-----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, E+kRHLoHZbpqa2u6cr0g0L99a+EMSREOnrenz6T7itx6pQHRBOlThidO7NJN2Dtz kF4I4a+BgY/ua4sMQ9SP5w== 0000950110-99-001451.txt : 19991124 0000950110-99-001451.hdr.sgml : 19991124 ACCESSION NUMBER: 0000950110-99-001451 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMS HEALTH INC CENTRAL INDEX KEY: 0001058083 STANDARD INDUSTRIAL CLASSIFICATION: 7374 IRS NUMBER: 061506026 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14049 FILM NUMBER: 99753563 BUSINESS ADDRESS: STREET 1: 200 NYALA FARMS CITY: WESTPORT STATE: CT ZIP: 06880 BUSINESS PHONE: 2032224523 MAIL ADDRESS: STREET 1: 200 NYALA FARMS ROAD CITY: WESTPORT STATE: CT ZIP: 06880 10-Q 1 FORM 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, 1999 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________ Commission file number 001-14049 IMS Health Incorporated (Exact name of registrant as specified in its charter) Delaware 06-1506026 (State of Incorporation) (I.R.S. Employer Identification No.) 200 Nyala Farms, Westport, CT 06880 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 222-4200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of Class Shares Outstanding Common Stock, at September 30, 1999 par value $.01 per share 307,927,288 IMS HEALTH INCORPORATED INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION PAGE(S) ------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income Three Months Ended September 30, 1999 and 1998 3 Nine Months Ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Comprehensive Income Three Months Ended September 30, 1999 and 1998 5 Nine Months Ended September 30, 1999 and 1998 5 Condensed Consolidated Statements of Financial Position September 30, 1999 and December 31, 1998 6 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 7 Notes to Condensed Consolidated Financial Statements 9-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22-35 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 36 SIGNATURES 37 2 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per share data)
Three Months Ended September 30, 1999 1998 ------------------------------- Operating Revenue $348,409 $283,606 Operating Costs 131,298 112,364 Selling and Administrative Expenses 94,865 87,468 Depreciation and Amortization 26,288 25,102 Direct Acquisition Integration Costs 0 43,019 Acquired In-Process Research and Development 0 10,900 - - ---------------------------------------------------------------------------------------------------------------- Operating Income 95,958 4,753 - - ---------------------------------------------------------------------------------------------------------------- Interest Income 2,591 7,241 Interest Expense (2,138) (335) Gains from Dispositions--Net 4,313 12,047 Other Expense--Net (3,221) (3,441) - - ---------------------------------------------------------------------------------------------------------------- Non-Operating Income--Net 1,545 15,512 - - ---------------------------------------------------------------------------------------------------------------- Income Before Provision for Income Taxes 97,503 20,265 Provision for Income Taxes (27,263) (5,479) - - ---------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 70,240 14,786 Income from Discontinued Operations, Net of Income Taxes of $931 and $7,261 for 1999 and 1998, respectively 1,384 10,169 - - ---------------------------------------------------------------------------------------------------------------- Net Income $ 71,624 $ 24,955 - - ---------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share of Common Stock: Income from Continuing Operations $0.23 $0.05 Income from Discontinued Operations 0.00 0.03 - - ---------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share of Common Stock $0.23 $0.08 - - ---------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock: Income from Continuing Operations $0.22 $0.04 Income from Discontinued Operations 0.00 0.03 - - ---------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock $0.22 $0.07 - - ---------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding--Basic 311,159,000 328,102,000 Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 6,185,000 8,110,000 Adjustment of Shares Applicable to Exercised Stock Options 328,000 1,468,000 - - ---------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding--Diluted 317,672,000 337,680,000 - - ----------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements (unaudited). The third quarter of 1998 for the IMS operating units includes the three months ended August 31, 1998. (See Note 2. Basis of Presentation). 3 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per share data)
Nine Months Ended September 30, 1999 1998 ------------------------------- Operating Revenue $994,303 $795,070 Operating Costs 412,659 391,819 Selling and Administrative Expenses 293,047 244,560 Depreciation and Amortization 75,174 68,303 Direct Acquisition Integration Costs 0 48,019 Acquired In-Process Research and Development 0 32,800 - - ---------------------------------------------------------------------------------------------------------------------------- Operating Income 213,423 9,569 - - ---------------------------------------------------------------------------------------------------------------------------- Interest Income 6,371 16,110 Interest Expense (4,672) (747) Gain on Sale of Subsidiary Stock 0 12,777 Gains from Dispositions--Net 20,590 22,462 Other Expense--Net (11,457) (8,688) - - ---------------------------------------------------------------------------------------------------------------------------- Non-Operating Income--Net 10,832 41,914 - - ---------------------------------------------------------------------------------------------------------------------------- Income Before Provision for Income Taxes 224,255 51,483 Provision for Income Taxes (64,048) (26,703) - - ---------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 160,207 24,780 Income from Discontinued Operations, Net of Income Taxes of $12,635 and $38,780 for 1999 and 1998, respectively 25,695 82,902 - - ---------------------------------------------------------------------------------------------------------------------------- Net Income $185,902 $107,682 - - ---------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share of Common Stock: Income from Continuing Operations $0.51 $0.08 Income from Discontinued Operations 0.08 0.25 - - ---------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share of Common Stock $0.59 $0.33 - - ---------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock: Income from Continuing Operations $0.50 $0.07 Income from Discontinued Operations 0.08 0.25 - - ---------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock $0.58 $0.32 - - ---------------------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding--Basic 314,431,000 326,474,000 Dilutive Effect of Shares Issuable as of Period-End Under Stock Option Plans 6,810,000 6,432,000 Adjustment of Shares Applicable to Exercised Stock Options 565,000 4,220,000 - - ---------------------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding--Diluted 321,806,000 337,126,000 - - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements (unaudited). The Statement of Income at September 30, 1998 for the IMS operating units includes the nine months ended August 31, 1998. (See Note 2. Basis of Presentation). 4 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollar amounts in thousands, except per share data)
Three Months Ended September 30, 1999 1998 ---------------------- Net Income $ 71,624 $ 24,955 Other Comprehensive Income, Net of Tax: Foreign Currency Translation Adjustments Gains 10,301 175 Unrealized Gains/(Losses) on Securities: Unrealized Holding Gains/(Losses) on Securities Arising During the Period: Other (Net of Tax Benefit of $502 for 1998) 4 (1,329) Gartner (Net of Tax Expense at $10,195 for 1999) 18,934 -- Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax Expense of $1,410 and $2,302 for 1999 and 1998, respectively) (3,738) (6,100) - - --------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Gains (Losses) on Investments 15,200 (7,429) - - --------------------------------------------------------------------------------------------------------------------- Total Other Comprehensive Income (Loss), Net of Tax 25,501 (7,254) - - --------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 97,125 $ 17,701 - - --------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 1999 1998 --------- --------- Net Income $ 185,902 $ 107,682 Other Comprehensive Income, Net of Tax: Foreign Currency Translation Adjustments Losses (21,133) (9,421) Unrealized Gains/(Losses) on Securities: Unrealized Holding Gains/(Losses) on Securities Arising During the Period: Other (Net of Tax Benefit of $710 and $2,440 for 1999 and 1998, respectively) (1,880) (6,464) Gartner (Net of Tax Expense at $10,195 for 1999) 18,934 -- Less: Reclassification Adjustment for Gains included in Net Income (Net of Tax Expense of $4,212 and $1,557 for 1999 and 1998, respectively) (11,161) (4,126) - - --------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Gains (Losses) on Investments 5,893 (10,590) - - --------------------------------------------------------------------------------------------------------------------- Total Other Comprehensive Loss, Net of Tax (15,240) (20,011) - - --------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 170,662 $ 87,671 - - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements (unaudited). The Statement of Comprehensive Income at September 30, 1998 for the IMS operating units includes the three and nine months ended August 31, 1998, respectively. (See Note 2. Basis of Presentation). In the third quarter and first nine months of 1999, Unrealized Holding Gains include $18,934 of unrealized gains, net of $10,195 of tax expense, related to the Company's Gartner Group holdings, classified in Net Assets from Discontinued Operations. (See Note 2. Basis of Presentation). The Company has significant investments outside of the U.S. Therefore, changes in the value of foreign currencies affect the Company's Condensed Consolidated Financial Statements when translated into U.S. dollars. The currency translation adjustment excludes the offsetting impact of the Company's hedging program. (See Note 8. Financial Instruments with Off-Balance Sheet Risk). 5 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) (Dollar amounts in thousands, except per share data) September 30, December 31, 1999 1998 ---------------------------- Assets: Current Assets: Cash and Cash Equivalents $ 230,714 $ 206,390 Accounts Receivable-Net 246,991 324,219 Other Current Assets 106,236 103,868 Net Assets from Discontinued Operations 100,356 240,708 - - -------------------------------------------------------------------------------- Total Current Assets 684,297 875,185 - - -------------------------------------------------------------------------------- Securities and Other Investments 82,455 106,276 Property, Plant and Equipment-Net 170,550 179,151 Other Assets-Net: Computer Software 174,989 168,994 Goodwill 344,123 363,841 Other Assets 23,915 25,928 - - -------------------------------------------------------------------------------- Total Other Assets-Net 543,027 558,763 - - -------------------------------------------------------------------------------- Total Assets $1,480,329 $1,719,375 - - -------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Current Liabilities: Short Term Debt $ 168,834 $ 39,169 Accounts Payable 48,197 51,715 Accrued and Other Current Liabilities 222,353 298,625 Accrued Income Taxes 81,900 32,537 Deferred Revenues 102,349 128,272 - - -------------------------------------------------------------------------------- Total Current Liabilities 623,633 550,318 - - -------------------------------------------------------------------------------- Post-retirement and Post-employment Benefits 27,943 27,577 Minority Interests 120,628 116,225 Other Liabilities 191,634 199,985 - - -------------------------------------------------------------------------------- Total Liabilities 963,838 894,105 - - -------------------------------------------------------------------------------- Shareholder's Equity: Common Stock, Par Value $.01, Authorized 800,000,000 Shares: Issued 335,045,390 Shares in September 1999 and December 1998 respectively 3,350 3,350 Capital in Excess of Par 732,088 732,014 Retained Earnings 720,413 686,653 Treasury Stock, at Cost, 27,118,102 and 16,303,690 Shares at September 1999 and December 1998, respectively (866,753) (535,971) Cumulative Translation Adjustment (101,873) (84,149) Unrealized Gains on Gartner Group 18,934 0 Unrealized Gains on Investments 10,332 23,373 - - -------------------------------------------------------------------------------- Total Shareholders' Equity 516,491 825,270 - - -------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $1,480,329 $1,719,375 See accompanying notes to the Condensed Consolidated Financial Statements (unaudited). The Financial Position at December 31,1998 includes the IMS operating units as of November 30,1998. (See Note 2. Basis of Presentation). 6 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollar amounts in thousands, except per share data)
Nine Months Ended September 30, 1999 1998 ------------------------------- Cash Flows from Operating Activities: Net Income $ 185,902 $ 107,682 Less Income from Discontinued Operations (25,695) (82,902) - - ------------------------------------------------------------------------------------------------------ Income from Continuing Operations 160,207 24,780 Reconciliation of Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 75,174 68,303 Gains from Sale of Investments, Net (20,590) (22,462) Write-off of Purchased In-Process Research and Development 0 32,800 Direct Acquisition Integration Costs 0 48,019 Benefit Payments (10,469) (2,748) Net Decrease in Accounts Receivable 24,414 29,790 Net (Decrease)/Increase in Deferred Revenues (16,583) 14,161 Gain from Sale of Subsidiary Stock 0 (12,777) Minority Interests 4,189 7,012 Deferred Income Taxes (2,338) 1,118 Net increase in Accrued Income Taxes 46,006 3,999 Other Working Capital Items (28,252) (36,436) - - ------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 231,758 155,559 - - ------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities: Proceeds from Sale of Investments 46,759 42,432 Acquisition and Integration Payments (28,248) 0 Payments for Acquisition of Businesses (3,100) (2,938) Cash of Companies Acquired in Stock Purchases 0 11,895 Capital Expenditures (23,243) (20,375) Additions to Software (44,496) (45,428) Net Increase in Other Investments (16,500) (20,705) Other Investing Activities - Net 8,355 4,369 - - ------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (60,473) (30,750) - - ------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities: Payments for Purchase of Treasury Stock (359,859) (510,867) Proceeds from Exercise of Stock Options 22,669 61,638 Proceeds from the Sale and Issuance of Subsidiary Stock 0 27,128 Dividends Paid (18,923) (14,805) Proceeds from Employee Stock Purchase Plan 3,514 3,403 Proceeds from Debt Assumed by Nielsen Media Research 0 300,000 Short-Term Borrowings 243,443 35,165 Short-Term Debt Repayments (113,306) 0 Other Financing Activities - Net (213) (1,877) - - ------------------------------------------------------------------------------------------------------ Net Cash Used in Financing Activities (222,675) (100,215) - - ------------------------------------------------------------------------------------------------------ Effect of Exchange Rate Changes on Cash and Equivalents (7,827) (7,618) Effect of the elimination of the one-month reporting lag 30,664 0 Cash Flow from Discontinued Operations 52,877 (17,173) - - ------------------------------------------------------------------------------------------------------ Increase/(Decrease) in Cash and Cash Equivalents 24,324 (197) Cash and Cash Equivalents, Beginning of Period 206,390 312,442 - - ------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents, End of Period $ 230,714 $ 312,245 - - ------------------------------------------------------------------------------------------------------
See accompanying notes to the Condensed Consolidated Financial Statements (unaudited). The Statement of Cash Flows for the nine month period ended September 30, 1998 for the IMS operating units includes the nine months ended August 31, 1998. (See Note 2. Basis of Presentation). 7 IMS HEALTH INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollar amounts in thousands, except per share data)
Nine Months Ended September 30, 1999 1998 -------- -------- Supplemental Disclosure of Cash Flow Information: Cash Paid during the Period for Interest $ 4,731 $ 747 Cash Paid during the Period for Income Taxes $ 57,478 $ 65,313 Cash received from Income Tax Refunds $ 42,449 $ 6,832 Non-Cash Investing Activities: Stock Issued in Connection with Acquisitions -- $243,854 Dividend of Gartner Shares $134,259 --
See accompanying notes to the Condensed Consolidated Financial Statements (unaudited). 8 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 1. Interim Consolidated Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended. The condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes of IMS Health Incorporated (the "Company" or "IMS Health") in the 1998 Annual Report on Form 10-K. Accordingly, the accompanying condensed consolidated financial statements do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been included. Certain prior-period amounts have been reclassified to conform to the 1999 presentation. Note 2. Basis of Presentation This document relates to IMS Health. The Common Stock of IMS Health was distributed by Cognizant Corporation ("Cognizant"), which subsequently changed its name to Nielsen Media Research, Inc. ("NMR"), to Cognizant's shareholders on June 30, 1998 (the "Distribution"). The condensed consolidated financial statements of the Company have been reclassified to reflect NMR as a discontinued operation for periods up to and including June 30, 1998. IMS Health consists of the market information and decision support services business for the pharmaceutical and healthcare industries conducted by IMS Health and various subsidiaries ("IMS") including IMS Health Strategic Technologies, Inc. ("Strategic Technologies"); ERISCO Managed Care Technologies, Inc. ("Erisco"); Enterprise Associates LLC ("Enterprises") and a controlling interest (approximately 61% of shares outstanding) in Cognizant Technology Solutions Corporation ("CTS"). On July 26, 1999, having received the approval of Gartner Group Inc. ("Gartner") shareholders and the Boards of Directors of both the Company and Gartner, the Company completed a spin-off of the majority of its equity investment in Gartner to IMS Health shareholders (the "Gartner Spin-Off"). The distribution consisted of 0.1302 shares of Gartner Class B Common Stock for each share of the Company's Common Stock outstanding on the July 17, 1999 record date and totaled 40.7 million Gartner Class B shares. The condensed consolidated financial statements of the Company have been reclassified for all periods presented to reflect the Gartner equity investment as a discontinued operation. (See Note 3. Investment in Gartner Group Stock). 9 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 2. Basis of Presentation (continued) A summary of Gartner and Nielsen Media Research as discontinued operations is as follows: Results of Operations
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ------------------------- ------------------------- Operating Revenue - Nielsen Media Research $ -- $ -- $ -- $ 193,996 Income Before Provision for Income Taxes - Nielsen Media Research -- -- -- 57,980 Equity Income and SAB 51 Gains ($1,459 and $14,838 for the three and nine month periods in 1998, respectively) Before Provision for Income Taxes - Gartner 2,315 17,430 38,330 63,702 ------------------------- ------------------------- Provision for Income Taxes - Nielsen Media Research -- -- -- (15,887) Provision for Income Taxes - Gartner (931) (7,261) (12,635) (22,893) Income from Discontinued Operations $ 1,384 $ 10,169 $ 25,695 $ 82,902 ========================= =========================
Elimination of one-month reporting lag in IMS operating entities Effective in the first quarter of 1999, IMS operating units which previously reported on a fiscal year ended November 30 revised their reporting period to conform to the Company's fiscal year ended December 31. The 1998 third quarter and year-to-date results for the IMS operating units include the three and nine months ended August 31. The $1,040 of net income related to the results of the IMS operating units for the period December 1 through December 31, 1998 was recorded as an addition to Retained Earnings. In addition, December 1998 included a $3,409 credit that was recorded as a cumulative translation adjustment. The following table presents IMS operating units condensed consolidated financial information for the one month ended December 31, 1998. One Month Ended December 31, 1998 -------------------------------------------------------------------------- Revenue $ 71,754 Operating Income 1,137 Income Before Provision for Income Taxes 1,432 Provision for Income Taxes (392) -------------- Net Income $ 1,040 ============== Earnings Per IMS Health Share $ 0.003 10 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 2. Basis of Presentation (continued) The following table presents IMS operating units cash flow information for the one month ended December 31, 1998: One Month Ended December 31, 1998 -------------------------------------------------------------------------- Net Cash Provided by Operating Activities $ 30,852 Net Cash Used in Investing Activities (3,645) Net Cash Provided by Financing Activities 2,276 Effect of Exchange Rate Changes on Cash and Cash Equivalents 1,181 -------------- Increase in Cash and Cash Equivalents $ 30,664 ============== Note 3. Investment in Gartner Group Stock On November 11, 1998 the Company announced that its Board of Directors had approved a plan, subject to numerous conditions, to spin-off substantially all of its equity ownership of Gartner. The transaction was structured as a tax-free distribution of Gartner stock to IMS Health shareholders and the Company received a favorable ruling from the Internal Revenue Service ("IRS"). On July 16, IMS Health and Gartner Board of Directors approved the final plan, terms and conditions governing the spin-off of the Company's investment in Gartner Group. Accordingly, pursuant to Accounting Principles Board No. 30, "Reporting the results of Operations - Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occuring Events and Transactions", the condensed consolidated financial statements of the Company have been reclassified to reflect Gartner equity investment as a discontinued operation for all periods presented. Gartner declared a special cash dividend which was paid on July 23, 1999 to holders of record on July 16, 1999. IMS Health's portion of the dividend was $52,877, net of taxes, and is included as Cash from Discontinued Operations in the Condensed Consolidated Statements of Cash Flow. 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 tax-free distribution consisted of 0.1302 Gartner Class B Shares for each outstanding share of the Company's Common Stock (the "Gartner Distribution"). The net assets of the Gartner discontinued operations at December 31, 1998 were $240,708. Income from discontinued operations for the nine month period ended September 30, 1999 was $25,695, net of taxes of $12,635. The allocated value of the Gartner Class B Shares distributed was $132,104 and was recorded as a reduction of net assets of discontinued operations and Dividend of Gartner Shares. The allocated 11 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 3. Investment in Gartner Group Stock (continued) value was calculated from the original cost of the shares and the proportional allocation of the earnings from past periods, less the net dividend received on the shares prior to the Distribution. The Company's remaining investment in Gartner consists of 6,909,457 Gartner Class A Shares and warrants to purchase a further 599,400 Gartner Class A Shares (at a cost basis of $81,422). The Company expects to monetize the remaining position in Gartner. Accordingly, the net assets from discontinued operations are included in current assets. The Company's Gartner Class A shares have been accounted for as "available for sale" securities under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The unrealized gain as of the date of the Gartner Distribution (based on a per share price of $22.75 on Gartner Stock) was $51,716 (net of taxes of $27,847), and was recorded as Other Comprehensive Income and included as a component of equity. Subsequent changes in the per share price of Gartner Stock from the date of the Gartner Distribution to September 30, 1999 (based on a per share price of $16.00 on Gartner Stock) generated an unrealized loss of $32,782 (net of taxes of $17,652), which was also recorded as Other Comprehensive Income and included as a component of equity. Upon sale of these securities, the unrealized gain related to those securities measured based on the value of Gartner shares as of the date of the Gartner Distribution will be recognized in Discontinued Operations. Gains or losses in the fair value subsequent to the date of the Gartner Distribution will be recognized in Continuing Operations as shares are sold. Holders of options to purchase the Company's stock did not receive shares in the Gartner Distribution. Consequently, options granted under the Company's plans were adjusted to recognize the effect of the Gartner Distribution. The options, as adjusted, represented as increase in the number of shares issuable when exercised but had the same ratio of the exercise price to the market value per share, the same aggregate difference between market value and exercise price and the same vesting provisions, option periods and other terms and conditions as the options prior to the adjustment. The option adustment was performed in accordance with the provisions of EITF90-9. Accordingly, no compensation charge was required for this options adjustment. Note 4. Dispositions During the third quarter of 1999, the Company recorded $4,313 of pre-tax net gains due primarily to the sale of Enterprises investments in TSI International Software Ltd. and Pegasus Systems Inc. Pre-tax cash received from dispositions in the quarter amounted to $7,602. Year-to-date the Company has recorded $20,590 of pre-tax net gains due primarily to the sale of Super Systems Japan kk ("SSJ") and Enterprises investments in edata resources Inc., Oacis Healthcare Inc., Pegasus Systems Inc. and TSI International Software Ltd. Pre-tax cash received year-to-date as a result of dispositions was $46,759. Note 5. Acquisitions During the first quarter of 1999, the Company acquired 100% of the stock of PharmaFELAX Kft., a pharmaceutical information company based in Hungary. In connection with the acquisition, the Company recorded goodwill of $3,100. 12 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 5. Acquisitions (continued) Walsh Acquisition On June 24, 1998, Cognizant acquired Walsh International, Inc. ("Walsh"). The final purchase price was $193,748, including $167,148 of Cognizant common stock, $9,521 for Cognizant stock options issued and $17,079 of direct acquisition and integration costs. Walsh shareholders received 6,454,600 shares of Cognizant common stock, issued from treasury stock, with a market value of $167,148. The original estimate of direct acquisition and integration costs consisted of severance ($4,876), lease terminations ($2,569) and other direct acquisition and integration costs ($9,634). These acquisition and integration costs were incurred as a direct result of the plan to exit certain activities as part of the overall integration effort (such as severance costs related to Walsh employees) and certain contractual costs (such as Walsh leases). Incurred acquisition and integration costs to date are within original projections. The Company incurred higher-than anticipated severance costs and restructured acquired Walsh leases at a cost lower than originally anticipated and, as a result, reduced the remaining liability for acquisition and integration costs and goodwill by $890. Approximately $155,667 (originally $156,557) was recorded as the excess of the purchase price over the fair value of identifiable net assets (goodwill), which is being amortized on a straight-line basis over 15 years. PMSI Acquisition On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical Marketing Services Inc. ("PMSI"). The final purchase price was $103,291, consisting of IMS Health common stock ($75,292), IMS Health stock options issued ($5,415) and direct acquisition and integration costs ($22,584). PMSI received 2,395,926 shares of IMS Health common stock, issued from treasury stock, with a market value of $75,292. The original estimate of direct acquisition and integration costs consisted of severance ($3,794), lease terminations ($1,623), contract cancellation ($10,935), and other direct acquisition and integration costs ($6,232). The acquisition and integration costs were incurred as a direct result of the formal plan to exit certain activities as part of the overall integration effort (such as severance costs related to PMSI employees) and certain contractual cancellation costs (such as PMSI contracts and leases). $115,275 was recorded as the excess of the purchase price over the fair value of identifiable net assets (goodwill), which is being amortized on a straight-line basis over 15 years. Purchase Price Allocation In connection with both the Walsh and PMSI acquisitions, the Company made allocations of the purchase price to acquired in-process research and development ("IPR&D") amounting to $21,900 in the second quarter of 1998 related to the Walsh acquisition and $10,900 in the third quarter of 1998 related to the PMSI acquisition. At the date of the respective acquisitions, the development of the IPR&D projects had not reached technological feasibility and had no alternative future uses. Accordingly, these costs were expensed as of the respective acquisition dates. 13 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 5. Acquisitions (continued) In accordance with Securities and Exchange Commission guidance, the amount allocated to IPR&D reflects the relative value and contribution of the acquired IPR&D. Consideration was given to the projects' stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, the costs already incurred and the projected cost to complete the projects. In addition, the Company allocated $29,000 in the Walsh businesses and $7,700 in the PMSI businesses to existing core technology, representing computer software that is currently in use. Such amounts are being amortized over 5 years. The allocation of the Company's aggregate purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed in connection with these acquisitions was based primarily on estimates of fair values by an independent appraisal firm. The initial allocations, prior to the $890 adjustment to Walsh goodwill referred to above, were: Walsh PMSI Total -------------------------------------------------------------------------- In-process R&D write-off $ 21,900 $ 10,900 $ 32,800 Net liabilities assumed (5,009) (28,274) (33,283) Software/ Core technology 29,000 7,700 36,700 Deferred taxes (8,700) (2,310) (11,010) Goodwill 156,557 115,275 271,832 -------------------------------------------------------------------------- Total Purchase Price $ 193,748 $ 103,291 $ 297,039 ========================================================================== In connection with the PMSI acquisition, the Company evaluated then-existing IMS Health product offerings. Based on this strategic assessment, the Company abandoned certain then- existing IMS Health software products. Accordingly, the Company recognized the impairment of certain computer software assets ($36,300), the closure of certain IMS facilities ($800) and the severance of some IMS employees ($5,600). This resulted in a one-time charge of $43,019 recorded in the third quarter of 1998 as a component of operating income. Note 6. Minority Interests The Company consolidates the assets, liabilities, results of operations and cash flows of businesses in which it maintains a controlling interest. Third parties' ownership interests are reflected as a minority interest on the Company's financial statements. Two of the Company's subsidiaries have contributed assets to, and participate in, a limited partnership. One subsidiary serves as general partner, and all other partners hold limited partnership interests. The partnership, which is a separate and distinct legal entity, is in the business of licensing database assets and computer software. In the second quarter of 1997, third-party investors contributed $100,000 to the partnership in exchange for minority ownership interests. The Company and its subsidiaries maintain a controlling (85%) interest in the partnership. The Company also has a controlling interest in CTS (approximately 61% of the outstanding shares representing approximately 94.1 % of the voting power) and the related minority interest at September 30, 1999 was $15,900. 14 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 7. Contingencies The Company and its subsidiaries are involved in legal proceedings and claims litigation arising in the ordinary course of business. In addition, the Company enters into global tax planning and financing strategies and initiatives in the normal course of business which are subject to review by the tax authorities. In the opinion of management, the outcome of such current legal proceedings and claims litigation and tax matters, if decided adversely, could have a material effect on quarterly or annual operating results, cash flows or consolidated financial position when resolved in a future period. The Company has established reserves for specific liabilities in connection with these proceedings, litigations and tax matters to the extent the Company currently deems them to be probable and estimatable. Management does not expect the ultimate resolution of the foregoing will have a material effect on its financial condition, results of operations, or cash flows. In addition, the Company is subject to certain other contingencies not arising in the ordinary course of business as discussed below: Information Resources Litigation On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in the United States District Court for the Southern District of New York, naming as defendants D&B, A.C. Nielsen Company and IMS (the "IRI Action"). The complaint alleges various violations of the United States antitrust laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with a contract and a claim of tortious interference with a prospective business relationship. These latter claims relate to the acquisition by defendants of Survey Research Group Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI when it agreed to be acquired by defendants and that the defendants induced SRG to breach that agreement. IRI's complaint alleges damages in excess of $350,000, which amount IRI has asked to be trebled under the antitrust laws. IRI also seeks punitive damages in an unspecified amount. In October 15, 1996, defendants moved for an order dismissing all claims in the complaint. On May 6, 1997 the United States District Court for the Southern District of New York issued a decision dismissing IRI's claim of attempted monopolization in the United States, with leave to replead within sixty days. The Court denied defendants' motion with respect to the remaining claims in the complaint. On June 3, 1997, defendants filed an answer denying the material allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim alleging that IRI has made false and misleading statements about its services and commercial activities. On July 7, 1997, IRI filed an amended and restated complaint repleading its alleged claim of attempted monopolization in the United States and realleging its other claims. On August 18, 1997, defendants moved for an order dismissing the amended claims. On December 1, 1997, the court denied the motion and, on December 16, 1997, defendants filed a supplemental answer denying the remaining material allegations of the amended complaint. Discovery is continuing in this matter. In light of the potentially significant liabilities which could arise from the IRI Action and in order to facilitate the 1996 distribution by The Dun & Bradstreet Corporation ("D&B") of shares 15 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 7. Contingencies (continued) of Cognizant and ACNielsen Corporation ("ACNielsen"; the parent company of A.C. Nielsen Company), D&B, ACNielsen and Cognizant entered into an Indemnity and Joint Defense Agreement pursuant to which they agreed (i) to certain arrangements allocating liabilities that may arise out of or in connection with the IRI Action, and (ii) to conduct a joint defense of such action. In particular, the Indemnity and Joint Defense Agreement provides that ACNielsen will assume exclusive liability for liabilities up to a maximum amount to be calculated at the time such liabilities, if any, become payable (the "ACN Maximum Amount") and that Cognizant and D&B will share liability equally for any amounts in excess of the ACN Maximum Amount. The ACN Maximum Amount will be determined by an investment banking firm as the maximum amount which ACNielsen will be able to pay after giving effect to (i) any plan submitted by such investment bank which is designed to maximize the claims paying ability of ACNielsen without impairing the investment banking firm's ability to deliver a viability opinion (but which will not require any action requiring shareholder approval) and (ii) payment of related fees and expenses. For these purposes, financial viability means the ability of ACNielsen, after giving effect to such plan, the payment of related fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as they become due and to finance the current and anticipated operating and capital requirements of its business, as reconstituted by such plan, for two years from the date any such plan is expected to be implemented. IMS Health and Nielsen Media Research are jointly and severally liable to D&B and ACNielsen for Cognizant's obligations under the terms of the Distribution Agreement dated October 28, 1996 among D&B, Cognizant and ACNielsen (the "1996 Distribution Agreement"). IMS Health and Nielsen Media Research have agreed that, as between themselves, IMS Health will assume 75%, and Nielsen Media Research will assume 25%, of any payments to be made in respect of the IRI Action under the Indemnity and Joint Defense Agreement or otherwise, including any legal fees and expenses related thereto incurred in 1999 or thereafter. IMS Health agreed to be fully responsible for any legal fees and expenses incurred during 1998. Nielsen Media Research's aggregate liability to IMS Health for payments in respect of the IRI Action and certain other contingent liabilities shall not exceed $125,000. Management of the Company is unable to predict at this time the final outcome of this matter or whether the resolution of this matter could materially affect the Company's results of operations, cash flows or financial position. Other Contingencies Prior to the Distribution, Cognizant and IMS Health entered into certain agreements that govern the relationship between Nielsen Media Research and IMS Health and provide for the allocation of tax, employee benefits and certain other liabilities and obligations arising from periods prior to the Distribution. Among other things, the agreements set forth principles to be applied in allocating certain Distribution-related costs and specify portions of contingent liabilities, including those described herein, to be shared if certain amounts are exceeded, including certain liabilities to D&B that may arise in connection with the 1996 Distribution Agreement. 16 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 7. Contingencies (continued) Cognizant and D&B entered into global tax planning initiatives in the normal course of their business. These activities are subject to review by the 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 Cognizant or D&B. The Company has been informed by D&B that the IRS is currently reviewing D&B's utilization of certain capital losses during 1989 and 1990. While D&B has not received an assessment with respect to these transactions, it understands that the IRS will challenge D&B's position. The Company has estimated that D&B's total cash liability to the IRS, if an assessment were to be made and the IRS prevail, would be approximately $444,000 for taxes and accrued interest, net of tax benefit, as of September 30, 1999. Under the terms of the 1996 Distribution Agreement, the Company is liable to pay half of such taxes and interest, net of tax benefit, owed to the IRS to the extent that D&B's total liabilities exceed $137,000. A portion of the Company's liability would in turn be shared with Nielsen Media Research under the Distribution Agreement dated as of June 30, 1998 between IMS Health and Nielsen Media Research. The Company estimates that its share of the liability, were the IRS to prevail, would be approximately $142,000. This liability is included in Other Liabilities. Management does not believe that these matters will have a material adverse effect on the Company's consolidated financial position or operating results when they are resolved in future periods. However, should the IRS issue assessment notices, payment of the Company's share could have a material adverse effect on cash flows in the period in which it is made. The Company believes that it has more than sufficient funds available from operating cash flows and committed bank lines to cover any such payment without a material effect on its liquidity or its financial condition. At September 30, 1999, the Company has committed short-term borrowing arrangements with several banks to provide up to $350,000 of borrowings. In connection with the Gartner Spin-Off, the Company and Gartner entered into a Distribution Agreement and an Agreement and Plan of Merger (the "1999 Distribution Agreements"). Pursuant to the 1999 Distribution Agreements, Gartner has 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 highly unlikely that any such liabilities will be incurred by the Company. Note 8. Financial Instruments with Off-Balance-Sheet Risk The Company transacts business in virtually every part of the world and is subject to risks associated with foreign exchange rates. The Company's objective is to reduce earnings and cash flow volatility associated with foreign exchange rates to allow management to focus its attention on its core business activities. Accordingly, to protect the value of a portion of foreign currency revenues and non-functional currency assets and liabilities, the Company enters into hedge 17 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 8. Financial Instruments with Off-Balance-Sheet Risk (continued) agreements which change in value as foreign exchange rates change. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures over the next twelve months, in amounts intended to protect operating income from the effect on revenues of fluctuations in currency exchange rates. It is the Company's policy to enter into foreign currency hedging transactions only to the extent necessary to meet its objectives as stated above. The Company uses a variety of financial instruments, primarily forward contracts and purchased currency options, to hedge committed and anticipated foreign currency denominated revenues. The Company also uses forward contracts to hedge non-functional currency assets and liabilities. The currencies hedged are primarily the Euro, the Japanese yen and the Swiss franc. The Company does not enter into foreign currency transactions for speculative purposes. Gains and losses on contracts hedging anticipated and committed foreign currency revenues are deferred until such revenues are recognized and offset changes in the value of such revenues due to fluctuations in currency exchange rates. Gains and losses on contracts hedging non-functional currency assets and liabilities are not deferred and are included in other expense--net. At September 30, 1999, the notional amounts of committed foreign currency revenues and non-functional currency assets and liabilities hedged were $64,266 and $56,226 respectively. Note 9. Summary of Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained For Internal Use." SOP 98-1 provides guidance on costs to be capitalized, including when capitalization of such costs should commence. SOP 98-1 applies to costs incurred after its adoption, including costs for internal use software projects that are in progress at the time of the adoption. The implementation of SOP 98-1, as of January 1, 1999, did not have a material effect on the Company's financial statements. In April 1998, the AICPA issued SOP 98-5, "Accounting For the Costs of Start-up Activities." SOP 98-5 requires all costs of start-up activities to be expensed as incurred. SOP 98-5 is effective for financial statements for the years beginning after December 15, 1998. The implementation of SOP 98-5, as of January 1, 1999, did not have a material effect on the Company's financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In July 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of SFAS No.133- an amendment of FASB Statement No. 133". Citing concerns about companies' ability to modify their information systems in time to apply SFAS 133, the FASB delayed its effective date for one year, to fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). Management continues to evaluate the effects of SFAS No.133 on the Company's financial statements. 18 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 10. Operations by Business Segment The IMS segment consists of IMS, the leading global provider of market information and decision-support services to the pharmaceutical and healthcare industries, and Strategic Technologies, a leading provider of automated sales support technologies to the pharmaceutical industry. The Walsh and PMSI businesses acquired in 1998 have been integrated into the IMS segment operations. Effective in the first quarter of 1999, the IMS segment's operating units revised their reporting period to conform to the Company's fiscal year ended December 31 (the "Calendarization"). (See Note 2. Basis of Presentation) The Emerging Markets segment includes Erisco, a leading supplier of software-based administrative and analytical solutions to the managed care industry, and Enterprises, the Company's venture capital unit focused on investments in emerging businesses. In 1998, it included SSJ, a marketer of financial application software products to the Japanese market, which was divested in the first quarter of 1999. CTS delivers life cycle software development and maintenance technology consulting services through the use of a seamless on-site and offshore project teams. These services include application development and maintenance services, Year 2000 and Eurocurrency compliance services, testing and quality assurance services and re-hosting and re-engineering services. Historical results are restated to reflect Gartner and Nielsen Media Research as discontinued operations. (See Note 2. Basis of Presentation). The Company evaluates the performance of its operating segments based on revenue and operating income. 19 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 10. Operations by Business Segment (continued)
Periods Ended September 30, 1999 - - ------------------------------------------------------------------------------------------------------------------- Emerging Three Months: IMS Markets CTS Total -------------------------------------------- Operating Revenue (1) $317,086 $ 12,246 $ 19,077 $348,409 Segment Operating Income 99,418 2,465 4,169 106,052 General Corporate Expenses (2) (10,094) Interest Income (3) 2,264 327 2,591 Interest Expense (4) Non-Operating Income/(Expense): Gains from Dispositions 4,313 4,313 Other Expense - Net (5,359) - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Provision for Income Taxes 97,503 Provision for Income Taxes (27,263) - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 70,240 Income from Discontinued Operations, Net of Income Taxes (5) 1,384 - - ------------------------------------------------------------------------------------------------------------------- Net Income $71,624 - - ------------------------------------------------------------------------------------------------------------------- Nine Months: Operating Revenue (1) $905,719 $ 34,472 $ 54,112 $994,303 Segment Operating Income 230,139 4,685 12,109 246,933 General Corporate Expenses (2) (33,510) Interest Income (3) 5,249 853 6,102 Interest Expense (4) (753) (753) Non-Operating Income/(Expense): Gains from Dispositions 20,590 20,590 Other Expense - Net (15,107) - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Provision for Income Taxes 224,255 Provision for Income Taxes (64,048) - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 160,207 Income from Discontinued Operations, Net of Income Taxes (5) 25,695 - - ------------------------------------------------------------------------------------------------------------------- Net Income $185,902 - - -------------------------------------------------------------------------------------------------------------------
(See Notes to Operations by Business Segments on next page) 20 IMS HEALTH INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Dollar amounts in thousands, except per share data) Note 10. Operations by Business Segment (continued)
Periods Ended September 30, 1998 - - ------------------------------------------------------------------------------------------------------------------- Emerging Three Months: IMS Markets CTS Total -------------------------------------------- Operating Revenue (1) $257,411 $ 12,463 $ 13,732 $283,606 Segment Operating Income 8,922 1,149 2,453 12,524 General Corporate Expenses (2) (7,771) Interest Income (3) 2,806 257 3,063 Interest Expense (4) (178) (178) Non-Operating Income/(Expense): Gains from Dispositions - Net 10,248 10,248 Other Expense - Net 2,379 - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Provision for Income Taxes 20,265 Provision for Income Taxes (5,479) - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 14,786 Income from Discontinued Operations, Net of Income Taxes (5) 10,169 - - ------------------------------------------------------------------------------------------------------------------- Net Income $ 24,955 - - ------------------------------------------------------------------------------------------------------------------- Nine Months: Operating Revenue (1) $730,234 $ 36,306 $ 28,530 $795,070 Segment Operating Income 63,034 1,048 5,141 69,223 General Corporate Expenses (2) (59,654) Interest Income (3) 6,956 337 7,293 Interest Expense (4) (558) (558) Non-Operating Income/(Expense): Gains from Sale of Subsidiary Stock 12,777 Gains from Dispositions - Net 20,663 Other Expense - Net 1,739 - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations Before Provision for Income Taxes 51,483 Provision for Income Taxes (26,703) - - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 24,780 Income from Discontinued Operations, Net of Income Taxes (5) 82,902 - - ------------------------------------------------------------------------------------------------------------------- Net Income $107,682 - - -------------------------------------------------------------------------------------------------------------------
Notes to Operations by Business Segments: (1) Excludes intersegment sales in 1999 of $3,799 and $10,688 for the three and nine month periods presented, respectively. Excludes intersegment sales in 1998 of $2,669 and $10,576 for the three and nine month periods presented, respectively. These sales, primarily from CTS to IMS, are accounted for on a time and materials basis and recognized as the service is performed. (2) General Corporate Expenses in 1999 include $2,000 and $9,500 related to the Gartner Spin-Off for the three and nine month periods presented, respectively. General Corporate Expenses in 1998 include one-time charges of $35,025 related to the Distribution for the nine month period presented. (3) Interest Income in 1999 excludes amounts recorded at Corporate of $269 for the nine month period presented. Interest Income in 1998 excludes amounts recorded at Corporate of $4,178 and $8,817 for the three and nine month periods presented, respectively. (4) Interest expense in 1999 excludes amounts recorded at Corporate of $2,138 and $3,919 for the three and nine month periods presented, respectively. Interest expense in 1998 excludes amounts recorded at Corporate of $157 and $189 for the three and nine month periods presented, respectively. (5) Income from Discontinued Operations, Net of Income Taxes in 1999 includes $1,384 and $25,695 related to Gartner for the three and nine month periods presented, respectively. Income from Discontinued Operations, Net of Income Taxes in 1998 includes $10,169 and $40,809 related to Gartner for the three and nine month periods presented, respectively and $42,093 related to NMR for the nine month period presented. 21 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) This discussion and analysis relates to IMS Health and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. IMS Health consists of the market information and decision support services business for the pharmaceutical and healthcare industries conducted by IMS Health and various subsidiaries ("IMS") including IMS Health Strategic Technologies, Inc. ("Strategic Technologies"); ERISCO Managed Care Technologies, Inc. ("Erisco"); Enterprise Associates LLC ("Enterprises") and a controlling interest (approximately 61% of shares outstanding) in Cognizant Technology Solutions Corporation ("CTS"). Forward-Looking Statements This Quarterly Report on Form 10-Q as well as information included in oral statements or other written statements made or to be made by IMS Health, contain statements which, in the opinion of IMS Health, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These statements appear in a number of places in this quarterly report and include, but are not limited to, all statements relating to plans for future growth and other business development activities as well as capital expenditures, financing sources, dividends and the effects of regulation and competition, Y2K readiness and all other statements regarding the intent, plans, beliefs or expectations of IMS Health or its directors or officers. Stockholders are cautioned that such forward-looking statements are not assurances for future performance or events and involve risks and uncertainties that could cause actual results and developments to differ materially from those covered in such forward-looking statements. These risks and uncertainties include, but are not limited to, risks associated with operating on a global basis, including fluctuations in the value of foreign currencies relative to the U.S. dollar, and the ability to successfully hedge such risks; to the extent IMS Health seeks growth through acquisition, the ability to identify, consummate and integrate acquisitions on satisfactory terms; the ability to develop new or advanced technologies and systems for their businesses on schedule and on a cost-effective basis; the ability to successfully achieve estimated effective tax rates and corporate overhead levels; competition, particularly in the markets for pharmaceutical information; regulatory and legislative initiatives, particularly in the area of medical privacy; the ability to timely and cost-effectively resolve any problems associated with the Y2K issue; the ability to obtain future financing on satisfactory terms; deterioration in economic conditions, particularly in the pharmaceutical, healthcare, or other industries in which customers may operate; conditions in the securities markets which may effect the value or liquidity of portfolio investments and management's estimates of lives of assets, recoverability of assets, fair market value, estimates and liabilities and accrued income tax benefits and liabilities. Consequently, all the forward-looking statements contained in this Quarterly Report on Form 10-Q are qualified by the information contained herein, including, but not limited to, the information contained under this heading and the condensed consolidated financial statements and notes thereto for the three and nine month periods ended September 30, 1999. IMS Health is under no obligation to publicly release any revision to any forward-looking statement contained or incorporated herein to reflect any future events or occurrences. 22 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Spin-Off of Equity Investment in Gartner On November 11, 1998 the Company announced that its Board of Directors had approved a plan, subject to numerous conditions, to spin-off substantially all of its equity ownership of Gartner. The transaction was structured as a tax-free distribution of Gartner stock to IMS Health shareholders and the Company received a favorable ruling from the Internal Revenue Service ("IRS") regarding the tax-free nature of the proposed transaction. On July 16, IMS Health and Gartner Board of Directors approved the final plan, terms and conditions governing the spin-off of the Company's investment in Gartner Group. Accordingly, pursuant to Accounting Principles Board No. 30, "Reporting the results of Operations - Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occuring Events and Transactions", the condensed consolidated financial statements of the Company have been reclassified to reflect Gartner equity investment as a discontinued operation for all periods presented. The Gartner spin transaction is discussed in more detail in Note 3. Investment in Gartner Group Stock. 23 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Walsh Acquisition On June 24, 1998, Cognizant acquired Walsh International, Inc. ("Walsh"). (See Note 5. Acquisitions). The severance costs included in the final purchase price are related to approximately 80 terminated Walsh employees. The outstanding employee separation costs are due to be paid in the fourth quarter of 1999 and the first quarter of 2000. The Company incurred higher than anticipated severance costs and restructured acquired Walsh leases at a cost lower than originally anticipated. To reflect the net reduction in costs, the original liability estimate, and goodwill, have been reduced by $890. The following table displays the status of such activities:
Original Liability Expenditures to September 30, 1999 Estimate Date Reclassifications Balance - - --------------------------------------------------------------------------------------------------------- Employee Separation $ 4,876 $ (4,602) $ 1,278 $ 1,552 Lease Terminations 2,569 (256) (2,168) 145 Other Direct Costs 9,634 (9,634) 0 0 - - --------------------------------------------------------------------------------------------------------- Total $ 17,079 $ (14,492) $ (890) $ 1,697 - - ---------------------------------------------------------------------------------------------------------
PMSI Acquisition On August 5, 1998, IMS Health acquired certain non-U.S. assets of Pharmaceutical Marketing Services Inc. ("PMSI"). (See Note 5. Acquisitions). The severance costs included in the final purchase price are related to 63 terminated PMSI employees. As of September 30, 1999, the severance costs and the costs of terminating various leaseholdings were lower than originally anticipated. However, the Company has incurred higher costs related to contract cancellations and other costs such as legal fees. The following table displays the status of such activities: 24 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data)
Original Liability Expenditures to September 30, 1999 Estimate Date Reclassifications Balance - - --------------------------------------------------------------------------------------------------------- Employee Separation $ 3,794 $ (3,342) $ (11) $ 441 Lease Terminations 1,623 (774) (849) 0 Contract Cancellations 10,935 (5,345) 835 6,425 Other Direct Costs 6,232 (6,232) $ 25 25 - - --------------------------------------------------------------------------------------------------------- Total $ 22,584 $ (15,693) $ 0 $ 6,891 - - ---------------------------------------------------------------------------------------------------------
Purchase Price Allocation In connection with the Walsh and the PMSI acquisition, the Company made allocations of the purchase price to acquired in-process research and development ("IPR&D"). (See Note 5. Acquisitions). Management continues to support the IPR&D efforts that were underway at the time of the Walsh and PMSI acquisitions. IMS Health is currently on target to begin realizing the estimated benefits from these various projects through product introductions at various launch dates through January 2000. There are currently no material variations from the underlying projections and assumptions made at the time of the purchase price allocations. Operations Effective in the first quarter of 1999, IMS operating units that previously reported on a fiscal year ended November 30 revised their reporting period to conform to the Company's fiscal year ended December 31 (the "Calendarization"). (See Note 2. Basis of Presentation) Revenue for the third quarter of 1999 increased by 22.8% to $348,409 from $283,606 for the third quarter of the prior year. Year-to-date revenue increased 25.1% to $994,303 from $795,070 for the comparable period a year ago. Adjusting the quarter and year-to-date 1998 for the Calendarization and the sale of Super Systems Japan kk ("SSJ"), revenue increased by 15.8% and 21.7%, respectively. This increase reflected double-digit constant dollar revenue growth at IMS, Erisco and CTS and is further described in the Results by Business Segment discussion (below). The impact of a stronger U.S. dollar decreased reported revenue by less than 0.5% for the quarter and year-to-date, including the impact of the Company's hedging program. Operating income for the third quarter of 1999 was $95,958, compared to $4,753 for the third quarter of the prior year. Operating results in the third quarter of 1999 and 1998 include Year 2000 costs ("Y2K Costs") of $4,189 and $11,780, respectively. Adjusting for Y2K Costs, 1999 charges related to the Gartner Spin-Off ($2,000), the Calendarization ($11,724), the 1998 in-process research and development write-off ($10,900) and the 1998 direct acquisition and integration costs related to the PMSI acquisition ($43,019), operating income for the third quarter of 1999 increased by 24.3%. Year-to-date operating income was $213,423 compared with $9,569 for the comparable period a year ago. Year-to-date operating results in 1999 and 1998 include Y2K Costs of $19,989 and $34,081, respectively. Adjusting for Y2K Costs, 1999 charges related to the Gartner Spin-Off ($9,500), the Calendarization ($26,631), 1998 charges related to the Distribution ($35,025), the 1998 research and development write-off ($32,800) and 1998 direct acquisition and integration costs ($48,019) related to the Walsh and PMSI acquisitions, year-to-date operating income for 1999 increased by 30.5%. 25 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Operations (continued) Adjusted operating income growth in the 1999 third quarter and year-to-date outpaced revenue growth due primarily to the Company's ability to leverage its worldwide resources. The impact of a stronger U.S. dollar affected operating income growth by less than 2% in the third quarter and less than 0.5% year-to-date, including the impact of the Company's hedging program. Non-operating income-net for the third quarter of 1999 was $1,545 compared with $15,512 for the third quarter of the prior year. The decrease is due primarily to reduced gains related to the sale of Enterprise investments ($4,823), reduced interest income from lower cash balances ($4,650) and increased expense on short term borrowings ($1,803). Year-to-date non-operating income-net was $10,832 compared with $41,914 for the comparable period a year ago. The decrease is due primarily to 1998 gains related to the CTS IPO ($12,777), reduced gains related to the sale of Enterprise investments ($1,872), reduced interest income on lower cash balances ($9,739) and increased interest expense on short term borrowings ($3,925). The third quarter 1999 effective tax rate of 28.0% reflected a non-deductible one-time charge of $2,000 related to the Gartner Spin-Off. The third quarter 1998 effective tax rate of 27.0% reflected the research and development write-off related to the PMSI acquisition ($10,900), which did not give rise to a tax benefit. The Company's effective tax rate is attributable to numerous tax planning initiatives. For example, to consolidate certain of its international operations, in 1999 and 1998 the Company engaged in certain non-U.S. reorganizations which give rise to tax deductable non-U.S. intangible assets. The Company's year-to-date effective tax rate of 28.6% reflected a non-deductible one-time Gartner spin-related charge ($9,500). The 1998 year-to-date effective tax rate of 51.9% reflected non-deductible charges related to the Distribution ($30,125), the research and development write-off related to the Walsh and PMSI acquisitions ($32,800) and certain direct acquisition and integration costs related to both acquisitions, which did not give rise to a tax benefit. Income from continuing operations in the third quarter of 1999 was $70,240, compared with $14,786 in the third quarter of the prior year. Excluding the after-tax impact of Y2K costs and net gains associated with investments from both years, charges related to the 1999 Gartner Distribution, the 1998 CTS IPO gain, 1998 direct acquisition and integration costs related to the PMSI acquisition and the 1998 in-process research and development write-off, income from continuing operations in the third quarter of 1999 increased 11.2%. Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's recurring tax rate of $27.4%, income from continuing operations for the quarter increased to 16.3%. Year-to-date income from continuing operations was $160,207 compared with $24,780 for the comparable period ago. Excluding the after-tax impact of Y2K costs and net gains associated with investments in both years, 1999 charges related to the Gartner Spin-Off, the 1998 CTS IPO gain, 1998 charges related to the Distribution, the 1998 in-process research and development write-off and 1998 direct acquisition and integration costs related to the Walsh and PMSI acquisitions, year-to-date income from continuing operations increased 15.6%. Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's recurring tax rate of 27.4%, year-to-date income from continuing operations increased 21.0%. Income from discontinued operations, net of income taxes, in the third quarter of 1999 was $1,384, compared with $10,169 in the third quarter of the prior year. Income from discontinued operations net of income taxes represents Gartner equity income through July 1999 and SAB 51 gains from Gartner in 1998. 26 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Operations (continued) Year-to-date income from discontinued operations, net of income taxes, was $25,695, compared with $82,902 for the comparable period a year ago. Income from discontinued operations net of income taxes represents Gartner equity income in both years and SAB 51 gains from Gartner and six months of the results of Nielsen Media Research in 1998. Net income for the third quarter of 1999 was $71,624, an increase of 187.0% from net income of $24,955 in the third quarter of the prior year. Year-to-date net income increased 72.6% to $185,902 from $107,682 for the comparable period a year ago. Basic earnings per share in the third quarter of 1999 were $0.23 compared with $.05 in the third quarter of the prior year. Excluding the impact of the previously identified one-time items, at a continuing operations tax rate of 27.4% and 24.1% in 1999 and 1998, respectively, basic earnings per share from continuing operations for the quarter increased 9.5%. Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's recurring tax rate of 27.4% basic earnings per share for the quarter increased 21.1%. Year-to-date basic earnings per share in 1999 were $0.51 compared with $.08 for the comparable period a year ago. Excluding the impact of the previously identified one-time items, at a continuing operations tax rate of 27.4% and 24.1% in 1999 and 1998, respectively, year-to-date basic earnings per share from continuing operations increased 20.0%. Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's recurring tax rate of 27.4%, year-to-date basic earnings per share increased 25.6%. Diluted earnings per share in the third quarter of 1999 were $0.22 compared with $0.04 in the third quarter of the prior year. Excluding the impact of the previously identified one-time items, at a continuing operations tax rate of 27.4% and 24.1% in 1999 and 1998, respectively, diluted earnings per share from continuing operations for the quarter increased 15.0%. Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's recurring tax rate of 27.4%, diluted earnings per share for the quarter increased 21.1%. Year-to-date diluted earnings per share in 1999 were $0.50 compared with diluted earnings per share of $.07 for the comparable period a year ago. Excluding the impact of the previously identified one-time items, at a continuing operations tax rate of 27.4% and 24.1% in 1999 and 1998, respectively, year-to-date diluted earnings per share from continuing operations increased 23.3%. Further, adjusting the 1998 tax rate to mitigate the impact of the Gartner Spin-Off on the Company's recurring tax rate of 27.4%, year-to-date diluted earnings per share increased 26.2% Results by Business Segment IMS Segment The IMS segment consists of IMS, the leading global provider of market information and decision-support services to the pharmaceutical and healthcare industries, and Strategic Technologies, a leading provider of automated sales support technologies to the pharmaceutical industries. IMS Segment revenue for the third quarter of 1999 increased 23.2% to $317,086 from $257,411 in the third quarter of the prior year. Adjusting 1998 revenue for the Calendarization 27 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) IMS Segment (continued) revenue for the third quarter 1999 increased by 14%. Market Research Products increased 10.6% to $108,737, Sales Management Products increased 17.8% to $170,526 and Other Services increased 11.3% to $37,823. This growth was due primarily to the strong performance of Sales Management Products and Services, introduction of new products and expansion in existing markets. Third quarter 1999 operating income increased to $99,418 from $8,922 in the prior year. Excluding Y2K costs in both years, the Calendarization and the 1998 direct acquisition and integration costs related to the PMSI acquisition and the 1998 in-process research and development write-off, operating income for 1999 increased 20.3%. Adjusted operating income growth outpaced revenue growth due primarily to the segment's ability to leverage its worldwide resources. Year-to-date IMS Segment revenue increased 24.0% to $905,719 from $730,234 in the prior year. Adjusting for the Calendarization revenue for the first nine months of 1999 increased by 19%. Market Research Products increased 8.6% to $301,874, Sales Management Products increased 25.6% to $496,091 and Other Services increased 23.76% to $107,754. This growth was due primarily to the strong performance of Sales Management Products and Services, introduction of new products, expansion in existing markets and the impact of the Walsh and PMSI acquisitions. IMS Segment operating income for the first nine months of 1999 increased to $230,139 from $63,034 in the first nine months of the prior year. Excluding Y2K costs, the impact of the Calendarization, the 1998 direct acquisition and integration costs related to the Walsh and PMSI acquisitions and the 1998 in-process research and development write-off, operating income for the first nine months of 1999 increased 23.4%. Emerging Markets Segment The Emerging Markets segment includes Erisco, a leading supplier of software-based administrative and analytical solutions to the managed care industry, and Enterprises, the Company's venture capital unit focused on investments in emerging businesses. In 1998, this segment included SSJ, which was divested in the first quarter of 1999. Emerging Markets revenue for the third quarter of 1999 decreased 1.7% to $12,246 from $12,463 in the prior year. This decrease was due primarily to the absence of revenues from SSJ during 1999. Excluding SSJ, Emerging Markets revenue for the third quarter of 1999 increased by 22.4%. Operating income increased to $2,465 in the third quarter from $1,149 in the third quarter of the prior year. Excluding SSJ, operating income for the third quarter of 1999 increased 77.1%. Emerging Markets revenue for the first nine months of 1999 decreased 5.1% to $34,472 from $36,306 in the prior year. This decrease was due primarily to the absence of revenues from SSJ during 1999. Excluding SSJ, year-to-date Emerging Markets revenue increased by 20.7%. Year-to-date 28 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Emerging Markets Segment (continued) Emerging markets operating income increased to $4,685 from $1,048 for the comparable period a year ago. CTS Segment CTS delivers life cycle software development and maintenance technology consulting services through the use of a seamless on-site and offshore project team. These services include application development and maintenance services, Year 2000 and Eurocurrency compliance services, testing and quality assurance services and re-hosting and re-engineering services. CTS revenue, net of intersegment sales, increased to $19,077 in the third quarter of 1999 from $13,732 in the prior year. The increase is due to continuing strong demand for application development and maintenance, Euro currency compliance services, the addition of new customers and further penetration of its existing client base to generate new project work. Operating income increased to $4,169 from $2,453 in the third quarter of the prior year. Year-to-date CTS revenue net of intersegment sales, increased 89.7% to $54,112 from $28,530 in the prior year. Year-to-date CTS operating income increased 135.5% to $12,109 from $5,141 for the comparable period a year ago. Condensed Consolidated Statement of Cash Flows Net cash provided by operating activities totaled $231,758 for the nine months ended September 30, 1999 compared with $155,559 in 1998. The $76,199 increase was due primarily to increased income from continuing operations ($135,427) and higher income tax accruals ($42,007), which were partially offset by lower deferred revenues ($30,744) and the absence of the 1998 IPR&D write-off ($32,800) and direct acquisition and integration costs ($48,019). As a consequence of accounting for the Calendarization through retained earnings, the December 1998 cash flows from IMS operating units are not included in the Company's net cash provided by operating activities for the nine months ended September 30, 1999. During the month of December 1998, IMS generated $30,664 of cash, including a significant decrease in accounts receivable ($35,353). Net cash used in investing activities totaled $60,473 for the first nine months of 1999 compared with $30,750 used during the comparable period in 1998. The $29,723 increase was due primarily to 1999 acquisition and integration payments ($28,248) and 1998 cash from companies acquired ($11,895), partially offset by lower expenditure on other investments ($4,205) and higher proceeds from sale of investments ($4,327). Net cash used in financing activities totaled $222,675 for the nine months ended September 30, 1999 compared with $100,215 used in 1998. The increase of $122,460 was due primarily to 1998 proceeds received from debt assumed by Nielsen Media Research ($300,000) and the CTS IPO ($27,128) and lower 1999 proceeds from the exercise of stock options ($38,969), partially offset by lower purchases of treasury stock ($151,008) and increased proceeds from short-term 29 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Condensed Consolidated Statement of Cash Flows (continued) debt ($94,972, net of repayments). Short-term borrowings have been used to partially fund the Company's stock repurchase program. Cash flow from discontinued operations was $52,877 for the first nine months of 1999 compared with an outflow of $17,173 in 1998. The Gartner dividend accounted for all of the cash flow from discontinued operations in 1999 and Nielsen Media Research discontinued operations accounted for all of the 1998 cash outflow from discontinued operations. The Company's cash, cash equivalents, marketable securities, cash generated from operations and debt unutilized capacity are expected to be sufficient to meet the Company's current long-term and short-term requirements including operations, cash dividends, acquisitions, stock repurchase programs and other contingencies. Changes in Financial Position at September 30, 1999 Compared to December 31, 1998 Cash & Cash Equivalents increased to $230,714 at September 30, 1999 from $206,390 at December, 1998 due primarily to cash generated from operating activities ($231,758), the Gartner dividend ($52,877), proceeds from the disposal of investments ($46,759) and cash provided by the IMS operating units during December 1998 ($30,664), partially offset by payments for the purchase of treasury stock ($359,859). Accounts Receivable decreased to $246,991 at September 30, 1999, from $324,219 at December 31, 1998, due primarily to increased collections. Days sales outstanding improved to 64 days at the end of the quarter compared to 100 days as of December 31, 1998. Net Assets of Discontinued Operations decreased to $100,356 at September 30, 1999, from $240,708 at December 31, 1998 reflecting primarily the Gartner Spin-Off ($132,104) and special cash dividend ($52,877, net of taxes ), partially offset by the after-tax equity income from Gartner ($25,695) and unrealized gain in the Gartner shares. (See Note 3. Investment in Gartner Group Stock) Securities and Other Investments decreased to $82,455 at September 30, 1999, from $106,276 at December 31, 1998, due primarily to the net reductions in the Enterprise portfolio of investments arising from additions, disposals and marking investments to market value. Short Term Debt increased to $168,834 at September 30, 1999, from $39,169 at December 31, 1998, due primarily to increased borrowings to partially fund the Company's stock re-purchase program. The July receipt of the Gartner dividend ($52,877) was used to pay down short-term borrowing. 30 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Changes in Financial Position at September 30, 1999 Compared to December 31, 1998 (continued) During the third quarter, the Company purchased 5.1 million shares of outstanding stock for a total cost of $137,208. The Company's third share repurchase program was completed in October. On October 19, 1999, the Company's Board of Directors authorized a fourth systematic stock repurchase program of up to 16 million shares, which is underway. As of November 12, 1999, the Company had U.S. short term debt of $226,700, an increase since September 30, which reflects primarily the funding of the share repurchases thus far in the fourth quarter. Accrued Liabilities decreased to $222,353 at September 30, 1999, from $298,625 at December 31, 1998 due primarily to payments related to the PMSI and Walsh accrued direct acquisition and integration costs and a lower level of accruals for salaries, wages, bonuses and other compensation. Accrued Taxes increased to $81,900 at September 30, 1999, from $32,537 at December 31, 1998. The increase of $49,363 reflected a reduction of a tax receivable included in accrued taxes relating to a tax refund from Germany received during the quarter. Deferred Revenue decreased to $102,349 at September 30, 1999, from $128,272 at December 31, 1998 due primarily to the amortization of annual contracts billed in advance at December 31, 1998 and the effect of the Calendarization. Shareholders' Equity decreased to $516,491 at September 30, 1999, from $825,270 at December 31, 1998 due primarily to the purchase of treasury stock ($359,859), the Gartner Spin-Off ($134,259), change in the cumulative translation adjustment ($21,133) and dividends paid ($18,923), partially offset by net income ($185,902), December equity changes ($4,449) and the change in unrealized gains on investments ($5,893). Year 2000 Many computer systems and software applications use two digits, rather than four, to record years (for example "98" instead of "1998"). Unless modified, such systems will not properly record or interpret years after 1999, which could lead to business disruptions. This is known as the "Year 2000 issue" ("Year 2000"). Assessments of the potential effects of the Year 2000 issue vary markedly among different companies, governments, consultants and economists which results in the inability to predict what the actual impact may be. The Company began to address the Year 2000 issue in 1996. In 1997, the Company created a Year 2000 Task Force (the "Task Force") to manage overall risks and to facilitate activities across the entire Company. The Task Force, in consultation with operating personnel, evaluated whether conversion or replacement and enhancement (i.e. "reengineering") was necessary. CTS was engaged to do work on a significant portion of conversion and reengineering projects to allow most internal staff members to focus on the core business. The Company has also used outside services to assist in conversions, reengineering and the assessment of progress of its Year 2000 program. 31 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Year 2000 (continued) The Task Force developed a conversion methodology that included three phases: analysis, coding and testing, and testing and implementation. The analysis phase includes planning, inventory and impact analysis. The coding and testing phase involves code changes, using conversion rules and criteria and unit testing, verifying and documenting the results of the conversion. The testing and implementation phase includes system test across platforms and verification of data, an acceptance test within the user environment, and implementation or releasing the systems back into production. This conversion methodology has been utilized throughout the Company to achieve substantial systems compliance by the Year 2000. The reengineering projects followed the same procedures as are used for new product development including customer requirements, development, testing and rollout. The creation of customer products relies on the receipt of data from external data suppliers and the Company's ability to convert the data and deliver the information to its customers. The consolidation of the data is principally performed at central processing locations. The Company believes central systems represent approximately 85% of its Year 2000 conversion efforts. The Company operates central processing facilities in Germany, England, the United States and Japan. The systems at these sites contained the most lines of code required to undergo conversion. At September 30, 1999, the Company has completed 99% of Year 2000 conversions at central processing locations. IMS Health continues to enhance its existing product portfolio and continues to launch new products. There is an ongoing effort to ensure this software is Year 2000 compliant. As an alternative to conversions and as a result of business needs for individual products, the Company has decided to replace and enhance certain non-compliant software. There are only two reengineered systems remaining to be completed. Core development has been completed for these systems and they are Y2K enabled. Only country-based customization for these products remains, with implementation scheduled for the fourth quarter of 1999. The data in these country-specific customization systems is offered as a stand-alone product and also feed into other IMS products and services. In the event there are delays in the rollout of any of these country-specific reengineered systems, the Company believes the revenue impact will not be material to the Company as a whole. The Company operates local offices in over 90 countries with about half of them using systems for data collection, panel administration and customized local requirements. Varied approaches have been utilized to ensure Year 2000 compliance, including the replacement of localized systems with central systems and the conversion of the local system. In some cases, specialized teams from CTS were used to assist the local offices with all phases of their system conversions and hardware compliance. At September 30, 1999, the Company has completed 98% of Year 2000 conversions of local systems and personal computer applications across the world. 32 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Year 2000 (continued) The Company's Year 2000 project incorporates administrative operations systems and software such as accounts receivable, accounts payable, general ledger and payroll. These systems are 99% compliant. The Year 2000 readiness of the Company's customers varies, and the Company is actively encouraging its customers to prepare their own systems for the millennium. The Company continues to emphasize the importance for customers of installing Y2K compliant versions and we anticipate 99% in production by December 31, 1999. As data and services are often transmitted electronically, to the extent that there are disruptions in the customer or the Company's internal operations, the customer may not be able to make normal use of the Company's products or services. Additional risk includes disruptions in critical services on which the Company relies such as electricity, telephone systems and banking services. The Company developed an internal audit program that examines the testing and effectiveness of controls, assesses the accuracy and completeness of inventories and reviews the documentation for completeness and accuracy. The Company continues to audit central systems and local country conversions with the assistance of CTS and outside consultants. To date over 95% of IMS Health revenue has been audited for Year 2000 compliance. These audits will continue throughout the world until Year 2000 with several sites revisited to ensure continued compliance. The Company engaged TRW to conduct an audit review of the Year 2000 program for business critical and mission critical systems in sixteen locations. These audits were conducted in the first half of 1999 and focused on survivability, preparedness and due diligence in addressing the Year 2000 problem. Issues identified as a result of these audits were initially responded to and necessary actions as well as contingency planning will continue throughout the end of the year. The Company relies on tens of thousands of suppliers of electronic data in the healthcare industry and has been proactive in working with these suppliers to determine their Year 2000 readiness and ability to maintain data flow continuity. A program consisting of seminars, visits, mailings and telephone calls continues to be administered to track the status of and to assess and address risks associated with Year 2000 readiness by the Company's key data suppliers. The Company assesses risk regarding the readiness of its data suppliers through the use of detailed questionnaires regarding Year 2000 conversion plans in order to verify the supplier's ability to continue to deliver data. As a contingency, statistically valid methods of data extrapolation have been developed in the event the supply of data from a limited number of suppliers is incomplete or found to be unusable. Investigation of alternate sources is pursued when the risk assessment determines the data source to have a high risk of impacting the Company's ability to deliver products and services. Some of the Company's data suppliers could be disrupted due to Year 33 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Year 2000 (continued) 2000 problems with their internal systems or circumstances beyond their control, such as power outages. As these instances are out of the Company's direct control, the magnitude of the risk depends on the speed in which the Company and the supplier can mitigate the problem. The Company's most recent assessment indicates that the primary risk continues to be with hospital information in certain countries, which the Company believes will not have a material impact on the consolidated revenues of the Company. As year end approaches, the Company will continue to focus its Year 2000 efforts on (i) the implementation of reengineered products and services; (ii) the continued assessment of supplier readiness to address the Year 2000 conversion; and (iii) finalizing contingency plans to address unanticipated issues. The Company is establishing an operational command center to coordinate the rollover from 1999 into 2000. For each area of the business, specific individuals are responsible for the development and execution of recovery plans, if deemed necessary. External and internal costs of addressing the Year 2000 issue are expensed as incurred. It is currently estimated that the aggregate cost of the Company's Year 2000 program will be approximately $76,000 to $80,000. Through September 30, 1999, the Company has incurred $74,730 of which $44,922 was incurred in 1998. The Company expects to incur between $2,000 and $5,000 during the remainder of 1999. These estimates do not include the costs of software and systems that are being replaced or enhanced in the normal course of business. The cost of addressing the Year 2000 issue and the dates which the Company currently expects to complete Year 2000 compliance are based on the current best estimates of management, which are derived utilizing various assumptions regarding the future events. There can be no guarantee that these estimates will be achieved, and actual results may differ. Specific factors that may cause such differences include, but are not limited to, the availability and cost of personnel trained in this area of expertise, the ability to locate and correct all relevant computer codes, and the success of customers and suppliers in addressing the Year 2000 issue. The Company's plans are dependent on industries out of the Company's direct control such as utilities and transportation. The above expectations are subject to uncertainties. For example, if the Company is unsuccessful in identifying or fixing all Year 2000 problems in its critical operations, or effected by the inability of its data suppliers or major customers to continue operations due to such a problem, the Company's results of operations or financial condition could be materially impacted. The Year 2000 statements set forth above are designated as "Year 2000 Readiness Disclosures" pursuant to the Year 2000 Information Readiness Disclosure Act (P.L. 105-271). 34 IMS HEALTH INCORPORATED Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in thousands, except per share data) Euro Conversion On January 1, 1999, 11 member countries of the European Union established fixed exchange rates between their existing currencies and the European Union's common currency ("Euro"). The transition period for the introduction of the Euro is between January 1, 1999 and January 1, 2002. The Company instituted plans for the introduction of the Euro and addressed the related issues, including the conversion of information technology systems, recalculating currency risk, recalibrating derivatives and other financial instruments, continuity of contracts, taxation and accounting records, and the increased price transparency resulting from the use of a single currency in eleven participating countries which may affect the ability of some companies to price products differently in the various European markets. The Company believes that differences in national market size, data collection requirements and specific product specifications required due to the diverse market information needs in the healthcare markets of Europe will reduce the potential for price harmonization in most of the Company's product ranges. IMS Health's expectations regarding the Euro currency issue are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the ability or willingness of third parties to convert systems in a timely manner and the actions of governmental agencies or other third parties with respect to Euro currency issues. 35 IMS HEALTH INCORPORATED PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 10 Material Contracts .1 First Amendment to the IMS Health Incorporated Savings Plan, dated as of July 19, 1999. .2 First Amendment to the IMS Health Incorporated Retirement Plan, dated as of July 19, 1999. .3 Amended and Restated 1998 IMS Health Incorporated Employees' Stock Incentive Plan dated July 20, 1999. .4.1 IMS Health Incorporated Executive Deferred Compensation Plan, dated July 20, 1999 .4.2 Selected portions of the Prospectus Supplement, dated September 27, 1999 setting forth certain terms and conditions of the Executive Deferred Compensation Plan for U.S. employees. .4.3 Selected portions of the Private Placement Memorandum, dated September 27, 1999 setting forth certain terms and conditions of the Executive Deferred Compensation Plan for U.S. employees. .5 Second Amendment to the IMS Health Incorporated Savings Plan, dated as of September 1, 1999. .6 First Amendment to the IMS Health Incorporated Supplemental Executive Retirement Plan, dated September 1, 1999. .7 First Amendment to the IMS Health Incorporated Retirement Excess Plan, dated September 1, 1999. .8 First Amendment to the IMS Health Incorporated Savings Equalization Plan, dated September 1, 1999. 27 Financial Data Schedules (b) Reports on 8-K: There were no reports on Form 8-K filed during the quarter ended September 30, 1999. 36 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/ J. MICHAL CONAWAY -------------------------------------------- J. Michal Conaway Chief Financial Officer By: /s/ JAMES C. MALONE -------------------------------------------- James C. Malone Senior Vice President - Finance & Controller Date: November 15, 1999 37 EX-10.1 2 FIRST AMENDMENT TO THE IMS HEALTH INCORPORATED Exhibit 10.1 FIRST AMENDMENT TO THE IMS HEALTH INCORPORATED SAVINGS PLAN EFFECTIVE AS OF JULY 19, 1999 1. Article I of the IMS Health Incorporated Savings Plan (the "Plan") is hereby amended by deleting therefrom Section 1.11. 2. Article I of the Plan is hereby further amended by adding the following new Section 1.60 to the end thereof, to read in its entirety as follows: "1.60 `PLAN ADMINISTRATOR' shall mean the Company, except that any action authorized to be taken by the Plan Administrator hereunder may also be taken by any committee or person(s) duly authorized by the Board or the duly authorized delegees of such duly authorized committee or person(s)." 3. The Plan is hereby further amended by deleting therefrom all references to the term "Committee" and replacing therefor the term "Plan Administrator." 4. Sections 12.1 and 12.2 of the Plan are hereby amended to read in their entirety as follows: "12.1 VOTING OF SHARES. Each Member shall have the right and shall be afforded the opportunity to direct the manner in which whole shares of the common stock held in any Fund designated to invest in securities of the Employer or Predecessor Employer (or securities of any unrelated company that may be distributed with respect to the securities of the Employer or Predecessor Employer by reason of a spin-off or otherwise), and attributable to his or her Account as of the Valuation Date coincident with or preceding the record date shall be voted at all stockholders' meetings. The Funding Agent shall confidentially receive and tally the instructions from Members. The Funding Agent shall not disclose such instructions to the Employer or the Plan Administrator or any officer, director or Affiliate. Any stock for which a signed voting direction instrument is not received from the Member, or is not subject to being received, shall be voted by the Funding Agent in the same proportion as the stock for which signed voting-direction instruments are received as to the matter to be voted upon. 12.2 TENDER OFFERS. A Member may direct the Funding Agent in writing how to respond to a tender or exchange offer for any or all whole securities held in any Fund designated to invest in securities of the Employer (or securities of any unrelated company that may be distributed with respect to the securities of the Employer or Predecessor Employer by reason of a spin-off or otherwise), and attributable to his or her Account as of the Valuation Date preceding, or coincident with, the offer. A Member's instructions hereunder shall be confidential and shall not be disclosed to the Employer or the Plan Administrator. The Plan Administrator shall notify each Member and timely distribute or cause to be distributed to him or her such information as will be distributed to securityholders in connection with any such tender or exchange offer. The Funding Agent shall confidentially receive instructions from Members and shall not disclose such instructions to the Employer or the Plan Administrator. Upon receipt of such instructions, the Funding Agent shall tender such securities as and to the extent so instructed. If the Funding Agent shall not receive instructions with respect to a Member regarding any such tender or exchange offer for such shares of stock (or shall receive instructions not to tender or exchange such shares), the Funding Agent shall have no discretion in such matter and shall take no action with respect thereto. Any shares for which instructions are not subject to being received shall be tendered by the Funding Agent only in the same proportion as the stock for which instructions to tender are received. Any securities received by the Funding Agent as a result of a tender of securities shall be held, and any cash so received, shall be invested in short-term investments for the Account of the Member with respect to whom shares were tendered pending any reinvestment by the Funding Agent consistent with the purpose of the Plan." -2- 5. The Plan is hereby further amended by deleting therefrom subsection (a)(10) of Section 13.1. 6. The Plan is hereby further amended by deleting therefrom Section 13.2. 7. Section 13.3 of the Plan is hereby amended to read in its entirety as follows: "13.3 INDEMNIFICATION. In each case in which a director, officer or Employee of an Employer is or was serving at the request of the Board as the Plan Administrator or as a member of a committee authorized to act on behalf of the Plan Administrator, the Employer, by the adoption of this Plan, indemnifies and holds such person or the members of such committee (including their delegees), jointly and severally, harmless from the effects and consequences of their acts, omissions, and conduct in their official capacities, except to the extent that the effects and consequences result from their own willful misconduct or gross negligence in the performance of their duties. The foregoing right of indemnification will not be exclusive of other rights to which each such individual may be entitled by any contract or other instrument or as a matter of law." 8. Section 13.5 of the Plan is hereby amended by deleting the first sentence thereof. 9. Section 15.1 of the Plan is hereby amended to read in its entirety as follows: "15.1 RIGHT TO AMEND THE PLAN. The Board has delegated to the Employee Benefits Committee appointed by the Board the right at -3- any time to amend the Plan, provided that any such amendment could not significantly affect the cost of the Plan. If an amendment could significantly affect the cost of the Plan, then such amendment may only be adopted by the Board. Any amendment adopted by the Employee Benefits Committee or the Board shall be binding upon each Employer. Except as provided in Section 17.2, no such amendment(s) shall have the effect of reverting to the Employer the whole or any part of the principal or income for purposes other than for the exclusive benefit of Members or Beneficiaries at any time prior to the satisfaction of all the liabilities under the Plan with respect to such persons. No amendment shall reduce a Member's Account balance on the effective date of the Plan amendment or eliminate an optional form of benefit under the Plan with respect to the Member's Account balance on the date of the amendment." -4- EX-10.2 3 FIRST AMENDMENT TO THE IMS HEALTH INCORPORATED Exhibit 10.2 FIRST AMENDMENT TO THE IMS HEALTH INCORPORATED RETIREMENT PLAN EFFECTIVE AS OF JULY 19, 1999 1. Article I of the IMS Health Incorporated Retirement Plan (the "Plan") is hereby amended by deleting therefrom Section 1.12. 2. Article I of the Plan is hereby further amended by adding the following new Section 1.56 to the end thereof, to read in its entirety as follows: "1.56 'PLAN ADMINISTRATOR' shall mean the Company, except that any action authorized to be taken by the Plan Administrator hereunder may also be taken by any committee or person(s) duly authorized by the Board or the duly authorized delegees of such duly authorized committee or person(s)." 3. The Plan is hereby further amended by deleting therefrom all references to the term "Committee" and replacing therefor the term "Plan Administrator." 4. The Plan is hereby further amended by deleting therefrom subsection (a)(10) of Section 10.1. 5. The Plan is hereby further amended by deleting therefrom Section 10.2. 6. Section 10.3 of the Plan is hereby amended to read in its entirety as follows: "10.3 INDEMNIFICATION. In each case in which a director, officer or Employee of an Employer is or was acting by authority of the Board to carry out duties of the Plan Administrator either individually or as a member of a committee, the Employer, by the adoption of this Plan, shall indemnify and hold such person or the members of such committee (including their delegees), jointly and severally, harmless from the effects and consequences of their acts, omissions, and conduct in their official capacities, except to the extent that the effects and consequences result from their own willful misconduct or gross negligence in the performance of their duties. The foregoing right of indemnification will not be exclusive of other rights to which each such individual may be entitled by any contract or other instrument or as a matter of law." 7. Section 10.5 of the Plan is hereby amended by deleting the first sentence thereof. 8. Section 12.1 of the Plan is hereby amended to read in its entirety as follows: "12.1 RIGHT TO AMEND THE PLAN. The Board has delegated to the Employee Benefits Committee appointed by the Board the right at any time to amend the Plan, provided that any such amendment could not significantly affect the cost of the Plan. If an amendment could significantly affect the cost of the Plan, then such amendment may only be adopted by the Board. Any amendment adopted by the Employee Benefits Committee or the Board shall be binding upon each Employer. Except as provided in Section 13.1 or 17.2, no such amendment(s) shall have the effect of reverting to the Employer the whole or any part of the principal or income for purposes other than for the exclusive benefit of Members or Beneficiaries at any time prior to the satisfaction of all the liabilities under the Plan with respect to such persons. No amendment shall reduce a Member's Accrued Benefit as of the effective date of the Plan amendment or eliminate an optional form of benefit under the Plan with respect to the Member's Accrued Benefit on the date of the amendment." -2- EX-10.3 4 1998 IMS STOCK INCENTIVE PLAN Exhibit 10.3 1998 IMS HEALTH INCORPORATED EMPLOYEES' STOCK INCENTIVE PLAN (As amended and restated effective July 20, 1999) 1. PURPOSE OF THE PLAN The purpose of the Plan is to aid the Company and its Subsidiaries in securing and retaining employees of outstanding ability and to motivate such employees to exert their best efforts on behalf of the Company and its Subsidiaries by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such employees will have in the welfare of the Company as a result of their proprietary interest in the Company's success. 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 LIMIT: The limitation on the amount of certain Awards intended to qualify as "performance-based compensation" that may be granted to a given Participant each year. (c) AWARD: An Option, Stock Appreciation Right or Other Stock-Based Award 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 after Effective Date: (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; (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; or (v) the Board determines that a Change in Control shall be deemed to have occurred for purposes of the Plan, provided that the Board may impose limitations on the effects of a Change in Control on any Award or otherwise if the Change in Control has occurred under this Section 2(f)(v) and not under other subsections of this Section 2(f). (g) CODE: The Internal Revenue Code of 1986, as amended, or any successor thereto. 2 (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) DISABILITY: Inability of a Participant to perform the services for the Company and its Subsidiaries required by his or her employment with the Company due to any medically determinable physical and/or mental incapacity or disability which is permanent. The determination whether a Participant has suffered a Disability shall be made by the Committee based upon such evidence as it deems necessary and appropriate. A Participant shall not be considered disabled unless he or she furnishes such medical or other evidence of the existence of the Disability as the Committee, in its sole discretion, may require. (l) EFFECTIVE DATE: The date on which the Plan takes effect, as defined pursuant to Section 17 of the Plan. (m) FAIR MARKET VALUE: With respect to Shares, unless otherwise determined by the Committee, 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 Nasdaq 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 Nasdaq System on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used. (n) LSAR: A limited stock appreciation right granted pursuant to Section 8(d) of the Plan. (o) OTHER STOCK-BASED AWARDS: Awards granted pursuant to Section 9 of the Plan. (p) OPTION: A stock option granted pursuant to Section 7 of the Plan. 3 (q) OPTION PRICE: The purchase price per Share of an Option, as determined pursuant to Section 7(a) of the Plan. (r) PARTICIPANT: An individual who is selected by the Committee to participate in the Plan pursuant to Section 5 of the Plan. (s) PERFORMANCE-BASED AWARDS: Certain Other Stock-Based Awards granted pursuant to Section 9(b) of the Plan. (t) PERSON: As such term is used for purposes of Section 13(d) or 14(d) of the Act (or any successor section thereto). (u) PLAN: The 1998 IMS Health Incorporated Employees' Stock Incentive Plan. (v) RETIREMENT: Termination of employment with the Company or a Subsidiary after such Participant has attained age 65 or age 55 and five years of service with the Company. The foregoing notwithstanding, in the case of Awards granted under this Plan prior to July 21, 1999, the term "Retirement" shall mean termination of employment after the Participant has attained age 65 or with the prior written consent of the Committee that a termination prior to age 65 be treated as a Retirement, except that the Committee (or other committee authorized by the Board) may determine that the term Retirement as used in respect of specified Awards granted prior to July 21, 1999 shall be defined as set forth in the first sentence of this definition. (w) SHARES: Shares of common stock, par value $0.01 per Share, of the Company. (x) SPINOFF DATE: The date on which the Shares that are owned by Cognizant are distributed to the holders of record of shares of Cognizant. (y) STOCK APPRECIATION RIGHT: A stock appreciation right granted pursuant to Section 8 of the Plan. (z) SUBSIDIARY: A subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto). 3. SHARES SUBJECT TO THE PLAN (a) AGGREGATE SHARE LIMITATIONS. Subject to adjustment as provided in Section 10(a), the total number of Shares which may be issued and/or delivered under the Plan is 13,000,000 plus the number of Shares reserved for awards under the IMS Health Incorporated Replacement Plan for Certain Employees Holding Cognizant Corporation Equity-Based Awards (the "Replacement Plan") that are not in fact issued 4 or delivered in connection with such awards; provided however, that in no event may more than 1,000,000 shares be issued as restricted stock or similar Awards. The Shares may consist, in whole or in part, of authorized and unissued Shares or treasury Shares. Shares subject to an Award under the Plan that is canceled, expired, forfeited, settled in cash, or otherwise terminated without a delivery of Shares to the Participant (or a Beneficiary), including the number of Shares withheld or surrendered in payment of any exercise or purchase price of an Award or taxes relating to an Award, will become available for Awards under the Plan, and Shares shall be counted as issued or delivered under the Replacement Plan in a manner consistent with the counting of Shares under this Section 3. In addition, in the case of any Award granted in substitution for awards of a company or business acquired by the Company or a Subsidiary, Shares issued or issuable in connection with such substitute Award shall not be counted against the number of Shares reserved under the Plan, but shall be deemed to be available under the Plan by virtue of the Company's assumption of the plan or arrangement of the acquired company or business. (b) ANNUAL PER-PERSON LIMITATIONS. In each calendar year during any part of which the Plan is in effect, a Participant may be granted Awards under each of Section 7, Section 8, and Section 9(b) relating to up to the Participant's Annual Limit (such Annual Limit to apply separately to each Section). A Participant's Annual Limit, in any year during any part of which the Participant is then eligible under the Plan, shall equal 1,000,000 shares plus the amount of the Participant's unused Annual Limit as of the close of the previous year, subject to adjustment as provided in Section 10(a). 4. ADMINISTRATION (a) 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 individuals who are each "non-employee directors" within the meaning of Rule 16b-3 under the Act (or any successor rule thereto) and "outside directors" within the meaning of Section 162(m) of the Code (or any successor section 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 Committee shall require payment of any amount it may determine to be necessary to withhold for minimum statutory withholding requirements for federal, state, local or other taxes as a result of the exercise or settlement of an Award. Unless the Committee specifies otherwise, the Participant may elect to pay a portion or all of such withholding taxes by (a) delivery in shares or (b) having shares withheld by the Company from any shares that would have otherwise been received by the Participant. No authority to withhold shares is conferred under the Plan to the extent that, solely due to such authority, an Award would be accounted for as a "variable" award under APB 25. The Committee may, in its discretion, grant Awards either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan 5 of the Company, any subsidiary, or any business entity to be acquired by the Company or a subsidiary, or any other right of a Participant to receive payment from the Company or any subsidiary. If the chief executive officer of the Company is a member of the Board, the Board by specific resolution may constitute such chief executive officer as a committee of one which shall have the authority to grant Awards of up to an aggregate of 50,000 Shares in each calendar year to each Participant who is not subject to the rules promulgated under Section 16 of the Act (or any successor section thereto); PROVIDED, HOWEVER, that such chief executive officer shall notify the Committee of any such grants made pursuant to this Section 4. (b) Without the prior approval of the Company's stockholders, Options granted under the Plan will not be repriced, replaced or regranted through cancellation, or by lowering the Option exercise price of a previously granted Option. 5. ELIGIBILITY Employees (but not members of the Committee or any person who serves only as a director) of the Company and its Subsidiaries are eligible to be granted Awards. In addition, any person who has been offered employment by the Company or a Subsidiary is eligible to be granted Awards, provided that no such person may receive any payment or exercise any right relating to an Award until such person has commenced such employment. Participants shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of Shares to be covered by the Awards granted to each Participant. 6. LIMITATIONS No Award may be granted under the Plan after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date. 7. TERMS AND CONDITIONS OF OPTIONS Options granted under the Plan shall be, as determined by the Committee, non-qualified, incentive or other stock options for federal income tax purposes, as evidenced by the related Award agreements, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine: (a) OPTION PRICE. The Option Price per Share shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of the Shares on the date an Option is granted. The Committee may require the Participant to pay a portion of the Option Price at the time of grant of the option, with the remainder of the Option Price payable upon exercise of the Option. Such prepayment of the Option Price shall be non-refundable except to the extent set forth in a Participant's original option agreement. (b) EXERCISABILITY. Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by 6 the Committee, but in no event shall an Option be exercisable more than ten years after the date it is granted. (c) EXERCISE OF OPTIONS. Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the Shares for which it is then exercisable. For purposes of Section 7 of the Plan, the exercise date of an Option shall be the later of the date a notice of exercise is received by the Company and, if applicable, (A) the date payment is received by the Company pursuant to clauses (i), (ii) or (iii) in the following sentence, or (B) the date of sale by a broker of all or a portion of the Shares being purchased pursuant to clause (iv) in the following sentence. Unless otherwise determined by the Committee, the Option Price for the Shares as to which an Option is exercised shall be paid to the Company in full not later than the time of exercise at the election of the Participant (i) in cash, (ii) in Shares having a Fair Market Value equal to the aggregate unpaid Option Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee, (iii) partly in cash and partly in such Shares, or (iv) through the delivery of irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the aggregate Option Price for the Shares being purchased. The Award agreement shall, unless otherwise provided by the Committee, permit the Participant to elect, subject to such terms and conditions as the Committee shall determine, to have the number of Shares deliverable to the Participant as a result of the exercise reduced by a number sufficient to pay the amount the Company determines to be necessary to withhold for federal, state, local or other taxes as a result of the exercise of the Option. No Participant shall have any rights to dividends or other rights of a stockholder with respect to Shares subject to an Option until the Participant has given written notice of exercise of the Option, paid in full for such Shares and, if applicable, has satisfied any other conditions imposed by the Committee pursuant to the Plan. (d) RESTRICTIONS ON SHARES ISSUED UPON EXERCISE; OTHER CONDITIONS. If and to the extent so determined by the Committee, Shares issued upon exercise of an Option may be subject to limitations on transferability, risks of forfeiture, deferral of delivery, or such other terms and conditions as the Committee may impose, subject to Section 14(b). Such terms and conditions may include required forfeiture of Options or gains realized upon exercise thereof, for a specified period after exercise, in the event the Participant fails to comply with conditions relating to non-competition, non-disclosure, non-solicitation or non-interference with employees, suppliers, or customers, and non-disparagement and other conditions specified by the Committee. (e) EXERCISABILITY UPON TERMINATION OF EMPLOYMENT BY DEATH OR DISABILITY. If a Participant's employment with the Company and its Subsidiaries terminates by reason by death or Disability after the date of grant of an Option, (i) the unexercised portion of such Option shall immediately vest in full (i.e., become non-forfeitable) and (ii) such portion may thereafter be exercised during the shorter of (A) the remaining stated term of the Option or (B) five years after the date of death or Disability. (f) EXERCISABILITY UPON TERMINATION OF EMPLOYMENT BY RETIREMENT. If a Participant's employment with the Company and its Subsidiaries terminates by reason of Retirement after the date of grant of an Option, the Participant's unexercised Option may thereafter be exercised only during the period ending at the earlier of five years after such Retirement or the stated expiration date of such Option (the "Post-Retirement 7 Exercise Period"), provided that such Option shall be exercisable during such Post-Retirement Exercise Period only to the extent such Option was exercisable at the time of such Retirement. The foregoing notwithstanding, (i) the Committee may, in its sole discretion, accelerate the vesting of the unvested portion of such Option held by a Participant upon such Participant's Retirement, in which case such Option shall not be forfeited as provided herein but thereafter shall become exercisable to the extent and at such times as such portion of the Option would have become both vested and exercisable during the Post-Retirement Exercise Period had the Participant's employment not been terminated, unless the Committee specifies otherwise; and (ii), if a Participant dies within a period of five years after such Retirement, the Participant's unexercised Option (to the extent not previously forfeited) may thereafter be exercised during the shorter of (i) the remaining stated term of the Option or (ii) the period that is the longer of (A) five years after the date of such termination of employment or (B) one year after the date of death. (g) EFFECT OF OTHER TERMINATION OF EMPLOYMENT. If a Participant's employment with the Company and its Subsidiaries terminates for any reason other than death, Disability or Retirement after the date of grant of an Option as described above, the Participant's unexercised Option may thereafter be exercised during the period ending 90 days after the date of such termination of employment, but only to the extent such Option was exercisable at the time of such termination of employment, and in no event may such Option be exercised after its stated expiration date. The foregoing notwithstanding, the Committee may, in its sole discretion, accelerate the vesting of unvested Options held by a Participant if such Participant is terminated from employment without "cause" (as such term is defined by the Committee in its sole discretion) by the Company. 8. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS (a) GRANTS. The Committee also may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof. A Stock Appreciation Right granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same Shares covered by an Option (or such lesser number of Shares as the Committee may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 8 (or such additional limitations as may be included in an Award agreement). (b) TERMS. The exercise price per Share of a Stock Appreciation Right shall be an amount determined by the Committee but in no event shall such amount be less than the greater of (i) the Fair Market Value of a Share on the date the Stock Appreciation Right is granted or, in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the Option Price of the related Option and (ii) an amount permitted by applicable laws, rules, by-laws or policies of regulatory authorities or stock exchanges. Each Stock Appreciation Right granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the exercise price per Share, times (ii) the number of Shares covered by the Stock Appreciation Right. Each Stock Appreciation Right granted in conjunction with an Option, or a portion 8 thereof, shall entitle a Participant to surrender to the Company the unexercised Option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the Option Price per Share, times (ii) the number of Shares covered by the Option, or portion thereof, which is surrendered. The date a notice of exercise is received by the Company shall be the exercise date. Payment shall be made in Shares or in cash, or partly in Shares and partly in cash, valued at such Fair Market Value, all as shall be determined by the Committee. Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Company of written notice of exercise stating the number of Shares subject to an exercisable Option with respect to which the Stock Appreciation Right is being exercised. No fractional Shares will be issued in payment for Stock Appreciation Rights, but instead cash will be paid for a fraction or, if the Committee should so determine, the number of Shares will be rounded downward to the next whole Share. (c) LIMITATIONS. The Committee may impose, in its discretion, such conditions upon the exercisability or transferability of Stock Appreciation Rights as it may deem fit. (d) LIMITED STOCK APPRECIATION RIGHTS. The Committee may grant LSARs that are exercisable upon the occurrence of specified contingent events. Such LSARs may provide for a different method of determining appreciation, may specify that payment will be made only in cash and may provide that any related Awards are not exercisable while such LSARs are exercisable. Unless the context otherwise requires, whenever the term "Stock Appreciation Right" is used in the Plan, such term shall include LSARs. 9. OTHER STOCK-BASED AWARDS (a) GENERALLY. The Committee, in its sole discretion, may grant Awards of Shares, Awards of restricted Shares and Awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of, Shares ("Other Stock-Based Awards"). Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive one or more Shares (or the equivalent cash value of such Shares) as an outright bonus or upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine to whom and when Other Stock-Based Awards will be made, the number of Shares to be awarded under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Shares or a combination of cash and Shares; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof). Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 9(a). In addition, the Committee is authorized to grant dividend equivalents to a Participant, entitling the Participant to receive cash, Shares, other Awards, or other property equal in value to dividends paid with respect to a specified number of Shares, or other periodic payments. Dividend equivalents may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents 9 shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares, Awards, or other investment vehicles, subject to such restrictions on transferability and risks of forfeiture as the Committee may specify. (b) PERFORMANCE-BASED AWARDS. Notwithstanding anything to the contrary herein, certain Other Stock-Based Awards granted under this Section 9 may be granted in a manner which is deductible by the Company without limitation under Section 162(m) of the Code (or any successor section thereto) ("Performance-Based Awards"). A Participant's Performance-Based Award shall be determined based on the attainment of written performance goals approved by the Committee for a performance period established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the following criteria: (i) consolidated earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per share; (v) book value per share; (vi) return on stockholders' equity; (vii) expense management; (viii) return on investment; (ix) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) maintenance or improvement of profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow; (xvii) working capital; (xviii) economic value added; (xix) return on assets; (xx) total stockholder return (stock price appreciation plus dividends and distributions); (xxi) operating management goals; (xxii) and execution of pre-approved corporate strategy. The foregoing criteria may relate to the Company, one or more of its Subsidiaries or one or more of its divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the degree consistent with Section 162(m) of the Code (or any successor section thereto), the performance goals may be calculated without regard to extraordinary items. In the case of a Performance-Based Award which is not valued in a way in which the limitation set forth in the final sentence of Section 3 would operate as an effective limitation satisfying Treasury Regulation 1.162-27(e)(4), the maximum amount of a Performance-Based Award to any Participant with respect to performance in a single fiscal year of the Company shall be $5,000,000. The Committee shall determine whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant and, if they have, to so certify and ascertain the amount of the applicable Performance-Based Award. No Performance-Based Awards will be paid for such performance period until such certification is made by the Committee. The amount of the Performance-Based Award actually paid to a given Participant may be less than the amount determined by the applicable performance goal formula, at the discretion of the Committee. The amount of the Performance-Based Award determined by the Committee for a performance period shall be paid to the Participant at such time as determined by the Committee in its sole discretion after the end of such performance period; provided, HOWEVER, that a Participant may, if and to the extent permitted by the Committee and consistent with the provisions of Section 162(m) of the Code, elect to defer payment of a Performance-Based Award. 10. ADJUSTMENTS UPON CERTAIN EVENTS Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan: (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 of other corporate exchange, or any large, special, and non-recurring distribution to Stockholders, 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 (i) the number or kind of Shares or other securities issued or reserved for issuance pursuant to the Plan or pursuant to outstanding Awards, (ii) the Option Price, (iii) the number and kind of Shares by which annual per-person Award limitations are measured under Section 3 hereof and/or (iv) any other affected terms of such Awards (including making provision for the payment of cash, other Awards or other property in respect of any outstanding Award). In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or any business unit, or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized to be made if and to the extent that such authority or the making of such adjustment would cause Options, Stock Appreciation Rights, or Performance Awards granted under Section 9(b) hereof intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to so qualify. (b) CHANGE IN CONTROL. Except as otherwise provided in an Award agreement, 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 Award (including, without limitation, (i) the acceleration of an Award, (ii) the payment of a cash amount in exchange for the cancellation of an Award 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. 11. NO RIGHT TO EMPLOYMENT The granting of an Award under the Plan shall impose no obligation on the Company or any Subsidiary to continue the employment of a Participant and shall not lessen or affect the Company's or Subsidiary's right to terminate the employment of such Participant. 11 12. 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. 13. NONTRANSFERABILITY OF AWARDS An Award 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, an Award shall be exercisable only by such Participant. An Award exercisable after the death of a Participant may be exercised by the legatees, personal representatives or distributees of the Participant. Notwithstanding anything to the contrary herein, the Committee, in its sole discretion, shall have the authority to waive this Section 13 (or any part thereof) to the extent that this Section 13 (or any part thereof) is not required under the rules promulgated under any law, rule or regulation applicable to the Company. 14. AMENDMENTS OR TERMINATION (a) CHANGES TO THE PLAN. The Board may amend, alter or discontinue the Plan, except that (i) any amendment or alteration shall be subject to the approval of the Company's stockholders at or before the next annual meeting of stockholders for which the record date is after the date of such Board action if (x) such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit amendments or alterations to stockholders for approval or (y) such amendment or alteration would materially increase the number of shares reserved for the purposes of the Plan, materially broaden the employees or class of employees eligible to receive Awards under the Plan or materially increase benefits accruing to employees participating in the Plan; (ii) without the consent of a Participant, no amendment or alteration shall materially impair any of the Participant's rights under an Award theretofore granted to such Participant; and (iii) the Committee may amend or alter the Plan in such manner as it deems necessary to permit the granting of Awards meeting requirements of the Code or other applicable laws. Notwithstanding anything to the contrary herein, the Board may not amend, alter or discontinue the provisions relating to Section 10(b) of the Plan after the occurrence of a Change in Control. (b) CHANGES TO OUTSTANDING AWARDS. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate any Award theretofore granted and any Award agreement relating thereto, except as otherwise provided in the Plan and except that the Committee may not amend or alter an Award theretofore granted if such action would result in an Award having terms that would not have been authorized or permitted for a new grant or Award under the Plan; provided that, without the consent of an affected Participant, no such Committee action may materially and adversely affect the rights of such Participant under such Award. Other provisions of the Plan notwithstanding, if any right under this Plan would cause a transaction to be ineligible for pooling of interest accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right so that pooling of interest accounting shall be available, including the 12 substitution of Shares having a Fair Market Value equal to the cash otherwise payable hereunder for the right which caused the transaction to be ineligible for pooling of interest accounting. 15. INTERNATIONAL PARTICIPANTS With respect to Participants who reside or work outside the United States of America and either who are not (and who are not expected to be) "covered employees" within the meaning of Section 162(m) of the Code or who are granted Awards not intended to qualify as "performance-based compensation" under Section 162(m), the Committee may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to conform such terms with local laws, regulations, or customs or otherwise to meet the objectives of the Plan, and may, where appropriate, establish one or more sub-plans to reflect such amended provisions. 16. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board nor any submission of the Plan, specific Plan terms, or amendments thereto to a vote of stockholders of the Company shall be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable, including, without limitation, the granting of awards otherwise than under the Plan, and such other arrangements may be either applicable generally or only in specific cases. 17. CHOICE OF LAW The Plan shall be governed by and construed in accordance with the laws of the State of New York. 18. EFFECTIVENESS OF THE PLAN The Plan shall be effective as of the Spinoff Date. EX-10.4(1) 5 EXECUTIVE DEFERRED COMPENSATION PLAN Exhibit 10.4.1 IMS HEALTH INCORPORATED EXECUTIVE DEFERRED COMPENSATION PLAN IMS HEALTH INCORPORATED - - -------------------------------------------------------------------------------- EXECUTIVE DEFERRED COMPENSATION PLAN - - -------------------------------------------------------------------------------- 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 1. PURPOSE. The purpose of this Executive Deferred Compensation Plan (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. (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. 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, -3- 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. (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 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 -4- payment date, divided by (C) the fair market value of a share of Stock at such payment date. (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 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 Participant's Account 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). -5- (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 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. -6- (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 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 -7- 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) 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 -8- 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, including compensation not subject to deferral as well as amounts payably 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). -9- (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. -10- EX-10.4(2) 6 IMS HEALTH INC. EMPLOYEES' STOCK INCENTIVE PLAN Exhibit 10.4.2 IMS HEALTH INCORPORATED IMS HEALTH INCORPORATED EMPLOYEES' STOCK INCENTIVE PLAN and IMS HEALTH INCORPORATED REPLACEMENT PLAN FOR CERTAIN EMPLOYEES HOLDING COGNIZANT CORPORATION EQUITY-BASED AWARDS PROSPECTUS SUPPLEMENT (SELECTED PORTIONS) THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 The date of this Prospectus Supplement is September 27, 1999 2 IMS HEALTH INCORPORATED 200 Nyala Farms Westport, CT 06880 IMS HEALTH INCORPORATED EMPLOYEES' STOCK INCENTIVE PLAN and IMS HEALTH INCORPORATED REPLACEMENT PLAN FOR CERTAIN EMPLOYEES HOLDING COGNIZANT CORPORATION EQUITY-BASED AWARDS PART II -- TERMS AND CONDITIONS OF DEFERRALS DEFERRAL PLAN INCORPORATED BY REFERENCE AND APPLICABLE TO DEFERRALS. All of the terms and conditions set forth in the Executive Deferred Compensation Plan (the "Deferral Plan") apply to a participant's election to defer restricted stock units ("RSUs") and shares that represent the "profit" upon certain exercises of stock options ("Option Profit Shares") and the resulting deferrals under the Deferral Plan. These terms are incorporated by reference into the agreement that arises between the Company and the participant as a result of any election to defer. If any term, condition, or disclosure in this Prospectus Supplement is inconsistent with a Deferral Plan provision, the Deferral Plan provision will govern. STOCK-DENOMINATED COMPENSATION THAT MAY BE DEFERRED The Compensation and Benefits Committee of the Board of Directors of the Company (the "Committee") has authorized the deferral of compensation payable in the form of Stock, specifically: o Restricted stock units awarded under the Company's Performance- Based Restricted Stock Program (these RSUs are referred to as "PERS"); o Other awards of RSUs awarded under the Employees' Stock Incentive Plan (the "ESIP") or the Replacement Plan for Certain Employees Holding Cognizant Corporation Equity-Based Awards (the "Replacement Plan"); and o Option Profit Shares, which represent the pre-tax "profit" realized on exercise of options in specified circumstances, as described in more detail below. Deferral of RSUs and Option Profit Shares under the Deferral Plan results in the crediting to the participant's deferral account of a number of shares of Deferred Stock equal to the number of RSUs or Option Profit Shares deferred. Each share of Deferred Stock will be settled by delivery of one share of Stock. 3 To defer receipt of shares in settlement of PERS or other RSUs, the participant must file an election form specifying the PERS or RSUs to be deferred at least six months in advance of the date the PERS or RSUs are scheduled to be settled according to their original terms (see "--Deferral Elections" below). To defer receipt of Option Profit Shares otherwise issuable upon exercise of a stock option, the participant must take the following steps: o File an election form specifying the option and the portion of the Option Profit Shares to be deferred at least six months in advance of the option exercise (see "--Deferral Elections" below); o Not exercise the option during the six-month period following the filing of the election, unless the participant has ceased to be an employee of the Company and its subsidiaries; o Thereafter, exercise the option at a time the participant remains an employee of the Company and its subsidiaries; and o Pay the exercise price of the option by surrendering previously acquired shares, in a so-called "stock-for-stock" exercise (Note: shares acquired under Company plans within six months before the exercise generally cannot be surrendered to pay the exercise price). Upon completion of the foregoing steps, the participant will receive upon exercise of the option, on a non-deferred basis, a number of shares equal to the number surrendered to pay the exercise price. Instead of receiving other shares that would be deliverable upon such exercise -- shares which would represent the "profit" on the exercise -- the participant will be credited with a like number of shares of Deferred Stock under the Deferral Plan. The Company will make no matching contributions or other contributions to a participant's account under the Deferral Plan, aside from the Company's obligation to credit dividend equivalents and issue shares in settlement of the Deferred Stock. OTHER DEFERRED STOCK TERMS Three special provisions apply to deferrals of Stock-denominated compensation into Deferred Stock: o Deferred Stock is the only investment vehicle into which PERS, other RSUs, and Option Profit Shares may be deferred (in contrast to cash deferrals under the Deferral Plan); o Deferred Stock, once acquired, cannot be reallocated or "switched" into any other investment vehicles, and will be settled solely by delivery of actual shares of Stock (net of applicable withholding); and 4 o No shares of Stock will be held in any trust that may be created pursuant to the Plan. Participant Has No Shareholder Rights. Deferred Stock under the Deferral Plan does not represent an actual investment in or ownership of Stock by the participant. Thus, the participant cannot vote or direct the voting of Deferred Stock, and has no right to actual dividends or distributions or payments to shareholders upon liquidation. Dividend Equivalents and Adjustments. Participants who are credited Deferred Stock under the Deferral Plan are entitled to be credited "dividend equivalents" on their Deferred Stock. Although the Committee retains discretion to vary the form and manner in which dividend equivalents are credited or paid, generally they will be credited as follows: o If the Company declares and pays a cash dividend on Common Stock, the participant's deferral account will be credited with a number of additional shares of Deferred Stock, as of the dividend payment date, equal to the number of shares of Deferred Stock credited to the account as of the record date for such dividend multiplied by the amount of cash actually paid as a dividend on each outstanding share of Stock, divided by the Fair Market Value of a share of Stock at the dividend payment date. o If the Company declares and pays a non-cash dividend on Common Stock in the form of property other than shares of Stock (for example, in a spin-off of a subsidiary), then the participant's deferral account will be credited with a number of additional shares of Deferred Stock as of the dividend payment date equal to the number of shares of Deferred Stock credited to the Account as of the record date for such dividend multiplied by the Fair Market Value of such property actually paid as a dividend on each outstanding share of Stock divided by the Fair Market Value of a share of Stock on the day after the dividend payment date. o If the Company declares and pays a dividend on Common Stock in the form of additional shares of Stock, or there occurs a forward split of Stock, then the participant's deferral account will be credited with a number of additional shares of Deferred Stock as of the payment date for such dividend or forward split equal to the number of shares of Deferred Stock credited to the account as of the record date for such dividend or split multiplied by the number of additional shares of Stock actually paid as a dividend or issued in such split in respect of each outstanding share. In addition, Deferred Stock otherwise may be adjusted by the Committee to prevent dilution or enlargement of a participant's rights in connection with any other extraordinary corporate event that affects the value of the Common Stock (taking into account any crediting of additional Deferred Stock under the above rules). 5 RISKS INHERENT IN DEFERRALS Deferred Stock carries certain risks. Each share of Deferred Stock under the Deferral Plan represents a right to receive one share of Stock upon settlement. Obviously, there is a risk that the Stock will go down in value. There is also a risk that the Company will be unwilling to issue Stock in settlement, despite its contractual obligation to do so, and the risk that financial constraints or legal obligations will impede or prohibit the Company in delivering shares in settlement of Deferred Stock. Moreover, if the participant did not elect to defer RSUs or Option Profit Shares, he or she could instead sell shares of Stock acquired in respect of those awards and reinvest the proceeds. In addition, since the Plan provides for an adjustment of additional shares of Stock in the case of a non cash dividend payable other than in Stock, a holder of Deferred Stock will not be able to participate in the investment returns of any such property which is distributed. Electing deferral as Deferred Stock represents an undiversified investment subject to all the risks of an investment in the stock of one company. Moreover, in contrast to other investment vehicles, Deferred Stock is illiquid, in that Deferred Stock cannot be reallocated to other investment vehicles or sold until the deferral period ends. Finally, a participant's financial security may be substantially tied to the Company due to his or her employment by the Company and other compensation linked to Company securities. Indeed, even apart from any deferral in Deferred Stock, the Company's equity securities and options thereon may represent the single biggest investment position held by the participant. For such a participant, the lack of diversification and illiquidity of Deferred Stock under the Deferral Plan may make it unsuitable as a long-term deferral of Stock-denominated compensation under the Deferral Plan. ELECTIONS RELATING TO DEFERRALS Participants will be entitled to make two distinct types of elections relating to deferrals of Stock-denominated compensation: (1) Elections as to the amount of PERS, other RSUs, and Option Profit Shares to defer; and (2) Elections as to the time at which resulting Deferred Stock will be settled. Elections, which further defer the settlement date (so-called "second-look" elections) will be permitted in certain cases. An election to defer PERS and RSUs must be filed at least six months before the risk of forfeiture (vesting) of the award (a lesser period may be specified for awards vesting before December 31, 1999). An election to defer Option Profit Shares must be filed at least six months before the date the option is exercised. Once an election to defer Option Profit Shares is filed, the participant will not be permitted to exercise the option during the six-month quiet period, unless the participant has ceased to be employed by the Company and its subsidiaries or there has occurred a Change in Control or other event that would have ended the deferral of Deferred Stock had it occurred before the date of such event. These elections become irrevocable upon filing with the Company. However, elections relating to deferrals of Option Profit Shares will cease to be effective as to options not yet exercised at the time of termination of employment. 6 Elections as to the time at which deferrals will be settled are discussed in the next part of this Prospectus Supplement, under the caption "--Settlement--Timing and Form of Payment." SETTLEMENT--TIMING AND FORM OF PAYMENT. Permitted Elections as to Time of Settlement. The Deferral Plan permits considerable flexibility in electing the time of settlement of a participant's deferral account. The primary limitation on these elections is that not more than ten installments may be elected, with the final installment payable not later than ten years after termination of employment due to retirement, death or disability (a "Qualifying Termination"). (The definition of the terms "retirement" and "disability" is set forth below under the caption "--Accelerated Settlement, Including Upon Non-Qualifying Termination.") A participant may elect a payout in a lump-sum or installments, at a fixed date which may be during employment or after a Qualifying Termination, or at dates specified in relation to a Qualifying Termination. Generally, these elections will apply to all deferred balances resulting from deferrals of amounts that would have otherwise become payable in a given year. Deferrals are deemed to occur at the date of vesting in the case of PERS and RSUs and at the "exercise date" in the case of Stock Option Profit Shares. Thus, for example, a participant could elect that all deferral account balances resulting from deferrals in 2000 be settled (i) 100% on the first anniversary of the participant's retirement or other Qualifying Termination, (ii) 50% on the first business day in January 2006 and 50% on the first business day in January 2010, or (iii) $50,000 per year on the first business day in January 2006 through 2009 (to fund child education) and lump sum balance one year after retirement. The participant also could elect different settlement dates for year 2001 deferrals. Any payment which would otherwise be due on a non-business day will be deferred to the next business day. A participant generally must elect a time of settlement not later than the time the original election to defer is filed. If no new election as to the time of settlement is filed with a new deferral election, the participant's prior election as to the time of settlement of prior deferrals will continue to be in effect for any new deferrals. However, a payment election with respect to Option Profit Shares shall apply to a specified option whenever exercised. Election to Further Defer Settlement of Deferred Amounts. Elections, which further defer the settlement date of existing deferral account balances (i.e., "second-look" elections) will be permitted in the following circumstances. Unless otherwise determined by the Committee, such elections (i) may only be filed while the participant remains employed by the Company or a subsidiary, (ii) may only operate to further extend the deferral period, and not to accelerate the end of the deferral period for any portion of the deferral account balance, and (iii) must be filed at least one year before the date the deferral period to be extended would otherwise end. Thus, for example, a participant who has elected a lump sum payment of the entire deferral account balance one year after termination could, immediately prior to a Qualifying Termination, elect ten 7 annual installment payments commencing on the first anniversary of the Qualifying Termination. Accelerated Settlement, Including Upon Non-Qualifying Termination. Regardless of any elections as to the period of deferral, in the event of a termination of employment that is not a Qualifying Termination, the participant's deferral account will be settled as promptly as practicable following such termination. Thus, if the participant terminates employment voluntarily, or is terminated by the Company or a subsidiary with or without cause -- assuming the termination does not qualify as a retirement or a termination due to disability or death -- the participant will receive a lump sum settlement of shares of Stock which generally will subject the participant to federal income taxation of the amount distributed in the year of the settlement. For purposes of the Deferral Plan, the term "retirement" means a 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 by the Committee. For purposes of the Deferral Plan, the term "disability" means a physical or mental impairment of sufficient severity such that the participant is both eligible for and in receipt of benefits under the long-term disability provisions of the Company's benefit plans. Settlement will be accelerated in the event of a Change in Control, as discussed below under the caption "--Effect of Change in Control and Related Transactions." In addition, the Committee may, in connection with a termination of the Deferral Plan or otherwise, accelerate the settlement of the deferral account of any or all participants. Mandatory Deferrals. The Deferral Plan permits the Company to mandate deferrals of awards under other compensation plans and arrangements, including Stock-denominated awards, with those deferrals to be governed by Deferral Plan terms and conditions. The authority to implement compensatory awards under other Company plans with mandatory deferral periods is implicit in those other plans; this provision simply allows the Deferral Plan to provide the framework for conveniently administering any such deferrals. The Deferral Plan does not authorize the Company to mandatorily defer compensation, such as salary, to which a participant has a legally enforceable right, but it does permit the Company to mandate deferral of compensation awarded as a bonus or as to which the participant has agreed to permit deferrals in the discretion of the Company. In this regard, in electing to defer compensation under the Deferral Plan, the participant agrees that the Company may impose a mandatory deferral of settlement of the deferred compensation to the extent necessary to ensure that the settlement of the deferred compensation will not result in payment of non-tax deductible compensation by the Company. Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), compensation paid to a person who is a "covered employee," which means the Company's Chief Executive Officer and other of the most highly compensated executive officers for the given year, is not deductible by the Company to the extent that the compensation exceeds $1 million and is not qualified "performance-based" compensation (subject to limited exceptions not here relevant). This mandatory deferral would apply only to the extent that the participant has elected a settlement prior to termination of employment, only as to deferrals that do not qualify as "performance-based" 8 compensation, and only to the extent that the settlement, when added to other non-performance-based compensation paid to the participant in a given year or which the Committee deems likely to be paid in a given year, will exceed $1 million. Such mandatory deferral would extend only to the earliest time that the compensation could be paid without loss of a tax deduction by the Company under Section 162(m). Form of Payment Upon Settlement. Upon any settlement of the participant's deferral account, he or she will receive delivery of one share of Stock in settlement of each share of Deferred Stock. No fractional shares will be issued and, whenever a settlement would otherwise require the payment of a fractional share, the shares otherwise issuable will be rounded down to the nearest number of full shares. EFFECT OF CHANGE IN CONTROL AND RELATED TRANSACTIONS Special rules apply to any Change in Control and related transactions. For purposes of the Deferral Plan, a "Change in Control" has the meaning defined in any employment agreement or change-in-control severance agreement between the Company and the participant or, if no such agreement is in effect at the relevant date, the meaning as defined in the Company's Employees' Stock Incentive Plan. 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. Upon a Change in Control: o All deferral periods will be automatically accelerated to end at the time of the Change in Control and deferral accounts will be settled within five business days thereafter, provided that the Committee may accelerate this settlement (for all or specified parts of a deferral account) in anticipation of a Change in Control for any reason (including to permit the participant to participate in a transaction related to but preceding the Change in Control), subject to such conditions as the Committee may impose; and o If the Change in Control involves a transaction that is to be accounted for as a pooling of interests, regardless of any other rights the participant may have under the Deferral Plan, the participant's rights will be adjusted or restricted to the extent necessary to ensure that such rights under the Deferral Plan will not impair the pooling-of-interests accounting treatment of the transaction. WITHDRAWALS FOR FINANCIAL EMERGENCY A participant may make a written application to the Committee seeking a withdrawal of all or a portion of his or her deferral account to respond to a financial emergency of the participant. The Committee may disapprove such a withdrawal for any reason, and will consider approving such an application only if the participant's financial emergency is of a substantial nature and beyond the participant's control, and if the Participant lacks other readily available assets that could be used to timely 9 address the emergency, such that the payment to the participant of amounts previously deferred under the Deferral Plan is warranted. Upon such an approval of an emergency withdrawal, the Committee may specify the amount to be paid out to the participant and the time and manner of such payment. It is expected that withdrawals for financial emergencies will be approved only in highly unusual circumstances, and not to permit participants to respond to financial circumstances that could have been anticipated. Deferred Stock paid out in such a withdrawal will be settled in the form of Stock. RABBI TRUST The Company intends but is not obligated to establish an irrevocable grantor trust--generally referred to as a "rabbi trust" -- in connection with the Deferral Plan. The Company does not, however, currently intend to deposit shares in the trust in connection with Deferred Stock credited under the Deferral Plan. FICA/HI TAX OBLIGATIONS; TAX WITHHOLDING; SETOFFS Under U.S. law, amounts deferred under the Deferral Plan generally are subject to Social Security and Medicare withholding (FICA/HI) at the time of deferral, although FICA/HI may apply earlier to PERS and RSUs if they vest and become non-forfeitable prior to deferral under the Deferral Plan. A participant who elects to defer under the Deferral Plan will have to meet FICA/HI obligations out of other cash income, and must authorize the Company or a subsidiary or affiliate to withhold other cash compensation to meet these obligations. In other words, no part of the amount deferred will be used to satisfy the FICA/HI obligations. Once deferred, any earnings or appreciation in value of the deferral balance should not subject the participant to additional FICA/HI obligations. All withdrawals and payments in settlement of a participant's deferral account are subject to withholding for U.S. federal, state and local income and employment taxes. Similar income, employment and withholding taxes also may apply to participants who are resident in foreign jurisdictions. These may apply at the time of deferral, during any deferral period, or at the time of a withdrawal or payment in settlement of the participant's account. Moreover, any withdrawal or payment in settlement of a participant's account may be reduced or retained by the Company and applied to the payment of any deficit of the participant or other obligation of the participant to the Company, the participant's employer, or any affiliate of the Company or such employer. By deferring compensation and participating in the Deferral Plan, each participant consents to the right of setoff of the Company, his or her employer, and their affiliates. NON-TRANSFERABILITY A participant's deferral account balances, including Deferred Stock credited thereto, rights to withdraw and rights to settlement of his or her deferral account, and all other rights under the Deferral Plan are not transferable except, in the event of the participant's death, by will or by the laws of descent and distribution or to a beneficiary designated by the participant in accordance with the Deferral Plan and any regulations adopted by the Committee permitting such designation. Likewise, a participant's 10 deferral account balances, rights to withdraw and rights to settlement of his or her deferral account, and all other rights under the Deferral Plan are not subject to alienation, pledge, encumbrance, attachment, garnishment, levy, or other legal process. RELIANCE ONLY ON WRITTEN DOCUMENTS; COPY OF DEFERRAL PLAN The terms of the Deferral Plan are set forth in the Deferral Plan document, any written rules, regulations, or forms approved by the Committee for use under the Deferral Plan, and the portion of this Prospectus Supplement captioned "Part II -- Terms and Conditions of Deferrals." No person is authorized to make any representation or commitment to a participant or beneficiary that is inconsistent with such written documents, and no statement regarding the Deferral Plan should be relied on unless it is set forth in writing by the Company. This Prospectus Supplement is intended only to provide a summary of significant terms of the Deferral Plan, and it does not purport to be a complete description of all terms of the Deferral Plan. This Prospectus Supplement is qualified in its entirety by the Deferral Plan document. A participant may obtain a copy of the Deferral Plan document, and other information and documents regarding the ESIP, the Replacement Plan and the Company, by contacting the Company's Executive Compensation Department at: IMS Health Incorporated 660 W. Germantown Pike Plymouth Meeting, PA 19462 (610) 832-5867 STATEMENTS TO PARTICIPANTS The Company intends to provide a statement to each participant recording transactions and balances in the participant's deferral account since the close of the period covered in a previous statement not less frequently than annually. EX-10.4(3) 7 MEMORANDUM 1 IMS HEALTH INCORPORATED 200 Nyala Farms Westport, CT 06880 MEMORANDUM (Selected Portions) TO: Executives Eligible to Participate in the IMS Health Incorporated Executive Deferred Compensation Plan FROM: IMS Health Incorporated DATE: September 27 1999 RE: Cash Deferrals Under the Executive Deferred Compensation Plan: Terms and Conditions and Related Information PART II -- TERMS AND CONDITIONS OF DEFERRALS PLAN INCORPORATED BY REFERENCE AND APPLICABLE TO DEFERRALS. All of the terms and conditions set forth in the Executive Deferred Compensation Plan (the "Plan") apply to a participant's election to defer and the resulting deferrals under the Plan. These terms are incorporated by reference into the agreement that arises between IMS Health Incorporated (the "Company" or "IMS Health") and the participant as a result of any election to defer. If any term, condition, or disclosure in this memorandum is inconsistent with a Plan provision, the Plan provision will govern. COMPENSATION THAT MAY BE DEFERRED; DEFERRAL LIMITS. The Compensation and Benefits Committee of the Board of Directors of the Company (the "Committee") has authorized the deferral of the following types of compensation: (1) Cash compensation otherwise payable in the form of: o Salary; and o Annual incentive awards; and (2) Compensation payable in the form of the Company's Common Stock ("Stock"), specifically: 2 o Restricted stock units awarded under the Company's Performance-Based Restricted Stock Program (these restricted stock units are referred to as "PERS"); o Other awards of restricted stock units awarded under any Company plan; and o Shares representing the pre-tax "profit" realized on exercise of options in specified circumstances, as described in more detail in the Stock Deferral Prospectus Supplement. The Plan imposes limits on the amount of compensation that may be deferred. Under these limits, a participant may defer compensation in a given year only to the extent that it exceeds the social security wage base ($72,600 in 1999; the amount for 2000 will be available in November) plus the amount necessary to satisfy Medicare (1.45% of wages in excess of the social security wage base in 2000) and all other payroll taxes (other than income tax withholdings) imposed on the participant's wages. For administrative convenience, this limit will be applied to cash compensation (and not to Stock-denominated deferrals), so that, regardless of a participant's deferral elections, salary and annual incentive compensation at least equal to this minimum amount will be paid on a non-deferred basis. For purposes of this memorandum, a "deferral" refers to the time at which compensation otherwise would have been payable to the participant, but for his or her prior election to defer the compensation hereunder. Thus, the deferral results from the participant's election to defer, but the election occurs earlier in time than the deferral. Certain participant rights and benefits under other Company plans are determined based upon the amount of cash compensation paid to an employee. To the extent practicable and consistent with laws and regulations governing Company plans, a participant's cash compensation will be deemed to include amounts of cash compensation deferred under the Plan and exclude payout of amounts previously deferred so that participation in the Plan will not affect the participant's rights and benefits under such other plans. The Company will make no matching contributions or other contributions to a participant's account under the Plan, aside from the Company's obligation to pay, at settlement, the value of the deferral account as adjusted to reflect the investment performance of the investment vehicle in which the deferral account balance has been deemed invested. INVESTMENT VEHICLES. Choices of Investment Vehicles. The participant will be permitted to direct the manner in which cash amounts deferred will be deemed to be invested (this flexibility does not apply to Stock-denominated deferrals, which are deemed solely invested in Deferred Stock). The list of investment vehicles from which a participant may choose will be specified from time to time by the Company. Deferrals will be "deemed" to be invested in these investment vehicles on a hypothetical or "notional" basis -- as though the deferred amounts had been invested in the investment vehicles and any earnings reinvested in such investment vehicles. The Plan does not require that the Company actually make such investments, although, as discussed below, the Company may make actual investments in the investment vehicles in certain circumstances. See "--Investment Vehicles--Measurement of Value Based on Trust Assets." 3 Initially, the Company will make available, as investment vehicles for cash deferrals, notional investments in the types of index fund investment vehicles currently available under the Company's 401(k) Plan. The indexes upon which these funds will be based are listed on the attached "Investment Directions Form Under the Executive Deferred Compensation Plan." Information regarding the past history of these indexes accompanies this memorandum. A notional version of the IMS Stock fund under the 401(k) Plan is not an investment vehicle under the Plan. Moreover, notional investment of cash deferrals in IMS Stock -- through the Deferred Stock feature of the Plan -- is not an investment vehicle available at this time. The financial services company which will sponsor and manage the index funds to be investment vehicles under the Plan has not been finally determined at the date of this memorandum. The investment return of funds that attempt to replicate the results of financial indexes may differ from the results charted by the index, due to a variety of circumstances affecting the funds. One significant difference that can result in funds underperforming the index on which they are based is that the fund must buy and sell securities, incurring transaction costs, and the fund will be reduced by the amount of management fees paid. There can be no assurance that the index funds that will be available under the Plan as investment vehicles can produce returns in the future that equal the results of the index or equal the returns of the index funds currently available under the Company's 401(k) Plan. The Company reserves the right to disapprove any investment direction given by a participant, in which case the participant will be permitted to give an alternative investment direction (subject to approval of the Company). In the absence of an approved investment election, deferrals will be deemed invested in the investment vehicle most closely approximating cash equivalents, unless otherwise directed by the Committee. Participant Has No Direct Interest in Investment Vehicles. As stated above, cash deferrals under the Plan do not represent actual investments by the participant in these investment vehicles. Rather, the investment vehicle is used to measure the appreciation or depreciation of the amount deferred and earnings and distributions thereon. Upon settlement of the deferral account, the Company is obligated to pay an amount measured based on the investment vehicle. Measurement of Value Based on Trust Assets. The Company is authorized under the Plan to establish one or more grantor trusts -- commonly referred to as "rabbi trusts" -- into which funds may be deposited to be used to purchase assets that match the investment vehicles elected by participants. See "Part II - - -- Rabbi Trust." Initially, the Company intends to establish and use such a trust in connection with the Plan for deferrals other than those deemed invested in Deferred Stock, although the Company is not obligated to continue this practice. In such case, the time at which deferred cash amounts will be deemed invested in those investment vehicles, including upon deferral of cash or reallocation of previously deferred amounts, will be tied to the timing of the parallel transactions by the trust, and the valuation of your deferral and any earnings thereon or appreciation or loss of value thereof will be measured by the value of the assets of the rabbi trust. This will simplify the administration of the Plan and provide the Company with income that offsets any additional expense relating to its deferred compensation obligation to participants. Note that the use of a rabbi trust may result in delays, expected not to exceed one or two business days, between the date of a cash deferral (the date cash compensation otherwise would have been paid) and the date the Company invests funds through the rabbi trust, and possibly similar delays when participant's make other transactions permitted under the Plan affecting their Deferral Accounts. 4 Participant's Change in Choice of Investment Vehicles; Discontinued Investment Vehicles. Once you have commenced participation in the Plan, you will be able to change your investment directions for cash deferrals in two ways. First, you may change the investment vehicles in which cash amounts deferred after the date of your new election are deemed invested - i.e., a change in investment directions covering future deferrals. EXAMPLE: A participant elects in September 1999 to defer $30,000 of annual incentive, if such amount would otherwise become payable in February 2000, and directs that the deferred amount be deemed invested in a money market fund. In January 2000, the participant files a new investment direction directing that all subsequent cash deferrals be deemed invested in an equity index fund. As a result of this new investment direction, the February 2000 deferral of annual incentive (if it is paid) will be deemed invested in the equity index fund. You may also reallocate or "switch" the investment vehicles in which previously deferred cash amounts are deemed invested. This "switching" election is a change in investment directions affecting existing deferral account balances (prior deferrals) but not affecting amounts deferred in the future. Changes in investment directions that affect future deferral and "switching" changes that affect prior deferred amounts will both be implemented as promptly as administratively practicable. Initially, these changes will be permitted no more frequently that once per month, but the Company may alter the frequency of such changes to promote efficient administration of the Plan. The investment vehicles available under the Plan may change from time to time. In the event an investment vehicle you have previously elected is discontinued, you will be given an opportunity to reallocate prior cash deferrals allocated to that investment vehicle and to direct future deferrals to an alternative investment vehicle. If you fail to give timely directions regarding such a change, however, your deferral account balance in that investment vehicle will be automatically reallocated, and your future deferrals will be directed to the investment vehicle that most closely represents cash or cash equivalents. A deferral account balance deemed invested in an investment vehicle under the Plan will be credited with amounts equivalent to dividends and distributions on the specified investment vehicle. To the extent reasonably practicable, these amounts will be deemed reinvested in the same investment vehicle. To the extent the investment vehicle provides a dividend reinvestment plan, dividends may be "reinvested" pursuant to such plan. RISKS INHERENT IN PLAN DEFERRALS AND INVESTMENT VEHICLES There are two distinct investment risks under the Plan. First is the risk that the value of the amount deferred will go down or fail to go up at a rate deemed satisfactory by the participant. Any such investment return is based on the investment vehicle selected by the participant, into which amounts deferred are deemed invested. Most of the investment vehicles, particularly those that relate to equity securities, have a substantial risk that they will go down in value based on market conditions and other factors. In such case, the Participant may receive little or nothing upon settlement of his deferral account under the Plan. The Company, the Committee, any trustee of a rabbi trust relating to the Plan, and employees and agents of the Company make no recommendation as to any of the investment vehicles and make no guarantee of the performance of any of the investment vehicles. You are urged to 5 consult with a financial advisor or other professional in determining whether to defer compensation under the Plan and in selecting investment vehicles into which amounts will be deferred or reallocated from time to time. Second is the risk that the Company is unable or unwilling to pay amounts to which the participant is entitled in settlement of his or her deferral account. As stated above, the "notional" investment in a given investment vehicle is used only to measure the value of the participant's deferral account. Even if the participant has chosen an investment vehicle that has performed well and appreciated in value, the participant still depends on the Company's financial soundness and willingness to pay in order to receive payment in settlement of the deferred compensation. In this regard, if and to the extent that funds are deposited in the rabbi trust, the trustee will be obligated to pay assets out in settlement of deferred compensation obligations under the Plan, unless such assets become subject to claims of creditors of the Company. ELECTIONS RELATING TO DEFERRALS. Participants will be entitled to make elections that have three distinct elements under the Plan: (1) One element will specify the type and amount of cash compensation to defer, including salary and annual incentive awards (note: Stock-denominated deferrals of PERS, other restricted stock units, and "profit shares" upon exercise of options are discussed in the Prospectus Supplement dated September 27, 1999 (the "Stock Deferral Prospectus Supplement")); (2) In the case of cash deferrals, one element will specify the type of investment vehicles in which the deferred amounts are deemed invested, including (i) elections applicable to future deferrals and (ii) "switching" elections reallocating existing deferral account balances; and (3) One element will specify the time at which deferrals will be settled. Elections, which further defer the settlement date (so-called "second-look" elections) will be permitted in certain cases. With regard to the first element of elections, as to the type and amount of compensation to defer, strict timing rules apply as to the time such elections must be filed with the Company: o Salary deferrals -- at least 15 days prior to the beginning of the next calendar quarter, at which time the salary deferral will commence; o Annual incentive award deferrals -- no later than October 15, 1999 for annual incentive awards potentially payable in January or February 2000 in respect of 1999 performance; after the Plan start-up year of 1999, these elections must be filed by the end of the third quarter of the year for which the award will be payable (e.g., September 30, 2000 for annual incentive awards potentially payable in January or February 2001) o PERS and other restricted stock units -- at least six months before the date of vesting of the award, except that a filing by October 15, 1999 will be deemed timely for all restricted stock units vesting thereafter during 1999 6 o "Profit shares" acquired upon exercise of options -- at least six months before the date the option is exercised These elections become irrevocable upon filing with the Company. With regard to the second element of the election, covering the type of investment vehicles in which cash deferrals are deemed invested, an election must be filed with (or prior to) the time any election to defer cash compensation becomes effective. Rules as to the timing of filing a change in the type of investment vehicles elected are discussed under the caption "--Investment Vehicles--Participant's Change in Choice of Investment Vehicles; Discontinued Investment Vehicles." The third type of election, as to the time at which deferrals will be settled, is discussed in the next part of the memorandum, under the caption "--Settlement--Timing and Form of Payment." SETTLEMENT--TIMING AND FORM OF PAYMENT. Permitted Elections as to Time of Settlement. The Plan permits considerable flexibility in electing the time of settlement of a participant's deferral account. The primary limitation on these elections is that not more than ten installments may be elected, with the final installment payable not later than ten years after termination of employment due to retirement, death or disability (a "Qualifying Termination"). (The definition of the terms "retirement" and "disability" is set forth below under the caption "--Accelerated Settlement, Including Upon Non-Qualifying Termination.") A participant may elect payout in a lump-sum or installments, at a fixed date which may be during employment or after a Qualifying Termination, or at dates specified in relation to a Qualifying Termination. Generally, these elections will apply to all deferred balances resulting from deferrals of amounts that would have otherwise become payable in a given year. Thus, for example, a participant could elect that all deferral account balances resulting from deferrals in 2000 be settled (i) 100% on the first anniversary of the participant's retirement or other Qualifying Termination, (ii) 50% on the first business day in January 2006 and 50% on the first business day in January 2010, or (iii) $50,000 per year on the first business day in January 2006 through 2009 (to fund child education) and lump sum balance one year after retirement. The participant could elect different settlement dates for year 2001 deferrals. Any payment which otherwise would be due on a non-business day will be deferred to the next business day. A participant generally must elect a time of settlement not later than the time the original election to defer is filed. If no new election as to the time of settlement is filed with a new deferral election, the participant's prior election as to the time of settlement of prior deferrals will continue to be in effect for any new deferrals. Election to Further Defer Settlement of Deferred Amounts. Elections which further defer the settlement date of existing deferral account balances (i.e., "second-look" elections) will be permitted in the following circumstances. Unless otherwise determined by the Committee, such elections (i) may only be filed while the participant remains employed by the Company or a subsidiary, (ii) may only operate to further extend the deferral period, and not to accelerate the end of the deferral period for any portion of the deferral account balance, and (iii) must be filed 7 at least one year before the date the deferral period to be extended would otherwise end. Thus, for example, a participant who has elected a lump sum payment of the entire deferral account balance one year after termination could, immediately prior to a Qualifying Termination, elect ten annual installment payments commencing on the first anniversary of the Qualifying Termination. Accelerated Settlement, Including Upon Non-Qualifying Termination. Regardless of any elections as to the period of deferral, in the event of a termination of employment that is not a Qualifying Termination, the participant's deferral account will be settled as promptly as practicable following such termination. Thus, if the participant terminates employment voluntarily, or is terminated by the Company or a subsidiary with or without cause -- assuming the termination does not qualify as a retirement or a termination due to disability or death -- the participant will receive a lump sum settlement which generally will subject the participant to federal income taxation of the amount distributed in the year of the settlement. For purposes of the Plan, the term "retirement" means a 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 by the Committee. For purposes of the Plan, the term "disability" means a physical or mental impairment of sufficient severity such that the participant is both eligible for and in receipt of benefits under the long-term disability provisions of the Company's benefit plans. Settlement will be accelerated in the event of a Change in Control, as discussed below under the caption "--Effect of Change in Control and Related Transactions." In addition, the Committee may, in connection with a termination of the Plan or otherwise, accelerate the settlement of the deferral account of any or all participants. Mandatory Deferrals. The Plan permits the Company to mandate deferrals of awards under other compensation plans and arrangements, with those deferrals to be governed by Plan terms and conditions. The authority to implement compensatory awards under other plans with deferral periods is implicit in those other plans; this provision simply allows the Plan to provide the framework for conveniently administering any such deferrals. The Plan does not authorize the Company to mandatorily defer compensation, such as salary, to which a participant has a legally enforceable right, but it does permit the Company to mandate deferral of compensation awarded as a bonus or as to which the participant has agreed to permit deferrals in the discretion of the Company. In this regard, in electing to defer compensation under the Plan, the participant agrees that the Company may impose a mandatory deferral of settlement of the deferred compensation to the extent necessary to ensure that the settlement of the deferred compensation will not result in payment of non-tax deductible compensation by the Company. Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), compensation paid to a person who is a "covered employee," which means the Company's Chief Executive Officer and other four other most highly compensated executive officers for the given year, is not deductible by the Company to the extent that the compensation exceeds $1 million and is not qualified "performance-based" compensation (subject to limited exceptions not here relevant). This mandatory deferral would apply only to the extent that the participant has elected a settlement prior to termination of employment, only as to deferrals that do not qualify as "performance-based" compensation, and only to the extent that the settlement, when added to other non-performance-based compensation paid to the participant in a given year or which the Committee deems likely to be paid in such given year, will exceed $1 million. Such 8 mandatory deferral would extend only to the earliest time that the compensation could be paid without loss of a tax deduction by the Company under Section 162(m). With regard to "performance-based" compensation deferred under the Plan, the Plan provides that (i) if the participant is likely to be a "covered employee" in the year of settlement and (ii) if the compensation would lose its status as "performance-based" compensation due to deferral or the operation of any term of the Plan, then terms of the deferral will be automatically modified to the extent necessary to ensure that the compensation would not, at settlement, be disqualified as "performance-based compensation." Form of Payment Upon Settlement. Upon any settlement of the participant's deferral account, he or she will receive, with respect to cash deferrals, payment of the value of his or her deferral account at the settlement date in cash or, in the discretion of the Committee, delivery of other assets having a fair market value equal to the amount otherwise payable in cash. It is the intention of the Company that, if assets other than cash are to be delivered, only assets that correspond in type and amount to the investment vehicles in which the participant's deferral amounts are deemed invested immediately prior to settlement will be delivered to the participant. Any such cash or property may be delivered out of the rabbi trust relating to the Plan in settlement of the Company's obligation. See "--Rabbi Trust." EFFECT OF CHANGE IN CONTROL AND RELATED TRANSACTIONS Special rules apply to any Change in Control and related transactions. For purposes of the Plan, a "Change in Control" has the meaning defined in any employment agreement or change-in-control severance agreement between the Company and the participant or, if no such agreement is in effect at the relevant date, the meaning as defined in the Company's Employees' Stock Incentive Plan. 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. Upon a Change in Control: o All deferral periods will be automatically accelerated to end at the time of the Change in Control and deferral accounts will be settled within five business days thereafter, provided that the Committee may accelerate this settlement (for all or specified parts of a deferral account) in anticipation of a Change in Control for any reason (including to permit the participant to participate in a transaction related to but preceding the Change in Control), subject to such conditions as the Committee may impose. WITHDRAWALS FOR FINANCIAL EMERGENCY A participant may make a written application to the Committee seeking a withdrawal of all or a portion of his or her deferral account to respond to a financial emergency of the participant. The Committee may disapprove such a withdrawal for any reason, and will consider approving such an application only if the participant's financial emergency is of a substantial nature and beyond the participant's control, and if the Participant lacks other readily available assets that could be used to timely address the emergency, such that the payment to the participant of amounts previously deferred under the Plan is warranted. Upon such an approval of an emergency withdrawal, the Committee may specify the amount to be paid out to the participant and the time and manner of such payment. It is expected that withdrawals for 9 financial emergencies will be approved only in highly unusual circumstances, and not to permit participant's to respond to financial circumstances that could have been anticipated. VOLUNTARY WITHDRAWAL SUBJECT TO A 10% PENALTY A participant may voluntarily withdraw all or a portion of his or her deferral account balance upon 30 days' notice to the Committee, subject to a penalty equal to 10% of the amount withdrawn. The amount of this penalty will be forfeited and paid over to the Company. NATURE OF DEFERRED COMPENSATION OBLIGATIONS UNDER THE PLAN A participant's rights under the Plan are similar to those of an unsecured creditor of the Company, but subject to certain additional limitations. The obligations of the Company in respect of deferrals under the Plan, including any earnings or appreciation relating to the deferrals, is to make payments to a participant and his or her beneficiaries in accordance with the terms of the Plan (the "Obligations"). The Obligations are unsecured general obligations of the Company, and rank PARI PASSU with other unsecured and unsubordinated indebtedness and other liabilities, including trade payables, of the Company from time to time outstanding. The Obligations, which are denominated and payable in United States dollars, are not convertible into another security of the Company. The Obligations do not have the benefit of a negative pledge or any other affirmative or negative covenant on the part of the Company. Accordingly, the Company is subject to no limits in its ability to incur other liabilities that would have priority over the Obligations in a bankruptcy. No trustee (including any trustee of a rabbi trust, if one is created and used under the Plan) has been or will be appointed having the authority to take action which would provide any substantial protections to participants with respect to the Obligations, and each participant is responsible for acting independently with respect to, among other things, the giving of notices, responding to any requests for consents, waivers or amendments pertaining to the Obligations, enforcing agreements of the Company and taking action upon any default by the Company. No specific events are defined as events of default with respect to the Obligations. The deposit of any assets to a rabbi trust under the Plan will provide no substantial assurance that the Company will not default in the Obligations, and the Company will not otherwise segregate or set aside assets in respect of the Obligations. To the extent that the Company conducts operations through subsidiaries, all of the assets of its subsidiaries will be used to satisfy the creditors of the subsidiaries before any of such assets are available to the Company or its creditors, including participants. The Company's subsidiaries have numerous liabilities, and Plan participants have no protection from any restriction on subsidiaries incurring additional liabilities. In addition, dividends, loans and advances from certain subsidiaries to the Company may be restricted under debt covenants or other regulations or contractual restrictions. In addition, the restrictions on a participant's right to transfer or encumber the Obligations, any risk of forfeiture of awards granted under other Company plans but deferred under the Plan, and the inability of a participant to negotiate the terms of the Obligations cause the rights of a participant to be, in these respects, more restricted than those of other unsecured creditors of the Company. 10 RABBI TRUST The Company intends, but is not obligated, to establish an irrevocable grantor trust -- generally referred to as a "rabbi trust" -- for purposes of measuring the performance of the investment vehicles relating to cash compensation deferred under the Plan, to provide income to offset changes in the amount of the Company's deferred compensation obligations resulting from investment performance, and otherwise to facilitate the operation and administration of the Plan. Such trust provides no substantial protection to participants with regard to risks as to the creditworthiness of the Company, because the assets of the trust will remain subject to claims of the creditors of the Company. The Company may direct the trustee to pay cash or deliver assets in kind to a participant in settlement of his or her deferral account. FICA/HI TAX OBLIGATIONS; TAX WITHHOLDING; SETOFFS. Under U.S. law, amounts deferred under the Plan generally are subject to Social Security and Medicare withholding (FICA/HI) at the time of deferral. A participant who elects to defer under the Plan will have to meet these obligations out of other cash income, and must authorize the Company or a subsidiary or affiliate to withhold other cash compensation to meet these obligations. In other words, no part of the amount deferred will be used to satisfy the FICA/HI obligations. Once deferred, any earnings or appreciation in value of the deferral balance should not subject the participant to additional FICA/HI obligations. All withdrawals and payments in settlement of a participant's deferral account are subject to withholding for U.S. federal, state and local income and employment taxes. Similar income, employment and withholding taxes also may apply to participants who are resident in foreign jurisdictions. These may apply at the time of deferral, during any deferral period, or at the time of a withdrawal or payment in settlement of the participant's account. Moreover, any withdrawal or payment in settlement of a participant's account may be reduced or retained by the Company and applied to the payment of any deficit of the participant or other obligation of the participant to the Company, the participant's employer, or any affiliate of the Company or such employer. By deferring compensation and participating in the Plan, each participant consents to the right of setoff of the Company, his or her employer, and their affiliates. NON-TRANSFERABILITY A participant's account balances, rights to withdraw and rights to settlement of his or her deferral account, and all other rights under the Plan are not transferable except, in the event of the participant's death, by will or by the laws of descent and distribution or to a beneficiary designated by the participant in accordance with the Plan and any regulations adopted by the Committee permitting such designation. Likewise, a participant's account balances, rights to withdraw and rights to settlement of his or her deferral account, and all other rights under the Plan are not subject to alienation, pledge, encumbrance, attachment, garnishment, levy, or other legal process. RELIANCE ONLY ON WRITTEN DOCUMENTS; COPY OF PLAN The terms of the Plan are set forth in the Plan document, any written rules, regulations, or forms approved by the Committee for use under the Plan, and the portion of this memorandum captioned "Part II -- Terms and Conditions of Deferrals." No person is authorized to make any representation or commitment to a participant or beneficiary that is inconsistent 11 with such written documents, and no statement regarding the Plan should be relied on unless it is set forth in writing by the Company. This memorandum is intended only to provide a summary of significant terms of the Plan document, and it does not purport to be a complete description of all terms of the Plan. This memorandum is qualified in its entirety by the Plan document. A participant may obtain a copy of the Plan document by contacting the Company's Executive Compensation Department at the address set forth below: IMS Health Incorporated 660 W. Germantown Pike Plymouth Meeting, PA 19462 (610) 832-5867 STATEMENTS TO PARTICIPANTS The Company intends to provide a statement to each participant recording transactions and balances in the participant's the Plan account since close of the period covered in a previous statement not less frequently than annually. EX-10.5 8 SECOND AMENDMENT TO IMS HEALTH INC. SAVINGS PLAN Exhibit 10.5 SECOND AMENDMENT TO IMS HEALTH INCORPORATED SAVINGS PLAN Effective as of September 1, 1999 1. Article 1 of the IMS Health Incorporated Savings Plan (the "Plan") is hereby amended by adding the following new Section 1.24a to read in its entirety as follows: "1.24a `Emron Plan' shall mean the Emron, Inc. 401(k) Savings & Investment Plan." 2. Section 7.1(a) of the Plan is hereby amended by adding the following new sentence to the end thereof: "For a Member whose account balance under the Emron Plan was transferred to this Plan, the value of such transferred account which is attributable to his or her pre-tax contributions to the Emron Plan shall also be accounted for in his or her Pre-tax Account." 3. Section 7.1(d) of the Plan is hereby amended by adding the following new sentence to the end thereof: "For a Member whose account balance under the Emron Plan was transferred to this Plan, the value of such transferred account which is attributable to employer contributions to the Emron Plan shall also be accounted for in his or her Employer Account." 4. Section 7.1(e) of the Plan is hereby amended by adding the following new sentence to the end thereof: "For a Member whose account balance under the Emron Plan was transferred to this Plan, the value of such transferred account which is attributable to a promissory note due to a loan under the Emron Plan shall also be accounted for in his or her Loan Account." 5. Section 9.1 of the Plan is hereby amended by adding the following new subsection (e) to the end thereof to read in its entirety as follows: "(e) A Member whose account balance under the Emron Plan was transferred to this Plan may make a withdrawal of an amount up to the amounts so transferred into his or her Employer Account, Pre-tax Account and Loan Account at any time after attaining the age of 60." 6. Section 10.3 of the Plan is hereby amended by adding the following sentence to the end of subsection (e) thereof: "Notwithstanding the foregoing, a Member whose account balance under the Emron Plan was transferred to this Plan shall not have a vested portion of his or her Employer Account less than his or her nonforfeitable percentage of employer contributions under the Emron Plan as of the date of such transfer." 7. Section 11.1 of the Plan is hereby amended by adding the following new paragraph to the end thereof: "Notwithstanding the foregoing, a Member whose account balance under the Emron Plan was transferred to this Plan may elect to receive distribution of an amount up to the amounts so transferred into his or her Employer Account, Pre-tax Account and Loan Account under one or any combination of the following methods: (1) by payment in a lump sum, or (2) by payment in monthly, quarterly or annual installments over a fixed reasonable period of time, not exceeding the life expectancy of the Member, or the joint life and last survivor expectancy of the Member and his or her Beneficiary." -2- EX-10.6 9 1ST AMEND TO SUPP EXEC RETIREMENT PLAN Exhibit 10.6 FIRST AMENDMENT TO THE IMS HEALTH INCORPORATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE AS OF SEPTEMBER 1, 1999 1. Section 1.1 of the IMS Health Incorporated Supplemental Executive Retirement Plan (the "Plan") is hereby amended to read in its entirety as follows: "1.1 "ACTUARIAL EQUIVALENT VALUE" shall mean a benefit of equivalent value computed on the basis of the 1983 Group Annuity Mortality Table and interest equal to the yield on 30-year Treasury Bonds as of the last business day of the Plan Year prior to the year in which the relevant calculation occurs; provided, however, that for purposes of determining the Actuarial Equivalent Value of the amount described in Section 1.23(a) for Members or Vested Former Members who participated in the Predecessor to this Plan, the foregoing assumptions or the assumptions used in the Predecessor to this Plan shall be used, whichever produces the greater benefit for the Member or the Vested Former Member." 2. Section 1.23(b) of the Plan is hereby amended to read in its entirety as follows: "(b) the retirement income payable to a Member or Vested Former Member from any `excess benefit plan' as that term is defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), any plan described in Section 201(2) of ERISA, and any other contract, agreement or other arrangement providing a defined pension benefit or defined contribution retirement benefit, in any case, maintained or entered into with the Company or an Affiliated Employer (excluding this Plan, any Basic Plan, any defined contribution plan intended to meet the requirements of Code Section 401(a) and any elective plan of deferred compensation)." 3. Section 1.25 of the Plan is hereby amended to read in its entirety as follows: "1.25 "PREDECESSOR TO THIS PLAN" shall mean the Supplemental Executive Benefit Plan of The Dun & Bradstreet Corporation, as amended as of December 21, 1994." 4. Section 1 of the Plan is hereby further amended by adding the following new Section 1.32 to the end thereof to read in its entirety as follows: "1.32 `PLAN ADMINISTRATOR' shall mean the Company, except that any action authorized to be taken by the Plan Administrator hereunder may also be taken by any committee or person(s) duly authorized by the Board or the duly authorized delegees of such duly authorized committee or person(s)." 5. The Plan is hereby further amended by deleting therefrom all references to the term "Committee" and replacing therefor the term "Plan Administrator." 6. Section 7.1 of the Plan is hereby amended to read in its entirety as follows: "7.1 AMENDMENT; TERMINATION. The Board of Directors of the Company, may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part; provided, however, that no termination, suspension or amendment of the Plan may adversely affect (a) a Member's or Vested Former Member's benefit under the Paln to which he or she is entitled hereunder,or, (b) a Vested Former Member's right or the right of a Surviving Spouse to receive or to continue to receive a benefit in accordance with the Plan, such benefits or rights as in effect on the date immediately preceding the date of such termination, suspension or amendment. Notwithstanding the foregoing, the Employee Benefits Committee of the Company may amend the Plan without the approval of the Board of Directors of the Company with respect to amendments that such Committee determines do not have a significant effect on the cost of the Plan." -2- EX-10.7 10 FIRST AMENDMENT TO THE RETIREMENT EXCESS PLAN Exhibit 10.7 FIRST AMENDMENT TO THE IMS HEALTH INCORPORATED RETIREMENT EXCESS PLAN EFFECTIVE AS OF SEPTEMBER 1, 1999 1. Section VII(a) of the IMS Health Incorporated Retirement Excess Plan (the "Plan") is hereby amended to read in its entirety as follows: "(a) The Company shall be the plan administrator (the "Plan Administrator") under the Plan and as such shall be responsible for the administration of the Plan , except that any action authorized to be taken by the Plan Administrator hereunder may also be taken by any committee or person(s) duly authorized by the Board of Directors of the Company or the duly authorized delegees of such duly authorized committee or person(s). The Plan Administrator shall have the authority to determine all questions arising in connection with the Plan, to interpret the provisions of the Plan and construe all of its terms, to adopt, amend, and rescind rules and regulations for the administration of the Plan, and generally to conduct and administer the Plan and to make all determinations in connection with the Plan as may be necessary or advisable. All such actions of the Plan Administrator shall be conclusive and binding upon all participants and beneficiaries." 2. Section VII(b) of the Plan is hereby amended by deleting the first sentence thereof, and replacing it with the following: "(b) The Board of Directors of the Company may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part; PROVIDED, HOWEVER, that in the event of termination, the rights of participants to their accrued benefits hereunder shall be come nonforfeitable. Notwithstanding the foregoing, the Employee Benefits Committee of the Company may amend the Plan without the approval of the Board of Directors of the Company with respect to amendments that such Committee determines do not have a significant effect on the cost of the Plan." 3. Section IV(a) of the Plan is hereby amended by deleting therefrom the reference to the term "Committee" and replacing therefor the term "Plan Administrator". -2- EX-10.8 11 FIRST AMENDMENT TO THE SAVINGS EQUALIZATION PLAN Exhibit 10.8 FIRST AMENDMENT TO THE IMS HEALTH INCORPORATED SAVINGS EQUALIZATION PLAN EFFECTIVE AS OF SEPTEMBER 1, 1999 1. Section II of the IMS Health Incorporated Savings Equalization Plan (the "Plan") is hereby amended to read in its entirety as follows: "II. ADMINISTRATION OF THE PLAN. IMS Health Incorporated (the "Corporation" or the "Company") shall administer the Plan , except that any action authorized to be taken by the Company hereunder may also be taken by any committee or person(s) duly authorized by the Board of Directors of the Company or the duly authorized delegees of such duly authorized committee or person(s). The Company shall have full authority to determine all questions arising in connection with the Plan, including interpreting its provisions and construing all of its terms; may adopt procedural rules; and may employ and rely on such legal counsel, such actuaries, such accountants and such agents as it may deem advisable to assist in the administration of the Plan. All of its rules, interpretations and decisions shall be applied in a uniform manner to all participants similarly situated and decisions of the Company shall be conclusive and binding on all persons." 2. Section V of the Plan is hereby amended by adding the following sentence to the end of the first paragraph thereof: "Notwithstanding the foregoing, the Employee Benefits Committee of the Corporation may amend the Plan without the approval of the Board of Directors of the Corporation with respect to amendments that such Committee determines do not have a significant effect on the cost of the Plan." EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 230,714 0 246,991 12,634 35,362 583,941 364,602 194,052 1,480,329 623,633 0 0 0 3,350 513,141 1,480,329 0 994,303 0 780,880 0 0 4,672 224,255 64,048 160,207 25,695 0 0 185,902 .59 .58
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