-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VZBOBbV1/uPMw4RjARoPLy4kEfQ0ScZvXvgbQJlhBMuLokMxY0m3r8gwyfHggVsD fDeUeY3zSkcOqgutmkvlEQ== /in/edgar/work/0000912057-00-048692/0000912057-00-048692.txt : 20001114 0000912057-00-048692.hdr.sgml : 20001114 ACCESSION NUMBER: 0000912057-00-048692 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMS HEALTH INC CENTRAL INDEX KEY: 0001058083 STANDARD INDUSTRIAL CLASSIFICATION: [7374 ] IRS NUMBER: 061506026 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14049 FILM NUMBER: 758969 BUSINESS ADDRESS: STREET 1: 200 NYALA FARMS CITY: WESTPORT STATE: CT ZIP: 06880 BUSINESS PHONE: 2032224523 MAIL ADDRESS: STREET 1: 200 NYALA FARMS ROAD CITY: WESTPORT STATE: CT ZIP: 06880 10-Q 1 a2029637z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark one) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------ OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _______________ Commission file number 001-14049 --------- IMS HEALTH INCORPORATED - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1506026 - ---------------------------------------- ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 200 Nyala Farms, Westport, CT 06880 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 222-4200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of Class Shares Outstanding Common Stock, At September 30, 2000 ------------- --------------------- par value $.01 per share 293,656,644 IMS HEALTH INCORPORATED INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION PAGE(S) - ----------------------------- ------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income Three Months Ended September 30, 2000 and 1999 3 Condensed Consolidated Statements of Income Nine Months Ended September 30, 2000 and 1999 4 Condensed Consolidated Statements of Comprehensive Income Three Months and Nine Months Ended September 30, 2000 and 1999 5 Condensed Consolidated Statements of Financial Position September 30, 2000 and December 31, 1999 6 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 1999 7-8 Notes to Condensed Consolidated Financial Statements 9-28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 29-45 Item 3. Quantitative and Qualitative Disclosures About Market Risk 45 PART II. OTHER INFORMATION Item 1. Legal Proceedings 46 Item 6. Exhibits and Reports on Form 8-K 46 SIGNATURES 47 2 PART I. FINANCIAL INFORMATION Item I. FINANCIAL STATEMENTS IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except share and per share data)
Three Months Ended September 30, -------------------------------- 2000 1999 -------------------------------- Operating Revenue $ 355,867 $ 348,409 Operating Costs 136,447 129,298 Selling and Administrative Expenses 95,475 94,865 Depreciation and Amortization 23,237 26,288 Spin and Related Costs* 31,254 2,000 Impairment Charge - Synavant* 115,453 -- - ----------------------------------------------------------------------------------------------------------------- Operating (Loss) Income (45,999) 95,958 - ----------------------------------------------------------------------------------------------------------------- Interest Income 997 2,591 Interest Expense (6,660) (2,138) Loss on Gartner Shares Contributed to Synavant (See Note 3) (3,102) -- Gains from Dispositions--Net 6,201 4,313 Other Expense--Net (5,785) (3,221) - ----------------------------------------------------------------------------------------------------------------- Non-Operating (Expense) Income--Net (8,349) 1,545 - ----------------------------------------------------------------------------------------------------------------- (Loss) Income Before Provision for Income Taxes (54,348) 97,503 Provision for Income Taxes (4,069) (27,263) - ----------------------------------------------------------------------------------------------------------------- (Loss) Income from Continuing Operations (58,417) 70,240 Income from Discontinued Operations, Net of Income Taxes of $1,198 and $931 for 2000 and 1999 respectively 2,226 1,384 - ----------------------------------------------------------------------------------------------------------------- Net (Loss) Income $ (56,191) $ 71,624 - ----------------------------------------------------------------------------------------------------------------- Basic (Loss) Earnings Per Share of Common Stock: (Loss) Income from Continuing Operations $ (0.20) $ 0.23 Income from Discontinued Operations 0.01 0.00 - ----------------------------------------------------------------------------------------------------------------- Basic (Loss) Earnings Per Share of Common Stock $ (0.19) $ 0.23 - ----------------------------------------------------------------------------------------------------------------- Diluted (Loss) Earnings Per Share of Common Stock: (Loss) Income from Continuing Operations $ (0.20) $ 0.22 Income from Discontinued Operations 0.01 0.00 - ----------------------------------------------------------------------------------------------------------------- Diluted (Loss) Earnings Per Share of Common Stock $ (0.19) $ 0.22 - ----------------------------------------------------------------------------------------------------------------- Weighted Average Number of Shares Outstanding--Basic 295,749,000 311,159,000 Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans -- 6,185,000 Adjustment of Shares Outstanding Applicable to Exercised/Cancelled Stock Options During the Period -- 328,000 - ----------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding--Diluted 295,749,000 317,672,000 - -----------------------------------------------------------------------------------------------------------------
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. * As more fully described in Note 6 and Note 7 these costs relate directly to Synavant, now a separate publicly traded company, or were a result of the Synavant Spin. Note 14 "Operations by Business Segment" provides operating results for the core IMS and CTS Segments. Diluted net loss per share is computed in the same manner as basic net loss per share since the company experienced a net loss for the quarter ended September 30, 2000 and, therefore, including potential common shares would be antidilutive. For the quarter ended September 30, 2000, the dilutive impact on the weighted average number of shares outstanding would have been 1.9 million shares. 3 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except share and per share data)
Nine Months Ended September 30, -------------------------------- 2000 1999 -------------------------------- Operating Revenue $ 1,077,791 $ 994,303 Operating Costs 420,625 403,159 Selling and Administrative Expenses 328,164 293,047 Depreciation and Amortization 73,140 75,174 Spin and Related Costs* 32,801 9,500 Impairment Charge - Synavant* 115,453 -- - ----------------------------------------------------------------------------------------------------------------- Operating Income 107,608 213,423 - ----------------------------------------------------------------------------------------------------------------- Interest Income 3,001 6,371 Interest Expense (10,027) (4,672) Loss on Gartner Shares Contributed to Synavant (See Note 3) (3,102) -- Gains from Dispositions--Net 63,915 20,590 Other Expense--Net (19,458) (11,457) - ----------------------------------------------------------------------------------------------------------------- Non-Operating Income--Net 34,329 10,832 - ----------------------------------------------------------------------------------------------------------------- Income Before Provision for Income Taxes 141,937 224,255 Provision for Income Taxes (67,273) (64,048) - ----------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 74,664 160,207 Income from Discontinued Operations, Net of Income Taxes of $1,198 and $12,635 for 2000 and 1999 respectively 2,226 25,695 - ----------------------------------------------------------------------------------------------------------------- Net Income $ 76,890 $ 185,902 - ----------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share of Common Stock: Income from Continuing Operations $ 0.25 $ 0.51 Income from Discontinued Operations 0.01 0.08 - ----------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share of Common Stock $ 0.26 $ 0.59 - ----------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock: Income from Continuing Operations $ 0.25 $ 0.50 Income from Discontinued Operations 0.01 0.08 - ----------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock $ 0.26 $ 0.58 - ----------------------------------------------------------------------------------------------------------------- Weighted Average Number of Shares Outstanding--Basic 297,627,000 314,431,000 Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 1,937,000 6,810,000 Adjustment of Shares Outstanding Applicable to Exercised/Cancelled Stock Options During the Period 218,000 565,000 - ----------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding--Diluted 299,782,000 321,806,000 - -----------------------------------------------------------------------------------------------------------------
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. * As more fully described in Note 6 and Note 7 these costs relate directly to Synavant, now a separate publicly traded company, or were a result of the Synavant Spin. Note 14 "Operations by Business Segment" provides operating results for the core IMS and CTS Segments. 4 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollar amounts in thousands)
Three Months Ended September 30, ------------------------ 2000 1999 ------------------------ Net (Loss) Income $ (56,191) $ 71,624 Other Comprehensive Income, Net of Taxes: Foreign Currency Translation Adjustments 4,590 10,301 Unrealized Gains/(Losses) on Securities: Unrealized Holding Gains/(Losses) on Securities Arising During the Period: Investments (Net of Tax Expense of $15,692 in 2000 (29,148) 4 Gartner Shares Held For Sale (Net of Tax (Benefit) Expense of ($889) and $10,195 for 2000 and 1999 respectively) (1,652) 18,934 Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax Expense of $1,895 for 2000 and $1,410 for 1999) (3,520) (3,738) - ----------------------------------------------------------------------------------------------------------------------- Change in Unrealized (Losses)/Gains on Investments, Net of Tax (34,320) 15,200 - ----------------------------------------------------------------------------------------------------------------------- Total Other Comprehensive (Loss)/Income, Net of Tax (29,730) 25,501 - ----------------------------------------------------------------------------------------------------------------------- Comprehensive (Loss) Income $ (85,921) $ 97,125 ======================================================================================================================= Nine Months Ended September 30, ------------------------ 2000 1999 ------------------------ Net (Loss) Income $ 76,890 $ 185,902 Other Comprehensive Income, Net of Taxes: Foreign Currency Translation Adjustments (13,915) (21,133) Unrealized Gains/(Losses) on Securities: Unrealized Holding Gains/(Losses) on Securities Arising During the Period: Investments (Net of Tax Expense/(Benefit) of $9,246 and ($710) for 2000 and 1999, respectively) 29,736 (1,880) Gartner Shares Held For Sale (Net of Tax Expense/(Benefit) of ($8,748) and $10,195 for 2000 and 1999, respectively) (16,247) 18,934 Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax Expense of $9,675 and $4,212 for 2000 and 1999, respectively). (25,007) (11,161) - ----------------------------------------------------------------------------------------------------------------------- Change in Unrealized (Losses)/Gains on Investments, Net of Tax (11,518) 5,893 - ----------------------------------------------------------------------------------------------------------------------- Total Other Comprehensive Loss, Net of Tax (25,433) (15,240) - ----------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 51,457 $ 170,662 =======================================================================================================================
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. The Company has significant operations outside of the United States. Therefore, changes in the value of foreign currencies affect the Company's Condensed Consolidated Financial Statements when translated into U.S. dollars. The currency translation adjustment excludes the offsetting impact of the Company's hedging program. (See Note 10 to the Condensed Consolidated Financial Statements). 5 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) (Dollar amounts in thousands, except per share data)
September 30, December 31, 2000 1999 ---------------------------- Assets: Current Assets: Cash and Cash Equivalents $ 106,389 $ 115,875 Accounts Receivable-Net 221,260 284,679 Other Receivable (see Note 9) 41,136 -- Other Current Assets 109,568 109,908 Net Assets from Discontinued Operations (see Note 3) 81,060 96,988 - ------------------------------------------------------------------------------------------------ Total Current Assets 559,413 607,450 - ------------------------------------------------------------------------------------------------ Securities and Other Investments 155,693 127,415 Property, Plant and Equipment-Net 146,180 169,190 Other Assets-Net: Computer Software 146,873 174,974 Goodwill 156,756 339,491 Other Assets 33,326 32,236 Note and Interest Receivable from Related Party (see Note 10) 3,062 -- - ------------------------------------------------------------------------------------------------ Total Other Assets-Net 340,017 546,701 - ------------------------------------------------------------------------------------------------ Total Assets $ 1,201,303 $ 1,450,756 - ------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity: Current Liabilities: Accounts Payable $ 32,920 $ 44,577 Accrued and Other Current Liabilities 189,466 196,375 Short Term Debt 339,232 134,663 Accrued Income Taxes 74,082 211,592 Deferred Revenues 90,668 136,196 - ------------------------------------------------------------------------------------------------ Total Current Liabilities 726,368 723,403 - ------------------------------------------------------------------------------------------------ Post-retirement and Post-employment Benefits 27,778 27,429 Other Liabilities 101,067 81,343 - ------------------------------------------------------------------------------------------------ Total Liabilities 855,213 832,175 - ------------------------------------------------------------------------------------------------ Commitments and Contingencies Minority Interests 131,507 124,875 Shareholders' Equity: Common Stock, Par Value $.01, Authorized 800,000,000 Shares; Issued 335,045,390 Shares at September 30, 2000 and December 31, 1999, respectively 3,350 3,350 Capital in Excess of Par 738,298 738,993 Retained Earnings 725,635 804,452 Treasury Stock, at Cost, 41,388,746 and 32,901,441 Shares at September 30, 2000 and December 31, 1999, respectively (1,187,908) (1,013,730) Cumulative Translation Adjustment (110,150) (96,235) Unrealized (Loss)Gains on Gartner Group Holdings, net of tax (682) 15,565 Unrealized Gains on Investments, net of tax 46,040 41,311 - ------------------------------------------------------------------------------------------------ Total Shareholders' Equity 214,583 493,706 - ------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $ 1,201,303 $ 1,450,756 - ------------------------------------------------------------------------------------------------
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements 6 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollar amounts in thousands)
Nine Months Ended September 30, ------------------------------- 2000 1999 ------------------------------- Cash Flows from Operating Activities: Net Income $ 76,890 $ 185,902 Less Income from Discontinued Operations (2,226) (25,695) - --------------------------------------------------------------------------------------------- Income from Continuing Operations 74,664 160,207 Reconciliation of Net Income to Net Cash Provided by Operating Activities: Impairment Charge - Synavant 115,453 -- Depreciation and Amortization 73,140 75,174 Gains from Sale of Investments, Net (63,915) (20,590) Loss on Gartner Shares Contributed to Synavant 3,102 -- Benefit Payments (1,782) (10,469) Net Decrease in Accounts Receivable 176 24,414 Net Decrease in Deferred Revenues (30,591) (16,583) Minority Interests 10,868 4,189 Deferred Income Taxes 3,707 (2,338) Net Increase in Accrued Income Taxes 36,868 46,006 Net Decrease in Accrued and Other Current Liabilities 17,680 (10,252) Other Working Capital Items (3,831) (18,000) - --------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 235,539 231,758 - --------------------------------------------------------------------------------------------- Cash Flows Used in Investing Activities: Proceeds from Sale of Investments, Net 70,245 46,759 Acquisition and Integration Payments (4,796) (28,248) Payments for Acquisition of Business -- (3,100) Capital Expenditures (22,085) (23,243) Additions to Computer Software (37,832) (44,496) Net Increase in Other Investments (25,929) (16,500) Other Investing Activities - Net (4,147) 8,355 - --------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (24,544) (60,473) - --------------------------------------------------------------------------------------------- Cash Flows Used in Financing Activities: Payments for Purchase of Treasury Stock (198,716) (359,859) Proceeds from Exercise of Stock Options 19,590 22,669 Dividends Paid (17,866) (18,923) Proceeds from Employee Stock Purchase Plan 1,766 3,514 Payment on D&B Tax Contingency (212,291) -- Short-Term Borrowings 251,122 243,443 Short-Term Debt Repayments (40,500) (113,306) Synavant Dividend (19,438) -- Other Financing Activities - Net 13 (213) - --------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (216,320) (222,675) - --------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents (4,161) (7,827) Effect of Change in Year End of the IMS Operating Units -- 30,664 Cash Flow Provided By Discontinued Operations -- 52,877 - --------------------------------------------------------------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (9,486) 24,324 Cash and Cash Equivalents, Beginning of Period 115,875 206,390 - --------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Period $ 106,389 $ 230,714 - ---------------------------------------------------------------------------------------------
7
Nine Months Ended September 30, ------------------------------- 2000 1999 ------------------------------- Supplemental Disclosure of Cash Flow Information: Cash Paid during the Period for Interest $ 10,089 $ 4,731 Cash Paid during the Period for Income Taxes (Exclusive of payment of D&B Tax Contingency- See Note 9 to the Condensed Consolidated Financial Statements.) $ 37,160 $ 57,478 Cash Received from Income Tax Refunds $ 13,165 $ 42,449 Non-Cash Investing Activities: Dividend of Gartner Shares -- $134,259 Synavant Dividend $118,403 --
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 8 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Note 1. Interim Consolidated Financial Statements The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended. The Condensed Consolidated Financial Statements and related notes should be read in conjunction with the consolidated financial statements and related notes of IMS Health Incorporated (the "Company" or "IMS Health") in the 1999 Annual Report on Form 10-K. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been included. Certain prior-period amounts have been reclassified to conform to the 2000 presentation. Note 2. Basis of Presentation IMS Health is the world's leading provider of information solutions to the pharmaceutical and healthcare industries. IMS Health operates in over 100 countries. At September 30, 2000, IMS Health consists of (a) the IMS segment ("IMS"), which consists of the market information and decision support services business for the pharmaceutical and healthcare industries conducted by IMS Health and various subsidiaries; (b) a controlling interest in Cognizant Technology Solutions Corporation ("CTS"), and (c) ERISCO Managed Care Technologies Inc., as the primary component within the Transaction Business Segment. During the quarter IMS Health also included the segment containing (i) the pharmaceutical industry automated sales and marketing support business of IMS Health Strategic Technologies, Inc. ("Strategic Technologies"), substantially all of IMS Health's interactive and direct marketing business, including the business of Clark-O'Neill, Inc. ("Clark-O'Neill"), and a majority stake in a foreign joint venture (collectively, "Synavant") (ii) ERISCO Managed Care Technologies, Inc. ("Erisco") and (iii) three small non-strategic software businesses ((i), (ii) and (iii), collectively, the "Transaction Businesses"). The Company spun off the Synavant business in the quarter, divested ERISCO on October 3, 2000 and intends to divest the remaining businesses in the Transaction Businesses Segment (See Note 14). The Company's venture capital unit, Enterprises, is managed as a corporate activity. The Condensed Consolidated Financial Statements of the Company have been reclassified for the periods presented to reflect the Gartner Group Inc. ("Gartner") equity investment as a discontinued operation (See Note 3). Effective in the first quarter of 1999, IMS operating units which previously reported on a fiscal year ending November 30 revised their reporting period to conform to the Company's fiscal year ending December 31. 9 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Note 3. Investment in Gartner Group Stock On November 11, 1998, the Company announced that its Board of Directors had approved a plan to spin-off substantially all of its equity ownership of Gartner (the "Gartner Spin-Off"). As provided for under the Distribution Agreement, entered into between Gartner and the Company, 40,689,648 Gartner Class A Shares were converted into an equal number of Gartner Class B Shares. As a result of the then proposed Gartner Spin-off, the Company at the time ceased recognition of gains in accordance with Securities and Exchange Commission Staff Accounting Bulletin 51 ("SAB 51") in the fourth quarter of 1998. On July 16, 1999, subject to Gartner shareholder approval, the IMS Health and Gartner Boards of Directors approved the final plan, terms and conditions governing the Spin-off of the Company's investment in Gartner. Upon Gartner shareholder approval, which was obtained on July 16, 1999, in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", the Financial Statements of the Company were reclassified to reflect the Gartner equity investment as a discontinued operation for the periods presented. On July 16, 1999, the Company's Board of Directors declared a dividend of all Gartner Class B Shares, which was distributed on July 26, 1999 to holders of the Company's Common Stock of record as of July 17, 1999. The transaction was structured as a tax-free distribution of Gartner stock to IMS Health shareholders and the Company received a favorable ruling from the Internal Revenue Service ("IRS"). The distribution consisted of 0.1302 Gartner Class B Shares for each outstanding share of the Company's Common Stock (the "Gartner Distribution"). The Company's remaining investment in Gartner at September 30, 2000 consists of 6,909,457 Gartner Class A Shares and warrants to purchase a further 599,400 Gartner Class A Shares (at an original cost basis of $81,422). Under the terms of the IRS ruling, the Company must monetize the remaining position in Gartner to maintain the tax-free nature of the Gartner Distribution. Accordingly, the net assets from discontinued operations in the amount of $81,060 are included in current assets at September 30, 2000. As the Company intends to dispose of these remaining securities, the Company's Gartner Class A shares have been accounted for as "available for sale" securities in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The unrealized gain as of the date of the Gartner Distribution (based on the then per share price of $22.75 on Gartner Stock, the price at the time of the Gartner Distribution) was $49,353 (net of taxes of $27,847), and was recorded as Other Comprehensive Income and included as a component of Shareholders' Equity. Subsequent changes in the per share price of Gartner Stock from the date of the Gartner Distribution to September 30, 2000 (based on a per share price of $11.625 of Gartner Stock at September 30, 2000) generated an unrealized loss of $49,353 since the date of the Gartner Distribution (net of taxes of $27,836), which was also recorded as Other Comprehensive Income and included as a component of Shareholders' Equity. Upon the sale or disposal of these securities, the unrealized gain relating to those securities measured based on the value of the Gartner shares as of the date of the Gartner Distribution will be recognized in Discontinued Operations. The unrealized gains or losses in the fair value 10 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) subsequent to the date of the Gartner Distribution will be recognized in Continuing Operations as shares are sold. There were no sales of Gartner shares during the nine months ended September 30, 2000. The Company has, however, agreed to contribute 312,195 Gartner Class A Shares to Synavant as part of the Synavant Spin-off described in Note 6. This contribution had a fair market value of $4,000 at the date of the Synavant Spin-off, and resulted in a realized gain of $3,424 which was recorded as income from discontinued operations (net of applicable taxes of $1,198), to reflect the difference between the fair market value at the date of the Gartner Spin-off (July 26,1999) and the book value; and a loss for dispositions of $3,102 which was reflected in Loss on Gartner Shares Contributed to Synavant to reflect the difference between the fair market value at the date of the Gartner Spin-off (July 26,1999) and the date of the Synavant Spin-off (August 31, 2000). Note 4. Dispositions During the third quarter of 2000, the Company recorded $6,201 of pre-tax net gains primarily due to a partial sale of e-Credit to Internet Capital Group Inc. and the sale of marketable investments in Verisign, Inc. Both Verisign and e-Credit were part of the Enterprises portfolio. In addition, a loss of $3,102 was recorded on the value of Gartner Group shares that will be contributed to Synavant as part of the Synavant Spin-off. A gain of $2,226, net taxes of $1,198 is recorded in discontinued operations for the same distribution of Gartner shares to Synavant. (See Note 6). During the first nine months of 2000, the Company recorded $63,915 of pre-tax net gains due primarily to the sale of investments in American Cellular, Aspect Development, Inc., Mercator Software, Inc., Viant Corporation and Verisign, Inc. that were part of the Enterprises portfolio. Cash received, net of costs to dispose, amounted to $70,245 in the nine months. These were in addition to the Gartner Group share loss and gain noted above. In the third quarter, senior management of GIC Gesellschaft fur Informationstechnologie und Consulting GmbH, formerly a wholly-owned subsidiary of IMS Health, and its newly-formed affiliated company, GIC Global Information Technology and Consulting GmbH (collectively, "GIC") completed a management buy-out of IMS Health's data processing center located in Frankfurt, Germany. Under the terms of the purchase agreement, the aggregate purchase price of $6,100 will be paid to IMS Health in monthly installments ending August 1, 2001 through the rendering of data processing and technology solution services by GIC at no charge to IMS Health. These services and associated operating costs have been specified under the terms of an outsourcing agreement entered into by IMS Health and GIC. The Company recognized the fair value of the services received and a pre-tax gain of approximately $1,600 in the third quarter in respect of services rendered by GIC in that quarter. The gain on this transaction was included in Operating Costs in the Company's consolidated statement of income. The remaining portion of the gain (approximately $3,000) has been deferred and will be recognized as services are rendered in accordance with the agreement. The operating results of the Frankfurt data center were not material to the Company's consolidated operating results in any of the periods presented. Under the outsourcing agreement, GIC is obligated to render fully dedicated mainframe processing and client/server services to IMS Health until such time as these services are fully migrated to IMS Health's global computing center located in Plymouth Meeting, Pennsylvania. 11 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) IMS Health intends to complete the migration of its mainframe computing systems to its Plymouth Meeting facility by January 31, 2001 and its client/server systems during 2001. IMS Health will also purchase certain other technology solution services from GIC under the terms of the outsourcing agreement. Note 5. Securities and Investments Allscripts On February 17, 2000, IMS Health announced an alliance with Allscripts, Inc. ("Allscripts") (NASDAQ:MDRX) to develop and market new Internet-based information solutions for the pharmaceutical industry. In conjunction with the agreement IMS Health made a private equity investment of $10,000 to acquire 214,794 shares of Allscripts common stock. IMS Health's investment in Allscripts is carried at cost and is included in "Securities and Other Investments". Other Investments Amounts for Equity Securities are included in the Condensed Consolidated Statements of Financial Position as Securities and Other Investments. Securities and Other Investments include the Company's private equity investments in venture capital partnerships. Such investments are carried at cost. During the nine months ended September 30, 2000 the venture capital partnerships distributed shares to the Company in US Interactive Inc. Verisign, Inc., Internet Capital Group and Internet Pictures Corporation. These were distributed at historical cost and, upon distribution, these shares became available for sale and have accordingly been marked to market. Note 6. Spin-Off of Synavant Inc. On August 31, 2000, IMS Health completed the Spin-off of Synavant Inc., its wholly owned subsidiary, as an independent publicly traded company. Synavant is a newly created Delaware corporation. Prior to the Spin-off, IMS Health transferred to Synavant selected assets and liabilities held by IMS Health and its subsidiaries related to the businesses that Synavant is expected to operate. Synavant's businesses include the pharmaceutical industry automated sales and marketing support businesses previously operated by IMS Health Strategic Technologies Inc. and certain other foreign subsidiaries of IMS Health, substantially all of IMS Health's interactive and direct marketing business, including the business of Clark-O'Neill, Inc., a wholly owned subsidiary of IMS Health, and a majority stake in a foreign joint venture. IMS Health distributed (the "Distribution") to its shareholders of record as of the close of business on July 28, 2000 all of the outstanding shares of common stock, par value $0.01 per share, of Synavant (the "Synavant Common Stock"). The Distribution was effected by means of a pro rata dividend to the IMS Health shareholders of one share of Synavant Common Stock (together with the associated preferred share purchase right) for every twenty shares of common stock, par value $0.01 per share, of IMS Health (the "IMS Common Stock") held. In lieu of fractional shares of Synavant Common Stock, each IMS Health shareholder received a cash payment representing such holder's proportionate interest in the net proceeds from the sale by the distribution agent for the Distribution of the aggregate fractional shares of Synavant Common 12 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Stock. The Distribution has been accounted for as a tax-free pro-rata dividend to IMS shareholders and charged to retained earnings based on the book value of assets distributed to Synavant as at the date of the Distribution (August 31, 2000). The dividend charged to retained earnings totaled $137,841 and was comprised of assets of $181,032 (including $43,175 of Accounts Receivable and $58,450 of Goodwill) and liabilities of $43,191 (including $15,246 of Accrued Liabilities and $9,170 of Deferred Revenue). In connection with the Distribution, IMS Health and Synavant entered into a Distribution Agreement (the "Distribution Agreement"), providing for, among other things, certain corporate transactions required to effect the Distribution and other arrangements between IMS Health and Synavant subsequent to the Distribution. In particular, the Distribution Agreement defines the assets, liabilities and contractual relationships which are being allocated to and assumed by Synavant and those that will remain with IMS Health. This includes IMS Health's agreement to indemnify Synavant with respect to certain contingent liabilities. On August 11, 2000 Synavant obtained a revolving line of credit from Sun Trust Bank ($20,000) for working capital purposes. The line of credit is guaranteed by The Company, and terminates the earlier of December 31 or ninety days from the Distribution Date. Synavant expects to obtain an independent line of credit. If this is not possible, the Company is obligated to provide credit support through August 31, 2001 in assisting Synavant in obtaining a line of credit. In addition to the Distribution Agreement, IMS Health and Synavant also entered into other agreements governing the relationship between IMS Health and Synavant. These include various Data Rights Agreements, a Tax Allocation Agreement, an Employee Benefits Agreement, a Data and Telecommunications Service Agreement, certain Sublease Arrangements, a Corporate Services Agreement, Shared Transaction Services Agreements, an Information Service Agreement and certain Credit Support Arrangements. After the date of the Distribution, there will be individuals on the Boards of Directors of IMS Health and Synavant who will also serve on the Board of Directors of the other company. No consideration was payable by IMS Health shareholders for the shares of Synavant Common Stock, nor were such shareholders required to surrender or exchange shares of IMS Common Stock or take any action in order to receive the shares of Synavant Common Stock. IMS has received an opinion from outside counsel that the Distribution should qualify under Section 355 of the Internal Revenue Code and be tax free to IMS Health and to IMS Health shareholders for U.S. federal income tax purposes. As an opinion of counsel does not bind the Internal Revenue Service or the courts, the IRS may challenge positions taken on an opinion of counsel and could assert claims, which could be material in amount, in connection with the Distribution. Outside counsel, however, is of the opinion that if the matter were litigated as a result of an assertion by the IRS that the Distribution should be taxable, the taxpayers should prevail. If the Distribution were not to qualify as tax free under Section 355 of the Internal Revenue Code, then, in general, a corporate tax would be payable by the consolidated group, of which IMS Health is a common parent and Synavant is a member, based on the difference between (x) the fair market value of the Synavant Common Stock and (y) the adjusted basis of such Synavant Common Stock. In addition, under the consolidated return rules, each member of the consolidated group would be severally liable for such tax liability. IMS Health estimates that the aggregate tax liability in this regard would be approximately $100,000. Pursuant to the Tax Allocation 13 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Agreement, IMS Health will 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 this risk is not probable. Historically, the Synavant Business was managed as part of the IMS Segment. Effective with the decision to Spin-off Synavant, the business was managed as part of the other transaction businesses and accordingly its results are included in the Transaction Businesses Segment. Selected financial data for Synavant is included in Note 14. Additional information concerning Synavant and the Distribution is contained in Synavant's registration Statement on Form 10/A (Amendment No. 3) (Commission File No. 000-30822), which was declared effective by the Securities and Exchange Commission on August 29, 2000. In connection with the Spin-off of Synavant, the Company incurred $31,254 of costs for the quarter ended September 30, 2000 ($32,801 for the 9 months). These costs include $8,248 for expenses related to reductions in the IMS and corporate administrative workforce (124 positions) resulting from consolidation following the Synavant Spin-off. As at September 30, 2000, 31 employees under the ongoing employee protection program have left the company for payments of $2,382. Additionally, a data processing agreement with a third party for $5,200 will not be used by the Company as a result of the Company's determination to streamline IMS's operations to focus on its core business. In accordance with the settlement of this liability the Company has paid $2,400 with a remaining balance to be paid (included within Accrued and Other Current Liabilities), of $2,800 as of September 30, 2000. The remaining Spin-off charges relate primarily to legal, professional and other direct incremental costs. Holders of options to purchase the Company's stock did not receive shares in the Synavant Distribution. Consequently, options granted under the Company's plans were adjusted to recognize the effect of the Synavant Distribution. The options, as adjusted, represented an increase in the number of shares issuable when exercised but maintained the same ratio of the exercise price to the market value per share, the same aggregate difference between market value and exercise price and the same vesting provisions, option periods and other terms and conditions as the options prior to the adjustment. The option adjustment was performed in accordance with the provisions of Emerging Issues Task Force (EITF) Statement Number 90-9. Accordingly, no compensation charge was required for this option adjustment. Note 7. Impairment Charge - Synavant On July 14, 2000, Synavant entered into a 5-year strategic alliance with Siebel Systems, Inc. ("Siebel"), a leading provider of eBusiness applications software. Through the alliance, the companies intend to jointly develop, market and sell pharmaceutical and healthcare related versions of Siebel's eBusiness software applications. As part of the strategic alliance, Synavant and Siebel entered into (1) a Value Added Industry Remarketer Agreement (the "Reseller Agreement"), (2) a Siebel Alliance Program Master Agreement (the "Alliance Agreement"), and (3) a license of certain Siebel software for Synavant's internal use. Pursuant to the Reseller Agreement, Siebel appointed Synavant as a non-exclusive distributor of certain Siebel Licensed software. Under this arrangement, Synavant has 14 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) the right to distribute and sublicense Siebel software products to companies in the life sciences industry worldwide in conjunction with Synavant's own proprietary software and services. As part of the arrangement, Siebel and Synavant share in the sublicensing and maintenance fees generated from the licensing of the Siebel software. Under the terms of the agreement, Synavant will pay Siebel a license fee of $2.5 million. Additionally, the Reseller Agreement limits the extent to which Synavant may independently develop, integrate, market, license or distribute products that are directly competitive with those packaged and promoted by Siebel. Synavant may, however, continue to license and support its existing Cornerstone and Premiere customers. The Reseller Agreement contemplates a five-year term for the alliance, however the parties may, under certain circumstances, extend the agreement for an additional two years on the same terms as the existing agreement. It also contains certain provisions that would allow for early termination in the event certain contractual requirements are not met. The Alliance Agreement complements the Reseller Agreement and establishes a framework for the joint marketing efforts by Synavant and Siebel to such life sciences companies. Under this arrangement Synavant will be a Siebel Strategic Software Partner throughout the world to serve the life sciences market. Synavant will be permitted to use the Siebel logos and marks as part of the joint marketing effort in its promotional materials. Under the terms of the alliance, Synavant is contractually obligated to discontinue the future enhancement and development of the Cornerstone and Premiere products, but will continue to support users of these products under current and future contracts. Management anticipates that these products will eventually be phased out and replaced by a new generation of joint solution offerings incorporating Siebel technology. As a result of this transaction, Synavant management has concluded that significant portions of its software (including acquired technology), and enterprise-wide goodwill are not recoverable. Synavant has completed its assessment of the financial impact of this transaction with respect to determining the amount of the impairment to capitalized software and enterprise-wide goodwill. Under its accounting policy for capitalized software, Synavant performed a net realizable value analysis to determine the recoverability of its capitalized software assets. This analysis resulted in a write-down of its capitalized software asset balance of $14,553 in the period ended September 30, 2000. Under its accounting policy for goodwill impairment, Synavant completed a discounted cash flow analysis on an enterprise wide basis, resulting in a write down of $100,900 of goodwill in the period ended September 30, 2000. The total impairment charge is shown on the income statement for $115,453. The impairment charge has been recorded in the results of IMS Health's Transaction Businesses Segment. This charge is being recorded by IMS Health as a result of the Siebel transaction being 15 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) effected prior to the Spin-off of Synavant. The impairment charge does not affect the IMS Segment (See Note 14). Note 8. Minority Interests The Company consolidates the assets, liabilities, and results of operations and cash flows of businesses and investments in which it has control. Third parties' ownership interests are reflected as minority interests on the Company's financial statements. Two of the Company's subsidiaries have contributed assets to, and participate in, a limited partnership. One subsidiary serves as general partner, and all other partners hold limited partnership interests. The partnership, which is a separate and distinct legal entity, is in the business of licensing database assets and computer software. In the second quarter of 1997, third-party investors contributed $100,000 to the partnership in exchange for minority ownership interests. The Company and its subsidiaries maintain a controlling (88%) interest in the partnership. The Company also has a controlling interest in CTS (60.6% of the outstanding shares representing approximately 93.9% of the voting power at September 30, 2000). The related minority interest included within the Condensed Consolidated Statement of Financial Position at September 30, 2000 and December 31, 1999 was $22,181 and $17,611, respectively. Selected unaudited financial data for CTS is included in Note 14. Note 9. Contingencies The Company and its subsidiaries are involved in legal proceedings, claims litigation and tax matters arising in the ordinary course of business. In the opinion of management, the outcome of such current legal proceedings, claims litigation and tax matters, if decided adversely, could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, in the opinion of management, these matters will not materially affect the Company's consolidated financial position. In addition, the Company is subject to certain other contingencies discussed below: Information Resources Litigation On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in the United States District Court for the Southern District of New York, naming as defendants The Dun and Bradstreet Corporation ("D&B"), A.C. Nielsen Company and I.M.S. International Inc. (a predecessor of IMS Health) (the "IRI Action"). The complaint alleges various violations of the United States antitrust laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with a contract and a claim of tortious interference with a prospective business relationship. These latter claims relate to the acquisition by defendants of Survey Research Group Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI when it agreed to be acquired by defendants and that the defendants induced SRG to breach that 16 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) 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 ACNielsen will assume exclusive liability for liabilities up to a maximum amount to be calculated at the time such liabilities, if any, become payable (the "ACN Maximum Amount") and that Cognizant and D&B will share liability equally for any amounts in excess of the ACN Maximum Amount. The ACN Maximum Amount will be determined by an investment banking firm as the maximum amount which ACNielsen will be able to pay after giving effect to (i) any plan submitted by such investment bank which is designed to maximize the claims paying ability of ACNielsen without impairing the investment banking firm's ability to deliver a viability opinion (but which will not require any action requiring shareholder approval), and (ii) payment of related fees and expenses. For these purposes, financial viability means the ability of ACNielsen, after giving effect to such plan, the payment of related fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as they become due and to finance the current and anticipated operating and capital requirements of its business, as reconstituted by such plan, for two years from the date any such plan is expected to be implemented. In 1998, IMS Health was spun-off from Cognizant (the "1998 Spin-Off") which then changed its name to Nielsen Media Research, Inc. ("NMR"). IMS Health and NMR are jointly and severally liable to D&B and ACNielsen for Cognizant's obligations under the terms of the Distribution Agreement dated October 28, 1996 among D&B, Cognizant and ACNielsen (the "1996 17 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) 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. Other Contingencies The Company, Cognizant and D&B have entered, and the Company continues to enter, into global tax planning initiatives in the normal course of their business. These activities are subject to review by tax authorities. As a result of the review process, uncertainties exist and it is possible that some of these matters could be resolved adversely to the Company, Cognizant or D&B. The Company has been informed by D&B that the IRS is challenging D&B's utilization of certain capital losses during 1989 and 1990. D&B has advised the Company that it filed an amended tax return for these periods which reflects $561,582 of tax and interest due. Under the terms of the 1996 Distribution Agreement, the Company is liable to pay half of such taxes and interest owed to the IRS to the extent that D&B total liabilities exceed $137,000. In May 2000, D&B paid $349,291 of this amount, and the Company paid $212,291, which the Company funded through short-term borrowings. The payments were made to the IRS to stop further interest from accruing. A portion (approximately $41,000) of the Company's obligation will in turn be shared with NMR under the Distribution Agreement between those companies dated June 30, 1998 (the "1998 Distribution Agreement"). NMR is not obligated to pay its share to the Company until January 2, 2001. Accordingly, the receivable has been accounted for as a short-term asset. D&B received a formal assessment for the additional tax from the IRS during the second quarter of 2000. D&B has advised the Company that, notwithstanding the filing and payment, it intends to contest the assessment and would also contest the assessment of amounts, if any, in excess of the amounts paid. The Company estimates that its share of the liability that was paid is approximately $140,000 net of income tax benefit on interest (approximately $31,300) and NMR's contribution obligations (approximately $41,000). The Company is the subject of complaints filed with the European Commission (the "Commission") pursuant to Article 3 of Council Regulation No. 17 of 1972. The EC complaints allege that the Company has engaged in certain commercial practices that violate Articles 81 and 82 of the EC Treaty. The Company has responded to the complaints denying the allegations contained therein and has provided information to the Commission pursuant to formal information requests. 18 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) On October 19, 2000, the Commission initiated formal proceedings against the Company through the adoption of a statement of objections. 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 will have 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 may request the opportunity to present its defense at an oral hearing. The Commission may impose fines against the Company. If such a decision is rendered against the Company, it could appeal that decision before the European Court of First Instance. 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 described in Note 6, 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 prior Distribution Agreements for the liabilities relating to certain tax matters as well as those relating to the IRI Action. Under the Distribution Agreement, as between IMS Health and Synavant, it is expected that each will bear a prescribed portion of IMS Health's share of these liabilities (net of the liability borne by NMR) up to a maximum liability of $9,000 for Synavant. The Company intends to vigorously defend these matters. 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 10. Financial Instruments Foreign Exchange Risk Management The Company transacts business in virtually every part of the world and is subject to risks associated with changing foreign exchange rates. The Company's objective is to reduce earnings and cash flow volatility associated with foreign exchange rates to allow management to focus its attention on its core business activities. Accordingly, the Company enters into various contracts which change in value as foreign exchange rates change to protect the value of a portion of committed foreign currency revenues and non-functional currency assets and liabilities. The Company's policy is to maintain hedge coverage between minimum and maximum percentages of its foreign exchange exposures over the next twelve months, in amounts intended to protect operating income from the effect of fluctuations in foreign exchange rates. It is the Company's policy to enter into foreign currency hedging transactions only to the extent necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for investment or speculative purposes. 19 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) The Company uses foreign currency forward contracts to hedge committed foreign currency denominated revenues. The principal currencies hedged are the Japanese yen, the Euro and the Swiss franc. The Company also uses foreign currency forward contracts to hedge non-functional currency assets and liabilities. Gains and losses on contracts hedging committed foreign currency revenues are deferred until such revenues are recognized and offset changes in the value of such revenues. Gains and losses on contracts hedging non-functional currency assets and liabilities are not deferred and are included in other income/expense - - net. At September 30, 2000, the notional amounts of committed foreign currency revenues and non-functional currency assets and liabilities hedged were $57,370 and $117,371 respectively. Note Receivable - (related party) At January 3, 2000, the Company held a related party note receivable totalling $3,558 from Victoria R. Fash, its President and Chief Executive Officer and a Director. On January 12, 2000, $632 was repaid in cash leaving a principal amount of $2,926. The loan accrues interest at an annual rate of 6.21% with principal and accrued interest due on December 31, 2008 with earlier payment permitted, accelerated payment required, and the loan forgiven under certain circumstances. The loan is collateralized by 81,260 shares of the Company's Common Stock. The balance outstanding at September 30, 2000 was $3,062. Cash used, net of repayment, for this loan is included in Other Investing Activities - Net on the Condensed Consolidated Statement of Cash Flows. Credit Concentrations The Company continually monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments and does not anticipate non-performance by counterparties. The Company would not realize a material loss as of September 30, 2000, in the event of non-performance by any one counterparty. The Company enters into transactions only with financial institution counterparties which have a credit rating of A or better. In addition, the Company limits the amount of credit exposure with any one institution. The Company maintains accounts receivable balances ($221,260 and $284,679 net of allowances for doubtful accounts, at September 30, 2000, and December 31, 1999, respectively) principally from customers in the pharmaceutical industry. The Company's trade receivables do not represent significant concentrations of credit risk at September 30, 2000 due to the high quality of its customers and their dispersion across many geographic areas. Short-Term Borrowings / Lines of Credit Borrowings under short-term lines of credit were $339,232 and $134,663 at September 30, 2000 and December 31, 1999 respectively. The borrowings were taken out mainly to support the Company's share repurchase program and more recently to fund the D&B tax payment further described in Note 9. The borrowings are repayable within 364 days from inception and have maturity dates through December 14, 2000. The weighted average rates of interest for the 20 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) borrowings were 7.0% and 0.9% at September 30, 2000 and December 31, 1999, respectively. There are no significant debt covenants associated with the Company's short-term borrowings. The Company had unused available lines of credit of $175,270 and $273,273 at September 30, 2000 and December 31, 1999 respectively. In general, the terms of these lines of credit give the Company the option to borrow at an interest rate equal to LIBOR plus 37.5 basis points and can be withdrawn by the 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 September 30, 2000 the Company's Total Current Liabilities exceed its Total Current Assets. Based on estimated future cash flows from operations, the ability to monetize Enterprise investments upon distribution from Venture capital partnerships, the investment in Cognizant Technology Solutions as well as the Company's ability to obtain additional lines of credit and debt, the Company believes it will have sufficient cash and other resources to fund its short and long term business plans, including its current short term obligations, its stock repurchase program and its operations. Note 11. Income Tax To consolidate certain of its international operations in 1999 the Company engaged in certain non-U.S. reorganizations which gave rise to tax deductible non-U.S. intangible assets. In 2000, the effective tax rate was higher than in 1999 as a result of the non-deductible write down of Synavant goodwill, a higher amount of Enterprise's investment gains which have been taxed at an overall rate of 35%, and the costs incurred as result of the Spin-off of Synavant, a portion of which is non-deductible, offset by the recognition of certain German trade tax benefits (approximately $19,400), the recognition of the benefit of certain net operating losses (NOL's) due to the implementation of global tax planning strategies (approximately $3,400) and the reversal of previously accrued tax liabilities (approximately $3,000). The German trade tax benefits of $19,400 result from a favorable final German court decision rendered in the third quarter of 2000 which permitted the utilization of certain pre-existing tax benefits. This benefit will offset a fourth quarter charge resulting from new legislation discussed below. The global tax planning strategies which permitted the recognition of the benefit of the NOL's were developed and implemented during the first quarter of 2000. These NOL's had previously been reserved with a full valuation allowance. The reversal of previously accrued tax liabilities resulted from the true-up of state and local tax returns and the favorable resolution of audits in certain foreign tax jurisdictions recognized during the first quarter. The impact of the German legislation that has been enacted reduces the German Corporate tax rate from 40% to 25%. This legislation was signed into law on October 23, 2000. Pursuant to current accounting regulations, the Company must recognize the impact of such tax law changes in the fiscal quarter in which such laws are enacted; as a result such tax law change will be treated as a fourth quarter event for accounting purposes. The impact of the new legislation to the Company will be a reduction in the net deferred income tax assets of approximately $17,500, to be recorded as a charge to income tax expense. This will be more than offset by the German trade tax benefit of $19,400 recorded in the third quarter. While the Company intends to continue to seek global tax planning initiatives, there can be no assurance that the Company will be able to successfully implement such initiatives. Note 12. IMS Health Capital Stock On July 19, 2000 the Board of Directors authorized a stock repurchase program to buy up 40 million shares, marking the fifth consecutive repurchase program the Company has implemented. 21 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Shares acquired through the repurchase program will be open-market purchases in compliance with Securities and Exchange Commission Rule 10b-18. During the first nine months of 2000, the Company repurchased 9,858,750 shares of outstanding common stock at a total cost of $198,716. The shares were repurchased under the stock repurchase program approved by the Board of Directors on October 19, 1999, which authorized the repurchase of up to 16 million of the Company's outstanding common stock. As of September 30, 2000, approximately 15.3 million shares had been repurchased since the inception of the October 1999 repurchase program at a total cost of $335,000. The remaining shares authorized under this program were purchased in October 2000. Note 13. Summary of Recent Accounting Pronouncements In December 1999 the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No 101 "Revenue Recognition in Financial Statements" ("SAB No 101"). SAB No 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. On June 26, 2000, the SEC staff issued SAB 101B to provide registrants with additional time to implement guidance contained in SAB 101. SAB 101B delays the implementation date of SAB No 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company believes its revenue recognition policies are compliant with the SEC staff's views. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.133- an amendment of FASB Statement No. 133." Citing concerns about companies' ability to modify their information systems in time to apply SFAS 133, the FASB delayed its effective date for one year, to fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). Management does not believe that adoption of this statement will have a material impact on the Company's financial statements. 22 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Note 14. Operations by Business Segment Historical results are reclassified to reflect Gartner as a discontinued operation (See Note 3). Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making groups, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company, operating globally in more than 100 countries, is managed by way of and delivers information, software and related services principally through the strategic business segments referenced below. The chief operating decision-makers evaluate the performance and allocate resources based on revenue and operating income. All intersegment transactions are excluded from management's analysis of operations by business segment. Effective beginning the quarter ended June 30, 2000 the Company has realigned its business segments to reflect the change in management approach which has arisen as a result of the then planned divestitures of Synavant and Erisco and the pending divestiture of non-strategic software companies. This change will allow focus on the core business. Historical segmental information has been reclassified to give effect to the new segment grouping. The revised segments are as follows: 1. The IMS Segment consists of IMS, 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 now included in the Transaction Businesses Segment. 2. The CTS Segment delivers full life cycle solutions to complex software development problems and maintenance problems that companies face as they transition to eBusiness. These services are delivered through the use of a seamless on-site and offshore consulting project team. The Company's primary service offerings include application development and integration, application management, re-engineering and mass change. 3. The Transaction Businesses Segment includes Synavant, which serves the pharmaceutical industry by developing and selling pharmaceutical relationship management solutions that support sales and marketing decision making; Erisco, a leading supplier of software-based administrative and analytical solutions to the managed care industry and three small non-strategic software companies. As indicated in Note 6, the Company has spun-off the Synavant business. The Company also intends to divest other small non-strategic software businesses. As indicated in Note 15, the Company sold Erisco to TriZetto and entered into a strategic alliance with TriZetto on October 3, 2000. Historically, Erisco was managed as part of the Emerging Markets Segment; whereas, Synavant was managed as part of the core IMS Health business. The remaining piece of the historical Emerging Markets Segment is Enterprises, the Company's venture capital unit focused on investments in emerging businesses. Enterprises is now being managed within general corporate activities. 23 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data)
Periods Ended September 30, 2000 - ----------------------------------------------------------------------------------------------------------------------- Three Months: IMS CTS Transaction Total Businesses --------------------------------------------------------------- Operating Revenue (1),(2),(7) $ 282,074 $ 33,376 $ 40,417 $ 355,867 Segment Operating Income (loss) (1), (3) 109,316 7,078 (124,121) (7,727) General Corporate Expenses (3) (38,272) Interest Income 264 733 997 Interest Expense (5) (165) (66) (231) Non-OperatingIncome/(Expense): Gains from Dispositions - Net 6,201 Loss on Gartner Shares Contributed to Synavant (3,102) Other Expense - Net (5) (12,214) - ----------------------------------------------------------------------------------------------------------------------- Loss Before Provision for Income Taxes (54,348) Provision for Income Taxes (4,069) Income from Discontinued Operations, Net of Income Taxes (6) 2,226 - ----------------------------------------------------------------------------------------------------------------------- Net Income $ (56,191) - ----------------------------------------------------------------------------------------------------------------------- Nine Months: Operating Revenue (1),(2),(7) $ 822,546 $ 85,029 $ 170,216 $ 1,077,791 Segment Operating Income (1), (3) 277,636 18,243 (132,015) 163,864 General Corporate Expenses (3) (56,256) Interest Income 1,178 1,780 43 3,001 Interest Expense (5) (835) (139) (974) Non-Operating Income/(Expense): Gains from Dispositions - Net 63,915 Loss on Gartner Shares Contributed to Synavant (3,102) Other Expense - Net (5) (28,511) - ----------------------------------------------------------------------------------------------------------------------- Income Before Provision for Income Taxes 141,937 Provision for Income Taxes (67,273) Income from Discontinued Operations, Net of Income Taxes (6) 2,226 - ----------------------------------------------------------------------------------------------------------------------- Net Income $ 76,890 - ----------------------------------------------------------------------------------------------------------------------- Total Identifiable Assets at September 30, 2000 (8) $ 731,870 $ 95,380 $ 36,682 $ 863,932 - -----------------------------------------------------------------------------------------------------------------------
The IMS and CTS segment combined total revenues were $315,450 and $907,575 for the three and nine-month periods ended September 30, 2000. The combined operating incomes, after corporate expenses (net of Spin and Related Costs - $31,254 and $32,801 for the three and nine months) and excluding one-time technology acceleration costs ($2,836 for the three and nine months) and other non-recurring costs ($2,094 for the three and nine months) totaled $114,306 and $277,354 for the three and nine-month periods ended September 30, 2000. These results reflect those of the core recurring IMS business as further described in the Management Discussion and Analysis and Quarterly Earnings Press Release. 24 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data)
Periods Ended September 30, 1999 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Three Months: IMS CTS Transaction Total Businesses ------------------------------------------------- Operating Revenue (1), (2) $259,814 $19,077 $ 69,518 $ 348,409 Segment Operating Income (1), (3) 97,044 4,169 4,839 106,052 General Corporate Expenses (3) (10,094) Interest Income 2,264 327 2,591 Interest Expense (5) -- Non-Operating Income/(Expense): Gains from Dispositions - Net 4,313 Other Expense - Net (4), (5) (5,359) - ------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Provision for Income Taxes 97,503 Provision for Income Taxes (27,263) - ------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 70,240 Income from Discontinued Operations, Net of Income Taxes (6) 1,384 - ------------------------------------------------------------------------------------------------------------------------- Net Income $ 71,624 - ------------------------------------------------------------------------------------------------------------------------- Nine Months: Operating Revenue (1),(2) 743,634 54,112 196,557 $ 994,303 Segment Operating Income (1), (3) 223,815 12,109 11,009 246,933 General Corporate Expenses (3) (33,510) Interest Income (4) 5,249 853 6,102 Interest Expense (5) (753) (753) Non-Operating Income/(Expense): Gains from Dispositions - Net 20,590 Other Expense - Net (4), (5) (15,107) - ------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Provision for Income Taxes 224,255 Provision for Income Taxes (64,048) - ------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 160,207 Income from Discontinued Operations, Net of Income Taxes (6) 25,695 - ------------------------------------------------------------------------------------------------------------------------- Net Income $ 185,902 - ------------------------------------------------------------------------------------------------------------------------- Total Identifiable Assets at September 30, 1999 (8) $749,791 $61,047 $307,573 $ 1,118,411 - -------------------------------------------------------------------------------------------------------------------------
The IMS and CTS segment combined total revenues of $278,891 and $797,746 for the three and nine-month periods ended September 30, 1999. The combined operating incomes for the IMS and CTS Segments, after corporate expenses (net of Spin and Related Costs $2,000 and $9,500) and excluding year 2000 remediation costs ($4,155 and $19,963), total $97,274 and $231,877 for the three and nine-month periods ended September 30, 1999. These results reflect those of the core recurring IMS business as further described in the Management Discussion and Analysis and Quarterly Earnings Press Release. 25 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Notes to Operations by Business Segments: (1) The IMS and CTS segment combined total revenues of $315,450 and $907,575 for the three and nine-month periods ended in 2000 compared to $278,891 and $797,746 for the comparable periods of 1999. The combined operating incomes after corporate expenses (net of Spin and Related Costs) and excluding Year 2000 remediation costs, other non-recurring costs and technology acceleration costs, total $114,306 and $277,354 for the three and nine-month periods ended in 2000 compared to $97,274 and $231,877 for the same periods of 1999. These results reflect those of the core recurring IMS business as further described in the Management Discussion and Analysis and Quarterly Earnings Press Release. (2) Operating revenue excludes intersegment sales in 2000 of $3,731 and $10,949 for the three and nine-months presented, respectively. Operating revenue in 1999 excludes intersegment sales of $3,799 and $10,688 for the three and nine-months presented, respectively. These sales, primarily from CTS to IMS, are recognized as the service is performed. (3) General Corporate Expenses in 2000 includes $31,254 and $32,801 incremental Synavant Spin and Related Costs for the three and nine-months periods presented, respectively. In 1999 comparable expenses include $2,000 and $9,500 incremental Gartner Spin-off costs in the three and nine-months, respectively. See Note 6 for a discussion of the Spin and Related Costs. (4) Interest income in 1999 excludes amounts recorded at corporate of $269 for the nine-month period presented. This amount have been included in Other Expenses-Net. (5) Interest expense in 2000 excludes amounts recorded at Corporate of $6,429 and $9,053 for the three and nine-month periods presented, respectively. Interest expense in 1999 excludes amounts recorded at corporate of $2,138 and $3,919 for the three and nine-month periods presented, respectively. These amounts have been included in Other Expenses-Net. (6) Income from Discontinued Operations, Net of Income Taxes relates to Gartner. Taxes for both the three and nine-month periods ended September 30, 2000 were $1,198. Taxes for the three and nine-month periods were $931 and $12,635 respectively in 1999. (7) The Transaction Businesses Segment includes Synavant up to the Spin-off date of August 31, 2000. Accordingly, the Segment Includes for the Synavant Businesses revenues of approximately $26,700 and $119,700 and operating losses of ($122,600) and ($132,000), respectively for the three and nine-months ended September 30, 2000. A significant part of residual revenues and results of operations relate to the Erisco business. (8) Total assets include Net Assets of Discontinued Operations of $81,060 and $100,356 as of September 30, 2000 and September 30, 1999, respectively. Assets of $256,311 and $261,562 as of September 30, 2000 and September 30, 1999, respectively, include Cash and Cash Equivalents, Investments, and Property, Plant and Equipment not identified with business segments and represent the reconciling items between total identifiable assets and net assets of discontinued operations and the Company's total assets. 26 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Note 15. Subsequent Events Disposal of Erisco On October 3, 2000, Elbejay Acquisition Corp. ("Merger Sub"), a Delaware corporation and a wholly owned subsidiary of the TriZetto Group, Inc. ("TriZetto"), a Delaware corporation, was merged (the "Merger") with and into ERISCO Managed Care Technologies, Inc ("Erisco"), a New York corporation and a wholly owned subsidiary of IMS Health pursuant to the Agreement and Plan of Reorganization dated as of May 16, 2000 (the "Merger Agreement"), by and among TriZetto, Merger Sub, IMS Health, and Erisco. The Merger effectuated IMS's sale of Erisco to TriZetto. In consideration of the Merger, TriZetto issued 12,142,857 shares of common stock, par value $.001 per share (the "TriZetto Common Stock), of TriZetto to IMS Health. The transaction will be accounted for by IMS Health as a disposition of Erisco in exchange for the acquisition of an approximately 36% interest in TriZetto. The gross proceeds received by IMS Health, based on the closing share price of TriZetto Common Stock on the Nasdaq National Market on October 2, 2000 ($15.125 per share), were approximately $183,700. (See Note 14). As contemplated by the Merger Agreement, TriZetto's board of directors appointed IMS Health's director-nominee, Victoria R. Fash, President and Chief Executive Officer of IMS Health, to the TriZetto Board of Directors. Additionally, as contemplated by the Merger Agreement, IMS Health and TriZetto entered into a Stockholder Agreement and a Registration Rights Agreement in the forms attached as exhibits to the Merger Agreement, and a Transitional Services Agreement, Data Rights Agreement, and HealthWeb License Agreement in accordance with the principal terms set forth in the Merger Agreement. The Stockholder Agreement imposes certain restrictions on IMS Health. These restrictions include, without limitation: (i) a standstill provision restricting IMS Health from, among other things, acquiring additional shares of TriZetto Common Stock until the earlier of the fourth anniversary of the Closing Date, or the date on which a Change of Control (as defined in the Stockholder Agreement) of TriZetto shall have occurred or TriZetto shall have publicly announced its willingness to consider a transaction that would constitute a Change of Control; (ii) a share transfer restriction that limits transfers of TriZetto Common Stock measured as of the Closing Date, the date on which IMS Health beneficially owns less than 10% of the outstanding TriZetto Common Stock measured as of the Closing Date, or the date on which a Change of Control of TriZetto shall have occurred; (iii) a right of first refusal for TriZetto on transfers by IMS Health of more than 10% of the outstanding TriZetto Common Stock measured as of the time of the transfer commencing upon the termination of the share transfer restriction period and continuing until the date on which IMS Health beneficially owns less than 10% of the outstanding TriZetto Common Stock measured as of the Closing Date (unless a Change of Control of TriZetto shall have occurred); and (iv) a right of first offer for TriZetto on any transfer of TriZetto Common Stock by IMS Health commencing upon the termination the share transfer restriction period and continuing until the date on which IMS Health beneficially owns less than 10% of the outstanding TriZetto Common Stock measured as of the Closing Date. The 27 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited) (Dollar amounts in thousands, except per share data) Stockholder Agreement also grants IMS Health, for so long as IMS Health beneficially owns more than 10% of the outstanding TriZetto Common Stock measured as of the Closing Date, (i) the right to designate one director-nominee to the TriZetto Board of Directors and (ii) consent rights regarding certain transaction by TriZetto, subject in each case, to earlier termination of such rights upon the occurrence of certain events. Pursuant to the Registration Rights Agreement, IMS was granted registration rights in respect of the shares of TriZetto Common Stock issued to IMS in connection with the sale of Erisco. Additionally, pursuant to Section 6.14 of the Merger Agreement, TriZetto has adopted a Stockholder Protection Rights Agreement as set forth more fully in the Merger Agreement. IMS will account for its ownership interest in TriZetto on an equity basis, recording its share of the TriZetto operating results and the amortization of the goodwill and other acquired intangibles. The allocation of the TriZetto purchase price has not yet been fully determined. IMS will separately disclose IMS core operations and its equity investment in TriZetto. In connection with the transaction, IMS paid $32,000 of cash to TriZetto which was funded by short-term debt. IMS will record its equity investment in TriZetto of approximately $130,000 in the fourth quarter of 2000. The equity investment will reflect IMS's residual approximately 36% interest in the net assets of Erisco, and it's proportionate share of the tangible and intangible assets and the liabilities of TriZetto and goodwill. Management is currently evaluating the net assets acquired, including all intangibles and their respective amortization periods (with preliminary estimates from 5 to 7 years), however, the allocation of the purchase price has not yet been completed. The actual values attributable to goodwill and other intangibles will be based on consideration received less disposition costs and the fair values of IMS's proportionate interest in the tangible assets and liabilities of TriZetto on the date of acquisition. It is currently expected that underlying intangible assets will be a significant portion of the investment in TriZetto and the amortization of such intangibles will be reflected in the future earnings of IMS. No assurance can be given that the actual value of the intangibles arising or the amortization periods will not be more or less than the amount or periods currently contemplated. IMS expects to record a significant gain on the sale of ERISCO. Approximately $10,000 of costs associated with this transaction have been deferred on the Condensed Consolidated Statement of Financial Position and are included within Other Current Assets. These costs will be expensed against the gain in the fourth quarter. 28 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) This discussion and analysis should be read in conjunction with the accompanying Condensed unaudited Consolidated Financial Statements and related notes. IMS Health is the world's leading provider of information solutions to the pharmaceutical and healthcare industries. IMS Health operates in over 100 countries and its key products and services include: o Market research for prescription and over-the-counter pharmaceutical products; o Sales management information to optimize sales force productivity; and o IT application development, integration and management services. At September 30, 2000, IMS Health consisted of (a) the IMS segment ("IMS"), which consists of sales management information services and market research business for the pharmaceutical and healthcare industries conducted by IMS and various subsidiaries; (b) a controlling interest in Cognizant Technology Solutions Corporation ("CTS") and (c) ERISCO Managed Care Technologies Inc. as the primary component within the Transaction Business Segment. During the quarter IMS Health also included the segment containing (i) the pharmaceutical industry automated sales and marketing support business of IMS Health Strategic Technologies, Inc. ("Strategic Technologies"), substantially all of IMS Health's interactive and direct marketing business, including the business of Clark-O'Neill, Inc. ("Clark-O'Neill"), and a majority stake in a foreign joint venture (collectively the "Synavant Business"), (ii) ERISCO Managed Care Technologies, Inc. ("Erisco"), and (iii) three small non-strategic software businesses ((i), (ii) and (iii), collectively the "Transaction Businesses"). On July 26, 1999, having received the approval of Gartner Group Inc. ("Gartner") shareholders and the Boards of Directors of both the Company and Gartner, the Company completed a Spin-off of the majority of its equity investment in Gartner to IMS Health shareholders (the "Gartner Spin-off"). The Gartner Spin-off consisted of 0.1302 shares of Gartner Class B Common Stock for each share of the Company's Common Stock outstanding on the July 17, 1999 record date and totaled 40.7 million Gartner Class B shares. The Condensed Consolidated Financial Statements of the Company have been reclassified for the periods presented to reflect the Gartner equity investment as a discontinued operation. On July 23, 1999, in connection with the Gartner Spin-off, Gartner paid a special cash dividend. IMS Health's portion of the dividend was $52,877, net of taxes. The Company's remaining investment in Gartner at September 30, 2000 consists of 6,597,262 Gartner Class A shares and warrants to purchase a further 599,400 Gartner Class A shares. The carrying value of the Gartner investment, after taxes, was $81,060 at September 30, 2000. (See Note 3 to the Condensed Consolidated Financial Statements). As part of the Spin-off of Synavant, 312,195 shares ($4,000 fair market value) of Gartner Class A shares will be distributed to Synavant. On August 31, 2000 IMS Health spun-off Synavant (See Note 6 and Note 14 to the Condensed Consolidated Financial Statements). On October 3, 2000 the Company sold Erisco to The TriZetto Group, Inc. in exchange for an equity interest in Trizetto and entered into a technology and data alliance. See Note 15 to the Condensed Consolidated Financial Statements. These transactions, together with the planned divestitures of small non strategic software businesses 29 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) will result in a company concentrated on IMS's core data business of providing market information and decision support services to the pharmaceutical industry, together with the CTS Segment. The technology and data alliance between IMS Health and TriZetto will (a) accelerate implementation of the Company's internet strategy through TriZetto's HealthWeb technology; and (b) facilitate developments of new products. IMS Health will own approximately 36% of Trizetto's common stock after the transaction and will account for its share of Trizetto on an equity basis. Acquisition On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical Marketing Services Inc. ("PMSI") for $103,921, consisting of IMS Health common stock, IMS Health stock options issued and accrued acquisition and integration costs in the amount of $22,584. The Company recognized approximately $116,775 of goodwill related to the acquisition, which is being amortized on a straight-line basis over 15 years. The severance costs, relating to the termination of 63 PMSI employees, the costs of terminating various leaseholdings and costs associated with contract cancellations were less than originally anticipated. However, the Company's other direct costs recognized as a result of the acquisition, such as direct legal fees and a pre-acquisition contingency in the amount of $1,500 were greater than originally estimated. The following table provides the activities since the acquisition with respect to these liabilities:
Original Liability Expenditures Reclassifications/ September 30, Estimate to Date Adjustments 2000 Balance - ----------------------------------------------------------------------------------------- Employee Separation $ 3,794 $ (3,689) $ (105) $ -- Lease Terminations 1,623 (774) (849) -- Contract Cancellations 10,935 (7,999) (834) 2,102 Other Direct Costs 6,232 (8,011) 3,288 1,509 - ----------------------------------------------------------------------------------------- Total $ 22,584 $(20,473) $ 1,500 $ 3,611 - -----------------------------------------------------------------------------------------
In Process Research and Development Since the acquisition of PMSI and Walsh International Inc., both in 1998, the in process research and development products (IPR&D) that were underway at the time of the acquisitions have reached technological feasibility at the level of cost anticipated in the original valuations. Revenues and profitability of the PMSI products subsequent to their release have been in line with the original expectations incorporated within the calculation of the IPR&D charges. As a direct result of the Siebel transaction one remaining Walsh project has been discontinued. Synavant Strategic Alliance On July 14, 2000 Synavant entered into a strategic alliance with Siebel, a leading provider of eBusiness applications software (see Note 7 to the Condensed Consolidated Financial Statements). As a result of this transaction, Synavant has assessed the financial impact of this 30 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) transaction with respect to determining the amount of any impairment to the capitalised software and enterprise-wide goodwill. This impairment loss is $115,453 accounted for in the quarter ended September 30, 2000. Data Centers During the third quarter IMS announced the formation of a global data processing hub in Plymouth Meeting, Pennsylvania. One of the world's largest computer centers, handling 26 terabytes of data, the hub will provide the technology foundation for the Company's global data processing and new Internet-based products. In the quarter, the Company has incurred $2,836 of technology acceleration costs in connection with the development of such products. In Frankfurt, Germany, GIC Gesellschaft fur Informationstechnologie und Consulting GmbH (GIC) was formed through a management buyout, providing outsourcing services to IMS Health. This transaction and disclosure relates to the gains more fully described in Note 4 to the Condensed Consolidated Financial Statements. Three Months Ended September 30, 2000 compared with Three Months Ended September 30, 1999. Operations Revenue for the third quarter of 2000 increased by 2.1% to $355,867 from $348,409 in the third quarter of the prior year. This growth is primarily attributable to the IMS and CTS Segment; partially offset by the inclusion of only two months of Synavant revenues in 2000 versus three months in 1999 due to the Spin-off, compounded by the decline in Synavant revenues as well as the translation impact of a generally stronger US dollar. IMS Health revenue, excluding the Transaction Businesses Segment, increased by 13.1% to $315,450 in 2000 from $278,891 for the third quarter of the prior year. On a constant dollar basis revenue growth was 16.5% in the third quarter. This increase in revenue is primarily due to the continued rollout of Xponent in Europe, an increasing client base for the Japanese weekly data services, increased sales of Xponent in North America resulting from the strength in the pharmaceutical industry and growth at CTS. Operating costs for the Company include internal computer costs, the cost of data collection and production and costs attributable to personnel involved in production, data management and the processing and delivery of the Company's services. The Company's operating costs increased by 5.5% to $136,447 in 2000 from $129,298 in the third quarter of the prior year primarily due to increases in CTS and IMS partially offset by the Synavant Spin-off in the quarter. IMS Health operating costs, excluding the Transaction Businesses Segment and excluding Year 2000 remediation ($4,155) in 1999 and technology acceleration costs ($2,836) in 2000, increased by 19.2% to $110,439 from $92,637 for the comparable quarter of 1999. This increase 31 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) is attributable to an increased number of technical professionals at CTS to meet the increased demand for services and an increase in the IMS Segment to support higher revenues. 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 increased during the third quarter of 2000 by 0.6% to $95,475 from $94,865 in the third quarter of the prior year. IMS Health selling and administrative expenses, excluding the Transaction Businesses Segment, and one time costs of $2,094 in the third quarter of 2000, increased during the third quarter by 3.3% from $70,656 to $73,040. The increase was due to continued investment in CTS sales and administrative functions and infrastructure. In connection with the Spin-off of Synavant, the Company incurred $31,254 of costs for the quarter ended September 30, 2000 ($32,801 for the 9 months). These costs include $8,248 for expenses related to reductions in the IMS and corporate administrative workforce (124 positions) resulting from consolidation following the Synavant Spin-off. As at September 30, 2000, 31 employees under the ongoing employee protection program have left the company for payments of $2,382. Additionally, a data processing agreement with a third party for $5,200 will not be used by the Company as a result of the Company's determination to streamline IMS's operations to focus on its core business. In accordance with the settlement of this liability the Company has paid $2,400 with a remaining balance to be paid (included within Accrued and Other Current Liabilities), of $2,800 as of September 30, 2000. The remaining Spin-off charges relate primarily to legal, professional and other direct incremental costs. In 1999 the $2,000 of Spin and Related Costs reflect direct incremental costs associated with the Gartner Spin-off. In connection with the Siebel transaction more fully described in Note 7 to the Condensed Consolidated Financial Statements, Synavant has assessed the impairment of it's computer software (including acquired technology), goodwill and other intangible assets and change in intangible asset lives. This impairment does not impact the IMS segment. As a result of this transaction, Synavant has recorded an impairment charge in the third quarter of $14,553 on computer software and $100,900 on goodwill. The Company is required to record this impairment loss due to the Siebel alliance which was signed prior to the Spin-off. Operating loss for the third quarter of 2000 of $45,999 versus income of $95,958 in the third quarter of the prior year was primarily a result of the Synavant impairment charge, the one-time spin and related costs and a decline in the Synavant business, partially offset by growth in the IMS and CTS Segments. IMS Health operating income, excluding the Transaction Businesses Segment, the Synavant Spin and Related Costs and the non-recurring costs mentioned above, increased by 17.5% in 2000 to $114,306 from $97,274 in the third quarter of the prior year. This growth is primarily due to the revenue growth in North America, Europe, Japan and CTS and the slower growth in operating 32 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) and selling and administrative expenses. Operating income growth outpaced revenue growth primarily due to the Company's ability to leverage its world-wide resources. Net interest expense was $5,663 in the third quarter of 2000 compared with net interest income of $453 in the third quarter of the prior year. This increase in expense is due to a higher level of short term borrowings to fund the Company's stock repurchase program and payment of the D&B tax contingency described in Note 9 to the Condensed Consolidated Financial Statements. The Loss on Gartner Shares Contributed to Synavant ($3,102) reflects the decline in the fair market value of 312,195 Gartner shares to be contributed to Synavant as part of the Spin-off agreements. These shares had a fair market value of $4,000 at the date of the Spin-off, compared with $7,102 on the date of the Gartner Spin-off (July 26,1999). A gain on these shares is recognized in discontinued operations. Gains from Dispositions, Net, were $6,201 in the third quarter of 2000, compared to $4,313 in the third quarter of the prior year. In the third quarter of 2000, the Company's gains are primarily due to the partial sale of e-Credit to Internet Capital Group Inc, and from the sale of marketable investments in Verisign Inc. Both Verisign Inc. and e-Credit were part of the Enterprises portfolio. Other Expense, Net, increased in the third quarter to $5,785 from $3,221 in the third quarter of the prior year. This increase is primarily due to non-recurring expenses in 2000 as well as higher CTS minority interest expense. In 2000, the effective tax rate was higher than in 1999 as a result of the non-deductible write down of Synavant goodwill, a higher amount of Enterprise's investment gains which have been taxed at an overall rate of 35% and the costs incurred as result of the Spin-off of Synavant, (a portion of which is non-deductible), offset by the recognition of certain German trade tax benefits (approximately $19,400). This is more fully described in Note 11 to the Condensed Consolidated Financial Statements. Loss from continuing operations in the third quarter of 2000 was $58,417 versus income of $70,240 in the third quarter of the prior year, the loss being a result of the Spin and Related Costs and Impairment Charge - Synavant incurred during the quarter; partially offset by strong operating income growth in the IMS and CTS Segments. IMS Health income from continuing operations, excluding the Transaction Businesses Segment, Spin and Related Costs, other non-recurring items, net disposition gains and loss on Gartner shares, described above and using a normalized tax rate of 32% (without regard to discrete items), increased 10.6% in the third quarter of 2000 to $71,077. This increase is due primarily to the improved operating income from the IMS and CTS Segments, described in the results by business segment. Income from discontinued operations in the third quarter of 2000 was $2,226, net of taxes of $1,198, reflecting a gain on the Gartner Group shares to be contributed to Synavant as part of the Spin-off. (See Note 3 to the Condensed Consolidated Financial Statements). Income from 33 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) discontinued operations in the third quarter of 1999 was $1,384, net of income taxes of $931. This represents Gartner equity income prior to the Gartner Spin-off. The Company recorded a net loss for the third quarter of 2000 of $56,191 compared with net income of $71,624 in the third quarter of the prior year. The loss is primarily a result of the Synavant impairment charge and related Spin-off costs, offset in part by strong operating growth in the IMS and CTS segments. IMS Health net income, excluding the Transaction Businesses Segment, the Spin and Related Costs and the one time costs and disposition gains previously identified and using a normalized tax rate of 32% increased by 10.6% to $71,077 in the third quarter of 2000, compared to $64,264 in the comparable quarter of 1999 due primarily to the increased operating income of the IMS and CTS segments. Basic loss per share from continuing operations in the third quarter of 2000 was $0.20 versus earnings of $0.23 in the third quarter of the prior year. The loss was driven by the Synavant impairment charge and related Spin-off cost, which reduced earnings per share by approximately $0.45, net of taxes. Diluted loss per share from continuing operations in the third quarter of 2000 was $0.20 compared with earnings of $0.22 in the third quarter of the prior year. IMS Health diluted earnings per share, excluding the Transaction Businesses Segment, the Spin and Related Costs, non-recurring costs and dispositions gains described above and using a normalized tax rate of 32% increased in 2000 by 20% to $0.24 compared with $0.20 in the third quarter of the prior year. Results by Business Segment IMS Segment The IMS Segment consists of IMS, 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. Historically, this segment included the Synavant Business and three non-strategic software companies that are now included in the Transaction Businesses Segment. IMS Segment revenue for the third quarter increased 8.6% (12.2% on a constant dollar basis) to $282,074 from $259,814 in the third quarter of the prior year. Sales Management revenue increased 14.9% to $168,562, Market Research revenue increased 2.6% to $103,213, and Other Services revenue decreased 17.8% to $10,299. Sales Management revenue growth is primarily due to Xponent in the United States and Europe and also to the weekly data product launched at the end of 1999 in Japan. Other Services revenue includes consultancy services which are ad hoc and less predictable in nature. This quarterly decrease is due to the timing of such ad hoc revenues and on a year to date basis Other Service revenue has increased by 5.6%. Sales Management, Market Research and other service revenue growths have been adversely impacted by foreign exchange movements for the quarter ended September 30, 2000. 34 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) IMS Segment operating income for the third quarter increased 12.6% to $109,316 from $97,044 in the prior year. Excluding Year 2000 remediation costs in 1999 and technology acceleration and other non-recurring costs in 2000, third quarter operating income increased 12.9% to $114,246 from $101,199 in the prior year. Adjusted operating income growth outpaced revenue growth due primarily to the segment's ability to leverage its established worldwide resources. Transaction Businesses Segment Transaction Businesses revenue for the third quarter of 2000 decreased 41.9% to $40,417 from $69,518 in the comparable period of the prior year. This was primarily due to the inclusion of only two months of Synavant revenue in 2000 versus three months in 1999. An increase in Erisco revenues (software licenses and services) was offset by lower interactive marketing volumes and lower Strategic Technologies' software fees, and the impact of adverse foreign currency movements. The Transaction Business Segment reported an operating loss for the quarter of $124,121 compared to an operating income of $4,839 in the comparable period of the prior year. This is primarily due to the Synavant impairment charge of $115,453. CTS Segment CTS revenue for the quarter, net of intersegment sales, increased 75.0% to $33,376 from $19,077 in the comparable period of the prior year. CTS operating income for the period increased 69.8% to $7,078 in 2000 from $4,169 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 partially offset by a decrease in Year 2000 compliance services. Nine Months Ended September 30, 2000 Versus Nine Months Ended September 30, 1999 Operations Revenue for the nine-month period increased by 8.4% in 2000 to $1,077,791 from $994,303 for the comparable period a year ago. The increase is primarily due to the continued rollout of Xponent in Europe, an increasing client base for the Japanese weekly data services, increased sales of existing products in North America and IMS's emerging markets and growth at CTS. This is partially offset by the inclusion of only eight months of Synavant revenues in 2000 versus nine months in 1999 due to the Spin-off, compounded by the decline in Synavant revenues, as well as by the translation impact of a generally stronger U.S dollar. IMS Health revenue for the first nine months of 2000, excluding the Transaction Businesses Segment, increased 13.8%, to $907,575 from $797,746. On a constant dollar basis this revenue growth was 16.3%. This increase is primarily due to the continued rollout of Xponent in Europe, an increasing client base for the Japanese weekly data services, increased sales of Xponent in North America helped by the strength in the pharmaceutical industry and growth at CTS . Operating costs for the nine-month period increased by 4.3% in 2000 to $420,625 from $403,159 for the comparable period of the prior year. The increase was primarily due to the increased 35 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) direct costs to support the increase in demand for services, as well as investment in a number of internet initiatives, including i-squared; partially offset by the absence of Year 2000 remediation costs in 2000 compared with $19,963 in 1999. IMS Health operating costs, excluding the Transaction Businesses Segment, operating costs, Year 2000 remediation costs in 1999 of $19,963, and technology acceleration costs in 2000 of $2,836, increased by 12.5% to $332,320. Selling and administrative expenses increased during the nine-month period by 12.0% to $328,164 in 2000 from $293,047 for the comparable period in the prior year. This increase is due to increased service costs for the installed user client base of Strategic Technologies, as well as investment in CTS infrastructures and in global and U.S. sales and marketing functions. IMS Health selling and administrative expenses, excluding the Transaction Businesses Segment costs, and the non recurring costs of $2,094, increased during the nine-month period by 12.5% to $246,721. The increase in such expenses was due to investment in CTS infrastructures and in global and U.S. sales and marketing functions. In connection with the Spin-off of Synavant, the Company incurred $31,254 of costs for the quarter ended September 30, 2000 ($32,801 for the 9 months). These costs include $8,248 for expenses related to reductions in the IMS and corporate administrative workforce (124 positions) resulting from consolidation following the Synavant Spin-off. As at September 30, 2000, 31 employees under the ongoing employee protection program have left the company for payments of $2,382. Additionally, a data processing agreement with a third party for $5,200 will not be used by the Company as a result of the Company's determination to streamline IMS's operations to focus on its core business. In accordance with the settlement of this liability the Company has paid $2,400 with a remaining balance to be paid (included within Accrued and Other Current Liabilities), of $2,800 as of September 30, 2000. The remaining Spin-off charges relate primarily to legal, professional and other direct incremental costs. In 1999 the $9,500 of Spin and Related Costs reflect direct incremental costs associated with the Gartner Spin-off. In connection with the Siebel transaction more fully described in Note 7 to the Condensed Consolidated Financial Statements, Synavant has assessed the impairment of its computer software (including acquired technology), its goodwill and other intangible assets and change in intangible asset lives. As a result of this transaction an impairment charge has been recorded in quarter three of $14,553 for computer software and $100,900 for goodwill. The Company is required to record this impairment loss due to the Siebel alliance which was signed prior to the Spin-off. Operating income for the nine-month period decreased to $107,608 in 2000 from $213,423 for the comparable period in the prior year due primarily to the Synavant impairment charge and Synavant Spin costs; partially off-set by growth in the IMS and CTS Segments. 36 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) IMS Health operating income, excluding the Transaction Businesses Segment and the non- recurring costs described above, increased by 19.6% to $277,354 in 2000 from $231,877 in the nine months of 2000 compared to the comparable period of the prior year. Net interest expense for the nine-month period increased to $7,026 in 2000 compared to a net interest income of $1,699 in the comparable period of the prior year. This increase in interest expense is due to an increase in the level of short term borrowings ($204,569) to fund the Company's stock repurchase program and payment of the D& B tax contingency. The Loss on Gartner Shares Contributed to Synavant ($3,102) reflects the decline in the fair market value of 312,195 Gartner Shares to be contributed to Synavant as part of the Spin-off agreements. These shares had a fair market value of $4,000 at the date of the Spin-off, compared with $7,102 on the date of the Gartner Spin-off (July 26,1999). Gains from Dispositions, Net, for the nine-month period increased to $63,915 from $20,590 in the prior year as a result of higher gains from the sale of Enterprises investments. (See Note 4 to the Condensed Consolidated Financial Statements). Other expense, net, for the nine-month period increased to $19,458 from $11,457 in the comparable period of the prior year. This increase is due primarily to non-capitalizable acquisition costs and other non-recurring expenses and to higher CTS minority interest expense. The effective tax rate for the nine-month period was 47% compared to 29% for the same period in the prior year. To consolidate certain of its international operations in 1999 the Company engaged in certain non-U.S. reorganizations which gave rise to tax deductible non-U.S. intangible assets. In 2000, the effective tax rate was higher than in 1999 as a result of the non-deductible write down of Synavant goodwill, a higher amount of Enterprise's investment gains which have been taxed at an overall rate of 35% and the cost incurred as result of the Spin-off of Synavant, a portion of which are non-deductible, offset by the recognition of certain German trade tax benefits (approximately $19,400), the recognition of the benefit of certain net operating losses (NOL's) due to the implementation of global tax planning strategies (approximately $3,400) and the reversal of previously accrued tax liabilities (approximately $3,000). The German trade tax benefits of $19,400 result from a favorable final German court decision rendered in the third quarter of 2000 which permitted the utilization of certain pre-existing tax benefits. The global tax planning strategies which permitted the recognition of the benefit of the NOL's were developed and implemented during the first quarter of 2000. These NOL's had previously been reserved with a full valuation allowance. The reversal of previously accrued tax liabilities resulted from the true-up of state and local tax returns and the favorable resolution of audits in certain foreign tax jurisdictions recognized during the first quarter. This benefit will offset a fourth quarter charge resulting from new German legislation discussed below. The impact of the German legislation that has been enacted reduces the German Corporate tax rate from 40% to 25%. This legislation was signed into law on October 23, 2000. Pursuant to current accounting regulations, the Company must recognize the impact of such tax law changes in the fiscal quarter in which such laws are enacted; as a result such tax law change will be 37 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) treated as a fourth quarter event for accounting purposes. The impact to the Company will be a reduction in the net deferred income tax assets of approximately $17,500, which will be recorded in the fourth quarter, more than offset by the German trade tax benefit discussed above. 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. Income from continuing operations for the nine-month period was $74,664 in 2000 compared with $160,207 for the comparable period of the prior year. This decrease is primarily due to the Synavant impairment charge and Spin-off costs in 2000; partially off-set by higher operating income in the IMS and CTS Segments. IMS Health income from continuing operations, excluding the Transaction Businesses Segment and the non-recurring items and disposition gains and loss on Gartner shares contributed to Synavant described above and applying a normalized tax rate of 32%, increased 16% for the reasons described above. Income from discontinued operations for the first nine-months of 2000 was $2,226, net of taxes of $1,198 reflecting the recognition of an unrealized gain on the Gartner Group shares contributed to Synavant as part of the Spin-off. (See Note 3 to the Condensed Consolidated Financial Statements). Income from discontinued operations, net of income taxes of $12,635 for the nine-month period in 1999, was $25,695. This represents Gartner equity income. Net income for the nine months was $76,890 in 2000 compared to $185,902 for the comparable period in the prior year. This decrease is primarily due to the Synavant impairment charge and Spin-off costs in 2000; partially offset by higher operating income in the IMS and CTS Segments. IMS Health net income, excluding the Transaction Businesses Segment and other one time items and gains and losses described above and applying a normalized tax rate of 32% increased 16.2%. This increase is primarily due to growth in the IMS and CTS segments operating income described above. Basic earnings per share from continuing operations for the nine month period are $0.25 in 2000 compared to $0.51 for the comparable period of the prior year. Diluted earnings per share for the nine month period are $0.26 versus $0.58 for the comparable period of the prior year. IMS Health diluted earnings per share, excluding the Transaction Businesses Segment and other one time items described above, gains and losses and a normalized tax rate of 32% increased for the nine-month period by 26% to $0.59 in 2000 from $0.47 for the comparable period of the prior year. 38 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Results by Business Segment IMS Segment IMS Segment revenue for the first nine months of the year increased 10.6% to $822,546 in 2000 from $743,634 in the prior year. Excluding the impact of foreign currency translation, revenue grew 13.3%. Sales Management revenue increased 15% to $489,921, Market Research revenue increased 4.7% to $301,462, and Other revenue increased 5.6% to $31,163. Sales Management revenue growth was due to the strong growth of Xponent in the U.S. and Europe as well as the weekly data product in Japan. IMS Segment operating income for the nine-month period increased 24.0% to $277,636 in 2000 from $223,815 in the comparable period of the prior year. Excluding Year 2000 remediation costs in 1999 and technology acceleration costs and other one time costs in 2000, operating income for the first nine months increased 15.9% to $282,566. Transaction Businesses Segment Transaction Businesses Segment revenue for the first nine months of 2000 decreased 13.4% to $170,216 from $196,557 in the comparable period of the prior year. This was primarily due to the inclusion of only eight months of Synavant revenue in 2000 versus nine months in 1999. An increase in Erisco revenues (software licenses and services) was partially offset by a decline in Strategic Technologies' sales force automation license revenues, lower interactive marketing revenues and the impact of a stronger US dollar. The Transaction Businesses Segment reported an operating loss for the first nine months of 2000 of $132,015 compared to an operating income of $11,009 in the comparable period of the prior year. This is primarily due to the Synavant impairment charge and the impact of the reduced revenues explained above on operating income. CTS Segment CTS revenue for the nine-month period, net of intersegment sales, increased 57.1% to $85,029 from $54,112 in the comparable period of the prior year. CTS operating income for the nine- month period increased 50.6% to $18,243 in 2000 from $12,109 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 partially offset by a decrease in Year 2000 compliance services. Condensed Consolidated Statement of Cash Flows Net Cash Provided by Operating Activities totaled $235,539 for the nine months ended September 30, 2000, compared with net cash provided of $231,758 for the comparable period in 1999. The change was due primarily to lower net income ($109,012) and unfavorable movements in Accounts Receivable ($24,238) and Deferred Revenues ($14,008), which were offset by the impact of the Synavant impairment ($115,453) and the change in Accrued & Other Current Liabilities ($27,932) and a reduction in Benefit Payments ($8,687). Excluding the 39 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Transaction Businesses, for the nine months ended September 30, 2000 Depreciation and Amortization was $51,076, the net increase in Accounts Receivable was $4,786, the net decrease in Deferred Revenue was $33,989, the Net Decrease in Accrued and Other Current Liabilities was $9,389, and Other Working Capital Items were $2,814. Net Cash Used in Investing Activities totaled $24,544 for the nine months ended September 30, 2000 compared with a usage of $60,473 for the comparable period in 1999. The decrease was primarily due to higher Proceeds from Sale of Investments, Net ($23,486), a reduction in Acquisition and Integration payments ($23,452), and a decrease in Capital Expenditures and Additions to Computer Software ($7,822), offset by an increase in the Net Increase in Other Investments and Other Investing Activities - Net ($21,931). Excluding the Transaction Businesses, for the nine months ended September 30, 2000 Capital Expenditures were $18,694, and Additions to Deferred Software were $32,557. Net Cash Used in Financing Activities totaled $216,320 for the nine months ended September 30, 2000 compared with a usage of $222,675 for the comparable period in 1999. The improvement was primarily due to a reduction in Payments for Purchase of Treasury Stock ($161,143) and net Short Term Borrowings ($80,485), offset by the Payment of the D&B Tax Contingency ($212,291) and the Synavant Dividend ($19,438). Effective in the first quarter of 1999, IMS operating units, which previously reported on a fiscal year ended November 30, revised their reporting period to conform to the Company's fiscal year end of December 31. The impact of this change in year end of the IMS reporting units resulted in an additional $30,664 of cash and cash equivalents in the nine months ended September 30, 1999. Financing Activities include cash dividends paid of $17,866 and $18,923 for the nine months ended September 30, 2000 and 1999 respectively. Dividends paid per share were $0.02 for the quarters ended September 30, 2000, June 30, 2000 and March 31, 2000. The Company has been informed by D&B that the IRS is challenging D&B's utilization of certain capital losses during 1989 and 1990. D&B has advised the Company that it filed an amended tax return for these periods which reflects $561,582 of tax and interest due. Under the terms of the 1996 Distribution Agreement, the Company is liable to pay half of such taxes and interest owed to the IRS to the extent that D&B total liabilities exceed $137,000. In May 2000, D&B paid $349,291 of this amount, and the Company paid $212,291, which the Company funded through short-term borrowings. The payments were made to the IRS to stop further interest from accruing. A portion (approximately $41,000) of the Company's obligation will in turn be shared with NMR under the Distribution Agreement between those companies dated June 30, 1998 (the "1998 Distribution Agreement"). NMR is not obligated to pay its share to the Company until January 2, 2001. Accordingly, the receivable has been accounted for as a short-term asset. D&B received a formal assessment for the additional tax from the IRS during the second quarter of 2000. D&B has advised the Company that, notwithstanding the filing and payment, it intends to contest the assessment and would also contest the assessment of amounts, if any, in excess of the amounts paid. The Company estimates that its share of the liability that 40 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) was paid is approximately $140,000 net of income tax benefit on interest (approximately $31,300) and NMR's contribution obligations (approximately $41,000). At September 30, 2000 the Company's Total Current Liabilities exceed its Total Current Assets. Based on estimated future cash flows from operations, the ability to monetize Enterprise investments upon distribution from Venture capital partnerships, the investment in Cognizant Technology Solutions as well as the Company's ability to obtain additional lines of credit and debt, 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. During the first nine months of 2000, the Company repurchased 9,858,750 shares of outstanding common stock at a total cost of $198,716. The shares were repurchased under the stock repurchase program approved by the Board of Directors on October 19, 1999, which authorized the repurchase of up to 16 million of the Company's outstanding common stock. As of September 30, 2000, approximately 15.3 million shares had been repurchased since the inception of the October 1999 repurchase program at a total cost of $335,000. The remaining shares authorized under this program were purchased in October 2000. 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 will be open-market purchases in compliance with Securities and Exchange Commission Rule 10b-18. Through September 30, 2000 the Company has acquired 20% of its initial capitalization. Changes in Financial Position at September 30, 2000 Compared to December 31, 1999 CASH & CASH EQUIVALENTS decreased to $106,389 at September 30, 2000, from $115,875 at December 31, 1999 (which includes $52,836 and $42,641 of CTS' cash and cash equivalents at September 30, 2000 and December 31, 1999, respectively), due primarily to improved working capital management. ACCOUNTS RECEIVABLE - NET decreased to $221,260 from $284,679, primarily due to the receivables transferred to the Transaction Businesses ($43,195), the Company's continuing emphasis on collections and the impact of foreign exchange; partially offset by higher billings resulting from strong revenue growth. OTHER RECEIVABLE increased to $41,136 at September 30, 2000 from $0 at December 31, 1999 to reflect the Nielsen Media Research (NMR) share of the D&B tax contingency (see Note 9 to the Condensed Consolidated Financial Statements). NET ASSETS FROM DISCONTINUED OPERATIONS declined to $81,060 on September 30, 2000 from $96,988 at year-end 1999 due to a decline in the value of the Company's investment in Gartner, which resulted from a lower market price of Gartner shares (See Note 3 to the Condensed Consolidated Financial Statements). SECURITIES AND OTHER INVESTMENTS increased to $155,693 at September 30, 2000, from $127,415 at December 31, 1999, due primarily to the distribution of certain investments, which the Company previously held at cost, from the venture capital fund partnerships to the Company. These 41 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) investments are marked to market as of September 30, 2000. In addition, the Company made an investment of $10,000 in Allscripts which is held at cost. (See Note 5 to the Condensed Consolidated Financial Statements). These increases were partially offset by dispositions. PROPERTY, PLANT AND EQUIPMENT - NET decreased to $146,180 from $169,190 due primarily to the Synavant Spin-off ($16,294) and the translation impact of a generally-stronger U.S. dollar ($7,315). COMPUTER SOFTWARE was $146,873 on September 30, 2000, compared with $174,974 at year-end 1999. The reduction was primarily due to the Synavant Spin-off ($13,479), amortization ($31,910), the impaired software charge ($14,553) and the translation impact of a generally-stronger U.S. dollar, partially offset by investment in deferred software ($37,832). GOODWILL declined to $156,756 on September 30, 2000 from $339,491 at year-end 1999. The decrease was primarily due to the Synavant Spin-off ($58,168), an impairment charge ($100,900) and amortization ($16,736). ACCOUNTS PAYABLE decreased to $32,920 on September 30, 2000, from $44,577 at year-end 1999 principally due to the Synavant Spin-off ($6,696) and the translation impact of a generally-stronger U.S. dollar ($6,125). ACCRUED AND OTHER CURRENT LIABILITIES decreased to $189,466 at September 30, 2000, from $196,375 at December 31, 1999 due primarily to payments of accruals for salaries, wages, bonuses and other compensation and payments related to PMSI direct acquisition and integration costs. An increase for Spin and Related Cost accruals is offset by the Spin of the Synavant liabilities. SHORT TERM DEBT increased to $339,232 at September 30, 2000, from $134,663 at December 31, 1999, due primarily to the payment of the D&B tax contingency ($212,291) and the funding of the Company's share repurchase program ($198,716), partially offset by Net Cash Provided by Operating Activities ($235,539). ACCRUED INCOME TAXES decreased to $74,082 at September 30, 2000, from $211,592 at December 31, 1999. The decrease reflects net taxes paid less taxes accrued in the nine-month period. DEFERRED REVENUES decreased to $90,668 at September 30, 2000, from $136,196 at December 31, 1999 due primarily to the amortization of annual subscription, maintenance and support contracts billed in advance at December 31, 1999 ($29,840) and to the Synavant Spin-off ($9,170). OTHER LIABILITIES increased to $101,067 on September 30, 2000, from $81,343 at year end 1999 primarily due to an increase in the Long Term Deferred Tax Liability. SHAREHOLDERS' EQUITY decreased to $214,583 at September 30, 2000 from $493,706 at December 31, 1999 primarily due to the Synavant Spin-off ($137,841) and share repurchases ($198,716), partially offset by net income ($76,890). 42 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Summary of Recent Accounting Pronouncements In December 1999 the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No 101 "Revenue Recognition in Financial Statements" ("SAB No 101"). SAB No 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. On June 26, 2000, the SEC staff issued SAB 101B to provide registrants with additional time to implement guidance contained in SAB 101. SAB 101B delays the implementation date of SAB No 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company believes its revenue recognition policies are compliant with the SEC staff's views. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.133- an amendment of FASB Statement No. 133." Citing concerns about companies' ability to modify their information systems in time to apply SFAS 133, the FASB delayed its effective date for one year, to fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). Management does not believe that adoption of this statement will have a material impact on the Company's financial statements. Euro Conversion On January 1, 1999, 11 member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency ("Euro"). The transition period for the introduction of the Euro is between January 1, 1999 and January 1, 2002. The Company instituted plans for the introduction of the Euro and addressed the related issues, including the conversion of information technology systems, recalculating currency risk, recalibrating derivatives and other financial instruments, continuity of contracts, taxation and accounting records and the increased price transparency resulting from the use of a single 43 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) currency in eleven participating countries which may affect the ability of some companies to price products differently in various European markets. The Company believes that differences in national market size, data collection requirements and specific product specifications required due to the diverse market information needs in the healthcare markets of Europe will reduce the potential for price harmonization in most of the Company's product ranges. Forward-Looking Statements This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by IMS Health, contain statements which, in the opinion of IMS Health, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These statements appear in a number of places in this quarterly report and include, but are not limited to, all statements relating to plans for future growth and other business development activities as well as capital expenditures, financing sources, dividends and the effects of regulation and competition, Euro conversion and all other statements regarding the intent, plans, beliefs or expectations of IMS Health or its directors or officers. Stockholders are cautioned that such forward-looking statements are not assurances for future performance or events and involve risks and uncertainties that could cause actual results and developments to differ materially from those covered in such forward-looking statements. These risks and uncertainties include, but are not limited to, risks associated with operating on a global basis, including fluctuations in the value of foreign currencies relative to the U.S. dollar, and the ability to successfully hedge such risks; to the extent IMS Health seeks growth through acquisitions, alliances or joint ventures, the ability 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; the ability to obtain future financing on satisfactory terms; deterioration in economic conditions, particularly in the pharmaceutical, healthcare, or other industries in which customers may operate; consolidation in the pharmaceutical industry and the other industries in which IMS Health's customers operate; conditions in the securities markets which may effect the value or liquidity of portfolio investments and management's estimates of lives of assets, recoverability of assets, fair market value, estimates and liabilities and accrued income tax benefits and liabilities; and; failure of third parties to convert their information technology systems to the Euro currency in a timely manner and actions of government agencies and other third parties with respect to Euro currency issues. Consequently, all the forward-looking statements contained in this Quarterly Report on Form 10-Q are qualified by the information contained herein, including, but not limited to, the information contained under this heading and the condensed consolidated financial statements and notes thereto for the three and nine month period ended September 30, 2000 and by the material set forth under the headings "Business" and "Factors that May Affect Future Results" in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. IMS Health is under no obligation 44 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) to publicly release any revision to any forward-looking statement contained or incorporated herein to reflect any future events or occurrences. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information in response to this Item is set forth in "Note 10. Financial Instruments" of Notes to Condensed Consolidated Financial Statements on pages 19-21. 45 PART II. OTHER INFORMATION Item 1. Legal Proceedings Information in response to this Item is set forth in "Note 9. Contingencies" of Notes to Condensed Consolidated Financial Statements on pages 16 through 19 hereof. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Instruments Defining Rights of Security Holders (4.1) Amendment No. 2 to the Rights Agreement, dated as of July 18, 2000, between IMS Health Incorporated and First Chicago Trust Company of New York Material Contracts 10.1 IMS Health Incorporated U.S Executive Retirement Plan dated as of July 25, 2000 27 Financial Data Schedules (b) Reports on 8-K: The following reports on Form 8-K were filed during the quarter ended September 30, 2000: A report on Form 8 K was filed on September 15, 2000 to present under Item 2, Acquisition or Disposition of Assets, a description of the Company's Spin-off of Synavant Inc. (the "Synavant Spin-off"); under Item 5, Other Events, the status of the Company's anticipated disposition of ERISCO Managed Care Technologies, Inc. to The TriZetto Group, Inc., and two smaller dispositions, and under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, Pro Forma Financial Information regarding the Synavant Spin-off. 46 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IMS Health Incorporated By: /s/ James C. Malone ------------------------------------ Date: November 13, 2000 James C. Malone Chief Financial Officer /s/ Wendy J. Timmins ------------------------------------ Date: November 13, 2000 Wendy J. Timmins Vice President-Finance & Controller (Principal Accounting Officer) 47 EX-4.1 2 a2029637zex-4_1.txt EX-4.1 Exhibit 4.1 AMENDMENT NO. 2 TO THE RIGHTS AGREEMENT This Amendment No. 2, dated as of July 18, 2000 (the "Amendment"), to the Rights Agreement, dated as of June 15, 1998 (as amended from time to time, the "Rights Agreement"), between IMS Health Incorporated, a Delaware corporation (the "Company"), and First Chicago Trust Company, as Rights Agent (the "Rights Agent"). WHEREAS, on June 15, 1998, the Company and the Rights Agent entered into a rights agreement, as amended on March 28, 2000 (the "Original Rights Agreement"); WHEREAS, Section 27 of the Original Rights Agreement permits the Company to amend the Original Rights Agreement in the manner provided herein; WHEREAS, Section 27 of the Original Rights Agreement provides that the Rights Agent shall execute this Amendment upon delivery of a certificate from an appropriate officer of the Company which states that this Amendment is in compliance with the terms of Section 27 of the Original Rights Agreement (the "Officer's Certificate"); and WHEREAS, the Officer's Certificate is being delivered to the Rights Agent concurrently with this Amendment; WHEREAS, the Company deems this Amendment to be necessary and desirable and in the best interests of the holders of Rights and has duly approved this Amendment; WHEREAS, the Company and the Rights Agent wish to amend the Original Rights Agreement as follows: NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Rights Agent hereby agree as follows: 1. Section 1(d) is hereby amended and restated in its entirety as follows: "(d) "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of New Jersey, or the State in which the principal office of the Rights Agent is located, are authorized or obligated by law or executive order to close." 2. Section 2 is hereby amended and restated in its entirety as follows: "Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of Common Stock) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable upon ten (10) days prior written notice to the Rights Agent. The Rights Agent shall have no duty to supervise and shall in no event be liable for the acts or omissions of any such co-Rights Agent." 3. Section 18(a) is hereby amended and restated in its entirety as follows: "(a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability arising therefrom, directly or indirectly." 4. Section 20(c) is hereby amended and restated in its entirety as follows: "(c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross negligence, bad faith or willful misconduct." 5. Section 35 is hereby deleted in its entirety. 6. Except as expressly set forth herein, the Rights Agreement shall not by implication or otherwise be supplemented or amended by virtue of this Amendment, but shall remain in full force and effect, as amended hereby. 7. This Amendment may be executed in any number of counterparts, and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the Company and the Rights Agent have executed this Amendment as of the date and year first written above. IMS HEALTH INCORPORATED By: /s/ Matthew L. Friedman ------------------------------------- Name: Matthew L. Friedman Title: Vice President - Treasurer FIRST CHICAGO TRUST COMPANY By: /s/ Craig Broomfield -------------------------------------- Name: Craig Broomfield Title: Senior Account Manager EX-10.1 3 a2029637zex-10_1.txt EXHIBIT 10.1 Exhibit 10.1 IMS HEALTH INCORPORATED U.S. EXECUTIVE RETIREMENT PLAN Effective as of July 25, 2000 TABLE OF CONTENTS PAGE INTRODUCTION...................................................................1 SECTION 1 - DEFINITIONS................................................1 1.1 "Actuarial Equivalent Value".................................1 1.2 "Affiliated Employer"........................................1 1.3 "Average Final Compensation".................................1 1.4 "Basic Disability Plan"......................................2 1.5 "Basic Disability Plan Benefit"..............................2 1.6 "Basic Plan".................................................2 1.7 "Basic Plan Benefit".........................................2 1.8 "Board" 1.9 "Change in Control"..........................................3 1.10 "Code" ....................................................4 1.11 "Company"....................................................5 1.12 "Compensation"...............................................5 1.13 "Covered Earnings"...........................................5 1.14 "Deferred Vested Benefit"....................................5 1.15 "Disability"or "Disabled"....................................5 1.16 "Disability Benefits"........................................5 1.17 "Effective Date".............................................6 1.18 "Former Member"..............................................6 1.19 "Lump Sum Election"..........................................6 1.20 "Member" 6 1.21 "Other Disability Income"....................................6 1.22 "Other Retirement Income"....................................6 1.23 "Plan" ....................................................7 1.24 "Retirement".................................................7 1.25 "Retirement Benefits"........................................7 1.26 "Service"....................................................7 1.27 "Surviving Spouse"...........................................8 -i- TABLE OF CONTENTS (CONTINUED) PAGE 1.28 "Surviving Spouse's Benefits"................................8 1.29 "Vested Former Member".......................................9 1.30 "Plan Administrator".........................................9 SECTION 2 - PARTICIPATION..............................................9 2.1 Commencement of Participation................................9 2.2 Termination of Participation.................................9 SECTION 3 - AMOUNT AND FORM OF BENEFITS...............................10 3.1 Retirement Benefits.........................................10 3.2 Deferred Vested Benefit.....................................11 3.3 Form of Payment.............................................13 3.4 Lump Sum Election...........................................15 3.5 Cessation of Benefits.......................................16 3.6 Notification of Cessation of Benefits.......................18 3.7 Repayment of Benefits Paid as Lump Sum......................18 3.8 Change in Control...........................................19 SECTION 4 - DISABILITY BENEFITS.......................................19 4.1 Disability Benefits.........................................19 (a) Eligibility........................................19 (b) Amount.............................................19 SECTION 5 - SURVIVING SPOUSE'S BENEFITS...............................19 5.1 Death Prior to Benefit Commencement.........................19 5.2 Death On or After Benefit Commencement......................20 5.3 Commencement of Surviving Spouse's Benefit..................20 5.4 Lump Sum Payment............................................20 5.5 Reduction...................................................21 SECTION 6 - PLAN ADMINISTRATOR........................................22 6.1 Duties and Authority........................................22 SECTION 7 - MISCELLANEOUS.............................................22 7.1 Amendment; Termination......................................22 -ii- TABLE OF CONTENTS (CONTINUED) PAGE 7.2 No Employment Rights........................................23 7.3 Payout in Discretion of the Plan Administrator..............23 7.4 Unfunded Status.............................................24 7.5 Arbitration.................................................24 7.6 No Alienation...............................................24 7.7 Withholding.................................................25 7.8 Governing Law...............................................25 -iii- IMS HEALTH INCORPORATED U.S. EXECUTIVE RETIREMENT PLAN Effective as of July 25, 2000 INTRODUCTION Effective as of July 25, 2000, the IMS Health Incorporated U.S. Executive Retirement Plan (the "Plan") is established to provide a means of ensuring the payment of a competitive level of retirement income and disability and survivor benefits, and thereby attract, retain and motivate a select group of executives of IMS Health Incorporated and its affiliated employers. SECTION 1 - DEFINITIONS 1.1 "ACTUARIAL EQUIVALENT VALUE" shall mean a benefit of equivalent value computed on the basis of the 1983 Group Annuity Mortality Table and interest equal to the yield on 30-year Treasury Bonds as of the last business day of the Plan Year prior to the year in which the relevant calculation occurs. 1.2 "AFFILIATED EMPLOYER" shall mean an entity affiliated with the Company. 1.3 "AVERAGE FINAL COMPENSATION" shall mean a Member's average annual Compensation during the five consecutive 12-month periods in the last ten consecutive 12-month periods of his or her Service (or during the total number of consecutive 12-month periods if fewer than five), immediately prior to the month following the Member's termination of employment with the Company or an Affiliated Employer or, if earlier, removal from participation under this Plan, affording the highest such Average Final Compensation. If actual monthly Compensation for any month during the 120-month computational period is unavailable, Compensation for such month shall be determined by dividing the Member's annual rate of base pay in the month preceding such unavailable month by 12. 1.4 "BASIC DISABILITY PLAN" shall mean as to any Member the long-term disability plan of the Company or an Affiliated Employer pursuant to which long-term disability benefits are payable to such Member. 1.5 "BASIC DISABILITY PLAN BENEFIT" shall mean the amount of benefits payable to a Member from the Basic Disability Plan. 1.6 "BASIC PLAN" shall mean as to any Member or Vested Former Member the defined benefit pension plan of the Company or an Affiliated Employer intended to meet the requirements of Code Section 401(a) pursuant to which retirement benefits are payable to such Member or Vested Former Member or to the Surviving Spouse or designated beneficiary of a deceased Member or Vested Former Member. 1.7 "BASIC PLAN BENEFIT" shall mean the amount of benefits payable from the Basic Plan to a Member or Vested Former Member. 1.8 "BOARD" shall mean the Board of Directors of IMS Health Incorporated, except that any action authorized to be taken by the Board hereunder may also be taken by a duly authorized committee of the Board or its duly authorized delegees. -2- 1.9 "CHANGE IN CONTROL" shall mean: (a) any "Person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company), becomes the "Beneficial Owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of 24 months (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board, and any new director (other than (i) a director nominated by a Person who has entered into an agreement with the Company to effect a transaction described in Sections 1.9(a), (c), or (d) hereof, (ii) a director nominated by any Person (including the Company) who publicly announces an intention to take or to consider taking actions (including, but not limited to, an actual or threatened proxy contest) which if consummated would constitute a Change in Control, or (iii) a director nominated by any Person who is the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's securities) whose election by the Board or nomination for election by the Company's stockholders was approved in advance by a vote of at least two-thirds (2/3) of the directors then still in office who either were -3- directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve any transaction or series of transactions under which the Company is merged or consolidated with any other company, other than a merger or consolidation (i) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 66 2/3% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, and (ii) after which no "Person" holds 20% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity; (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; or (e) the Board adopts a resolution to the effect that, for purposes of this Plan, a Change in Control has occurred. 1.10 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. -4- 1.11 "COMPANY" shall mean IMS Health Incorporated. 1.12 "COMPENSATION" shall mean base salary, annual bonuses, commissions, overtime and shift pay, in each case prior to reductions for elective contributions under Sections 401(k) and 125 of the Code and deferred compensation under any nonqualified deferred compensation plan. Notwithstanding the foregoing, Compensation shall exclude severance pay (including, without limitation, severance pay under the Company's Employee Protection Plan), stay-on bonuses, long-term bonuses, retirement income, change-in-control payments, contingent payments, amounts paid under this Plan (other than Disability Benefits) or any other retirement plan or deferred compensation plan, income derived from stock options, stock appreciation rights and other equity-based compensation and other forms of special remuneration. 1.13 "COVERED EARNINGS" shall mean a Member's Compensation in the 12 months immediately preceding the onset of the Member's Disability. 1.14 "DEFERRED VESTED BENEFIT" shall mean the benefits described in Section 3.2(b) hereof. 1.15 "DISABILITY" OR "DISABLED" shall mean disability or disabled for purposes of the Basic Disability Plan. 1.16 "DISABILITY BENEFITS" shall mean the benefits provided as described in Section 4.1(b) hereof. -5- 1.17 "EFFECTIVE DATE" shall mean July 25, 2000. 1.18 "FORMER MEMBER" shall mean (i) a Member whose employment with the Company or an Affiliated Employer terminates with a Vested Percentage equal to 0%, or (ii) a Member who was removed from participation in the Plan, in accordance with Section 2.2 hereof, with a Vested Percentage equal to 0%. 1.19 "LUMP SUM ELECTION" shall mean an election to receive all or portion of the benefits payable hereunder in a lump sum pursuant to Section 3.4 hereof. 1.20 "MEMBER" shall mean an employee of the Company or an Affiliated Employer who becomes a participant in the Plan pursuant to Section 2, but excludes any Former Member or Vested Former Member. 1.21 "OTHER DISABILITY INCOME" shall mean (i) the disability insurance benefit that the Member is entitled to receive under the Federal Social Security Act while he or she is receiving the Basic Disability Plan Benefit and (ii) the disability income payable to a Member from any supplemental executive disability plan of the Company or any Affiliated Employer or from any other contract, agreement or other arrangement with the Company or an Affiliated Employer (excluding any Basic Disability Plan). 1.22 "OTHER RETIREMENT INCOME" shall mean the retirement income payable to a Member or Vested Former Member from any `excess benefit plan' as that term is defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), -6- any plan described in Section 201(2) of ERISA, and any other contract, agreement or other arrangement providing a defined pension benefit or defined contribution retirement benefit, in any case, maintained or entered into with the Company or an Affiliated Employer (excluding this Plan, any Basic Plan, any defined contribution plan intended to meet the requirements of Code Section 401(a) and any elective plan of deferred compensation). 1.23 "PLAN" shall mean the IMS Health Incorporated U.S. Executive Retirement Plan, as embodied herein, and any amendments thereto. 1.24 "RETIREMENT" shall mean the termination of a Member's or Vested Former Member's employment with the Company or an Affiliated Employer other than by reason of death or Disability (i) after reaching age 55, completing ten years of Service and with a Vested Percentage greater than 0%, or (ii) immediately following the cessation of the payment of Disability Benefits under the Plan to such Member or Vested Former Member while he or she is Disabled. In determining whether age 55 has been attained under clause (i) of this definition, there shall be included as years of age the number of additional years credited as "age" for purposes of the Plan to the Member or Vested Former Member under a then-effective employment agreement between the Company and such person. 1.25 "RETIREMENT BENEFITS" shall mean the benefits described in Section 3.1(b) hereof. 1.26 "SERVICE" shall mean a Member's service defined as Vesting Service in the Basic Plan, which is taken into account for vesting purposes thereunder (including any such service -7- prior to the date such individual becomes a Member but not including any such service after participation hereunder terminates), except that (i) Service will also include service while the Member is receiving Disability Benefits under this Plan; (ii) if a Member was employed by a company acquired by the Company or an Affiliated Employer after the Effective Date, such Member's service with that company prior to the date of acquisition will not constitute Service hereunder; (iii) upon commencement of participation hereunder in accordance with Section 2.1 hereof, the CEO (as defined in such section) may limit any service otherwise to constitute Service hereunder with respect to periods prior to the date of participation in the Plan; and (iv) no service of a Former Member or Vested Former Member during any period after removal from participation under Section 2.2 shall constitute Service for purposes of the Plan. The foregoing notwithstanding, there shall be included as Service under the Plan the number of additional years (or other additional period) credited as "service" for purposes of the Plan to the Member of Former Member or Vested Former Member under an employment agreement between the Company or an Affiliated Employer and such person in effect at the time of such person's termination of employment. 1.27 "SURVIVING SPOUSE" shall mean the spouse of a deceased Member or Vested Former Member to whom such Member or Vested Former Member is married under applicable state law immediately preceding such Member or Vested Former Member's death. 1.28 "SURVIVING SPOUSE'S BENEFITS" shall mean the benefits described in Section 5 hereof. -8- 1.29 "VESTED FORMER MEMBER" shall mean (i) a Member whose employment with the Company or an Affiliated Employer terminates on or after the date on which his or her Vested Percentage is greater than 0%, or (ii) a Member who was removed from participation in the Plan, in accordance with Section 2.2 hereof, on or after the date on which his or her Vested Percentage is greater than 0%. 1.30 "PLAN ADMINISTRATOR" shall mean the Company, except that any action authorized to be taken by the Plan Administrator hereunder may also be taken by any committee or person(s) duly authorized by the Board or the duly authorized delegees of such duly authorized committee or person(s). SECTION 2 - PARTICIPATION 2.1 COMMENCEMENT OF PARTICIPATION. Such key executives of the Corporation and its Affiliated Employers as are designated by the CEO in writing and approved by the Plan Administrator shall participate in the Plan as of a date determined by the CEO. 2.2 TERMINATION OF PARTICIPATION. A Member's participation in the Plan shall terminate upon termination of his or her employment with the Company or any Affiliated Employer. Prior to termination of employment, a Member may be removed, upon written notice by the CEO as approved by the Plan Administrator, from further participation in the Plan. As of the date of termination or removal, no further benefits shall accrue to such individual hereunder. -9- SECTION 3 - AMOUNT AND FORM OF BENEFITS 3.1 RETIREMENT BENEFITS. (a) ELIGIBILITY. Upon the Retirement of a Member or Vested Former Member from the Company or an Affiliated Employer, he or she shall be entitled to receive a percentage (the "Vested Percentage") of the Retirement Benefit described in Section 3.1(b) hereof, payable in the form specified in Section 3.3. Notwithstanding the provisions of Section 1.26 of the Plan to the contrary, solely for the purpose of determining the Vested Percentage under the following schedule, Service shall exclude any such service prior to the date the individual becomes a Member, except to the extent otherwise determined by the Chief Executive Officer of the Company, in his or her sole discretion.
If the Member's Service is: The Vested Percentage is: --------------------------- ------------------------- Less than 1 year 0% At least 1 but less than 2 years 33% At least 2 but less than 3 years 67% 3 or more years 100%
(b) AMOUNT. The Retirement Benefit of a Member or Vested Former Member shall be an annual benefit equal to the difference between (i) and the sum of (ii) and (iii), where: (i) is 1.67% of his or her Average Final Compensation multiplied by the number of his or her years of Service not in excess of 36 years; -10- (ii) is the Basic Plan Benefit payable to the Member or Vested Former Member as of the date of his or her Retirement expressed in the form of an annual life annuity, or, if the Basic Plan Benefit becomes payable after the Member's or Vested Former Member's Retirement, the Actuarial Equivalent Value as of such date of the Basic Plan Benefit that would become payable in the form of an annual life annuity starting on the earliest possible date under the terms of the Basic Plan; (iii) is the Other Retirement Income payable to the Member or Vested Former Member as of the date of his or her Retirement expressed in the form of an annual life annuity, or, if the Other Retirement Income becomes payable after the Member's or Vested Former Member's Retirement, the Actuarial Equivalent Value as of such date of the Other Retirement Income that would become payable in the form of an annual life annuity starting on the earliest possible date under the terms of the appropriate retirement arrangement. 3.2 DEFERRED VESTED BENEFIT. (a) ELIGIBILITY. Each Member and Vested Former Member who has a Vested Percentage (as defined below) greater than 0% and whose employment with the Company or an Affiliated Employer terminates with the Company's consent, prior to Retirement, other than by reason of death or Disability, shall be entitled to receive a percentage (the "Vested Percentage") of the Deferred Vested Benefit -11- described in Section 3.2(b) hereof, payable in the form specified in Section 3.3. Notwithstanding the provisions of Section 1.26 of the Plan to the contrary, solely for the purpose of determining the Vested Percentage under the following schedule, Service shall exclude any such service prior to the date the individual becomes a Member, except to the extent otherwise determined by the Chief Executive Officer of the Company, in his or her sole discretion.
If the Member's Service is: The Vested Percentage is: --------------------------- ------------------------- Less than 1 year 0% At least 1 but less than 2 years 33% At least 2 but less than 3 years 67% 3 or more years 100%
(b) AMOUNT. The Deferred Vested Benefit of a Member or Vested Former Member who terminates and who meets the eligibility requirements of Section 3.2(a) shall be an annual benefit equal to the difference between (i) and the sum of (ii) and (iii), where: (i) is 1.67% of his or her Average Final Compensation multiplied by the number of his or her years of Service not in excess of 36; (ii) is the Basic Plan Benefit payable to the Member or Vested Former Member as of the date his or her Deferred Vested Benefit commences expressed in the form of an annual life annuity, or, if the Basic Plan Benefit becomes payable after the Member's or Vested Former Member's -12- Deferred Vested Benefit commences, the Actuarial Equivalent Value as of such date of the Basic Plan Benefit that would become payable in the form of an annual life annuity starting on the earliest possible date under the terms of the Basic Plan; (iii) is the Other Retirement Income payable to the Member or Vested Former Member as of the date his or her Deferred Vested Benefit commences expressed in the form of an annual life annuity, or, if the Other Retirement Income becomes payable after the Member's or Vested Former Member's Deferred Vested Benefit commences, the Actuarial Equivalent Value as of such date of the Other Retirement Income that would become payable in the form of an annual life annuity starting on the earliest possible date under the terms of the appropriate retirement arrangement. 3.3 FORM OF PAYMENT. (a) Except as provided under Section 3.3(b) or Section 3.3(c), the Retirement Benefit or Deferred Vested Benefit under this Plan, as the case may be, shall be payable in monthly installments in the form of a straight life annuity and without regard to any optional form of benefits elected under the Basic Plan. Payments shall commence on the first day of the calendar month coinciding with or next following (i) the Member's or Vested Former Member's Retirement, in the case of Retirement Benefits or (ii) the later of the date the Member or Vested Former -13- Member attains age 55 or terminates employment, in the case of Deferred Vested Benefits. (b) If a Member or Vested Former Member has made a Lump Sum Election pursuant to Section 3.4 and such Lump Sum Election becomes effective (i) prior to the date of such Member's or Vested Former Member's Retirement or termination of employment with the Company or an Affiliated Employer and (ii) while he or she was still a Member, the Retirement Benefit, or Deferred Vested Benefit under this Plan, as the case may be, shall be payable in the form or combination of forms of payment elected pursuant to such Lump Sum Election under Section 3.4 and without regard to any optional form of benefits elected under the Basic Plan. Any portion of the benefits hereunder payable in a lump sum shall be paid within 60 days following (i) the Member's or Vested Former Member's Retirement, in the case of Retirement Benefits or (ii) the later of the date the Member or Vested Former Member attains age 55 or terminates employment, in the case of Deferred Vested Benefits. (c) Notwithstanding any Lump Sum Election made (or not made) under Section 3.3, if the lump sum value, determined in the same manner as provided under Section 3.4(a), of a Member's or Vested Former Member's Retirement, or Deferred Vested Benefit is $10,000 or less at the time such benefit is payable under this Plan, such benefit shall be payable as a lump sum. -14- 3.4 LUMP SUM ELECTION. (a) A Member or Vested Former Member may elect to receive all, none, or a specified portion, as provided in Section 3.4(c), of his or her Retirement Benefit or Deferred Vested Benefit under the Plan as a lump sum and to receive any balance of such benefit in the form of an annuity; provided that any such Lump Sum Election shall be effective for purposes of this Plan only if the conditions of Section 3.4(b) are satisfied. A Member or Vested Former Member may elect a payment form different than the payment form previously elected by him or her under this Section 3.4(a) by filing a revised election form; provided that any such new election shall be effective only if the conditions of Section 3.4(b) are satisfied with respect to such new election. Any prior Lump Sum Election made by a Member that has satisfied the conditions of Section 3.4(b) shall remain effective for purposes of the Plan until such Member has made a new election satisfying the conditions of Section 3.4(b). The amount of any portion of a Member's or a Vested Former Member's Retirement Benefit or Deferred Vested Benefit payable as a lump sum under this Section 3.4 shall equal the present value of such portion of the benefit, and such present value shall be determined (i) based on a discount rate equal to 85% of the average of the 15-year non-callable U.S. Treasury bond yields as of the close of business on the last business day of each of the three months immediately preceding the date the annuity value is determined and (ii) using the 1983 Group Annuity Mortality Table. -15- (b) A Member's Election under Section 3.4(a) becomes effective only if all of the following conditions are satisfied: (i) such Member remains in the employment of the Company or an Affiliated Employer, as the case may be, for the full 12 calendar months immediately following the date of such election (the "Election Date"), except in the case of death or Disability of such Member (in which case Section 3.4 (d) shall apply) and (ii) such Member complies with the administrative procedures set forth by the Plan Administrator with respect to the making of a Lump Sum Election. (c) A Member making an election under Section 3.4(a) may specify the portion of his Retirement or Deferred Vested Benefit under the Plan to be received in a lump sum as follows: 0%, 25%, 50%, 75%, or 100%. (d) In the event a Member who has made an Election pursuant to Section 3.4(a) dies or becomes Disabled while employed by the Company or an Affiliated Employer and such death or total and permanent Disability occurs during the 12 calendar-month period immediately following the Election Date, the condition under Section 3 .4(b)(i) shall be deemed satisfied with respect to such Member. 3.5 CESSATION OF BENEFITS. Subject to Section 3.8 hereof, no benefits or no further benefits, as the case may be, shall be paid to a Member, Vested Former Member or Surviving Spouse if the Member or Vested Former Member has: -16- (a) become a stockholder (unless such stock is listed on a national securities exchange or traded on a daily basis in the over-the-counter market and the Member's or Vested Former Member's ownership interest is not in excess of 2% of the company whose shares are being purchased), employee, officer, director or consultant of or to a Company, or a member or an employee of or a consultant to a partnership or any other business or firm, which competes with any of the businesses owned or operated by the Company, or if the Member or Vested Former Member becomes associated with a company, partnership or individual which company, partnership or individual acts as a consultant to businesses in competition with the Company, such Member or Vested Former Member provided services to such competing businesses, whether or not, in any of the foregoing cases, such Member or Vested Former Member accepts any form of compensation from such competing entity or consultant; or (b) been discharged from employment with the Company or any Affiliated Employer for "cause." "Cause" shall mean "Cause" as defined in an employment agreement between the Company and the Member or Former Member or Vested Former Member then in effect or, if no such employment agreement containing a definition of Cause is then in effect, "Cause" shall mean (i) willful malfeasance or willful misconduct by the Member or Former Vested Member in connection with his or her employment, (ii) continuing failure to perform such duties as are requested by any employee to whom the Member or Vested Former Member reports or the Board, or (iii) the commission by a Member or Vested Former Member of (A) any felony or (B) any misdemeanor involving moral turpitude. -17- 3.6 NOTIFICATION OF CESSATION OF BENEFITS. Subject to Section 3.8 hereof, in any case described in Section 3.5, the Member, Vested Former Member or Surviving Spouse shall be given prior written notice that no benefits or no further benefits, as the case may be, will be paid to such Member, Vested Former Member or Surviving Spouse. Such written notice shall specify the particular act(s), or failures to act, and the basis on which the decision to cease paying his or her benefits has been made. 3.7 REPAYMENT OF BENEFITS PAID AS LUMP SUM. (a) Subject to Section 3.8 hereof, a Member or Vested Former Member who receives in a lump sum any portion of his or her Retirement Benefit or Deferred Vested Benefit pursuant to a Lump Sum Election, shall receive such lump sum portion of such Retirement Benefit or Deferred Vested Benefit subject to the condition that if such Member or Vested Former Member engages in any of the acts described in Section 3.5(a), then such Member or Vested Former Member shall, within 60 days after written notice by the Company, repay to the Company the amount described in Section 3.7(b). (b) The amount described in this section shall equal the amount of the Member's or Vested Former Member's lump sum benefit paid under this Plan to which such Member or Vested Former Member would not have been entitled, if such lump sum benefit had instead been payable in the form of an annuity under this Plan and such annuity payments were subject to the provisions of Section 3.5. -18- 3.8 CHANGE IN CONTROL. Notwithstanding anything to the contrary contained herein, the provisions of Sections 3.5 through 3.7 shall be of no force or effect from and after a Change in Control with respect to any Member and Vested Former Member who is employed by the Company or an Affiliated Employer as of such Change in Control. SECTION 4 - DISABILITY BENEFITS 4.1 DISABILITY BENEFITS. (a) ELIGIBILITY. A Member who is enrolled for the maximum disability insurance coverage available under the Basic Disability Plan and who has become Disabled shall be entitled to the Disability Benefit described in Section 4.1(b). (b) AMOUNT. The Disability Benefit of a Member entitled thereto shall be an annual benefit payable in monthly installments under this Plan during the same period as disability benefits are actually paid by the Basic Disability Plan, in an amount equal to 60% of the Member's Covered Earnings, offset by the Member's (i) Basic Disability Plan Benefit, (ii) Basic Plan Benefit, if the Basic Disability Plan Benefit does not already include an offset for such Basic Plan Benefit, and (iii) Other Disability Income. SECTION 5 - SURVIVING SPOUSE'S BENEFITS 5.1 DEATH PRIOR TO BENEFIT COMMENCEMENT. Upon the death of a Member or Vested Former Member, prior to the commencement of his or her Retirement Benefit or Deferred Vested Benefit hereunder, his or her Surviving Spouse will be entitled to a Surviving Spouse's -19- Benefit under this Plan equal to 50% of the Retirement or Deferred Vested Benefit that would have been provided from the Plan had the Member or Vested Member retired from or terminated employment with the Company or an Affiliated Employer on the date of death. 5.2 DEATH ON OR AFTER BENEFIT COMMENCEMENT. Upon the death of a Vested Former Member while he or she is receiving Retirement or Deferred Vested Benefits, his or her Surviving Spouse shall receive a Surviving Spouse's Benefit equal to 50% of the Benefit he or she was receiving at the time of death. Notwithstanding the foregoing, no benefit shall be payable under this Section 5.2 to the extent a Retirement Benefit or Deferred Vested Benefit was previously paid to a Member or Vested Former Member in the form of a lump sum. 5.3 COMMENCEMENT OF SURVIVING SPOUSE'S BENEFIT. Except as provided in Section 5.4, the Surviving Spouse's Benefit provided under Sections 5.1 or 5.2 will be payable monthly, commencing on the first day of the month coincident with or next following the date of the Member's or Vested Former Member's death, or, if the Member or Vested Former Member had not attained age 55, on the date such Member or Vested Former Member would have attained age 55 had he or she lived. Such benefits shall continue until the first day of the month in which the Surviving Spouse dies. 5.4 LUMP SUM PAYMENT. -20- (a) If a Member or a Vested Former Member made an Election under Section 3.4 but such Member or Vested Former Member died prior to such lump sum payment, the Surviving Spouse's Benefit payable under Section 5.1 hereof will be payable in the form or combination of forms of payment so elected by such Member or Vested Former Member pursuant to such Lump Sum Election. The amount of any lump sum payment under the Plan shall be determined using the actuarial assumptions set forth in Section 3.4(a). (b) If the lump sum value, determined in the same manner as provided under Section 3.4(a), of a Surviving Spouse's Benefit is $10,000 or less at the time such Surviving Spouse's Benefit is payable under this Plan, such benefit shall be payable as a lump sum. (c) Any Surviving Spouse's Benefit which is payable as a lump sum shall be paid within 60 days after the date when any portion of such benefit payable in annuity form commences or would commence if any portion of such Surviving Spouse's Benefit were payable as an annuity as set forth in Section 5.3. 5.5 REDUCTION. Notwithstanding the foregoing provisions of Section 5, the amount of a Surviving Spouse's Benefit shall be reduced by one percentage point for each year (where a half year or more is treated as a full year) in excess of ten years that the age of the Member or Vested Former Member exceeds the age of the Surviving Spouse. -21- SECTION 6 - PLAN ADMINISTRATOR 6.1 DUTIES AND AUTHORITY. The Plan Administrator shall be responsible for the administration of the Plan and may delegate to any management committee, employee, director or agent its responsibility to perform any act hereunder, including, without limitation, those matters involving the exercise of discretion; provided, that such delegation shall be subject to revocation at any time at the Plan Administrator's discretion. The Plan Administrator shall have the authority to determine all questions arising in connection with the Plan, to interpret the provisions of the Plan and to construe all of its terms, to adopt, amend, and rescind rules and regulations for the administration of the Plan, and generally to conduct and administer the Plan and to make all determinations in connection with the Plan as may be necessary or advisable. All such actions of the Plan Administrator shall be conclusive and binding upon all Members, Former Members, Vested Former Members and Surviving Spouses. SECTION 7 - MISCELLANEOUS 7.1 AMENDMENT; TERMINATION. The Board of Directors of the Company, may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part; provided, however, that no termination, suspension or amendment of the Plan may adversely affect (a) a Member's or Vested Former Member's benefit under the Plan to which he or she is entitled hereunder, or, (b) a Vested Former Member's right or the right of a Surviving Spouse to receive or to continue to receive a benefit in accordance with the Plan, such benefits or rights as in effect on the date immediately preceding the date of such termination, suspension or amendment. Notwithstanding the -22- foregoing, the Employee Benefits Committee of the Company may amend the Plan without the approval of the Board of Directors of the Company with respect to amendments that such Committee determines do not have a significant effect on the cost of the Plan. 7.2 NO EMPLOYMENT RIGHTS. Nothing contained herein will confer upon any Member, Former Member or Vested Former Member the right to be retained in the service of the Company or any Affiliated Employee, nor will it interfere with the right of the Company or any Affiliated Employer to discharge or otherwise deal with Members, Former Members or Vested Former Members with respect to matters of employment. 7.3 PAYOUT IN DISCRETION OF THE PLAN ADMINISTRATOR. Notwithstanding anything herein to the contrary, at any time following the termination of service of the Member or Vested Former Member, the Plan Administrator may authorize, under uniform rules applicable to all Members, Vested Former Members and Surviving Spouses under the Plan, a lump sum distribution of a Member's, Vested Former Member's and/or Surviving Spouse's Retirement Benefit or Surviving Spouse's Benefit under the Plan in an amount equal to the present value of such Retirement Benefit or Surviving Spouse's Benefit, using the actuarial assumptions then in use for funding purposes under the IMS Health Incorporated Retirement Plan, in full satisfaction of all present and future Plan liability with respect to such Member, Vested Former Member and/or Surviving Spouse, if the amount of such present value is less than $250,000. Such lump sum distribution may be made without the consent of the Member, Vested Former Member or Surviving Spouse. -23- 7.4 UNFUNDED STATUS. Members and Vested Former Members shall have the status of general unsecured creditors of the Company, and this Plan constitutes a mere promise by the Company to make benefit payments at the time or times required hereunder. It is the intention of the Company that this Plan be unfunded for tax purposes and for purposes of Title I of ERISA and any trust created by the Company and any assets held by such trust to assist the Company in meeting its obligations under the Plan shall meet the requirements necessary to retain such unfunded status. 7.5 ARBITRATION. Any dispute or controversy arising under or in connection with the Plan shall be settled exclusively by arbitration in New York, New York in accordance with the rules of the American Arbitration Association in effect at the time of such arbitration. The Company shall pay the entire costs of any proceeding brought by a Member, Vested Former Member, Former Member, or Surviving Spouse hereunder, including the fees and expenses of counsel and pension experts engaged by such person, and such expenses shall be reimbursed promptly upon evidence that such expenses have been incurred without awaiting the outcome of the proceedings; provided however, that such costs and expenses shall be repaid to the Company by the recipient of same if it is finally determined by the arbitrators that the position taken by such person was entirely without merit. Failure of such person to prevail in any dispute or controversy shall not be the sole basis on which such determination shall be made. 7.6 NO ALIENATION. A Member's or Vested Former Member's right to benefit payments under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, -24- assignment, pledge, encumbrance, attachment or garnishment by creditors or such Member or Vested Former Member or his or her Surviving Spouse. 7.7 WITHHOLDING. The Company may withhold from any benefit under the Plan an amount sufficient to satisfy its tax withholding obligations. 7.8 GOVERNING LAW. The Plan shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in such state to the extent not preempted by federal law. -25- IN WITNESS WHEREOF, the Company has caused this document to be executed by its officer effective July 25, 2000. IMS Health Incorporated By: /s/ Victoria R. Fash --------------------------------------- Its: President and Chief Executive Officer Date: July 25, 2000 -26- EX-27 4 a2029637zex-27.txt EXHIBIT 27
5 9-MOS JAN-01-1999 SEP-30-2000 106,389 0 262,396 7,437 28,646 559,413 309,906 163,726 1,201,303 726,368 0 0 0 3,350 211,233 1,201,303 0 1,077,791 0 970,183 0 0 10,027 141,937 67,273 74,664 2,226 0 0 76,890 .26 .26
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