**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

 

**(Mark one)**

 

| **ý**                                                                                                                                           |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                 |
| **For the quarterly period ended September  30, 2003**                                                                                               |
|                                                                                                                                                 |
| **OR**                                                                                                                                               |
|                                                                                                                                                 |
| **o**                                                                                                                                                |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                 |
| **For the transition period from                      to** |

** **

**Commissionfile number 001-14049**

** **

| **IMS  Health Incorporated**                                                                                                |
|-----------------------------------------------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)                                                                     |
|                                                                                                                        |   |   |
| **Delaware**                                                                                                                |   | **06-1506026** |
| (State of Incorporation)                                                                                                    |   | (I.R.S. Employer Identification No.) |
|                                                                                                                        |   |   |
| **1499 Post Road, Fairfield, CT**                                                                                           |   | **06824** |
| (Address of principal executive offices)                                                                                    |   | (Zip Code) |
|                                                                                                                        |   |   |
| Registrant’s telephone  number, including area code         **(203) 319-4700** |
|                                                                                                                        |   |   |
| **Not  Applicable**                                                                                                         |
| (Former name, former  address and former fiscal year, if changed since last report)                                         |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Sections 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

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

 

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

 

| **Title  of Class**                    |   | **Shares Outstanding  At September 30, 2003** |
|----------------------------------------|--------|-----------------------------------------------|
| Common Stock, par value $.01 per share |   | 239,459,616                                   |

 

 

----

 

**IMS HEALTH INCORPORATED**

 

**INDEX TO FORM 10-Q**

 

 
| **PART I. FINANCIAL INFORMATION**                                                                       |
|---------------------------------------------------------------------------------------------------------|
| **Item 1. Financial Statements (Unaudited)**                                                            |
| Condensed Consolidated Statements of  Financial Position  September 30, 2003 and December 31, 2002      |
| Condensed Consolidated Statements of Income    Three Months Ended September 30, 2003 and 2002           |
| Condensed Consolidated Statements of Income    Nine Months Ended September 30, 2003 and 2002            |
| Condensed Consolidated Statements of Cash  Flows   Nine Months Ended September 30, 2003 and 2002        |
| Notes to Condensed Consolidated Financial  Statements                                                   |
| **Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations** |
| **Item 3. Quantitative and Qualitative  Disclosures About Market Risk**                                 |
| **Item 4. Controls and Procedures**                                                                     |
|                                                                                                    |
| **PART II.  OTHER INFORMATION**                                                                    |
| **Item 1. Legal Proceedings**                                                                           |
|                                                                                                    |
| **Item 6. Exhibits and Reports on Form 8-K**                                                            |
|                                                                                                    |
| **SIGNATURES**                                                                                          |
|                                                                                                    |
| **EXHIBITS**                                                                                            |

 

2

----

 

**PARTI. FINANCIAL INFORMATION**

**ItemI. FINANCIAL STATEMENTS**

** **

**IMSHEALTH INCORPORATED**

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

*(Dollars and shares in thousands, except pershare data)*

* *
|                                                                                                                                        |   | **As  of September 30,  2003** |          | **As  of December 31,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------------|-------------------------------|------------|
| **Assets:**                                                                                                                                 |   |                           |          |                          |       |
| **Current Assets:**                                                                                                                         |   |                           | ** **    |                          | ** ** |
| Cash and cash equivalents                                                                                                                   |   | **$**                          | **307,422**   | ** **                    | $          | 289,261 |   |
| Short-term marketable securities                                                                                                            |   | **34,312**                     | ** **    | —                        |       |
| Accounts receivable, net of allowances of  $4,846 and $5,808 in 2003 and 2002, respectively                                                 |   | **227,121**                    | ** **    | 215,868                       |       |
| Other receivable (Note 9)                                                                                                                   |   | **—**                     | ** **    | 36,116                        |       |
| Other current assets                                                                                                                        |   | **109,519**                    | ** **    | 110,258                       |       |
| Current assets of  discontinued operations                                                                                                  |   | **—**                     | ** **    | 175,761                       |       |
| **Total Current Assets**                                                                                                                    |   | **678,374**                    | ** **    | 827,264                       |       |
| Securities and other investments                                                                                                            |   | **15,316**                     | ** **    | 18,239                        |       |
| TriZetto equity investment (Note 8)                                                                                                         |   | **49,448**                     | ** **    | 74,557                        |       |
| Property, plant and equipment, net of  accumulated depreciation of $166,134 and $150,606 in 2003 and 2002,  respectively                    |   | **132,375**                    | ** **    | 131,587                       |       |
| Computer software                                                                                                                           |   | **185,032**                    | ** **    | 168,985                       |       |
| Goodwill                                                                                                                                    |   | **231,266**                    | ** **    | 184,163                       |       |
| Other assets                                                                                                                                |   | **187,327**                    | ** **    | 159,070                       |       |
| Non-current assets of  discontinued operations                                                                                              |   | **—**                     | ** **    | 54,663                        |       |
| **Total Assets**                                                                                                                            |   | **$**                          | **1,479,138** | ** **                    | $          | 1,618,528 |   |
|                                                                                                                                        |   |                           |          |                          |       |
| **Liabilities, Minority Interests and Shareholders’ Equity:**                                                                          |   |                           | ** **    |                          |       |
| **Current Liabilities:**                                                                                                                    |   |                           | ** **    |                          |       |
| Accounts payable                                                                                                                            |   | **$**                          | **31,810**    | ** **                    | $          | 31,940 |   |
| Accrued and other current liabilities                                                                                                       |   | **170,320**                    | ** **    | 152,201                       |       |
| Short-term debt                                                                                                                             |   | **185,543**                    | ** **    | 204,812                       |       |
| Accrued income taxes                                                                                                                        |   | **154,182**                    | ** **    | 143,872                       |       |
| Short-term deferred tax liability                                                                                                           |   | **12,126**                     | ** **    | 11,964                        |       |
| Deferred revenues                                                                                                                           |   | **95,359**                     | ** **    | 94,061                        |       |
| Current liabilities of  discontinued operations                                                                                             |   | **—**                     | ** **    | 39,733                        |       |
| **Total Current Liabilities**                                                                                                               |   | **649,340**                    | ** **    | 678,583                       |       |
| Postretirement and postemployment benefits                                                                                                  |   | **72,804**                     | ** **    | 73,813                        |       |
| Long-term debt (Note 10)                                                                                                                    |   | **342,762**                    | ** **    | 325,000                       |       |
| Other liabilities                                                                                                                           |   | **177,717**                    | ** **    | 107,894                       |       |
| Non-current liabilities of  discontinued operations                                                                                         |   | **—**                     | ** **    | 31,622                        |       |
| **Total Liabilities**                                                                                                                       |   | **$**                          | **1,242,623** | ** **                    | $          | 1,216,912 |   |
|                                                                                                                                        |   |                           |          |                          |       |   |   |
| **Commitments and Contingencies (Note  9)**                                                                                                 |   |                           | ** **    |                          | ** ** |
| **Minority Interests**                                                                                                                      |   | **$**                          | **101,269**   | ** **                    | $          | 102,033 |   |
| **Minority Interests of Discontinued Operations**                                                                                           |   | **—**                     | ** **    | 77,327                        |       |
|                                                                                                                                        |   |                           | ** **    |                          | ** ** |
| **Shareholders’ Equity:**                                                                                                              |   |                           | ** **    |                          |       |
| Common Stock, par value $.01, authorized  800,000 shares;  issued 335,045 shares at September 30, 2003 and December 31, 2002,  respectively |   | **$**                          | **3,350**     | ** **                    | $          | 3,350 |   |
| Capital in excess of par                                                                                                                    |   | **497,948**                    | ** **    | 497,562                       |       |
| Retained earnings                                                                                                                           |   | **1,724,620**                  | ** **    | 1,165,090                     |       |
| Treasury stock, at cost, 95,586 and 53,980 shares at  September 30, 2003 and December 31, 2002, respectively                                |   | **(2,000,918**                 | **)**         | (1,316,354                    | )          |
| Cumulative translation adjustment                                                                                                           |   | **(69,970**                    | **)**         | (106,907                      | )          |
| Minimum pension liability adjustment, net  of taxes of $8,371 at September 30, 2003 and December 31, 2002                                   |   | **(17,487**                    | **)**         | (17,487                       | )          |
| Unrealized loss on changes in fair value of cash  flow hedges, net of tax                                                                   |   | **(2,809**                     | **)**         | (3,141                        | )          |
| Unrealized gains on investments, net of taxes of  $276 and $76 at September 30, 2003 and December 31, 2002, respectively                    |   | **512**                        | ** **    | 143                           |       |
| **Total Shareholders’ Equity**                                                                                                         |   | **$**                          | **135,246**   | ** **                    | $          | 222,256 |   |
| **Total Liabilities, Minority Interests and Shareholders’ Equity**                                                                     |   | **$**                          | **1,479,138** | ** **                    | $          | 1,618,528 |   |

 

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

 

3

----

 

**IMSHEALTH INCORPORATED**

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

*(Dollars and shares in thousands, except pershare data)*

 
|                                                                                                    |   | **Three  Months Ended   September 30,** |        |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-------------|
|                                                                                                    |   | **2003**                                |        | **2002** |   |
|                                                                                                    |   |                                    |        |   |   |
| **Operating Revenue**                                                                                   |   | **$**                                   | **345,978** |   | $ | 306,048 |   |
|                                                                                                    |   |                                    |        |   |   |
| Operating costs                                                                                         |   | **137,954**                             |        | 110,723 |   |
| Selling and administrative expenses                                                                     |   | **81,684**                              |        | 70,416 |   |
| Depreciation and amortization                                                                           |   | **18,398**                              |        | 14,398 |   |
| **Operating Income**                                                                                    |   | **107,942**                             |        | 110,511 |   |
| Interest income                                                                                         |   | **739**                                 |        | 1,552 |   |
| Interest expense                                                                                        |   | **(3,688**                              | **)**       | (3,960 | ) |
| Gains from investments, net                                                                             |   | **1,964**                               |        | 1,200 |   |
| Loss on issuance of investees’ stock, net                                                          |   | **(143**                                | **)**       | (489 | ) |
| Other expense, net                                                                                      |   | **(1,117**                              | **)**       | (1,514 | ) |
| **Non-Operating Income (Loss), Net**                                                                    |   | **(2,245**                              | **)**       | (3,211 | ) |
| Income before provision for income taxes                                                                |   | **105,697**                             |        | 107,300 |   |
| Provision for income taxes (Note 11)                                                                    |   | **(36,702**                             | **)**       | (33,245 | ) |
| TriZetto equity income (loss), net of income taxes  of $(141) and $262 for 2003 and 2002, respectively  |   | **218**                                 |        | (406 | ) |
| **Income from Continuing Operations**                                                                   |   | **69,213**                              |        | 73,649 |   |
| Income from discontinued operations, net of income  taxes of $4,065 for 2002 (Note 6)                   |   | **—**                              |        | 8,607 |   |
| **Net Income**                                                                                          |   | **$**                                   | **69,213**  |   | $ | 82,256 |   |
|                                                                                                    |   |                                    |        |   |   |   |   |
| **Basic Earnings Per Share of Common Stock:**                                                           |   |                                    |        |   |   |
| Income from continuing operations                                                                       |   | **$**                                   | **0.29**    |   | $ | 0.26 |   |
| Income from discontinued operations                                                                     |   | **—**                              |        | 0.03 |   |
| **Basic Earnings Per Share of Common Stock**                                                            |   | **$**                                   | **0.29**    |   | $ | 0.29 |   |
|                                                                                                    |   |                                    |        |   |   |
| **Diluted Earnings Per Share of Common Stock:**                                                         |   |                                    |        |   |   |
| Income from continuing operations                                                                       |   | **$**                                   | **0.29**    |   | $ | 0.26 |   |
| Income from discontinued operations                                                                     |   | **—**                              |        | 0.03 |   |
| **Diluted Earnings Per Share of Common Stock**                                                          |   | **$**                                   | **0.29**    |   | $ | 0.29 |   |
|                                                                                                    |   |                                    |        |   |   |
| Weighted average number of shares  outstanding – basic                                             |   | **239,141**                             |        | 283,089 |   |
| Dilutive effect of shares issuable as of  period-end under stock option plans                           |   | **2,593**                               |        | 207 |   |
| Adjustment of shares outstanding applicable  to exercised and cancelled stock options during the period |   | **64**                                  |        | 4 |   |
| **Weighted Average Number of Shares Outstanding – Diluted**                                        |   | **241,798**                             |        | 283,300 |   |

 

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

 

4

----

 

**IMSHEALTH INCORPORATED**

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

*(Dollars and shares in thousands, except pershare data)*

 
|                                                                                                                    |   | **Nine  Months Ended   September 30,** |        |
|-------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-------------|
|                                                                                                                    |   | **2003**                               |        | **2002** |   |
|                                                                                                                    |   |                                   |        |   |   |
| **Operating Revenue**                                                                                                   |   | **$**                                  | **997,671** |   | $ | 899,662 |   |
|                                                                                                                    |   |                                   |        |   |   |
| Operating costs                                                                                                         |   | **406,254**                            |        | 345,807 |   |
| Selling and administrative expenses                                                                                     |   | **252,779**                            |        | 228,773 |   |
| Depreciation and amortization                                                                                           |   | **55,027**                             |        | 38,156 |   |
| Severance, impairment and  other charges                                                                                |   | **37,220**                             |        | — |   |
| **Operating Income**                                                                                                    |   | **246,391**                            |        | 286,926 |   |
| Interest income                                                                                                         |   | **3,257**                              |        | 4,320 |   |
| Interest expense                                                                                                        |   | **(11,662**                            | **)**       | (10,268 | ) |
| Gains from investments, net                                                                                             |   | **1,120**                              |        | 2,450 |   |
| Loss on issuance of investees’ stock, net                                                                          |   | **(404**                               | **)**       | (575 | ) |
| Other expense, net                                                                                                      |   | **(21,755**                            | **)**       | (17,823 | ) |
| **Non-Operating Income (Loss), Net**                                                                                    |   | **(29,444**                            | **)**       | (21,896 | ) |
| Income before provision for income taxes                                                                                |   | **216,947**                            |        | 265,030 |   |
| Provision for income taxes (Note 11)                                                                                    |   | **(130,514**                           | **)**       | (82,737 | ) |
| TriZetto equity loss, net of income taxes of $117  and $453 for 2003 and 2002, respectively                             |   | **(181**                               | **)**       | (701 | ) |
| TriZetto impairment  charge, net of income taxes of $9,565 for 2003                                                     |   | **(14,842**                            | **)**       | — |   |
| **Income from Continuing Operations**                                                                                   |   | **71,410**                             |        | 181,592 |   |
| Income from discontinued operations, net of income  taxes of $1,237 and $8,308 for 2003 and 2002, respectively (Note 6) |   | **2,779**                              |        | 21,857 |   |
| Gain on discontinued  operations (Note 6)                                                                               |   | **495,053**                            |        | — |   |
| **Net Income**                                                                                                          |   | **$**                                  | **569,242** |   | $ | 203,449 |   |
|                                                                                                                    |   |                                   |        |   |   |   |   |
| **Basic Earnings Per Share of Common Stock:**                                                                           |   |                                   |        |   |   |
| Income from continuing operations                                                                                       |   | **$**                                  | **0.29**    |   | $ | 0.63 |   |
| Income from discontinued operations                                                                                     |   | **2.02**                               |        | 0.08 |   |
| **Basic Earnings Per Share of Common Stock**                                                                            |   | **$**                                  | **2.31**    |   | $ | 0.71 |   |
|                                                                                                                    |   |                                   |        |   |   |
| **Diluted Earnings Per Share of Common Stock:**                                                                         |   |                                   |        |   |   |
| Income from continuing operations                                                                                       |   | **$**                                  | **0.29**    |   | $ | 0.63 |   |
| Income from discontinued operations                                                                                     |   | **2.01**                               |        | 0.08 |   |
| **Diluted Earnings Per Share of Common Stock**                                                                          |   | **$**                                  | **2.30**    |   | $ | 0.70 |   |
|                                                                                                                    |   |                                   |        |   |   |
| Weighted average number of shares  outstanding – basic                                                             |   | **246,776**                            |        | 287,486 |   |
| Dilutive effect of shares issuable as of  period-end under stock option plans                                           |   | **1,058**                              |        | 1,053 |   |
| Adjustment of shares outstanding  applicable to exercised and cancelled stock options during the period                 |   | **83**                                 |        | 50 |   |
| **Weighted Average Number of Shares Outstanding – Diluted**                                                        |   | **247,917**                            |        | 288,589 |   |

* *

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

 

5

----

 

**IMSHEALTH INCORPORATED**

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

*(Dollars and shares in thousands, except pershare data)*

 
|                                                                                     |   | **Nine  Months Ended September 30,** |        |
|------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                                     |   | **2003**                             |        | **2002** |   |
| **Cash Flows from Operating Activities:**                                                |   |                                 |        |   |   |
| Net income                                                                               |   | **$**                                | **569,242** |   | $ | 203,449 |   |
| Less income from discontinued operations and gain on  disposal                           |   | **(497,832**                         | **)**       | (21,857 | ) |
| Income from continuing operations                                                        |   | **71,410**                           |        | 181,592 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:       |   |                                 |        |   |   |
| Depreciation and amortization                                                            |   | **55,027**                           |        | 38,156 |   |
| Bad debt expense                                                                         |   | **864**                              |        | 1,198 |   |
| Nielsen Media Research interest receivable                                               |   | **—**                           |        | (2,067 | ) |
| Deferred income taxes                                                                    |   | **10,436**                           |        | 15,361 |   |
| Gains from investments, net                                                              |   | **(1,120**                           | **)**       | (2,450 | ) |
| Loss on issuance of investees’ stock, net                                           |   | **404**                              |        | 575 |   |
| TriZetto equity loss, net                                                                |   | **181**                              |        | 701 |   |
| TriZetto impairment charge, net                                                          |   | **14,842**                           |        | — |   |
| Minority interests in net income of  consolidated companies                              |   | **6,189**                            |        | 7,933 |   |
| Non-cash stock compensation charges                                                      |   | **2,303**                            |        | 480 |   |
| Non-cash portion of severance, impairment  and other charges                             |   | **6,576**                            |        | — |   |
| Change in assets and liabilities,  excluding effects from acquisitions and dispositions: |   |                                 |        |   |   |
| Net decrease in accounts receivable                                                      |   | **298**                              |        | 6,215 |   |
| Net increase in inventory                                                                |   | **(377**                             | **)**       | (4,559 | ) |
| Net increase in prepaid expenses and  other current assets                               |   | **(7,380**                           | **)**       | (6,219 | ) |
| Net decrease in accounts payable                                                         |   | **(3,431**                           | **)**       | (7,235 | ) |
| Net (decrease) increase in accrued and  other current liabilities                        |   | **(224**                             | **)**       | 4,576 |   |
| Net increase (decrease) in accrued  severance, impairment and other charges              |   | **10,219**                           |        | (27,467 | ) |
| Net decrease in deferred revenues                                                        |   | **(10,234**                          | **)**       | (17,210 | ) |
| Net increase in accrued income taxes                                                     |   | **77,722**                           |        | 28,834 |   |
| Net decrease (increase) in pension assets  and liabilities                               |   | **435**                              |        | (3,529 | ) |
| Net decrease (increase) in other  long-term assets                                       |   | **3,061**                            |        | (7,582 | ) |
| Net tax benefit on stock option exercises                                                |   | **799**                              |        | 793 |   |
| Nielsen Media Research payment received  in respect of D&B Legacy Tax Matters        |   | **37,025**                           |        | — |   |
| **Net Cash Provided by Operating Activities**                                            |   | **275,025**                          |        | 208,096 |   |
| **Cash Flows Used in Investing Activities:**                                             |   |                                 |        |   |   |
| Capital expenditures                                                                     |   | **(12,948**                          | **)**       | (12,931 | ) |
| Additions to computer software                                                           |   | **(56,743**                          | **)**       | (52,746 | ) |
| Investments in short-term marketable  securities                                         |   | **(34,312**                          | **)**       | — |   |
| Payments for acquisitions of businesses,  net of cash acquired                           |   | **(52,237**                          | **)**       | (10,244 | ) |
| Proceeds from sale of investments, net                                                   |   | **3,988**                            |        | 22,020 |   |
| Funding of venture capital investments                                                   |   | **(1,200**                           | **)**       | (3,000 | ) |
| Other investing activities, net                                                          |   | **(9,645**                           | **)**       | (17,613 | ) |
| **Net Cash Used in Investing Activities**                                                |   | **(163,097**                         | **)**       | (74,514 | ) |
| **Cash Flows Used in Financing Activities:**                                             |   |                                 |        |   |   |
| Net (decrease) increase in debt                                                          |   | **(156,380**                         | **)**       | 206,948 |   |
| Borrowings under private placement                                                       |   | **150,000**                          |        | — |   |
| Payments for purchase of treasury stock                                                  |   | **(97,936**                          | **)**       | (260,543 | ) |
| Proceeds from exercise of stock options                                                  |   | **11,545**                           |        | 14,883 |   |
| Dividends paid                                                                           |   | **(14,575**                          | **)**       | (17,324 | ) |
| Proceeds from employee stock purchase plan                                               |   | **1,382**                            |        | 1,411 |   |
| Increase in cash overdrafts                                                              |   | **1,246**                            |        | 1,883 |   |
| Refund of cash portion of Synavant spin-off dividend                                     |   | **4,863**                            |        | — |   |
| **Net Cash Used in Financing Activities**                                                |   | **(99,855**                          | **)**       | (52,742 | ) |
| **Effect of Exchange Rate  Changes**                                                     |   | **6,088**                            |        | 640 |   |
| **Increase in Cash and  Cash Equivalents**                                               |   | **18,161**                           |        | 81,480 |   |
| **Cash and Cash Equivalents, Beginning of Period**                                       |   | **289,261**                          |        | 183,409 |   |
| **Cash and Cash Equivalents, End of Period**                                             |   | **$**                                | **307,422** |   | $ | 264,889 |   |

* *

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

 

6

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**IMSHEALTH INCORPORATED**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

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

 

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

 

The accompanying Condensed Consolidated Financial Statements(unaudited) have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and Article 10 of Regulation S-X under the Securities and ExchangeAct of 1934, as amended.  The CondensedConsolidated 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 opinion of management, alladjustments, all of which are of a normal recurring nature, considerednecessary for a fair presentation of financial position, results of operationsand cash flows for the periods presented have been included.  The results of operations for interimperiods are not necessarily indicative of the results expected for the fullyear.  The Condensed ConsolidatedFinancial Statements (unaudited) and related notes should be read inconjunction with the Consolidated Financial Statements and related notes of IMSHealth Incorporated (the “Company” or “IMS”) included in its 2002 Annual Reporton Form 10-K and in its previous filings on Form 10-Q.  Certainprior year amounts have been reclassified to conform to the 2003presentation.  Amounts presented in theCondensed Consolidated Financial Statements (unaudited) may not add due torounding.  

 

**Note 2.     Basis ofPresentation**

 

The Company isa leading global provider of information solutions to the pharmaceutical andhealthcare industries.  The Companyoperates in more than 100 countries and providesmarket information, sales management and decision-support services to thepharmaceutical and healthcare industries. Its key products include sales management information to optimize salesforce productivity, marketing effectiveness research for prescription andover-the-counter pharmaceutical products, consulting and other services.  The Company also owns a venture capitalunit, Enterprise Associates, LLC (“Enterprises”), which is focused on investmentsin emerging businesses, and a 26.0% equity interest in The TriZettoGroup, Inc. (“TriZetto”), at September 30, 2003.

 

During the year ended December 31, 2002, the Company also included theCognizant Technology Solutions Corporation Segment (“CTS”), which provides customInformation Technology (“IT”) design, development, integration and maintenanceservices.  CTS is a publicly traded corporation on the Nasdaq national marketsystem.  IMS owned 55.3% of the commonshares outstanding of CTS (92.5% of the outstanding voting power) as ofDecember 31, 2002, and accounted for CTS as a consolidated subsidiary.  On February 6, 2003, the Companydivested CTS through a split-offtransaction, and as a result, during the three months ended March 31,2003, the Company recorded a net gain from discontinued operations of$495,053.  The Company’s share of CTS results arepresented as discontinued operations for 2003 through the date of divestitureand for the three and nine months ended September 30, 2002.  CTS’s assets and liabilities are presentedas discontinued operations as of December 31, 2002 (see Note 6). 

 

**Note 3.    Summary ofRecent Accounting Pronouncements**

 

In May 2003,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for howan 

 

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enterprise classifies andmeasures certain financial instruments that have characteristics of bothliabilities and equity.  SFAS No. 150requires an enterprise to classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances).  SFAS No. 150 was effective for financialinstruments entered into or modified after May 31, 2003, and otherwise waseffective at the beginning of the first interim period beginning after June 15,2003.  The adoption of SFAS No. 150effective June 1, 2003 did not have a material impact on the Company’sfinancial position, results of operations or cash flows through September 30,2003. 

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.”  SFASNo. 149 amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives) and for hedging activitiesunder SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  The adoption of SFAS No.149 effective July 1, 2003 did not have a material impact on the Company’sfinancial position, results of operations or cash flows for the three monthsended September 30, 2003.  

 

In November2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue00-21, “Revenue Arrangements with Multiple Deliverables.”  EITF 00-21 addresses the revenue recognitionfor arrangements with multiple deliverables. The deliverables in these arrangements must be divided into separateunits of accounting when the individual deliverables have value to the customeron a stand-alone basis, there is objective and reliable evidence of the fairvalue of the undelivered elements, and, if the arrangement includes a generalright to return the delivered element, delivery or performance of theundelivered element is considered probable. The relative fair value of each unit should be determined and the totalconsideration of the arrangement should be allocated among the individual unitsbased on their fair value.  EITF 00-21was effective for revenue arrangements entered into after June 30, 2003.  The adoption of EITF 00-21, effective July1, 2003 did not have a material impact on the Company’s financial position,results of operations or cash flows for the three months ended September 30,2003. 

 

In June 2001,the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  SFAS No. 143 addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  SFAS No. 143 requires anenterprise to record the fair value of an asset retirement obligation as aliability in the period in which it incurs a legal obligation associated withthe retirement of a tangible long-lived asset. SFAS No. 143 was effective for fiscal years beginning after June 15,2002.  The adoption of SFAS No. 143effective January 1, 2003 did not have a material impact on the Company’sfinancial position, results of operations or cash flows for the three and ninemonths ended September 30, 2003.  

 

**Note 4.    Summary ofSignificant Accounting Policies**

 

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

 

*Stock-basedcompensation.*  SFAS No. 123, “Accounting forStock-Based Compensation,” requires that companies with stock-basedcompensation plans either recognize compensation expense based on 

 

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

** **
|                |                                                                                                               | **Three months ended  September 30,** |       | **Nine months ended  September 30,** |       |
|---------------------|--------------------------------------------------------------------------------------------------------------------|---------------------------------------|------------|--------------------------------------|------------|
|                |                                                                                                               | **2003**                              |       | **2002**                             |       | **2003** |   | **2002** |   |
| Net  Income:        | As  reported                                                                                                       |                                  | **$**      | **69,213**                           |       | $ | 82,256 |   | **$** | **569,242** |   | $ | 203,449 |   |
|                | Add:   Stock-based employee compensation expense included in reported net  income, net of tax                 |                                  | **586**    |                                 | 662        | ** ** | **1,760** |   | 1,657 |   |
|                | Deduct:   Total stock-based employee compensation expense under fair value  method for all awards, net of tax |                                  | **(5,136** | **)**                                | (8,485     | ) | **(16,011** | **)** | (19,969 | ) |
|                | Pro forma                                                                                                          |                                  | **$**      | **64,663**                           |       | 74,433 | ** ** | **$** | **554,991** |   | $ | 185,137 |   |
| Earnings Per Share: |                                                                                                               |                                  |       |                                 |       |   |   |   |   |
| Basic               | As reported                                                                                                        |                                  | **$**      | **0.29**                             | ** ** | $ | 0.29 |   | **$** | **2.31** | ** ** | $ | 0.71 |   |
|                | Pro forma                                                                                                          |                                  | **$**      | **0.27**                             |       | $ | 0.26 | ** ** | **$** | **2.25** |   | $ | 0.64 |   |
| Diluted             |                                                                                                               |                                  |       |                                 |       |   |   |   |   |
|                | As reported                                                                                                        |                                  | **$**      | **0.29**                             |       | $ | 0.29 | ** ** | **$** | **2.30** |   | $ | 0.70 |   |
|                | Pro forma                                                                                                          |                                  | **$**      | **0.27**                             |       | $ | 0.26 | ** ** | **$** | **2.24** |   | $ | 0.64 |   |

 

For adescription of the Company’s other critical accounting policies, please referto the Company’s 2002 Annual Report on Form 10-K as filed with the Securitiesand Exchange Commission.  

 

**Note5.    Acquisitions**

 

*Acquisitions*

 

During thenine months ended September 30, 2003, the Company completed five acquisitions withan aggregate cash purchase price of $58,238. These acquisitions were Data Niche Associates, Inc. (U.S.), Azyx PolskaGeopharma Information Services, Sp.z.o.o. (Poland), Azyx Serviços deGeomarketing Farmacéutico, Ltda. (Portugal), Interpharma Asia Pacific’shealthcare consulting business (China) and Rx Canada, Inc. (Canada) and wereaccounted for under the purchase method of accounting.  As such, the aggregate cash purchase pricehas been allocated on a preliminary basis to the assets and liabilities acquiredbased on estimated fair values as of the closing date.  The purchase price allocation will befinalized after completion of the valuation of certain assets andliabilities.  Any adjustments resultingfrom the finalization of the purchase price allocations are not expected tohave a material impact on the Company’s results of operations.  The unaudited Condensed ConsolidatedFinancial Statements include the results of these acquired companies subsequentto the closing of the acquisitions.  Hadthese acquisitions occurred as of January 1, 2003 or 2002, the impact on theCompany’s results of operations would not have been significant.  

 

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The Company isin the process of completing its purchase price allocation related to itsacquisitions of Medcom Canada, Marketing Initiatives, Inc., Rosenblatt-KlauberGroup, Battaerd Mansley PTY Limited and Medical Radar Limited, which closed during 2002.  In addition, the Company made tax relatedand other acquisition related payments during the nine months ended September30, 2003.  Accordingly, additionalgoodwill of $4,509 was recorded.  Thisincludes a reduction of $3,012 related to the deferred tax liabilitiesresulting from intangible assets which are not amortizable for tax purposes. 

 

In February2002, the Company acquired Infoplex Durdaut & Jassmann GmbH, based inGermany.  The purchase price for this acquisition,including direct and incremental transaction costs, amounted to $7,013, paid incash.  After an allocation of thepurchase price to the net assets acquired, the Company recorded goodwill of$3,758. 

 

**Note6.    CTS Split-Off**

 

On February 6,2003, the Company completed an exchange offer to distribute its majorityinterest in CTS.  The Company exchanged0.309 shares of CTS class B common shares for each share of the Company that was tendered.  Under terms of the offer, the Companyaccepted 36,540 IMS common shares tendered in exchange for all 11,291 CTS common shares that the Company owned.  As theoffer was oversubscribed, the Company accepted tendered IMS shares on apro-rata basis in proportion to the number of shares tendered.  The proration factor was 21.115717%. 

 

As a result ofthis exchange offer, during the three months ended March 31, 2003, the Companyrecorded a net gain from discontinued operations of $495,053.  This gain was based on the Company’s closing market price onFebruary 6, 2003 multiplied by the 36,540 shares of IMS common shares acceptedin the offer, net of the Company’s carrying valueof CTS and after deducting direct and incremental expenses related to theexchange offer. 

 

In accordancewith the provisions of SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” the Company recorded the results of CTS through thedisposition date and the gain on disposal as income from discontinuedoperations net of income taxes in the Condensed Consolidated Statements ofIncome (unaudited) for the nine months ended September 30, 2003.  The Company’s share of CTS’s assets andliabilities are presented as discontinued operations as of December 31,2002.  The Company’s share of CTS’s results forthe three and nine months ended September 30, 2002 and the period from January1, 2003 through the effective date of the exchange offer are presented asdiscontinued operations. 

 

Direct costsrelated to the CTS Split-Off approximated $17,300, consisting primarily ofinvestment advisor, legal and accounting fees.

 

**Note7.    Goodwill and Intangible Assets**

 

EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets.”  SFAS No. 142addresses the initial recognition and measurement of intangible assets acquiredoutside of a business combination and the accounting for goodwill and otherintangible assets subsequent to their acquisition.  SFAS No. 142 provides that goodwill and intangible assets which haveindefinite useful lives will not be amortized but rather will be tested atleast annually for impairment.

 

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It also provides thatintangible assets that have finite useful lives be amortized.  There was no impairment of goodwill uponadoption of SFAS No. 142 and as such, the Company did not recognize atransition adjustment during the first nine months of 2002.  

 

During thefirst nine months of 2003, the Company recorded additional goodwill of $35,603based on a preliminary allocation of purchase price for the five acquisitionscompleted in 2003 (see Note 5).  TheCompany is in the process of completing its purchase price allocations inrelation to certain acquisitions completed during the second half of 2002 (seeNote 5), and as such during the first nine months of 2003 has increasedgoodwill and reduced certain intangible assets by $3,711.  As of September 30, 2003 total goodwillamounted to $231,266.  

 

All of theCompany’s other acquired intangibles are subject to amortization.  During the first nine months of 2003, theCompany recorded intangible assets of $23,046 based on a preliminary allocationof purchase price for acquisitions completed in 2003. ** **Intangibleasset amortization expense was $2,378 and $6,767 during the three and ninemonths ended September 30, 2003.  AtSeptember 30, 2003, intangible assets were primarily composed of Customer Relationships,Databases and Trade Names (principally included in Other assets) and Computersoftware.  The gross carrying amountsand related accumulated amortization of these intangibles were $58,752 and $9,975,respectively, at September 30, 2003. These intangibles are amortized over periods ranging from two to fifteenyears.  

 

Amortizationexpense associated with intangible assets at September 30, 2003 is estimated tobe $2,382 for the fourth quarter of 2003 and approximately $9,528 for each yearbeginning in 2004 through 2008.

 

**Note8.    Investments in Equity Investees**

 

Summary financial information for TriZetto for the three and ninemonths ended September 30, 2003 and 2002 is presented below.  The amounts shown represent TriZetto’s unaudited consolidated operating results,based on publicly available information.

 
|                          |   | **Three Months ended  September 30,** |       | **Nine Months ended  September 30,** |   |
|-------------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                          |   | **2003**                              |       | **2002**                             |   | **2003** |   | **2002** |   |
| Net Sales                     |   | **$**                                 | **76,018** |                                 | $      | 68,602 |   | **$** | **223,668** |   | $ | 195,077 |   |
| Gross Profit                  |   | **$**                                 | **22,267** |                                 | $      | 23,149 | ** ** | **$** | **67,394** |   | $ | 64,364 |   |
| Income (Loss) from Operations |   | **$**                                 | **1,437**  |                                 | $      | (3,627 | ) | **$** | **(1,532** | **)** | $ | (14,659 | ) |
| Net Income (Loss)             |   | **$**                                 | **630**    |                                 | $      | (3,487 | ) | **$** | **(3,398** | **)** | $ | (11,771 | ) |

 

The investmentin TriZetto is accounted for under the equity method of accounting.  Following an initial decline in the marketvalue of TriZetto stock below cost in the latter part of the second quarter of2002, the Company performed, and continuesto perform, a periodic assessment in accordance with its policy to determinewhether an other-than-temporary decline in fair value has occurred.  An impairment charge of $14,842, netof taxes of $9,565, was recorded in the three months ended March 31, 2003, towrite down the Company’s investment in TriZetto following the continuedsignificant decline in the market value of TriZetto shares below the Company’scarrying value.  As of September 30,2003,

 

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TriZetto shares closed at $6.70 compared to the Company’s carryingvalue per share of $4.06.

 

**Note 9.    Contingencies **

 

The Companyand its subsidiaries are involved in legal and tax proceedings, claims andlitigation arising in the ordinary course of business.  Management periodically assesses theCompany’s liabilities and contingencies in connection with these matters basedupon the latest information available. For those matters where management currently believes it is probablethat the Company will incur a loss and that the probable loss or range of losscan be reasonably estimated, the Company has recorded reserves in theconsolidated financial statements based on its best estimates of suchloss.  In other instances, because ofthe uncertainties related to either the probable outcome or the amount or rangeof loss, management is unable to make a reasonable estimate of a liability, ifany.  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 additionalinformation becomes available, the Company adjusts its assessment and estimatesof such liabilities accordingly. 

 

The Companyroutinely enters into agreements with its customers to sell data that theCompany acquires in the normal course of business.  In these customer agreements the Company agrees to indemnify andhold harmless the customers for any damages they may suffer as a result ofpotential intellectual property infringement claims.  These indemnities typically have terms of approximately twoyears.  The Company has not accrued aliability with respect to these matters, as the exposure is considered neitherprobable nor reasonably estimable. 

 

Based on itsreview of the latest information available, in the opinion of management, theultimate liability of the Company in connection with pending tax and legalproceedings, claims and litigation will not have a material effect on theCompany’s results of operations, cash flows or financial position, with thepossible exception of the matters described below. 

 

*Legacy and RelatedMatters*

* *

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

 

In November1996, the company then known as The Dun & Bradstreet Corporation(“D&B”) separated into three public companies by spinning-off ACNielsenCorporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”) (the “1996Spin-Off”).  Pursuant to the agreementseffecting the 1996 Spin-Off, among other things, certain liabilities, includingcontingent liabilities relating to the IRI Action (defined below) and taxliabilities arising out of certain prior business transactions (the “D&BLegacy Tax Matters”), described more fully below, were allocated among D&B,ACNielsen and Cognizant. 

 

In June 1998,Cognizant separated into two public companies by spinning off IMS (the “1998Spin-Off”) and then changed its name to Nielsen Media Research, Inc.(“NMR”).  As a result of the 1998 

 

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Spin-Off, the Company and NMR are jointly and severally liable for allliabilities of Cognizant under the agreements effecting the 1996 Spin-Off.  Asbetween themselves, however, the Company and NMR agreed that IMS will assume75%, and NMR will assume 25%, of any payments to be made in respect of the IRIAction, including any legal fees and expenses related thereto incurred in 1999or thereafter (IMS agreed to be responsible for legal fees and expensesincurred during 1998).  In addition, theCompany and NMR agreed they would share equally Cognizant’s share of liabilityarising out of the D&B Legacy Tax Matters after the Company paid the first$130,000 of such liability.  NMR’saggregate liability for payments in respect of the IRI Action and the D&BLegacy Tax Matters shall not exceed $125,000.

 

Also during1998, D&B separated into two public companies by spinning-off The Dun &Bradstreet Corporation (“D&B I”) and then changed its name to R.H.Donnelley (“Donnelley”).  As a result oftheir separation in 1998, Donnelley and D&B I are each jointly andseverally liable for all liabilities of D&B under the agreements effectingthe 1996 Spin-Off. 

 

During 2000,D&B I separated into two public companies by spinning off The Dun & BradstreetCorporation (“D&B II”) and then changed its name to Moody’s Corporation(“Moody’s).  Pursuant to theirseparation in 2000, Moody’s and D&B II are each jointly and severallyliable for all of D&B’s liabilities under the agreements effecting the 1996Spin-Off. 

 

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

 

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

 

In connection with the 1996 Spin-Off, D&B, ACNielsen and Cognizantentered into an Indemnity and Joint Defense Agreement pursuant to which they agreed(i) to certain arrangements allocating liabilities that may arise out ofor in connection with the IRI Action, and (ii) to conduct a joint defenseof such action.  In particular, theIndemnity and Joint Defense Agreement provides that, in the event of an adversedecision, ACNielsen will assume exclusive liability for liabilities up to anamount to be calculated by an investment banking firm, at the time suchliabilities, if any, become payable, pursuant to a specified solvency testdesigned to permit ACNielsen to pay the maximum amount of the liabilitypossible while remaining a viable company (the “ACN Maximum Amount”) and thatCognizant and Donnelley will share liability equally for any amounts in excessof the ACN Maximum Amount.  OnFebruary 19, 2001, ACNielsen announced that it merged with a wholly-ownedsubsidiary of VNU N.V.  

 

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Pursuant to the Indemnity and Joint Defense Agreement, VNU is to beincluded with ACNielsen for purposes of determining the ACN Maximum Amount.

 

*D&B Legacy and Related Tax Matters. *During the secondquarter of 2003, the IRS issued an agent’s final examination report seeking todisallow certain royalty expense deductions claimed by D&B on its 1995 and1996 tax returns in connection with a partnership established in 1993.  In October of 2003, the IRS issued a Noticeof Proposed Adjustment seeking to reallocate certain items of partnershipincome and expense as well as disallow certain items of partnership expense onthe partnership’s 1997 tax return during which year Cognizant was a partner inthe partnership.  In October 2003, thepartnership and the Company received Notices of Proposed Adjustments seeking toreverse items of partnership income and loss and disallow certain royaltyexpense deductions claimed by the Company on its 1998 and 1999 tax returnsarising from the Company’s participation in the partnership.  If the IRS were to ultimately prevail in theforegoing positions, the Company’s share of the total liability for 1995 and1996 would be approximately $40,700, its liability for 1997 would beapproximately $17,600, and its aggregate liability for 1998 and 1999 would beapproximately $26,500 (all net of income tax benefit).  If the IRS were to take a comparable positionwith respect to all of the Company’s open tax years subsequent to 1999 andultimately prevail, the Company’s additional liability would be approximately$30,300 (net of income tax benefit). 

 

In addition,in the second quarter of 2003, the IRS issued an additional agent’s finalexamination report to the partnership described above seeking to reallocatecertain partnership income to D&B for 1996.  D&B II and the Company believe that the positions taken bythe IRS in this report are inconsistent with the IRS’s denial of the royalty expensedeductions described above.  If the IRSwere to ultimately prevail in this matter, the Company’s share of the liabilityfor 1996 would be approximately $20,500 (net of income tax benefit). 

 

In addition,the IRS has asserted penalties for the years described above based on itsinterpretation of applicable law.  Ifthe IRS were to prevail in its assertion of penalties and interest thereon, theCompany’s share of such penalties and interest would be approximately $8,100 for1995 and 1996 and its aggregate liability for 1998 and 1999 would beapproximately $9,700 (all net of income tax benefit).  D&B II and the Company dispute this interpretation. 

 

D&B II, asthe agent for Donnelley in the D&B Legacy Tax Matters, has filed protestsrelating to the proposed assessments for 1995 and 1996 with the IRS Office ofAppeals.  D&B II will attempt toresolve these matters at the appeals phase before proceeding to litigation ifnecessary.  The Company intends tocontest the adjustments asserted by the IRS against Cognizant for 1997 and theCompany for 1998 and 1999 in due course. 

 

During thefirst quarter of 2003, the Company increased its reserve to its anticipatedshare of the probable liability in connection with the foregoing tax matters.  Accordingly, based on information currentlyavailable, management does not believe that these matters will have a materialadverse effect on the Company’s consolidated financial position or results ofoperations but may have a material adverse effect on cash flows in the periodin which any such amounts are paid. 

 

In addition to 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 

 

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activities are subject to review byapplicable tax authorities.  As a resultof the review process, uncertainties exist and it is possible that some ofthese matters could be resolved adversely to the Company.

 

*SharingDispute. *In May 2000, the Company paid $212,291 to the IRSin connection with a D&B Legacy Tax Matter.  Pursuant to the terms of the 1998 Spin-Off, NMR was liable for aportion of this amount but was not obligated to pay the Company for its shareuntil January 2, 2001.  InDecember 2000, the Company requested reimbursement from NMR in the amountof $41,136, which represented NMR’s share of the liability according to theCompany’s calculations.  OnJanuary 2, 2001, NMR made a payment of $10,530 but refused to pay theremaining $30,606 based on its interpretation of the applicableagreements.  At March 31, 2003, theCompany had a receivable of $36,805, which included the outstanding principaland accumulated accrued interest of $6,199. During each of the three and nine months ended September 30, 2003 and2002, $0, $909, $689 and $2,067, respectively, of interest income was accruedin accordance with the terms of the applicable agreements.  These amounts were reflected in Other receivablein the Condensed Consolidated Statements of Financial Position(unaudited).  On April 29, 2003,a panel from the American ArbitrationAssociation International Center for Dispute Resolution issued an awardin favor of the Company and ordered that NMR pay the Company the entireprincipal balance plus simple 9% interest from January 2, 2001, together withall legal fees and costs incurred by the Company in connection with thearbitration.  On April 30, 2003, theCompany received $37,025 from NMR in satisfaction of the principal amount plusinterest from January 2, 2001 through April 30, 2003.  On May 16, 2003, the Company received an additional $1,332 fromNMR as reimbursement of the Company’s legal fees and costs in connection withthe arbitration. 

 

*Matters Before theEuropean Commission*

 

On December19, 2000, National Data Corporation (“NDC”) filed a complaint against theCompany with the European Commission (“EC” or “Commission”), requesting thatthe Commission initiate a proceeding against the Company for an allegedinfringement of Article 82 of the EC Treaty.  Article 82 of the EC Treaty relates to abuses of a dominantposition that adversely affect competition. The complaint concerned an IMS geographic mapping structure used for thereporting of regional sales data in Germany, which the German courts have ruledis copyright protected.  In addition toseeking a formal Commission proceeding against the Company, the complaintrequested that the Commissiongrant interim relief requiring the Company to grant NDC a compulsory license toenable NDC to use this structure in its competing regional sales data servicein Germany. 

 

OnMarch 8, 2001, the Commission initiated formal proceedings against theCompany in this matter and on July 3, 2001, the Commission ordered interimmeasures against the Company pending a final decision (the “InterimDecision”).  Under the Interim Decision,the Company was ordered to grant a license of the geographic mapping structureon commercially reasonable terms without delay to NDC and to any othercompetitor currently present on the German regional sales data market thatrequested a license. 

 

OnAugust 6, 2001, the Company filed an appeal with the Court of FirstInstance (“CFI”) seeking the annulment of the Interim Decision in its entirety(the “Annulment Appeal”) and requesting that operation of the Interim Decisionbe suspended until the CFI renders judgment on the Annulment Appeal.  On October 26, 2001, the President ofthe CFI suspended operation of the Interim Decision 

 

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pending a judgment on the Annulment Appeal.  On April 11, 2002, the European Court of Justice (“ECJ”) deniedan appeal by NDC of the October 26 decision. In August 2003, the Commission withdrew its Interim Decision.  In October 2003, the Commission applied tothe CFI to have the Annulment Appeal declared moot.  

 

In October2002, the CFI informed the Company that it had suspended the AnnulmentAppeal.  The Annulment Appeal issuspended until the ECJ renders a decision on questions referred to it by theGerman court that is presiding over a certain litigation that the Company ismaintaining against NDC in Germany for misappropriation of the Company’sintellectual property rights. 

 

The Companyintends to continue to vigorously assert that its refusal to grant licenses forthe use of its copyright protected geographic mapping structure to its directcompetitors in Germany, which compete in the same market for which thecopyright exists, is not in contravention of Article 82 of the ECTreaty.  Management of the Company isunable to predict at this time the final outcome of this matter or whether theresolution of this matter could materially affect the Company’s future resultsof operations, cash flows or financial position. 

 

*Other Contingencies*

* *

*Contingent Consideration. *Under the terms ofthe purchase agreements related to acquisitions made in 2002 and 2001, theCompany may be required to pay additional amounts as contingent considerationbased on the achievement of certain targets during 2003 to 2007.  Any additional payments will be recorded asgoodwill in accordance with EITF No. 95-8, “Accounting for ContingentConsideration Paid to the Shareholders of an Acquired Enterprise in a PurchaseBusiness Combination.”  Based on currentestimates, management expects the additional payments under these agreements tototal approximately $14,000.  As ofSeptember 30, 2003, no amounts were earned under these contingencies.  The annual contingent payments will be resolvedwithin a specified time period after the end of each respective calendar yearfrom 2003 through 2007. 

 

*Gartner Spin-Off. *In July 1999, the Company spun offGartner, Inc.  Pursuant to the terms ofthat spin-off, Gartner agreed to indemnify the Company and its stockholders foradditional taxes that may become payable as a result of certain actions thatmay be taken by Gartner that adversely affect the tax-free treatment of thespin-off.  However, the Company maybecome obligated for certain tax liabilities in the event the spin-off isdeemed to be a taxable transaction as a result of certain Gartner sharetransactions that may be undertaken following the spin-off.  In the opinion of management, it is not probablethat the Company will incur any material liabilities with respect to thismatter. 

 

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

 

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$4,900 represented an adjustment to the Synavant Spin dividend,approximately $2,200 represented the reimbursement of previously expensed legalfees and approximately $1,100 was a prepayment of Synavant’s future 50% shareof legal fees associated with the IRI litigation. 

 

If, contraryto expectations, the spin-off of Synavant were not to qualify as tax free underSection 355 of the Internal Revenue Code, then, in general, a corporatetax would be payable by the consolidated group, of which the Company is acommon parent and Synavant is a member, based on the difference between(x) the fair market value of the Synavant common stock on the date of thespin-off and (y) the adjusted basis of such Synavant common stock.  In addition, under the consolidated returnrules, each member of the consolidated group would be severally liable for suchtax liability.  The Company estimatesthat the aggregate tax liability in this regard is not expected to exceed$100,000.  Pursuant to the terms of thespin-off, the Company would be liable for the resulting corporate tax, exceptin certain circumstances.  In theopinion of management and based on the opinion of tax counsel, it is notprobable that the Company will incur any liability. 

 

*CTS Split-Off.*  The Company completed the CTS Split-Offexchange offer on February 6, 2003 (see Note 6).  If, contrary to expectations, the CTS distribution were not toqualify as tax free under Section 355 of the Internal Revenue Code, then,in general, a corporate tax would be payable by the Companybased on the difference between (x) the fair market value of the CTS classB common stock at the time of the exchange offer and (y) the Company’s adjusted tax basis in such class B commonstock.  Such corporate tax would bematerial in amount because the Company’s adjusted taxbasis in the CTS class B common stock is zero. Pursuant to the distribution agreement entered into between the Company and CTS in connection with the distribution, CTSagreed to indemnify the Company in the event thetransaction is taxable as a result of a breach of certain representations madeby CTS, subject to certain exceptions. In the opinion of management and based on the opinion of tax counsel, itis not probable that the Company will incur any liability for taxes in thismatter. 

 

*Other Litigation. *On January 17, 2003, the Company was served with a summons in a new litigation matter(the “Douglas Litigation”).  Also namedas defendants in this litigation are approximately 60 software vendors fromwhich the Company purchased prescription datain the 1990’s (and, for many of these vendors, from which the Company continues to purchase data).  In this action, it is alleged the Company misappropriatedthe trade secrets (i.e., prescription data) of thousands of pharmacies in theUnited States and used this information either without authorization or outsidethe scope of any authorization.  Thissame conduct is alleged to breach contracts between the Companyand the software vendors from which the Company had purchased thisprescription data. 

 

The action hasbeen brought in state court in southern Illinois (Circuit Court of the 20thJudicial Circuit) by two pharmacies. Plaintiffs are seeking class action status, representing all pharmacieswhose data was sold to the Company bytheir pharmacy dispensary software vendors from 1990 to the present.  The pharmacies are seeking $100,000 inactual damages plus an unspecified amount of unjust enrichment damages (i.e.,share of the Company profits) derivedfrom use of the prescription data by theCompany and the other defendants, or, in the alternative, a reasonable royaltypaid for the use of the prescription data. However, the Company believes that its practices with respect to theacquisition and use of this prescription data are consistent with applicablelaw and industry practices, and that the claims are without merit.

 

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The Company isa defendant in another litigation brought in state court in southern Illinois(Circuit Court of the 20th Judicial Circuit) (the “MayberryLitigation”).  This lawsuit wasoriginally brought in 1994 against Mayberry Systems, a small developer ofpharmacy dispensary software in the Midwest. Two pharmacy customers alleged Mayberry Systems was taking prescriptiondata from their systems without authorization, and selling it to others(including the Company).  The Companywas subsequently added to the lawsuit in 1996, alleging that the Company knewor should have known that Mayberry Systems was taking the data and selling itwithout authorization (i.e., misappropriation of trade secrets).  The lawsuit was later certified as a classaction on behalf of all former and current customers of Mayberry Systems(approximately 350 pharmacies). Plaintiffs are demanding damages in the amount of $20,000 plus punitivedamages and attorney’s fees.  TheCompany denies any of the wrongdoing alleged by the plaintiffs and plans tovigorously defend this action if required.

 

Although, theCompany continues to believe that the two actions described above are withoutmerit, the Company is pursuing a joint settlement of the cases.  During the third quarter of 2003, theCompany proposed a settlement agreement with the plaintiffs’ counsel on boththe actions.  Under the proposedsettlement, the Company would make certain cash payments, provide certainproduct credits and enter into certain agreements for the purchase of dataoriginating from the independent pharmacy plaintiffs.  This would provide the Company the opportunity to acquire newdata for new offerings while eliminating the costs and risks oflitigation.  There are a number ofcontingencies that must be determined before the settlement is finalized anduncertainty exists as to the final outcome. Currently, the Company cannot reasonably estimate the potential range ofloss or conclude that any such loss is probable.  If a joint settlement of these cases on commercial termssatisfactory to the Company cannot be reached, the Company intends to return tolitigation.  If the Company returns tolitigation, management believes that the risk that the Company will incur anymaterial liabilities with respect to the Mayberry Litigation is remote but isunable at this time to predict the manner in which the Douglas Litigation wouldeventually be resolved or, if resolved adversely to the Company, the range ofpossible liability.  Therefore, theCompany has not accrued a liability for these matters as of September 30, 2003.

 

During thesecond quarter of 2003 and up to the date of this filing, the Company has beenserved with 63 complaints filed with the labor court in Frankfurt,Germany.  The plaintiffs are part of agroup of approximately 110 employees of GIC Global Information Technology andConsulting GmbH (“GIC Global”) whose employment was terminated in the secondquarter of 2003 in connection with GIC Global’s insolvency proceedings.  GIC Global is owned by former seniormanagers of what was once the Company’s data processing center in Frankfurt,Germany.  GIC Global purchased theassets and business of the Frankfurt data processing center from the Company inSeptember 2000 as part of a management buyout. Thereafter, the Company moved its data processing to its data center inthe United States.  The plaintiffs areseeking reemployment and/or severance from the Company.  The Company is currently investigating theclaims made by these plaintiffs and is unable at this time to predict themanner in which this matter may eventually be resolved or, if resolved adverselyto the Company, the range of possible liability.  However, the Company believes that these claims are without meritand intends to vigorously defend these actions.

 

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With respectto the matters described in this Note, management of the Company is unable topredict at this time the final outcome or whether their resolution couldmaterially affect the Company’s future results of operations, cash flows orfinancial position. 

 

**Note 10.    FinancialInstruments**

 

*Foreign Exchange 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 to reduce earnings and cash flowvolatility associated with foreign exchange rate changes.  Accordingly, the Company enters into foreigncurrency forward contracts to minimize the impact of foreign exchange movementson net income and on the value of non-functional currency assets andliabilities. 

 

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

 

The impact offoreign exchange risk management activities on pre-tax income resulted in netpre-tax gains (losses) of $222 and $(16,762), and $1,196 and $(8,981), duringthe three and nine months ended September 30, 2003 and 2002, respectively.  In addition, at September 30, 2003, theCompany had approximately $255,938 in foreign exchange forward contractsoutstanding with various expiration dates through December 2003 relating tonon-functional currency assets and liabilities and estimated 2003 operatingincome.  Gains and losses on thesecontracts are not deferred and are included in the Condensed ConsolidatedStatements of Income (Unaudited) in Other expense, net.

 

*Fair Value ofFinancial Instruments*

* *

At September30, 2003, the Company’s financial instruments included cash, cash equivalents,short-term marketable securities, accounts receivable, accounts payable,short-term debt, including short-term borrowings reclassified as long-termdebt, long-term debt, interest rate swaps and foreign currency forwardcontracts.  At September 30, 2003, thefair values of cash, cash equivalents, short-term marketable securities,accounts receivable, accounts payable and short-term debt approximated carryingvalues due to the short-term nature of these instruments.  The contractual value of the Company’sforeign currency forward contracts was approximately $255,938 at September 30,2003, and all contracts mature in 2003. The estimated fair values of the forward contracts were determined basedon quoted market prices.

 

*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 Company would not realize a materialloss as of September 30, 2003 in the event of non-performance by any onecounterparty.  The Company enters intotransactions only with financial institution counterparties that have a creditrating of A or better.  In addition, theCompany limits the amount of credit exposure with any one institution.

 

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The Companymaintains accounts receivable balances ($227,121 and $215,868, net ofallowances, at September 30, 2003 and December 31, 2002, respectively),principally from customers in the pharmaceutical industry.  The Company does not have significant tradereceivables with any one customer at September 30, 2003.  Further, the majority of its customers arelarge pharmaceutical corporations having a broad geographic dispersion. 

 

*Lines of Credit andLiquidity*

 

The Companyhas borrowing arrangements with several domestic and international banks toprovide lines of credit up to $662,500 at September 30, 2003.  Total borrowings under these existing linestotaled $373,300 and $523,900 at September 30, 2003 and December 31, 2002,respectively.  In general, the terms ofthese lines of credit give the Company the option to borrow at an interest rateequal to LIBOR plus 37.5 basis points for short-term lines and LIBOR plus 65.0basis points for long-term lines.  Theweighted average interest rates for the short-term lines were 1.67% and 1.99%at September 30, 2003 and December 31, 2002, respectively.  The weighted average interest rates for thelong-term lines were 3.12% and 2.21% at September 30, 2003 and December 31,2002, respectively.  The commitment feeassociated with the unused short-term lines of credit is 22.5 basis points peryear, increasing to 28.75 basis points per year if the facilities are less than50% utilized.  Under the long-term linesthe commitment fee is 52.5 basis points on the unused portion per year.  The borrowing arrangements require the Company to comply withcertain financial covenants and at September 30, 2003, the Company was in compliance with allsuch covenants.  Total debt of $528,305and $529,812 at September 30, 2003 and December 31, 2002, respectively,included $150,000 of five-year private placement debt (as further discussedbelow) at September 30, 2003, and $5,005 and $5,912 at September 30, 2003 andDecember 31, 2002, respectively, related primarily to cash overdrafts, certaincapital leases, mortgages and an adjustment to the carrying amount of fairvalue hedged debt.

 

During thefourth quarter of 2001, the Company renegotiated with several banks and enteredinto three-year lines of credit for borrowings of up to $175,000.  During the second quarter of 2003, theCompany renegotiated with a bank and increased the amount available under anexisting three-year line by $25,000. Borrowings under these three-year facilities are short-term in nature;however, the Company has the ability and the intent to refinance the short-termborrowings as they come due through December 2004.  As such, at September 30, 2003 and December 31, 2002, the Companyreclassified $190,000 and $175,000, respectively, of its then outstanding debtas long-term debt pursuant to the provisions of SFAS No. 6, “Classification ofShort-Term Obligations Expected to be Refinanced.”  Borrowings have maturity dates of up to 90 days from theirinception.

 

In March andApril 2002, the Company entered into interest rate swaps on a portion of itsvariable rate debt portfolio.  These arrangementsconvert the variable interest rates to a fixed interest rate on a notionalamount of $75,000 and mature at various times from March 2005 through April2006.  The fixed rates range from 4.05%to 5.08%.  The interest rate swaps areaccounted for as cash flow hedges and any changes in fair value are recorded inOther comprehensive income, in the Consolidated Statements of Shareholders’Equity (Unaudited).  The mark-to-marketadjustment for the three and nine months ended September 30, 2003 was an unrealizednet gain of $461 and $332, respectively. 

 

In January2003, the Company closed a private placement transaction pursuant to which theCompany issued $150,000 of five-year debt to several highly rated insurancecompanies at a fixed rate 

 

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of 4.60%.  The proceeds were used to pay downshort-term debt.  At December 31, 2002,the Company reclassified $150,000 of its short-term debt outstanding aslong-term debt in accordance with the provisions of SFAS No. 6.  The Company also swapped $100,000 of thefixed rate debt to floating rate based on six-month LIBOR plus a margin ofapproximately 107 basis points.  Theseswaps have been accounted for as fair value hedges under the provisions of SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities.”

 

**Note11.    Income Taxes**

 

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

 

In the ninemonths ended September 30, 2003 the Company’s effective tax rate was impactedby approximately $69,600 due to the Company’s reassessment, based oninformation received in April 2003, of its liability associated with certainD&B Legacy Tax Matters and related subsequent transactions.  This is more fully described in Note 9.  Further, the effective tax rate was affectedby the favorable settlement of a non-U.S. audit which approximated$13,900.  In the nine months endedSeptember 30, 2002, the Company’s effective tax rate reflected true-ups ofcurrent and deferred income tax liabilities. 

 

While theCompany intends to continue to seek global tax planning initiatives, there canbe no assurance that the Company will be able to successfully implement suchinitiatives to reduce or maintain its overall tax rate.

 

**Note12.    IMS Health Capital Stock**

 

On April 15,2003, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares, marking the sixth consecutive repurchase program the Company hasimplemented.  Shares acquired throughthe repurchase program will be open-market purchases or privately negotiatedtransactions in compliance with Securities and ExchangeCommission Rule 10b-18.

 

On July 19,2000, the Board of Directors authorized a stock repurchase program to buy up to40,000 shares, marking the fifth consecutive repurchase program the Company hadimplemented.  Shares acquired throughthis repurchase program were open-market purchases in compliance withSecurities and Exchange Commission Rule 10b-18.

 

During thenine months ended September 30, 2003, the Company repurchased approximately6,000 shares of outstanding common stock under these programs at a total costof $97,936, compared with total repurchases of approximately 13,700 shares at atotal cost of $260,543 for the nine months ended September 30, 2002.  As of September 30, 2003, approximately 800shares of the 6,000 shares purchased during 2003 had been repurchased since theinception of the April 2003 program, at a total cost of $14,185. 

 

As discussedin Note 6, during the three months ended March 31, 2003, the Company completedthe CTS Split-Off exchange offer and accepted 36,540 IMS common shares tenderedin exchange for all 11,291 CTS common shares that the Company owned. 

 

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The Company re-issued approximately 618 treasury shares under optionexercises for proceeds of $9,790 during the three months ended September 30,2003.  During the nine months endedSeptember 30, 2003, the Company re-issued approximately 733 treasury shares under option exercisesfor proceeds of $11,545.  In addition,the Company paid dividends of $0.02 per share for a total of $4,790 during thethree months ended September 30, 2003. For the nine months ended September 30, 2003, the Company paid dividendsof $0.06 per share for a total of $14,575.

 

**Note13.    Comprehensive Income**

 

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

 
|                                               |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |       |
|----------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                               |   | **2003**                               |       | **2002**                              |       | **2003** |   | **2002** |   |
|                                               |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| **Net Income**                                     |   | **$**                                  | **69,213** |                                  | $          | 82,256 | ** ** | **$** | **569,242** |   | $ | 203,449 |   |
| Other comprehensive income, net of taxes:          |   |                                   |       |                                  |       |   |   |   |   |
| Unrealized gains (losses) on:                      |   |                                   |       |                                  |       |   |   |   |   |
| Available-for-sale equity securities               |   | **2,742**                              |       | 2,019                                 | ** ** | **3,460** |   | (1,423 | ) |
| Reclassification adjustment                        |   | **(2,692**                             | **)**      | (4,901                                | )          | **(2,893** | **)** | (12,417 | ) |
| Tax benefit on above                               |   | **(18**                                | **)**      | 1,008                                 |       | **(199** | **)** | 4,844 |   |
| Change in unrealized gains (losses) on investments |   | **32**                                 |       | (1,874                                | )          | **368** |   | (8,996 | ) |
| Foreign currency translation gains (losses)        |   | **7,664**                              |       | (2,370                                | )          | **36,937** |   | 15,697 |   |
| Changes in fair value of cash flow hedges          |   | **461**                                |       | (1,802                                | )          | **332** |   | (3,017 | ) |
| Total other comprehensive income (loss)            |   | **8,157**                              |       | (6,046                                | )          | **37,637** |   | 3,684 |   |
| **Comprehensive Income**                           |   | **$**                                  | **77,370** |                                  | $          | 76,210 | ** ** | **$** | **606,879** |   | $ | 207,133 |   |

 

Included inthe reclassification adjustments of $(2,692) and $(2,893) for the three andnine months ended September 30, 2003, respectively, are $0 and $655, respectivelyof write downs related to other-than-temporary declines in value of the venturecapital investments. 

 

**Note14.    Severance, Impairment and Other Charges**

 

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

 

Approximately $9,958 was charged to expense in the first quarter of2003, related to a worldwide reduction in headcount of approximately 80 employees. These severance benefits were calculated pursuant to theterms of established employee protection plans, in accordance with localstatutory minimum requirements or individual employee contracts, as applicable.

 

The Company recorded approximately $22,303 in contract-related charges,including $16,500 in charges to exit data supply and processing contracts and$5,803 related to lease obligations associated with abandoned properties.  These costs are incrementaland eitherrelate to existing contractual obligations that do not have any future economicbenefit or represent a contract cancellation penalty.

 

Approximately $4,959 was charged to expense to write down computersoftware to its net realizable value.  Thesewrite-downs resultedfrom the Company’s decision to abandon certain products.

 

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The cash portion of this charge amounts to $30,644, of which the Companypaid approximately $11,760 during the first nine months of 2003 relatedprimarily to employee termination payments and contract-related charges.  The remaining accrual of $18,884 at September 30, 2003 relates to leaseobligations and continuing payments related to employee terminations.

 

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

 

During thefourth quarter of 2001, the Company completed the assessment of its CompetitiveFitness Program (the “Program”).  Thisprogram was designed to streamline operations, increase productivity, andimprove client service.  In connectionwith this program,the Company recorded $94,616 of Severance, impairment and other charges duringthe fourth quarter of 2001 as a component of operating income.

 

During thefirst nine months of 2003, the Company paid approximately $8,683 under theProgram, related primarily to employee termination payments and costs relatedto a facility shutdown.  Since theprogram’s inception $53,583 has been paid by the Company.  As expected, all actions under the Programwere completed by December 31, 2002. The remaining accrual of $10,121 atSeptember 30, 2003 relates primarilyto lease obligations and continuing payments related to completed employeeterminations.

 

**Note15.    Operations by Business Segment**

 

Operatingsegments are defined as components of an enterprise about which financialinformation is available that is evaluated on a regular basis by the chief operatingdecision maker, or decision making groups, in deciding how to allocateresources to an individualsegment and in assessing the performance of the segment.  The Company has one reportable segment; itoperates globally and is principally managed by way of and deliversinformation, software and related services through one reporting segment. 

 

The chiefoperating decision-makers evaluate performance and allocate resources based onrevenue and operating income data.

 

A summary ofthe Company’s revenue by product line, as of and for the three and nine monthsended September 30, 2003 and 2002 is presented below: 

 
|                               |   | **Three  Months Ended  September 30,** |        | **Nine  Months Ended  September 30,** |   |
|------------------------------------|--------|----------------------------------------|-------------|---------------------------------------|--------|
|                               |   | **2003**                               |        | **2002**                              |   | **2003** |   | **2002** |   |
| Operating Revenue by product line: |   |                                   |        |                                  |   |   |   |   |   |
| Sales management                   |   | **$**                                  | **206,821** |                                  | $      | 186,991 | ** ** | **$** | **599,741** |   | $ | 546,191 |   |
| Market research                    |   | **$**                                  | **125,297** |                                  | $      | 106,032 | ** ** | **$** | **359,904** |   | $ | 315,172 |   |
| Other services                     |   | **$**                                  | **13,860**  |                                  | $      | 13,025 | ** ** | **$** | **38,026** |   | $ | 38,299 |   |
| Total Operating Revenue            |   | **$**                                  | **345,978** |                                  | $      | 306,048 | ** ** | **$** | **997,671** |   | $ | 899,662 |   |

 

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

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

 

*This discussion and analysis should be read in conjunction with theaccompanying Condensed Consolidated Financial Statements (unaudited) andrelated notes*. 

 

IMS Health Incorporated (“IMS” or the “Company”) is aleading global provider of information solutions to the pharmaceutical and healthcareindustries.  IMS operates in more than100 countries and provides marketinformation, sales management and decision-support services to thepharmaceutical and healthcare industries. Its key products include sales management information to optimize salesforce productivity, marketing effectiveness research for prescription andover-the-counter pharmaceutical products, consulting and other services.  IMS also owns a venture capital unit,Enterprise Associates, LLC (“Enterprises”), which is focused on investments inemerging businesses, and a 26.0% equity interest in The TriZettoGroup, Inc. (“TriZetto”), at September 30, 2003.

 

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

 

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

 

***Operating Results***

 

The referenceto constant dollar throughout this report is made so that IMS’s results can beviewed without the impacts of changing foreign currency exchange rates andtherefore facilitates a comparative view of business growth.  In the first nine months of 2003 the U.S.Dollar generally weakened against other currencies, so growth at constantdollar exchange rates was lower than growth at actual currency exchange rates. 

 

Operatingrevenue for the three months ended September 30, 2003 grew 13.0% to $345,978from $306,048 in the three months ended September 30, 2002.  On a constant dollar basis revenue growthwas 7.5%.  Sales Management revenue of$206,821 in the three months ended September 30, 2003 reflects an increase of10.6% from the three months ended September 30, 2002, with growth of 4.8% on aconstant dollar basis, driven by new product sales.  Market Research revenue improved 18.2% to $125,297 in the threemonths ended September 30, 2003, and grew 12.7% constant dollar, reflectinggrowth from new clients and expansion of product capabilities.  Other Services revenue increased 6.4% to$13,860 for the three months ended September 30, 2003, and grew 4.2% on aconstant dollar basis, primarily due to strong revenue growth for CambridgePharma Consultancy, Limited (“Cambridge”). 

 

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IMS’soperating costs include data processing costs, the costs of data collection andproduction, and costs attributable to personnel involved in production, data managementand the processing and delivery of IMS’s services.  IMS’s operating costs grew 24.6% to $137,954 in the three monthsended September 30, 2003, from $110,723 in the three months ended September 30,2002.  The increase resulted primarilyfrom foreign exchange and higher operating costs resulting from acquisitionsmade during the latter half of 2002 and the first half of 2003. 

 

Selling andadministrative expenses consist primarily of the costs attributable to sales,marketing, client service and administration, including human resources, legal,management, and finance.  IMS’s sellingand administrative expenses grew 16.0% in the three months ended September 30,2003, to $81,684 from $70,416 in the three months ended September 30, 2002,primarily due to foreign exchange and higher selling and administrative costsresulting from acquisitions made during the latter half of 2002 and the firsthalf of 2003. 

 

Depreciation and amortization charges increased 27.8% to $18,398 in the three months ended September 30, 2003, from $14,398 in the three months ended September 30, 2002, primarily due to foreign exchange, higher amortization ofintangible assets resulting from acquisitions made during the latter half of 2002 and the first half of 2003 andincreased software amortization associated with new products.  

 

Operating income for the three months ended September 30, 2003,declined 2.3% to $107,942 from $110,511 in the three months ended September 30, 2002.  On a constant dollar basis operating income declined by 6.8%.

 

Net interest expense was $2,949 in the three months ended September 30, 2003 compared with $2,408 in the three months ended September 30, 2002,primarily due to lower interest income from Nielsen Media Research, Inc.(“NMR”) in 2003.  See Note 9 to theunaudited Condensed Consolidated Financial Statements.

 

Gains frominvestments, net, amounted to $1,964 in the three months ended September 30,2003, as compared to $1,200 in the three months ended September 30, 2002.  The net gain in 2003 is due to a gain of$2,698, primarily from the sale of an investment in the Enterprises portfolioand other investments, net of management fees relating to the Enterprisesportfolio of $734.  The gain in thethree months ended September 30, 2002 was due primarily to $4,901 of net gains realized on the sale ofinvestments within the Enterprises portfolio, partially offset by write downsrelated to the assessment of other-than-temporary declines in value of theventure capital investments amounting to $2,713.

 

Loss on issuance of investees’ stock, net, amounted to $143 in thethree months ended September 30, 2003, relating to the exercise of stock options by TriZetto employees and TriZetto sharerepurchases, compared to $489 in the three months ended September 30, 2002.  These losses have been recognized inaccordance with Staff Accounting Bulletin (“SAB”) No. 51, “Accounting forSales of Stock by a Subsidiary.”

 

Other expense,net, decreased in the three months ended September 30, 2003, to $1,117 from$1,514 in the three months ended September 30, 2002.  This decrease was primarily due to minority interest expense of$744 in the three months ended September 30, 2003, compared with $2,660 in the 

 

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three months ended September30, 2002, partially offset by a foreign exchange hedge gains of $222 in thethree months ended September 30, 2003, compared with $1,172 in the three monthsended September 30, 2002.

 

In the threemonths ended September 30, 2003 and September 30, 2002, IMS’s effective taxrate was reduced as a result of global tax planning initiatives.  While IMS intends to continue to seek globaltax planning initiatives, there can be no assurance that IMS will be able tosuccessfully implement such initiatives to reduce or maintain its overall taxrate.

 

TriZetto equity income, net, of $218 was recorded in the three monthsended September 30, 2003, compared with a net loss of $406 in the three monthsended September 30, 2002.

 

On February 6,2003, the Company divested CTS through asplit-off transaction, and as a result, CTS’s results are presented asincome from discontinued operations for 2003 through the date of divestitureand for the three months ended September 30, 2002 (see Note 6 to the unauditedCondensed Consolidated Financial Statements). Income from discontinued operations net of $8,607 was recorded in thethree months ended September 30, 2002. As a result of the divestiture there was no comparable income in thethree months ended September 30, 2003. 

 

**NineMonths Ended September 30, 2003 compared with Nine Months Ended September 30,2002**

** **

***Operating Results***

*** ***

Operatingrevenue for the nine months ended September 30, 2003 grew 10.9% to $997,671from $899,662 in the nine months ended September 30, 2002.  On a constant dollar basis revenue growthwas 3.9%.  Sales Management revenue of$599,741 in the nine months ended September 30, 2003 reflects an increase of9.8% from the nine months ended September 30, 2002, with growth of 2.6% on aconstant dollar basis, driven by new product sales.  Market Research revenue improved 14.2% to $359,904 in the ninemonths ended September 30, 2003, and grew 7.0% constant dollar, reflectinggrowth from new clients and expansion of product capabilities.  Other Services revenue declined 0.7% to$38,026 for the nine months ended September 30, 2003, a decline of 3.6% on aconstant dollar basis primarily due to a very strong first half in 2002 forCambridge compared to the first half of 2003.

 

IMS’soperating costs grew 17.5% to $406,254in the nine months ended September 30, 2003, from $345,807 in the ninemonths ended September 30, 2002.  The increase resulted primarily from foreignexchange and higher operating costs resulting from acquisitions made during thelatter half of 2002 and the first nine months of 2003.

 

IMS’s selling and administrative expenses grew 10.5% in the nine monthsended September 30, 2003, to $252,779 from $228,773 in the nine months endedSeptember 30, 2002, primarily due to foreign exchange and higher selling andadministrative costs resulting from acquisitions made during the latter half of2002 and the first nine months of 2003.

 

Depreciation and amortization chargesincreased 44.2% to $55,027 in the nine months ended September 30, 2003, from $38,156 in the nine months ended September 30, 2002,primarily due to 

 

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foreignexchange, higher amortization of intangible assets resulting from acquisitionsmade during the latter half of 2002 and the first nine months of 2003 andincreased software amortization associated with new products.

 

During thefirst quarter of 2003, IMS recorded a $37,220 pretax charge for Severance,impairments and other charges consisting primarily of severance charges ofapproximately $9,958 for approximately 80 employees, charges to exit datasupply and processing contracts of $16,500, lease obligations associated withabandoned properties of $5,803, and approximately $4,959 to write down computersoftware to its net realizable value. There was no comparable charge during the nine months ended September30, 2002.   See Note 14 to the unauditedCondensed Consolidated Financial Statements.

 

Operating income for the nine months ended September 30, 2003, decreased 14.1%to $246,391 from $286,926 in the ninemonths ended September 30, 2002, primarily due to the Severance, impairment andother charges of $37,220 recorded in the first quarter of 2003.  On a constant dollar basis operating incomedeclined by 20.2%.

 

Net interest expense was $8,405 in the nine months endedSeptember 30, 2003, compared with $5,948 in the nine monthsended September 30, 2002, primarily due to lower interest income from NMR.  See Note 9 to the unaudited CondensedConsolidated Financial Statements.

 

Gains frominvestments, net, amounted to $1,120 inthe nine months ended September 30, 2003, as compared to $2,450 in the ninemonths ended September 30, 2002.  Thenet gain in 2003 is due to gains of $3,555 primarily from the sale ofinvestments in the Enterprises portfolio and other investments, partiallyoffset by management fees relating to the Enterprises portfolio of $1,780 andwrite downs related to other-than-temporary declines in value of the venturecapital investments of $655.  Thegain in the nine months ended September 30, 2002 was due primarily to $12,417of net gains realized on the sale of investments within the Enterprisesportfolio, partially offset by write downs related to the assessment ofother-than-temporary declines in value of the venture capital investmentsamounting to $7,620 and management fees relating to the Enterprises portfolioof $1,589.

 

Loss on issuance of investees’ stock, net, amounted to $404 in the nine months ended September 30,2003, relating to the exercise of stock options by TriZetto employees andTriZetto share repurchases, compared to a net loss of $575 in the ninemonths ended September 30, 2002.  Theselosses have been recognized in accordance with SAB No. 51.

 

Other expense,net, increased in the nine months ended September 30, 2003, to $21,755 from$17,823 in the nine months ended September 30, 2002, primarily due to netforeign exchange losses of $16,762 in the nine months ended September 30, 2003,compared with net foreign exchange losses of $8,892 in the nine months endedSeptember 30, 2002, partially offset by minority interest expense of $6,189 inthe nine months ended September 30, 2003, compared with $7,940 in the ninemonths ended September 30, 2002, and a $2,210 cash refund from Synavantreceived during the second quarter of 2003 relating to their share of fees forthe IRI litigation.

 

In the ninemonths ended September 30, 2003, IMS’s effective tax rate was impacted byapproximately $69,600 due to IMS’s reassessment, based on information receivedin April 2003, of 

 

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its liability associated withcertain D&B Legacy Tax Matters and related subsequent transactions.  This is more fully described in Note 9 tothe unaudited Condensed Consolidated Financial Statements.  Further, the effective tax rate was affectedby the favorable settlement of a non-U.S. audit which approximated$13,900.   In the nine months endedSeptember 30, 2002, IMS’s effective tax rate reflected true-ups of current anddeferred income tax liabilities. 

 

For allperiods presented, IMS’s effective tax rate was reduced as a result of globaltax planning initiatives.  While IMSintends to continue to seek global tax planning initiatives, there can be noassurance that IMS will be able to successfully implement such initiatives toreduce or maintain its overall tax rate. 

 

A TriZetto equity loss, net, of $181 was recorded in the nine months ended September 30, 2003, comparedwith a net loss of $701 in the nine months ended September 30, 2002.

 

An impairmentcharge of $14,842, net of taxes of $9,565, was recorded in the three monthsended March 31, 2003 to write down IMS’s investment in TriZetto following thecontinued significant decline in the market value of TriZetto shares belowIMS’s carrying value, including a further substantial decline subsequent toDecember 31, 2002.  As of September 30,2003, TriZetto shares closed at $6.70 compared to IMS’s carrying value pershare of $4.06. 

 

On February 6,2003, the Company divested CTS through asplit-off transaction, and as a result, CTS’s results are presented asincome from discontinued operations for 2003 through the date of divestitureand for the nine months ended September 30, 2002 (see Note 6 to the unauditedCondensed Consolidated Financial Statements). Income from discontinued operations net in the nine months endedSeptember 30, 2003 decreased to $2,779 from $21,857in the nine months ended September 30, 2002. The decrease is due to only 37 days of IMS’s share of CTS net income(January 1, 2003 through February 6, 2003) being included for 2003 comparedwith a full nine months in 2002.  As aresult of the divestiture, the Company recorded a net gain from discontinuedoperations during the three months ended March 31, 2003, of $495,053. 

 

***Liquidity andCapital Resources***

 

Cash and cashequivalents increased $18,161 during the first nine months of 2003 to $307,422 atSeptember 30, 2003 compared to $289,261 at December 31, 2002.  The increase reflects cash generated fromoperating activities of $275,025 and exchange rate changes of $6,088 offset by cash usedin investing and financing activities of $163,097 and $99,855, respectively.  Including the change in short-termmarketable securities, which is included in cash used in investing activities,cash and cash equivalents and short-term marketable securities increased to$341,734 at September 30, 2003 compared to $289,261 at December 31, 2002, anincrease of $52,473.  On February 6,2003, the Company divested CTS through asplit-off transaction, and as a result, the Company’s share of CTS’sassets and liabilities is presented as discontinued operations as of December31, 2002.  The Company’s share of CTS’sresults for the nine months ended September 30, 2002 and the period fromJanuary 1, 2003 through the effective date of the exchange offer are presentedas discontinued operations, and the Condensed Consolidated Statements of CashFlows exclude CTS Cash Flows for the nine months ended September 30, 2003 and2002 (see Note 6 to the unaudited Condensed Consolidated Financial Statements).

 

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Net cashprovided by operating activities amounted to $275,025 for the nine months ended September30, 2003, an increase of $66,929 over the comparable period in 2002.  The increase relates primarily to the NMRpayment received in respect of Legacy D&B Tax Matters and lower cashrequirements for accrued income taxes and accrued severance, impairment andother charges.  These items were partiallyoffset by lower income from continuing operations in 2003. 

 

Net cash usedin investing activities amounted to $163,097 for the nine months ended September30, 2003, an increase in cash used of $88,583 over the comparable period in2002.  The greater cash requirementsduring 2003 relate primarily to $41,993 in higher spending on acquisitions, $34,312 ofinvestments in short-term marketable securities in 2003 with no comparableinvestment in 2002 and an $18,032 reduction in cash receipts received for salesof investments. 

 

Net cash usedin financing activities amounted to $99,855 for the nine months ended September30, 2003, an increase of $47,113 over the comparable period in 2002.  This increase was primarily due to a $6,380net decrease in borrowings in 2003 compared with an increase of $206,948 inborrowings during 2002 offset by a reduction of $162,607 in payments forpurchase of treasury stock. 

 

On April 15,2003, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares, marking the sixth consecutive repurchase program IMS hadimplemented.  Shares acquired throughthis repurchase program will be open-market purchases or privately negotiatedtransactions in compliance with Securities and Exchange Commission Rule 10b-18.

 

On July 19,2000, the Board of Directors authorized a stock repurchase program to buy up to40,000 shares, marking the fifth consecutive repurchase program IMS hadimplemented.  Shares acquired throughthe repurchase program were open-market purchases in compliance with Securitiesand Exchange Commission Rule 10b-18. 

 

During thenine months ended September 30, 2003, IMS repurchased approximately 6,000shares of outstanding common stock under these programs at a total cost of$97,936, compared with total repurchases of approximately 13,700 shares at atotal cost of $260,543 for the nine months ended September 30, 2002.  As of September 30, 2003, approximately 800shares of the 6,000 shares purchased during 2003 had been repurchased under theApril 2003 program, at a total cost of $14,185. 

 

IMS believesthat its available funds, credit facilities and the cash flows expected to begenerated from operations will be adequate to satisfy its current and plannedoperations and needs and contingent payments for at least the next 12 months.  IMS’s ability to expand and grow itsbusiness in accordance with current plans, to make acquisitions, repurchasestock and to meet its long-term capital requirements beyond this 12-monthperiod will depend on many factors, including the rate, if any, at which itscash flow increases, its ability and willingness to accomplish acquisitions,repurchase treasury stock and the availability to IMS of public and privatedebt and equity financing, including its current ability to secure bank linesof credit.  IMS cannot be certain thatadditional financing, if required, will be available on terms favorable to it,if at all.

 

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***Recently IssuedAccounting Standards***

 

In May 2003,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for howan enterprise classifies and measures certain financial instruments that havecharacteristics of both liabilities and equity.  SFAS No. 150 requires an enterprise to classify a financialinstrument that is within its scope as a liability (or an asset in some circumstances).  SFAS No. 150 was effective for financialinstruments entered into or modified after May 31, 2003, and otherwise waseffective at the beginning of the first interim period beginning after June 15,2003.  The adoption of SFAS No. 150effective June 1, 2003 did not have a material impact on IMS’s financialposition, results of operations or cash flows through September 30, 2003.

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts (collectively referred to as derivatives) and for hedgingactivities under SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  The adoption ofSFAS No. 149 effective July 1, 2003 did not have a material impact on IMS’sfinancial position, results of operations or cash flows for the three monthsended September 30, 2003.

 

In November2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue00-21, “Revenue Arrangements with Multiple Deliverables.”  EITF 00-21 addresses the revenue recognitionfor arrangements with multiple deliverables. The deliverables in these arrangements must be divided into separateunits of accounting when the individual deliverables have value to the customeron a stand-alone basis, there is objective and reliable evidence of the fairvalue of the undelivered elements, and, if the arrangement includes a general rightto return the delivered element, delivery or performance of the undeliveredelement is considered probable.  Therelative fair value of each unit should be determined and the totalconsideration of the arrangement should be allocated among the individual unitsbased on their fair value.  EITF 00-21was effective for revenue arrangements entered into after June 30, 2003.  The adoption of EITF 00-21, effective July1, 2003 did not have a material impact on IMS’s financial position, results ofoperations or cash flows for the three months ended September 30, 2003.

 

In June 2001,the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  SFAS No. 143 addressesfinancial accounting and reporting for obligations associated with the retirementof tangible long-lived assets and the associated asset retirement costs.  SFAS No. 143 requires an enterprise torecord the fair value of an asset retirement obligation as a liability in theperiod in which it incurs a legal obligation associated with the retirement ofa tangible long-lived asset.  SFAS No.143 was effective for fiscal years beginning after June 15, 2002.  The adoption of SFAS No. 143 effectiveJanuary 1, 2003 did not have a material impact on IMS’s financial position,results of operations or cash flows for the three and nine months endedSeptember 30, 2003.

 

***Forward-Looking Statements***

 

This QuarterlyReport on Form 10-Q, as well as information included in oral statements orother written statements made or to be made by IMS, contain statements that, inthe opinion of IMS, may constitute “forward-looking statements” within themeaning of the Private Securities Litigation 

 

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Reform Act of 1995.  The words such as “believe,” “expect,” “anticipate,” “intend,”“plan,” “foresee,” “likely,” “project,” “estimate,” “will,” “may,” “should,”“future,” “predicts,” “potential,” “continue” and similar expressions identifythese forward-looking statements, which appear in a number of places in this QuarterlyReport and include, but are not limited to, all statements relating to plansfor future growth and other business development activities as well as capitalexpenditures, financing sources, dividends and the effects of regulation andcompetition, foreign currency conversion and all other statements regarding theintent, plans, beliefs or expectations of IMS or its directors orofficers.  Investors are cautioned thatsuch forward-looking statements are not assurances for future performance orevents and involve risks and uncertainties that could cause actual results anddevelopments to differ materially from those covered in such forward-lookingstatements.  These risks anduncertainties include, but are not limited to: 

 

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

 

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

 

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

 

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

 

•                    theability to identify and implement cost-containment measures; 

 

•                    theability to successfully maintain historic effective tax rates; 

 

•                    competition,particularly in the markets for pharmaceutical information; 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Consequently,all the forward-looking statements contained in this Quarterly Report on Form10-Q are qualified by the information contained herein, including, but notlimited to, the information contained under this heading and the CondensedConsolidated Financial Statements (unaudited) and notes thereto for the threeand nine month periods ended September 30, 2003 and by the material set forthunder the headings “Business” and “Factors That May Affect Future Results” inIMS’s Annual Report on Form 10-K for the year ended December 31, 2002.  IMS is under no obligation to publiclyrelease any revision to any forward-looking statement contained or incorporatedherein to reflect any future events or occurrences. 

 

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

 

Information in response to this Item is setforth in “Note 10. Financial Instruments” in the Notes to the CondensedConsolidated Financial Statements (unaudited) on pages 19 through 21hereof.  

 

**Item4.  Controls and Procedures**

 

(a)           Evaluation of Disclosure Controls andProcedures  

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the reportsthat the Company files or submits to the SEC under the Securities Exchange Actof 1934, as amended (the “Exchange Act”), is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as theCompany’s are designed to do, and management necessarily was required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

The Company’s Chief Executive Officer and****Chief Financial Officer have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-14c and 15d-14c under the Exchange Act) as of September30, 2003 (the “Evaluation Date”).  Basedon such evaluation, such officers have concluded that, as of the EvaluationDate, the Company’s disclosure controls and procedures are effective inalerting them on a timely basis to material information relating to the Company(including its consolidated subsidiaries) required to be included in theCompany’s periodic filings under the Exchange Act.

 

(b)           Changes in Internal Control overFinancial Reporting

 

There have been no changes in ourinternal control over financial reporting that occurred during the periodcovered by this report that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.    

 

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**PART II. OTHER INFORMATION**

** **

**Item1. Legal Proceedings**

 

Information in response to this Item isincorporated by reference to the information set forth in “Note 9.Contingencies” in the Notes to the Condensed Consolidated Financial Statements(unaudited) on pages 12 through 19 hereof.

 

**Item6. Exhibits and Reports on Form 8-K****** 

 

(a)     Exhibits:

 
| **Exhibit  Number** |   |   | **Description of Exhibits**                                                                                                                                                                                            |
|---------------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |   |
| 10.1                |   |   | Rules of the IMS Health Incorporated 2001 Inland Revenue Approved  Sub-Plan for United Kingdom Employees Adopted by the Company on October 16,  2001, as amended by Amendments Adopted by the Company on July 14, 2003 |
|                |   |   |                                                                                                                                                                                                                   |
| 31.1                |   |   | CEO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                             |
|                |   |   |                                                                                                                                                                                                                   |
| 31.2                |   |   | CFO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                             |
|                |   |   |                                                                                                                                                                                                                   |
| 32.1                |   |   | Joint CEO/CFO Certification Required Under Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                              |

 

(b)     Reportson 8-K:

 

A report on Form 8-K was filed on July 23, 2003 to present under Item9, Regulation FD Disclosure, the Press Release regarding IMS Health’s financialresults for its second quarter of fiscal 2003.

 

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**SIGNATURE****S**

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                   | IMS Health Incorporated                    |
|------------------------|--------------------------------------------|
|                   |                                       |
|                   |                                       |
| By:                    |                                       |   /s/ Nancy E. Cooper |   |
| Date: November 4, 2003 |   Nancy E. Cooper                |
|                   |   Senior Vice President and      |
|                   |   Chief Financial Officer        |
|                   |   (principal financial officer)  |
|                   |                                       |
|                   |                                       |
|                   |   /s/ Leslye G. Katz             |   |
| Date: November 4, 2003 |   Leslye G. Katz                 |
|                   |   Vice President, Controller     |
|                   |   (principal accounting officer) |
|                        |                                            |  |  |

 

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**EXHIBITINDEX**

 
| **Exhibit   Number** |   | **Description of Exhibits**                                                                                                                                                                                            |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                                   |
| 10.1                 |   | Rules of the IMS Health Incorporated 2001 Inland Revenue Approved  Sub-Plan for United Kingdom Employees Adopted by the Company on October 16,  2001, as amended by Amendments Adopted by the Company on July 14, 2003 |
|                 |   |                                                                                                                                                                                                                   |
| 31.1                 |   | CEO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                             |
|                 |   |                                                                                                                                                                                                                   |
| 31.2                 |   | CFO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                             |
|                 |   |                                                                                                                                                                                                                   |
| 32.1                 |   | Joint CEO/CFO Certification Required Under Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                              |

 

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