** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý** |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****FOR  THE QUARTERLY PERIOD ENDED March 31, 2006**                                                        |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   | ** **                                                                                                                                                                                                           |
| **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**

 

**IMSHealth Incorporated**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITSCHARTER)

 

| **Delaware**             | ** ** | **06-1506026**                       |
|--------------------------|------------|--------------------------------------|
| (State of Incorporation) |       | (I.R.S. Employer Identification No.) |

 

**1499 Post Road, Fairfield, CT 06824**

(Address of principal executive offices)(ZipCode)

 

**(203) 319-4700**

(Registrant’s telephone number, includingarea code)

 

 

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to the filing requirements for the past 90 days.

ýYes    oNo

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in rule 12b-2 of the Exchange Act.(Check one):

 
| Large accelerated filer ý |   | Accelerated filer o |   | Non-accelerated filer o |
|--------------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). o  Yes    ý  No

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date. At March 31,2006, there were 199,704,803 shares of IMS Health Incorporated Common Stock,$0.01 par value, outstanding.

 

 

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**IMS HEALTHINCORPORATED**

 

**INDEX TO FORM 10-Q**

 
| ** **                                                                                              | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|
| **PART I. FINANCIAL INFORMATION**                                                                  | 3          |
|                                                                                                    | ** ** |
| **Item 1. Financial Statements (Unaudited)**                                                            | 3          |
|                                                                                                    |       |
| Condensed Consolidated Statements of Financial Position                                                 |       |
| As of March 31, 2006 and  December 31, 2005                                                   | 3          |
|                                                                                                    |       |
| Condensed Consolidated Statements of Income                                                             |       |
| Three Months Ended March 31, 2006 and  2005                                                        | 4          |
|                                                                                                    |       |
| Condensed Consolidated Statements of Cash Flows                                                         |       |
| Three Months Ended March 31, 2006 and  2005                                                        | 5          |
|                                                                                                    |       |
| Notes to Condensed Consolidated Financial Statements                                                    | 6          |
| ** **                                                                                              |       |
| **Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations** | 29         |
|                                                                                                    |       |
| **Item 3. Quantitative and Qualitative  Disclosures About Market Risk**                                 | 46         |
| ** **                                                                                              |       |
| **Item 4. Controls and Procedures**                                                                     | 46         |
|                                                                                                    | ** ** |
| **PART II. OTHER INFORMATION**                                                                     | 47         |
| ** **                                                                                              |       |
| **Item 1. Legal Proceedings**                                                                           | 47         |
| ** **                                                                                              | ** ** |
| **Item 2. Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities**           | 47         |
|                                                                                                    |       |
| **Item 6. Exhibits**                                                                                    | 48         |
|                                                                                                    |       |
| **SIGNATURES**                                                                                          | 49         |
| ** **                                                                                              | ** ** |
| **EXHIBITS**                                                                                            | 50         |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. FINANCIAL STATEMENTS**

 

**IMS HEALTHINCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)**

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

* *
| ** **                                                                                                               | ** ** | **As of March 31,  2006** | ** **    | **As of December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|---------------|-----------------------------------|------------|
| **Assets:**                                                                                                              |       |                           |          |                              |       |
| **Current Assets:**                                                                                                      | ** ** | ** **                     | ** **    | ** **                        | ** ** |
| Cash and cash equivalents                                                                                                | ** ** | **$**                          | **146,424**   |                              | $          | 362,943 |   |
| Accounts receivable, net of allowances of  $6,966 and $7,629 in 2006 and  2005, respectively                        | ** ** | **310,163**                    |          | 297,302                           |       |
| Other current assets                                                                                                     | ** ** | **177,274**                    |          | 160,765                           |       |
| **Total Current Assets**                                                                                                 | ** ** | **633,861**                    |          | 821,010                           |       |
| Securities and other investments                                                                                         | ** ** | **4,707**                      |          | 6,037                             |       |
| Property, plant and equipment, net of  accumulated depreciation of $183,464 and $180,576 in 2006 and 2005,  respectively | ** ** | **148,733**                    |          | 148,586                           |       |
| Computer software                                                                                                        | ** ** | **242,927**                    |          | 241,298                           |       |
| Goodwill                                                                                                                 | ** ** | **471,962**                    |          | 457,006                           |       |
| Other assets                                                                                                             | ** ** | **313,448**                    |          | 299,083                           |       |
| **Total Assets**                                                                                                         | ** ** | **$**                          | **1,815,638** |                              | $          | 1,973,020 |   |
| ** **                                                                                                               | ** ** | ** **                     |          |                              |       |
| **Liabilities, Minority Interests and  Shareholders’ (Deficit) Equity:**                                            |       |                           |          |                              |       |
| **Current Liabilities:**                                                                                                 |       |                           |          |                              |       |
| Accounts payable                                                                                                         | ** ** | **$**                          | **72,917**    |                              | $          | 71,737 |   |
| Accrued and other current liabilities                                                                                    | ** ** | **191,083**                    |          | 231,475                           |       |
| Accrued income taxes                                                                                                     | ** ** | **112,375**                    |          | 114,325                           |       |
| Short-term deferred tax liability                                                                                        | ** ** | **8,688**                      |          | 8,627                             |       |
| Deferred revenues                                                                                                        | ** ** | **123,624**                    |          | 122,884                           |       |
| **Total Current Liabilities**                                                                                            | ** ** | **508,687**                    |          | 549,048                           |       |
| Postretirement and postemployment benefits                                                                               | ** ** | **115,846**                    |          | 110,782                           |       |
| Long-term debt (Note 10)                                                                                                 | ** ** | **1,112,768**                  |          | 611,431                           |       |
| Other liabilities                                                                                                        | ** ** | **150,380**                    |          | 186,839                           |       |
| **Total Liabilities**                                                                                                    | ** ** | **$**                          | **1,887,681** |                              | $          | 1,458,100 |   |
| ** **                                                                                                               | ** ** | ** **                     | ** **    | ** **                        | ** ** |
| **Commitments and Contingencies (Note 8)**                                                                               | ** ** | ** **                     | ** **    | ** **                        | ** ** |
| **Minority Interests**                                                                                                   | ** ** | **$**                          | **99,949**    |                              | $          | 99,865 |   |
| ** **                                                                                                               | ** ** | ** **                     | ** **    | ** **                        | ** ** |
| **Shareholders’ (Deficit) Equity:**                                                                                 |       |                           |          |                              |       |
| Common Stock, par value $.01, authorized  800,000 shares; issued 335,045 shares in 2006 and 2005, respectively           | ** ** | **$**                          | **3,350**     |                              | $          | 3,350 |   |
| Capital in excess of par                                                                                                 | ** ** | **471,510**                    |          | 468,299                           |       |
| Retained earnings                                                                                                        | ** ** | **2,433,827**                  |          | 2,321,765                         |       |
| Treasury stock, at cost, 135,341 and 107,075  shares in 2006 and 2005, respectively                                      | ** ** | **(3,026,917**                 | **)**         | (2,315,404                        | )          |
| Cumulative translation adjustment                                                                                        | ** ** | **(22,399**                    | **)**         | (31,521                           | )          |
| Minimum pension liability adjustment, net  of taxes of $14,484 in 2006 and 2005, respectively                            | ** ** | **(31,408**                    | **)**         | (31,408                           | )          |
| Unrealized loss on changes in fair value of  cash flow hedges, net of tax                                                | ** ** | **(16**                        | **)**         | (59                               | )          |
| Unrealized gain on investments, net of tax                                                                               | ** ** | **61**                         | ** **    | 33                                |       |
| **Total Shareholders’ (Deficit) Equity**                                                                            | ** ** | **$**                          | **(171,992**  | **)**                             | $          | 415,055 |   |
| **Total Liabilities, Minority Interests and  Shareholders’ (Deficit) Equity**                                       | ** ** | **$**                          | **1,815,638** |                              | $          | 1,973,020 |   |

## ** **

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

 

3

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**IMS HEALTHINCORPORATED**

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

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

 
| ** **                                                                                              | ** ** | **Three Months Ended  March 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                                                                              | ** ** | **2006**                               | ** **  | **2005** | ** ** |
| ** **                                                                                              | ** ** | ** **                             | ** **  | ** ** | ** ** |
| **Operating Revenue**                                                                                   | ** ** | **$**                                  | **446,154** |   | $ | 410,984 |   |
|                                                                                                    |       |                                   |        |   |   |
| Operating costs                                                                                         | ** ** | **197,917**                            |        | 180,006 |   |
| Selling and administrative expenses                                                                     | ** ** | **124,152**                            |        | 109,429 |   |
| Depreciation and amortization                                                                           | ** ** | **27,349**                             |        | 24,677 |   |
| **Operating Income**                                                                                    | ** ** | **96,736**                             |        | 96,872 |   |
| Interest income                                                                                         | ** ** | **1,543**                              |        | 2,355 |   |
| Interest expense                                                                                        | ** ** | **(8,459**                             | **)**       | (6,153 | ) |
| Gains from investments, net                                                                             | ** ** | **2,673**                              | ** **  | 2,671 |   |
| Other income, net                                                                                       | ** ** | **1,772**                              | ** **  | 9,261 |   |
| **Non-Operating (Loss) Income, Net**                                                                    | ** ** | **(2,471**                             | **)**       | 8,134 |   |
| Income before benefit (provision) for  income taxes                                                     | ** ** | **94,265**                             |        | 105,006 |   |
| Benefit (Provision) for income taxes (Note  12)                                                         | ** ** | **23,832**                             |        | (74,663 | ) |
| **Net Income**                                                                                          | ** ** | **$**                                  | **118,097** |   | $ | 30,343 |   |
|                                                                                                    |       |                                   |        |   |   |
| **Basic Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                  | **0.56**    |   | $ | 0.13 |   |
| **Diluted Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                  | **0.56**    |   | $ | 0.13 |   |
|                                                                                                    | ** ** | ** **                             |        |   |   |
| Weighted average number of shares  outstanding – Basic                                             | ** ** | **209,262**                            |        | 227,874 |   |
| Dilutive effect of shares issuable as of  period-end under stock-based compensation plans and other     | ** ** | **2,559**                              |        | 3,405 |   |
| Adjustment of shares outstanding applicable  to exercised and cancelled stock options during the period | ** ** | **81**                                 |        | 178 |   |
| **Weighted Average Number of Shares  Outstanding – Diluted**                                       | ** ** | **211,902**                            |        | 231,457 |   |

 

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

 

4

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**IMS HEALTH INCORPORATED**

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

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

 
| ** **                                                                                       | ** ** | **Three Months Ended March 31,** | ** **  |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                       | ** ** | **2006**                              | ** **  | **2005** | ** ** |
| **Cash Flows from Operating Activities:**                                                        |       |                                  | ** **  |   |   |
| Net income                                                                                       | ** ** | **$**                                 | **118,097** | ** ** | $ | 30,343 |   |
| **Adjustments to reconcile net income to net  cash provided by (used in) operating activities:** | ** ** | ** **                            | ** **  | ** ** | ** ** |
| Depreciation and amortization                                                                    | ** ** | **27,349**                            | ** **  | 24,677 |   |
| Bad debt expense                                                                                 |       | **—**                            | ** **  | 1,311 |   |
| Deferred income taxes                                                                            | ** ** | **(2,892**                            | **)**       | 2,380 |   |
| Gains from investments, net                                                                      | ** ** | **(2,673**                            | **)**       | (2,671 | ) |
| Minority interests in net income of  consolidated companies                                      | ** ** | **891**                               | ** **  | 727 |   |
| Non-cash stock-based compensation charges                                                        | ** ** | **11,155**                            | ** **  | 740 |   |
| Excess tax benefits from stock-based  compensation                                               | ** ** | **(454**                              | **)**       | **—** |   |
| Change in assets and liabilities, excluding  effects from acquisitions and dispositions:         |       |                                  | ** **  |   |   |
| Net increase in accounts receivable                                                              | ** ** | **(10,527**                           | **)**       | (49,405 | ) |
| Net (increase) decrease in inventory                                                             | ** ** | **(1,343**                            | **)**       | 3,295 |   |
| Net increase in prepaid expenses and other  current assets                                       | ** ** | **(12,580**                           | **)**       | (34,605 | ) |
| Net increase in accounts payable                                                                 | ** ** | **(2,195**                            | **)**       | (302 | ) |
| Net decrease in accrued and other current  liabilities                                           | ** ** | **(27,201**                           | **)**       | (31,782 | ) |
| Net decrease in accrued severance,  impairment and other charges                                 | ** ** | **(11,081**                           | **)**       | (6,982 | ) |
| Net decrease in deferred revenues                                                                | ** ** | **(918**                              | **)**       | (2,780 | ) |
| Net (decrease) increase in accrued income  taxes                                                 | ** ** | **(37,558**                           | **)**       | 32,789 |   |
| Net increase in pension assets (net of  liabilities)                                             | ** ** | **(7,212**                            | **)**       | (2,031 | ) |
| Net increase in other long-term assets                                                           | ** ** | **(355**                              | **)**       | (1,699 | ) |
| Net decrease in other long-term liabilities                                                      | ** ** | **(931**                              | **)**       | (4,111 | ) |
| Net tax benefit on stock-based compensation                                                      | ** ** | **204**                               | ** **  | 1,990 |   |
| **Net Cash Provided by (Used in) Operating  Activities**                                         | ** ** | **39,776**                            | ** **  | (38,116 | ) |
| **Cash Flows Used in Investing Activities:**                                                     |       |                                  | ** **  |   |   |
| Capital expenditures                                                                             | ** ** | **(5,406**                            | **)**       | (4,337 | ) |
| Additions to computer software                                                                   | ** ** | **(19,257**                           | **)**       | (20,885 | ) |
| Proceeds from sale of TriZetto                                                                   | ** ** | **—**                            | ** **  | 37,414 |   |
| Investments in short-term marketable  securities                                                 | ** ** | **—**                            | ** **  | 8,305 |   |
| Payments for acquisitions of businesses,  net of cash acquired                                   | ** ** | **(18,298**                           | **)**       | (62,455 | ) |
| Proceeds from sales of investments, net                                                          | ** ** | **4,057**                             | ** **  | 3,023 |   |
| Funding of venture capital investments                                                           | ** ** | **—**                            | ** **  | (500 | ) |
| Other investing activities, net                                                                  | ** ** | **1,966**                             | ** **  | (2,800 | ) |
| **Net Cash Used in Investing Activities**                                                        | ** ** | **(36,938**                           | **)**       | (42,235 | ) |
| **Cash Flows (Used in) Provided by Financing  Activities:**                                      |       |                                  | ** **  |   |   |
| Net increase in debt                                                                             | ** ** | **501,750**                           | ** **  | 107,100 |   |
| Payments for purchase of treasury stock                                                          | ** ** | **(728,201**                          | **)**       | (92,580 | ) |
| Proceeds from exercise of stock options                                                          | ** ** | **9,792**                             | ** **  | 23,856 |   |
| Excess tax benefits from stock-based  compensation                                               | ** ** | **454**                               | ** **  | — |   |
| Dividends paid                                                                                   | ** ** | **(6,035**                            | **)**       | (4,570 | ) |
| Increase in cash overdrafts                                                                      | ** ** | **2,986**                             | ** **  | 9,476 |   |
| Payments to minority interests and other  financing activities                                   | ** ** | **(808**                              | **)**       | (827 | ) |
| **Net Cash (Used in) Provided by Financing  Activities**                                         | ** ** | **(220,062**                          | **)**       | 42,455 |   |
| Effect of Exchange Rate Changes on Cash and  Cash Equivalents                                    | ** ** | **705**                               | ** **  | (5,680 | ) |
| **Decrease in Cash and Cash Equivalents**                                                        | ** ** | **(216,519**                          | **)**       | (43,576 | ) |
| **Cash and Cash Equivalents, Beginning of  Period**                                              | ** ** | **362,943**                           | ** **  | 444,903 |   |
| **Cash and Cash Equivalents, End of Period**                                                     | ** ** | **$**                                 | **146,424** | ** ** | $ | 401,327 |   |

 

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

 

5

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**IMS HEALTHINCORPORATED**

**Notes to Condensed Consolidated Financial Statements (****Unaudited)**

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

 

**Note 1.**   InterimCondensed Consolidated Financial Statements (Unaudited)

** **

Theaccompanying Condensed Consolidated Financial Statements (Unaudited) have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and Article 10of Regulation S-X under the Securities and Exchange Act of 1934, as amended. TheCondensed Consolidated Financial Statements (Unaudited) do not include all theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements. In the opinionof management, 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. Theresults of operations for interim periods are not necessarily indicative of theresults expected for the full year. The December 31, 2005 balance sheetdata was derived from audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America. The Condensed Consolidated Financial Statements (Unaudited)and related notes should be read in conjunction with the Consolidated FinancialStatements and related notes of IMS Health Incorporated (the “Company” or “IMS”)included in its 2005 Annual Report on Form 10-K. Certain prior yearamounts have been reclassified to conform to the 2006 presentation. Amountspresented in the Condensed Consolidated Financial Statements (Unaudited) may notadd due to rounding.

 

**Note 2.**   Basisof Presentation

** **

IMS Health Incorporated (“IMS” or the “Company”)is the leading global provider of market intelligence to the pharmaceutical andhealthcare industries. The Company offers leading-edge business intelligenceproducts and services that are integral to our clients’ day-to-day operations,including portfolio optimization capabilities; launch and brand managementsolutions; sales force effectiveness innovations; managed care andover-the-counter offerings; and consulting and services solutions that improveROI and the delivery of quality healthcare worldwide. The Company’s informationproducts are developed to meet client needs by using data secured from aworldwide network of suppliers in the markets where operations exist. Keyinformation products include:

 

•      Sales ForceEffectiveness to optimize sales force productivity and territory management;

 

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

 

•      Launch, BrandManagement and Other to support client needs relative to market segmentationand positioning and life cycle management for prescription and over-the-counterpharmaceutical products.

 

Within these key information products, theCompany provides consulting and services that use in-house capabilities andmethodologies to assist pharmaceutical clients in analyzing and evaluatingmarket trends, strategies and tactics, and to help in the development andimplementation of customized software applications and data warehouse tools.

 

The Company operates in more than 100countries. Until December 21, 2004, the Company also owned approximately a25.0% equity interest in the TriZetto Group, Inc. (“TriZetto”) (See Note7).

 

6

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The Company is managed on aglobal business model with global leaders for the majority of its criticalbusiness processes and accordingly has one reportable segment (See Note 16).

 

**Note 3. Summary of RecentAccounting Pronouncements**

** **

In February 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 155, “Accounting for Certain HybridFinancial Instruments – an amendment of FASB Statements No. 133 and 140.” Thisstatement clarifies the application of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” to beneficial interests insecuritized financial assets and improves the consistency of accounting forsimilar financial instruments. This statement also amends SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities – a replacement of FASB Statement No. 125,” to eliminate theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. This statement is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. The Company is currentlyevaluating this statement to determine any potential impact that it may haveon its financial results.

 

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets – anamendment of FASB Statement No. 140.” This statement amends SFAS 140 andclarifies the accounting for, measurement of, and disclosure of servicingassets and servicing liabilities. This statement should be adopted as of thebeginning of an entity’s first fiscal year that begins after September 15,2006, but earlier adoption is permitted. The Company is currently evaluatingthis statement to determine any potential impact that it may have on itsfinancial results.

 

**Note 4.**   Summaryof Significant Accounting Policies

** **

*Stock-Based Compensation Expense*

 

On January 1, 2006, the Company adoptedSFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors including employeestock options, restricted stock and employee stock purchases related to theEmployee Stock Purchase Plan based on estimated fair values. SFAS 123Rsupersedes the Company’s previous accounting under Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In March 2005, the Securitiesand Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB107”) relating to SFAS 123R. The Company has applied the provisions of SAB 107in its adoption of SFAS 123R.

 

The Company adopted SFAS 123R using themodified prospective transition method, which requires the application of theaccounting standard as of January 1, 2006, the first day of the Company’sfiscal year 2006. The Company’s Condensed Consolidated Financial Statements(Unaudited) as of and for the three months ended March 31, 2006 reflectthe impact of SFAS 123R. In accordance with the modified prospective transitionmethod, the Company’s Condensed Consolidated

 

7

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Financial Statements (Unaudited) for prior periods have not beenretrospectively adjusted to reflect, and do not include, the impact of SFAS123R. See Note 9 for additional information.

 

SFAS 123R requires companies to estimate thefair value of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service period ofthe award in the Company’s Condensed Consolidated Statements of Income(Unaudited). Prior to the adoption of SFAS 123R, the Company accounted forstock-based awards to employees and directors using the intrinsic value methodin accordance with APB 25 as allowed under SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”). Under the intrinsic value method,stock-based compensation expense had been recognized in the Company’s CondensedConsolidated Statements of Income (Unaudited) only for stock optionmodifications and restricted stock units because the exercise price of theCompany’s stock options granted to employees and directors equaled the fairmarket value of the underlying stock at the date of grant.

 

Stock-based compensation expense recognizedduring the period is based on the value of the portion of share-based paymentawards that is ultimately expected to vest during the period. Stock-basedcompensation expense recognized in the Company’s Condensed ConsolidatedStatements of Income (Unaudited) for the first quarter of fiscal 2006 includedcompensation expense for share-based payment awards granted prior to, but notyet vested as of January 1, 2006 based on the grant date fair valueestimated in accordance with the pro forma provisions of SFAS 123 andcompensation expense for the share-based payment awards granted subsequent to January 1,2006 based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R. Prior to the adoption of SFAS 123R, the Company usedthe straight-line method of attributing the value of stock-based compensationand continued to use that method after the adoption. As stock-basedcompensation expense recognized in the Condensed Consolidated Statements ofIncome (Unaudited) for the first quarter of fiscal 2006 is based on awardsultimately expected to vest, it has been reduced for estimated forfeitures.SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. In the Company’s pro forma information required under SFAS 123for the periods prior to fiscal 2006, the Company accounted for estimatedforfeitures for stock option grants and for forfeitures as they occurred forrestricted stock grants. The Company’s method of valuation for share-basedawards granted after January 1, 2006 is the Black-Scholes option-pricingmodel which was also previously used for the Company’s pro forma informationrequired under SFAS 123. See Note 9 for additional information.

 

*Computation of Net Income per Share*

 

Basic net income per share is computed usingthe weighted-average number of common shares outstanding during the period.Diluted net income per share is computed using the weighted-average number ofcommon shares and dilutive potential common shares outstanding during theperiod. Dilutive potential common shares primarily consist of employee stockoptions and restricted stock.

 

SFAS No. 128, “Earnings per Share,”requires that employee equity share options, restricted stock units and similarequity instruments granted by the Company be treated as potential common sharesoutstanding in computing diluted earnings per share. Diluted shares outstandinginclude restricted

 

8

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stock units and the dilutive effect of in-the-money options which iscalculated based on the average share price for each fiscal period using thetreasury stock method. Under the treasury stock method, the amount the employeemust pay for exercising stock options, the amount of compensation cost forfuture service that the Company has not yet recognized, and the amount ofbenefits that would be recorded in additional paid-in capital when the awardbecomes deductible for tax purposes are assumed to be used to repurchaseshares.

 

For a description of the Company’s other criticalaccounting policies, please refer to the Company’s 2005 Annual Report on Form 10-Kas filed with the SEC.

 

**Note 5.**   Acquisitions

** **

The Company makesacquisitions in order to expand its products, services and geographic reach. Duringthe three months ended March 31, 2006, the Company completed oneacquisition of Läkemedelsstatistik AB (Sweden) at a cost of approximately$12,000. This acquisition was accounted for under the purchase method ofaccounting. As such, the aggregate purchase price has been allocated on apreliminary basis to the assets acquired based on estimated fair values as ofthe closing date. The purchase price allocations will be finalized after thecompletion of the valuation of certain assets and liabilities. Any adjustmentsresulting from the finalization of the purchase price allocations are notexpected to have a material impact on the Company’s results of operations. TheCondensed Consolidated Financial Statements (Unaudited) include the results ofthis acquired company subsequent to the closing of the acquisition. Had thisacquisition occurred as of January 1, 2006 or 2005, the impact on theCompany’s results of operations would not have been significant. Goodwill ofapproximately $10,723 was recorded in connection with this acquisition, ofwhich none is deductible for tax purposes.

 

During the threemonths ended March 31, 2005, the Company completed two acquisitions for anaggregate cost of approximately $25,000. These acquisitions were TaskarenaSoftware Engineering GmbH (Germany) and SAI Healthcare (U.S.) and wereaccounted for under the purchase method of accounting. As such, the aggregatepurchase price had been allocated on a preliminary basis to the assets acquiredbased on estimated fair values as of the closing date. The Company finalizedthe purchase price allocation for these acquisitions during 2005 which did nothave a material impact on the Company’s results of operations. The CondensedConsolidated Financial Statements (Unaudited) include the results of theseacquired companies subsequent to the closing of the acquisitions. Had each ofthese acquisitions occurred as of January 1, 2005, the impact on theCompany’s results of operations would not have been significant. Goodwill ofapproximately $16,414 was recorded in connection with these acquisitions, ofwhich approximately $9,000 is deductible for tax purposes.

 

Additionally,during January 2005, the Company paid approximately $36,000 to acquire the50% interest in IHA.IMS Health GmbH (“IHA”) not owned by IMS. The Companyaccounted for this purchase as a step transaction and allocated the purchaseprice to acquired intangible assets and goodwill. Prior to 2005, the Companyconsolidated the results of IHA and recorded minority interest expense for the50% not owned by the Company.

 

9

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**Note 6.**   Goodwilland Intangible Assets

** **

During the three months ended March 31, 2006, theCompany recorded additional goodwill of approximately $11,255 related primarilyto the preliminary allocation of purchase price for the acquisition completedduring the first quarter of 2006 and also to earn-out agreements foracquisitions completed prior to 2006 (see Note 8). During the three monthsended March 31, 2005, the Company recorded additional goodwill ofapproximately $54,798 related primarily to the acquisition of the remaining 50%of IHA in January 2005, the preliminary allocation of purchase price forthe acquisitions completed during the first quarter of 2005 and to earn-outagreements for acquisitions completed prior to 2005.

 

All of the Company’s other acquiredintangibles are subject to amortization. Intangible asset amortization expensewas $4,399 and $4,278 during the three months ended March 31, 2006 and2005, respectively. At March 31, 2006, intangible assets were primarilycomposed of customer relationships, databases and trade names (included inOther assets) and computer software. The gross carrying amounts and relatedaccumulated amortization of these intangibles were $133,160 and $46,423,respectively, at March 31, 2006 and $131,338 and $41,978, respectively, atDecember 31, 2005. These intangibles are amortized over periods rangingfrom two to fifteen years. As of March 31, 2006, the weighted averageamortization periods of the acquired intangibles by asset class are listedin the following table:

 
| **Intangible Asset Type**        | ** ** | **Weighted Average  Amortization (Years) Period** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|
| Customer Relationships           |       | 10.1                                              |       |
| Computer Software and Algorithms |       | 7.0                                               |       |
| Databases                        |       | 4.9                                               |       |
| Trade Names                      |       | 4.4                                               |       |
| Other                            |       | 3.8                                               |       |
| Weighted average                 |       | 8.9                                               |       |

 

Based on current estimated useful lives, amortization expenseassociated with intangible assets at March 31, 2006 is estimated to be approximately$4,100 for each of the remaining three quarters in 2006. Thereafter, annualamortization expense associated with intangible assets is estimated to be asfollows:

 

| **Year Ended  December 31,** | ** ** | **Amortization  Expense** | ** ** |
|-----------------------------------|------------|---------------------------|------------|
| 2007                              |       | $                         | 14,278     |   |
| 2008                              |       | 12,698                    |       |
| 2009                              |       | 10,923                    |       |
| 2010                              |       | 7,758                     |       |
| 2011                              |       | 6,672                     |       |
| Thereafter                        |       | $                         | 21,980     |   |

 

10

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**Note 7.**   Investmentsin Equity Investees

** **

On December 21, 2004, the Company and TriZettoentered into a share purchase agreement pursuant to which, the Company sold toTriZetto all of the 12,142,857 shares of Common Stock, par value $0.001 pershare, of TriZetto owned by the Company for an aggregate cash consideration of$81,964. The Company received $44,550 in December 2004 and the balance of$37,414 in January 2005.

 

**Note 8.**   Contingencies

 

The Company and its subsidiaries are involved in legal and taxproceedings, claims and litigation arising in the ordinary course of business. Managementperiodically assesses the Company’s liabilities and contingencies in connectionwith these matters based upon the latest information available. For thosematters where management currently believes it is probable that the Companywill incur a loss and that the probable loss or range of loss can be reasonablyestimated, the Company has recorded reserves in the Condensed ConsolidatedFinancial Statements (Unaudited) based on its best estimates of such loss. Inother instances, because of the uncertainties related to either the probableoutcome or the amount or range of loss, management is unable to make areasonable estimate of a liability, if any. However, even in many instanceswhere the 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 additional information becomes available, the Company adjustsits assessment and estimates of such liabilities accordingly.

 

The Company routinely enters into agreements with its suppliers toacquire data and with its customers to sell data, all in the normal course ofbusiness. In these agreements, the Company sometimes agrees to indemnify andhold harmless the other party for any damages such other party may sufferas a result of potential intellectual property infringement and other claims. Theseindemnities typically have terms of approximately two years. The Company hasnot accrued a liability with respect to these matters, as the exposure isconsidered remote.

 

Based on its review of the latest informationavailable, in the opinion of management, the ultimate liability of the Companyin connection with pending tax and legal proceedings, claims and litigationwill not have a material effect on the Company’s results of operations, cashflows or financial position, with the possible exception of the mattersdescribed below.

 

*Legacy IRI Litigation*

 

In July 1996, Information Resources, Inc. (“IRI”) filed acomplaint (the “IRI Action”), subsequently amended in 1997, in the U.S.District Court of the Southern District of New York (the “District Court”),naming as defendants a company then known as The Dun & BradstreetCorporation (“D&B”) and now known as R.H. Donnelley (“Donnelley”), A.C.Nielsen Company (a subsidiary of ACNielsen Corporation (“ACNielsen”)) andI.M.S. International, Inc. (a predecessor of the Company) (collectively,the “Defendants”). At the time of the filing of the complaint, each of theother defendants was a wholly-owned subsidiary of Donnelley. The amendedcomplaint alleged various violations of U.S. antitrust laws under Sections 1and 2 of the Sherman Antitrust Act. IRI sought

 

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damages in excess of $650,000, which IRI asked to be trebled, as wellas punitive damages in an unspecified amount.

 

In connection with the spin-off by D&B of ACNielsen and CognizantCorporation (“Cognizant” - then the parent Company of I.M.S. International, Inc.and now known as Nielsen Media Research, Inc. (“NMR”)), in 1996 (the “1996Spin-Off”), ACNielsen assumed exclusive responsibility for the payment of allliabilities incurred by the other Defendants and their affiliates relating to ajudgment or any settlement being entered in the IRI Action (the “IRILiabilities”). In 2001, ACNielsen was acquired by VNU N.V., a publicly tradedDutch company (“VNU”). Thereafter, VNU and certain of its affiliates, includingACNielsen, assumed exclusive responsibility for the payment of all IRILiabilities.

 

On February 1, 2005, the U.S. District Court for the SouthernDistrict of New York (the “District Court”) entered a final judgment againstIRI dismissing IRI’s claims with prejudice and on the merits. IRI filed anotice of appeal to the U.S. Court of Appeals for the Second Circuit (the “SecondCircuit”) and oral arguments were held on October 18, 2005. On February 16,2006, IRI and the Defendants entered into a settlement agreement pursuant towhich such parties agreed to cause the IRI Action to be dismissed withprejudice. Pursuant to the settlement agreement, ACNielsen deposited $55,000into escrow for the benefit of IRI, IRI deposited a full release of each of theDefendants and their affiliates and successors in interest into escrow and eachof the Defendants deposited a full release of IRI into escrow, all to be heldpending entry of an order of dismissal. On March 7, 2006, the SecondCircuit entered an order of dismissal and the settlement funds and releaseswere released from escrow. The IRI Action is now finally resolved.

 

*D&B Legacy and Related Tax Matters*

 

*Sharing Disputes.*The agreements effecting the 1996 Spin-Off allocated tax-relatedliability with respect to certain prior business transactions (the “Legacy TaxControversies”) between D&B and Cognizant. The D&B portion of suchliability is now shared among Donnelley and certain of its former affiliates,and the Cognizant portion of such liability is shared between NMR and theCompany pursuant to the agreements effecting Cognizant’s spin-off of theCompany in 1998 (the “1998 Spin-Off”). The underlying tax controversies withthe Internal Revenue Service (the “IRS”) have substantially all been resolvedbut certain disputes have arisen between Donnelley and its former affiliates,on the one hand, and NMR and the Company, on the other hand, as to the properinterpretation of, and allocation of liability under, the 1996 Spin-Offagreements. The parties are currently attempting to resolve these disputesthrough negotiation. If no resolution is reached through negotiation, the 1996Spin-Off agreements provide that the parties arbitrate the disputes. Althoughthe Company intends to vigorously defend itself with respect to these disputes,as of March 31, 2006 the Company has a reserve of approximately $25,300for these matters, of which $24,100 was accrued during the first quarter of2006.

 

*The Partnership (Tax Year 1997)*. The IRS is seeking to reallocate certainitems of partnership income and expense as well as disallow certain items ofpartnership expense with respect to a partnership now substantially owned bythe Company (the “Partnership”) on the Partnership’s 1997 tax return. During1997, the Partnership was substantially owned by Cognizant, but liability forthis matter was allocated to the Company pursuant to the agreements effectingthe 1998 Spin-Off. The Company

 

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has filed a formal protest relating to the proposed assessment for 1997with the IRS Office of Appeals. The Company is attempting to resolve thismatter in the administrative appeals process before proceeding to litigation ifnecessary. If the IRS were to ultimately prevail in its position, the Company’sliability (tax and interest, net of tax benefit) with respect to tax year 1997would be approximately $19,400, which amount the Company has reserved incurrent accrued income taxes payable at March 31, 2006.

 

*The Partnership (Tax Years 1998-2013).*The IRS also sought to reverse items ofpartnership income and loss and disallow certain royalty expense deductionsclaimed by the Company on its 1998 through 2003 tax returns arising from theCompany’s participation in the Partnership. On March 15, 2006, the Companyand the IRS entered into a settlement relating to this matter. Under the termsof the settlement, the Company’s aggregate liability (tax and interest, net oftax benefit for interest) for the tax years that were under audit, 1998 through2003, was approximately $19,300, of which the Company paid approximately$16,300 in April 2006. The Company’s aggregate liability (tax andinterest, net of tax benefit for interest) for tax years 2004 and 2005 isapproximately $7,500. The Company was fully reserved for these items. Thesettlement also provides that the Company’s tax treatment of the Partnershipand the transactions conducted therein will not be challenged by the IRS fortax years 1998 through 2013 and also stipulates the allowable amount of relatedexpenses that the Company may deduct on its federal income tax returns fortax years 2004 through 2013 (see Note 12).

 

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 aresubject to review by applicable tax authorities. As a result of the reviewprocess, uncertainties exist and it is possible that some of these matterscould be resolved adversely to the Company.

 

*Matters Before the Belgian Competition Service*

 

Complaints were filed in 1998 and 1999 against the Company with theBelgian Competition Service (“BCS”) alleging abuse of a dominant position onthe Belgian market. In October 1999 and 2000, the Chairman of the BelgianCompetition Council (“BCC”) adopted interim measures against the Company, withwhich the Company complied. In December 2004, the Company received aformal statement of objections alleging that the Company had abused itsdominant position on the Belgian market in violation of Article 82 of theEC Treaty and corresponding Belgian law. The Company submitted its comments tothe statement of objections in writing to the BCC in February 2005.

 

In a separate matter, in October 2004, the BCS notified IMS of arequest for information in connection with IMS’s acquisition in April 2004of a competitor in the Belgian market, Source Informatics Belgium S.A. The BCSis investigating whether such acquisition may have violated Article 82of the EC Treaty and corresponding Belgian law. The Company responded to therequest for information in December 2004.

 

The Company intends to continue to vigorously defend itself in thesematters before the Belgian competition authorities. Management of the Companyis unable to predict at this time the final outcome of these matters or whetheradverse resolutions thereof could materially affect the Company’s results ofoperations, cash flows or financial position in the period in which suchadverse resolution

 

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occurs.

 

*Other Contingencies*

 

*ContingentConsideration.*Under the terms of the purchase agreementsrelated to acquisitions made from 2001 through 2005, the Company may berequired to pay additional amounts as contingent consideration based on theachievement of certain targets during 2003 through 2008. Substantially all ofany additional payments will be recorded as goodwill in accordance withEmerging Issues Task Force Issue (“EITF”) No. 95-8, “Accounting forContingent Consideration Paid to the Shareholders of an Acquired Enterprise ina Purchase Business Combination.” As of March 31, 2006, approximately$26,000 was earned under these contingencies. Based on current estimates,management expects the remaining additional contingent payments under theseagreements to total approximately $40,000. It is expected that these contingentpayments will be resolved within a specified time period after the end of eachrespective calendar year from 2006 through 2008.

 

*SynavantSpin-Off.*In August 2000, the Company spun off Synavant, Inc.in a transaction qualifying as tax free under Section 355 of the InternalRevenue Code (“IRC”). If, contrary to expectations, the spin-off of Synavantwere not to qualify as tax free under Section 355, then the Company wouldgenerally be liable for the resulting corporate tax, except in certaincircumstances. In the opinion of management and based on the opinion of taxcounsel, McDermott, Will & Emery, it is not probable, but may bereasonably possible, that the Company will incur liability for this matter;therefore, the Company has not recorded reserves for this matter. The Companyestimates that the aggregate tax liability in this regard would not exceed$100,000.

 

*CTS Split-Off.*On February 6, 2003, the Companycompleted an exchange offer to distribute its majority interest in CognizantTechnology Solutions (“CTS”) in a transaction qualifying as tax free under Section 355of the IRC. If, contrary to expectations, the CTS distribution were not toqualify as tax free under Section 355, then the Company would generally beliable for the resulting corporate tax. However, pursuant to the distributionagreement entered into between the Company and CTS in connection with the distribution, CTS agreed to indemnify the Company in the event the transaction is taxable as aresult of a breach of certain representations made by CTS, subject to certainexceptions. In the opinion of management and based on the opinion of taxcounsel, McDermott, Will & Emery, it is not probable, but may bereasonably possible, that the Company will incurliability for this matter; therefore, the Company has not recordedreserves for this matter. The Company estimatesthat the aggregate tax liability in this regard would not exceed $215,725.

 

*Other Tax Contingencies.*In addition to the tax items discussed above,the Company has tax reserves of approximately $20,800 that relate to variouspositions it has taken on tax returns filed in numerous countries over the lastseveral years. These reserves represent the Company’s best estimate of theprobable liability should the tax return positions be challenged by therelevant tax authorities. While the amount is material in the aggregate, noindividual item is material and no single event will have a material impactrelated to these reserves. See Note 12 for additional tax related matters.

 

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**Note 9.**   Stock-BasedCompensation

** **

Effective January 1, 2006, the Companyadopted SFAS 123R. The Company elected to use the modified prospectivetransition method, therefore, prior period results were not restated. Prior tothe adoption of SFAS 123R, stock-based compensation expense related to stockoptions was not recognized in the results of operations if the exercise pricewas at least equal to the market value of the Common Stock on the grant date,in accordance with APB 25. As a result, the recognition of stock-basedcompensation expense was generally limited to the expense attributed torestricted stock unit awards and stock option modifications.

 

SFAS 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized ascompensation expense over the requisite service period (generally the vestingperiod) in the consolidated financial statements based on their fair values.For options with graded vesting, the Company values the stock option grants andrecognizes compensation expense as if each vesting portion of the award was part ofthe total award and not a separate award. Under the modified prospectivemethod, awards that were granted, modified, or settled on or after January 1,2006 are measured and accounted for in accordance with SFAS 123R. Unvestedequity-classified awards that were granted prior to January 1, 2006 willcontinue to be accounted for in accordance with the pro forma provisions ofSFAS 123, except that all awards are recognized in the results of operationsover the remaining vesting periods. SFAS 123R requires the recognition ofstock-based compensation for the number of awards that are ultimately expectedto vest. As a result, for most awards, recognized stock compensation wasreduced for estimated forfeitures prior to vesting primarily based onhistorical annual forfeiture rates. Estimated forfeitures will be reassessed insubsequent periods and may change based on new facts and circumstances.Prior to January 1, 2006, forfeitures were estimated for stock optiongrants for purposes of required pro forma stock compensation disclosures andwere recognized as they occurred for restricted stock grants. In addition, therealization of tax benefits in excess of amounts recognized for financialreporting purposes will be recognized as a financing activity rather than anoperating activity as in the past for purposes of the cash flow statement.

 

TheCompany maintains four Stock Incentive Plans, which provide for the grant ofstock options, restricted stock and restricted stock units to eligibleemployees and Non-Employee Directors. At March 31, 2006, there were 52,579shares of Common Stock reserved for issuance under all of the Company’s stockplans, of which 6,889 shares are still available for future grants. CommonStock reserved for issuance includes 18,448 shares from the 2000 StockIncentive Plan, which the Board of Directors approved during 2000, 29,784shares from the 1998 Employees’ Stock Incentive Plan, which was approved by theshareholders during 1998, 3,437 shares from the 1998 Employees’ Stock PurchasePlan, which was approved by the shareholders during 1998, and 910 shares fromthe 1998 Non-Employee Directors’ Stock Incentive Plan, 410 shares of which wereapproved by the shareholders during 1998 and an additional 500 shares of whichwere approved by the shareholders in May 2003. Historically,stock options have been granted to broad groups of employees on a discretionarybasis. Beginning in fiscal 2006, employees are generally eligible to receiverestricted stock units with a service condition of four years instead of stockoptions with a service condition of three years. Certain senior employees willcontinue to be eligible to receive restricted stock unit awards which containboth performance and service conditions.

 

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TheEmployee Stock Purchase Plan (“ESPP”) was originally adopted in 1998 witha quarterly purchase period and a price equal to the lesser of 90% of the fairmarket value on the first trading day or the last trading day of the period. TheCompany amended its Employee Stock Purchase Plan in 2001 to allow employees topurchase a limited amount of Common Stock at the end of each six-month periodat a price equal to the lesser of 85% of fair market value on (a) thefirst trading day of the period, or (b) the last trading day of the period.Beginning with the first purchase of 2006, the plan has been amended to allowemployees to purchase a limited amount of Common Stock at the end of eachsix-month period at a price equal to 85% of the fair market value on the lasttrading day of the period. Fair market value is defined as the average of thehigh and low prices of the shares on the relevant day. The 15% discountmakes the plan compensatory under SFAS 123R.

 

Stock options are granted with an exerciseprice equal to the market value of a share of Common Stock on the date of grant.Stock options expire within five, seven, or ten years and generally vest ratably over threeyears for employees and one to three years for non-employee directors. Thevesting period and option term for grants to employees is at the discretion ofthe Compensation and Benefits Committee of the Board of Directors.

 

Restricted stock units are granted at a priceequal to the market value of a share of Common Stock on the date of grant. Restrictedstock unit awards with service vesting generally vest ratably over three tofour years. Thevesting period for grants to employees is at the discretion of the Compensationand Benefits Committee of the Board of Directors.

 

Participation in the Performance RestrictedStock Units program (“PERS”), under which performance restricted stock awardsare granted, is limited to key senior executives. The target award isdenominated in cash and is equal to each eligible executive’s annual incentivetarget. These awards are subject to fair value adjustments for any changes inthe underlying market value of our Common Stock until the end of theperformance period. The performance period is one year during which performanceagainst the established financial criterion is measured. The actual award isquantified and granted to eligible employees in restricted stock units at the February Compensation and Benefits Committeeof the Board of Directors meeting in the year following the one yearperformance period. Upon grant, there is an additional two year cliff vestservice requirement which begins on the first business day of the yearfollowing the performance period. If performance criterion is not met, theaward is forfeited and no restricted stock units are granted. The final valueof the restricted stock units granted are at fair market value based on theaverage high/low stock price for the last 20 business days of the performanceperiod in accordance with the PERS plan document.

 

Participation in the Long Term Incentiveprogram (“LTI”), under which performance restricted stock awards are granted,is at the CEO’s discretion with participants varying from year to year. Thetarget awards, by person, are approved at the February Compensation andBenefits Committee meeting for each performance cycle. The target award isdenominated 50% in cash, which is payable after the two year performanceperiod, and 50% in restricted stock units, which are granted after the two yearperformance period with an additional two year cliff vest service requirement. Arestricted stock unit, if earned, may only be settled by issuance ordelivery of a share. These awards are subject to fair value adjustments for anychanges in the underlying market value of our Common Stock until the end of thetwo year performance period. At the end of the performance period, achievementagainst the

 

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established financial criterion is measured and the actual payoutpercentage is quantified and approved by the Compensation and BenefitsCommittee of the Board of Directors following approval of year end results bythe Board of Directors. If performance criterion is not met, the award isforfeited and no restricted stock units are granted or cash is paid. The finalvalue of the restricted stock units granted are at fair market value based onthe average high/low stock price for the last 20 business days of theperformance period in accordance with the LTI plan document.

 

The following table summarizes stock optionactivity for the periods indicated:

 
| ** **                                  | ** ** | **Shares** | ** ** | **Weighted  Average Exercise  Price Per Share** | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------------------------------|------------|
| Options Outstanding, December 31, 2003 |       | 37,021     |       | $                                               | 20.89      |   |
| Granted                                     |       | 6,003      |       | $                                               | 23.90      |   |
| Exercised                                   |       | (5,598     | )          | $                                               | 17.25      |   |
| Forfeited                                   |       | (1,020     | )          | $                                               | 18.89      |   |
| Cancelled                                   |       | (906       | )          | $                                               | 27.50      |   |
| Options Outstanding, December 31, 2004 |       | 35,500     |       | $                                               | 21.86      |   |
| Granted                                     |       | 4,813      |       | $                                               | 24.12      |   |
| Exercised                                   |       | (8,726     | )          | $                                               | 18.97      |   |
| Forfeited                                   |       | (575       | )          | $                                               | 20.63      |   |
| Cancelled                                   |       | (1,028     | )          | $                                               | 26.93      |   |
| Options Outstanding, December 31, 2005 |       | 29,984     |       | $                                               | 22.91      |   |
| Granted                                     |       | 8          |       | $                                               | 24.54      |   |
| Exercised                                   |       | (521       | )          | $                                               | 18.79      |   |
| Forfeited                                   |       | (241       | )          | $                                               | 22.67      |   |
| Cancelled                                   |       | (350       | )          | $                                               | 28.83      |   |
| Options Outstanding, March 31, 2006    |       | 28,880     |       | $                                               | 22.92      |   |
| Exercisable, March 31, 2006            |       | 19,338     |       | $                                               | 23.02      |   |

 

As of March 31, 2006, approximately$33,052 of unrecognized stock compensation related to unvested stock options(net of estimated forfeitures) is expected to be recognized over aweighted-average period of 1.37 years. As of March 31, 2005, approximately$42,983 of unrecognized stock compensation related to unvested stock options(net of estimated forfeitures) was expected to be recognized over a weighted-averageperiod of 1.50 years. The weighted average remaining term for outstanding stockoptions was 4.00 years at March 31, 2006 and 4.34 years at March 31,2005. The weighted average grant price for the stock options granted during thefirst quarter of 2006 and 2005 is $24.54 and $23.02, respectively. Theaggregate intrinsic value at March 31, 2006 and March 31, 2005 was$105,542 and $121,574 for stock options outstanding and $75,627 and $74,810 forstock options exercisable, respectively. The intrinsic value for stock optionsis calculated based on the exercise price of the underlying awards and themarket price of our Common Stock as of the end of the period. Proceeds receivedfrom the exercise of stock options were $9,792 during the first quarter of fiscal2006 and $23,856 during the first quarter of fiscal 2005. The intrinsic valuerelated to the exercise of stock options was $3,326 during the first quarter offiscal 2006, which is currently deductible for tax purposes, and $7,299 duringthe first quarter of fiscal 2005.

 

The fair value of stock options was estimatedusing the Black-Scholes option-pricing model. This model requires the input ofsubjective assumptions that will usually have a significant impact on the

 

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fair value estimate. The assumptions for the current period grants weredeveloped based on SFAS 123R and SEC guidance contained in SAB 107. Thefollowing table summarizes the assumptions used to compute the weighted averagefair value of stock option grants:

 
| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Dividend Yield                                  |       | 0.5                                    | %          | 0.3 | % |
| Weighted Average Volatility                     |       | 29.4                                   | %          | 34.1 | % |
| Risk Free Interest Rate                         |       | 4.5                                    | %          | 3.6 | % |
| Expected Term                                   |       | 4.39 years                             |       | 4.39 years |   |
| Weighted Average Fair Value of Options  Granted |       | $                                      | 7.82       |   | $ | 7.74 |   |
|                                            |       |                                   |       |   |   |
|                                                 |            |                                        |            |  |  |  |  |

 

•      The dividendyield is equal to the annualized dividend divided by the closing stock price onthe date of payment. The increase in the dividend yield from 2005 to 2006 wasdue to a $0.01 per share increase in the quarterly dividend payment. Anincrease in the dividend yield will decrease stock compensation expense.

 

•      The weightedaverage volatility for the current period was developed using historicalvolatility for periods equal to the expected life of the options. An increasein the weighted average volatility assumption will increase stock compensationexpense.

 

•      The risk-freeinterest rate was developed using the U.S. Treasury yield curve for periodsequal to the expected life of the options on the grant date. An increase in therisk-free interest rate will increase stock compensation expense.

 

•      The expectedterm for the current period and prior period grants was estimated by reviewingthe historical exercise experience of a fully vested material grant that wasclose to maturity. An increase in the expected holding period will increasestock compensation expense.

 

The following table summarizes non-vestedrestricted stock unit activity.

 
| ** **                       | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------|------------|------------|------------|-----------------------------------------------|------------|
| Unvested, December 31, 2003 |       | 516        |       | $                                             | 19.24      |   |
| Granted                          |       | 194        |       | $                                             | 23.42      |   |
| Exercised                        |       | (29        | )          | $                                             | 20.72      |   |
| Forfeited                        |       | (30        | )          | $                                             | 20.89      |   |
| Unvested, December 31, 2004 |       | 651        |       | $                                             | 20.34      |   |
| Granted                          |       | 347        |       | $                                             | 22.22      |   |
| Exercised                        |       | (172       | )          | $                                             | 22.65      |   |
| Forfeited                        |       | (6         | )          | $                                             | 17.72      |   |
| Unvested, December 31, 2005 |       | 820        |       | $                                             | 20.67      |   |
| Granted                          |       | 288        |       | $                                             | 24.77      |   |
| Exercised                        |       | (338       | )          | $                                             | 22.30      |   |
| Unvested, March 31, 2006    |       | 770        |       | $                                             | 21.91      |   |

 

 

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As of March 31, 2006, approximately$6,862 of unrecognized stock compensation expense related to unvestedrestricted stock awards (net of estimated forfeitures) is expected to berecognized over a weighted-average period of 1.75 years. As of March 31,2005, approximately $6,536 of unrecognized stock compensation related tounvested restricted stock awards was expected to be recognized over aweighted-average period of 1.61 years. The aggregate intrinsic value at March 31,2006 and March 31, 2005 was $16,542 and $15,713 for outstanding restrictedstock, respectively. The intrinsic value for restricted stock is calculatedbased on the grant price of the underlying awards. The total fair value ofshares vested during the years ended March 31, 2006 and 2005 was $7,540and $3,464, respectively.

 

The following table summarizes the pro formaeffect of stock-based compensation as if the fair value method of accountingfor stock compensation had been applied:

 
| ** **          | ** **                                                                                                  | ** ** | **Three Months  Ended March 31,  2005** | ** ** |
|---------------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| Net Income:         | As reported                                                                                                 | ** ** | **$**                                        | **30,343** | ** ** |
|                | Add: Stock-based employee compensation  expense included in reported net income, net of tax                 | ** ** | **918**                                      | ** ** |
|                | Deduct: Total stock-based employee  compensation expense under fair value method for all awards, net of tax | ** ** | **(6,353**                                   | **)**      |
|                | Pro forma                                                                                                   | ** ** | **$**                                        | **24,908** | ** ** |
| Earnings Per Share: |                                                                                                        |       |                                         |
| Basic               | As reported                                                                                                 | ** ** | **$**                                        | **0.13**   | ** ** |
|                | Pro forma                                                                                                   | ** ** | **$**                                        | **0.11**   | ** ** |
| Diluted             |                                                                                                        |       |                                         |       |
|                | As reported                                                                                                 | ** ** | **$**                                        | **0.13**   | ** ** |
|                | Pro forma                                                                                                   | ** ** | **$**                                        | **0.11**   | ** ** |

 

The following table summarizes the componentsand classification of stock-based compensation expense:

 
| ** **                                      | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| Stock Options                                   | ** ** | **$**                                      | **9,141**  | ** ** |
| Restricted Stock Units                          | ** ** | **1,772**                                  | ** ** |
| ESPP Purchases                                  | ** ** | **242**                                    | ** ** |
| Total Stock-Based Compensation Expense          | ** ** | **$**                                      | **11,155** | ** ** |
|                                            |       |                                       |       |
| Operating Costs                                 | ** ** | **$**                                      | **1,540**  | ** ** |
| Selling, General & Administrative      | ** ** | **9,615**                                  | ** ** |
| Total Stock-Based Compensation Expense          | ** ** | **$**                                      | **11,155** | ** ** |
|                                            | ** ** | ** **                                 | ** ** |
| Tax Benefit on Stock-Based Compensation Expense | ** ** | **$**                                      | **3,326**  | ** ** |

 

19

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The Company satisfies stock option exercises,vested restricted stock units and ESPP shares with repurchased treasury stockon hand. For further information regarding the Company’s share repurchaseprograms and shares available for repurchase under such programs, see Note 13.

 

**Note 10.**FinancialInstruments

** **

*ForeignExchange Risk Management*

 

The Companytransacts business in more than 100 countries and is subject to risksassociated with changing foreign exchange rates. The Company’s objective is toreduce earnings and cash flow volatility associated with foreign exchange ratechanges. Accordingly, the Company enters into foreign currency forwardcontracts to minimize the impact of foreign exchange movements on net incomeand on the value of non-functional currency assets and liabilities.

 

It is the Company’spolicy to enter into foreign currency transactions only to the extent necessaryto meet its objectives as stated above. The Company does not enter into foreigncurrency transactions for investment or speculative purposes. The principalcurrencies hedged are the Euro, the Japanese Yen, the British Pound, the SwissFranc and the Canadian Dollar.

 

The impact offoreign exchange risk management activities on pre-tax income in the threemonths ended March 31, 2006 was a net gain of $2,691, and net gain of$11,236 in the three months ended March 31, 2005. In addition, at March 31,2006, the Company had approximately $621,714 in foreign exchange forwardcontracts outstanding with various expiration dates through February 2007relating to non-US Dollar Anticipated Royalties and non-functional currencyassets and liabilities. Foreign exchange forward contracts are recorded atestimated fair value. The estimated fair values of the forward contracts arebased on quoted market prices.

 

Unrealized andrealized gains and losses on the contracts hedging non-functional currencyassets and liabilities do not qualify for hedge accounting in accordance withSFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” asamended by SFAS No. 138, “Accounting for Certain Derivative Instrumentsand Certain Hedging Activities,” and SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities,” (collectively, “SFAS No. 133”),and therefore are not deferred and are included in the Condensed ConsolidatedStatements of Income (Unaudited) in Other income, net.

 

Unrealized gainsand losses on the contracts hedging non-US Dollar Anticipated Royalties qualifyfor hedge accounting under SFAS No. 133 and are therefore deferred andincluded in OCI “Other Comprehensive Income.”

 

*FairValue of Financial Instruments*

 

At March 31,2006, the Company’s financial instruments included cash, cash equivalents,receivables, accounts payable and long-term debt. At March 31, 2006, thefair values of cash, cash equivalents, receivables and accounts payableapproximated carrying values due to the short-term nature of these instruments.At March 31, 2006, the fair value of long-term debt approximated carryingvalue.

 

20

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*CreditConcentrations*

 

The Companycontinually monitors its positions with, and the credit quality of, thefinancial institutions which are counterparties to its financial instrumentsand does not anticipate non-performance by the counterparties. The Companywould not realize a material loss as of March 31, 2006 in the event ofnon-performance by any one counterparty. The Company enters into transactionsonly with financial institution counterparties that have a credit rating of Aor better. In addition, the Company limits the amount of credit exposure withany one institution.

 

The Companymaintains accounts receivable balances ($310,163 and $297,302, net ofallowances, at March 31, 2006 and December 31, 2005, respectively),principally from customers in the pharmaceutical industry. The Company’s tradereceivables do not represent significant concentrations of credit risk at March 31,2006 due to the high quality of its customers and their dispersion across manygeographic areas.

 

*Linesof Credit*

 

The followingtable summarizes the Company’s long-term debt at March 31, 2006 and December 31,2005:

 
| ** **                                                                                                                                                                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| 4.6% Private Placement Note, principal  payment of $150,000 due January 2008, net of interest rate swaps of  $(3,123) and $(2,710), respectively                                    |       | $                        | 146,877    |                        | $          | 147,290 |   |
|                                                                                                                                                                                     |       |                     |       |                        |       |
| Short-Term Credit Agreement due May 2,  2006 (Refinanced on April 27, 2006 with 5.55% Private Placement Notes,  principal payment of $150,000 due April 2016 - see below) |       | 150,000                  |       | —                      |       |
|                                                                                                                                                                                     |       |                     |       |                        |       |
| 1.70% Private Placement Note, principal  payment of 34,395,000 Japanese Yen due January 2013                                                                                        |       | 291,532                  |       | —                      |       |
|                                                                                                                                                                                     |       |                     |       |                        |       |
| Revolving Credit Facility:                                                                                                                                                               |       |                     |       |                        |       |
| Japanese Yen denominated borrowings at  average floating rates of approximately 0.47%                                                                                                    |       | 78,657                   |       | 371,924                     |       |
| Swiss Franc denominated borrowings at  average floating rates of approximately 1.52%                                                                                                     |       | 94,301                   |       | 92,217                      |       |
| U.S. Dollar denominated borrowings at  average floating rates of approximately 5.20%                                                                                                     |       | 351,401                  |       | —                      |       |
|                                                                                                                                                                                     |       |                     |       |                        |       |
| Total Long-Term Debt                                                                                                                                                                     |       | $                        | 1,112,768  |                        | $          | 611,431 |   |

 

21

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In January 2006,the Company entered into a $175,000 short term credit agreement with a bank. Totalborrowings under this agreement were $150,000 at March 31, 2006. Suchamount is classified as long-term debt in the Condensed Consolidated Statementsof Financial Position (Unaudited) in accordance with the provisions of SFAS No. 6,“Classification of Short-Term Obligations Expected to be Refinanced,” as theCompany refinanced this debt through a private placement transaction closed on April 27,2006, pursuant to which it issued $150,000 of ten-year notes to two highlyrated insurance companies at a fixed rate of 5.55%.

 

In January 2006, the Company closed a private placement transactionpursuant to which its Japanese subsidiary issued 34,395,000 Japanese Yenseven-year debt (equal to $300,000 at date of issuance) to several highly ratedinsurance companies at a fixed rate of 1.70%. The Company used the proceeds torefinance existing debt in Japan.

 

In April 2004,the Company entered into a $700,000 revolving credit facility with a syndicateof 12 banks (the “Unsecured Facility”). The Unsecured Facility replaced theCompany’s lines of credit with several domestic and international banks. On March 9,2005, the Company renegotiated with the syndicate of 12 banks to amend andrestate the Unsecured Facility (the “Amended and Restated Facility”). The termsof the Amended and Restated Facility extended the maturity of the facility inits entirety to a term of five years, maturing March 2010, reduced theborrowing margins and increased subsidiary borrowing limits. Total borrowingsunder these existing lines were $524,359 and $464,141 at March 31, 2006and December 31, 2005, respectively, all of which were classified aslong-term. The Company defines long-term lines as those where the lines arenon-cancelable for more than 365 days from the balance sheet date by thefinancial institutions except for specified, objectively measurable violationsof the provisions of the agreement. In general, rates for borrowing under theAmended and Restated Facility are LIBOR plus 40 basis points and can vary basedon the Company’s Debt to EBITDA ratio. The weighted average interest rates forthe Company’s lines were 3.83% and 0.62% at March 31, 2006 and December 31,2005, respectively. In addition, the Company is required to pay a commitmentfee on any unused portion of the facilities of 0.9%. At March 31, 2006,the Company had approximately $175,641 available under its existing bank creditfacilities.

 

In January 2003,the Company closed a private placement transaction pursuant to which it issued$150,000 of five-year debt to several highly rated insurance companies at afixed rate of 4.60%. The Company used the proceeds to pay down short-term debt.The Company also swapped $100,000 of its fixed rate debt to floating rate basedon six-month LIBOR plus a margin of approximately 107 basis points. The Companyaccounted for these swaps as fair value hedges under the provisions of SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.” The Companydetermined the fair values based on estimated prices quoted by financialinstitutions. The fair values of these swaps were $(3,123) and $(2,710) as of March 31,2006 and December 31, 2005, respectively.

 

In March and April 2002,the Company entered into interest rate swaps on a portion of its variable ratedebt portfolio. In March 2005, $50,000 of these swaps matured. Theremaining arrangement converts the variable interest rates to a fixed interestrate of 5.08% on a notional amount of $25,000 and matured in April 2006. TheCompany accounted for the interest rate swaps as cash flow hedges and recordedany changes in fair value in Other Comprehensive Income. The Company determinedthe fair values based on estimated prices quoted by financial institutions. Thefair values of these swaps were $(35) and $(100) as of March 31, 2006 and December 31,2005, respectively.

 

22

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The Company’sfinancing arrangements provide for certain covenants and events of defaultcustomary for similar instruments, including in the case of its main bankarrangements and the 2003 private placement transaction, covenants to maintainspecific ratios of consolidated total indebtedness to EBITDA and of EBITDA tocertain fixed charges. At March 31, 2006, the Company was in compliancewith these financial debt covenants.

 

**Note 11.**Pensionand Postretirement Benefits

** **

**The following table provides the Company’s expenseassociated with pension benefits that are accounted for under SFAS No. 87,“Employers’ Accounting for Pensions,” and postretirement benefits that areaccounted for under SFAS No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions.” For a complete description of theCompany’s pension and postretirement benefits, refer to Note 12 of the Company’s2005 Annual Report on Form 10-K as filed with the SEC.**

 
| **Components of Net Periodic Benefit Cost for the  Three Months Ended March 31,** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **2006**                                                                                                                                 | ** ** | **2005**                  | ** ** | **2006**                | ** ** | **2005** |
| Service cost                                                                                                                             |       | $                         | 3,464      |                    | $          | 2,315 |   | $ | 10 |   | $ | 18 |   |
| Interest cost                                                                                                                            |       | 3,911                     |       | 3,642                   |       | 193 |   | 167 |   |
| Expected return on plan assets                                                                                                           |       | (6,354                    | )          | (5,586                  | )          | — |   | — |   |
| Amortization of prior service cost (credit)                                                                                              |       | (45                       | )          | (55                     | )          | (141 | ) | (247 | ) |
| Amortization of transition obligation                                                                                                    |       | (1                        | )          | (1                      | )          | — |   | — |   |
| Amortization of net loss                                                                                                                 |       | 1,128                     |       | 728                     |       | 152 |   | 63 |   |
| Net periodic benefit cost                                                                                                                |       | $                         | 2,103      |                    | $          | 1,043 |   | $ | 214 |   | $ | 1 |   |

 

**Note 12.**IncomeTaxes

** **

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.

 

For the three months ended March 31, 2006, the Company’s effectivetax rate was reduced primarily due to a favorable U.S. partnership auditsettlement of approximately $69,200 for the tax years 1998 through 2003 and afavorable U.S. audit settlement of approximately $17,600 for the tax years 2000through 2003. Also in the first quarter of 2006, approximately $24,100 of taxexpense was recorded related to disputes between the Company and NMR, on theone hand, and Donnelley and certain of its former affiliates on the other hand,as to proper interpretation of, and allocation of tax liabilities under, the1996 Spin-Off agreements (see Note 8). For the three months ended March 31,2005, the Company’s effective tax rate was reduced primarily due to a favorablenon-U.S. audit settlement of approximately $29,300. Also in the first quarterof 2005, $67,100 of tax expense was recorded related to the decision torepatriate approximately $647,000 of foreign earnings back to the U.S. during2005 under the American Jobs Creation Act of 2004. While the Company intends tocontinue to seek global tax planning initiatives, there can be no assurancethat the Company will be able to successfully implement such initiatives toreduce or maintain its overall tax rate.

 

The Company accrues for tax loss contingencies in the period in whichthey are probable and estimable in accordance with SFAS No. 5, “Accountingfor Contingencies.” These reserves are included in current income taxes payableto the extent the related amounts are expected to be paid within the nexttwelve-month period. If the Company expects the liability to be settled beyondone year, these amounts are classified as a long-term liability.

 

23

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**Note 13.**IMSHealth Capital Stock

** **

The Company’sshare repurchase program has been developed to buy opportunistically, when theCompany believes that its share price provides it with an attractive use of itscash flow and debt capacity.

 

On January 25,2006, the Board of Directors authorized a stock repurchase program to buy up to30,000 shares. As of March 31, 2006, 11,374 shares remained available forrepurchase under the January 2006 program.

 

On November 16,2005, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares. This program was completed in February 2006 at a total costto date of $251,620. The final total cost will be determined upon completion ofthe accelerated share repurchase program (“ASR”) settlement period as describedbelow.

 

On December 14,2004, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares. This program was completed in January 2006 at a total costof $242,680.

 

On February 10,2004, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares. This program was completed in January 2005 at a total costof $232,770.

 

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

 

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

 

During the firstquarter of 2006, the Company repurchased 29,000 shares of outstanding CommonStock under these programs at a total cost of $728,202, including therepurchase of 25,000 shares on January 30, 2006 pursuant to an ASR. TheASR agreement provides for the final settlement of the contract in either cashor additional shares of the Company’s Common Stock at the Company’s solediscretion. The Company’s final settlement amount will increase (decrease)based on an increase (decrease) in the Company’s share price over thesettlement period, and will occur no later than August 7, 2006.

 

During 2005, theCompany repurchased approximately 10,213 shares of outstanding Common Stockunder these programs at a total cost of $246,507.

 

Shares acquiredthrough the Company’s repurchase programs described above are open-marketpurchases or privately negotiated transactions in compliance with Securitiesand Exchange Commission Rule 10b-18, with the exception of purchasespursuant to the ASR.

 

Under the Company’s Restated Certificate ofIncorporation as amended, the Company has authority to issue 820,000 shareswith a par value of $.01 per share of which 800,000 represent shares of CommonStock, 10,000 represent shares of preferred stock and 10,000 represent sharesof Series Common Stock. The preferred and series Common Stock can beissued with varying terms, as determined by the Board of Directors.

 

24

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The Company paid cashdividends of $0.03 and $0.02 per share which amounted to $6,035 and $4,570 duringthe three months ended March 31, 2006 and 2005, respectively.  The payments and level of cash dividends madeby the Company are subject to the discretion of the Board of Directors.

 

**Note 14.**       ComprehensiveIncome

 

Thefollowing table sets forth the components of comprehensive income, net ofincome tax expense:

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** **  |
|-----------------------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                                          | ** ** | **2006**                                         | ** **  | **2005** | ** ** |
| **Net  Income**                                     | ** ** | **$**                                            | **118,097** | ** ** | **$** | **30,343** | ** ** |
| Other comprehensive  income, net of taxes:          | ** ** | ** **                                       | ** **  | ** ** | ** ** |
| Unrealized gains  (losses) on:                      | ** ** | ** **                                       | ** **  | ** ** | ** ** |
| Available-for-sale  equity securities               | ** ** | **44**                                           | ** **  | **(105** | **)** |
| Tax (expense)  benefit on above                     | ** ** | **(16**                                          | **)**       | **37** | ** ** |
| Change in  unrealized gains (losses) on investments | ** ** | **28**                                           | ** **  | **(68** | **)** |
| Foreign currency  translation gains (losses)        | ** ** | **9,121**                                        | ** **  | **(26,298** | **)** |
| Changes in fair  value of cash flow hedges          | ** ** | **43**                                           | ** **  | **353** | ** ** |
| Total other  comprehensive income (loss)            | ** ** | **9,192**                                        | ** **  | **(26,013** | **)** |
| **Comprehensive  Income**                           | ** ** | **$**                                            | **127,289** | ** ** | **$** | **4,330** | ** ** |

 

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

 

Duringthe fourth quarter of 2004, the Company recorded $36,890 of Severance,impairment and other charges as a component of operating income.  As a result of leveraging prior investmentsin technology and process improvements, the Company committed to a plan toeliminate selected positions involved primarily in production anddevelopment.  The plan resulted in acharge for one-time termination benefits relating to a headcount reduction ofapproximately 490 employees located primarily in Europe and the U.S.  These severance benefits werecalculated pursuant to the terms of established employee protection plans, inaccordance with local statutory minimum requirements or individual employeecontracts, as applicable.

 

All of the 2004 fourth quarter charge will be settledin cash.  Substantially all terminationactions under this plan were completed by March 31, 2006.

 
| ** **                   | ** ** | **Severance Related  Reserves** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| Charge at  December 31, 2004 |       | $                                    | 36,890     |   |
| 2004 utilization             |       | (452                                 | )          |
| 2005 utilization             |       | (24,052                              | )          |
| 2006 utilization             |       | (8,631                               | )          |
| Balance at March  31, 2006   |       | $                                    | 3,755      |   |

 

TheCompany currently expects that a substantial portion of the cash outlaysrelating to the 2004 fourth quarter charge will be applied against theremaining March 31, 2006 balance during the remainder of 2006.

 

25

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Duringthe three months ended March 31, 2003, the Company recorded $37,220 ofSeverance, impairment and other charges as a component of operatingincome.  These charges were designed tofurther streamline operations and increase productivity through a worldwidereduction in headcount of approximately 80 employees and charges related toimpaired contracts and assets.   Thecontract-related charges were for impaired data supply and data processing contactsprimarily in the Company’s U.S. and Japanese operations.  The asset write-downs portion of the 2003charge related to the Company’s decision to abandon certain products and assuch, certain computer software primarily in the U.S., Japan and Europe waswritten-down to its net realizable value.

 
| ** **                 | ** ** | **Severance  Related  Reserves** | ** ** | **Contract  Related  Reserves** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at March  31, 2003  |       | $                                | 9,958      |                            | $          | 22,307                   |       | $         | 4,955      |   | $ | 37,220 |   |
| 2003 utilization           |       | (6,197                           | )          | (7,047                          | )          | (6,634                   | )          | (19,878   | )          |
| 2004 utilization           |       | (1,637                           | )          | (3,614                          | )          | —                   |       | (5,251    | )          |
| 2005 utilization           |       | (378                             | )          | (6,747                          | )          | —                   |       | (7,125    | )          |
| 2006 utilization           |       | —                           |       | (1,934                          | )          | —                   |       | (1,934    | )          |
| Adjustments                |       | (1,746                           | )          | 67                              |       | 1,679                    |       | —    |       |
| Balance at March  31, 2006 |       | $                                | —     |                            | $          | 3,032                    |       | $         | —     |   | $ | 3,032 |   |

 

Approximately$9,958 of the 2003 charge 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 minimum requirementsor individual employee contracts, as applicable.

 

Thecash portion of the first quarter 2003 charge amounted to $30,586, of which theCompany paid approximately $1,934 during the first quarter of 2006 for contractrelated charges.  The remaining accrualof $3,032 at March 31, 2006 relates to lease obligations.

 

The Company expects thatcash outlays will be applied against the $3,032 balance remaining of the firstquarter 2003 charge at March 31, 2006 as follows:

 
| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| 2006                                   |       | $                     | 372        |   |
| 2007                                   |       | 2,660                 |       |
| Total                                  |       | $                     | 3,032      |   |

 

During2003, the Company reversed approximately $1,750 of severance related chargesoriginally included in the first quarter 2003 charge due to the Company’srefinement of estimates.  The Companyalso recorded additional charges during 2003 of approximately $1,700 relatedprimarily to a software impairment.

 

During the fourth quarterof 2001, the Company completed the assessment of its Competitive FitnessProgram.  This program was designed tostreamline operations, increase productivity, and improve client service.  In connection with this program, the Companyrecorded $94,616 of Severance, impairment and other charges during the fourthquarter of 2001 as a component of operating income.

 

26

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| ** **                   | ** ** | **Severance  Related  Reserves** | ** ** | **Contract  Related  Reserves** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at  December 31, 2001 |       | $                                | 39,652     |                            | $          | 26,324                   |       | $         | 28,640     |   | $ | 94,616 |   |
| 2001 utilization             |       | (3,692                           | )          | (6,663                          | )          | (27,887                  | )          | (38,242   | )          |
| 2002 utilization             |       | (26,277                          | )          | (9,819                          | )          | (1,474                   | )          | (37,570   | )          |
| 2003 utilization             |       | (6,384                           | )          | (2,720                          | )          | (241                     | )          | (9,345    | )          |
| 2004 utilization             |       | (455                             | )          | (1,232                          | )          | —                   |       | (1,687    | )          |
| 2005 utilization             |       | (262                             | )          | (1,881                          | )          | —                   |       | (2,143    | )          |
| 2006 utilization             |       | (66                              | )          | (451                            | )          | —                   |       | (517      | )          |
| Adjustments                  |       | (688                             | )          | (274                            | )          | 962                      |       | —    |       |
| Balance at March  31, 2006   |       | $                                | 1,828      |                            | $          | 3,284                    |       | $         | —     |   | $ | 5,112 |   |

 

The Company expects thatcash outlays will be applied against the $5,112 balance remaining in theprogram at March 31, 2006 as follows:

 
| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| 2006                                   |       | $                     | 1,704      |   |
| 2007                                   |       | 1,903                 |       |
| 2008                                   |       | 262                   |       |
| 2009                                   |       | 262                   |       |
| 2010                                   |       | 262                   |       |
| Thereafter                             |       | 719                   |       |
| Total                                  |       | $                     | 5,112      |   |

** **

**Note 16.**       Operationsby Business Segment

 

Operating segments aredefined as components of an enterprise about which financial information isavailable that is evaluated on a regular basis by the chief operatingdecision-maker, or decision-making groups, in deciding how to allocateresources to an individual segment and in assessing performance of the segment.  The Company operates a globally consistentbusiness model, offering pharmaceutical business information, software andrelated services to its customers in more than 100 countries.  See Note 2.

 

The Company maintainsregional geographic management to facilitate local execution of its globalstrategies.  However, the Companymaintains global leaders for the majority ofits critical business processes; and the most significant performanceevaluations and resource allocations made by the Company’s chief operatingdecision makers are made on a global basis. As such, the Company has concluded that it maintains one operating andreportable segment.

** **

**Geographic Financial Information:**

 

The following representsselected geographic information for the regions in which we operate for thethree months ended March 31, 2006 and 2005:

 

27

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| ** **                              | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended March 31, 2006:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating Revenue (4)                   |       | $                 | 207,079    |            | $          | 174,852                    |       | $                               | 64,223     |           | —     |   | $ | 446,154 |   |
| Operating Income  (Loss) (5)            |       | $                 | 73,274     |            | $          | 18,009                     |       | $                               | 27,599     |           | $          | (22,146 | ) | $ | 96,736 |   |
| **Three  months ended March 31, 2005:** | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                  |       | $                 | 176,550    |            | $          | 175,606                    |       | $                               | 58,828     |           | —     |   | $ | 410,984 |   |
| Operating Income  (Loss) (5)            |       | $                 | 65,403     |            | $          | 18,072                     |       | $                               | 28,275     |           | $          | (14,878 | ) | $ | 96,872 |   |

 

----

**Notes to Geographic Financial Information:**

 

*(1)**             Americasincludes the United States, Canada and Latin America.*

 

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

 

*(3)**             AsiaPacific includes Japan, Australia and other countries in the Asia Pacificregion.*

 

*(4)**             Operatingrevenue relates to external customers and is primarily based on the location ofthe customer.  The operating revenue forthe geographic regions includes the impact of foreign exchange in convertingresults into U.S. dollars.*

 

*(5)**             Operatingincome for the three geographic regions does not reflect the allocation ofcertain expenses that are maintained in Corporate and Other and as such, is nota true measure of the respective regions’ profitability.   The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. dollars.*

 

A summary of the Company’soperating revenue by product line for the three months ended March 31, 2006 and2005 is presented below:

 

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** **  |
|----------------------------|------------|--------------------------------------------------|-------------|
| ** **                 | ** ** | **2006**                                         | ** **  | **2005** | ** ** |
| Sales force  effectiveness | ** ** | **$**                                            | **214,137** |   | $ | 199,973 |   |
| Portfolio  optimization    | ** ** | **129,811**                                      |        | 126,748 |   |
| Launch, brand  and other   | ** ** | **102,206**                                      |        | 84,263 |   |
| Total Operating  revenue   | ** ** | **$**                                            | **446,154** |   | $ | 410,984 |   |

 

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* *

**Item 2. Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

**(Dollars and shares in thousands, except per sharedata)**

*** ***

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

 

***Executive Summary***

*** ***

***Our Business***

 

IMSHealth Incorporated (“we”, “us” or “our”) is the leading global provider ofmarket intelligence to the pharmaceutical and healthcare industries.  Weoffer leading-edge business intelligence products and services that areintegral to our clients’ day-to-day operations, including portfoliooptimization capabilities; launch and brand management solutions; sales forceeffectiveness innovations; managed care and over-the-counter offerings; andconsulting and services solutions that improve ROI and the delivery of qualityhealthcare worldwide.  Our informationproducts are developed to meet client needs by using data secured from aworldwide network of suppliers in the markets where operations exist.  Keyinformation products include:

 

•                  Sales ForceEffectiveness to optimize sales force productivity and territory management;

 

•                  Portfolio Optimizationto provide clients with insights into market opportunity and businessdevelopment assessment; and

 

•                  Launch, Brand Management and Other to supportclient needs relative to market segmentation and positioning and life cyclemanagement for prescription and over-the-counter pharmaceutical products.

 

Withinthese business lines, we provide consulting and services that use in-housecapabilities and methodologies to assist pharmaceutical clients in analyzingand evaluating market trends, strategies and tactics, and to help in thedevelopment and implementation of customized software applications and datawarehouse tools.

 

Weoperate in more than 100 countries. Until December 21, 2004, we also owned approximately a 25% equityinterest in the TriZetto Group, Inc. (“TriZetto”) (see Note 7 to the Condensed ConsolidatedFinancial Statements (Unaudited).

 

Wemanage on a global business model with global leaders for the majority of ourcritical business processes and accordingly have one reportable segment.

 

Webelieve that important measures of our financial condition and results ofoperations include operating revenue, constant dollar revenue growth, operatingincome, constant dollar operating income growth, operating margin and cashflows.

 

**PerformanceOverview**

 

Our operating revenuegrew 8.6% to $446,154 in the first quarter of 2006 as compared to $410,984 inthe first quarter of 2005 with growth in all three of our business lines.  Our operating income remained essentiallyflat at $96,736 in the first quarter of 2006 and $96,872 in the first quarter

 

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of 2005, as the growth inoperating revenue was offset by increases in operating costs and selling andadministrative expenses. These increases in costs and expenses were primarilydriven by our adoption of Statementof Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS 123R”), acquisitions, increased costs of data, andadditional investments in consulting and services capabilities.  Our net income was $118,097 for the firstquarter of 2006 as compared to $30,343 for the first quarter of 2005 primarilydue to favorable U.S. tax-related audit settlements in the first quarter of2006.  As a result, our diluted earningsper share of Common Stock increased to $0.56 for the first quarter of 2006 ascompared to $0.13 for the first quarter of 2005.

 

**Results of Operations**

 

*Reclassifications. *Certain prior-year amounts have been reclassified to conform to the 2006presentation.

 

*Referencesto constant dollar results. *Wereport results in U.S. dollars, but we do business on a global basis.  Exchange rate fluctuations affect the rate atwhich we translate foreign revenues and expenses into U.S. dollars and have importanteffects on our results.  In order toillustrate these effects, the discussion of our business in this reportsometimes describes the magnitude of changes in constant dollar terms.  We believe this information facilitates acomparative view of business growth.  Inthe first three months of 2006, the U.S. dollar was generally stronger againstother currencies as compared to the first three months of 2005, so growth atconstant dollar exchange rates was higher than growth at actual currencyexchange rates.  See “How Exchange RatesAffect Our Results” below and the discussion of “Market Risk” in the ManagementDiscussion and Analysis section of our annual report on Form 10-K for the yearended December 31, 2005 for a more complete discussion regarding the impact offoreign currency translation on our business.

 

***Stock-Based Compensation Expense***

 

SFAS 123R was adopted on January 1, 2006, which nowrequires among other items, the recognition of stock option expense in theresults of operations. The modified prospective transition method was elected;therefore, prior period results were not retrospectively adjusted.  Prior to the adoption of SFAS 123R,stock-based compensation expense related to stock options was not recognized inthe results of operations if the exercise price was at least equal to themarket value of the common stock on the grant date, in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” (“APB 25”). As a result, the recognition of stock-basedcompensation expense was generally limited to the expense attributed torestricted stock unit awards and stock option modifications.  Historically, stock options have been grantedto broad groups of employees on a discretionary basis. Beginning in fiscal2006, employees are eligible to receive restricted stock units with a servicecondition of four years instead of stock options with a service condition ofthree years. Employees in more advanced leadership positions will continue tobe eligible to receive restricted stock units which contain performance andservice conditions.

 

As a result of adoptingSFAS 123R on January 1, 2006, our income before income taxes and net income forthe period ended March 31, 2006 are $9,623 lower and $6,728 lower, respectively,than if the company had continued to account for share-based compensation underAPB 25.  Basic and diluted earnings pershare for the period ended March 31, 2006 both were $0.56, but would have been

 

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$0.60 and $0.59,respectively, if we had not adopted SFAS 123R. Stock-based compensation expense was $11,155 before taxes during thethree months ended March 31, 2006 and $8,630 before taxes during the threemonths ended March 31, 2005.  Stock-basedcompensation expense recognized in the results of operations during the firstquarter of fiscal 2006 was $2,525 higher than the proforma amount determinedunder the fair value-based method and disclosed in accordance with SFAS No. 123,“Accounting for Stock-Based Compensation,” for the comparable prior yearperiod. This increase was primarily due to higher fair value amounts attributedto the more recent awards, acceleration of the vesting of restricted stockunits and stock options of one executive employee due to retirement, and anincrease in the amount of restricted stock unit amortization in the firstquarter of the fiscal year due to an increase in restricted stock grants toemployees of recent acquisitions.   As ofMarch 31, 2006, approximately $6,862 of unrecognized stock compensation relatedto unvested restricted stock awards (net of estimated forfeitures) is expectedto be recognized over a weighted-average period of 1.75 years.  As of March 31, 2006, approximately $33,052of unrecognized stock compensation related to unvested stock options (net ofestimated forfeitures) is expected to be recognized over a weighted-averageperiod of 1.37 years.

 

**Summary ofOperating Results**

** **
| ** **                           | ** ** | ** **                                           | ** **  | **% Variance**     | ** ** |
|--------------------------------------|------------|------------------------------------------------------|-------------|-------------------------|------------|
| ** **                           | ** ** | **Three months ended March 31,** | ** **  | **2006  vs. 2005** | ** ** |
| **2006**                             | ** ** | **2005**                                             |
| Operating  revenue                   | ** ** | **$**                                                | **446,154** |                    | $          | 410,984 |   | 8.6 | % |
| Operating costs                      | ** ** | **197,917**                                          |        | 180,006                 |       | 10.0 | % |
| Selling and  administrative expenses | ** ** | **124,152**                                          |        | 109,429                 |       | 13.5 | % |
| Depreciation and  amortization       | ** ** | **27,349**                                           |        | 24,677                  |       | 10.8 | % |
| Operating income                     | ** ** | **$**                                                | **96,736**  |                    | $          | 96,872 |   | (0.1 | )% |

 

***Operating Income***

 

Our operating income forthe first quarter of 2006 was essentially flat at $96,736 from $96,872 in thefirst quarter of 2005.  This wasprimarily due to the increase in our operating revenue, offset by increases in ouroperating costs and selling and administrative expenses driven primarily byacquisitions, increased cost of data, investments in consulting and servicescapabilities, and the adoption of SFAS 123R. Our operating income increased 2.8% in constant dollar terms.  Excluding the effect of our adoption of SFAS123R, our operating income increased 9.8% on a reported basis and 12.7% inconstant dollar terms (See Note 9 to our Condensed Consolidated FinancialStatements (Unaudited)).

 

***Operating Revenue***

 

Revenue in 2005 reflectsa reclassification between our three business lines to conform to the 2006presentation.

 

Our operating revenue forthe first quarter of 2006 grew 8.6% to $446,154 from $410,984 in the firstquarter of 2005. On a constant dollar basis our operating revenue growth was12.9%.  Acquisitions made during 2005 and2006 contributed approximately 4.0 percentage points to both reported andconstant dollar operating revenue growth. The increase in our operating revenue

 

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resulted from growth inrevenue in all three of our business lines, together with the effect ofcurrency translation.  On a constantdollar basis, all business lines grew.

 

**Summary of Operating Revenue**

** **
| ** **                 | ** ** | ** **                                           | ** **  | **% Variance  2006 vs 2005** | ** ** |
|----------------------------|------------|------------------------------------------------------|-------------|---------------------------------------------|------------|
| ** **                 | ** ** | **Three months ended March 31,** | ** **  | **Reported  Rates**                         | ** ** | **Constant  Dollar** | ** ** |
| **2006**                   | ** ** | **2005**                                             |
| Sales force  effectiveness | ** ** | **$**                                                | **214,137** |                                        | $          | 199,973 |   | 7.1 | % | 11.1 | % |
| Portfolio  optimization    | ** ** | **129,811**                                          |        | 126,748                                     |       | 2.4 | % | 6.8 | % |
| Launch, brand  and other   | ** ** | **102,206**                                          |        | 84,263                                      |       | 21.3 | % | 26.5 | % |
| Operating  Revenue         | ** ** | **$**                                                | **446,154** |                                        | $          | 410,984 |   | 8.6 | % | 12.9 | % |

 

•                  *Sales Force Effectiveness*revenue grew primarily due to our DDD offering in Japan, Long-Term Careofferings in the Americas, and growth in our weekly data offerings as well ascontinued growth in our Sales and Account Management consulting practice area.

 

•                  *Portfolio Optimization*revenue grew primarily due to strong demand for certain of our core productsincluding MIDAS Quantum.

 

•                  *Launch, Brand Managementand Other product lines* revenue grew primarily due to our Launch andBrand management offerings and strong acceptance of our Managed Care offeringsin the Americas.

 

•                  Consulting and services revenue, asincluded in the business lines above, was $69,019 in the first quarter of 2006,up 25.9% from $54,818 in the first quarter of 2005 (up 30.9% on aconstant-dollar basis).  Approximatelytwo-thirds of the consulting and services revenue growth for the first quarterof 2006 was attributable to acquisitions completed during 2006 and 2005.

 

***Operating Costs***

 

Our operating costsinclude data processing costs, the costs of data collection and production, andcosts attributable to personnel involved in production, data management and theprocessing and delivery of our consulting and services offerings.  Our operating costs grew 10.0% to $197,917 inthe first quarter of 2006, from $180,006 in the first quarter of 2005.  The increase in our operating costs wasprimarily due to the adoption of SFAS 123R, operating costs of acquiredbusinesses, increased cost of data, and increases in costs related toconsulting and services partially offset by the effect of foreign currencytranslations.  SFAS 123R increased ouroperating costs by $1,407 and foreign currency translation decreased ouroperating costs by approximately $9,000 for the first quarter of 2006.  Excluding the effect of these two items, ouroperating costs grew 14.3% in the first quarter of 2006 as compared to thefirst quarter of 2005.

 

Our operating costsgenerally have increased at a rate greater than operating revenues in each ofthe last three full fiscal years.  Thisincrease has been due primarily to higher data costs to support revenue growthand acquisitions**.**

 

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***Selling and AdministrativeExpenses***

 

Our selling andadministrative expenses consist primarily of the expenses attributable tosales, marketing, and administration, including human resources, legal,management and finance.  Our selling andadministrative expenses grew 13.5% in the first quarter of 2006, to $124,152from $109,429 in the first quarter of 2005:

 

•                  *SFAS 123R*: Theeffect of the adoption of SFAS 123R increased our selling and administrativeexpenses by $8,216 for the first quarter of 2006 as compared to the firstquarter of 2005 (See Note 9 to our Condensed Consolidated Financial Statements(Unaudited)).

 

•                  *Foreign CurrencyTranslation*: The effect of foreign currency translation decreasedour selling and administrative expenses by approximately $5,000 for the firstquarter of 2006 as compared to the first quarter of 2005.

 

Excluding the effect of SFAS123R and the change due to foreign currency translation, our selling andadministrative expenses grew 10.6% in the first quarter of 2006 as compared tothe first quarter of 2005.

 

•                  *Sales and Marketing*:Sales and marketing expense increased by approximately $4,000 in the firstquarter of 2006, compared to the first quarter of 2005 to support revenuegrowth.

 

•                  *Consulting*:  Consulting and services expenses increased byapproximately $9,000 in the first quarter of 2006, compared to the firstquarter of 2005 to support the growth in this revenue stream.

 

***Depreciation and Amortization***

 

Ourdepreciation and amortization charges increased 10.8% to $27,349 in the first quarter of 2006, from $24,677 in the first quarter of 2005,primarily due to computer software amortization associated with new productswhich increased by approximately $2,500, andamortization of intangibles related to recent acquisitions, which increased byapproximately $1,000 in the first quarter of 2006 as compared to the firstquarter of 2005.

 

***Trends in our Operating Margins***

 

Ouroperating margin for the first quarter of 2006 was 21.7%, as compared to 23.6% in the first quarter of 2005.  Thedecrease in our operating margins for the first quarter of 2006 is primarilydue to the adoption of SFAS 123R. Excluding the effect of SFAS 123R, our operating margin would haveincreased 0.2 percentage points to 23.8% in the first quarter of 2006, from23.6% in the first quarter of 2005.

 

Recentacquisitions have had an adverse effect on our operating margins due to thefact that some of our small business acquisitions have historically experiencedlower operating margins than ours, and the revenue and cost synergies that we incorporateinto our business plans are not all immediately realized.  We also experience higher intangibleamortization in the first years after completing an acquisition and

 

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mayincur additional costs in integrating the acquired operations into ours, bothof which tend to increase our costs and thus decrease our operating margins inthe initial years of each completed acquisition.

 

Excludingthe effect of SFAS 123R, our operating margin stabilized during the firstquarter of 2006.  Operating margins arelikely to decline throughout 2006 as a result of our adoption of SFAS 123R.

 

***Non-Operating Income (Loss), net***

 

Our non-operating income(loss), net decreased to a loss of $2,471 in the first quarter of 2006 fromincome of $8,134 in the first quarter of 2005. The decrease in our non-operating income was primarily due to thefollowing factors:

 

•                  *Interest Expense, net*:Net interest expense for the first quarter was $6,916 in 2006, compared with$3,798 in 2005, primarily due to both higher debt levels and interest rates.

 

•                  *Gains from Investments,net*: We had gains from investments of $2,673 during the firstquarter of 2006, primarily as a result of the sale of our investment inAllscripts Healthcare Solutions, Inc., offset by management fees related to ourEnterprise portfolio and write-downs related to other-than-temporary declinesin the value of our venture capital investments.  Gains from investment of $2,671 in the firstquarter of 2005 were primarily as a result of a divestiture of an interest wehad in a German company.

 

•                  *Other Income, net*:Other income, net, decreased by $7,489 primarily due to net foreign exchangegains of $2,691 in the first quarter of 2006, compared with net foreignexchange gains of $11,236 in the first quarter of 2005.

 

***Taxes***

 

Forthe three months ended March 31, 2006, our effective tax rate was reducedprimarily due to a favorable U.S. partnership audit settlement ofapproximately $69,200 for the tax years 1998 through 2003 and a favorable U.S.audit settlement of approximately$17,600 for the tax years 2000 through 2003.  Also in the first quarter of 2006,approximately $24,100 of tax expense was recorded related to disputes betweenthe Company and NMR, on the one hand, and Donnelley and certain of its formeraffiliates on the other hand, as to proper interpretation of, and allocation oftax liabilities under, the 1996 Spin-Off agreements.  Forthe three months ended March 31, 2005, our effective tax rate was reducedprimarily due to a favorable non-U.S. audit settlement of approximately $29,300.  Also in the first quarter of 2005, $67,100 oftax expense was recorded related to the decision to repatriate approximately$647,000 of foreign earnings back to the U.S. during 2005 under the AmericanJobs Creation Act of 2004 (“AJCA”).

 

For all periodspresented, our effective tax rate was reduced as a result of global taxplanning initiatives.  While we intend tocontinue to seek global tax planning initiatives, there can be no assurance thatwe will be able to successfully identify and implement such initiatives toreduce or maintain our overall tax rate.

 

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## **Operating Results byGeographic Region**

 

The following representsselected geographic information for the regions in which we operate for thethree months ended March 31, 2006 and 2005:

 

 
| ** **                              | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended March 31, 2006:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating Revenue (4)                   |       | $                 | 207,079    |            | $          | 174,852                    |       | $                               | 64,223     |           | —     |   | $ | 446,154 |   |
| Operating Income  (Loss) (5)            |       | $                 | 73,274     |            | $          | 18,009                     |       | $                               | 27,599     |           | $          | (22,146 | ) | $ | 96,736 |   |
| **Three  months ended March 31, 2005:** | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                  |       | $                 | 176,550    |            | $          | 175,606                    |       | $                               | 58,828     |           | —     |   | $ | 410,984 |   |
| Operating Income  (Loss) (5)            |       | $                 | 65,403     |            | $          | 18,072                     |       | $                               | 28,275     |           | $          | (14,878 | ) | $ | 96,872 |   |

 

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**Notes to Geographic Financial Information:**

 

*(1)**                               Americasincludes the United States, Canada and Latin America.*

 

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

 

*(3)**                               AsiaPacific includes Japan, Australia and other countries in the Asia Pacificregion.*

 

*(4)**                               Operatingrevenue relates to external customers and is recognized primarily based on thelocation of the customer.  The operatingrevenue for the geographic regions includes the impact of foreign exchange inconverting results into U.S. dollars.*

 

*(5)**                               Operatingincome for the three geographic regions does not reflect the allocation ofcertain expenses that are maintained in Corporate and Other and as such, is nota true measure of the respective regions’ profitability.   The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. dollars.*

 

***Americas Region***

 

Operating revenue growth inthe Americas region was 17.3% in the first quarter of 2006, compared to thefirst quarter of 2005, primarily due to strong performance in consulting andservices within the launch and brand management, managed care and otherbusiness lines and continued overall strength of the sales force effectivenessbusiness line.

 

Operating income in theAmericas region grew 12.0% in the first quarter of 2006, compared to the firstquarter of 2005.  The operating incomegrowth reflects revenue growth in the region and foreign currency translations,partially offset by the adoption of SFAS 123R, increased cost of data,investment in consulting capabilities, and costs associated withacquisitions.  Excluding the effect offoreign currency translations, operating income grew by 11.1%.  Excluding the effect of SFAS 123R, afteradjusting for currency, operating income grew 15.0% in the Americas region.

 

***Europe Region***

 

Operating revenuedecreased in the Europe region by 0.4% in the first quarter of 2006, comparedto the first quarter of 2005, primarily due to foreign currencytranslations.  Excluding the effect of

 

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foreign currencytranslations, operating revenue grew 8.0% primarily due to the strongperformance of our SFE and Launch and Brand Management offerings and growth inof our portfolio optimization data sales.

 

Operating income in the Europeregion decreased by 0.3% in the first quarter of 2006, compared to the firstquarter of 2005.  The decline inoperating income in the first quarter of 2006 was primarily driven by foreigncurrency translations and the effect of SFAS 123R.  Excluding the effect of foreign currencytranslations, operating income grew by 7.4%. Excluding the effect of SFAS 123R, after adjusting for currency,operating income grew 21.6% in the Europe region, primarily due to increasedrevenue and a decrease in our production costs as a result of the fourthquarter 2004 severance actions.

 

***Asia Pacific Region***

 

Operating revenue in the AsiaPacific region increased 9.2% in the first quarter of 2006, compared to thefirst quarter of 2005, primarily due to our sales force effectiveness offeringin Japan and consulting and services in the rest of the region, partiallyoffset by foreign currency translations. Excluding the effect of foreign currency translations, operating revenuegrew 17.1%.

 

Operating income in the AsiaPacific region decreased by 2.4% in the first quarter of 2006, compared to thefirst quarter of 2005, primarily due to foreign currency translations and the adoptionof SFAS 123R.  Excluding theeffect of foreign currency translations, operating income grew by 5.7%.  Excluding the effect of SFAS 123R, afteradjusting for currency, operating income grew by 7.9% in the Asia Pacificregion, primarily due to increased revenue offset by increased costs related todata and production support and investments in consulting capabilities.

 

### **How Exchange Rates Affect Our Results**

### ** **

We operate globally, deriving a significant portion ofour operating income from non-U.S. operations. As a result, fluctuations in the value of foreign currencies relative tothe U.S. dollar may increase the volatility of U.S. dollar operatingresults.  We enter into foreign currency forwardcontracts to partially offset the effect of currency fluctuations.  In the first quarter of 2006, foreigncurrency translation decreased U.S. dollar revenue growth by approximately 4.4percentage points, while the impact on operating income growth was anapproximate decrease of 2.9 percentage points.

 

Non-U.S. monetary assets are maintained in currenciesother than the U.S. dollar, principally the Euro, the Japanese Yen and theSwiss Franc.  Where monetary assets areheld in the functional currency of the local entity, changes in the value of thesecurrencies relative to the U.S. dollar are charged or credited to Cumulativetranslation adjustment in the Condensed Consolidated Statements of FinancialPosition (Unaudited).  The effect ofexchange rate changes during 2006 increased the U.S. dollar amount of Cash andcash equivalents by $705.

 

***Liquidityand Capital Resources***

*** ***

Our cash and cash equivalents decreased $216,519 duringthe first quarter of 2006 to $146,424    at March 31, 2006 compared to $362,943 atDecember 31, 2005.  The decrease reflectscash provided

 

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by operating activities of $39,776, offset by cash used in investing activities of $36,938andfinancingactivities of $220,062.

 

We currently expect thatwe will use our cash and cash equivalents primarily to fund:

 

•                  developmentof software to be used in our new products and capital expenditures to expandand upgrade our information technology capabilities and to build or acquirefacilities to house our growing business (we currently expect to spendapproximately $99,000 to $106,000 during 2006 for software development andcapital expenditures);

 

•                  acquisitions;

 

•                  sharerepurchases;

 

•                  dividendsto our shareholders (we expect 2006 dividends will be $0.12 per share orapproximately $24,000);

 

•                  payments for tax-related matters,including the D&B Legacy Tax Matters discussed further in Note 8 to our CondensedConsolidated Financial Statements (Unaudited). In addition to the $16,300 payment made in April 2006 (see Note 8 to ourCondensed Consolidated Financial Statements (Unaudited)), payments for certainof the D&B Legacy Tax Matters could be up to approximately $51,300 prior toMarch 31, 2007; and

 

•                  pension and other postretirementbenefit plan contributions (we currently expect contributions to U.S. andnon-U.S. pension and other postretirement benefit plans to total approximately$7,300 in 2006, in addition to approximately $10,500 paid in January 2006).

 

Net cash provided by operating activities amounted to $39,776for the three months ended March 31, 2006, an increase of cash provided of $77,892over the comparable period in 2005.  Theincrease relates primarily to lower funding of accounts receivable and prepaidexpenses during the three months ended March 31, 2006.

 

Net cash used in investing activities amounted to $36,938for the three months ended March 31, 2006, a decrease in cash used of $5,297over the comparable period in 2005.  The decreaserelates primarily to the fact that we made payments of $18,298 for acquisitionsduring the first three months of 2006, compared to payments made foracquisitions of $62,455 during the comparable period in 2005.  This decrease was partially offset by $37,414of proceeds from the sale of our investment in TriZetto in the first quarter of2005 (see Note 7 of the Condensed Consolidated Financial Statements (Unaudited)).

 

Net cash used in financing activities amounted to $220,062for the three months ended March 31, 2006, an increase of $262,517 over thecomparable period in 2005.  This increasein cash used was primarily due to an increase of $635,621 in purchases of ourstock during the first quarter of 2006 compared to the first quarter of 2005,partially offset by an increase of $394,650 in related debt during the firstquarter of 2006 compared to the first quarter of 2005.  Refer to the Stock Repurchase

 

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Programs and Debt sections for further information on our variancebetween the first quarters of 2006 and 2005.

 

Our financing activities include cash dividends wepaid of $0.03 and $0.02 per share quarterly for 2006 and 2005, respectively,which amounted to $6,035 and $4,570 during the first three months of 2006 and 2005,respectively.  The payments and level ofcash dividends made by us are subject to the discretion of our Board ofDirectors.  Any future dividends, otherthan the $0.03 per share dividend for the second quarter of 2006, which wasdeclared by our Board of Directors in April 2006, will be based on, andaffected by, a number of factors, including our operating results and financialrequirements.

 

Prior to the adoption of SFAS 123R, we presented alltax benefits of deductions resulting from the exercise of stock options asoperating cash flows in the Statement of Cash Flows.  Beginning on January 1, 2006, we changed ourcash flow presentation in accordance with SFAS 123R which requires the cashflows resulting from the tax benefits resulting from tax deductions in excessof the compensation cost recognized for those options (excess tax benefits) tobe classified as financing cash flows.

 

**Tax and Other Contingencies**

 

We are exposed to certainknown tax and other contingencies that are material to our investors.  Thefacts and circumstances surrounding these contingencies and a discussion oftheir effect on us are included in Note 8 to our Condensed ConsolidatedFinancial Statements (Unaudited) for the period ended March 31, 2006.  We do not know of any material tax or othercontingencies, other than those described in Note 8 to our CondensedConsolidated Financial Statements (Unaudited).

 

These contingencies may havea material effect on our liquidity, capital resources or results ofoperations.  Although we have established reserves for D&B Legacy TaxMatters in accordance with SFAS No. 5, “Accounting for Contingencies,” theactual liability may exceed the amount of the reserve.  We have not established any reserves inrespect of the other contingencies other than those discussed in Note 8 of ourNotes to Condensed Consolidated Financial Statements (Unaudited).  Inaddition, even where our reserves are adequate, the incurrence of any of theseliabilities may have a material effect on our liquidity and the amount of cashavailable to us for other purposes.

 

Management believes that wehave made appropriate arrangements in respect of the future effect on us ofthese known tax and other contingencies.  Management also believesthat the amount of cash available to us from our operations, together with cashfrom financing, will be sufficient for us to pay any known tax and othercontingencies as they become due without materially affecting our ability toconduct our operations and invest in the growth of our business.

 

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**Stock Repurchase Programs**

 

Our share repurchase program has been developed to buyopportunistically, when we believe that our share price provides us with anattractive use of our cash flow and debt capacity.

 

On January 25, 2006, the Board of Directors authorizeda stock repurchase program to buy up to 30,000 shares.  As of March 31, 2006, 11,374 shares remainedavailable for repurchase under the January 2006 program.

 

On November 16, 2005, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in February 2006at a total cost to date of $251,620.  Thefinal total cost will be determined upon completion of the accelerated sharerepurchase program (“ASR”) settlement period as described below.

 

On December 14, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in January 2006 ata total cost of $242,680.

 

On February 10, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in January 2005 ata total cost of $232,770.

 

On April 15, 2003, the Board of Directors authorized astock repurchase program to buy up to 10,000 shares.  This program was completed in May 2004 at atotal cost of $243,520.

 

On July 19, 2000, the Board of Directors authorized astock repurchase program to buy up to 40,000 shares.  This program was completed in June 2003 at atotal cost of $868,314.

 

During the first quarter of 2006, we repurchased 29,000shares of outstanding Common Stock under these programs at a total cost of$728,202, including the repurchase of 25,000 shares on January 30, 2006pursuant to an ASR.  The ASR agreementprovides for the final settlement of the contract in either cash or additionalshares of our Common Stock at our sole discretion.  Our final settlement amount will increase(decrease) based on an increase (decrease) in our share price over thesettlement period, and will occur no later than August 7, 2006.

 

During 2005, we repurchased approximately 10,213shares of outstanding Common Stock under these programs at a total cost of$246,507.

 

Shares acquired through our repurchase programsdescribed above are open-market purchases or privately negotiated transactionsin compliance with Securities and Exchange Commission Rule 10b-18, with theexception of purchases pursuant to the ASR.

 

Under our Restated Certificate of Incorporation asamended, we have the authority to issue 820,000 shares with a par value of $.01per share of which 800,000 represent shares of Common Stock, 10,000 representshares of preferred stock and 10,000 represent shares of Series CommonStock.  The preferred and series CommonStock can be issued with varying terms, as determined by the Board ofDirectors.

 

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**Debt**

 

In recent years, we haveincreased debt levels to balance appropriately the objective of generating anattractive cost of capital with providing us a reasonable amount of financialflexibility.  At March 31, 2006, our debttotaled $1,112,768, and management does not believe that this level of debtposes a material risk to us due to the following factors:

 

•                  ineach of the last three years, we have generated strong net cash provided byoperating activities in excess of $300,000;

 

•                  at March31, 2006, we had $146,424 in worldwide cash and cash equivalents;

 

•                  at March31, 2006, we had $175,641 of unused debt capacity under our existing bankcredit facilities; and

 

•                  webelieve that we have the ability to obtain additional debt capacity outside ofour existing debt arrangements.

 

The following table summarizes our long-term debt atMarch 31, 2006 and December 31, 2005:

 
| ** **                                                                                                                                                                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| 4.6% Private  Placement Note, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(3,123) and $(2,710), respectively                           |       | $                        | 146,877    |                        | $          | 147,290 |   |
|                                                                                                                                                                       |       |                     |       |                        |       |
| Short-Term  Credit Agreement due May 2, 2006 (Refinanced on April 27, 2006 with 5.55%  Private Placement Notes, principal payment of $150,000 due April 2016 - see  below) |       | 150,000                  |       | —                      |       |
|                                                                                                                                                                       |       |                     |       |                        |       |
| 1.70% Private  Placement Note, principal payment of 34,395,000 Japanese Yen due January 2013                                                                               |       | 291,532                  |       | —                      |       |
|                                                                                                                                                                       |       |                     |       |                        |       |
| Revolving Credit  Facility:                                                                                                                                                |       |                     |       |                        |       |
| Japanese Yen  denominated borrowings at average floating rates of approximately 0.47%                                                                                      |       | 78,657                   |       | 371,924                     |       |
| Swiss Franc  denominated borrowings at average floating rates of approximately 1.52%                                                                                       |       | 94,301                   |       | 92,217                      |       |
| U.S. Dollar  denominated borrowings at average floating rates of approximately 5.20%                                                                                       |       | 351,401                  |       | —                      |       |
|                                                                                                                                                                       |       |                     |       |                        |       |
| Total Long-Term  Debt                                                                                                                                                      |       | $                        | 1,112,768  |                        | $          | 611,431 |   |

 

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In January 2006, we entered into a $175,000 short termcredit agreement with a bank.  Totalborrowings under this agreement were $150,000 at March 31, 2006.  Such amount is classified as long-term debtin the Condensed Consolidated Statements of Financial Position (Unaudited) inaccordance with the provisions of SFAS No. 6, “Classification of Short-TermObligations Expected to be Refinanced,” as we refinanced this debt through aprivate placement transaction closed on April 27, 2006, pursuant to which weissued $150,000 of ten-year notes to two highly rated insurance companies at afixed rate of 5.55%.

 

In January 2006, we closed aprivate placement transaction pursuant to which its Japanese subsidiary issued34,395,000 Japanese Yen seven-year debt (equal to $300,000 at date of issuance)to several highly rated insurance companies at a fixed rate of 1.70%.  Weused the proceeds to refinance existing debt in Japan.

 

In April 2004, we entered into a $700,000 revolvingcredit facility with a syndicate of 12 banks (the “Unsecured Facility”).  The Unsecured Facility replaced our lines ofcredit with several domestic and international banks.  On March 9, 2005, we renegotiated with thesyndicate of 12 banks to amend and restate the Unsecured Facility (the “Amendedand Restated Facility”).  The terms ofthe Amended and Restated Facility extended the maturity of the facility in itsentirety to a term of five years, maturing March 2010, reduced the borrowingmargins and increased subsidiary borrowing limits.  Total borrowings under these existing lineswere $524,359 and $464,141 at March 31, 2006 and December 31, 2005, respectively,all of which were classified as long-term. We define long-term lines as those where the lines are non-cancelablefor more than 365 days from the balance sheet date by the financialinstitutions except for specified, objectively measurable violations of theprovisions of the agreement.  In general,rates for borrowing under the Amended and Restated Facility are LIBOR plus 40basis points and can vary based on the our Debt to EBITDA ratio.  The weighted average interest rates for ourlines were 3.83% and 0.62% at March 31, 2006 and December 31, 2005,respectively.  In addition, we arerequired to pay a commitment fee on any unused portion of the facilities of0.9%.  At March 31, 2006, we hadapproximately $175,641 available under our existing bank credit facilities.

 

In January 2003, we closed a private placementtransaction pursuant to which it issued $150,000 of five-year debt to severalhighly rated insurance companies at a fixed rate of 4.60%.  We used the proceeds to pay down short-termdebt.  We also swapped $100,000 of itsfixed rate debt to floating rate based on six-month LIBOR plus a margin ofapproximately 107 basis points.  Weaccounted for these swaps as fair value hedges under the provisions of SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities.”  We determined the fair values based onestimated prices quoted by financial institutions.  The fair values of these swaps were $(3,123)and $(2,710) as of March 31, 2006 and December 31, 2005, respectively.

 

In March and April 2002, we entered into interest rateswaps on a portion of its variable rate debt portfolio.  In March 2005, $50,000 of these swapsmatured.  The remaining arrangementconverts the variable interest rates to a fixed interest rate of 5.08% on anotional amount of $25,000 and matured in April 2006.  We accounted for the interest rate swaps ascash flow hedges and recorded any changes in fair value in Other ComprehensiveIncome.  We determined the fair valuesbased on estimated prices quoted by financial institutions.  The fair values of these swaps were $(35) and$(100) as of March 31, 2006 and December 31, 2005, respectively.

 

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Our financing arrangements provide for certaincovenants and events of default customary for similar instruments, including inthe case of its main bank arrangements and the 2003 private placementtransaction, covenants to maintain specific ratios of consolidated totalindebtedness to EBITDA and of EBITDA to certain fixed charges.  At March 31, 2006, we were in compliance withthese financial debt covenants.

 

**Severance,Impairment and Other Charges**

 

During the fourth quarter of2004, we recorded $36,890 of Severance, impairment and other charges as acomponent of operating income.  As aresult of leveraging prior investments in technology and process improvements,we committed to a plan to eliminate selected positions involved primarily inproduction and development.  The planresulted in a charge for one-time termination benefits relating to a headcountreduction of approximately 490 employees located primarily in Europe and theU.S.  These severance benefitswere calculated pursuant to the terms of established employee protection plans,in accordance with local statutory minimum requirements or individual employeecontracts, as applicable.

 

All of the 2004 fourth quarter charge will be settledin cash.  Substantially all terminationactions under this plan were completed by March 31, 2006.

 
| ** **                   | ** ** | **Severance Related  Reserves** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| Charge at  December 31, 2004 |       | $                                    | 36,890     |   |
| 2004 utilization             |       | (452                                 | )          |
| 2005 utilization             |       | (24,052                              | )          |
| 2006 utilization             |       | (8,631                               | )          |
| Balance at March  31, 2006   |       | $                                    | 3,755      |   |

 

We currently expect that asubstantial portion of the cash outlays relating to the 2004 fourth quartercharge will be applied against the remaining March 31, 2006 balance during theremainder of 2006.

 

See Note 15 of our CondensedConsolidated Financial Statements (Unaudited) for a description of our 2001 and2003 restructuring programs.

 

We expect that futureresults will benefit from the 2001 and 2003 restructuring charges to the extentof the contract-related charges and asset write-downs primarily through2007.  Our severance actions in the 2001and 2003 programs related to a shifting of resources around the Company.  The benefits from the 2004 severance actionswill be partially offset by headcount additions in selected locations.  The benefits will be realized primarily inOperating costs and Selling and administrative expense, with a partial year ofbenefit realized in 2005 and a full year of benefit expected to be realized in2006.  For the 2001 and 2003 charges theincome statement lines that will be impacted in future periods are Operatingcosts for the contract-related charges and Depreciation and amortizationrelated to the asset write-downs.  However, we do not expect a material impact onfuture cash flows due to the fact that we are still contractually obligated tocontinue to make payments under impaired contracts.

 

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**Recently Issued Accounting Standards**

 

In February 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid FinancialInstruments – an amendment of FASB Statements No. 133 and 140.”  This statement clarifies the application ofSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”to beneficial interests in securitized financial assets and improves theconsistency of accounting for similar financial instruments. This statementalso amends SFAS No. 140, “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities – a replacement of FASB Statement No.125,” to eliminate the prohibition on a qualifying special-purpose entity fromholding a derivative financial instrument that pertains to a beneficialinterest other than another derivative financial instrument.  This statement is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. We are currently evaluating this statement to determine any potentialimpact that it may have on our financial results.

 

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets – anamendment of FASB Statement No. 140.” This statement amends SFAS 140 andclarifies the accounting for, measurement of, and disclosure of servicingassets and servicing liabilities.  Thisstatement should be adopted as of the beginning of an entity’s first fiscalyear that begins after September 15, 2006, but earlier adoption ispermitted.  We are currently evaluatingthis statement to determine any potential impact that it may have on ourfinancial results.

 

***Forward-LookingStatements and Risk Factors***

*** ***

This Quarterly Report on Form 10-Q, as well asinformation included in oral statements or other written statements made or tobe made by us, contain statements that, in our opinion, may constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  The words such as “believe,” “expect,”“anticipate,” “intend,” “plan,” “foresee,” “likely,” “project,” “estimate,” “will,”“may,” “should,” “future,” “predicts,” “potential,” “continue” and similarexpressions identify these forward-looking statements, which appear in a numberof places in this Quarterly Report and include, but are not limited to, allstatements relating to plans for future growth and other business developmentactivities as well as capital expenditures, financing sources, dividends andthe effects of regulation and competition, foreign currency conversion and allother statements regarding our intent, plans, beliefs or expectations or thoseof our directors or officers.  Investorsare cautioned that such forward-looking statements are not assurances forfuture performance or events and involve risks and uncertainties that couldcause actual results and developments to differ materially from those coveredin such forward-looking statements.  Theserisks and uncertainties include, but are not limited to:

 

•                  risks associated with operating on aglobal basis, including fluctuations in the value of foreign currenciesrelative to the U.S. dollar, and the ability to successfully hedge such risks –we derived approximately 64% of our operating revenue in 2005 from non-U.S.operations;

 

•                  to the extent we seek growth throughacquisitions, alliances or joint ventures, the ability to identify, consummateand integrate acquisitions, alliances and joint ventures on satisfactory terms;

 

43

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•                  our ability to develop new oradvanced technologies, including sophisticated information systems, softwareand other technology used to deliver our products and services and to do so ona timely and cost-effective basis, and the exposure to the risk of obsolescenceor incompatibility of these technologies with those of our customers orsuppliers;

 

•                  our ability to maintain and defendour intellectual property rights in jurisdictions around the world;

 

•                  our ability to successfully maintainhistoric effective tax rates;

 

•                  competition, particularly in themarkets for pharmaceutical information;

 

•                  regulatory, legislative andenforcement initiatives to which we are or may become subject, relatingparticularly to tax and to patient privacy and the collection and disseminationof data and specifically, the use of anonymized patient-specific information,which we anticipate to be an increasingly important tool in the design, developmentand marketing of pharmaceuticals;

 

•                  regulatory, legislative andenforcement initiatives to which our customers in the pharmaceutical industryare or may become subject restricting the prices that may be charged forsubscription or other pharmaceutical products or the manner in which suchproducts may be marketed or sold;

 

•                  deterioration in economic conditions,particularly in the pharmaceutical, healthcare, or other industries in whichour customers operate;

 

•                  consolidation in the pharmaceuticalindustry and the other industries in which our customers operate;

 

•                  the imposition of additionalrestrictions on our use of or access to data, or the refusal by data suppliersto provide data to us;

 

•                  conditions in the securities marketsthat may affect the value or liquidity of portfolio investments; and management’sestimates of lives of assets, recoverability of assets, fair market value,estimates and liabilities and accrued income tax benefits and liabilities;

 

•                  to the extent unforeseen cash needsarise, the ability to obtain financing on favorable terms; and

 

•                  terrorist activity, the threat ofsuch activity, and responses to and results of such activity and threats,including but not limited to effects, domestically and/or internationally, onus, our personnel and facilities, our customers and suppliers, financialmarkets and general economic conditions.

 

Consequently, all of the forward-looking statements wemake in this document are qualified by the information contained herein,including, but not limited to, the information contained under this heading andour Condensed Consolidated Financial Statements (Unaudited) and notes theretofor the

 

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three months ended March 31, 2006 and by the material set forth underthe headings “Business” and “Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2005.  Weare under no obligation to publicly release any revision to any forward-lookingstatement contained or incorporated herein to reflect any future events oroccurrences.

 

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

 

Information in response to this Item is set forth in “Note10. Financial Instruments” in the Notes to the Condensed Consolidated FinancialStatements (Unaudited).

 

**Item 4. Controls and Procedures**

 

(a)          Evaluation of Disclosure Controls and Procedures

 

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 the SEC’srules and forms, and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as the Company’sdisclosure controls and procedures are designed to do.  Thus, management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.

 

The Company’s ChiefExecutive Officer and****Chief FinancialOfficer have evaluated the effectiveness of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-14c and 15d-14c under theExchange Act) as of March 31, 2006 (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 the Company’s internalcontrol over financial reporting that occurred during the period covered bythis report that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

Information in response to this Item is incorporatedby reference to the information set forth in “Note 8. Contingencies” in theNotes to the Condensed Consolidated Financial Statements (Unaudited).

 

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

 
| **Period**           | ** ** | **Total Number  of Shares  Purchased(1)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased Under  Publicly Announced  Programs** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Programs(2)** | ** ** |
|----------------------|------------|-----------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
|                 |       |                                                |       |                                         |       |                                                                                               |       |                                                                                                                    |       |
| January 1-31,  2006  |       | 4,000,000                                           |       | 25.31                                        |       | 4,000,000                                                                                          |       | 36,374,200                                                                                                              |       |
|                 |       |                                                |       |                                         |       |                                                                                               |       |                                                                                                                    |       |
| February 1-28,  2006 |       | 25,000,000                                          |       | 25.05                                        |       | 25,000,000                                                                                         |       | 11,374,200                                                                                                              |       |
|                 |       |                                                |       |                                         |       |                                                                                               |       |                                                                                                                    |       |
| March 1-31, 2006     |       | —                                              |       | —                                       |       | —                                                                                             |       | 11,374,200                                                                                                              |       |
|                 |       |                                                |       |                                         |       |                                                                                               |       |                                                                                                                    |       |
| **Total**            |       | 29,000,000                                          |       | 25.09                                        |       | 29,000,000                                                                                         |       | 11,374,200                                                                                                              |       |

 

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(1)   All shareswere repurchased through the Company’s publicly announced stock repurchaseprograms.

 

(2)   In December2004, the Board of Directors authorized a stock repurchase program to buy up to10,000,000 shares.  This program wascompleted in January 2006.  In November2005, the Board of Directors authorized a stock repurchase program to buy up to 10,000,000 shares.  This program was completed in February 2006.  In January 2006, the Board of Directorsauthorized a stock repurchase program to buy up to 30,000,000 shares.  As of March 31, 2006, 11,374,200 sharesremained available for repurchase under the January 2006 program.  Unless terminated earlier by resolution ofthe Company’s Board of Directors, this program will expire when the Company hasrepurchased all shares authorized for repurchase thereunder.  See Note 13 of our Notes to CondensedConsolidated Financial Statements (Unaudited) for further details.

 

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**Item 6. Exhibits**

 
|   | (a) | Exhibits: |
|--------|-----|-----------|

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                      |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                       |
| 10.1                |       | Closing Agreement on Final Determination Covering Specific Matters  dated as of March 15, 2006 by and between IMS Health Incorporated and the  Commissioner of the Internal Revenue Service                |
|                |       |                                                                                                                                                                                                       |
| 10.2                |       | Closing Agreement on Final Determination Covering Specific Matters  dated as of March 15, 2006 by and between IMS Health Licensing Associates  L.L.C. and the Commissioner of the Internal Revenue Service |
|                |       |                                                                                                                                                                                                       |
| 10.3                |       | Summary Sheet for Non-Employee Director Remuneration as in effect at  April 18, 2006                                                                                                                       |
|                |       |                                                                                                                                                                                                       |
| 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                                                                                                                 |

 

48

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**SIGNATURES**

 

 

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

 

 
|              | IMS Health Incorporated        |
|-------------------|--------------------------------|
|              |                           |
|              |                           |
|              | By:                            | /s/ Nancy E. Cooper |   |
| Date: May 5, 2006 | Nancy E. Cooper                |
|              | Senior Vice President and      |
|              | Chief Financial Officer        |
|              | (principal financial officer)  |
|              |                           |
|              |                           |
|              | /s/ Leslye G. Katz             |   |
| Date: May 5, 2006 | Leslye G. Katz                 |
|              | Vice President, Controller     |
|              | (principal accounting officer) |
|                   |                                |  |  |

 

49

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                      |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                       |
| 10.1                |       | Closing Agreement on Final Determination Covering Specific Matters  dated as of March 15, 2006 by and between IMS Health Incorporated and the  Commissioner of the Internal Revenue Service                |
|                |       |                                                                                                                                                                                                       |
| 10.2                |       | Closing Agreement on Final Determination Covering Specific Matters  dated as of March 15, 2006 by and between IMS Health Licensing Associates  L.L.C. and the Commissioner of the Internal Revenue Service |
|                |       |                                                                                                                                                                                                       |
| 10.3                |       | Summary Sheet for Non-Employee Director Remuneration as in effect at  April 18, 2006                                                                                                                       |
|                |       |                                                                                                                                                                                                       |
| 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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