** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

 

**(Mark one)**

 
| **ý**                                                                                                                                                                                                                                                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                   |       |                                                                                          |
| **For the quarterly period ended June 30,  2004**                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                   |       |                                                                                          |
| **OR**                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                   |       |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                   |       |                                                                                          |
| **For the transition period from                      to                    ** |

 

**Commission file number 001-14049**

 

| **IMS Health Incorporated**                             |
|---------------------------------------------------------|
| (Exact name of registrant as specified in  its charter) |
|                                                    |   |   |
| **Delaware**                                            |   | **06-1506026** |
| (State of Incorporation)                                |   | (I.R.S. Employer Identification No.) |
|                                                    |   |   |
| **1499 Post Road, Fairfield, CT**                       |   | **06824** |
| (Address of principal executive offices)                |   | (Zip Code) |

 

Registrant’s telephone number, including area code              **(203) 319-4700**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Sections 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý No o

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:

 

| **Title  of Class**                    | ** ** | **Shares Outstanding   At June 30, 2004** |
|----------------------------------------|------------|-------------------------------------------|
| Common Stock, par value $.01 per share |       | 233,858,708                               |

 

 

----

 

**IMS HEALTH INCORPORATED**

 

**INDEX TO FORM 10-Q**

 
| **PART I. FINANCIAL INFORMATION**                                                                       | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** |
| **Item 1. Financial Statements (Unaudited)**                                                            | ** ** |
|                                                                                                    | ** ** |
| Condensed Consolidated Statements of  Financial Position  As of June 30, 2004 and December 31, 2003     |       |
|                                                                                                    |       |
| Condensed Consolidated Statements of Income  Three Months Ended June 30, 2004 and 2003                  |       |
|                                                                                                    |       |
| Condensed Consolidated Statements of Income  Six Months Ended June 30, 2004 and 2003                    |       |
|                                                                                                    |       |
| Condensed Consolidated Statements of Cash Flows  Six Months Ended June 30, 2004 and 2003                |       |
|                                                                                                    |       |
| Notes to Condensed Consolidated Financial  Statements                                                   |       |
|                                                                                                    |       |
| **Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations** |       |
| ** **                                                                                              |       |
| **Item 3. Quantitative and Qualitative  Disclosures About Market Risk**                                 | ** ** |
| ** **                                                                                              | ** ** |
| **Item 4. Controls and Procedures**                                                                     | ** ** |
| ** **                                                                                              | ** ** |
| **PART II.  OTHER INFORMATION**                                                                    | ** ** |
| ** **                                                                                              | ** ** |
| **Item 1. Legal Proceedings**                                                                           | ** ** |
| ** **                                                                                              | ** ** |
| **Item 2. Changes in Securities, Use of  Proceeds and Issuer Purchases of Equity Securities**           | ** ** |
| ** **                                                                                              |       |
| **Item 4. Submission of Matters to a Vote of  Security Holders**                                        | ** ** |
| ** **                                                                                              | ** ** |
| **Item 6. Exhibits and Reports on Form 8-K**                                                            | ** ** |
|                                                                                                    |       |
| **SIGNATURES**                                                                                          | ** ** |
| ** **                                                                                              | ** ** |
| **EXHIBITS**                                                                                            | ** ** |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

**Item I.FINANCIAL STATEMENTS**

 

**IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL POSITION(Unaudited)**

*(Dollars and shares in thousands,except per share data)*

* *
| ** **                                                                                                                            | ** ** | **As of June 30,  2004** | ** **    | **As of December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|------------------------------|------------|
| **Assets:**                                                                                                                           |       |                     | ** **    |                         |       |
| **Current Assets:**                                                                                                                   |       |                     | ** **    |                         |       |
| Cash and cash equivalents                                                                                                             | ** ** | **$**                    | **371,897**   | ** **                   | $          | 344,432 |   |
| Short-term marketable securities                                                                                                      | ** ** | **27,821**               | ** **    | 40,108                       |       |
| Accounts receivable, net of allowances of  $4,753 and $4,429 in 2004 and 2003, respectively                                           | ** ** | **293,715**              | ** **    | 271,268                      |       |
| Other current assets                                                                                                                  | ** ** | **111,851**              | ** **    | 123,121                      |       |
| **Total Current Assets**                                                                                                              | ** ** | **805,284**              | ** **    | 778,929                      |       |
| Securities and other investments                                                                                                      | ** ** | **12,023**               | ** **    | 14,988                       |       |
| TriZetto equity investment (Note 8)                                                                                                   | ** ** | **40,562**               | ** **    | 42,742                       |       |
| Property, plant and equipment, net of  accumulated depreciation of $181,882 and $174,472 in 2004 and 2003,  respectively              | ** ** | **140,277**              | ** **    | 141,282                      |       |
| Computer software                                                                                                                     | ** ** | **207,903**              | ** **    | 198,558                      |       |
| Goodwill                                                                                                                              | ** ** | **259,677**              | ** **    | 247,958                      |       |
| Other assets                                                                                                                          | ** ** | **222,529**              | ** **    | 219,881                      |       |
| **Total Assets**                                                                                                                      | ** ** | **$**                    | **1,688,255** | ** **                   | $          | 1,644,338 |   |
| ** **                                                                                                                            | ** ** | ** **               | ** **    |                         |       |
| **Liabilities, Minority Interests and  Shareholders’ Equity:**                                                                   |       |                     | ** **    |                         |       |
| **Current Liabilities:**                                                                                                              |       |                     | ** **    |                         |       |
| Accounts payable                                                                                                                      | ** ** | **$**                    | **52,177**    | ** **                   | $          | 47,513 |   |
| Accrued and other current liabilities                                                                                                 | ** ** | **160,829**              | ** **    | 190,478                      |       |
| Short-term debt                                                                                                                       | ** ** | **233,417**              | ** **    | 409,941                      |       |
| Accrued income taxes                                                                                                                  | ** ** | **102,626**              | ** **    | 67,369                       |       |
| Short-term deferred tax liability                                                                                                     | ** ** | **9,461**                | ** **    | 9,248                        |       |
| Deferred revenues                                                                                                                     | ** ** | **113,921**              | ** **    | 112,076                      |       |
| **Total Current Liabilities**                                                                                                         | ** ** | **672,431**              | ** **    | 836,625                      |       |
| Postretirement and postemployment benefits                                                                                            | ** ** | **91,293**               | ** **    | 86,920                       |       |
| Long-term debt (Note 10)                                                                                                              | ** ** | **401,187**              | ** **    | 152,050                      |       |
| Other liabilities                                                                                                                     | ** ** | **234,760**              | ** **    | 277,313                      |       |
| **Total Liabilities**                                                                                                                 | ** ** | **$**                    | **1,399,671** | ** **                   | $          | 1,352,908 |   |
| ** **                                                                                                                            | ** ** | ** **               | ** **    |                         |       |
| **Commitments and contingencies (Note 9)**                                                                                            |       |                     | ** **    |                         |       |
| **Minority Interests**                                                                                                                | ** ** | **$**                    | **103,021**   | ** **                   | $          | 101,853 |   |
| **Shareholders’ Equity:**                                                                                                        |       |                     | ** **    |                         |       |
| Common Stock, par value $.01, authorized  800,000 shares; issued 335,045 shares at June 30, 2004 and December 31, 2003,  respectively | ** ** | **$**                    | **3,350**     | ** **                   | $          | 3,350 |   |
| Capital in excess of par                                                                                                              | ** ** | **481,550**              | ** **    | 490,297                      |       |
| Retained earnings                                                                                                                     | ** ** | **1,926,202**            | ** **    | 1,789,503                    |       |
| Treasury stock, at cost, 101,187 and 96,706  shares at June 30, 2004 and December 31, 2003, respectively                              | ** ** | **(2,158,697**           | **)**         | (2,032,748                   | )          |
| Cumulative translation adjustment                                                                                                     | ** ** | **(44,668**              | **)**         | (37,255                      | )          |
| Minimum pension liability adjustment, net  of taxes of $10,806 at June 30, 2004 and December 31, 2003                                 | ** ** | **(21,963**              | **)**         | (21,963                      | )          |
| Unrealized loss on changes in fair value of  cash flow hedges, net of tax                                                             | ** ** | **(1,323**               | **)**         | (2,299                       | )          |
| Unrealized gains on investments, net of  taxes of $599 and $373 at June 30, 2004 and December 31, 2003, respectively                  | ** ** | **1,112**                | ** **    | 692                          |       |
| **Total Shareholders’ Equity**                                                                                                   | ** ** | **$**                    | **185,563**   | ** **                   | $          | 189,577 |   |
| **Total Liabilities, Minority Interests and  Shareholders’ Equity**                                                              | ** ** | **$**                    | **1,688,255** | ** **                   | $          | 1,644,338 |   |

## ** **

## ***See accompanying Notes to theCondensed Consolidated Financial Statements (unaudited).***

## ** **

3

----

 

## **IMSHEALTH INCORPORATED**

## **CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

*(Dollarsand shares in thousands, except per share data)*

 
| ** **                                                                                              | ** ** | **Three Months Ended  June 30,** | ** **  |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                              | ** ** | **2004**                         |        | **2003** | ** ** |
|                                                                                                    |       |                             |        |   |   |
| **Operating Revenue**                                                                                   | ** ** | **$**                            | **379,583** | ** ** | $ | 337,776 |   |
|                                                                                                    |       |                             | ** **  |   |   |
| Operating costs                                                                                         | ** ** | **162,386**                      | ** **  | 141,547 |   |
| Selling and administrative expenses                                                                     | ** ** | **92,412**                       | ** **  | 79,099 |   |
| Depreciation and amortization                                                                           | ** ** | **22,317**                       | ** **  | 19,831 |   |
| **Operating Income**                                                                                    | ** ** | **102,468**                      | ** **  | 97,299 |   |
| Interest income                                                                                         | ** ** | **2,103**                        | ** **  | 1,255 |   |
| Interest expense                                                                                        | ** ** | **(4,162**                       | **)**       | (3,920 | ) |
| Gains (losses) from investments, net                                                                    | ** ** | **2,074**                        | ** **  | 32 |   |
| Gain (loss) on issuance of investees’  stock, net                                                  | ** ** | **(91**                          | **)**       | 54 |   |
| Other expense, net                                                                                      | ** ** | **(1,604**                       | **)**       | (9,835 | ) |
| **Non-Operating Income (Loss), Net**                                                                    | ** ** | **(1,680**                       | **)**       | (12,414 | ) |
| Income before provision for income taxes                                                                | ** ** | **100,788**                      | ** **  | 84,885 |   |
| Provision for income taxes (Note 12)                                                                    | ** ** | **(35,364**                      | **)**       | (29,463 | ) |
| TriZetto equity loss, net of income taxes  of $196 and $43** **for 2004 and 2003, respectively     | ** ** | **(303**                         | **)**       | (66 | ) |
| **Net Income**                                                                                          | ** ** | **$**                            | **65,121**  | ** ** | $ | 55,356 |   |
|                                                                                                    |       |                             | ** **  |   |   |
| **Basic Earnings Per Share of Common Stock**                                                            | ** ** | **$**                            | **0.28**    | ** ** | $ | 0.23 |   |
|                                                                                                    |       |                             | ** **  |   |   |
| **Diluted Earnings Per Share of Common Stock**                                                          | ** ** | **$**                            | **0.27**    | ** ** | $ | 0.23 |   |
|                                                                                                    | ** ** | ** **                       | ** **  |   |   |
| Weighted average number of shares  outstanding – basic                                             | ** ** | **235,142**                      | ** **  | 241,999 |   |
| Dilutive effect of shares issuable as of  period-end under stock option plans                           | ** ** | **5,017**                        | ** **  | 813 |   |
| Adjustment of shares outstanding applicable  to exercised and cancelled stock options during the period | ** ** | **137**                          | ** **  | 5 |   |
| **Weighted Average Number of Shares  Outstanding – Diluted**                                       | ** ** | **240,296**                      | ** **  | 242,817 |   |

 

*See accompanying Notes to the Condensed ConsolidatedFinancial Statements (unaudited).*

 

4

----

 

## **IMSHEALTH INCORPORATED**

## **CONDENSEDCONSOLIDATED STATEMENTS OF INCOME(Unaudited)**

*(Dollarsand shares in thousands, except per share data)*

 
| ** **                                                                                              | ** ** | **Six Months Ended  June 30,** | ** **  |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                                                                              | ** ** | **2004**                       | ** **  | **2003** | ** ** |
|                                                                                                    |       |                           |        |   |   |
| **Operating Revenue**                                                                                   | ** ** | **$**                          | **741,159** | ** ** | $ | 651,693 |   |
|                                                                                                    |       |                           | ** **  |   |   |
| Operating costs                                                                                         | ** ** | **311,940**                    | ** **  | 278,804 |   |
| Selling and administrative expenses                                                                     | ** ** | **186,496**                    | ** **  | 160,591 |   |
| Depreciation and amortization                                                                           | ** ** | **44,023**                     | ** **  | 36,629 |   |
| Severance, impairment and other  charges                                                                | ** ** | **—**                     | ** **  | 37,220 |   |
| **Operating Income**                                                                                    | ** ** | **198,700**                    | ** **  | 138,449 |   |
| Interest income                                                                                         | ** ** | **3,065**                      | ** **  | 2,518 |   |
| Interest expense                                                                                        | ** ** | **(8,433**                     | **)**       | (7,974 | ) |
| Gains (losses) from investments, net                                                                    | ** ** | **8,527**                      | ** **  | (844 | ) |
| Loss on issuance of investees’ stock, net                                                          | ** ** | **(91**                        | **)**       | (261 | ) |
| Other income (expense), net                                                                             | ** ** | **1,173**                      | ** **  | (20,638 | ) |
| **Non-Operating Income (Loss), Net**                                                                    | ** ** | **4,241**                      | ** **  | (27,199 | ) |
| Income before provision for income taxes                                                                | ** ** | **202,941**                    | ** **  | 111,250 |   |
| Provision for income taxes (Note 12)                                                                    | ** ** | **(55,473**                    | **)**       | (93,812 | ) |
| TriZetto equity loss, net of income taxes  of $820 and $258 for 2004 and 2003, respectively             | ** ** | **(1,269**                     | **)**       | (399 | ) |
| TriZetto impairment charge, net  of income taxes of $9,565 for 2003                                     | ** ** | **—**                     | ** **  | (14,842 | ) |
| **Income from continuing operations**                                                                   | ** ** | **146,199**                    | ** **  | 2,197 |   |
| Income from discontinued operations, net of  income taxes of $1,237 for 2003 (Note 6)                   | ** ** | **—**                     | ** **  | 2,779 |   |
| Gain on discontinued operations  (Note 6)                                                               | ** ** | **—**                     | ** **  | 495,053 |   |
| **Net Income**                                                                                          | ** ** | **$**                          | **146,199** | ** ** | $ | 500,029 |   |
| **Basic Earnings Per Share of Common Stock:**                                                           |       |                           | ** **  |   |   |
| Income from continuing operations                                                                       | ** ** | **$**                          | **0.62**    | ** ** | $ | 0.01 |   |
| Income from discontinued operations                                                                     | ** ** | **—**                     | ** **  | 1.99 |   |
| **Basic Earnings Per Share of Common Stock**                                                            | ** ** | **$**                          | **0.62**    | ** ** | $ | 1.99 |   |
|                                                                                                    |       |                           | ** **  |   |   |
| **Diluted Earnings Per Share of Common Stock:**                                                         |       |                           | ** **  |   |   |
| Income from continuing operations                                                                       | ** ** | **$**                          | **0.61**    | ** ** | $ | 0.01 |   |
| Income from discontinued operations                                                                     | ** ** | **—**                     | ** **  | 1.98 |   |
| **Diluted Earnings Per Share of Common Stock**                                                          | ** ** | **$**                          | **0.61**    | ** ** | $ | 1.99 |   |
|                                                                                                    | ** ** | ** **                     | ** **  |   |   |
| Weighted average number of shares  outstanding – basic                                             | ** ** | **235,074**                    | ** **  | 250,658 |   |
| Dilutive effect of shares issuable as of  period-end under stock option plans                           | ** ** | **4,901**                      | ** **  | 663 |   |
| Adjustment of shares outstanding applicable  to exercised and cancelled stock options during the period | ** ** | **354**                        | ** **  | 5 |   |
| **Weighted Average Number of Shares  Outstanding – Diluted**                                       | ** ** | **240,329**                    | ** **  | 251,326 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements (unaudited).*

 

5

----

 

**IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

*(Dollars and shares in thousands,except per share data)*

 
| ** **                                                                               | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                               | ** ** | **2004**                      | ** **  | **2003** | ** ** |
| **Cash Flows from Operating Activities:**                                                |       |                          | ** **  |   |   |
| Net income                                                                               | ** ** | **$**                         | **146,199** | ** ** | $ | 500,029 |   |
| Less income from discontinued operations  and gain on disposal                           | ** ** | **—**                    | ** **  | (497,832 | ) |
| Income from continuing operations                                                        | ** ** | **146,199**                   | ** **  | 2,197 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:       |       |                          | ** **  |   |   |
| Depreciation and amortization                                                            | ** ** | **44,023**                    | ** **  | 36,629 |   |
| Bad debt expense                                                                         | ** ** | **450**                       | ** **  | 513 |   |
| Deferred income taxes                                                                    | ** ** | **32,966**                    | ** **  | 9,079 |   |
| (Gains) losses from investments, net                                                     | ** ** | **(8,527**                    | **)**       | 844 |   |
| Loss on issuance of investees’ stock, net                                           | ** ** | **91**                        | ** **  | 261 |   |
| TriZetto equity loss, net                                                                | ** ** | **1,269**                     | ** **  | 399 |   |
| TriZetto impairment charge, net                                                          | ** ** | **—**                    | ** **  | 14,842 |   |
| Minority interests in net income of  consolidated companies                              | ** ** | **2,781**                     | ** **  | 5,445 |   |
| Non-cash stock compensation charges                                                      | ** ** | **1,492**                     | ** **  | 1,532 |   |
| Non-cash portion of severance, impairment  and other charges                             | ** ** | **—**                    | ** **  | 6,480 |   |
| Change in assets and liabilities, excluding  effects from acquisitions and dispositions: |       |                          | ** **  |   |   |
| Net increase in accounts receivable                                                      | ** ** | **(17,601**                   | **)**       | (12,984 | ) |
| Net increase in inventory                                                                | ** ** | **(3,055**                    | **)**       | (857 | ) |
| Net increase in prepaid expenses and other  current assets                               | ** ** | **(10,846**                   | **)**       | (13,071 | ) |
| Net increase in accounts payable                                                         | ** ** | **3,736**                     | ** **  | 2,149 |   |
| Net decrease in accrued and other current  liabilities                                   | ** ** | **(27,590**                   | **)**       | (7,453 | ) |
| Net (decrease) increase in accrued  severance, impairment and other charges              | ** ** | **(3,374**                    | **)**       | 18,304 |   |
| Net increase in deferred revenues                                                        | ** ** | **393**                       | ** **  | 3,300 |   |
| Net (decrease) increase in accrued income  taxes                                         | ** ** | **(12,774**                   | **)**       | 52,210 |   |
| Net decrease in pension assets and  liabilities                                          | ** ** | **385**                       | ** **  | 933 |   |
| Net decrease in other long-term assets                                                   | ** ** | **5,345**                     | ** **  | 2,065 |   |
| Net tax benefit on stock option exercises                                                | ** ** | **6,029**                     | ** **  | 78 |   |
| Nielsen Media Research payment received in  respect of D&B Legacy Tax Matters        | ** ** | **—**                    | ** **  | 37,025 |   |
| **Net Cash Provided by Operating Activities**                                            | ** ** | **161,392**                   | ** **  | 159,920 |   |
| **Cash Flows Used in Investing Activities:**                                             |       |                          | ** **  |   |   |
| Capital expenditures                                                                     | ** ** | **(10,997**                   | **)**       | (9,133 | ) |
| Additions to computer software                                                           | ** ** | **(36,736**                   | **)**       | (37,680 | ) |
| Investments in short-term marketable  securities                                         | ** ** | **12,287**                    | ** **  | (3,333 | ) |
| Payments for acquisitions of businesses,  net of cash acquired                           | ** ** | **(19,275**                   | **)**       | (48,966 | ) |
| Funding of venture capital investments                                                   | ** ** | **(500**                      | **)**       | (1,200 | ) |
| Other investing activities, net                                                          | ** ** | **1,455**                     | ** **  | (2,843 | ) |
| **Net Cash Used in Investing Activities**                                                | ** ** | **(53,766**                   | **)**       | (103,155 | ) |
| **Cash Flows Used in Financing Activities:**                                             |       |                          | ** **  |   |   |
| Net increase (decrease) in debt                                                          | ** ** | **72,766**                    | ** **  | (91,272 | ) |
| Borrowings under private placement                                                       | ** ** | **—**                    | ** **  | 150,000 |   |
| Payments for purchase of treasury stock                                                  | ** ** | **(204,284**                  | **)**       | (93,550 | ) |
| Proceeds from exercise of stock options                                                  | ** ** | **60,220**                    | ** **  | 1,755 |   |
| Dividends paid                                                                           | ** ** | **(9,500**                    | **)**       | (9,785 | ) |
| Proceeds from employee stock purchase plan                                               | ** ** | **1,847**                     | ** **  | 1,385 |   |
| Increase in cash overdrafts                                                              | ** ** | **2,011**                     | ** **  | 832 |   |
| Payments to minority interests                                                           | ** ** | **(1,613**                    | **)**       | (4,152 | ) |
| Refund of cash portion of Synavant spin-off  dividend                                    | ** ** | **—**                    | ** **  | 4,863 |   |
| **Net Cash Used in Financing Activities**                                                | ** ** | **(78,553**                   | **)**       | (39,924 | ) |
| Effect of Exchange Rate Changes                                                          | ** ** | **(1,608**                    | **)**       | 4,956 |   |
| **Increase in Cash and Cash Equivalents**                                                | ** ** | **27,465**                    | ** **  | 21,797 |   |
| **Cash and Cash Equivalents, Beginning of  Period**                                      | ** ** | **344,432**                   | ** **  | 264,732 |   |
| **Cash and Cash Equivalents, End of Period**                                             | ** ** | **$**                         | **371,897** | ** ** | $ | 286,529 |   |

* *

*See accompanying Notes to the CondensedConsolidated Financial Statements (unaudited).*

 

6

----

 

**IMS HEALTH INCORPORATED**

**NOTES TO CONDENSED****CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

*(Dollars and shares in thousands,except per share data)*

 

**Note 1.**                                  Interim Condensed Consolidated FinancialStatements (unaudited)

** **

The accompanying Condensed ConsolidatedFinancial Statements (unaudited) have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and Article 10 of Regulation S-X under theSecurities and Exchange Act of 1934, as amended.  The Condensed Consolidated FinancialStatements (unaudited) do not include all the information and notes required byaccounting principles generally accepted in the United States of America forcomplete financial statements.  In theopinion of management, all adjustments, all of which are of a normal recurringnature, considered necessary for a fair presentation of financial position,results of operations and cash flows for the periods presented have beenincluded.  The results of operations forinterim periods are not necessarily indicative of the results expected for thefull year.  The Condensed ConsolidatedFinancial Statements (unaudited) and related notes should be read inconjunction with the Consolidated Financial Statements and related notes of IMSHealth Incorporated (the “Company” or “IMS”) included in its 2003 Annual Reporton Form 10-K and in its previous filings on Form 10-Q.  Certain prior year amounts have beenreclassified to conform to the 2004 presentation.  Amounts presented in the Condensed ConsolidatedFinancial Statements (unaudited) may not add due to rounding.

** **

**Note 2.**                                  Basis of Presentation

** **

The Company is a leading global provider of information solutions tothe pharmaceutical and healthcare industries. The Company’s revenues are derived primarily from the sale of a broadline of market information, sales management and consulting services to thepharmaceutical and healthcare industries. The Company’s information products are developed to meet client needs byusing data secured from a worldwide network of suppliers in the markets whereoperations exist.  Key information productsinclude:

 

•      Sales Force Effectiveness tooptimize sales force productivity and territory management;

 

•      Portfolio Optimization toprovide clients with insights into market opportunity and business developmentassessment;

 

•      Brand and Launch Managementand Other to support client needs relative to market segmentation andpositioning and life cycle management for prescription and over-the-counterpharmaceutical products; and

 

•      Consulting and Services thatuse in-house capabilities and methodologies to assist pharmaceutical clients inanalyzing and evaluating market trends, strategies and tactics, and to help inthe development and implementation of customized software applications and datawarehouse tools.

 

The Company operates in more than 100 countries.  The Company also owns a venture capital unit,Enterprise Associates, LLC (“Enterprises”), which is focused on investments inemerging businesses, and a 25.8% equity interest in The TriZettoGroup, Inc. (“TriZetto”), at June 30, 2004.

 

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The Company is managed ona global business model with global leaders for the majority of its criticalbusiness processes and accordingly has one reportable segment.

 

Management believes thatimportant measures of the Company’s financial condition and results ofoperations include operating revenue, constant dollar revenue growth, operatingincome, operating margin and cash flows.

 

Until February 6, 2003,the Company also included the Cognizant Technology Solutions CorporationSegment (“CTS”), which provides custom Information Technology (“IT”) design,development, integration and maintenance services.  CTS is a publicly traded corporation on theNasdaq national market system.  TheCompany owned 55.3% of the common shares outstanding of CTS (92.5% of theoutstanding voting power) as of December 31, 2002, and accounted for CTS as aconsolidated subsidiary.  On February 6,2003, the Company divested CTS through a split-off transaction, and as aresult, the Company’s share of CTS results are presented as discontinuedoperations for 2003 through the date of divestiture (see Note 6).

 

**Note 3.**                                  Summary of Recent AccountingPronouncements

** **

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,”(“FIN 46”).  FIN 46 requires all VariableInterest Entities (“VIEs”) to be consolidated by the primary beneficiary.  The primary beneficiary is the entity thatholds the majority of the beneficial interests in the VIE.  In addition, FIN 46 expands disclosurerequirements for both VIEs that are consolidated as well as VIEs from which theentity is the holder of a significant amount of the beneficial interest, butnot the majority.  In December 2003, theFASB issued Interpretation 46R, “Consolidation of Variable Interest Entities”(revised December 2003), (“FIN 46R”) which further clarified the provisions ofFIN 46 and delayed the effective date for applying the provisions of FIN 46until the end of the first quarter of 2004 for interests held by publicentities in VIEs or potential VIEs created before February 1, 2003.  The adoption of FIN 46R did not have amaterial impact on the Company’s financial position, results of operations orcash flows for the three and six months ended June 30, 2004.

 

In December 2003, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 132(revised 2003), “Employer’s Disclosures about Pensions and Other PostretirementBenefits,” an amendment of SFAS Nos. 87, “Employers’ Accounting for Pensions”,88, “Employers’ Accounting for Settlements and Curtailments of Defined BenefitPension Plans and for Termination of Benefits,” and 106, *“***Employers’ Accounting for Postretirement Benefits OtherThan Pensions,”** and a revision of SFAS No. 132.  SFAS No. 132 (revised 2003) requiresadditional disclosures about the assets, obligations, cash flows, and netperiodic benefit cost of defined benefit pension plans and other postretirementbenefit plans, but does not change the measurement or recognition of suchplans.  The new disclosure requirementscontained in SFAS No. 132 (revised 2003) are effective for fiscal years endingafter December 15, 2003, with a delayed effective date for certain disclosures,for foreign plans, and for non-public entities. The Company has adopted all aspects of SFAS No. 132 (revised 2003) forall foreign and non-foreign plans, with the exception of the estimated futurebenefit payment disclosure.  Thisrequirement is first effective for fiscal years ending after June 15,2004.  Additionally the Company isrequired to disclose components of the net benefit cost in the quarterlyfinancial statements beginning with the first quarter of 2004.  This interim disclosure information isincluded in

 

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Note 11.  The adoption of SFAS No. 132 (revised 2003)did not have a material impact on the Company’s financial position, results ofoperations or cash flows for the three and six months ended June 30, 2004.

 

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the“Act”) was signed into law in the U.S. The Act introduced a prescription drug benefit under Medicare Part D anda federal subsidy to sponsors of retirement health care plans that provide abenefit that is at least actuarially equivalent to Medicare Part D.  In May 2004, the FASB issued Staff PositionNo. (“FSP”) FAS 106-2, “Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003.”  This statement requires entities to disclosethe effects of the Act and to assess the impact of the subsidy on theaccumulated postretirement benefit obligation and the net periodic postretirementbenefit cost in the first interim period beginning after June 15, 2004.  The effective date for the Company is thequarter ending September 30, 2004.  TheCompany is currently evaluating the impact of the Act on its postretirementbenefit plan.

 

**Note 4.**                                  Summary of Significant AccountingPolicies

** **

*Stock-based compensation.*  SFASNo. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure – anamendment of FASB Statement No. 123” requires that companies with stock-basedcompensation plans either recognize compensation expense based on the fairvalue of options granted or continue to apply the existing accounting rules anddisclose pro forma net income and earnings per share assuming the fair valuemethod had been applied.  The Company haschosen to continue applying Accounting Principles Board (“APB”) Opinion No. 25,and related interpretations in accounting for its plans.  If the compensation cost for the Company’s stock-basedcompensation plans was determined based on the fair value at the grant datesfor awards under those plans, consistent with the method of SFAS No. 123, theCompany’s net income and earnings per share would have been reduced to the proforma amounts indicated below for the three and six months ended June 30:

** **
| ** **           | ** **                                                                                                         | **Three months ended  June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|----------------------|--------------------------------------------------------------------------------------------------------------------|----------------------------------|------------|---------------------------------|------------|
| **2004**             | ** **                                                                                                         | **2003**                         | **2004**   | ** **                      | **2003**   |
| Net Income:          | As reported                                                                                                        |                             | **$**      | **65,121**                      | ** ** | $ | 55,356 |   | **$** | **146,199** | ** ** | $ | 500,029 |   |
|                 | Add:   Stock-based employee compensation expense included in reported net  income, net of tax                 |                             | **913**    | ** **                      | 552        |   | **1,657** | ** ** | 1,175 |   |
|                 | Deduct:   Total stock-based employee compensation expense under fair value  method for all awards, net of tax |                             | **(7,708** | **)**                           | (4,769     | ) | **(13,070** | **)** | (10,875 | ) |
|                 | Pro forma                                                                                                          |                             | **$**      | **58,326**                      | ** ** | $ | 51,139 |   | **$** | **134,786** | ** ** | $ | 490,329 |   |
| Earnings Per  Share: |                                                                                                               | ** **                       | ** ** |                            |       | ** ** | ** ** |   |   |
| Basic                | As reported                                                                                                        |                             | **$**      | **0.28**                        | ** ** | $ | 0.23 |   | **$** | **0.62** | ** ** | $ | 1.99 |   |
|                 | Pro forma                                                                                                          |                             | **$**      | **0.25**                        | ** ** | $ | 0.21 |   | **$** | **0.57** | ** ** | $ | 1.96 |   |
| Diluted              |                                                                                                               |                             | ** ** | ** **                      |       |   | ** ** | ** ** |   |   |
|                 | As reported                                                                                                        |                             | **$**      | **0.27**                        | ** ** | $ | 0.23 |   | **$** | **0.61** | ** ** | $ | 1.99 |   |
|                 | Pro forma                                                                                                          |                             | **$**      | **0.24**                        | ** ** | $ | 0.21 |   | **$** | **0.56** | ** ** | $ | 1.95 |   |

 

9

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For a description of theCompany’s other critical accounting policies, please refer to the Company’s2003 Annual Report on Form 10-K as filed with the Securities and ExchangeCommission.

 

**Note 5.**                                  Acquisitions

 

The Company makesacquisitions in order to expand its products, services and geographicreach.  During the six months ended June30, 2004, the Company completed four acquisitions for an aggregate cost of$19,497.  The acquisitions were SourceBelgium S.A. (Belgium), H.E.D.M. Bvba (Belgium), SciCon WissenschaftlicheUnternehmensberatung GmbH (Germany) and Groupe PR (France) and were accountedfor under the purchase method of accounting. As such, the aggregate purchase price has been allocated on apreliminary basis to the assets and liabilities acquired based on estimatedfair values as of the closing date.  Thepurchase price allocations will be finalized after completion of the valuationof certain assets and liabilities.  Anyadjustments resulting from the finalization of the purchase price allocationsare not expected to have a material impact on the Company’s results ofoperations.  The Condensed ConsolidatedFinancial Statements (unaudited) include the results of these acquiredcompanies subsequent to the closing of the acquisitions.  Had these acquisitions occurred as of January1, 2004 or 2003, the impact on the Company’s results of operations would not havebeen significant.  Goodwill of approximately$7,693 was recorded in connection with these acquisitions, of which none isdeductible for tax purposes.

 

During the three monthsended March 31, 2003, the Company completed two acquisitions for an aggregatecost of $52,938.  These acquisitions wereData Niche Associates, Inc. (U.S.) and Azyx Polska Geopharma InformationServices, Sp.z.o.o. (Poland).  Theseacquisitions were accounted for under the purchase method of accounting.  The aggregate purchase price for eachacquisition has been allocated to the assets and liabilities acquired based ontheir respective fair values.  TheCondensed Consolidated Financial Statements (unaudited) include the results ofthese acquired companies subsequent to the closing of the acquisitions.  Had these acquisitions occurred as of January1, 2003, the impact on the Company’s results of operations would not have beensignificant.  Goodwill of approximately$31,973 was recorded in connection with these acquisitions, of which $26,990 isdeductible for tax purposes.

 

During the three monthsended March 31, 2003, the Company also entered into an agreement to purchasethe Azyx business in Portugal.  However,at the time, the completion of this acquisition was contingent upon the Companygetting regulatory approval from Portugal. The Company received regulatory approval for the Azyx business inPortugal during July 2003, and the acquisition was completed during the thirdquarter of 2003.

 

**Note 6.**                                  CTS Split-Off

** **

On February 6, 2003, theCompany completed an exchange offer to distribute its majority interest inCTS.  The Company exchanged 0.309 sharesof CTS class B common shares for each share of the Company that was tendered.  Under terms of the offer, the Companyaccepted 36,540 IMS common shares tendered in exchange for all 11,291 CTScommon shares that the Company owned. As the offer was oversubscribed, the Company accepted tendered IMSshares on a pro-rata basis in proportion to the number of shares tendered.  The proration factor was 21.115717%.

 

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As a result of thisexchange offer, during the three months ended March 31, 2003, the Companyrecorded a net gain from discontinued operations of $495,053.  This gain was based on theCompany’s closingmarket price on February 6, 2003 multiplied by the 36,540 shares of IMS commonshares accepted in the offer, net of the Company’s carrying value of CTS and afterdeducting direct and incremental expenses related to the exchange offer.

 

During the first quarterof 2003, the Company recorded direct and incremental costs related to the CTSSplit-Off of approximately $17,300, consisting primarily of investment advisor,legal and accounting fees.  During thefourth quarter of 2003, the Company reversed $1,834 of expenses as a true up ofactual costs incurred.  This reversalresulted in an increase to the gain from discontinued operations of $1,834.

 

In accordance with theprovisions of SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” for the period from January 1, 2003 through the dispositiondate the Company recorded the results of CTS and the gain on disposal as incomefrom discontinued operations net of income taxes in the Condensed ConsolidatedStatements of Income (unaudited).

 

If, contrary to expectations,the CTS distribution were not to qualify as tax free under Section 355 ofthe Internal Revenue Code, then, in general, a corporate tax would be payableby the Company based on the difference between (x) the fairmarket value of the CTS class B common stock at the time of the exchange offerand (y) the Company’s adjusted tax basis in such class B common stock.  Pursuant to the distribution agreemententered into between the Company and CTS in connection with thedistribution, CTS agreed to indemnify the Company in the event the transaction is taxableas a result of a breach of certain representations made by CTS, subject tocertain exceptions.  In the opinion ofmanagement and based on the opinion of tax counsel, McDermott, Will &Emery, it is not probable, but may be reasonably possible, that the Companywill incur liability for this matter and as such the Company has not accruedfor this potential liability.  TheCompany estimates that the aggregate tax liability in this regard is notexpected to exceed $215,725.

 

**Note 7.**                                  Goodwill and Intangible Assets

** **

During the first half of2004, the Company recorded additional goodwill of $13,136 related primarily tothe preliminary allocation of purchase price for the four acquisitionscompleted in 2004 (see Note 5) and payments on earn-out agreements onacquisitions completed prior to 2004.  Asof June 30, 2004, goodwill amounted to $259,677.

 

All of the Company’s acquired intangibles are subject to amortization.  Intangibleasset amortization expense was $2,975 and $5,738, during the three and sixmonths ended June 30, 2004, respectively.  At June 30, 2004, intangibleassets were primarily composed of Customer Relationships, Databases and TradeNames (principally included in Other assets) and Computer software.  Thegross carrying amounts and related accumulated amortization of theseintangibles were $75,170 and $18,148, respectively, at June 30, 2004 and$58,612 and $7,597, respectively, at June 30, 2003.  These intangibles are amortized over periodsranging from two to fifteen years with a weighted average life of 7.7years.  The weighted average amortizationperiods of the acquired intangibles by asset class are listed in the followingtable:

 

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| **Intangible Asset Type**         | ** ** | **Weighted average  amortization (years) period** |
|-----------------------------------|------------|---------------------------------------------------|
| Customer Relationships            |       | 8.4                                               |
| Computer Software and  Algorithms |       | 9.8                                               |
| Databases                         |       | 4.9                                               |
| Trade Names                       |       | 3.7                                               |
| Other                             |       | 4.5                                               |
| Weighted average                  |       | 7.7                                               |

 

Customer relationships accounted for the largest portion of the Company’sacquired intangibles at June 30, 2004. In accordance with the principles of SFAS No. 142, “Goodwill and OtherIntangible Assets” and Statement of Financial Accounting Concepts No. 7, *“***Using Cash Flow Information and Present Value inAccounting Measurements,”** when determining the value ofcustomer relationships for purposes of allocating the purchase price of anacquisition, the Company looks at existing customer contracts of the acquiredbusiness to determine if they represent a reliable future source of income andhence, a valuable intangible asset for the Company.  The Company determines the fair value of thecustomer relationships based on the estimated future benefits the Companyexpects from the acquired customer contracts. In performing its evaluation and estimation of the useful life ofcustomer relationships, the Company looks to the historical growth rate ofoperating revenue of the acquired company’s existing customers as well as thehistorical attrition rates.

 

Based on current estimated useful lives, amortizationexpense associated with intangible assets at June 30, 2004 is estimated to beapproximately $3,000 for each of the last two quarters of 2004.  Annual amortization expense associated withintangible assets is estimated to be as follows:

** **
| **Year Ended   December 31,** | ** ** | **Amortization  expense** | ** ** |
|-------------------------------|------------|---------------------------|------------|
| 2005                          |       | $                         | 11,622     |   |
| 2006                          |       | 10,280                    |       |
| 2007                          |       | 8,005                     |       |
| 2008                          |       | 5,633                     |       |
| 2009                          |       | 4,618                     |       |
| Thereafter                    |       | $                         | 13,196     |   |

 

**Note 8.**                                  Investments in Equity Investees

** **

The Company’s investmentin TriZetto is accounted for under the equity method of accounting.  The Company’s share of the adjusted operatingresults of TriZetto amounted to losses of $303 and $1,269 for the three and sixmonths ended June 30, 2004, respectively (net of deferred tax benefits of$196 and $820, respectively).  For thethree and six months ended June 30, 2003, the Company’s share of theadjusted operating results of TriZetto amounted to losses of $66 and $399 (netof deferred tax benefits of $43 and $258, respectively).

 

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The Company performs a periodic assessment in accordance with its policyto determine whether an other-than-temporary decline in fair value hasoccurred.  Based on this assessment, animpairment charge of $14,842, net of taxes of $9,565, was recorded in the firstquarter of 2003, to write down the Company’s investment in TriZetto followingthe continued significant decline in the market value of TriZetto shares belowthe Company’s carrying value.  TheCompany concluded that these declines were other-than-temporary in accordancewith Staff Accounting Bulletin (“SAB”) No. 59, “Views on Accounting forNoncurrent Marketable Equity Securities,” and the impairment charge recordedbrought the Company’s book value in TriZetto down to TriZetto’s March 31, 2003market value.  As of June 30, 2004, themarket value of TriZetto exceeded the carrying value by approximately $40,310.

 

**Note 9.**                                  Contingencies

** **

The Company and itssubsidiaries are involved in legal and tax proceedings, claims and litigationarising in the ordinary course of business. Management periodically assesses the Company’s liabilities andcontingencies in connection with these matters based upon the latestinformation available.  For those matterswhere management currently believes it is probable that the Company will incura loss and that the probable loss or range of loss can be reasonably estimated,the Company has recorded reserves in the consolidated financial statementsbased on its best estimates of such loss. In other instances, because of the uncertainties related to either theprobable outcome or the amount or range of loss, management is unable to make areasonable estimate of a liability, if any. However, even in many instances where the Company has recorded a reserve,the Company is unable to predict with certainty the final outcome of the matteror whether resolution of the matter will materially affect the Company’sresults of operations, financial position or cash flows.  As additional information becomes available,the Company adjusts its assessment and estimates of such liabilitiesaccordingly.

 

The Company routinelyenters into agreements with its customers to sell data that the Companyacquires in the normal course of business. In these customer agreements the Company agrees to indemnify and holdharmless the customers for any damages they may suffer as a result of potentialintellectual property infringement claims. These indemnities typically have terms of approximately two years.  The Company has not accrued a liability withrespect to these matters, as the exposure is considered remote.

 

Based on its review ofthe latest information available, in the opinion of management, the ultimateliability of the Company in connection with pending tax and legal proceedings,claims and litigation will not have a material effect on the Company’s resultsof operations, cash flows or financial position, with the possible exception ofthe matters described below.

 

*Legacy and Related Matters*

 

In order to understandthe Company’s exposure to the potential liabilities described below, it isimportant to understand the relationship between the Company and itspredecessors and other parties that, through various corporate reorganizationsand contractual commitments, have assumed varying degrees of responsibilitywith respect to such matters.

 

In November 1996, thecompany then known as The Dun & Bradstreet Corporation (“D&B”)separated into three public companies by spinning-off ACNielsen Corporation(“ACNielsen”) and

 

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Cognizant Corporation(“Cognizant”) (the “1996 Spin-Off”). Pursuant to the agreements effecting the 1996 Spin-Off, among otherthings, certain liabilities, including contingent liabilities relating to theIRI Action (defined below) and tax liabilities arising out of certain priorbusiness transactions (the “D&B Legacy Tax Matters”), described more fullybelow, were allocated among D&B, ACNielsen and Cognizant.

 

In June 1998, Cognizantseparated into two public companies by spinning off IMS (the “1998 Spin-Off”)and then changed its name to Nielsen Media Research, Inc. (“NMR”).  As a result of the 1998 Spin-Off, the Companyand NMR are jointly and severally liable for all liabilities of Cognizant underthe agreements effecting the 1996 Spin-Off. As between themselves, however, the Company and NMR agreed that IMS willassume 75%, and NMR will assume 25%, of any payments to be made in respect ofthe IRI Action, including any legal fees and expenses related thereto incurredin 1999 or thereafter (IMS agreed to be responsible for legal fees and expensesincurred during 1998).  In addition, theCompany and NMR agreed they would share equally Cognizant’s share of liabilityarising out of the D&B Legacy Tax Matters after the Company paid the first$130,000 of such liability.  NMR’saggregate liability for payments in respect of the IRI Action and the D&BLegacy Tax Matters shall not exceed $125,000.

 

Also during 1998, D&Bseparated into two public companies by spinning-off The Dun & BradstreetCorporation (“D&B I”) and then changed its name to R.H. Donnelley(“Donnelley”).  As a result of theirseparation in 1998, Donnelley and D&B I are each jointly and severallyliable for all liabilities of D&B under the agreements effecting the 1996Spin-Off.

 

During 2000, D&B Iseparated into two public companies by spinning off The Dun & BradstreetCorporation (“D&B II”) and then changed its name to Moody’s Corporation(“Moody’s).  Pursuant to their separationin 2000, Moody’s and D&B II are each jointly and severally liable for allof D&B’s liabilities under the agreements effecting the 1996 Spin-Off.

 

*IRI Litigation. *The following is adescription of an antitrust lawsuit filed in 1996 by Information Resources,Inc. (“IRI”).  As more fully describedbelow, VNU N.V., a publicly traded Dutch company (“VNU”), and its U.S.subsidiaries VNU, Inc., ACNielsen, AC Nielsen (US), Inc. (“ACN (US)”), and NMR(collectively, the “VNU Parties”), have assumed exclusive joint and severalliability for any judgment or settlement of this antitrust lawsuit.  As a result of the indemnity obligation, theCompany does not have any exposure to a judgment or settlement of this lawsuitunless the VNU Parties default on their obligations.  In the event of such default, the Companycould be liable as a successor to one of the named parties in the IRI Action(as defined below).

 

In July 1996, IRI filed a complaint, subsequently amended in 1997, inthe U.S. District Court for the Southern District of New York, naming as defendantsa company then known as The Dun & Bradstreet Corporation and now known asDonnelley, A.C. Nielsen Company (a subsidiary of ACNielsen) and I.M.S.International, Inc. (a predecessor of the Company) (the “IRI Action”).  At the time of the filing of the complaint,each of the other defendants was a wholly-owned subsidiary of Donnelley.  The amended complaint alleges variousviolations of U.S. antitrust laws under Sections 1 and 2 of the ShermanAntitrust Act.  The amended complaintalso alleges a claim of tortious interference with a contract and a claim oftortious interference with a prospective business relationship.  These claims relate to the acquisition bydefendants of Survey Research Group Limited 

 

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(“SRG”).  IRI alleged SRGviolated an alleged agreement with IRI when it agreed to be acquired bydefendants and that defendants induced SRG to breach that agreement.

 

IRI’s antitrust claims allege that defendants developed and implementeda plan to undermine IRI’s ability to compete within the United States andforeign markets in North America, Latin America, Asia, Europe and Australia/NewZealand through a series of anti-competitive practices, including: unlawfullytying/bundling services in the markets in which defendants allegedly hadmonopoly power with services in markets in which ACNielsen competed with IRI;entering into exclusionary contracts with retailers in certain countries todeny IRI’s access to sales data necessary to provide retail tracking servicesor to artificially raise the cost of that data; predatory pricing; acquiringforeign market competitors with the intent of impeding IRI’s efforts to expand;disparaging IRI to financial analysts and clients; and denying IRI access to capitalnecessary for it to compete.

 

IRI’s amended complaint originally alleged damages in excess of$350,000, which IRI asked to be trebled under antitrust laws.  IRI has since revised its allegation ofdamages to exceed $650,000, which IRI also asked to be trebled.  IRI has filed with the court the report ofits expert who has opined that IRI suffered damages of between $581,600 and$651,700 from the defendants’ alleged practices.  IRI also sought punitive damages in anunspecified amount.

 

In April 2003, the Court denied a motion for partial summary judgmentby defendants that sought to dismiss certain of IRI’s claims and granted inpart a motion by IRI seeking reconsideration of certain summary judgmentrulings the Court had previously made in favor of defendants.  The motion granted by the Court concernsIRI’s claims of injuries from defendants’ alleged conduct in certain foreignmarkets.

 

Pursuant to a scheduling order entered by the Court on April 8, 2004,discovery is scheduled to end on November 1, 2004, and trial is scheduled tobegin April 18, 2005.

 

OnJune 21, 2004, pursuant to a stipulation between IRI and defendants, the Courtordered that certain of IRI’s claims be dismissed with prejudice from thelawsuit, including the claim for tortious interference with the SRGacquisition.  ACNielsen has advised theCompany that based on discussions with its counsel ACNielsen believes that thedismissal of the tortious interference claims also precludes any claim for punitivedamages.

 

In connection with the 1996 Spin-Off, D&B (now Donnelley),Cognizant (now NMR) and ACNielsen entered into an Indemnity and Joint DefenseAgreement (the “Original JDA”), pursuant to which they agreed to:

 

•                  allocatepotential liabilities that may relate to, arise out of or result from the IRIAction (“IRI Liabilities”); and

 

•                  conduct a jointdefense of such action.

 

In particular, the Original JDA provided that:

 

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•                  ACNielsen wouldassume exclusive liability for IRI Liabilities up to a maximum amount to becalculated at such time as such liabilities became payable as a result of afinal non-appealable judgment or any settlement permitted under the OriginalJDA (the “ACN Maximum Amount”); and

 

•                  D&B andCognizant would share liability equally for any amounts in excess of the ACNMaximum Amount.

 

The Original JDA also provided that if it became necessary to post anybond pending an appeal of an adverse judgment, then Cognizant and D&B wouldbe required to obtain the bond required for the appeal, and each shall pay 50%of the costs of such bond, if any, which cost will be added to IRI Liabilities.

 

In 2001, ACNielsen was acquired by VNU N.V., a publicly traded Dutchcompany (“VNU”).  VNU assumed ACNielsen’sobligations under the Original JDA, and pursuant to the Original JDA VNU was tobe included with ACNielsen for purposes of determining the ACN Maximum Amount.

 

On July 30, 2004, the VNU Parties, Donnelley, D&B II, Moody’s andthe Company entered into an Amended and Restated Indemnity and Joint DefenseAgreement (the “Amended JDA”).  Pursuantto the Amended JDA, any and all IRI Liabilities incurred by Donnelley, D&BII, Moody’s or IMS relating to a judgment (even if not final) or any settlementbeing entered into in the IRI Action will be jointly and severally assumed andfully discharged exclusively by the VNU Parties.  Under the Amended JDA, the VNU Parties haveagreed to, jointly and severally, indemnify Donnelley, D&B II, Moody’s andIMS from and against all IRI Liabilities to which they become subject.  As a result, the concept of the “ACN MaximumAmount,” which previously represented a cap on VNU’s liability for the IRILiabilities, no longer exists and all such liabilities are the responsibilityof the VNU Parties pursuant to the Amended JDA.

 

In addition, the Amended JDA provides that if it becomes necessary topost any bond pending an appeal of an adverse judgment, then the VNU Partiesshall obtain the bond required for the appeal and shall pay the full cost ofsuch bond.

 

 

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In connection with entering into the Amended JDA, Donnelley, D&BII, Moody’s and IMS agreed to amend certain covenants of the Original JDA toprovide operational flexibility for ACNielsen going forward.  In addition, the Amended JDA includes certainamendments to the covenants of ACNielsen (which, under the Amended JDA, are nowalso applicable to ACN (US), which we understand holds ACNielsen’s operatingassets) that are designed to preserve such parties’ claim-paying ability andprotect Donnelley, D&B II, Moody’s and IMS. Among other covenants, ACNielsen and ACN (US) agreed that neither theynor any of their respective subsidiaries will incur any indebtedness to any affiliatedperson, except indebtedness the payment of which will, after a paymentobligation under the Amended JDA comes due, be conditioned on, and subordinatedto, the payment and performance of the obligations of such parties under theAmended JDA.  VNU has agreed to having aprocess agent in New York to receive on its behalf service of any processconcerning the Amended JDA.

 

As described above, the VNU Parties have assumed exclusiveresponsibility for the payment of all IRI Liabilities.  Provided that the VNU Parties are able tofulfill their obligations under the Amended JDA, and that they ultimately dofulfill such obligations, the Company believes that the resolution of the IRIAction should not have a material adverse effect on the Company’s financialposition, results of operations or cash flows. However, because liability for violations of the antitrust laws is jointand several and because the rights and obligations relating to the Amended JDAare based on contractual relationships, the failure of the VNU Parties tofulfill their obligations under the Amended JDA could result in the otherparties bearing all or a share of the IRI Liabilities.  Joint and several liability for the IRIAction means that even where more than one defendant is determined to have beenresponsible for an alleged wrongdoing, the plaintiff can collect all or part ofthe judgment from just one of the defendants. This is true regardless of whatever contractual allocation ofresponsibility the defendants and any other indemnifying parties may have made,including the allocations described above between the VNU Parties, Donnelly,D&B II, Moody’s and IMS.

 

Accordingly, and as a result of the allocations of liability describedabove, in the event the VNU Parties default on their obligations under theAmended JDA, the Company will be responsible for 75% of Cognizant’s share ofany liabilities arising out of the IRI Action (which, under the application ofjoint and several liability described above, could be all the IRI Liabilitiessince the Company is a successor to a named defendant) and NMR will beresponsible for 25% of any such liabilities; provided that NMR’s aggregateliability for payments in respect of the IRI Action and the D&B Legacy TaxMatters shall not exceed $125,000.  Todate, NMR has made payments of approximately $41,000 relating to the D&BLegacy Tax Matters.  Further, if the VNUParties default on their obligations, NMR, one of the VNU Parties, may defaulton its obligation to share any IRI Liabilities with the Company, or at the timethe IRI Liabilities arise may have previously made sharing payments up to its$125,000 cap.  In either such event, theCompany could be liable for an amount up to all the IRI Liabilities.

 

The Company is unable to predict the outcome of the IRI Action, thefinancial condition of any of the VNU Parties or the other defendants at thetime of any such outcome or whether the VNU Parties or the other defendantswill fulfill their obligations under the Amended JDA or other relatedcontractual agreements.  Hence, theCompany cannot estimate such parties’ ability to pay the IRI Liabilitiespursuant to the Amended JDA or the amount of the judgment or settlement in theIRI Action.  Nonetheless, management presently believes that the risk that theCompany will incur any material liabilities with respect to the IRI Action isremote and, therefore no liability in respect ofthis matter has been accrued in the Company’s financial statements.  As discussed above, provided that the VNUParties ultimately fulfill their obligations under the Amended JDA, the Companybelieves that the resolution of the IRI Action should not have a materialadverse effect on the Company’s financial position, results of operations orcash flows.  If, however, IRI were toprevail in whole or in part in this action and if the Company is required topay a substantial portion of any significant settlement or judgment, theoutcome of this matter could have a material adverse effect on the Company’sfinancial position, results of operations and cash flows.

 

*D&BLegacy and Related Tax Matters. *During the second quarter of 2003, theIRS issued an agent’s final examination report seeking to disallow certainroyalty expense deductions claimed by D&B on its 1995 and 1996 tax returnsin connection with a partnership established in 1993.  In January of 2004, the IRS issued an agent’sfinal examination report to the partnership seeking to reallocate certain itemsof partnership income and expense as well as disallow certain items ofpartnership expense on the partnership’s 1997 tax return during which yearCognizant was a partner in the partnership. In January 2004, the IRS issued agent’s final examination reports to thepartnership and

 

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the Company seeking toreverse items of partnership income and loss and disallow certain royaltyexpense deductions claimed by the Company on its 1998 and 1999 tax returnsarising from the Company’s participation in the partnership.  If the IRS were to ultimately prevail in theforegoing positions, the Company’s share of the total liability for 1995 and1996 would be approximately $41,800, its liability for 1997 would beapproximately $18,000, and its aggregate liability for 1998 and 1999 would beapproximately $27,200 (all net of income tax benefit).  If the IRS were to take a comparable positionwith respect to all of the Company’s tax years subsequent to 1999 andultimately prevail, the Company’s additional liability would be approximately$43,700 (net of income tax benefit).

 

In addition, in the secondquarter of 2003, the IRS issued an additional agent’s final examinationreport to the partnership described above seeking to reallocate certainpartnership income to D&B for 1996. D&B II and the Company believe that the positions taken by the IRSin this report are inconsistent with the IRS’s denial of the royalty expensedeductions described above.  If the IRSwere to ultimately prevail in this matter, the Company’s share of the liabilityfor 1996 would be approximately $21,000 (net of income tax benefit).

 

In addition, the IRS hasasserted penalties for the years described above based on its interpretation ofapplicable law.  If the IRS were toprevail in its assertion of penalties and interest thereon, the Company’s shareof such penalties and interest would be approximately $8,300 for 1995 and 1996and its aggregate liability for 1998 and 1999 would be approximately $9,900(all net of income tax benefit).  D&BII and the Company dispute this interpretation.

 

D&B II, as agent forDonnelley in the D&B Legacy Tax Matters, has filed protests relating to theproposed assessments for 1995 and 1996 with the IRS Office of Appeals.  D&B II advised that it will attempt toresolve these matters in the administrative appeals process before proceedingto litigation if necessary.  During thefirst quarter of 2004, as a result of information from D&B II regarding aproposed mediation with the IRS to settle partnership items related to 1995 and1996, the Company reclassified its tax reserves related to 1995 and 1996 fromlong-term (Other liabilities) to short-term (Accrued income taxes).  In addition, the Company has filed protestsrelating to the proposed assessments for 1997, 1998 and 1999 with the IRSOffice of Appeals and will attempt to resolve these matters in theadministrative appeals process before proceeding to litigation if necessary.

 

In June 2004, the Companywas advised that D&B II believes that it has reached a basis for settlementwith the IRS regarding the 1995 and 1996 corporate and partnership proposedassessments.  The agreement is tentativeand non-binding until a definitive settlement agreement is executed.  The agreement eliminates the “inconsistentpositions” described above.  The Companyexpects that its share of the liability could range from approximately $28,300to $35,700 (tax, penalty and interest, net of associated tax benefits), andthat such payment is expected to be made in 2004.

 

In another D&B Legacy Tax Matter, in June 2000, the IRS completedits review of Donnelley’s utilization of certain capital losses generatedduring 1989 and 1990 and issued a formal notice of adjustment. D&B I, asagent for Donnelley, advised the Company that on May 12, 2000, it filed anamended tax return for the 1989 and 1990 tax periods, which reflected $561,582 ofadditional tax and interest due.  D&BI paid the IRS $349,291 of this amount on May 12, 2000, and the Companypaid the IRS $212,291 on May 17, 2000. D&B I advised the Company that, notwithstanding the filing and 

 

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payment, it intended to contest the assessment and would also contestthe assessment of amounts, if any, in excess of the amounts paid.  D&B I filed the complaint for a refund inthe U.S. District Court on September 21, 2000.  In June 2004, D&B II advised the Companythat it has decided not to pursue the refund claim and believes it has reacheda basis for settlement with the IRS.  Theagreement is tentative and non-binding until a definitive settlement agreementis executed.  The pending settlementrequires Donnelley to withdraw its complaint for a refund.  The Company expects that its share of theliability could range from approximately $7,100 to $11,000 (penalty andinterest, net of associated tax benefits), and that such payment is expected tobe made in 2004.

 

The Company has reservesof approximately $42,000 with respect to the two foregoing matters whichmanagement believes are appropriate based on current expectations.  The Company’s share of the actual liabilitieswith respect to these matters is dependent on the terms of any settlementagreements, the computation of interest payable with respect to the settlementsand the terms of the 1996 and 1998 Spin-Off agreements referred to above.

 

During the first quarterof 2003, the Company increased its reserve to its anticipated share of theprobable liability in connection with all of the foregoing tax matters (toapproximately $133,145).  In the opinionof management, it is not probable, but may be reasonably possible that theCompany will have additional liability of $18,200 in excess of the amountreserved for these matters.  Accordingly,based on information currently available, management does not believe thatthese matters will have a material adverse effect on the Company’s consolidatedfinancial position or results of operations but may have a material adverseeffect on cash flows in the period in which any such amounts are paid.

 

In addition to thesematters, the Company and its predecessors have entered, and the Companycontinues to enter, into global tax planning initiatives in the normal courseof their businesses.  These activitiesare subject to review by applicable tax authorities.  As a result of the review process,uncertainties exist and it is possible that some of these matters could beresolved adversely to the Company.

 

*Sharing Dispute. *In May 2000, theCompany paid $212,291 to the IRS in connection with a D&B Legacy TaxMatter.  Pursuant to the terms of the1998 Spin-Off, NMR was liable for a portion of this amount but was notobligated to pay the Company for its share until January 2, 2001.  In December 2000, the Company requestedreimbursement from NMR in the amount of $41,136, which represented NMR’s shareof the liability according to the Company’s calculations.  On January 2, 2001, NMR made a paymentof $10,530 but refused to pay the remaining $30,606 based on its interpretationof the applicable agreements.  At March31, 2003, the Company had a receivable of $36,805, which included theoutstanding principal and accumulated accrued interest of $6,199.  During the three and six months ended June30, 2003, $220 and $909, respectively, of interest income was accrued inaccordance with the terms of the applicable agreements.  These amounts were reflected in Otherreceivable in the Condensed Consolidated Statements of Financial Position(unaudited).  On April 29, 2003, a panelfrom the American Arbitration Association International Center for DisputeResolution issued an award in favor of the Company and ordered that NMR pay theCompany the entire principal balance plus simple 9% interest from January 2,2001, together with all legal fees and costs incurred by the Company inconnection with the arbitration.  OnApril 30, 2003, the Company received $37,025 from NMR in satisfaction of theprincipal amount plus interest from January 2, 2001 through April 30,2003.  On May 16, 2003, the Companyreceived an additional $1,332 from NMR as reimbursement of the Company’s legalfees and costs in connection with the arbitration.

 

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*Matters Before the EuropeanCommission and Belgian Competition Service*

 

In December 2000,National Data Corporation (now NDCHealth Corporation, “NDC”) filed a complaintagainst the Company with the European Commission (the “Commission”), requestingthat the Commission initiate a proceeding against the Company for an allegedinfringement of Article 82 of the EC Treaty.  Article 82 of the EC Treaty relates toabuses of a dominant position that adversely affect competition.  The complaint concerned an IMS geographicmapping structure used for the reporting of regional sales data in Germany,which the German courts have ruled is copyright protected.  In addition to seeking a formal Commissionproceeding against the Company, the complaint requested that the Commissiongrant interim relief requiring the Company to grant NDC a compulsory license toenable NDC to use this structure in its competing regional sales data servicein Germany.

 

In March 2001, theCommission initiated formal proceedings against the Company in this matter andin July 2001, the Commission ordered interim measures against the Companypending a final decision (the “Interim Decision”).  Under the Interim Decision, the Company wasordered to grant a license of the geographic mapping structure on commerciallyreasonable terms without delay to NDC and to any other competitor then presentin the German regional sales data market that requested a license.

 

In August 2001, theCompany filed an appeal with the Court of First Instance (“CFI”) seeking thesuspension and annulment of the Interim Decision in its entirety (the“Annulment Appeal”).  In October 2001,the President of the CFI suspended the Interim Decision pending a judgment onthe Annulment Appeal.  In April 2002, theEuropean Court of Justice (“ECJ”) denied an appeal by NDC attempting tooverturn the CFI’s October 2001 suspension.

 

In October 2002, the CFIpostponed further consideration of the Annulment Appeal until after the ECJdecided certain questions separately referred to it by a German court that ispresiding over certain litigation that the Company is maintaining against NDCin Germany.  In the German litigation,the Company is seeking an injunction and damages against NDC formisappropriation of the Company’s intellectual property rights (the“Infringement Claim”).

 

In August 2003, theCommission withdrew its Interim Decision and then subsequently (in October2003), the Commission applied to the CFI to have the Annulment Appeal declaredmoot in its entirety.  Most recently, inApril 2004, the ECJ rendered its decision in the case referred to it by theGerman court.  This will permit the CFIto move forward with its consideration of the Annulment Appeal and the Germancourt to move forward with its consideration of the Infringement Claim againstNDC.

 

The Company intends tocontinue to vigorously assert that its refusal to grant licenses for the use ofits copyright protected geographic mapping structure to its direct competitorsin Germany, which compete in the same market for which the copyright exists, isnot in contravention of Article 82 of the EC Treaty.  Management of the Company is unable topredict at this time the final outcome of this matter or whether the resolutionof this matter could materially affect the Company’s future results ofoperations, cash flows or financial position.

 

Complaints were filed in1998 and 1999 against the Company with the Belgian Competition Service (“BCS”)by SmithKline Beecham Pharma S.A. (“SKB”) and Source Informatics Belgium S.A.

 

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(“Source”)alleging abuse of a dominant position on the Belgian market and requests weremade for the adoption of interim measures pending consideration of thecomplaints.  In October 1999 and 2000,the Chairman of the BCS adopted interim measures against the Company, withwhich the Company has complied.  In April2004, the Company acquired Source and in June 2004 the BCS sent information requeststo the Company, Source and the successor to SKB.  The Company and Source have responded to therequests and will vigorously contest any adverse determination (including theassertion of penalties) by the BCS. Management of the Company is unable to predict at this time the finaloutcome of this matter or whether an adverse resolution thereof couldmaterially affect the Company’s results of operations, cash flows or financialposition in the period in which such adverse resolution occurs.

 

*Other Contingencies*

 

*ContingentConsideration.*  Under the terms of the purchase agreementsrelated to acquisitions made from 2001 to 2004, the Company may be required topay additional amounts as contingent consideration based on the achievement ofcertain targets during 2003 to 2007. Substantially all of any additional payments will be recorded asgoodwill in accordance with EITF No. 95-8, “Accounting for ContingentConsideration Paid to the Shareholders of an Acquired Enterprise in a PurchaseBusiness Combination.”  As of June 30,2004, approximately $3,000 was earned and paid under these contingencies.  Based on current estimates, managementexpects the remaining additional contingent payments under these agreements tototal approximately $23,000.  It isexpected that these contingent payments will be resolved within a specifiedtime period after the end of each respective calendar year from 2004 through2007.

 

*GartnerSpin-Off. *In July 1999, the Company spun offGartner, Inc.  Pursuant to the terms ofthat spin-off, Gartner agreed to indemnify the Company and its stockholders foradditional taxes that may become payable as a result of certain actions thatmay be taken by Gartner that adversely affect the tax free treatment of thespin-off.  However, the Company maybecome obligated for certain tax liabilities in the event the spin-off isdeemed to be a taxable transaction as a result of certain Gartner sharetransactions that may be undertaken following the spin-off.  In the opinion of management, it is remotethat the Company will incur any material liabilities with respect to thismatter.

 

*SynavantSpin-Off. *In August 2000, the Company spun offSynavant, Inc.  Pursuant to the terms ofthat spin-off, Synavant undertook to be jointly and severally liable to theother parties to the 1996 Spin-Off for any future liabilities of Cognizantunder the terms of that spin-off and to NMR for any future liabilities of theCompany under the 1998 Spin-Off. However, as between the Company and Synavant, each agreed to bear 50% ofthe Company’s share of any future liability arising out of the IRI Action orthe D&B Legacy Tax Matters (net of the liability borne by NMR), up to amaximum liability of $9,000 for Synavant. In connection with the acquisition of Synavant by DendriteInternational, Inc., on June 16, 2003, Synavant satisfied its current andfuture liabilities to the Company in respect of the IRI Action and the D&BLegacy Tax Matters by paying $8,345 to the Company of which approximately$4,900 represented an adjustment to the Synavant Spin dividend, approximately$2,200 represented the reimbursement of previously expensed legal fees andapproximately $1,100 was a prepayment of Synavant’s future 50% share of legalfees associated with the IRI litigation.

 

If, contrary toexpectations, the spin-off of Synavant were not to qualify as tax free underSection 355 of the Internal Revenue Code, then, in general, a corporatetax would be payable by the

 

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consolidated group, ofwhich the Company is a common parent and Synavant is a member, based on thedifference between (x) the fair market value of the Synavant common stockon the date of the spin-off and (y) the adjusted basis of such Synavantcommon stock.  In addition, under theconsolidated return rules, each member of the consolidated group would beseverally liable for such tax liability. Pursuant to the terms of the spin-off, the Company would be liable forthe resulting corporate tax, except in certain circumstances.  In the opinion of management and based on theopinion of tax counsel, McDermott, Will & Emery, it is not probable, butmay be reasonably possible, that the Company will incur liability for thismatter, therefore, the Company has not recorded reserves for this matter.  The Company estimates that the aggregate taxliability in this regard would not exceed $100,000.

 

*CTSSplit-Off.*  The Company completed the CTS Split-Offexchange offer on February 6, 2003 (see Note 6).  If, contrary to expectations, the CTSdistribution were not to qualify as tax free under Section 355 of theInternal Revenue Code, then, in general, a corporate tax would be payable by theCompany based on thedifference between (x) the fair market value of the CTS class B commonstock at the time of the exchange offer and (y) theCompany’s adjustedtax basis in such class B common stock. Pursuant to the distribution agreement entered into between theCompany and CTS inconnection with the distribution, CTS agreed to indemnify theCompany in the eventthe transaction is taxable as a result of a breach of certain representationsmade by CTS, subject to certain exceptions. In the opinion of management and based on the opinion of tax counsel,McDermott, Will & Emery, it is not probable, but may be reasonablypossible, that the Company will incur liabilityfor this matter, therefore, the Company has not recorded reserves forthis matter. The Company estimates that the aggregate tax liability in this regardwould not exceed $215,725.

 

*Other TaxContingencies.*TheCompany has reserved approximately $22,000 of income tax benefits related to a1998 non-U.S. tax reorganization that gave rise to tax deductible amortizationof non-U.S. intangible assets.  Thisrepresents the Company’s best estimate of the probable liability in the eventthe relevant tax authorities challenge such tax benefits.  Accordingly, based on information currentlyavailable, management does not believe that this matter will have a materialadverse effect on the Company’s consolidated financial position or results ofoperations but may have a material adverse effect on cash flows in the periodin which any such amounts are paid.

 

In addition to the tax items discussed above, the Company has taxreserves of approximately $27,500 that relate to various positions it has takenon tax returns filed in numerous countries over the last several years.  These reserves represent the Company’s bestestimate of the probable liability should the tax return positions bechallenged by the relevant tax authorities. While the amount is material in the aggregate, no individual item ismaterial and no single event will have a material impact related to thesereserves.

 

*Other Litigation**. *On January17, 2003, the Company was served with a summons in a new litigation matter(the “Douglas Litigation”).  Also namedas defendants in this litigation are approximately 60 software vendors fromwhich the Company purchased prescription data in the 1990’s (and, formany of these vendors, from which the Company continues to purchase data).  In this action, it was alleged theCompanymisappropriated the trade secrets (i.e., prescription data) of thousands ofpharmacies in the United States and used this information either withoutauthorization or outside the

 

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scope of anyauthorization.  This same conduct wasalleged to breach contracts between the Company and the software vendors from which theCompany had purchasedthis prescription data.

 

The action was brought instate court in southern Illinois (Circuit Court of the 20th JudicialCircuit) by two pharmacies.  Plaintiffssought class action status, representing all pharmacies whose data was sold tothe Company by their pharmacy dispensary software vendors from 1990 to thepresent.  The pharmacies were seeking $100,000in actual damages plus an unspecified amount of unjust enrichment damages(i.e., share of the Company profits) derived from use of the prescription databy the Company and the other defendants, or, in the alternative, a reasonableroyalty paid for the use of the prescription data.  However, the Company believed and continuesto believe that its practices with respect to the acquisition and use of thisprescription data are consistent with applicable law and industry practices,and that the claims were without merit.

 

The Company was a defendant in another litigation brought in statecourt in southern Illinois (Circuit Court of the 20th JudicialCircuit) (the “Mayberry Litigation”). This lawsuit was originally brought in 1994 against Mayberry Systems, asmall developer of pharmacy dispensary software in the Midwest.  Two pharmacy customers alleged MayberrySystems was taking prescription data from their systems without authorization,and selling it to others (including the Company).  The Company was subsequently added to thelawsuit in 1996, alleging that the Company knew or should have known thatMayberry Systems was taking the data and selling it without authorization(i.e., misappropriation of trade secrets). The lawsuit was later certified as a class action on behalf of allformer and current customers of Mayberry Systems (approximately 350pharmacies).  Plaintiffs were demandingdamages in the amount of $20,000 plus punitive damages and attorney’s fees.

 

Although the Companybelieved that the two actions described above were without merit, the Companypursued a joint settlement of the cases. During the third quarter of 2003, the Company proposed a preliminarysettlement agreement with the plaintiffs’ counsel on both the actions which wassubject to several significant contingencies. On February 17, 2004, the Illinois state court approved the proposedsettlement.  The period for the filing ofappeals and motions for rehearing expired on March 18, 2004.  As a result of the resolution of thesignificant contingencies related to the settlement, in the fourth quarter of2003, the Company recorded a pre-tax charge of $10,636, net of $5,500 to bereimbursed under the Company’s insurance coverage.  Under the settlement, the Company will makecertain cash payments, provide certain product credits and enter into certainagreements for the purchase of data originating from the independent pharmacyplaintiffs.  This will provide theCompany the opportunity to acquire new data for new offerings while eliminatingthe costs and risks of litigation. During the first half of 2004, the Company paid approximately $7,400related to this settlement and received $5,500 from insurance coverage.

 

During the second quarterof 2003 and up to the date of this filing, the Company has been served with 66complaints filed with the Labor Court in Frankfurt, Germany.  The plaintiffs are mostly part of a group ofapproximately 110 employees of GIC Global Information Technology and ConsultingGmbH (“GIC Global”) whose employment was terminated in the second quarter of2003 in connection with GIC Global’s insolvency proceedings.  GIC Global is owned by former senior managersof what was once the Company’s data processing center in Frankfurt, Germany.  GIC Global purchased the assets and businessof the Frankfurt data processing center from the Company in September 2000 as

 

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part of a managementbuyout.  Thereafter, the Company movedits data processing to its data center in the United States.  The plaintiffs are seeking reemploymentand/or severance from the Company.

 

As of the date of thisfiling, a total of 25 of the complaints described above were dismissed by theLabor Court and two complaints were voluntarily withdrawn.  Five of the dismissal actions have beenappealed by the respective plaintiffs, one of which was voluntarily withdrawn,and proceedings with respect to the other four appeals remain pending.  On April 13, 2004 and May 11, 2004, judgmentson two of the complaints were rendered against the Company in the aggregateamount of approximately $240, which judgments the Company intends toappeal.  Actions on four additionalcomplaints remain pending.

 

Although the Companycontinues to believe that these claims are without merit and intends tovigorously defend the remaining actions, on April 13, 2004, the Company enteredinto settlements with 54 (which settlement superceded 18 of the 25 dismissalsdescribed above) of the GIC plaintiffs in the aggregate amount of approximately$200 in order to avoid the potential future costs of numerous appeals.  The Company has paid approximately $440 withrespect to these settlements and the two judgments which the Company intends toappeal but has not accrued a liability with respect to the four remainingactions, because management currently believes that the Company’s exposure toany material loss with respect to those remaining actions is remote.

 

**Note 10.**                           Financial Instruments

** **

*Foreign ExchangeRisk Management*

* *

The Companytransacts business in more than 100 countries and is subject to risksassociated with changing foreign exchange rates.  The Company’s objective is to reduce earningsand cash flow volatility associated with foreign exchange rate changes.  Accordingly, the Company enters into foreigncurrency forward contracts to minimize the impact of foreign exchange movementson net income and on the value of non-functional currency assets andliabilities.

 

It is the Company’spolicy to enter into foreign currency transactions only to the extent necessaryto meet its objectives as stated above. The Company does not enter into foreign currency transactions forinvestment or speculative purposes.  Theprincipal currencies hedged are the Euro, the Japanese Yen, the British Pound,the Swiss Franc and the Canadian Dollar.

 

The impact of foreignexchange risk management activities on pre-tax income in the three and sixmonths ended June 30, 2004 was a net gain of $1,222 and $5,591, respectively,and net losses in the three and six months ended June 30, 2003 of $9,282 and$16,984, respectively.  In addition, atJune 30, 2004, the Company had approximately $298,408 in foreign exchangeforward contracts outstanding with various expiration dates through September2004 relating to non-functional currency assets and liabilities.  Foreign exchange forward contracts arerecorded at estimated fair value.  Theestimated fair values of the forward contracts are based on quoted marketprices.  Unrealized and realized gainsand losses on these contracts are not deferred and are included in theCondensed Consolidated Statements of Income (unaudited) in Other income(expense), net.

 

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*Fair Value of FinancialInstruments*

 

At June 30, 2004, theCompany’s financial instruments included cash, cash equivalents, short-termmarketable securities, accounts receivables, accounts payable, short-tem debt,long-term debt and foreign currency forward contracts.  At June 30, 2004, the fair values of cash,cash equivalents, accounts receivables, accounts payable and short-term debtapproximated carrying values due to the short-term nature of theseinstruments.  The contractual value ofthe Company’s foreign currency forward contracts was approximately $298,408 atJune 30, 2004, and all contracts mature in 2004.  The estimated fair values of the forwardcontracts were determined based on quoted market prices.

 

*Credit Concentrations*

 

The Companycontinually monitors its positions with, and the credit quality of, thefinancial institutions which are counterparties to its financial instrumentsand does not anticipate non-performance by the counterparties.  The Company would not realize a material lossas of June 30, 2004 in the event of non-performance by any onecounterparty.  The Company enters intotransactions only with financial institution counterparties which haveprimarily credit ratings of A or better. In addition, the Company limits the amount of credit exposure with anyone institution.

 

The Company maintainsaccounts receivable balances ($293,715 and $271,268, net of allowances, at June30, 2004 and December 31, 2003, respectively), principally from customers inthe pharmaceutical industry.  TheCompany’s trade receivables do not represent significant concentrations ofcredit risk at June 30, 2004 due to the high quality of its customers and theirdispersion across many geographic areas.

 

*Lines of Credit and Liquidity*

 

The Company had borrowingarrangements with several domestic and international banks to provide lines ofcredit up to $700,000 at June 30, 2004. Total borrowings under these existing lines were $481,300 and $407,600at June 30, 2004 and December 31, 2003, respectively, of which $230,000 and$407,600 were classified as short-term, and $251,300 and $0 were classified aslong-term as of June 30, 2004 and December 31, 2003, respectively.

 

On April 5, 2004, the Company entered into a $700,000 revolving creditfacility with a syndicate of 12 banks (the “Unsecured Facility”).  The Unsecured Facility replaced the Company’slines of credit with several domestic and international banks.  The Unsecured Facility is comprised of$430,000 of short-term lines that expire April 2005 and $270,000 of long-termlines expiring April 2007.  In general,rates for borrowing under both the short-term and long-term components areLIBOR plus 45 basis points and can vary based on the Company’s Debt to EBITDAratio.  The weighted average interestrates for the short-term lines were 1.86% and 1.61% at June 30, 2004 andDecember 31, 2003, respectively.  Theweighted average interest rates for the long-term lines were 1.88% and 1.84% atJune 30, 2004 and December 31, 2003, respectively.  In addition, the Company will pay acommitment fee on the unused portion of the short-term and long-term facilitiesof 0.08% and 0.10%, respectively.

 

The Company defines long-term lines as those where the lines arenon-cancelable for more than 365 days from the balance sheet date by thefinancial institutions except for specified violations of the provisions of theagreement.  Borrowings under thesethree-year facilities are short-term in nature; however, the Company has theability and the intent to refinance the short-term borrowings as they

 

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come due through April 2007.  AtJune 30, 2004, the Company reclassified $251,300 of its debt outstanding aslong-term debt in accordance with the provisions of SFAS No. 6, “Classificationof Short-Term Obligations Expected to be Refinanced.”

 

Total debt of $634,604and $561,991 at June 30, 2004 and December 31, 2003, respectively, included$150,000 of five-year private placement debt (as further discussed below), and$3,304 and $4,391 at June 30, 2004 and December 31, 2003, respectively, relatedprimarily to cash overdrafts, certain capital leases, mortgages and anadjustment to the carrying amount of fair value hedged debt.  At June 30, 2004, the Company had $18,700 and$200,000 available under its long and short-term lines of credit, respectively.

 

During the fourth quarter of 2001, the Company renegotiated withseveral banks and entered into three-year lines of credit for borrowings of upto $175,000.  Borrowings had maturitydates of up to 90 days from their inception. These lines of credit were due to mature in 2004 and as such $175,000was reclassified to short-term debt as of December 31, 2003.

 

In March and April 2002, the Company entered into interest rate swapson a portion of its variable rate debt portfolio.  These arrangements convert the variableinterest rates to a fixed interest rate on a notional amount of $75,000 andmature at various times from March 2005 through April 2006.  The fixed rates range from 4.05% to5.08%.  The interest rate swaps areaccounted for as cash flow hedges and any changes in fair value are recorded inOther Comprehensive Income, in the Condensed Consolidated Statements ofShareholders’ Equity (unaudited).  Thefair values are determined based on estimated prices quoted by financialinstitutions.  The mark-to-marketadjustment for the three and six months ended June 30, 2004 was an unrealizednet loss of $870 and $976, respectively.

 

In January 2003, the Company closed a private placement transactionpursuant to which the Company issued $150,000 of five-year debt to severalhighly rated insurance companies at a fixed rate of 4.60%.  The proceeds were used to pay down short-termdebt.  The Company also swapped $100,000of its fixed rate debt to floating rate based on six-month LIBOR plus a marginof approximately 107 basis points.  Theseswaps have been accounted for as fair value hedges under the provisions of SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The fair values are determined based onestimated prices quoted by financial institutions.  The cumulative fair value adjustment to theswap as of June 30, 2004 was a decrease of $113.

 

The Company’s financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of its main bank arrangements andthe 2003 private placement transaction, covenants to maintain specific ratiosof consolidated total indebtedness to EBITDA and of EBITDA to certain fixedcharges.  At June 30, 2004, the Companywas in compliance with these financial debt covenants and anticipates that itwill remain in compliance with the covenants over the term of the borrowingarrangements.

 

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**Note 11.**                           Pension and Postretirement Benefits

** **
| **Components of Net Periodic  Benefit Cost for  three months ended June 30,** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **2004**                                                                      | ** ** | **2003**             | **2004**   | ** **         | **2003**   |
| Service cost                                                                  | ** ** | **$**                | **2,430**  | ** **         | $          | 1,738 |   | **$** | **29** | ** ** | $ | 36 |   |
| Interest cost                                                                 | ** ** | **3,237**            | ** ** | 2,881              |       | **217** | ** ** | 190 |   |
| Expected return on plan  assets                                               | ** ** | **(5,410**           | **)**      | (3,415             | )          | **0** | ** ** | 0 |   |
| Amortization of prior service  cost (credit)                                  | ** ** | **(80**              | **)**      | 56                 |       | **(247** | **)** | (247 | ) |
| Amortization of transition  obligation                                        | ** ** | **(23**              | **)**      | (3                 | )          | **0** | ** ** | 0 |   |
| Amortization of net loss                                                      | ** ** | **254**              | ** ** | 596                |       | **167** | ** ** | 113 |   |
| Net periodic benefit cost                                                     | ** ** | **$**                | **407**    | ** **         | $          | 1,853 |   | **$** | **166** | ** ** | $ | 92 |   |

 
| **Components of Net Periodic  Benefit Cost for six  months ended June 30,** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **2004**                                                                    | ** ** | **2003**             | **2004**   | ** **         | **2003**   |
| Service cost                                                                | ** ** | **$**                | **5,272**  | ** **         | $          | 4,732 |   | **$** | **83** | ** ** | $ | 72 |   |
| Interest cost                                                               | ** ** | **6,656**            | ** ** | 5,934              |       | **426** | ** ** | 380 |   |
| Expected return on plan  assets                                             | ** ** | **(9,372**           | **)**      | (6,830             | )          | **0** | ** ** | 0 |   |
| Amortization of prior service  cost (credit)                                | ** ** | **(114**             | **)**      | 112                |       | **(494** | **)** | (494 | ) |
| Amortization of transition  obligation                                      | ** ** | **(46**              | **)**      | (7                 | )          | **0** | ** ** | 0 |   |
| Amortization of net loss                                                    | ** ** | **1,296**            | ** ** | 1,167              |       | **316** | ** ** | 226 |   |
| Net periodic benefit cost                                                   | ** ** | **$**                | **3,692**  | ** **         | $          | 5,108 |   | **$** | **331** | ** ** | $ | 184 |   |

 

Plans accounted for underAPB Opinion No. 12, “Omnibus Opinion – 1967”. The Company provides certain executives with supplemental pensionbenefits in accordance with their individual employment arrangements.  As individual arrangements, these pension benefitsare accounted for under APB Opinion No. 12 (which addresses accounting fordeferred compensation contracts) and not SFAS No. 87, and as a result, thetables of this Note do not include the Company’s expense associated withproviding these benefits.  The Company’sexpense for these unfunded arrangements was $1,046 for the three months endedJune 30, 2004 and $2,125 for the six months ended June 30, 2004.  In addition the above tables have beenadjusted to exclude the impact of expense associated with these individualarrangements in the amount of $1,079 for the three months ended March 31, 2004and $702 for the three months ended March 31, 2003.

 

**Note 12.**                           Income Taxes

** **

The Companyoperates in more than 100 countries around the world and its earnings are taxedat the applicable income tax rate in each of these countries.

 

For the sixmonths ended June 30, 2004 the Company’s effective tax rate was impacted byapproximately $15,100 primarily due to a favorable partial U.S. auditsettlement.  For the six months endedJune 30, 2003 the Company’s effective tax rate was impacted by approximately$69,600 due to the Company’s reassessment, based on information received inApril 2003, of its liability associated with certain D&B Legacy Tax Mattersand related subsequent transactions. This is more fully described in Note 9. Further, the 2003 effective tax rate was affected by the favorablesettlement of a non-U.S. audit which approximated $13,900.

 

27

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While the Companyintends to continue to seek global tax planning initiatives, there can be noassurance that the Company will be able to successfully implement suchinitiatives to reduce or maintain its overall tax rate.

 

The Companyaccrues for tax loss contingencies in the period in which they are probable andestimable in accordance with SFAS No. 5, “Accounting for Contingencies.”  These reserves are included in current incometaxes payable to the extent the related amounts are expected to be paid withinthe next twelve-month period.  If theCompany expects the liability to be settled beyond one year, these amounts areclassified as a long-term liability.

 

**Note 13.**                           IMS Health Capital Stock

** **

On February 10, 2004, theBoard of Directors authorized a stock repurchase program to buy up to 10,000shares.  As of June 30, 2004,approximately 7,500 shares remained available for repurchase under the February2004 program.

 

On April 15, 2003, theBoard of Directors authorized a stock repurchase program to buy up to 10,000shares.  This program was completed inMay 2004 at a total cost of $243,520.

 

On July 19, 2000, theBoard of Directors authorized a stock repurchase program to buy up to 40,000shares.  This program was completed inJune 2003 at a total cost of $868,314.

 

During the six monthsended June 30, 2004, the Company repurchased approximately 8,057 shares ofoutstanding common stock under these programs, including the repurchase of4,600 shares on January 9, 2004 pursuant to an accelerated share repurchase program (“ASR”).  The ASR agreement provides for the finalsettlement of the contract in either cash or additional shares of the Company’scommon stock at the Company’s sole discretion.** **The Company was required to pay anadditional $942 as the final settlement amount based on an increase in theCompany’s share price over the settlement period.  The total cost of the shares repurchasedduring the six months ended June 30, 2004 was $204,284.

 

Shares acquired throughthe Company’s repurchase programs described above are open-market purchases orprivately negotiated transactions in compliance with Securities and ExchangeCommission Rule 10b-18.

 

As discussed in Note 6,during the three months ended March 31, 2003, the Company completed the CTSSplit-Off exchange offer and accepted 36,540 IMS common shares tendered inexchange for all 11,291 CTS common shares that the Company owned.

 

The Company re-issuedapproximately 3,463 treasury shares under option exercises for proceeds of$60,220 during the six months ended June 30, 2004.  In addition, the Company paid dividends of$0.02 per share for a total of $4,793 during the three months ended June 30,2004.  For the six months ended June 30,2004, the Company paid dividends of $0.04 per share for a total of $9,500.

 

**Note 14.         Comprehensive Income**

** **

*The following table sets forththe components of comprehensive income, net of income tax expense:*

 

28

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| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Net Income**                                      | ** ** | **$**                            | **65,121** | ** **                     | $          | 55,356 | ** ** | **$** | **146,199** | ** ** | $ | 500,029 |   |
| Other comprehensive income, net of taxes:           |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Unrealized gains (losses) on:                       |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Available-for-sale equity securities                | ** ** | **498**                          | ** ** | 834                            | ** ** | **427** | ** ** | 718 |   |
| Reclassification adjustment                         | ** ** | **0**                            | ** ** | (560                           | )          | **219** | ** ** | (201 | ) |
| Tax benefit on above                                | ** ** | **(174**                         | **)**      | (96                            | )          | **(226** | **)** | (181 | ) |
| Change in unrealized gains (losses) on  investments | ** ** | **324**                          | ** ** | 178                            | ** ** | **420** | ** ** | 336 |   |
| Foreign currency translation gains (losses)         | ** ** | **(2,422**                       | **)**      | 24,464                         | ** ** | **(7,413** | **)** | 29,273 |   |
| Changes in fair value of cash flow hedges           | ** ** | **870**                          | ** ** | (87                            | )          | **976** | ** ** | (129 | ) |
| Total other comprehensive income (loss)             | ** ** | **(1,228**                       | **)**      | 24,555                         | ** ** | **(6,017** | **)** | 29,480 |   |
| **Comprehensive Income**                            | ** ** | **$**                            | **63,893** | ** **                     | $          | 79,911 | ** ** | **$** | **140,182** | ** ** | $ | 529,509 |   |

 

**Note 15.**                           Severance, Impairment and Other Charges

** **

During the threemonths ended March 31, 2003, the Company recorded $37,220 of severance,impairment and other charges (the “first quarter charge”) as a component ofoperating income.  These charges wereincurred due to a number of business and strategic factors affecting theCompany:

 

•                  severance-relatedcharges of $9,958 were incurred in an effort to streamline operations andincrease productivity through a worldwide reduction in headcount ofapproximately 80 employees.  Thisreduction in headcount was primarily focused on upgrading the skills andcapabilities of our employee base as we transform the business to provide newand enhanced analytical and consulting offerings to our customers.  The reduction in headcount also led tocharges for impaired leases in the U.S. and U.K. for office space no longerbeing used by the Company and for which the Company has not been able to obtainsubleases at rates comparable to the terms of its lease obligations.  These severance benefits were calculatedpursuant to the terms of established employee protection plans, in accordancewith local statutory minimum requirements or individual employee contracts, asapplicable;

 

•                  contract-relatedcharges of $22,307 were incurred for impaired data supply, data processing andimpaired lease contracts in the Company’s U.S. and Japanese operations.  An impairment for a data supply contract inthe U.S. was realized due to the fact that in the first quarter of 2003 wedetermined that expected revenues under a co-marketing agreement with a datasupplier would not be generated, but the Company was still required to makepayments under the terms of the contract. The Company also realized an impairment for a data processing contractin Japan related to a weekly data product in Japan that was discontinued at theend of the first quarter of 2003, due to the interruption in data supply; and

 

•                  asset write-downs of $4,955 were recorded towrite-down certain computer software primarily in the U.S. and Japan to its netrealizable value.  In the U.S., adecision to change the underlying technology in a product required thewrite-down of a 

 

29

----

 

previous version.  In Japan, the terminationof the weekly data product required the write-down of the software used forthat product.

 
| ** **               | ** ** | **Severance  related charges** | ** ** | **Contract  related charges** | ** ** | **Asset  write-downs** | ** ** | **Total** | ** ** |
|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|------------------------|------------|-----------|------------|
| Charge at March 31, 2003 |       | $                              | 9,958      |                          | $          | 22,307                 |       | $         | 4,955      |   | $ | 37,220 |   |
| 2003 Utilization         |       | (6,197                         | )          | (7,047                        | )          | (6,634                 | )          | (19,878   | )          |
| 2004 Utilization         |       | (1,097                         | )          | (1,847                        | )          | —                 |       | (2,944    | )          |
| Adjustments              |       | (1,746                         | )          | 67                            |       | 1,679                  |       | —    |       |
| Balance at June 30, 2004 |       | $                              | 918        |                          | $          | 13,480                 |       | $         | 0          |   | $ | 14,398 |   |

 

The cash portion of the first quarter charge amounted to $30,586, ofwhich the Company paid approximately $13,244 during 2003 and $2,944 during thesix months ended June 30, 2004, related primarily to employee terminationbenefits and contract-related charges. The remaining accrual of $14,398 at June 30, 2004 relates to leaseobligations and continuing payments related to employee termination benefits.

 

The Companyexpects that cash outlays will be applied against the $14,398 balance remaining as follows: 

 

| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|------------------------------|------------|------------------|------------|
| 2004                         |       | $                | 2,948      |   |
| 2005                         |       | 7,917            |       |
| 2006                         |       | 923              |       |
| 2007                         |       | 752              |       |
| 2008                         |       | 228              |       |
| Thereafter                   |       | 1,630            |       |
| Total                        |       | $                | 14,398     |   |

 

During the nine months ended December 31, 2003, the Company reversedapproximately $1,750 of severance related charges originally included in thefirst quarter charge due to the Company’s refinement of estimates.  The Company also recorded additional chargesduring 2003 of approximately $1,700 related primarily to a software impairment.

 

During the fourthquarter of 2001, the Company completed the assessment of its CompetitiveFitness Program (the “Program”).  ThisProgram was designed to streamline operations, increase productivity, andimprove client service.  In connection withthis Program, the Company recorded $94,616 of Severance, impairment and othercharges during the fourth quarter of 2001 as a component of operating income.

 

30

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| ** **                  | ** ** | **Severance  related charges** | ** ** | **Contract  related charges** | ** ** | **Asset write-  downs** | ** ** | **Total** | ** ** |
|-----------------------------|------------|--------------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Charge at December 31, 2001 |       | $                              | 39,652     |                          | $          | 26,324                  |       | $         | 28,640     |   | $ | 94,616 |   |
| 2001 utilization            |       | (3,692                         | )          | (6,663                        | )          | (27,887                 | )          | (38,242   | )          |
| 2002 utilization            |       | (26,277                        | )          | (9,819                        | )          | (1,474                  | )          | (37,570   | )          |
| 2003 utilization            |       | (6,384                         | )          | (2,720                        | )          | (241                    | )          | (9,345    | )          |
| 2004 utilization            |       | (189                           | )          | (241                          | )          | —                  |       | (430      | )          |
| Adjustments                 |       | (688                           | )          | (274                          | )          | 962                     |       | —    |       |
| Balance at June 30, 2004    |       | $                              | 2,422      |                          | $          | 6,607                   |       | $         | 0          |   | $ | 9,029 |   |

 

Approximately$39,652 was charged to expense in the fourth quarter of 2001 related to aworldwide reduction in headcount.  Thisincluded $33,376 of severance benefits that were calculated pursuant to theterms of established employee protection plans in accordance with localstatutory minimum requirements or individual employee contracts, asapplicable.  This also included $6,277 ofseverance benefits for approximately 175 employees that were recorded as partof the Program in accordance with EITF Statement No. 94-3, “LiabilityRecognition of Certain Employee Termination Benefits and Other Costs to Exit anActivity (including Certain Costs Incurred in Restructuring).”

 

The Companyrecorded $15,827 in contract-related charges, including $7,493 in payments toexit data supply and processing contracts and $8,334 related to onerous leaseobligations.  These costs are incrementaland either relate to existing contractual obligations that do not have anyfuture economic benefit or represent a contract cancellation penalty.  They relate, in part, to the decision in thefourth quarter of 2001 to close down or vacate leased facilities in order toconsolidate functions geographically as part of the Program.

 

Approximately$17,723 was charged to expense in the fourth quarter of 2001 to write downdeferred software costs to their net realizable value.  These write-downs resulted from the Company’sdecision to abandon certain products or introduce new regional or globalplatforms.  The Company also charged$4,243 of goodwill to expense in the fourth quarter of 2001 as a result of thedecision to cease product offerings as well as increased competition in certainmarkets.

 

Approximately$17,170 of the 2001 charge relates to GIC and resulted from the Company’sdecision to exit the GIC relationship and accelerate the transition of certaindata processing functions that were rendered by GIC to the IMS Global DataCenter.  Of the total GIC charge,approximately $14,600 is for lease and other asset impairments with theremaining balance of $2,570 representing contract termination payments to bemade to GIC.

 

As of June 30,2004, the Company paid approximately $55,985 under the Program.  Total terminations under the Program were535.  Although the total number ofterminations from the Program was lower than the original plan by approximately18%, due to a change in the mix of actual employee terminations, the Companyhas experienced a higher level of severance costs per employee, therebyoffsetting any cost savings from fewer actual terminations.  As expected, all actions under the Programwere completed by December 31, 2002.  Theremaining accrual of $9,029 at June 30, 2004 related primarily to a facilityshutdown and employee termination payments.

 

31

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The adjusted cashportion of the 2001 charge amounted to $65,014, primarily for severancepayments and contract terminations.  Thenon-cash portion amounted to $29,602 and is composed primarily of assetwrite-offs.  The Company expects thatcash outlays will be applied against the $9,029 balance remaining as follows: 

 

| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|------------------------------|------------|------------------|------------|
| 2004                         |       | $                | 3,372      |   |
| 2005                         |       | 1,754            |       |
| 2006                         |       | 1,754            |       |
| 2007                         |       | 2,149            |       |
| Total                        |       | $                | 9,029      |   |

 

The Company expects that future results will benefit from the Program andthe first quarter charge to the extent of the contract-related charges andasset write-downs primarily through 2007. The Company’s severance actions related to a shifting of resourcesaround the Company and as such are not expected to generate material costsavings.  The income statement lines thatwill be impacted in future periods are Operating costs for the contract-relatedcharges and Depreciation and amortization for the asset write-downs.  However, the Company does not expect amaterial impact on future cash flows due to the fact that the Company is stillcontractually obligated to continue to make payments under impaired contracts.

 

**Note 16**.                           Operations by Business Segment

** **

Operating segmentsare defined as components of an enterprise about which financial information isavailable that is evaluated on a regular basis by the chief operating decisionmaker, or decision making groups, in deciding how to allocate resources to anindividual segment and in assessing performance of the segment.  The Company operates a globally consistentbusiness model, offering pharmaceutical business information, software andrelated services to its customers in more than 100 countries.  See Note 1.

 

The Companymaintains regional geographic management to facilitate local execution of itsglobal strategies.  However, the Companymaintains global leaders for the majority of its critical business processes;and the most significant performance evaluations and resource allocations madeby the Company’s chief operating decision makers are made on a globalbasis.  As such, the Company hasconcluded that it maintains one operating and reportable segment.

 

**GeographicFinancial Information:**

 

The followingrepresents selected geographic information for the regions in which the Companyoperates as of and for the three and six months June 30, 2004 and 2003:

 

32

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| ** **                            | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------------|------------|----------------------------|------------|----------------|------------|
| **Three months ended June 30, 2004:** | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating  revenue (4)                |       | $                 | 172,492    |            | $          | 156,669               |       | $                          | 50,422     |           | —     |   | $ | 379,583 |   |
| Operating income (5)                  |       | $                 | 75,712     |            | $          | 32,310                |       | $                          | 25,350     |           | $          | (30,904 | ) | $ | 102,468 |   |
| **Six months ended June 30, 2004:**   | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating revenue (4)                 |       | $                 | 339,403    |            | $          | 299,373               |       | $                          | 102,383    |           | —     |   | $ | 741,159 |   |
| Operating income (5)                  |       | $                 | 148,482    |            | $          | 56,200                |       | $                          | 54,048     |           | $          | (60,030 | ) | $ | 198,700 |   |
| **Three months ended June 30, 2003:** |       |              |       |            |       |                  |       |                       |       |           |       |
| Operating  revenue (4)                |       | $                 | 160,424    |            | $          | 133,927               |       | $                          | 43,425     |           | —     |   | $ | 337,776 |   |
| Operating income (5)                  |       | $                 | 72,332     |            | $          | 28,394                |       | $                          | 24,568     |           | $          | (27,995 | ) | $ | 97,299 |   |
| **Six months ended June 30, 2003:**   |       |              |       |            |       |                  |       |                       |       |           |       |
| Operating revenue (4)                 |       | $                 | 311,729    |            | $          | 247,936               |       | $                          | 92,028     |           | —     |   | $ | 651,693 |   |
| Operating income (5)                  |       | $                 | 139,824    |            | $          | 44,750                |       | $                          | 53,184     |           | $          | (99,309 | ) | $ | 138,449 |   |

** **

**Notes toGeographic Financial Information:**

 

*(1)**            **Americas**includes the UnitedStates, Canada and Latin America.*

 

*(2)**            **Europe includes countries in Europe,the Middle East and Africa.*

 

*(3)**            **Asia**Pacific**includes Japan,Australia and other countries in the Asia Pacific region.*

 

*(4)**            **Operating**revenue relates toexternal customers and is primarily based on the location of the customer.  The operating revenue for the geographicregions includes the impact of foreign exchange in converting results into U.S.Dollars.*

 

(5)                *Operating**income for the threegeographic regions does not reflect the allocation of certain expenses that aremaintained in Corporate and Other and as such, is not a true measure of therespective regions’ profitability.  Forthe three months ended March 31, 2003, Severance, impairment and other chargesof $17,369, $5,040 and $11,081 for the Americas, Europe and Asia Pacific,respectively, are presented in Corporate and Other.  The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. Dollars.*

 

A summary of theCompany’s operating revenue by product line, as of and for the three and sixmonths ended June 30, 2004 and 2003 is presented below:

 
| ** **                            | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                            | ** ** | **2004**                        | ** **  | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales Force Effectiveness             | ** ** | **$**                           | **172,660** |                          | $          | 159,613 | ** ** | **$** | **339,789** |   | $ | 311,975 |   |
| Portfolio Optimization                | ** ** | **$**                           | **109,673** |                          | $          | 99,482 | ** ** | **$** | **222,775** |   | $ | 199,932 |   |
| Brand and Launch Management and Other | ** ** | **$**                           | **52,406**  |                          | $          | 48,536 | ** ** | **$** | **101,186** |   | $ | 88,160 |   |
| Consulting and Services               | ** ** | **$**                           | **44,844**  |                          | $          | 30,145 | ** ** | **$** | **77,409** |   | $ | 51,626 |   |
| Total Operating revenue               | ** ** | **$**                           | **379,583** |                          | $          | 337,776 | ** ** | **$** | **741,159** |   | $ | 651,693 |   |

* *

33

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

**(Dollarsand shares in thousands, except per share data)**

 

*Thisdiscussion and analysis should be read in conjunction with the accompanyingCondensed Consolidated Financial Statements (unaudited) and related notes.*

 

***OurBusiness***

*** ***

IMS Health Incorporated (“we”, “us” or “our”) is a leading globalprovider of information solutions to the pharmaceutical and healthcareindustries.  Our revenues are derivedprimarily from the sale of a broad line of market information, sales managementand consulting services to the pharmaceutical and healthcare industries.  Our information products are developed to meetclient needs by using data secured from a worldwide network of suppliers in themarkets where operations exist.  Keyinformation products include:

 

•      SalesForce Effectiveness to optimize sales force productivity and territorymanagement;

 

•      PortfolioOptimization to provide clients with insights into market opportunity andbusiness development assessment;

 

•      Brandand Launch Management and Other to support client needs relative to marketsegmentation and positioning and life cycle management for prescription andover-the-counter pharmaceutical products; and

 

•      Consultingand Services that use in-house capabilities and methodologies to assistpharmaceutical clients in analyzing and evaluating market trends, strategiesand tactics, and to help in the development and implementation of customizedsoftware applications and data warehouse tools.

 

We operate in more than 100 countries. We also own a venture capital unit, Enterprise Associates, LLC(“Enterprises”), which is focused on investments in emerging businesses, and a25.8% equity interest in The TriZetto Group, Inc. (“TriZetto”), at June30, 2004.

 

We manage on a global business model with global leaders for themajority of our critical business processes and accordingly have one reportablesegment.

 

We believe thatimportant measures of our financial condition and results of operations includeoperating revenue, constant dollar revenue growth, operating income, operatingmargin and cash flows.

 

**Split-Off of Cognizant Technology SolutionsCorporation Segment (“CTS”)**

 

Until February 6,2003, we also included CTS, which provides custom Information Technology (“IT”)design, development, integration and maintenance services.  CTS is a publicly traded corporation on theNasdaq national market system.  We owned 55.3%of the common shares outstanding of CTS (92.5% of the outstanding voting power)as of December 31, 2002, and accounted for CTS as a consolidatedsubsidiary.  On February 6, 2003, wedivested CTS through a split-off transaction, and as a result, during the firstquarter of 2003, we recorded a net gain from discontinued operations of$495,053.  Our share of CTS results arepresented as discontinued operations for 2003

 

34

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through the date of divestiture (see Note 6 to the unaudited CondensedConsolidated Financial Statements).

 

**OperatingResults**

 

*Referencesto constant dollar results. *We report results in U.S. Dollars but wedo business on a global basis.  Exchangerate fluctuations affect the rate at which we translate foreign revenues andexpenses into U.S. Dollars and have important effects on our results.  In order to illustrate these effects, thediscussion of our business in this report sometimes describes the magnitude ofchanges in constant dollar terms.  Webelieve this information facilitates a comparative view of businessgrowth.  In the first six months of 2004,the U.S. Dollar was generally weaker against other currencies compared to thefirst six months of 2003, so growth at constant dollar exchange rates was lowerthan growth at actual currency exchange rates. See “How Exchange Rates Affect Our Results” below and the discussion of“Market Risk” in the Management Discussion and Analysis in our annual report onForm 10-K for the year ended December 31, 2003 for a more complete discussionregarding the impact of foreign currency translation on our business.

 

**Summaryof Operating Results**

** **
| ** **                          | ** ** | ** **         | ** **  | **% Variance** | ** ** |
|-------------------------------------|------------|--------------------|-------------|----------------|------------|
| **Three months ended June 30,**     | ** ** | **2004  vs. 2003** | ** **  |
| **2004**                            | ** ** | **2003**           | ** **  | ** **     |
| Operating revenue                   |       | **$**              | **379,583** |           | $          | 337,776 |   | 12.4 | % |
| Operating costs                     |       | **162,386**        |        | 141,547        |       | 14.7 | % |
| Selling and administrative expenses |       | **92,412**         |        | 79,099         |       | 16.8 | % |
| Depreciation and amortization       |       | **22,317**         |        | 19,831         |       | 12.5 | % |
| Operating income                    |       | **$**              | **102,468** |           | $          | 97,299 |   | 5.3 | % |

* *
| ** **                              | ** ** | ** **         | ** **  | **% Variance** | ** ** |
|-----------------------------------------|------------|--------------------|-------------|----------------|------------|
| **Six months ended June 30,**           | ** ** | **2004  vs. 2003** | ** **  |
| **2004**                                | ** ** | **2003**           | ** **  | ** **     |
| Operating revenue                       |       | **$**              | **741,159** |           | $          | 651,693 |   | 13.7 | % |
| Operating costs                         |       | **311,940**        |        | 278,804        |       | 11.9 | % |
| Selling and administrative expenses     |       | **186,496**        |        | 160,591        |       | 16.1 | % |
| Depreciation and amortization           |       | **44,023**         |        | 36,629         |       | 20.2 | % |
| Severance, impairment and other charges |       | **—**         |        | 37,220         |       | n/a |   |
| Operating income                        |       | **$**              | **198,700** |           | 138,449    |   | 43.5 | % |
|                                         |            |                    |             |                |            |  |  |  |  |

 

***OperatingIncome***

 

Our operatingincome for the second quarter of 2004 grew 5.3% at reported exchange rates and3.3% at constant dollar terms, to $102,468 from $97,299 in the second quarterof 2003.  The change was primarily due tothe increase in our operating revenue. Operating income for the six months ended June 30, 2004 grew 43.5% to$198,700 from $138,449 in the six months ended June 30, 2003.  The change was largely the result of $37,220in severance, impairment and other charges we recorded in the first quarter of2003 and the increase in our operating revenue. Absent the impact of severance,

 

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impairment andother charges, our operating income increased by 13.1% at reported exchangerates and 9.0% at constant dollar terms.

 

***OperatingRevenue***

 

Our operatingrevenue for the second quarter of 2004 grew 12.4% to $379,583 from $337,776 inthe second quarter of 2003.   On aconstant dollar basis our operating revenue growth was 8.6%.  Operating revenue for the first six months of2004 grew 13.7% to $741,159 from $651,693 in the first six months of 2003.  On a constant dollar basis our operatingrevenue growth was 8.1%.  The increase inour operating revenue during the second quarter and first six months of 2004resulted from growth in revenue in all four of our product and service categories,together with the effect of currency translation.

 

**Summaryof Operating Revenue**

** **
| ** **                            | ** ** | **Three months ended June 30,** | ** **  | **% Variance  2004 vs 2003** | ** ** |
|---------------------------------------|------------|---------------------------------|-------------|------------------------------|------------|
| **2004**                              | ** ** | **2003**                        | ** **  | **Reported Rates**           | ** ** | **Constant Dollar** | ** ** |
| Sales Force Effectiveness             |       | **$**                           | **172,660** |                         | $          | 159,613 |   | 8 | % | 5 | % |
| Portfolio Optimization                |       | **$**                           | **109,673** |                         | $          | 99,482 |   | 10 | % | 6 | % |
| Brand and Launch Management and Other |       | **$**                           | **52,406**  |                         | $          | 48,536 |   | 8 | % | 4 | % |
| Consulting and Services               |       | **$**                           | **44,844**  |                         | $          | 30,145 |   | 49 | % | 44 | % |
| Operating Revenue                     |       | **$**                           | **379,583** |                         | $          | 337,776 |   | 12 | % | 9 | % |

 
| ** **                            | ** ** | **Six months ended June 30,** | ** **  | **% Variance  2004 vs 2003** | ** ** |
|---------------------------------------|------------|-------------------------------|-------------|------------------------------|------------|
| **2004**                              | ** ** | **2003**                      | ** **  | **Reported Rates**           | ** ** | **Constant Dollar** | ** ** |
| Sales Force Effectiveness             |       | **$**                         | **339,789** |                         | $          | 311,975 |   | 9 | % | 4 | % |
| Portfolio Optimization                |       | **$**                         | **222,775** |                         | $          | 199,932 |   | 11 | % | 6 | % |
| Brand and Launch Management and Other |       | **$**                         | **101,186** |                         | $          | 88,160 |   | 15 | % | 8 | % |
| Consulting and Services               |       | **$**                         | **77,409**  |                         | $          | 51,626 |   | 50 | % | 44 | % |
| Operating Revenue                     |       | **$**                         | **741,159** |                         | $          | 651,693 |   | 14 | % | 8 | % |

 

•                  *Sales Force Effectiveness* revenue grew primarily due to CoreXponent offerings in the United States, Canada and Europe, and growth in Asia(excluding Japan), Latin America, and acquisitions.  The decline of revenue in Japan is levelingoff and we anticipate a gradual return to growth in the second half of 2004.

 

•                  *Portfolio Optimization* revenue grew primarily due to strongdemand for certain of our core products, including our next generation MIDASoffering, called MIDAS Quantum; KnowledgeLink, our proprietary search engine;and NPA Market-Dynamics, our premier longitudinal offering in the UnitedStates.

 

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•                  *Brand Management, LaunchManagement and Other product lines* revenue grew primarily due to weekly data sales andacquisitions in Europe.

 

•                  *Consulting and Services* revenue grew strongly across all ourservice lines, primarily in our Management Consulting service line.

 

***OperatingCosts***

 

Our operatingcosts include data processing costs, the costs of data collection andproduction, and costs attributable to personnel involved in production, datamanagement, and the processing and delivery of our consulting and services.  Our operating costs grew 14.7% to $162,386 inthe second quarter of 2004, from $141,547 in the second quarter of 2003 and forthe first six months of 2004 grew 11.9% to $311,940 from $278,804 for thecomparable period in 2003.  The increasein our operating costs was primarily due to**foreigncurrency translation, increased cost of consulting, higher data costs tosupport revenue growth, and acquisitions. The effect of foreign currency translation increased our operating costsby approximately $7,000 for the second quarter of 2004 as compared to thesecond quarter of 2003 and approximately $17,000 for the first six months of2004 as compared to the first six months of 2003.  Excluding the effect of the change in foreigncurrency translation, our operating costs grew 9.8% in the second quarter of2004 as compared to the second quarter of 2003 and grew 5.9% in the first sixmonths of 2004 as compared to the first six months of 2003.

 

Although ouroperating costs decreased as a percent of revenue in the first six months of2004 as compared to the first six months of 2003, our operating costs generallyhave increased at a rate greater than operating revenues in each of the lasttwo full fiscal years.  This increase hasbeen due to the impact of foreign currency translation, increased cost ofconsulting, higher data costs to support revenue growth, and acquisitions.

 

***Sellingand Administrative Expenses***

 

Our selling andadministrative expenses consist primarily of the costs attributable to sales,marketing and administration, including human resources, legal, management andfinance.  Our selling and administrativeexpenses grew 16.8% in the second quarter of 2004, to $92,412 from $79,099 inthe second quarter of 2003 and grew 16.1% to $186,496 from $160,591 in the firstsix months of 2004 compared to the first six months of 2003, primarily due tothe following factors:

 

•                  *Foreign Currency Translation*: The effect of foreign currencytranslation increased our selling and administrative expenses by approximately$4,000 for the second quarter of 2004 as compared to the second quarter of 2003and approximately $12,000 for the first six months of 2004 compared to thefirst six months of 2003.  Excluding theeffect of the change in foreign currency translation, our selling andadministrative expenses grew 11.8% in the second quarter of 2004 as compared tothe second quarter of 2003 and 8.9% in the first six months of 2004 as comparedto the first six months of 2003.

 

•                  *Sales and Marketing*: Sales and marketing expense increasedby $4,689 in the second quarter of 2004, compared to the second quarter of 2003and increased by $9,008 in the first six months of 2004, compared to the firstsix months of 2003 to support operating revenue growth.

 

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***Depreciationand Amortization***

 

Our depreciationand amortization charges increased 12.5% to $22,317 in the second quarter of2004, from $19,831 in the second quarter of 2003, primarily due to computersoftware amortization associated with new products, which increased by $1,731in the second quarter of 2004 compared to the second quarter of 2003.  Depreciation and amortization chargesincreased 20.2% to $44,023 in the first six months of 2004, from $36,629 in thefirst six months of 2003, primarily due to computer software amortizationassociated with new products, which increased by $6,326.

 

***Severance,Impairment and Other Charges***

 

During the firstquarter of 2003, we recorded a $37,220 pretax charge for Severance, impairmentand other charges, consisting primarily of severance charges of approximately$9,958 for approximately 80 employees, charges to exit data supply andprocessing contracts of $16,500, lease obligations associated with abandonedproperties of $5,807, and approximately $4,955 to write down computer softwareto its net realizable value.  For moredetail concerning these changes see Note 8 to the Consolidated FinancialStatements and the discussion of “Severance, Impairment and Other Charges” inthe Management Discussion and Analysis, both in our Annual Report on Form 10-Kfor the year ended December 31, 2003.

 

***Trendsin our Operating Margins***

 

Our operatingmargins for the second quarter and first six months of 2004 were 27.0% and26.8%, respectively, as compared to 28.8% and 21.2% in the second quarter of2003 and first six months of 2003, respectively.  The decrease in our operating margin for thesecond quarter of 2004 is primarily due to increases in data costs andcontinuing investment in new products. The improvement in our operating margin for the first six months of 2004was primarily due to the absence in 2004 of the Severance, impairment and othercharges of $37,220 recorded in the first quarter of 2003.

 

Operating marginsgenerally have declined over the past two years and may continue to decline infuture periods as we invest in acquisitions and new products and services todrive future revenue growth.

 

Recentacquisitions have had an adverse effect on our operating margins due to thefact that some of our acquisitions of small, niche businesses have historicallyexperienced lower operating margins than ours, and the revenue and costsynergies that we incorporate into our business plans are not all immediatelyrealized.  We also experience higherintangible amortization in the first several years after completing anacquisition and may incur additional costs in integrating the acquiredoperations into ours, both of which tend to increase our costs and thusdecrease our operating margins in the initial year of each completedacquisition.

 

***Non-OperatingIncome (Loss)***

 

Our non-operatingloss decreased 86.5% to a net loss of $1,680 in the second quarter of 2004 froma net loss of $12,414 in the second quarter of 2003 and grew 115.6% to a netgain of $4,241 in the six months ended June 30, 2004 from a net loss of $27,199in the six months ended June 30, 2003. The increase in our non-operating income was primarily due to thefollowing factors:

 

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•                  *Gains from Investments*: We had gains from investment of $2,074during the second quarter of 2004, primarily as a result of the sale ofinvestments in the Enterprises portfolio. Gains from investment in the second quarter of 2003 were $32. We hadgains from investment of $8,527 during the first six months of 2004, primarilyas a result of the sale of investments in the Enterprises portfolio.  Losses from investment in the first sixmonths of 2003 were $844.

 

•                  *Other Income*: Other income (expense), net, increasedprimarily due to net foreign exchange gains of $1,222 and $5,591 in the secondquarter and first six months of 2004, respectively, compared with net foreignexchange losses of $9,282 and $16,984 in the second quarter of and first sixmonths of 2003, respectively.

 

***Taxes***

 

For the six monthsended June 30, 2004, our effective tax rate was impacted by approximately$15,100, primarily due to a favorable partial U.S. audit settlement.  For the six months ended June 30, 2003, oureffective tax rate was impacted by approximately $69,600 due to ourreassessment, based on information received in April 2003, of our liabilityassociated with certain D&B Legacy Tax Matters and related subsequenttransactions.  This is more fullydescribed in Note 9 to the Condensed Consolidated Financial Statements(unaudited).  Further, our effective taxrate for the six months ended June 30, 2003 was affected by the favorablesettlement of a non-U.S. audit which approximated $13,900.

 

For all periodspresented, our effective tax rate was reduced as a result of global taxplanning initiatives.  While we intend tocontinue to seek global tax planning initiatives, there can be no assurancethat we will be able to successfully implement such initiatives to reduce ormaintain our overall tax rate.

 

***TriZetto***

 

In the firstquarter of 2003, we recorded an impairment charge of $14,842, net of taxes of$9,565, to write down our investment in TriZetto following the continuedsignificant decline in the market value of TriZetto shares below our carryingvalue.  We concluded that this declinewas other-than-temporary in accordance with Staff Accounting Bulletin (“SAB”)No. 59, “Views on Accounting for Noncurrent Marketable Equity Securities.”  As of March 31, 2003, TriZetto shares closedat $4.13 compared to our book value per share of $6.14 prior to recording theimpairment charge.  As of June 30, 2004,the market value of TriZetto exceeded our carrying value by approximately$40,310.  There can be no assurance thatTriZetto shares will continue to trade above our carrying value or that furtherimpairment charges will not be required.

 

A charge forTriZetto equity loss, net, of $303 and $1,269 was recorded in the three and sixmonths ended June 30, 2004, respectively and losses of $66 and $399 wererecorded in the three and six months ended June 30, 2003, respectively.  We do not control TriZetto and our resultsmay be significantly affected by our share of its income or losses.

 

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## **OperatingResults by Geographic Region**

## ** **

The followingrepresents selected geographic information for the regions in which we operatefor the three and six months ended June 30, 2004 and 2003:

 
| ** **                            | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------------|------------|----------------------------|------------|----------------|------------|
| **Three months ended June 30, 2004:** |       |              |       |            |       |                  |       |                       |       |           |       |
| Operating  revenue (4)                |       | $                 | 172,492    |            | $          | 156,669               |       | $                          | 50,422     |           | —     |   | $ | 379,583 |   |
| Operating income (5)                  |       | $                 | 75,712     |            | $          | 32,310                |       | $                          | 25,350     |           | $          | (30,904 | ) | $ | 102,468 |   |
| **Six months ended June 30, 2004:**   | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating revenue (4)                 |       | $                 | 339,403    |            | $          | 299,373               |       | $                          | 102,383    |           | —     |   | $ | 741,159 |   |
| Operating income (5)                  |       | $                 | 148,482    |            | $          | 56,200                |       | $                          | 54,048     |           | $          | (60,030 | ) | $ | 198,700 |   |
| **Three months ended June 30, 2003:** |       |              |       |            |       |                  |       |                       |       |           |       |
| Operating revenue (4)                 |       | $                 | 160,424    |            | $          | 133,927               |       | $                          | 43,425     |           | —     |   | $ | 337,776 |   |
| Operating income (5)                  |       | $                 | 72,332     |            | $          | 28,394                |       | $                          | 24,568     |           | $          | (27,995 | ) | $ | 97,299 |   |
| **Six months ended June 30, 2003:**   |       |              |       |            |       |                  |       |                       |       |           |       |
| Operating revenue (4)                 |       | $                 | 311,729    |            | $          | 247,936               |       | $                          | 92,028     |           | —     |   | $ | 651,693 |   |
| Operating income (5)                  |       | $                 | 139,824    |            | $          | 44,750                |       | $                          | 53,184     |           | $          | (99,309 | ) | $ | 138,449 |   |

 

**Notes toGeographic Financial Information:**

 

*(1)**            **Americas includes the UnitedStates, Canada and Latin America.*

 

*(2)**            **Europe includes countries inEurope, the Middle East and Africa.*

 

*(3)**            **Asia Pacific includes Japan,Australia and other countries in the Asia Pacific region.*

 

*(4)**            **Operating revenue relates toexternal customers and is primarily based on the location of the customer.  The operating revenue for the geographicregions includes the impact of foreign exchange in converting results into U.S.Dollars.*

 

(5)                *Operating income for the threegeographic regions does not reflect the allocation of certain expenses that aremaintained in Corporate and Other and as such, is not a true measure of therespective regions’ profitability.  Forthe three months ended March 31, 2003, Severance, impairment and other chargesof $17,369, $5,040 and $11,081 for the Americas, Europe and Asia Pacific,respectively, are presented in Corporate and Other.  The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. Dollars.*

 

***Americas Region***

 

Operatingrevenue growth in the Americas region was 7.5% in the second quarter of 2004,compared to the second quarter of 2003, primarily due to strong performance inthe consulting and services business in the U.S., and continued strength of thesales force effectiveness and portfolio optimization business lines,particularly in Canada.  Operatingrevenue growth was 8.9% in the first six months of 2004, compared to the firstsix months of 2003, primarily due to increased demand in all areas of theregion for our core sales force effectiveness and portfolio optimizationofferings.  Growth was also strong in ourconsulting and services line in the United States.

 

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Operatingincome growth in the Americas region was 4.7% in the second quarter of 2004,compared to the second quarter of 2003. Operating income growth lagged revenue growth due to investment inglobal consulting capabilities and higher data collection costs to support newproducts. Operating income growth was 6.2% in the first six months of 2004,compared to the first six months of 2003, primarily due to increased revenueoffset by increased costs of data, investments in product development andacquisitions.

 

***Europe Region***

 

Operatingrevenue growth in the Europe region was 17.0% in the second quarter of 2004,compared to the second quarter of 2003, primarily due to growth in core salesforce effectiveness, our next-generation MIDAS offering, our services andconsulting business, weekly data sales as well as foreign exchange.  Operating revenue growth was 20.7% in thefirst six months of 2004, compared to the first six months of 2003, primarilydue to strong growth in the consulting and services business and the salesforce effectiveness business line, as well as foreign exchange.

 

Operatingincome in the Europe region increased by 13.8% in the second quarter of 2004,compared to the second quarter of 2003. The operating income growth in 2004 was primarily driven by operatingrevenue growth and foreign exchange. Operating income growth was 25.6% in thefirst six months of 2004, compared to the first six months of 2003, primarilydriven by operating revenue growth, efforts to control costs and foreignexchange.

 

***Asia Pacific Region***

 

Operatingrevenue in the Asia Pacific region increased 16.1% in the second quarter of2004, compared to the second quarter of 2003, primarily due to a return togrowth in Japan, continued strong growth in the rest of the region and foreignexchange. Operating revenue growth was 11.3% in the first six months of 2004,compared to the first six months of 2003, primarily due to strong growth in theregion outside of Japan and foreign exchange, partially offset by the declinein Japan.  The decline in operatingrevenue in Japan was due to a data supplier issue that resulted in theinterruption of the data supply used in a weekly product.  We discontinued that product at the end ofthe first quarter of 2003 and it has not yet been replaced with a new product,causing the revenue decline.

 

Operatingincome in the Asia Pacific region increased by 3.2% in the second quarter of2004, compared to the second quarter of 2003, primarily due to the operatingrevenue issues discussed above. Operating income growth was 1.6% in the firstsix months of 2004, compared to the first six months of 2003.  The decline in operating margin in the regionwas due to the impact of the revenue decline in Japan from the discontinuationof the weekly product; because costs are primarily fixed in nature, the revenuedecline produced an operating income decline. In addition, we are incurring expenses to develop new products and servicesin Japan that are intended to replace and grow those revenues lost from thediscontinuation of the weekly product.

 

### **How Exchange RatesAffect Our Results**

### ** **

We operateglobally, deriving a significant portion of our operating income from non-U.S.operations.  As a result, fluctuations inthe value of foreign currencies relative to the U.S. Dollar may

 

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increase the volatility of our U.S. Dollar operating results.  We enter into forward foreign currencycontracts to partially offset the effect of currency fluctuations.  In 2004, foreign currency translationincreased our U.S. Dollar revenue growth by approximately 3.8 percentage pointsin the second quarter and 5.6 percentage points in the first six months, whilethe impact on our operating income growth was an approximate increase of 2.0percentage points in the second quarter and 4.1 percentage points in the firstsix months.

 

Our non-U.S.monetary assets are maintained in currencies other than the U.S. Dollar,principally the Euro, the Japanese Yen, the British Pound, the Swiss Franc andthe Canadian Dollar.  Where monetaryassets are held in the functional currency of the local entity, changes in thevalue of these currencies relative to the U.S. Dollar are charged or creditedto Cumulative translation adjustment in our Condensed Consolidated Statementsof Shareholders’ Equity (unaudited).  Theeffect of exchange rate changes during 2004 decreased our U.S. Dollar amount ofCash and cash equivalents by $1,608.

 

***Liquidityand Capital Resources***

*** ***

On February 6,2003, we divested CTS through a split-off transaction, and as a result, ourshare of CTS results are presented as discontinued operations for 2003 throughthe date of divestiture (see Note 6 to our unaudited Condensed ConsolidatedFinancial Statements).

 

Our cash and cashequivalents increased $27,465during the first six months of 2004 to $371,897at June 30, 2004 compared to $344,432 at December 31, 2003.  The increase primarily reflects cash wegenerated from operating activities of $161,392,offset by cash used in investing and financing activities of $53,766 and$78,553, respectively.  Including the change in short-term marketablesecurities, which is included in cash used in investing activities, our cashand cash equivalents and short-term marketable securities increased to $399,718at June 30, 2004 compared to $384,540 at December 31, 2003, an increase of$15,178.

 

We currentlyexpect that we will use our cash and cash equivalents primarily to fund:

 

•      development of software tobe used in our new products and capital expenditures to expand and upgrade ourinformation technology capabilities and to build or acquire facilities to houseour growing business (we currently expect to spend approximately $80,000 to$90,000 during 2004 for software development and capital expenditures);

 

•      acquisitions;

 

•      share repurchases;

 

•      dividends to ourshareholders (if dividends continue at our first and second quarter of 2004levels, we would expect dividends for 2004 to be $0.08 per share or approximately$19,000); and

 

•      payments for tax related matters, including theD&B Legacy Tax Matters discussed further in Note 9 to our CondensedConsolidated Financial Statements (unaudited). We currently

 

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            expectpayments for certain of the D&B Legacy Tax Matters to be up toapproximately $42,000 in the second half of 2004.

 

Net cashprovided by operating activities amounted to $161,392 for the six months ended June 30, 2004, an increase of $1,472 over the comparable period in2003.  The increase relates primarily tohigher income from continuing operations in the first half of 2004, offset bythe funding of income taxes, accrued and other current liabilities during thesix months ended June 30, 2004, and the payment from Nielsen Media Research in2003, as discussed in Note 9 to the Condensed Consolidated FinancialsStatements (unaudited), with no comparable payment in the same period in 2004

 

Net cash usedin investing activities amounted to $53,766for the six months ended June 30, 2004, a decrease in cash used of $49,389 over the comparable period in2003.  The lower cash requirements duringthe first six months of 2004 relate primarily to the fact that we only made netpayments of $19,275 for acquisitions during the first six months of 2004,compared to net payments made for acquisitions of $48,966 during the comparableperiod in 2003.  We also had a $15,620reduction in funding requirements for short-term marketable securities for thefirst half of 2004 compared with 2003.

 

Net cash usedin financing activities amounted to $78,553for the six months ended June 30, 2004, an increase of $38,629 over the comparable period in 2003.  This increase was primarily due to anincrease of $110,734 for payments to purchase our stock during the first sixmonths of 2004 compared with the comparable period in 2003, offset by a $58,465increase in proceeds we received from the exercise of stock options by ouremployees and a $14,038 net increase in our borrowings during the first sixmonths of 2004 compared with the comparable period in 2003.

 

Our financingactivities include cash dividends we paid of $0.02 per share quarterly, whichamounted to $9,500 and $9,785 during the first six months of 2004 and 2003,respectively.  The payments and level ofcash dividends made by us are reviewed quarterly and are subject to thediscretion of our Board of Directors. Any future dividends, other than the $0.02 per share dividends for thefirst and second quarters of 2004, which were declared by our Board ofDirectors in February 2004 and April 2004, respectively, will be based on, andaffected by, a number of factors, including our operating results and financialrequirements.

 

**Tax and other Contingencies**

 

We are exposedto certain known tax and other contingencies that are material to ourinvestors.  The facts and circumstances surrounding these contingenciesand a discussion of their effect on us are included in Note 9 to our CondensedConsolidated Financial Statements (unaudited) for the period ended June 30,2004.  We do not know of any material taxor other contingencies, other than those described in Note 9 to our CondensedConsolidated Financial Statements (unaudited).

 

Thesecontingencies may have a material effect on our liquidity, capitalresources or results of operations.  Although we have established reservesfor D&B Legacy Tax Matters, a 1998 non-U.S. tax reorganization and certaintax return positions in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 5, “Accounting for Contingencies”, the actual liabilityfor these

 

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matters may exceed the amountof the reserve.  We have not establishedany reserves in respect of the other contingencies described in Note 9 to theCondensed Consolidated Financial Statements (unaudited).  In addition,even where our reserves are adequate, the incurrence of any of theseliabilities may have a material effect on our liquidity and the amount of cashavailable to us for other purposes.

 

Managementbelieves that we have made appropriate arrangements in respect of the futureeffect on us of these known tax and other contingencies.  Managementalso believes that the amount of cash available to us from our operations,together with cash from financing, will be sufficient for us to pay any knowntax and other contingencies as they become due without materially affecting ourability to conduct our operations and invest in the growth of ourbusiness.

 

**Stock Repurchase Programs**

 

Our sharerepurchase program has been developed to buy opportunistically, when we believethat our share price provides us with an attractive use of our cash flow anddebt capacity.

 

On February 10,2004, our Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  As of June 30, 2004,approximately 7,500 shares remained available for repurchase under the February2004 program.

 

On April 15, 2003,our Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  We completed in May 2004at a total cost of $243,520.

 

On July 19, 2000,our Board of Directors authorized a stock repurchase program to buy up to40,000 shares.  We completed in June 2003at a total cost of $868,314.

 

During the sixmonths ended June 30, 2004, we repurchased approximately 8,057 shares ofoutstanding common stock under these programs, including the repurchase of4,600 shares on January 9, 2004 pursuant to an accelerated share repurchase program (“ASR”).  The ASR agreement provides for the finalsettlement of the contract in either cash or additional shares of our commonstock at our sole discretion.** **We were required to pay anadditional $942 as the final settlement amount based on an increase in ourshare price over the settlement period. The total cost of the shares repurchased during the six months endedJune 30, 2004 was $204,284.

 

Shares acquiredthrough our repurchase programs described above are open-market purchases orprivately negotiated transactions in compliance with Securities and ExchangeCommission Rule 10b-18.

 

**Debt**

 

In recent years,we have increased debt levels to balance appropriately the objective ofgenerating an attractive cost of capital with providing us a reasonable amountof financial flexibility.  At June 30, 2004,our debt totaled $634,604, and management does not believe that this level ofdebt poses a material risk to us due to the following factors:

 

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•      in each of the last twoyears, we have generated strong net cash provided by operating activities inexcess of $300,000;

 

•      at June 30, 2004, we had$399,718 in worldwide cash and cash equivalents and short-term marketablesecurities;

 

•      at June 30, 2004, we had$218,700 of unused debt capacity under our existing bank credit facilities($18,700 and $200,000 available under our long and short-term lines,respectively); and

 

•      we believe that we have theability to obtain additional debt capacity outside of our existing debtarrangements.

 

We hadborrowing arrangements with several domestic and international banks to providelines of credit up to $700,000 at June 30, 2004.  Total borrowings under these existing lineswere $481,300 and $407,600 at June 30, 2004 and December 31, 2003,respectively, of which $230,000 and $407,600 were classified as short-term and$251,300 and $0 were classified as long-term as of June 30, 2004 and December31, 2003, respectively.

 

On April 5,2004, we entered into a $700,000 revolving credit facility with a syndicate of12 banks (the “Unsecured Facility”).  TheUnsecured Facility replaced our lines of credit with several domestic andinternational banks.  The UnsecuredFacility is comprised of $430,000 of short-term lines that expire April 2005and $270,000 of long-term lines expiring April 2007.  In general, rates for borrowing under boththe short-term and long-term components are LIBOR plus 45 basis points and canvary based on our Debt to EBITDA ratio. The weighted average interest rates for our short-term lines were 1.86%and 1.61% at June 30, 2004 and December 31, 2003, respectively.  The weighted average interest rates for ourlong-term lines were 1.88% and 1.84% at June 30, 2004 and December 31, 2003,respectively.  In addition, we will pay acommitment fee on the unused portion of the short-term and long-term facilitiesof 0.08% and 0.10%, respectively.

 

We definelong-term lines as those where the lines are non-cancelable for more than 365days from the balance sheet date by the financial institutions except forspecified violations of the provisions of the agreement.  Borrowings under these three-year facilitiesare short-term in nature; however, we have the ability and the intent torefinance the short-term borrowings as they come due through April 2007.  At June 30, 2004, we reclassified $251,300 ofour short-term debt outstanding as long-term debt in accordance with theprovisions of SFAS No. 6, “Classification of Short-Term Obligations Expected tobe Refinanced.”

 

Our total debt of$634,604 and $561,991 at June 30, 2004 and December 31, 2003, respectively,included $150,000 of five-year private placement debt (as further discussedbelow), and $3,304 and $4,391 at June 30, 2004 and December 31, 2003,respectively, related primarily to cash overdrafts, certain capital leases, mortgagesand an adjustment to the carrying amount of fair value hedged debt.  At June 30, 2004, we had $18,700 and $200,000available under our long and short-term lines of credit, respectively.

 

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During the fourthquarter of 2001, we renegotiated with several banks and entered into three-yearlines of credit for borrowings of up to $175,000.  Borrowings had maturity dates of up to 90days from their inception.  These linesof credit were due to mature in 2004 and as such $175,000 was reclassified toshort-term as of December 31, 2003.

 

In March and April2002, we entered into interest rate swaps on a portion of our variable ratedebt portfolio.  These arrangementsconvert the variable interest rates to a fixed interest rate on a notionalamount of $75,000 and mature at various times from March 2005 through April2006.  The fixed rates range from 4.05%to 5.08%.  We accounted for the interestrate swaps as cash flow hedges and we recorded any changes in fair value inOther Comprehensive Income, in our Condensed Consolidated Statements ofShareholders’ Equity (unaudited).  Wedetermine the fair values based on estimated prices quoted by financialinstitutions.  The mark-to-marketadjustment for the three and six months ended June 30, 2004 was an unrealizednet loss of $870 and $976, respectively.

 

In January2003, we closed a private placement transaction pursuant to which we issued$150,000 of five-year debt to several highly rated insurance companies at a fixedrate of 4.60%.  We used the proceeds topay down short-term debt.  We alsoswapped $100,000 of our fixed rate debt to floating rate based on six-monthLIBOR plus a margin of approximately 107 basis points.  We accounted for these swaps as fair value hedgesunder the provisions of SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  We determinedthe fair values based on estimated prices quoted by financial institutions.  The cumulative fair value adjustment to theswap as of June 30, 2004 was a decrease of $113.

 

Our financing arrangements provide for certain covenants and events ofdefault customary for similar instruments, including in the case of our mainbank arrangements and the 2003 private placement transaction, covenants tomaintain specific ratios of consolidated total indebtedness to EBITDA and ofEBITDA to certain fixed charges.  At June30, 2004, we were in compliance with these financial debt covenants and weanticipate that we will remain in compliance with the covenants over the termof the borrowing arrangements.

 

**Severance,Impairment and Other Charges**

 

During the threemonths ended March 31, 2003, we recorded $37,220 of severance, impairment andother charges (the “first quarter charge”) as a component of operatingincome.  We incurred these charges due toa number of business and strategic factors affecting us:

 

•      severance-related charges of$9,958 were incurred in an effort to streamline operations and increaseproductivity through a worldwide reduction in headcount of approximately 80employees.  This reduction in headcountwas primarily focused on upgrading the skills and capabilities of our employeebase as we transform the business to provide new and enhanced analytical andconsulting offerings to our customers. The reduction in headcount also led to charges for impaired leases inthe U.S. and U.K. for office space no longer being used by us and for which wehad not been able to obtain subleases at rates comparable to the terms of ourlease obligations.  These severancebenefits were calculated pursuant to the terms of established employeeprotection plans, in accordance with local statutory minimum requirements orindividual employee contracts, as applicable;

 

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•      contract-related charges of$22,307 were incurred for impaired data supply, data processing and impairedlease contracts in our U.S. and Japanese operations.  An impairment for a data supply contract inthe U.S. was realized due to the fact that in the first quarter of 2003 wedetermined that expected revenues under a co-marketing agreement with a datasupplier would not be generated, but we are still required to make paymentsunder the terms of the contract.  We alsorealized an impairment for a data processing contract in Japan related to aweekly data product in Japan that was discontinued at the end of the firstquarter of 2003, due to the interruption in data supply; and

 

•      asset write-downs of $4,955 were recorded towrite-down certain of our computer software primarily in the U.S. and Japan toits net realizable value.  In the U.S.,our decision to change the underlying technology in a product required thewrite-down of a previous version.  InJapan, the termination of our weekly data product required the write-down ofour software used for that product.

 
| ** **               | ** ** | **Severance  related charges** | ** ** | **Contract  related charges** | ** ** | **Asset  write-downs** | ** ** | **Total** | ** ** |
|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|------------------------|------------|-----------|------------|
| Charge at March 31, 2003 |       | $                              | 9,958      |                          | $          | 22,307                 |       | $         | 4,955      |   | $ | 37,220 |   |
| 2003 Utilization         |       | (6,197                         | )          | (7,047                        | )          | (6,634                 | )          | (19,878   | )          |
| 2004 Utilization         |       | (1,097                         | )          | (1,847                        | )          | —                 |       | (2,944    | )          |
| Adjustments              |       | (1,746                         | )          | 67                            |       | 1,679                  |       | —    |       |
| Balance at June 30, 2004 |       | $                              | 918        |                          | $          | 13,480                 |       | $         | 0          |   | $ | 14,398 |   |

 

The cash portion of the first quarter charge amounted to $30,586, ofwhich we paid approximately $13,244 during 2003 and $2,944 during the sixmonths ended June 30, 2004, related primarily to employee termination benefitsand contract-related charges.  Theremaining accrual of $14,398 at June 30, 2004 relates to lease obligations andcontinuing payments related to employee termination benefits.

 

We expect thatcash outlays will be applied against the $14,398 balance remaining as follows: 

 

| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|------------------------------|------------|------------------|------------|
| 2004                         |       | $                | 2,948      |   |
| 2005                         |       | 7,917            |       |
| 2006                         |       | 923              |       |
| 2007                         |       | 752              |       |
| 2008                         |       | 228              |       |
| Thereafter                   |       | 1,630            |       |
| Total                        |       | $                | 14,398     |   |

 

During the nine months ended December 31, 2003, we reversed approximately$1,750 of severance related charges originally included in the first quartercharge due to our refinement of estimates. We also recorded additional charges during 2003 of approximately $1,700related primarily to a software impairment.

 

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We expect that future results will benefit from the first quarter chargeto the extent of the contract-related charges and asset write-downs primarilythrough 2007.  Our severance actionsrelated to a shifting of resources and as such are not expected to generatematerial cost savings.  The incomestatement lines that will be impacted in future periods are Operating costs forthe contract-related charges and Depreciation and amortization for the assetwrite-downs.  However, we do not expect amaterial impact on future cash flows due to the fact that we are still contractuallyobligated to continue to make payments under impaired contracts.

 

***RecentlyIssued Accounting Standards***

 

In January 2003,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,”(“FIN 46”).  FIN 46 requires all VariableInterest Entities (“VIEs”) to be consolidated by the primary beneficiary.  The primary beneficiary is the entity thatholds the majority of the beneficial interests in the VIE.  In addition, FIN 46 expands disclosure requirementsfor both VIEs that are consolidated as well as VIEs from which the entity isthe holder of a significant amount of the beneficial interest, but not themajority.  In December 2003, the FASBissued Interpretation 46R, “Consolidation of Variable Interest Entities”(revised December 2003), (“FIN 46R”) which further clarified the provisions ofFIN 46 and delayed the effective date for applying the provisions of FIN 46until the end of the first quarter of 2004 for interests held by publicentities in VIEs or potential VIEs created before February 1, 2003.  The adoption of FIN 46R did not have amaterial impact on our financial position, results of operations or cash flowsfor the three and six months ended June 30, 2004.

 

In December2003, the FASB issued SFAS No. 132 (revised 2003), “Employer’s Disclosuresabout Pensions and Other Postretirement Benefits,” an amendment of SFAS Nos.87, “Employers’ Accounting for Pensions”, 88, “Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination of Benefits,” and 106, “Employers’ Accounting for PostretirementBenefits Other Than Pensions,” and a revision of SFAS No. 132.  SFAS No. 132 (revised 2003) requiresadditional disclosures about the assets, obligations, cash flows, and netperiodic benefit cost of defined benefit pension plans and other postretirementbenefit plans, but does not change the measurement or recognition of suchplans.  The new disclosure requirementscontained in SFAS No. 132 (revised 2003) are effective for fiscal years endingafter December 15, 2003, with a delayed effective date for certain disclosures,for foreign plans, and for non-public entities. We have adopted all aspects of SFAS No. 132 (revised 2003) for allforeign and non-foreign plans, with the exception of the estimated futurebenefit payment disclosure.  Thisrequirement is first effective for fiscal years ending after June 15,2004.  Additionally, we are required todisclose components of the net benefit cost in quarterly financial statementsbeginning with the first quarter of 2004. This interim disclosure information is included in Note 11 to theCondensed Consolidated Financial Statements (unaudited).  The adoption of SFAS No. 132 (revised 2003)did not have a material impact on our financial position, results of operationsor cash flows for the three and six months ended June 30, 2004.

 

In December 2003, the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”) was signed into law in the U.S.  The Act introduced a prescription drugbenefit under Medicare Part D and a federal subsidy to sponsors of retirementhealth care plans that provide a benefit that is at least actuariallyequivalent to Medicare Part D.  In May2004, the FASB issued Staff

 

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Position No. (“FSP”) FAS 106-2, “Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003.” This statement requires entities to disclose the effects of the Act andto assess the impact of the subsidy on the accumulated postretirement benefitobligation and the net periodic postretirement benefit cost in the firstinterim period beginning after June 15, 2004. The effective date for us is the quarter ending September 30, 2004.  We are currently evaluating the impact of theAct on our postretirement benefit plan.

 

***Forward-Looking Statements***

*** ***

This QuarterlyReport on Form 10-Q, as well as information included in oral statements orother written statements made or to be made by us, contain statements that, inour opinion, may constitute “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995.  The words such as “believe,” “expect,”“anticipate,” “intend,” “plan,” “foresee,” “likely,” “project,” “estimate,”“will,” “may,” “should,” “future,” “predicts,” “potential,” “continue” andsimilar expressions identify these forward-looking statements, which appear ina number of places in this Quarterly Report and include, but are not limitedto, all statements relating to plans for future growth and other businessdevelopment activities as well as capital expenditures, financing sources,dividends and the effects of regulation and competition, foreign currency conversionand all other statements regarding the intent, plans, beliefs or ourexpectations or our directors or officers. Investors are cautioned that such forward-looking statements are notassurances for future performance or events and involve risks and uncertaintiesthat could cause actual results and developments to differ materially fromthose covered in such forward-looking statements.  These risks and uncertainties include, butare 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 – we derivedapproximately 61% of our operating revenue in 2003 from non-U.S. operations;

 

•      to the extent we seek growth through acquisitions,alliances or joint ventures, the ability to identify, consummate and integrateacquisitions, alliances and ventures on satisfactory terms;

 

•      our ability to develop new or advanced technologies,including sophisticated information systems, software and other technology usedto deliver our products and services and to do so on a timely andcost-effective basis, and the exposure to the risk of obsolescence orincompatibility of these technologies with those of our customers or suppliers;

 

•      our ability to maintain and defend our intellectualproperty rights in jurisdictions around the world;

 

•      our ability to successfully maintain historiceffective tax rates;

 

•      competition, particularly in the markets forpharmaceutical information;

 

•      regulatory, legislative and enforcement initiatives towhich we are or may become subject, relating particularly to tax and to patientprivacy and the collection and dissemination of 

 

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data and specifically, the use of anonymized patient-specificinformation, which we anticipate to be an increasingly important tool in thedesign, development and marketing of pharmaceuticals;

 

•      regulatory, legislative and enforcement initiatives towhich our customers in the pharmaceutical industry are or may become subjectrestricting the prices that may be charged for subscription or otherpharmaceutical products or the manner in which such products may be marketed orsold;

 

•      deterioration in economic conditions, particularly inthe pharmaceutical, healthcare, or other industries in which our customers mayoperate;

 

•      consolidation in the pharmaceutical industry and theother industries in which our customers operate;

 

•      the imposition of additional restrictions on our useof or access to data, or the refusal by data suppliers to provide data to us;

 

•      conditions in the securities markets that may affectthe value or liquidity of portfolio investments, including the investment inTriZetto and management’s estimates of lives of assets, recoverability ofassets, fair market value, estimates and liabilities and accrued income taxbenefits and liabilities;

 

•      to the extent unforeseen cash needs arise, the abilityto obtain financing on favorable terms; and

 

•      terrorist activity, the threat of such activity, andresponses to and results of such activity and threats, including but notlimited to effects, domestically and/or internationally, on us, our personneland facilities, our customers and suppliers, financial markets and generaleconomic conditions.

 

Consequently, allthe forward-looking statements contained in this Quarterly Report on Form 10-Qare qualified by the information contained herein, including, but not limitedto, the information contained under this heading and our Condensed ConsolidatedFinancial Statements (unaudited) and notes thereto for the three and six monthsended June 30, 2004 and by the material set forth under the headings “Business”and “Factors That May Affect Future Results” in our Annual Report on Form 10-Kfor the year ended December 31, 2003.  Weare under no obligation to publicly release any revision to any forward-lookingstatement contained or incorporated herein to reflect any future events or occurrences.

 

***Critical Accounting Policies***

*** ***

*Income Taxes.* In addition to the tax items discussed in Note 9 to the CondensedConsolidated Financial Statements (unaudited), we have tax reserves ofapproximately $27,500 that relate to various positions we have taken on tax returnsfiled in numerous countries over the last several years.  These reserves represent our best estimate ofthe probable liability should the tax return positions be challenged by therelevant tax authorities.  While theamount is material in the aggregate, no individual item is material and nosingle event will have a material impact related to these reserves.

 

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Information inresponse to this Item is set forth in “Note 10. Financial Instruments” in theNotes to the Condensed Consolidated Financial Statements (unaudited) on pages24 through 26 hereof.

 

**Item 4. Controls and Procedures**

 

(a)                                  Evaluation of Disclosure Controls andProcedures

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports that the Company files or submits to the SEC under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, as the Company’s are designed to do, and managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

TheCompany’s Chief Executive Officer and****ChiefFinancial Officer have evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-14c and 15d-14cunder the Exchange Act) as of June 30, 2004 (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s periodic filings under the ExchangeAct.

 

(b)                                 Changes in Internal Control over FinancialReporting

 

There have been no changes in our internal controlover financial reporting that occurred during the period covered by this reportthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Information inresponse to this Item is incorporated by reference to the information set forthin “Note 9. Contingencies” in the Notes to the Condensed Consolidated FinancialStatements (unaudited) on pages 13 through 24 hereof.

 

**Item2.  Changes in Securities, Use ofProceeds and Issuer Purchases of Equity Securities**

 

The followingtable provides information about the purchase by the Company during the quarterended June 30, 2004 of equity securities that are registered by the Company pursuantto Section 12 of the Exchange Act. 

 
| **Period**       | ** ** | **Total Number  of Shares  Purchased(1)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased Under  Publicly Announced Programs** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Programs(2)** | ** ** |
|------------------|------------|-------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
|             |       |                                      |       |                               |       |                                                                     |       |                                                                            |       |
| April 1-30, 2004 |       | —                                    |       | —                             |       | —                                                                   |       | —                                                                          |       |
| May 1-31, 2004   |       | 1,097,900                                 |       | 24.77                              |       | 1,097,900                                                                |       | 9,032,100                                                                       |       |
| June 1-30, 2004  |       | 1,502,500                                 |       | 24.68                              |       | 1,502,500                                                                |       | 7,529,600                                                                       |       |
| **Total**        |       | 2,600,400                                 |       | 24.72                              |       | 2,600,400                                                                |       | 7,529,600                                                                       |       |

 

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(1)          Allshares were repurchased through the Company’s publicly announced stockrepurchase programs.

 

(2)          OnApril 15, 2003, the Company announced a stock repurchase program to buy up to10,000,000 shares of the Company’s common stock.  The Company completed the April 2003 programduring the quarter ended June 30, 2004. On February 10, 2004, the Company announced a stock repurchase programto buy up to 10,000,000 shares of the Company’s common stock.  Unless terminated earlier by resolution ofthe Company’s Board of Directors, this program will expire when the Company hasrepurchased all shares authorized for repurchase thereunder.  As of June 30, 2004, 2,470,400 shares hadbeen purchased under the February 2004 program.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

The AnnualMeeting of Shareholders of IMS Health Incorporated was held on May 7, 2004.

 

The followingnominees for director named in the Proxy Statement dated March 22, 2004 wereelected at the Meeting by the votes indicated:

 
| ** **            | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|-----------------------|------------|-------------|------------|--------------|------------|
|                  |       |        |       |         |       |
| James D. Edwards      |       | 189,962,989 |       | 7,016,746    |       |
|                  |       |        |       |         |       |
| David M. Thomas       |       | 188,650,488 |       | 8,329,247    |       |
|                  |       |        |       |         |       |
| William C. Van Faasen |       | 189,935,052 |       | 7,044,683    |       |

 

 

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The votes infavor of the election of the nominees represent at least 96% of the sharespresent at the meeting.

 

Approval ofthe appointment of PricewaterhouseCoopers LLP as Independent Public Accountantswas approved by the following vote:

 
| ** **                                                                                      | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                                            |       |        |       |        |       |        |       |
| Number of Shares                                                                                |       | 190,015,208 |       | 5,400,740   |       | 1,563,783   |       |
|                                                                                            |       |        |       |        |       |        |       |
| Approval of  the Shareholder Proposal to Elect Each Director Annually:                          |       |
|                                                                                            |       |
| Number of Shares                                                                                |       | 130,602,609 |       | 41,061,132  |       | 1,769,706   |       |
|                                                                                            |       |        |       |        |       |        |       |
| Approval of  the Shareholder Proposal Regarding Shareholder Input Regarding Golden  Parachutes: |       |
|                                                                                            |       |
| Number of Shares                                                                                |       | 73,586,515  |       | 95,992,379  |       | 3,854,550   |       |

 

**Item 6.Exhibits and Reports on Form 8-K**

 

(a)          Exhibits:

 
| **Exhibit  Number** | ** ** | **Description  of Exhibits**                                                                                                                                                                                                                                                               |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                       |
| 10.1                |       | Amended and  Restated Indemnity and Joint Defense Agreement among VNU N.V., VNU Inc., AC  Nielsen Corporation, Neilsen Media Research Inc., R.H. Donnelley Corporation,  The Dun & Bradstreet Corporation, Moody’s Corporation and IMS Health  Incorporated, dated July 30, 2004. |
|                |       |                                                                                                                                                                                                                                                                                       |
| 31.1                |       | CEO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                       |
| 31.2                |       | CFO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                       |
| 32.1                |       | Joint  CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                 |

 

(b)         Reports on 8-K:

 

A report on Form 8-K was filed on April 20,2004 to present under Item 12, Results of Operations and Financial Condition,the Press Release regarding IMS Health’s financial results for its 2004 firstquarter.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                  |   | IMS Health  Incorporated        |
|-----------------------|--------|---------------------------------|
|                  |   |                            |
|                  |   |                            |
|                  | By:    | /s/ Nancy E.  Cooper            |   |
| Date: August  3, 2004 |   | Nancy E.  Cooper                |
|                  |   | Senior Vice  President and      |
|                  |   | Chief  Financial Officer        |
|                  |   | (principal  financial officer)  |
|                  |   |                            |
|                  |   |                            |
|                  |   | /s/ Leslye  G. Katz             |   |
| Date: August  3, 2004 |   | Leslye G.  Katz                 |
|                  |   | Vice  President, Controller     |
|                  |   | (principal  accounting officer) |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description  of Exhibits**                                                                                                                                                                                                                                                               |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                       |
| 10.1                |       | Amended and  Restated Indemnity and Joint Defense Agreement among VNU N.V., VNU Inc., AC  Nielsen Corporation, Neilsen Media Research Inc., R.H. Donnelley Corporation,  The Dun & Bradstreet Corporation, Moody’s Corporation and IMS Health  Incorporated, dated July 30, 2004. |
|                |       |                                                                                                                                                                                                                                                                                       |
| 31.1                |       | CEO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                       |
| 31.2                |       | CFO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                       |
| 32.1                |       | Joint  CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                 |

 

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