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<SEC-DOCUMENT>0000950110-99-000251.txt : 19990304
<SEC-HEADER>0000950110-99-000251.hdr.sgml : 19990304
ACCESSION NUMBER: 0000950110-99-000251
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 31
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990301
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-K
SEC ACT:
SEC FILE NUMBER: 001-14049
FILM NUMBER: 99553695
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 001-12275.
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, CONNECTICUT 06880
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (203) 222-4200.
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- - ------------------- -------------------
Common Stock, par value $.01 per share ................. New York Stock Exchange
Preferred Stock Purchase Rights ........................ New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of February 1, 1999, 318,016,855 shares of Common Stock of IMS Health
Incorporated were outstanding and the aggregate market value of such Common
Stock held by nonaffiliates (based upon its closing transaction price on the
Composite Tape on such date) was approximately $12,025 million.
(Continued)
================================================================================
<PAGE>
Documents Incorporated by Reference
PART I
ITEM 1 -Business IMS Health Business
Segments, 1998, Pages
34 to 36 Note 17.
Operations by Business
Segments, of the 1998
Annual Report to
Shareholders.
ITEM 3 -Legal Proceedings Pages 32 and 33, Note
15. Contingencies, of
the 1998 Annual Report
to Shareholders.
PART II
ITEM 5 -Market for the Registrant's Common Pages 11 and 12,
Equity and Related Stockholder Financial Review, of
Matters the 1998 Annual Report
to Shareholders.
ITEM 6 -Selected Financial Data Page 38, Five-Year
Selected Financial
Data, of the 1998
Annual Report to
Shareholders.
ITEM 7 -Management's Discussion and Analysis Pages 1 to 12,
of Financial Condition and Results of Financial Review, of
Operations the 1998 Annual Report
to Shareholders.
ITEM 7A -Quantitative and Qualitative Disclosure Page 11, Financial
About Market Risk Review, and Page 24 to
25, Note 9. Financial
Instruments, of the
1998 Annual Report to
Shareholders.
ITEM 8 -Financial Statements and Supplementary Pages 14 to 38 of the
Data 1998 Annual Report to
Shareholders; Pages F-1
to F-20 of the Gartner
Group, Inc. 1998 Annual
Report to Shareholders.
PART III
ITEM 10 -Directors and Executive Officers of the Section entitled
Registrant "Election of Directors"
of the Company's Proxy
Statement dated
February 26, 1999.
ITEM 11 -Executive Compensation Section entitled
"Compensation of
Executive Officers and
Directors" of the
Company's Proxy
Statement dated
February 26, 1999.
ITEM 12 -Security Ownership of Certain Beneficial Section entitled
Owners and Management "Security Ownership of
Management and Others"
of the Company's Proxy
Statement dated February
26, 1999.
ITEM 13 -Certain Relationships and Related Not Applicable.
Transactions
--------------------------
The Index to Exhibits is located on Page 23
1
<PAGE>
PART I
As used in this report, except where the context indicates otherwise, the
terms "Company" and "IMS HEALTH" mean IMS Health Incorporated and all
subsidiaries consolidated in the financial statements contained or incorporated
by reference herein.
ITEM 1. BUSINESS
IMS Health Incorporated ("accounting successor to Cognizant") was
incorporated under the laws of the State of Delaware on February 3, 1998. The
Company began operating as an independent publicly held company on July 1, 1998
(the "Distribution Date") as a result of its spin-off (the "Cognizant Spin-off")
from Cognizant Corporation ("Cognizant"). Prior to the Cognizant Spin-off, the
Company was owned by Cognizant. Cognizant began operating as an independent
publicly held company on November 1, 1996 as a result of its spin-off (the "D&B
Spin-off") from The Dun & Bradstreet Corporation ("Dun & Bradstreet"). Prior to
the D&B Spin-off, Cognizant was owned by Dun & Bradstreet.
The Common stock of IMS HEALTH was distributed by Cognizant Corporation
("Cognizant") to its shareholders on June 30, 1998. Simultaneously with the
distribution Cognizant changed its name to Nielsen Media Research, Inc.
("Nielsen Media Research"). Notwithstanding the legal form of the distribution,
whereby Cognizant spun off IMS HEALTH, for accounting purposes the transaction
is accounted for as if Cognizant spun off Nielsen Media Research and IMS HEALTH
has been deemed the "accounting successor" to Cognizant. The separation created
IMS HEALTH as the premier global provider of information solutions to the
pharmaceutical and healthcare industries, and established an independent Nielsen
Media Research, the leader in North American electronic audience measurement
services.
On November 11, 1998 the Company announced that its Board of Directors
approved a plan, in principle, to spin-off substantially all of its equity
ownership of Gartner Group, Inc. ("Gartner"). The transaction, expected to be
completed in the first half of 1999, is to be structured as a tax-free
distribution of Gartner stock to IMS HEALTH shareholders.
At the December 31, 1998 the Company owned approximately 47 million shares
of Gartner. Prior to the spin-off, 40.1 million of these shares will be
exchanged for new Class B Common Stock of Gartner. The Class B Stock will be
entitled to elect 80% of Gartner's Board of Directors, but will otherwise be
identical to existing Class A Common Stock. The exchange will be part of a
Gartner recapitalization. The Class B shares will be distributed to the
Company's shareholders in a tax-free distribution, subject to receipt of a
favorable tax ruling from the Internal Revenue Service ("IRS") with respect to
the distribution. The Company intends to monetize its remaining position in
Gartner by the end of 1999. This includes 6.9 million shares of Class A Common
Stock and warrants to purchase a further 600,000 shares.
Separately, Gartner announced that, subject to approval by the IRS of the
tax-free treatment of the distribution, it intends to declare a special one-time
cash dividend of $300 million to its shareholders of record immediately prior to
the spin-off. The Gartner Board of Directors also announced that it intends to
authorize a $300 million open market share repurchase program for up to 20% of
its stock commencing immediately after the spin-off.
The transaction is subject to receipt of a favorable ruling from the IRS,
final approval by the Company's and Gartner Boards of Directors, and approval by
Gartner shareholders.
IMS HEALTH is the global provider of information solutions to the
pharmaceutical and healthcare industries. 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"),
IMS Health Strategic Technologies Inc. ("Strategic Technologies"), which is a
leading provider of automated sales support to the pharmaceutical industry,
ERISCO Managed Care Technologies, Inc. ("Erisco"), which provides application
software and services to the healthcare industry to help manage the
administration of group health and life insurance products, Enterprise
Associates, Inc. ("Enterprises"), which invests in businesses mainly in the
information technology and healthcare information industries, a 61.7% ownership
interest in Cognizant Technology Solutions Corporation ("CTS"), which provides
software solutions to complex IT problems including application development and
maintenance services and Year 2000 and Eurocurrency compliance services. The
Company also has an equity investment in Gartner Group, Inc. ("Gartner"), the
premier provider of research and advisory services to the information technology
industry. The Company operates in approximately 90 countries. The number of
full-time equivalent employees at December 31, 1998 was approximately 8,000.
The Company's operations can be grouped into the following business
segments: IMS, Emerging Markets, and CTS, plus its equity investment in Gartner.
Gartner is the leading independent provider of research and analysis on the
computer hardware, software, communications and related technology industries.
2
<PAGE>
IMS
The IMS segment provides information and decision-support services to the
pharmaceutical and healthcare industries worldwide. These services broadly
include market research services, sales management services, sales force
automation and other professional, software, direct marketing and research and
development services. IMS provides information services covering 94 countries
and maintains offices in 74 countries on six continents, with 62% of total
revenue generated outside the United States in 1998. In 1998, IMS continued its
expansion in developing markets in Eastern Europe and Sub-Saharan Africa.
Revenue in 1998 increased by 22% compared with 1997 in these developing markets.
Sales management services represented approximately 48% of the IMS
segment's worldwide revenue in 1998. Sales management services include sales
territory reports, prescription tracking reports and doctor profiling services.
These reports are customized for each pharmaceutical client and are used
principally by pharmaceutical manufacturers to measure and forecast the
effectiveness and efficiency of sales representatives and to target the
marketing and sales efforts of a client's salesforce. IMS's principal sales
management services are as follows:
o Sales Territory Reporting Services. Sales territory reporting is the
principal sales management service offered by IMS to its
pharmaceutical clients. Sales territory reports can be precisely
tailored for each client, and measure the sales of a client's own
products and those of competitors within specified geographical
configurations. These reports are designed to provide marketing and
sales managers with a reliable measurement of each salesperson's
activity and effectiveness in his or her sales territory, and
therefore are used by clients, among other things, for determining
sales force compensation. Data reported for multiple territories are
used for applications such as resource allocation, territory
alignment, market analyses and distribution management. Depending on
the particular market, sales territory reports are available to
clients on a weekly, monthly or quarterly basis. In the United
States, sales territory reports from IMS's DDD service allow
pharmaceutical clients to track the flow of their products and those
of their competitors to various levels of geography and channels of
distribution. The DDD database contains a virtual census of sales of
pharmaceutical products through all distribution channels, including
direct sales by pharmaceutical manufacturers and indirect sales
through drug wholesalers, mail order distributors, warehousing
chains and other market participants. IMS provides sales territory
reporting services in 35 countries.
o Prescription Tracking Reporting Services. Prescription tracking
reporting services are designed to monitor prescription activity and
to track the movement of pharmaceutical products out of pharmacies.
Prescription tracking services are used by pharmaceutical companies
to facilitate product marketing at the prescriber level. In the
United States, the Xponent service monitors prescription activity at
the retail pharmacy and mail order outlet level, and uses a patented
statistical methodology to project the prescription activity of
nearly one million individual prescribers on a monthly basis.
Xponent is currently under development in Europe. The Europe Xponent
database is built from prescription data collected from retail
pharmacies and coding centers which are linked to the geographical
area in which the prescription was written, and where permissible
under local data privacy laws, to individual prescribers. Europe
Xponent is in development in the United Kingdom, Germany, Belgium,
the Netherlands, Italy, France and Spain. The acquisition of PMSI
has accelerated the development of Xponent.
Sales management reporting services are made available to clients
and their sales representatives and management via hardcopy reports, CD-ROMs,
software application tools, computer on-line services, web based access and
magnetic media for use in client computer systems and IMS's customized
electronic workstations. IMS's data delivery systems assist clients in
maximizing efficiency by aiding in the setting of sales targets and calculation
of sales commissions; giving fast access to sales data and permitting more
sophisticated analyses; improving call reporting; and improving communication
between sales management and their sales forces. In the United States, IMS has
several customized client-server decision support systems that allow a client to
store large amounts of data at its own site and integrate its own internal sales
and marketing data with IMS data and other external data. IMS also provides
clients with customized data warehouse tools and web based access capabilities.
Market research services represented approximately 35% of the IMS
segment's worldwide revenue in 1998. The principal market research services are
syndicated pharmaceutical, medical, hospital, promotional, prescription and
self-medication audits. Market research services are utilized by clients for
various strategic purposes, including analyzing market shares, therapeutic
prescribing trends and price movements at the national and subnational levels.
The information reported in these services is generated or derived from data
collected primarily from pharmaceutical manufacturers, pharmaceutical
wholesalers, pharmacies, hospitals and doctors. Market research services are
delivered to clients via hardcopy reports, CD-ROMs, software application tools,
computer on-line services, and magnetic media for use in client computer systems
and IMS's customized electronic workstations. IMS's principal market research
services are as follows:
3
<PAGE>
o Pharmaceutical Audits. These audits measure the sale of
pharmaceutical products into pharmacies, supplemented in some
countries by data collected from prescribing physicians, retail
chains and discount stores. These audits contain data projected to
national estimates, showing product sales by therapeutic class
broken down by package size and dosage form. IMS publishes
pharmaceutical audits in over 83 countries.
o Medical Audits. These audits are based on information collected from
panels of practicing physicians and contain projected national
estimates of the number of consultations for each diagnosed disease
with details of the therapy prescribed. These audits also analyze
the use physicians make of individual drugs by listing the diseases
for which they are prescribed, the potential therapeutic action the
physician is expecting, other drugs prescribed at the same time, and
estimates of the total number of drugs used for each disease. IMS
publishes medical audits in over 47 countries.
o Hospital Audits. These audits contain data projected to national
estimates and show the sale of pharmaceutical products to hospitals
by therapeutic class. Related reports provide audits of laboratory
diagnostic supplies, hospital supplies, and hospital records. IMS
publishes hospital audits for 38 countries.
o Promotional Audits. These audits measure pharmaceutical promotion
for a particular market, including sales-force promotion and journal
and mail advertising, based on information received from panels of
physicians and from monitoring medical journals and direct mail. IMS
publishes promotional reports for 26 countries.
o Prescription Audits. These audits analyze the rate at which drugs
move out of the pharmacy and into the hands of the consumer, and
measure both what is prescribed by physicians and what is actually
dispensed at the pharmacy. IMS publishes prescription audits in over
15 countries.
o Self-Medication and OTC Reports. These reports provide detailed
product movement, market share and pricing information for
over-the-counter, personal care and patient care products. IMS
publishes self-medication reports in 34 countries.
o Other Market Research Reports. These include managed care reports
which offer an array of information to quantify the effects of
managed care on the pharmaceutical and healthcare industry; personal
care reports which measure the sale of healthcare accessories, wound
care and dietetic aids; and veterinary reports which analyze the
animal care pharmaceutical market. IMS has developed, in certain
countries, disease and treatment information at the patient level
(which information is not identifiable to any individual patient)
that gives participants in the healthcare industry new insights into
the treatment of diseases. The availability, scope and frequency of
the foregoing reports vary on a country-by-country basis.
The remaining 17% of the IMS segment's 1998 revenue was derived primarily
through professional consulting, software, direct marketing, research and
development services, and sales support technology. IMS provides pharmaceutical
and other clients with a range of value-added services that are used (i) to
study specific issues and trends in the pharmaceutical marketplace and the
healthcare industry, (ii) to manage sales and marketing, (iii) to evaluate the
effectiveness of marketing programs, (iv) to analyze components of a product
marketing program at any stage of its implementation, and (v) for consultancy
in optimizing strategy, marketing programs and product commercialization. These
services are as follows:
o IMS Global Services. IMS's Global Services unit is based in the
United Kingdom and the United States and provides access to global
level information services to pharmaceutical clients operating on a
multinational level. Global Services' core service offering,
MIDAS(TM), is an on-line multinational integrated data analysis tool
which harnesses IMS's worldwiDE databases and is used by the
pharmaceutical industry to assess and utilize pharmaceutical
information and trends in multiple markets. MIDAS gives clients
on-line access to IMS-compiled pharmaceutical, medical, promotional
and chemical data. Using MIDAS, clients are able to select
information from the national databases compiled by IMS and produce
statistical reports in the format the client requires. IMS Global
Services also publishes various in-depth reviews of the worldwide
pharmaceutical marketplace and provides custom market research and
strategic consultancy.
o Territory enterprise relationship management systems. Strategic
Technologies, a subsidiary of IMS HEALTH is a leading provider of
automated sales support technologies to the pharmaceutical industry.
Strategic Technologies offers sales and marketing applications which
can be integrated with client-critical databases to provide customer
and business insights. Over 35,000
4
<PAGE>
pharmaceutical sales executives worldwide rely on Strategic
Technologies' solutions to make critical sales and marketing
decisions on a daily basis. Three industry-leading IMS HEALTH
products increase pharmaceutical sales force performance and
productivity by providing access to up-to-the-minute profiling,
targeting, activity reporting, team selling and sample management
information. Cornerstone(TM) is a flexiblE, Windows(TM)-based,
integrated sales and marketing information system used by sales
forces. Capabilities of IMS HEALTH'S Cornerstone include the ability
to quickly access and generate standard and customized reports, such
as weekly activity summary reports, division reports and product
launch reports; desktop or laptop reporting that provides fast
updating of customer activities; and access to pharmaceutical
databases through Cornerstone's MarketViews, which can be configured
to deliver customized sales summaries by territory, district and
physicians. Premiere(SM) is a Windows(TM)-based, integrated salES
and marketing information system similar to Cornerstone with a
substantial user base in Europe, Canada and Asia/Pacific. Core data
can be drawn from various sources and tailored by country, region,
department or individual user. Its unique application generators and
builders are used to customize and modify the system to a company's
specific requirements --quickly and without the need for
re-programming. Sales and marketing professionals at every level of
an organization can use Premiere to develop selling strategies,
allocate and coordinate sales resources, track competitive activity,
and plan, monitor and evaluate sales activity. Precise(SM)2000 is an
Electronic Territory Management System that offers lower-cost
hardware solutions for pharmaceutical sales organizations. The
system is designed to help sales teams optimize their resources at
every level, including organizing daily sales activities, monitoring
individual performance, and making strategic and tactical decisions.
This fully integrated software system also can be customized to
increase productivity, to target prospective customers and to
improve decision-making within a sales organization. Management is
currently developing a next stage integrated and global sales
management information system. Strategic Technologies is a market
leader in application of a variety of hand held devices which offer
greater portability in developed markets and a low cost entry
strategy into sales force automation in emerging markets.
o Professional Consulting Services. IMS's professional consulting
services are provided to assist clients in the analysis and
evaluation of market trends, strategies and tactics, and to assist
in the development and implementation of customized software
applications and data warehouse tools. In the United States, IMS's
professional consulting services provides a wide range of custom
market research, promotion optimization, promotion effectiveness,
managed care and other advanced analytics services for the
pharmaceutical and healthcare marketplace. The professional services
consulting group also assists clients in designing customized
decision support systems based on a variety of cutting-edge
technologies which enable clients to optimize IMS data more rapidly
and effectively in their decision-making process. Outside of the
United States, a variety of consulting services is generally offered
on a country-by-country basis.
o Direct Marketing Services. IMS engages in the direct marketing
businesses in the United States. Clark-O'Neill, Inc.
("Clark-O'Neill"), a wholly-owned subsidiary, represents the core of
IMS's direct marketing business. Clark-O'Neill's services include
sample distribution, pharmaceutical field salesforce support
services, publication circulation management, direct mail,
telemarketing projects utilizing physicians and other healthcare
professionals, and other customized promotion programs.
o Research and Development Services. IMS's research and development
services provide clients with information and workstation tools
intended to improve the effectiveness and speed of clinical research
and subsequent regulatory approvals. IMS's regulatory affairs
database, IDRAC, covers the European Union, certain Eastern European
countries, Japan and the United States, guides users through the
drug development and registration process. IMS also owns a 40%
equity interest in DataEdge, an information provider to the
pharmaceutical industry on clinical trial design and implementation.
o Pharmacy dispensing and point-of-sales software systems. IMS also
provides pharmacy dispensing and point-of-sale software systems to
retail pharmacies in the United Kingdom and Australia.
Over the past four decades, IMS has developed strong relationships with
its data suppliers in each market in which it operates. As the supply of
pharmaceutical data is critical to IMS's business, IMS devotes significant human
and financial resources to its data collection efforts and in many cases has
historical connections with the trade associations and professional associations
involved. In the United States, IMS HEALTH and Clark-O'Neill each have been
designated as database licensees by the American Medical Association ("AMA") for
use and sublicensing of the AMA's physician database.
Sales to the healthcare industry accounted for substantially all of the
IMS segment's revenue in 1998. All major pharmaceutical companies are customers
of IMS, and many of the companies subscribe to reports and services in several
5
<PAGE>
countries. IMS's customer base is broad in scope and enables it to avoid
dependence on any single customer. None of IMS's customers accounted for more
than 10% of the Company's gross revenues in 1998.
While no competitor provides the geographical reach or breadth of IMS's
services, IMS generally has competition in the countries in which it operates
from other information services companies, as well as the in-house capabilities
of its customers. Generally, competition has arisen on a country-by-country
basis. In the United States, certain of IMS's sales management services,
including its sales territory and prescription tracking reports, representing
approximately 60% of the annual revenue of the US unit, compete with the
services of National Data Corp. Quality, completeness and speed of delivery of
information services and products are the principal methods of competition in
IMS's market.
EMERGING MARKETS
This segment is comprised of Erisco, Enterprises and SSJ K.K. ("SSJ").
ERISCO
Erisco has been a leading provider of application software and services to
the healthcare industry for over two decades. Erisco's legacy system solutions,
ClaimFacts and GroupFacts, were designed to help indemnity insurance carriers,
third party administrators and self-administered corporations manage the
administration of group health and life insurance products.
Erisco's primary offering, Facets, is a client/server system which
integrates advanced technology with clinical information to help managed care
organizations ("MCOs") provide high-quality, cost-effective solutions in their
marketplace. Primary markets include health maintenance organizations, preferred
provider organizations, Blue Cross/Blue Shield organizations, managed-indemnity
carriers and specialized MCOs.
Erisco's strategic growth will come from Facets sales to the MCO market.
Ongoing change in healthcare has had a significant impact on this market
segment, resulting in the migration of plan members from indemnity-oriented
plans to managed care. By the year 2000, managed health plan membership in the
United States is estimated to surpass the 100 million mark. This significant
market growth combined with the limitations of aging information systems, will
continue to increase the demand for sophisticated managed care applications.
Erisco also extends its Facets business solution through a service bureau
offering for low-volume customers, and through alliances with strategic,
complementary systems partners, and systems integration and implementation
consultants.
Within the high-growth managed care market segment, Erisco competes with
three other information systems vendors; McKessonHBOC, Computer Sciences
Corporation and Health Systems Design. Competition is principally based on
company reputation, system functionality and technology, and ease of use and
service.
ENTERPRISES
Enterprises invests in emerging and established businesses, with an
emphasis on information technology and the health care information industry. It
has invested as a limited partner in Information Partners Capital Fund,
Information Associates, L.P. and Information Associates II, L.P., all of which
are venture capital limited partnerships, as well as through direct investments.
SSJ
SSJ is based in Japan and markets financial application software products
and services tailored for the Japanese market.
6
<PAGE>
CTS
In the second quarter of 1998, CTS effected an initial public offering of
its Class A Common Stock. As of December 31, 1998 IMS HEALTH owns 61.7% of the
outstanding common stock of CTS, representing approximately 94% of the combined
voting power of CTS' common stock. CTS is quoted on the Nasdaq National Market
under the trading symbol "CTSH." CTS provides various software development and
maintenance services to IMS Health and is subsidiaries, including assisting in
IMS HEALTH'S Year 2000 compliance efforts. IMS HEALTH provides certain
administrative services to CTS pursuant to an agreement entered into in
connection with the public offering.
During 1998, CTS recorded intercompany sales of approximately $13
million, principally to the IMS segment. These sales are eliminated in
consolidation.
CTS delivers high-quality, cost-effective, full life cycle solutions to
complex software development and maintenance problems. Its services include the
following:
o Application Development Services. CTS develops new applications for
IBM mainframe, client/server architectures and other emerging
technology environments. CTS follows either of two approaches,
including (i) full life cycle application development in which CTS
assumes total start-to-finish responsibility and accountability for
analysis, design, implementation and testing of systems, or (ii)
cooperative development in which CTS's employees work with a
customer's in-house information technology ("IT") personnel to
analyze, design, implement and test new systems.
o Application Maintenance Support Services. CTS provides services to
ensure that a customer's legacy software systems are operational and
responsive to end-users' changing needs. In doing so, CTS is often
able to introduce process enhancements and improve service levels to
customers requesting modifications and on-going support.
o Year 2000 Compliance Services. With the year 2000 approaching,
computer software systems that were not designed to process dates
correctly in the next century are expected to fail. Organizations
rely on mission-critical software systems and must either repair the
problem presented by the Year 2000 issue or replace legacy systems.
CTS uses its proprietary Year 2000 toolset and methodology, Century
Transition Services 2000, to provide a cost-effective total solution
for all phases of a Year 2000 compliance project. The Century
Transition Services 2000 methodology covers the entire life cycle of
a Year 2000 compliance project and comprises a seven step process:
(i) inventory preparation, (ii) impact analysis, (iii) strategy and
design, (iv) code change and data migration, (v) unit, system and
acceptance testing, (vi) implementation and (vii)
post-implementation support. The Century Transition Services 2000
toolset covers a wide array of common programming languages and
environments including many client/server environments. CTS is thus
able to provide complete solutions across a large portion of
customers' systems.
o Eurocurrency Compliance Services. The monetary union of the European
Community presents a significant opportunity for CTS as computer
systems which deal with any European denominated currency modified
to handle local currency and Eurocurrency transactions. CTS is
addressing the Eurocurrency compliance problem and has established a
dedicated practice to focus on this problem. CTS believes that
portions of its Year 2000 toolset and methodology can be extended to
efficiently address the European currency compliance needs of
customers.
o Testing and Quality Assurance Services. Testing and quality
assurance is a critical aspect of any software development activity.
CTS works with customers to better define the quality assurance
processes which are in use by the customers' in-house IT
departments. CTS utilizes its quality assurance expertise to ensure
better quality software through fundamental process improvements.
o Re-Hosting and Re-Engineering Services. Through CTS's re-hosting and
re-engineering service offerings, CTS works with customers to
migrate systems based on legacy computing environments to newer,
open-systems-based platforms and client/server architectures.
The IT services market includes a large number of participants, is subject
to rapid changes and is highly competitive. Many of CTS's competitors have
significantly greater financial, technical and marketing resources and greater
name recognition than CTS. The principal competitive factors affecting the
markets for CTS's services include (i) performance and reliability, (ii) quality
of technical support, training and services, (iii) responsiveness to customer
needs, (iv) reputation, experience and financial stability and (v) competitive
pricing of services.
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RESOURCE GROUP
Shared Business Services began operations in 1994 as an internal services
business. The shared service center in Allentown, Pennsylvania provides
centralized functions covering broad finance and administrative services
formerly supplied within each IMS HEALTH division, in the United States and
Canada, but at lower cost with higher levels of service. In 1998 effective with
the Cognizant Spin-off, the center began servicing Nielsen Media Research as an
external services provider in the functions of general accounting, accounts
payable, payroll and financial systems support.
FOREIGN OPERATIONS
As indicated above, IMS HEALTH and its subsidiaries engage in a
significant portion of their business outside of the United States. IMS HEALTH's
foreign operations are subject to the usual risks inherent in carrying on
business outside of the United States, including fluctuation in relative
currency values, possible nationalization, expropriation, price controls and
other restrictive government actions. IMS HEALTH believes that the risk of
nationalization or expropriation is reduced because its products are software,
services and information, rather than the production of products which require
manufacturing facilities or the use of natural resources.
INTELLECTUAL PROPERTY
IMS HEALTH owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business. Management believes that the "IMS" name and related names,
marks and logos are of material importance to IMS HEALTH. IMS HEALTH is licensed
to use certain technology and other intellectual property rights owned and
controlled by others, and similarly, other companies are licensed to use certain
technology and other intellectual property rights owned and controlled by IMS
HEALTH. The technology and other intellectual property rights licensed by IMS
HEALTH are of importance to its business, although management of IMS HEALTH
believes that IMS HEALTH's business, as a whole, is not dependent upon any one
intellectual property or group of such properties.
The names of IMS HEALTH's and its subsidiaries' products and services
referred to herein are trademarks, service marks, registered trademarks or
registered service marks owned by or licensed to IMS HEALTH or one of its
subsidiaries.
RELATIONSHIP BETWEEN IMS HEALTH
AND NIELSEN MEDIA RESEARCH AFTER THE DISTRIBUTION
Prior to the Cognizant Spin-off, IMS HEALTH and Cognizant (which changed
its name to Nielsen Media Research, Inc.) entered into certain agreements
governing their relationship subsequent to the Cognizant Spin-off and providing
for the allocation of certain liabilities and obligations arising from periods
prior to the Cognizant Spin-off, including those obligations and liabilities
that arose in connection with the D&B Spin-off. The following descriptions
summarize certain terms of such agreements, but is qualified by reference to the
texts of such agreements, which are incorporated by reference to the Exhibits to
this Form 10-K.
DISTRIBUTION AGREEMENT
Cognizant and IMS HEALTH entered into a Distribution Agreement (the
"Distribution Agreement") providing for, among other things, certain corporate
transactions required to effect the Cognizant Spin-off and other arrangements
between Cognizant and IMS HEALTH subsequent to the Cognizant Spin-off.
In particular, the Distribution Agreement defines the assets and
liabilities which were allocated to and assumed by IMS HEALTH and those which
are allocated to and assumed by Nielsen Media Research. All assets were
transferred without any representation or warranty, "as is-where is", and the
relevant transferee bears the risk that any necessary consent to transfer was
not obtained.
The Distribution Agreement provides for, among other things, assumption of
liabilities and cross indemnities designed to allocate generally, effective as
of the Distribution Date, financial responsibility for the liabilities arising
out of or in connection with (i) Cognizant's businesses (i.e., Nielsen Media
Research) and certain other specified liabilities and (ii) all other liabilities
to IMS HEALTH. Pursuant to the terms of the 1996 Distribution Agreement (the
"1996 Distribution Agreement") among Cognizant, Dun & Bradstreet and ACNielsen
Corporation ("ACNielsen"), as a condition to the Distribution, IMS HEALTH and
Nielsen Media Research were required to and did undertake to be jointly and
severally liable to Dun & Bradstreet and ACNielsen for any liabilities arising
thereunder. The Distribution Agreement allocates between IMS HEALTH and
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Nielsen Media Research the financial responsibility for such liabilities
including contingent liabilities related to certain prior business transactions
and certain liabilities to Dun & Bradstreet that may arise in connection with
the D&B Spin-off.
Among other things, IMS HEALTH and Nielsen Media Research agreed to an
allocation of certain potential liabilities in connection with the action filed
by Information Resources, Inc. described in Note 15 of the Notes to Consolidated
Financial Statements in the 1998 Annual Report to Shareholders, referred to in
Item 3 Legal Proceedings (the "IRI Action"). IMS HEALTH and Nielsen Media
Research have agreed that, as between themselves, IMS HEALTH will assume 75%,
and Cognizant will assume 25%, of any payments to be made by Cognizant in
respect of IRI Action under the 1996 Indemnity and Joint Defense Agreement among
Cognizant, Dun & Bradstreet and ACNielsen (the "IJDA") including any legal fees
and expenses incurred in 1999 or thereafter. IMS HEALTH agreed to be fully
responsible for any legal fees and expenses incurred during 1998. Nielsen Media
Research aggregate liability to IMS HEALTH for payments in respect of the IRI
Action and certain other specified contingent liabilities is not to exceed $125
million. Under the IJDA, ACNielsen assumed exclusive liability for the IRI
Liabilities up to a specified amount (the "ACN Maximum Amount"), which is to be
calculated at the time such liabilities, if any, become payable, and that
Cognizant and Dun & Bradstreet 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 is able to pay
after giving effect to (i) any plan submitted by such investment bank which is
designed to maximize the claims-paying ability of ACNielsen without impairing
the investment banking firm's ability to deliver a viability opinion (but which
will not require any action requiring shareholder approval), and (ii) payment of
related fees and expenses. For these purposes, financial viability means the
ability of ACNielsen, after giving effect to such plan, the payment of related
fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as
they become due and to finance the current and anticipated operating and capital
requirements of its business, as reconstituted by such plan, for two years from
the date any such plan is expected to be implemented.
In addition, pursuant to the Distribution Agreement, on the Distribution
Date, Nielsen Media Research contributed to IMS HEALTH all cash in Nielsen Media
Research accounts other than (i) cash required by Nielsen Media Research to
satisfy certain specified obligations and (ii) such additional cash as was
necessary for the net borrowings of Nielsen Media Research (excluding the items
referred to in clause (i)) to be $300 million as of the Distribution Date.
The Distribution Agreement provides that neither Nielsen Media Research
nor IMS HEALTH will take any action that would jeopardize the intended tax
consequences of the Cognizant Spin-off. Specifically, each company agrees to
maintain its status as a company engaged in the active conduct of a trade or
business, as defined in Section 355(b) of the Internal Revenue Code, until the
second anniversary of the Distribution Date. As part of the request for a ruling
that the Cognizant Spin-off will be tax free for Federal income tax purposes,
each company represented to the Internal Revenue Service that, subject to
certain exceptions, it has no plan or intent to liquidate, merge or sell all or
substantially all of its assets. As a result, the Company may not initiate any
action leading to a change of control, and in the case of a change in control,
the foregoing representations, and the ruling based thereon, could be called
into question. As a result, the acquisition of control of the Company prior to
July 1, 2000 may be more difficult or less likely to occur because of the
potential substantial contractual damages associated with a breach of such
provisions of the Distribution Agreement.
TAX ALLOCATION AGREEMENT
Nielsen Media Research and IMS HEALTH entered into a Tax Allocation
Agreement under which IMS HEALTH agreed to pay any taxes, or receive any refunds
or credits of taxes, shown as due on a U.S. federal, state or local income or
franchise tax return for a taxable period beginning prior to the Distribution
Date (including the current taxable period to the extent such taxes, refunds or
credits are attributable to the portion of such taxable period up to and
including the Distribution Date). Any subsequent adjustment of such taxes will
be allocated to IMS HEALTH if such adjustment relates to IMS HEALTH's business
and to Cognizant if such adjustment relates to the Nielsen Media Research
business, except that any adjustment of such taxes attributable to tax items or
positions initially determined by Cognizant's corporate office will be allocated
to IMS HEALTH.
All taxes other than U.S. federal, state and local income and franchise
taxes will be the responsibility of IMS HEALTH if they are attributable to IMS
HEALTH's business and of Nielsen Media Research if they are attributable to
Nielsen Media Research business.
For taxable periods beginning on or after the Distribution Date (and the
portion of the current taxable period beginning after the Distribution Date),
IMS HEALTH and Nielsen Media Research will be responsible for their own taxes.
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EMPLOYEE BENEFITS AGREEMENT
Nielsen Media Research and IMS HEALTH entered into an Employee Benefits
Agreement, which allocates responsibility for certain employee benefits matters
on and after the Distribution Date. Among other things, the Employee Benefits
Agreement requires that the Company adopt a defined pension plan, nonqualified
supplemental pension plans and welfare plans for the benefit of IMS HEALTH
employees and former employees. Nielsen Media Research is required to continue
to sponsor its current defined benefit pension plans and welfare plans for the
benefit of employees and former employees and will retain the liability for
benefits under Nielsen Media Research nonqualified supplemental pension plans
for such employees. Nielsen Media Research and IMS HEALTH will each generally
retain the severance liabilities of their respective employees who terminated
employment prior to the Distribution Date. Assets and liabilities of the
Cognizant Pension Plan attributable to the Company's employees and retirees were
transferred to a plan maintained by the Company.
AMENDED AND RESTATED TRANSITION SERVICES AGREEMENT
Nielsen Media Research, IMS HEALTH, Dun & Bradstreet, R.H. Donnelley,
Inc., ACNielsen and Gartner entered into an Amended and Restated Transition
Services Agreement pursuant to which such parties have agreed to certain basic
terms governing the provision by Dun & Bradstreet to the other parties of
insurance and risk management services for a transitional period after the
Distribution Date. The Amended and Restated Transition Services Agreement amends
and restates in its entirety the Transition Services Agreement dated as of
October 28, 1996 among Cognizant, Dun & Bradstreet and ACNielsen entered into in
connection with the D&B Spin-off and includes Gartner as a party to such
agreement.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information and statements provided by the Company may
contain "forward-looking statements" as defined by the Private Securities
Litigation Reform Act of 1995. The Company cautions shareholders and investors
that actual results may differ materially from those projected or suggested in
any forward-looking statement as a result of a wide variety of factors,
including but not limited to the factors set forth below:
o Many existing computer systems and software applications use two
digits, rather than four, to record years. Unless modified, such
systems will not properly record or interpret years after 1999,
which could lead to business disruptions ("the Year 2000 issue").
The Company began to address the Year 2000 issue in 1996, when it
began to assess the impact on its operations. 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. CTS, a
majority owned subsidiary, is being used to convert the majority of
the systems to allow most internal staff members to focus on the
core business. The Company has also used outside services to assist
in conversion and to assess the progress of its Year 2000 program.
The Company has identified its Year 2000 areas of focus as systems
and software for the creation and delivery of its products and
systems and software for its internal administrative operations.
o 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 materially. Specific factors that may cause such
material 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 the continuous
operation of industries outside of its direct control such as
utilities, transportation, etc. 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. See the "Financial Review" in the 1998 Annual
Report to Shareholders.
o Results could be affected by the costs and other effects of
litigation and other contingencies involving the Company. In
particular, management of the Company is unable to predict at this
time the final outcome of the IRI Action described in "Note 15.
Contingencies" of the Notes to Consolidated Financial Statements in
the 1998 Annual Report to Shareholders, or whether the resolution of
this matter could materially affect the Company's results of
operations, cash flows or financial position.
o The Company has been informed by The Dun & Bradstreet Corporation
("D&B") that the IRS is currently reviewing D&B's utilization of
certain 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 is made
and the IRS prevails would be approximately $425,000 for taxes and
accrued interest net of tax benefit. Under the terms of the 1996
Distribution Agreement, the Company is liable to pay half of such
taxes and interest owed to the extent that D&B's total liabilities
exceed $137,000. A portion of the Company's liabilities would in
turn be shared with Nielsen Media Research in connection with the
Distribution dated June 30, 1998 between Cognizant and the Company.
The Company estimates that its current share of the Liability were
the IRS to prevail would be approximately $135,000. Additional
information is incorporated by reference to Note 12. Income Taxes on
Pages 30 - 31 of the 1998 Annual Report to Shareholders.
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o The Company operates globally, deriving 59% of its $1,186,513 in
revenue and 114% of its $132,484 in operating income from non-U.S.
operations. As a result, fluctuations in the value of foreign
currencies relative to the U.S. dollar may increase the volatility
of U.S. dollar-denominated operating results. The Company's
geographic expansion in emerging markets such as Eastern Europe,
Africa and Asia Pacific is expected to continue. Emerging markets
tend to be considerably less stable than established markets which
may further contribute to volatility in operating results. In
addition, the Company is subject to the usual risks inherent in
carrying on business in certain countries outside the United States,
including possible nationalization, expropriation, price controls or
other restrictive government actions. Management believes that the
risk of nationalization or expropriation is reduced because its
basic service is the delivery of information, rather than the
production of products which require manufacturing facilities or use
of natural resources.
o Although an important aspect of the Company's business strategy is
growth through acquisitions, there can be no assurance that
management of the Company will be able to identify and consummate
acquisitions on satisfactory terms. Furthermore, every acquisition
will entail some degree of uncertainty and risk, and even if
consummated, may not produce the operating results or increases in
value over time which were expected at the time of acquisition.
o The Company competes in businesses which demand or sell
sophisticated information systems, software and other technology.
The types of systems which the Company's businesses require or sell
can be expected to be subject to refinements as such systems and
underlying technologies are upgraded and advanced, and there can be
no guarantee that as various systems and technologies become
outdated, the Company will be able to replace them, to replace them
as quickly as the Company's competition or to develop and market new
and better products and services in the future on a cost-effective
basis.
o Currently, the Company's assets include a significant block of the
outstanding shares of Gartner. In the third quarter of 1997, the
Company's voting interest in Gartner fell below 50% to 49.5% based
upon the exercise of Gartner employee stock options and employee
stock purchases. Accordingly, as of September 30, 1997 the Company
deconsolidated Gartner and is accounting for its ownership interest
on the equity basis. Gartner's common stock has historically traded
at higher multiples than market averages and has generally
experienced greater price volatility than the market as a whole. It
can be expected that variations in the market value of the Gartner
shares held by the Company will have an impact on the trading prices
of the Company's Common Stock. Gartner's results of operations may
also be subject to the various factors described in Gartner's
reports filed with the SEC from time to time.
o A number of countries in which the Company operates have enacted
regulations limiting the prices pharmaceutical companies may charge
for drugs. The Company believes that such cost containment measures
will cause pharmaceutical companies to seek more effective means of
marketing their products (which will benefit the Company in the
medium and long term). However, such governmental regulation may
cause pharmaceutical companies to revise or reduce their marketing
programs in the near term.
o Certain of the data services provided by the Company relate to the
diagnosis and treatment of disease. The use of patient-specific
information is anticipated to be an increasingly important tool in
the design, development and marketing of pharmaceuticals. To protect
privacy, no individual patient is identified in any IMS database.
Recently, there have been a number of regulatory and legislative
initiatives in the area of medical privacy at the federal, state and
foreign government levels. Most of these initiatives seek to place
restrictions on the use and disclosure of patient-identifiable
information without consent and consequently would not apply to the
Company's business. However, there can be no assurance that future
initiatives would not adversely affect the Company's ability to
generate or assemble data or to develop or market current or future
products and services.
o Each of the Company's businesses is subject to significant or
potential competition which is likely to intensify in the future.
o The Company's results could be adversely affected by general or
specific weakening of economic conditions, including weak economic
conditions in the pharmaceutical, healthcare, information technology
or other industries in which the Company's customers operate.
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o On November 11, 1998 the Company announced that its Board of
Directors approved a plan, in principle, to spin-off substantially
all of its equity ownership of Gartner. The transaction, expected to
be completed in the first half of 1999, is to be structured as a
tax-free distribution of Gartner Stock to IMS HEALTH shareholders.
The transaction is subject to receipt of a favorable ruling from the
IRS, final approval by the Company's and Gartner's Board of
Directors, and approval by Gartner shareholders. Additional
information is incorporated by reference to the Financial Review on
pages 1-12 of the 1998 Annual Report to Shareholders.
---------------------------------------
The names of the Company's products used in this report are trademarks or
registered trademarks of IMS Health Incorporated or one of its subsidiaries.
Additional information is incorporated by reference to Note 17. Operations by
Business Segment on Pages 34 - 36 of the 1998 Annual Report to Shareholders.
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ITEM 2. PROPERTIES
The principal properties of the Company are set forth below.
The executive offices of IMS Health Incorporated are located at 200 Nyala
Farms, Westport, Connecticut in a leased property.
Property of the Company is geographically distributed to meet sales and
operating requirements worldwide. The properties of the Company are
generally considered to be both suitable and adequate to meet current
operating requirements and virtually all space is being utilized.
IMS
Owned properties located within the United States include three
facilities. The properties are located in Totowa, New Jersey; and Plymouth
Meeting and West Norriton, Pennsylvania.
Owned properties located outside the United States include nine
facilities: one property each in Buenos Aires, Argentina; Artarmon,
Australia; Crows Nest, Australia; Innsbruck, Austria; Santiago, Chile;
Lisbon, Portugal; and London, Loughborough and Pinner, England.
The operations of this business unit are also conducted from twenty-two
leased offices located throughout the United States and one-hundred and
five non-United States locations.
EMERGING MARKETS
Operations are conducted from two leased office locations throughout the
United States.
CTS
Operations are conducted from three leased office locations throughout the
United States and nine non-United States locations.
RESOURCE GROUP/CORPORATE
Operations are conducted from two leased office locations in Allentown,
Pennsylvania and Westport, Connecticut.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 15. of Notes to Consolidated Financial
Statements on Pages 32 and 33 of the 1998 Annual Report to Shareholders
which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT*
Officers are elected by the Board of Directors to hold office until their
respective successors are chosen and qualified.
Listed below are the executive officers of the registrant at February 26,
1999 and brief summaries of their business experience during the past five
years.
Name Title Age
---- ----- ---
Robert E. Weissman Chairman and Chief Executive Officer** 58
Victoria R. Fash President and Chief Operating Officer** 48
J. Michal Conaway Chief Financial Officer 50
Gilles Pajot Vice Chairman and President - Europe Region 49
Robert Hooper President, IMS America 53
Alan J. Klutch Senior Vice President - Finance 54
James C. Malone Senior Vice President - Finance and Controller 50
Kenneth S. Siegel Senior Vice President - General Counsel and
Corporate Secretary 43
Craig S. Kussman Senior Vice President - Corporate Development 40
David H. Owen Senior Vice President - Global Human Resources 48
Matthew L. Friedman Vice President and Treasurer 41
* Set forth as a separate item pursuant to Items 401(b) and (e) of
Regulation S-K.
** Member of the Board of Directors.
Mr. Weissman was appointed Chairman and Chief Executive Officer of IMS
Health Incorporated in February, 1998. He previously served as Chairman and
Chief Executive Officer of Cognizant Corporation from September, 1996 to July,
1998. Mr. Weissman was Chairman and Chief Executive Officer of Dun & Bradstreet
from April, 1995 to October, 1996 after serving as President and Chief Executive
Officer from January, 1994 to March, 1995. He was named Dun & Bradstreet's
President and Chief Operating Officer in January, 1985.
Ms. Fash was appointed President and Chief Operating Officer of IMS Health
Incorporated in February, 1998 and will become the Chief Executive Officer,
effective March 19, 1999. Ms. Fash served as Executive Vice President and Chief
Financial Officer of Cognizant Corporation from September, 1996 to July, 1998
and Chairman and Chief Executive Officer of I.M.S. International, Inc., a
subsidiary of Cognizant, from December, 1997 to July, 1998. From April, 1995 to
November, 1996, Ms. Fash was Vice President-Business Strategy of Dun &
Bradstreet. Prior to that, she served as Vice President-Business Operations
Planning of Dun & Bradstreet from May, 1994 to April, 1995. Previously, she had
served as Assistant to the President of Dun & Bradstreet from September, 1991 to
May, 1994.
Mr. Conaway was appointed Chief Financial Officer in September, 1998. He
previously served as Senior Vice President and Chief Financial Officer of Fluor
Corporation, an engineering and diversified services company, from June, 1995 to
September, 1998; Vice President and Chief Financial Officer from June, 1994 to
June, 1995 and Vice President-Finance from January, 1993 to June, 1994.
Mr. Pajot was appointed Vice Chairman and President - Europe Region in
December, 1997. Prior to that he served as Senior Vice President and President
Market Region Europe of Pharmacia & Upjohn. From September, 1994 to November
1995 he was Executive Vice President Worldwide of Pharmacia AB.
Mr. Hooper was appointed General Manager of IMS America, Ltd. in April,
1997 and was appointed President in April, 1998. Prior to that, he was President
of Abbott Laboratories Canada from July 1993 to April, 1997.
Mr. Klutch was appointed Senior Vice President - Finance of IMS Health
Incorporated in June, 1998. He previously served as Senior Vice President -
Finance of Cognizant Corporation from September, 1996 to July, 1998. Mr. Klutch
was Vice President - Financial Planning of Dun & Bradstreet from October, 1984
to October, 1996.
Mr. Malone was appointed Senior Vice President - Finance and Controller of
IMS Health Incorporated in May, 1998. He served as Senior Vice President -
Finance and Controller of Cognizant Corporation from December, 1996 to July,
1998 and had been appointed Vice President - Finance and Controller from
September, 1996 to December, 1996. Previously, he had served as Assistant Vice
President and Leader - North American Shared Transaction Services Center
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from February, 1995 to December, 1996 and as Vice President and Controller of
Reuben H. Donnelley Corporation, subsidiary of Dun & Bradstreet from 1990 to
February, 1995.
Mr. Siegel was appointed Secretary of IMS Health Incorporated in February,
1998 and Senior Vice President, General Counsel and Corporate Secretary in June,
1998. He served as Senior Vice President and General Counsel of Cognizant
Corporation from February, 1997 to July, 1998 and Secretary from July, 1997 to
July, 1998. Mr. Siegel was a partner with the law firm of Baker & Botts, L.L.P.
from September, 1994 to February, 1997. Previously, he was a partner at the law
firm of O'Sullivan Graev & Karabell from July, 1987 to August, 1994.
Mr. Kussman was appointed Senior Vice President - Corporate Development in
August, 1998 having served as Vice President Corporate Development since June,
1998. He served as Vice President - Corporate Development of Cognizant
Corporation from October, 1997 to June, 1998 and Vice President - Mergers and
Acquisitions, from November, 1996 to October, 1997. Previously, he had served as
Assistant Vice President - Financial Planning of Dun & Bradstreet from May, 1991
to November, 1996.
Mr. Owen was appointed Senior Vice President, Global Human Resources in
December 1998. Previously, he operated his own business consulting firm, Owen
Consultants, from January, 1998 to November, 1998 and again from July, 1997 to
December, 1997. Mr. Owen was Resourcing Director of Origin BV, an information
technology services company, from February, 1997 to December, 1997 and was
Director, Human Resources, Service Delivery and Internal Communications at Forte
plc, a hotel and restaurant operator.
Mr. Friedman was appointed Vice President and Treasurer of IMS Health
Incorporated in February, 1999, having served as Interim Treasurer of the
Company since August, 1998. Previously he was Assistant Treasurer of Cognizant
Corporation from November, 1996 to June, 1998. Prior to that he served as
Director - International Finance for Dun & Bradstreet from December, 1994 to
November, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information in response to this Item is set forth under Dividends and
Common Stock Information in the "Financial Review" on Page 7 of the 1998 Annual
Report to Shareholders, which information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data required by this Item is incorporated herein by
reference to the information relating to the years 1994 through 1998 set forth
in the "Five-Year Selected Financial Data" on Page 27 of the 1998 Annual Report
to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information in response to this Item is set forth in the "Financial
Review" on Pages 1 to 7 of the 1998 Annual Report to Shareholders, which
information is incorporated herein by reference.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information in response to this Item is set forth under Market Risk in the
"Financial Review" on Page 11 and in Note 9. Financial Instruments on Pages 24
to 25 of the 1998 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules under Item 14 on Page 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors" in the Company's proxy statement
dated February 26, 1999 with the Securities and Exchange Commission, except that
"Executive Officers of the Registrant" on Page 10 of this report responds to
Items 401(b) and (e) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
to the section entitled "Compensation of Executive Officers and Directors" in
the Company's proxy statement dated February 26, 1999 with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference
to the section entitled "Security Ownership of Management and Others" in the
Company's proxy statement dated February 26, 1999 with the Securities and
Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference
to the section entitled "Security Ownership of Management and Others" in the
Company's proxy statement dated February 26, 1999 with the Securities and
Exchange Commission.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
See Index to Financial Statements and Schedule on Page 20.
(2) Financial Statement Schedule.
See Index to Financial Statements and Schedule on Page 20.
(3) Other Financial Information.
Five-year Selected Financial Data. See Index to Financial
Statements and Schedule on Page 20.
(4) Exhibits.
See Index to Exhibits on Pages 23, which indicates which
Exhibits are management contracts or compensatory plans
required to be filed as Exhibits. Only responsive information
appearing on pages 1 to 38 to Exhibit 13 is incorporated
herein by reference, and no other information appearing in
Exhibit 13 is or shall be deemed to be filed as part of this
Form 10-K.
(b) Reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
By: /s/ ROBERT E. WEISSMAN
------------------------------------
(Robert E. Weissman,
Chairman)
By: /s/ VICTORIA R. FASH
------------------------------------
(Victoria R. Fash,
President & Chief Executive Officer)
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: February 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ CLIFFORD L. ALEXANDER /s/ H. EUGENE LOCKHART
- - -------------------------------------- ---------------------------------
(Clifford L. Alexander, Jr., Director) (H. Eugene Lockhart, Director)
/s/ VICTORIA R. FASH /s/ M. BERNARD PUCKETT
- - -------------------------------------- ---------------------------------
(Victoria R. Fash, Director) (M. Bernard Puckett, Director)
/s/ JOHN P. IMLAY /s/ WILLIAM C. VAN FAASEN
- - -------------------------------------- ---------------------------------
(John P. Imlay, Jr., Director) (William C. Van Faasen, Director)
/s/ ROBERT KAMERSCHEN /s/ ROBERT E. WEISSMAN
- - -------------------------------------- ---------------------------------
(Robert Kamerschen, Director) (Robert E. Weissman, Director)
/s/ ROBERT J. LANIGAN
- - --------------------------------------
(Robert J. Lanigan, Director)
Date: February 26, 1999
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
FINANCIAL STATEMENTS:
The Company's consolidated financial statements, the notes thereto and the
related report thereon of PricewaterhouseCoopers LLP, independent accountants,
for the years ended December 31, 1998, 1997, and 1996, appearing on pages 14 to
36 of the accompanying 1998 Annual Report to Shareholders, are incorporated by
reference into this Annual Report on Form 10-K (see below). The additional
financial data indicated below should be read in conjunction with such
consolidated financial statements.
<TABLE>
<CAPTION>
PAGE
----------------------------------------------
10-K 1998 ANNUAL REPORT TO
SHAREHOLDERS
--------------------- ---------------------
<S> <C> <C>
Statement of Management's Responsibility for Financial Statements........Exhibit 13 Pg 13 13
Report of Independent Accountants........................................Exhibit 13 Pg 13 13
As of December 31, 1998, 1997 and 1996:
Consolidated Statements of Financial Position..........................Exhibit 13 Pg 15 15
For the years ended December 31, 1998, 1997 and 1996:
Consolidated Statements of Income......................................Exhibit 13 Pg 14 14
Consolidated Statements of Cash Flows..................................Exhibit 13 Pg 16 16
Consolidated Statements of Shareholders' Equity........................Exhibit 13 Pg 17 - 18 17 - 18
Notes to Consolidated Financial Statements...............................Exhibit 13 Pg 19 - 37 19 - 37
Other Financial Information:
Quarterly Financial Data (Unaudited) for the years ended
December 31, 1998, 1997 and 1996.......................................Exhibit 13 Pg 37 37
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................Exhibit 13 Pg 1- 7 1 - 7
Business Segments is already included in "Notes to Consolidated Financial Statements"
Five-Year Selected Financial Data......................................Exhibit 13 Pg 38 38
SCHEDULE:
Report of Independent Accountants...................................... 16 --
II. Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997, and 1996............................................ 17 --
OTHER:
IMS Health Incorporated and Subsidiaries............................... Exhibit 21 --
Schedules other than the one listed above are omitted as not required or
inapplicable or because the required information is provided in the consolidated
financial statements, including the notes thereto.
The consolidated financial statements of Gartner Group, Inc. and the notes
thereto, for the years ended September 30, 1998, 1997, and 1996, and the related
report thereon of KPMG Peat Marwick LLP, independent accountants, for the years
ended September 30, 1998, 1997 and 1996 appearing on pages F-1 to F-20 of the
Gartner Group, Inc. 1998 Annual Report to Shareholders, filed hereunder as
Exhibit 99.2, are incorporated by reference into this Annual Report on Form
10-K.
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of IMS Health Incorporated:
Our audits of the consolidated financial statements referred to in our
report dated February 16, 1999 appearing in the 1998 Annual Report to
Shareholders of IMS Health Incorporated ("accounting successor to Cognizant
Corporation") (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedules listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
February 16, 1999
21
<PAGE>
IMS HEALTH INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS(A)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- - -----------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(B) OF PERIOD
----------- --------- -------- ------------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the Year Ended December 31, 1998 ... $ 3,905 $ 1,828 $ 2,034 $ 7,767
======= ======= ======= =======
For the Year Ended December 31, 1997 ... $11,697 $ 462 $(8,254) $ 3,905
======= ======= ======= =======
For the Year Ended December 31, 1996 ... $ 8,135 $ 4,093 $ (531) $11,697
======= ======= ======= =======
</TABLE>
NOTE:
(A) Schedule II has been restated to exclude Nielsen Media Research, a
discontinued operation.
(B) Primarily represents the inclusion of the allowance for doubtful
accounts related to the Walsh and PMSI businesses in 1998; and the
deconsolidation of Gartner and the recovery of accounts in 1997.
22
<PAGE>
INDEX TO EXHIBITS
REGULATION S-K
EXHIBIT NUMBER DESCRIPTION
- - -------------- -----------
3 Articles of Incorporation and By-laws
.1 Restated Certificate of Incorporation of IMS Health Incorporated
dated May 29, 1998 (incorporated by reference to Exhibit 3.1 to
Registrant's Registration Statement on Form 10 filed on June 12,
1998, file number 001-14049).
.2 Amended and Restated By-laws of IMS Health Incorporated
(incorporated by reference to Exhibit 3.1 to Registrant's
Registration Statement on Form 10 filed on June 12, 1998, file
number 001-14049).
10 Material Contracts
.1 Distribution Agreement between Cognizant Corporation and IMS Health
Incorporated, dated as of June 30, 1998.
.2 Tax Allocation Agreement between Cognizant Corporation and IMS
Health Incorporated, dated as of June 30, 1998.
.3 Employee Benefits Agreement between Cognizant Corporation and IMS
Health Incorporated, dated as of June 30, 1998.
.4 Amended and Restated Transition Services Agreement among The Dun &
Bradstreet Corporation, The New Dun & Bradstreet Corporation,
Cognizant Corporation, IMS Health Incorporated, ACNielsen
Corporation and Gartner Group, Inc., dated as of June 30, 1998.
.5 1998 IMS Health Incorporated Non-Employee Directors' Stock Incentive
Plan, as adopted effective July 1, 1998.*
.6 1998 IMS Health Incorporated Non-Employee Directors' Deferred
Compensation Plan, as adopted effective July 1, 1998.*
.7 1998 IMS Health Incorporated Employees' Stock Incentive Plan, as
adopted effective July 1, 1998.*
.8 1998 IMS Health Incorporated Replacement Plan for Certain Employees
Holding Cognizant Corporation Equity-Based Awards, as adopted
effective July 1, 1998.*
.9 1998 IMS Health Incorporated Replacement Plan for Certain
Non-Employee Directors Holding Cognizant Corporation Equity-Based
Awards, as adopted effective July 1, 1998.*
.10 Form of Non-Employee Directors' Stock Option Agreement.*
.11 Form of Non-Employee Directors' Restricted Stock Agreement.*
.12 Form of Restricted Stock Unit Agreements
.13 Form of Stock Option Agreement.*
.14 Form of Purchased Option Agreement.*
.15 Forms of Change-in-Control Agreement for Certain Executives of IMS
Health Incorporated.*
.16 IMS Health Incorporated Employee Protection Plan, as adopted
effective December 1, 1998.*
.17 IMS Health Incorporated Executive Annual Incentive Plan, as adopted
effective July 1, 1998. *
.18 IMS Health Incorporated Supplemental Executive Retirement Plan, as
adopted effective July 1, 1998.*
.19 IMS Health Incorporated Retirement Excess Plan, as adopted effective
July 1, 1998.*
.20 Rights Agreement dated as of June 15, 1998 between IMS Health
Incorporated and First Chicago Trust Company of New York.
.21 IMS Health Incorporated Savings Equalization Plan, as adopted
effective July 1, 1998.*
.22 Employment Agreement by and between IMS Health Incorporated and
Robert E. Weissman, dated as of July 1, 1998.*
.23 Employment Agreement by and between IMS Health Incorporated and
Victoria R. Fash, dated as of July 1, 1998.*
.24 Amended and Restated Cognizant Technology Solutions Non-Employee
Directors' Stock Option Plan (incorporated by reference to Exhibit
10.3 to the Form S-1 filed by Cognizant Technology Solution
Corporation on April 9, 1998, file number 333-49783).
.25 Undertaking of IMS Health Incorporated, dated June 30, 1998.
13 1998 Annual Report to Shareholders.
21 List of Active Subsidiaries as of December 31, 1998.
23 Consent of Independent Accountants.
27 Financial Data Schedules.
99. Additional Exhibits
.1 Consent of KPMG Peat Marwick LLP, independent accountants for
Gartner Group, Inc.
.2 Pages F1 to F20 of the Gartner Group, Inc. 1998 Annual Report
to Shareholders.
- - --------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>2
<DESCRIPTION>ANNUAL REPORT -- IMS
<TEXT>
IMS HEALTH INCORPORATED
-------------------------------------------------
1998 ANNUAL REPORT TO SHAREHOLDERS
IMS HEALTH [LOGO}
<PAGE>
IMS HEALTH INCORPORATED
1998 ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
Financial Review........................................................... 1-12
Statement of Management's Responsibility for Financial Statements............ 13
Report of Independent Accountants............................................ 13
Consolidated Financial Statements..........................................14-18
Notes to Consolidated Financial Statements................................ 19-36
Quarterly Financial Data..................................................... 37
Five-Year Selected Financial Data............................................ 38
<PAGE>
IMS HEALTH INCORPORATED
FINANCIAL REVIEW
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
All share and per share data presented are adjusted to reflect a 2-for-1
stock split distributed to shareholders on January 15, 1999. (See Note 2. to the
Consolidated Financial Statements).
YEAR-ENDED DECEMBER 31, 1998 COMPARED WITH
YEAR-ENDED DECEMBER 31, 1997
The accompanying financial statements and related financial review relate
to IMS Health Incorporated ("IMS Health" or the "Company"). On June 30, 1998,
the common stock of IMS Health was distributed by Cognizant Corporation
("Cognizant") to its shareholders. Simultaneously with the distribution (the
"Distribution"), Cognizant changed its name to Nielsen Media Research, Inc.
("Nielsen Media Research"). Notwithstanding the legal form of the Distribution,
whereby Cognizant spun off IMS Health, for accounting purposes the transaction
is accounted for as if Cognizant spun off Nielsen Media Research and IMS Health
has been deemed the "accounting successor" to Cognizant. 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, Inc. ("Enterprises"), a 61.7% interest in Cognizant
Technology Solutions Corporation ("CTS") and SSJ K.K. ("Super Systems Japan").
The Company also has an equity investment in Gartner Group, Inc. ("Gartner").
Pursuant to Accounting Principles Board ("APB") Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect the results of Nielsen Media Research as a discontinued
operation. (See Note 1. to the Consolidated Financial Statements).
Investment in Gartner
In September 1997, the Company's voting interest in Gartner fell below 50%
as a result of the exercise of Gartner employee stock options and employee stock
purchases. Accordingly, in the third quarter of 1997, the Company deconsolidated
Gartner (the "Gartner Deconsolidation") and as of January 1, 1997 is accounting
for its ownership interest on the equity basis. (See Note 3. to the Consolidated
Financial Statements).
On November 11, 1998, the Company announced that its Board of Directors had
approved a plan, to spin-off substantially all of its equity ownership of
Gartner. The transaction, expected to be completed in the first half of 1999, is
to be structured as a tax-free distribution of Gartner stock to IMS Health
shareholders. The transaction is subject to receipt of a favorable ruling from
the Internal Revenue Service ("IRS") regarding the tax free nature of the
proposed transaction, final approval by the Company's and Gartner's Boards of
Directors, and approval by Gartner shareholders.
At December 31, 1998, the Company owned approximately 47 million shares of
Gartner. Prior to the proposed spin-off transaction, 40.1 million of these
shares will be exchanged for new Class B Common Stock of Gartner. The Class B
Stock will be entitled to elect 80% of Gartner's Board of Directors, but will
otherwise be identical to existing Class A Common Stock. The exchange will be
part of a Gartner recapitalization and requires approval by Gartner
shareholders. The Class B shares will be distributed to the Company's
shareholders in a tax-free distribution, subject to receipt of a favorable tax
ruling from the Internal Revenue Service with respect to the distribution. The
Company intends to monetize its remaining position in Gartner through the first
quarter of the Year 2000. This includes 6.9 million shares of Class A Common
Stock and warrants to purchase a further 600,000 shares.
Separately, Gartner announced that subject to approval by the IRS of the
tax-free treatment of the distribution, it intends to declare a special one-time
cash dividend of $300,000 to its shareholders of record immediately prior to the
spin-off. The Gartner Board of Directors has authorized a $300,000 open market
share repurchase program for up to 20% of its stock commencing immediately after
the spin-off.
Dispositions
During the year, the Company recorded $46,118 net pre-tax gains principally
reflecting the sale of investments in Aspect Development, Inc., which is part of
Enterprises' portfolio and the sale of shares in CTS. (See Note 6. to the
Consolidated Financial Statements). These sales generated cash proceeds of
$78,883.
Acquisitions and Joint Venture
On June 24, 1998, Cognizant acquired Walsh International Inc. ("Walsh").
The final purchase price of the acquisition was $193,748, consisting of $167,148
of common stock, $9,521 of stock options and $17,079 of accrued acquisition and
integration costs.
Under the terms of the Walsh acquisition agreement, Walsh shareholders
received .6082 (on a pre-split basis the ratio is .3041) shares of Cognizant
common stock per Walsh share or based on a Cognizant share price of $25.896,
consideration of approximately $167,148 (on a pre-split basis a Cognizant share
price of $51.792). Walsh had 10,612,628 shares outstanding. Cognizant issued
1
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
6,454,600 shares from treasury stock to consummate the Walsh acquisition. The
direct acquisition and integration costs consist of severance of $4,876, lease
terminations of $2,569, and other direct acquisition and integration costs of
$9,634. These direct acquisition and integration costs were incurred as a direct
result of the acquisition and the formal 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). To date,
incurred acquisition and integration costs are within original estimates.
Approximately $156,557 is 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.
The severance costs are related to 78 Walsh employees. As of December 31,
1998, the Company made payments of $3,257, reducing the work force by 56, and
the remaining terminations are anticipated to be completed by June 1999. The
following table displays the activities since the acquisition with respect to
these liabilities:
ORIGINAL LIABILITY 1998 DECEMBER 31,
ESTIMATE EXPENDITURES 1998 BALANCE
- - --------------------------------------------------------------------------------
Employee Separation $ 4,876 $ (3,257) $ 1,619
Lease terminations 2,569 (96) 2,473
Other direct costs 9,634 (8,713) 921
- - --------------------------------------------------------------------------------
Total $ 17,079 $(12,066) $ 5,013
- - --------------------------------------------------------------------------------
On August 5, 1998, IMS Health acquired certain non-U.S. assets of
Pharmaceutical Marketing Services Inc. ("PMSI"). The final purchase price of the
acquisition was $103,291, consisting of $75,292 of common stock, $5,415 of stock
options and $22,584 of accrued acquisition and integration costs.
Under the terms of the PMSI acquisition agreement, PMSI received 2,395,926
shares of IMS Health common stock. The direct acquisition and integration costs
consist of severance of $3,794, lease terminations of $1,623, contract
cancellations of $10,935, and other direct acquisition and integration costs of
$6,232. These direct acquisition and integration costs are incremental to other
costs and 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). Acquisition and integration costs incurred to date
are within original estimates. Approximately $115,275 is 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.
The severance costs are related to 63 PMSI employees. As of December 31,
1998, the Company made payments of $2,013 reducing the work force by 33, and the
remaining terminations are anticipated to be completed by July 1999. The
following table displays the activities since the acquisition with respect to
these liabilities:
ORIGINAL LIABILITY 1998 DECEMBER 31,
ESTIMATE EXPENDITURES 1998 BALANCE
- - --------------------------------------------------------------------------------
Employee Separation $ 3,794 $(2,013) $ 1,781
Lease terminations 1,623 (60) 1,563
Contract Cancellations 10,935 (1,038) 9,897
Other direct costs 6,232 (5,077) 1,156
- - --------------------------------------------------------------------------------
Total $22,584 $(8,187) $14,397
- - --------------------------------------------------------------------------------
Joint Venture
On September 1, 1998, the Company formed a joint venture with IHA Institut
fur Marktanalysen AG ("IHA"). The Company and IHA each contributed all of their
Swiss pharmaceutical research assets to the venture and each own 50% of the
venture. The Company contributed assets of $54 and cash of $11,014. The $12,027
excess of the investment over the value of the Company's share of the net assets
has been recorded as goodwill, which is being amortized on a straight line basis
over 20 years. The Company has accounted for its ownership interest in the joint
venture under the equity method.
Purchase Price Allocation
The Company made allocations of the aggregate 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.
The Securities and Exchange Commission (the "SEC") recently issued revised
guidance with respect to allocations of IPR&D projects in connection with
acquisitions. In accordance with this guidance, the amount allocated to IPR&D
reflects the relative value and contribution of the acquired IPR&D.
Consideration was given to the project's stage of completion, the complexity of
the work completed to date, the difficulty of completing the remaining
development, costs already incurred and the projected cost to complete the
projects.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible assets acquired and liabilities assumed in
connection with the Walsh and PMSI acquisitions, was based primarily on
estimates of fair values by an independent appraisal firm. The allocation is
summarized below:
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
- - -------------------------------------------------------------
2
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
In the aggregate, the impact of both the Walsh and PMSI acquisitions on the
results of operations, other than the one-time charges and IPR&D write-offs, had
they occurred on January 1, 1998 or 1997, would be immaterial.
At the date of the respective acquisitions, the development of the IPR&D
projects had not yet reached technological feasibility and had no alternative
future use. Accordingly, these costs were expensed as of the respective
acquisition dates.
The projects identified as IPR&D at Walsh include enhancement of Walsh's
Windows-based sales manage-ment information system, enhancement of its
pharmaceutical marketing database, and development of a next-stage integrated
and enhanced sales management information system. These projects were identified
as underway at Walsh and, at the date of the acquisition, would require
additional effort to establish technological feasibility. In addition, based on
a third party independent appraiser, the Company allocated $29,000 to existing
core technology representing computer software that is currently in use, which
is being amortized over 5 years.
The projects identified as IPR&D at PMSI include significant improvements
of PMSI's physician database products in Europe and Japan and to its pharmacy
software system in the United Kingdom. These projects were identified as being
underway at PMSI, at the date of acquisition, and would require additional
effort to establish technological feasibility. In addition, based on a third
party independent appraiser, the Company allocated $7,700 to existing core
technology representing computer software that is currently in use, which is
being amortized over 5 years.
The amounts assigned to the IPR&D projects were determined by first
estimating the degree of completion of each project and the potential net cash
flows from such projects after commercial introduction. The potential net cash
flows include reductions reflecting the necessary investment in fixed and
working capital and other collateral assets, which include core technology,
where appropriate and a fair return on those assets. A portion of the potential
net cash flows for each project was then attributed to the effort already
completed by Walsh and PMSI by the acquisition date, based upon the estimated
degree of completion. The attributed potential net cash flows for each project
were discounted to present value using a risk-adjusted discount rate.
The discount rates utilized to value the IPR&D projects ranged from 17% to
30%. Such discount rates took into account the industry risk for the Walsh and
PMSI businesses acquired (as evidenced by the calculated weighted average cost
of capital), technological development risk associated with completing the
in-process projects, and market and commercial risk associated with introducing
the new products/technology. The implied weighted average cost of capital for
the different Walsh and PMSI projects ranged from 12% to 15%.
The degree of completion represents the extent to which the different
in-process projects are complete, as of the respective acquisition dates. The
completion percentage ranged from 53% to 87% for projects at Walsh and 80% to
90% for projects at PMSI. In the opinion of management, IMS Health is on target
to begin realizing the benefits from these various projects through product
introductions at launch dates ranging from early 1999 to January 2000.
The Company believes that the assumptions used, including the revenue
forecasts and margin analysis, are reasonable. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. For these reasons, actual results may
vary from the projected results.
Management expects to continue supporting these IPR&D efforts and believes
the Company has a reasonable chance of successfully completing the IPR&D
programs. However, there is risk associated with the completion of the IPR&D
projects and the Company cannot be assured that any will meet with either
technological or commercial success.
If none of these IPR&D projects are successfully developed, the sales and
profitability of the Company may be adversely affected in future periods. The
failure of any particular individual project in-process would not materially
impact the Company's financial condition, results of operations or cash flows.
Operating results are subject to uncertain market events and risks, which are
beyond the Company's control, such as trends in technology, government
regulations, market size and growth, and product introduction or other actions
by competitors.
In connection with the PMSI acquisition, the Company commenced an
evaluation of its existing IMS Health product offerings. Based on this strategic
assessment, the Company decided to abandon certain of its existing software
products. The impact of this decision was to recognize 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 and is included as a component of operating income.
3
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Public Offering of a Subsidiary
On June 19, 1998, CTS effected an initial public offering (the "CTS IPO")
of 2,917,000 shares of Class A Common Stock, par value $0.01 per share
(3,354,550 including the underwriters' over-allotment option granted by
Cognizant). Cognizant's interest in CTS was transferred to the Company in the
Distribution. The Company's ownership interest was 61.7% at December 31, 1998
and, accordingly, the Company consolidates CTS results within its financial
statements. The equity not owned by the Company is reflected on the Statement of
Financial Position in the minority interest line and on the Consolidated
Statements of Income in the Other Expense-Net line. (See Note 6. to the
Consolidated Financial Statements).
Operating Results
Revenue in 1998 increased 12.0% to $1,186,513 from $1,059,559 in 1997. This
increase primarily reflects the strong growth of the core IMS worldwide
business. The core IMS worldwide revenues benefited from the introduction of new
compounds within the pharmaceutical client base, new product introductions,
acquisition-related revenue and geographic expansion. Adjusting for the impact
of a stronger U.S. dollar, 1998 revenue increased by 15.4%.
Operating costs and selling and administrative expenses in 1998 were
$1,054,029, compared with $831,949 in 1997, an increase of 26.7%. This increase
was due primarily to the Company's increased spending on new revenue growth
initiatives, increased spending on the Year 2000 ("Y2K") issue, charges related
to the Distribution (approximately $35,000), one-time charges and IPR&D
write-offs related to the Walsh and PMSI acquisitions, and incremental recurring
expenses related to the two acquired businesses. If these 1998 expenses are
adjusted to exclude the charges related to the Distribution, the one-time
charges and IPR&D write-offs related to the Walsh and PMSI acquisitions, Y2K
costs, operating costs and selling and administrative expenses increased by
7.4%, to $893,263 in 1998.
Operating income in 1998 decreased 41.8% to $132,484 from $227,610 in 1997.
This decrease primarily reflects the impact of increased spending on the Y2K
issue, charges related to the Distribution, one-time charges and IPR&D
write-offs related to the Walsh and PMSI acquisitions, and the operations of
Walsh and PMSI. If 1998 operating income is adjusted to exclude the charges
related to the Distribution, the one-time charges and IPR&D write-offs related
to the Walsh and PMSI acquisitions, Y2K costs, operating income increased by
28.8%, to $293,250 in 1998. This operating income growth outpaced revenue growth
primarily due to the Company's ability to leverage its worldwide resources.
Operating margin in 1998 was 11.2%, compared with 21.5% in 1997. If the
1998 operating margin is adjusted to exclude the items listed above, operating
margin improved to 24.7% in 1998 from 21.5% in 1997. The IMS segment operating
margin was 28.6% in 1998 compared with 28.1% in 1997.
Non-operating income-net (including interest income and expense) in 1998
was $138,177, compared with $94,864 in 1997. The increase was principally due to
gains from the CTS IPO and the sale of assets from the Enterprises portfolio,
increased Gartner Equity Income and higher net interest income.
The Company's consolidated 1998 effective tax rate was 34.1%, compared with
27.4% in 1997. The Company's higher tax rate in 1998 reflects non-deductible
charges related to the Distribution, and the one-time charges and IPR&D
write-offs related to the Walsh and PMSI acquisitions, and the continued impact
of global tax planning strategies.
Income from continuing operations in 1998 was $178,465, compared with
$234,116 in 1997, a decrease of 23.8%. This decrease was due principally to
increased spending on the Y2K issue, charges related to the Distribution,
one-time charges and IPR&D write-offs related to the Walsh and PMSI
acquisitions, partially offset by gains from the CTS IPO, the sale of assets
from the Enterprises portfolio and a pre-tax unrealized gain on its investment
in Gartner ("SAB 51 Gain"). Excluding these items, income from continuing
operations increased 25.5% to $271,815 in 1998 from $216,634 in 1997, reflecting
the strong growth of the core IMS worldwide business.
Income from discontinued operations, net of income taxes in 1998 was
$42,093 (which includes the first six months of Nielsen Media Research's 1998
operations), compared to $78,234 in 1997 (which includes a full year of Nielsen
Media Research's operations).
Net income in 1998 was $220,558, compared with $312,350 in 1997, a decrease
of 29.4%. This decrease principally reflects the items noted above in income
from continuing operations and the inclusion of only six months of Nielsen Media
Research's 1998 operations.
RESULTS BY BUSINESS SEGMENT
IMS
The IMS segment consists of IMS, the leading global provider of market
information, sales management 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.
IMS segment revenue increased 10.6% in 1998 to $1,083,992 from $980,521 in 1997.
This
4
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FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
growth reflected strong performance of core business services, increased demand
for services due to introduction of new compounds within the pharmaceutical
client base, geographic expansion, the impact of the Walsh and PMSI
acquisitions, and strong revenue growth at Strategic Technologies. Excluding the
impact of a stronger U.S. dollar in 1998, revenue growth was 14.1%. Operating
income decreased 30.4% to $184,771 in 1998 from $265,351 in 1997. Excluding the
one-time charges and IPR&D write-offs related to the Walsh and PMSI
acquisitions, and Y2K costs in 1998, operating income growth was 17.0% due to
the factors described above. Operating income growth outpaced revenue growth
primarily due to the segment's ability to leverage its worldwide resources.
EMERGING MARKETS
The Emerging Markets segment consists primarily of Erisco, and also
includes Enterprises and Super Systems Japan. In the third quarter of 1997, the
Company sold Pilot and recorded a non-cash pre-tax loss of $29,945. Excluding
Pilot in 1997, the segment had a 21.7% increase in 1998 revenue to $57,542 from
$47,286 in 1997, primarily reflecting strong growth at Erisco. 1998 operating
income for the segment was $6,171 compared with a loss of $12,669 in 1997. This
improvement reflects the elimination of the Pilot losses, combined with strong
improvements in profitability at Erisco.
CTS
CTS revenue, excluding sales to related parties, increased 224.1% to
$44,979 in 1998 from $13,879 in 1997. This growth reflected the addition of new
customers and the continuing conversion of Y2K customers into ongoing
development and maintenance customers. Operating income, excluding the operating
profit associated with related parties, increased 205.7% to $8,918 in 1998 from
$2,917 in 1997. The strong revenue growth was partially offset by the continued
acceleration of sales and marketing investments and increased infrastructure to
support revenue growth.
GARTNER
Gartner is the world's leading independent provider of research and
analysis on the computer hardware, software, communications and related
information technology industries. As discussed earlier, the Company's voting
interest in Gartner fell below 50% in September 1997. Accordingly, the Company
accounts for its ownership interest on the equity basis. In both 1997 and 1998,
the income statement impact of the Company's ownership interest appears in
non-operating income-net as Gartner equity income and as a pre-tax unrealized
gain on Gartner stock (included as a separate line ("SAB 51") in the income
statement). Gartner Equity Income grew by 9.0% to $70,979 in 1998 from $65,120
in 1997. SAB 51 gains grew by 1.0% to $14,838 in 1998 from $14,689 in 1997. A
SAB 51 Gain was not recognized in the fourth quarter of 1998 due to the
announcement of the spin-off of the Company's equity investment in Gartner (See
Note 3. to the Consolidated Financial Statements).
RESULTS BY GEOGRAPHIC AREA
Revenue in the United States increased by 19.6% to $489,719 in 1998 from
$409,527 in 1997. The increase reflected the strong performance of core business
services by the IMS segment, high revenue growth at Erisco and CTS through the
addition of new customers and new product introductions and the Walsh
acquisition.
Non-U.S. revenue increased 7.2% to $696,794 in 1998 from $650,032 in 1997.
Non-U.S. operations include Europe, Australia and the Far East. The increase
reflects continued growth of IMS, new product introductions, geographic
expansion by IMS and the impact of the Walsh and PMSI acquisitions. Excluding
the impact of a stronger U.S. dollar in 1998, non-U.S. revenue increased by
12.7%.
YEAR-ENDED DECEMBER 31, 1997 COMPARED WITH
YEAR-ENDED DECEMBER 31, 1996
In September 1997, the Company's voting interest in Gartner fell below 50%
as a result of the exercise of Gartner employee stock options and employee stock
purchases. Accordingly, in the third quarter, the Company deconsolidated Gartner
as of January 1, 1997 and is accounting for its ownership interest on the equity
basis.
Revenue in 1997 decreased 24.9% to $1,059,559 from $1,411,192 in 1996. This
decrease primarily reflects the impact of the Gartner Deconsolidation. Revenue
in 1997 increased by 10.2%, excluding Gartner revenue from both years and the
impact of a stronger U.S. dollar. The increase reflects double-digit revenue
growth in the IMS segment, partially offset by Pilot, which was sold in the
third quarter of 1997. IMS segment revenue growth benefited from strong
performance of its core business services, geographic expansion and excellent
growth of its electronic territory management product. The impact of a stronger
U.S. dollar in 1997 reduced revenue growth by approximately 3%.
Operating costs and selling and administrative expenses in 1997 were
$831,949 compared with $1,167,485 in 1996, a decrease of 28.7%. This decrease
primarily reflects the impact of the Gartner Deconsolidation. Excluding Gartner
expenses from both years and business units sold in 1996, operating costs and
selling and administrative expenses increased 4.0% to $831,949 in 1997 from
$799,939 in 1996. This increase reflects the Company's increased spending on new
revenue growth initiatives
5
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FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
which contributed to revenue growth of 10.2% in 1997. The impact of a stronger
U.S. dollar in 1997 decreased operating costs and selling and administrative
expenses by approximately 3%.
Operating income in 1997 decreased 6.6% to $227,610 from $243,707 in 1996.
This decrease primarily reflects the impact of the Gartner Deconsolidation.
Excluding Gartner operating income in both years and sold business units in
1996, operating income increased 21.8% to $227,610 in 1997 from $186,871 in
1996. Operating income growth outpaced revenue growth primarily due to IMS's
ability to leverage its resources. The impact of a stronger U.S. dollar in 1997
decreased reported operating income by approximately 1%. The sale of Pilot,
which had been generating an operating loss, enabled the Company to redeploy
resources to strategic technology investments, including the initiative to
accelerate Y2K compliance. The impact on operating income of Y2K compliance was
$9,819 in 1997.
Operating margin in 1997 was 21.5%, compared with 17.3% in 1996. Excluding
Gartner results from both years, and discontinued business units in 1996,
operating margin was 21.5% in 1997 compared with 18.9% in 1996.
Non-operating income-net in 1997 was $94,864, compared with $5,853 in 1996.
The increase was due principally to recording $65,120 of Gartner equity income
in 1997 as a result of the Gartner Deconsolidation. The Company also recognized
a SAB 51 Gain of $14,689 (included as a separate line in the income statement)
corresponding to the net increase in the underlying value of its investment in
Gartner. In addition, non-operating income-net for 1997 includes gains of
$39,336 related to the disposition of Enterprises' investment in WEFA Group,
Inc. and a portion of its investment in TSI International, Inc. and Aspect
Development, Inc., and a $29,945 loss on the sale of Pilot (included in gains
from dispositions-net).
The Company's consolidated 1997 effective tax rate was 27.4%, compared with
44.0% in 1996. The Company's lower tax rate in 1997 is due to the benefits of
global tax planning strategies.
Income from continuing operations in 1997 was $234,116, compared with
$139,754 in 1996, an increase of 67.5%. This increase principally reflects IMS
operating income growth, gains from dispositions-net and SAB 51 gains in 1997
and a reduction in the tax rate from 44.0% in 1996 to 27.4% in 1997 due to
global tax planning actions. It also reflects a one-time after-tax
acquisition-related charge of $32,778 for IPR&D costs associated with Gartner's
acquisition of J3 Learning Corporation (the "J3 charge") in 1996. Excluding
these items, income from continuing operations increased 21.3% to $216,616 in
1997 from $178,597 in 1996.
Income from discontinued operations, net of income taxes in 1997 was
$78,234, compared with $55,697 in 1996 an increase of 40.5%. Income from
discontinued operations, net of income taxes represents the results of Nielsen
Media Research. The increase is a result of a reduced tax rate of 27.4% in 1997
from 44.0% in 1996 and growth in Nielsen Media Research. Excluding this item and
Y2K expenses net of taxes in 1997, income from discontinued operations increased
12.1% over the prior year.
Net income in 1997 was $312,350, compared with $195,451 in 1996, an
increase of 59.8%. This increase principally reflects the items noted above in
income from continuing operations and the reduction in the discontinued
operations tax rate. Excluding these items, net income increased 17.6% to
$294,850 in 1997 from $250,805 in 1996.
RESULTS BY BUSINESS SEGMENT
IMS
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, an operating unit of IMS Health and the
leading provider of automated sales support technologies to the pharmaceutical
industry. IMS segment revenue increased 8.4% in 1997 to $980,521 from $904,444
in 1996. This growth reflected strong performance of core business services, new
product introductions, geographic expansion and strong revenue growth at
Strategic Technologies. Excluding the impact of a stronger U.S. dollar, revenue
growth was 11.4%. Operating income grew 14.0% to $265,351 in 1997 from $232,827
in 1996 due to the factors described above. Operating income growth outpaced
revenue growth primarily due to the segment's ability to leverage its resources.
Excluding the impact of Y2K compliance, a stronger U.S. dollar in 1997, and
business units sold in 1996, operating income grew 18.2%.
EMERGING MARKETS
The Emerging Markets segment consists primarily of Erisco, and also
includes Enterprises, Pilot and Super Systems Japan. In the third quarter of
1997, the Company sold Pilot and recorded a non-cash pre-tax loss of $29,945.
The segment had a 17.7% decrease in 1997 revenue to $65,159 from $79,205 in
1996, reflecting the sale of Pilot. Erisco posted high revenue growth through
the addition of new customers and new product introductions. The 1997 operating
loss for the segment was $12,669, compared with $14,558 in 1996, reflecting the
sale of Pilot.
6
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
CTS
CTS revenue, excluding sales to related parties, increased to $13,879 in
1997 from $3,161 in 1996. Operating income, excluding the operating profit
associated with re-lated parties, increased to $2,917 in 1997 from $1,655 in
1996. This growth reflected the impact of the addition of new customers.
GARTNER
Gartner is the world's leading independent provider of research and
analysis on the computer hardware, software, communications and related
information technology industries. As discussed earlier, the Company's voting
interest in Gartner fell below 50% in September 1997. Accordingly, the Company
has deconsolidated Gartner and is accounting for its ownership interest on the
equity basis as of January 1, 1997. In 1997, the income statement impact of the
Company's ownership interest appears in non-operating income-net as Gartner
equity income and as a SAB 51 gain (included as a separate line in the income
statement). Revenue and operating income for Gartner in 1996 were $424,382 and
$60,114, respectively. Operating income was adversely affected by the J3 Charge.
Excluding this item, operating income was $93,347.
RESULTS BY GEOGRAPHIC AREA
Revenue in the United States decreased by 36.0% to $409,527 in 1997 from
$639,831 in 1996. This decrease is primarily the result of the Gartner
Deconsolidation. Excluding Gartner and Pilot revenue in both years, 1997 revenue
in the United States increased by 18.7%. The increase reflected a strong
performance of core business services by IMS and high revenue growth at Erisco
and CTS through the addition of new customers and new product introductions.
Non-U.S. revenue decreased by 15.7% to $650,032 in 1997 from $771,361 in
1996. The decrease is primarily the result of the Gartner Deconsolidation.
Excluding Gartner and Pilot revenue in both years and excluding the impact of a
stronger U.S. dollar, 1997 non-U.S. revenue increased by 10.7%. This increase
reflects continued growth at IMS and geographic expansion.
CHANGES IN FINANCIAL POSITION AT DECEMBER 31, 1998
COMPARED TO DECEMBER 31, 1997
Cash and cash equivalents were $206,390, $312,442 and $422,963 at December
31, 1998, 1997 and 1996, respectively. Cash decreased $106,052 in 1998 primarily
due to payments for the purchase of treasury stock ($666,694) and investing
activities for capital expenditures, additions to software and other investments
($113,389). These cash uses were partially offset by proceeds from debt assumed
by Nielsen Media Research ($300,000), cash from operating activities ($229,842),
proceeds from exercise of stock options ($104,990) and proceeds from sale of
businesses and investments and issuance of subsidiary stock ($78,883).
Accounts Receivable-Net increased to $324,219 at December 31, 1998, from
$251,623 at December 31, 1997, primarily reflecting the Walsh and PMSI
acquisitions and increases at IMS due to new product launches in the fourth
quarter and increased sales.
Other Current Assets increased to $103,868 at December 31, 1998, from
$65,692 at December 31, 1997, primarily reflecting an increase in deferred
income taxes associated with tax deductible non-U.S. intangible assets.
Investment in Gartner Group increased to $252,852 at December 31, 1998,
from $195,695 at December 31, 1997, primarily reflecting equity income-net of
taxes ($41,507) and a gain on the sale by Gartner of Gartner stock ($14,838).
Goodwill increased to $363,841 at December 31, 1998, from $87,430 at
December 31, 1997, primarily reflecting the Walsh acquisition ($156,557) and the
PMSI acquisition ($115,275).
Net Assets from Discontinued Operations decreased to $0 at December 31,
1998, from $122,778 at December 31, 1997, due to the Distribution of Nielsen
Media Research.
Accounts and Notes Payable increased to $90,884 at December 31, 1998, from
$44,441 at December 31, 1997, primarily reflecting short term borrowings in
Japan and the inclusion of the liabilities related to the Walsh and PMSI
businesses.
Accrued and Other Current Liabilities increased to $298,625 at December 31,
1998, from $189,384 at December 31, 1997, primarily reflecting the Walsh and
PMSI acquisitions and related acquisition costs.
Deferred Income Taxes decreased to $30,322 at December 31, 1998, from
$92,153 at December 31, 1997, primarily reflecting long-term benefits associated
with tax deductible non-U.S. intangible assets.
Other Liabilities increased to $181,807 at December 31, 1998, from $71,786
at December 31, 1997, primarily reflecting an increase in pre-spin liabilities.
NON-U.S. OPERATING AND MONETARY ASSETS
The Company operates globally, deriving a significant portion of its
operating income from non-U.S. operations. As a result, fluctuations in the
value of foreign currencies relative to the U.S. dollar may increase the
volatility of U.S. dollar operating results. The Company enters into forward
contracts to offset the effect of currency fluctuations
7
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
on operating income. In 1998, foreign currency translation decreased U.S. dollar
revenue growth and operating income growth by approximately 3% and 8%,
respectively. In 1997, foreign currency translation decreased U.S. dollar
revenue growth and operating income growth by approximately 3% and 1%,
respectively.
Non-U.S. monetary assets are maintained in currencies other than the U.S.
dollar, principally in those of Switzerland, Japan and Australia. Changes in the
value of these currencies relative to the U.S. dollar are charged or credited to
shareholders' equity. The effect of exchange rate changes during 1998 decreased
the U.S. dollar amount of cash and cash equivalents by $1,574.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $206,390, $312,442 and $422,963 at December
31, 1998, 1997 and 1996, respectively. Cash decreased $106,052 in 1998 primarily
due to payments for the purchase of treasury stock ($666,694) and investing
activities for capital expenditures, additions to software and other investments
($113,389). These cash uses were partially offset by proceeds from debt assumed
by Nielsen Media Research ($300,000), cash from operating activities ($229,842),
proceeds from exercise of stock options ($104,990) and proceeds from sale of
businesses and investments and issuance of subsidiary stock ($78,883).
Net cash provided by operating activities was $229,842, $259,465 and
$257,059 in 1998, 1997 and 1996, respectively. The decrease of $29,623 in
operating activities in 1998 primarily reflected increased accounts receivable
from fourth quarter revenues ($46,001), higher taxes paid ($44,425) and
increased postemployment benefit payments ($6,671). These decreases were
partially offset by lower other working capital ($31,584) and higher tax
refunds. The increase of $2,406 in operating activities in 1997 primarily
reflected increased cash from operations, improved collections of accounts
receivable, the absence in 1997 of restructuring payments, and a lower level of
postemployment benefit and non-recurring charge payments. These increases were
partially offset by payment of income taxes in 1997 of $44,094.
Net cash used in investing activities totaled $102,592 for 1998, compared
with $73,456 and $115,686 in 1997 and 1996, respectively. The cash usage in 1998
increased $29,136 reflecting payments for acquisitions and joint ventures
($38,356) and increases in other investments-net, partially offset by lower
capital expenditures ($16,158) and lower additions to computer software
($13,687). The decrease in cash usage in 1997 of $42,330 primarily reflected
higher proceeds from the sale of businesses and investments ($43,336) and the
absence of purchases of Gartner common stock ($49,419), offset in part by the
absence of net proceeds from marketable securities ($27,601).
Net cash (used in)/provided by financing activities totaled ($214,555),
($215,198) and $80,609 for 1998, 1997 and 1996, respectively. Total financing
activity remained essentially unchanged in 1998 from 1997 with usage for the
purchase of treasury stock increasing ($341,927) and the absence of the 1997
minority interest financing ($100,000), offset by the proceeds of the debt
assumed by Nielsen Media Research ($300,000), higher proceeds from employee
stock option exercises ($78,581), increased short-term borrowing-net of
repayments ($34,008) and the proceeds from the sale and issuance of subsidiary
stock ($31,197). The increase in 1997 of cash used in financing activities
primarily reflected the purchase of shares of the Company's common stock
($324,767) and dividend payments ($19,883); partially offset by minority
interest financing $100,000 and proceeds from exercise of stock options $26,409.
Cash flow (used by)/provided from discontinued operations totaled
($17,173), $53,580 and $47,694 for 1998, 1997 and 1996, respectively.
The Gartner Deconsolidation resulted in the elimination of the Gartner
Group opening cash balances in 1997. Gartner Group cash balance as of December
31, 1996 was $123,697.
On October 21, 1997 Cognizant announced that its board of directors had
authorized a systematic stock repurchase program to buy up to 20,000,000 shares
(on a post split basis) of Cognizant's outstanding common stock. As the
Accounting Successor to Cognizant, the Company purchased the remaining balance
of 18,850,800 shares of the Company's stock (on a post split basis) pursuant to
this program. A portion of this program was intended to offset option exercises.
This program was completed by the Company on November 17, 1998 at a cost of
$591,331.
In the fourth quarter the Board of Directors authorized a stock repurchase
program to buy up to 16,000,000 shares (on a post split basis) of the Company's
outstanding common stock. A portion of this program is intended to offset option
exercises. Through December 31, 1998, 2,898,800 shares (on a post split basis)
have been acquired at a total cost of $98,113.
In connection with the Distribution, Cognizant borrowed $300,000, which was
to repay existing intercompany liabilities. This debt was assumed by Nielsen
Media Research upon the Distribution.
8
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
On November 11, 1998 the Company announced that its Board of Directors,
approved a plan, to spin-off substantially all of its equity ownership in
Gartner. The transaction, expected to be completed in the first half of 1999, is
to be structured as a tax-free distribution of Gartner stock to IMS Health
shareholders. The transaction is subject to receipt of a favorable ruling from
the IRS, final approval by the Company's and Gartner Boards of Directors, and
approval by Gartner shareholders.
The Company owns approximately 47 million shares of Gartner. Prior to the
spin-off, 40.1 million of these shares will be exchanged for new Class B Common
Stock of Gartner. The Class B Stock will be entitled to elect 80% of Gartner's
Board of Directors, but will otherwise be identical to existing Class A Common
Stock. The exchange will be part of a Gartner recapitalization and requires
approval by Gartner shareholders. The Class B shares will be distributed to the
Company's shareholders in a tax-free distribution, subject to receipt of a
favorable tax ruling from the Internal Revenue Service with respect to the
distribution. The Company intends to monetize its remaining position in Gartner,
6.9 million shares of Class A Common Stock and warrants to purchase a further
600,000 shares, during the twelve months following the spin-off.
Separately, Gartner announced that, subject to approval by the IRS of the
tax-free treatment of the distribution, it intends to declare a special one-time
cash dividend of $300,000 to its shareholders of record immediately prior to the
spin-off. The Gartner Board of Directors intends to authorize a $300,000 open
market share repurchase program for up to 20% of its stock commencing
immediately after the spin-off. If completed as currently contemplated the
Company anticipates receiving $200-$300 million after-tax cash proceeds from the
monetization of the stock and warrants and the Gartner dividend.
The Company has been informed by the Dun & Bradstreet Corporation ("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 is made and the IRS prevails would be approximately $425,000 for
taxes and accrued interest net of tax benefit. Under the terms of the
Distribution Agreement dated October 28, 1996 among D&B, Cognizant and ACNielsen
Corporation (the "1996 Distribution Agreement"), the Company is liable to pay
half of such taxes and interest owed 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 in connection with the Distribution dated June 30,
1998 between Cognizant and the Company. The Company estimates that its current
share of the liability were the IRS to prevail would be approximately $135,000.
(See Note 12. to the Consolidated Financial Statements).
The Company's existing balances of cash, cash equivalents and marketable
securities, and cash generated from operations and debt capacity are expected to
be more than sufficient to meet the Company's current long-term and short-term
cash requirements including dividends, acquisitions, stock repurchase programs
and the other contingencies noted above.
YEAR 2000
Many existing computer systems and software applications use two digits,
rather than four, to record years, e.g., "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".
The Company began to address the Y2K issue in 1996, when it began to assess
the impact on its operations. In 1997, the Company created a Y2K Task Force (the
"task force") to manage overall risks and to facilitate activities across the
entire Company. CTS, a majority owned subsidiary, is being used to convert the
majority of the systems to allow most internal staff members to focus on the
core business. The Company has also used outside services to assist in
conversion and to assess the progress of its Y2K program. The Company has
identified its Y2K areas of focus as systems and software for the creation and
delivery of its products and systems and software for its internal
administrative operations.
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. Coding and
testing involves code changes, using conversion rules and criteria and unit
testing, and verifying and documenting the results of the conversion. Testing
and implementation includes system tests 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
communicated throughout the Company and is being utilized to achieve systems
compliance by the Year 2000.
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
9
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Y2K 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. The following is a status
report of each location as of December 31, 1998:
% OF LINE OF CODE
LOCATION TESTED AND IMPLEMENTED EXPECTED COMPLIANCE
TO DATE
--------------------------------------------------------------
Germany 94% lines of code 99% by 1st quarter 1999
England 89% lines of code 99% by 1st quarter 1999
United States 89% lines of code 99% by 1st quarter 1999
Japan 98% lines of code 99% by 1st quarter 1999
--------------------------------------------------------------
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 compliant (such software is excluded from the tables above). In
addition, the Company has decided to replace certain non-compliant software. It
is imperative that these replacement projects be completed and deployed on
schedule, as the existing software is not undergoing Y2K renovation. These
projects are on track to be completed and deployed by the fourth quarter of 1999
and continue to be under close scrutiny by the task force. The Erisco systems
are 99% compliant as of December 31, 1998.
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 are utilized to ensure system compliance.
In some cases, specialized teams from CTS are being used to assist the local
offices with all phases of their system conversions and hardware compliance. The
following table represents a status report of each geographic region as of
December 31, 1998:
% OF LOCAL SYSTEMS
CONVERTED AND BACK
LOCATION IN PRODUCTION EXPECTED COMPLIANCE
- - ------------------------------------------------------------
North America 81% 99% 1st Quarter 1999
Europe 56% 99% 2nd Quarter 1999
Asia Pacific 62% 99% 1st Quarter 1999
South America 33% 99% 1st Quarter 1999
Rest of World 29% 99% 2nd Quarter 1999
- - ------------------------------------------------------------
% OF PC'S AND
SERVERS MADE Y2K OVERALL %
LOCATION CAPABLE TO DATE EXPECTED COMPLIANCE COMPLETED
- - -------------------------------------------------------------------
North America 89% 99% 1st Quarter 1999 89%
Europe 64% 99% 2nd Quarter 1999 63%
Asia Pacific 80% 99% 2nd Quarter 1999 77%
South America 63% 99% 2nd Quarter 1999 62%
Rest of World 86% 99% 1st Quarter 1999 70%
- - -------------------------------------------------------------------
These numbers exclude end-user desktop applications such as spreadsheets,
macros, etc. The Company's Y2K project incorporates administrative operations
systems and software such as accounts receivable, payroll, accounts payable and
the general ledger systems. These systems are expected to be 99% compliant by
the end of the first quarter of 1999.
The Company has also 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. As of
December 31, 1998, audits occurred in the United States, England and Germany,
with follow up audits scheduled for early 1999. An audit of Japan is also
planned for the first quarter of 1999. The Company performs audits on the local
country conversions with the assistance of CTS. Local office audits have been
performed in North America and Europe with South America planned for early 1999.
The Company relies on over 16,000 suppliers of electronic data and has been
proactive in working with these suppliers to determine their Y2K readiness and
ability to maintain data flow continuity. A program consisting of seminars,
visits, mailings and telephone calls continues to be administered so the Company
can track status and assess risk associated with Y2K readiness for key data
suppliers.
Considerable risk to some data sources currently exists, especially for
hospital information as their priority relates to patient care. In some
instances, IMS Health receives data from governments and continued receipt of
their data will be a function of their readiness. Based on information from data
sources to date, it appears that the Y2K readiness information has been
incomplete or progress to date has been unsatisfactory in some areas. The
Company assesses risk regarding the readiness of data sources through the use of
a detailed questionnaire regarding Y2K conversion plans in order to verify and
the supplier's ability to continue to deliver data. As a contingency,
statistically valid methods of data extrapolation are being 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 will be pursued when
the risk assessment determines the data source to have a high risk of impacting
the Company's ability to deliver products. Ultimately, the risk for our
customers will be the completeness and quality of the data, but the Company
believes it is a short-term issue and is working to minimize the effect on its
data and customers.
Throughout 1999 the Company's Y2K efforts will focus on (i) the testing the
critical components of the Company's systems; (ii) the continued assessment of
supplier and customer readiness to address the Y2K conversion and; (iii)
finalizing contingency plans to address unanticipated issues.
10
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
External and internal costs of addressing the Y2K issue are expensed as
incurred. It is currently estimated that the aggregate cost of the Company's Y2K
program will be approximately $75,000. Through December 31, 1998 the Company has
incurred $54,741 of which $44,922 was incurred in 1998. The Company expects to
incur between $20,000 to $25,000 in 1999. These estimates do not include the
costs of software and systems that are being replaced or upgraded in the normal
course of business.
The cost of addressing the Y2K issue and the dates which the Company
currently expects to complete Y2K 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 materially. Specific factors that may
cause such material 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 Y2K issue. The Company's plans are
dependent on the continuous operation of industries out of the Company's direct
control such as utilities, transportation, etc.
The above expectations are subject to uncertainties. For example, if the
Company is unsuccessful in identifying or fixing all Y2K problems in its
critical operations, or is affected 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.
MARKET RISK
The Company's primary market risks are the impact of foreign exchange
fluctuations on non-dollar-denominated revenue and price fluctuations on equity
securities.
In the normal course of business, the Company employs established practices
and procedures to manage its exposure to fluctuations in the value of foreign
currencies using a variety of financial instruments.
The Company's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention on its
core business activities. Accordingly, the Company enters into various contracts
which change in value as foreign exchange rates change to protect the value of a
portion of committed foreign currency revenues and non-functional currency
assets and liabilities. The principal currencies hedged are the Japanese yen,
the Euro and the Swiss franc. By policy, the Company maintains hedge coverage
between minimum and maximum percentages of its anticipated foreign exchange
exposures over the next year. The gains and losses on these hedges offset
changes in the value of the related exposures.
It is the Company's policy to enter into foreign currency transactions only
to the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for investment or speculative
purposes.
The fair value of the Company's hedging instruments are subject to change
as a result of potential changes in foreign exchange rates. The potential loss
in fair value for foreign exchange rate-sensitive instruments, all of which were
forward exchange contracts, based on a hypothetical 10% decrease in the value of
the U.S. dollar or, in the case of non-dollar-related instruments, the currency
being purchased, was $11,977 at December 31, 1998. The estimated fair values of
the foreign exchange risk management contracts were determined based on quoted
market prices.
The Company also invests in equity securities and is subject to equity
price risk. These investments are classified as available for sale and
consequently, carried at fair value, with unrealized gains and losses, net of
income taxes, reported as a component of shareholders' equity. The Company does
not hedge this market risk exposure. A 10% decline in the market price of these
equity securities would cause the fair value of the securities to decrease by
$3,768 at December 31, 1998.
EURO CONVERSION
On January 1, 1999, 11 member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency ("Euro"). The transition period for the introduction of
the Euro is between January 1, 1999 and January 1, 2002.
The Company has prepared for the introduction of the Euro, including the
conversion of information technology systems, recalculating currency risk,
recalibrating derivatives and other financial instruments, strategies concerning
continuity of contracts, and impacts on the processes for preparing taxation and
accounting records. Although the Euro may affect some companies' pricing
policies, differences in IMS' national market size, data collection requirements
and specific product specifications required due to the diverse market
information needs in the healthcare markets of Europe are expected to minimize
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
11
<PAGE>
FINANCIAL REVIEW (continued)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
number of risks and uncertainties that could cause the 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 affected systems in a timely manner and the actions of governmental
agencies or other third parties with respect to Euro currency issues.
FORWARD-LOOKING STATEMENTS
This 1998 Annual Report to Shareholders, 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 annual 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, the terms of
the Distribution 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 of 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 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 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, stimates and liabilities
and accrued income tax benefits and liabilities. Consequently, all the
forward-looking statements contained in this annual report are qualified by the
information contained herein, including, but not limited to, the information
contained under this heading the consolidated financial statements and notes
thereto and by the material set forth under the headings "Business" and
"Factors" that May Affect Future Results, in the Annual Report on Form 10-K for
the year ended December 31, 1998. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, various new accounting pronouncements were issued which may
impact the Company's financial statements. (See Note 2. to the Consolidated
Financial Statements).
DIVIDENDS
The payment and level of cash dividends by the Company are subject to the
discretion of the board of directors of the Company. Although the Company has
declared and anticipates that it will declare quarterly dividends in the range
of 6% to 10% of net earnings, dividend decisions will be based on, and affected
by, a number of factors; including the operating results and financial
requirements of the Company. The Company's Board of Directors approved a first
quarter dividend increase of 33%, to a quarterly rate of $0.02 per post-split
share, or $0.08 per share annually. This follows the January 1999 2-for-1 stock
split.
IMS HEALTH COMMON STOCK INFORMATION
The Company's common stock is listed on the NYSE (symbol "RX"). The number
of shareholders of record and shares outstanding on December 31, 1998 were
10,084 and 318,741,700, respectively. The high and low closing stock price per
share during 1998 was $38 and $26 3/8, respectively. Approximately 70% of the
Company's shares were held by institutions.
All share and per-share amounts have been restated to give effect to the
2-for-1 stock split approved by the Company's Board of Directors on December 15,
1998 and distributed to shareholders on January 15, 1999 (See Note 2. to the
Consolidated Financial Statements).
DIVIDENDS PAID
PRICE PER SHARE ($) PER SHARE ($)
- - ------------------------------------------------------------
1998 1998
- - ------------------------------------------------------------
HIGH LOW
- - ------------------------------------------------------------
First Quarter -- -- --
Second Quarter (1) 29 3/4 26 9/16 --
Third Quarter 33 3/32 27 1/2 0.015
Fourth Quarter 38 29 3/8 0.015
- - ------------------------------------------------------------
Year 38 26 3/8 0.030
- - ------------------------------------------------------------
(1) Commencing June 23, 1998
12
<PAGE>
STATEMENT OF MANAGEMENT'S
RESPONSIBILITY FOR FINANCIAL
STATEMENTS
- - --------------------------------------------------------------------------------
To the Shareholders of IMS Health Incorporated:
Management is responsible for the preparation of the consolidated financial
statements and related information that are presented in this report. The
consolidated financial statements, which include amounts based on management's
estimates and judgments, have been prepared in conformity with generally
accepted accounting principles. Other financial information in the report to
shareholders is consistent with that in the consolidated financial statements.
The Company maintains accounting and internal control systems to provide
reasonable assurance at reasonable cost that assets are safeguarded against loss
from unauthorized use or disposition, and that the financial records are
reliable for preparing financial statements and maintaining accountability for
assets. These systems are augmented by written policies, an organizational
structure providing division of responsibilities, careful selection and training
of qualified personnel and a program of internal audits.
The Company engaged PricewaterhouseCoopers LLP, independent accountants, to
audit and render an opinion on the consolidated financial statements in
accordance with generally accepted auditing standards. These standards include
an assessment of the systems of internal controls and tests of transactions to
the extent considered necessary by them to support their opinion.
The Board of Directors, through its Audit Committee consisting solely of
outside directors of the Company, meets periodically with management, internal
auditors and our independent accountants to ensure that each is meeting its
responsibilities and to discuss matters concerning internal controls and
financial reporting. PricewaterhouseCoopers and the internal auditors each have
full and free access to the Audit Committee.
/s/ ROBERT E. WEISSMAN
Robert E. Weissman
Chairman &
Chief Executive Officer
/s/ VICTORIA R. FASH
Victoria R. Fash
President &
Chief Operating Officer
/s/ J. MICHAL CONAWAY
J. Michal Conaway
Chief Financial Officer
REPORT OF INDEPENDENT
ACCOUNTANTS
- - --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of IMS Health Incorporated:
In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of income, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of IMS Health Incorporated ("accounting successor to Cognizant Corporation") and
its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
February 16, 1999
13
<PAGE>
<TABLE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Income
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
Dollar amounts in thousands, except per share data 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE $ 1,186,513 $ 1,059,559 $ 1,411,192
- - ----------------------------------------------------------------------------------------------------------------------------
Operating Costs 533,634 432,654 566,567
Selling and Administrative Expenses 343,218 310,644 459,053
Depreciation and Amortization 96,358 88,651 108,632
Acquired In Process Research and Development 32,800 0 33,233
Direct Acquisition Integration Costs 48,019 0 0
- - ----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 132,484 227,610 243,707
- - ----------------------------------------------------------------------------------------------------------------------------
Interest Income 19,548 12,749 9,456
Interest Expense (1,166) (2,293) (1,338)
Gartner Equity Income 70,979 65,120 0
Gain from Sale of Gartner Stock (SAB 51) 14,838 14,689 0
Gains from Dispositions--Net 33,341 9,391 200
Gain on Issuance of Subsidiary Stock 12,777 0 0
Other Expense--Net (12,140) (4,792) (2,465)
- - ----------------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 138,177 94,864 5,853
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations,
Before Provision for Income Taxes 270,661 322,474 249,560
Provision for Income Taxes (92,196) (88,358) (109,806)
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 178,465 234,116 139,754
Income from Discontinued Operations, Net of
Income Taxes of $15,887, $29,527 and $43,764 for
1998, 1997, and 1996, respectively 42,093 78,234 55,697
- - ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 220,558 $ 312,350 $ 195,451
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock
Basic
Income from Continuing Operations $ .55 $ .71 $ .41
Income from Discontinued Operations .13 .24 .17
- - ----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ .68 $ .95 $ .58
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
DILUTED
INCOME FROM CONTINUING OPERATIONS $ .53 $ .70 $ .41
INCOME FROM DISCONTINUED OPERATIONS .13 .23 .16
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .66 $ .93 $ .57
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Basic 324,584,000 330,326,000 339,888,000
Dilutive Effect of Shares Issuable as of Period-End
Under Stock Option Plans 5,968,000 3,334,000 374,000
Adjustment of Shares Applicable to Exercised
Stock Options and Restricted Stock during the period 5,218,000 1,320,000 738,000
- - ----------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 335,770,000 334,980,000 341,000,000
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
<TABLE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Financial Position
<CAPTION>
As of December 31,
----------------------------
Dollar amounts in thousands, except per share data 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 206,390 $ 312,442
Accounts Receivable--Net 324,219 251,623
Other Current Assets 103,868 65,692
- - ----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 634,477 629,757
- - ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT IN GARTNER GROUP 252,852 195,695
SECURITIES AND OTHER INVESTMENTS 106,276 109,712
PROPERTY, PLANT AND EQUIPMENT--NET 179,151 178,533
OTHER ASSETS--NET
Computer Software 168,994 153,958
Goodwill 363,841 87,430
Other Assets 25,928 24,226
- - ----------------------------------------------------------------------------------------------------------------------------
Total Other Assets-Net 558,763 265,614
- - ----------------------------------------------------------------------------------------------------------------------------
Net Assets from Discontinued Operations 0 122,778
- - ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,731,519 $ 1,502,089
- - ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and Notes Payable $ 90,884 $ 44,441
Accrued and Other Current Liabilities 298,625 189,384
Accrued Income Taxes 32,537 52,696
Deferred Revenues 128,272 110,768
- - ----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 550,318 397,289
- - ----------------------------------------------------------------------------------------------------------------------------
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS 27,577 38,082
DEFERRED INCOME TAXES 30,322 92,153
MINORITY INTERESTS 116,225 101,209
OTHER LIABILITIES 181,807 71,786
- - ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 906,249 700,519
- - ----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share, Authorized--
10,000,000 Shares; Outstanding--None
Series Common Stock, Par Value $.01 Per Share, Authorized--
10,000,000 Shares; Outstanding--None
Common Stock, Par Value $.01 Per Share, Authorized--800,000,000 Shares;
Issued 335,045,390 and 342,240,138 Shares in 1998 and 1997 , respectively 3,352 3,422
Capital in Excess of Par 732,012 806,839
Retained Earnings 686,653 358,456
Treasury Stock, at cost, 16,303,690, and 18,052,896 Shares in 1998 and 1997, respectively (535,971) (323,026)
Cumulative Translation Adjustment (84,149) (76,771)
Unrealized Gains on Investments 23,373 32,650
- - ----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 825,270 801,570
- - ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,731,519 $ 1,502,089
- - ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
15
<PAGE>
<TABLE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
Dollar amounts in thousands 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 220,558 $ 312,350 $ 195,451
Less Income from Discontinued Operations (42,093) (78,234) (55,697)
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 178,465 234,116 139,754
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 96,358 88,651 108,632
Gains on Issuance of Subsidiary Stock (12,777) -- --
Gains from Sale of Investments, Net (33,341) (9,391) (200)
Acquired In-Process Research and Development 32,800 -- 33,233
Direct Acquisition Integration Costs 48,019 -- --
Benefit Payments (13,653) (6,982) (10,641)
Non-Recurring Charge Payments (3,885) (5,201) (13,096)
Restructuring Payments -- -- (11,515)
Net (Increase) Decrease in Accounts Receivable (40,123) 5,878 (5,530)
Net Increase in Deferred Revenue 10,596 10,054 22,020
Equity Income, Net of Taxes (41,507) (38,040) --
Gain from Sale of Gartner Stock (SAB 51) (14,838) (14,689) --
Minority Interests 10,303 4,797 11,710
Deferred Income Taxes 6,380 48,414 (11,299)
Net Increase (Decrease) in Accrued Income Taxes 14,781 (18,822) 16,194
Net Increase in Other Working Capital Items (7,736) (39,320) (22,203)
- - ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 229,842 259,465 257,059
- - ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Businesses and Investments 47,686 44,901 1,565
Payments for Acquisitions of Businesses and Joint Ventures (38,356) -- (24,386)
Cash of Companies Acquired in Stock Purchases 11,895 -- --
Capital Expenditures (30,862) (47,020) (57,034)
Additions to Computer Software (61,089) (74,776) (47,960)
Increase in Other Investments-Net (21,438) (10,723) (24,423)
Proceeds from Maturities of Marketable Securities -- -- 193,392
Payments for Marketable Securities -- -- (165,791)
Payments for Purchase of Gartner Group Common Stock -- -- (49,419)
Other (10,428) 14,162 58,370
- - ----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (102,592) (73,456) (115,686)
- - ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (666,694) (324,767) --
Proceeds from Exercise of Stock Options 104,990 26,409 557
Dividends Paid (19,592) (19,883) --
Proceeds from Employee Stock Purchase Plan 3,855 1,683 --
Short-Term Borrowings 42,546 -- --
Short-Term Debt Payments (8,538) -- (50,000)
Proceeds from debt assumed by Nielsen Media Research 300,000 -- --
Proceeds from Sale and Issuance of Subsidiary Stock 31,197 -- --
Minority Interest Financing -- 100,000 --
Net Transfers from The Dun & Bradstreet Corporation -- -- 44,880
Other Stock Transactions with Employees -- -- 14,377
Proceeds from Issuance of Purchased Stock Options -- -- 8,699
Other (2,319) 1,360 62,096
- - ----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (214,555) (215,198) 80,609
- - ----------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents (1,574) (11,215) (3,063)
Change of Gartner Group to Equity Basis -- (123,697) --
Cash Flow (used by) provided by Discontinued Operations (17,173) 53,580 47,694
- - ----------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (106,052) (110,521) 266,613
Cash and Cash Equivalents, Beginning of Year 312,442 422,963 156,350
- - ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 206,390 $ 312,442 $ 422,963
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Period for Interest $ 1,645 $ 2,293 $ 1,463
Cash Paid during the Period for Income Taxes $ 88,519 $ 44,094 $ 48,372
Non-Cash Investing Activities
Stock Issued in Connection with Acquisitions $ 243,853 $ -- $ --
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT CORPORATION)
Consolidated Statements of Shareholders' Equity
Dollar amounts in thousands
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OTHER COMPREHENSIVE
INCOME:
---------------------
CAPITAL UNREALIZED
IN EXCESS CUMULATIVE GAINS/ COMPRE-
DIVISIONAL COMMON OF PAR RETAINED TREASURY TRANSLATION (LOSSES) HENSIVE
THREE YEARS ENDED DECEMBER 31, 1998 EQUITY STOCK VALUE EARNINGS STOCK ADJUSTMENT INVESTMENTS INCOME TOTAL
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 598,083 -- -- -- -- $ 6,505 -- $604,588
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Income 129,462 $ 129,462 129,462
Net Transfers from The Dun &
Bradstreet Corporation 44,880 44,880
Change in Cumulative Translation
Adjustment (16,817) (16,817) (16,817)
--------------------
Comprehensive Income $ 112,645
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Recapitalization, November 1, 1996 -- $ 3,422 $794,203 -- $ (25,200) $ (10,312) -- $762,113
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Income 65,989 $ 65,989 65,989
Exercise of Stock Options 557 557
Restricted Stock Plan (82,800 shares) 210 210
Less: Unearned Portion (210) (210)
Purchase Stock Options 8,699 8,699
Change in Cumulative Translation
Adjustment (1,440) (1,440) (1,440)
Unrealized Gains on Investments 36,695 36,695 36,695
--------------------
Comprehensive Income $ 101,244
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- $ 3,422 $803,459 $ 65,989 $ (25,200) $ (11,752)$ 36,695 $872,613
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Income 312,350 $ 312,350 312,350
Cash Dividends ($.06 per share) (19,883) (19,883)
Exercise of Stock Options
(75,536 shares) 1,151 1,151
Treasury Stock Reissued Under:
Exercise of Stock Options
(1,637,850 shares) 2,187 25,258 27,445
Restricted Stock Plan (82,800
shares) 1,741 1,741
Less: Unearned Portion (1,741) (1,741)
Plus: Earned Portion 42 42
Employee Stock Purchase Plan
(93,290 shares) 1,683 1,683
Treasury Shares Acquired
(18,266,836 shares) (324,767) (324,767)
Change in Cumulative Translation
Adjustment (65,019) (65,019) (65,019)
Unrealized Loss on Investments--Net of
reclassification adjustment (4,045) (4,045) (4,045)
--------------------
Comprehensive Income $ 243,286
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 -- $ 3,422 $806,839 $ 358,456 $(323,026) $ (76,771)$ 32,650 $801,570
- - ---------------------------------------------------------------------------------------------------------------------------------
17
</TABLE>
<PAGE>
<TABLE>
Dollar amounts in thousands
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OTHER COMPREHENSIVE
INCOME:
---------------------
CAPITAL UNREALIZED
IN EXCESS CUMULATIVE GAINS/ COMPRE-
DIVISIONAL COMMON OF PAR RETAINED TREASURY TRANSLATION (LOSSES) HENSIVE
THREE YEARS ENDED DECEMBER 31, 1998 EQUITY STOCK VALUE EARNINGS STOCK ADJUSTMENT INVESTMENTS INCOME TOTAL
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 -- $ 3,422 $806,839 $ 358,456 $(323,026) $ (76,771)$ 32,650 $801,570
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Income 220,558 $ 220,558 220,558
Cash Dividends ($.06 per share) (19,592) (19,592)
Prepaid Employee Stock Option Plan
exercises or cancellations (1,950) (1,950)
Transfer to Nielsen Media Research
Employee Prepaid Stock Option Plan
Payments (1,159) (1,159)
Value of Stock Options granted
in connection with acquisitions 14,936 14,936
Treasury Shares Acquired
(21,749,600 shares) (666,694) (666,694)
Treasury Stock Reissued Under:
Exercise of Stock Options
(7,145,992 shares) 8,649 104,990 113,639
Restricted Stock Plan
(38,090 shares) 4,317 4,317
Less: Unearned Portion (4,317) (4,317)
Plus: Earned Portion of Grants
(33,340 shares) 3,846 3,846
Employee Stock Purchase Plan
(184,548 shares) 3,855 3,855
Stock issued for Walsh and other
acquisitions (6,506,162 shares) 168,561 168,561
Stock Issued for PMSI Acquisition
(2,395,926 Shares) 75,292 75,292
Other 1,832 1,832
Dividend of Nielsen Media
Research including
Treasury Shares (7,194,748) (70) (80,367) 127,231 80,437 127,231
Change in Cumulative Translation
Adjustment (7,378) (7,378) (7,378)
Unrealized Loss on Investments--Net of
reclassification adjustment (9,277) (9,277) (9,277)
--------------------
Comprehensive Income $ 203,903
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 -- $ 3,352 $732,012 $ 686,653 $(535,971) $ (84,149)$ 23,373 $825,270
- - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the consolidated financial statements.
18
</TABLE>
<PAGE>
IMS HEALTH INCORPORATED
(ACCOUNTING SUCCESSOR TO COGNIZANT)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Note 1. Basis of Presentation
The financial statements and notes relate to IMS Health Incorporated ("IMS
Health" or the "Company"). The Common Stock of IMS Health was distributed by
Cognizant Corporation ("Cognizant") to its shareholders on June 30, 1998.
Simultaneously with the distribution (the "Distribution"), Cognizant changed its
name to Nielsen Media Research, Inc. ("Nielsen Media Research"). Notwithstanding
the legal form of the Distribution, whereby Cognizant spun off IMS Health, for
accounting purposes the transaction is accounted for as if Cognizant spun off
Nielsen Media Research and IMS Health has been deemed the "accounting successor"
to Cognizant. The separation created IMS Health as the global provider of
information solutions to the pharmaceutical and healthcare industries, and
established an independent Nielsen Media Research. IMS Health consists of the
market information, sales management, and decision support services business for
the pharmaceutical and healthcare industries conducted by IMS Health and various
subsidiaries ("IMS"), IMS Health Strategic Technologies Inc. ("Strategic
Technologies"), ERISCO Managed Care Technologies, Inc. ("Erisco"), Enterprise
Associates, Inc. ("Enterprises"), a 61.7% interest in Cognizant Technology
Solutions Corporation ("CTS") and SSJ K.K. ("Super Systems Japan"). The Company
also has an equity investment in Gartner Group, Inc. ("Gartner").
Cognizant received a favorable ruling from the Internal Revenue Service
("IRS") with respect to the tax-free treatment of the Distribution in May 1998.
Cognizant's Board of Directors on June 15, 1998 approved the final plan, terms
and conditions relating to the separation of the Company including distribution,
tax allocation, employee benefits and other agreements and authorized management
to execute the plan of distribution. The Board of Directors declared a dividend
to shareholders of record as of the close of business on June 25, 1998
consisting of one share of IMS Health Common Stock for each share of Cognizant
Common Stock. The Distribution was effective June 30, 1998.
In connection with the Distribution, Cognizant borrowed $300,000 on June
24, 1998, which was used to repay existing intercompany liabilities. This debt
remained the obligation of Nielsen Media Research following the Distribution. In
connection with the Distribution, Cognizant contributed to IMS Health all cash
in Cognizant's accounts other than (i) cash required by Cognizant (renamed
Nielsen Media Research) to satisfy certain specified obligations and (ii) such
additional cash as was necessary for the net borrowings of Cognizant (renamed
Nielsen Media Research) to equal $300,000 as of the Distribution.
Prior to the Distribution, Nielsen Media Research and IMS Health entered
into certain agreements that govern the relationship between Nielsen Media
Research and IMS Health subsequent to the Distribution and provide for the
allocation of tax, employee benefits and certain other liabilities and
obligations that may arise from periods prior to the Distribution (the
"Distribution Agreement"). Among other things, the agreements set forth
principles to be applied in allocating certain Distribution-related costs and
specify portions of contingent liabilities to be shared if certain amounts are
exceeded (including certain liabilities that may arise in connection with the
1996 spin-off of Cognizant from The Dun and Bradstreet Corporation ("D&B")).
Pursuant to Accounting Principles Board ("APB") Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect Nielsen Media Research as discontinued operations for
periods up to and including June 30, 1998 and reflect the Distribution which
occurred on June 30, 1998.
Summarized data for discontinued operations is as follows.
YEARS ENDED DECEMBER 31,
--------------------------------------
RESULTS OF OPERATIONS 1998 (1) 1997 1996
- - --------------------------------------------------------------------------------
Operating Revenue $193,996 $358,594 $319,404
Income Before Provision
for Income Taxes 57,980 107,761 99,461
Income from Discontinued
Operations, Net of Income
Taxes $ 42,093 $ 78,234 $ 55,697
(1) Includes Nielsen Media Research results through the date of the
Distribution.
NET ASSETS OF DISCONTINUED OPERATIONS DECEMBER 31, 1997
- - --------------------------------------------------------------------------------
Current Assets $ 64,655
Property Plant & Equipment 55,050
Computer Software 43,093
Deferred Charges 16,299
Other Assets 21,112
Current Liabilities (43,921)
Other Liabilities (33,510)
- - --------------------------------------------------------------------------------
Net Assets of Discontinued Operations $122,778
================================================================================
As of December 31, 1998, IMS Health does not have any ownership interest in
Nielsen Media Research.
================================================================================
Note 2. Summary of Significant
Accounting Policies
Consolidation. The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries after elimination of all material
intercompany accounts and transactions.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Investments in companies over which the Company has significant influence but
not a controlling interest are accounted for under the equity method of
accounting. The Company recognizes in the income statement any gains or losses
related to the sale or issuance of stock by a consolidated subsidiary or a
company accounted for under the equity basis. (See Note 3. to the Consolidated
Financial Statements).
The financial statements of the IMS segment reflect a fiscal year ending
November 30 to facilitate timely reporting of the Company's financial results.
(See Note 19. to the Consolidated Financial Statements).
Cash Equivalents. The Company considers all highly liquid investments with a
maturity of 90 days or less at the time of purchase to be cash equivalents.
Securities and Other Investments. Marketable securities, principally consisting
of equity securities, are classified as available-for-sale. Such securities are
carried at fair value, with the unrealized gains and losses, net of income
taxes, reported as a component of shareholders' equity. Any gains or losses from
the sale of these securities are recognized using the specific identification
method. (See Note 8. to the Consolidated Financial Statements).
Property, Plant and Equipment. Buildings and machinery and equipment are
depreciated over their estimated useful lives using principally the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of the term of the lease or the estimated useful life of
the improvement.
Computer Software. Direct costs incurred in the development of computer software
are capitalized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed". Research and Development costs incurred to
establish technological feasibility of a computer software product are expensed
in the periods in which they are incurred. Capitalization ceases and
amortization starts when the product is available for general release to
customers. Computer software costs are being amortized, on a product by product
basis, for three to five years. Annual amortization is the greater of the amount
computed using (a) the ratio that gross revenues for a product bear to the total
of current and anticipated future gross revenues for that product, or (b) the
straight-line method over the remaining estimated economic life of the product.
At each balance sheet date, the Company reviews the recoverability of the
unamortized capitalized costs of computer software products by comparing the
carrying value of computer software with its estimated net realizable value. The
Company recognizes any impairment losses on capitalized software as a result of
its review.
Goodwill. Goodwill represents the excess purchase price over the fair value of
identifiable net assets of businesses acquired and is amortized on a
straight-line basis over five to forty years. At each balance sheet date, the
Company reviews the recoverability of goodwill, not identified with impaired
long-lived assets, based on estimated undiscounted future cash flow from
operating activities compared with the carrying value of goodwill and recognizes
any impairment on the basis of such comparison. The recognition and measurement
of goodwill impairment is assessed at the business unit level.
Other Long-Lived Assets. In accordance with the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company reviews long-lived assets and certain identifiable
intangibles held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In general, this statement requires recognition of an impairment
loss when the sum of undiscounted expected future cash flow is less than the
carrying amount of such assets. Accordingly, the Company recognizes impairment
losses on long-lived assets as a result of its review. The measurement for such
impairment loss is then based on the fair value of the asset. (See Note 7. to
the Consolidated Financial Statements).
Revenue Recognition. The Company generally recognizes revenue as earned, which
is over the contract period or as the information is delivered or related
services are performed. Amounts billed for service and subscriptions are
credited to deferred revenues and reflected in operating revenue over the
subscription term, which is generally one year. Software license revenue is
recognized upon delivery of the software, when persuasive evidence of an
arrangement exists, the related fees are fixed or determinable and collection of
fees is probable. Revenue from post-contract customer support (maintenance) is
recognized on a straight-line basis over the term of the contract.
Foreign Currency Translation. The Company has significant investments in
non-U.S. countries. Therefore, changes in the value of foreign currencies affect
the Company's consolidated financial statements when translated into U.S.
dollars.
For all operations outside the United States where the Company has
designated the local currency as the functional currency, assets and liabilities
are translated using end-of-period exchange rates; revenues and expenses are
translated using average rates of exchange. For these countries,
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
currency translation adjustments are accumulated in a separate component of
shareholders' equity whereas realized transaction gains and losses are
recognized in other expense net. For operations in countries that are considered
to be highly inflationary or where the U.S. dollar is designated as the
functional currency, monetary assets and liabilities are translated using
end-of-period exchange rates, whereas non-monetary accounts are translated using
historical exchange rates, and all translation and transaction adjustments are
recognized in other expense net.
Income Taxes. Prior to the Distribution, the Company was included in the Federal
and certain state and non-U.S. income tax returns of Cognizant. Income taxes are
provided using the asset and liability method in accordance with SFAS No. 109.
Deferred tax assets and liabilities are recognized based on differences between
the book and tax bases of assets and liabilities using presently enacted tax
rates. The provision for income taxes is the sum of the amount of income tax
paid or payable for the year as determined by applying the provisions of enacted
tax laws to taxable income for that year and the net changes during the year in
the Company's deferred tax assets and liabilities.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Estimates are used for, but not
limited to, the accounting for: allowance for uncollectible accounts receivable,
depreciation and amortization, capitalized software costs, employee benefit
plans, taxes, restructuring reserves, contingencies, in-process research and
development ("IPR&D") and purchase price allocations.
Earnings Per Share. Basic earnings per share are calculated by dividing net
income by weighted average common shares. Diluted earnings per share are
calculated by dividing net income by dilutive potential common shares. Dilutive
potential common shares are calculated in accordance with the treasury stock
method, which assumes that proceeds from the exercise of all options are used to
repurchase common stock at market value. The amount of shares remaining after
the proceeds are exhausted represent the potentially dilutive effect of the
securities. The computation includes the weighted average number of shares of
Cognizant common stock outstanding through the Distribution Date, reflecting the
one-for-one distribution ratio, and the weighted average number of shares of IMS
Health common stock outstanding since the Distribution.
On December 15, 1998, the Company's Board of Directors authorized a 2-for-1
split of its common stock effective January 15, 1999, in the form of a stock
dividend to shareholders of record on December 29, 1998. All share and per-share
amounts in the accompanying Consolidated Financial Statements and Notes to
Consolidated Financial Statements have been restated to give effect to the stock
split.
Concentrations of Credit Risk. IMS Health maintains accounts receivable balances
($324,219 and $251,623 at December 31, 1998 and 1997, respectively), principally
from customers in the pharmaceutical industry.
Reclassifications. Certain prior-year amounts have been reclassified to conform
with the 1998 presentation.
Recently Issued Accounting Standards. In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued 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 and when capitalization of such
costs should commence. SOP 98-1 applies to costs incurred after adoption,
including costs for software projects that are in progress at the time of the
adoption. The Company has evaluated the impact of this SOP on its financial
position and results of operations and will implement SOP 98-1 for fiscal years
beginning after December 15, 1998. The adoption of this pronouncement will 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 years
beginning after December 15, 1998. The adoption of this pronouncement will not
have a material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 is effective for all fiscal quarters for all fiscal years beginning
after June 15, 1999 (January 1, 2000 for the Company). SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. For fair-value hedge transactions in which the Company is
hedging changes in an asset's, liability's, or firm commitment's fair value,
changes in the fair value of the derivative instrument will generally be offset
in the income statement by changes in the hedged item's fair value. For
cash-flow hedge transactions, in which the Company is
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
hedging the variability of cash flows related to a variable-rate asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income. The gains
and losses on the derivative instrument that are reported in other comprehensive
income will be reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges will be recognized in current period earnings.
Management is currently evaluating the effects of this change on the Company's
financial statements.
================================================================================
Note 3. Investment in Gartner
In the third quarter of 1997, the Company's voting interest in Gartner fell
below 50%, principally as a result of the exercise of Gartner employee stock
options and employee stock purchases. Accordingly, effective January 1, 1997,
the Company deconsolidated Gartner in that year and is now accounting for its
ownership interest on the equity basis.
In 1998, proceeds from the issuance of shares to Gartner employees,
including associated tax benefits, increased Gartner's equity by $43,654 and
reduced the Company's ownership interest by less than 1% to approximately 47% at
September 30, 1998. Accordingly, the Company recognized a pre-tax unrealized
gain on Gartner stock of $14,838 corresponding to the net increase in the value
of its underlying investment in Gartner. As a result of the proposed tax-free
spin-off of Gartner, the Company has not recognized gains in accordance with
Staff Accounting Bulletin 51 ("SAB 51") for the fourth quarter of 1998.
Selected financial information regarding the results of operations and
financial position of Gartner is summarized below:
(UNAUDITED)
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
- - -------------------------------------------------------------
Condensed Income Statement
Information
Operating Revenue $669,670 $548,539
Operating Income $148,134 $126,239
Income Before Provision for Taxes $155,992 $134,385
Net Income $ 92,791 $ 79,732
=============================================================
(UNAUDITED)
AS OF DECEMBER 31,
-----------------------
1998 1997
- - ------------------------------------------------------------
Condensed Balance Sheet Information
Current Assets $511,857 $439,356
Non-current Assets $328,323 $237,284
Current Liabilities $386,528 $338,087
Non-current Liabilities $ 888 $ 3,933
============================================================
Note 4. Dispositions
During 1998, the Company realized a net $46,118 pre-tax gain on the sale of
certain of its investments including Aspect Development Inc., which is part of
Enterprises' portfolio and the sale of stock holdings in CTS. (See Note 6. to
the Consolidated Financial Statements). These sales generated cash proceeds of
$78,883.
During 1997, the Company realized a $39,336 pre-tax gain on the sale of its
investment in WEFA Group, Inc. and a portion of its investment in TSI
International, Inc. and Aspect Development, Inc. These investments, which were
part of Enterprises' portfolio, generated cash proceeds of $43,601.
Additionally, in the third quarter of 1997, the Company sold its wholly
owned subsidiary Pilot Software Inc. and realized a non-cash pre-tax loss of
$29,945.
================================================================================
Note 5. Investment Partnership
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
limited partnership interests. For financial reporting purposes, the assets,
liabilities, results of operations and cash flows of the partnership are
included in the Company's consolidated financial statements because the Company
and its subsidiaries maintain a controlling interest (85%) in the partnership.
The third-parties' investments in this partnership are reflected as a minority
interest.
================================================================================
Note 6. Public Offering of a Subsidiary
CTS effected an initial public offering (the "CTS IPO") of 2,917,000 shares
of Class A Common Stock, par value $0.01 per share, of CTS (3,354,550 including
the underwriters' over-allotment option granted by Cognizant) on June 19, 1998.
Of such shares, 2,500,000 were offered by CTS and 417,000 shares were offered by
Cognizant, the accounting predecessor to IMS Health. Of the total proceeds, CTS
used approximately $6.5 million to repay intercompany debt owed to Cognizant.
Cognizant's interest in CTS was transferred to the Company in the Distribution.
The transaction (other than the over-allotment option) closed on June 24, 1998
and resulted in a gain of $12,777, which is a SAB 51 gain. The underwriters
over-allotment option was exercised during the third quarter. The Company
recognized a gain from this sale. The Company's
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
ownership interest is 61.7% at December 31, 1998 and accordingly, the Company
consolidates CTS's results within its financial statements. Any minority
interest is captured on the Statement of Financial Position in the minority
interest line and on the Consolidated Statements of Income in the Other
Expense-Net line. CTS's Class A Common Stock is listed on the NASDAQ National
Market under the symbol "CTSH".
================================================================================
Note 7. Acquisitions and Joint Venture
Walsh Acquisition
On June 24, 1998, Cognizant acquired Walsh International Inc. ("Walsh").
The final purchase price of the acquisition was $193,748, consisting of $167,148
of common stock, $9,521 of stock options and $17,079 of accrued acquisition and
integration costs.
Under the terms of Walsh acquisition agreement, Walsh shareholders received
.6082 (on a pre-split basis the ratio is .3041) shares of Cognizant common stock
per Walsh per share or based on a Cognizant share price of $25.896,
consideration of approximately $167,148 (on a pre-split basis a Cognizant share
price of $51.792). Walsh had 10,612,628 shares outstanding. Cognizant issued
6,454,600 shares from treasury stock to consummate the Walsh acquisition. The
direct acquisition and integration costs consist of severance of $4,876, lease
terminations of $2,569, and other direct acquisition and integration costs of
$9,634. These direct acquisition and integration costs were incurred as a direct
result of the acquisition and the formal 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). To date
incurred acquisition and integration costs are within original estimates.
Approximately $156,557 is 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 of the
acquisition was $103,291, consisting of $75,292 of common stock, $5,415 of stock
options and $22,584 of accrued acquisition and integration costs.
Under the terms of PMSI acquisition agreement, PMSI received 2,395,926
shares of IMS Health common stock issued from treasury stock, consideration of
approximately $75,292. The acquisition and integration costs consist of
severance of $3,794, lease terminations of $1,623, contract cancellation of
$10,935, and other direct acquisition and integration costs of $6,232. These
direct acquisitions and integration costs are incremental to other costs and
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). Acquisition and integration costs incurred to date are
within original estimates. Approximately $115,275 is 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.
Joint Venture
On September 1, 1998, the Company formed a joint venture with IHA Institut
fur Marktanalysen AG ("IHA"). The Company and IHA each contributed all of their
Swiss pharmaceutical research assets to the venture and each own 50% of the
venture. The Company contributed assets of $54 and cash of $11,014. The $12,027
excess of the investment over the value of the Company's share of the net assets
has been recorded as goodwill, which is being amortized on a straight line basis
over 20 years. The Company has accounted for its ownership interest in the
venture under the equity basis.
Purchase Price Allocation
In connection with both the Walsh and PMSI acquisitions, the Company made
allocations of the purchase price to acquired 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.
The Securities and Exchange Commission (the "SEC") recently issued revised
guidance with respect to allocations of IPR&D projects in connection with an
acquisition. In accordance with this guidance, the amount allocated to IPR&D
reflects the relative value and contribution of the acquired IPR&D.
Consideration was given to the project's stage of completion, the complexity of
the work completed to date, the difficulty of completing the remaining
development, costs already incurred and the projected cost to complete the
projects.
In addition, the Company allocated $29,000 at Walsh and $7,700 at PMSI to
existing core technology, representing computer software that will be used. 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
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
by an independent appraisal firm. The allocation is summarized below:
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
- - -------------------------------------------------------------------------------
The excess of the purchase price over the fair value of the net tangible
and identifiable intangible assets acquired has been recorded as goodwill, which
is being amortized on a straight-line basis over a period of 15 years.
At the date of the respective acquisitions, the development of the IPR&D
projects had not yet reached technological feasibility and had no alternative
future uses. Accordingly, these costs were expensed as of the respective
acquisition dates.
In the aggregate, the impact of both the Walsh and PMSI acquisitions on the
results of operations, other than the one-time charges and the IPR&D write-offs,
had they occurred on January 1, 1998 or 1997 would be immaterial.
In connection with the PMSI acquisition, the Company commenced an
evaluation of its existing IMS Health product offerings. Based on this strategic
assessment, the Company decided to abandon certain existing IMS Health software
products. The impact of this decision was to recognize 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 as a one time acquisition charge as a component of
operating income.
================================================================================
Note 8. Equity Securities
Amounts included below are classified in the consolidated statements of
financial position as Securities and Other Investments. Cash equivalents have
been excluded from these disclosures.
DECEMBER 31,
-------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
COST FAIR VALUE COST FAIR VALUE
- - -------------------------------------------------------------------------------
Equity Securities $5,491 $37,685 $3,491 $48,463
================================================================================
Note 9. Financial Instruments
Foreign Exchange Risk Management
The Company transacts business in virtually every part of the world and is
subject to risks associated with changing foreign exchange rates. The Company's
objective is to reduce earnings and cash flow volatility associated with foreign
exchange rate changes to allow management to focus its attention on its core
business activities. Accordingly, the Company enters into various contracts
which change in value as foreign exchange rates change to protect the value of a
portion of committed and anticipated foreign currency revenues and
non-functional currency assets and liabilities. The Company's policy is to
maintain hedge coverage between minimum and maximum percentages of its
anticipated foreign exchange exposures over the next year. The gains and losses
on these hedges offset changes in the value of the related exposures.
It is the Company's policy to enter into foreign currency transactions only
to the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for investment or speculative
purposes.
The Company uses forward contracts and purchased currency options to hedge
committed and anticipated foreign currency denominated revenues, respectively.
The principal currencies hedged are the Japanese yen, the Euro and the Swiss
franc. The Company also uses forward contracts to hedge non-functional currency
assets and liabilities.
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. At December 31, 1998, the notional amount
hedged of committed foreign revenues was $126,271. At December 31, 1998, the
Company had deferred losses of $1,185 related to foreign currency hedge
transactions. Deferred amounts to be recognized can change with market
conditions and are expected to be substantially offset by changes in the value
of the related hedged transactions. The impact of foreign exchange risk
management activities on operating income in 1998 and 1997 was a net gain of $
9,433 and $15,617, respectively. In addition, at December 31, 1998, the Company
had approximately $75,211 in foreign exchange forward contracts outstanding with
various expiration dates through January 1999 hedging non-functional currency
assets and liabilities. Gains and losses on contracts hedging non-functional
currency assets and liabilities are not deferred and are included in current
income in other income/expense-net.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Fair Value of Financial Instruments
At December 31, 1998, the Company's financial instruments included cash,
cash equivalents, receivables, accounts payable and foreign exchange risk
management contracts. At December 31, 1998, the fair values of cash, cash
equivalents, receivables and accounts payable approximated carrying values due
to the short-term nature of these instruments. At December 31, 1998, the
notional amounts of the Company's risk management contracts were $201,482 and
all contracts mature in 1999. The estimated fair values of the foreign exchange
risk management contracts were determined based on quoted market prices.
Credit Concentrations
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its financial
instruments and does not anticipate non-performance by the counterparties. The
Company would not realize a material loss as of December 31, 1998 in the event
of non-performance by any one counterparty. The Company enters into transactions
only with financial institution counterparties which have a credit rating of A
or better. In addition, the Company limits the amount of credit exposure with
any one institution.
The Company maintains accounts receivable balances ($324,219 and $251,623
at December 31, 1998 and 1997, respectively), principally from customers in the
pharmaceutical industry. The Company's trade receivables do not represent
significant concentrations of credit risk at December 31, 1998 due to the high
quality of its customers and their dispersion across many geographic areas.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Note. 10 Pension and Post-retirement Benefits
In accordance with FAS No. 132, "Employers' Disclosure About Pensions and
Other Postretirement Benefits", the status of all of the Company's defined
benefit pension and postretirement benefit plans at December 31, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS POST-RETIREMENT BENEFITS
- - --------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $150,372 $124,327 $ 14,940 $ 14,880
Service Cost 10,687 9,959 870 1,000
Interest Cost 9,738 10,504 720 860
Foreign Currency Exchange Loss (1,931) (2,013) 0 0
Amendments (1,156) 0 0 (1,920)
Plan participant's contributions 988 895 30 20
Actuarial (gain)/loss (865) 8,976 (230) 240
Impact of 1998 Distribution of Nielsen Media Research (34,870) 0 (8,040) 0
Benefits paid (3,427) (2,276) (180) (140)
- - --------------------------------------------------------------------------------------------------------------------------
Net benefit obligation at December 31, $129,536 $150,372 $ 8,110 $ 14,940
- - --------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $175,263 $144,105 $ 0 $ 0
Actual return on plan assets 27,965 31,007 0 0
Foreign Currency Exchange Loss (948) 0 0 0
Employer contribution 1,653 1,532 150 120
Plan participant's contributions 988 895 30 20
Impact of 1998 Distribution of Nielsen Media Research (58,290) 0 0 0
Benefits paid (3,427) (2,276) (180) (140)
- - --------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31, $143,204 $175,263 $ 0 $ 0
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENSION BENEFITS POST-RETIREMENT BENEFITS
- - -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OVER/(UNDER) FUNDED STATUS AT END OF YEAR $ 13,668 $ 24,891 $ (8,110) $(14,940)
Unrecognized actuarial (gain)/loss (18,898) (17,823) 420 540
Unrecognized prior service cost/(benefit) (2,606) (5,620) (680) (2,110)
Unrecognized net transition asset (388) (1,990) 0 0
- - ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at December 31, $ (8,224) $ (542) $ (8,370) $(16,510)
- - ------------------------------------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ 13,295 $ 21,083 $ 0 $ 0
Accrued benefit liability (22,282) (21,625) (8,370) (16,510)
Intangible asset 763 0 0 0
- - ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized in the Statement of Financial
Position at December 31, $ (8,224) $ (542) $ (8,370) $(16,510)
- - ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate 6.34% 6.93% 6.50% 7.00%
Expected return on plan assets 8.68% 9.11% n/a n/a
Rate of compensation increase 4.98% 4.33% n/a n/a
- - ------------------------------------------------------------------------------------------------------------------------------------
The assumed rate of future increases in per capita cost of covered healthcare benefits is 6.5% in 1999, decreasing gradually to
5% for the year 2021 and remaining constant thereafter.
The components of net periodic benefit cost for 1998 and 1997 are summarized as follows:
<CAPTION>
PENSION BENEFITS POST-RETIREMENT BENEFITS
- - ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 10,687 $ 9,959 $ 870 $ 1,000
Interest cost 9,738 10,504 720 860
Expected return on plan assets (13,124) (13,951) 0 0
Amortization of prior service cost (237) (190) (490) (660)
Recognized actuarial loss 316 660 0 0
- - ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost for the year ended December 31 $ 7,380 $ 6,982 $ 1,100 $ 1,200
- - ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost for 1996 was $6,885 and $2,619 for pension benefits and postretirement benefits, respectively. The
components of 1996 net periodic benefit costs is unavailable.
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
The Distribution at June 30, 1998 resulted in a transfer of the allocable
portion of the benefit obligation and plan assets to Nielsen Media Research.
(See Note 1. to the Consolidated Financial Statements). Pension expenses related
to discontinued operations included in the table above were $226, $1,571 and
$2,397 for the years 1998, 1997 and 1996, respectively. Other benefit costs for
discontinued operations were not significant.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $35,036, $28,964, and $14,695, respectively, as of
December 31, 1998, and $38,247, $23,522, and $13,415, respectively as of
December 31, 1997.
Assumed health care costs trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates for 1998 would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
- - --------------------------------------------------------------------------------
Increase/(Decrease)
Effect on total service/interest cost $130 ($110)
Effect on post-retirement benefit
obligation $780 ($680)
- - --------------------------------------------------------------------------------
Certain employees of the Company in the United States also are eligible to
participate in the Company-sponsored defined contribution plan. The Company's
businesses make a matching contribution of up to 50% of the employee's
contribution based on specified limits of the employee's salary. The Company's
expense related to this plan was $3,713, $4,666 and $4,075 for the years 1998,
1997 and 1996, respectively which includes expenses related to discontinued
operations of $768, $2,021, and $1,797 for the years 1998, 1997, and 1996,
respectively.
- - --------------------------------------------------------------------------------
Note 11. Employee Stock Plans
The Company has an Employees Stock Incentive Plan which provides for the
grant of stock options and restricted stock to eligible employees. In addition
it provides an opportunity for the purchase of stock options with a prepayment
equal to ten percent of the exercise price, with the remaining payment due when
the options are exercised. All options have a life of ten years, vest
proportionally over three to six years and have an exercise price equal to the
fair market value of the common stock on the grant date.
The Company adopted an Employee Stock Purchase Plan in 1998 which allows
eligible employees to purchase a limited amount of common stock at the end of
each quarter at a price equal to the lesser of 90% of fair market value on (a)
the first trading day of the quarter, or (b) the last trading day of the
quarter. Fair market value is defined as the average of the high and low prices
of the shares on the relevant day.
Gartner has several stock option and stock purchase plans. The exercise
price of options granted under the plans is equal to the fair market value at
the date of grant of Gartner stock. Options outstanding and exercisable were
14,560,757 and 5,774,615, respectively, at December 31, 1998, at prices ranging
from $0.63 to $35.68 per share.
In July 1997, CTS adopted a Key Employees Stock Option Plan which provides
for the grant of stock options to eligible employees. Options granted under this
plan may not be granted at an exercise price less than fair market value of the
underlying shares on the date of grant. All options have a life of ten years,
vest proportionally over four years and have an exercise price equal to the fair
market value of the common stock on the grant date. At December 31, 1998,
586,776 options were outstanding at a weighted average exercise price of $5.40
per share. Of this amount, 89,628 were exercisable at a price of $3.85.
In December 1997, CTS adopted a Non-Employee Directors' Stock Option Plan
which provides for the grant of stock options to eligible directors. Options
granted under this plan may not be granted at an exercise price less than fair
market value of the underlying shares on the date of grant. All options have a
life of ten years, vest proportionally over two years and have an exercise price
equal to the fair market value of the common stock on the grant date. At
December 31, 1998, 49,500 options were outstanding at a weighted average
exercise price of $9.76 per share. Of this amount, 10,250 were exercisable at
prices ranging from $9.08 to $10.00 per share.
In March 1998, CTS granted non-qualified stock options to purchase an
aggregate of 48,750 shares to CTS's Chairman and Chief Executive Officer at an
exercise price of $6.92 per share. At December 31, 1998, 12,187 were
exercisable.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires that companies
with stock-based compensation plans either recognize compensation expense based
on the fair value of options granted or continue to apply the existing
accounting rules and disclose pro forma net income and earnings per share
assuming the fair value method had been applied. The Company has chosen to
continue applying APB Opinion No. 25 and related interpretations in accounting
for its plans. Accordingly, no significant compensation cost has been recognized
for the fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans, consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
Years Ended December 31,
---------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Net Income As reported $220,558 $312,350 $195,451
Pro forma $188,001 $284,634 $188,705
Earnings Per Share:
Basic As reported $0.68 $0.95 $0.58
Pro forma $0.58 $0.86 $0.56
Diluted As reported $0.66 $0.93 $0.57
Pro forma $0.56 $0.85 $0.55
================================================================================
Years Ended December 31,
--------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Income from continuing operations:
As reported $178,465 $234,116 $139,754
Pro forma $147,734 $206,400 $133,008
Earnings Per Share:
Basic from Continuing Operations
As reported $0.55 $0.71 $0.41
Pro forma $0.46 $0.62 $0.39
Diluted from Continuing Operations
As reported $0.53 $0.70 $0.41
Pro forma $0.44 $0.62 $0.39
================================================================================
Note: The pro forma disclosures shown above are not representative of the
effects on net income and earnings per share in future years.
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option pricing model. The following
weighted-average assumptions were used for 1998, 1997 and 1996: dividend yield
of 0.3%; expected volatility of 25%; a risk-free interest rate of 5.1%; and an
expected term of 3.5 years. The weighted average fair value of the Company's
stock options granted in 1998, 1997 and 1996 are $7.92, $6.56 and $4.88,
respectively.
The fair value of Gartner stock options used to compute the Company's pro
forma net income and earnings per share disclosures was computed in the same
manner as the Company's with the following weighted-average assumptions for
1998, 1997 and 1996: dividend yield of 0%; expected volatility of 38%; a
risk-free interest rate of 5.4%; and an expected term of 3.5 years. The weighted
average fair value of Gartner stock options granted in 1998, 1997 and 1996 are
$11.55, $10.12 and $11.80, respectively.
Immediately following the 1996 Distribution, outstanding awards under the
D&B Key Employees Stock Option Plans held by Cognizant employees were canceled
and replaced by substitute awards under Cognizant's Key Employees Stock
Incentive Plan. The substitute awards had the same ratio of the exercise price
per option 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 they replaced.
Immediately following the Distribution, outstanding awards under
Cognizant's Key Employees Stock Incentive Plan and other option plans were
cancelled and replaced by substitute awards under various IMS Health option
plans. The formula to determine the number of replacement options was the
average fair market value of Cognizant shares before the Distribution divided by
the average fair market value of IMS Health shares after the Distribution.
At December 31, 1998, outstanding options for IMS Health common stock held
by Company employees, including the replacement awards mentioned above, totaled
28,859,996, of which 5,402,436 had vested and were exercisable. The option
prices range from $3.69 to $34.25 per share and are exercisable over periods
ending no later than 2008. At December 31, 1997, outstanding options for
Cognizant common stock held by Company employees totaled 43,844,780, of which
8,772,362 had vested and were exercisable. The option prices ranged from $11.50
to $22.24 per share.
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- - -------------------------------------------------------------------------------
Options Outstanding,
December 31, 1996 40,453,498 $16.50
Granted 7,756,474 $21.18
Exercised (1,713,386) $15.39
Expired/Terminated (2,651,806) $16.60
- - --------------------------------------------------------------------------------
Options Outstanding,
December 31, 1997 43,844,780 $17.38
================================================================================
Nielsen Media Research (9,394,856) $16.89
Conversion Adjustment (1,768,840) --
Granted (1)(2) 6,508,614 $28.94
Exercised (2) (6,324,494) $16.91
Expired/Terminated (2) (4,005,208) $18.17
- - --------------------------------------------------------------------------------
Options Outstanding,
December 31, 1998 28,859,996 $21.18
================================================================================
(1) This includes 1,928,188 options granted in connection with the Walsh and
PMSI acquisitions.
(2) Excludes Nielsen Media Research.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
-------------------------------------------------------------
DECEMBER 31, 1998 OPTION EXERCISE PRICES
RANGE OF ---------------------------------------------- REMAINING -----------------------------------------
EXERCISE PRICES NUMBER OUTSTANDING NUMBER EXERCISABLE CONTRACTUAL LIFE OUTSTANDING EXERCISABLE
- - -------------------- ----------------------- ---------------------- ------------------- ---------------- ------------------------
<S> <C> <C> <C> <C> <C>
$ 3.69-$14.83 443,490 388,780 4.8 years $12.42 $12.29
$15.23-$17.82 16,702,910 3,777,072 7.8 years $17.57 $17.39
$18.23-$20.86 1,254,202 566,580 7.4 years $19.20 $18.91
$21.48-$23.51 4,951,255 668,791 8.9 years $23.41 $23.46
$27.39-$29.97 1,181,737 671 9.5 years $29.22 $27.39
$30.17-$34.25 4,326,402 542 9.7 years $31.85 $30.17
----------------------- ----------------------
28,859,996 5,402,436
==================================================================================================================================
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Note 12. Income Taxes
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 is made and the IRS prevails
would be approximately $425,000 for taxes and accrued interest net of tax
benefit. Under the terms of the Distribution Agreement dated October 28, 1996
among D&B, Cognizant and ACNielsen Corporation (the "1996 Distribution
Agreement"), the Company is liable to pay half of such taxes and interest owed
to the IRS to the extent that D&B'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. The Company estimates that its share of the
liability were the IRS to prevail would be approximately $135,000. This
liability has been included in other liabilities.
The Company has accrued its anticipated share of the probable liability to
D&B under the 1996 Distribution Agreement. Accordingly, management does not
believe that this matter will have a material adverse effect on the Company's
consolidated financial position or operating results when it is resolved in a
future period. However, should the IRS issue an assessment notice, payment of
the Company's share could have a material adverse effect on cash flows in the
period in which it is made. However, the Company believes that is 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.
Income from continuing operations before provision for income taxes consisted
of:
1998 1997 1996
- - ------------------------------------------------------------
U.S. $122,161 $124,524 $ 66,164
Non-U.S. 148,500 197,950 183,396
- - ------------------------------------------------------------
Total $270,661 $322,474 $249,560
- - ------------------------------------------------------------
The provision (benefit) for income taxes consisted of:
1998 1997 1996
- - ------------------------------------------------------------
U.S. Federal and State:
Current $161,661 $16,883 $16,031
Deferred (3,627) 1,528 25,092
- - ------------------------------------------------------------
Sub-total $158,034 $ 18,411 $41,123
- - ------------------------------------------------------------
Non-U.S.:
Current $30,235 $57,221 $ 61,660
Deferred (96,073) 12,726 7,023
- - ------------------------------------------------------------
Sub-total (65,838) 69,947 68,683
- - ------------------------------------------------------------
Total $92,196 $88,358 $109,806
- - ------------------------------------------------------------
The following table summarizes the significant differences between the U.S.
Federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes.
1998 1997 1996
- - ---------------------------------------------------------------
Tax Expense at Statutory Rate 35.0% 35.0% 35.0%
State and Local Income Taxes,
net of Federal TaxBenefit 0.7 1.5 1.1
Impact of Non-U.S. Tax Rates
and Credit 0.4 (0.2) 1.6
Amortization of Non-U.S.
Intangibles (43.7) -- --
Pre D&B Spin Liability 39.0 -- --
Amortization of U.S.
Intangibles (7.4) (8.8) --
Non-Deductible
Reorganization Costs 4.5 -- --
Non-Deductible IPR&D 4.2 -- 4.6
Goodwill 1.3 0.4 1.5
Other 0.1 (0.5) 0.2
- - ---------------------------------------------------------------
Total Taxes 34.1% 27.4% 44.0%
- - ---------------------------------------------------------------
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
1998 1997
- - ------------------------------------------------------------
Deferred Tax Assets:
Non U.S. Intangibles $ 86,738 $ --
U.S. Intangibles 20,701 15,107
Operating Losses 22,546 23,236
Post-Retirement and
Post-Employment Benefits 9,934 8,069
Other 5,576 9,129
- - ------------------------------------------------------------
145,495 55,541
Valuation Allowance (21,239) (21,826)
- - ------------------------------------------------------------
124,256 33,715
- - ------------------------------------------------------------
Deferred Tax Liabilities:
Computer Software (48,549) (40,781)
Deferred Revenue (28,990) (33,322)
Depreciation (10,168) (10,822)
Marketable Securities (8,821) (20,522)
Other (25,301) (13,158)
- - ------------------------------------------------------------
(121,829) (118,605)
- - ------------------------------------------------------------
Net Deferred Tax $ 2,427 $ (84,890)
Asset/(Liability)
- - ------------------------------------------------------------
To consolidate certain of its international operations, in 1998 the Company
engaged in certain non-U.S. reorganizations which gave rise to tax deductible
non-U.S. intangible assets.
The 1998 net deferred tax asset consists of a current deferred tax asset of
$32,749, included in Other Current Assets, offset by a non-current deferred tax
liability of $30,322. (See Notes 2., 5. and 16. to the Consolidated Financial
Statements).
The Company has established a valuation allowance attributable to deferred
tax assets in certain U.S. state and non-U.S. tax jurisdictions where, based on
available evidence, it is more likely than not that such assets will not be
realized.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Undistributed earnings of non-U.S. subsidiaries aggregated approximately
$534,930 at December 31, 1998. Deferred tax liabilities have not been recognized
for these undistributed earnings because it is the Company's intention to
indefinitely reinvest such undistributed earnings outside the United States. If
such earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, applicable taxes will be provided for on such amounts.
It is not currently practicable to determine the amount of applicable taxes.
- - --------------------------------------------------------------------------------
Note 13. Commitments
Certain of the Company's operations are conducted from leased facilities,
which are under operating leases. Rental expense under real estate operating
leases for the years 1998, 1997 and 1996 was $21,868, $19,432, and $28,963,
respectively. The minimum annual rental expense for real estate operating leases
that have remaining noncancelable lease terms in excess of one year, net of
sublease rentals, at December 31, 1998 was: 1999--$22,527; 2000--$21,563;
2001--$20,762; 2002--$17,313; 2003--$15,029 and an aggregate of $31,546
thereafter.
The Company also leases or participates in leases of certain computer and
other equipment under operating leases. These leases are frequently renegotiated
or otherwise changed as advancements in computer technology produce
opportunities to lower costs and improve performance. Rental expense under
computer and other equipment leases was $17,815, $28,241, and $23,372 for 1998,
1997 and 1996, respectively. At December 31, 1998, the minimum annual rental
expense for computer and other equipment under operating leases that have
remaining noncancelable lease terms in excess of one year was: 1999--$16,778;
2000--$10,859; 2001--$6,435; 2002--$5,320 and 2003--$651.
The Company has agreements with various third parties to purchase certain
data and telecommunications services, extending beyond one year. At December 31,
1998, the purchases covered by these agreements aggregated: 1999--$76,287;
2000--$26,181 and 2001--$14,389.
- - --------------------------------------------------------------------------------
Note 14. IMS Health Capital Stock
Under the Company's Restated Certificate of Incorporation, the Company has
authority to issue 420,000,000 shares with a par value of $.01 per share of
which 400,000,000 represent shares of common stock, 10,000,000 represent shares
of preferred stock and 10,000,000 represent shares of series common stock. The
preferred and series common stock can be issued with varying terms, as
determined by the Board of Directors.
On June 30, 1998, 335,225,390 shares of the Company's common stock were
distributed to the shareholders of Cognizant. Since the Company has been treated
as the successor entity for accounting purposes, the Company's historical
financial statements reflect the recapitalization of the Company in connection
with the Distribution, including the elimination of treasury shares (which
shares became treasury shares of Nielsen Media Research).
In connection with the Distribution, the Company entered into a Rights
Agreement designed to protect shareholders of the Company in the event of
unsolicited offers to acquire the Company and the other coercive takeover
tactics which, in the opinion of the Board of Directors, could impair its
ability to represent shareholder interests. Under the Rights Agreement, each
share of the common stock has one-half of one right which trades with the stock
until the right becomes exercisable. Each right entitles the registered holder
to purchase 1/1000 of a share of Series A Junior Participating Preferred Stock,
par value $.0l per share, at a price of $225 per 1/1000 of a share, subject to
adjustment. The rights will generally not be exercisable until a person or group
("Acquiring Person") acquires beneficial ownership of, or commences a tender
offer or exchange offer which would result in such person or group having
beneficial ownership of 15% or more of the outstanding common stock (20% in the
case of certain institutional investors).
In the event that any person or group becomes an Acquiring Person, each
right will thereafter entitle its holder (other than the Acquiring Person) to
receive, upon exercise, shares of stock having a market value of two times the
exercise price in the form of the Company's common stock or, where appropriate,
the Acquiring Person's common stock. The Company may redeem the rights, which
expire in June 2008, for $0.01 per right, under certain circumstances.
On October 21, 1997 Cognizant announced that its board of directors had
authorized a systematic stock repurchase program to buy up to 20,000,000 shares
(on a post split basis) of Cognizant's outstanding common stock. As the
"Accounting Successor to Cognizant," the Company purchased the remaining balance
of 18,850,800 shares of the Company's stock (on a post split basis). A portion
of this program was intended to offset option exercises. This program was
completed by the Company on November 17, 1998 at a total cost of $591,331.
In the fourth quarter, the Board of Directors authorized a stock repurchase
program to buy up to 16,000,000 shares of the Company's outstanding common
stock. A portion of this program is intended to offset option exercises. Through
December 31, 1998, 2,898,800 shares have been acquired at a total cost of
$98,113.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Note 15. Contingencies
The Company and its subsidiaries are involved in legal proceedings, claims
litigation and tax matters arising in the ordinary course of business. In the
opinion of management, the outcome of such current legal proceedings, claims
litigation and tax matters, if decided adversely, could have a material effect
on quarterly or annual operating results or cash flows when resolved in a future
period. However, in the opinion of management, these matters will not materially
affect the Company's consolidated financial position.
In addition the Company is subject to certain other contingencies discussed
below:
Information Resources Litigation
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants D&B, A.C. Nielsen Company and I.M.S. International Inc. (a
predecessor of IMS Health) (the "IRI Action").
The complaint alleges various violations of the United States antitrust
laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
latter claims relate to the acquisition by defendants of Survey Research Group
Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI
when it agreed to be acquired by defendants and that the defendants induced SRG
to breach that agreement.
IRI's complaint alleges damages in excess of $350,000, which amount IRI has
asked to be trebled under the antitrust laws. IRI also seeks punitive damages in
an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997 the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an amended and restated
complaint repleading its alleged claim of attempted monopolization in the United
States and realleging its other claims. On August 18, 1997, defendants moved for
an order dismissing the amended claims. On December 1, 1997, the court denied
the motion and, on December 16, 1997, defendants filed a supplemental answer
denying the remaining material allegations of the amended complaint. Discovery
is continuing in this matter.
In light of the potentially significant liabilities which could arise from
the IRI Action and in order to facilitate the distribution by D&B of shares of
Cognizant and ACNielsen in 1996, D&B, ACNielsen (the parent company of A.C.
Nielsen Company) 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.
Under the terms of the 1996 Distribution Agreement as a condition to the
Distribution, IMS Health and Nielsen Media Research were required to and did
undertake to be jointly and severally liable to D&B and ACNielsen for
Cognizant's obligations under the 1996 Distribution Agreement. In connection
with the Distribution, IMS Health and Nielsen Media Research 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 has 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 million.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Management of the Company is unable to predict at this time the final
outcome of this matter or whether the resolution of this matter could materially
affect the Company's results of operations, cash flows or financial position.
Other Contingencies
The Company, Cognizant and D&B have entered into global tax planning
initiatives in the normal course of business. These activities are subject to
review by tax authorities. As a result of the review process, uncertainties
exist and it is possible that some of these matters could be resolved adversely
to the Company, Cognizant or D&B. (See Notes 2. and 12. to the Consolidated
Financial Statements).
- - --------------------------------------------------------------------------------
Note 16. Supplemental Financial Data
Accounts Receivable--Net:
1998 1997
- - -------------------------------------------------------------
Trade and Notes $262,990 $204,317
Less: Allowance for
Doubtful Accounts (7,767) (3,905)
Unbilled Receivables 51,097 34,232
Other 17,899 16,979
- - -------------------------------------------------------------
At December 31, $324,219 $251,623
- - -------------------------------------------------------------
Other Current Assets:
1998 1997
- - -------------------------------------------------------------
Deferred Income Taxes $32,749 $ 7,263
Prepaid Expenses 39,706 32,114
Inventories 31,413 26,315
- - -------------------------------------------------------------
At December 31, $103,868 $ 65,692
- - -------------------------------------------------------------
Property, Plant and Equipment--Net, Carried at Cost, Less Accumulated
Depreciation and Amortization: 1998 1997
- - ------------------------------------------------------------
Buildings $88,921 $92,291
Machinery and Equipment 238,679 229,610
Less: Accumulated (170,764) (162,660)
Depreciation
Leasehold Improvements, less:
Accumulated Amortization of
$13,415 and $11,310 14,340 12,636
Land 7,975 6,656
- - ------------------------------------------------------------
At December 31, $179,151 $178,533
- - ------------------------------------------------------------
Computer Software and Goodwill:
COMPUTER SOFTWARE GOODWILL
- - ------------------------------------------------------------
January 1, 1997 $148,604 $251,483
Additions at Cost 74,776 1,554
Amortization (47,521) (8,810)
Other Deductions,
Additions and
Reclassifications (21,901) (156,797)
- - ------------------------------------------------------------
December 31, 1997 153,958 87,430
Additions at Cost 61,089 292,349
Amortization (51,190) (12,100)
Asset Impairment (36,300) --
Software Additions from
Acquisitions 36,700 --
Other Deductions and
Reclassifications 4,737 (3,838)
- - ------------------------------------------------------------
December 31, 1998 $168,994 $ 363,841
- - ------------------------------------------------------------
Accumulated Amortization of Computer Software was $216,136 and $203,970 at
December 31, 1998 and 1997, respectively. Accumulated Amortization of Goodwill
$46,380 and $40,399 at December 31, 1998 and 1997, respectively.
Accounts and Notes Payable:
1998 1997
- - -------------------------------------------------------------
Trade $21,892 $21,994
Taxes Other Than Income Taxes 16,596 13,736
Notes 40,378 458
Other 12,018 8,253
- - -------------------------------------------------------------
At December 31, $90,884 $44,441
- - -------------------------------------------------------------
The weighted average interest rates in notes payable at December 31,1998
and 1997 were 2.0% and 7.50%, respectively.
The Company has short-term borrowing arrangements with several banks to
provide up to $135,400 of borrowings at December 31, 1998. None of these
arrangements had material commitment fees or compensating balance requirements.
Accrued and Other Current Liabilities:
1998 1997
- - -------------------------------------------------------------
Salaries, Wages, Bonuses and
Other Compensation $75,178 $ 60,159
Accrued Acquisition and
Integration Costs 19,410 --
Other 204,037 129,225
- - -------------------------------------------------------------
At December 31, $298,625 $189,384
- - -------------------------------------------------------------
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
At December 31, 1998, the Company had a severance accrual of $11,700,
included in other liabilities, principally relating to the reorganization of its
European operations.
- - --------------------------------------------------------------------------------
Note 17. Operations by Business Segment
As described in Note 1, the business segments have been restated to reflect
Nielsen Media Research as a discontinued operation.
In 1997, the Company adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information". As required, the Company has restated prior
period segment results in order to conform to this statement. The Company,
operating globally in approximately 80 countries, delivers information, software
and related services principally through the strategic business segments
referenced below. The accounting policies of the segments are the same as those
described in Note 2. to the Consolidated Financial Statements.
The IMS segment includes the market information, sales management and
decision-support services and sales management systems businesses for the
pharmaceutical and healthcare industries. In 1998, the IMS segment includes the
acquisition of Walsh and PMSI, (See Note 7. to the Consolidated Financial
Statements), which have been integrated into the IMS operations.
The Emerging Markets segment principally includes Erisco, a leading
supplier of software-based administrative and analytical solutions to the
managed care industry. It also includes Super Systems Japan, a marketer of
financial application software products to the Japanese market; Enterprises, the
Company's venture capital unit focused on investments in emerging healthcare
businesses; and Pilot Software Inc. ("Pilot"), which was sold as of July 31,
1997.
CTS is a provider of software applications development and maintenance
services and Year 2000 and Eurocurrency compliance services (See Note 6. to the
Consolidated Financial Statements).
Gartner is the world's leading independent provider of research and
analysis on the computer hardware, software, communications and related
information technology industries.
34
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars amounts in thousands, except per share data
<CAPTION>
EMERGING
YEAR ENDED DECEMBER 31, 1998 IMS MARKETS CTS (1) GARTNER(2) TOTAL
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE $1,083,992 $ 57,542 $ 44,979 $1,186,513
Acquired In Process Research and Development 32,800 32,800
Direct Acquisition Integration Costs 48,019 48,019
SEGMENT OPERATING INCOME $ 184,771 $ 6,171 $ 8,918 $ 199,860
General Corporate Expenses (67,376)
Interest Income (3) 9,212 3 638 9,853
Interest Expense (4) (804) (804)
Non-Operating Income--Net
Gartner Equity Income (2) 70,979 70,979
Gains from Dispositions--Net (5) 27,753 12,777 40,530
Non-Operating Income--Other--Net 17,619
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
Provisions for Income Taxes $ 270,661
Provision for Income Taxes (92,196)
Income from Discontinued Operations, Net of Income
Taxes (6) 42,093
Net Income 220,558
Segment Depreciation and Amortization $ 87,723 $ 5,418 $ 2,221 $ 95,362
Segment Capital Expenditures $ 25,146 $ 1,121 $ 4,075 $ 30,342
Identifiable Assets at December 31, 1998 (7) $1,235,285 $ 109,431 $ 51,634 $ 252,852 $1,649,202
- - ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- - ----------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE $ 980,521 $ 65,159 $ 13,879 $1,059,559
SEGMENT OPERATING INCOME/(LOSS) $ 265,351 $ (12,669) $ 2,917 $ 255,599
General Corporate Expenses (27,989)
Interest Income (3) 4,441 123 17 4,581
Interest Expense (4) (679) (109) (788)
Non-Operating Income--Net
Gartner Equity Income (1) 65,120 65,120
Gains from Dispositions--Net 9,391 9,391
Non-Operating Income--Other--Net 16,560
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision
for Income Taxes $ 322,474
Provision for Income Taxes (88,358)
Income from Discontinued Operations, Net of Income
Taxes (6) 78,234
Net Income 312,350
Segment Depreciation and Amortization $ 76,375 $ 10,164 $ 975 $ 87,514
Segment Capital Expenditures $ 41,932 $ 1,724 $ 2,580 $ 46,236
Identifiable Assets at December 31, 1997 (7) $ 855,789 $ 132,748 $ 15,880 $ 195,695 $1,199,112
- - ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
- - ----------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE $ 904,444 $ 79,205 $ 3,161 $ 424,382 $1,411,192
Write-Off of Purchased In Process Research &
Development 33,233 33,233
SEGMENT OPERATING INCOME/(LOSS) $ 232,827 $ (14,558) $ 1,655 $ 60,114 $ 280,038
General Corporate Expenses (36,331)
Interest Income (3) 3,597 125 96 3,982 7,800
Interest Expense (4) (1,043) (295) (1,338)
Non-Operating Expense--Other--Net (809)
Gains from Dispositions--Net 200 200
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Provision
for Income Taxes $ 249,560
Provision for Income Taxes (109,806)
Income from Discontinued Operations, Net of Income
Taxes (6) 55,697
Net Income 195,451
Segment Depreciation and Amortization $ 80,313 $ 11,634 $ 547 $ 15,934 $ 108,428
Segment Capital Expenditures $ 37,862 $ 2,522 $ 732 $ 15,918 $ 57,034
Identifiable Assets at December 31, 1996 (7) $ 756,966 $ 196,743 $ 10,082 $ 497,242 $1,461,033
- - ----------------------------------------------------------------------------------------------------------------------------
35
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars amounts in thousands, except per share data
(1) Related party sales of $13,627, $11,092 and $8,877 for the years ended
December 31, 1998, 1997 and 1996, respectively, consisting primarily of
sales from CTS to the IMS segment and Nielsen Media Research have been
excluded. The related party sales associated with discontinued operations
were $4,365 and $2,436 for December 31, 1997 and 1996, respectively.
(2) The Company maintained a majority interest in Gartner during 1996 and
accordingly, reflected Gartner on a consolidated basis. During 1997, The
Company's voting interest in Gartner fell below 50%. Gartner's results for
1997 and 1998 are therefore reflected as Gartner Equity Income and included
in Non-Operating Income--Net.
(3) Interest income excludes amounts recorded at corporate of $9,695, $8,168
and $1,656 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(4) Interest expense excludes amounts recorded at corporate of $362, $1,505 and
$0 for the years ended December 31, 1998, 1997 and 1996, respectively.
(5) Gains from Dispositions-Net excludes amounts recorded at Corporate of
$5,588 at December 31, 1998.
(6) Income from Discontinued Operations, Net of Income Taxes includes taxes of
$15,887, $29,527 and $43,764 for the years ended December 31, 1998, 1997
and 1996, respectively.
(7) Total Assets include Net Assets of Discontinued Operations of $122,778, and
$98,124 as of December 31, 1997 and 1996, respectively. Assets of $82,317,
$180,199 and $234,288 as of December 31, 1998, 1997 and 1996, respectively,
include cash and cash equivalents and Property, Plant and Equipment not
identified with business segments and represent the reconciling items
between total identifiable assets and Net Assets of Discontinued
Operations. (See Note 1. to the Consolidated Financial Statements) and the
Company's total assets.
Financial Information by Country:(1)
<TABLE>
<CAPTION>
UNITED STATES UNITED KINGDOM ALL OTHER (3) TOTAL
- - -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE (2) $489,719 $ 79,897 $616,897 $ 1,186,513
LONG-LIVED ASSETS $239,578 $153,236 $342,100 $ 734,914
- - -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- - -------------------------------------------------------------------------------------------------------------------------------
Operating Revenue (2) $409,527 $43,299 $606,733 $ 1,059,559
Long-Lived Assets $242,974 $54,028 $134,145 $ 431,147
- - -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
- - -------------------------------------------------------------------------------------------------------------------------------
Operating Revenue (2) $639,831 $82,727 $688,634 $ 1,411,192
Long-Lived Assets $430,020 $73,153 $142,898 $ 646,071
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The above table reflects the deconsolidation of Gartner and the sale of
Pilot, in 1997.
(2) Revenue relates to external customers and is primarily attributable to the
country of domicile.
(3) Included in All Others is non U.S. and non-UK revenue principally from
Europe, Australia and the Far East.
Note 18. Subsequent Events (Unaudited)
Elimination of one month Reporting lag in IMS operating entities. As indicated
in Note 2. to the Consolidated Financial Statements, the Company consolidates
its IMS operating units on a one month reporting lag basis. Effective in the
first quarter of the Company's 1999 fiscal year, IMS operating units that
previously reported on a fiscal year ending November 30, changed their reporting
period to eliminate the one month lag to bring these to a fiscal year ending
December 31. This change was made to reflect the results of operations and
financial position of these operating units on a more timely basis and to
increase operating and planning efficiency. The results of these operating units
for the period December 1 through December 31, 1998, will be reflected as an
adjustment to retained earnings in the Company's 1999 first quarter reporting
period ending March 31, 1999. The Company is still evaluating the financial
statement impact of the change.
36
<PAGE>
<TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
Dollar amounts in thousands, except per share data
Historical results are restated to reflect Nielsen Media Research as a discontinued operation. (See Note 1. to the Consolidated
Financial Statements). The results of operations and related disclosures as of and for the quarter ended June 30, 1998 and September
30, 1998 have been restated as it relates to the purchase price allocation for the Walsh and PMSI acquisitions. This change was made
to conform with the SEC's refined approach for the measurement of acquired IPR&D, Core Technology/Software and the related
allocation of purchase price. The estimate for the one time charge for the acquired IPR&D projects for the original quarterly
filing(s) upon the acquisitions was $57,000 for Walsh (revised to $52 million quarter 3) and $14,200 for PMSI. These have now been
reduced to $21,900 and $10,900, respectively. The impact of this re-allocation of the purchase price on the income statement, is an
increase to net income of $35,100 for quarter 2 and a decrease in pre-tax income of $2,335 for Quarter 3, on previously reported
amounts for consolidated income. The impact of increased amortization expense related to the intangible assets is not significant.
Net income for the year is increased now by $32,785. (See note 7 to the Consolidated Financial Statement). Additionally, the Company
has retroactively restated all per-share amounts to give effect for the 2:1 stock split (See Note 2. to the Consolidated Financial
Statements). 1997 quarterly results have been restated to reflect the deconsolidation of Gartner. (See Note 3. to the Consolidated
Financial Statements).
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 FULL YEAR
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
OPERATING REVENUE $240,968 $270,496 $283,606 $391,443 $1,186,513
OPERATING INCOME $ 18,728 $(13,912) $ 4,753 $122,915 $ 132,484
INCOME FROM CONTINUING OPERATIONS,
NET OF INCOME TAXES $ 39,082 $ 1,552 $ 24,955 $112,876 $ 178,465
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES $ 21,005 $ 21,088 $ 0 $ 0 $ 42,093
NET INCOME $ 60,087 $ 22,640 $ 24,955 $112,876 $ 220,558
- - ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
BASIC
INCOME FROM CONTINUING OPERATIONS $ .12 $ .00 $ .08 $ .35 $ .55
INCOME FROM DISCONTINUED OPERATIONS $ .06 $ .07 $ .00 $ .00 $ .13
NET INCOME $ .18 $ .07 $ .08 $ .35 $ .68
DILUTED
INCOME FROM CONTINUING OPERATIONS $ .12 $ .00 $ .07 $ .34 $ .53
INCOME FROM DISCONTINUED OPERATIONS $ .06 $ .07 $ .00 $ .00 $ .13
NET INCOME $ .18 $ .07 $ .07 $ .34 $ .66
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 FULL YEAR
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Operating Revenue $229,305 $251,076 $251,130 $328,048 $1,059,559
Operating Income $ 21,608 $ 39,355 $ 59,174 $107,473 $ 227,610
Income from Continuing Operations,
Net of Income Taxes $ 33,371 $ 40,067 $ 57,317 $103,361 $ 234,116
Income from Discontinued Operations,
Net of Income Taxes $ 19,534 $ 19,988 $ 19,749 $ 18,963 $ 78,234
Net Income $ 52,905 $ 60,055 $ 77,066 $122,324 $ 312,350
- - ------------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock
Basic
Income from Continuing Operations $ 0.10 $ 0.12 $ 0.18 $ 0.31 $ 0.71
Income from Discontinued Operations $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
Net Income $ 0.16 $ 0.18 $ 0.24 $ 0.37 $ 0.95
Diluted
Income from Continuing Operations $ 0.10 $ 0.12 $ 0.17 $ 0.31 $ 0.70
Income from Discontinued Operations $ 0.06 $ 0.06 $ 0.06 $ 0.05 $ 0.23
Net Income $ 0.16 $ 0.18 $ 0.23 $ 0.36 $ 0.93
- - ------------------------------------------------------------------------------------------------------------------------------------
37
</TABLE>
<PAGE>
<TABLE>
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
Dollar amounts in thousands, except per share data
- - ------------------------------------------------------------------------------------------------------------------------------------
The Company has retroactively restated all per-share amounts to give effect for the 2:1 stock split. (See Note 2. to the
Consolidated Financial Statements).
<CAPTION>
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating Revenue $ 1,186,513 $ 1,059,559 $ 1,411,192 $ 1,253,688 $ 995,112
Costs and Expenses(1)(2) 1,054,029 831,949 1,167,485 1,186,079 849,899
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating Income(1)(2) 132,484 227,610 243,707 67,609 145,213
Non-Operating Income--Net(3) 138,177 94,864 5,853 7,880 18,85
- - ------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations, Before Provision
for Income Tax 270,661 322,474 249,560 75,489 164,065
Provision For Income Taxes (92,196) (88,358) (109,806) (34,214) (66,282)
- - ------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 178,465 234,116 139,754 41,275 97,783
Income from Discontinued Operations, Net of Income
Taxes (4) 42,093 78,234 55,697 47,606 48,622
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 220,558 $ 312,350 $ 195,451 $ 88,881 $ 146,405
- - ------------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock
Basic
Income from Continuing Operations $ .55 $ .71 $ .41 $ .12 $ .29
- - ------------------------------------------------------------------------------------------------------------------------------------
Income from Discontinued Operations, Net of Income
Taxes $ .13 $ .24 $ .17 $ .14 $ .14
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ .68 $ .95 $ .58 $ .26 $ .43
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding 324,584,000 330,326,000 339,888,000 339,044,000 339,892,000
Diluted
Income from Continuing Operations $ .53 $ .70 $ .41 $ .12 --
Income from Discontinued Operations, Net of
Income Taxes $ .13 $ .23 $ .16 $ .14 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ .66 $ .93 $ .57 $ .26 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding 335,770,000 334,980,000 341,000,000 343,216,000 --
- - ------------------------------------------------------------------------------------------------------------------------------------
As a % of Operating Revenue:
Operating Income (1) 11.2% 21.5% 17.3% 5.4% 14.6%
Income from continuing operations (1) 15.1% 22.1% 9.9% 3.3% 9.8%
SHAREHOLDERS' EQUITY $ 825,270 $ 801,570 $ 872,613 $ 604,588 $ 606,483
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,731,519 $ 1,502,089 $ 1,793,445 $ 1,398,823 $ 1,305,114
- - ------------------------------------------------------------------------------------------------------------------------------------
(1) 1998 includes charges related to the Distribution of $35,025 and one-time charges and IPR&D write-offs to the Walsh and PMSI
acquisitions of $48,019 and $32,800, respectively. 1996 includes a one-time acquisition-related charge of $33,233 related to
Gartner's acquisition of J3 Learning Corporation.
(2) 1995 includes a non-recurring charge of $87,770 and an incremental provision for post-employment benefits of $32,500. Also
includes restructuring expense of $12,800 and $7,957 in 1995 and 1994, respectively.
(3) Non-operating Income in 1998 includes Gartner equity income of $70,979, SAB 51 gains of $14,838, the gain related to the CTS
IPO of $12,777, and gains from dispositions-net of $33,341. Non-Operating Income in 1997 includes Gartner equity income of
$65,120, SAB 51 gains of $14,689, and gains from dispositions--net of $9,391. Results for prior years include gains from
dispositions--net of $200, $15,124 and $21,473 in non-operating income in 1996, 1995 and 1994, respectively.
(4) Income from Discontinued Operations, net of Income Taxes include a tax provision of $15,887, $29,527, $43,764, $39,462 and
$32,801 for 1998, 1997, 1996, 1995 and 1994, respectively.
</TABLE>
38
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<TABLE>
IMS HEALTH INCORPORATED
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
DIRECTORS
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLIFFORD L. ALEXANDER, JR. (1) H. EUGENE LOCKHART (1)
President Executive Vice President &
Alexander & Associates, Inc. Chief Marketing Officer
AT&T Corporation
VICTORIA R. FASH M. BERNARD PUCKETT (2)
President & Chief Operating Officer Private Investor
IMS Health Incorporated
JOHN P. IMLAY, JR. (2) WILLIAM C. VAN FAASEN (2)
Chairman President & Chief Executive Officer
Imlay Investments, Inc. Blue Cross & Blue Shield of Massachusetts
ROBERT KAMERSCHEN (2) ROBERT E. WEISSMAN
Chairman Chairman & Chief Executive Officer
ADVO, Inc. IMS Health Incorporated
Board Committees
ROBERT J. LANIGAN (1) (1) Audit Committee
Chairman Emeritus (2) Compensation and Benefits
Former Chairman & Chief Executive Officer Committee
Owens-Illinois, Inc.
OFFICERS
- - ----------------------------------------------------------------------------------------------------------------------------
ROBERT E. WEISSMAN
Chairman & Chief Executive Officer
- - ----------------------------------------------------------------------------------------------------------------------------
VICTORIA R. FASH
President & Chief Operating Officer
- - ----------------------------------------------------------------------------------------------------------------------------
J. MICHAL CONAWAY
Chief Financial Officer
- - ----------------------------------------------------------------------------------------------------------------------------
ALAN J. KLUTCH JAMES C. MALONE KENNETH S. SIEGEL
Senior Vice President-Finance Senior Vice President-Finance & Senior Vice President
Controller General Counsel & Secretary
CRAIG S. KUSSMAN DAVID H. OWEN MATTHEW L. FRIEDMAN
Senior Vice President-Corporate Development Senior Vice President-Global Human Vice President-Treasurer
Resources
OFFICERS OF OPERATING UNITS
- - ----------------------------------------------------------------------------------------------------------------------------
IMS EMERGING MARKETS
VICTORIA R. FASH ERISCO Managed Care Technologies, Inc.
Chairman & Chief Executive Officer ANTHONY BELLOMO COGNIZANT TECHNOLOGY SOLUTIONS
President CORPORATION
GILES PAJOT WIJEYARAJ A. MAHADEVA
Vice Chairman Enterprise Associates, Inc. Chairman & Chief Executive Officer
President, IMS Europe Region VENETIA KONTOGOURIS
President
ROBERT HOOPER
President, IMS America Region
SHUNSUKE KEIMATSU
Chairman & Chief Executive Officer, IMS Japan
HANS BIEDERMAN
President, Emerging Markets
JAMES C. NEWELL
President, Global Services
RONALD BROWN
Chief Executive Officer and President
IMS Health Strategic Technologies, Inc.
</TABLE>
<PAGE>
IMS HEALTH [LOGO]
TRANSFER AGENT
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone: (201) 324-1225
CORPORATE CENTER
200 Nyala Farms
Westport, Connecticut 06880
Telephone: (203) 222-4200
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1301 Avenue of Americas
New York, N.Y. 10019
FORM 10-K
Your Company will file its report to shareholders on Form 10-K with
the Securities and Exchange Commission by March 31, 1999. Many of the
SEC's 10-K information requirements are satisfied by this 1998 Annual
Report to Shareholders. However, a copy of the Form 10-K will be
available without charge after March 31, 1999, upon request to the Investor
Relations Department at the Corporate Center address.
COMMON STOCK INFORMATION
The Company's common stock (RX) is listed on the New York Stock
Exchange.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<DESCRIPTION>DISTRIBUTION AGREEMENT
<TEXT>
Exhibit 10.1
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, dated as of June 30, 1998, between COGNIZANT
CORPORATION, a Delaware corporation (the "Corporation") and IMS HEALTH
INCORPORATED, a Delaware corporation ("IMS HEALTH").
WHEREAS, the Corporation acting through its direct and indirect
subsidiaries, currently conducts a number of businesses, including, without
limitation, (i) providing television audience measurement services (the "Nielsen
Media Research Business"), (ii) providing information and decision support
services to the pharmaceutical and healthcare industries (the "IMS Business"),
(iii) providing software-based administrative and analytical solutions to the
managed care industry (the "ERISCO Business"), (iv) making venture capital
investments in emerging healthcare businesses (the "Enterprises Business") and
(v) providing software application and development services specializing in Year
2000 conversion services (the "Technology Solutions Business").
WHEREAS, the Board of Directors of the Corporation has determined that it
is appropriate, desirable and in the best interests of the holders of shares of
common stock, par value $0.01 per share, of the Corporation (the "Cognizant
Common Stock"), as well as of the Corporation and its businesses, to reorganize
the Corporation to separate from the Corporation all businesses currently
conducted by the Corporation other than the Nielsen Media Research Business and
to cause such businesses to be owned and conducted, directly or indirectly, by
IMS HEALTH;
WHEREAS, in order to effect the separation, the Board of Directors of the
Corporation has determined that it is appropriate, desirable and in the best
interests of the holders of Cognizant Common Stock, as well as of the
Corporation and its businesses, for the Corporation (i) to take certain steps to
reorganize the Corporation's Subsidiaries (as defined herein) and businesses,
including prior to the Distribution (as defined herein) (A) causing Media
Licensing Associates, Inc. ("Media Licensing") to withdraw its interest in
Cognizant Licensing Associates, L.P. ("Licensing Associates"), and, in
connection therewith, to receive the shares of common stock of Gartner Group,
Inc. ("Gartner") held by Licensing Associates, (B) upon the completion of the
transaction described in (A), causing Media Licensing to merge with and into
NMR, with NMR as the surviving corporation, (C) upon the completion of the
transaction described in (B), to cause NMR to merge with and into the
Corporation, with the Corporation as the surviving corporation renamed "Nielsen
Media Research, Inc.", (D) causing I.M.S. International, Inc. to merge with and
into IMS HEALTH, with IMS HEALTH as the surviving corporation, (E) upon the
completion of the transaction described in (D), causing IMS America Ltd. to
merge with and into IMS HEALTH, with IMS HEALTH as the surviving corporation,
(F) upon the completion of the transaction described in (E), causing the
Corporation to contribute all of the non-stock assets and liabilities held
directly by the Corporation (other than assets specified herein to remain with
the Corporation after the Distribution) to IMS HEALTH, (G) upon the completion
of the transaction described in (F), causing the Corporation to contribute all
the capital stock held by the Corporation in Cognizant Technology Solutions
Corporation, Cognizant Enterprises Inc., Gartner, Erisco, Inc., I.M.S. Services
Nederland B.V., IMS Italia S.p.A., IMS Japan K.K., Cognizant India Holdings
Corporation, IMS ChinaMetrik Incorporated, Cognizant Transportation Services
Corporation, DBHC Inc., IMS
<PAGE>
2
Holdings (UK) Limited, Sales Technologies, Inc., Walsh International, Inc. and
any other first tier subsidiary of the Corporation not related to the NMR
Business and (ii) upon the completion of such reorganization to distribute to
the holders of the Cognizant Common Stock all the outstanding shares of common
stock of IMS HEALTH (the "IMS HEALTH Common Shares"), together with the
associated Rights (as defined herein), as set forth herein;
WHEREAS, each of the Corporation and IMS HEALTH has determined that it is
necessary and desirable, on or prior to the Distribution Date (as defined
herein), to allocate and transfer those assets and to allocate and assign
responsibility for those liabilities in respect of the activities of the
businesses of such entities and those assets and liabilities in respect of other
businesses and activities of the Corporation and its current and former
Subsidiaries and other matters; and
WHEREAS, each of the Corporation and IMS HEALTH has determined that it is
necessary and desirable to set forth the principal corporate transactions
required to effect such Distribution and to set forth other agreements that will
govern certain other matters following the Distribution.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereby agree as follows:
ARTICLE I. DEFINITIONS
SECTION I.1. General. As used in this Agreement, the following terms shall
have the following meanings:
(a) "Action" shall mean any action, suit, arbitration, inquiry, proceeding
or investigation by or before any court, any governmental or other regulatory or
administrative agency, body or commission or any arbitration tribunal.
(b) "Affiliate" shall mean, when used with respect to a specified person,
another person that controls, is controlled by, or is under common control with
the person specified. As used herein, "control" means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such person, whether through the ownership of voting securities
or other interests, by contract or otherwise.
(c) "Agent" shall have the meaning set forth in Section 2.1(b).
(d) "Agreement Disputes" shall have the meaning set forth in Section 6.1.
(e) "Ancillary Agreements" shall mean all of the written agreements,
instruments, assignments or other arrangements (other than this Agreement)
entered into in connection with the transactions contemplated hereby, including,
without limitation, the
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3
Conveyancing and Assumption Instruments, the Employee Benefits Agreement, the
Tax Allocation Agreement and the Transition Services Agreement.
(f) "Assets" shall mean assets, properties and rights (including goodwill),
wherever located (including in the possession of vendors or other third parties
or elsewhere), whether real, personal or mixed, tangible, intangible or
contingent, in each case whether or not recorded or reflected or required to be
recorded or reflected on the books and records or financial statements of any
person, including, without limitation, the following:
(i) all accounting and other books, records and files whether in
paper, microfilm, microfiche, computer tape or disc, magnetic tape or any
other form;
(ii) all apparatus, computers and other electronic data processing
equipment, fixtures, machinery, equipment, furniture, office equipment,
automobiles, trucks, aircraft and other transportation equipment, special
and general tools, test devices, prototypes and models and other tangible
personal property;
(iii) all inventories of materials, parts, raw materials, supplies,
work-in-process and finished goods and products;
(iv) all interests in real property of whatever nature, including
easements, whether as owner, mortgagee or holder of a Security Interest in
real property, lessor, sublessor, lessee, sublessee or otherwise;
(v) all interests in any capital stock or other equity interests of
any Subsidiary or any other person, all bonds, notes, debentures or other
securities issued by any Subsidiary or any other person, all loans,
advances or other extensions of credit or capital contributions to any
Subsidiary or any other person and all other investments in securities of
any person;
(vi) all license agreements, leases of personal property, open
purchase orders for raw materials, supplies, parts or services, unfilled
orders for the manufacture and sale of products and other contracts,
agreements or commitments;
(vii) all deposits, letters of credit and performance and surety
bonds;
(viii) all written technical information, data, specifications,
research and development information, engineering drawings, operating and
maintenance manuals, and materials and analyses prepared by consultants and
other third parties;
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4
(ix) all domestic and foreign patents, copyrights, trade names,
trademarks, service marks and registrations and applications for any of the
foregoing, mask works, trade secrets, inventions, data bases, other
proprietary information and licenses from third persons granting the right
to use any of the foregoing;
(x) all computer applications, programs and other software, including
operating software, network software, firmware, middleware, design
software, design tools, systems documentation and instructions;
(xi) all cost information, sales and pricing data, customer prospect
lists, supplier records, customer and supplier lists, customer and vendor
data, correspondence and lists, product literature, artwork, design,
development and manufacturing files, vendor and customer drawings,
formulations and specifications, quality records and reports and other
books, records, studies, surveys, reports, plans and documents;
(xii) all prepaid expenses, trade accounts and other accounts and
notes receivable;
(xiii) all rights under contracts or agreements, all claims or rights
against any person arising from the ownership of any asset, all rights in
connection with any bids or offers and all claims, choses in action or
similar rights, whether accrued or contingent;
(xiv) all rights under insurance policies and all rights in the nature
of insurance, indemnification or contribution;
(xv) all licenses, permits, approvals and authorizations which have
been issued by any Governmental Authority;
(xvi) cash or cash equivalents, bank accounts, lock boxes and other
deposit arrangements; and
(xvii) interest rate, currency, commodity or other swap, collar, cap
or other hedging or similar agreements or arrangements.
(g) "Assignee" shall have the meaning set forth in Section 2.1(f).
(h) "Business Entity" shall mean any corporation, partnership, limited
liability company or other entity which may legally hold title to Assets.
(i) "Claims Administration" shall mean the processing of claims made under
the Shared Policies, including, without limitation, the reporting of claims to
the insurance carriers and the management of the defense of claims.
<PAGE>
5
(j) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the Treasury regulations promulgated thereunder, including any successor
legislation.
(k) "Cognizant Common Stock" shall have the meaning set forth in the
recitals hereto.
(l) "Commission" shall mean the U.S. Securities and Exchange Commission.
(m) "Conveyancing and Assumption Instruments" shall mean, collectively, the
various agreements, instruments and other documents heretofore entered into and
to be entered into to effect the transfer of Assets and the assumption of
Liabilities in the manner contemplated by this Agreement, or otherwise arising
out of or relating to the transactions contemplated by this Agreement, which
shall be in substantially the forms attached hereto as Schedule 1.1(m) for
transfers to be effected pursuant to New York law or the laws of one of the
other states of the United States, or, if not appropriate for a given transfer,
and for transfers to be effected pursuant to non-U.S. laws, shall be in such
other form or forms as the parties agree and as may be required by the laws of
such non-U.S. jurisdictions.
(n) the "Corporation" or "Cognizant" shall mean Cognizant Corporation, a
Delaware corporation, which will change its name in connection with the
Distribution to "Nielsen Media Research, Inc.".
(o) "Corporation Debt" shall mean have the meaning set forth in Section
2.1(n).
(p) "Distribution" shall mean the distribution on the Distribution Date to
holders of record of shares of Cognizant Common Stock as of the Distribution
Record Date of the IMS HEALTH Common Shares owned by the Corporation on the
basis of one IMS HEALTH Common Share for each outstanding share of Cognizant
Common Stock.
(q) "Distribution Date" shall mean June 30, 1998.
(r) "Distribution Record Date" shall mean June 25, 1998.
(s) "Effective Time" shall mean immediately prior to the midnight, New York
time, that ends the 24-hour period comprising June 30, 1998.
(t) "Employee Benefits Agreement" shall mean the Employee Benefits
Agreement between the Corporation and IMS HEALTH.
(u) "Enterprises Business" shall have the meaning set forth in the recitals
hereto.
(v) "ERISCO Business" shall have the meaning set forth in the recitals
hereto.
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6
(w) "Governmental Authority" shall mean any federal, state, local, foreign
or international court, government, department, commission, board, bureau,
agency, official or other regulatory, administrative or governmental authority.
(x) "IMS Business" shall have the meaning set forth in the recitals hereto.
(y) "IMS HEALTH Assets" shall mean, collectively, all the rights and Assets
owned or held by the Corporation or any Subsidiary of the Corporation
immediately prior to the Effective Time, except the NMR Assets.
(z) "IMS HEALTH Business" shall mean each and every business conducted at
any time by the Corporation or any Subsidiary of the Corporation prior to the
Effective Time (including, without limitation, the IMS Business, the ERISCO
Business, the Enterprises Business and the Technology Solutions Business),
except an NMR Business.
(aa) "IMS HEALTH Common Shares" shall have the meaning set forth in the
recitals hereto.
(bb) "IMS HEALTH Contracts" shall mean all the contracts and agreements to
which the Corporation or any of its Affiliates who are not individuals is a
party or by which it or any of its Affiliates who are not individuals is bound
immediately prior to the Effective Time, except the NMR Contracts.
(cc) "IMS HEALTH Group" shall mean IMS HEALTH and each person (other than
any member of the NMR Group) that is a Subsidiary of the Corporation immediately
prior to the Effective Time.
(dd) "IMS HEALTH Indemnitees" shall mean IMS HEALTH, each member of the IMS
HEALTH Group, each of their respective present and former directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing, except the NMR Indemnitees, as well as any present and
former directors, officers, employees and agents of the Corporation prior to the
Effective Time and each of their heirs, executors, successors and assigns.
(ee) "IMS HEALTH Liabilities" shall mean collectively, all obligations and
Liabilities of the Corporation or any Subsidiary of the Corporation immediately
prior to the Effective Time, except the NMR Liabilities.
(ff) "IMS HEALTH Policies" shall mean all Policies, current or past, which
are owned or maintained by or on behalf of the Corporation or any Subsidiary of
the Corporation immediately prior to the Effective Time which do not relate to
the NMR Business and which Policies are either maintained by IMS HEALTH or a
member of the IMS HEALTH Group or are assignable to IMS HEALTH or a member of
the IMS HEALTH Group.
(gg) "Indemnifiable Losses" shall mean any and all losses, liabilities,
claims, damages, demands, costs or expenses (including, without limitation,
reasonable attorneys' fees and
<PAGE>
7
any and all out-of-pocket expenses) reasonably incurred in investigating,
preparing for or defending against any Actions or potential Actions or in
settling any Action or potential Action or in satisfying any judgment, fine or
penalty rendered in or resulting from any Action.
(hh) "Indemnifying Party" shall have the meaning set forth in Section 3.3.
(ii) "Indemnitee" shall have the meaning set forth in Section 3.3.
(jj) "Indemnity and Joint Defense Agreement" shall mean the Indemnity and
Joint Defense Agreement dated as of October 28, 1996 by and among the
Corporation, The Dun & Bradstreet Corporation and ACNielsen Corporation.
(kk) "Information Statement" shall mean the Information Statement sent to
the holders of shares of Cognizant Common Stock in connection with the
Distribution, including any amendment or supplement thereto.
(ll) "Insurance Administration" shall mean, with respect to each Shared
Policy, the accounting for premiums, retrospectively-rated premiums, defense
costs, indemnity payments, deductibles and retentions, as appropriate, under the
terms and conditions of each of the Shared Policies; and the reporting to excess
insurance carriers of any losses or claims which may cause the per-occurrence,
per claim or aggregate limits of any Shared Policy to be exceeded, and the
distribution of Insurance Proceeds as contemplated by this Agreement.
(mm) "Insurance Proceeds" shall mean those monies (i) received by an
insured from an insurance carrier or (ii) paid by an insurance carrier on behalf
of an insured, in either case net of any applicable premium adjustment,
retrospectively-rated premium, deductible, retention, or cost of reserve paid or
held by or for the benefit of such insured.
(nn) "Insured Claims" shall mean those Liabilities that, individually or in
the aggregate, are covered within the terms and conditions of any of the Shared
Policies, whether or not subject to deductibles, co-insurance, uncollectibility
or retrospectively-rated premium adjustments.
(oo) "IRI Action" shall mean the complaint filed in the United States
District Court for the Southern District of New York on July 29, 1996 by
Information Resources, Inc. naming as defendants The Dun & Bradstreet
Corporation, A. C. Nielsen Company and IMS International, Inc.
(pp) "Liabilities" shall mean any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, payments, costs
and expenses, sums of money, accounts, reckonings, bonds, specialties,
indemnities and similar obligations, exonerations, covenants, contracts,
controversies, agreements, promises, doings, omissions, variances, guarantees,
make whole agreements and similar obligations, and other liabilities, including
all contractual obligations, whether absolute or contingent, matured or
unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown,
whenever arising, and including those arising under any
<PAGE>
8
law, rule, regulation, Action, threatened or contemplated Action (including the
costs and expenses of demands, assessments, judgments, settlements and
compromises relating thereto and attorneys' fees and any and all costs and
expenses, whatsoever reasonably incurred in investigating, preparing or
defending against any such Actions or threatened or contemplated Actions), order
or consent decree of any governmental or other regulatory or administrative
agency, body or commission or any award of any arbitrator or mediator of any
kind, and those arising under any contract, commitment or undertaking, including
those arising under this Agreement or any Ancillary Agreement, in each case,
whether or not recorded or reflected or required to be recorded or reflected on
the books and records or financial statements of any person.
(qq) "Nielsen Media Research Business" shall have the meaning set forth in
the recitals hereto.
(rr) "1996 Distribution" shall mean the distribution described in the 1996
Distribution Agreement.
(ss) "1996 Distribution Agreement" shall mean the Distribution Agreement
among the Corporation, The Dun & Bradstreet Corporation and ACNielsen
Corporation dated as of October 28, 1996.
(tt) "NMR" shall mean Nielsen Media Research, Inc., a Delaware corporation
and a wholly-owned subsidiary of the Corporation.
(uu) "NMR Assets" shall mean:
(i) the ownership interests in those Business Entities listed on
Schedule 1.1(au)(i);
(ii) any and all Assets that are expressly contemplated by this
Agreement, including those on the list of pre-Distribution reorganization
transactions attached as Schedule 1.1(au)(ii) hereto, or any Ancillary
Agreement (or included on any Schedule hereto or thereto) as Assets which
have been or are to be transferred to the Corporation, NMR or any other
member of the NMR Group prior to the Effective Time or are to remain with
the Corporation, NMR or any member of the NMR Group subsequent to the
Effective Time;
(iii) any Assets reflected on the NMR Balance Sheet or the accounting
records supporting such balance sheet and any Assets acquired by or for NMR
or any member of the NMR Group subsequent to the date of such balance sheet
which, had they been so acquired on or before such date and owned as of
such date, would have been reflected on such balance sheet if prepared on a
consistent basis, subject to any dispositions of any of such Assets
subsequent to the date of such balance sheet;
<PAGE>
9
(iv) subject to Article VII, any rights of any member of the NMR Group
under any of the Policies, including any rights thereunder arising from and
after the Effective Time in respect of any Policies that are occurrence
policies;
(v) any NMR Contracts, any rights or claims arising thereunder, and
any other rights or claims or contingent rights or claims primarily
relating to or arising from any NMR Asset or the NMR Business;
(vi) the minute books and similar corporate records of the
Corporation; and
(vii) any and all Assets of the Corporation from and after the
Effective Time.
Notwithstanding the foregoing, the NMR Assets shall not in any event
include:
(v) the Corporation's rights arising from or related to the Corporation's
agreements to acquire Walsh International Inc. ("Walsh") or Pharmaceutical
Marketing Services Inc. ("PMSI"), or any of the assets of Walsh or PMSI; or
(w) any rights of the Corporation under (i) the 1996 Distribution Agreement
or (ii) the Tax Allocation Agreement, Employee Benefits Agreement or any
Ancillary Agreement referred to in the 1996 Distribution Agreement (except in
each case to the extent provided in this Agreement or any Ancillary Agreement to
this Agreement); or
(x) the Corporation's interest in the capital stock of the Gartner Group,
Inc. and any other Assets listed or described on Schedule 1.1(au)(x); or
(y) any Assets primarily relating to or used in any terminated or divested
Business Entity, business or operation formerly owned or managed by or
associated with the Corporation, NMR or any NMR Business, except for those
Assets primarily relating to or used in those Business Entities, businesses or
operations listed on Schedule 1.1(au)(y); or
(z) any and all Assets that are expressly contemplated by this Agreement or
any Ancillary Agreement (or the Schedules hereto or thereto) as Assets to be
transferred or conveyed to any member of the IMS HEALTH Group.
<PAGE>
10
In the event of any inconsistency or conflict which may arise in the
application or interpretation of any of the foregoing provisions, for the
purpose of determining what is and is not an NMR Asset, any item explicitly
included on a Schedule referred to in this Section 1.1(au) shall take priority
over any provision of the text hereof, and clause (ii) shall take priority over
clause (iii) hereof of this Section 1.1(au).
(vv) "NMR Balance Sheet" shall mean the consolidated balance sheet of the
NMR Group, including the notes thereto, as of March 31, 1998, set forth as
Schedule 1.1(av) hereto.
(ww) "NMR Business" shall mean (i) the Nielsen Media Research Business,
(ii) the businesses of the members of the NMR Group, (iii) any other business
conducted by the Corporation or any Subsidiary of the Corporation primarily
through the use of the NMR Assets, (iv) the businesses of Business Entities
acquired or established by or for NMR or any of its Subsidiaries after the date
of this Agreement and (v) the business of the Corporation from and after the
Effective Time.
(xx) "NMR Contracts" shall mean the following contracts and agreements to
which the Corporation or any of its Affiliates who are not individuals is a
party or by which it or any of its Affiliates who are not individuals or any of
their respective Assets is bound, whether or not in writing, except for any such
contract or agreement that is not expressly contemplated to be transferred or
assigned to the Corporation, NMR or any other member of the NMR Group prior to
the Effective Time, or to remain with the Corporation, NMR or any other member
of the NMR Group subsequent to the Effective Time, pursuant to any provision of
this Agreement or any Ancillary Agreement:
(i) the TAM Master Agreement (as defined herein), the Intellectual
Property Agreement referred to in the 1996 Distribution Agreement (except
to the extent it relates to intellectual property used by the IMS HEALTH
Group) and any contracts or agreements listed or described on Schedule
1.1(ax)(i);
(ii) any contract or agreement entered into in the name of the
Corporation, or in the name of, or expressly on behalf of, any division,
business unit or member of the NMR Group except for those contracts listed
or described on Schedule 1.1(ax)(ii) or which are primarily for the benefit
of any division, business unit or member of the IMS HEALTH Group;
(iii) any contract or agreement that relates primarily to the NMR
Business;
(iv) federal, state and local government and other contracts and
agreements that are listed or described on Schedule 1.1(ax)(iv) and any
other government contracts or agreements entered into after the date hereof
and prior to the Effective Time that relate primarily to the NMR Business;
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11
(v) any contract or agreement representing capital or operating
equipment lease obligations reflected on the NMR Balance Sheet, and
obligations as lessee under those contracts or agreements listed on
Schedule 1.1(ax)(v);
(vi) any contract or agreement that is otherwise expressly
contemplated pursuant to this Agreement or any of the Ancillary Agreements
to be transferred or assigned to the Corporation or any member of the NMR
Group prior to the Effective Time or to remain with the Corporation or any
member of the NMR Group subsequent to the Effective Time; and
(vii) any guarantee, indemnity, representation or warranty of any
member of the NMR Group.
(yy) "NMR Group" shall mean (i) NMR, (ii) each Business Entity which is
contemplated to become a Subsidiary of the Corporation or NMR hereunder prior to
the Effective Time or to remain a Subsidiary of the Corporation or NMR hereunder
subsequent to the Effective Time, which shall include those identified as such
on Schedule 1.1(au)(i) hereto, which Schedule shall also indicate the amount of
the Corporation's or NMR's direct or indirect ownership interest therein, and
(iii) the Corporation from and after the Effective Time.
(zz) "NMR Indemnitees" shall mean NMR, each member of the NMR Group, each
of their respective present and former directors, officers, employees and agents
and each of the heirs, executors, successors and assigns of any of the
foregoing.
(aaa) "NMR Liabilities" shall mean:
(i) any and all Liabilities that are expressly contemplated by this
Agreement or any Ancillary Agreement (or the Schedules hereto or thereto,
including Schedule 1.1(ba) hereto) as Liabilities to be assumed by the
Corporation or any member of the NMR Group prior to the Effective Time or
to remain with the Corporation or any member of the NMR Group subsequent to
the Effective Time, and all agreements, obligations and Liabilities of the
Corporation or any member of the NMR Group under this Agreement or any of
the Ancillary Agreements;
(ii) all Liabilities (other than Taxes and any employee-related
Liabilities which are subject to the provisions of the Tax Allocation
Agreement and the Employee Benefits Agreement, respectively), primarily
relating to, arising out of or resulting from:
(A) the operation of the NMR Business, as conducted at any time
prior to, on or after the Effective Time (including any Liability
relating to, arising out of or resulting from any act or failure to
act by any director,
<PAGE>
12
officer, employee, agent or representative (whether or not such act or
failure to act is or was within such person's authority));
(B) the operation of any business conducted by the Corporation or
any Subsidiary of the Corporation at any time from and after the
Effective Time (including any Liability relating to, arising out of or
resulting from any act or failure to act by any director, officer,
employee, agent or representative (whether or not such act or failure
to act is or was within such person's authority)); or
(C) any NMR Assets;
whether arising before, on or after the Effective Time;
(iii) all Liabilities reflected as liabilities or obligations on the
NMR Balance Sheet or the accounting records supporting such balance sheet,
and all Liabilities arising or assumed after the date of such balance sheet
which, had they arisen or been assumed on or before such date and been
retained as of such date, would have been reflected on such balance sheet,
subject to any discharge of such Liabilities subsequent to the date of the
NMR Balance Sheet; and
(iv) the Corporation Debt.
Notwithstanding the foregoing, the NMR Liabilities shall not include:
(x) any Liabilities that are expressly contemplated by this Agreement or
any Ancillary Agreement (or the Schedules hereto or thereto) as Liabilities to
be assumed by IMS HEALTH or any member of the IMS HEALTH Group, including any
Liabilities set forth in Schedule 1.1(ba)(x);
(y) any Liabilities primarily relating to, arising out of or resulting from
any terminated or divested Business Entity, business or operation formerly owned
or managed by or associated with the Corporation or any NMR Business except for
Liabilities primarily relating to, arising out of or resulting from those
Business Entities, businesses or operations listed in Schedule 1.1(ba)(y); or
(z) all agreements and obligations of any member of the IMS HEALTH Group
under this Agreement or any of the Ancillary Agreements.
(bbb) "NMR Policies" shall mean all Policies, current or past, which are
owned or maintained by or on behalf of the Corporation or any Subsidiary of the
Corporation immediately prior to the Effective Time, which do not relate to the
IMS HEALTH Business.
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13
(ccc) "person" shall mean any natural person, Business Entity, corporation,
business trust, joint venture, association, company, partnership, other entity
or government, or any agency or political subdivision thereof.
(ddd) "Policies" shall mean insurance policies and insurance contracts of
any kind (other than life and benefits policies or contracts), including,
without limitation, primary, excess and umbrella policies, comprehensive general
liability policies, director and officer liability, fiduciary liability,
automobile, aircraft, property and casualty, workers' compensation and employee
dishonesty insurance policies, bonds and self-insurance and captive insurance
company arrangements, together with the rights, benefits and privileges
thereunder.
(eee) "Provider" shall have the meaning set forth in Section 5.1.
(fff) "Recipient" shall have the meaning set forth in Section 5.1.
(ggg) "Records" shall have the meaning set forth in Section 4.1.
(hhh) "Rights" shall have the meaning set forth in Section 2.1(c).
(iii) "Rules" shall have the meaning set forth in Section 6.2.
(jjj) "Security Interest" shall mean any mortgage, security interest,
pledge, lien, charge, claim, option, right to acquire, voting or other
restriction, right-of-way, covenant, condition, easement, encroachment,
restriction on transfer, or other encumbrance of any nature whatsoever.
(kkk) "Shared Policies" shall mean all Policies, current or past, which are
owned or maintained by or on behalf of the Corporation or any Subsidiary of the
Corporation immediately prior to the Effective Time which relate to the IMS
HEALTH Business and the NMR Business.
(lll) "Shared Transaction Services Agreement" shall mean the Shared
Transaction Services Agreement between the Corporation and IMS HEALTH.
(mmm) "Subsidiary" shall mean any corporation, partnership or other entity
of which another entity (i) owns, directly or indirectly, ownership interests
sufficient to elect a majority of the Board of Directors (or persons performing
similar functions) (irrespective of whether at the time any other class or
classes of ownership interests of such corporation, partnership or other entity
shall or might have such voting power upon the occurrence of any contingency) or
(ii) is a general partner or an entity performing similar functions (e.g., a
trustee).
(nnn) "TAM Master Agreement" shall mean the master agreement between the
Corporation and ACNielsen Corporation dated as of October 28, 1996, including
any agreements ancillary thereto, relating to the conduct of the television
audience measurement business after the 1996 Distribution.
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14
(ooo) "Tax" shall have the meaning set forth in the Tax Allocation
Agreement.
(ppp) "Tax Allocation Agreement" shall mean the Tax Allocation Agreement
between the Corporation and IMS HEALTH.
(qqq) "Technology Solutions Business" shall have the meaning set forth in
the recitals hereto.
(rrr) "Third Party Claim" shall have the meaning set forth in Section 3.3.
(sss) "Transition Services Agreement" shall mean the Amended and Restated
Transition Services Agreement among the Corporation, IMS HEALTH, The Dun &
Bradstreet Corporation, The New Dun & Bradstreet Corporation, ACNielsen
Corporation and Gartner Group, Inc.
SECTION I.2. References; Interpretation. References in this Agreement to
any gender include references to all genders, and references to the singular
include references to the plural and vice versa. The words "include", "includes"
and "including" when used in this Agreement shall be deemed to be followed by
the phrase "without limitation". Unless the context otherwise requires,
references in this Agreement to Articles, Sections, Exhibits and Schedules shall
be deemed references to Articles and Sections of, and Exhibits and Schedules to,
such Agreement. Unless the context otherwise requires, the words "hereof",
"hereby" and "herein" and words of similar meaning when used in this Agreement
refer to this Agreement in its entirety and not to any particular Article,
Section or provision of this Agreement.
ARTICLE II. DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION II.1. The Distribution and Other Transactions.
(a) Certain Transactions. On or prior to the Distribution Date:
(i) the Corporation shall, on behalf of itself and its Subsidiaries,
transfer or cause to be transferred to IMS HEALTH or another member of the
IMS HEALTH Group, effective prior to or as of the Effective Time, all of
the Corporation's and its Subsidiaries' right, title and interest in the
IMS HEALTH Assets.
(ii) IMS HEALTH shall to the extent not already held by the
Corporation or a member of the NMR Group, on behalf of itself and its
Subsidiaries, transfer or cause to be transferred to the Corporation or a
member of the NMR Group, effective prior to or as of the
<PAGE>
15
Effective Time, all of IMS HEALTH's and its Subsidiaries' right, title and
interest in the NMR Assets.
(iii) the Corporation or IMS HEALTH, as applicable, shall be entitled
to designate the Business Entity within the NMR Group or the IMS HEALTH
Group, as applicable, to which any Assets are to be transferred pursuant to
this Section 2.1(a).
(b) Stock Dividend to the Corporation. On or prior to the Distribution
Date, IMS HEALTH shall issue to the Corporation as a stock dividend (i) such
number of IMS HEALTH Common Shares as will be required to effect the
Distribution, as certified by the Corporation's stock transfer agent (the
"Agent"). In connection therewith the Corporation shall deliver to IMS HEALTH
for cancellation the share certificate held by it representing IMS HEALTH Common
Shares and shall receive a new certificate or certificates representing the
total number of IMS HEALTH Common Shares to be owned by the Corporation after
giving effect to such stock dividend.
(c) Charters; By-laws; Rights Plans. On or prior to the Distribution Date,
all necessary actions shall have been taken to provide for the adoption of the
form of Certificate of Incorporation and By-laws and the execution and delivery
of the form of Rights Agreement, relating to the preferred share purchase rights
relating to the IMS HEALTH Common Shares (the "Rights"), filed by IMS HEALTH
with the Commission as exhibits to IMS HEALTH's Registration Statement on Form
10 (or any amendment thereto).
(d) Directors. On or prior to the Distribution Date, the Corporation as the
sole stockholder of IMS HEALTH, shall have taken all necessary action to cause
the Board of Directors of IMS HEALTH to consist of the individuals identified in
the Information Statement as directors of IMS HEALTH.
(e) Certain Licenses and Permits. Without limiting the generality of the
obligations set forth in Section 2.1(a), on or prior to the Distribution Date or
as soon as reasonably practicable thereafter:
(i) all transferable licenses, permits and authorizations issued by
any Governmental Authority which do not relate primarily to the NMR
Business but which are held in the name of the Corporation or any member of
the NMR Group, or in the name of any employee, officer, director,
stockholder or agent of the Corporation or any such member, or otherwise,
on behalf of a member of the IMS HEALTH Group shall be duly and validly
transferred or caused to be transferred by the Corporation to the
appropriate member of the IMS HEALTH Group; and
(ii) all transferable licenses, permits and authorizations issued by
Governmental Authorities which relate primarily to the NMR Business but
which are held in the name of any member of the IMS HEALTH Group, or in the
name of any employee, officer, director, stockholder, or agent of any such
member, or otherwise, on behalf of a member of the NMR
<PAGE>
16
Group shall be duly and validly transferred or caused to be transferred by IMS
HEALTH to the Corporation or the appropriate member of the NMR Group.
(f) Transfer of Agreements. Without limiting the generality of the
obligations set forth in Section 2.1(a):
(i) the Corporation hereby agrees that on or prior to the Distribution
Date or as soon as reasonably practicable thereafter, subject to the
limitations set forth in this Section 2.1(f), it will, and it will cause
each member of the NMR Group to, assign, transfer and convey to the
appropriate member of the IMS HEALTH Group all of the Corporation's or such
member of the NMR Group's respective right, title and interest in and to
any and all IMS HEALTH Contracts;
(ii) IMS HEALTH hereby agrees that on or prior to the Distribution
Date or as soon as reasonably practicable thereafter, subject to the
limitations set forth in this Section 2.1(f), it will, and it will cause
each member of the IMS HEALTH Group to, assign, transfer and convey to the
Corporation or the appropriate member of the NMR Group all of IMS HEALTH's
or such member of the IMS HEALTH Group's respective right, title and
interest in and to any and all NMR Contracts;
(iii) subject to the provisions of this Section 2.1(f), any agreement
to which any of the parties hereto or any of their Subsidiaries is a party
that inures to the benefit of both the NMR Business and the IMS HEALTH
Business shall be assigned in part so that each party shall be entitled to
the rights and benefits inuring to its business under such agreement;
(iv) the assignee of any agreement assigned, in whole or in part,
hereunder (an "Assignee") shall assume and agree to pay, perform, and fully
discharge all obligations of the assignor under such agreement or, in the
case of a partial assignment under paragraph (f)(iii), such Assignee's
related portion of such obligations as determined in accordance with the
terms of the relevant agreement, where determinable on the face thereof,
and otherwise as determined in accordance with the practice of the parties
prior to the Distribution; and
(v) notwithstanding anything in this Agreement to the contrary, this
Agreement shall not constitute an agreement to assign any agreement, in
whole or in part, or any rights thereunder if the agreement to assign or
attempt to assign, without the consent of a third party, would constitute a
breach thereof or in any way adversely affect the rights of the assignor or
Assignee thereof. Until such consent is obtained, or if an attempted
assignment thereof would be ineffective or would adversely affect the
rights of any party hereto so that the intended Assignee would not, in
fact, receive all such rights, the parties will cooperate with each other
in any arrangement designed to provide for the intended Assignee the
benefits of, and to permit the intended Assignee to assume liabilities
under, any such agreement.
<PAGE>
17
(g) Consents. The parties hereto shall use their commercially reasonable
efforts to obtain required consents to transfer and/or assignment of licenses,
permits and authorizations of Governmental Authorities and of agreements
hereunder.
(h) Delivery of Shares to Agent. The Corporation shall deliver to the Agent
the share certificates representing the IMS HEALTH Common Shares issued to the
Corporation by IMS HEALTH pursuant to Section 2.1(b) which are to be distributed
to the holders of Cognizant Common Stock in the Distribution and shall instruct
the Agent to distribute, on or as soon as practicable following the Distribution
Date, certificates representing such IMS HEALTH Common Shares to holders of
record of shares of Cognizant Common Stock on the Distribution Record Date as
further contemplated by the Information Statement and herein. IMS HEALTH shall
provide all share certificates that the Agent shall require in order to effect
the Distribution.
(i) Certain Liabilities. For purposes of this Agreement, including Article
III hereof, IMS HEALTH agrees with the Corporation that:
(i) any and all Liabilities arising from or related to Cognizant's
agreements to acquire Walsh and PMSI or any filings with the Commission or
any other governmental or regulatory authority related thereto shall be
deemed to be IMS HEALTH Liabilities and not NMR Liabilities;
(ii) any and all Liabilities arising from or based upon "controlling
person" liability relating to the Form 10 (or any amendment thereto) filed
by IMS HEALTH shall be deemed to be IMS HEALTH Liabilities and not NMR
Liabilities; and
(iii) notwithstanding Section 2.1(m) below, any and all Liabilities
arising from or related to the spin-off of the Corporation and ACNielsen
Corporation from The Dun & Bradstreet Corporation pursuant to the 1996
Distribution Agreement, other than those set forth on Schedule 2.1(i) or
allocated to NMR pursuant to Section 2.1(j), shall be deemed to be IMS
HEALTH Liabilities and not NMR Liabilities.
(j) Certain Contingencies. For purposes of this Agreement, including
Article III hereof, each of IMS HEALTH and the Corporation agrees that:
(i) notwithstanding anything to the contrary herein or in the Tax
Allocation Agreement, each of the Corporation and IMS HEALTH shall be
liable for a portion of the liabilities related to certain prior business
transactions to the extent and in the circumstances described in Schedule
2.1(j)(i);
(ii) subject to Section 2.1(p), any and all Liabilities of Cognizant
under the Indemnity and Joint Defense Agreement or otherwise related to the
IRI Action, including legal fees and expenses related thereto, shall be
allocated 75% to the IMS HEALTH Group (and thereby become IMS HEALTH
Liabilities hereunder) and 25% to the NMR Group (and thereby become NMR
Liabilities hereunder); provided that (X) any such legal fees and
<PAGE>
18
expenses incurred prior to January 1, 1999 shall be IMS HEALTH Liabilities
and not NMR Liabilities and (Y) any such legal fees and expenses incurred
during 1999 that are NMR Liabilities will be reimbursed to IMS HEALTH on
the first business day after January 1, 2000 with respect to fees incurred
through November 30, 1999 and notified to the Corporation, and within 10
business days after notice to the Corporation of other such fees incurred
in 1999; and provided further that the aggregate amount of NMR Liabilities
under Section 2.1(j)(i) and this Section 2.1(j)(ii) shall be limited to
$125 million, and any amounts in excess of $125 million shall be IMS HEALTH
Liabilities; and
(iii) notwithstanding anything to the contrary herein or in the Tax
Allocation Agreement, each of the Corporation and IMS HEALTH agree that the
Corporation's interests in certain prior business transactions described on
Schedule 2.1(j)(i) of the 1996 Distribution Agreement shall be held by IMS
HEALTH or a member of the IMS HEALTH Group and not by NMR or any member of
the NMR Group and any rights or Liabilities arising in connection with such
interests and any transactions relating thereto shall be IMS HEALTH rights
and Liabilities and not NMR rights and Liabilities.
(k) Matters Relating to Certain Partnerships. Each of the Corporation and
IMS HEALTH agrees that the interests in Cognizant Licensing Associates, L.P.
held by members of the NMR Group will be retired prior to the Distribution.
(l) Certain Acquisitions. The Corporation shall contribute to IMS HEALTH
any Assets relating to Walsh and PMSI which the Corporation acquires pursuant to
its agreements to acquire such companies.
(m) Undertaking of IMS HEALTH. On or prior to the Distribution Date, IMS
HEALTH will undertake to each of The Dun & Bradstreet Corporation and ACNielsen
Corporation to be jointly and severally liable for all "Cognizant Liabilities"
(as defined in the 1996 Distribution Agreement) under the 1996 Distribution
Agreement pursuant to an undertaking substantially in the form of Exhibit 2.1(m)
hereto.
(n) Corporation Debt. In connection with the Distribution, the Corporation
shall borrow an aggregate of $300 million, the proceeds of which will be used to
pay expenses of the Distribution and to repay existing intercompany indebtedness
to certain members of the IMS HEALTH Group. This $300 million of debt shall be
an obligation of the Corporation after the Distribution.
(o) Cognizant Common Stock Held by IMSA. IMS HEALTH agrees that promptly
after the Distribution Date IMS HEALTH will sell the 800,000 shares of Cognizant
Common Stock which IMS HEALTH will own as a result of Cognizant Common Stock
currently held by IMS America Ltd.
(p) 1996 Distribution. The Corporation agrees that it will not take any
action it is required or permitted to take pursuant to the terms of (i) the 1996
Distribution Agreement or (ii)
<PAGE>
19
the Indemnity and Joint Defense Agreement, the Tax Allocation Agreement, the
Employee Benefits Agreement or any Ancillary Agreement referred to in the 1996
Distribution Agreement (other than the TAM Master Agreement and the Intellectual
Property Agreement (to the extent such action relates to intellectual property
used by the NMR Group)), in each such case without the prior written consent of
IMS HEALTH. The Corporation agrees that it will take any action pursuant to the
terms of the agreements referred to in clauses (i) and (ii) of the preceding
sentence that it is requested to take by IMS HEALTH; provided that IMS HEALTH
agrees to consult with the Corporation regarding the terms and conditions of any
settlement agreement relating to the IRI Action which would require the
Corporation to contribute to the amount of the settlement thereunder; and
provided further that if the Corporation reasonably asserts that such settlement
would cause financial hardship to the Corporation then the obligations of the
Corporation under this Agreement with respect to the payment of its portion of
such settlement shall be adjusted as follows:
(I) if the payment date for the settlement (the "Payment Date") occurs
prior to the second anniversary of the Distribution Date, then (A) the
Corporation shall pay 50% of the amount that it would otherwise be
obligated to pay hereunder in respect of such settlement on the Payment
Date, (B) IMS HEALTH shall pay the remaining 50% of such amount on behalf
of the Corporation on the Payment Date and (C) the Corporation shall
reimburse IMS HEALTH for the amount IMS HEALTH pays pursuant to clause (B)
(plus interest thereon at the prevailing three-month treasury rate) in two
equal installments to be paid on each of the first and second anniversaries
of the Payment Date; and
(II) if the Payment Date occurs on or after the second anniversary of
the Distribution Date but prior to the third anniversary of the
Distribution Date, then (A) the Corporation shall pay 66 2/3% of the amount
that it would otherwise be obligated to pay hereunder in respect of such
settlement on the Payment Date, (B) IMS HEALTH shall pay the remaining 33
1/3% of such amount on behalf of the Corporation on the Payment Date and
(C) the Corporation shall reimburse IMS HEALTH for the amount IMS HEALTH
pays pursuant to clause (B) (plus interest thereon at the prevailing
three-month treasury rate) on the first anniversary of the Payment Date.
Notwithstanding the foregoing, if the Payment Date occurs on or after the third
anniversary of the Distribution Date, then no adjustment shall be made to the
obligations of the Corporation under this Agreement with respect to the payment
of its portion of such settlement.
(q) Cognizant Restricted Stock. At the time of the Distribution, the
Corporation shall contribute to IMS HEALTH any IMS HEALTH Common Shares received
by the Corporation as a result of the forfeiture of restricted Cognizant Common
Stock by employees of the Corporation in connection with the Distribution.
<PAGE>
20
(r) New Assistance Agreement. As soon as reasonably practicable after the
Distribution Date, the Corporation and IMS HEALTH shall enter into an amendment
to the Assistance Agreement (the "1996 Assistance Agreement") among the State of
Connecticut, acting by the Department of Economic and Community Development, The
Dun & Bradstreet Corporation, ACNielsen Corporation and the Corporation dated
October 30, 1996 pursuant to which the Corporation will be released from its
obligations under the 1996 Assistance Agreement in consideration for (i) the
Corporation's agreement to maintain no less than 170 Full Time Positions (as
defined in the 1996 Assistance Agreement) and (ii) IMS HEALTH's agreement to
maintain no less than 17 Full Time Positions (as defined in the 1996 Assistance
Agreement), in each such case for the remainder of the term of the 1996
Assistance Agreement. The Corporation and IMS HEALTH shall cooperate with one
another in negotiating such amendment and shall use their respective reasonable
efforts to conclude such negotiations on or prior to July 15, 1998.
(s) Other Transactions. On or prior to the Distribution Date, each of the
Corporation and IMS HEALTH shall consummate those other transactions in
connection with the Distribution that are contemplated by the ruling request
submissions by the Corporation to the Internal Revenue Service in respect of the
ruling granted on May 21, 1998, and not specifically referred to in
subparagraphs (a)-(r) above. After the Distribution Date, each of the
Corporation and IMS HEALTH will exercise good faith commercially reasonable
efforts to consummate as promptly as practicable all other transactions which
must be consummated in order fully to complete the Distribution and any of the
transactions contemplated hereby or by any of the Ancillary Agreements.
SECTION II.2. Intercompany Accounts. The parties acknowledge that the
Corporation has transferred $417 million to IMS HEALTH to repay intercompany
indebtedness to certain members of the IMS HEALTH Group existing as of May 31,
1998. On the Distribution Date, the Corporation shall transfer the remaining
cash balances referred to in Section 2.3 below to IMS HEALTH as a contribution
of capital. If there is a net amount due and payable from either party to the
other for intercompany receivables, payables and loans with respect to the month
of June, 1998, the amount characterized as a capital contribution by the
Corporation to IMS HEALTH shall be adjusted by such net amount due and no cash
payment in respect thereof shall be made.
SECTION II.3. Cash Balances. In addition to any other obligations hereunder
or under any Ancillary Agreement or otherwise, on the Distribution Date, the
Corporation shall contribute to IMS HEALTH all cash in the Corporation's
accounts other than the estimated cash amounts set forth on Schedule 2.3.
Promptly after the Distribution Date, but no later than July 31, 1998, the
Corporation and IMS HEALTH shall determine the actual amounts for each item on
Schedule 2.3. Any net variance between such actual amounts and the estimated
amounts set forth on Schedule 2.3 shall be paid by the appropriate party to the
other party on or promptly after July 31, 1998 (including the closing market
price on June 30, 1998 of the APAC Teleservices, Inc. shares held pursuant to
the Escrow Agreement identified in Schedule 1.1(ax)(ii)). If additional
variances are discovered thereafter and prior to December 31, 1998, the
appropriate party shall pay the amount thereof promptly to the other party.
<PAGE>
21
SECTION II.4. Assumption and Satisfaction of Liabilities. Except as
otherwise specifically set forth in any Ancillary Agreement, and subject to
Section 2.3 hereof, from and after the Effective Time, (i) the Corporation
shall, and shall cause each member of the NMR Group to, assume, pay, perform and
discharge all NMR Liabilities and (ii) IMS HEALTH shall, and shall cause each
member of the IMS HEALTH Group to, assume, pay, perform and discharge all IMS
HEALTH Liabilities. To the extent reasonably requested to do so by another party
hereto, each party hereto agrees to sign such documents, in a form reasonably
satisfactory to such party, as may be reasonably necessary to evidence the
assumption of any Liabilities hereunder.
SECTION II.5. Resignations. (a) Subject to Section 2.5(b), the Corporation
and NMR shall cause all their employees to resign or be terminated, effective
not later than the Effective Time, from all positions as officers or directors
of any member of the IMS HEALTH Group in which they serve, and IMS HEALTH shall
cause all its employees to resign or be terminated, effective not later than the
Effective Time, from all positions as officers or directors of the Corporation
or any members of the NMR Group in which they serve.
(b) No person shall be required by any party hereto to resign from any
position or office with another party hereto if such person is disclosed in the
Information Statement as the person who is to hold such position or office
following the Distribution.
SECTION II.6. Further Assurances. In case at any time after the Effective
Time any further action is reasonably necessary or desirable to carry out the
purposes of this Agreement and the Ancillary Agreements, the proper officers of
each party to this Agreement shall take all such necessary action. Without
limiting the foregoing, the Corporation and IMS HEALTH shall use their
commercially reasonable efforts promptly to obtain all consents and approvals,
to enter into all amendatory agreements and to make all filings and applications
that may be required for the consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements, including, without limitation, all
applicable governmental and regulatory filings.
SECTION II.7. Limited Representations or Warranties. Each of the parties
hereto agrees that no party hereto is, in this Agreement or in any other
agreement or document contemplated by this Agreement or otherwise, making any
representation or warranty whatsoever, as to title or value of Assets being
transferred. It is also agreed that, notwithstanding anything to the contrary
otherwise expressly provided in the relevant Conveyancing and Assumption
Instrument, all Assets either transferred to or retained by the parties, as the
case may be, shall be "as is, where is" and that (subject to Section 2.6) the
party to which such Assets are to be transferred hereunder shall bear the
economic and legal risk that such party's or any of the Subsidiaries' title to
any such Assets shall be other than good and marketable and free from
encumbrances. Similarly, each party hereto agrees that, except as otherwise
expressly provided in the relevant Conveyancing and Assumption Instrument, no
party hereto is representing or warranting in any way that the obtaining of any
consents or approvals, the execution and delivery of any amendatory agreements
and the making of any filings or applications contemplated by this Agreement
will satisfy the provisions of any or all applicable agreements or the
requirements of any or all applicable laws or judgments, it being agreed that
the party to which any Assets are transferred shall bear the economic and legal
risk
<PAGE>
22
that any necessary consents or approvals are not obtained or that any
requirements of laws or judgments are not complied with.
SECTION II.8. Guarantees. (a) Except as otherwise specified in any
Ancillary Agreement, the Corporation and IMS HEALTH shall use their commercially
reasonable efforts to have, on or prior to the Distribution Date, or as soon as
practicable thereafter, the Corporation and any member of the NMR Group removed
as guarantor of or obligor for any IMS HEALTH Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.8(a) to the
extent that they relate to IMS HEALTH Liabilities.
(b) Except as otherwise specified in any Ancillary Agreement, the
Corporation and IMS HEALTH shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, any member of the IMS HEALTH Group removed as guarantor of or
obligor for any NMR Liability, including, without limitation, in respect of
those guarantees set forth on Schedule 2.8(b) to the extent that they relate to
NMR Liabilities.
(c) If the Corporation or IMS HEALTH is unable to obtain, or to cause to be
obtained, any such required removal as set forth in clauses (a) or (b) of this
Section 2.8, the applicable guarantor or obligor shall continue to be bound as
such and, unless not permitted by law or the terms thereof, the relevant
beneficiary shall or shall cause one of its Subsidiaries, as agent or
subcontractor for such guarantor or obligor to pay, perform and discharge fully
all the obligations or other liabilities of such guarantor or obligor thereunder
from and after the date hereof.
SECTION II.9. Witness Services. At all times from and after the
Distribution Date, each of the Corporation and IMS HEALTH shall use their
commercially reasonable efforts to make available to the other, upon reasonable
written request, its and its Subsidiaries' officers, directors, employees and
agents as witnesses to the extent that (i) such persons may reasonably be
required in connection with the prosecution or defense of any Action in which
the requesting party may from time to time be involved and (ii) there is no
conflict in the Action between the requesting party and the Corporation or IMS
HEALTH as applicable. A party providing witness services to the other party
under this Section shall be entitled to receive from the recipient of such
services, upon the presentation of invoices therefor, payments for such amounts,
relating to disbursements and other out-of-pocket expenses (which shall be
deemed to exclude the costs of salaries and benefits of employees who are
witnesses), as may be reasonably incurred in providing such witness services.
<PAGE>
23
SECTION II.10. Certain Post-Distribution Transactions. (a)(i) The
Corporation shall comply and shall cause its Subsidiaries to comply with and
otherwise not take action inconsistent with each representation and statement
made to the Internal Revenue Service in connection with the request by the
Corporation for a ruling letter in respect of the Distribution as to certain tax
aspects of the Distribution and (ii) until two years after the Distribution
Date, the Corporation will maintain its status as a company engaged in the
active conduct of a trade or business, as defined in Section 355(b) of the Code.
(b)(i) IMS HEALTH shall comply and shall cause its Subsidiaries to comply
with and otherwise not take action inconsistent with each representation and
statement made to the Internal Revenue Service in connection with the request by
the Corporation for a ruling letter in respect of the Distribution as to certain
tax aspects of the Distribution and (ii) until two years after the Distribution
Date, IMS HEALTH will maintain its status as a company engaged in the active
conduct of a trade or business, as defined in Section 355(b) of the Code.
(c) The Corporation agrees that until two years after the Distribution
Date, it will not (i) merge or consolidate with or into any other corporation,
(ii) liquidate or partially liquidate, (iii) sell or transfer all or
substantially all of its assets (within the meaning of Rev. Proc. 77-37, 1977 -
2 C.B. 568) in a single transaction or series of related transactions, (iv)
redeem or otherwise repurchase any Cognizant Common Stock (other than as
described in Section 4.05(1)(b) of Rev. Proc. 96-30, 1996-1 C.B. 696), or (v)
take any other action or actions which in the aggregate would have the effect of
causing or permitting one or more persons to acquire directly or indirectly
stock representing a 50 percent or greater interest (within the meaning of
Section 355(e) of the Code) in the Corporation, unless prior to taking such
action the Corporation has obtained (and provided to IMS HEALTH) a written
opinion of a law firm reasonably acceptable to IMS HEALTH, or a supplemental
ruling from the Internal Revenue Service, that such action or actions will not
result in (i) the Distribution failing to qualify under Section 355(a) of the
Code or (ii) the IMS HEALTH Common Shares failing to qualify as qualified
property for purposes of Section 355(c)(2) of the Code by reason of Section
355(e) of the Code.
(d) Notwithstanding anything to the contrary herein or in the Tax
Allocation Agreement, if the Corporation or IMS HEALTH (or any of their
respective Subsidiaries) fails to comply with any of its obligations under
Sections 2.10(a), 2.10(b) and 2.10(c) above or takes or fails to take any action
on or after the Distribution Date, and such failure to comply, action or
omission contributes to a determination that (i) the Distribution fails to
qualify under Section 355(a) of the Code or (ii) the IMS HEALTH Common Shares
fail to qualify as qualified property for purposes of Section 355(c)(2) of the
Code by reason of Section 355(e) of the Code, then such party shall indemnify
and hold harmless the other party and each member of the consolidated group of
which the other party is a member from and against any and all federal, state
and local taxes, including any interest, penalties or additions to tax, imposed
upon or incurred by such other party, any member of its group or any stockholder
of either party as a result of the failure of the Distribution to qualify under
Section 355(a) of the Code or the application of Section 355(e). The obligation
of the Corporation to indemnify IMS HEALTH pursuant to the preceding sentence
shall not be affected by the delivery of any legal opinion or supplemental
ruling under Section 2.10(c).
<PAGE>
24
SECTION II.11. Transfers Not Effected Prior to the Distribution; Transfers
Deemed Effective as of the Distribution Date. To the extent that any transfers
contemplated by this Article II shall not have been consummated on or prior to
the Distribution Date, the parties shall cooperate to effect such transfers as
promptly following the Distribution Date as shall be practicable. Nothing herein
shall be deemed to require the transfer of any Assets or the assumption of any
Liabilities which by their terms or operation of law cannot be transferred;
provided, however, that the parties hereto and their respective Subsidiaries
shall cooperate to seek to obtain any necessary consents or approvals for the
transfer of all Assets and Liabilities contemplated to be transferred pursuant
to this Article II. In the event that any such transfer of Assets or Liabilities
has not been consummated, from and after the Distribution Date the party
retaining such Asset or Liability shall hold such Asset in trust for the use and
benefit of the party entitled thereto (at the expense of the party entitled
thereto) or retain such Liability for the account of the party by whom such
Liability is to be assumed pursuant hereto, as the case may be, and take such
other action as may be reasonably requested by the party to whom such Asset is
to be transferred, or by whom such Liability is to be assumed, as the case may
be, in order to place such party, insofar as is reasonably possible, in the same
position as would have existed had such Asset or Liability been transferred as
contemplated hereby. As and when any such Asset or Liability becomes
transferable, such transfer shall be effected forthwith. The parties agree that,
as of the Distribution Date, each party hereto shall be deemed to have acquired
complete and sole beneficial ownership over all of the Assets, together with all
rights, powers and privileges incident thereto, and shall be deemed to have
assumed in accordance with the terms of this Agreement all of the Liabilities,
and all duties, obligations and responsibilities incident thereto, which such
party is entitled to acquire or required to assume pursuant to the terms of this
Agreement.
SECTION II.12. Conveyancing and Assumption Instruments. In connection with
the transfers of Assets and the assumptions of Liabilities contemplated by this
Agreement, the parties shall execute or cause to be executed by the appropriate
entities the Conveyancing and Assumption Instruments in substantially the form
contemplated hereby for transfers to be effected pursuant to New York law or the
laws of one of the other states of the United States or, if not appropriate for
a given transfer, and for transfers to be effected pursuant to non-U.S. laws, in
such other form as the parties shall reasonably agree, including the transfer of
real property with deeds as may be appropriate. The transfer of capital stock
shall be effected by means of delivery of stock certificates and executed stock
powers and notation on the stock record books of the corporation or other legal
entities involved, or by such other means as may be required in any non-U.S.
jurisdiction to transfer title to stock and, to the extent required by
applicable law, by notation on public registries.
SECTION II.13. Ancillary Agreements. On or prior to the Distribution Date,
each of the Corporation and IMS HEALTH shall enter into, and/or (where
applicable) shall cause members of the NMR Group or the IMS HEALTH Group, as
applicable, to enter into, the Ancillary Agreements and any other agreements in
respect of the Distribution reasonably necessary or appropriate in connection
with the transactions contemplated hereby and thereby.
<PAGE>
25
SECTION II.14. Corporate Names. (a) Except as otherwise specifically
provided in any Ancillary Agreement:
(i) on or prior to the Distribution Date, the Corporation shall change
its name to remove any reference to "Cognizant" therein;
(ii) as soon as reasonably practicable after the Distribution Date but
in any event within six months thereafter, the Corporation will, at its own
expense, remove (or, if necessary, on an interim basis, cover up) any and
all exterior signs and other identifiers located on any of its property or
premises or on the property or premises used by it or its Subsidiaries
(except property or premises to be shared with IMS HEALTH or its
Subsidiaries after the Distribution) which refer or pertain to Cognizant or
which include the Cognizant name, logo or other trademark or other
intellectual property utilizing Cognizant;
(iii) as soon as reasonably practicable after the Distribution Date
but in any event within six months thereafter, the Corporation will, and
will cause its Subsidiaries to, remove from all letterhead, envelopes,
invoices and other communications media of any kind, all references to
Cognizant, including the "Cognizant" name, logo and any other trademark or
other intellectual property utilizing Cognizant (except that the
Corporation shall not be required to take any such action with respect to
materials in the possession of customers), and neither the Corporation nor
its Subsidiaries shall use or display the "Cognizant" name, logo or other
trademarks or intellectual property utilizing Cognizant without the prior
written consent of any assignee of the Corporation's rights to the
"Cognizant" name, logo or other trademarks or intellectual property
utilizing Cognizant;
(iv) as soon as reasonably practicable after the Distribution Date,
but in any event within six months thereafter, the Corporation will cause
its Subsidiaries to change their corporate names to the extent necessary to
remove and eliminate any reference to Cognizant, including the "Cognizant"
name; provided, however, that notwithstanding the foregoing requirements of
this Section 2.14(a), if the Corporation has exercised good faith efforts
to comply with this clause (iv) but is unable, due to regulatory or other
circumstance beyond its control, to effect a corporate name change in
compliance with applicable law, then the Corporation or its Subsidiary will
not be deemed to be in breach hereof if it continues to exercise good faith
efforts to effectuate such name change and does effectuate such name change
within nine months after the Distribution Date, and, in such circumstances,
such party may continue to include in exterior signs and other identifiers
and in letterhead, envelopes, invoices and other communications references
to the name which includes references to Cognizant, but only to the extent
necessary to identify such party and only until such party's corporate name
can be changed to remove and eliminate such references; and
(v) notwithstanding the foregoing clauses (i) through (iv), nothing
herein or in any Ancillary Agreement shall require the Corporation to take
any action to remove any reference to Cognizant, including the "Cognizant"
name, from any stock certificate relating to shares of Cognizant Common
Stock outstanding on or prior to the Effective Time;
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26
provided that from and after the Effective Time, any newly issued stock
certificates representing Cognizant Common Stock (which at the Effective
Time will become NMR Common Stock) shall not have any reference to
Cognizant, including the "Cognizant" name.
(b) Except as otherwise specifically provided in any Ancillary Agreement:
(i) as soon as reasonably practicable after the Distribution Date but
in any event within six months thereafter, IMS HEALTH will, at its own
expense, remove (or, if necessary, on an interim basis, cover up) any and
all exterior signs and other identifiers located on any of their respective
property or premises owned or used by them or their respective Subsidiaries
(except property or premises to be shared with the Corporation or its
Subsidiaries after the Distribution) which refer or pertain to NMR or which
include the "Nielsen Media Research" or "Nielsen" name, logo or other
trademark or other NMR intellectual property;
(ii) as soon as reasonably practicable after the Distribution Date but
in any event within six months thereafter, IMS HEALTH will, and will cause
its respective Subsidiaries to, remove from all letterhead, envelopes,
invoices and other communications media of any kind, all references to NMR,
including the "Nielsen Media Research" or "Nielsen" name, logo and any
other trademark or other NMR intellectual property (except that IMS HEALTH
shall not be required to take any such action with respect to materials in
the possession of customers), and neither IMS HEALTH nor any of its
Subsidiaries shall use or display the "Nielsen Media Research" or "Nielsen"
name, logo or other trademarks or NMR intellectual property without the
prior written consent of the Corporation; and
(iii) as soon as reasonably practicable after the Distribution Date
but in any event within six months thereafter, IMS HEALTH will, and will
cause its Subsidiaries to, change their corporate names to the extent
necessary to remove and eliminate any reference to NMR, including the
"Nielsen Media Research" or "Nielsen" name; provided, however, that
notwithstanding the foregoing requirements of this Section 2.14(b), if IMS
HEALTH has exercised good faith efforts to comply with this clause (iii)
but is unable, due to regulatory or other circumstance beyond its control,
to effect a corporate name change in compliance with applicable law, then
IMS HEALTH or its Subsidiary will not be deemed to be in breach hereof if
it continues to exercise good faith efforts to effectuate such name change
and does effectuate such name change within nine months after the
Distribution Date, and, in such circumstances, such party may continue to
include in exterior signs and other identifiers and in letterhead,
envelopes, invoices and other communications references to the name which
includes references to NMR but only to the extent necessary to identify
such party and only until such party's corporate name can be changed to
remove and eliminate such references.
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27
ARTICLE III. INDEMNIFICATION
SECTION III.1. Indemnification by the Corporation. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, the Corporation shall indemnify, defend and hold harmless the IMS
HEALTH Indemnitees from and against any and all Indemnifiable Losses of the IMS
HEALTH Indemnitees arising out of, by reason of or otherwise in connection with
the NMR Liabilities or alleged NMR Liabilities, including any breach by the
Corporation of any provision of this Agreement or any Ancillary Agreement.
SECTION III.2. Indemnification by IMS HEALTH. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, IMS HEALTH shall indemnify, defend and hold harmless the NMR
Indemnitees from and against any and all Indemnifiable Losses of the NMR
Indemnitees arising out of, by reason of or otherwise in connection with the IMS
HEALTH Liabilities or alleged IMS HEALTH Liabilities, including any breach by
IMS HEALTH of any provision of this Agreement or any Ancillary Agreement.
SECTION III.3. Procedures for Indemnification.
(a) Third Party Claims. If a claim or demand is made against an NMR
Indemnitee or a IMS HEALTH Indemnitee (each, an "Indemnitee") by any person who
is not a party to this Agreement (a "Third Party Claim") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the party which is or may be required pursuant to
Section 3.1 or Section 3.2 hereof to make such indemnification (the
"Indemnifying Party") in writing, and in reasonable detail, of the Third Party
Claim promptly (and in any event within 15 business days) after receipt by such
Indemnitee of written notice of the Third Party Claim; provided, however, that
failure to give such notification shall not affect the indemnification provided
hereunder except to the extent the Indemnifying Party shall have been actually
prejudiced as a result of such failure (except that the Indemnifying Party shall
not be liable for any expenses incurred during the period in which the
Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver
to the Indemnifying Party, promptly (and in any event within five business days)
after the Indemnitee's receipt thereof, copies of all notices and documents
(including court papers) received by the Indemnitee relating to the Third Party
Claim.
If a Third Party Claim is made against an Indemnitee, the Indemnifying
Party shall be entitled to participate in the defense thereof and, if it so
chooses and acknowledges in writing its obligation to indemnify the Indemnitee
therefor, to assume the defense thereof with counsel selected by the
Indemnifying Party; provided that such counsel is not reasonably objected to by
the Indemnitee. Should the Indemnifying Party so elect to assume the defense of
a Third Party Claim, the Indemnifying Party shall, within 30 days (or sooner if
the nature of the Third Party Claim so requires), notify the Indemnitee of its
intent to do so, and the Indemnifying Party shall thereafter not be liable to
the Indemnitee for legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense thereof; provided, that such
Indemnitee shall have the right to employ counsel to represent such Indemnitee
if, in such Indemnitee's reasonable judgment, a conflict of interest between
such Indemnitee and such Indemnifying Party exists in respect of such claim
which
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28
would make representation of both such parties by one counsel inappropriate, and
in such event the fees and expenses of such separate counsel shall be paid by
such Indemnifying Party. If the Indemnifying Party assumes such defense, the
Indemnitee shall have the right to participate in the defense thereof and to
employ counsel, subject to the proviso of the preceding sentence, at its own
expense, separate from the counsel employed by the Indemnifying Party, it being
understood that the Indemnifying Party shall control such defense. The
Indemnifying Party shall be liable for the fees and expenses of counsel employed
by the Indemnitee for any period during which the Indemnifying Party has failed
to assume the defense thereof (other than during the period prior to the time
the Indemnitee shall have given notice of the Third Party Claim as provided
above). If the Indemnifying Party so elects to assume the defense of any Third
Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party
in the defense or prosecution thereof, including by providing or causing to be
provided, Records and witnesses as soon as reasonably practicable after
receiving any request therefor from or on behalf of the Indemnifying Party.
If the Indemnifying Party acknowledges in writing responsibility for a
Third Party Claim, then in no event will the Indemnitee admit any liability with
respect to, or settle, compromise or discharge, any Third Party Claim without
the Indemnifying Party's prior written consent; provided, however, that the
Indemnitee shall have the right to settle, compromise or discharge such Third
Party Claim without the consent of the Indemnifying Party if the Indemnitee
releases the Indemnifying Party from its indemnification obligation hereunder
with respect to such Third Party Claim and such settlement, compromise or
discharge would not otherwise adversely affect the Indemnifying Party. If the
Indemnifying Party acknowledges in writing liability for a Third Party Claim,
the Indemnitee will agree to any settlement, compromise or discharge of a Third
Party Claim that the Indemnifying Party may recommend and that by its terms
obligates the Indemnifying Party to pay the full amount of the liability in
connection with such Third Party Claim and releases the Indemnitee completely in
connection with such Third Party Claim and that would not otherwise adversely
affect the Indemnitee; provided, however, that the Indemnitee may refuse to
agree to any such settlement, compromise or discharge if the Indemnitee agrees
that the Indemnifying Party's indemnification obligation with respect to such
Third Party Claim shall not exceed the amount that would be required to be paid
by or on behalf of the Indemnifying Party in connection with such settlement,
compromise or discharge. If an Indemnifying Party elects not to assume the
defense of a Third Party Claim, or fails to notify an Indemnitee of its election
to do so as provided herein, such Indemnitee may compromise, settle or defend
such Third Party Claim.
Notwithstanding the foregoing, the Indemnifying Party shall not be entitled
to assume the defense of any Third Party Claim (and shall be liable for the fees
and expenses of counsel incurred by the Indemnitee in defending such Third Party
Claim) if the Third Party Claim seeks an order, injunction or other equitable
relief or relief for other than money damages against the Indemnitee which the
Indemnitee reasonably determines, after conferring with its counsel, cannot be
separated from any related claim for money damages. If such equitable relief or
other relief portion of the Third Party Claim can be so separated from that for
money damages, the Indemnifying Party shall be entitled to assume the defense of
the portion relating to money damages.
<PAGE>
29
(b) In the event of payment by an Indemnifying Party to any Indemnitee in
connection with any Third-Party Claim, such Indemnifying Party shall be
subrogated to and shall stand in the place of such Indemnitee as to any events
or circumstances in respect of which such Indemnitee may have any right or claim
relating to such Third-Party Claim against any claimant or plaintiff asserting
such Third-Party Claim. Such Indemnitee shall cooperate with such Indemnifying
Party in a reasonable manner, and at the cost and expense of such Indemnifying
Party, in prosecuting any subrogated right or claim.
(c) The remedies provided in this Article III shall be cumulative and shall
not preclude assertion by any Indemnitee of any other rights or the seeking of
any and all other remedies against any Indemnifying Party.
SECTION III.4. Indemnification Payments. Indemnification required by this
Article III shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or loss,
liability, claim, damage or expense is incurred.
ARTICLE IV. ACCESS TO INFORMATION
SECTION IV.1. Provision of Corporate Records.
(a) Other than in circumstances in which indemnification is sought pursuant
to Article III (in which event the provisions of such Article will govern),
after the Distribution Date, upon the prior written request by IMS HEALTH for
specific and identified agreements, documents, books, records or files
(collectively, "Records") which relate to (x) IMS HEALTH or the conduct of the
IMS HEALTH Business up to the Effective Time, or (y) any Ancillary Agreement to
which the Corporation and IMS HEALTH are parties, as applicable, the Corporation
shall arrange, as soon as reasonably practicable following the receipt of such
request, for the provision of appropriate copies of such Records (or the
originals thereof if IMS HEALTH has a reasonable need for such originals) in the
possession or control of the Corporation or any of its Subsidiaries, but only to
the extent such items are not already in the possession or control of IMS
HEALTH.
(b) Other than in circumstances in which indemnification is sought pursuant
to Article III (in which event the provisions of such Article will govern),
after the Distribution Date, upon the prior written request by the Corporation
for specific and identified Records which relate to (x) the Corporation, NMR or
the conduct of the NMR Business up to the Effective Time, or (y) any Ancillary
Agreement to which IMS HEALTH and the Corporation are parties, as applicable,
IMS HEALTH shall arrange, as soon as reasonably practicable following the
receipt of such request, for the provision of appropriate copies of such Records
(or the originals thereof if the Corporation has a reasonable need for such
originals) in the possession or control of IMS HEALTH or any of its
Subsidiaries, but only to the extent such items are not already in the
possession or control of the Corporation.
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30
SECTION IV.2. Access to Information. Other than in circumstances in which
indemnification is sought pursuant to Article III (in which event the provisions
of such Article will govern), from and after the Distribution Date, each of the
Corporation and IMS HEALTH shall afford to the other and its authorized
accountants, counsel and other designated representatives reasonable access
during normal business hours, subject to appropriate restrictions for
classified, privileged or confidential information, to the personnel,
properties, books and records of such party and its Subsidiaries insofar as such
access is reasonably required by the other party and relates to (x) such other
party or the conduct of its business prior to the Effective Time or (y) any
Ancillary Agreement to which each of the party requesting such access and the
party requested to grant such access are parties.
SECTION IV.3. Reimbursement; Other Matters. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing Records or access to
information to the other party under this Article IV shall be entitled to
receive from the recipient, upon the presentation of invoices therefor, payments
for such amounts, relating to supplies, disbursements and other out-of-pocket
expenses, as may be reasonably incurred in providing such Records or access to
information.
SECTION IV.4. Confidentiality. Each of (i) the Corporation and its
Subsidiaries and (ii) IMS HEALTH and its Subsidiaries shall not use or permit
the use of (without the prior written consent of the other) and shall keep, and
shall cause its consultants and advisors to keep, confidential all information
concerning the other parties in its possession, its custody or under its control
(except to the extent that (A) such information has been in the public domain
through no fault of such party or (B) such information has been later lawfully
acquired from other sources by such party or (C) this Agreement or any other
Ancillary Agreement or any other agreement entered into pursuant hereto permits
the use or disclosure of such information) to the extent such information (w)
relates to or was acquired during the period up to the Effective Time, (x)
relates to any Ancillary Agreement, (y) is obtained in the course of performing
services for the other party pursuant to any Ancillary Agreement, or (z) is
based upon or is derived from information described in the preceding clauses
(w), (x) or (y), and each party shall not (without the prior written consent of
the other) otherwise release or disclose such information to any other person,
except such party's auditors and attorneys, unless compelled to disclose such
information by judicial or administrative process or unless such disclosure is
required by law and such party has used commercially reasonable efforts to
consult with the other affected party or parties prior to such disclosure.
SECTION IV.5. Privileged Matters. The parties hereto recognize that legal
and other professional services that have been and will be provided on or prior
to the Distribution Date have been and will be rendered for the benefit of each
of the Corporation, the members of the NMR Group and the members of the IMS
HEALTH Group, and that each of the Corporation, the members of the NMR Group and
the members of the IMS HEALTH Group should be deemed to be the client for the
purposes of asserting all privileges which may be asserted under applicable law.
To allocate the interests of each party in the information as to which any party
is entitled to assert a privilege, the parties agree as follows:
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31
(a) The Corporation shall be entitled, in perpetuity, to control the
assertion or waiver of all privileges in connection with privileged information
which relates solely to the NMR Business, whether or not the privileged
information is in the possession of or under the control of the Corporation or
IMS HEALTH. The Corporation shall also be entitled, in perpetuity, to control
the assertion or waiver of all privileges in connection with privileged
information that relates solely to the subject matter of any claims constituting
NMR Liabilities, now pending or which may be asserted in the future, in any
lawsuits or other proceedings initiated against or by the Corporation, whether
or not the privileged information is in the possession of or under the control
of the Corporation or IMS HEALTH.
(b) IMS HEALTH shall be entitled, in perpetuity, to control the assertion
or waiver of all privileges in connection with privileged information which
relates solely to the IMS HEALTH Business, whether or not the privileged
information is in the possession of or under the control of the Corporation or
IMS HEALTH. IMS HEALTH shall also be entitled, in perpetuity, to control the
assertion or waiver of all privileges in connection with privileged information
which relates solely to the subject matter of any claims constituting IMS HEALTH
Liabilities, now pending or which may be asserted in the future, in any lawsuits
or other proceedings initiated against or by IMS HEALTH whether or not the
privileged information is in the possession of or under the control of the
Corporation or IMS HEALTH.
(c) The parties hereto agree that they shall have a shared privilege, with
equal right to assert or waive, subject to the restrictions in this Section 4.5,
with respect to all privileges not allocated pursuant to the terms of Sections
4.5(a) and (b). All privileges relating to any claims, proceedings, litigation,
disputes, or other matters which involve both the Corporation and IMS HEALTH in
respect of which both parties retain any responsibility or liability under this
Agreement, shall be subject to a shared privilege among them.
(d) No party hereto may waive any privilege which could be asserted under
any applicable law, and in which the other party hereto has a shared privilege,
without the consent of the other party, except to the extent reasonably required
in connection with any litigation with third-parties or as provided in
subsection (e) below. Consent shall be in writing, or shall be deemed to be
granted unless written objection is made within twenty (20) days after notice
upon the other party requesting such consent.
(e) In the event of any litigation or dispute between or among any of the
parties hereto, any party and a Subsidiary of another party hereto, or a
Subsidiary of one party hereto and a Subsidiary of another party hereto, either
such party may waive a privilege in which the other party has a shared
privilege, without obtaining the consent of the other party, provided that such
waiver of a shared privilege shall be effective only as to the use of
information with respect to the litigation or dispute between the parties and/or
their Subsidiaries, and shall not operate as a waiver of the shared privilege
with respect to third parties.
(f) If a dispute arises between or among the parties hereto or their
respective Subsidiaries regarding whether a privilege should be waived to
protect or advance the interest of any
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32
party, each party agrees that it shall negotiate in good faith, shall endeavor
to minimize any prejudice to the rights of the other parties, and shall not
unreasonably withhold consent to any request for waiver by another party. Each
party hereto specifically agrees that it will not withhold consent to waiver for
any purpose except to protect its own legitimate interests.
(g) Upon receipt by any party hereto or by any Subsidiary thereof of any
subpoena, discovery or other request which arguably calls for the production or
disclosure of information subject to a shared privilege or as to which another
party has the sole right hereunder to assert a privilege, or if any party
obtains knowledge that any of its or any of its Subsidiaries' current or former
directors, officers, agents or employees have received any subpoena, discovery
or other requests which arguably calls for the production or disclosure of such
privileged information, such party shall promptly notify the other party or
parties of the existence of the request and shall provide the other party or
parties a reasonable opportunity to review the information and to assert any
rights it or they may have under this Section 4.5 or otherwise to prevent the
production or disclosure of such privileged information.
(h) The transfer of all Records and other information pursuant to this
Agreement is made in reliance on the agreement of the Corporation and IMS
HEALTH, as set forth in Sections 4.4 and 4.5, to maintain the confidentiality of
privileged information and to assert and maintain all applicable privileges. The
access to information being granted pursuant to Sections 4.1 and 4.2 hereof, the
agreement to provide witnesses and individuals pursuant to Sections 2.9 and 3.3
hereof, the furnishing of notices and documents and other cooperative efforts
contemplated by Section 3.3 hereof, and the transfer of privileged information
between and among the parties and their respective Subsidiaries pursuant to this
Agreement shall not be deemed a waiver of any privilege that has been or may be
asserted under this Agreement or otherwise.
SECTION IV.6. Ownership of Information. Any information owned by one party
or any of its Subsidiaries that is provided to a requesting party pursuant to
Article III or this Article IV shall be deemed to remain the property of the
providing party. Unless specifically set forth herein, nothing contained in this
Agreement shall be construed as granting or conferring rights of license or
otherwise in any such information.
SECTION IV.7. Limitation of Liability. (a) No party shall have any
liability to any other party in the event that any information exchanged or
provided pursuant to this Agreement which is an estimate or forecast, or which
is based on an estimate or forecast, is found to be inaccurate.
(b) Other than in connection with Section 2.2, no party or any Subsidiary
thereof shall have any liability or claim against any other party or any
Subsidiary of any other party based upon, arising out of or resulting from any
agreement, arrangement, course of dealing or understanding existing on or prior
to the Distribution Date (other than this Agreement or any Ancillary Agreement
or any agreement entered into in connection herewith or in order to consummate
the transactions contemplated hereby or thereby), unless such agreement,
arrangement, course of dealing or understanding is listed on Schedule 4.7(b)
hereto, and any such liability or
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33
claim, whether or not in writing, which is not reflected on such Schedule, is
hereby irrevocably cancelled, released and waived.
SECTION IV.8. Other Agreements Providing for Exchange of Information. The
rights and obligations granted under this Article IV are subject to any specific
limitations, qualifications or additional provisions on the sharing, exchange or
confidential treatment of information set forth in any Ancillary Agreement.
ARTICLE V. ADMINISTRATIVE SERVICES
SECTION V.1. Performance of Services. Beginning on the Distribution Date,
each party will provide, or cause one or more of its Subsidiaries to provide, to
the other party and its Subsidiaries such services on such terms as may be set
forth in the Shared Transaction Services Agreement. Except as otherwise set
forth in such agreement or any Schedule thereto, the party that is to provide
the services (the "Provider") will use (and will cause its Subsidiaries to use)
commercially reasonable efforts to provide such services to the other party (the
"Recipient") and its Subsidiaries in a satisfactory and timely manner and as
further specified in such agreement.
SECTION V.2. Independence. Unless otherwise agreed in writing, all
employees and representatives of the Provider providing the scheduled services
to the Recipient will be deemed for purposes of all compensation and employee
benefits matters to be employees or representatives of the Provider and not
employees or representatives of the Recipient. In performing such services, such
employees and representatives will be under the direction, control and
supervision of the Provider (and not the Recipient) and the Provider will have
the sole right to exercise all authority with respect to the employment
(including, without limitation, termination of employment), assignment and
compensation of such employees and representatives.
SECTION V.3. Non-exclusivity. Nothing in this Agreement precludes any party
from obtaining, in whole or in part, services of any nature that may be
obtainable from the other party from its own employees or from providers other
than the other party.
ARTICLE VI. DISPUTE RESOLUTION
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SECTION VI.1. Negotiation. In the event of a controversy, dispute or claim
arising out of, in connection with, or in relation to the interpretation,
performance, nonperformance, validity or breach of this Agreement or otherwise
arising out of, or in any way related to this Agreement or the transactions
contemplated hereby, including, without limitation, any claim based on contract,
tort, statute or constitution (but excluding any controversy, dispute or claim
arising out of any agreement relating to the use or lease of real property if
any third party is a party to such controversy, dispute or claim) (collectively,
"Agreement Disputes"), the general counsels of the parties shall negotiate in
good faith for a reasonable period of time to settle such Agreement Dispute,
provided such reasonable period shall not, unless otherwise agreed by the
parties in writing, exceed 30 days from the time the parties began such
negotiations; provided further that in the event of any arbitration in
accordance with Section 6.2 hereof, the parties shall not assert the defenses of
statute of limitations and laches arising for the period beginning after the
date the parties began negotiations hereunder, and any contractual time period
or deadline under this Agreement or any Ancillary Agreement to which such
Agreement Dispute relates shall not be deemed to have passed until such
Agreement Dispute has been resolved.
SECTION VI.2. Arbitration. If after such reasonable period such general
counsels are unable to settle such Agreement Dispute (and in any event, unless
otherwise agreed in writing by the parties, after 60 days have elapsed from the
time the parties began such negotiations), such Agreement Dispute shall be
determined, at the request of any party, by arbitration conducted in New York
City, before and in accordance with the then-existing International Arbitration
Rules of the American Arbitration Association (the "Rules"). In any dispute
between the parties hereto, the number of arbitrators shall be one. Any judgment
or award rendered by the arbitrator shall be final, binding and nonappealable
(except upon grounds specified in 9 U.S.C. '10(a) as in effect on the date
hereof). If the parties are unable to agree on the arbitrator, the arbitrator
shall be selected in accordance with the Rules; provided that the arbitrator
shall be a U.S. national. Any controversy concerning whether an Agreement
Dispute is an arbitrable Agreement Dispute, whether arbitration has been waived,
whether an assignee of this Agreement is bound to arbitrate, or as to the
interpretation of enforceability of this Article VI shall be determined by the
arbitrator. In resolving any dispute, the parties intend that the arbitrator
apply the substantive laws of the State of New York, without regard to the
choice of law principles thereof. The parties intend that the provisions to
arbitrate set forth herein be valid, enforceable and irrevocable. The parties
agree to comply with any award made in any such arbitration proceeding that has
become final in accordance with the Rules and agree to enforcement of or entry
of judgment upon such award, by any court of competent jurisdiction, including
(a) the Supreme Court of the State of New York, New York County, or (b) the
United States District Court for the Southern District of New York, in
accordance with Section 8.17 hereof. The arbitrator shall be entitled, if
appropriate, to award any remedy in such proceedings, including, without
limitation, monetary damages, specific performance and all other forms of legal
and equitable relief; provided, however, the arbitrator shall not be entitled to
award punitive damages. Without limiting the provisions of the Rules, unless
otherwise agreed in writing by or among the parties or permitted by this
Agreement, the parties shall keep confidential all matters relating to the
arbitration or the award, provided such matters may be disclosed (i) to the
extent reasonably necessary in any proceeding brought to enforce the award or
for entry of a judgment upon the award and (ii) to the extent otherwise required
by law. Notwithstanding Article
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35
32 of the Rules, the party other than the prevailing party in the arbitration
shall be responsible for all of the costs of the arbitration, including legal
fees and other costs specified by such Article 32. Nothing contained herein is
intended to or shall be construed to prevent any party, in accordance with
Article 22(3) of the Rules or otherwise, from applying to any court of competent
jurisdiction for interim measures or other provisional relief in connection with
the subject matter of any Agreement Disputes.
SECTION VI.3. Continuity of Service and Performance. Unless otherwise
agreed in writing, the parties will continue to provide service and honor all
other commitments under this Agreement and each Ancillary Agreement during the
course of dispute resolution pursuant to the provisions of this Article VI with
respect to all matters not subject to such dispute, controversy or claim.
ARTICLE VII. INSURANCE
SECTION VII.1. Policies and Rights Included Within Assets; Assignment of
Policies. (a) Policy Rights. The IMS HEALTH Assets shall include (i) any and all
rights of an insured party under each of the Shared Policies, subject to the
terms of such Shared Policies and any limitations or obligations of IMS HEALTH
contemplated by this Article VII, specifically including rights of indemnity and
the right to be defended by or at the expense of the insurer, with respect to
all claims, suits, actions, proceedings, injuries, losses, liabilities, damages
and expenses incurred or claimed to have been incurred on or prior to the
Distribution Date by any party in or in connection with the conduct of the IMS
HEALTH Business or, to the extent any claim is made against IMS HEALTH or any of
its Subsidiaries, the conduct of the NMR Business, and which claims, suits,
actions, proceedings, injuries, losses, liabilities, damages and expenses may
arise out of an insured or insurable occurrence under one or more of such Shared
Policies.
(b) Assignment of Shared Policies. Subject to the terms and conditions
hereof, the Corporation hereby assigns, transfers and conveys to IMS HEALTH all
of the Corporation's right, title and interest in and to any and all of the
Shared Policies, including, without limitation, the right of indemnity, the
right to be defended by or at the expense of the insurer and the right to any
applicable Insurance Proceeds thereunder; and the Corporation and IMS HEALTH
shall use their commercially reasonable efforts to obtain any required consents
of insurers to the assignment contemplated by this paragraph.
SECTION VII.2. Post-Distribution Date Claims. If, subsequent to the
Distribution Date, any person shall assert a claim against IMS HEALTH or any of
its Subsidiaries (including, without limitation, where IMS HEALTH or its
Subsidiaries are joint defendants with other persons) with respect to any claim,
suit, action, proceeding, injury, loss, liability, damage or expense incurred or
claimed to have been incurred on or prior to the Distribution Date in or in
connection with the conduct of the IMS HEALTH Business or, to the extent any
claim is made against IMS HEALTH or any of its Subsidiaries (including, without
limitation, where IMS HEALTH or its Subsidiaries are joint defendants with other
persons), in connection with the conduct of the NMR Business, and
<PAGE>
36
which claim, suit, action, proceeding, injury, loss, liability, damage or
expense may arise out of an insured or insurable occurrence under one or more of
the Shared Policies, the Corporation shall, at the time such claim is asserted,
to the extent any such Policy may require that Insurance Proceeds thereunder be
collected directly by the named insured or anyone other than the party against
whom the Insured Claim is asserted, be deemed to designate, without need of
further documentation, IMS HEALTH as the agent and attorney-in-fact to assert
and to collect any related Insurance Proceeds under such Shared Policy.
SECTION VII.3. Administration; Other Matters. (a) Administration. After the
Distribution Date, IMS HEALTH shall be responsible for (i) Insurance
Administration of the Shared Policies and (ii) Claims Administration under such
Shared Policies with respect to NMR Liabilities and IMS HEALTH Liabilities;
provided that the assumption of such responsibilities by IMS HEALTH is in no way
intended to limit, inhibit or preclude any right to insurance coverage for any
Insured Claim of a named insured under such Policies as contemplated by the
terms of this Agreement; provided further that IMS HEALTH's assumption of the
administrative responsibilities for the Shared Policies shall not relieve the
party submitting any Insured Claim of the primary responsibility for reporting
such Insured Claim accurately, completely and in a timely manner or of such
party's authority to settle any such Insured Claim within any period permitted
or required by the relevant Policy; and provided further that all direct or
indirect communication with insurers relating to the Shared Policies shall be
conducted by IMS HEALTH. IMS HEALTH may discharge its administrative
responsibilities under this Section 7.3 by contracting for the provision of
services by independent parties. Each of the parties hereto shall administer and
pay any costs relating to defending its respective Insured Claims under Shared
Policies to the extent such defense costs are not covered under such Policies
and shall be responsible for obtaining or reviewing the appropriateness of
releases upon settlement of its respective Insured Claims under Shared Policies.
The disbursements, out-of-pocket expenses and direct and indirect costs of
employees or agents of IMS HEALTH relating to Claims Administration and
Insurance Administration contemplated by this Section 7.3(a) shall be treated in
accordance with the terms of the Transition Services Agreement, if still in
effect with respect to insurance and risk management, or, if the Transition
Services Agreement shall no longer be in effect with respect to insurance and
risk management, then each of the Corporation and IMS HEALTH shall be
responsible for its own Claims Administration and Insurance Administration.
(b) Exceeding Policy Limits. The Corporation and IMS HEALTH shall not be
liable to one another for claims not reimbursed by insurers for any reason not
within the control of the Corporation or IMS HEALTH, as the case may be,
including, without limitation, coinsurance provisions, deductibles, quota share
deductibles, self-insured retentions, bankruptcy or insolvency of an insurance
carrier, Shared Policy limitations or restrictions, any coverage disputes, any
failure to timely claim by the Corporation or IMS HEALTH or any defect in such
claim or its processing.
(c) Allocation of Insurance Proceeds. Insurance Proceeds received with
respect to claims, costs and expenses under the Shared Policies shall be paid to
IMS HEALTH, which shall thereafter administer the Shared Policies by paying the
Insurance Proceeds, as appropriate, to the Corporation with respect to NMR
Liabilities and to IMS HEALTH with respect to IMS HEALTH
<PAGE>
37
Liabilities. Payment of the allocable portions of indemnity costs of Insurance
Proceeds resulting from such Policies will be made by IMS HEALTH to the
appropriate party upon receipt from the insurance carrier. In the event that the
aggregate limits on any Shared Policies are exceeded by the aggregate of
outstanding Insured Claims by both of the parties hereto, the parties agree to
allocate the Insurance Proceeds received thereunder based upon their respective
percentage of the total of their bona fide claims which were covered under such
Shared Policy (their "allocable portion of Insurance Proceeds"), and any party
who has received Insurance Proceeds in excess of such party's allocable portion
of Insurance Proceeds shall pay to the other party the appropriate amount so
that each party will have received its allocable portion of Insurance Proceeds
pursuant hereto. Each of the parties agrees to use commercially reasonable
efforts to maximize available coverage under those Shared Policies applicable to
it, and to take all commercially reasonable steps to recover from all other
responsible parties in respect of an Insured Claim to the extent coverage limits
under a Shared Policy have been exceeded or would be exceeded as a result of
such Insured Claim.
(d) Allocation of Deductibles. In the event that both parties have bona
fide claims under any Shared Policy for which an aggregate deductible is
reached, the parties agree that the aggregate amount of the deductible paid
shall be borne by the parties in the same proportion which the Insurance
Proceeds received by each such party bears to the total Insurance Proceeds
received under the applicable Shared Policy (their "allocable share of the
deductible"), and any party who has paid more than such share of the deductible
shall be entitled to receive from the other party an appropriate amount so that
each party has borne its allocable share of the deductible pursuant hereto.
(e) After the Distribution Date, each of IMS HEALTH and the Corporation
shall be responsible for its applicable deductible for workers' compensation,
general liability and automobile liability claims.
SECTION VII.4. Agreement for Waiver of Conflict and Shared Defense. In the
event that Insured Claims of both of the parties hereto exist relating to the
same occurrence, the parties shall jointly defend and waive any conflict of
interest necessary to the conduct of the joint defense. Nothing in this Article
VII shall be construed to limit or otherwise alter in any way the obligations of
the parties to this Agreement, including those created by this Agreement, by
operation of law or otherwise.
SECTION VII.5. Cooperation. The parties agree to use their commercially
reasonable efforts to cooperate with respect to the various insurance matters
contemplated by this Agreement.
<PAGE>
38
ARTICLE VIII. MISCELLANEOUS
SECTION VIII.1. Complete Agreement; Construction. This Agreement, including
the Exhibits and Schedules, and the Ancillary Agreements shall constitute the
entire agreement between the parties with respect to the subject matter hereof
and shall supersede all previous negotiations, commitments and writings with
respect to such subject matter. In the event of any inconsistency between this
Agreement and any Schedule hereto, the Schedule shall prevail. Other than
Section 2.1(j), Section 2.7, Section 4.5 and Article VI, which shall prevail
over any inconsistent or conflicting provisions in any Ancillary Agreement,
notwithstanding any other provisions in this Agreement to the contrary, in the
event and to the extent that there shall be a conflict between the provisions of
this Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION VIII.2. Ancillary Agreements. Subject to the last sentence of
Section 8.1, this Agreement is not intended to address, and should not be
interpreted to address, the matters specifically and expressly covered by the
Ancillary Agreements.
SECTION VIII.3. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
SECTION VIII.4. Survival of Agreements. Except as otherwise contemplated by
this Agreement, all covenants and agreements of the parties contained in this
Agreement shall survive the Distribution Date.
SECTION VIII.5. Expenses. Except as set forth on Schedule 8.5 or as
otherwise set forth in this Agreement or any Ancillary Agreement, all costs and
expenses incurred and for which invoices have been submitted on or prior to the
Distribution Date in connection with the preparation, execution, delivery and
required implementation of this Agreement and any Ancillary Agreement, the
Information Statement (including any registration statement on Form 10 (or any
amendment thereto) of which such Information Statement may be a part) and the
Distribution and the consummation of the transactions contemplated thereby shall
be charged to and paid by the Corporation; provided that if such costs and
expenses are not paid by the Corporation prior to the Effective Time, they shall
be charged to and paid by IMS HEALTH. Except as set forth on Schedule 8.5 or as
otherwise set forth in this Agreement or any Ancillary Agreement, all costs and
expenses incurred or for which invoices are submitted after the Distribution
Date in connection with the required implementation of this Agreement or any
Ancillary Agreement, the consummation of the Distribution or the consummation of
the transactions contemplated by this Agreement or any Ancillary Agreement shall
be charged to and paid by IMS HEALTH. Except as set forth on Schedule 8.5 or as
otherwise set forth in this Agreement or any Ancillary Agreement, each party
shall bear its own costs and expenses incurred after the Distribution Date. Any
amount or expense to be paid or reimbursed by any party hereto to any other
party hereto shall be so paid or reimbursed
<PAGE>
39
promptly after the existence and amount of such obligation is determined and
demand therefor is made.
SECTION VIII.6. Notices. All notices and other communications hereunder
shall be in writing and hand delivered or mailed by registered or certified mail
(return receipt requested) or sent by any means of electronic message
transmission with delivery confirmed (by voice or otherwise) to the parties at
the following addresses (or at such other addresses for a party as shall be
specified by like notice) and will be deemed given on the date on which such
notice is received:
To the Corporation:
Nielsen Media Research, Inc.
299 Park Avenue
New York, NY 10171
Telecopy: (212) 708-6927
Attn: Chief Legal Officer
To IMS HEALTH:
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
Telecopy: (203) 222-4313
Attn: General Counsel
SECTION VIII.7. Waivers. The failure of any party to require strict
performance by any other party of any provision in this Agreement will not waive
or diminish that party's right to demand strict performance thereafter of that
or any other provision hereof.
SECTION VIII.8. Amendments. Subject to the terms of Section 8.11 hereof,
this Agreement may not be modified or amended except by an agreement in writing
signed by each of the parties hereto.
SECTION VIII.9. Assignment. (a) This Agreement shall not be assignable, in
whole or in part, directly or indirectly, by any party hereto without the prior
written consent of the other parties hereto, and any attempt to assign any
rights or obligations arising under this Agreement without such consent shall be
void.
(b) The Corporation will not distribute to its stockholders any interest in
any NMR Business Entity, by way of a spin-off distribution, split-off or
exchange of interests in a NMR Business Entity for any interest in the
Corporation held by NMR stockholders, or any similar
<PAGE>
40
transaction or transactions, unless the distributed NMR Business Entity
undertakes to IMS HEALTH to be jointly and severally liable for all NMR
Liabilities hereunder.
(c) IMS HEALTH will not distribute to its stockholders any interest in any
IMS HEALTH Business Entity, by way of a spin-off distribution, split-off or
exchange of interests in a IMS HEALTH Business Entity for any interest in IMS
HEALTH held by IMS HEALTH stockholders, or any similar transaction or
transactions, unless the distributed IMS HEALTH Business Entity undertakes to
the Corporation to be jointly and severally liable for all IMS HEALTH
Liabilities hereunder.
SECTION VIII.10. Successors and Assigns. The provisions to this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and permitted assigns.
SECTION VIII.11. Termination. This Agreement (including, without
limitation, Article III hereof) may be terminated and the Distribution may be
amended, modified or abandoned at any time prior to the Distribution by and in
the sole discretion of the Corporation without the approval of IMS HEALTH or the
shareholders of the Corporation. In the event of such termination, no party
shall have any liability of any kind to any other party or any other person.
After the Distribution, this Agreement may not be terminated except by an
agreement in writing signed by the parties; provided, however, that Article III
shall not be terminated or amended after the Distribution in respect of the
third party beneficiaries thereto without the consent of such persons.
SECTION VIII.12. Subsidiaries. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Subsidiary of such party or
by any entity that is contemplated to be a Subsidiary of such party on or after
the Distribution Date.
SECTION VIII.13. Third Party Beneficiaries. Except as provided in Article
III relating to Indemnitees, this Agreement is solely for the benefit of the
parties hereto and their respective Subsidiaries and Affiliates and should not
be deemed to confer upon third parties any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
SECTION VIII.14. Title and Headings. Titles and headings to sections herein
are inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement.
SECTION VIII.15. Exhibits and Schedules. The Exhibits and Schedules shall
be construed with and as an integral part of this Agreement to the same extent
as if the same had been set forth verbatim herein.
SECTION VIII.16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
<PAGE>
41
STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE STATE
OF NEW YORK.
SECTION VIII.17. Consent to Jurisdiction. Without limiting the provisions
of Article VI hereof, each of the parties irrevocably submits to the exclusive
jurisdiction of (a) the Supreme Court of the State of New York, New York County,
and (b) the United States District Court for the Southern District of New York,
for the purposes of any suit, action or other proceeding arising out of this
Agreement or any transaction contemplated hereby. Each of the parties agrees to
commence any action, suit or proceeding relating hereto either in the United
States District Court for the Southern District of New York or if such suit,
action or other proceeding may not be brought in such court for jurisdictional
reasons, in the Supreme Court of the State of New York, New York County. Each of
the parties further agrees that service of any process, summons, notice or
document by U.S. registered mail to such party's respective address set forth
above shall be effective service of process for any action, suit or proceeding
in New York with respect to any matters to which it has submitted to
jurisdiction in this Section 8.17. Each of the parties irrevocably and
unconditionally waives any objection to the laying of venue of any action, suit
or proceeding arising out of this Agreement or the transactions contemplated
hereby in (i) the Supreme Court of the State of New York, New York County, or
(ii) the United States District Court for the Southern District of New York, and
hereby further irrevocably and unconditionally waives and agrees not to plead or
claim in any such court that any such action, suit or proceeding brought in any
such court has been brought in an inconvenient forum.
SECTION VIII.18. Severability. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions, the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provisions.
<PAGE>
42
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
COGNIZANT CORPORATION
By: /s/ Robert E. Weissman
---------------------------------
Name: Robert E. Weissman
Title: Chairman and Chief Executive
Officer
IMS HEALTH INCORPORATED
By: /s/ Victoria R. Fash
---------------------------------
Name: Victoria R. Fash
Title: President and Chief Operating
Officer
<PAGE>
DISTRIBUTION AGREEMENT
between
COGNIZANT CORPORATION
and
IMS HEALTH INCORPORATED
Dated as of June 30, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. DEFINITIONS.........................................................2
SECTION 1.1. General....................................................2
SECTION 1.2. References; Interpretation................................14
ARTICLE II. DISTRIBUTION AND OTHER TRANSACTIONS;
CERTAIN COVENANTS...............................................14
SECTION 2.1. The Distribution and Other Transactions...................14
SECTION 2.2. Intercompany Accounts.....................................20
SECTION 2.3. Cash Balances.............................................20
SECTION 2.4. Assumption and Satisfaction of Liabilities................20
SECTION 2.5. Resignations..............................................20
SECTION 2.6. Further Assurances........................................20
SECTION 2.7. Limited Representations or Warranties.....................21
SECTION 2.8. Guarantees................................................21
SECTION 2.9. Witness Services..........................................22
SECTION 2.10. Certain Post-Distribution Transactions....................22
SECTION 2.11. Transfers Not Effected Prior to the Distribution;
Transfers Deemed Effective as of the Distribution
Date ....................................................23
SECTION 2.12. Conveyancing and Assumption Instruments...................23
SECTION 2.13. Ancillary Agreements......................................24
SECTION 2.14. Corporate Names...........................................24
ARTICLE III. INDEMNIFICATION.................................................26
SECTION 3.1. Indemnification by the Corporation........................26
SECTION 3.2. Indemnification by IMS HEALTH.............................26
SECTION 3.3. Procedures for Indemnification............................26
SECTION 3.4. Indemnification Payments..................................28
ARTICLE IV. ACCESS TO INFORMATION............................................28
SECTION 4.1. Provision of Corporate Records............................28
SECTION 4.2. Access to Information.....................................29
SECTION 4.3. Reimbursement; Other Matters..............................29
SECTION 4.4. Confidentiality...........................................29
SECTION 4.5. Privileged Matters........................................29
SECTION 4.6. Ownership of Information..................................31
SECTION 4.7. Limitation of Liability...................................31
SECTION 4.8. Other Agreements Providing for Exchange of Information....32
ARTICLE V. ADMINISTRATIVE SERVICES...........................................32
SECTION 5.1. Performance of Services...................................32
SECTION 5.2. Independence..............................................32
SECTION 5.3. Non-exclusivity...........................................32
i
<PAGE>
ARTICLE VI. DISPUTE RESOLUTION..............................................32
SECTION 6.1. Negotiation...............................................32
SECTION 6.2. Arbitration...............................................33
SECTION 6.3. Continuity of Service and Performance.....................34
ARTICLE VII. INSURANCE.......................................................34
SECTION 7.1. Policies and Rights Included Within Assets;
Assignment of Policies...................................34
SECTION 7.2. Post-Distribution Date Claims.............................34
SECTION 7.3. Administration; Other Matters.............................35
SECTION 7.4. Agreement for Waiver of Conflict and Shared Defense.......36
SECTION 7.5. Cooperation...............................................36
ARTICLE VIII. MISCELLANEOUS..................................................36
SECTION 8.1. Complete Agreement; Construction..........................36
SECTION 8.2. Ancillary Agreements......................................37
SECTION 8.3. Counterparts..............................................37
SECTION 8.4. Survival of Agreements....................................37
SECTION 8.5. Expenses..................................................37
SECTION 8.6. Notices...................................................37
SECTION 8.7. Waivers...................................................38
SECTION 8.8. Amendments................................................38
SECTION 8.9. Assignment................................................38
SECTION 8.10. Successors and Assigns...................................38
SECTION 8.11. Termination..............................................38
SECTION 8.12. Subsidiaries.............................................39
SECTION 8.13. Third Party Beneficiaries................................39
SECTION 8.14. Title and Headings.......................................39
SECTION 8.15. Exhibits and Schedules...................................39
SECTION 8.16. GOVERNING LAW............................................39
SECTION 8.17. Consent to Jurisdiction..................................39
SECTION 8.18. Severability.............................................40
ii
<PAGE>
Exhibits
Exhibit 2.1(m) Undertaking of IMS Health Incorporated
iii
<PAGE>
Schedules to Distribution Agreement
Schedules
1.1(m) Conveyance and assumption instruments
1.1(au)(i) Certain Business Entities and Subsidiaries to be included in the
NMR Group
1.1(au)(ii) Pre-Distribution reorganization transactions to transfer assets
to the Corporation or the NMR Group
1.1(au)(x) Certain assets not to be included as NMR Assets
1.1(au)(y) Certain Business Entities or businesses holding assets from
divested, terminated or former businesses which are to be
included as NMR Assets
1.1(av) Combined balance sheet of the NMR Group as of March 31, 1998
1.1(ax)(i) Certain contracts to be included as NMR Contracts
1.1(ax)(ii) Certain contracts in the name of the Corporation or NMR to be
included as IMS HEALTH Contracts
1.1(ax)(iv) Certain federal, state and local government contracts to be
included as NMR Contracts
1.1(ax)(v) Capital or operating lease obligations to be included as NMR
Contracts
1.1(ba)(i) Certain liabilities to be included as NMR Liabilities
1.1(ba)(x) Certain liabilities not to be included as NMR Liabilities
1.1(ba)(y) Certain Business Entities or businesses holding liabilities from
divested, terminated or former businesses which are to be
included as NMR Liabilities
2.1(i) Liabilities from 1996 Distribution to be included as NMR
Liabilities
2.1(j)(i) Allocation of Liabilities for certain prior business transactions
2.3 Cash Balances
2.8(a) Guarantees of IMS HEALTH Liabilities from which NMR Group
members are to be removed
2.8(b) Guarantees of NMR Liabilities from which IMS HEALTH Group
members are to be removed
4.7(b) Pre-existing agreements between the parties which continue
after the Distribution
iv
<PAGE>
Exhibit 2.1(m)
IMS Health Incorporated
200 Nyala Farms
Westport, CT 06880
June 29, 1998
Nancy Henry, Esq.
The Dun & Bradstreet Corporation
One Diamond Hill Road
Murray Hill, NJ 07974
Earl Doppelt, Esq.
ACNielsen Corporation
177 Broad Street
Stamford, CT 06901
Dear Ms. Henry and Mr. Doppelt:
Reference is made to the Distribution Agreement (the "1996 Distribution
Agreement"), dated as of October 28, 1996, among Cognizant Corporation
("Cognizant"), The Dun & Bradstreet Corporation ("D&B") and ACNielsen
Corporation ("ACNielsen"). Cognizant has announced its intention to separate
into two separate companies through a distribution (the "IMS HEALTH
Distribution") to its stockholders of all of the shares of common stock of its
subsidiary IMS Health Incorporated ("IMS HEALTH"). In Section 8.9(c) of the 1996
Distribution Agreement, Cognizant agreed not to make a distribution such as the
IMS HEALTH Distribution unless it caused the distributed entity to undertake to
both D&B and ACNielsen to be jointly and severally liable for all Cognizant
Liabilities (as defined in the 1996 Distribution Agreement). Therefore, in
accordance with Section 8.9(c) of the 1996 Distribution Agreement and intending
to be legally bound hereby, from and after the effective time of the IMS HEALTH
Distribution, IMS HEALTH undertakes to each of D&B and ACNielsen to be jointly
and severally liable with Cognizant for all Cognizant Liabilities under the 1996
Distribution Agreement.
Very truly yours,
IMS HEALTH INCORPORATED
By:
-----------------------------
Name:
Title:
<PAGE>
Schedule 2.1(j)(i)
Allocation of Liabilities Relating to Certain Prior Business Transactions
1. Any and all Liabilities of Cognizant for any audit adjustments to Taxes
arising out of the transactions and related agreements known as (a) Nieuw
Willemstad Partnership or Oud Philipsburg Partnership, involving A.C. Nielsen
Company and The Dun & Bradstreet Corporation; (b) Duns Licensing Associates,
L.P., involving Dun & Bradstreet, Inc. and IMS America, Ltd.; and (c) D&B
Investors, L.P., involving Reuben H. Donnelley Corporation, IMS America, Ltd.
and Dun & Bradstreet, Inc. shall be allocated as follows: (x) IMS HEALTH shall
be liable for and shall pay all such Taxes allocated to Cognizant pursuant to
Section 2.1(j)(ii) of the 1996 Distribution Agreement until such Taxes, in the
aggregate, equal one hundred and thirty million dollars; and (y) IMS HEALTH and
the Corporation shall each be liable for and shall pay one-half of any such
Taxes allocated to Cognizant pursuant to Section 2.1(j)(ii) of the 1996
Distribution Agreement in excess of one hundred and thirty million dollars;
provided, that the Corporation's aggregate liability for Taxes pursuant to this
paragraph and for amounts described in Section 2.1(j)(ii) of the Distribution
Agreement shall not exceed one hundred and twenty-five million dollars;
provided, further, that prior to January 1, 2001, IMS HEALTH shall make any and
all payments for all of the Taxes referred to in clause (y) above, with the
Corporation reimbursing IMS HEALTH for its proportionate share thereof on the
first business day after such date.
2. The liability for any audit adjustments to Taxes arising out of the
transactions and related agreements known as Dun & Bradstreet Computer Leasing,
Inc. and Fillupar Leasing Partnership shall be allocated solely to IMS HEALTH.
3. To the extent that the allocation of liability for Taxes in this
Schedule 2.1(j) results in the sharing of liability for Taxes between IMS HEALTH
and the Corporation, Section 5.1 of the Tax Allocation Agreement, governing Tax
Audits and Controversies, shall be applied as though IMS HEALTH alone were
liable for all such Taxes and the Corporation were not liable for such Taxes;
provided, however, that IMS HEALTH shall not enter into any final settlement or
closing agreement without the consent of the Corporation, which consent may not
be unreasonably withheld. Where consent to any final settlement or closing
agreement is withheld, the Corporation shall continue or initiate further
proceedings, at its own expense, and the liability of IMS HEALTH shall be
limited to the liability that would have resulted for IMS HEALTH from the
proposed closing agreement or final settlement (including interest, additions to
tax and penalties which have accrued at that time).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<DESCRIPTION>TAX ALLOCATION AGREEMENT
<TEXT>
Exhibit 10.2
TAX ALLOCATION AGREEMENT
This TAX ALLOCATION AGREEMENT is dated as of June 30, 1998, between
COGNIZANT CORPORATION, a Delaware corporation (the "Corporation") and IMS HEALTH
INCORPORATED, a Delaware corporation ("IMS HEALTH") (collectively, the
"Parties").
WHEREAS, the Corporation acting through its direct and indirect
subsidiaries, currently conducts a number of businesses, including, without
limitation, providing television audience measurement services (the "Nielsen
Media Research Business");
WHEREAS, the Board of Directors of the Corporation has determined that it
is appropriate, desirable and in the best interests of the holders of shares of
common stock, par value $0.01 per share, of the Corporation (the "Cognizant
Common Stock"), as well as of the Corporation and its businesses, to reorganize
the Corporation to separate from the Corporation all businesses currently
conducted by the Corporation other than the Nielsen Media Research Business and
to cause such businesses to be owned and conducted, directly or indirectly, by
IMS HEALTH;
WHEREAS, in order to effect the separation, the Board of Directors of the
Corporation has determined that it is appropriate, desirable and in the best
interests of the holders of Cognizant Common Stock, as well as of the
Corporation and its businesses, for the Corporation (i) to take certain steps to
reorganize the Corporation's Subsidiaries (as defined herein) and businesses,
including prior to the Distribution (as defined herein) merging I.M.S.
International, Inc. and IMS America, Inc. with and into IMS HEALTH and (ii) upon
the completion of such reorganization to distribute to the holders of the
Cognizant Common Stock all the outstanding shares of common stock of IMS HEALTH
(the "IMS HEALTH Common Shares"), together with the associated Rights;
WHEREAS, as of the date hereof, the Corporation is the common parent of an
affiliated group of domestic corporations within the meaning of Section 1504(a)
of the Code (as defined herein), including members of the IMS HEALTH Group (as
defined herein), and the members of the affiliated group have heretofore joined
in filing consolidated federal Income Tax Returns (as defined herein);
WHEREAS, as a result of the Distribution, the IMS HEALTH Group will not be
included in the consolidated federal Income Tax Return of the Corporation for
the portion of the year following the Distribution and in future years; and
<PAGE>
2
WHEREAS, the Corporation and IMS HEALTH desire to allocate the Tax (as
defined herein) burdens and benefits of transactions which occurred on or prior
to the Distribution Date (as defined herein) and to provide for certain other
Tax matters, including the assignment of responsibility for the preparation and
filing of Tax Returns (as defined herein), the payment of Taxes, and the
prosecution and defense of any Tax controversies.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the Parties hereby agree as follows:
ARTICLE DEFINITIONS
SECTION General. Capitalized terms used in this Agreement and not defined
herein shall have the meanings that such terms have in the Distribution
Agreement. As used in this Agreement, the following terms shall have the
following meanings:
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any successor
legislation.
"Combined Returns" shall mean all state Income Tax Returns with respect to
which the Corporation files on a combined or unitary basis with some or all of
its Subsidiaries for taxable periods beginning November 1, 1996, January 1, 1997
and January 1, 1998.
"Consolidated Returns" shall mean all consolidated federal Income Tax
Returns of the affiliated group of which the Corporation is the common parent
for taxable periods beginning November 1, 1996, January 1, 1997 and January 1,
1998.
"Controlled Entity" shall mean any corporation, partnership or other entity
of which another entity (i) owns, directly or indirectly, ownership interests
sufficient to elect a majority of the Board of Directors (or persons performing
similar functions) (irrespective of whether at the time any other class or
classes of ownership interests of such corporation, partnership or other entity
shall or might have such voting power upon the occurrence of any contingency) or
(ii) is a general partner or an entity performing similar functions (e.g., a
trustee).
"D&B Tax Allocation Agreement" shall mean the Tax Allocation Agreement
dated October 28, 1996 among The Dun & Bradstreet Corporation, the Corporation
and ACNielsen Corporation.
"Deferred Compensation Deduction" shall mean any deduction with respect to
(i) compensation payments made by any member of the IMS HEALTH Group or the NMR
Group,
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3
as the case may be, if such deduction is disallowed for any member of the
payor's group and may be claimed by any member of the other group and/or (ii)
the exercise of stock options in IMS HEALTH or the Corporation, as the case may
be, by any former employee of the Pre-Distribution Cognizant Group if such
deduction is disallowed for any member of the IMS HEALTH Group or the NMR Group,
as the case may be, and may be claimed by any member of the other group.
"Distribution" shall mean the distribution on the Distribution Date to
holders of record of shares of Cognizant Common Stock as of the Distribution
Record Date of the IMS HEALTH Common Shares owned by the Corporation on the
basis of one IMS HEALTH Common Share for each outstanding share of Cognizant
Common Stock.
"Distribution Agreement" shall mean the distribution agreement, dated as of
June 30, 1998, between the Corporation and IMS HEALTH.
"Distribution Date" shall mean June 30, 1998.
"Final Determination" shall mean the final resolution of liability for any
Tax for any taxable period, including any related interest or penalties, by or
as a result of: a final and unappealable decision, judgment, decree or other
order by any court of competent jurisdiction; a closing agreement or accepted
offer in compromise under Section 7121 or 7122 of the Code, or comparable
agreement under the laws of other jurisdictions which resolves the entire Tax
liability for any taxable period; any allowance of a refund or credit in respect
of an overpayment of Tax, but only after the expiration of all periods during
which such refund may be recovered by the jurisdiction imposing the Tax; or any
other final disposition, including by reason of the expiration of the applicable
statute of limitations.
"Franchise Tax Returns" shall mean all franchise Tax Returns of the
Pre-Distribution Cognizant Group or any member thereof for taxable periods
beginning November 1, 1996, January 1, 1997, January 1, 1998 and, solely for
purposes of Sections 2.1(a) and 2.2(a), on or the day after the Distribution
Date.
"Governmental Authority" shall mean any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.
"IMS HEALTH Business" shall mean each and every business conducted at any
time by the Corporation or any Subsidiary of the Corporation prior to the
Effective Time, including, without limitation, (i) providing
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4
information and decision support services to the pharmaceutical and healthcare
industries (the "IMS Business"), (ii) providing software-based administrative
and analytical solutions to the managed care industry (the "ERISCO Business"),
(iii) making venture capital investments in emerging healthcare businesses (the
"Enterprises Business"), (iv) supplying research and analysis to the information
technology industry (the "Gartner Business") and (v) providing software
applications and development services specializing in Year 2000 conversion
services (the "Technology Solutions Business"), but excluding the NMR Business.
"IMS HEALTH Group" shall mean IMS HEALTH and each Business Entity (other
than any member of the NMR Group) that is a Subsidiary of the Corporation
immediately prior to the Effective Time.
"Included Party" shall have the meaning as defined in Section 2.3.
"Income Tax Return" shall mean any Tax Return relating to Income Taxes.
"Income Taxes" shall mean any federal, state or local Taxes determined by
reference to income or imposed in lieu of income Taxes, such as Taxes based on
net worth or gross receipts.
"Indemnifying Party" shall have the meaning as defined in Section 3.5(c).
"Indemnitee" shall have the meaning as defined in Section 3.5(c).
"IRS" shall mean the Internal Revenue Service.
"NMR" shall mean Nielsen Media Research, Inc., a Delaware corporation.
"NMR Assets" shall have the same meaning as such term has in the
Distribution Agreement.
"NMR Business" shall mean (i) the Nielsen Media Research Business, (ii) the
businesses of the members of the NMR Group, (iii) any other business conducted
by the Corporation or any Subsidiary of the Corporation primarily through the
use of the NMR Assets, (iv) the businesses of any Business Entity acquired or
established by or for NMR or any of its Subsidiaries after the date of this
Agreement and (v) the business of the Corporation from and after the Effective
Time.
"NMR Group" shall mean NMR, each Business Entity which is contemplated to
remain or become a
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5
Subsidiary of the Corporation or NMR hereunder, which shall include those
identified as such on Schedule 1.1(au)(i) to the Distribution Agreement, and the
Corporation from and after the Effective Time.
"Non-Combined Returns" shall mean all state and local Income Tax Returns
(other than Combined Returns and any foreign Tax Returns), of the
Pre-Distribution Cognizant Group or any member thereof for taxable periods
beginning November 1, 1996, January 1, 1997, January 1, 1998 and, solely for
purposes of Sections 2.1(a) and 2.2(a), on or the day after the Distribution
Date.
"Nonperforming Party" shall have the meaning as defined in Section 5.2.
"Other Taxes" shall mean all Taxes other than Taxes covered by a
Consolidated Return, a Combined Return, a Non-Combined Return or a Franchise Tax
Return.
"Parties" shall have the meaning as defined in the recitals hereto.
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Post-Distribution Expense Deduction" shall mean any deduction with respect
to an expense or indemnity paid by a member of the IMS HEALTH Group or the NMR
Group after the Distribution Date if such deduction is disallowed or not
allowable for any member of the payor's group and may be claimed by any member
of the other group.
"Pre-Distribution Cognizant Group" shall mean the Corporation and all of
its Subsidiaries (direct and indirect, domestic and foreign) prior to the
Distribution.
"Preparing Party" shall have the meaning as defined in Section 2.3.
"Reorganization Tax Payment" shall mean the payment of any Tax for which
IMS HEALTH is liable pursuant to Section 3.3(a) of this Agreement.
"Reorganizations" shall mean the series of contributions and distributions
of Controlled Entities and assets, transfers and assumptions of liabilities, and
other transactions whereby the NMR Group and the IMS HEALTH Group are formed and
all other Controlled Entities of the Corporation prior to the Distribution are
placed under the control of the appropriate parent corporation(s) in preparation
for the Distribution.
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6
"Subsidiary" shall mean any entity of which another entity's ownership
satisfies the 80-percent voting and value test defined in Section 1504(a)(2) of
the Code, whether directly or indirectly.
"Tax" or "Taxes" whether used in the form of a noun or adjective, shall
mean taxes on or measured by income, franchise, gross receipts, sales, use,
excise, payroll, personal property, real property, ad-valorem, value-added,
leasing, leasing use or other taxes, levies, imposts, duties, charges or
withholdings of any nature. Whenever the term "Tax" or "Taxes" is used
(including, without limitation, regarding any duty to reimburse another Party
for indemnified taxes or refunds or credits of taxes) it shall include
penalties, fines, additions to tax and interest thereon.
"Tax Benefit" shall mean the sum of the amount by which the Tax liability
(after giving effect to any alternative minimum or similar Tax) of a corporation
or group of affiliated corporations to the appropriate taxing authority is
reduced (including, without limitation, by deduction, entitlement to refund,
credit or otherwise, whether available in the current taxable year, as an
adjustment to taxable income in any other taxable year or as a carryforward or
carryback, as applicable) plus any interest from such government or jurisdiction
relating to such Tax liability.
"Tax Item" shall mean any item of income, capital gain, net operating loss,
capital loss, deduction, credit or other Tax attribute relevant to the
calculation of a Tax liability.
"Tax Matters Partner" shall mean the tax matters partner as defined in
section 6231(a)(7) of the Code.
"Tax Returns" shall mean all reports or returns (including information
returns) required to be filed or that may be filed for any period with any
taxing authority (whether domestic or foreign) in connection with any Tax or
Taxes (whether domestic or foreign).
SECTION References; Interpretation. References in this Agreement to any
gender include references to all genders, and references to the singular include
references to the plural and vice versa. The words "include", "includes" and
"including" when used in this Agreement shall be deemed to be followed by the
phrase "without limitation". Unless the context otherwise requires, references
in this Agreement to Articles, Sections, Exhibits and Schedules shall be deemed
references to Articles and Sections of, and Exhibits and Schedules to, such
Agreement. Unless the context otherwise requires, the words "hereof", "hereby"
and "herein" and words of similar
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7
meaning when used in this Agreement refer to this Agreement in its entirety and
not to any particular Article, Section or provision of this Agreement.
ARTICLE PREPARATION AND FILING OF TAX RETURNS
SECTION Predistribution Tax Returns.
IMS HEALTH (or its relevant Controlled Entity) shall prepare, and the
Corporation (or its relevant Controlled Entity) shall file, (i) all Consolidated
Returns, Combined Returns, Non-Combined Returns, and Franchise Tax Returns that
are not filed prior to the Distribution Date and (ii) any Tax Returns of any
partnership (other than NMR Licensing Associates LP) of which the Corporation or
any Subsidiary is the Tax Matters Partner if a distributive share of partnership
income or loss is included in any such Return.
All Tax Returns for Other Taxes for periods beginning prior to the
Distribution Date that are not subject to the D&B Tax Allocation Agreement shall
be prepared and filed by IMS HEALTH if they relate to any member of the IMS
HEALTH Group and, otherwise, by the Corporation.
SECTION Post-Distribution Tax Returns.
The filing of all Tax Returns for periods beginning on or after the
Distribution Date (other than Non-Combined Returns and Franchise Tax Returns
covered by Section 2.1(a)) shall be the responsibility of the Corporation if
they relate to the NMR Group or any member thereof and shall be the
responsibility of IMS HEALTH if they relate to the IMS HEALTH Group or any
member thereof.
In the case of any partnership in which a member of the Pre-Distribution
Cognizant Group is the designated Tax Matters Partner, such entity shall
continue to be responsible for the preparation and filing of such partnership's
Tax Returns.
SECTION Manner of Preparation.
To the extent any Tax Return includes Taxes relating to a Party (or any of
its Subsidiaries) other than the Party preparing such Tax Return (the "Preparing
Party"), the Party not responsible for preparing the Tax Return (the "Included
Party"), shall prepare and deliver to the Preparing Party, at least 120 days
prior to the due date (including extensions) of such Tax Return, a true and
correct accounting of all relevant Tax Items relating to the Included Party (and
any of its Subsidiaries) for the taxable period.
<PAGE>
8
All Tax Returns filed on or after the Distribution Date shall be prepared
on a basis that is consistent with the rulings obtained from the IRS or any
other Governmental Authority in connection with the Reorganizations or
Distribution (in the absence of a controlling change in law or circumstances)
and shall be filed on a timely basis (including pursuant to extensions) by the
Party responsible for such filing under this Agreement. In the absence of a
controlling change in law or circumstances and unless deviation from past
practice would have no adverse effect on the other Party, all Tax Returns filed
within three years after the Distribution Date shall be prepared on a basis
consistent with the elections, accounting methods, conventions, assumptions and
principles of taxation used for the most recent taxable periods for which Tax
Returns involving similar Tax Items have been filed; provided, however, that a
Party preparing any Tax Return that does not conform to such past practices
shall not be liable for any additional Tax liability imposed, in whole or in
part, as a result of such deviation from past practice if: (i) 30 days prior to
the filing of such Tax Return, the Party preparing such Tax Return notifies the
other Party if such other Party may be adversely affected; and (ii) the Party
preparing such Tax Return establishes that conformity with past practice
involves a significant risk of the imposition of a penalty. Subject to the
provisions of this Agreement, all decisions relating to the preparation of Tax
Returns shall be made in the sole discretion of the Party responsible under this
Agreement for its preparation; provided, however, that the "Included Party"
shall have the right to review and comment on such Tax Return prior to the
filing thereof in the following manner:
The Preparing Party shall submit any part of such Tax Return relating to
the Included Party (or any of its Subsidiaries) to the Included Party at least
28 days prior to the date on which such Tax Return is due (including
extensions). The Included Party shall submit its comments to the Preparing Party
within 14 days of receipt of the relevant portions of such Tax Return. The
Preparing Party shall alter such Tax Return to reflect the reasonable comments
of the Included Party unless the Preparing Party reasonably believes that such
alteration would have an adverse impact upon the Preparing Party.
Unless otherwise required by the IRS, any Governmental Authority or a
court, the Parties hereby agree to file all Tax Returns, and to take all other
actions, in a manner consistent with the position that the Distribution Date is
the last day on which any member of the IMS HEALTH Group was included in the
Pre-Distribution Cognizant Group. For any period that includes but does not end
on the Distribution Date, to the extent permitted by law or administrative
practice, the taxable year of each member of
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9
the Pre-Distribution Cognizant Group and any group of such members shall be
treated as ending on the Distribution Date.
ARTICLE PAYMENT OF TAXES
SECTION Predistribution Taxes
The Party responsible for the filing of any Tax Return pursuant to Sections
2.1 and 2.2 shall pay to the relevant taxing authority all Taxes due or payable
in connection therewith; provided, that if, pursuant to this Article III, one
Party is liable for any Taxes relating to a Tax Return filed by the other Party,
such non-filing Party shall pay the filing Party the amount of such Taxes at
least 5 days prior to the due date (including extensions) of such Tax Return.
With respect to any Consolidated Return, Combined Return, Non-Combined
Return or Franchise Tax Return for a taxable period ending before January 1,
1998 that is not filed prior to the Distribution Date, IMS HEALTH shall be
liable for all Taxes payable with such Return and shall be entitled to any
refund or credit for an overpayment of Taxes shown on such Return. With respect
to any Consolidated Return, Combined Return, Non-Combined Return or Franchise
Tax Return for a taxable period beginning on or after January 1, 1998, IMS
HEALTH (i) shall only be liable for Taxes payable with such Return that are
attributable to the portion of such taxable period up to and including the
Distribution Date and that exceed the amount of Taxes paid in respect of such
taxable period (as estimated Taxes or otherwise) on or prior to the Distribution
Date and (ii) shall be entitled to any refund or credit of Taxes to the extent
Taxes paid in respect of such taxable period (as estimated Taxes or otherwise)
on or prior to the Distribution Date exceed the amount of Taxes attributable to
the portion of the period up to and including the Distribution Date. The
determination of the amount of Taxes attributable to the portion of such taxable
period up to and including the Distribution Date shall be done on a closing of
the books basis, except that Tax Items calculated on an annual basis shall be
apportioned on a time basis.
In the event of any Final Determination adjusting the amount of any Taxes
that are the subject of a Consolidated Return, Combined Return, Non-Combined
Return or Franchise Tax Return, IMS HEALTH shall be liable for its share of any
increases in Taxes and shall be entitled to its share of any refunds or credits
of Taxes, and the Corporation shall be liable for all other increases in Taxes
and shall be entitled to all other refunds or credits of Taxes. IMS HEALTH's
share of any Taxes, credits or refunds shall be determined in accordance with
the following principles:
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10
(i) IMS HEALTH shall be liable for any increase in Taxes, and shall be
entitled to all refunds or credits of Taxes, that are attributable to a Tax
Return that relates solely to the IMS HEALTH Business; and
(ii) In the case of any Tax Return that relates to both the IMS HEALTH
Business and the NMR Business, IMS HEALTH's share of any increase in Taxes, or
refunds or credits of Taxes, shall be determined on a pro forma basis as if IMS
HEALTH filed a separate Tax Return for the taxable period that (i) included only
(x) the Tax Items attributable to the IMS HEALTH Business otherwise included in
the Tax Return and (y) an appropriate allocation of Tax Items not specifically
attributable to either the IMS HEALTH Business or the NMR Business (including,
without limitation, corporate overhead) and (ii) credits IMS HEALTH with its
share of Taxes previously paid by the Corporation or IMS HEALTH with respect to
such taxable period;
provided, that, in the case of a Consolidated Return, Combined Return,
Non-Combined Return or Franchise Tax Return, IMS HEALTH shall be liable for and
shall pay all increases in Taxes, and shall be entitled to receive all refunds
or credits of Taxes, that result from a Tax Item or position determined by the
corporate office.
The Corporation shall be liable for all Other Taxes that are attributable
to the NMR Business and IMS HEALTH shall be liable for all Other Taxes that are
attributable to the IMS HEALTH Business.
In the case of any Consolidated Return, Combined Return, Non-Combined
Return or Franchise Tax Return with respect to which IMS HEALTH has
responsibility for any Taxes or is entitled to any refunds or credits of Taxes
pursuant to Section 3.1(c) above, IMS HEALTH shall have the right to prepare an
amended Tax Return. The Corporation shall have the right to review any such
amended Tax Return and shall be required to sign and file any such amended Tax
Return unless it reasonably determines that the filing of such amended Tax
Return would create a significant risk of a material increase in the Taxes
payable by the NMR Group or any member thereof for any taxable period beginning
on or after the Distribution Date. IMS HEALTH shall be entitled to any refunds
or credits of Taxes relating to any such amended Tax Return.
If the Corporation is liable for any Taxes or entitled to any refunds or
credits of Taxes pursuant to the D&B Tax Allocation Agreement, such Taxes,
refunds or credits shall be allocated between the Corporation and IMS HEALTH in
accordance with the principles of this Section 3.1.
Notwithstanding any statement herein to the contrary, any Taxes covered by
Section 2.1(j)(i) of the
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11
Distribution Agreement shall be governed by Schedule 2.1(j)(i) to the
Distribution Agreement.
SECTION Post-Distribution Taxes. Unless otherwise provided in this
Agreement:
The Corporation shall pay all Taxes and shall be entitled to receive and
retain all refunds of Taxes attributable to the NMR Group or any member thereof:
(i) with respect to a Consolidated Return, Combined Return,
Non-Combined Return or Franchise Tax Return for a taxable period that
begins prior to the Distribution Date and includes but does not end on
the Distribution Date to the extent such Taxes or refunds are
attributable to the portion of such period after the Distribution Date;
and
(ii) with respect to periods beginning on or after the
Distribution Date.
IMS HEALTH shall pay all Taxes and shall be entitled to receive and retain
all refunds of Taxes with respect to periods beginning on or after the
Distribution Date that are attributable to the IMS HEALTH Group or any member
thereof.
SECTION Restructuring Taxes.
Notwithstanding any statement to the contrary in this Agreement and except
as otherwise provided in the Distribution Agreement, to the extent that any
Taxes are found to arise out of the Reorganizations, then any such Tax liability
incurred by the Parties (or any of their Subsidiaries) shall be the
responsibility of IMS HEALTH; provided, however, that to the extent specific
cash allocations for such Taxes are made in connection with the Distribution,
IMS HEALTH shall be relieved of its liability for such Taxes to the extent
covered by such cash.
Notwithstanding any statement herein to the contrary, any Taxes relating to
or arising out of the Distribution shall be governed by Section 2.10 of the
Distribution Agreement.
SECTION Gain Recognition Agreements. IMS HEALTH shall assume all of the
Corporation's responsibilities with respect to gain recognition agreements
pursuant to the D&B Tax Allocation Agreement.
SECTION Indemnification.
Indemnification by the Corporation. The Corporation shall indemnify, defend
and hold harmless IMS HEALTH (and its affiliates) from and against any and all
Tax liabilities allocated to the Corporation by this Agreement.
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12
Indemnification by IMS HEALTH. IMS HEALTH shall indemnify, defend and hold
harmless the Corporation (and its affiliates) from and against any and all Tax
liabilities allocated to IMS HEALTH by this Agreement.
Indemnity Payments.
To the extent that one Party (the "Indemnifying Party") owes money to
another Party (the "Indemnitee") pursuant to this Section 3.5, the Party (the
"Notifying Party") having knowledge of such obligation shall notify the other
Party and shall provide such other Party with its calculations of such
obligation (as specified in Article II and Article III). The other Party, within
14 days after receiving the Notifying Party's calculations, shall submit to the
Notifying Party such other Party's calculations of the amount required to be
paid pursuant to this Section 3.5, showing such calculations in sufficient
detail so as to permit the Notifying Party to understand the calculations. The
Indemnifying Party shall pay the Indemnitee, no later than the later of 5 days
prior to the due date (including extensions) of the relevant Tax Returns and 14
days after the Notifying Party receives the other Party's calculations, the
amount for which the Indemnifying Party is required to pay or indemnify the
Indemnitee under this Section 3.5. The Indemnifying Party shall have the right
to disagree with the Indemnitee's calculations. Any dispute regarding such
calculations shall be resolved in accordance with Section 5.4 of this Agreement.
All indemnity payments shall be calculated on a pre-Tax basis and shall be
treated as contributions to capital and/or reductions of assets previously
contributed and/or dividends immediately prior to the Distribution.
ARTICLE TAX ATTRIBUTES AND REORGANIZATION TAX PAYMENTS
SECTION Carrybacks. In the event of the realization of any deduction, loss
or credit by a Party for any taxable period beginning on or after the
Distribution Date, the Party realizing such deduction, loss or credit may, in
its sole discretion, and to the extent permitted under applicable Tax law, elect
to either carry back or carry forward such deduction, loss or credit. Any refund
attributable to such carryback shall be allocable to such Party. In the event
both Parties elect to carry back an amount to the same taxable period beginning
prior to the Distribution Date, any refund shall be apportioned between the
Parties based on the relative carryback amounts.
SECTION Reorganization Tax Payments, Deferred Compensation Deductions and
Post-Distribution Expense Deductions.
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13
If an audit or other examination of any federal, state or local Tax Return
for any taxable period shall result (by settlement or otherwise) in a Deferred
Compensation Deduction or Post-Distribution Expense Deduction in favor of the
NMR Group or any member thereof or if any Reorganization Tax Payment is made by
IMS HEALTH, then:
If necessary, IMS HEALTH shall notify the Corporation and shall provide the
Corporation with adequate information so that it can reflect on the appropriate
Tax Returns any resulting increases in deductions, losses or Tax credits or
decreases in income, gains or recapture of Tax credits;
The Corporation shall pay IMS HEALTH the amount of any Tax Benefit that
relates to any adjustments arising from or connected with such Reorganization
Tax Payment or that results from such Deferred Compensation Deduction or
Post-Distribution Expense Deduction within 30 days of the date such Tax Benefits
are realized;
Notwithstanding the foregoing, the Corporation shall only be required to
take steps to obtain such Tax Benefit or to pay IMS HEALTH if, in the opinion of
the Corporation's Tax counsel, which counsel shall be reasonably acceptable to
IMS HEALTH, the reporting of such Tax Benefit shall not subject the Corporation
to the imposition of a penalty unless IMS HEALTH agrees to indemnify the
Corporation for such penalty.
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14
If an audit or other examination of any federal, state or local Tax Return
for any taxable period shall result (by settlement or otherwise) in a Deferred
Compensation Deduction or Post-Distribution Expense Deduction in favor of the
IMS HEALTH Group or any member thereof, then:
If necessary, the Corporation shall notify IMS HEALTH and shall provide IMS
HEALTH with adequate information so that it can reflect on the appropriate Tax
Returns any resulting increases in deductions, losses or Tax credits or
decreases in income, gains or recapture of Tax credits;
IMS HEALTH shall pay the Corporation the amount of any Tax Benefit that
results from such Deferred Compensation Deduction or Post-Distribution Expense
Deduction within 30 days of the date such Tax Benefits are realized;
Notwithstanding the foregoing, IMS HEALTH shall only be required to take
steps to obtain such Tax Benefit or to pay the Corporation if, in the opinion of
IMS HEALTH's Tax counsel, which counsel shall be reasonably acceptable to the
Corporation, the reporting of such Tax Benefit shall not subject IMS HEALTH to
the imposition of a penalty unless the Corporation agrees to indemnify IMS
HEALTH for such penalty.
Realization of Tax Benefits.
For purposes of this Section 4.2, a Tax Benefit shall be deemed to have
been realized at the time any refund of Taxes is received or applied against
other Taxes due, or at the time of filing of a Tax Return (including any Tax
Return relating to estimated Taxes) on which a loss, deduction or credit is
applied in reduction of Taxes which would otherwise be payable; provided,
however, that where a Party has other losses, deductions, credits or similar
items available to it, such deductions, credits or similar items may be applied
prior to the use of any adjustments relating to a Reorganization Tax Payment or
any Deferred Compensation Deduction or Post-Distribution Expense Deduction.
Either Party may, at its election, pay the amount of any Tax Benefit to the
other Party rather than filing amended returns or otherwise reflecting
adjustments or taking positions on its Tax Returns. If such an election is made,
the Party will be treated as having realized a Tax Benefit at the time it would
have realized a Tax Benefit had it chosen to file amended returns or otherwise
to reflect adjustments or to take positions on its Tax Returns.
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15
Tax Benefits Subsequently Denied. If any Tax Benefit realized pursuant to
Section 4.2(b)(i) is subsequently denied, then IMS HEALTH or the Corporation, as
the case may be, shall refund the amount of any payment for such Tax Benefit
within 30 days of its notification by the other Party that a Final Determination
has been reached denying the claimed Tax Benefit.
SECTION Competent Authority Relief. If as a result of any audit of a
taxable period beginning prior to the Distribution Date, a Party (or Subsidiary)
is required to adjust its income, deductions, credits or allowances under
Section 482 of the Code or under similar principles in a foreign jurisdiction,
and the payment of additional Taxes in accordance with such a determination
allows the other Party (or Subsidiary) to obtain competent authority relief as a
result thereof, then the Party eligible to obtain such relief shall: execute or
cause to be executed any powers of attorney or other documents necessary to
enable the other Party to pursue such relief at its own expense; and cooperate
with the other Party and the competent authorities in seeking such relief.
ARTICLE TAX AUDITS, TRANSACTIONS AND OTHER MATTERS
SECTION Tax Audits and Controversies. In the case of any audit, examination
or other proceeding ("Proceeding") brought against a Party (or Subsidiary) with
respect to Taxes for which the other Party is or may be liable pursuant to this
Agreement, the Party subject to such Proceeding shall promptly inform such other
Party and shall execute or cause to be executed any powers of attorney or other
documents necessary to enable the other Party to take all actions desired with
respect to such Proceeding to the extent such Proceeding may affect the amount
of Taxes for which the other Party is liable pursuant to this Agreement. Each
Party shall have the right to control, at its own expense, the portion of any
such Proceeding that relates to Taxes for which such Party is or may be liable
pursuant to this Agreement; provided, however, that such Party shall consult
with the other Party with respect to any issue that may affect the other Party
(or Subsidiary). The Party in control of such Proceeding or any part thereof
shall not enter into any final settlement or closing agreement that may
adversely affect the other Party (or Subsidiary) without the consent of such
other Party, which consent may not unreasonably be withheld. Where consent to
any final settlement or closing agreement is withheld, the Party withholding
consent shall continue or initiate further proceedings, at its own expense, and
the liability of the Party in control of such Proceeding shall not exceed the
liability that would have resulted from the proposed closing agreement or final
settlement (including interest, additions to Tax and penalties which have
accrued at that time).
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16
SECTION Cooperation. The Corporation and IMS HEALTH shall cooperate with
each other in the filing of any Tax Returns and the conduct of any audit or
other proceeding and each shall execute and deliver such powers of attorney and
other documents and make available such information and documents as are
necessary to carry out the intent of this Agreement. To the extent such
cooperation involves the services of officers, directors, employees, or agents
of a Party, such services shall be made available in accordance with Section 2.9
of the Distribution Agreement. Each Party agrees to notify the other Party of
any audit adjustment that does not result in Tax liability but can reasonably be
expected to affect Tax Returns of the other Party or any of its Subsidiaries.
Notwithstanding any other provision of this Agreement, if a Party (the
"Nonperforming Party") fails to give its full cooperation and use its best
efforts in the conduct of an audit or other proceeding as provided by this
Section 5.2, and such failure results in the imposition of additional Taxes for
the period or periods involved in the audit or other proceeding, the
Nonperforming Party shall be liable in full for such additional Taxes.
SECTION Retention of Records; Access. Beginning on the Distribution Date,
the Corporation and IMS HEALTH shall, and shall cause each of their Controlled
Entities to:
retain adequate records, documents, accounting data and other information
(including computer data) necessary for the preparation and filing of all Tax
Returns required to be filed by any member of the Pre-Distribution Cognizant
Group or any combination of such members and for any audits and litigation
relating to such Tax Returns or to any Taxes payable by any member of the
Pre-Distribution Cognizant Group or any combination of such members; and
give to the other Party reasonable access to such records, documents,
accounting data and other information (including computer data) and to its
personnel and premises, for the purpose of the review or audit of such reports
or returns to the extent relevant to an obligation or liability of a Party under
this Agreement and in accordance with the procedures provided in Article IV of
the Distribution Agreement. The obligations set forth in these paragraphs 5.3(a)
and 5.3(b) shall continue until the final conclusion of any litigation to which
the records and information relate or until expiration of all applicable
statutes of limitations, whichever is longer.
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SECTION Dispute Resolution. Any dispute or claim arising out of, in
connection with, or in relation to the interpretation, performance,
nonperformance, validity or breach of this Agreement or otherwise arising out
of, or in any way related to this Agreement, shall be resolved in the manner set
forth in Article VI of the Distribution Agreement.
SECTION Confidentiality; Ownership of Information; Privileged Information.
The provisions of Article IV of the Distribution Agreement relating to
confidentiality of information, ownership of information, privileged information
and related matters shall apply with equal force to any records and information
prepared and/or shared by and between the Parties in carrying out the intent of
this Agreement.
ARTICLE MISCELLANEOUS
SECTION Complete Agreement; Construction. This Agreement, including the
Exhibits and Schedules, shall constitute the entire agreement between the
Parties with respect to the subject matter hereof and shall supersede all
previous negotiations, commitments and writings with respect to such subject
matter. In the event of any inconsistency between this Agreement and any
Schedule hereto, the Schedule shall prevail.
SECTION Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the Parties and delivered to the other Party.
SECTION Survival of Agreements. Except as otherwise provided by this
Agreement, all covenants and agreements of the Parties contained in this
Agreement shall survive the Distribution Date.
A. SECTION Expenses. Except as otherwise set forth in this Agreement, all costs
and expenses in connection with the preparation, execution, delivery and
required implementation of this Agreement shall be charged to and paid by the
Parties in accordance with Section 8.5 of the Distribution Agreement.
SECTION Notices. All notices and other communications hereunder shall be in
writing and hand delivered or mailed by registered or certified mail (return
receipt requested) or sent by any means of electronic message transmission with
delivery confirmed (by voice or otherwise) to the Parties at the following
addresses (or at such other addresses for a Party as shall be specified by like
notice) and will be deemed given on the date on which such notice is received:
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18
To the Corporation:
Nielsen Media Research, Inc.
299 Park Avenue
New York, NY 10171
Telecopy:
Attn: Chief Legal Officer
To IMS HEALTH:
200 Nyala Farms
Westport, CT 06880
Telecopy: (203) 222-4313
Attn: General Counsel
and
Vice President - Taxes
SECTION Waivers. The failure of any Party to require strict performance by
any other Party of any provision in this Agreement will not waive or diminish
that Party's right to demand strict performance thereafter of that or any other
provision hereof.
SECTION Amendments. This Agreement may not be modified or amended except by
an agreement in writing signed by each of the Parties hereto.
SECTION Assignment. This Agreement shall not be assignable, in whole or in
part, directly or indirectly, by any Party hereto without the prior written
consent of t