-----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, HT4cXgfvpybi6+rqd5Z8su2125Y5h9pUm7yluzEphk7QL5Z8J9bGHcSOzEHvmJfX oTUUu4Dq4iqUYCkZPhYD6A== 0000912057-02-042539.txt : 20021118 0000912057-02-042539.hdr.sgml : 20021118 20021114175323 ACCESSION NUMBER: 0000912057-02-042539 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMS HEALTH INC CENTRAL INDEX KEY: 0001058083 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 061506026 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14049 FILM NUMBER: 02826793 BUSINESS ADDRESS: STREET 1: 1499 POST ROAD CITY: FAIRFIELD STATE: CT ZIP: 06824 BUSINESS PHONE: 2032224523 MAIL ADDRESS: STREET 1: 1499 POST ROAD CITY: FAIRFIELD STATE: CT ZIP: 06880 10-Q 1 a2092589z10-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, 2002 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.) 1499 Post Road, Fairfield, CT 06824 - ----------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 319-4700 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 Shares Outstanding of Class At October 31, 2002 -------- ------------------- Common Stock, par value $.01 per share 280,915,233 IMS HEALTH INCORPORATED INDEX TO FORM 10-Q
PAGE(S) ------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Statements of Financial Position September 30, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Income Three Months Ended September 30, 2002 and 2001 4 Condensed Consolidated Statements of Income Nine Months Ended September 30, 2002 and 2001 5 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001 6 Notes to Condensed Consolidated Financial Statements 7-24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25-33 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34 ITEM 4. CONTROLS AND PROCEDURES 34 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 35 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 35 SIGNATURES 36 CERTIFICATIONS CHIEF EXECUTIVE OFFICER 37 CHIEF FINANCIAL OFFICER 38
2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------------------------------- ASSETS: CURRENT ASSETS: Cash and cash equivalents $ 387,972 $ 268,386 Accounts receivable, net of allowance for doubtful accounts of $8,731 and $8,492 in 2002 and 2001, respectively 247,506 228,626 Other receivable (Note 8) 35,428 33,361 Other current assets 125,755 126,472 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 796,661 656,845 - ----------------------------------------------------------------------------------------------------------------------- Securities and other investments 21,210 51,992 TriZetto equity investment (Note 7) 118,167 119,896 Property, plant and equipment, net of accumulated depreciation of $171,176 and $170,388 in 2002 and 2001, respectively 152,084 149,084 Computer software 149,292 116,540 Goodwill 166,638 148,597 Other assets 145,666 124,600 - ----------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,549,718 $ 1,367,554 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable $ 29,443 $ 32,115 Accrued and other current liabilities 187,680 196,215 Short-term debt 381,522 197,675 Accrued income taxes 131,468 108,941 Short-term deferred tax liability 12,220 10,684 Deferred revenues 75,022 89,861 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 817,355 635,491 - ----------------------------------------------------------------------------------------------------------------------- Post-retirement and post-employment benefits 41,597 44,305 Long-term debt (Note 9) 175,000 150,000 Other liabilities 183,068 174,373 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $ 1,217,020 $ 1,004,169 - ----------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 8) MINORITY INTERESTS (NOTE 8) $ 166,193 $ 145,019 SHAREHOLDERS' EQUITY: Common Stock, par value $.01, authorized 800,000 shares; issued 335,045 shares at September 30, 2002 and December 31, 2001, respectively $ 3,350 $ 3,350 Capital in excess of par 498,637 504,776 Retained earnings 1,108,050 921,925 Treasury stock, at cost, 53,648 and 40,957 shares at September 30, 2002 and December 31, 2001, respectively (1,314,445) (1,078,914) Cumulative translation adjustment (122,426) (138,123) Minimum pension liability adjustment (3,746) (3,746) Unrealized loss on changes in fair value of cash flow hedges, net of tax (3,017) - Unrealized gains on investments, net of tax expense 102 9,098 - ----------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 166,505 $ 218,366 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY $ 1,549,718 $ 1,367,554 - -----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). 3 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, -------------------------- 2002 2001 -------------------------- OPERATING REVENUE $ 361,762 $ 328,137 Operating costs 134,692 113,909 Selling and administrative expenses 88,047 74,933 Depreciation and amortization 16,403 15,853 - ---------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 122,620 123,442 - ---------------------------------------------------------------------------------------------------------------------- Interest income 2,023 3,828 Interest expense (3,960) (3,742) Loss on Gartner investment (Note 5) - (84,880) Gains (losses) from investments, net 1,200 (2,969) Gain on issuance of investees' stock, net 3,940 3,082 Other expense, net (5,851) (6,966) - ---------------------------------------------------------------------------------------------------------------------- NON-OPERATING INCOME (LOSS), NET (2,648) (91,647) - ---------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 119,972 31,795 Income tax (provision) benefit (37,310) 11,237 TriZetto equity loss, net of income taxes of $262 for 2002 and $1,126 for 2001 (406) (1,747) - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 82,256 41,285 Income from discontinued operations, net of income taxes of $25,320 (Note 5) - 47,025 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 82,256 $ 88,310 - ---------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE OF COMMON STOCK: Income from continuing operations $ 0.29 $ 0.14 Income from discontinued operations - $ 0.16 - ---------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.29 $ 0.30 - ---------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE OF COMMON STOCK: Income from continuing operations $ 0.29 $ 0.14 Income from discontinued operations - $ 0.16 - ---------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.29 $ 0.29 - ---------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding - basic 283,089 296,910 Dilutive effect of shares issuable as of period-end under stock option plans 207 4,152 Adjustment of shares outstanding applicable to exercised and cancelled stock options during the period 4 193 - ---------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 283,300 301,255 - ----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). 4 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2002 2001 ---------------------------- OPERATING REVENUE $ 1,046,172 $ 992,048 Operating costs 412,851 361,052 Selling and administrative expenses 270,603 253,508 Depreciation and amortization 43,836 50,362 - ---------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 318,882 327,126 - ---------------------------------------------------------------------------------------------------------------------- Interest income 5,625 6,662 Interest expense (10,268) (15,410) Loss on Gartner investment (Note 5) - (84,880) Gains (losses) from investments, net 2,450 (594) Gain on issuance of investees' stock, net 7,508 753 Other expense, net (29,003) (14,775) - ---------------------------------------------------------------------------------------------------------------------- NON-OPERATING INCOME (LOSS), NET (23,688) (108,244) - ---------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 295,194 218,882 Provision for income taxes (91,044) (41,680) TriZetto equity loss, net of income taxes of $454 for 2002 and $3,599 for 2001 (701) (5,547) - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 203,449 171,655 Income from discontinued operations, net of income taxes of $25,320 (Note 5) - 47,025 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 203,449 $ 218,680 - ---------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE OF COMMON STOCK: Income from continuing operations $ 0.71 $ 0.58 Income from discontinued operations - $ 0.16 - ---------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.71 $ 0.74 - ---------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE OF COMMON STOCK: Income from continuing operations $ 0.70 $ 0.57 Income from discontinued operations - $ 0.16 - ---------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.70 $ 0.73 - ---------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding - basic 287,486 295,335 Dilutive effect of shares issuable as of period-end under stock option plans 1,053 4,313 Adjustment of shares outstanding applicable to exercised and cancelled stock options during the period 50 1,607 - ---------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 288,589 301,255 - ----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). 5 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2002 2001 ----------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 203,449 $ 218,680 Less income from discontinued operations - (47,025) - ------------------------------------------------------------------------------------------------------------------- Income from continuing operations 203,449 171,655 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,836 50,362 Bad debt expense 3,983 2,385 Nielsen Media Research interest receivable (2,067) (2,067) Deferred income taxes 16,264 749 Loss (gain) from investments, net (2,450) 594 Gain on issuance of investees' stock, net (7,508) (753) TriZetto equity loss, net 701 5,547 Minority interests in net income of consolidated companies 19,031 15,590 Non-cash stock compensation charges 480 1,652 Loss on Gartner investment - 84,880 Change in assets and liabilities, excluding effects from acquisitions and dispositions: Net increase in accounts receivable (10,828) (790) Net increase in inventory (4,559) (4,545) Net increase in prepaid expenses and other current assets (5,999) (6,714) Net decrease in accounts payable (4,083) (6,112) Net increase (decrease) in accrued and other current liabilities 13,867 (46,035) Net decrease in accrued severance, impairment and other charges (27,467) (26,804) Net decrease in deferred revenues (18,304) (15,994) Net increase (decrease) in accrued income taxes 29,652 (19,964) Net (increase) decrease in pension assets (3,529) 2,467 Net increase in long-term assets (7,582) (2,152) Net tax benefit on stock option exercises 6,339 30,150 Payment received in respect of legacy D&B tax contingency (Note 8) - 10,530 - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 243,226 244,631 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures (20,176) (23,777) Additions to computer software (52,746) (31,278) Payments for acquisitions of businesses (10,244) (14,429) Proceeds from sale of investments, net 22,020 2,262 Proceeds from sale of IDRAC Holdings Inc. - 2,640 Proceeds from sale of Gartner investment - 65,207 Funding of venture capital investments (3,000) - Other investing activities, net (7,392) (11,292) - ------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (71,538) (10,667) - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS USED IN FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings 206,948 (77,134) Payments for purchase of treasury stock (260,543) (255,921) Proceeds from exercise of stock options 14,883 239,003 Dividends paid (17,324) (17,737) Proceeds from employee stock purchase plan 1,411 1,442 Increase in cash overdrafts 1,883 - - ------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (52,742) (110,347) - ------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes 640 (1,294) - ------------------------------------------------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS 119,586 122,323 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 268,386 118,593 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 387,972 $ 240,916 - -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying Condensed Consolidated Financial Statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 (unaudited) and related notes should be read in conjunction with the Consolidated Financial Statements and related notes of IMS Health Incorporated (the "Company" or "IMS") included in its 2001 Annual Report on Form 10-K and in its previous filings on Form 10-Q. Accordingly, the accompanying Condensed Consolidated Financial Statements (unaudited) do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, all of which are 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. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Certain prior year amounts have been reclassified to conform with the 2002 presentation. NOTE 2. BASIS OF PRESENTATION IMS is a leading global provider of information solutions to the pharmaceutical and healthcare industries. IMS operates in more than 100 countries and consists of the following segments: - The IMS Segment provides market information, sales management and decision-support services to the pharmaceutical and healthcare industries. Its key products include sales management information to optimize sales force productivity, marketing effectiveness research for prescription and over-the-counter pharmaceutical products, consulting and other services. IMS also owns a venture capital unit, Enterprise Associates, LLC ("Enterprises") which is focused on investments in emerging businesses, and a 26.5% equity interest in The TriZetto Group, Inc. ("TriZetto"). - The Cognizant Technology Solutions Corporation Segment ("CTS") provides custom Information Technology ("IT") design, development, integration and maintenance services. CTS's core competencies include web-centric applications, data warehousing, component-based development and legacy and client-server systems. CTS provides the IT services it offers using an integrated on-site/offshore business model. This seamless on-site/offshore business model combines technical and account management teams located on-site at the customer location and offshore at dedicated development centers located in India and Ireland. CTS is a publicly traded corporation on the Nasdaq national market system. IMS owned 56.4% of the common shares outstanding of CTS (92.8% of the outstanding voting power) as of September 30, 2002 and 58.3% as of December 31, 2001 (93.3% of the outstanding voting power). IMS accounts for CTS as a consolidated subsidiary. On July 26, 1999, the Company completed a spin-off of the majority of its equity investment in Gartner, Inc. ("Gartner", formerly known as "Gartner Group, Inc.") to the Company's shareholders (the "Gartner Spin-Off"). The Company sold its remaining interest in Gartner during the third quarter of 2001 (see Note 5). 7 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses the accounting for costs to terminate a contract that is not a capital lease, costs to consolidate facilities and relocate employees, and involuntary termination benefits under one-time benefit arrangements that are not an ongoing benefit program or an individual deferred compensation contract. A liability for contract termination costs should be recognized and measured at fair value either when the contract is terminated or when the entity ceases to use the right conveyed by the contract. A liability for one-time termination benefits should be recognized and measured at fair value at the communication date if the employee would not be retained beyond a minimum retention period (i.e., either a legal notification period or 60 days, if no legal requirement exists). For employees retained beyond the minimum retention period, a liability should be accrued ratably over the future service period. The provisions of the statement will be effective for disposal activities initiated after December 31, 2002. IMS is currently evaluating the financial impact of adoption of SFAS No. 146. NOTE 4. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS In February 2002, the Company acquired Infoplex Durdaut & Jassmann GmbH, based in Germany. The purchase price for this acquisition, including direct and incremental transaction costs, amounted to $7,013, paid in cash. After an allocation of the purchase price to the net assets acquired, the Company recorded goodwill of $3,758. On June 30, 2002, Cognizant Technology Solutions Ireland Limited ("CTS Ireland"), a newly formed, wholly-owned subsidiary of CTS, purchased certain assets from and assumed certain liabilities of UnitedHealthcare Ireland Limited ("UHC Ireland"), a subsidiary of UnitedHealth Group, for $2,900. UHC Ireland previously provided, and will continue to provide, through CTS Ireland, application design, development and maintenance services, using the existing staff of 70 IT professionals. The acquisition of the assets of UHC Ireland will enable CTS to provide a wide range of services to its clients in Europe and worldwide and represents the initial phase of the implementation of CTS's previously announced international expansion strategy. CTS has completed a preliminary assessment of the allocation of the purchase price to the tangible and amortizable intangible assets acquired and liabilities assumed. Based upon that preliminary assessment, CTS has assigned estimated values to the workforce and customer relationship acquired, and expects the useful lives of such assets to range between three and ten years. Amortization expense associated with intangible assets of $114 has been included in the Condensed Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2002. The Company expects that adjustments related to the finalization of the valuation of such intangible assets will not have a material effect on its results of operations. Pending finalization of the valuation, the purchase price, net of amounts assigned to fixed assets of approximately $260, has been included in long-term Other assets in the accompanying Condensed Consolidated Statements of Financial Position (unaudited). Had these acquisitions occurred as of January 1, 2002 or January 1, 2001, the impact on the 8 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) Company's results of operations would not have been material. During the nine months ended September 30, 2002, the Company finalized its purchase price allocation related to its acquisition of Cambridge Pharma Consultancy, Ltd. ("Cambridge"). Accordingly, additional goodwill of $9,844 was recorded as a result of the finalization of the purchase price allocation, including $5,982 relating to the recognition of deferred tax liabilities resulting from non-amortizable intangibles associated with the Cambridge acquisition. During the first nine months of 2001, the Company exercised its option to purchase the remaining interest in Medicare Audits Limited ("Medicare"), a U.K. based hospital research firm, for a net cash payment of $7,889. After the final allocation of the purchase price to the net assets acquired, goodwill of $7,921 was recorded. In addition, the Company purchased the remaining interest it did not own in GPI Krankenhaus-forschung Gesellschaft fur Pharma-informationssysteme mbH ("GPI"), a German hospital market research firm, for $4,807. After the final allocation of the purchase price to the assets acquired, goodwill of $4,505 was recorded. DISPOSITIONS During the nine months ended September 30, 2002, the Company and its venture capital funds sold investments with a cost basis of $14,762 and realized a pre-tax gain of $12,417. These sales resulted in cash proceeds of $26,819. Of the cash proceeds, $2,730 will be received in the fourth quarter, while $2,069 was retained by the venture capital funds. In addition, the Company recorded $7,620 of write-downs associated with other-than-temporary declines in the fair value of its venture capital investments. Furthermore, the Company's unrealized gains on available-for-sale securities declined by $8,996 since January 1, 2002. In addition, during the first nine months of 2001, the Company recorded $594 of pre-tax net losses from dispositions included in Gains (losses) from investments, net. This includes a gain of $1,990 resulting from the sale of IDRAC Holdings Inc. ("IDRAC"), a non-strategic property that provides information on pharmaceutical product registrations, to a wholly owned subsidiary of Information Holdings, Inc. ("IHI"). The operating results of IDRAC were not significant to the results of operations of the Company. The IDRAC gain was offset primarily by the write down of investments held by Enterprises, the Company's venture capital unit. In a separate transaction, the Company also granted a non-exclusive perpetual license to IHI to use certain data for aggregate cash consideration of approximately $17,000, all of which was recognized on delivery as revenue in the first half of 2001. NOTE 5. INVESTMENT IN GARTNER, INC. ("GARTNER") STOCK On November 11, 1998, the Company announced that its Board of Directors had approved a plan to spin-off substantially all of its equity ownership of Gartner (the "Gartner Spin-Off"). On July 16, 1999, the Company's Board of Directors declared a dividend of all Gartner Class B Shares, which was distributed on July 26, 1999 to holders of the Company's Common Stock of record as of July 17, 1999. The transaction was structured as a tax-free distribution of Gartner stock to IMS 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"). 9 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) The unrealized gain as of the date of the Gartner Distribution (based on the then market price per share of $22.75 of Gartner Stock, the price at the time of the Gartner Distribution) was recorded as Other comprehensive income and included as a component of Shareholders' equity. Subsequent changes in the per share price of Gartner Stock since the date of the Gartner Distribution were also recorded as Other comprehensive income. Upon the sale of these securities, the unrealized gain measured based on the value of the Gartner shares as of the date of the Gartner Distribution was recognized in discontinued operations. The unrealized losses in the market value subsequent to the date of the Gartner Distribution were recognized in continuing operations as shares were sold. During the third quarter of 2001, IMS decided to sell, and by August 29, 2001, completed the sale of 1,555 shares of Class A common stock of Gartner ("Gartner Shares") to Gartner and its remaining holding in Gartner Shares to several institutional investors. The Company received aggregate proceeds of $65.2 million, or $9.88 per share, from these sales. The Company's original cost basis in these shares was $77.7 million, or $11.78 per share. These sales divested IMS of its then remaining equity interest in Gartner. The sale of shares to Gartner was part of Gartner's $75 million stock buyback program announced on July 19, 2001. These sales resulted in a pre-tax realized loss of $12,536 ($8,146, net of applicable taxes), which was recorded in two different lines in the income statement: (i) Income from Discontinued Operations of $72,344 ($47,025 net of applicable taxes), to reflect the difference between the fair market value at the date of the Gartner Spin-Off (July 26, 1999) and the book value of those shares; (ii) a loss from dispositions in continuing operations of $84,880 which was recorded as Loss on Gartner investment, to reflect the difference between the fair market value at the date of the Gartner Spin-Off and the disposal proceeds. NOTE 6. GOODWILL AND INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and intangible assets which have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. It also provides that intangible assets that have finite useful lives be amortized. There was no impairment of goodwill upon adoption of SFAS No. 142 and as such, the Company did not recognize a transition adjustment during the first nine months of 2002. Net income and earnings per share for the three and nine months ended September 30, 2001, adjusted to exclude goodwill amortization expense (net of taxes) are as follows: 10 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2001 2001 - ---------------------------------------------------------------------------------------------------------- NET INCOME: Reported net income $ 88,310 $ 218,680 Goodwill amortization 2,619 7,141 Equity method goodwill amortization (TriZetto) 1,773 5,428 - ---------------------------------------------------------------------------------------------------------- Adjusted Net Income $ 92,702 $ 231,249 ========================================================================================================== BASIC EARNINGS PER SHARE OF COMMON STOCK: Reported basic earnings per share of common stock $ 0.297 $ 0.740 Goodwill amortization 0.009 0.024 Equity method goodwill amortization (TriZetto) 0.006 0.018 - ---------------------------------------------------------------------------------------------------------- Adjusted Basic Earnings Per Share of Common Stock $ 0.312 $ 0.782 ========================================================================================================== DILUTED EARNINGS PER SHARE OF COMMON STOCK: Reported diluted earnings per share of common stock $ 0.293 $ 0.726 Goodwill amortization 0.009 0.024 Equity method goodwill amortization (TriZetto) 0.006 0.018 - ---------------------------------------------------------------------------------------------------------- Adjusted Diluted Earnings Per Share of Common Stock $ 0.308 $ 0.768 ==========================================================================================================
During the nine months ended September 30, 2002, the Company recorded additional goodwill of $15,366 (see Note 4). As of September 30, 2002, goodwill amounted to $165,760 at the IMS Segment and $878 at the CTS Segment. All of the Company's acquired intangibles are subject to amortization. The Company did not acquire any material intangible assets during the nine months ended September 30, 2002. Intangible asset amortization expense was $644 and $1,705 during the three and nine months ended September 30, 2002. At September 30, 2002, intangible assets (included in Other assets) were primarily composed of Customer Relationships and Trade Names. The gross carrying amounts and related accumulated amortization of Customer Relationships and Trade Names were $17,650 and $1,189 and $2,980 and $402, respectively, at September 30, 2002. Amortization expense associated with intangible assets at September 30, 2002 is estimated to be $742 for the last quarter of 2002 and approximately $2,968 for each year beginning in 2003 through 2006. NOTE 7. INVESTMENTS IN EQUITY INVESTEES AND SUBSIDIARIES TRIZETTO Summary financial information for TriZetto for the three and nine months ended September 30, 2002 and 2001 is presented below. The amounts shown represent TriZetto's unaudited consolidated operating results, based on publicly available information. 11 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- -------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------------------- Net Sales $ 68,602 $ 57,216 $ 195,077 $ 156,574 Gross Profit $ 23,149 $ 19,424 $ 64,364 $ 48,648 Loss from Operations $ (3,627) $ (13,698) $ (14,659) $ (54,891) Net Loss $ (3,487) $ (11,604) $ (11,771) $ (44,519)
The market value of the Company's investment in TriZetto was $60,471 as of September 30, 2002. The investment in TriZetto is accounted for under the equity method of accounting. Following a decline in the market value of TriZetto stock below cost in the latter part of the second quarter of 2002, the Company performed, and continues to perform, a periodic assessment in accordance with its policy to determine whether an other-than-temporary decline in fair value has occurred. The Company evaluated the recoverability of the investment by reviewing recent information related to the industry and the operating results and financial position of TriZetto and by considering the Company's ability and intent to hold the investment on a long-term basis if necessary. Additionally, the market value of the Company's investment in TriZetto has increased significantly since September 30, 2002. The Company concluded that evidence existed at September 30, 2002 to support the recoverability of its carrying value, that there were no events or changes in circumstances specifically relating to TriZetto, that the underlying business fundamentals are strong and that the decline in the market value is consistent with the historical volatility of the stock and is attributable to the general market conditions since the middle of the second quarter of 2002. Accordingly, the Company concluded that the decline in market value of the TriZetto stock as of September 30, 2002 was temporary in nature and has not adjusted the cost basis of its investment. If the decline in value continues or should the Company's assessment change, the Company would take a charge to its earnings for the amount that is deemed unrecoverable. CTS The Company recorded net gains of $3,940 and $7,508 in Gains (losses) from issuance of investees' stock, net, for the three and nine months ending September 30, 2002, primarily relating to the exercise of stock options by CTS employees. This gain has been recognized in accordance with Staff Accounting Bulletin ("SAB") No. 51, "Accounting for Sales of Stock by a Subsidiary." Minority interest expense of $4,361 and $11,091 for the three and nine months ended September 30, 2002, respectively, and $2,596 and $7,247 for the three and nine months ended September 30, 2001, respectively, was recorded in Other expense, net. NOTE 8. CONTINGENCIES The Company and its subsidiaries are involved in miscellaneous legal proceedings, claims litigation and tax matters arising in the ordinary course of business. Although the outcome of such matters cannot be predicted with certainty, in the opinion of management, the ultimate liability of the Company in connection with such matters will not have a material effect on the Company's results of operations, cash flows or financial position. In addition, the Company is subject to certain other contingencies discussed below: 12 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) INFORMATION RESOURCES LITIGATION On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in the United States District Court for the Southern District of New York, naming as defendants the corporation then known as "The Dun and Bradstreet Corporation" and now known as "R. H. Donnelley Corporation" ("Donnelley"), A.C. Nielsen Company and I.M.S. International, Inc. (a predecessor of IMS) (the "IRI Action"). At the time of the filing of the complaint, each of the other defendants was a subsidiary of Donnelley. The complaint alleges various violations of the antitrust laws of the United States, including alleged violations of Sections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with a contract and a claim of tortious interference with a prospective business relationship. These latter claims relate to the acquisition by the defendants of Survey Research Group Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI when it agreed to be acquired by the defendants and that the defendants induced SRG to breach that agreement. IRI's complaint alleges damages in excess of $350,000, which amount IRI has asked to be trebled under the antitrust laws. IRI also seeks punitive damages in an unspecified amount. In light of the potentially significant liabilities which could arise from the IRI Action and in order to facilitate the distribution by Donnelley of shares of Cognizant Corporation ("Cognizant") and ACNielsen Corporation ("ACNielsen," which is the parent company of A.C. Nielsen Company) in 1996, Donnelley, ACNielsen and Cognizant entered into an Indemnity and Joint Defense Agreement pursuant to which they agreed (i) to certain arrangements allocating liabilities that may arise out of or in connection with the IRI Action, and (ii) to conduct a joint defense of such action. In particular, the Indemnity and Joint Defense Agreement provides that, in the event of an adverse decision, ACNielsen will assume exclusive liability for liabilities up to a maximum amount to be calculated at the time such liabilities, if any, become payable (the "ACN Maximum Amount") and that Cognizant and Donnelley will share liability equally for any amounts in excess of the ACN Maximum Amount. The ACN Maximum Amount will be determined by an investment banking firm as the maximum amount ACNielsen will be able to pay after giving effect to (i) any plan submitted by such investment bank that is designed to maximize the claims paying ability of ACNielsen without impairing the investment banking firm's ability to deliver a viability opinion (but which will not require any action requiring shareholder approval), and (ii) payment of related fees and expenses. For these purposes, financial viability means the ability of ACNielsen, after giving effect to such plan, the payment of related fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as they become due and to finance the current and anticipated operating and capital requirements of its business, as reconstituted by such plan, for two years from the date any such plan is expected to be implemented. On February 19, 2001, ACNielsen announced that it merged with VNU N.V. Pursuant to the Indemnity and Joint Defense Agreement, VNU is to be included with ACNielsen for purposes of determining the ACN Maximum Amount. In 1998, IMS was spun-off from Cognizant (the "1998 Spin-Off"), which then changed its name to Nielsen Media Research, Inc. ("NMR"). IMS and NMR are jointly and severally liable to Donnelley and ACNielsen for Cognizant's obligations under the terms of the Distribution Agreement dated October 28, 1996 among Donnelley, Cognizant and ACNielsen (the "1996 Distribution Agreement"). In connection with the 1998 Spin-Off, IMS and NMR agreed that, as between themselves, IMS will 13 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 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 agreed to be fully responsible for any legal fees and expenses incurred during 1998. NMR's aggregate liability to IMS for payments in respect of the IRI Action and certain other contingent liabilities shall not exceed $125,000. During 1998, Donnelley separated into two companies (the "1998 Donnelley Spin"), Donnelley and The Dun & Bradstreet Corporation ("D&B I"). As a result, Donnelley and D&B I are each jointly and severally liable for all Donnelley liabilities under the Indemnity and Joint Defense Agreement and the 1996 Distribution Agreement. During 2000, D&B I separated into two companies, Moody's Corporation ("Moody's") and The Dun & Bradstreet Corporation ("D&B II"). Moody's and D&B II are each jointly and severally liable for all liabilities under the Indemnity and Joint Defense Agreement and the 1996 Distribution Agreement that were assumed by D&B I in the 1998 Donnelley Spin. Management of the Company is unable to predict at this time the final outcome of this matter or whether the resolution of this matter could materially affect the Company's future results of operations, cash flows or financial position. MATTERS BEFORE THE EUROPEAN COMMISSION Complaints have been filed against the Company with the European Commission ("EC" or the "Commission") pursuant to Article 3 of Council Regulation No. 17 of 1972. The EC complaints allege that the Company has and continues to be engaged in certain commercial practices that violate Articles 81 and 82 of the EC Treaty, which relate to agreements or abuses of a dominant position that adversely affect competition. As a result of certain of these complaints, on October 19, 2000, the Commission initiated formal proceedings against the Company through the adoption of a statement of objections alleging that certain of the Company's commercial practices constituted an abuse of a dominant position in contravention of Article 82 of the EC Treaty. The Commission informed the Company on October 1, 2002 that it had decided to close the file on this matter and that the complainants had withdrawn their complaints. Another of the EC complaints is an application lodged with the Commission by National Data Corporation ("NDC") on December 19, 2000. This complaint requested that the Commission initiate a proceeding against the Company for an alleged infringement of Article 82 of the EC Treaty and grant interim measures (the "Application"). The Application concerned an IMS geographic mapping structure used for the reporting of regional sales data in Germany, which the German courts have ruled is copyright protected. The Application requested that the Commission grant interim relief requiring the Company to grant NDC a compulsory license to enable NDC to use this structure in its competing regional sales data service in Germany. AzyX Deutschland GmbH ("AzyX"), another competitor, intervened in the same proceedings against the Company. In response to the Application, on March 8, 2001, the Commission decided to initiate formal proceedings against the Company through the adoption of a statement of objections alleging that the Company's refusal to enter into negotiations with NDC following NDC's request for a license to use the aforementioned geographic mapping structure could constitute an abuse of a dominant position in 14 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) contravention of Article 82 of the EC Treaty. In addition, the Commission proposed the granting of interim measures requiring the Company to license this structure to third parties, including NDC, until the Commission adopts a final decision on the merits of the case. On July 3, 2001, the Commission announced its interim decision in these proceedings (the "Interim Decision") ordering interim measures pending a final decision on the Application. The Interim Decision required the Company to grant a license of the geographic mapping structure on commercially reasonable terms without delay to NDC and to any other competitor currently present on the German regional sales data market, should it request a license. The terms and royalties to be paid for the license were to be agreed upon between the Company and the requesting party, and if an agreement could not be reached in a two week period, then the terms and royalties for the license would be determined by one or more independent experts agreed to by the parties, or if the parties could not agree, then the Commission would appoint one or more experts. The Interim Decision stated that the expert(s) shall communicate its determination to the Commission for approval within two weeks of being chosen. Finally, the Interim Decision provided for a penalty of 1,000 Euros per day should the Company fail to comply with the Interim Decision. On August 6, 2001, the Company filed an appeal with the Court of First Instance ("CFI") seeking the annulment of the Interim Decision in its entirety (the "Annulment Appeal") and requesting that operation of the Interim Decision be suspended until the CFI renders judgement on the Annulment Appeal. On October 26, 2001, the President of the CFI ruled in the Company's favor and suspended the operation of the Interim Decision until the Annulment Appeal is heard and decided. On December 12, 2001, NDC filed an appeal to the European Court of Justice ("ECJ") seeking annulment of the October 26 decision against it. On April 11, 2002, the ECJ denied NDC's appeal. In October 2002, the CFI informed the Company that it has suspended the Annulment Appeal until such time as the ECJ renders a decision on questions referred to the ECJ by the German courts that are presiding over certain litigations that the Company commenced against NDC and others in Germany for misappropriation of the Company's intellectual property rights. The Company intends to continue to vigorously assert that its refusal to grant licenses for the use of its copyright protected geographic mapping structure to its direct competitors in Germany, which compete in the same market for which the copyright exists, is not in contravention of Article 82 of the EC Treaty. Management of the Company is unable to predict at this time the final outcome of the matters described above or whether the resolution of these matters could materially affect the Company's future results of operations, cash flows or financial position. OTHER CONTINGENCIES Under the terms of the purchase agreements related to acquisitions made in 2001, the Company may be required to pay up to $36,720 in relation to performance results for the period from 2002 to 2004 as contingent consideration. Of the contingent consideration, up to $13,760 will be recorded as additional goodwill, while up to $22,960 will be recorded as compensation as earned in accordance with the provisions of Emerging Issues Task Force ("EITF") Statement No. 95-8, "Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination." 15 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) The maximum contingent consideration payable with respect to any given year in the earn out period is $12,420. As of September 30, 2002, no accrual has been recorded as the contingency has not been resolved. The annual contingent payments will be resolved at the end of each respective calendar year from 2002 through 2004. The Company and its predecessors have entered, and the Company continues to enter, into global tax planning initiatives in the normal course of their businesses. These activities are subject to review by applicable tax authorities. As a result of the review process, uncertainties exist and it is possible that some of these matters could be resolved adversely to the Company. In 1999, the Company was informed by D&B I, acting as agent for Donnelley, that the IRS was reviewing Donnelley's utilization of certain capital losses during 1989 and 1990. In response, D&B I advised that it intended to file an amended tax return for these periods and to pay this amount in order to prevent further interest from accruing. In May 2000, D&B I paid $349,291 of this amount and the Company paid $212,291 pursuant to its obligation under the 1996 Distribution Agreement and the Distribution Agreement between Cognizant (renamed NMR) and the Company (the "1998 Distribution Agreement"), whereby the Company is in effect obligated to pay an amount equal to one-half of the tax and interest owed to the IRS for this matter together with certain other legacy tax matters (the "Donnelley Legacy Tax Matters") to the extent the liability exceeds $137,000 (subject to reimbursement to the Company of a portion of this amount by NMR). In the second quarter of 2000, Donnelley received a formal assessment from the IRS with respect to this matter in the amount of $561,582, for additional tax and interest due, which was satisfied by the payments made by D&B I and the Company in May 2000. D&B I has advised the Company that, notwithstanding the filing and payment, it intends to contest the assessment and would also contest the assessment of amounts, if any, in excess of the amounts paid. The Company had previously accrued for this liability and, therefore, this payment did not result in an expense in 2000. Pursuant to the 1998 Distribution Agreement, NMR is responsible for a portion of the amount that the Company paid pursuant to the 1996 Distribution Agreement ($41,136 according to the Company's calculations). NMR was not obligated to pay its share to the Company until January 2, 2001. In December 2000, the Company requested reimbursement of this amount from NMR. On January 2, 2001, NMR made a payment of $10,530 in respect of such matter but refused to pay the remaining $30,606 based on its interpretation of the applicable agreements. The Company believes that NMR's position has no merit and plainly contravenes the terms of the applicable agreements. Accordingly, the Company has a receivable of $35,428, which includes the outstanding principal and accumulated accrued interest income of $4,822. During the three and nine months ended September 30, 2002, $689 and $2,067, respectively, of interest income was accrued in accordance with the terms of the applicable agreements. The Company recorded $2,067 of interest income on the NMR receivable during the three and nine months ended September 30, 2001. These amounts are reflected in Other receivable in the Condensed Consolidated Statements of Financial Position (unaudited). The Company has commenced arbitration regarding this matter by filing a Demand for Arbitration with the American Arbitration Association International Center for Dispute Resolution. The Company believes it will prevail in this matter, and it intends to vigorously pursue it. In connection with the Gartner Spin-Off, which occurred in July 1999, the Company and Gartner entered into a Distribution Agreement and an Agreement and Plan of Merger (together, the "1999 16 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 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 material liabilities will be incurred by the Company with respect to this matter. IMS and Synavant, Inc. ("Synavant") entered into a Distribution Agreement (the "Synavant Distribution Agreement") as part of the Synavant Spin-Off, which occurred in August 2000. Synavant was formerly a wholly-owned subsidiary of IMS. In connection with the distribution, Synavant will be jointly and severally liable to the other parties to the 1996 and 1998 Distribution Agreements for the liabilities relating to certain tax matters as well as those relating to the IRI Action. Under the Synavant Distribution Agreement, as between IMS and Synavant, each will bear 50% of IMS's share of these liabilities (net of the liability borne by NMR), up to a maximum liability of $9,000 for Synavant. If, contrary to expectations, the Synavant Spin-Off were not to qualify as tax free under Section 355 of the Internal Revenue Code, then, in general, a corporate tax would be payable by the consolidated group, of which IMS is a common parent and Synavant is a member, based on the difference between (x) the fair market value of the Synavant Common Stock on the date of the Synavant Spin-Off and (y) the adjusted basis of such Synavant Common Stock. In addition, under the consolidated return rules, each member of the consolidated group would be severally liable for such tax liability. IMS estimates that the aggregate tax liability in this regard is not expected to exceed $100,000. Pursuant to the Tax Allocation Agreement, IMS would be liable for the resulting corporate tax, except as provided in the Synavant Distribution Agreement. In the opinion of management and based on the opinion of tax counsel, it is not probable that the Company will incur any liability. During the second quarter of this year, in connection with another Donnelley Legacy Tax Matter, the Company was informed that the IRS had issued Notices of Proposed Adjustments ("Notices") with respect to a certain transaction entered into by Donnelley in 1993. In these Notices, the IRS proposed to disallow certain royalty expense deductions claimed by Donnelly on its 1995 and 1996 tax returns and by Cognizant on its 1997 tax return. The IRS previously concluded an audit of the 1993 and 1994 Donnelley federal income tax returns and did not disallow any similar claimed deductions. D&B II and the Company disagree with the position taken by the IRS in its Notices and a responsive brief has been filed to this effect with the IRS. If the IRS were to issue a formal assessment consistent with such Notices and such assessment were ultimately upheld in full by the courts, the Company's share of the total liability, as determined in accordance with the 1996 and 1998 Distribution Agreements, would be approximately $53,000, net of income tax benefit. In addition the Company has been informed by D&B II that in recent verbal communications that D&B II had with the IRS, the IRS indicated an intention to assert penalties for 1995 and 1996 based on its interpretation of applicable law. The Company has been advised by D&B II that Donnelley would challenge this interpretation. If the IRS were to prevail in its assertion of penalties and interest thereon, the Company's share of such penalties and interest, as determined in accordance with the 1996 and 1998 Distribution Agreements, would be approximately $7,000, net of income tax benefit. In the opinion of management it is not probable that the Company will incur a liability for this matter which is materially in excess of the amounts provided for in the Financial Statements. 17 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) Although the Company has recorded its best estimates of provisions where these Other Contingencies are considered to be probable and reasonably estimable, it is unable to predict with certainty 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. If these matters are resolved adversely to the Company, there could be a material affect on the Company's results of operations, cash flows or financial position in the period in which such matters are adversely resolved. The Company consolidates the assets, liabilities, results of operations and cash flows of businesses and investments over 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 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 1997, third-party investors contributed $100,000 to the partnership in exchange for minority ownership interests. The Company and its subsidiaries maintain a controlling (88%) interest in the partnership. Under the terms of the partnership agreements, the third-party investors have the right to take steps that would result in the liquidation of their partnership interest on June 30, 2003. In the event that the third party investors liquidate their partnership interest, the Company would take steps to replace the minority interest with new investors prior to such termination. NOTE 9. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE RISK MANAGEMENT On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133." These statements standardize the accounting for derivative instruments. The Company is required to record all derivative instruments on the balance sheet at fair value. Derivatives that are not classified as hedges are adjusted to fair value through earnings. Changes in fair value of the derivatives that the Company has designated and that qualify as effective hedges are recorded in either Other comprehensive income or earnings. Any ineffective portion of the Company's derivatives that are classified as hedges is immediately recognized in earnings. This change in accounting principle did not have a material impact on the Company's financial position, results of operations or cash flow at the date of adoption. The Company transacts business in more than 100 countries 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 rate changes. Accordingly, the Company enters into foreign currency forward contracts to minimize the impact of foreign exchange movements on net income and on the value of non-functional currency assets and liabilities. It is the Company's policy to enter into foreign currency 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. At September 30, 2002, all foreign currency forward contracts had a term of less than one year. The principal currencies hedged are the Japanese yen, the Euro, the Swiss franc, the Canadian dollar and the British pound sterling. The impact of foreign exchange risk management activities on pre-tax income resulted in a net pre-tax gain (loss) of $1,196 and $(8,981) during the three and nine months ended September 30, 2002, 18 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) and $(301) and $2,327 during the three and nine months ended September 30, 2001. Gains and losses on these contracts are included in the Condensed Consolidated Statements of Income (unaudited) in Other expense, net. At September 30, 2002, the Company had foreign exchange forward contracts outstanding with a contractual value of $190,469 hedging non-functional currency assets and liabilities and other foreign exchange exposures. These contracts have expiration dates through December 2002. At September 30, 2002, the fair value of these contracts approximated their contractual value. FAIR VALUE OF FINANCIAL INSTRUMENTS At September 30, 2002, the Company's financial instruments included cash, cash equivalents, receivables, accounts payable, short-term debt, including short-term borrowings reclassified as long-term debt, and foreign currency forward contracts. Due to their short-term nature, the fair value of these instruments approximated their carrying value at September 30, 2002. CREDIT CONCENTRATIONS The Company continually monitors its positions with, and the credit quality of, the financial institutions that are counter parties to its financial instruments and does not anticipate non-performance by the counter parties. The Company would not realize a material loss as of September 30, 2002 in the event of non-performance by any one counter party. The Company enters into transactions only with high credit quality financial institution counter parties. In addition, the Company limits the amount of credit exposure with any one institution. The Company maintained accounts receivable balances of $247,506 and $228,626, net of allowances for doubtful accounts, at September 30, 2002 and December 31, 2001, respectively, principally from customers in the pharmaceutical industry. The Company believes its trade receivables do not represent significant concentrations of credit risk at September 30, 2002, due to the high quality of its customers and their dispersion across many geographic areas. LINES OF CREDIT AND LIQUIDITY The Company has borrowing arrangements with several international banks to provide short and long-term lines of credit up to $620,000. Total borrowings were $556,522 and $347,675 at September 30, 2002 and December 31, 2001, respectively. In general, the terms of the lines of credit give the Company the option to borrow at an interest rate equal to LIBOR plus 37.5 basis points for short-term lines and LIBOR plus 65 basis points for long-term lines. The weighted average interest rates for the short-term lines were 2.35% and 2.34% at September 30, 2002 and December 31, 2001, respectively. The weighted average interest rates for the long-term lines were 3.67% and 2.48% at September 30, 2002 and December 31, 2001 respectively. The commitment fee associated with the unused short-term lines of credit is 22.5 basis points per year, increasing to 28.75 basis points per year if the facilities are less than 50% utilized. Under the long-term lines the commitment fee is 52.5 basis points per year. The borrowing arrangements require the Company to comply with certain financial covenants and at September 30, 2002 and December 31, 2001, the Company was in compliance with all such covenants. 19 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) During the fourth quarter of 2001, the Company renegotiated certain borrowing arrangements and entered into three-year lines of credit for up to $175,000. Borrowings under these three-year facilities are short-term in nature; however, the Company has the ability and the intent to refinance the short-term borrowings through December 2004 as they come due under existing long-term lines. As such, at September 30, 2002, the Company reclassified $175,000 of its then outstanding debt as long-term debt pursuant to the provisions of SFAS No. 6, "Classification of Short-Term Obligations Expected to be Refinanced." Borrowings classified as short-term were $381,522 and $197,675 at September 30, 2002 and December 31, 2001, respectively. Borrowings have maturity dates of up to 90 days from their inception. In March and April 2002, the Company entered into interest rate swaps on a portion of its variable rate debt portfolio. These arrangements convert the variable interest rates to a fixed interest rate on a notional amount of $75,000 and mature at various times from March 2005 through April 2006. The fixed rates range from 4.05% to 5.08%. The interest rate swaps are accounted for as cash flow hedges and any changes in fair value are recorded in Other comprehensive income. The mark-to-market adjustment for the three and nine months ended September 30, 2002 was an unrealized net loss of $1,802 and $3,017, respectively. At September 30, 2002, the Company's Total Current Liabilities exceed its Total Current Assets by $20,694 primarily as a result of management's decision to maintain a greater proportion of short-term borrowings versus longer-term debt instruments. This strategy allows the Company to achieve lower borrowing costs while providing flexibility to repay debt with cash flow from operations and proceeds from the exercise of stock options and the liquidation of equity holdings. Based on estimated future cash flows from operations, the continued monetization of its Securities and other investments, the ability to monetize other assets including its investment in CTS (see Note 15) as well as the Company's ability to utilize existing unused lines of credit, the Company believes it will have sufficient cash and other resources to fund its short-term and long-term business plans, including its current and long-term obligations, its contingent payments, its stock repurchase program and its operations. NOTE 10. INCOME TAXES The Company operates in more than 100 countries around the world and its earnings are taxed at the applicable income tax rate in each of these countries. In 2002, the Company's tax rate was impacted by CTS's decision that effective January 1, 2002, pursuant to Accounting Principles Board ("APB") Opinion No. 23, "Accounting For Income Taxes-Special Areas," CTS will no longer accrue taxes on the repatriation of Indian earnings realized in 2002 and subsequent periods as these earnings are now considered to be indefinitely reinvested outside of the United States. During the first quarter of 2002, CTS made a strategic decision to pursue an international strategy that includes expanded infrastructure investments in India and geographic expansion in Europe and Asia. As a component of this strategy, CTS intends to use 2002 and future Indian earnings to expand operations outside the United States, instead of repatriating these earnings to the United States. During the second quarter of 2002, there was a change in the manner in which repatriated earnings are taxed in India. These changes resulted in an effective tax rate for CTS of 23.4% during the first nine months of 2002, compared to an effective tax rate for CTS of 37.4% in the first nine months of 2001. Additionally, 20 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) the Company's effective tax rate reflects true-ups of current and deferred income tax liabilities. In 2001, the Company's effective tax rate was reduced by the tax benefit at the U.S. federal rate on the loss from the sale of Gartner Shares recorded in continuing operations (see Note 5), the result of the expiration, without adjustment, on September 30, 2001 of the statute of limitations on certain previously reserved for Donnelley legacy transactions (approximately $21,800 recorded in the quarter ended September 30, 2001), and the recognition of additional tax benefits arising from a 1998 non-U.S. reorganization which gave rise to tax deductible non-U.S. intangible assets (approximately $11,700 recorded in the quarter ended March 31, 2001), which resulted from the reassessment of the tax benefits from the reorganization following certain new non-U.S. tax legislation enacted at the end of the first quarter of 2001. 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 to reduce or maintain its overall tax rate. NOTE 11. IMS HEALTH CAPITAL STOCK On July 19, 2000, the Board of Directors authorized a stock repurchase program to buy up to 40,000 shares, marking the fourth consecutive repurchase program the Company has implemented. Shares acquired through the repurchase program are open-market purchases in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the third quarter of 2002, the Company repurchased approximately 4,300 shares of outstanding common stock under this program at a total cost of $68,322. For the first nine months of 2002 the Company repurchased approximately 13,700 shares of outstanding common stock under this program at a total cost of $260,543 compared with total repurchases of $255,921 for the first nine months in 2001. As of September 30, 2002, approximately 34,300 shares had been repurchased since the inception of the program, at a total cost of $777,699. As a result of these repurchases, the weighted average of shares outstanding on a diluted basis for the three months ended September 30, 2002 declined to 283,300 from 301,255 for the same period in 2001. The Company re-issued approximately 202 treasury shares under option exercises for proceeds of $3,224 during the three months ended September 30, 2002. For the first nine months of 2002, the Company re-issued 900 shares for proceeds of $14,883. In addition, the Company paid dividends of $0.02 per share for a total of $5,698 during the three months ended September 30, 2002. For the first nine months of 2002, the Company paid dividends of $0.06 per share for a total of $17,324. NOTE 12. COMPREHENSIVE INCOME THE FOLLOWING TABLE SETS FORTH THE COMPONENTS OF COMPREHENSIVE INCOME, NET OF INCOME TAX EXPENSE: 21 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ -------------------------- 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------------- NET INCOME $ 82,256 $ 88,310 $ 203,449 $ 218,680 Other comprehensive income, net of taxes: Unrealized gains (losses) on: Available-for-sale equity securities 2,019 (11,088) (1,423) (12,623) Gartner, Inc. shares held for sale - (7,360) - 19,689 Reclassification adjustment (4,901) 14,649 (12,417) 16,066 Tax benefit (expense) on above 1,008 1,330 4,844 (8,096) --------------------------------------------------------------------------------------------------------------- Change in unrealized gains on investments (1,874) (2,469) (8,996) 15,036 --------------------------------------------------------------------------------------------------------------- Foreign currency translation gains (losses) (2,370) 11,960 15,697 (16,015) --------------------------------------------------------------------------------------------------------------- Changes in fair value of cash flow hedges (1,802) - (3,017) - --------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (6,046) 9,491 3,684 (979) --------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 76,210 $ 97,801 $ 207,133 $ 217,701 ===============================================================================================================
Included in the reclassification adjustment of $4,901 and $12,417 for the three and nine months ended September 30, 2002 were gains on sales of securities of $4,901 and $14,793, respectively, and losses on sales of securities of $0 and $2,376, respectively. NOTE 13. SEVERANCE, IMPAIRMENT AND OTHER CHARGES During the first nine months of 2002, the Company paid approximately $27,467 under its Competitive Fitness Program (the "Program"), which was announced in the fourth quarter of 2001. The Company terminated approximately 276 employees during the first nine months of 2002. This included 74 employee terminations and cash payments of approximately $2,654 against the $6,277 charge recorded in the fourth quarter of 2001 as part of this program in accordance with EITF 94-3, "Liability Recognition of Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)." Total terminations to date under the Program stand at 466. Although the total cost of the Program is still expected to be in line with the original estimate, the total number of employees to be terminated will be lower by approximately 15%. The reduction in the planned number of employee terminations is the result of a different mix of employee terminations than originally planned. Due to the change in the mix of employee terminations, the Company has experienced a higher level of severance cost per employee, thereby offsetting any cost savings from fewer actual terminations. As a direct result of the change in the mix of employee terminations, the cost savings are still expected to be in line with original estimates under the Program. As expected, the Program will be substantially complete by the end of 2002. NOTE 14. OPERATIONS BY BUSINESS SEGMENT Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making groups, in deciding how to allocate resources to an individual segment and in assessing the performance of the segment. The Company operates globally and is principally managed by way of and delivers information, software and related services through, the strategic business segments referenced below. The chief operating decision-makers evaluate performance and allocate resources based on revenue and operating income data. All inter-segment transactions are excluded from management's analysis of operations by business segment. 22 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) At September 30, 2002 and 2001, the Company consisted of the following segments: 1. The IMS Segment provides market information, sales management and decision-support services to the pharmaceutical and healthcare industries. Its key products include sales management information to optimize sales force productivity, marketing effectiveness research for prescription and over-the-counter pharmaceutical products, consulting and other services. The IMS Segment is managed on a global business model with global leaders for the majority of its critical business processes. In addition, the IMS Segment includes the Company's venture capital unit, Enterprises, which is focused on investments in emerging businesses, and IMS's 26.5% equity interest in TriZetto. 2. The CTS Segment provides custom IT design, development, integration and maintenance services. CTS's core competencies include web-centric applications, data warehousing, component-based development and legacy and client-server systems. CTS provides the IT services it offers using an integrated on-site/offshore business model. This seamless on-site/offshore business model combines technical and account management teams located on-site at the customer location and offshore at dedicated development centers located in India and Ireland.
TOTAL THREE MONTHS ENDED SEPTEMBER 30, 2002: IMS CTS ELIMINATION CONSOLIDATED - ---------------------------------------------------------------------------------------------------------- Operating Revenue(1) $ 306,048 $ 61,233 $ (5,519) $ 361,762 Operating income $ 110,512 $ 12,108 - $ 122,620 Total assets at September 30, 2002(1)(2) $ 1,351,374 $ 200,776 $ (2,432) $ 1,549,718 - ---------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2001: Operating Revenue(1) $ 287,734 $ 45,502 $ (5,099) $ 328,137 Operating income $ 114,119 $ 9,323 - $ 123,442 Total assets at September 30, 2001(1)(2) $ 1,112,404 $ 138,573 $ (1,751) $ 1,249,226 - ---------------------------------------------------------------------------------------------------------- TOTAL NINE MONTHS ENDED SEPTEMBER 30, 2002: IMS CTS ELIMINATION CONSOLIDATED - ---------------------------------------------------------------------------------------------------------- Operating Revenue(1) $ 899,662 $ 162,075 $ (15,565) $ 1,046,172 Operating income $ 286,926 $ 31,956 - $ 318,882 - ---------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2001: Operating Revenue(1) $ 871,245 $ 134,317 $ (13,514) $ 992,048 Operating income $ 300,540 $ 26,586 - $ 327,126 - ----------------------------------------------------------------------------------------------------------
NOTES TO OPERATIONS BY BUSINESS SEGMENTS: 1. Eliminations relate to sales and corresponding receivables from the CTS Segment to the IMS Segment. 2. CTS Segment assets include Cash and cash equivalents of $123,082 and $79,767 at September 30, 2002 and 2001, respectively. 3. The IMS Segment operates principally in the United States, Japan, Germany, the United Kingdom, Canada, Australia and other countries within Europe, Latin America and the Asia-Pacific region. 4. The CTS Segment operates principally in the United States and India. 23 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 15. SUBSEQUENT EVENTS ACQUISITIONS Subsequent to September 30, 2002, the IMS Segment completed two acquisitions with an aggregate purchase price of $9,050. The companies acquired were Rosenblatt-Klauber Group (U.S. and Canada) and Marketing Initiatives, Inc. (U.S.). Under the terms of these purchase agreements, the Company may be required to make additional payments in relation to 2002 to 2007 as contingent consideration, all of which will be recorded as additional goodwill. On October 29, 2002, CTS completed the transfer of Silverline Technologies, Inc.'s American Express practice to CTS. CTS will now provide application design, development and maintenance services to American Express through an acquired workforce of approximately 300 IT and support professionals located primarily in the U.S. and India. CTS has commenced a preliminary assessment of the allocation of the consideration paid of approximately $10,400 to the amortizable intangible assets acquired in this transaction. Based upon that preliminary assessment, the Company expects that the amortization of such intangible assets will not have a material effect on the Company's results of operations. Since these transactions were effected subsequent to September 30, 2002, the results of operations of these transactions will be included in the consolidated financial statements of the Company in the fourth quarter of 2002. The operating results from the above transactions are not expected to be material to the Company. COGNIZANT SPLIT-OFF CTS intends to file a registration statement on Form S-4 with the Securities and Exchange Commission ("SEC") concurrently with the filing of the CTS quarterly report on Form 10-Q for the period ended September 30, 2002. The purpose of the filing is to register the offer by IMS to exchange shares of CTS Class B common stock owned by IMS for a number of shares of common stock of IMS that will be determined according to an exchange ratio that will be established at a later time (the "Exchange Offer"). IMS is offering to exchange up to 11,291 shares of CTS Class B common stock in the Exchange Offer, representing all the CTS shares that are currently owned by IMS. The shares of IMS common stock received by the Company pursuant to the Exchange Offer will be recorded as an acquisition of treasury stock at a cost equal to the market value of such shares received at the date of completion of the exchange offer. Any excess of the market value of the IMS shares acquired above the net book value of the Company's investment in CTS at that date will be recognized by the Company as a gain on the disposal of the CTS shares after deducting direct and incremental expenses of the Exchange Offer. Depending on the market value and the number of IMS shares received by the Company in the Exchange Offer, the gain on the disposal may be significant. The disposal of the Company's investment in CTS will be accounted for as a tax-free split-off for federal income tax purposes. Subject to the SEC's review of the registration statement and satisfaction of the conditions of the Exchange Offer, this transaction is expected to be completed during the first quarter of 2003. We urge you to read the documents that IMS and CTS have filed and will file in the future with the SEC in connection with the Exchange Offer. These documents contain important information about the Exchange Offer and its effect on the companies and their shareholders. These documents are available free at the SEC's website (http://www.sec.gov) or from IMS Investor Relations at 1499 Post Road, Fairfield, Connecticut 06824. 24 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND RELATED NOTES. IMS Health Incorporated ("IMS" or the "Company") is a leading global provider of information solutions to the pharmaceutical and healthcare industries. IMS operates in more than 100 countries and consists of the following business segments: - The IMS Segment provides market information, sales management and decision-support services to the pharmaceutical and healthcare industries. Its key products include sales management information to optimize sales force productivity, marketing effectiveness research for prescription and over-the-counter pharmaceutical products, consulting and other services. The IMS Segment is managed on a global business model with global leaders for the majority of its critical business processes. In addition, the IMS Segment includes IMS's venture capital unit Enterprise Associates, LLC ("Enterprises"), which is focused on investments in emerging businesses, and IMS's 26.5% equity interest in the TriZetto Group, Inc. ("TriZetto"). - The Cognizant Technology Solutions Corporation Segment ("CTS") provides custom Information Technology ("IT") design, development, integration and maintenance services. CTS's core competencies include web-centric applications, data warehousing, component-based development and legacy and client-server systems. CTS provides the IT services it offers using an integrated on-site/offshore business model. This seamless on-site/offshore business model combines technical and account management teams located on-site at the customer location and offshore at dedicated development centers located in India and Ireland. CTS is a publicly traded corporation on the Nasdaq national market system. IMS owned 56.4% of the common shares outstanding of CTS (92.8% of the outstanding voting power) as of September 30, 2002 and 58.3% as of December 31, 2001 (93.3% of the outstanding voting power). IMS accounts for CTS as a consolidated subsidiary. THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2001 OPERATING RESULTS Operating revenue for the third quarter of 2002 grew 10.2% to $361,762 from $328,137 in the third quarter of the prior year. On a constant dollar basis (i.e., a basis that eliminates the impact of year-over-year foreign currency fluctuations), revenue growth was 8.4% in the third quarter. The increase was primarily due to the introduction of new products at IMS, the expansion of the consulting business through acquisitions and growth at CTS, partially offset by the adverse impact of transitioning certain products to a more competitive pricing structure and a data supply interruption in two of our new products in Japan. IMS's operating costs include data processing costs, the costs of data collection and production, and costs attributable to personnel involved in production, data management and the processing and delivery of IMS's services. IMS's operating costs grew 18.2% to $134,692 in the third quarter of 2002 from $113,909 in the third quarter of the prior year. The increase resulted primarily from higher data collection costs in the IMS Segment to support revenue growth and the investment in our global consulting business, and additional investment to support revenue growth at CTS. 25 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) Selling and administrative expenses consist primarily of the costs attributable to sales, marketing, client service and administration, including personnel, promotion, communications, management, finance and occupancy. IMS's selling and administrative expenses grew 17.5% during the third quarter of 2002 to $88,047 from $74,933 in the third quarter of the prior year primarily due to additional investment to support revenue growth at CTS. Depreciation and amortization charges increased by 3.5% to $16,403 in the third quarter of 2002 from $15,853 in the third quarter of 2001, arising from increased software amortization associated with new product development, partially offset by the fact that the Company ceased amortization of goodwill effective January 1, 2002 in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") (as described in Note 6 to the unaudited Condensed Consolidated Financial Statements). Operating income for the third quarter of 2002 declined 0.7% to $122,620 from $123,442 in the third quarter of 2001. On a constant dollar basis operating income declined 1.4%. Net interest expense was $1,937 in the third quarter of 2002, compared with income of $86 in the third quarter of the prior year. The higher level of interest expense results from the recognition of cumulative interest income on the NMR receivable recorded during the third quarter of the prior year. During the third quarter of 2001, IMS decided to sell, and by August 29, 2001, completed the sale of 1,555 shares of Class A common stock of Gartner, Inc. ("Gartner Shares") to Gartner and its remaining holding in Gartner Shares to several institutional investors. The Company received aggregate proceeds of $65.2 million, or $9.88 per share, from these sales. The Company's original cost basis in these shares was $77.7 million, or $11.78 per share. These sales divested IMS of its then remaining equity interest in Gartner. The sale of shares to Gartner was part of Gartner's $75 million stock buyback program announced on July 19, 2001. These sales resulted in a pre-tax realized loss of $12,536 ($8,146, net of applicable taxes), which was recorded in two different lines in the income statement: (i) Income from Discontinued Operations of $72,344 ($47,025 net of applicable taxes), to reflect the difference between the fair market value at the date of the Gartner Spin-Off (July 26, 1999) and the book value of those shares; (ii) a loss from dispositions in continuing operations of $84,880 which was recorded as Loss on Gartner investment, to reflect the difference between the fair market value at the date of the Gartner Spin-Off and the disposal proceeds (see Note 5 to the unaudited Condensed Consolidated Financial Statements). Gains from investments, net, amounted to $1,200 in the third quarter of 2002 as compared to a loss of $2,969 in the third quarter of the prior year. The net gain in the third quarter of 2002 is due primarily to $4,901 of net gains realized on the sale of investments within IMS's Enterprises portfolio, partially offset by write downs related to other-than-temporary declines in value of the venture capital investments amounting to $2,713. The $2,969 loss recognized in the third quarter of 2001 related primarily to the write down of investments held within the Enterprises portfolio. A $3,940 net gain on the issuance of CTS and TriZetto stock, relating to the exercise of stock options by CTS and TriZetto employees, was recorded in the third quarter of 2002. This gain has been recognized in accordance with Staff Accounting Bulletin ("SAB") No. 51, "Accounting for Sales of Stock by a Subsidiary." A $3,082 net gain in the third quarter of the prior year resulted 26 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) primarily from the issuance by CTS of shares relating to the exercise of employee stock options. Other expense, net, decreased in the third quarter of 2002 to $5,851 from $6,966 in the third quarter of the prior year, due to foreign exchange hedge gains in the current year, primarily resulting from the weakness of the U.S. dollar relative to the Japanese yen and the Euro and lower legal fees, partially offset by increased minority interest expense in 2002 for CTS. In the third quarter of 2002, the effective tax rate was 30.8%, compared to 32.0% in the third quarter of 2001. This is more fully described in Note 10 to the Condensed Consolidated Financial Statements (unaudited). A TriZetto equity loss, net, of $406 was recorded in the third quarter of 2002, compared with a net loss of $1,747 in the third quarter of 2001. The improvement resulted primarily from the absence of goodwill amortization expense in 2002 in accordance with SFAS No. 142 (see Note 6 to the unaudited Condensed Consolidated Financial Statements), and lower TriZetto reported operating losses. RESULTS BY BUSINESS SEGMENT IMS SEGMENT IMS Segment revenue was $306,048 in the third quarter of 2002, an increase of 6.4% from $287,734 in the prior year. Excluding the impact of a generally weaker U.S. dollar in the third quarter of 2002, revenue grew 4.3%. Sales Management revenue of $186,993 in the third quarter of 2002 reflects an increase of 3.3% from the prior year, and a growth of 1.0% on a constant-dollar basis, driven by new product sales, primarily EarlyView(TM) and Prescriber Validation(TM) in the United States, Xponent(R), Pharmascope(TM), Sales Analyzer(TM) and IMS Sales Strategy Evaluator(TM) in Europe, Xplorer.web(TM) in Canada and Weekly GP / Pharma(TM) in Japan. Market Research revenue improved 5.2% to $106,033 in the third quarter of 2002, and grew 3.7% constant dollar, reflecting growth from new clients and expansion of product capabilities. Other Services generated revenue of $13,023 in the third quarter of 2002, compared with $5,894 in the third quarter of 2001, primarily reflecting the impact of an acquisition in the Company's consulting business. IMS Segment operating income for the third quarter of 2002, after excluding legal fees associated with the European Union Litigation of $2,336 for the three months ending September 30, 2001, was $110,512, down 5.1% from the comparable period from prior year and down 5.9% constant-dollar. The constant-dollar decline resulted from higher data collection costs and the investment in our global consulting business, partially offset by higher revenues, the benefits of cost-reduction actions initiated in the fourth quarter of 2001, and the absence of goodwill amortization expense in 2002 (see Note 6 to the unaudited Condensed Consolidated Financial Statements). CTS SEGMENT CTS revenue for the third quarter of 2002, net of inter-segment sales of $5,519, grew 37.9% to $55,714 from $40,403 in the comparable period of the prior year due to higher revenues from application management services. CTS operating income for the three months ended 27 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) September 30, 2002 increased 29.9% to $12,108 from $9,323 in the comparable period of the prior year. The decrease in operating margin was due primarily to higher incentive compensation expense associated with better than expected performance. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2001 OPERATING RESULTS Operating revenue for the first nine months of 2002 grew 5.5% to $1,046,172 from $992,048 in the first nine months of the prior year. On a constant dollar basis, revenue growth was 6.2% in the nine months. The increase was primarily due to the introduction of new products at IMS, the expansion of the consulting business through acquisitions and growth at CTS (see Note 4 to the unaudited Condensed Consolidated Financial Statements). IMS's operating costs grew 14.3% to $412,851 in the first nine months of 2002 from $361,052 in the first nine months of the prior year. The increase resulted primarily from higher data collection costs in the IMS Segment to support revenue growth, the investment in our global consulting business and the additional investment to support revenue growth at CTS. IMS's selling and administrative expenses grew during the first nine months of 2002 to $270,603 from $253,508 in the first nine months of the prior year. Selling and administrative expenses grew at 6.7%, primarily due to additional investment to support revenue growth at CTS. Depreciation and amortization charges decreased by 13.0% to $43,836 in the first nine months of 2002 from $50,362 in the first nine months of 2001. The decline was due primarily to the fact that the Company ceased amortization of goodwill effective January 1, 2002 in accordance with SFAS No. 142 (see Note 6 to the unaudited Condensed Consolidated Financial Statements), and to the impact of the write down of certain deferred software costs to their net realizable value as part of the Severance, impairment and other charges recorded in the fourth quarter of 2001, partially offset by higher software amortization associated with new product development. Operating income for the first nine months of 2002 declined 2.5% to $318,882 from $327,126 in the first nine months of 2001. Excluding the impact of fluctuations in the U.S. dollar, primarily against the Japanese yen and the Euro, operating income was essentially flat. Net interest expense was $4,643 in the first nine months of 2002, compared with $8,748 in the first nine months of the prior year. The expense reduction resulted primarily from lower interest rates achieved on our borrowings. Gains from investments, net, amounted to a net gain of $2,450 in the first nine months of 2002. The net gain is due primarily to a $12,417 net gain realized on the sale of investments primarily within IMS's Enterprises portfolio offset by a $9,967 write down related to other-than-temporary declines in value of the venture capital and available for sale investments and other charges. The net loss of $594 in the first nine months of 2001 was due primarily to the write down due to other-than-temporary declines in value of the venture capital investments in Enterprises, offset by IMS's disposal of IDRAC Holdings Inc. ("IDRAC"), a non-strategic property providing information on 28 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) pharmaceutical product registration, for a gain of $1,990. Gain on issuance of investees stock net amounted to $7,508 in the first nine months of 2002 versus $753 in the prior year. The increase relates primarily to an increase of $3,405 in SAB No. 51 gains relating to issuances of CTS stock and a decrease of $3,350 in SAB No. 51 losses on issuances of TriZetto shares. Other expense, net, increased in the first nine months of 2002 to $29,003 from $14,775 in the first nine months of the prior year, due to foreign exchange hedge losses in 2002, primarily related to the Japanese yen and the Euro and increased minority interest expense in 2002 for CTS, compared with the prior year. In the first nine months of 2002, the effective tax rate was 30.8% compared to 32.0% in the first nine months of 2001. This is more fully described in Note 10 to the Condensed Consolidated Financial Statements (unaudited). A TriZetto equity loss, net, of $701 was recorded in the first nine months of 2002, compared with a net loss of $5,547 in the first nine months of 2001. The improvement resulted from the absence of goodwill amortization expense in 2002 in accordance with SFAS No. 142 (see Note 6 to the unaudited Condensed Consolidated Financial Statements), and lower TriZetto reported operating losses. RESULTS BY BUSINESS SEGMENT IMS SEGMENT IMS Segment revenue was $899,662 in the first nine months of 2002, an increase of 3.3% from $871,245 in the comparable period of the prior year. Excluding the impact of fluctuations in the U.S. dollar in the first nine months of 2002, revenue grew 4.1%. Sales Management revenue of $546,345 in the first nine months of 2002 reflects an increase of 1.6% from the prior year, but grew 2.2% on a constant-dollar basis driven by new product sales, primarily EarlyView(TM) and Prescriber Validation(TM) in the United States, Xponent(R), Pharmascope(TM), Sales Analyzer(TM) and IMS Sales Strategy Evaluator(TM) in Europe, Xplorer.web(TM) in Canada and Weekly GP / Pharma(TM) in Japan. Market Research revenue increased 2.2% to $315,030 in the first nine months of 2002, but grew 2.8% constant dollar, reflecting growth from new clients and expansion of product capabilities. Other Services generated revenue of $38,288 in the first nine months of 2002, compared with $25,242 in the first nine months of 2001, primarily reflecting the impact of an acquisition in the Company's consulting business. IMS Segment operating income for the first nine months of 2002 was $286,926, down 4.5% from the comparable period from prior year, but down 3.1% on a constant-dollar basis. The constant-dollar decline resulted from higher data collection costs and the investment in our global consulting business, partially offset by higher revenues, the benefits of cost-reduction actions initiated in the fourth quarter of 2001, and the absence of goodwill amortization expense in 2002 (see Note 4 to the unaudited Condensed Consolidated Financial Statements). 29 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) CTS SEGMENT CTS revenue for the first nine months of 2002, net of inter-segment sales of $15,565, grew 21.3% to $146,510 from $120,803 in the comparable period of the prior year due to higher revenues from application management services. CTS operating income for the nine months ended September 30, 2002 increased 20.2% to $31,956 from $26,586 in the comparable period of the prior year. However, operating margins decreased slightly due to higher incentive compensation expense associated with better than expected performance. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities amounted to $243,226 for the nine months ended September 30, 2002, a decrease of $1,405 over the comparable period in 2001. The decrease relates primarily to lower tax benefits from stock option exercises, a $10,530 cash receipt received in the prior year from Nielsen Media Research in respect of the Donnelley legacy tax contingency, for which there was no comparable receipt in 2002 and greater cash requirements in funding the Company's accounts receivable. Offsetting these items were lower cash requirements in funding the Company's accrued liabilities, primarily reduced bonus payments. During the first nine months of 2002, the Company paid approximately $27,467 under its Competitive Fitness Program ("the Program"), which was announced in the fourth quarter of 2001. Although the total cost of the Program is still expected to be in line with the original estimate, the total number of employees to be terminated will be lower by approximately 15%, but still represents over 10% of IMS employees. Net cash used in investing activities amounted to $71,538 for the nine months ended September 30, 2002, an increase in cash used of $60,871 over the comparable period in 2001. The greater cash requirements during 2002 relate primarily to $21,468 in higher spending on deferred software relating to new product development, a required $3,000 funding of a venture capital investment and cash receipts of $67,847 received in the prior year for proceeds from the sale of the Gartner investment and IDRAC Holdings Inc., for which there were no comparable receipts in 2002. These items were offset by an increase in proceeds received from the sales of investments of $19,758, lower payments for capital expenditures by $3,601, lower payments for business acquisitions by $4,185 and a decrease in cash used in other investing activities by $3,900. Net cash used in financing activities amounted to $52,742 for the nine months ended September 30, 2002, a decrease in cash used of $57,605 over the prior period. This was primarily due to $284,082 in higher borrowings used to fund the share repurchase program during 2002 as a result of $224,120 in lower proceeds received from the exercise of stock options in the prior year period. At September 30, 2002, the Company's Total Current Liabilities exceed its Total Current Assets by $20,694 primarily as a result of management's decision to maintain a greater proportion of short-term borrowings versus longer-term debt instruments. This strategy allows the Company to achieve lower borrowing costs while providing flexibility to repay debt with cash flow from operations and proceeds from the exercise of stock options and the liquidation of equity holdings. Based on estimated future cash flows from operations, the continued monetization of its venture capital investments, the ability to monetize other assets including its investment in CTS if the exchange offer is not consummated (see Note 15 to the unaudited Condensed Consolidated Financial 30 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) Statements) as well as the Company's ability to utilize unused existing lines of credit (see Note 9 to the unaudited Condensed Consolidated Financial Statements), the Company believes it will have sufficient cash and other resources to fund its short-term and long-term business plans, including its current and long-term obligations, its contingent payments, its stock repurchase program and its operations. On July 19, 2000, the Board of Directors authorized a stock repurchase program to buy up to 40,000 shares, marking the fourth consecutive repurchase program the Company has implemented. Shares acquired through the repurchase program are open-market purchases in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). During the first nine months of 2002, the Company repurchased approximately 13,700 shares of outstanding common stock at a total cost of $260,543. As of September 30, 2002, approximately 34,300 shares have been acquired under this program at a total cost of $777,699. IMS believes that its available funds, credit facilities and the cash flows expected to be generated from operations will be adequate to satisfy its current and planned operations and needs and contingent payments for at least the next 12 months including an estimate of approximately $9,000 to $14,000 in fees associated with the Cognizant Split-off (see Note 15 to the unaudited Condensed Consolidated Financial Statements). IMS's ability to expand and grow its business in accordance with current plans, to make acquisitions, repurchase stock and to meet its long-term capital requirements beyond this 12-month period will depend on many factors, including the rate, if any, at which its cash flow increases, its ability and willingness to accomplish acquisitions, repurchase treasury stock and the availability to IMS of public and private debt and equity financing, including its current ability to secure bank lines of credit. IMS cannot be certain that additional financing, if required, will be available on terms favorable to it, if at all. Cash and cash equivalents include amounts at CTS of $123,082 and $84,977 as of September 30, 2002 and December 31, 2001, respectively. The Company owned 56.4% of the CTS common shares outstanding which represented 92.8% of the voting power at September 30, 2002. To access these cash and cash equivalents, the Company would have to require CTS to declare and pay a dividend. Furthermore, a portion of the dividend would be paid to the minority shareholders of CTS. CHANGES IN CRITICAL ACCOUNTING POLICIES Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and intangible assets which have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment at the reporting unit level. It also provides that intangible assets that have finite useful lives be amortized. There was no impairment of goodwill upon adoption of SFAS No. 142 and as such, the Company did not recognize a transition adjustment during the first half of 2002. The effect of adopting SFAS No. 142 is more fully explained in Note 6 to the Condensed Consolidated Financial Statements (unaudited). Goodwill may become impaired as a result of several factors such as increased competition and lower demand for the Company's products and services. 31 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses the accounting for costs to terminate a contract that is not a capital lease, costs to consolidate facilities and relocate employees, and involuntary termination benefits under one-time benefit arrangements that are not an ongoing benefit program or an individual deferred compensation contract. A liability for contract termination costs should be recognized and measured at fair value either when the contract is terminated or when the entity ceases to use the right conveyed by the contract. A liability for one-time termination benefits should be recognized and measured at fair value at the communication date if the employee would not be retained beyond a minimum retention period (i.e., either a legal notification period or 60 days, if no legal requirement exists). For employees retained beyond the minimum retention period, a liability should be accrued ratably over the future service period. The provisions of the statement will be effective for disposal activities initiated after December 31, 2002. IMS is currently evaluating the financial impact of adoption of SFAS No. 146. 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, contain statements which, in the opinion of IMS, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Quarterly Report and include, but are not limited to, all statements relating to plans for future growth and other business development activities as well as capital expenditures, financing sources, dividends and the effects of regulation and competition, and all other statements regarding the intent, plans, beliefs or expectations of IMS or its directors or officers. Investors 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 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 identify and implement cost-containment measures; 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 obtain future financing on satisfactory terms; deterioration in economic conditions, particularly in the pharmaceutical, healthcare, or other industries in which IMS's customers may operate; consolidation in the pharmaceutical industry and the other industries in which IMS's customers operate; conditions in the securities markets which may effect the value or liquidity of portfolio investments, including the investment in TriZetto and management's estimates of lives of assets, recoverability of assets, fair market value, estimates and liabilities and accrued income tax benefits and liabilities; to the extent unforeseen cash needs arise, the ability to obtain financing on favorable terms; terrorist activity, the threat of such activity, and responses to and results of such activity and threats, including but not limited to effects, domestically and/or internationally, on IMS, its personnel and facilities, its customers and suppliers, 32 IMS HEALTH INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) financial markets and general economic conditions; the concentration of CTS's operations in India and the related geo-political risks of local and cross-border conflicts and uncertainties regarding the satisfaction or waiver of the conditions to the Exchange Offer and the effects on the Exchange Offer of market conditions, economic conditions, tax treatment, regulatory and legal requirements and the results of negotiations between CTS and IMS. 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 (unaudited) and notes thereto for the three and nine month periods ended September 30, 2002 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, 2001. IMS is under no obligation to publicly release any revision to any forward-looking statement contained or incorporated herein to reflect any future events or occurrences. 33 IMS HEALTH INCORPORATED ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information in response to this Item is set forth in "Note 9. Financial Instruments" in the Notes to the Condensed Consolidated Financial Statements (unaudited) on pages 18 through 20 hereof. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Based on their evaluation as of a date within 90 days of the filing date of this report, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) were effective as of such date to ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. CHANGES IN CONTROLS AND PROCEDURES Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 34 IMS HEALTH INCORPORATED PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information in response to this Item is incorporated by reference to the information set forth in "Note 8. Contingencies" in the Notes to the Condensed Consolidated Financial Statements (unaudited) on pages 12 through 18 hereof. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 IMS Health Incorporated Executive Deferred Compensation Plan as Amended and Restated August 1, 2002. 10.2 1998 IMS Health Incorporated Non-Employee Directors' Deferred Compensation Plan as Amended and Restated Through August 1, 2002. (b) Reports on 8-K: On August 12, 2002, the Company filed a Current Report on Form 8-K whereby the Company made a disclosure under Item 9, Regulation FD Disclosure, relating to the announcement that its Chief Executive Officer and the Chief Financial Officer had filed sworn statements with the Securities and Exchange Commission in compliance with SEC Order No. 4-460 and Section 906 of the Sarbanes-Oxley Act of 2002. 35 IMS HEALTH INCORPORATED 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/ Nancy E. Cooper Date: November 14, 2002 Nancy E. Cooper Senior Vice President and Chief Financial Officer (principal financial officer) /s/ Leslye G. Katz Date: November 14, 2002 Leslye G. Katz Vice President, Controller (principal accounting officer) 36 IMS HEALTH INCORPORATED CERTIFICATIONS I, David M. Thomas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of IMS Health Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ David M. Thomas -------------------------------------- Date: November 14, 2002 David M. Thomas Chairman and Chief Executive Officer 37 IMS HEALTH INCORPORATED I, Nancy E. Cooper, certify that: 1. I have reviewed this quarterly report on Form 10-Q of IMS Health Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Nancy E. Cooper -------------------------------- Date: November 14, 2002 Nancy E. Cooper Senior Vice President and Chief Financial Officer 38 EX-10.1 3 a2092589zex-10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 IMS HEALTH INCORPORATED EXECUTIVE DEFERRED COMPENSATION PLAN AS AMENDED AND RESTATED AUGUST 1, 2002 IMS HEALTH INCORPORATED EXECUTIVE DEFERRED COMPENSATION PLAN AS AMENDED AND RESTATED AUGUST 1, 2002
PAGE ---- 1. Purpose........................................................... 1 2. Definitions....................................................... 1 3. Administration.................................................... 2 4. Participation..................................................... 3 5. Deferrals......................................................... 3 6. Deferral Accounts................................................. 4 7. Settlement of Deferral Accounts................................... 6 8. Provisions Relating to Section 16 of the Exchange Act and Section 162(m) of the Code.................................... 7 9. Statements........................................................ 7 10. Sources of Stock: Limitation on Amount of Stock-Denominated Deferrals....................................... 7 11. Amendment/Termination............................................. 8 12. General Provisions................................................ 8 13. Effective Date.................................................... 9
IMS HEALTH INCORPORATED EXECUTIVE DEFERRED COMPENSATION PLAN AS AMENDED AND RESTATED AUGUST 1, 2002 1. PURPOSE. The purpose of this Executive Deferred Compensation Plan, as amended and restated (the "Plan"), is to provide to members of a select group of management or highly compensated employees of IMS Health Incorporated (the "Company") and its subsidiaries and/or its affiliates who are selected for participation in the Plan a means to defer receipt of specified portions of compensation and to have such deferred amounts treated as if invested in specified investment vehicles, in order to enhance the competitiveness of the Company's executive compensation program and, therefore, its ability to attract and retain qualified key personnel necessary for the continued success and progress of the Company, and to encourage such persons to retain a significant equity stake in the Company. 2. DEFINITIONS. In addition to the terms defined in Section 1 above, the following terms used in the Plan shall have the meanings set forth below: (a) "Administrator" shall mean the Compensation & Benefits Committee of the Board of Directors or such other committee designated under Section 3(b), to which the Board has delegated the authority to take action under the Plan. (b) "Beneficiary" shall mean the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified under the Plan upon a Participant's death, provided that, if and to the extent authorized by the Administrator, a Participant may be permitted to designate a Beneficiary, in which case the "Beneficiary" instead will be the person, persons, trust or trusts (if any are then surviving) which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Administrator to receive the benefits specified under the Plan upon such Participant's death. Unless otherwise determined by the Administrator, a Participant's designation of a Beneficiary other than the Participant's spouse shall be subject to the written consent of the spouse. (c) "Board" or "Board of Directors" shall mean the Board of Directors of the Company. (d) "Cash Deferral" shall mean that portion of the assets of a Participant's Deferral account which is attributable to cash based deferrals made by Participant and investment results earned (or lost) thereon. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation (including a proposed regulation) thereunder shall include any successor provisions or regulations. (f) "Deferral Account" shall mean the account or subaccount established and maintained by the Company for specified deferrals by a Participant, as described in Section 6. Deferral Accounts will be maintained solely as bookkeeping entries by the Company to evidence unfunded obligations of the Company. (g) "Deferred Stock" shall mean a credit to the Participant's Deferral Account representing the right to receive one share of Stock for each share of Deferred Stock so credited, together with rights to dividend equivalents and other rights and limitations specified in the Plan. (h) "Disability" shall mean a physical or mental impairment of sufficient severity such that a Participant is both eligible for and in receipt of benefits under the long-term disability provisions of the Company's benefit plans. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. References to any provision of the Exchange Act or rule thereunder shall include any successor provisions or rules. (j) "Participant" shall mean any employee of the Company or any subsidiary or affiliate who is designated by the Administrator as eligible to participate and who participates or makes an election to participate in the Plan. (k) "Retirement" shall mean a Participant's voluntary termination of employment (i) at or after attaining age 65 or (ii) prior to attaining age 65 if such termination is approved in advance as a Retirement by the Administrator. (l) "Stock" shall mean the Company's Common Stock, $.01 par value, or any other equity securities of the Company designated by the Administrator. -3- (m) "Trust" shall mean any trust or trusts established by the Company as part of the Plan; PROVIDED, HOWEVER, that the assets of such trusts shall remain subject to the claims of the general creditors of the Company. (n) "Trustee" shall mean the trustee of a Trust. (o) "Trust Agreement" shall mean the agreement entered into between the Company and the Trustee to carry out the purposes of the Plan, as amended or restated from time to time. (p) "Valuation Date" shall mean the close of business on the last business day of each calendar quarter or other periodic date specified by the Administrator; PROVIDED, HOWEVER, that in the case of termination of employment for reasons other than Retirement, death, or Disability, the Valuation Date shall mean the close of business on the last business day of the year in which employment terminates. 3. ADMINISTRATION. (a) AUTHORITY. The Administrator (subject to the ability of the Board of Directors to restrict the Administrator) shall administer the Plan in accordance with its terms, and shall have all powers necessary to accomplish such purpose, including the power and authority to construe and interpret the Plan, to define the terms used herein, to prescribe, amend and rescind rules and regulations, agreements, forms, and notices relating to the administration of the Plan, to make all other determinations necessary or advisable for the administration of the Plan, and to determine whether to terminate participation of and accelerate distributions to Participants, including Participants who engage in activities competitive with or not in the best interests of the Company. Any actions of the Administrator with respect to the Plan and determination in all matters referred to herein shall be conclusive and binding for all purposes and upon all persons including the Company, the Administrator and members of the committee serving as such, Participants and employees, and their respective successors in interest (subject to the Board's authority to oversee the Administrator). The Administrator may appoint agents and delegate thereto powers and duties under the Plan, except as otherwise limited by the Plan. (b) ADMINISTRATOR. The Administrator shall consist of such number of members as shall be determined by the Board, each of whom shall be appointed by, shall remain in office at the will of, and may be removed, with or without cause, by the Board of Directors, and any member of the Administrator may resign at any time. The Administrator may delegate administrative and other functions under the Plan to officers or employees of the Company and its subsidiaries. No member of the committee serving as Administrator shall be entitled to act on or decide any matter relating solely to himself or herself or any of his or her rights or benefits under the Plan. No bond or other security shall be required in connection with the Plan of the Administrator or any member of the committee serving as such in any jurisdiction. (c) LIMITATION OF LIABILITY. Each member of the committee serving as Administrator shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or any subsidiary or affiliate, the Company's independent certified public accountants, or any executive compensation consultant, legal counsel, or other professional retained by the Company to assist in the administration of the Plan. To the maximum extent permitted by law, no member of the committee serving as Administrator, nor any person to whom ministerial duties have been delegated under the Plan, shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan, except for the willful misconduct or gross negligence of such member or person. 4. PARTICIPATION. The Administrator shall determine those employees of the Company and its subsidiaries and/or affiliates, from among the senior executives who qualify as a select group of management or highly compensated employees, who will be eligible to participate in the Plan. Such persons shall be notified of such eligibility by the Company's Executive Compensation Department, subject to the direction of the Administrator. -4- 5. DEFERRALS. To the extent authorized by the Administrator, a Participant may elect to defer compensation or awards which may be in the form of cash, Stock, Stock-denominated awards or other property to be received from the Company or a subsidiary or affiliate, including salary, annual bonus awards, long-term awards, shares issuable on stock option exercise and compensation payable under other plans and programs, employment agreements or other arrangements, or otherwise, as may be provided under the terms of such plans, programs and arrangements or as designated by the Administrator. Stock-denominated awards that the may authorize for deferral include (i) stock unit awards such as Restricted Stock Units granted under the Company's Employees' Stock Incentive Plan and (ii) the shares representing the profit upon exercise of stock options granted under any Company plan, in circumstances in which the option exercise price is paid by the surrender of previously acquired shares. The foregoing notwithstanding, a Participant may defer, with respect to a given year, receipt of only that portion of the Participant's salary, annual bonus award, long-term award, shares issuable on stock option exercise and compensation payable under other plans and programs, employment agreements or other arrangements that exceeds the FICA maximum taxable wage base plus the amount necessary to satisfy Medicare and all other payroll taxes (other than Federal, state or local income tax withholding) imposed on the wages or compensation of such Participant from the Company and its subsidiaries and affiliates. In addition to such limitation, and any terms and conditions of deferral set forth under plans, programs or arrangements from which receipt of compensation or awards is deferred, the Administrator may impose limitations on the amounts permitted to be deferred and other terms and conditions on deferrals under the Plan. Any such limitations, and other terms and conditions of deferral, shall be specified in documents setting forth terms and conditions of deferrals under the Plan, rules relating to the Plan or election forms, other forms, or instructions published by or at the direction of the Administrator. The Administrator may permit awards and other amounts to be treated as deferrals under the Plan, including deferrals that may be mandatory as determined by the in its sole discretion or under the terms of another plan or arrangement of the Company, for administrative convenience or otherwise to serve the purposes of the Plan and such other plan or arrangement. (a) ELECTIONS. Once an election form, properly completed, is received by the Company, the elections of the Participant shall be irrevocable; PROVIDED, HOWEVER, that the Administrator may in its discretion determine that elections are revocable until the deadline specified for the filing of such election; PROVIDED FURTHER, that the Administrator may, in its discretion, permit a Participant to elect a further deferral of amounts credited to a Deferral Account by filing a later election form; and PROVIDED, FURTHER, that, unless otherwise approved by the Administrator, any election to further defer amounts credited to a Deferral Account must be made at least one year prior to the date such amounts would otherwise be payable. (b) DATE OF ELECTION. An election to defer compensation or awards hereunder must be received by the Administrator prior to the date specified by or at the direction of the Administrator. Under no circumstances may a Participant defer compensation or awards to which the Participant has attained, at the time of deferral, a legally enforceable right to current receipt of such compensation or awards. 6. DEFERRAL ACCOUNTS. (a) ESTABLISHMENT; CREDITING OF AMOUNTS DEFERRED. One or more Deferral Accounts will be established for each Participant, as determined by the Administrator. The amount of compensation or awards deferred with respect to each Deferral Account will be credited to such Account as of the date on which such amounts would have been paid to the Participant but for the Participant's election to defer receipt hereunder, unless otherwise determined by the Administrator. With respect to any fractional shares of Stock or Stock-denominated awards, the Administrator shall determine whether to credit the Deferral Account with a fraction of a share, to pay cash in lieu of the fractional share or carry forward such cash amount under the Plan, round to the nearest whole share, round to the next whole share, or round down to eliminate the fractional share or otherwise make provision for the fractional share. With respect to Cash Deferrals, amounts of hypothetical income and appreciation and depreciation in value of such account will be credited and debited to, or otherwise reflected in, such Account from time to time. Unless otherwise determined by the Administrator (including under Section 6(e)), Cash Deferrals shall be deemed invested in a hypothetical investment as of the date of deferral. -5- (b) INVESTMENT VEHICLES. (i) Amounts credited as Deferred Stock to a Participant's Deferral Account (whether or not as a result of a Cash Deferral) may not be reallocated or deemed reinvested in any other investment vehicle, but shall remain as Deferred Stock until such time as the Deferral Account is settled in accordance with Section 7. (ii) Subject to the provisions of Sections 6(d) and 8, Cash Deferral amounts shall be deemed to be invested, at the Participant's direction, in one or more investment vehicles as may be specified from time to time by the Administrator; PROVIDED, HOWEVER, that the Administrator may expressly reserve the right to approve or disapprove any investment direction given by a Participant. The Administrator may change or discontinue any hypothetical investment vehicle available under the Plan in its discretion; PROVIDED, HOWEVER, that each affected Participant shall be given the opportunity, without limiting or otherwise impairing any other right of such Participant regarding changes in investment directions, to redirect the allocation of his or her Cash Deferral amount deemed invested in the discontinued investment vehicle among the other hypothetical investment vehicles, including any replacement vehicle. (c) DIVIDEND EQUIVALENTS AND ADJUSTMENTS. Deferred Stock credited to a Participant's Deferral Account will be credited with Dividend Equivalents and subject to adjustment as provided in this Section 6(c): (i) CASH DIVIDENDS. If the Company declares and pays a cash dividend on Stock, then, for any such dividend paid prior to August 1, 2002, a number of additional shares of Deferred Stock shall be credited to a Participant's Deferral Account as of the payment date for such dividend equal to (A) the number of shares of Deferred Stock credited to the Deferral Account as of the record date for such dividend, multiplied by (B) the amount of cash actually paid as a dividend on each share at such payment date, divided by (C) the fair market value of a share of Stock at such payment date; and for any such dividend paid on or after August 1, 2002, the amount to be paid as Dividend Equivalents relating to such cash dividends paid prior to settlement for each share of Deferred Stock shall not be credited at the payment date, but shall be calculated at the time of such settlement and credited and paid in cash at settlement, without interest; provided, however, that large, special and non-recurring cash dividends will be governed by Section 6(c)(v) below. (ii) NON-STOCK DIVIDENDS. If the Company declares and pays a dividend on Stock in the form of property other than shares of Stock, then a number of additional shares of Deferred Stock shall be credited to a Participant's Deferral Account as of the payment date for such dividend equal to (A) the number of shares of Deferred Stock credited to the Deferral Account as of the record date for such dividend, multiplied by (B) the fair market value of any property other than shares actually paid as a dividend on each share at such payment date, divided by (C) the fair market value of a share of Stock on the day after such payment date. (iii) STOCK DIVIDENDS AND SPLITS. If the Company declares and pays a dividend on Stock in the form of additional shares of Stock, or there occurs a forward split of Stock, then a number of additional shares of Deferred Stock shall be credited to Participant's Deferral Account as of the payment date for such dividend or forward Stock split equal to (A) the number of shares of Deferred Stock credited to the Deferral Account as of the record date for such dividend or split, multiplied by (B) the number of additional shares actually paid as a dividend or issued in such split in respect of each share of Stock. (iv) MODIFICATIONS TO DIVIDEND EQUIVALENTS POLICY. Other provisions of this Section 6(c) notwithstanding, the Administrator may modify the manner of payment or crediting of Dividend Equivalents hereunder, in order to coordinate the value of Deferral Accounts -6- with any trust holding shares established under Section 6(e), for administrative convenience, or for any other reason. (v) ADJUSTMENTS. The number of shares of Deferred Stock credited to the Participants' Accounts may be adjusted by the Administrator in order to prevent dilution or enlargement of Participants' rights with respect to Deferred Stock, in the event of any unusual corporate transaction or event which affects the value of Common Stock, provided that any such adjustment shall be made taking into account any crediting of Deferred Stock to the Participant under other provisions of this Section 6(c) in connection with such transaction or event. (d) ALLOCATION AND REALLOCATION OF HYPOTHETICAL INVESTMENTS. A Participant may allocate the Cash Deferral portion of his or her Deferral Account to one or more of the hypothetical investment vehicles authorized under the Plan. Subject to Section 6(b)(i) and any rules established by the Administrator, a Participant may reallocate such Cash Deferrals as of the Valuation Date or other date specified by the Administrator at or following the filing of Participant's election to one or more of such hypothetical investment vehicles, by filing with the Administrator a notice in such form as may be specified by the Administrator. The Administrator may, in its discretion, restrict allocation into or reallocation by specified Participants into or out of specified investment vehicles or specify minimum or maximum amounts that may be allocated or reallocated by Participants. (e) TRUSTS. The Administrator may, in its discretion, establish one or more Trusts (including sub-accounts under such Trust(s)), and deposit therein amounts of cash, Stock, or other property not exceeding the amount of the Company's obligations with respect to a Participant's Deferral Account established under this Section 6. In such case, the amounts of hypothetical income and appreciation and depreciation in value of such Deferral Account shall be equal to the actual income on, and appreciation and depreciation of, the assets in such Trust(s). Other provisions of this Section 6 notwithstanding, the timing of allocations and reallocations of assets in such a Deferral Account, and the investment vehicles available with respect to the Cash Deferral portion of the Deferral Account, may be varied to reflect the timing of actual investments of the assets of such Trust(s) and the actual investments available to such Trust(s). (f) CASHLESS EXERCISE. If and to the extent permitted by the Administrator, and subject to such terms and conditions as may be established by the Administrator from time to time, a Participant may submit a request to the Administrator to surrender (or constructively surrender) Deferred Stock allocated to his or her Deferral Account to pay the purchase price of any stock options of the Company granted to the Participant under another plan, program or arrangement. (g) RESTRICTIONS ON PARTICIPANT DIRECTION. The provisions of Section 6(b), 6(d), and 7(c) notwithstanding, the Administrator may restrict or prohibit reallocations of amounts deemed invested in specified investment vehicles, and subject such amounts to a risk of forfeiture and other restrictions, in order to conform to restrictions applicable to Stock, a Stock-denominated award, or any other award or amount deferred under the Plan and resulting in such deemed investment, to comply with any applicable law or regulation, or for such other purpose as the Administrator may determine is not inconsistent with the Plan. 7. SETTLEMENT OF DEFERRAL ACCOUNTS. (a) FORM OF PAYMENT. The Company shall settle a Participant's Deferral Account, and discharge all of its obligations to pay deferred compensation under the Plan with respect to such Deferral Account, as follows: (i) with respect to Cash Deferrals, payment of cash or, in the discretion of the Administrator, by delivery of other liquid assets (including Stock) having a fair market value equal to the Cash Deferral amount credited to the Deferral Account; provided, however, that, to the extent practicable, any assets delivered in settlement of Cash Deferrals shall be of the -7- same type or kind as the investment vehicle in which those Cash Deferrals were deemed invested at the time of settlement; or (ii) with respect to Stock based deferral amounts, by delivery of shares of Stock, including shares of Stock delivered out of the assets of the Trust. (b) FORFEITURES UNDER OTHER PLANS AND ARRANGEMENTS. To the extent that Stock or any other award or amount (i) is deposited in a Trust pursuant to Section 6 in connection with a deferral of Stock, a Stock-denominated award, or any other award or amount under another plan, program, employment agreement or other arrangement, or otherwise is deemed to be deferred under the Plan without such a deposit, and (ii) is forfeited pursuant to the terms of such plan, program, agreement or arrangement, the Participant shall not be entitled to the value of such Stock and other property related thereto (including without limitation, dividends and distributions thereon) or other award or amount, or proceeds thereof. Any Stock or Stock-denominated awards, other property or other award or amount (and proceeds thereof) forfeited shall be returned to the Company. (c) TIMING OF PAYMENTS. Payments in settlement of a Deferral Account shall be made as soon as practicable after the date or dates (including upon the occurrence of specified events), and in such number of installments, as may be directed by the Participant in his or her election relating to such Deferral Account, provided that, in the event of termination of employment for reasons other than Retirement, death or Disability, a single lump sum payment in settlement of any Deferral Account (including a Deferral Account with respect to which one or more installment payments have previously been made) shall be made as promptly as practicable following the next Valuation Date, unless otherwise determined by the Administrator; provided further, that payments in settlement of a Deferral Account will be made in accordance with Section 7(d) in the event of a Change in Control; and provided further, that, unless otherwise determined by the Administrator, payments in settlement of a Deferral Account will be made in not more than ten installments and in no event later than ten years after the Participant's termination of employment due to Retirement, death or Disability. (d) CHANGE IN CONTROL. In the event of a "Change in Control," as defined in this Section 7(d), the following provisions shall apply: (i) All deferral periods will be automatically accelerated to end at the time of the Change in Control, and each Deferral Account will be settled within five business days after the end of the deferral period, provided that the Administrator may accelerate this settlement (for all or specified parts of a Deferral Account) in anticipation of a Change in Control for any reason, subject to such conditions as the Administrator may impose; and (ii) If the Change in Control involves a transaction that is to be accounted for as a pooling of interests, then, regardless of any other rights the Participant may have hereunder, each Participant's rights hereunder will be adjusted or restricted to the extent necessary to ensure that such rights will not impair the pooling-of-interests accounting treatment of the transaction. For purposes of the Plan, the term "Change in Control" has the meaning defined in any employment agreement or change-in-control severance agreement between the Company and the Participant in effect at the time such event occurs or, if no such agreement is in effect at the relevant date, the meaning as defined in the Company's Employees' Stock Incentive Plan; provided, however, no transaction in which the Participant is actively participating in a capacity other than as a director, officer, employee or stockholder of the Company will constitute a Change in Control for purposes of that Participant's deferral account. (e) FINANCIAL EMERGENCY AND OTHER PAYMENTS. Other provisions of the Plan (except Section 8) notwithstanding, if, upon the written application of a Participant, the Administrator determines that the Participant has a financial emergency of such a substantial nature, beyond the Participant's control, and as to which the Participant lacks other readily available assets that could be used to timely address the emergency, so that payment of amounts previously deferred under the Plan is warranted, the -8- Administrator may direct the payment to the Participant of all or a portion of the balance of a Deferral Account and the time and manner of such payment. (f) VOLUNTARY WITHDRAWAL WITH 10% PENALTY. A Participant may voluntarily withdraw all or a portion of his or her Deferral Account balance upon 30 days' notice to the Administrator, subject to a penalty equal to 10% of the amount withdrawn; provided, however, that the Participant shall have no right to withdraw Deferred Stock under this Section 7(f) if the existence of such right would result in "variable" accounting under APB 25 with respect any Deferred Stock or if such withdrawal is otherwise not approved by the Administrator. The amount of any penalty under this Section 7(f) will be forfeited and paid over to the Company. 8. PROVISIONS RELATING TO SECTION 16 OF THE EXCHANGE ACT AND SECTION 162(m) OF THE CODE. (a) AVOIDANCE OF LIABILITY UNDER SECTION 16. With respect to a Participant who is then subject to the reporting requirements of Section 16(a) of the Exchange Act, the Administrator shall implement transactions under the Plan and administer the Plan in a manner that will ensure that each transaction by such a Participant is exempt from liability under Rule 16b-3 or otherwise will not result in liability under Section 16(b) of the Exchange Act. (b) COMPLIANCE WITH CODE SECTION 162(m). It is the intent of the Company that any compensation (including any award) deferred under the Plan by a person who is, with respect to the year of payout, determined by the Administrator likely to be a "covered employee" within the meaning of Code Section 162(m) and regulations thereunder, shall not, as a result of deferral hereunder, become compensation with respect to which the Company would not be entitled to a tax deduction under Code Section 162(m). Accordingly, unless otherwise determined by the Administrator, if any payment in settlement of a Deferral Account would be subject to a loss of deductibility by the Company at the a time of scheduled settlement hereunder, the terms of such deferral shall be automatically modified to the extent necessary to ensure that the compensation will be, at the time of settlement hereunder, fully deductible by the Company. 9. STATEMENTS. The Administrator will furnish statements, at least once each calendar year, to each Participant reflecting the amounts credited to a Participant's Deferral Accounts, transactions therein since the date reported on in the last previous statement, and other information deemed relevant by the Administrator. 10. SOURCES OF STOCK: LIMITATION ON AMOUNT OF STOCK-DENOMINATED DEFERRALS. Shares of Stock deliverable in settlement of Deferred Stock, including shares deposited under the Plan in a Trust pursuant to Section 6 in connection with a deferral of a Stock-denominated award granted or acquired under another plan, program, employment agreement or other arrangement that provides for the issuance of shares, shall be deemed to have originated, and shall be counted against the number of shares reserved, under such other plan, program or arrangement. Shares of Stock actually delivered in settlement of such deferral shall be originally issued shares or treasury shares in accordance with the terms of such other plan, program or arrangement. If the authorizes deemed investments in Deferred Stock by Participants deferring cash, and any shares to be deposited under the Plan in a Trust in connection with such deemed investments in Deferred Stock or otherwise to be delivered in settlement of Deferred Stock shall be solely treasury shares or shares acquired in the market by or on behalf of the Trust. The shall reserve a specified number of shares of Stock held in treasury by the Company for the delivery in connection with such cash deferrals at the time it authorizes Deferred Stock as an investment vehicle for Cash Deferrals. 11. AMENDMENT/TERMINATION. The Administrator may, with prospective or retroactive effect, amend, alter, suspend, discontinue, or terminate the Plan at any time without the consent of Participants, stockholders, or any other person; PROVIDED, HOWEVER, that, without the consent of a Participant, no such action shall materially and adversely affect the rights of such Participant with respect to any rights to payment of amounts credited to such Participant's Deferral Account. The foregoing notwithstanding, the Administrator may terminate the Plan (in whole or in part) and distribute to Participants (in whole or in part) -9- the amounts credited to his or her Deferral Accounts, and reserves the right to accelerate the settlement of any individual Participant's Deferral Account (in whole or in part). The termination of the Plan, and any amendment or alteration to the Plan that is beyond the scope of the authority or the Administrator, shall be subject to the approval of the Board of Directors. 12. GENERAL PROVISIONS. (a) LIMITS ON TRANSFER OF AWARDS. Other than by will or the laws of descent and distribution, no right, title or interest of any kind in the Plan or to a payment under the Plan shall be transferable or assignable by a Participant or his or her Beneficiary, shall be subject to alienation, anticipation, encumbrance, garnishment, attachment, levy, execution or other legal or equitable process, nor shall be subject to the debts, contracts, liabilities or engagements, or torts of any Participant or his or her Beneficiary. Any attempt to alienate, sell, transfer, assign, pledge, garnish, attach or take any other action subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void. (b) RECEIPT AND RELEASE. Payments (in any form) to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims for the compensation or awards deferred and relating to the Deferral Account to which the payments relate against the Company or any subsidiary or affiliate, and the Administrator may require such Participant or Beneficiary, as a condition to such payments, to execute a receipt and release to such effect. In the case of any payment under the Plan of less than all amounts then credited to an account in the form of Deferred Stock, the amounts paid shall be deemed to relate to the Deferred Stock credited to the account at the earliest time. (c) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended to constitute an "unfunded" plan for deferred compensation and Participants shall rely solely on the unsecured promise of the Company for payment hereunder. With respect to any payment not yet made to a Participant under the Plan, nothing contained in the Plan shall give a Participant any rights that are greater than those of a general unsecured creditor of the Company; PROVIDED, HOWEVER, that the Administrator may authorize the creation of Trusts, including but not limited to the Trusts referred to in Section 6 hereof, or make other arrangements to meet the Company's obligations under the Plan, which Trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Administrator otherwise determines with the consent of each affected Participant. (d) COMPLIANCE. A Participant in the Plan shall have no right to receive payment (in any form) with respect to his or her Deferral Account until legal and contractual obligations of the Company relating to establishment of the Plan and the making of such payments shall have been complied with in full. In addition, the Company shall impose such restrictions on Stock delivered to a Participant hereunder and any other interest constituting a security as it may deem advisable in order to comply with the Securities Act of 1933, as amended, the requirements of the New York Stock Exchange or any other stock exchange or automated quotation system upon which the Stock is then listed or quoted, any state securities laws applicable to such a transfer, any provision of the Company's Certificate of Incorporation or By-Laws, or any other law, regulation, or binding contract to which the Company is a party. (e) OTHER PARTICIPANT RIGHTS. No Participant shall have any of the rights or privileges of a stockholder of the Company under the Plan, including as a result of the crediting of Stock equivalents or other amounts to a Deferral Account, or the creation of any Trust and deposit of such Stock therein, except at such time as Stock may be actually delivered in settlement of a Deferral Account. No provision of the Plan or transaction hereunder shall confer upon any Participant any right to be employed by the Company or a subsidiary or affiliate, or to interfere in any way with the right of the Company or a subsidiary or affiliate to increase or decrease the amount of any compensation payable to such Participant. Subject to the limitations set forth in Section 12(a) hereof, the Plan shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. (f) TAX WITHHOLDING. The Company and any subsidiary or affiliate shall have the right to deduct from amounts otherwise payable by the Company or any subsidiary or affiliate to the Participant, -10- including compensation not subject to deferral as well as amounts payable hereunder in settlement of the Participant's Deferral Account, any sums that federal, state, local or foreign tax law requires to be withheld with respect to the deferral of compensation hereunder, transactions affecting the Participant's deferral account, and payments in settlement of the Participant's Deferral Account, including FICA, Medicare and other employment taxes. Shares may be withheld to satisfy such obligations in any case where taxation would be imposed upon the delivery of shares, except that shares issued or delivered under any plan, program, employment agreement or other arrangement may be withheld only in accordance with the terms of such plan, program, employment agreement or other arrangement and any applicable rules, regulations, or resolutions thereunder. (g) RIGHT OF SETOFF. The Company or any subsidiary may, to the extent permitted by applicable law, deduct from and set off against any amounts the Company or a subsidiary may owe to the Participant from time to time, including amounts payable in connection with Participant's Deferral Account, owed as wages, fringe benefits, or other compensation owed to the Participant, such amounts as may be owed by the Participant to the Company, although the Participant shall remain liable for any part of the Participant's payment obligation not satisfied through such deduction and setoff. By electing to participant in the Plan and defer compensation hereunder, the Participant agrees to any deduction or setoff under this Section 12(g). (h) GOVERNING LAW. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York, without giving effect to principles of conflicts of laws, and applicable provisions of federal law. (i) LIMITATION. A Participant and his or her Beneficiary shall assume all risk in connection with any decrease in value of the Deferral Account and neither the Company nor the Administrator shall be liable or responsible therefor. (j) CONSTRUCTION. The captions and numbers preceding the sections of the Plan are included solely as a matter of convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of the Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. (k) SEVERABILITY. In the event that any provision of the Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of the Plan but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein. (l) STATUS. The establishment and maintenance of, or allocations and credits to, the Deferral Account of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan and in accordance with the terms of the Trust. 13. EFFECTIVE DATE. The Plan shall be effective as of July 20, 1999. -11- EX-10.2 4 a2092589zex-10_2.txt EXHIBIT 10.2 EXHIBIT 10.2 1998 IMS HEALTH INCORPORATED NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN AS AMENDED AND RESTATED THROUGH AUGUST 1, 2002 1. PURPOSE OF THE PLAN The purpose of the Plan is to enhance the Company's ability to attract and retain talented individuals to serve as members of the Board and to promote a greater alignment of interests between non-employee directors and the shareholders of the Company. 2. DEFINITIONS The following capitalized terms used in the Plan have the respective meanings set forth in this Section: (a) Act: The Securities Exchange Act of 1934, as amended, or any successor thereto. (b) Annual Deferral Amount: As such term is defined in Section 5(a) of the Plan. (c) Award: A Deferred Share Unit, Stock Option or Deferred Cash granted pursuant to the Plan. (d) Beneficial Owner: As such term is defined in Rule 13d-3 under the Act (or any successor rule thereto). (e) Board: The Board of Directors of the Company. (f) Change in Control: The occurrence of any of the following events: (i) any Person (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then-outstanding securities; (ii) during any period of twenty-four 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 (A) a director nominated by a Person who has entered into an agreement with the Company to effect a transaction described in Sections 2(f)(i), (iii) or (iv) of the Plan, (B) 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 (C) 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 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; (iii) 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 (A) 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 (B) 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; or (iv) 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. (g) Code: The Internal Revenue Code of 1986, as amended, or any successor thereto. (h) Cognizant: Cognizant Corporation, a Delaware corporation. (i) Committee: The Compensation and Benefits Committee of the Board. (j) Company: IMS Health Incorporated, a Delaware corporation. (k) Deferred Cash: A bookkeeping entry credited in accordance with an election made by a Participant pursuant to Section 5 of the Plan. (l) Deferred Share Unit: A bookkeeping entry, equivalent in value to one Share, credited in accordance with an election made by a Participant pursuant to Section 5 of the Plan. (m) Determination Date: As such term is defined in Section 6 of the Plan. (n) Effective Date: The date on which the Plan takes effect, as defined pursuant to Section 13 of the Plan. (o) Election Date: The date on which a Participant files an election with the Secretary of the Company pursuant to Section 5 of the Plan. (p) Fair Market Value: On a given date, the arithmetic mean of the high and low prices of the Shares as reported on such date on the Composite Tape of the principal national securities exchange on which such Shares are listed or admitted to trading, or, if no Composite Tape exists for such national securities exchange on such date, then on the principal national securities exchange on which such Shares are listed or admitted to trading, or, if the Shares are not listed or admitted on a national securities exchange, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted), or, if there is no market on which the Shares are regularly quoted, the Fair Market Value shall be the value established by the Committee in good faith. If no sale of Shares shall have been reported on such Composite Tape or such national securities exchange on such date or quoted on the National Association of Securities Dealers Automated Quotation System on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used. (q) First Trading Date: The first date on which the Shares are traded regular way on the principal national securities exchange on which such Shares are listed or admitted to trading. (r) Participant: Any director of the Company who is not an employee of the Company or any Subsidiary of the Company (i) as of any Election Date and (ii) during any years of service covered by the election made on such Election Date. (s) Person: As such term is used for purposes of Section 13(d) or 14(d) of the Act (or any successor section thereto). (t) Plan: The 1998 IMS Health Incorporated Non-Employee Directors' Deferred Compensation Plan, as amended and restated. (u) Plan Interest Rate: The rate of interest per annum, as determined from time to time by the Company's Chief Financial Officer, in effect and applicable to Deferred Cash for a given year or other period specified by the Chief Financial Officer. The Chief Financial Officer will base the Plan Interest Rate upon the prime interest rate(s) then generally in effect, or upon such other prevailing interest rates or other factors deemed relevant by the Chief Financial Officer in his or her sole discretion, and will announce the Plan Interest Rate in advance of the period in which it will be in effect. (v) Shares: Shares of common stock, par value $0.01 per Share, of the Company. (w) Spinoff Date: The date on which the Shares that are owned by Cognizant are distributed to the holders of record of shares of Cognizant. (x) Stock Option: A non-qualified stock option granted in accordance with an election made by a Participant pursuant to Section 5 of the Plan. (y) Stock Option Value: The value assigned to a Stock Option to purchase one share, for purposes of determining the number of Shares to be subject to a Stock Option granted in lieu of payment of an Annual Deferral Amount (or specified portion thereof) under Section 5(c). The Stock Option Value shall be determined from time to time by the Committee, based on a reasonable valuation methodology selected by the Committee, and shall remain in effect until changed by the Committee. Initially and until changed by the Committee, the Stock Option Value shall be deemed to be one-third of the Fair market Value of one Share on the date the Stock Option is granted. (z) Subsidiary: A subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto). 3. ADMINISTRATION The Plan shall be administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two "non-employee directors" within the meaning of Rule 16b-3 under the Act (or any successor rule thereto). The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their beneficiaries or successors). The foregoing notwithstanding, the Board may exercise any power or perform any function of the Committee, in which case any applicable reference to "Committee" herein shall be deemed to refer to the Board. 4. ELIGIBILITY All Participants shall be eligible to participate under this Plan. 5. VOLUNTARY DEFERRAL OF CASH COMPENSATION A Participant may voluntarily elect to defer his or her cash compensation (including, but not limited to, annual retainer, board meeting fees, committee meeting fees and committee chairman fees) in the following manner: (a) METHOD OF ELECTION. In order to make a voluntary election pursuant to the Plan, the Participant must complete and deliver to the Secretary of the Company a written election, not later than 30 days after the date on which he or she commences service as a director of the Company or, in subsequent years, not later than the anniversary of the normal commencement date for such director's term (or such other deadline as may be specified by the Company, provided that such deadline shall be established so as to ensure effective tax deferral by the Participant), designating (i) the portion of his or her cash compensation for a year of service as a director that is to be deferred (the "Annual Deferral Amount") and (ii) the portion of the Annual Deferral Amount that is to be deferred into (A) Deferred Share Units and/or (B) Stock Options and/or (C) Deferred Cash. Such an election shall only be effective with respect to (i) the annual retainer and (ii) any other fees earned after the date of the election. Such election shall remain effective for all future years of service unless the Participant makes a new valid election in a subsequent year. (b) DEFERRED SHARE UNITS. If a Participant elects to defer his or her Annual Deferral Amount into Deferred Share Units, such Participant will have Deferred Share Units credited (as of each date on which his or her cash compensation would otherwise have been paid) to a Deferred Share Unit account maintained for him or her on the books of the Company. The number of Deferred Share Units (including fractional Deferred Share Units) to be credited shall be determined by dividing (i) the amount of cash compensation to be deferred into Deferred Share Units by (ii) the Fair Market Value of one Share on the date credited. Deferred Share Units, during such period as they are outstanding, shall be credited with dividend equivalents based on dividends paid on Shares. Dividend equivalents resulting from dividend payments prior to August 1, 2002 shall be converted into additional Deferred Share Units based on the Fair Market Value of Shares on the date credited. From and after August 1, 2002, dividend equivalents relating to cash dividends paid prior to settlement of a Deferred Share Unit shall be calculated at the time of such settlement and credited and paid in cash at settlement, without interest; provided, however, that non-cash dividends and large, special and non-recurring cash dividends will be governed by Section 9 of the Plan. Notwithstanding anything to the contrary in this Section 5(b), the Fair Market Value of one Share on any date prior to the First Trading Date shall be the Fair Market Value of one Share on the First Trading Date. (c) STOCK OPTIONS. If a Participant elects to defer his or her Annual Deferral Amount into Stock Options, such Participant will receive a grant of a Stock Option as of each date on which his or her cash compensation would otherwise have been paid. The number of Shares purchasable under the Option (rounded to the nearest whole Share) will be determined by dividing (i) the amount of cash compensation to be deferred into Stock Options by (ii) the Stock Option Value then in effect. The Stock Option (i) will have an exercise price per Share equal to 100% of the Fair Market Value of a Share at the date of grant, (ii) will have a stated expiration date of seven years after the date of grant, (iii) will be non-forfeitable, and (iv) will become exercisable on the first anniversary of the date of grant. The foregoing notwithstanding, the Stock Option will become exercisable immediately prior to a Change in Control or in the event of the termination of the Participant's service as a director due to death or disability. (d) DEFERRED CASH. If a Participant makes a voluntary election to defer his or her Annual Deferral Amount into Deferred Cash, such Participant will have Deferred Cash credited, as of each date on which his or her cash compensation would otherwise have been paid, to a Deferred Cash account maintained for him or her on the books of the Company. The amount of Deferred Cash to be credited shall equal the amount of cash compensation to be deferred into Deferred Cash. A Participant's account shall be credited with additional Deferred Cash equal to the amount of notional interest earned on the account, assuming that such interest is earned at the Plan Interest Rate and compounded on an annual basis. 6. TERMINATION OF BOARD SERVICE No later than the first business day of the calendar year immediately following the date on which a Participant terminates service with the Company (the "Determination Date"), the Participant shall receive (a) a lump sum payment in Shares equal in number to the Deferred Share Units credited to the Participant's Deferred Share Unit account (provided, however, that any fractional Shares shall be paid in cash based on the Fair Market Value of a Share as of the Determination Date) and (b) a lump sum payment in cash equal to the Deferred Cash credited to the Participant's Deferred Cash account. 7. NONTRANSFERABILITY OF AWARDS AND RIGHTS UNDER THE PLAN Awards and related rights under the Plan shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. During the lifetime of a Participant, Awards shall be payable only to or exercisable only by such Participant. Deferred Share Units and Deferred Cash payable after the death of a Participant may be paid to the legatees, personal representatives or distributees of the Participant, and a Stock Option may be transferred to and thereafter exercised by the legatees, personal representatives or distributees of the Participant after the Participant's death. The foregoing notwithstanding, the Committee may permit a transfer of Stock Options in connection with the Participant's estate planning, subject to such terms and conditions as the Committee may specify. 8. UNFUNDED PLAN Unless otherwise determined by the Committee, the Plan shall be unfunded. To the extent any individual holds any rights by virtue of an Award granted under the Plan, such rights (unless otherwise determined by the Committee) shall be no greater than the rights of an unsecured general creditor of the Company. 9. ADJUSTMENTS UPON CERTAIN EVENTS Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to Awards. (a) GENERALLY. In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of Shares or other corporate exchange, or any distribution to stockholders of Shares other than regular cash dividends, the Committee in its sole discretion and without liability to any person may make such substitution or adjustment, if any, as it deems to be equitable, as to any Deferred Share Units or Stock Options granted under the Plan. (b) CHANGE IN CONTROL. In the event of a Change in Control, the Committee in its sole discretion and without liability to any person may take such actions, if any, as it deems necessary or desirable with respect to any Awards (including, without limitation, (i) the acceleration of Awards (not otherwise vested or exercisable upon the Change in Control), (ii) the payment of a cash amount in exchange for the cancellation of Awards and/or (iii) the requiring of the issuance of substitute Awards that will substantially preserve the value, rights and benefits of any affected Awards previously granted hereunder) as of the date of the consummation of the Change in Control. 10. SUCCESSORS AND ASSIGNS The Plan shall be binding on all successors and assigns of the Company and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 11. AMENDMENTS OR TERMINATION The Board may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of any Participant under any Awards theretofore granted without such Participant's consent. 12. CHOICE OF 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 the State of New York. 13. EFFECTIVENESS OF THE PLAN The Plan shall be effective as of the Spinoff Date. -----END PRIVACY-ENHANCED MESSAGE-----