Liability Adjustment (672) (672)
Unrealized Loss on Gartner, Inc., net of tax benefit (3,364) (20,946)
Unrealized Gains on Investments, net of tax expense 11,033 11,110
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TOTAL SHAREHOLDERS' EQUITY 279,327 103,540
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,280,098 $ 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)
SIX MONTHS ENDED JUNE 30,
----------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 130,351 $ 133,081
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY/(USED IN)
OPERATING ACTIVITIES:
Depreciation and Amortization 34,509 49,903
Gains from Sale of Investments, Net (2,375) (57,714)
Loss on Issuance of Investees' Stock 2,329 --
Deferred Income Taxes 2,335 20,641
TriZetto Equity Loss, Net 3,800 --
Minority Interests in Net Income of Consolidated Companies 10,050 7,038
Change in assets and liabilities, excluding effects from acquisitions and
dispositions:
Net Increase in Accounts Receivable (30,965) (9,762)
Net Increase in Prepaid Expenses (6,676) (3,794)
Net (Decrease)/Increase in Accounts Payable (2,563) 2,949
Net Decrease in Accrued and Other Current Liabilities (62,323) (19,550)
Net Decrease in Deferred Revenues (5,403) (22,003)
Net Increase in Accrued Income Taxes 1,586 21,246
Net Tax Benefit on Stock Option Exercises 24,764 350
Payment on Legacy D&B Tax Contingency (Note 7) -- (212,291)
Neilsen Media Research payment received in respect of Legacy D&B Tax
Contingency (Note 7) 10,530 --
Net Decrease in Benefit Payments -- (1,634)
Other Working Capital Items - Net (1,020) (875)
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Net Cash Provided by/(Used in) Operating Activities 108,929 (92,415)
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CASH FLOWS (USED IN)/PROVIDED BY INVESTING ACTIVITIES:
Capital Expenditures (12,407) (13,051)
Additions to Computer Software (18,134) (21,139)
Payments for Acquisitions of Businesses (10,336) (4,588)
Proceeds from Sale of Investments, Net 1,346 66,734
Proceeds from Sale of IDRAC Holdings Inc., Net 2,940 --
Net Increase in Other Investments (61) (16,710)
Other Investing Activities - Net 4,308 (10,630)
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Net Cash (Used in)/Provided by Investing Activities (32,344) 616
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CASH FLOWS (USED IN)/PROVIDED BY FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (170,961) (119,623)
Proceeds from Exercise of Stock Options 211,547 6,326
Dividends Paid (11,785) (11,923)
Proceeds from Employee Stock Purchase Plan 1,436 1,608
Short-Term Borrowings 30,314 245,588
Short-Term Debt Repayments (83,416) (40,500)
Other Financing Activities - Net 10,599 (420)
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Net Cash (Used in)/Provided by Financing Activities (12,266) 81,056
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Effect of Exchange Rate Changes (3,436) (1,984)
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Increase/(Decrease) in Cash and Cash Equivalents 60,883 (12,727)
Cash and Cash Equivalents, Beginning of Period 118,593 115,875
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Cash and Cash Equivalents, End of Period $ 179,476 $ 103,148
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7
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $14,393 $ 3,324
Cash Paid during the Period for Income Taxes (Exclusive of payment of
Legacy D&B Tax Contingency - See Note 7 to the Condensed Consolidated
Financial Statements) $19,802 $27,254
Cash Received from Income Tax Refunds $ 1,032 $ 8,677
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 59.2% 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 owns approximately 28% of
TriZetto's common stock as at June 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 which is charged directly to retained earnings. 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.
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 Company's remaining investment in Gartner at June 30, 2001 consists of
6,597,292 Gartner Class A Shares (at an original cost basis of $77,745 or
$11.78 average per common share). Under the terms of the IRS ruling, the
Company must monetize the remaining position in Gartner to maintain the
tax-free nature of the Gartner Spin-Off. Accordingly, net assets from
discontinued operations in the amount of $72,569 are included in current
assets at June 30, 2001. These shares have been accounted for as an available
for sale investment. The Company has classified its investment in Gartner as
a current asset as it intends to dispose of it in the short-term if and when
it recovers substantially all of its cost, but has the ability to hold the
investment on a long-term basis. The Company continues to evaluate different
alternatives for monetizing its remaining investment in Gartner in the
short-term.
Following a decline in the market value of Gartner stock below cost for the
first time in late 2000, the Company performed, and continues to perform, a
periodic assessment in accordance with its policy to determine whether an
other-than-temporary decline in fair value had occurred. The Company evaluated
the recoverability of the investment by reviewing recent information related to
the industry and the operating results and financial position of Gartner and by
considering the
10
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Company's ability and intent to hold the investment on a short or long-term
basis if need be. The Company concluded that evidence existed to support the
recoverability of its carrying value, that there were no events or changes in
circumstances specifically relating to Gartner, that the underlying business
fundamentals are strong and that the decline in the market value is consistent
with the historical volatility of the stock and is attributable to the general
market conditions. Accordingly, the Company concluded that the decline in market
value of the Gartner stock as of June 30, 2001, which is reflected as Unrealized
Loss on Gartner Shares, within Shareholders' Equity, was temporary in nature and
has not adjusted the cost basis of its investment.
NOTE 5. ACQUISITIONS AND DISPOSITIONS
During the first six months of 2001, the Company exercised its option to
purchase the remaining interest in Medicare Audits Ltd. ("Medicare"), a U.K.
based hospital research firm for a net cash payment of $7,889. After a
preliminary allocation of the purchase price to the assets acquired, goodwill
of $6,724 was recorded.
In addition, during the first six months of 2001, the Company recorded $2,375
of pre-tax net gains. 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 revenues during
2001. This gain will be recognized when and if all the conditions for payment
have been satisfied. In a separate transaction, the Company also granted a
non-exclusive perpetual license to IHI to use certain data for aggregate cash
consideration of approximately $17 million.
During the first six months of 2000, the Company recorded $57,714 of pre-tax net
gains due primarily to the sale of investments in American Cellular, Aspect
Development Inc., Mercator Software Inc., Viant Corporation and Verisign Inc.,
which were part of the Company's investment portfolio. Included in this amount
are pre-tax net gains of $8,272 recorded during the second quarter of 2000.
As described in Note 2 and Note 11, 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 six months
ended June 30, 2000, but not for the three and six months ended June 30, 2001.
NOTE 6. INVESTMENT IN TRIZETTO
Summary financial information for TriZetto for the three and six months ended
June 30, 2001 is presented below. The amounts shown represent consolidated
TriZetto operating results, unaudited, based on publicly available information.
11
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 2001:
Net Sales $ 53,319
Gross Profit $ 17,110
Loss from Operations $ (18,167)
Net Loss $ (14,981)
SIX MONTHS ENDED JUNE 30, 2001:
Net Sales $ 99,358
Gross Profit $ 29,223
Loss from Operations $ (41,193)
Net Loss $ (32,915)
The market value of the Company's investment in TriZetto was approximately
$112,321 as at June 30, 2001. The investment in TriZetto is accounted for on an
equity basis and is not marked to market. The Company believes that the decline
in market value at June 30, 2001 is temporary in nature and has not adjusted the
cost basis of its investment. Subsequent to the quarter end the market value of
the Company's investment in TriZetto exceeded the cost basis of its holding.
The issuance by TriZetto of shares of common stock resulted in a loss recorded
in the second quarter of 2001. The majority of these shares were issued in a
follow-on offering which generated proceeds of approximately $56 million. 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 March 31, 2001 to
approximately 28% on June 30, 2001. This loss has been recognized in accordance
with Staff Accounting Bulletin ("SAB") No. 51, "Accounting for Sales of Stock by
a Subsidiary".
NOTE 7. CONTINGENCIES
The Company and its subsidiaries are involved in various legal proceedings,
claims litigation and tax matters arising in the ordinary course of business. In
the opinion of management, the outcome of such current legal proceedings, claims
litigation and tax matters, if decided adversely, could have a material effect
on quarterly or annual operating results or cash flows when resolved in a future
period. However, in the opinion of management, these matters will not materially
affect the Company's consolidated financial position.
In addition, the Company is subject to certain other contingencies discussed
below:
INFORMATION RESOURCES LITIGATION
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in the
United States District Court for the Southern District of New York, naming as
defendants The Dun and Bradstreet Corporation ("D&B"), A.C. Nielsen Company and
I.M.S. International Inc. (a predecessor of IMS Health) (the "IRI Action").
The complaint alleges various violations of the United States antitrust laws,
including alleged
12
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
violations of Sections 1 and 2 of the Sherman Act. The complaint also alleges a
claim of tortious interference with a contract and a claim of tortious
interference with a prospective business relationship. These latter claims
relate to the acquisition by defendants of Survey Research Group Limited
("SRG"). IRI alleges that SRG violated an alleged agreement with IRI when it
agreed to be acquired by defendants and that the defendants induced SRG to
breach that agreement. IRI's complaint alleges damages in excess of $350,000,
which amount IRI has asked to be trebled under the antitrust laws. IRI also
seeks punitive damages in an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in the
complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an amended and restated
complaint repleading its alleged claim of attempted monopolization in the United
States and realleging its other claims. On August 18, 1997, defendants moved for
an order dismissing the amended claims. On December 1, 1997, the court denied
the motion and, on December 16, 1997, defendants filed a supplemental answer
denying the remaining material allegations of the amended complaint. On December
22, 1999, defendants filed a motion for partial summary judgement seeking to
dismiss IRI's non-U.S. antitrust claims. On July 12, 2000, the court granted the
motion dismissing claims of injury suffered from activities in foreign markets
where IRI operated through subsidiaries or companies owned by joint ventures or
"relationships" with local companies. Discovery is continuing in this matter.
In light of the potentially significant liabilities which could arise from the
IRI Action and in order to facilitate the distribution by D&B of shares of
Cognizant Corporation ("Cognizant") and ACNielsen Corporation (the parent
company of A.C. Nielsen Company) in 1996, D&B, ACNielsen and Cognizant entered
into an Indemnity and Joint Defense Agreement pursuant to which they agreed (i)
to certain arrangements allocating liabilities that may arise out of or in
connection with the IRI Action, and (ii) to conduct a joint defense of such
action. In particular, the Indemnity and Joint Defense Agreement provides that,
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 D&B will share liability equally for any amounts in excess of the
ACN Maximum Amount. The ACN Maximum Amount will be determined by an investment
banking firm as the maximum amount which ACNielsen will be able to pay after
giving effect to (i) any plan submitted by such investment bank which is
designed to maximize the claims paying ability of ACNielsen without impairing
the investment banking firm's ability to deliver a viability opinion (but which
will not require any action requiring shareholder approval), and (ii) payment of
related fees and expenses. On February 19, 2001, ACNielsen announced that it
merged with VNU N.V. Pursuant to the Indemnity and Joint Defense Agreement, VNU
is to be included with ACNielsen for purposes of determining the ACN Maximum
Amount.
For these purposes, financial viability means the ability of ACNielsen, after
giving effect to such plan, the payment of related fees and expenses and the
payment of the ACN Maximum Amount, to
13
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
pay its debts as they become due and to finance the current and anticipated
operating and capital requirements of its business, as reconstituted by such
plan, for two years from the date any such plan is expected to be implemented.
In 1998, IMS Health was spun-off from Cognizant (the "1998 Spin-Off") which then
changed its name to Nielsen Media Research, Inc. ("NMR"). IMS Health and NMR are
jointly and severally liable to D&B and ACNielsen for Cognizant's obligations
under the terms of the Distribution Agreement dated October 28, 1996 among D&B,
Cognizant and ACNielsen (the "1996 Distribution Agreement"). In connection with
the 1998 Spin-Off, IMS Health and NMR agreed that, as between themselves, IMS
Health will assume 75%, and NMR will assume 25%, of any payments to be made in
respect of the IRI Action under the Indemnity and Joint Defense Agreement or
otherwise, including any legal fees and expenses related thereto incurred in
1999 or thereafter. IMS Health agreed to be fully responsible for any legal fees
and expenses incurred during 1998. NMR's aggregate liability to IMS Health for
payments in respect of the IRI Action and certain other contingent liabilities
shall not exceed $125,000.
Management of the Company is unable to predict at this time the final outcome of
this matter or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
MATTERS BEFORE THE EUROPEAN COMMISSION
The Company is the subject of complaints filed with the European Commission (the
"Commission") pursuant to Article 3 of Council Regulation No. 17 of 1972. The
complaints with the Commission were filed by Source Informatics Ltd. (December
1, 1997), NDC Health Information Services (Arizona) Inc. (May 13, 1998), and
Source Informatics S.A/N.V. (February 18, 2000) (which also filed a complaint
with the Belgian Competition Council, where a complaint filed by SmithKline
Beecham is also pending). The EC complaints allege that the Company has been and
continues to engage in certain commercial practices that violate Articles 81 and
82 of the EC Treaty, which relate to agreements or abuses of a dominant position
that adversely affect competition. The Company 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.
14
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
On December 19, 2000, National Data Corporation ("NDC") lodged an application
with the Commission requesting that the Commission initiate a proceeding against
the Company for an alleged infringement of Article 82 of the EC Treaty and
granting interim measures (the "Application"). The Application concerns 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 requires 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
market should they request a license. The terms and royalties to be paid for the
license are to be agreed between the Company and the requesting party, and if
agreement cannot be reached in a two week period, then the terms and royalties
for the license will be determined by one or more independent experts agreed to
by the parties, or if the parties cannot 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 [EURO]1000 (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.
The Company intends to fully comply with the Decision, notwithstanding that it
contradicts prior decisions of competent German courts which have found that the
Company's refusal to license its copyright to competitors that compete in the
same market and that have been found to have infringed the Company's copyright
does not constitute a violation of either EC or German competition law.
On August 6, 2001, the Company lodged an appeal to the European Court of First
Instance (the
15
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
"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 has an opportunity
to make a final ruling on the Company's application to suspend the Decision.
The Company expects that the CFI will rule on its request to suspend the
operation of the Decision in September or October 2001, and on the appeal
seeking annulment of the Decision at a later date.
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, Cognizant and D&B 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, Cognizant or D&B.
In 1999, the Company was informed by D&B that the IRS was reviewing D&B's
utilization of certain capital losses during 1989 and 1990. In response, D&B
advised that it intended to file an amended tax return for these periods and to
pay this amount in order to prevent further interest from accruing. In May 2000,
D&B paid $349,291 of this amount and the Company paid $212,291 pursuant to its
obligation under the 1996 Distribution Agreement and the Distribution Agreement
between Cognizant (renamed NMR) and the Company (the "1998 Distribution
Agreement"), whereby the Company is in effect obligated to pay one-half of the
tax and interest owed to the IRS for this matter to the extent the liability
exceeds $137,000. In the second quarter of 2000, D&B received a formal
assessment from the IRS with respect to this matter in the amount of $561,582,
for additional tax and interest due, which was satisfied by the payments made by
D&B and the Company in May 2000. D&B has advised the Company that,
notwithstanding the filing and payment, it intends to contest the assessment and
would also contest the assessment of amounts, if any, in excess of the amounts
paid. The Company 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
(approximately $41,000 according to the Company's calculations). NMR was not
obligated to pay its share to the Company until January 2, 2001. In December
2000, the Company requested reimbursement of this amount from NMR. On January 2,
2001, NMR made a payment of $10,530 in respect of such matter but refused to pay
the remaining $30,606 based on its interpretation of the 1998 Distribution
Agreement. The Company believes that NMR's position has no merit and plainly
contravenes the terms of the 1998 Distribution Agreement. Accordingly, the
Company has accrued for the contemplated payment from NMR and has recorded an
account receivable. The Company has commenced arbitration regarding this matter
by filing a Demand for Arbitration with the American Arbitration Association
16
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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
this liability.
The Company intends to vigorously defend the matters noted above. The Company is
unable to predict at this time the final outcome of these matters or whether the
resolution of these matters could materially affect the Company's results of
operations, cash flows, or financial position.
NOTE 8. 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
17
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 six months ended June 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 June 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 June 30, 2001 due to the high
quality of its customers and their dispersion across many geographic areas.
LINES OF CREDIT AND LIQUIDITY
The Company had unused available lines of credit of $234,149 and $178,975 at
June 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 28.85 basis points if the
facilities are less than 50% utilized.
At June 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
June 30, 2001 the working capital deficit has
18
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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.
NOTE 9. 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 Company's effective tax rate was reduced by approximately $10,200,
primarily from the recognition of additional tax benefits (approximately
$11,700) arising from a 1998 non-U.S. reorganization which gave rise to tax
deductible non-U.S. intangible assets. This change in estimate, which was
recorded in the quarter ended March 31, 2001, 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 Company's effective tax rate was impacted by a higher amount of
Enterprises' investment gains, which were taxed at a U.S. federal rate of 35%,
offset by the realization of certain net operating losses ("NOLs") due to the
implementation of global tax planning strategies (approximately $2,800) and the
reversal of previously accrued tax liabilities (approximately $3,000). These tax
planning strategies were developed and implemented during the first quarter of
2000. These NOLs were previously reserved with a full valuation allowance. The
reversal of previously accrued tax liabilities resulted from the true up of
state and local tax returns and the favorable resolution of audits in certain
non-U.S. tax jurisdictions.
While the Company intends to continue to seek global tax planning initiatives,
there can be no assurance that the Company will be able to successfully
implement such initiatives.
NOTE 10. 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 2.9 million shares of outstanding common
stock under this program in the second quarter of 2001 at an average price of
$27.59 per share or a total cost of $79.7 million. For the first six months the
Company repurchased approximately 6.4 million shares at an average price of
$26.58 per share, or a total cost of $171.0 million. As of June 30, 2001
approximately 14.9 million shares had been repurchased since the inception of
the July 2000
19
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
program at a total cost of $377.6 million.
The Company re-issued approximately 5.9 million treasury shares under option
exercises for proceeds of $124.4 million during the second quarter. For the year
to date 12.6 million such shares have been issued for proceeds of $211.5
million.
NOTE 11. 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 June 30, 2001, the Company consisted of the following segments:
1. The IMS Segment, which consists of IMS Health, a leading global
provider of market information, sales management and decision-support
services to the pharmaceutical and healthcare industries. Historically,
this segment included Synavant and three small non-strategic software
companies that are included in the Transaction Businesses Segment. The
IMS Segment is managed on a global business model with global leaders
for the majority of its critical business processes. Corporate
expenses, which were previously not allocated to segments, are now
included with the IMS Segment as the costs principally relate to
management of the IMS business. Corporate expenses of $8,413 and
$16,444 have been reclassified accordingly for the three and six
months ended June 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, re-engineering
services and mass change.
During the three and six months ended June 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 companies. The Company spun-off
the Synavant business on August 31, 2000, sold Erisco to TriZetto and
entered into a strategic alliance with TriZetto on
20
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
October 3, 2000. The Company also divested or discontinued the other
small non-strategic software businesses.
-------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2001: IMS CTS TRANSACTION TOTAL
BUSINESSES (2) CONSOLIDATED
-------------------------------------------------------------------------------------------------------
Revenue (1) $ 293,935 $ 40,414 -- $ 334,349
Operating Income $ 98,333 $ 8,874 -- $ 107,207
Total Assets at June 30, 2001 (3) (4) $1,156,815 $ 123,283 -- $1,280,098
-------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2000:
-------------------------------------------------------------------------------------------------------
Revenue (1) $ 276,620 $ 28,089 $ 64,692 $ 369,401
Operating Income/(Loss) $ 80,197 $ 6,041 $ (7,691) $ 78,547
Total Assets at June 30, 2000 (3) (4) $1,118,893 $ 83,048 $ 308,352 $1,510,293
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001: IMS CTS TRANSACTION TOTAL
BUSINESSES (2) CONSOLIDATED
-------------------------------------------------------------------------------------------------------
Revenue (1) $ 583,511 $ 80,400 -- $ 663,911
Operating Income $ 186,402 $ 17,263 -- $ 203,665
Total Assets at June 30, 2001 (3) (4) $1,156,815 $ 123,283 -- $1,280,098
-------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000:
-------------------------------------------------------------------------------------------------------
Revenue (1) $ 540,471 $ 51,653 $ 129,800 $ 721,924
Operating Income/(Loss) $ 151,869 $ 11,164 $ (9,426) $ 153,607
Total Assets at June 30, 2000 (3) (4) $1,118,893 $ 83,048 $ 308,352 $1,510,293
-------------------------------------------------------------------------------------------------------
NOTES TO OPERATIONS BY BUSINESS SEGMENTS:
1. Revenue excludes inter-segment sales of $4,997 and $3,712 for June 30,
2001 and 2000, respectively on a quarterly basis. Revenue excludes
inter-segment sales of $8,415 and $7,218 for June 30, 2001 and 2000,
respectively on a six months basis.
2. Included in the Transaction Businesses Segment for the six months
ended June 30, 2000 are revenue and operating losses related to
the Synavant business of approximately $93,000 and ($11,500),
respectively. Residual revenues and results of operations relate
primarily to the Erisco business.
3. Total assets of the IMS Segment include Net Assets of Discontinued
Operations of $72,569 and $82,392 as of June 30, 2001 and June 30,
2000, respectively. IMS Segment assets also include the Company's
investment in TriZetto and other Corporate assets.
4. CTS Segment assets include cash and cash equivalents of $67,659 and
$45,209 at June 30, 2001 and June 30, 2000, respectively.
21
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 59.2% 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 owns approximately 28% of
TriZetto's common stock as at June 30, 2001, and accounts for its share of
TriZetto on an equity basis.
As of June 30, 2001, IMS Health consisted of:
1. The IMS Segment, which consists of IMS Health, a leading global
provider of market information, sales management and decision-support
services to the pharmaceutical and healthcare industries. Historically,
this segment included Synavant and three small non-strategic software
companies that are included in the Transaction Businesses Segment. The
IMS Segment is managed on a global business model with global leaders
for the majority of its critical business processes. Corporate
expenses, which were previously not allocated to segments, are now
included with the IMS Segment as the costs principally relate to
management of the IMS business. 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
22
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, re-engineering services and mass
change.
During the three and six months ended June 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 companies. The Company spun-off
the Synavant business on August 31, 2000 and sold Erisco to TriZetto on
October 3, 2000. The Company also divested or discontinued the other
small non-strategic software businesses.
All prior year segment information has been reclassified to conform with the
June 30, 2001 presentation.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000
OPERATING RESULTS
Revenue for the second quarter of 2001 decreased by 9.5% to $334,349 from
$369,401 in the second quarter of the prior year. This decrease is primarily
attributable to the inclusion of Synavant and Erisco revenues in the second
quarter of 2000, partially offset by strong growth in the IMS and CTS Segments.
Both Synavant and Erisco were disposed of in the second half of the year 2000.
The Company's revenue, excluding the Transaction Businesses Segment, increased
by 9.7% to $334,349 in the second quarter of 2001 from $304,709 for the second
quarter of the prior year. On a constant dollar basis (i.e., a basis that
eliminates currency rate fluctuations) revenue growth was 15.6% in the second
quarter. Sales management products such as Xponent in Europe, EarlyView in the
U.S., Weekly Data in Japan and Xplorer Web in Canada were the key sources of
revenue growth. Additionally the consulting operation, as well as the entire
operation, of North America performed well against the comparable quarter of
2000 with an exceptionally strong IT consulting business. 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 16.0% to $122,548 in the
second quarter of 2001 from $145,917 in the second quarter of the prior year due
to operating costs in the second 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.
23
IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's operating costs, excluding the Transaction Businesses Segment in
2000, increased by 8.1% to $122,548 in the second quarter of 2001 from $113,353
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 5.2% 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
infrastructure 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 second quarter of 2001 by 26.6% to $88,709 from
$120,812 in the second quarter of the prior year due to expenses in the second
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, were essentially flat for the second quarter of 2001
($88,709) as compared to the comparable quarter of 2000 ($88,965). 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 $5,277 (6.4%) 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.
Second quarter depreciation and amortization charges decreased by 34.2% from
$24,125 in 2000 to $15,885 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 1.7%
from $16,154 in 2000 to $15,885 in 2001. This decrease reflects, in part, the
impact of assets written off at the end of 2000.
Operating income for the second quarter of 2001 increased by 36.5% reflecting
the growth in the IMS and CTS Segments. In the second quarter of 2000 the IMS
Segment profits offset losses made by the Transaction Businesses.
The Company's operating income, excluding the Transaction Businesses Segment,
increased by 24.3% in 2001 to $107,207 from $86,238 in the second quarter of the
prior year. This growth is primarily due to the revenue growth in all geographic
regions of 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 expense was $3,763 in the second quarter of 2001 compared with
$1,137 in the second quarter of the prior year. The increase is due to a higher
level of short term borrowings to fund the Company's stock repurchase program
and payment of the legacy Dun & Bradstreet ("D&B") tax contingency made in May
2000.
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)
Gains from Dispositions, Net, were $975 in the second quarter of 2001, compared
to $8,272 in the second quarter of the prior year. The 2001 gains arose as a
result of the disposition of investments in Verisign Inc. which was held within
the Enterprises portfolio. In 2000, the Company recorded $8,272 of pre-tax net
gains due primarily to the sale of investments in Mercator Software Inc., and
Verisign Inc. that were part of the Enterprises portfolio.
In the second quarter of 2001 the Company recorded a loss on the issuance of
investees' stock of $3,062. This loss primarily arose from the issuance by
TriZetto of shares of common stock in the second quarter. The majority of
these shares were included in a follow-on offering which generated proceeds
of about $56 million. 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 March 31, 2001 to approximately 28% on June 30, 2001. This loss was
partially 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 accordance with Staff Accounting Bulletin
("SAB") No. 51, "Accounting for Sales of Stock by a Subsidiary".
Other Expense-Net, decreased in the second quarter to $1,330 from $4,965 in the
second quarter 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 second quarter of 2001, the effective tax rate was 34.2% compared to
37.8% in the comparable quarter of 2000. This is more fully described in Note 9
to the Condensed Consolidated Financial Statements.
The TriZetto equity loss, net of income tax benefit, of $1,243, including
amortization of acquired intangibles, has been recorded in the second quarter of
2001. The Company had no investment in TriZetto as of June 30, 2000.
Net income for the second quarter of 2001 increased by 28.5% from $50,229 to
$64,544, primarily due to the increased operating income arising from strong
growth in both the IMS and the CTS Segments.
Basic earnings per share in the second quarter of 2001 were $0.22 versus
earnings of $0.17 in the second quarter of the prior year. Diluted earnings per
share in the second quarter of 2001 were $0.21 compared with earnings of $0.17
in the second quarter of the prior year. The increase in earnings per share was
driven primarily by the increased operating income.
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
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)
consultancy and other related services.
IMS Segment revenue for the second quarter of 2001 increased 6.3% (12.7% on a
constant dollar basis) to $293,935 from $276,620 in the second quarter of the
prior year. Sales Management revenue increased 7.6% (15.0% on a constant dollar
basis) to $180,219. Sales Management revenue growth is primarily due to Xponent
in the United States and Europe, to the Weekly Data product in Japan as well as
new products such as EarlyView in the U.S. and Xplorer Web in Canada. Market
Research revenue increased 4.1% (8.5% on a constant dollar basis) to $102,992,
and Other Services revenue increased 5.6% to $10,724. Other Services revenue
includes consultancy services which are ad hoc and less predictable in nature.
IMS Segment operating income for the second quarter increased 22.6% to $98,333
from $80,197 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 second quarter, net of inter-segment sales, increased 43.9%
to $40,414 from $28,089 in the comparable period of the prior year. CTS
operating income for the second quarter increased 46.9% to $8,874 in the second
quarter of 2001 from $6,041 in the comparable period of the prior year. The
increase resulted primarily from an increase in application management 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.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000
OPERATING RESULTS
Revenue for the first six months of 2001 decreased by 8.0% to $663,911 from
$721,924 in the first six months of the prior year. This decrease is primarily
attributable to the inclusion of Synavant and Erisco revenues in the first six
months of 2000, partially offset by significant growth in the IMS and CTS
Segments. Both Synavant and Erisco were disposed of prior to the beginning of
the first six months of 2001.
The Company's revenue, excluding the Transaction Businesses Segment, increased
by 12.1% to $663,911 in the first six months of 2001 from $592,124 for the first
six months of the prior year. On a constant dollar basis (i.e., a basis that
eliminates currency rate fluctuations) revenue growth was 17.6% in the first six
months. Sales management products such as Xponent in Europe, EarlyView in the
U.S., Weekly Data in Japan and Xplorer Web in Canada were the key sources of
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)
revenue growth. Additionally the consulting operation, as well as the entire
operation, of North America performed well against the comparable quarter of
2000 with an exceptionally strong IT consulting business. 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 13.5% to $247,162 in the
first six months of 2001 from $285,725 in the first six months of the prior year
due to operating costs in the first six 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 in
2001, increased by 11.4% to $247,162 in the first six months of 2001 from
$221,866 for the comparable six 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 of 6.5% in the IMS Segment 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 infrastructure 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 six months of 2001 by 23.3% to $178,575 from
$232,689 in the first six months of the prior year due to expenses in the first
six 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, increased during the first six months of 2001 by 2.8% from
$173,698 to $178,575. 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 2.8% 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.
First six months depreciation and amortization charges decreased by 30.8% from
$49,903 in 2000 to $34,509 in 2001. This decrease primarily reflects the higher
amortization in 2000 relating to the Transaction Businesses. Excluding the
Transaction Businesses Segment, depreciation and amortization increased by 2.9%
from $33,523 in 2000 to $34,509 in 2001.
Operating income for the first six months of 2001 increased by 32.6% reflecting
the growth in the IMS and CTS Segments. In the first six months of 2000 the IMS
Segment profits offset losses made by the Transaction Businesses.
The Company's operating income, excluding the Transaction Businesses Segment,
increased by 24.9% in 2001 to $203,665 from $163,033 in the first six months of
the prior year. This growth
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)
is primarily due to the revenue growth in all geographic regions of the IMS
Segment and CTS and the slower growth in operating and selling and
administrative expenses. Operating income growth outpaced revenue growth
primarily due to the Company's ability to leverage its worldwide resources.
Net interest expense was $8,834 in the first six months of 2001 compared with
$1,363 in the first six months of the prior year. The increase is due to a
higher level of short term borrowings to fund the Company's stock repurchase
program and payment of the legacy D&B tax contingency made in May 2000.
Gains from Dispositions, Net, were $2,375 in the first six months of 2001,
compared to $57,714 in the first six months of the prior year. During the first
six months of 2001 the Company disposed of IDRAC Holdings Inc. ("IDRAC"), a
non-strategic property providing information on pharmaceutical product
registration, recording a gain of $1,990. In accordance with the IDRAC sales
agreement, the Company is entitled to additional consideration of up to $4.9
million, which is contingent upon IDRAC achieving a specified level of revenues
during 2001. This gain will be recognized once the conditions for payment have
been satisfied. Disposition gains for investment in Verisign Inc. were also
recorded in 2001. In 2000, the Company recorded $57,714 of pre-tax net gains due
primarily to the sale of investments in American Cellular, Aspect Developments
Inc., Mercator Software Inc., Viant Corporation and Verisign Inc., that were
part of the Enterprises portfolio.
In the first six months of 2001 the Company recorded a loss on the issuance
of investee's stock of $2,329. This loss primarily arose from the issuance by
TriZetto of shares of common stock in the second quarter. The majority of
these shares were included in a follow-on offering which generated proceeds
of about $56 million. 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 March 31, 2001 to approximately 28% on June 30, 2001. This loss was
partially 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 accordance with Staff Accounting Bulletin
("SAB") No. 51, "Accounting for Sales of Stock by a Subsidiary".
Other Expense-Net, decreased in the first six months to $7,809 from $13,673 in
the first six 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 six months of 2001, the effective tax rate was 28.3% compared to
32.2% in the comparable six months of 2000. This is more fully described in Note
9 to the Condensed Consolidated Financial Statements.
The TriZetto equity loss, net of income tax benefit, of $3,800, including
amortization of acquired intangibles, has been recorded in the first six months
of 2001. The Company had no investment in TriZetto as of June 30, 2000.
Net income for the first six months of 2001 decreased by 2.1% from $133,081 to
$130,351,
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)
primarily due to the reduction in gains from dispositions which offset growth in
the core business.
Basic earnings per share in the first six months of 2001 were $0.44 versus
earnings of $0.45 in the first six months of the prior year. Diluted earnings
per share in the first six months of 2001 were $0.43 compared with earnings of
$0.44 in the first six months of the prior year. The decline in earnings per
share was driven primarily by the reduction in gains from dispositions,
offsetting growth in the core business.
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 six months of 2001 increased 8.0% (13.9% on a
constant dollar basis) to $583,511 from $540,471 in the first six months of the
prior year. Sales Management revenue increased 11.0% (17.4% on a constant dollar
basis) to $356,566. 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 4.7% (9.8% on a constant dollar basis) to
$207,598, and Other Services revenue decreased 7.3% to $19,347. Other Services
revenue includes services and consultancy revenue and other ad hoc projects.
These are ad hoc and less predictable in nature, and the six monthly decrease in
Other Services revenue is due to the timing of such revenues.
IMS Segment operating income for the first six months increased 22.7% to
$186,402 from $151,869 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 six months, net of inter-segment sales, increased 55.7% to
$80,400 from $51,653 in the comparable period of the prior year. CTS operating
income for the period increased 54.6% to $17,263 in the first six months of 2001
from $11,164 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,
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)
therefore, there are no comparable operating results in 2001.
CASH FLOWS
Net cash provided by operating activities was $108,929 during the six months
ended June 30, 2001 as compared to a cash outflow of $92,415 during the six
months ended June 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 Legacy D&B Tax Contingency (see Note 7 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
$98,399 and $119,876 respectively. The decrease results primarily from higher
accounts receivable-net balances, driven by strong revenue growth and a
decrease in accrued and other current liabilities, partially offset by
increased cash flows from operations after the add-back of non-cash items.
The decrease in accrued and other current liabilities is primarily due to the
timing of bonus payments and the settlement of non-recurring items.
The Company's investing activities used net cash of $32,344 during the six
months ended June 30, 2001 as compared to net cash provided of $616 for the
comparable period in 2000. The decrease in 2001 primarily reflects reduced
proceeds from the sale of investments partially offset by reduced spending on
investments.
The Company's financing activities used net cash of $12,266 for the six months
ended June 30, 2001 as compared to net cash provided by financing activities of
$81,056 for the same period in 2000. The decrease in net cash provided by
financing activities is primarily due to lower short-term borrowings net of
repayments and higher payments for the purchase of treasury stock, partially
offset by a higher level of cash proceeds from the exercise of stock options in
2001, as compared to the prior year.
Financing Activities include cash dividends paid of $11,785 and $11,923 for the
six months ended June 30, 2001 and 2000 respectively. Dividends paid per share
were $0.02 for the quarter ended June 30, 2001.
At June 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
June 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 8 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.
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)
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 June 30, 2001, approximately 14.9 million shares have been
acquired under this program at a total cost of $377.6 million. During the first
six months of 2001, the Company repurchased approximately 6.4 million shares of
outstanding common stock at a total cost of $171.0 million.
FINANCIAL POSITION
Total assets increased by $37,091 at June 30, 2001, primarily due to higher cash
and cash equivalent balances (refer to Cash Flows for further details).
Total liabilities at June 30, 2001, decreased by $144,694 due primarily to a
reduced level of short-term borrowings, following increased proceeds from the
exercise of stock options. In addition the decrease was due to reduced accrued
and other current liabilities as a result of payment of amounts relating to
salaries, bonuses and other compensation and settlement of non-recurring items.
Shareholders' Equity increased to $279,327 at June 30, 2001 from $103,540 at
December 31, 2000. The increase is primarily due to the net income recorded for
the first six months of 2001 ($130,351), the impact of the exercise of stock
options ($211,547), the net tax benefit on the exercise of stock options
($24,764) and a net decrease in unrealized holding losses ($17,505), partially
offset by treasury stock repurchases ($170,961), adverse exchange rate movements
relating mainly to the Japanese Yen and the Euro ($27,975) and dividends paid
($11,785).
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 which is charged directly to retained earnings. 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.
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)
EURO CONVERSION
On January 1, 1999, 11 member countries of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency ("Euro"). The transition period for the introduction of the Euro
is between January 1, 1999 and January 1, 2002.
The Company instituted plans for the introduction of the Euro and addressed the
related issues, including the conversion of information technology systems,
recalculating currency risk, recalibrating derivatives and other financial
instruments, continuity of contracts, taxation and accounting records.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, as well as information included in oral
statements or other written statements made or to be made by IMS Health, contain
statements which, in the opinion of IMS Health, may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this Quarterly Report
and include, but are not limited to, all statements relating to plans for future
growth and other business development activities as well as capital
expenditures, financing sources, dividends and the effects of regulation and
competition, Euro conversion and all other statements regarding the intent,
plans, beliefs or expectations of IMS Health or its directors or officers.
Stockholders are cautioned that such forward-looking statements are not
assurances for future performance or events and involve risks and uncertainties
that could cause actual results and developments to differ materially from those
covered in such forward-looking statements. These risks and uncertainties
include, but are not limited to, risks associated with operating on a global
basis, including fluctuations in the value of foreign currencies relative to the
U.S. dollar, and the ability to successfully hedge such risks; to the extent IMS
Health seeks growth through acquisitions, alliances or joint ventures, the
ability to identify, consummate and integrate acquisitions, alliances and
ventures on satisfactory terms; the ability to develop new or advanced
technologies, systems and products for their businesses on time and on a
cost-effective basis including but not limited to those that use or are related
to the Internet; the ability to successfully maintain historic effective tax
rates and to achieve estimated corporate overhead levels; competition,
particularly in the markets for pharmaceutical information; regulatory,
legislative and enforcement initiatives, particularly in the area of medical
privacy and tax; the ability to timely and cost-effectively resolve any problems
associated with the Euro currency issue, including the possibility of problems
with internal data processing systems; the ability to obtain future financing on
satisfactory terms; deterioration in economic conditions, particularly in the
pharmaceutical, healthcare, or other industries in which IMS Health's customers
may operate; consolidation in the pharmaceutical industry and the other
industries in which IMS Health's customers operate; conditions in the securities
markets which may effect the value or liquidity of portfolio investments and
management's estimates of lives of assets, recoverability of assets, fair market
value, estimates and liabilities and accrued income tax benefits and
liabilities; and; failure of third parties to convert their information
technology systems to the Euro currency in a timely manner and actions of
government agencies and other third parties with respect to Euro currency
issues. Consequently, all the forward-looking statements contained in this
Quarterly Report on Form 10-Q are qualified by the information contained herein,
including, but
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)
not limited to, the information contained under this heading and the Condensed
Consolidated Financial Statements and notes thereto for the three and six month
periods ended June 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 8. Financial
Instruments" of Notes to Condensed Consolidated Financial Statements on pages
17-19.
33
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 7. Contingencies" of Notes to Condensed
Consolidated Financial Statements on pages 12 through 17 hereof.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 26, 2001, in reliance upon the exemption provided in Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), the Company issued to
Quintiles Transnational Corp. 53,039 shares of its Common Stock that were not
registered under the Securities Act. The shares were issued in connection with
the Purchase Agreement (the "Purchase Agreement") dated as of August 3, 1998
among IMS Health and Pharmaceutical Marketing Services Inc., PMSI Holdings
Limited and Source Informatics European Holdings LLC (collectively, "PMSI"),
pursuant to which IMS Health acquired certain non-U.S. assets of PMSI. Under the
Purchase Agreement, PMSI had agreed to arrange for the sale of a building in the
Netherlands acquired by IMS Health in the transaction. In exchange, IMS Health
agreed to issue to PMSI an amount of its Common Stock equal in value at the time
of the sale to the proceeds from the sale of the building, after various
adjustments. The sale of the building occurred on February 5, 1999 and the
adjusted amount of the proceeds from the sale was $1,745,539, which the parties
agreed was equal in value, at the time of the sale, to 53,039 shares of the
Company's common stock. Quintiles Transnational Corp. is currently the parent
company of PMSI.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of IMS Health Incorporated was held on May 3,
2001.
The following nominees for director named in the Proxy Statement dated March 30,
2001 were elected at the Meeting by the votes indicated:
FOR WITHHELD
--- --------
Clifford L. Alexander, Jr. 218,750,413 34,374,149
David M. Thomas 250,212,452 2,912,110
William C. Van Faasen 250,163,436 2,961,126
The votes in favor of the election of the nominees represent at least 86% of the
shares present at the meeting.
Approval of the appointment of PricewaterhouseCoopers LLP as Independent Public
Accountants was approved by the following vote:
34
PART II. OTHER INFORMATION (continued)
FOR AGAINST ABSTAIN
--- ------- -------
Number of Shares 251,644,755 729,314 750,493
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 IMS Health Incorporated Long-Term Incentive Program, effective January 1,
2001.
(b) Reports on 8-K:
A report on Form 8-K was filed on June 15, 2001 to present under Item 9,
Regulation FD Disclosure, disclosure regarding (i) an investor presentation by
representatives of management of the Company at the Goldman Sachs' 22nd Annual
Healthcare Conference on June 13, 2001 and (ii) additional information regarding
the Company's disposition in the first quarter of 2001 of IDRAC Holdings Inc.
35
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: August 14, 2001 James C. Malone
Chief Financial Officer
/s/ Wendy J. Timmins
----------------------------------
Date: August 14, 2001 Wendy J. Timmins
Vice President & Controller
(Principal Accounting Officer)
36