** **

**SECURITIES 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 March 31, 2003**                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **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) has filed all reportsrequired to be filed by Sections 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

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

 

| **Title  of Class**                     |   | **Shares  OutstandingAt April 30, 2003** |
|-----------------------------------------|--------|------------------------------------------|
| Common  Stock, par value $.01 per share |   | 243,054,322                              |

 

 

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**IMS HEALTH INCORPORATED**

 

**INDEX TO FORM 10-Q**

 
| **PART I. FINANCIAL  INFORMATION**                                                                       |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |
| **Item 1. Financial  Statements (Unaudited)**                                                            |
|                                                                                                     |
| Condensed  Consolidated Statements of Financial Position March 31, 2003 and December 31,  2002           |
|                                                                                                     |
| Condensed  Consolidated Statements of Income Three Months Ended March 31, 2003 and 2002                  |
|                                                                                                     |
| Condensed  Consolidated Statements of Cash Flows Three Months Ended March 31, 2003 and  2002             |
|                                                                                                     |
| 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 5. Other Information**                                                                            |
|                                                                                                     |
| **Item 6.  Exhibits and Reports on Form 8-K**                                                            |
|                                                                                                     |
| **SIGNATURES**                                                                                           |
|                                                                                                     |
| **CERTIFICATIONS**                                                                                       |
| **Chief Executive Officer**                                                                              |
|                                                                                                     |
| **Chief Financial Officer**                                                                              |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item I. FINANCIAL STATEMENTS**

 

**IMS HEALTH INCORPORATED**

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

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

* *
|                                                                                                                                   |   | **As  of March 31,  2003** |          | **As  of December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------------|-------------------------------|--------|
| **Assets:**                                                                                                                            |   |                       | ** **    |                          |   |
| **Current Assets:**                                                                                                                    |   |                       | ** **    |                          |   |
| Cash and cash equivalents                                                                                                              |   | **$**                      | **285,625**   | ** **                    | $      | 289,261 |   |
| Accounts receivable, net of allowances of $7,156 and  $5,808 in 2003 and 2002, respectively                                            |   | **242,890**                | ** **    | 215,868                       |   |
| Other receivable (Note 9)                                                                                                              |   | **36,805**                 | ** **    | 36,116                        |   |
| Other current assets                                                                                                                   |   | **110,695**                | ** **    | 110,258                       |   |
| Current assets of discontinued operations                                                                                              |   | —                     | ** **    | 175,761                       |   |
| **Total Current Assets**                                                                                                               |   | **676,015**                | ** **    | 827,264                       |   |
| Securities and other investments                                                                                                       |   | **22,054**                 | ** **    | 18,239                        |   |
| TriZetto equity investment (Note 8)                                                                                                    |   | **49,287**                 | ** **    | 74,557                        |   |
| Property, plant and equipment, net of accumulated  depreciation of $153,847 and $150,606 in 2003 and 2002, respectively                |   | **131,535**                | ** **    | 131,587                       |   |
| Computer software                                                                                                                      |   | **171,005**                | ** **    | 168,985                       |   |
| Goodwill                                                                                                                               |   | **217,144**                | ** **    | 184,163                       |   |
| Other assets                                                                                                                           |   | **182,880**                | ** **    | 159,070                       |   |
| Non-current assets of discontinued  operations                                                                                         |   | —                     | ** **    | 54,663                        |   |
| **Total Assets**                                                                                                                       |   | **$**                      | **1,449,920** | ** **                    | $      | 1,618,528 |   |
|                                                                                                                                   |   |                       |          |                          |   |
| **Liabilities, Minority Interests and Shareholders’ Equity:**                                                                     |   |                       | ** **    |                          |   |
| **Current Liabilities:**                                                                                                               |   |                       | ** **    |                          |   |
| Accounts payable                                                                                                                       |   | **$**                      | **37,314**    | ** **                    | $      | 31,940 |   |
| Accrued and other current liabilities                                                                                                  |   | **174,289**                | ** **    | 152,201                       |   |
| Short-term debt                                                                                                                        |   | **256,064**                | ** **    | 204,812                       |   |
| Accrued income taxes                                                                                                                   |   | **132,958**                | ** **    | 143,872                       |   |
| Short-term deferred tax liability                                                                                                      |   | **12,006**                 | ** **    | 11,964                        |   |
| Deferred revenues                                                                                                                      |   | **96,462**                 | ** **    | 94,061                        |   |
| Current liabilities of discontinued  operations                                                                                        |   | —                     | ** **    | 39,733                        |   |
| **Total Current Liabilities**                                                                                                          |   | **709,093**                | ** **    | 678,583                       |   |
| Postretirement and postemployment benefits                                                                                             |   | **72,154**                 | ** **    | 73,813                        |   |
| Long-term debt (Note 10)                                                                                                               |   | **327,452**                | ** **    | 325,000                       |   |
| Other liabilities                                                                                                                      |   | **172,252**                | ** **    | 107,894                       |   |
| Non-current liabilities of discontinued  operations                                                                                    |   | —                     | ** **    | 31,622                        |   |
| **Total Liabilities**                                                                                                                  |   | **$**                      | **1,280,951** | ** **                    | $      | 1,216,912 |   |
|                                                                                                                                   |   |                       |          |                          |   |
| **Commitments and contingencies (Note  9)**                                                                                            |   |                       | ** **    |                          |   |
| **Minority Interests**                                                                                                                 |   | **$**                      | **102,652**   | ** **                    | $      | 102,033 |   |
| **Minority Interests of discontinued operations**                                                                                      |   | —                     | ** **    | 77,327                        |   |
| **Shareholders’ Equity:**                                                                                                         |   |                       | ** **    |                          |   |
| Common Stock, par value $.01, authorized 800,000  shares; issued 335,045 shares at March 31, 2003 and December 31, 2002,  respectively |   | **$**                      | **3,350**     | ** **                    | $      | 3,350 |   |
| Capital in excess of par                                                                                                               |   | **501,557**                | ** **    | 497,562                       |   |
| Retained earnings                                                                                                                      |   | **1,604,860**              | ** **    | 1,165,090                     |   |
| Treasury stock, at cost, 90,446 and 53,980 shares at March 31, 2003  and December 31, 2002, respectively                               |   | **(1,920,984**             | **)**         | (1,316,354                    | )      |
| Cumulative translation adjustment                                                                                                      |   | **(102,097**               | **)**         | (106,907                      | )      |
| Minimum pension liability adjustment, net of taxes  of $8,371 and $8,371 at March 31, 2003 and December 31, 2002, respectively         |   | **(17,487**                | **)**         | (17,487                       | )      |
| Unrealized loss on changes in fair value of cash flow hedges, net of  tax                                                              |   | **(3,183**                 | **)**         | (3,141                        | )      |
| Unrealized gains on investments, net of taxes of $162 and $76 at  March 31, 2003 and December 31, 2002, respectively                   |   | **301**                    | ** **    | 143                           |   |
| **Total Shareholders’ Equity**                                                                                                    |   | **$**                      | **66,317**    | ** **                    | $      | 222,256 |   |
| **Total Liabilities, Minority Interests and Shareholders’ Equity**                                                                |   | **$**                      | **1,449,920** | ** **                    | $      | 1,618,528 |   |

## ** **

## ***See accompanyingNotes to the Condensed Consolidated Financial Statements (unaudited).***

 

3

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** **

**IMS HEALTH INCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

 

 
|                                                                                                                           |   | **Three Months Ended  March 31,** |        |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-------------|
|                                                                                                                           |   | **2003**                          |        | **2002** |   |
| **Operating Revenue**                                                                                                          |   | **$**                             | **313,917** | ** ** | $ | 289,714 |   |
|                                                                                                                           |   |                              | ** **  |   |   |
| Operating costs                                                                                                                |   | **132,989**                       | ** **  | 115,251 |   |
| Selling and administrative expenses                                                                                            |   | **85,760**                        | ** **  | 80,582 |   |
| Depreciation and amortization                                                                                                  |   | **16,798**                        | ** **  | 11,744 |   |
| Severance, impairment and other charges                                                                                        |   | **37,220**                        | ** **  | — |   |
| **Operating Income**                                                                                                           |   | **41,150**                        | ** **  | 82,137 |   |
| Interest income                                                                                                                |   | **1,263**                         | ** **  | 1,389 |   |
| Interest expense                                                                                                               |   | **(4,054**                        | **)**       | (2,683 | ) |
| Gains (losses) from investments, net                                                                                           |   | **(876**                          | **)**       | (1,220 | ) |
| Gain on issuance of investees’ stock, net                                                                                 |   | **(315**                          | **)**       | — |   |
| Other expense, net                                                                                                             |   | **(10,803**                       | **)**       | (702 | ) |
| **Non-Operating Income (Loss), Net**                                                                                           |   | **(14,785**                       | **)**       | (3,216 | ) |
| Income before provision for income taxes                                                                                       |   | **26,365**                        | ** **  | 78,921 |   |
| Provision for income taxes (Note 11)                                                                                           |   | **(64,349**                       | **)**       | (24,548 | ) |
| TriZetto equity loss, net of income taxes of $215 and $132****for  2003 and 2002, respectively                                 |   | **(333**                          | **)**       | (202 | ) |
| TriZetto impairment charge, net of income  taxes of $9,565 for 2003                                                            |   | **(14,842**                       | **)**       | — |   |
| **Income (Loss) from continuing operations**                                                                                   |   | **(53,159**                       | **)**       | 54,171 |   |
| Income from discontinued operations, net of income taxes of $1,237  and $1,921  for 2003 and 2002,  respectively (Note 6) |   | **2,779**                         | ** **  | 5,008 |   |
| Gain on discontinued operations (Note 6)                                                                                       |   | **495,053**                       | ** **  | — |   |
| **Net Income**                                                                                                                 |   | **$**                             | **444,673** | ** ** | $ | 59,179 |   |
|                                                                                                                           |   |                              |        |   |   |
| **Basic Earnings Per Share of Common Stock:**                                                                                  |   |                              | ** **  |   |   |
| Income (loss) from continuing operations                                                                                       |   | **$**                             | **(0.20**   | **)** | $ | 0.19 |   |
| Income from discontinued operations                                                                                            |   | **1.92**                          | ** **  | 0.02 |   |
| **Basic Earnings Per Share of Common Stock**                                                                                   |   | **$**                             | **1.71**    | ** ** | $ | 0.20 |   |
|                                                                                                                           |   |                              | ** **  |   |   |
| **Diluted Earnings Per Share of Common Stock:**                                                                                |   |                              | ** **  |   |   |
| Income (loss) from continuing operations                                                                                       |   | **$**                             | **(0.20**   | **)** | $ | 0.18 |   |
| Income from discontinued operations                                                                                            |   | **1.91**                          | ** **  | 0.02 |   |
| **Diluted Earnings Per Share of Common Stock**                                                                                 |   | **$**                             | **1.71**    | ** ** | $ | 0.20 |   |
|                                                                                                                           |   |                              |        |   |   |
| Weighted average number of shares outstanding –  basic                                                                    |   | **259,414**                       | ** **  | 291,804 |   |
| Dilutive effect of shares issuable as of period-end  under stock option plans                                                  |   | **615**                           | ** **  | 1,352 |   |
| Adjustment of shares outstanding applicable to  exercised and cancelled stock options during the period                        |   | **1**                             | ** **  | 57 |   |
| **Weighted Average Number of Shares Outstanding – Diluted**                                                               |   | **260,030**                       | ** **  | 293,213 |   |

 

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

 

4

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**IMSHEALTH INCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

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

 

 
|                                                                                     |   | **Three  Months Ended  March 31,** |        |
|------------------------------------------------------------------------------------------|--------|------------------------------------|-------------|
|                                                                                     |   | **2003**                           |        | **2002** |   |
| **Cash Flows from Operating Activities:**                                                |   |                               | ** **  |   |   |
| Net income                                                                               |   | **$**                              | **444,673** | ** ** | $ | 59,179 |   |
| Less income from discontinued operations                                                 |   | **(497,832**                       | **)**       | (5,008 | ) |
| Income (loss) from continuing operations                                                 |   | **(53,159**                        | **)**       | 54,171 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       |   |                               | ** **  |   |   |
| Depreciation  and amortization                                                           |   | **16,798**                         | ** **  | 11,744 |   |
| Bad debt expense                                                                         |   | **1,344**                          | ** **  | 1,593 |   |
| Nielsen Media Research interest receivable                                               |   | **(689**                           | **)**       | (689 | ) |
| Deferred income taxes                                                                    |   | **7,940**                          | ** **  | 3,691 |   |
| (Gains) losses from  investments, net                                                    |   | **876**                            | ** **  | 1,163 |   |
| (Gain) loss on issuance of investees’ stock, net                                    |   | **315**                            | ** **  | — |   |
| TriZetto equity loss, net                                                                |   | **333**                            | ** **  | 202 |   |
| TriZetto impairment charge, net                                                          |   | **14,842**                         | ** **  | — |   |
| Minority interests in net income of  consolidated companies                              |   | **2,695**                          | ** **  | 2,564 |   |
| Non-cash stock compensation charges                                                      |   | **623**                            | ** **  | 361 |   |
| Non-cash portion of severance, impairment  and other charges                             |   | **4,959**                          | ** **  | — |   |
| Change in assets and liabilities,  excluding effects from acquisitions and dispositions: |   |                               | ** **  |   |   |
| Net increase in accounts receivable                                                      |   | **(25,195**                        | **)**       | (41,553 | ) |
| Net (increase) decrease in inventory                                                     |   | **20**                             | ** **  | (968 | ) |
| Net increase in prepaid expenses and  other current assets                               |   | **(10,056**                        | **)**       | (10,605 | ) |
| Net increase in accounts payable                                                         |   | **4,661**                          | ** **  | 3,144 |   |
| Net decrease in accrued and other current  liabilities                                   |   | **(5,002**                         | **)**       | (3,868 | ) |
| Net increase (decrease) in accrued  severance, impairment and other charges              |   | **24,321**                         | ** **  | (10,541 | ) |
| Net decrease in deferred revenues                                                        |   | **(4,569**                         | **)**       | (3,946 | ) |
| Net increase in accrued income taxes                                                     |   | **46,973**                         | ** **  | 12,965 |   |
| Net increase in pension assets and  liabilities                                          |   | **(225**                           | **)**       | (760 | ) |
| Net (increase) decrease in other  long-term assets                                       |   | **1,160**                          | ** **  | (8,019 | ) |
| Net tax benefit on stock option exercises                                                |   | **—**                         | ** **  | 535 |   |
| **Net Cash Provided by Operating Activities**                                            |   | **28,965**                         | ** **  | 11,184 |   |
| **Cash Flows Used in Investing Activities:**                                             |   |                               | ** **  |   |   |
| Capital expenditures                                                                     |   | **(5,069**                         | **)**       | (4,382 | ) |
| Additions to computer software                                                           |   | **(19,461**                        | **)**       | (15,471 | ) |
| Payments for acquisitions of businesses,  net of cash acquired                           |   | **(47,249**                        | **)**       | (7,013 | ) |
| Proceeds from sale of  investments, net                                                  |   | **—**                         | ** **  | 3,000 |   |
| Funding of venture capital investments                                                   |   | **—**                         | ** **  | (3,000 | ) |
| Other investing activities, net                                                          |   | **(8,813**                         | **)**       | 6,973 |   |
| **Net Cash Used in Investing Activities**                                                |   | **(80,592**                        | **)**       | (19,893 | ) |
| **Cash Flows Provided by Financing Activities:**                                         |   |                               | ** **  |   |   |
| Net increase in short-term borrowings                                                    |   | **48,725**                         | ** **  | 111,801 |   |
| Payments for purchase of treasury stock                                                  |   | **—**                         | ** **  | (99,707 | ) |
| Proceeds from exercise  of stock options                                                 |   | **909**                            | ** **  | 7,182 |   |
| Dividends paid                                                                           |   | **(4,903**                         | **)**       | (5,840 | ) |
| Proceeds from employee stock purchase plan                                               |   | **14**                             | ** **  | — |   |
| Increase in cash overdrafts                                                              |   | **1,878**                          | ** **  | — |   |
| **Net Cash Provided by Financing Activities**                                            |   | **46,623**                         | ** **  | 13,436 |   |
| Effect of Exchange Rate Changes                                                          |   | **1,368**                          | ** **  | (988 | ) |
| **Increase in Cash and Cash Equivalents**                                                |   | **(3,636**                         | **)**       | 3,739 |   |
| **Cash and Cash Equivalents, Beginning of Period**                                       |   | **289,261**                        | ** **  | 183,409 |   |
| **Cash and Cash Equivalents, End of Period**                                             |   | **$**                              | **285,625** | ** ** | $ | 187,148 |   |

* *

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

** **

**5**

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**IMS HEALTH INCORPORATED**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)**

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

** **

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

 

The accompanying Condensed Consolidated FinancialStatements (unaudited) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and Article 10 of Regulation S-X under the Securities andExchange Act of 1934, as amended.  TheCondensed Consolidated Financial Statements (unaudited) and related notesshould be read in conjunction with the Consolidated Financial Statements andrelated notes of IMS Health Incorporated (the “Company” or “IMS”) included inits 2002 Annual Report on Form 10-K. Accordingly, the accompanying 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.  Certain prior year amounts have been reclassified to conform with the2003 presentation.

** **

**Note2.   Basis of Presentation**

 

TheCompany is a leading global provider of information solutions to thepharmaceutical and healthcare industries. The Company operates in more than 100 countries and provides market information, sales management anddecision-support services to the pharmaceutical and healthcareindustries.  Its key products includesales management information to optimize sales force productivity, marketing effectivenessresearch for prescription and over-the-counter pharmaceutical products,consulting and other services.  TheCompany also owns a venture capital unit, Enterprise Associates, LLC(“Enterprises”) which is focused on investments in emerging businesses, and a26.3% equity interest in The TriZetto Group, Inc. (“TriZetto”), at March31, 2003.

 

During the year ended December 31, 2002, the Company alsoincluded:

 

•                  The Cognizant Technology SolutionsCorporation Segment (“CTS”), which provides customInformation Technology (“IT”) design, development, integration and maintenanceservices.  CTS is a publicly traded corporation on the Nasdaq national marketsystem.  IMS owned 55.3% of the commonshares outstanding of CTS (92.5% of the outstanding voting power) as ofDecember 31, 2002, and accounted for CTS as a consolidated subsidiary.  On February 6, 2003, the Companydivested CTS through a split-offtransaction, and as a result, during the three months ended March 31,2003, the Company recorded a net gain from discontinued operations of $495,053.  The Company’s share of CTS results arepresented as discontinued operations for 2003 through the date of divestitureand the three months ended March 31, 2002. CTS’s assets and liabilities are presented as discontinued operations asof December 31, 2002 (see Note 6.)

** **

**Note3.   Summary of Recent AccountingPronouncements**

 

In June2001, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 143, “Accounting for AssetRetirement Obligations.”  SFAS

 

6

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No. 143 addresses financial accounting and reportingfor obligations associated with the retirement of tangible long-lived assetsand the associated asset retirement costs. SFAS No. 143 requires an enterprise to record the fair value of an assetretirement obligation as a liability in the period in which it incurs a legalobligation associated with the retirement of a tangible long-lived asset.  SFAS No. 143 was effective for fiscal yearsbeginning after June 15, 2002.  Theadoption of SFAS No. 143 effective January 1, 2003 did not have a materialimpact on the Company’s financial position, results of operations or cash flowsfor the three months ended March 31, 2003.

** **

**Note4.   Summary of Significant AccountingPolicies**

* *

*Stock-based compensation.* SFAS No. 123, “Accounting for Stock-BasedCompensation,” requires that companies with stock-based compensation planseither recognize compensation expense based on the fair value of optionsgranted or continue to apply the existing accounting rules and disclose proforma net income and earnings per share assuming the fair value method had beenapplied.  The Company has chosen tocontinue applying Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employers” and related interpretations inaccounting for its plans.  If thecompensation cost for the Company’s stock-based compensation plans wasdetermined based on the fair value at the grant dates for awards under thoseplans, consistent with the method of SFAS No. 123, the Company’s net income andearnings per share would have been reduced to the pro forma amounts indicatedbelow for the three months ended March 31:

 
|                |   |                                                                                                               |   | **2003** |    | **2002** |   |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Net Income:         |   | As reported                                                                                                        |   | $        | 444,673 |     | $      | 59,179 |   |
|                |   | Add:  Stock-based employee  compensation expense included in reported net income, net of tax                  |   | 623      |    | 361      |   |
|                |   | Deduct:  Total stock-based  employee compensation expense under fair value method for all awards, net of  tax |   | (6,106   | )       | (3,931   | )      |
|                |   | Pro forma                                                                                                          |   | $        | 439,190 |     | $      | 55,609 |   |
| Earnings Per Share: |   |                                                                                                               |   |     |    |     |   |
| Basic               |   | As reported                                                                                                        |   | $        | 1.71    |     | $      | 0.20 |   |
|                |   | Pro forma                                                                                                          |   | $        | 1.69    |     | $      | 0.19 |   |
| Diluted             |   |                                                                                                               |   |     |    |     |   |
|                |   | As reported                                                                                                        |   | $        | 1.71    |     | $      | 0.20 |   |
|                |   | Pro forma                                                                                                          |   | $        | 1.69    |     | $      | 0.19 |   |

 

For a description of the Company’s other criticalaccounting policies, please refer to the Company’s 2002 Annual Report on Form10-K as filed with the Securities and Exchange Commission.

 

**Note5.   Acquisitions**

*** ***

*Acquisitions*

 

During the three months ended March 31, 2003, theCompany completed two acquisitions with an aggregate cash purchase price of$52,938.  These acquisitions were DataNiche Associates, Inc. (U.S.)

 

7

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and Azyx Polska Geopharma Information Services,Sp.z.o.o. (Poland).  These acquisitionswere accounted for under the purchase method of accounting.  As such, the aggregate cash purchase pricehas been allocated on a preliminary basis to the assets and liabilitiesacquired based on estimated fair values as of the closing date.  The purchase price allocation will befinalized after completion of the valuation of certain assets andliabilities.  The unaudited CondensedConsolidated Financial Statements include the results of these acquiredcompanies subsequent to the closing of the acquisition.  Had these acquisitions occurred as ofJanuary 1, 2003 or 2002, the impact on the Company’s results of operationswould not have been significant.

 

During the three months ended March 31, 2003, theCompany also entered into an agreement to purchase the Azyx business inPortugal.  However, the completion ofthis acquisition is contingent upon the Company getting regulatory approvalfrom Portugal.

 

In February 2002, the Company acquired InfoplexDurdaut & Jassmann GmbH, based in Germany. The purchase price for this acquisition, including direct andincremental transaction costs, amounted to $7,013, paid in cash.  After an allocation of the purchase price tothe net assets acquired, the Company recorded goodwill of $3,758.

** **

**Note 6.   CTS Split-Off**

 

On January 9, 2003, the Company commenced an exchangeoffer to distribute its majority interest in CTS.  The Company offered to exchange 0.309 shares of CTS class Bcommon shares for each share of the Company that wastendered.  The exchange offer, which wasoversubscribed, expired on February 6, 2003. Under terms of the offer, the Company accepted 36,540 IMS common sharestendered in exchange for all 11,291 CTS common shares that the Company owned.  As theoffer was oversubscribed, the Company accepted tendered IMS shares on apro-rata basis in proportion to the number of shares tendered.  The proration factor was 21.115717%.

 

As a result of this exchange offer, during the threemonths ended March 31, 2003, the Company recorded a net gain from discontinuedoperations of $495,053.  This gain isbased on the Company’s closing marketprice on February 6, 2003 multiplied by the 36,540 shares of IMS accepted inthe offer, net of the Company’s carrying value of CTS andafter deducting direct and incremental expenses related to the exchange offer.

 

In accordance with the provisions of SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Companyrecorded the results of CTS through the disposition date and the gain ondisposal as income from discontinued operations net of income taxes in theCondensed Consolidated Statements of Income (unaudited) for the three monthsended March 31, 2003.  The Company’s share of CTS’s,assets and liabilities are presented as discontinued operations as of March 31,2003 and December 31, 2002.  TheCompany’s share of CTS’s results for the three months ended March 31, 2002 andthe period from January 1, 2003 through the effective date of the exchangeoffer are presented as discontinued operations.

 

The Company currently expects direct costs related tothe CTS Split-Off to be approximately $17,300, consisting primarily ofinvestment advisor, legal and accounting fees. Of this amount, approximately $3,944 was paid through March 31,2003.  

** **

**8**

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**Note 7.   Goodwill and Intangible Assets**

 

Effective January 1, 2002, the Companyadopted SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 addresses the initialrecognition and measurement of intangible assets acquired outside of a businesscombination and the accounting for goodwill and other intangible assetssubsequent to their acquisition.  SFASNo. 142 provides that goodwill and intangible assets which have indefinite usefullives will not be amortized but rather will be tested at least annually forimpairment.  It also provides thatintangible assets that have finite useful lives be amortized.  There was no impairment of goodwill uponadoption of SFAS No. 142 and as such, the Company did not recognize a transitionadjustment during the first three months of 2002.

 

During the three months ended March 31,2003, the Company recorded additional goodwill of $31,973 based on apreliminary allocation of purchase price for the two acquisitions completed in2003 (see Note 5).  As of March 31, 2003total goodwill amounted to $217,144.

 

All of the Company’s other acquiredintangibles are subject to amortization. During the three months ended March 31, 2003, the Company recordedintangible assets of $21,000 based on a preliminary allocation of purchaseprice for acquisitions completed in 2003. Intangible asset amortization expense was $2,017 during the three monthsended March 31, 2003.  At March 31,2003, intangible assets (principally included in Other assets) were primarilycomposed of Customer Relationships, Databases and Trade Names.  The gross carrying amounts and relatedaccumulated amortization of these intangibles were $62,323 and $5,225,respectively, at March 31, 2003.  Theseintangibles are amortized over periods ranging from three to ten years.

 

Amortization expense associated withintangible assets at March 31, 2003 is estimated to be $7,809 for the lastthree quarters of 2003 and approximately $10,412 for each year beginning in2004 through 2008.

 

**Note 8.   Investments in Equity Investees**

 

Summary financialinformation for TriZetto for the three months ended March 31, 2003 and 2002 ispresented below.  The amounts shownrepresent TriZetto’s unaudited consolidated operating results, based onpublicly available information.

 
|                 |   | **Three  Months ended March 31,** |   |
|----------------------|--------|-----------------------------------|--------|
|                 |   | **2003**                          |   | **2002** |   |
| Net Sales            |   | $                                 | 69,034 |   | $ | 59,694 |   |
| Gross Profit         |   | $                                 | 21,092 |   | $ | 19,295 |   |
| Loss from Operations |   | $                                 | (2,141 | ) | $ | (5,961 | ) |
| Net Loss             |   | $                                 | (2,669 | ) | $ | (4,614 | ) |

 

The investment in TriZetto is accounted forunder the equity method of accounting. Following an initial decline in the market value of TriZetto stock belowcost in the latter part of the second quarter of 2002, the Company performed, and continues to perform, a periodic assessment inaccordance with its policy to determine whether an other-than-temporary declinein fair value has occurred.  Animpairment charge of $14,842, net of taxes of $9,565, was recorded in the threemonths ended March 31, 2003, to write down the Company’s investment in TriZettofollowing the continued significant

 

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decline in the market value of TriZetto shares belowthe Company’s carrying value.  As ofMarch 31, 2003, TriZetto shares closed at $4.13 compared to the Company’s carryingvalue per share of $6.14.  The Companyconcluded that this decline is other-than-temporary in accordance with StaffAccounting Bulletin (“SAB”) No. 59, “Views on Accounting for NoncurrentMarketable Equity Securities,” and the impairment charge recorded brings thebook value of the Company’s investment in TriZetto down to TriZetto’s March 31,2003 market value.

** **

**Note 9.   Contingencies**

 

The Company and its subsidiaries areinvolved in legal and tax proceedings, claims and litigation arising in the ordinarycourse of business.  Managementperiodically assesses the Company’s liabilities and contingencies in connectionwith these matters based upon the latest information available.  For those matters where management currentlybelieves it is probable that the Company will incur a loss and that theprobable loss or range of loss can be reasonably estimated, the Company hasrecorded reserves in the consolidated financial statements based on its bestestimates of such loss.  In otherinstances, because of the uncertainties related to either the probable outcomeor the amount or range of loss, management is unable to make a reasonableestimate of a liability, if any. However, even in many instances where the Company has recorded areserve, the Company is unable to predict with certainty the final outcome ofthe matter or whether resolution of the matter will materially affect theCompany’s results of operations, financial position or cash flows.  As additional information becomes available,the Company adjusts its assessment and estimates of such liabilitiesaccordingly.

 

The Company routinely enters intoagreements with its customers to sell data that the Company acquires in thenormal course of business.  In thesecustomer agreements the Company agrees to indemnify and hold harmless thecustomers for any damages they may suffer as a result of potential intellectualproperty infringement claims.  Theseindemnities typically have terms of approximately two years.  The Company has not accrued a liability withrespect to these matters, as the exposure is not considered probable andreasonably estimable.

 

Based on its review of the latestinformation available, in the opinion of management, the ultimate liability ofthe Company in connection with pending tax and legal proceedings, claims andlitigation will not have a material effect on the Company’s results ofoperations, cash flows or financial position, with the possible exception ofthe matters described below.

* *

*Legacy and Related Matters*

 

In order to understand the Company’sexposure to the potential liabilities described below, it is important tounderstand the relationship between the Company and its predecessors and otherparties that, through various corporate reorganizations and contractualcommitments, have assumed varying degrees of responsibility with respect tosuch matters.

 

In November 1996, the company then known asThe Dun & Bradstreet Corporation (“D&B”) separated into three publiccompanies by spinning-off ACNielsen Corporation (“ACNielsen”) and CognizantCorporation (“Cognizant”) (the “1996 Spin-Off”).  Pursuant to the agreements effecting the 1996 Spin-Off, amongother things, certain liabilities, including contingent liabilities relating tothe IRI Action (defined below) and tax liabilities arising out of certain priorbusiness transactions (the

 

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“D&B Legacy Tax Matters”), described more fullybelow, were allocated among D&B, ACNielsen and Cognizant.

 

In June 1998, Cognizant separated into twopublic companies by spinning-off IMS (the “1998 Spin-Off”) and then changed itsname to Nielsen Media Research, Inc. (“NMR”). As a result of the 1998 Spin-Off, the Company and NMR are jointly andseverally liable for all liabilities of Cognizant under the agreementseffecting the 1996 Spin-Off.  As between themselves, however, the Company and NMRagreed that IMS will assume 75%, and NMR will assume 25%, of any payments to bemade in respect of the IRI Action, including any legal fees and expensesrelated thereto incurred in 1999 or thereafter (IMS agreed to be responsiblefor legal fees and expenses incurred during 1998).  In addition, the Company and NMR agreed they would share equallyCognizant’s share of liability arising out of the D&B Legacy Tax Matters afterthe Company paid the first $130,000 of such liability.  NMR’s aggregate liability for payments inrespect of the IRI Action and the D&B Legacy Tax Matters shall not exceed$125,000.

 

Also during 1998, D&B separated intotwo public companies by spinning-off The Dun & Bradstreet Corporation(“D&B I”) and then changed its name to R.H. Donnelley (“Donnelley”).  As a result of their separation in 1998,Donnelley and D&B I are each jointly and severally liable for allliabilities of D&B under the agreements effecting the 1996 Spin-Off.

 

During 2000, D&B I separated into twopublic companies by spinning off The Dun & Bradstreet Corporation (“D&BII”) and then changed its name to Moody’s Corporation (“Moody’s).

 

Pursuant to their separation in 2000,Moody’s and D&B II are each jointly and severally liable for all ofD&B’s liabilities under the agreements effecting the 1996 Spin-Off.

* *

*IRI Litigation. *On July 29, 1996, Information Resources, Inc. (“IRI”)filed a complaint in the United States District Court for the Southern Districtof New York, naming as defendants the corporation then known as “The Dun andBradstreet Corporation” and now known as Donnelley, A.C. Nielsen Company (asubsidiary of ACNielsen) and I.M.S. International, Inc. (a predecessor ofthe Company and then a subsidiary of Cognizant) (the “IRI Action”).  At the time of the filing of the complaint,each of the other defendants was a subsidiary of Donnelley.

 

The complaint alleges various violations ofthe antitrust laws of the United States, including alleged violations ofSections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with acontract and a claim of tortious interference with a prospective businessrelationship.  These latter claimsrelate to the acquisition by the defendants of Survey Research Group Limited(“SRG”).  IRI alleges that SRG violatedan alleged agreement with IRI when it agreed to be acquired by the defendantsand that the defendants induced SRG to breach that agreement.  IRI’s complaint alleges damages in excess of$350,000, which amount IRI has asked to be trebled under the antitrustlaws.  IRI also seeks punitive damagesin an unspecified amount.

 

In connection with the 1996 Spin-Off,D&B, ACNielsen and Cognizant entered into an Indemnity and Joint DefenseAgreement pursuant to which they agreed (i) to certain arrangementsallocating liabilities that may arise out of or in connection with the IRIAction, and (ii) to conduct a joint defense of such action.  In particular, the Indemnity and JointDefense Agreement provides that, in the event of an adverse decision, ACNielsenwill assume exclusive liability for liabilities up to an

 

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amount to be calculated by an investment banking firm,at the time such liabilities, if any, become payable, pursuant to a specifiedsolvency test (the “ACN Maximum Amount”) and that Cognizant and Donnelley willshare liability equally for any amounts in excess of the ACN Maximum Amount.  On February 19, 2001, ACNielsenannounced that it merged with VNU N.V. Pursuant to the Indemnity and Joint Defense Agreement, VNU is to beincluded with ACNielsen for purposes of determining the ACN Maximum Amount.

* *

*D&B Legacy and Related Tax Matters. *During the second quarter of2002, the IRS issued Notices of Proposed Adjustments (“Notices”) with respectto a certain transaction entered into by D&B in 1993.  In these Notices, the IRS proposed todisallow certain royalty expense deductions claimed by D&B on its 1995 and1996 tax returns and by Cognizant on its 1997 tax return.  The IRS previously concluded an audit of the1993 and 1994 D&B federal income tax returns and did not disallow anysimilar claimed deductions.  D&B IIis the agent for Donnelley in the D&B Legacy Tax Matters.  D&B II and the Company disagree with theposition taken by the IRS in its Notices and a responsive brief has been filedto this effect with the IRS.  If the IRSwere to issue a formal assessment consistent with such Notices and suchassessment were ultimately upheld in full by the courts, the Company’s share ofthe total liability for 1995 and 1996 (as determined pursuant to the agreementseffecting the 1996 and 1998 Spin-Off’s) would be approximately $39,900, net ofincome tax benefit.  If the IRS were toissue a formal assessment for 1997 consistent with such Notices and suchassessment were ultimately upheld in full by the courts, the Company’s totalliability would be approximately $17,200, net of income tax benefit.  In addition, the IRS has indicated anintention to assert penalties for 1995 and 1996 based on its interpretation ofapplicable law.  D&B II has advisedthe Company that Donnelley would challenge this interpretation.  If the IRS were to prevail in its assertionof penalties and interest thereon, the Company’s share of such penalties andinterest would be approximately $8,000, net of income tax benefit.

 

In addition, in February 2003, thepartnership associated with the transaction described above received a SummaryReport from the IRS that challenges the tax treatment of certain royaltypayments received by the partnership which relate to the royalty expensedeductions referred to above.  In theSummary Report, the IRS proposes to reallocate certain partnership income toD&B.  If the IRS were to prevail inthe positions taken in the Summary Report, the Company’s share of theadditional liability including penalties and interest thereon would beapproximately $20,100, net of income tax benefit.  Management disagrees with the position taken by the IRS, in partbecause this position is inconsistent with the IRS’s position with respect tothe royalty expense deduction described above, and D&B II has advised theCompany that Donnelley intends to vigorously challenge the IRS’s interpretation.

 

If the IRS were to prevail in the positionstaken in the Summary Report, certain deductions taken by the Company subsequentto the 1996 Spin-Off may be disallowed. The Company believes the deductions are appropriate and will vigorouslychallenge any disallowance claimed by the IRS. If the IRS were to issue a formal assessment and such assessment wereultimately upheld in full by the courts, the Company’s liability would beapproximately $55,800 net of income tax benefits.

 

Based on new information received in April2003, the Company increased its reserve to its anticipated share of theprobable liability in connection with the foregoing tax matters.  Accordingly, based on information currentlyavailable, management does not believe that these matters will have a

 

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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.

 

On June 26, 2000, the IRS issued a formalassessment in the amount of $561,582, for additional tax and interest due basedon its review of Donnelley’s utilization of certain capital losses during 1989and 1990.  D&B I, as agent forDonnelley, advised the Company that on May 12, 2000 it filed an amended taxreturn for these periods, which reflected $561,000 of tax and interestdue.  In May 2000, D&B I paid$349,291 of this amount and the Company paid $212,291 (subject to reimbursementto the Company of a portion of this amount by NMR).  Notwithstanding the filing and payment, D&B II is contestingthe assessment and has advised the Company that it would also contest theassessment of amounts, if any, in excess of the amounts paid.  The Company had previously accrued for thisliability and, therefore, this payment did not result in an expense in 2000.

 

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 ispossible that some of these matters could be resolved adversely to the Company.

* *

*Sharing Dispute. *Pursuantto the terms of the 1998 Spin-Off, NMR was not obligated to pay the Company forits share of the $212,291 that the Company paid to theIRS in 2000 in connection with a D&B Legacy Tax Matter 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.  TheCompany believes that NMR’s position has no merit and plainly contravenes theterms of the applicable agreements. Accordingly, at March 31, 2003, the Company has a receivable of $36,805,which includes the outstanding principal and accumulated accrued interest of$6,199.  During each of the three monthsended March 31, 2003 and 2002, $689 of interest income was accrued inaccordance with the terms of the applicable agreements.  These amounts are reflected in Otherreceivable in the Condensed Consolidated Statements of Financial Position.  The Company commenced arbitration regardingthis matter in April 2001 by filing a Demand for Arbitration with the AmericanArbitration Association International Center for Dispute Resolution.  On April 29, 2003, the arbitrationpanel issued an award in favor of the Company and ordered that NMR pay the Company the entireprincipal balance plus simple 9% interest from January 2, 2001, together withall legal fees and costs incurred by the Company in connection with thearbitration.  On April 30, 2003, theCompany received $37,025 from NMR in satisfaction of the principal amount plusinterest from January 2, 2001 through April 30, 2003; payment of the legal feesis pending.

 

*MattersBefore the European Commission*

 

On December 19, 2000 National DataCorporation (“NDC”) filed a complaint against the Company with the EuropeanCommission (“EC” or “Commission”), requesting that the Commission initiate aproceeding against the Company for an alleged infringement of Article 82of the EC Treaty.  Article 82 ofthe EC Treaty relates to abuses of a dominant position that adversely affectcompetition.  The complaint concerned anIMS geographic mapping structure used for the reporting of regional

 

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sales data in Germany, which the German courts haveruled is copyright protected.  Inaddition to seeking a formal Commission proceeding against the Company, thecomplaint requested that the Commission grant interim relief requiring theCompany to grant NDC a compulsory license to enable NDC to use this structurein its competing regional sales data service in Germany.  AzyX Deutschland GmbH (“AzyX”), anothercompetitor, intervened in the same proceedings against the Company.

 

On March 8, 2001, the Commissioninitiated formal proceedings against the Company in this matter and onJuly 3, 2001, the Commission ordered interim measures against the Companypending a final decision (the “Interim Decision”).  Under the Interim Decision, the Company was ordered to grant alicense of the geographic mapping structure on commercially reasonable termswithout delay to NDC and to any other competitor currently present on theGerman regional sales data market that requested a license.

 

On August 6, 2001, the Company filedan appeal with the Court of First Instance (“CFI”) seeking the annulment of theInterim Decision in its entirety (the “Annulment Appeal”) and requesting thatoperation of the Interim Decision be suspended until the CFI renders judgementon the Annulment Appeal.  OnOctober 26, 2001, the President of the CFI suspended operation of theInterim Decision pending a judgement on the Annulment Appeal.  On April 11, 2002, the European Court of Justice(“ECJ”) denied an appeal by NDC of the October 26 decision.  In October 2002, the CFI informed theCompany that it had suspended the Annulment Appeal.  The Annulment Appeal is suspended until the ECJ renders adecision on questions referred to it by the German court that is presiding overcertain litigations that the Company commenced against NDC and others inGermany for misappropriation of the Company’s intellectual property rights.

 

The Company intends to vigorously continueto assert that its refusal to grant licenses for the use of its copyrightprotected geographic mapping structure to its direct competitors in Germany,which compete in the same market for which the copyright exists, is not incontravention of Article 82 of the EC Treaty.  Management of the Company is unable to predict at this time thefinal outcome of this matter or whether the resolution of this matter couldmaterially affect the Company’s future results of operations, cash flows orfinancial position.

 

As a result of other complaints filed withthe Commission, on October 19, 2000, the Commission initiated formalproceedings against the Company through the adoption of a statement ofobjections alleging that certain of the Company’s commercial practicesconstituted an abuse of a dominant position in contravention of Article 82of the EC Treaty.  The Commissioninformed the Company on October 1, 2002 that it had decided to close the fileon this matter and that the complaints had been withdrawn.

* *

*OtherContingencies*

* *

*Contingent Consideration.*  Under the terms of the purchase agreementsrelated to acquisitions made in 2002 and 2001, the Company may be required topay additional amounts as contingent consideration based on the achievement ofcertain targets during 2003 to 2007. Any additional payments will be recorded as goodwill in accordance withEmerging Issues Task Force Issue No. 95-8, “Accounting for ContingentConsideration Paid to the Shareholders of an Acquired Enterprise in a PurchaseBusiness Combination.”  Based on currentestimates, management expects the additional

 

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payments under these agreements to total approximately$14,000.  As of March 31, 2003, noamounts were earned under these contingencies. The annual contingent payments will be resolved within a specified timeperiod after the end of each respective calendar year from 2003 through 2007.

* *

*Gartner Spin-Off. *In July 1999, the Company spun-off Gartner, Inc.  Pursuant to the terms of that spin-off,Gartner agreed to indemnify the Company and its stockholders for additionaltaxes that may become payable as a result of certain actions that may be takenby Gartner that adversely affect the tax-free treatment of the spin-off.  However, the Company may become obligatedfor certain tax liabilities in the event the spin-off is deemed to be a taxabletransaction as a result of certain Gartner share transactions that may beundertaken following the spin-off.  Inthe opinion of management, it is not probable that the Company will incur anymaterial liabilities with respect to this matter.

* *

*Synavant Spin-Off. *In August 2000, the Company spun-off Synavant, Inc.  Pursuant to the terms of that spin-off,Synavant undertook to be jointly and severally liable to the other parties tothe 1996 Spin-Off for any future liabilities of Cognizant under the terms ofthat spin-off and to NMR for any future liabilities of the Company under the1998 Spin-Off.  However, as between theCompany and Synavant, each will bear 50% of the Company’s share of any futureliability arising out of the IRI Action or the D&B Legacy Tax Matters (netof the liability borne by NMR), up to a maximum liability of $9,000 forSynavant.  If, contrary to expectations,the spin-off of Synavant were not to qualify as tax free under Section 355of the Internal Revenue Code, then, in general, a corporate tax would bepayable by the consolidated group, of which the Company is a common parent andSynavant is a member, based on the difference between (x) the fair marketvalue of the Synavant common stock on the date of the spin-off and (y) theadjusted basis of such Synavant common stock. In addition, under the consolidated return rules, each member of theconsolidated group would be severally liable for such tax liability.  The Company estimates that the aggregate taxliability in this regard is not expected to exceed $100,000.  Pursuant to the terms of the spin-off, theCompany would be liable for the resulting corporate tax, except in certaincircumstances.  In the opinion ofmanagement and based on the opinion of tax counsel, it is not probable that theCompany will incur any liability.

* *

*CTS Split-Off.*  The Company completed the CTS Split-Offexchange offer on February 6, 2003 (see Note 6).  If, contrary to expectations, the CTS distribution were not toqualify as tax free under Section 355 of the Internal Revenue Code, then,in general, a corporate tax would be payable by 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 adjustedtax basis in such class B common stock. Such corporate tax would be material in amount because the Company’s adjusted tax basis in the CTSclass B common stock is zero.  Pursuantto the distribution agreement entered into between the Company and CTS in connection with the distribution, CTSagreed to indemnify the Company inthe event the transaction is taxable as a result of a breach of certainrepresentations made by CTS, subject to certain exceptions.  In the opinion of management and based onthe opinion of tax counsel, it is not probable that the Company will incur anyliability for taxes in this matter.

* *

*Recent Litigation. *On January 17, 2003, theCompany was served with a summons in a new litigation matter.  Also named as defendants in this litigationare approximately 50 software vendors from which the Company purchased prescription data in the 1990’s (and, formany of these vendors, from which theCompany continues to purchase data).  Inthis action, it is alleged theCompany 

 

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misappropriated the trade secrets (i.e., prescriptiondata) of thousands of pharmacies in the United States and used this informationeither without authorization or outside the scope of any authorization.  This same conduct is alleged to breachcontracts between the Company and thesoftware vendors from which theCompany had purchased this prescription data.

 

The action has been brought in state courtin southern Illinois (Circuit Court of the 20th Judicial Circuit) bytwo pharmacies.  Plaintiffs are seekingclass action status, representing all pharmacies whose data was sold to the Company by their pharmacy dispensarysoftware vendors from 1990 to the present.  The pharmacies are seeking $100,000 in actual damages plus anunspecified amount of unjust enrichment damages (i.e., share of the Company profits) derived from use ofthe prescription data by the Companyand the other defendants, or, in the alternative, a reasonable royalty paid forthe use of the prescription data.

 

The Company is currently investigating thecircumstances surrounding the claims and is unable at this time to predict themanner in which this matter may eventually be resolved or, if resolvedadversely to the Company, the range of possible liability.  However, the Company believes that itspractices with respect to the acquisition and use of this prescription data areconsistent with applicable law and industry practices, and that the claims arewithout merit.

 

*Limited Partnership.*  The Company consolidates the assets,liabilities, results of operations and cash flows of businesses and investmentsover which it has control.  Thirdparties’ ownership interests are reflected as minority interests on theCompany’s financial statements.  Two ofthe Company’s subsidiaries contributed assets to, and participate in, a limitedpartnership.  One subsidiary serves asgeneral partner, and all other partners hold limited partnershipinterests.  The partnership, which is aseparate and distinct legal entity, is in the business of licensing databaseassets and computer software.  In 1997,third-party investors contributed $100,000 to the partnership in exchange forminority ownership interests.  TheCompany and its subsidiaries maintain a controlling (88%) interest in thepartnership.  Under the terms of thepartnership agreements, the third-party investors have the right to take stepsthat would result in the liquidation of their partnership interest on June 30,2003.  The Company intends to negotiatean extension of such date and in the unlikely event it is not successful inobtaining the extension, the Company intends to replace the partner with a newpartner prior to any such liquidation.

 

With respect to the matters described inthis Note, management of the Company is unable to predict at this time thefinal outcome or whether their resolution could materially affect the Company’sfuture results of operations, cash flows or financial position.

** **

**Note 10.   Financial Instruments**

* *

* Foreign Exchange Risk Management*

 

The Company transacts business in more than100 countries and is subject to risks associated with changing foreign exchangerates.  The Company’s objective is toreduce earnings and cash flow volatility associated with foreign exchange ratechanges.  Accordingly, the Companyenters into foreign currency forward contracts to minimize the impact offoreign exchange movements on net income and on the value of non-functionalcurrency assets and liabilities.

 

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It is the Company’s policy to enter intoforeign currency transactions only to the extent necessary to meet itsobjectives as stated above.  The Companydoes not enter into foreign currency transactions for investment or speculativepurposes.  The principal currencieshedged are the Japanese Yen, the Euro and the Swiss Franc.

 

The impact of foreign exchange riskmanagement activities on pre-tax income resulted in a net pre-tax (loss) gainof $(7,702) and $2,427 during the three months ended March 31, 2003 and 2002,respectively.  In addition, at March 31,2003, the Company had approximately $380,847 in foreign exchange forwardcontracts outstanding with various expiration dates through June 2003 relatingto non-functional currency assets and liabilities and estimated 2003 operatingincome.  Gains and losses on thesecontracts are not deferred and are included in the Condensed ConsolidatedStatements of Income (Unaudited) in Other expense, net.

* *

*FairValue of Financial Instruments*

 

At March 31, 2003, the Company’s financialinstruments included cash, cash equivalents, receivables, accounts payable,short-term debt, including short-term borrowings reclassified as long-termdebt, long-term debt, interest rate swaps and foreign currency forwardcontracts.  At March 31, 2003, the fairvalues of cash, cash equivalents, receivables, accounts payable and short-termdebt approximated carrying values due to the short-term nature of theseinstruments.  The contractual value ofthe Company’s foreign currency forward contracts was approximately $380,847 atMarch 31, 2003, and all contracts mature in 2003.  The estimated fair values of the forward contracts weredetermined based on quoted market prices.

* *

*CreditConcentrations*

 

The Company continually monitors itspositions with, and the credit quality of, the financial institutions which arecounterparties to its financial instruments and does not anticipatenon-performance by the counterparties. The Company would not realize a material loss as of March 31, 2003in the event of non-performance by any one counterparty.  The Company enters into transactions onlywith financial institution counterparties which have a credit rating of A orbetter.  In addition, the Company limitsthe amount of credit exposure with any one institution.

 

The Company maintains accounts receivablebalances ($242,890 and $215,868, net of allowances, at March 31, 2003 andDecember 31, 2002, respectively), principally from customers in the pharmaceuticalindustry.  The Company’s tradereceivables do not represent significant concentrations of credit risk at March31, 2003, due to the high quality of its customers and their dispersion acrossmany geographic areas.

* *

*Linesof Credit and Liquidity*

 

The Company has borrowing arrangements withseveral domestic and international banks to provide lines of credit up to$607,500 at March 31, 2003.  Totalborrowings under these existing lines totaled $428,200 and $523,900 at March31, 2003 and December 31, 2002, respectively. In general, the terms of these lines of credit give the Company theoption to borrow at an interest rate equal to LIBOR plus 37.5 basis points forshort-term lines and LIBOR plus 65.0 basis points for long-term lines.  The weighted average interest rates for theshort-term lines were 1.75% and 1.99% at March

 

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31, 2003 and December 31, 2002, respectively.  The weighted average interest rates for thelong-term lines were 2.03% and 2.21% at March 31, 2003 and December 31, 2002,respectively.  The commitment feeassociated with the unused short-term lines of credit is 22.5 basis points peryear, increasing to 28.75 basis points per year if the facilities are less than50% utilized.  Under the long-term linesthe commitment fee is 52.5 basis points on the unused portion per year.  The borrowing arrangements require theCompany to comply with certain financial covenants and at March 31, 2003, theCompany was in compliance with all such covenants.  Total debt of $583,516 and $529,812 at March 31, 2003 andDecember 31, 2002, respectively, included $150,000 of five-year privateplacement debt (as further discussed below) at March 31, 2003, and $2,864 and$5,912 at March 31, 2003 and December 31, 2002, respectively, related primarilyto cash overdrafts, certain capital leases, mortgages and an adjustment to thecarrying amount of fair value hedged debt.

 

In March and April 2002, the Companyentered into interest rate swaps on a portion of its variable rate debtportfolio.  These arrangements convertthe variable interest rates to a fixed interest rate on a notional amount of$75,000 and mature at various times from March 2005 through April 2006.  The fixed rates range from 4.05% 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 Consolidated Statements of Shareholders’Equity.  The mark-to-market adjustmentfor the three months ended March 31, 2003 was an unrealized net loss of $42. 

 

In January 2003, the Company closed aprivate placement transaction pursuant to which the Company issued $150,000 offive-year debt to several highly rated insurance companies at a fixed rate of4.60%.  The proceeds were used to paydown short-term debt.  At December 31,2002, the Company reclassified $150,000 of its short-term debt outstanding aslong-term debt in accordance with the provisions of SFAS No. 6, “Classificationof Short-Term Obligations Expected to be Refinanced.”  The Company also swapped $100,000 of the fixed rate debt tofloating rate based on six-month LIBOR plus a margin of approximately 107 basispoints.  These swaps have been accountedfor as fair value hedges under the provisions of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”

 

During the fourth quarter of 2001, theCompany renegotiated with several banks and entered into three-year lines ofcredit for borrowings of up to $175,000. Borrowings under these three-year facilities are short-term in nature;however, the Company has the ability and the intent to refinance the short-termborrowings as they come due through December 2004.  As such, at March 31, 2003 and December 31, 2002, the Companyreclassified $175,000, of its then outstanding debt as long-term debt pursuantto the provisions of SFAS No. 6. Borrowings have maturity dates of up to 90 days from their inception.

 

At March 31, 2003, the Company’s TotalCurrent Liabilities exceed its Total Current Assets by $33,078 primarily as aresult of management’s decision to maintain a greater proportion of short-termborrowings versus longer-term debt instruments.  This strategy allows the Company to achieve lower borrowing costswhile providing flexibility to repay debt with cash flow from operations andproceeds from the exercise of stock options and the liquidation of equityholdings.  Based on estimated futurecash flows from operations, the continued monetization of its venture capitalinvestments, the ability to monetize other assets as well as IMS’s ability toutilize unused existing lines of credit, the Company believes it will havesufficient cash and other resources to fund its short-term

 

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and long-term business plans, including its currentand long-term obligations, its contingent payments, its stock repurchaseprogram and its operations.

** **

**Note 11.   Income Taxes**

 

TheCompany operates in more than 100 countries around the world and its earningsare taxed at the applicable income tax rate in each of these countries.

 

Inthe three months ended March 31, 2003 the Company’s effective tax rate wasimpacted by the Company’s reassessment, based on information received in April2003, of its liability associated with certain D&B Legacy Tax Matters andrelated subsequent transactions (approximately $69,600).  This is more fully described in Note 9.  Further, the effective tax rate was affectedby the favorable settlement of a non-U.S. audit (approximately $13,900).  In the three months ended March 31, 2002,the Company’s effective tax rate reflects true-ups of current and deferredincome tax liabilities.

 

Whilethe Company intends to continue to seek global tax planning initiatives, therecan be no assurance that the Company will be able to successfully implementsuch initiatives to reduce or maintain its overall tax rate.

** **

**Note 12.   IMS Health Capital Stock**

 

On April 15, 2003, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares, marking thesixth consecutive repurchase program the Company has implemented.  Shares acquired through the repurchaseprogram will be open-market purchases or privately negotiated transactions incompliance with Securities and Exchange Commission Rule 10b-18.

 

On July 19, 2000, the Board of Directorsauthorized a stock repurchase program to buy up to 40,000 shares, marking thefifth consecutive repurchase program the Company has implemented.  Shares acquired through the repurchase programwill be open-market purchases in compliance with Securities and ExchangeCommission Rule 10b-18.

 

During the three months ended March 31,2003, the Company did not repurchase any shares of outstanding common stockunder these programs, compared with total repurchases of $99,707 for the threemonths ended March 31, 2002.  As ofMarch 31, 2003, approximately 34,811 shares had been repurchased since theinception of the July 2000 program, at a total cost of $784,569.

 

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

 

The Companyre-issued approximately 61 treasury shares under option exercises for proceedsof $909 during the three months ended March 31, 2003.  In addition, the Company paid dividends of $0.02 per share for atotal of $4,903 during the three months ended March 31, 2003.

** **

**19**

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** **

**Note 13.   Comprehensive Income**

* *

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

 

 
|                                               |   | **Three Months Ended  March 31,** |        |
|----------------------------------------------------|--------|-----------------------------------|-------------|
|                                               |   | **2003**                          |        | **2002** |   |
| **Net Income**                                     |   | **$**                             | **444,673** |   | $ | 59,179 |   |
| Other comprehensive income, net of taxes:          |   |                              |        |   |   |
| Unrealized gains (losses) on:                      |   |                              |        |   |   |
| Available-for-sale equity securities               |   | **(116**                          | **)**       | (3,973 | ) |
| Reclassification adjustment                        |   | **359**                           | ** **  | 492 |   |
| Tax benefit on above                               |   | **(85**                           | **)**       | 1,218 |   |
| Change in unrealized gains (losses) on investments |   | **158**                           | ** **  | (2,263 | ) |
| Foreign currency translation gains (losses)        |   | **4,809**                         | ** **  | (8,259 | ) |
| Changes in fair value of cash flow hedges          |   | **(42**                           | **)**       | — |   |
| Total other comprehensive income (loss)            |   | **4,925**                         | ** **  | (10,522 | ) |
| **Comprehensive Income**                           |   | **$**                             | **449,598** | ** ** | $ | 48,657 |   |

 

Included inthe reclassification adjustment of $359 for the three months ended March 31,2003, are $359 of write downs related to other-than-temporary declines in valueof the venture capital investments.

 

**Note 14.   Severance, Impairment and Other Charges**

 

During the three months ended March 31, 2003, the Company completed itsassessment of, and recorded $37,220 of Severance, impairment and other chargesas a component of operating income. These charges were designed to further streamline operations andincrease productivity.

 

Approximately $9,958 was charged to expense in the three months endedMarch 31, 2003, related to a worldwide reduction in headcount of approximately80 employees.  Theseseverance benefits were calculated pursuant to the terms of establishedemployee protection plans, in accordance with local statutory minimumrequirements or individual employee contracts, as applicable.

 

The Company recorded approximately $22,303 in contract-related charges,including $16,500 in charges to exit data supply and processing contracts and$5,803 related to lease obligations associated with abandoned properties.  These costs areincremental and either relate to existing contractual obligations that do nothave any future economic benefit or represent a contract cancellation penalty.

 

Approximately $4,959 was charged to expense to write down computersoftware to its net realizable value.  These write-downs resulted from the Company’s decision to abandoncertain products or introduce new regional or global platforms.

 

The cash portion of this charge amounts to $32,261, of which the Companypaid approximately $1,322 during the three months ended March 31, 2003.

 

During thefourth quarter 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 connectionwith this program, the Company recorded $94,616 of Severance, impairment andother charges relating to the IMS Segment during the fourth quarter of 2001 asa component of operating income.

 

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During thethree months ended March 31, 2003, the Company paid approximately $6,168 underthe Program, related primarily to employee termination payments and costsrelated to a facility shutdown.  Sincethe program’s inception $51,068 has been paid by the Company.  As expected, all actions under the Programwere completed by December 31, 2002. The remaining accrual of $12,636 at March 31, 2003 related primarily tolease obligations and continuing payments related to completed employeeterminations.

** **

**Note 15.   Operations by Business Segment**

 

Operating segments are defined as components of anenterprise about which financial information is available that is evaluated ona regular basis by the chief operating decision maker, or decision makinggroups, in deciding how to allocate resources to an individual segment and inassessing the performance of the segment. The Company has one reportable segment; it operates globally and is principallymanaged by way of and delivers information, software and related servicesthrough one reporting segment.

 

The chief operating decision-makers evaluateperformance and allocate resources based on revenue and operating income data.

 

A summary of the Company’s revenue by product line, asof and for the three months ended March 31, 2003 and 2002 is presented below:

 
|                               |   | **Three Months Ended March  31,** |    |
|------------------------------------|--------|-----------------------------------|---------|
|                               |   | **2003**                          |    | **2002** |   |
| Operating Revenue by product line: |   |                              |    |   |   |
| Sales management                   |   | $                                 | 187,636 |   | $ | 174,731 |   |
| Market research                    |   | $                                 | 114,951 |   | $ | 102,938 |   |
| Other services                     |   | $                                 | 11,330  |   | $ | 12,045 |   |
| Total Operating Revenue            |   | $                                 | 313,917 |   | $ | 289,714 |   |

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

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

 

*This discussion and analysis shouldbe read in conjunction with the accompanying Condensed Consolidated FinancialStatements (unaudited) and related notes.*

 

IMS Health Incorporated (“IMS” or the “Company”) is a leading global provider of information solutions to thepharmaceutical and healthcare industries. IMS operates in more than 100 countries and provides market information, sales management and decision-supportservices to the pharmaceutical and healthcare industries.  Its key products include sales managementinformation to optimize sales force productivity, marketing effectiveness research forprescription and over-the-counter pharmaceutical products, consulting and otherservices.  IMS also owns a venturecapital unit, Enterprise Associates, LLC (“Enterprises”) which is focused oninvestments in emerging businesses, and a 26.3% equity interest in The TriZettoGroup, Inc. (“TriZetto”), at March 31, 2003.

 

During the year ended December31, 2002, IMS also included:

 

**•**                  TheCognizant Technology Solutions Corporation Segment (“CTS”), which provides customInformation Technology (“IT”) design, development, integration and maintenanceservices.  CTS is a publicly traded corporation on the Nasdaq national marketsystem.  IMS owned 55.3% of the commonshares outstanding of CTS (92.5% of the outstanding voting power) as ofDecember 31, 2002, and accounted for CTS as a consolidated subsidiary.  On February 6, 2003, the Companydivested CTS through a split-offtransaction, and as a result, during the three months ended March 31,2003, the Company recorded a net gain from discontinued operations of$495,053.  The Company’s share of CTS results arepresented as discontinued operations for 2003 through the date of divestitureand the three months ended March 31, 2002. CTS’s assets and liabilities are presented as discontinued operations asof December 31, 2002 (see Note 6 to the unaudited Condensed ConsolidatedFinancial Statements.)

** **

**ThreeMonths Ended March 31, 2003 compared with Three Months Ended March 31, 2002**

 

***Operating Results***

 

Operating revenue for the three months ended March 31,2003, grew 8.4% to $313,917 from $289,714 in the three months ended March 31,2002.  On a constant dollar basis (i.e.a basis that eliminates the impact of year-over-year foreign currencyfluctuations), revenue growth was 0.8%. Sales Management revenue of $187,636 in the three months ended March 31,2003, reflects an increase of 7.4% from the three months ended March 31, 2002,and a decline of 0.2% on a constant dollar basis, driven by new productsales.  Market Research revenue improved11.7% to $114,951 in the three months ended March 31, 2003, and grew 3.7%constant dollar, reflecting growth from new clients and expansion of productcapabilities.  Other Services revenuedeclined 5.9% to $11,330 for the three months ended March 31, 2003, an 8.7%decline on a constant dollar basis, primarily due to a very strong first quarterin 2002 for Cambridge.

 

IMS’s operating costs include data processing costs,the costs of data collection and production, and costs attributable topersonnel involved in production, data management and the processing anddelivery of IMS’s services.  IMS’soperating costs grew 15.4% to $132,989 in the three months ended March 31,2003, from $115,251 in the three months ended March 31, 2002.  The increase resulted primarily from higherdata collection costs in the IMS Segment to support revenue growth, the

 

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investment in the global consulting business andhigher operating costs resulting from acquisitions made during the latter halfof 2002 and the first quarter of 2003.

 

Selling and administrative expenses consist primarilyof the costs attributable to sales, marketing, client service andadministration, including personnel, promotion, communications, management,finance, and occupancy.  IMS’s sellingand administrative expenses grew 6.4% in the three months ended March 31, 2003,to $85,760 from $80,582 in the three months ended March 31, 2002, primarily dueto investment in the global consulting business and higher selling andadministrative costs resulting from acquisitions made during the latter half of2002 and the first quarter of 2003.

 

Depreciationand amortization charges increased 43.0% to $16,798 in the three months endedMarch 31, 2003, from $11,744 in the three months ended March 31, 2002,primarily due to higher amortization of intangible assets resulting fromacquisitions made during the latter half of 2002 and the first quarter of 2003and increased software amortization associated with new product development.

 

During the three months ended March 31, 2003, IMSrecorded a $37,220 pretax charge for Severance, impairments and other chargesconsisting primarily of severance charges of approximately $9,958 forapproximately 80 employees, charges to exit data supply and processingcontracts of $16,500, lease obligations associated with abandoned properties of$5,803, and approximately $4,959 to write down computer software to its netrealizable value.  There was nocomparable charge during the three months ended March 31, 2002.

 

Operating income for the threemonths ended March 31, 2003, decreased 49.9% to $41,150 from $82,137 in thethree months ended March 31, 2002, primarily due to the Severance, impairmentand other charges of $37,220 recorded in the three months ended March 31,2003.  

 

Net interest expense was $2,791in the three months ended March 31, 2003, compared with $1,294 in the threemonths ended March 31, 2002, primarily due to higher levels of debt.  During each of the three months ended March31, 2003 and 2002, IMS recorded $689 of interest income related to itsreceivable from Nielsen Media Research, Inc. (“NMR”).  See Note 9 to the unaudited Condensed Consolidated FinancialStatements.

 

Gains (losses) from investments, net, amounted to anet loss of $876 in the three months ended March 31, 2003, as compared to a netloss of $1,220 in the three months ended March 31, 2002.  The net loss in 2003 is due primarily to $359of write downs related to other-than-temporary declines in value of the venturecapital investments, and management fees of $517.  The loss in the three months ended March 31, 2002 was dueprimarily to $549 of net losses realized on the sale of investments withinIMS’s Enterprises portfolio and a write down related to the assessment ofother-than-temporary declines in value of the venture capital investmentsamounting to $671.

 

A $315net loss on the issuance of TriZetto stock, relating to the exercise of stockoptions by TriZetto employees, was recorded in the three months ended March 31,2003.  This loss has been recognized inaccordance with Staff Accounting Bulletin (“SAB”) No. 51, “Accounting forSales of Stock by a Subsidiary.”  Therewas no comparable charge in the three months ended March 31, 2002.

 

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Other expense, net, increased in the three monthsended March 31, 2003, to $10,803 from $702 in the three months ended March 31,2002, primarily due to net foreign exchange losses of $7,702 in the threemonths ended March 31, 2003, compared with net foreign exchange gains of $2,427in the three months ended March 31, 2002.

 

In the three months endedMarch 31, 2003, IMS’s effective tax rate was impacted by the IMS’sreassessment, based on information received in April 2003, of its liabilityassociated with certain D&B Legacy Tax Matters and related subsequenttransactions (approximately $69,600). This is more fully described in Note 9 to the unaudited CondensedConsolidated Financial Statements. Further the effective tax rate was affected by the favorable settlementof a non-U.S. audit (approximately $13,900). In the three months ended March 31, 2002, IMS’s effective tax ratereflects true-ups of current and deferred income tax liabilities.

 

For all periods presented,IMS’s effective tax rate was reduced as a result of global tax planninginitiatives.  While IMS intends tocontinue to seek global tax planning initiatives, there can be no assurancethat IMS will be able to successfully implement such initiatives to reduce ormaintain its overall tax rate.

 

A TriZetto equity loss, net, of $333 was recorded in the three months ended March 31, 2003, compared with a net lossof $202 in the three months ended March 31, 2002.

 

An impairment charge of $14,842, net of taxes of$9,565, was recorded in the three months ended March 31, 2003 to write downIMS’s investment in TriZetto following the continued significant decline in themarket value of TriZetto shares below IMS’s carrying value, including a furthersubstantial decline subsequent to December 31, 2002.  As of March 31, 2003, TriZetto shares closed at $4.13 compared toIMS’s carrying value per share of $6.14. IMS concluded that this decline is other-than-temporary in accordancewith SAB No. 59, “Views on Accounting for Noncurrent Marketable EquitySecurities,” and the impairment charge recorded brings IMS’s book value inTriZetto down to TriZetto’s March 31, 2003 market value.

 

On February 6, 2003, the Company divested CTS through a split-off transaction, and asa result, CTS’s results are presented as income from discontinued operationsfor 2003 through the date of divestiture and for the three months ended March 31,2002 (see Note 6 to the unaudited Condensed Consolidated FinancialStatements).  Income from discontinuedoperations net in the three months ended March 31, 2003 decreased to $2,779from $5,008 in the three months ended March 31, 2002.  The decrease is due to only 37 days of IMS’s share of CTS netincome (January 1, 2003 through February 6, 2003) being included for 2003compared with a full quarter in 2002. As a result of the divestiture, the Company recorded a net gain fromdiscontinued operations during the first quarter of 2003 of $495,053.

 

***Liquidity and Capital Resources***

 

Cash and cash equivalents decreased $3,636 during thefirst quarter of 2003 to $285,625 at March 31, 2003 compared to $289,261 atDecember 31, 2002.  The decrease wasdriven by cash used in investing activities of $80,592, offset by cashgenerated from operating and financing activities of $28,965 and $46,623,respectively.  On February 6, 2003, theCompany divested CTS through a 

 

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split-off transaction, and asa result, the Company’s share of CTS’s, assets and liabilities are presented asdiscontinued operations as of March 31, 2003 and December 31, 2002.  The Company’s share of CTS’s results for thethree months ended March 31, 2002 and the period from January 1, 2003 throughthe effective date of the exchange offer are presented as discontinuedoperations, and the Condensed Consolidated Statements of Cash Flows arepresented to exclude CTS Cash Flows for the three months ended March 31, 2003and 2002, respectively (see Note 6.)

 

Net cash provided by operating activities amounted to$28,965 for the three months ended March 31, 2003, an increase of $17,781 overthe comparable period in 2002.  Theincrease relates primarily to lower cash requirements for severance, impairmentand other, accrued income taxes, and lower funding of accounts receivablesbalances due to improved collection. These items were offset by lower cash from continuing operations in2003.

 

Net cash used in investing activities amounted to$80,592 for the three months ended March 31, 2003, an increase in cash used of$60,699 over the comparable period in 2002. The greater cash requirements during 2003 relate primarily to $40,236 inhigher spending on acquisitions, an increase in cash used in other investingactivities of $15,786, $3,990 in higher spending on deferred software relatingto new product development and cash receipts received in the prior period forsales of investments of $3,000 for which there were no comparable receiptsduring 2003.  These items were offset bya required $3,000 funding of a venture capital investment in the prior periodfor which there was no comparable outlay in 2003.

 

Net cash provided by financing activities amounted to$46,623 for the three months ended March 31, 2003, an increase of $33,187 overthe comparable period in 2002.  Thisincrease was primarily due to $99,707 of payments for purchase of treasurystock in the prior period, for which there was no comparable payment in 2003 offsetby a $63,076 decrease in borrowings during 2003 when compared with the priorperiod.

 

At March 31, 2003, IMS’s Total Current Liabilities exceed its TotalCurrent Assets by $33,078 primarily as a result of management’s decision tomaintain a greater proportion of short-term borrowings versus longer-term debtinstruments.  This strategy allows IMSto achieve lower borrowing costs while providing flexibility to repay debt withcash flow from operations and proceeds from the exercise of stock options andthe liquidation of equity holdings. Based on estimated future cash flows from operations, the continuedmonetization of its venture capital investments, the ability to monetize otherassets as well as IMS’s ability to utilize unused existing lines of credit (seeNote 10 to the unaudited Condensed Consolidated Financial Statements), IMS believes it will havesufficient cash and other resources to fund its short-term and long-termbusiness plans, including its current and long-term obligations, its contingentpayments, its stock repurchase program and its operations.

 

On April 15, 2003, the Board of Directors authorized astock repurchase program to buy up to 10,000 shares, marking the sixthconsecutive repurchase program the Company has implemented.  Shares acquired through the repurchaseprogram will be open-market purchases or privately negotiated transactions incompliance with Securities and Exchange Commission Rule 10b-18.

 

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On July 19, 2000, the Board of Directors authorized astock repurchase program to buy up to 40,000 shares, marking the fifthconsecutive repurchase program the Company has implemented.  Shares acquired through the repurchaseprogram will be open-market purchases in compliance with Securities andExchange Commission Rule 10b-18.  Duringthe three months ended March 31, 2003, the Company did not repurchase anyshares of outstanding common stock under these programs.  As of March 31, 2003, approximately 34,811shares had been repurchased since the inception of the July 2000 program, at atotal cost of $784,569.

 

IMS believes that its available funds, creditfacilities and the cash flows expected to be generated from operations will beadequate to satisfy its current and planned operations and needs and contingentpayments for at least the next 12 months including an estimate of approximately$13,356 in fees associated with the CTS Split-Off (see Note 6 to the unauditedCondensed Consolidated Financial Statements). IMS’s ability to expand and grow its business in accordance with currentplans, to make acquisitions, repurchase stock and to meet its long-term capitalrequirements beyond this 12-month period will depend on many factors, includingthe rate, if any, at which its cash flow increases, its ability and willingnessto accomplish acquisitions, repurchase treasury stock and the availability toIMS of public and private debt and equity financing, including its currentability to secure bank lines of credit. IMS cannot be certain that additional financing, if required, will beavailable on terms favorable to it, if at all.

*** ***

***Recently IssuedAccounting Standards***

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143,“Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. SFAS No. 143 requires an enterprise to record the fair value of an assetretirement obligation as a liability in the period in which it incurs a legalobligation associated with the retirement of a tangible long-lived asset.  SFAS No. 143 was effective for fiscal yearsbeginning after June 15, 2002.  IMSadopted SFAS No. 143 effective January 1, 2003, which did not have a materialimpact on the IMS’s financial position, results of operations or cash flows forthe three months ended March 31, 2003.

 

***Forward-Looking Statements***

 

This Quarterly Report on Form 10-Q, as well asinformation included in oral statements or other written statements made or tobe made by IMS, contain statements that, in the opinion of IMS, may constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Thewords such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,”“likely,” “project,” “estimate,” “will,” “may,” “should,” “future,” “predicts,”“potential,” “continue” and similar expressions identify these forward-lookingstatements, which appear in a number of places in this Quarterly Report andinclude, but are not limited to, all statements relating to plans for futuregrowth and other business development activities as well as capitalexpenditures, financing sources, dividends and the effects of regulation andcompetition, foreign currency conversion and all other statements regarding theintent, plans, beliefs or expectations of IMS or its directors or officers.  Investors are cautioned that suchforward-looking statements are not assurances for future performance or eventsand involve risks and uncertainties that could cause actual results

 

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and developments to differ materially from thosecovered in such forward-looking statements. These risks and uncertainties include, but are not limited to:

 

**•**            risksassociated with operating on a global basis, including fluctuations in thevalue of foreign currencies relative to the U.S. dollar, and the ability tosuccessfully hedge such risks – IMS derived approximately 59% of its revenue in2002 from non-US operations;

 

**•**            tothe extent IMS seeks growth through acquisitions, alliances or joint ventures,the ability to identify, consummate and integrate acquisitions, alliances andventures on satisfactory terms;

 

**•**            theability to develop new or advanced technologies, including sophisticatedinformation systems, software and other technology used to deliver its productsand services and to do so on a timely and cost-effective basis, and theexposure to the risk of obsolescence or incompatibility of these technologieswith those of its customers or suppliers;

 

**•**            theability of IMS to maintain and defend its intellectual property rights injurisdictions around the world;

 

**•**            theability to identify and implement cost-containment measures;

 

**•**            theability to successfully maintain historic effective tax rates and toachieve  estimated corporate overheadlevels;

 

**•**            competition,particularly in the markets for pharmaceutical information;

 

**•**            regulatory,legislative and enforcement initiatives to which IMS is or may become subject,relating particularly to patient privacy and the collection and disseminationof data and specifically, the use of anonymized patient-specific information,which IMS anticipates to be an increasingly important tool in the design,development and marketing of pharmaceuticals, and tax;

 

**•**            regulatory,legislative and enforcement initiatives to which customers of IMS in thepharmaceutical industry are or may become subject restricting the prices thatmay be charged for subscription or other pharmaceutical products or the mannerin which such products may be marketed or sold;

 

**•**            deteriorationin economic conditions, particularly in the pharmaceutical, healthcare, orother industries in which IMS’s customers may operate;

 

**•**            consolidationin the pharmaceutical industry and the other industries in which IMS’scustomers operate;

 

**•**            theimposition of additional restrictions on IMS’s use of or access to data, or therefusal by data suppliers to provide data to IMS;

 

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**•**            conditionsin the securities markets which may affect the value or liquidity of portfolioinvestments, including the investment in TriZetto and management’s estimates oflives of assets, recoverability of assets, fair market value, estimates andliabilities and accrued income tax benefits and liabilities;

 

**•**            tothe extent unforeseen cash needs arise, the ability to obtain financing onfavorable terms; and

 

**•**            terroristactivity, the threat of such activity, and responses to and results of suchactivity and threats, including but not limited to effects, domestically and/orinternationally, on IMS, its personnel and facilities, its customers andsuppliers, financial markets and general economic conditions.

 

Consequently, all the forward-looking statementscontained in this Quarterly Report on Form 10-Q are qualified by theinformation contained herein, including, but not limited to, the informationcontained under this heading and the Condensed Consolidated FinancialStatements (unaudited) and notes thereto for the three month period ended March31, 2003 and by the material set forth under the headings “Business” and“Factors That May Affect Future Results” in IMS’s Annual Report on Form 10-Kfor the year ended December 31, 2002. IMS is under no obligation to publicly release any revision to anyforward-looking statement contained or incorporated herein to reflect anyfuture events or occurrences.

 

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Information in response to this Item is set forth in“Note 10. Financial Instruments” in the Notes to the Condensed ConsolidatedFinancial Statements (unaudited) on pages 16 through 19 hereof.

 

**Item4. Controls and Procedures**

 

(a)                                  Evaluation of Disclosure Controls andProcedures

 

The Company’s Chief Executive Officer and****Chief Financial Officer have evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as such term is defined inRules 13a-14c and 15d-14c under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures are effectivein alerting them on a timely basis to material information relating to the Company(including its consolidated subsidiaries) required to be included in theCompany’s periodic filings under the Exchange Act.

 

(b)                                 Changes in Internal Controls

 

Since the EvaluationDate, there have not been any significant changes in the Company’s internalcontrols or in other factors that could significantly affect such controls.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Informationin response to this Item is incorporated by reference to the information setforth in “Note 9. Contingencies” in the Notes to the Condensed ConsolidatedFinancial Statements (unaudited) on pages 10 through 16 hereof.

 

**Item 5. Other Information****.**

 

Due to a typographical error, the IMSHealth 2003 Proxy Statement incorrectly states the deadline for submittingshareholder proposals for inclusion in our Proxy Statement for consideration atthe Company’s 2004 Annual Meeting. Under the rules of the Securities and Exchange Commission, if ashareholder wants us to include a proposal in our Proxy Statement (and form ofproxy) for presentation at our 2004 Annual Meeting of Shareholders, theproposal must be received by us, marked to the attention of Robert H. Steinfeld, Corporate Secretary, at our principal executive offices byDecember 2, 2003 – not December 2, 2004.

 

For additional details on submittingshareholder proposals, please refer to IMS’s 2003 Proxy Statement.

 

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

 
| (a)    | Exhibits:                                                                                                                                                                                                                                                                                      |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                           |
|   | None.                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                           |
| (b)    | Reports  on 8-K:                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                           |
|   | A report on Form 8-K was  filed on January 16, 2003 to present under Item 5, Other Events, pro forma  financial information that updated and replaced pro forma financial  information presented in the Cognizant Technology exchange offering  circular-prospectus mailed on January 9, 2003. |
|   |                                                                                                                                                                                                                                                                                           |
|   | A report on Form 8-K was  filed on January 23, 2003 to present under Item 5, Other Events, disclosure  of an action filed against IMS Health and several other defendants alleging,  among other things, misappropriation of certain independent pharmacies’ trade  secrets.              |
|   |                                                                                                                                                                                                                                                                                           |
|   | A report on Form 8-K was  filed on February 5, 2003 to present under Item 5, Other Events, disclosure  of a press release announcing that IMS would take a non-cash, non-recurring  after-tax impairment charge in the fourth quarter of 2002 on its investment  in The TriZetto Group, Inc.   |

 

30

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**SIGNATURES**

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|              | IMS Health Incorporated        |
|-------------------|--------------------------------|
|              |                           |
|              |                           |
|              | By:                            | /s/ Nancy E. Cooper |   |
| Date: May 7, 2003 | Nancy E. Cooper                |
|              | Senior Vice President and      |
|              | Chief Financial Officer        |
|              | (principal financial officer)  |
|              |                           |
|              |                           |
|              | /s/ Leslye G. Katz             |   |
| Date: May 7, 2003 | Leslye G. Katz                 |
|              | Vice President, Controller     |
|              | (principal accounting officer) |
|                   |                                |  |  |

 

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**CERTIFICATIONS**

 

I, David M. Thomas, certifythat:

 

1.               I have reviewed this quarterly report on Form10-Q of IMS Health Incorporated;

 

2.               Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.               Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’s other certifying officer and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officer and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officer and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
|              | /s/ David M. Thomas                  |   |
|-------------------|--------------------------------------|--------|
| Date: May 7, 2003 | David  M. Thomas                     |
|              | Chairman and Chief Executive Officer |

 

32

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I, Nancy E. Cooper, certifythat:

 

1.               I have reviewed this quarterly report on Form10-Q of IMS Health Incorporated;

 

2.               Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.               Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’s other certifying officer and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officer and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officer and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
|              | /s/ Nancy E. Cooper        |   |
|-------------------|----------------------------|--------|
| Date: May 7, 2003 | Nancy  E. Cooper           |
|              | Senior  Vice President and |
|              | Chief Financial Officer    |

 

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