** **

**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 June 30,  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  Outstanding  At July 31, 2003** |
|----------------------------------------|--------|-------------------------------------------|
| Common Stock, par value $.01 per share |   | 239,100,245                               |

 

 

----

 

**IMS HEALTHINCORPORATED**

 

**INDEX TO FORM 10-Q**

 
| **PART I. FINANCIAL INFORMATION**                                                                        |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |
| **Item 1. Financial  Statements (Unaudited)**                                                            |
| Condensed Consolidated Statements of  Financial Position  June 30, 2003 and December 31, 2002            |
| Condensed Consolidated  Statements of Income  Three Months Ended June 30, 2003 and 2002                  |
| Condensed  Consolidated Statements of Income  Six Months Ended June 30, 2003 and 2002                    |
| Condensed  Consolidated Statements of Cash Flows  Six Months Ended June 30, 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  2. Changes in Securities and Use of Proceeds**                                                   |
|                                                                                                     |
| **Item  4. Submission of Matters to a Vote of Security Holders**                                         |
|                                                                                                     |
| **Item 6. Exhibits and Reports on Form 8-K**                                                             |
|                                                                                                     |
| **SIGNATURES**                                                                                           |
|                                                                                                     |
| **EXHIBITS**                                                                                             |

 

2

----

 

**PARTI. FINANCIAL INFORMATION****Item I. FINANCIAL STATEMENTS**

 

**IMS HEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTSOF FINANCIAL POSITION (Unaudited)**

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

 
|                                                                                                                                  |   | **As of June 30,  2003** |          | **As of December 31,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------------|------------------------------|------------|
| **Assets:**                                                                                                                           |   |                     | ** **    |                         |       |
| **Current Assets:**                                                                                                                   |   |                     | ** **    |                         | ** ** |
| Cash and cash equivalents                                                                                                             |   | **$**                    | **286,529**   | ** **                   | $          | 289,261 |   |
| Short-term marketable securities                                                                                                      |   | **27,862**               | ** **    | —                       |       |
| Accounts receivable, net of allowances of $7,631 and  $5,808 in 2003 and 2002, respectively                                           |   | **240,218**              | ** **    | 215,868                      |       |
| Other receivable (Note 9)                                                                                                             |   | **—**               | ** **    | 36,116                       |       |
| Other current assets                                                                                                                  |   | **114,705**              | ** **    | 110,258                      |       |
| Current assets of discontinued operations                                                                                             |   | **—**               | ** **    | 175,761                      |       |
| **Total Current Assets**                                                                                                              |   | **669,314**              | ** **    | 827,264                      |       |
| Securities and other investments                                                                                                      |   | **17,082**               | ** **    | 18,239                       |       |
| TriZetto equity investment (Note 8)                                                                                                   |   | **49,232**               | ** **    | 74,557                       |       |
| Property, plant and equipment, net of accumulated  depreciation of $162,507 and $150,606 in 2003 and 2002, respectively               |   | **134,094**              | ** **    | 131,587                      |       |
| Computer software                                                                                                                     |   | **179,236**              | ** **    | 168,985                      |       |
| Goodwill                                                                                                                              |   | **226,135**              | ** **    | 184,163                      |       |
| Other assets                                                                                                                          |   | **187,888**              | ** **    | 159,070                      |       |
| Non-current assets of discontinued  operations                                                                                        |   | **—**               | ** **    | 54,663                       |       |
| **Total Assets**                                                                                                                      |   | **$**                    | **1,462,981** | ** **                   | $          | 1,618,528 |   |
|                                                                                                                                  |   |                     |          |                         |       |
| **Liabilities, Minority Interests and Shareholders’ Equity:**                                                                    |   |                     | ** **    |                         |       |
| **Current Liabilities:**                                                                                                              |   |                     | ** **    |                         |       |
| Accounts payable                                                                                                                      |   | **$**                    | **36,717**    | ** **                   | $          | 31,940 |   |
| Accrued and other current liabilities                                                                                                 |   | **171,538**              | ** **    | 152,201                      |       |
| Short-term debt                                                                                                                       |   | **250,023**              | ** **    | 204,812                      |       |
| Accrued income taxes                                                                                                                  |   | **134,947**              | ** **    | 143,872                      |       |
| Short-term deferred tax liability                                                                                                     |   | **12,119**               | ** **    | 11,964                       |       |
| Deferred revenues                                                                                                                     |   | **108,475**              | ** **    | 94,061                       |       |
| Current liabilities of discontinued  operations                                                                                       |   | **—**               | ** **    | 39,733                       |       |
| **Total Current Liabilities**                                                                                                         |   | **713,819**              | ** **    | 678,583                      |       |
| Postretirement and postemployment benefits                                                                                            |   | **74,110**               | ** **    | 73,813                       |       |
| Long-term debt (Note 10)                                                                                                              |   | **345,015**              | ** **    | 325,000                      |       |
| Other liabilities                                                                                                                     |   | **170,939**              | ** **    | 107,894                      |       |
| Non-current liabilities of discontinued  operations                                                                                   |   | **—**               | ** **    | 31,622                       |       |
| **Total Liabilities**                                                                                                                 |   | **$**                    | **1,303,883** | ** **                   | $          | 1,216,912 |   |
|                                                                                                                                  |   |                     |          |                         |       |
| **Commitments and contingencies (Note  9)**                                                                                           |   |                     | ** **    |                         | ** ** |
| **Minority Interests**                                                                                                                |   | **$**                    | **103,326**   | ** **                   | $          | 102,033 |   |
| **Minority Interests of discontinued operations**                                                                                     |   | **—**               | ** **    | 77,327                       |       |
| **Shareholders’ Equity:**                                                                                                        |   |                     | ** **    |                         |       |
| Common Stock, par value $.01, authorized 800,000  shares; issued 335,045 shares at June 30, 2003 and December 31, 2002,  respectively |   | **$**                    | **3,350**     | ** **                   | $          | 3,350 |   |
| Capital in excess of par                                                                                                              |   | **500,068**              | ** **    | 497,562                      |       |
| Retained earnings                                                                                                                     |   | **1,660,197**            | ** **    | 1,165,090                    |       |
| Treasury stock, at cost, 95,956 and 53,980 shares at June 30, 2003  and December 31, 2002, respectively                          |   | **(2,009,931**           | **)**         | (1,316,354                   | )          |
| Cumulative translation adjustment                                                                                                     |   | **(77,634**              | **)**         | (106,907                     | )          |
| Minimum pension liability adjustment, net of taxes  of $8,371 at June 30, 2003 and December 31, 2002                             |   | **(17,487**              | **)**         | (17,487                      | )          |
| Unrealized loss on changes in fair value of cash flow hedges, net of  tax                                                             |   | **(3,270**               | **)**         | (3,141                       | )          |
| Unrealized gains on investments, net of taxes of $258 and $76 at June  30, 2003 and December 31, 2002, respectively                   |   | **479**                  | ** **    | 143                          |       |
| **Total Shareholders’ Equity**                                                                                                   |   | **$**                    | **55,772**    | ** **                   | $          | 222,256 |   |
| **Total Liabilities, Minority Interests and Shareholders’ Equity**                                                               |   | **$**                    | **1,462,981** | ** **                   | $          | 1,618,528 |   |

 

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

 

3

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**IMS HEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)**

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

 
|                                                                                                    |   | **Three Months Ended  June 30,** |        |
|---------------------------------------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                                                    |   | **2003**                         |        | **2002** |   |
|                                                                                                    |   |                             | ** **  |   |   |
| **Operating Revenue**                                                                                   |   | **$**                            | **337,776** | ** ** | $ | 303,900 |   |
|                                                                                                    |   |                             | ** **  |   |   |
| Operating costs                                                                                         |   | **135,311**                      | ** **  | 119,834 |   |
| Selling and administrative expenses                                                                     |   | **85,335**                       | ** **  | 77,775 |   |
| Depreciation and amortization                                                                           |   | **19,831**                       | ** **  | 12,014 |   |
| **Operating Income**                                                                                    |   | **97,299**                       | ** **  | 94,277 |   |
| Interest income                                                                                         |   | **1,255**                        | ** **  | 1,379 |   |
| Interest expense                                                                                        |   | **(3,920**                       | **)**       | (3,625 | ) |
| Gains (losses) from investments, net                                                                    |   | **32**                           | ** **  | 2,470 |   |
| Gain (loss) on issuance of investees’ stock, net                                                   |   | **54**                           | ** **  | (86 | ) |
| Other expense, net                                                                                      |   | **(9,835**                       | **)**       | (15,607 | ) |
| **Non-Operating Income (Loss), Net**                                                                    |   | **(12,414**                      | **)**       | (15,469 | ) |
| Income before provision for income taxes                                                                |   | **84,885**                       | ** **  | 78,808 |   |
| Provision for income taxes (Note 11)                                                                    |   | **(29,463**                      | **)**       | (24,944 | ) |
| TriZetto equity loss, net of income taxes of $43 and $61****for  2003 and 2002, respectively            |   | **(66**                          | **)**       | (93 | ) |
| **Income from continuing operations**                                                                   |   | **55,356**                       | ** **  | 53,771 |   |
| Income from discontinued operations, net of income taxes of $2,322  for 2002 (Note 6)                   |   | **—**                       | ** **  | 8,242 |   |
| **Net Income**                                                                                          |   | **$**                            | **55,356**  | ** ** | $ | 62,013 |   |
|                                                                                                    |   |                             |        |   |   |
| **Basic Earnings Per Share of Common Stock:**                                                           |   |                             | ** **  |   |   |
| Income from continuing operations                                                                       |   | **$**                            | **0.23**    | ** ** | $ | 0.19 |   |
| Income from discontinued operations                                                                     |   | **—**                       | ** **  | 0.03 |   |
| **Basic Earnings Per Share of Common Stock**                                                            |   | **$**                            | **0.23**    | ** ** | $ | 0.22 |   |
|                                                                                                    |   |                             | ** **  |   |   |
| **Diluted Earnings Per Share of Common Stock:**                                                         |   |                             | ** **  |   |   |
| Income from continuing operations                                                                       |   | **$**                            | **0.23**    | ** ** | $ | 0.19 |   |
| Income from discontinued operations                                                                     |   | **—**                       | ** **  | 0.03 |   |
| **Diluted Earnings Per Share of Common Stock**                                                          |   | **$**                            | **0.23**    | ** ** | $ | 0.21 |   |
|                                                                                                    |   |                             |        |   |   |
| Weighted average number of shares outstanding –  basic                                             |   | **241,999**                      | ** **  | 287,660 |   |
| Dilutive effect of shares issuable as of period-end  under stock option plans                           |   | **813**                          | ** **  | 1,576 |   |
| Adjustment of shares outstanding applicable to  exercised and cancelled stock options during the period |   | **5**                            | ** **  | 34 |   |
| **Weighted Average Number of Shares Outstanding – Diluted**                                        |   | **242,817**                      | ** **  | 289,270 |   |

 

*See accompanying Notes to the Condensed Consolidated FinancialStatements (unaudited).*

 

4

----

 

**IMS HEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTSOF INCOME (Unaudited)**

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

 
|                                                                                                                    |   | **Six Months Ended  June 30,** |        |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-------------|
|                                                                                                                    |   | **2003**                       |        | **2002** |   |
|                                                                                                                    |   |                           | ** **  |   |   |
| **Operating Revenue**                                                                                                   |   | **$**                          | **651,693** | ** ** | $ | 593,614 |   |
|                                                                                                                    |   |                           | ** **  |   |   |
| Operating costs                                                                                                         |   | **268,300**                    | ** **  | 235,085 |   |
| Selling and administrative expenses                                                                                     |   | **171,095**                    | ** **  | 158,357 |   |
| Depreciation and amortization                                                                                           |   | **36,629**                     | ** **  | 23,758 |   |
| Severance, impairment and other charges                                                                                 |   | **37,220**                     | ** **  | — |   |
| **Operating Income**                                                                                                    |   | **138,449**                    | ** **  | 176,414 |   |
| Interest income                                                                                                         |   | **2,518**                      | ** **  | 2,768 |   |
| Interest expense                                                                                                        |   | **(7,974**                     | **)**       | (6,308 | ) |
| Gains (losses) from investments, net                                                                                    |   | **(844**                       | **)**       | 1,250 |   |
| Loss on issuance of investees’ stock, net                                                                          |   | **(261**                       | **)**       | (86 | ) |
| Other expense, net                                                                                                      |   | **(20,638**                    | **)**       | (16,309 | ) |
| **Non-Operating Income (Loss), Net**                                                                                    |   | **(27,199**                    | **)**       | (18,685 | ) |
| Income before provision for income taxes                                                                                |   | **111,250**                    | ** **  | 157,729 |   |
| Provision for income taxes (Note 11)                                                                                    |   | **(93,812**                    | **)**       | (49,492 | ) |
| TriZetto equity loss, net of income taxes of $258 and $191 for 2003  and 2002, respectively                             |   | **(399**                       | **)**       | (295 | ) |
| TriZetto impairment charge, net of income  taxes of $9,565 for 2003                                                     |   | **(14,842**                    | **)**       | — |   |
| **Income from continuing operations**                                                                                   |   | **2,197**                      | ** **  | 107,942 |   |
| Income from discontinued operations, net of income taxes of $1,237  and $4,243 for 2003 and 2002, respectively (Note 6) |   | **2,779**                      | ** **  | 13,250 |   |
| Gain on discontinued operations (Note 6)                                                                                |   | **495,053**                    | ** **  | — |   |
| **Net Income**                                                                                                          |   | **$**                          | **500,029** | ** ** | $ | 121,192 |   |
|                                                                                                                    |   |                           |        |   |   |
| **Basic Earnings Per Share of Common Stock:**                                                                           |   |                           | ** **  |   |   |
| Income from continuing operations                                                                                       |   | **$**                          | **0.01**    | ** ** | $ | 0.37 |   |
| Income from discontinued operations                                                                                     |   | **1.99**                       | ** **  | 0.05 |   |
| **Basic Earnings Per Share of Common Stock**                                                                            |   | **$**                          | **1.99**    | ** ** | $ | 0.42 |   |
|                                                                                                                    |   |                           | ** **  |   |   |
| **Diluted Earnings Per Share of Common Stock:**                                                                         |   |                           | ** **  |   |   |
| Income from continuing operations                                                                                       |   | **$**                          | **0.01**    | ** ** | $ | 0.37 |   |
| Income from discontinued operations                                                                                     |   | **1.98**                       | ** **  | 0.05 |   |
| **Diluted Earnings Per Share of Common Stock**                                                                          |   | **$**                          | **1.99**    | ** ** | $ | 0.42 |   |
|                                                                                                                    |   |                           |        |   |   |
| Weighted average number of shares outstanding –  basic                                                             |   | **250,658**                    | ** **  | 289,720 |   |
| Dilutive effect of shares issuable as of period-end  under stock option plans                                           |   | **663**                        | ** **  | 1,440 |   |
| Adjustment of shares outstanding applicable to  exercised and cancelled stock options during the period                 |   | **5**                          | ** **  | 66 |   |
| **Weighted Average Number of Shares Outstanding – Diluted**                                                        |   | **251,326**                    | ** **  | 291,226 |   |

 

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

 

5

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**IMS HEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS (Unaudited)**

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

 
|                                                                                     |   | **Six Months Ended June 30,** |        |
|------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                                     |   | **2003**                      |        | **2002** |   |
| **Cash Flows from Operating Activities:**                                                |   |                          | ** **  |   |   |
| Net income                                                                               |   | **$**                         | **500,029** | ** ** | $ | 121,192 |   |
| Less income from discontinued operations and gain on disposal                            |   | **(497,832**                  | **)**       | (13,250 | ) |
| Income from continuing operations                                                        |   | **2,197**                     | ** **  | 107,942 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:       |   |                          | ** **  |   |   |
| Depreciation and amortization                                                            |   | **36,629**                    | ** **  | 23,758 |   |
| Bad debt expense                                                                         |   | **513**                       | ** **  | 2,307 |   |
| Nielsen Media Research interest receivable                                               |   | **—**                    | ** **  | (1,378 | ) |
| Deferred income taxes                                                                    |   | **9,079**                     | ** **  | 6,452 |   |
| (Gains) losses from investments, net                                                     |   | **844**                       | ** **  | (1,250 | ) |
| (Gain) loss on issuance of investees’ stock, net                                    |   | **261**                       | ** **  | 86 |   |
| TriZetto equity loss, net                                                                |   | **399**                       | ** **  | 295 |   |
| TriZetto impairment charge, net                                                          |   | **14,842**                    | ** **  | — |   |
| Minority interests in net income of consolidated  companies                              |   | **5,445**                     | ** **  | 5,277 |   |
| Non-cash stock compensation charges                                                      |   | **1,532**                     | ** **  | 904 |   |
| Non-cash portion of severance, impairment and other  charges                             |   | **6,480**                     | ** **  | — |   |
| Change in assets and liabilities, excluding effects  from acquisitions and dispositions: |   |                          | ** **  |   |   |
| Net increase in accounts receivable                                                      |   | **(12,984**                   | **)**       | (23,517 | ) |
| Net increase in inventory                                                                |   | **(857**                      | **)**       | (2,526 | ) |
| Net increase in prepaid expenses and other current  assets                               |   | **(13,071**                   | **)**       | (6,711 | ) |
| Net increase (decrease) in accounts payable                                              |   | **2,149**                     | ** **  | (3,568 | ) |
| Net (decrease) increase in accrued and other current  liabilities                        |   | **(7,453**                    | **)**       | 12,622 |   |
| Net increase (decrease) in accrued severance,  impairment and other charges              |   | **18,304**                    | ** **  | (19,429 | ) |
| Net increase (decrease) in deferred revenues                                             |   | **3,300**                     | ** **  | (5,189 | ) |
| Net increase in accrued income taxes                                                     |   | **52,210**                    | ** **  | 14,533 |   |
| Net decrease (increase) in pension assets and  liabilities                               |   | **933**                       | ** **  | (4,499 | ) |
| Net decrease (increase) in other long-term assets                                        |   | **2,065**                     | ** **  | (10,262 | ) |
| Net tax benefit on stock option exercises                                                |   | **78**                        | ** **  | (1,774 | ) |
| Nielsen Media Research payment received in respect  of D&B Legacy Tax Matters        |   | **37,025**                    | ** **  | — |   |
| **Net Cash Provided by Operating Activities**                                            |   | **159,920**                   | ** **  | 94,073 |   |
| **Cash Flows Used in Investing Activities:**                                             |   |                          | ** **  |   |   |
| Capital expenditures                                                                     |   | **(9,133**                    | **)**       | (8,988 | ) |
| Additions to computer software                                                           |   | **(37,680**                   | **)**       | (32,100 | ) |
| Investments in short-term marketable securities                                          |   | **(27,862**                   | **)**       | — |   |
| Payments for acquisitions of businesses, net of cash  acquired                           |   | **(48,966**                   | **)**       | (7,244 | ) |
| Proceeds from sale of investments, net                                                   |   | **1,296**                     | ** **  | 22,020 |   |
| Funding of venture capital investments                                                   |   | **(1,200**                    | **)**       | (3,000 | ) |
| Other investing activities, net                                                          |   | **(8,291**                    | **)**       | (2,795 | ) |
| **Net Cash Used in Investing Activities**                                                |   | **(131,836**                  | **)**       | (32,107 | ) |
| **Cash Flows Used in Financing Activities:**                                             |   |                          | ** **  |   |   |
| Net (decrease) increase in debt                                                          |   | **(91,272**                   | **) ** | 161,393 |   |
| Borrowings under private placement                                                       |   | **150,000**                   |        | — |   |
| Payments for purchase of treasury stock                                                  |   | **(93,550**                   | **)**       | (192,221 | ) |
| Proceeds from exercise of stock options                                                  |   | **1,755**                     | ** **  | 11,658 |   |
| Dividends paid                                                                           |   | **(9,785**                    | **)**       | (11,626 | ) |
| Proceeds from employee stock purchase plan                                               |   | **1,385**                     | ** **  | 1,406 |   |
| Increase in cash overdrafts                                                              |   | **832**                       | ** **  | 8,590 |   |
| Refund of cash portion of Synavant spin-off dividend                                     |   | **4,863**                     | ** **  | — |   |
| **Net Cash Used in Financing Activities**                                                |   | **(35,772**                   | **)**       | (20,800 | ) |
| Effect of Exchange Rate Changes                                                          |   | **4,956**                     | ** **  | 2,160 |   |
| **Increase in Cash and Cash Equivalents**                                                |   | **(2,732**                    | **)**       | 43,326 |   |
| **Cash and Cash Equivalents, Beginning of Period**                                       |   | **289,261**                   | ** **  | 183,409 |   |
| **Cash and Cash Equivalents, End of Period**                                             |   | **$**                         | **286,529** | ** ** | $ | 226,735 |   |

 

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

 

6

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**IMS HEALTH INCORPORATEDNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)(Dollars and shares in thousands, except per share data)**

 

**Note 1.  Interim Condensed ConsolidatedFinancial Statements (unaudited)**

 

The accompanying Condensed ConsolidatedFinancial Statements (unaudited) have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and Article 10 of Regulation S-X under theSecurities and Exchange Act of 1934, as amended.  The Condensed Consolidated Financial Statements (unaudited) donot include all the information and notes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  In the opinion ofmanagement, all adjustments, all of which are of a normal recurring nature,considered necessary for a fair presentation of financial position, results ofoperations and cash flows for the periods presented have been included.  The results of operations for interimperiods are not necessarily indicative of the results expected for the fullyear.  The Condensed ConsolidatedFinancial Statements (unaudited) and related notes should be read in conjunctionwith the Consolidated Financial Statements and related notes of IMS HealthIncorporated (the “Company” or “IMS”) included in its 2002 Annual Report onForm 10-K and in its previous filings on Form 10-Q.  Certain prior year amounts have been reclassified to conform withthe 2003 presentation.  Amountspresented in the Condensed Consolidated Financial Statements (unaudited) maynot add due to rounding.

** **

**Note 2.  Basis of Presentation**

 

The Company is a leading global provider of information solutions tothe pharmaceutical and healthcare industries. The Company operates in more than 100 countries and provides marketinformation, sales management and decision-support services to thepharmaceutical and healthcare industries. Its key products include sales management information to optimize salesforce productivity, marketing effectiveness research for prescription andover-the-counter pharmaceutical products, consulting and other services.  The Company also owns a venture capitalunit, Enterprise Associates, LLC (“Enterprises”) which is focused oninvestments in emerging businesses, and a 26.1% equity interest in The TriZettoGroup, Inc. (“TriZetto”), at June 30, 2003.

 

During the year ended December 31, 2002, the Company also included theCognizant Technology Solutions Corporation Segment (“CTS”), which providescustom Information Technology (“IT”) design, development, integration andmaintenance services.  CTS is a publiclytraded corporation on the Nasdaq national market system.  IMS owned 55.3% of the common sharesoutstanding of CTS (92.5% of the outstanding voting power) as of December 31,2002, and accounted for CTS as a consolidated subsidiary.  On February 6, 2003, the Company divestedCTS through a split-off transaction, and as a result, during the three monthsended March 31, 2003, the Company recorded a net gain from discontinuedoperations of $495,053.  The Company’s share of CTSresults are presented as discontinued operations for 2003 through the date ofdivestiture and for the three and six months ended June 30, 2002.  CTS’s assets and liabilities are presentedas discontinued operations as of December 31, 2002 (see Note 6.)

 

**Note 3.  Summary of Recent AccountingPronouncements**

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 establishesstandards for how an enterprise classifies and measures certain financialinstruments that have characteristics of both 

 

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liabilities and equity.  SFAS No. 150 requires an enterprise to classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances).  SFAS No. 150 waseffective for financial instruments entered into or modified after May 31,2003, and otherwise was effective at the beginning of the first interim periodbeginning after June 15, 2003.  Theadoption of SFAS No. 150 effective June 1, 2003 did not have a material impacton the Company’s financial position, results of operations or cash flows forthe three months ended June 30, 2003.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  SFAS No. 149 is effective for contracts entered into or modifiedafter June 30, 2003 and is not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.”  SFAS No. 143addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  SFAS No. 143 requiresan enterprise to record the fair value of an asset retirement obligation as aliability in the period in which it incurs a legal obligation associated withthe retirement of a tangible long-lived asset. SFAS No. 143 was effective for fiscal years beginning after June 15,2002.  The adoption of SFAS No. 143effective January 1, 2003 did not have a material impact on the Company’sfinancial position, results of operations or cash flows for the three and sixmonths ended June 30, 2003.

 

**Note 4.  Summary of Significant AccountingPolicies**

 

*Short-term marketable securities.*  Short-term marketable securities primarilyinclude highly liquid bonds.  TheCompany considers all highly liquid investments with maturities of greater than90 days and less than 365 days at the time of purchase to be short-termmarketable securities.

 

*Stock-based compensation.*  SFASNo. 123, “Accounting for Stock-Based Compensation,” requires that companieswith stock-based compensation plans either recognize compensation expense basedon the fair value of options granted or continue to apply the existingaccounting rules and disclose pro forma net income and earnings per shareassuming the fair value method had been applied.  The Company has chosen to continue applying Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employers” andrelated interpretations in accounting for its plans.  If the compensation cost for the Company’s stock-basedcompensation plans was determined based on the fair value at the grant datesfor awards under those plans, consistent with the method of SFAS No. 123, theCompany’s net income and earnings per share would have been reduced to the proforma amounts indicated below for the three and six months ended June 30:

 

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|                |                                                                                                               | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|---------------------|--------------------------------------------------------------------------------------------------------------------|----------------------------------|--------|--------------------------------|--------|
|                |                                                                                                               | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net Income:         | As reported                                                                                                        |                             | $      | 55,356                         |   | $ | 62,013 |   | $ | 500,029 |   | $ | 121,192 |   |
|                | Add:  Stock-based employee  compensation expense included in reported net income, net of tax                  |                             | 620    |                           | 403    |   | 1,175 |   | 995 |   |
|                | Deduct:  Total stock-based  employee compensation expense under fair value method for all awards, net of  tax |                             | (4,837 | )                              | (7,323 | ) | (10,875 | ) | (11,485 | ) |
|                | Pro forma                                                                                                          |                             | $      | 51,139                         |   | $ | 55,093 |   | $ | 490,329 |   | $ | 110,702 |   |
| Earnings Per Share: |                                                                                                               |                             |   |                           |   |   |   |   |   |
| Basic               | As reported                                                                                                        |                             | $      | 0.23                           |   | $ | 0.22 |   | $ | 1.99 |   | $ | 0.42 |   |
|                | Pro forma                                                                                                          |                             | $      | 0.21                           |   | $ | 0.19 |   | $ | 1.96 |   | $ | 0.38 |   |
| Diluted             |                                                                                                               |                             |   |                           |   |   |   |   |   |   |
|                | As reported                                                                                                        |                             | $      | 0.23                           |   | $ | 0.21 |   | $ | 1.99 |   | $ | 0.42 |   |
|                | Pro forma                                                                                                          |                             | $      | 0.21                           |   | $ | 0.19 |   | $ | 1.95 |   | $ | 0.38 |   |

 

For a description of the Company’s other critical accounting policies,please refer to the Company’s 2002 Annual Report on Form 10-K as filed with theSecurities and Exchange Commission.

 

**Note 5.  Acquisitions**

 

***Ac***quisitions

 

During the three months ended March 31, 2003, the Company completed twoacquisitions with an aggregate cash purchase price of $52,938.  These acquisitions were Data Niche Associates,Inc. (U.S.) and Azyx Polska Geopharma Information Services, Sp.z.o.o. (Poland)and were 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 and liabilities.  Any adjustments resulting from thefinalization of the purchase price allocations are not expected to have amaterial impact on the Company’s results of operations.  The unaudited Condensed ConsolidatedFinancial Statements include the results of these acquired companies subsequentto the closing of the acquisitions.  Hadthese acquisitions occurred as of January 1, 2003 or 2002, the impact on theCompany’s results of operations would not have been significant.

 

During the three months ended March 31, 2003, the Company also enteredinto an agreement to purchase the Azyx business in Portugal.  However, the completion of this acquisitionwas contingent upon the Company obtaining regulatory approval fromPortugal.  During July 2003, the Companyreceived regulatory approval from Portugal and expects to close the acquisitionduring the third quarter of 2003.

 

The Company is in the process of completing its purchase priceallocation related to its acquisitions of (a) Medcom Canada, (b) MarketingInitiatives, Inc., (c) Rosenblatt-Klauber Group, (d) Battaerd Mansley PTYLimited and (e) Medical Radar Limited, completed during 2002.  In addition, the Company made tax relatedand other acquisition related payments during the second quarter of 2003.  Accordingly, additional goodwill of $4,251was recorded as a result of this process for these 

 

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acquisitions. This includes a reduction of $3,012 related to the deferred taxliabilities resulting from intangible assets which are not amortizable for taxpurposes.

 

In February 2002, the Company acquired Infoplex Durdaut & JassmannGmbH, based in Germany.  The purchaseprice for this acquisition, including direct and incremental transaction costs,amounted to $7,013, paid in cash.  Afteran allocation of the purchase price to the net assets acquired, the Companyrecorded goodwill of $3,758.

 

**Note 6.  CTS Split-Off**

 

On February 6, 2003, the Company completed an exchange offer todistribute its majority interest in CTS. The Company exchanged 0.309 shares of CTS class B common shares for eachshare of theCompany that was tendered.  Underterms of the offer, the Company accepted 36,540 IMS common shares tendered inexchange for all 11,291 CTS common shares that the Company owned.  As the offer was oversubscribed, the Companyaccepted tendered IMS shares on a pro-rata basis in proportion to the number ofshares tendered.  The proration factorwas 21.115717%.

 

As a result of this exchange offer, during the three months ended March31, 2003, the Company recorded a net gain from discontinued operations of$495,053.  This gain was based on the Company’s closing marketprice on February 6, 2003 multiplied by the 36,540 shares of IMS common sharesaccepted in the offer, net of theCompany’s carrying value of CTS and after deducting direct and incrementalexpenses related to the exchange offer.

 

In accordance with the provisions of SFAS No. 144 “Accounting for theImpairment or Disposal of Long-Lived Assets,” the Company recorded the resultsof CTS through the disposition date and the gain on disposal as income fromdiscontinued operations net of income taxes in the Condensed ConsolidatedStatements of Income (unaudited) for the six months ended June 30, 2003.  The Company’s share of CTS’s, assets andliabilities are presented as discontinued operations as of December 31,2002.  The Company’s share of CTS’sresults for the three and six months ended June 30, 2002 and the period fromJanuary 1, 2003 through the effective date of the exchange offer are presentedas discontinued operations.

 

Direct costs related to the CTS Split-Off approximated $17,300,consisting primarily of investment advisor, legal and accounting fees.  Of this amount, approximately $12,400**was paid through June 30, 2003.

 

**Note 7.  Goodwill and Intangible Assets**

 

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwilland Other Intangible Assets.”  SFAS No.142 addresses the initial recognition and measurement of intangible assetsacquired outside of a business combination and the accounting for goodwill andother intangible assets subsequent to their acquisition.  SFAS No. 142 provides that goodwill andintangible assets which have indefinite useful lives will not be amortized butrather will be tested at least annually for impairment.  It also provides that intangible assets thathave finite useful lives be amortized. There was no impairment of goodwill upon adoption of SFAS No. 142 and assuch, the Company did not recognize a transition adjustment during the firstsix months of 2002.

 

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During the first quarter of 2003, the Company recorded additionalgoodwill of $31,973 based on a preliminary allocation of purchase price for thetwo acquisitions completed in 2003 (see Note 5).  During the three months ended June 30, 2003, the Companyincreased goodwill and reduced certain intangible assets by $3,711 related tocertain acquisitions completed during the second half of 2002, as it is in theprocess of completing its purchase price allocations (see Note 5).  As of June 30, 2003 total goodwill amountedto $226,135.

 

All of the Company’s other acquired intangibles are subject toamortization.  During the first quarterof 2003, the Company recorded intangible assets of $21,000 based on apreliminary allocation of purchase price for acquisitions completed in2003.  Intangible asset amortizationexpense was $2,372 and $4,389 during the three and six months ended June 30,2003.  At June 30, 2003, intangibleassets (principally included in Other assets) were primarily composed of CustomerRelationships, Databases and Trade Names. The gross carrying amounts and related accumulated amortization of theseintangibles were $58,612 and $7,597, respectively, at June 30, 2003.  These intangibles are amortized over periodsranging from two to fifteen years.

 

Amortization expense associated with intangible assets at June 30, 2003is estimated to be $4,745 for the second half of 2003 and approximately $9,490for each year beginning in 2004 through 2008.

 

**Note 8.  Investments in Equity Investees**

 

Summary financial information for TriZettofor the three and six months ended June 30, 2003 and 2002 is presentedbelow.  The amounts shown representTriZetto’s unaudited consolidated operating results, based on publiclyavailable information.

 
|                 |   | **Three Months ended  June 30,** |       | **Six Months ended  June 30,** |   |
|----------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                 |   | **2003**                         |       | **2002**                       |   | **2003** |   | **2002** |   |
| Net Sales            |   | **$**                            | **76,524** | ** **                     | $      | 66,781 |   | **$** | **145,558** | ** ** | $ | 126,475 |   |
| Gross Profit         |   | **$**                            | **24,035** | ** **                     | $      | 21,920 |   | **$** | **45,127** | ** ** | $ | 41,215 |   |
| Loss from Operations |   | **$**                            | **(828**   | **)**                          | $      | (5,071 | ) | **$** | **(2,969** | **)** | $ | (11,032 | ) |
| Net Loss             |   | **$**                            | **(1,359** | **)**                          | $      | (3,670 | ) | **$** | **(4,028** | **)** | $ | (8,284 | ) |

 

The investment in TriZetto is accounted for under the equity method ofaccounting.  Following an initialdecline in the market value of TriZetto stock below cost in the latter part ofthe second quarter of 2002, the Companyperformed, and continues to perform, a periodic assessment in accordance withits policy to determine whether an other-than-temporary decline in fair valuehas occurred.  An impairmentcharge of $14,842, net of taxes of $9,565, was recorded in the three monthsended March 31, 2003, to write down the Company’s investment in TriZettofollowing the continued significant decline in the market value of TriZettoshares below the Company’s carrying value. As of June 30, 2003, TriZetto shares closed at $5.99 compared to theCompany’s carrying value per share of $4.06.

 

**Note 9.  Contingencies**

 

The Company and its subsidiaries are involved in legal and taxproceedings, claims and litigation arising in the ordinary course ofbusiness.  Management periodicallyassesses the Company’s liabilities and contingencies in connection with thesematters based upon the latest information available.  For 

 

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those matters where management currently believes itis probable that the Company will incur a loss and that the probable loss orrange of loss can be reasonably estimated, the Company has recorded reserves inthe consolidated financial statements based on its best estimates of such loss.  In other instances, because of theuncertainties related to either the probable outcome or the amount or range ofloss, management is unable to make a reasonable estimate of a liability, ifany.  However, even in many instances wherethe Company has recorded a reserve, the Company is unable to predict withcertainty the final outcome of the matter or whether resolution of the matterwill materially affect the Company’s results of operations, financial positionor cash flows.  As additionalinformation becomes available, the Company adjusts its assessment and estimatesof such liabilities accordingly.

 

The Company routinely enters into agreements with its customers to selldata that the Company acquires in the normal course of business.  In these customer agreements the Companyagrees to indemnify and hold harmless the customers for any damages they maysuffer as a result of potential intellectual property infringement claims.  These indemnities typically have terms ofapproximately two years.  The Companyhas not accrued a liability with respect to these matters, as the exposure isconsidered neither probable nor reasonably estimable.

 

Based on its review of the latest information available, in the opinionof management, the ultimate liability of the Company in connection with pendingtax and legal proceedings, claims and litigation will not have a materialeffect on the Company’s results of operations, cash flows or financialposition, with the possible exception of the matters described below.

 

*Legacyand Related Matters*

 

In order to understand the Company’s exposure to the potentialliabilities described below, it is important to understand the relationshipbetween the Company and its predecessors and other parties that, throughvarious corporate reorganizations and contractual commitments, have assumedvarying degrees of responsibility with respect to such matters.

 

In November 1996, the company then known as The Dun & BradstreetCorporation (“D&B”) separated into three public companies by spinning-offACNielsen Corporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”)(the “1996 Spin-Off”).  Pursuant to theagreements effecting the 1996 Spin-Off, among other things, certainliabilities, including contingent liabilities relating to the IRI Action(defined below) and tax liabilities arising out of certain prior businesstransactions (the “D&B Legacy Tax Matters”), described more fully below,were allocated among D&B, ACNielsen and Cognizant.

 

In June 1998, Cognizant separated into two public companies by spinningoff IMS (the “1998 Spin-Off”) and then changed its name to Nielsen MediaResearch, Inc. (“NMR”).  As a result ofthe 1998 Spin-Off, the Company and NMR are jointly and severally liable for allliabilities of Cognizant under the agreements effecting the 1996 Spin-Off.  As between themselves, however, the Companyand NMR agreed that IMS will assume 75%, and NMR will assume 25%, of anypayments to be made in respect of the IRI Action, including any legal fees andexpenses related thereto incurred in 1999 or thereafter (IMS agreed to beresponsible for legal fees and expenses incurred during 1998).  In addition, the Company and NMR agreed theywould share equally Cognizant’s share of liability arising out of the D&BLegacy Tax 

 

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Matters after the Company paid the first $130,000 ofsuch liability.  NMR’s aggregateliability for payments in respect of the IRI Action and the D&B Legacy TaxMatters shall not exceed $125,000.

 

Also during 1998, D&B separated into two public companies byspinning-off The Dun & Bradstreet Corporation (“D&B I”) and thenchanged its name to R.H. Donnelley (“Donnelley”).  As a result of their separation in 1998, Donnelley and D&B Iare each jointly and severally liable for all liabilities of D&B under theagreements effecting the 1996 Spin-Off.

 

During 2000, D&B I separated into two public companies by spinningoff The Dun & Bradstreet Corporation (“D&B II”) and then changed itsname to Moody’s Corporation (“Moody’s). Pursuant to their separation in 2000, Moody’s and D&B II are eachjointly and severally liable for all of D&B’s liabilities under theagreements effecting the 1996 Spin-Off.

 

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

 

The complaint alleges various violations of the antitrust laws of theUnited States, including alleged violations of Sections 1 and 2 of the ShermanAct.  The complaint also alleges a claimof tortious interference with a contract and a claim of tortious interferencewith a prospective business relationship. These latter claims relate to the acquisition by the defendants ofSurvey Research Group Limited (“SRG”). IRI alleges that SRG violated an alleged agreement with IRI when itagreed to be acquired by the defendants and that the defendants induced SRG tobreach that agreement.  IRI’s complaintalleges damages in excess of $350,000, which amount IRI has asked to be trebledunder the antitrust laws.  IRI alsoseeks punitive damages in an unspecified amount.  A trial date has been set for September 20, 2004.

 

In connection with the 1996 Spin-Off, D&B, ACNielsen and Cognizantentered into an Indemnity and Joint Defense Agreement pursuant to which theyagreed (i) to certain arrangements allocating liabilities that may ariseout of or in connection with the IRI Action, and (ii) to conduct a jointdefense of such action.  In particular,the Indemnity and Joint Defense Agreement provides that, in the event of anadverse decision, ACNielsen will assume exclusive liability for liabilities upto an amount to be calculated by an investment banking firm, at the time suchliabilities, if any, become payable, pursuant to a specified solvency test (the“ACN Maximum Amount”) and that Cognizant and Donnelley will share liabilityequally 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 secondquarter of 2002, the IRS issued Notices of Proposed Adjustments (“Notices”)with respect to 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 

 

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concluded an audit of the 1993 and 1994 D&Bfederal income tax returns and did not disallow any similar claimeddeductions.  D&B II is the agent forDonnelley in the D&B Legacy Tax Matters. D&B II and the Company disagree with the position taken by the IRSin its Notices and a responsive brief has been filed to this effect with theIRS.  If the IRS were to issue a formalassessment consistent with such Notices and such assessment were ultimatelyupheld in full by the courts, the Company’s share of the total liability for1995 and 1996 (as determined pursuant to the agreements effecting the 1996 and1998 Spin-Off’s) would be approximately $40,300, net of income taxbenefit.  If the IRS were to issue aformal assessment for 1997 consistent with such Notices and such assessmentwere ultimately upheld in full by the courts, the Company’s total liabilitywould be approximately $17,400, 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 $8,100, net of income tax benefit.

 

In addition, in February 2003, the partnership associated with thetransaction described above received a Summary Report from the IRS thatchallenges the tax treatment of certain royalty payments received by thepartnership which relate to the royalty expense deductions referred to above.  In the Summary Report, the IRS proposes toreallocate certain partnership income to D&B.  If the IRS were to prevail in the positions taken in the SummaryReport, the Company’s share of the additional liability including penalties andinterest thereon would be approximately $20,300, net of income taxbenefit.  The IRS formalized itsposition by issuing 30 and 60-day letters to D&B II and the partnership inMay of 2003.  Management disagrees withthe position taken by the IRS, in part because this position is inconsistentwith the IRS’s position with respect to the royalty expense deduction describedabove, and D&B II has advised the Company that Donnelley intends tovigorously challenge the IRS’s interpretation.

 

If the IRS were to prevail in the positions taken in the SummaryReport, certain deductions taken by the Company subsequent to the 1996 Spin-Offmay be disallowed.  The Company believesthe deductions are appropriate and will vigorously challenge any disallowanceclaimed by the IRS.  If the IRS were toissue a formal assessment and such assessment were ultimately upheld in full bythe courts, the Company’s liability would be approximately $56,300 net ofincome tax benefits.

 

Based on new information received in April 2003, the Company increasedits reserve to its anticipated share of the probable liability in connectionwith the foregoing tax matters. Accordingly, based on information currently available, management doesnot believe that these matters will have a material adverse effect on theCompany’s consolidated financial position or results of operations but may havea material adverse effect on cash flows in the period in which any such amountsare paid.

 

In addition to these matters, the Company and its predecessors haveentered, and the Company continues to enter, into global tax planninginitiatives in the normal course of their businesses.  These activities are subject to review by applicable taxauthorities.  As a result of the reviewprocess, uncertainties exist and it is possible that some of these matters couldbe resolved adversely to the Company.

 

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*Sharing Dispute. *In May 2000, the Company paid $212,291to the IRS in connection with a D&B Legacy Tax Matter.  Pursuant to the terms of the 1998 Spin-Off,NMR was liable for a portion of this amount but was not obligated to pay theCompany for its share until January 2, 2001.  In December 2000, the Company requested reimbursement fromNMR in the amount of $41,136, which represented NMR’s share of the liability accordingto the Company’s calculations.  OnJanuary 2, 2001, NMR made a payment of $10,530 but refused to pay theremaining $30,606 based on its interpretation of the applicable agreements.  At March 31, 2003, the Company had areceivable of $36,805, which included the outstanding principal and accumulatedaccrued interest of $6,199.  During eachof the three and six months ended June 30, 2003 and 2002, $220, $909, $689 and$1,378, respectively, of interest income was accrued in accordance with theterms of the applicable agreements. These amounts were reflected in Other receivable in the CondensedConsolidated Statements of Financial Position. On April 29, 2003, the American Arbitration Association InternationalCenter for Dispute Resolution panel issued an award in favor of the Company andordered that NMR pay the Company the entire principal balance plus simple 9%interest from January 2, 2001, together with all legal fees and costs incurredby the Company in connection with the arbitration.  On April 30, 2003, the Company received $37,025 from NMR insatisfaction of the principal amount plus interest from January 2, 2001 throughApril 30, 2003.  On May 16, 2003, theCompany received an additional $1,332 from NMR as reimbursement of theCompany’s legal fees and costs in connection with the arbitration.

 

*MattersBefore the European Commission*

 

On December 19, 2000 National Data Corporation (“NDC”) filed acomplaint against the Company with the European Commission (“EC” or“Commission”), requesting that the Commission initiate a proceeding against theCompany for an alleged infringement of Article 82 of the EC Treaty.  Article 82 of the EC Treaty relates toabuses of a dominant position that adversely affect competition.  The complaint concerned an IMS geographicmapping structure used for the reporting of regional sales data in Germany,which the German courts have ruled is copyright protected.  In addition to seeking a formal Commissionproceeding against the Company, the complaint requested that the Commissiongrant interim relief requiring the Company to grant NDC a compulsory license toenable NDC to use this structure in its competing regional sales data servicein Germany.

 

On March 8, 2001, the Commission initiated formal proceedingsagainst the Company in this matter and on July 3, 2001, the Commissionordered interim measures against the Company pending a final decision (the“Interim Decision”).  Under the InterimDecision, the Company was ordered to grant a license of the geographic mappingstructure on commercially reasonable terms without delay to NDC and to anyother competitor currently present on the German regional sales data marketthat requested a license.

 

On August 6, 2001, the Company filed an appeal with the Court ofFirst Instance (“CFI”) seeking the annulment of the Interim Decision in itsentirety (the “Annulment Appeal”) and requesting that operation of the InterimDecision be suspended until the CFI renders judgement on the AnnulmentAppeal.  On October 26, 2001, thePresident of the CFI suspended operation of the Interim Decision pending ajudgement on the Annulment Appeal.  OnApril 11, 2002, the European Court of Justice (“ECJ”) denied an appeal by NDCof the October 26 decision.  In October2002, the CFI informed the Company that it had suspended the AnnulmentAppeal.  The Annulment Appeal issuspended until the ECJ renders a decision on questions referred to it by theGerman court that is presiding over certain 

 

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litigations that the Company commenced against NDC andothers in Germany for misappropriation of the Company’s intellectual propertyrights.

 

The Company intends to continue to vigorously assert that its refusalto grant licenses for the use of its copyright protected geographic mappingstructure to its direct competitors in Germany, which compete in the samemarket for which the copyright exists, is not in contravention ofArticle 82 of the EC Treaty. Management of the Company is unable to predict at this time the final outcomeof this matter or whether the resolution of this matter could materially affectthe Company’s future results of operations, cash flows or financial position.

 

*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 payments under these agreements tototal approximately $14,000.  As of June30, 2003, no amounts were earned under these contingencies.  The annual contingent payments will beresolved within a specified time period after the end of each respectivecalendar year from 2003 through 2007.

 

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

 

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

 

If, contrary to expectations, the spin-off of Synavant 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 consolidated group, ofwhich the Company is a common parent and Synavant is a member, based on 

 

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the difference between (x) the fair market valueof 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 of managementand based on the opinion of tax counsel, it is not probable that the Companywill 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 differencebetween (x) the fair market value of the CTS class B common stock at the timeof the exchange offer and (y) the Company’s adjusted tax basis in such class B commonstock.  Such corporate tax would bematerial in amount because theCompany’s adjusted tax basis in the CTS class B common stock iszero.  Pursuant to the distributionagreement entered into between theCompany and CTS in connection with the distribution, CTS agreed toindemnify the Companyin the 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.

 

*Other Litigation. *On January 17, 2003, the Company was served with a summons ina new litigation matter.  Also named asdefendants in this litigation are approximately 50 software vendors from whichthe Company purchasedprescription data in the 1990’s (and, for many of these vendors, from which the Company continues topurchase data).  In this action, it isalleged the Companymisappropriated the trade secrets (i.e., prescription data) of thousands ofpharmacies in the United States and used this information either withoutauthorization or outside the scope of any authorization.  This same conduct is alleged to breachcontracts between the Companyand the software vendors from which the Company had purchased this prescription data.

 

The action has been brought in state court in southern Illinois(Circuit Court of the 20th Judicial Circuit) by two pharmacies.  Plaintiffs are seeking class action status,representing all pharmacies whose data was sold to the Company by their pharmacydispensary software vendors from 1990 to the present.  The pharmacies are seeking $100,000 in actual damages plus an unspecifiedamount of unjust enrichment damages (i.e., share of the Company profits) derived from use ofthe prescription data by theCompany and the other defendants, or, in the alternative, a reasonableroyalty paid for the use of the prescription data.

 

The Company is currently investigating the circumstances surroundingthe claims and is unable at this time to predict the manner in which thismatter may eventually be resolved or, if resolved adversely to the Company, therange of possible liability.  However,the Company believes that its practices with respect to the acquisition and useof this prescription data are consistent with applicable law and industrypractices, and that the claims are without merit.

 

The Company is a defendant in another litigation brought in state courtin southern Illinois (Circuit Court of the 20th JudicialCircuit).  This lawsuit was originallybrought in 1994 against Mayberry Systems, a small developer of pharmacydispensary software in the Midwest.  Twopharmacy 

 

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customers alleged MayberrySystems was taking prescription data from their systems without authorization,and selling it to others (including the Company).  The Company was subsequently added to the lawsuit in 1996,alleging the Company knew or should have known that Mayberry Systems was takingthe data and selling it without authorization (i.e., misappropriation of tradesecrets).  The lawsuit was latercertified as a class action on behalf of all former and current customers ofMayberry Systems (approximately 350 pharmacies).  Plaintiffs are demanding damages in the amount of $20,000 pluspunitive damages and attorneys fees. The Company denies any of the wrongdoing alleged by the plaintiffs andplans to vigorously defend this action. The trial is scheduled to start during August, 2003.  In the opinion of management of the Company,it is remote that the Company will incur any material liabilities with respectto this matter.

 

During thesecond quarter of 2003 and up to the date of this filing, the Company has beenserved with 19 complaints filed with the labor court in Frankfurt,Germany.  The plaintiffs are part of agroup of approximately 110 employees of GIC Global Information Technology andConsulting GmbH (“GIC Global”) whose employment was terminated in the secondquarter in connection with GIC Global’s insolvency proceedings.  GIC Global is owned by former seniormanagers of what was once the Company’s data processing center in Frankfurt,Germany.  GIC Global purchased theassets and business of the Frankfurt data processing center from the Company inSeptember 2000 as part of a management buyout. Thereafter, the Company moved its data processing to its data center inthe United States.  The plaintiffs are seekingreemployment and/or severance from the Company.  The Company is currently investigating the claims made by theseplaintiffs and is unable at this time to predict the manner in which thismatter may eventually be resolved or, if resolved adversely to the Company, therange of possible liability.  However,the Company believes that these claims are without merit and intends tovigorously defend these actions.

 

*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 and consolidates the assets, liabilities, results of operations andcash flows of the partnership.  Underthe terms of the partnership agreements, the third-party investors had theright to take steps that would result in the liquidation of their partnershipinterest on June 30, 2003.  On July 1,2003, the Company and the third party investors entered into agreementsextending the date on which the third party investors could liquidate theirinterests to June 30, 2006.

 

With respect to the matters described in this Note, management of theCompany is unable to predict at this time the final outcome or whether theirresolution could materially affect the Company’s future results of operations,cash flows or financial position.

 

**Note 10.  Financial Instruments**

 

*Foreign Exchange RiskManagement*

 

The Company transacts business in more than 100 countries and issubject to risks associated with changing foreign exchange rates.  The Company’s objective is to reduceearnings 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.

 

It is the Company’s policy to enter into foreign currency transactionsonly to the extent necessary to meet its objectives as stated above.  The Company does not enter into foreigncurrency transactions for investment or speculative purposes.  The principal currencies hedged are theJapanese Yen, the Euro, the Swiss Franc and the Canadian Dollar.

 

The impact of foreign exchange risk management activities on pre-taxincome resulted in net pre-tax losses of $9,282 and $16,984, and $12,491 and$10,064, during the three and six months ended 

 

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June 30, 2003 and 2002, respectively.  In addition, at June 30, 2003, the Companyhad approximately $349,867 in foreign exchange forward contracts outstandingwith various expiration dates through September 2003 relating to non-functionalcurrency assets and liabilities and estimated 2003 operating income.  Gains and losses on these contracts are notdeferred and are included in the Condensed Consolidated Statements of Income(Unaudited) in Other expense, net.

 

*FairValue of Financial Instruments*

 

At June 30, 2003, the Company’s financial instrumentsincluded cash, cash equivalents, short-term marketable securities, accountsreceivable, accounts payable, short-term debt, including short-term borrowingsreclassified as long-term debt, long-term debt, interest rate swaps and foreigncurrency forward contracts.  At June 30,2003, the fair values of cash, cash equivalents, short-term marketablesecurities, accounts receivable, accounts payable and short-term debtapproximated carrying values due to the short-term nature of theseinstruments.  The contractual value ofthe Company’s foreign currency forward contracts was approximately $349,867 atJune 30, 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 its positions with, and the creditquality of, the financial institutions which are counterparties to itsfinancial instruments and does not anticipate non-performance by thecounterparties.  The Company would notrealize a material loss as of June 30, 2003 in the event of non-performance byany one counterparty.  The Companyenters into transactions only with financial institution counterparties thathave a credit rating of A or better.  Inaddition, the Company limits the amount of credit exposure with any oneinstitution.

 

The Company maintains accounts receivable balances ($240,218 and$215,868, net of allowances, at June 30, 2003 and December 31, 2002,respectively), principally from customers in the pharmaceutical industry.  The Company’s trade receivables do notrepresent significant concentrations of credit risk at June 30, 2003, due tothe high quality of its customers and their dispersion across many geographicareas.

 

*Linesof Credit and Liquidity*

 

The Company has borrowing arrangements with several domestic andinternational banks to provide lines of credit up to $632,500 at June 30,2003.  Total borrowings under theseexisting lines totaled $438,200 and $523,900 at June 30, 2003 and December 31,2002, respectively.  In general, theterms of these lines of credit give the Company the option to borrow at aninterest rate equal to LIBOR plus 37.5 basis points for short-term lines andLIBOR plus 65.0 basis points for long-term lines.  The weighted average interest rates for the short-term lines were1.67% and 1.99% at June 30, 2003 and December 31, 2002, respectively.  The weighted average interest rates for thelong-term lines were 1.89% and 2.21% at June 30, 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 the Company to comply withcertain financial covenants and at June 30, 2003, the Company

 

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was in compliance with all such covenants.  Total debt of $595,038 and $529,812 at June30, 2003 and December 31, 2002, respectively, included $150,000 of five-yearprivate placement debt (as further discussed below) at June 30, 2003, and$6,838 and $5,912 at June 30, 2003 and December 31, 2002, respectively, relatedprimarily to cash overdrafts, certain capital leases, mortgages and anadjustment to the carrying amount of fair value hedged debt.

 

During the fourth quarter of 2001, the Company renegotiated withseveral banks and entered into three-year lines of credit for borrowings of upto $175,000.  During the second quarterof 2003, the Company renegotiated with a bank and increased the amountavailable under an existing three-year line by $25,000.  Borrowings under these three-year facilitiesare short-term in nature; however, the Company has the ability and the intentto refinance the short-term borrowings as they come due through December 2004.  As such, at June 30, 2003 and December 31,2002, the Company reclassified $190,000 and $175,000, respectively, of its thenoutstanding debt as long-term debt pursuant to the provisions of SFAS No.6.  Borrowings have maturity dates of upto 90 days from their inception.

 

In March and April 2002, the Company entered into interest rate swapson a portion of its variable rate debt portfolio.  These arrangements convert the variable interest rates to a fixedinterest rate on a notional amount of $75,000 and mature at various times fromMarch 2005 through April 2006.  Thefixed rates range from 4.05% to 5.08%. The interest rate swaps are accounted for as cash flow hedges and anychanges in fair value are recorded in Other comprehensive income, in theConsolidated Statements of Shareholders’ Equity (Unaudited).  The mark-to-market adjustment for the threeand six months ended June 30, 2003 was an unrealized net loss of $87 and $129,respectively.

 

In January 2003, the Company closed a private placement transactionpursuant to which the Company issued $150,000 of five-year debt to severalhighly rated insurance companies at a fixed rate of 4.60%.  The proceeds were used to pay downshort-term debt.  At December 31, 2002,the Company reclassified $150,000 of its short-term debt outstanding as long-termdebt in accordance with the provisions of SFAS No. 6, “Classification ofShort-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.”

 

AtJune 30, 2003, the Company’s Total Current Liabilities exceed its Total CurrentAssets by $44,505 primarily as a result of management’s decision to maintain agreater proportion of short-term borrowings versus longer-term debtinstruments.  This strategy allows theCompany to achieve lower borrowing costs while providing flexibility to repaydebt with cash flow from operations and proceeds from the exercise of stockoptions and the liquidation of equity holdings.  Based on estimated future cash flows from operations, thecontinued monetization of its venture capital investments, the ability tomonetize other assets as well as IMS’s ability to utilize unused existing linesof credit, the Company believes it will have sufficient cash and otherresources to fund its short-term and long-term business plans, including itscurrent and long-term obligations, its contingent payments, its stockrepurchase program and its operations.

 

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**Note 11.  Income Taxes**

 

The Company operates in more than 100 countries around the world andits earnings are taxed at the applicable income tax rate in each of thesecountries.

 

In the six months ended June 30, 2003 the Company’s effective tax ratewas impacted by approximately $69,600 due to the Company’s reassessment, basedon information received in April 2003, of its liability associated with certainD&B Legacy Tax Matters and related subsequent transactions.  This is more fully described in Note 9.  Further, the effective tax rate was affectedby the favorable settlement of a non-U.S. audit which approximated$13,900.  In the six months ended June30, 2002, the Company’s effective tax rate reflected true-ups of current anddeferred income tax liabilities.

 

While the Company intends to continue to seek global tax planninginitiatives, there can be no assurance that the Company will be able tosuccessfully implement such initiatives to reduce or maintain its overall taxrate.

 

**Note 12.  IMS Health Capital Stock**

 

On April 15, 2003, the Board of Directors authorized a stock repurchaseprogram to buy up to 10,000 shares, marking the sixth consecutive repurchaseprogram the Company has implemented. Shares acquired through the repurchase program will be open-marketpurchases or privately negotiated transactions in compliance with Securitiesand Exchange Commission Rule 10b-18.

 

On July 19, 2000, the Board of Directors authorized a stock repurchaseprogram to buy up to 40,000 shares, marking the fifth consecutive repurchaseprogram the Company has implemented. Shares acquired through this repurchase program were open-marketpurchases in compliance with Securities and Exchange Commission Rule 10b-18.

 

During the six months ended June 30, 2003, the Company repurchasedapproximately 5,700 shares of outstanding common stock under these programs ata total cost of $93,550, compared with total repurchases of approximately 9,400shares at a total cost of $192,221 for the six months ended June 30, 2002.  As of June 30, 2003, approximately 500shares of the 5,700 shares purchased in the second quarter of 2003 had beenrepurchased since the inception of the April 2003 program, at a total cost of$9,799.

 

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

 

The Company re-issued approximately 54treasury shares under option exercises for proceeds of $846 during the threemonths ended June 30, 2003.  During thesix months ended June 30, 2003, the Company re-issued approximately 115treasury shares under option exercises for proceeds of $1,755.  In addition, the Company paid dividends of$0.02 per share for a total of $4,882 during the three months ended June 30,2003.  For the six months ended June 30,2003, the Company paid dividends of $0.04 per share for a total of $9,785.

 

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**Note 13.  Comprehensive Income**

 

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

 
|                                               |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |   |
|----------------------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                               |   | **2003**                         |       | **2002**                       |   | **2003** |   | **2002** |   |
| **Net Income**                                     |   | **$**                            | **55,356** | ** **                     | $      | 62,013 |   | **$** | **500,029** | ** ** | $ | 121,192 |   |
| Other comprehensive income, net of taxes:          |   |                             | ** ** |                           |   |   | ** ** |   |   |
| Unrealized gains (losses) on:                      |   |                             | ** ** |                           |   |   | ** ** |   |   |
| Available-for-sale equity securities               |   | **834**                          | ** ** | 532                            |   | **718** | ** ** | (3,442 | ) |
| Reclassification adjustment                        |   | **(560**                         | **)**      | (8,007                         | )      | **(201** | **)** | (7,515 | ) |
| Tax benefit on above                               |   | **(96**                          | **)**      | 2,616                          |   | **(181** | **)** | 3,835 |   |
| Change in unrealized gains (losses) on investments |   | **178**                          | ** ** | (4,859                         | )      | **336** | ** ** | (7,122 | ) |
| Foreign currency translation gains                 |   | **24,464**                       | ** ** | 26,327                         |   | **29,273** | ** ** | 18,068 |   |
| Changes in fair value of cash flow hedges          |   | **(87**                          | **)**      | (1,215                         | )      | **(129** | **)** | (1,215 | ) |
| Total other comprehensive income                   |   | **24,555**                       | ** ** | 20,253                         |   | **29,480** | ** ** | 9,731 |   |
| **Comprehensive Income**                           |   | **$**                            | **79,911** | ** **                     | $      | 82,266 |   | **$** | **529,509** | ** ** | $ | 130,923 |   |

 

Included in the reclassification adjustments of $(560) and $(201) forthe three and six months ended June 30, 2003, respectively, are $296 and $655,respectively of write downs related to other-than-temporary declines in valueof the venture capital investments.

 

**Note 14.  Severance, Impairment and OtherCharges**

 

During the three months ended March 31, 2003,the Company recorded $37,220 of Severance, impairment and other charges (the“first quarter charge”) as a component of operating income.  These charges were designed to furtherstreamline operations and increase productivity.

 

Approximately $9,958 was charged to expensein the first quarter of 2003, related to a worldwide reduction in headcount ofapproximately 80 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 incontract-related charges, including $16,500 in charges to exit data supply andprocessing contracts and $5,803 related to lease obligations associated withabandoned properties.  Thesecosts are incremental and either relate to existing contractual obligationsthat do not have any future economic benefit or represent a contractcancellation penalty.

 

Approximately $4,959 was charged to expenseto write down computer software to its net realizable value.  These write-downs resultedfrom the Company’s decision to abandon certain products.

 

The cash portion of this charge amounts to$32,261, of which the Company paid approximately $4,814 during the first halfof 2003 related primarily to employee termination payments and contract-relatedcharges.  The remaining accrual of$25,926 at June 30, 2003 relates to lease obligations and continuing paymentsrelated to employee terminations.

 

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During the three months ended June 30, 2003,the Company reversed approximately $3,000 of severance charges andcontract-related charges originally included in the first quarter charge due tothe Company’s refinement of estimates and change in headcount reductions.  The Company also recorded additional chargesduring the three months ended June 30, 2003 of approximately $3,000 relatedprimarily to a software impairment and severance action.

 

During the fourth quarter of 2001, the Company completed the assessmentof its Competitive Fitness Program (the “Program”).  This program was designed to streamline operations, increaseproductivity, and improve client service. In connection with this program, the Company recorded $94,616 ofSeverance, impairment and other charges during the fourth quarter of 2001 as acomponent of operating income.

 

During the first six months of 2003, the Company paid approximately$7,640 under the Program, related primarily to employee termination paymentsand costs related to a facility shutdown. Since the program’s inception $52,540 has been paid by the Company.  As expected, all actions under the Programwere completed by December 31, 2002. The remaining accrual of $11,164 atJune 30, 2003 relates primarily to lease obligations and continuing paymentsrelated to completed employee terminations.

 

**Note 15.  Operations by Business Segment**

 

Operating segments are defined as components of an enterprise aboutwhich financial information is available that is evaluated on a regular basisby the chief operating decision maker, or decision making groups, in decidinghow to allocate resources to an individual segment and in assessing theperformance of the segment.  The Companyhas one reportable segment; it operates globally and is principally managed byway of and delivers information, software and related services through onereporting segment.

 

The chief operating decision-makers evaluate performance and allocateresources based on revenue and operating income data.

 

A summary of the Company’s revenue by product line, as of and for thethree and six months ended June 30, 2003 and 2002 is presented below:

 

|                               |   | **Three Months Ended June 30,** |        | **Six Months Ended June 30,** |   |
|------------------------------------|--------|---------------------------------|-------------|-------------------------------|--------|
|                               |   | **2003**                        |        | **2002**                      |   | **2003** |   | **2002** |   |
| Operating Revenue by product line: |   |                            |        |                          |   |   |   |   |   |
| Sales management                   |   | **$**                           | **205,283** |                          | $      | 184,469 | ** ** | **$** | **392,920** |   | $ | 359,200 |   |
| Market research                    |   | **$**                           | **119,657** |                          | $      | 106,202 | ** ** | **$** | **234,607** |   | $ | 209,140 |   |
| Other services                     |   | **$**                           | **12,836**  |                          | $      | 13,229 | ** ** | **$** | **24,166** |   | $ | 25,274 |   |
| Total Operating Revenue            |   | **$**                           | **337,776** |                          | $      | 303,900 | ** ** | **$** | **651,693** |   | $ | 593,614 |   |

 

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**Item2. Management's Discussion and Analysis of Financial Condition and Results ofOperations****(Dollars and shares in thousands, except per share data)**

 

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

 

IMS Health Incorporated (“IMS” or the “Company”) is a leading globalprovider of information solutions to the pharmaceutical and healthcareindustries.  IMS operates in more than100 countries and provides market information, sales management anddecision-support services to the pharmaceutical and healthcare industries.  Its key products include sales managementinformation to optimize sales force productivity, marketing effectivenessresearch for prescription and over-the-counter pharmaceutical products,consulting and other services.  IMS alsoowns a venture capital unit, Enterprise Associates, LLC (“Enterprises”) whichis focused on investments in emerging businesses, and a 26.1% equity interestin The TriZetto Group, Inc. (“TriZetto”), at June 30, 2003.

 

During the year ended December 31, 2002, IMS also included theCognizant Technology Solutions Corporation Segment (“CTS”), which providescustom Information Technology (“IT”) design, development, integration andmaintenance services.  CTS is a publiclytraded corporation on the Nasdaq national market system.  IMS owned 55.3% of the common sharesoutstanding of CTS (92.5% of the outstanding voting power) as of December 31,2002, and accounted for CTS as a consolidated subsidiary.  On February 6, 2003, the Company divestedCTS through a split-off transaction, and as a result, during the three monthsended March 31, 2003, the Company recorded a net gain from discontinuedoperations of $495,053.  The Company’sshare of CTS results are presented as discontinued operations for 2003 throughthe date of divestiture and for the three and six months ended June 30,2002.  CTS’s assets and liabilities arepresented as discontinued operations as of December 31, 2002 (see Note 6 to theunaudited Condensed Consolidated Financial Statements.)

 

**ThreeMonths Ended June 30, 2003 compared with Three Months Ended June 30, 2002**

 

***Operating Results***

 

The reference to constant dollar throughout this report is made so thatIMS’s results can be viewed without the impacts of changing foreign currencyexchange rates and therefore facilitates a comparative view of businessgrowth.  In the first half of 2003 theU.S. Dollar generally weakened against other currencies, so growth at constant dollarexchange rates was lower than growth at actual currency exchange rates.

 

Operating revenue for the three months ended June 30, 2003 grew 11.1%to $337,776 from $303,900 in the three months ended June 30, 2002.  On a constant dollar basis revenue growthwas 3.0%.  Sales Management revenue of$205,283 in the three months ended June 30, 2003 reflects an increase of 11.3%from the three months ended June 30, 2002, with growth of 2.8% on a constantdollar basis, driven by new product sales. Market Research revenue improved 12.7% to $119,657 in the three monthsended June 30, 2003, and grew 4.5% constant dollar, reflecting growth from newclients and expansion of product capabilities. Other Services revenue declined 3.0% to $12,836 for the three months endedJune 30, 2003, a decline of 6.6% on a constant dollar basis, primarily due to avery strong second quarter in 2002 for Cambridge Pharma Consultancy, Limited(“Cambridge”).

 

IMS’s operating costs include data processing costs, the costs of datacollection and production, and costs attributable to personnel involved inproduction, data management and the processing and delivery of IMS’sservices.  IMS’s operating costs grew12.9% to $135,311 in the three months ended 

 

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June 30, 2003, from $119,834 in the three months endedJune 30, 2002.  The increase resultedprimarily from foreign exchange and higher operating costs resulting fromacquisitions made during the latter half of 2002 and the first half 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 9.7% in the three months ended June 30, 2003,to $85,335 from $77,775 in the three months ended June 30, 2002, primarily dueto foreign exchange and higher selling and administrative costs resulting fromacquisitions made during the latter half of 2002 and the first half of 2003.

 

Depreciation and amortization charges increased 65.1%to $19,831 in the three months ended June 30, 2003, from $12,014 in the threemonths ended June 30, 2002, primarily due to foreign exchange, higheramortization of intangible assets resulting from acquisitions made during thelatter half of 2002 and the first half of 2003 and increased softwareamortization associated with new products.

 

Operating income for the three months ended June 30,2003, increased 3.2% to $97,299 from $94,277 in the three months ended June 30,2002.  On a constant dollar basisoperating income declined by 4.4%.

 

Net interest expense was $2,665 in the three monthsended June 30, 2003, compared with $2,246 in the three months ended June 30,2002, primarily due to higher levels of debt and lower interest income fromNielsen Media Research, Inc. (“NMR”) in 2003. See Note 9 to the unaudited Condensed Consolidated Financial Statements.

 

Gains (losses) from investments, net, amounted to anet gain of $32 in the three months ended June 30, 2003, as compared to a netgain of $2,470 in the three months ended June 30, 2002.  The net gain in 2003 is due to a gain of$856 from the sale of an investment in the Enterprises portfolio, net of writedowns of $296 related to other-than-temporary declines in value of the venturecapital investments, and management fees relating to the portfolio of$528.  The gain in the three monthsended June 30, 2002 was due primarily to $8,008 of net gains realized on the saleof investments within IMS’s Enterprises portfolio, offset by a write downrelated to the assessment of other-than-temporary declines in value of theventure capital investments amounting to $4,235 and management fees of $1,301.

 

Gain (loss) on issuance of investees’ stock, net,amounted to $54 in the three months ended June 30, 2003, relating to theexercise of stock options by TriZetto employees and TriZetto share repurchases,compared to $(86) in the three months ended June 30, 2002.  This gain (loss) has been recognized inaccordance with Staff Accounting Bulletin (“SAB”) No. 51, “Accounting forSales of Stock by a Subsidiary.”

 

Other expense, net, decreased in the three monthsended June 30, 2003, to $9,835 from $15,607 in the three months ended June 30,2002.  This was primarily due to netforeign exchange losses of $9,282 in the three months ended June 30, 2003,compared with net foreign exchange losses of $12,491 in the three months endedJune 30, 2002, and a $2,210 cash refund from Synavant received during thesecond quarter of 2003 relating to their share of fees for the IRI litigation.

 

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In the three months endedJune 30, 2003 and June 30, 2002, IMS’s effective tax rate was reduced as a result ofglobal tax planning initiatives.  WhileIMS intends to continue to seek global tax planning initiatives, there can beno assurance that IMS will be able to successfully implement such initiativesto reduce or maintain its overall tax rate.

 

A TriZetto equity loss, net, of $66 was recorded inthe three months ended June 30, 2003, compared with a net loss of $93 in thethree months ended June 30, 2002.

 

On February 6, 2003, the Company divested CTS througha split-off transaction, and as a result, CTS’s results are presented as incomefrom discontinued operations for 2003 through the date of divestiture and forthe three months ended June 30, 2002 (see Note 6 to the unaudited CondensedConsolidated Financial Statements). Income from discontinued operations net of $8,242 was recorded in thethree months ended June 30, 2002.  As aresult of the divestiture there was no comparable income in the three monthsended June 30, 2003.

 

**SixMonths Ended June 30, 2003 compared with Six Months Ended June 30, 2002**

 

***Operating Results***

 

Operating revenue for the six months ended June 30,2003 grew 9.8% to $651,693 from $593,614 in the six months ended June 30,2002.  On a constant dollar basisrevenue growth was 2.0%.  SalesManagement revenue of $392,920 in the six months ended June 30, 2003 reflectsan increase of 9.4% from the six months ended June 30, 2002, with growth of1.4% on a constant dollar basis, driven by new product sales.  Market Research revenue improved 12.2% to$234,607 in the six months ended June 30, 2003, and grew 4.1% constant dollar,reflecting growth from new clients and expansion of product capabilities.  Other Services revenue declined 4.4% to$24,166 for the six months ended June 30, 2003, a decline of 7.6% on a constantdollar basis primarily due to a very strong first half in 2002 for Cambridge.

 

IMS’s operating costs grew 14.1% to $268,300 in thesix months ended June 30, 2003, from $235,085 in the six months ended June 30,2002.  The increase resulted primarilyfrom foreign exchange and higher operating costs resulting from acquisitionsmade during the latter half of 2002 and the first half of 2003.

 

IMS’s selling and administrative expenses grew 8.0% inthe six months ended June 30, 2003, to $171,095 from $158,357 in the six monthsended June 30, 2002, primarily due to foreign exchange and higher selling andadministrative costs resulting from acquisitions made during the latter half of2002 and the first half of 2003.

 

Depreciation and amortization charges increased 54.2%to $36,629 in the six months ended June 30, 2003, from $23,758 in the sixmonths ended June 30, 2002, primarily due to foreign exchange, higheramortization of intangible assets resulting from acquisitions made during thelatter half of 2002 and the first half of 2003 and increased softwareamortization associated with new products.

 

During the first quarter of 2003, IMS recorded a$37,220 pretax charge for Severance, impairments and other charges consistingprimarily of severance charges of approximately $9,958 for approximately 80employees, charges to exit data supply and processing contracts of $16,500,lease 

 

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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 six months ended June 30, 2002.  See Note 14 to the unaudited CondensedConsolidated Financial Statements.

 

Operating income for the six months ended June 30,2003, decreased 21.5% to $138,449 from $176,414 in the six months ended June30, 2002, primarily due to the Severance, impairment and other charges of$37,220 recorded in the first quarter of 2003. On a constant dollar basis operating income declined by 7.6%.

 

Net interest expense was $5,456 in the six monthsended June 30, 2003, compared with $3,540 in the six months ended June 30,2002, primarily due to higher levels of debt and lower interest income fromNMR.  See Note 9 to the unauditedCondensed Consolidated Financial Statements.

 

Gains (losses) from investments, net, amounted to anet loss of $844 in the six months ended June 30, 2003, as compared to a netgain of $1,250 in the six months ended June 30, 2002.  The net loss in 2003 is due primarily to management fees relatingto IMS’s Enterprises portfolio of $1,046 and $655 of write downs related toother-than-temporary declines in value of the venture capital investments,offset by gains realized on the sale of such investments of $856.  The gain in the six months ended June 30,2002 was due primarily to $7,515 of net gains realized on the sale ofinvestments within IMS’s Enterprises portfolio, offset by write downs relatedto the assessment of other-than-temporary declines in value of the venturecapital investments amounting to $4,907.

 

Loss on issuance of investees’ stock, net, amounted to$261 in the six months ended June 30, 2003, relating to the exercise of stockoptions by TriZetto employees and TriZetto share repurchases, compared to a netloss of $86 in the six months ended June 30, 2002.  This loss has been recognized in accordance with SAB No. 51.

 

Other expense, net, increased in the six months endedJune 30, 2003, to $20,638 from $16,309 in the six months ended June 30, 2002,primarily due to net foreign exchange losses of $16,984 in the six months endedJune 30, 2003, compared with net foreign exchange losses of $10,064 in the sixmonths ended June 30, 2002, and a $2,210 cash refund from Synavant receivedduring the second quarter of 2003 relating to their share of fees for the IRIlitigation.

 

In the six months endedJune 30, 2003, IMS’s effective tax rate was impacted by approximately $69,600due to IMS’s reassessment, based on information received in April 2003, of itsliability associated with certain D&B Legacy Tax Matters and relatedsubsequent transactions.  This is morefully described in Note 9 to the unaudited Condensed Consolidated FinancialStatements.  Further, the effective taxrate was affected by the favorable settlement of a non-U.S. audit which approximated$13,900.  In the six months ended June30, 2002, IMS’s effective tax rate reflected true-ups of current and deferredincome tax liabilities.

 

For all periods presented, IMS’s effective tax ratewas reduced as a result of global tax planning initiatives.  While IMS intends to continue to seek globaltax planning initiatives, there can be no assurance that IMS will be able tosuccessfully implement such initiatives to reduce or maintain its overall taxrate.

 

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A TriZetto equity loss, net, of $399 was recorded inthe six months ended June 30, 2003, compared with a net loss of $295 in the sixmonths ended June 30, 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 June 30, 2003, TriZetto shares closed at $5.99 compared toIMS’s carrying value per share of $4.06.

 

On February 6, 2003, the Company divested CTS througha split-off transaction, and as a result, CTS’s results are presented as incomefrom discontinued operations for 2003 through the date of divestiture and forthe six months ended June 30, 2002 (see Note 6 to the unaudited CondensedConsolidated Financial Statements). Income from discontinued operations net in the six months ended June 30,2003 decreased to $2,779 from $13,250 in the six months ended June 30,2002.  The decrease is due to only 37days of IMS’s share of CTS net income (January 1, 2003 through February 6,2003) being included for 2003 compared with a full six months in 2002.  As a result of the divestiture, the Companyrecorded a net gain from discontinued operations during the six months endedJune 30, 2003, of $495,053.

 

***Liquidity and Capital Resources***

 

Cash and cash equivalents decreased $2,732 during the first six months of2003 to $286,529 at June 30,2003 compared to $289,261 at December 31, 2002.  The decrease reflects cash used in investing and financingactivities of $131,836 and $35,772,respectively, offset by cash generated from operating activities of $159,920 and exchange rate changes of $4,956.  Including the change in short-termmarketable securities, which is included in cash used in investing activities,cash and cash equivalents and short-term marketable securities increased to$314,391 at June 30, 2003 compared to $289,261 at December 31, 2002, anincrease of $25,130.  On February 6,2003, the Company divested CTS through a split-off transaction, and as aresult, the Company’s share of CTS’s, assets and liabilities is presentedas discontinued operations as of June 30, 2003 and December 31, 2002.  The Company’s share of CTS’s results for thesix months ended June 30, 2002 and the period from January 1, 2003 through theeffective date of the exchange offer are presented as discontinued operations,and the Condensed Consolidated Statements of Cash Flows exclude CTS Cash Flowsfor the six months ended June 30, 2003 and 2002 (see Note 6 to the unauditedCondensed Consolidated Financial Statements.)

 

Net cash provided by operating activities amounted to$159,920 for the six monthsended June 30, 2003, an increase of $65,847over the comparable period in 2002.  Theincrease relates primarily to the NMR payment received in respect of LegacyD&B Tax Matters, lower cash requirements for accrued income taxes,severance, impairment and other charges and lower funding of accountsreceivables balances due to improved collection.  These items were partially offset by lower income from continuingoperations in 2003.

 

Net cash used in investing activities amounted to $131,836 for the six months ended June30, 2003, an increase in cash used of $99,729over the comparable period in 2002.  Thegreater cash requirements during 2003 relate primarily to $41,722 in higher spending onacquisitions, $27,862 of investments in short-term marketable securities in2003 with no comparable investment in 2002, a 

 

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$20,724 reduction in cash receipts received for salesof investments and an increase of $5,580in spending on deferred software relating to new product development.  These items were partially offset by arequired $3,000 funding of a venture capital investment in the prior periodcompared with a cash outlay of $1,200 in 2003.

 

Net cash used in financing activities amounted to $35,772 for the six months ended June30, 2003, an increase of $14,972over the comparable period in 2002. This increase was primarily due to a $9,903 decrease in proceeds fromexercise of stock options and a $7,758 decrease in cash overdrafts.

 

At June 30, 2003, IMS’s TotalCurrent Liabilities exceed its Total Current Assets by $44,505primarily as a result of management’s decision to maintain a greater proportionof short-term borrowings versus longer-term debt instruments.  This strategy allows IMS to achieve lowerborrowing costs while providing flexibility to repay debt with cash flow fromoperations and proceeds from the exercise of stock options and the liquidationof equity holdings.  Based on estimatedfuture cash flows from operations, the continued monetization of its venturecapital investments, the ability to monetize other assets as well as IMS’sability to utilize unused existing lines of credit (see Note 10 to the unaudited Condensed ConsolidatedFinancial 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 had implemented.  Shares acquired through this repurchaseprogram were open-market purchases or privately negotiated transactions incompliance with Securities and Exchange Commission Rule 10b-18.

 

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.

 

During the six months ended June 30, 2003, the Companyrepurchased approximately 5,700 shares of outstanding common stock under theseprograms at a total cost of $93,550, compared with total repurchases ofapproximately 9,400 shares at a total cost of $192,221 for the six months endedJune 30, 2002.  As of June 30, 2003,approximately 500 shares of the 5,700 shares purchased in the second quarter of2003, had been repurchased since the inception of the April 2003 program, at atotal cost of $9,799.

 

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$4,900 in fees associated withthe CTS Split-Off (see Note 6 to the unaudited Condensed Consolidated FinancialStatements).  IMS’s ability to expandand grow its business in accordance with current plans, to make acquisitions,repurchase stock and to meet its long-term capital requirements beyond this12-month period will depend on many factors, including the rate, if any, atwhich its cash flow increases, its ability and willingness to accomplishacquisitions, repurchase treasury stock and the 

 

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availability to IMS of public and private debt andequity financing, including its current ability to secure bank lines ofcredit.  IMS cannot be certain thatadditional financing, if required, will be available on terms favorable to it,if at all.

 

***Recently IssuedAccounting Standards***

 

In May 2003, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.”  SFAS No. 150establishes standards for how an enterprise classifies and measures certainfinancial instruments that have characteristics of both liabilities andequity.  SFAS No. 150 requires anenterprise to classify a financial instrument that is within its scope as a liability(or an asset in some circumstances). SFAS No. 150 was effective for financial instruments entered into ormodified after May 31, 2003, and otherwise was effective at the beginning ofthe first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 effective June1, 2003 did not have a material impact on the Company’s financial position,results of operations or cash flows for the three months ended June 30, 2003.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”  SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities.”  SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003 and is not expected to have amaterial impact on the Company’s financial position, results of operations orcash flows.

 

In June 2001, the FASB issued 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.  Theadoption of SFAS No. 143 effective January 1, 2003 did not have a material impacton the Company’s financial position, results of operations or cash flows forthe three and six months ended June 30, 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 orofficers.  Investors are cautioned thatsuch forward-looking statements are not assurances 

 

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for future performance or events and involve risks anduncertainties that could cause actual results and developments to differmaterially from those covered in such forward-looking statements.  These risks and uncertainties include, butare not limited to:

 

•                  risks associated with operating on a global basis, includingfluctuations in the value of foreign currencies relative to the U.S. Dollar,and the ability to successfully hedge such risks – IMS derived approximately59% of its revenue in 2002 from non-US operations;

 

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

 

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

 

•                  the ability of IMS to maintain and defend itsintellectual property rights in jurisdictions around the world;

 

•                  the ability to identify and implement cost-containmentmeasures;

 

•                  the ability to successfully maintain historiceffective tax rates;

 

•                  competition, particularly in the markets forpharmaceutical information;

 

•                  regulatory, legislative and enforcement initiatives towhich IMS is or may become subject, relating particularly to tax and to patientprivacy and the collection and dissemination of data and specifically, the useof anonymized patient-specific information, which IMS anticipates to be anincreasingly important tool in the design, development and marketing ofpharmaceuticals;

 

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

 

•                  deterioration in economic conditions, particularly inthe pharmaceutical, healthcare, or other industries in which IMS’s customersmay operate;

 

•                  consolidation in the pharmaceutical industry and theother industries in which IMS’s customers operate;

 

•                  the imposition of additional restrictions on IMS’s useof or access to data, or the refusal by data suppliers to provide data to IMS;

 

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

 

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

 

•                  terrorist activity, the threat of such activity, andresponses to and results of such activity and threats, including but notlimited to effects, domestically and/or internationally, on IMS, its personneland facilities, its customers and suppliers, financial markets and generaleconomic 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 and six month periodsended June 30, 2003 and by the material set forth under the headings “Business”and “Factors That May Affect Future Results” in IMS’s Annual Report on Form10-K for 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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**Item3.  Quantitative and QualitativeDisclosures About 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 18 through 20 hereof.

 

**Item4. Controls and Procedures**

 

(a)                                  Evaluation of Disclosure Controls andProcedures

 

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

 

TheCompany’s Chief Executive Officer and****ChiefFinancial Officer have evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-14c and 15d-14cunder the Exchange Act) as of June 30, 2003 (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s periodic filings under the ExchangeAct.

 

(b)                                 Changes in Internal Control over FinancialReporting

 

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

 

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**PART II.  OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Information inresponse to this Item is incorporated by reference to the information set forthin “Note 9. Contingencies” in the Notes to the Condensed Consolidated FinancialStatements (unaudited) on pages 11 through 18 hereof.

 

**Item 2. Changes in Securities and Use of Proceeds**

 

On April 14,2003, in reliance upon the exemption provided in Section 4(2) of the SecuritiesAct of 1933, as amended (the “Securities Act”), the Company issued to each ofCurtis C. Cutter and Joseph L. Ebersole 30,907 shares of its Common Stockwithout registration under the Securities Act. These shares were issued in satisfaction of the Company’s deferredcontingent purchase price obligation under the Agreement and Plan of Mergerbetween ChinaMetric, Inc., the Stockholders of ChinaMetric, Inc. and IMS (assuccessor to Cognizant Corporation) dated March 31, 1998, pursuant to which theCompany purchased ChinaMetric, Inc.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

The Annual Meeting ofShareholders of IMS Health Incorporated was held on May 2, 2003.

 

The following nominees fordirector named in the Proxy Statement dated March 31, 2003 were elected at theMeeting by the votes indicated:

 
|                     |   | **For**     |   | **Withheld** |   |
|--------------------------|--------|-------------|--------|--------------|--------|
|                     |   |        |   |         |   |
| John P. Imlay,  Jr. |   | 192,161,214 |   | 20,931,977   |   |
|                     |   |        |   |         |   |
| Robert J. Kamerschen     |   | 192,188,441 |   | 20,904,750   |   |
|                     |   |        |   |         |   |
| H. Eugene Lockhart       |   | 192,003,946 |   | 21,089,245   |   |

 

The votes in favor of theelection of the nominees represent at least 90% of the shares present at themeeting.

 

Approval of the appointment ofPricewaterhouseCoopers LLP as Independent Public Accountants was approved bythe following vote:

 
|             |   | **For**     |   | **Against** |   | **Abstain** |   |
|------------------|--------|-------------|--------|-------------|--------|-------------|--------|
|             |   |        |   |        |   |        |   |
| Number of Shares |   | 186,307,513 |   | 25,748,396  |   | 1,307,282   |   |

 

Approval of the Amended and Restated 1998 IMSHealth Incorporated Non-Employee Directors’ Stock Incentive Plan:

 
| Number of Shares |   | 132,616,034 |   | 47,501,020 |   | 1,762,167 |   |
|------------------|--------|-------------|--------|------------|--------|-----------|--------|

 

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Approval ofthe Amended and Restated 1998 IMS Health Incorporated Employees’ StockIncentive Plan:

 
| Number of Shares |   | 130,695,679 |   | 49,472,266 |   | 1,701,677 |   |
|------------------|--------|-------------|--------|------------|--------|-----------|--------|

 

Reapproval ofPerformance Goals Under the 1998 IMS Health Incorporated Employees’ StockIncentive Plan and Executive Annual Incentive Plan:

 
| Number of Shares |   | 199,552,397 |   | 11,979,396 |   | 1,557,396 |   |
|------------------|--------|-------------|--------|------------|--------|-----------|--------|

 

Approval of the Floor Proposalfor the Removal of the Staggered Board:

 
| Number of Shares |   | 400 |   | 213,093,191 |   | 0 |   |
|------------------|--------|-----|--------|-------------|--------|---|--------|

 

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

 

(a)                        Exhibits:

 
| **Exhibit  Number** |   | **Description  of Exhibits**                                                                                                   |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                           |
| 10.1                |   | First  Amendment to the IMS Health Incorporated U.S. Executive Retirement Plan (As  amended effective April 17, 2001)*         |
|                |   |                                                                                                                           |
| 10.2                |   | First  Amendment to the IMS Health Incorporated Supplemental Executive Retirement  Plan (As amended effective April 17, 2001)* |
|                |   |                                                                                                                           |
| 10.3                |   | IMS Health  Incorporated Executive Pension Plan effective as of April 17, 2001*                                                |
|                |   |                                                                                                                           |
| 10.4                |   | Employment  Agreement for Nancy E. Cooper (As amended and restated as of February 11,  2003)*                                  |
|                |   |                                                                                                                           |
| 10.5                |   | Employment  Agreement for Robert H. Steinfeld (As amended and restated as of February 11,  2003)*                              |
|                |   |                                                                                                                           |
| 31.1                |   | CEO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                    |
|                |   |                                                                                                                           |
| 31.2                |   | CFO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                    |
|                |   |                                                                                                                           |
| 32.1                |   | Joint  CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of  2002                                     |

 

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*Management Contract orCompensatory Plan Arrangement

 

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(b)                       Reportson 8-K:

 

A report on Form 8-K was filed on June 23, 2003 to present under Item9, Regulation FD Disclosure, Certifications of IMS Health’s Vice PresidentGlobal Compensation and Benefits and the Senior Vice President and ChiefFinancial Officer accompanying the Annual Report on Form 11-K of the IMS HealthIncorporated Savings Plan filed June 23, 2003.

 

A report on Form 8-K was filed on May 7, 2003 to present under Item 9,Regulation FD Disclosure, Certifications of IMS Health’s Chief ExecutiveOfficer and Chief Financial Officer accompanying the IMS Health IncorporatedQuarterly Report on Form 10-Q filed May 7, 2003.

 

A report on Form 8-K was filed on April 15, 2003 to present under Item9, Regulation FD Disclosure, Press Release regarding IMS Health’s financialresults for its first quarter of fiscal 2003.

 

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**SIGNATURES**

 

Pursuant tothe 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: August  5, 2003 |   | Nancy E.  Cooper  Senior Vice President and  Chief Financial Officer  (principal financial officer) |
|                  |   |                                                                                                |
|                  |   |                                                                                                |
|                  |   |                                                                                                | /s/ Leslye G. Katz |   |
| Date: August  5, 2003 |   | Leslye G.  Katz  Vice President, Controller  (principal accounting officer)                         |

 

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# **EXHIBIT** INDEX

 
| **Exhibit  Number** |   | **Description  of Exhibits**                                                                                                                |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                        |
| 10.1                |   | First  Amendment to the IMS Health Incorporated U.S. Executive Retirement Plan (As  amended and restated effective April 17, 2001)*         |
|                |   |                                                                                                                                        |
| 10.2                |   | First  Amendment to the IMS Health Incorporated Supplemental Executive Retirement  Plan (As amended and restated effective April 17, 2001)* |
|                |   |                                                                                                                                        |
| 10.3                |   | IMS Health  Incorporated Executive Pension Plan effective as of April 17, 2001*                                                             |
|                |   |                                                                                                                                        |
| 10.4                |   | Employment  Agreement for Nancy E. Cooper (As amended and restated as of February 11,  2003)*                                               |
|                |   |                                                                                                                                        |
| 10.5                |   | Employment  Agreement for Robert H. Steinfeld (As amended and restated as of February 11,  2003)*                                           |
|                |   |                                                                                                                                        |
| 31.1                |   | CEO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                 |
|                |   |                                                                                                                                        |
| 31.2                |   | CFO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                 |
|                |   |                                                                                                                                        |
| 32.1                |   | Joint  CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of  2002                                                  |

 

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*Management Contract orCompensatory Plan Arrangement

 

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