**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(Mark one)**

 
| **ý**                                              | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                    |
| **For the  quarterly period ended March 31, 2005** |
|                                                    |       |                                                                                                    |
| **OR**                                                  |
|                                                    |       |                                                                                                    |
| **o**                                                   | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom                 to                    **

 

**Commissionfile number 001-14049**

 

**IMSHealth 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 telephonenumber, including area code     **(203) 319-4700**

 

**Not Applicable**(Former name, former address and former fiscal year, if changed since lastreport)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 
| **Title**                               | ** ** | **Shares  Outstanding**     |
|-----------------------------------------|------------|-----------------------------|
| **of Class**                            | ** ** | **At  March 31, 2005** |
| Common Stock,  par value $.01 per share |       | 226,591,694                 |

 

 

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**IMSHEALTH INCORPORATED**

 

**INDEX TO FORM 10-Q**

 
| **PART I. FINANCIAL INFORMATION**                                                         |       |
|------------------------------------------------------------------------------------------------|------------|
| **Item 1. Financial Statements (Unaudited)**                                                   |       |
| Condensed  Consolidated Statements of Financial Position                                       |       |
| As of  March 31, 2005 and December 31, 2004                                          | 3          |
| Condensed  Consolidated Statements of Income                                                   |       |
| Three Months  Ended March 31, 2005 and 2004                                               | 4          |
| Condensed Consolidated Statements  of Cash Flows                                               |       |
| Three Months Ended March 31,  2005 and 2004                                               | 5          |
| Notes  to Condensed Consolidated Financial Statements                                          | 6          |
| **Item 2. Management’s Discussion  and Analysis of Financial**                            |       |
| **Condition and Results of  Operations**                                                       | 27         |
| **Item 3. Quantitative and  Qualitative Disclosures About Market Risk**                        | 41         |
| **Item  4. Controls and Procedures**                                                           | 41         |
|                                                                                           | ** ** |
| **PART II.  OTHER INFORMATION**                                                           | 42         |
| **Item  1. Legal Proceedings**                                                                 | 42         |
| ** **                                                                                     | ** ** |
| **Item  2. Changes in Securities, Use of  Proceeds and Issuer Purchases of Equity Securities** | 42         |
|                                                                                           |       |
| **Item 6. Exhibits**                                                                           | 43         |
|                                                                                           |       |
| **SIGNATURES**                                                                                 | 44         |
| ** **                                                                                     | ** ** |
| **EXHIBITS**                                                                                   |       |

 

2

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**PART I. FIN**ANCIAL INFORMATIONItem 1. FINANCIAL STATEMENTS

 

**IMS HEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OFFINANCIAL POSITION (Unaudited)***(Dollars and shares in thousands, except pershare data)*

* *
| ** **                                                                                                                                       | ** ** | **As of March 31,  2005** | ** **    | **As of December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|---------------|-----------------------------------|------------|
| **Assets:**                                                                                                                                      |       |                           | ** **    |                              |       |
| **Current  Assets:**                                                                                                                             |       |                           | ** **    |                              |       |
| Cash and cash  equivalents                                                                                                                       | ** ** | **$**                          | **401,327**   | ** **                        | $          | 444,903 |   |
| Short-term  marketable securities                                                                                                                | ** ** | **6,748**                      | ** **    | 15,053                            |       |
| Accounts  receivable, net of allowances of $7,567 and $8,270 in 2005 and 2004, respectively                                                 | ** ** | **330,312**                    | ** **    | 280,548                           |       |
| Other current  assets                                                                                                                            | ** ** | **190,534**                    | ** **    | 196,015                           |       |
| **Total  Current Assets**                                                                                                                        | ** ** | **928,921**                    | ** **    | 936,519                           |       |
| Securities and  other investments                                                                                                                | ** ** | **8,032**                      | ** **    | 7,915                             |       |
| Property, plant  and equipment, net of accumulated depreciation of $194,032 and $192,440 in  2005 and 2004, respectively                         | ** ** | **140,082**                    | ** **    | 145,214                           |       |
| Computer  software                                                                                                                               | ** ** | **235,007**                    | ** **    | 230,021                           |       |
| Goodwill                                                                                                                                         | ** ** | **342,972**                    | ** **    | 302,229                           |       |
| Other assets                                                                                                                                     | ** ** | **269,206**                    | ** **    | 268,808                           |       |
| **Total  Assets**                                                                                                                                | ** ** | **$**                          | **1,924,220** | ** **                        | $          | 1,890,706 |   |
| ** **                                                                                                                                       |       |                           | ** **    |                              |       |
| **Liabilities,  Minority Interests and Shareholders’ Equity:**                                                                              |       |                           | ** **    |                              |       |
| **Current  Liabilities:**                                                                                                                        |       |                           | ** **    |                              |       |
| Accounts payable                                                                                                                                 | ** ** | **$**                          | **70,523**    | ** **                        | $          | 70,344 |   |
| Accrued and  other current liabilities                                                                                                           | ** ** | **208,893**                    | ** **    | 237,139                           |       |
| Accrued income  taxes                                                                                                                            | ** ** | **177,919**                    | ** **    | 116,985                           |       |
| Short-term  deferred tax liability                                                                                                               | ** ** | **9,641**                      | ** **    | 9,923                             |       |
| Deferred  revenues                                                                                                                               | ** ** | **117,794**                    | ** **    | 119,730                           |       |
| **Total  Current Liabilities**                                                                                                                   | ** ** | **584,770**                    | ** **    | 554,121                           |       |
| Postretirement  and postemployment benefits                                                                                                      | ** ** | **99,531**                     | ** **    | 99,899                            |       |
| Long-term debt  (Note 9)                                                                                                                         | ** ** | **731,490**                    | ** **    | 626,670                           |       |
| Other  liabilities                                                                                                                               | ** ** | **219,326**                    | ** **    | 252,326                           |       |
| **Total  Liabilities**                                                                                                                           | ** ** | **$**                          | **1,635,117** | ** **                        | $          | 1,533,016 |   |
| ** **                                                                                                                                       |       |                           | ** **    |                              |       |
| **Commitments  and Contingencies (Note 8)**                                                                                                      |       |                           | ** **    |                              |       |
| **Minority  Interests**                                                                                                                          | ** ** | **$**                          | **99,645**    | ** **                        | $          | 101,976 |   |
|                                                                                                                                             |       |                           | ** **    |                              |       |
| **Shareholders’  Equity:**                                                                                                                  |       |                           | ** **    |                              |       |
| Common Stock,  par value $.01, authorized 800,000 shares; issued 335,045 shares at  March 31, 2005 and December 31, 2004, respectively | ** ** | **$**                          | **3,350**     | ** **                        | $          | 3,350 |   |
| Capital in  excess of par                                                                                                                        | ** ** | **473,742**                    | ** **    | 477,768                           |       |
| Retained  earnings                                                                                                                               | ** ** | **2,081,852**                  | ** **    | 2,056,079                         |       |
| Treasury stock,  at cost, 108,454 and 105,916 shares at March 31, 2005 and  December 31, 2004, respectively                            | ** ** | **(2,330,404**                 | **)**         | (2,268,414                        | )          |
| Cumulative  translation adjustment                                                                                                               | ** ** | **(14,059**                    | **)**         | 12,239                            |       |
| Minimum pension  liability adjustment, net of taxes of $11,129 at March 31, 2005 and  December 31, 2004                                | ** ** | **(24,691**                    | **)**         | (24,691                           | )          |
| Unrealized loss  on changes in fair value of cash flow hedges, net of tax                                                                        | ** ** | **(312**                       | **)**         | (665                              | )          |
| Unrealized  (loss) gain on investments, net of tax                                                                                               | ** ** | **(20**                        | **)**         | 48                                |       |
| **Total  Shareholders’ Equity**                                                                                                             | ** ** | **$**                          | **189,458**   | ** **                        | $          | 255,714 |   |
| **Total  Liabilities, Minority Interests and Shareholders’ Equity**                                                                         | ** ** | **$**                          | **1,924,220** | ** **                        | $          | 1,890,706 |   |

## ** **

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

 

3

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## **IMSHEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)***(Dollars and shares inthousands, except per share data)*

 
| ** **                                                                                               | ** ** | **Three Months Ended  March 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                                                                               | ** ** | **2005**                               | ** **  | **2004** | ** ** |
|                                                                                                     |       |                                   | ** **  |   |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                                  | **410,984** | ** ** | $ | 361,576 |   |
|                                                                                                     |       |                                   | ** **  |   |   |
| Operating costs                                                                                          | ** ** | **183,357**                            | ** **  | 152,688 |   |
| Selling and  administrative expenses                                                                     | ** ** | **106,078**                            | ** **  | 90,950 |   |
| Depreciation and  amortization                                                                           | ** ** | **24,677**                             | ** **  | 21,706 |   |
| **Operating  Income**                                                                                    | ** ** | **96,872**                             | ** **  | 96,232 |   |
| Interest income                                                                                          | ** ** | **2,355**                              | ** **  | 962 |   |
| Interest expense                                                                                         | ** ** | **(6,153**                             | **)**       | (4,271 | ) |
| Gains from  investments, net                                                                             | ** ** | **2,671**                              | ** **  | 6,453 |   |
| Other income,  net                                                                                       | ** ** | **9,261**                              | ** **  | 2,777 |   |
| **Non-Operating  Income, Net**                                                                           | ** ** | **8,134**                              | ** **  | 5,921 |   |
| Income before  provision for income taxes                                                                | ** ** | **105,006**                            | ** **  | 102,153 |   |
| Provision for  income taxes (Note 11)                                                                    | ** ** | **(74,663**                            | **)**       | (20,109 | ) |
| TriZetto equity  loss, net of income taxes of $624 for 2004                                              | ** ** | **—**                             | ** **  | (966 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                  | **30,343**  | ** ** | $ | 81,078 |   |
|                                                                                                     |       |                                   | ** **  |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            |       | $                                      | 0.13        | ** ** | $ | 0.35 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          |       | $                                      | 0.13        | ** ** | $ | 0.34 |   |
| Weighted average  number of shares outstanding – Basic                                              | ** ** | **227,874**                            | ** **  | 235,005 |   |
| Dilutive effect  of shares issuable as of period-end under stock option plans                            | ** ** | **3,405**                              | ** **  | 5,097 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **178**                                | ** **  | 274 |   |
| **Weighted  Average Number of Shares Outstanding – Diluted**                                        | ** ** | **231,457**                            | ** **  | 240,376 |   |

 

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

 

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**IMSHEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (Unaudited)**

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

 
| ** **                                                                                        | ** ** | **Three Months Ended March 31,** | ** **  |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                        | ** ** | **2005**                              | ** **  | **2004** | ** ** |
| **Cash  Flows from Operating Activities:**                                                        |       |                                  |        |   |   |
| Net income                                                                                        | ** ** | **$**                                 | **30,343**  |   | $ | 81,078 |   |
| **Adjustments  to reconcile net income to net cash (used in) provided by operating  activities:** |       |                                  |        |   |   |
| Depreciation and  amortization                                                                    | ** ** | **24,677**                            | ** **  | 21,706 |   |
| Bad debt expense                                                                                  | ** ** | **1,311**                             | ** **  | 400 |   |
| Deferred income  taxes                                                                            | ** ** | **2,380**                             | ** **  | 7,640 |   |
| Gains from  investments, net                                                                      | ** ** | **(2,671**                            | **)**       | (6,453 | ) |
| TriZetto equity  loss, net                                                                        | ** ** | **—**                            | ** **  | 966 |   |
| Minority  interests in net income of consolidated companies                                       | ** ** | **727**                               | ** **  | 1,179 |   |
| Non-cash stock  compensation charges                                                              | ** ** | **740**                               | ** **  | 563 |   |
| Change in assets  and liabilities, excluding effects from acquisitions and dispositions:          |       |                                  | ** **  |   |   |
| Net increase in  accounts receivable                                                              | ** ** | **(49,405**                           | **)**       | (21,962 | ) |
| Net decrease  (increase) in inventory                                                             | ** ** | **3,295**                             | ** **  | (272 | ) |
| Net increase in  prepaid expenses and other current assets                                        | ** ** | **(34,605**                           | **)**       | (10,565 | ) |
| Net (decrease)  increase in accounts payable                                                      | ** ** | **(302**                              | **)**       | 1,828 |   |
| Net decrease in  accrued and other current liabilities                                            | ** ** | **(31,782**                           | **)**       | (36,738 | ) |
| Net decrease in  accrued severance, impairment and other charges                                  | ** ** | **(6,982**                            | **)**       | (2,030 | ) |
| Net decrease in  deferred revenues                                                                | ** ** | **(2,780**                            | **)**       | (4,177 | ) |
| Net increase  (decrease) in accrued income taxes                                                  | ** ** | **32,789**                            | ** **  | (15,111 | ) |
| Net (increase) decrease  in pension assets (net of liabilities)                                   | ** ** | **(2,031**                            | **)**       | 167 |   |
| Net (increase)  decrease in other long-term assets                                                | ** ** | **(1,699**                            | **)**       | 3,353 |   |
| Net decrease in  other long-term liabilities                                                      | ** ** | **(4,111**                            | **)**       | (1,890 | ) |
| Net tax benefit  on stock option exercises                                                        | ** ** | **1,990**                             | ** **  | 3,722 |   |
| **Net  Cash (Used in) Provided by Operating Activities**                                          | ** ** | **(38,116**                           | **)**       | 23,404 |   |
| **Cash  Flows Used in Investing Activities:**                                                     |       |                                  | ** **  |   |   |
| Capital  expenditures                                                                             | ** ** | **(4,337**                            | **)**       | (4,524 | ) |
| Additions to  computer software                                                                   | ** ** | **(20,885**                           | **)**       | (17,181 | ) |
| Proceeds from  sale of TriZetto                                                                   | ** ** | **37,414**                            | ** **  | **—** | ** ** |
| Investments in  short-term marketable securities                                                  | ** ** | **8,305**                             | ** **  | (56 | ) |
| Payments for  acquisitions of businesses, net of cash acquired                                    | ** ** | **(62,455**                           | **)**       | (3,878 | ) |
| Proceeds from  sales of investments, net                                                          | ** ** | **3,023**                             | ** **  | 10,712 |   |
| Funding of  venture capital investments                                                           | ** ** | **(500**                              | **)**       | **—** | ** ** |
| Other investing  activities, net                                                                  | ** ** | **(2,800**                            | **)**       | (578 | ) |
| **Net  Cash Used in Investing Activities**                                                        | ** ** | **(42,235**                           | **)**       | (15,505 | ) |
| **Cash  Flows Provided by Financing Activities:**                                                 |       |                                  | ** **  |   |   |
| Net increase in  debt                                                                             | ** ** | **107,100**                           | ** **  | 97,793 |   |
| Payments for  purchase of treasury stock                                                          | ** ** | **(92,580**                           | **)**       | (138,851 | ) |
| Proceeds from  exercise of stock options                                                          | ** ** | **23,856**                            | ** **  | 36,337 |   |
| Dividends paid                                                                                    | ** ** | **(4,570**                            | **)**       | (4,707 | ) |
| Increase in cash  overdrafts                                                                      | ** ** | **9,476**                             | ** **  | 11,249 |   |
| Payments to  minority interests and other financing activities                                    | ** ** | **(827**                              | **)**       | (788 | ) |
| **Net  Cash Provided by Financing Activities**                                                    | ** ** | **42,455**                            | ** **  | 1,033 |   |
| Effect of  Exchange Rate Changes on Cash and Cash Equivalents                                     | ** ** | **(5,680**                            | **)**       | (958 | ) |
| **(Decrease)  Increase in Cash and Cash Equivalents**                                             | ** ** | **(43,576**                           | **)**       | 7,974 |   |
| **Cash  and Cash Equivalents, Beginning of Period**                                               | ** ** | **444,903**                           | ** **  | 344,432 |   |
| **Cash  and Cash Equivalents, End of Period**                                                     | ** ** | **$**                                 | **401,327** | ** ** | $ | 352,406 |   |

 

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

 

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

 

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

** **

The accompanying Condensed Consolidated FinancialStatements (unaudited) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and Article 10 of Regulation S-X under theSecurities and Exchange Act of 1934, as amended.  The Condensed Consolidated FinancialStatements (unaudited) do not include all the information and notes required byaccounting principles generally accepted in the United States of America forcomplete financial statements.  In theopinion of management, all adjustments, all of which are of a normal recurringnature, considered necessary for a fair presentation of financial position,results of operations and cash flows for the periods presented have beenincluded.  The results of operations forinterim periods are not necessarily indicative of the results expected for thefull year.  The Condensed ConsolidatedFinancial Statements (unaudited) and related notes should be read inconjunction with the Consolidated Financial Statements and related notes of IMSHealth Incorporated (the “Company” or “IMS”) included in its 2004 Annual Reporton Form 10-K.  Certain prior yearamounts have been reclassified to conform to the 2005 presentation.  Amounts presented in the Condensed ConsolidatedFinancial Statements (unaudited) may not add due to rounding.

 

**Note 2.**   Basisof Presentation

** **

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

 

•                  Sales Force Effectiveness to optimizesales force productivity and territory management;

 

•                  Portfolio Optimization to provideclients with insights into market opportunity and business developmentassessment; and

 

•                  Launch and Brand Management and Otherto support client needs relative to market segmentation and positioning andlife cycle management for prescription and over-the-counter pharmaceuticalproducts.

 

Withinthese key information products we provide consulting and services that usein-house capabilities and methodologies to assist pharmaceutical clients inanalyzing and evaluating market trends, strategies and tactics, and to help inthe development and implementation of customized software applications and datawarehouse tools.

 

TheCompany operates in more than 100 countries. The Company also owns a venture capital unit, Enterprise Associates, LLC(“Enterprises”), which is focused on investments in emerging businesses.  Until December 21, 2004, the Companyalso owned approximately a 25.0% equity interest in the TriZetto Group, Inc.“TriZetto” (See Note 7).

 

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The Company is managed ona global business model with global leaders for the majority of its criticalbusiness processes and accordingly has one reportable segment (See Note 15).

 

**Note 3.**   Summaryof Recent Accounting Pronouncements

** **

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payment”, which is a revisionof SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS No. 123R establishes standards forthe accounting of transactions in which an entity exchanges its equityinstruments for goods or services, or incurs liabilities in exchange for goodsor services that are based on the fair value of the entity’s equity instrumentsor that may be settled by the issuance of equity instruments.  SFAS No. 123R focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  SFAS No. 123Rrequires a public entity to measure the cost of all employee share-basedpayments, including grants of employee stock options, using a fair-value basedmethod, such as the Black-Scholes option valuation model at the date of thegrant.  The resulting cost is thenrecognized as compensation cost in the Consolidated Statements of Income overthe service period during which an employee is required to provide service inexchange for the award (usually the vesting period).  In April 2005, the Securities andExchange Commission deferred the effective date of SFAS No. 123R to thefirst annual reporting period beginning after June 15, 2005.  The Company is currently evaluating theimpact of SFAS No. 123R; however, based upon outstanding as well as futureanticipated stock-based award grants through December 31, 2006, theCompany expects that the adoption under the modified prospective method willhave approximately an $0.11 to $0.12 fully diluted earnings per share impact onits consolidated results of operations for the year ending December 31,2006.  For a description of the Company’smodel and assumptions used to calculate the fair value of the Company’sstock-based awards, refer to Note 13 of the Company’s 2004 Annual Report on Form 10-Kas filed with the Securities and Exchange Commission.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets-AnAmendment of APB Opinion No. 29.” SFAS No. 153 amends APB Opinion No. 29, “Accounting forNonmonetary Transactions,” to eliminate the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance.  SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange.  SFAS No. 153 iseffective for nonmonetary exchanges occurring in fiscal periods beginning afterJune 15, 2005.  The adoption of SFASNo. 153 is not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows for the year ending December 31,2006.

 

**Note 4.**   Summaryof Significant Accounting Policies

** **

*Stock-basedcompensation.**** * SFAS No. 123, “Accountingfor Stock-Based Compensation” requires that companies with stock-basedcompensation plans either recognize compensation expense based on the fairvalue of options granted or continue to apply the existing accounting rules anddisclose pro forma net income and earnings per share assuming the fair valuemethod had been applied.  The Company haschosen to continue applying Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” and related interpretations inaccounting for its plans.  If

 

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the compensation cost forthe Company’s stock-based compensation plans was determined based on the fairvalue at the grant dates for awards under those plans, consistent with themethod of SFAS No. 123, the Company’s net income and earnings per sharewould have been reduced to the pro forma amounts indicated below for the threemonths ended March 31:

 
| ** **           | ** **                                                                                                   | **Three Months Ended March 31,** | ** ** |
|----------------------|--------------------------------------------------------------------------------------------------------------|---------------------------------------|------------|
| ** **           | ** **                                                                                                   | **2005**                              | ** ** | **2004** | ** ** |
| Net Income:          | As reported                                                                                                  |                                  | **$**      | **30,343** | ** ** | **$** | **81,078** | ** ** |
|                 | Add: Stock-based  employee compensation expense included in reported net income, net of tax                  | ** **                            | **918**    | ** ** | **744** | ** ** |
|                 | Deduct: Total  stock-based employee compensation expense under fair value method for all  awards, net of tax | ** **                            | **(6,353** | **)** | **(5,362** | **)** |
|                 | Pro forma                                                                                                    | ** **                            | **$**      | **24,908** | ** ** | **$** | **76,460** | ** ** |
| Earnings Per  Share: |                                                                                                         |                                  |       |   | ** ** |
| Basic                | As reported                                                                                                  |                                  | **$**      | **0.13** | ** ** | **$** | **0.35** | ** ** |
|                 | Pro forma                                                                                                    | ** **                            | **$**      | **0.11** | ** ** | **$** | **0.33** | ** ** |
|                 |                                                                                                         |                                  |       |   |   | ** ** |
| Diluted              |                                                                                                         | ** **                            | **$**      | **0.13** | ** ** | **$** | **0.34** | ** ** |
|                 | As reported                                                                                                  | ** **                            | **$**      | **0.11** | ** ** | **$** | **0.32** | ** ** |
|                 | Pro forma                                                                                                    |                                  |       |   |   | ** ** |

 

For a description of theCompany’s other critical accounting policies, please refer to the Company’s2004 Annual Report on Form 10-K as filed with the Securities and ExchangeCommission.

 

**Note 5.**   Acquisitions

** **

The Company makesacquisitions in order to expand its products, services and geographicreach.  During the three months ended March 31,2005, the Company completed two acquisitions for an aggregate cost of$25,000.  These acquisitions wereTaskarena Software Engineering GmbH (Germany) and SAI Healthcare (U.S.) andwere accounted for under the purchase method of accounting.  As such, the aggregate purchase price hasbeen allocated on a preliminary basis to the assets acquired based on estimatedfair values as of the closing date.  Thepurchase price allocations will be finalized after the completion of thevaluation of certain assets and liabilities. Any adjustments resulting from the finalization of the purchase priceallocations are not expected to have a material impact on the Company’s resultsof operations.  The CondensedConsolidated Financial Statements (unaudited) include the results of theseacquired companies subsequent to the closing of the acquisitions.  Had each of these acquisitions occurred as ofJanuary 1, 2005 or 2004, the impact on the Company’s results of operationswould not have been significant. Goodwill of approximately $13,492 was recorded in connection with these acquisitions,of which approximately $9,000 is deductible for tax purposes.

 

Additionally, during January 2005,the Company paid approximately $36,000 to acquire the 50% interest in IHA.IMSHealth GmbH (“IHA”) not owned by the Company. The Company is currently evaluating the potential purchase priceallocation resulting from this payment but expects that a significant portionof the payment will be recorded as goodwill. For the three months ended March 31, 2004, the Company consolidatedthe results of IHA and recorded minority interest expense for the 50% not ownedby the Company.

 

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The Company made noacquisitions during the three months ended March 31, 2004; however it madecertain payments related to acquisitions completed during 2003 and 2002.

 

**Note 6.**   Goodwilland Intangible Assets

** **

During the three monthsended March 31, 2005, the Company recorded additional goodwill of $54,798related primarily to the acquisition of the remaining 50% of IHA in January 2005,the preliminary allocation of purchase price for the acquisitions completedduring the first quarter of 2005 and payments on earn-out agreements foracquisitions completed prior to 2005. During the three months ended March 31, 2004, the Company recordedadditional goodwill of $3,474 related primarily to earn-out agreements.

 

All of the Company’sother acquired intangibles are subject to amortization.  Intangible assetamortization expense was $4,278 and $2,763 during the three months ended March 31,2005 and 2004, respectively.  At March 31, 2005, intangible assetswere primarily composed of customer relationships, databases and trade names(included in Other assets) and computer software. The gross carrying amountsand related accumulated amortization of these intangibles were $104,082 and$29,221, respectively, at March 31, 2005 and $63,053 and $15,173,respectively, at March 31, 2004. These intangibles are amortized over periods ranging from two to fifteenyears.  As of March 31, 2005, theweighted average amortization periods of the acquired intangibles by assetclass are listed in the following table:

 
| **Intangible Asset Type**         | ** ** | **Weighted Average  Amortization (Years) Period** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| Customer  Relationships           |       | 8.6                                               |       |
| Computer  Software and Algorithms |       | 6.8                                               |       |
| Databases                         |       | 3.8                                               |       |
| Trade Names                       |       | 3.7                                               |       |
| Other                             |       | 3.9                                               |       |
| Weighted average                  |       | 7.6                                               |       |

 

Based on current estimated useful lives, amortizationexpense associated with intangible assets at March 31, 2005 is estimatedto be approximately $4,250 for each of the remaining three quarters in2005.  Annual amortization expenseassociated with intangible assets is estimated to be as follows:

 

| **Year Ended  December 31,** | ** ** | **Amortization  Expense** | ** ** |
|-----------------------------------|------------|---------------------------|------------|
| 2006                              |       | $                         | 14,128     |   |
| 2007                              |       | 11,366                    |       |
| 2008                              |       | 9,338                     |       |
| 2009                              |       | 7,575                     |       |
| 2010                              |       | 3,172                     |       |
| Thereafter                        |       | $                         | 16,530     |   |

 

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**Note 7.**   Investmentsin Equity Investees

** **

On December 21, 2004, the Company and TriZetto Group, Inc. (“TriZetto”)entered into a share purchase agreement pursuant to which, the Company sold to TriZettoall of the 12,142,857 shares of Common Stock, par value $0.001 per share, ofTriZetto owned by the Company for an aggregate cash consideration of $81,964.The Company received $44,550 in December 2004 and the remaining balance of$37,414 in January 2005.  Thebalance of $37,414 was included in Other current assets in the Company’sConsolidated Statements of Financial Position at December 31, 2004.  As a result of the transaction, the Companyrecorded a pre-tax gain of $38,803 in the fourth quarter of 2004.

 

Prior to the sale of theTriZetto shares, the Company accounted for its investment in TriZetto under theequity method of accounting.  The Company’sshare of the adjusted operating results of TriZetto for the three months ended March 31,2004 amounted to a loss of $966 (net of deferred tax benefit of $624).

 

**Note 8.****   Contingencies**

 

The Company and itssubsidiaries are involved in legal and tax proceedings, claims and litigationarising in the ordinary course of business. Management periodically assesses the Company’s liabilities andcontingencies in connection with these matters based upon the latestinformation available.  For those matterswhere management currently believes it is probable that the Company will incura loss and that the probable loss or range of loss can be reasonably estimated,the Company has recorded reserves in the Condensed Consolidated FinancialStatements (Unaudited) based on its best estimates of such loss.  In other instances, because of theuncertainties related to either the probable outcome or the amount or range ofloss, management is unable to make a reasonable estimate of a liability, ifany.  However, even in many instanceswhere the Company has recorded a reserve, the Company is unable to predict withcertainty the final outcome of the matter or whether resolution of the matterwill materially affect the Company’s results of operations, financial positionor cash flows.  As additional informationbecomes available, the Company adjusts its assessment and estimates of suchliabilities accordingly.

 

The Company routinelyenters into agreements with its suppliers to acquire data and with itscustomers to sell data, all in the normal course of business.  In these agreements, the Company sometimesagrees to indemnify and hold harmless the other party for any damages suchother party may suffer as a result of potential intellectual propertyinfringement and other claims.  Theseindemnities typically have terms of approximately two years.  The Company has not accrued a liability withrespect to these matters, as the exposure is considered remote.

 

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

 

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*Legacyand Related Matters*

 

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

 

In November 1996,the company then known as The Dun & Bradstreet Corporation (“D&B”)separated into three public companies by spinning-off ACNielsen Corporation (“ACNielsen”)and Cognizant Corporation (“Cognizant”) (the “1996 Spin-Off”).  Pursuant to the agreements effecting the 1996Spin-Off, among other things, certain liabilities, including contingentliabilities relating to the IRI Action (defined below) and tax liabilitiesarising out of certain prior business transactions (the “D&B Legacy TaxMatters”), described more fully below, were allocated among D&B, ACNielsenand 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 Spin-Off, the Companyand NMR are jointly and severally liable for all liabilities of Cognizant underthe agreements effecting the 1996 Spin-Off. As between themselves, however, the Company and NMR agreed that IMS willassume 75%, and NMR will assume 25%, of any payments to be made in respect ofthe IRI Action, including any legal fees and expenses related thereto incurredin 1999 or thereafter (IMS agreed to be responsible for legal fees and expensesincurred during 1998).  In addition, theCompany and NMR agreed they would share equally Cognizant’s share of liabilityarising out of the D&B Legacy and Related Tax Matters after the Companypaid the first $130,000 of such liability. NMR’s aggregate liability for payments in respect of the IRI Action andthe D&B Legacy Tax Matters (see below) shall not exceed $125,000.

 

Also during 1998, D&Bseparated 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 Iseparated into two public companies by spinning off The Dun &Bradstreet Corporation (“D&B II”) and then changed its name to Moody’sCorporation (“Moody’s”).  Pursuant totheir separation in 2000, Moody’s and D&B II are each jointly and severallyliable for all of D&B I’s liabilities under the agreements effecting the1996 Spin-Off.

 

*IRILitigation.*  In July 1996,Information Resources, Inc. (“IRI”) filed a complaint, subsequentlyamended in 1997, in the U.S. District Court of the Southern District of NewYork, naming as defendants a company then known as The Dun &Bradstreet Corporation and now known as Donnelley, A.C. Nielsen Company (asubsidiary of ACNielsen) and I.M.S. International, Inc. (a predecessor ofthe Company) (the “IRI Action”).  At thetime of the filing of the complaint, each of the other defendants was awholly-owned subsidiary of Donnelley. The amended complaint alleged various violations of U.S. antitrust lawsunder Sections 1 and 2 of the Sherman Antitrust Act.  IRI sought damages in excess of $650,000,which IRI asked to be trebled, as well as punitive damages in an unspecifiedamount.

 

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On February 1, 2005,the U.S. District Court for the Southern District of New York entered a finaljudgment against IRI dismissing IRI’s claims with prejudice and on themerits.  IRI has filed a notice of appealto the U.S. Court of Appeals for the Second Circuit.  The Second Circuit has ordered that the appeal be argued no earlierthan the week of June 13, 2005.

 

In connection with the1996 Spin-Off, D&B (now Donnelley), Cognizant (now NMR) and ACNielsenentered into an Indemnity and Joint Defense Agreement with respect to IRIAction.  In 2001, ACNielsen was acquiredby VNU N.V., a publicly traded Dutch company (“VNU”).  VNU assumed ACNielsen’s obligations under theoriginal Indemnity and Joint Defense Agreement.

 

On July 30, 2004,VNU and its U.S. subsidiaries, VNU, Inc., ACNielsen, AC Nielsen (US), Inc.(“ACN (US)”), and NMR (collectively, the “VNU Parties”), Donnelley, D&B II,Moody’s and the Company entered into an Amended and Restated Indemnity andJoint Defense Agreement (the “Amended JDA”). Pursuant to the Amended JDA, any and all liabilities incurred byDonnelley, D&B II, Moody’s or IMS relating to a judgment (even if notfinal) or any settlement being entered into in the IRI Action ("IRILiabilities”) will be jointly and severally assumed and fully dischargedexclusively by the VNU Parties.  Underthe Amended JDA, the VNU Parties agreed to, jointly and severally, indemnifyDonnelley, D&B II, Moody’s and IMS from and against all IRI Liabilities towhich they become subject.

 

As described above, theVNU Parties have assumed exclusive responsibility for the payment of all IRILiabilities.  Provided that the VNUParties are able to fulfill their obligations under the Amended JDA, and thatthey ultimately do fulfill such obligations, the Company believes that the finalresolution of the IRI Action should not have a material adverse effect on theCompany’s financial position, results of operations or cash flows.  However, because liability for violations ofthe antitrust laws is joint and several and because the rights and obligationsrelating to the Amended JDA are based on contractual relationships, the failureof the VNU Parties to fulfill their obligations under the Amended JDA couldresult in the other parties bearing all or a share of the IRI Liabilities.  Joint and several liability for the IRI Actionmeans that even where more than one defendant is determined to have beenresponsible for an alleged wrongdoing, the plaintiff can collect all or part ofthe judgment from just one of the defendants. This is true regardless of whatever contractual allocation ofresponsibility the defendants and any other indemnifying parties may have made,including the allocations described above between the VNU Parties, Donnelly,D&B II, Moody’s and IMS.

 

Accordingly, and as aresult of the allocations of liability described above, in the event the VNUParties default on their obligations under the Amended JDA, the Company will beresponsible for 75% of Cognizant’s share of any liabilities arising out of theIRI Action (which, under the application of joint and several liabilitydescribed above, could be all the IRI Liabilities since the Company is asuccessor to a named defendant) and NMR will be responsible for 25% of any suchliabilities; provided that NMR’s aggregate liability for payments in respect ofthe IRI Action and the D&B Legacy Tax Matters shall not exceed$125,000.  To date, NMR has made paymentsof approximately $57,000 relating to the IRI Action and the D&B Legacy TaxMatters.  Further, if the VNU Partiesdefault on their obligations, NMR, one of the VNU Parties, may default on itsobligation to share any IRI Liabilities with the Company, or at the time theIRI Liabilities arise, NMR may have previously made sharing payments up to its$125,000 cap.  In either such event, theCompany could be liable for an amount up to all the IRI Liabilities.

 

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While, as describedabove, the IRI Action has been dismissed with prejudice on the merits, IRI hasfiled an appeal.  Therefore, the Companyis unable to predict the final outcome of the IRI Action (including theappeal), the financial condition of any of the VNU Parties or the otherdefendants at the time of any such outcome or whether the VNU Parties or theother defendants will fulfill their obligations under the Amended JDA or otherrelated contractual agreements.  Hence,the Company cannot estimate such parties’ ability to pay the IRI Liabilities,if any, pursuant to the Amended JDA or the amount of any final judgment orsettlement in the IRI Action.  Nonetheless, management presently believes thatthe risk that the Company will incur any material liabilities with respect tothe IRI Action is remote and, therefore noliability in respect of this matter has been accrued in the Company’s financialstatements.  If, however, IRI wereto prevail in whole or in part in this action and if the VNU Parties fail tofulfill their indemnification obligations, the outcome of this matter couldhave a material adverse effect on the Company’s financial position, results ofoperations and cash flows.

 

*D&BLegacy and Related Tax Matters.*  During the second quarter of 2003, the IRSissued an agent’s final examination report seeking to disallow certain royaltyexpense deductions claimed by D&B on its 1995 and 1996 tax returns inconnection with a partnership established in 1993.  In January of 2004, the IRS issued anagent’s final examination report to the partnership seeking to reallocatecertain items of partnership income and expense as well as disallow certainitems of partnership expense on the partnership’s 1997 tax return during whichyear Cognizant was a partner in the partnership.  In January 2004, the IRS issued agent’sfinal examination reports to the partnership and the Company seeking to reverseitems of partnership income and loss and disallow certain royalty expensedeductions claimed by the Company on its 1998 and 1999 tax returns arising fromthe Company’s participation in the partnership. If the IRS were to ultimately prevail in the foregoing positions, theCompany’s share of the total liability (tax and interest) for 1995 and 1996would be approximately $33,000, its liability (tax and interest) for 1997 wouldbe approximately $18,500, and its aggregate liability (tax and interest) for1998 and 1999 would be approximately $27,900 (all net of income tax benefit forinterest).  If the IRS were to take acomparable position with respect to all of the Company’s tax years subsequentto 1999 and ultimately prevail, the Company’s additional liability would beapproximately $52,000 (net of income tax benefit for interest).

 

In addition, in thesecond 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 by the IRSin this report are inconsistent with the IRS’s denial of the royalty expensedeductions described above because such an assertion is duplicative.  If the IRS were to ultimately prevail in thismatter, the Company’s share of the additional liability for 1996 would beapproximately an additional $21,600 (net of income tax benefit forinterest).  The Company does not believethis liability is probable and has not recorded reserves for this item.

 

In addition, the IRS hasasserted penalties for the years described above based on its interpretation ofapplicable law.  If the IRS were toprevail in its assertion of penalties and interest thereon, the Company estimatesthat its liability for such penalties and interest would be approximately$8,100 for 1995 and 1996 and $9,000 for 1997 through 1999 (all net of incometax benefit).  D&B II and the Companydispute the IRS’s position.

 

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D&B II, as agent for Donnelleyin the D&B Legacy Tax Matters, has filed protests relating to the proposedassessments for 1995 and 1996 (referred to below as the “DLA Matter”) with theIRS Office of Appeals.  D&B IIadvised that it would attempt to resolve these matters in the administrativeappeals process before proceeding to litigation if necessary.  During the first quarter of 2004, as a resultof information from D&B II regarding a proposed mediation with the IRS tosettle partnership items related to 1995 and 1996, the Company reclassified itstax reserves related to 1995 and 1996 from long-term (Other liabilities) toshort-term (Accrued income taxes).  TheCompany has filed protests relating to the proposed assessments for 1997, 1998and 1999 with the IRS Office of Appeals. Notwithstanding the fact that the Company will attempt to resolve thesematters in the administrative appeals process before proceeding to litigationif necessary, the tax reserves related to 1998 and 1999 have been reclassifiedfrom long-term (Other liabilities) to short-term (Accrued income taxes) basedon an informal discussion with the IRS and the possibility of an assessment.

 

In June 2004, theCompany was advised that D&B II believed that it had reached a basis forsettlement with the IRS regarding the 1995 and 1996 corporate and partnershipproposed assessments (the “Preliminary Settlement Terms”).  The agreement to the Preliminary SettlementTerms was tentative and non-binding. Under the Preliminary Settlement Terms, the duplicative “inconsistentpositions” described above were eliminated and the Company’s expected share ofthe liability was estimated to range from approximately $28,500 to $35,500(including tax, penalty and interest, net of associated tax benefits).

 

In September 2004,D&B II advised the Company that the IRS had withdrawn its agreement to thePreliminary Settlement Terms.  D&B IIcontinued to negotiate with the IRS and subsequently developed a revisedproposed settlement (the “Revised Proposed Settlement”).  In October, Donnelley and D&B IIpresented the Revised Proposed Settlement to NMR and IMS and requested theirconsent.

 

Under the 1996 Spin-Offagreements, to the extent relevant here, Donnelley has the right and obligationto manage certain tax controversies with the IRS to the extent thosecontroversies relate to tax liabilities for Donnelley’s tax years 1995 and 1996arising from a specified partnership organized by Donnelley prior to the 1996Spin-Off (the “DLA Matter”).  Donnelleyhas apparently assigned this right and obligation to D&B II.  However, under the 1996 Spin-Off agreements,Donnelley cannot agree to any final settlement with respect to the DLA Matterwithout NMR’s consent, which right of consent NMR shares with IMS pursuant tothe terms of the 1998 Spin-Off agreements.  If NMR and the Company withhold consent, then NMR and the Company wouldhave the right and obligation to assume responsibility for management of theDLA Matter and indemnify Donnelley to the extent that the ultimate liabilityarising from the controversy exceeded the proposed settlement.

 

On October 28, 2004,the Company responded to Donnelley’s and D&B II’s request for consent tothe Revised Proposed Settlement by consenting to the settlement of taxliabilities with respect to the DLA Matter. However, the Revised Proposed Settlement addressed matters beyond theDLA Matter and these matters would have an adverse impact on the Company fortax years subsequent to the 1996 Spin-Off and with respect to which the Companybelieves neither Donnelley nor D&B II has the authority to negotiate orpropose a settlement.  The Companyadvised Donnelley that, to the extent the Revised Proposed Settlement addressedissues beyond the DLA Matter, the negotiation and presentation of the RevisedProposed Settlement constituted a breach of the 1996 Spin-Off agreements.

 

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On October 29, 2004,Donnelley and D&B II advised NMR and the Company that they are treating theCompany’s position as a withholding of consent, and that therefore under the1996 Spin-Off agreements, NMR and the Company are obligated to assumemanagement of the controversy and to indemnify Donnelley to the extent anyultimate resolution of the controversy is less favorable to Donnelley than thatcontained in the Revised Proposed Settlement. Such excess liability could approximate $50,400.  The Company does not agree with theseassertions and believes that Donnelley has breached and continues to breach theterms of the 1996 Spin-Off agreements by negotiating and requesting consent formatters beyond its authority. Accordingly, the Company does not believe this liability is probable andhas not recorded any reserves for this item. If the parties cannot resolve this disagreement as provided in thedispute resolution provisions of the 1996 Spin-Off agreements, the Company willpursue legal action to remedy Donnelley’s breach and believes that it willprevail.

 

On November 1, 2004,D&B II contacted the IRS to ask whether it would be willing to modify theRevised Proposed Settlement to delete certain matters beyond the DLAMatter.  On November 3, 2004, theIRS responded that it was unwilling to modify the Revised Proposed Settlementand would pursue collection of the disputed tax through applicable enforcement procedures.

 

In another D&B LegacyTax Matter, in June 2000, the IRS issued a formal notice of adjustmentregarding Donnelley’s utilization of certain capital losses generated during1989 and 1990.  D&B I, as agent forDonnelley, advised the Company that on May 12, 2000, it filed an amendedtax return for the 1989 and 1990 tax periods, which reflected $561,582 ofadditional tax and interest due.  In May 2000,D&B I paid the IRS $349,291 and the Company paid the IRS $212,291; NMRsubsequently reimbursed the Company approximately $41,000.  D&B I filed a complaint for a refund inthe U.S. District Court on September 21, 2000 to contest thisassessment.  In June 2004, D&BII advised the Company that it had decided not to pursue the refund claim andbelieved it had reached a basis for settlement with the IRS.  A definitive settlement agreement wasexecuted on December 6, 2004.  Thesettlement requires Donnelley to withdraw its complaint for a refund.  In the first quarter of 2005, Donnelleyreceived tax bills from the IRS in an aggregate amount of approximately $47,500with respect to this settlement.  TheCompany has paid the IRS approximately $10,900 in respect of these tax bills,which amount the Company believes represents its share of the total liabilityrelated to this matter.  Donnelley andD&B II have advised the Company that they believe the Company and NMR eachowe an additional approximately $7,100 (or approximately $4,700 net of taxbenefits) for this matter.  ShouldD&B II pursue arbitration, management does not believe that D&B IIwould prevail.

 

As of March 31,2005, the Company had reserves for these tax matters of approximately $138,000in the aggregate.  In the opinion ofmanagement, it is not probable, but may be reasonably possible that the Companywill have additional liability of $17,100 in excess of the amount reserved forthese matters attributable to potential penalties (and net interest thereon)for the years 1995 through 1999.  In theopinion of management, the Company’s reserves for the foregoing tax matters areadequate for the probable exposure and, accordingly, based on informationcurrently available, management does not believe that these matters will have amaterial adverse effect on the Company’s consolidated financial position or resultsof operations but may have a material adverse effect on cash flows in theperiod in which any such amounts are paid.

 

In addition to thesematters, the Company and its predecessors have entered, and the Companycontinues to enter, into global tax planning initiatives in the normal courseof their businesses.  These

 

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activities are subject toreview by applicable tax authorities.  Asa result of the review process, uncertainties exist and it is possible thatsome of these matters could be resolved adversely to the Company.

 

*MattersBefore the European Commission and Belgian Competition Service*

 

In December 2000,National Data Corporation (now NDCHealth Corporation, “NDC”) filed a complaintagainst the Company with the European Commission (the “Commission”), requestingthat the Commission initiate a proceeding against the Company for an allegedinfringement of Article 82 of the EC Treaty.  Article 82 of the EC Treaty relates toabuses of a dominant position that adversely affect competition.  The complaint concerned an IMS geographicmapping structure used for the reporting of regional sales data in Germany.

 

In July 2001, theCommission ordered interim measures against the Company pending a finaldecision (the “Interim Decision”).  Underthe Interim Decision, the Company was ordered to grant a license of thegeographic mapping structure on commercially reasonable terms without delay toNDC and to any other competitor then present in the German regional sales datamarket that requested a license.

 

In August 2001, theCompany filed an appeal with the Court of First Instance (“CFI”) seeking thesuspension and annulment of the Interim Decision in its entirety (the “AnnulmentAppeal”).  In October 2001, the Presidentof the CFI suspended the Interim Decision pending a judgment on the AnnulmentAppeal.

 

In August 2003, theCommission withdrew its Interim Decision and then subsequently (in October 2003),the Commission applied to the CFI to have the Annulment Appeal declared moot inits entirety.

 

In March 2005, theCFI issued an Order granting the Commission’s request to have the AnnulmentAppeal declared moot in its entirety.  Asa result, there are no further legal proceedings before the Commission orEuropean Courts in respect of the Interim Decision and IMS is not under anyduty to license its geographic mapping structure to NDC in Germany.

 

Complaints were filed in1998 and 1999 against the Company with the Belgian Competition Service (“BCS”)by SmithKline Beecham Pharma S.A. (“SKB”) and Source Informatics Belgium S.A. (“Source”)alleging abuse of a dominant position on the Belgian market and requests weremade for the adoption of interim measures pending consideration of thecomplaints.  In October 1999 and 2000,the Chairman of the Belgian Competition Council (“BCC”) adopted interimmeasures against the Company, with which the Company has complied.  In June 2004 the BCS sent informationrequests to the Company, Source and various third parties in respect of the SKBcomplaint filed in 1998.  The Company andSource responded to the requests.  In December 2004,the Company received a formal statement of objections alleging that the Companyhad abused its dominant position on the Belgian market in violation of Article 82of the EC Treaty and corresponding Belgian law. Under Belgian law, the Company has the opportunity to provide itscomments to the statement of objections, both in writing (which the Companysubmitted in February 2005) and orally. Once the investigation iscomplete, the BCC will issue a proposed decision to be adopted by the BCC, andthe reasons therefor. The Company will then be given access to theinvestigation file, will be given the right to contest in

 

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writing any findings ofthe report and to produce evidence of its own, and the right to present itsdefense at an oral hearing. The BCC will ultimately determine whether theCompany violated Article 82 of the EC Treaty and corresponding Belgian lawand may impose fines against the Company.

 

In a separate matter, in October 2004,the BCS notified IMS of a request for information in connection with IMS’sacquisition of Source in April 2004. The BCS is investigating whether such acquisition may violate Article 82of the EC Treaty and corresponding Belgian law. The Company responded to the request for information in December 2004.

 

The Company intends tocontinue to vigorously defend itself in these matters before the Belgiancompetition authorities.  Management ofthe Company is unable to predict at this time the final outcome of thesematters or whether adverse resolutions thereof could materially affect theCompany’s results of operations, cash flows or financial position in the periodin which such adverse resolution occurs.

 

*OtherContingencies*

 

*ContingentConsideration.*  Underthe terms of the purchase agreements related to acquisitions made from 2001 to2004, the Company may be required to pay additional amounts as contingentconsideration based on the achievement of certain targets during 2003 to2007.  Substantially all of anyadditional payments will be recorded as goodwill in accordance with EITF No. 95-8,“Accounting for Contingent Consideration Paid to the Shareholders of anAcquired Enterprise in a Purchase Business Combination.”  As of March 31, 2005, approximately$4,000 was earned and paid under these contingencies.  Based on current estimates, managementexpects the remaining additional contingent payments under these agreements tototal approximately $45,000.  It isexpected that these contingent payments will be resolved within a specifiedtime period after the end of each respective calendar year from 2005 through2007.

 

*SynavantSpin-Off.*  In August 2000,the Company spun off Synavant, Inc. in a transaction qualifying as taxfree under Section 355 of the Internal Revenue Code (“IRC”).  If, contrary to expectations, the spin-off ofSynavant were not to qualify as tax free under Section 355, then, ingeneral, a corporate tax would be payable by the consolidated group, of whichthe Company is a common parent and Synavant is a member, based on thedifference between (x) the fair market value of the Synavant common stockon the date of the spin-off and (y) the adjusted basis of such Synavant commonstock.  In addition, under theconsolidated return rules, each member of the consolidated group would beseverally liable for such tax liability. Pursuant to the terms of the spin-off, the Company would be liable forthe resulting corporate tax, except in certain circumstances.  In the opinion of management and based on theopinion of tax counsel, McDermott, Will & Emery, it is not probable,but may be reasonably possible, that the Company will incur liability for thismatter; therefore, the Company has not recorded reserves for this matter.  The Company estimates that the aggregateliability in this regard would not exceed $100,000.

 

*CTSSplit-Off.*  On February 6,2003, the Company completed an exchange offer to distribute its majorityinterest in Cognizant Technology Solutions (“CTS”) in a transaction qualifyingas tax free under Section 355 of the IRC. The Company exchanged 0.309 shares of CTS class B common shares for eachshare of the Companythat was tendered.  Under terms of theoffer, the Company accepted

 

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36,540 IMS common sharestendered in exchange for all 11,291 CTS common shares that the Company owned.  As the offer was oversubscribed, the Companyaccepted tendered IMS shares on a pro-rata basis in proportion to the number ofshares tendered.  The proration factorwas approximately 21.1%.

 

If, contrary toexpectations, the CTS distribution were not to qualify as tax free under Section 355,then, in general, a corporate tax would be payable by the Company based on thedifference between (x) the fair market value of the CTS class B commonstock at the time of the exchange offer and (y) the Company’s adjusted tax basis in suchclass B common stock.  Pursuant to thedistribution agreement entered into between the Company and CTS in connection with the distribution, CTSagreed to indemnify theCompany in the event the transaction is taxable as a result of a breachof certain representations made by CTS, subject to certain exceptions.  In the opinion of management and based on theopinion of tax counsel, McDermott, Will & Emery, it is not probable,but may be reasonably possible, that the Companywill incur liability for this matter, therefore, the Company has notrecorded reserves for this matter.  The Company estimates that the aggregate taxliability in this regard would not exceed $215,725.

 

*Other Tax Contingencies.*In addition to the tax items discussed above,the Company has tax reserves of approximately $22,000 that relate to variouspositions it has taken on tax returns filed in numerous countries over the lastseveral years.  These reserves representthe Company’s best estimate of the probable liability should the tax returnpositions be challenged by the relevant tax authorities.  While the amount is material in theaggregate, no individual item is material and no single event will have amaterial impact related to these reserves.

 

*Other Litigation.*  For a description of two class actionlitigations, referred to by the Company as the Douglas Litigation and theMayberry Litigation, that the Company settled during the first quarter of 2004,please see the Company’s Annual Report on Form 10-K for the year ended December 31,2004.

 

**Note 9.**          Financial Instruments

** **

*ForeignExchange Risk Management*

 

The Company transactsbusiness in more than 100 countries and is subject to risks associated withchanging foreign exchange rates.  TheCompany’s objective is to reduce earnings and cash flow volatility associatedwith foreign exchange rate changes.  Accordingly,the Company enters into foreign currency forward contracts to minimize theimpact of foreign exchange movements on net income and on the value ofnon-functional currency assets and liabilities.

 

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

 

The impact of foreignexchange risk management activities on pre-tax income in the three months endedMarch 31, 2005 was a net gain of $11,236, and net gain of $4,369 in thethree months ended March 31, 2004. In addition, at March 31, 2005, the Company had approximately$510,693 in foreign exchange forward contracts outstanding with variousexpiration dates through June 2005 relating to

 

18

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non-functional currencyassets and liabilities.  Foreign exchangeforward contracts are recorded at estimated fair value.  The estimated fair values of the forwardcontracts are based on quoted market prices. Unrealized and realized gains and losses on these contracts are notdeferred and are included in the Condensed Consolidated Statements of Income(unaudited) in Other income, net.

 

*FairValue of Financial Instruments*

 

At March 31, 2005,the Company’s financial instruments included cash, cash equivalents, short-termmarketable securities, receivables, accounts payable and long-term debt.  At March 31, 2005, the fair values ofcash, cash equivalents, receivables and accounts payable approximated carryingvalues due to the short-term nature of these instruments.  At March 31, 2005, the fair value oflong-term debt approximated carrying value. 

 

*CreditConcentrations*

 

The Company continuallymonitors its positions with, and the credit quality of, the financialinstitutions which are counterparties to its financial instruments and does notanticipate non-performance by the counterparties.  The Company would not realize a material lossas of March 31, 2005 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.

 

The Company maintainsaccounts receivable balances ($330,312****and $280,548,net of allowances, at March 31, 2005 and December 31, 2004,respectively), principally from customers in the pharmaceutical industry.  The Company’s trade receivables do notrepresent significant concentrations of credit risk at March 31, 2005 dueto the high quality of its customers and their dispersion across manygeographic areas.

 

*Linesof Credit*

 

On April 5, 2004,the Company entered into a $700,000 revolving credit facility with a syndicateof 12 banks (the “Unsecured Facility”). The Unsecured Facility replaced the Company’s lines of credit withseveral domestic and international banks. On March 9, 2005, the Company renegotiated with the syndicate of 12banks to amend and restate the Unsecured Facility (the “Amended and RestatedFacility”).  The terms of the Amended andRestated Facility extended the maturity of the facility in its entirety to aterm of five years, maturing March 2010, reduced the borrowing margins andincreased subsidiary borrowing limits. Total borrowings under these existing lines were $583,500 and $476,400at March 31, 2005 and December 31, 2004, respectively, all of whichwere classified as long-term.  TheCompany defines long-term lines as those where the lines are non-cancelable formore than 365 days from the balance sheet date by the financial institutionsexcept for specified, objectively measurable violations of the provisions ofthe agreement.  In general, rates forborrowing under the Amended and Restated Facility are LIBOR plus 40 basispoints and can vary based on the Company’s Debt to EBITDA ratio.  The weighted average interest rates for theCompany’s lines were 3.24% and 2.83% at March 31, 2005 and December 31,2004, respectively.  In addition, theCompany is required to pay a commitment fee on any unused portion of thefacilities of 0.09%.

 

19

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The Company’s total debtof $731,490 and $626,670 at March 31, 2005 and December 31, 2004,respectively, included $150,000 of private placement debt (as further discussedbelow), and an adjustment to the carrying amount of fair value hedgeddebt.  At March 31, 2005, theCompany had approximately $116,500 available under its existing bank creditfacilities.

 

In March and April 2002,the Company entered into interest rate swaps on a portion of its variable ratedebt portfolio.  $50,000 of these swapsmatured in March 2005.  Theremaining arrangement converts the variable interest rates to a fixed interestrate of 5.08% on a notional amount of $25,000 and matures in April 2006.  The Company accounted for the interest rateswaps as cash flow hedges and recorded any changes in fair value in OtherComprehensive Income (see Note 13).  TheCompany determines the fair values based on estimated prices quoted byfinancial institutions.  The fair valuesof these swaps were $(489) and $(1,022) as of March 31, 2005 and December 31,2004, respectively.

 

In January 2003, theCompany closed a private placement transaction pursuant to which it issued$150,000 of five-year debt to several highly rated insurance companies at afixed rate of 4.60%.  The Company usedthe proceeds to pay down short-term debt. The Company also swapped $100,000 of its fixed rate debt to floatingrate based on six-month LIBOR plus a margin of approximately 107 basispoints.  The Company accounted for theseswaps as fair value hedges under the provisions of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  The Company determined the fair values basedon estimated prices quoted by financial institutions.  The fair value of the swap was $(2,011) and$270 as of March 31, 2005 and December 31, 2004, respectively.

 

The Company’s financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of its main bank arrangements andthe 2003 private placement transaction, covenants to maintain specific ratiosof consolidated total indebtedness to EBITDA and of EBITDA to certain fixedcharges.  At March 31, 2005, theCompany was in compliance with these financial debt covenants and itanticipates that it will remain in compliance with the covenants over the termof the borrowing arrangements.

 

**Note 10.**Pensionand Postretirement Benefits

 

**The following table provides the Company’s expenseassociated with pension benefits that are accounted for under SFAS No. 87.For a complete description of the Company’s pension and postretirementbenefits, refer to Note 12 of the Company’s 2004 Annual Report on Form 10-Kas filed with the Securities and Exchange Commission.**

 
| **Components of Net Periodic  Benefit Cost for** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **the Three Months Ended  March 31,**       | ** ** | **2005**             | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                     |       | $                    | 2,315      |               | $          | 2,632 |   | $ | 18 |   | $ | 54 |   |
| Interest cost                                    |       | 3,642                |       | 3,355              |       | 167 |   | 209 |   |
| Expected return  on plan assets                  |       | (5,586               | )          | (4,669             | )          | — |   | — |   |
| Amortization of  prior service cost (credit)     |       | (55                  | )          | (57                | )          | (247 | ) | (247 | ) |
| Amortization of  transition obligation           |       | (1                   | )          | (23                | )          | — |   | — |   |
| Amortization of  net loss                        |       | 728                  |       | 649                |       | 63 |   | 149 |   |
| Net periodic  benefit cost                       |       | $                    | 1,043      |               | $          | 1,887 |   | $ | 1 |   | $ | 165 |   |

 

20

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**Note 11.**         IncomeTaxes

 

The Company operates in morethan 100 countries around the world and its earnings are taxed at theapplicable income tax rate in each of these countries.

 

For the three months ended March 31,2005, the Company’s effective tax rate was reduced primarily due to afavorable non-U.S. audit settlement of approximately $29,300. Also in the first quarter of 2005, $67,100 of tax expense was recordedrelated to the decision to repatriate approximately $647,000 of foreignearnings back to the U.S. during 2005 under the American Jobs Creation Act of2004 (“AJCA”).  For the three months ended March 31, 2004, the Company’s effectivetax rate was reduced primarily due to a favorable partial U.S. audit settlementof approximately $15,600.

 

While the Company intends tocontinue to seek global tax planning initiatives, there can be no assurancethat the Company will be able to successfully implement such initiatives toreduce or maintain its overall tax rate.

 

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

 

**Note 12.**         IMSHealth Capital Stock

** **

On December 14, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  As of March 31, 2005, approximately6,659 of the 10,000 shares remained available for repurchase under the December 2004program.

 

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

 

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

 

During the three monthsended March 31, 2005, the Company repurchased approximately 3,928 sharesof outstanding Common Stock at a total cost of approximately $92,580 underthese programs.  During the three monthsended March 31, 2004, the Company repurchased approximately 5,457 sharesof outstanding Common Stock at a total cost of approximately $138,851,including the repurchase of 4,600 shares on January 9, 2004 pursuant to anaccelerated share repurchase program (“ASR”). As required under the ASR agreement, the Company paid an additional $942of cash in May 2004 as the final settlement amount based on an increase inour share price over the settlement period. Shares acquired through the repurchase programs described aboveare open-market purchases or privately negotiated transactions in compliancewith Securities and Exchange Commission Rule 10b-18.

 

21

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The Company re-issuedapproximately 1,287 treasury shares under option exercises for proceeds ofapproximately $23,856 during the threemonths ended March 31, 2005.  Inaddition, the Company paid dividends of $0.02 per share for a total ofapproximately $4,570 during the three months ended March 31, 2005.

 

**Note 13.**         ComprehensiveIncome

 

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

 

| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| **Net  Income**                                     | ** ** | **$**                                  | **30,343** | ** ** | **$** | **81,078** | ** ** |
| Other  comprehensive income, net of taxes:          | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Unrealized gains  (losses) on:                      | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Available-for-sale  equity securities               | ** ** | **(105**                               | **)**      | **(71** | **)** |
| Reclassification  adjustment                        | ** ** | **—**                             | ** ** | **219** | ** ** |
| Tax (expense) benefit  on above                     | ** ** | **37**                                 | ** ** | **(52** | **)** |
| Change in  unrealized gains (losses) on investments | ** ** | **(68**                                | **)**      | **96** | ** ** |
| Foreign currency  translation losses                | ** ** | **(26,298**                            | **)**      | **(4,991** | **)** |
| Changes in fair  value of cash flow hedges          | ** ** | **353**                                | ** ** | **106** | ** ** |
| Total other  comprehensive loss                     | ** ** | **(26,013**                            | **)**      | **(4,789** | **)** |
| **Comprehensive  Income**                           | ** ** | **$**                                  | **4,330**  | ** ** | **$** | **76,289** | ** ** |

** **

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

** **

Duringthe fourth quarter of 2004, the Company recorded $36,890 of Severance,impairment and other charges as a component of operating income.  As a result of leveraging prior investmentsin technology and process improvements, the Company committed to a plan toeliminate selected positions involved primarily in production anddevelopment.  The plan resulted in acharge for one-time termination benefits relating to a headcount reduction ofapproximately 465 employees located primarily in Europe and the U.S.  These severance benefits were calculatedpursuant to the terms of established employee protection plans, in accordancewith local statutory minimum requirements or individual employee contracts, asapplicable.

 

All of the 2004 fourthquarter charge will be settled in cash. The Company currently expects that alltermination actions under this plan will be completed by the end of 2005.

 

| ** **                        | ** ** | **Severance Related  Charges** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| Charge at  December 31, 2004 |       | $                              | 36,890     |   |
| 2004 utilization                  |       | (452                           | )          |
| 2005 utilization                  |       | (5,559                         | )          |
| Balance at  March 31, 2005   |       | $                              | 30,879     |   |

 

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TheCompany currently expects that a substantial portion of the cash outlaysrelating to the 2004 fourth quarter charge will be applied against theremaining March 31, 2005 balance during the remainder of 2005 and 2006.

 

Duringthe three months ended March 31, 2003, the Company recorded $37,220 ofSeverance, impairment and other charges as a component of operatingincome.  These charges were designed tofurther streamline operations and increase productivity through a worldwidereduction in headcount of approximately 80 employees and charges related toimpaired contracts and assets.  Theseverance benefits were calculated pursuant to the terms of establishedemployee protection plans, in accordance with local statutory minimumrequirements or individual employee contracts, as applicable.  The contract-related charges were forimpaired data supply and data processing contacts primarily in the Company’sU.S. and Japanese operations.  The assetwrite-down portion of the 2003 charge related to the Company’s decision toabandon certain products and as such, certain computer software primarily inthe U.S., Japan and Europe was written-down to its net realizable value.

 

| ** **                      | ** ** | **Severance  Related  Charges** | ** ** | **Contract  Related  Charges** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|---------------------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at  March 31, 2003  |       | $                               | 9,958      |                           | $          | 22,307                   |       | $         | 4,955      |   | $ | 37,220 |   |
| 2003 utilization                |       | (6,197                          | )          | (7,047                         | )          | (6,634                   | )          | (19,878   | )          |
| 2004 utilization                |       | (1,637                          | )          | (3,614                         | )          | —                   |       | (5,251    | )          |
| 2005 utilization                |       | (132                            | )          | (888                           | )          | —                   |       | (1,020    | )          |
| Adjustments                     |       | (1,746                          | )          | 67                             |       | 1,679                    |       | —    |       |
| Balance at  March 31, 2005 |       | $                               | 246        |                           | $          | 10,825                   |       | $         | —     |   | $ | 11,071 |   |
|                                 |            |                                 |            |                                |            |                          |            |           |            |  |  |  |  |  |

 

Thecash portion of the first quarter 2003 charge amounted to $30,586, of which theCompany paid approximately $1,020 during the first quarter of 2005.  The remaining accrual of $11,071 at March 31,2005 relates to lease obligations and continuing payments related to employeetermination benefits.

 

The Company expects thatcash outlays will be applied against the $11,071 balance remaining of the firstquarter 2003 charge at March 31, 2005 as follows:

 

| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|-----------------------------------|------------|------------------|------------|
| 2005                              |       | $                | 6,176      |   |
| 2006                              |       | 2,504            |       |
| 2007                              |       | 713              |       |
| 2008                              |       | 258              |       |
| 2009                              |       | 258              |       |
| Thereafter                        |       | 1,162            |       |
| Total                             |       | $                | 11,071     |   |

 

During2003, the Company reversed approximately $1,750 of severance related chargesoriginally included in the first quarter 2003 charge due to the Company’srefinement of estimates.  The Company

 

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alsorecorded additional charges during 2003 of approximately $1,700 relatedprimarily to a software impairment.

 

During the fourth quarterof 2001, the Company completed the assessment of its Competitive FitnessProgram (the “Program”).  This programwas designed to streamline operations, increase productivity, and improveclient service.  In connection with thisprogram, the Company recorded $94,616 of Severance, impairment and othercharges during the fourth quarter of 2001 as a component of operating income.

 

| ** **                        | ** ** | **Severance  Related  Charges** | ** ** | **Contract  Related  Charges** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at  December 31, 2001 |       | $                               | 39,652     |                           | $          | 26,324                   |       | $         | 28,640     |   | $ | 94,616 |   |
| 2001 utilization                  |       | (3,692                          | )          | (6,663                         | )          | (27,887                  | )          | (38,242   | )          |
| 2002 utilization                  |       | (26,277                         | )          | (9,819                         | )          | (1,474                   | )          | (37,570   | )          |
| 2003 utilization                  |       | (6,384                          | )          | (2,720                         | )          | (241                     | )          | (9,345    | )          |
| 2004 utilization                  |       | (455                            | )          | (1,232                         | )          | —                   |       | (1,687    | )          |
| 2005 utilization                  |       | (66                             | )          | (495                           | )          | —                   |       | (561      | )          |
| Adjustments                       |       | (688                            | )          | (274                           | )          | 962                      |       | —    |       |
| Balance at  March 31, 2005   |       | $                               | 2,090      |                           | $          | 5,121                    |       | $         | —     |   | $ | 7,211 |   |

 

The Company expects thatcash outlays will be applied against the $7,211 balance remaining in the fourthquarter 2001 program at March 31, 2005 as follows:

 

| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|-----------------------------------|------------|------------------|------------|
| 2005                              |       | $                | 1,655      |   |
| 2006                              |       | 2,216            |       |
| 2007                              |       | 1,835            |       |
| 2008                              |       | 262              |       |
| 2009                              |       | 262              |       |
| Thereafter                        |       | 981              |       |
| Total                             |       | $                | 7,211      |   |

 

TheCompany expects that future results will benefit from the 2001 and 2003restructuring charges to the extent of the contract-related charges and assetwrite-downs primarily through 2007.  TheCompany’s severance actions in the 2001 and 2003 programs related to a shiftingof resources around the Company.  Thebenefits from the 2004 severance actions will be partially offset by headcountadditions in selected locations.  Thebenefits will be realized primarily in Operating costs and Selling andadministrative expense, with a partial year of benefit realized in 2005 and afull year of benefit realized in 2006. For the 2001 and 2003 charges, the income statement lines that will beimpacted in future periods are Operating costs for the contract-related chargesand Depreciation and amortization related to the asset write-downs.  However, the Company does not expect amaterial impact on future cash flows due to the fact that it is stillcontractually obligated to continue to make payments under impaired contracts.

 

24

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**Note 15.**         Operationsby Business Segment

** **

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

 

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

 

**GeographicFinancial Information:**

 

The following representsselected geographic information for the regions in which we operate for thethree months ended March 31, 2005 and 2004:

 
| ** **                                   | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended March 31, 2005:** |       |              |       |            |       |                  |       |                            |       |           |       |
| Operating Revenue (4)                        |       | $                 | 176,957    |            | $          | 175,409               |       | $                               | 58,618     |           | —     |   | $ | 410,984 |   |
| Operating Income  (5)                        |       | $                 | 65,706     |            | $          | 17,945                |       | $                               | 28,065     |           | $          | (14,844 | ) | $ | 96,872 |   |
| **Three  months ended March 31, 2004:** | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                       |       | $                 | 167,252    |            | $          | 142,344               |       | $                               | 51,980     |           | —     |   | $ | 361,576 |   |
| Operating Income  (5)                        |       | $                 | 64,855     |            | $          | 18,437                |       | $                               | 28,867     |           | $          | (15,927 | ) | $ | 96,232 |   |

 

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**Notes to Geographic FinancialInformation:**

 

*(1)  Americas includes the United States, Canadaand Latin America.*

* *

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

* *

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

* *

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

* *

*(5)  Operating income for the three geographicregions does not reflect the allocation of certain expenses that are maintainedin Corporate and Other and as such, is not a true measure of the respectiveregions’ profitability.   The operatingincome for the geographic segments includes the impact of foreign exchange inconverting results into U.S. Dollars.*

 

25

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A summary of theCompany’s operating revenue by product line, as of and for the three monthsended March 31, 2005 and 2004 is presented below:

 

| ** **                             | ** ** | **Three Months Ended  March 31,** | ** **  |
|----------------------------------------|------------|----------------------------------------|-------------|
| ** **                             | ** ** | **2005**                               | ** **  | **2004** | ** ** |
| Sales force  effectiveness             | ** ** | **$**                                  | **199,945** |   | $ | 179,678 |   |
| Portfolio  optimization                | ** ** | **$**                                  | **125,490** |   | $ | 114,789 |   |
| Launch and Brand  management and other | ** ** | **$**                                  | **85,549**  |   | $ | 67,109 |   |
| Total Operating  revenue               | ** ** | **$**                                  | **410,984** |   | $ | 361,576 |   |

 

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**Item 2. Management’s D****iscussion and Analysis ofFinancial Condition and Results of Operations(Dollars and shares in thousands, except per share data)**

 

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

 

***Our Business***

 

IMS Health Incorporated (“we”,“us” or “our”) is a leading global provider of information solutions to thepharmaceutical and healthcare industries.  Our revenues are derivedprimarily from the sale of a broad line of market information, sales managementand consulting services to the pharmaceutical and healthcare industries. Our information products are developed to meet client needs by using datasecured from a worldwide network of suppliers in the markets where operationsexist.  Key information products include:

 

•      SalesForce Effectiveness to optimize sales force productivity and territorymanagement;

 

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

 

•      Launchand Brand Management and Other to support client needs relative to marketsegmentation and positioning and life cycle management for prescription andover-the-counter pharmaceutical products.

 

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

 

We operate in more than100 countries.  We also own a venture capital unit, Enterprise Associates,LLC (“Enterprises”), which is focused on investments in emergingbusinesses.  Until December 21,2004, we also owned approximately a 25% equity interest in the TriZetto Group, Inc.  “TriZetto” (See Note 7 to the CondensedConsolidated Financial Statements (Unaudited)).

 

We manage on a globalbusiness model with global leaders for the majority of our critical businessprocesses and accordingly have one reportable segment.

 

We believe that importantmeasures of our financial condition and results of operations include operatingrevenue, constant dollar revenue growth, operating income, operating margin andcash flows.

 

**Operating Results**

 

*Reclassifications. *Certain prior-year amounts have been reclassified to conform to 2005presentation.

 

*References to constant dollarresults. *We report resultsin U.S. Dollars but we do business on a global basis.  Exchange rate fluctuations affect the rate atwhich we translate foreign revenues and expenses into U.S. Dollars and haveimportant effects on our results.  Inorder to illustrate these

 

27

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effects, the discussionof our business in this report sometimes describes the magnitude of changes inconstant dollar terms.  We believe thisinformation facilitates a comparative view of business growth.  In the first three months of 2005, the U.S.Dollar was generally weaker against other currencies compared to the firstthree months of 2004, so growth at constant dollar exchange rates was lowerthan growth at actual currency exchange rates. See “How Exchange Rates Affect Our Results” below and the discussion of “MarketRisk” in the Management Discussion and Analysis in our annual report on Form 10-Kfor the year ended December 31, 2004 for a more complete discussionregarding the impact of foreign currency translation on our business.

 

**Summary of Operating Results**

** **
| ** **                           | ** ** | ** **                            | ** **  | **% Variance** | ** ** |
|--------------------------------------|------------|---------------------------------------|-------------|----------------|------------|
| ** **                           | ** ** | **Three months ended March 31,** | ** **  | **2005**       | ** ** |
| ** **                           | ** ** | **2005**                              | ** **  | **2004**       | ** ** | **vs. 2004** | ** ** |
| Operating  revenue                   | ** ** | **$**                                 | **410,984** |           | $          | 361,576 |   | 13.7 | % |
| Operating costs                      | ** ** | **183,357**                           |        | 152,688        |       | 20.1 | % |
| Selling and  administrative expenses | ** ** | **106,078**                           |        | 90,950         |       | 16.6 | % |
| Depreciation and  amortization       | ** ** | **24,677**                            |        | 21,706         |       | 13.7 | % |
| Operating income                     | ** ** | **$**                                 | **96,872**  |           | $          | 96,232 |   | 0.7 | % |

 

***Operating Income***

 

Our operating income forthe first quarter of 2005 increased 0.7% to $96,872 from $96,232 in the firstquarter of 2004.  The change wasprimarily due to the increase in our operating revenue, partially offset byincreases in our operating costs and selling and administrative expenses drivenprimarily by investments in new products, consulting and services capabilitiesand increased cost of data.  Ouroperating income decreased 1.3% in constant dollar terms.

 

***OperatingRevenue***

 

Revenue in 2004 reflectsa reclassification of consulting and services revenue into the other threebusiness lines to conform to 2005 presentation.

 

Our operating revenue forthe first quarter of 2005 grew 13.7% to $410,984 from $361,576 in the firstquarter of 2004. On a constant dollar basis our operating revenue growth was10.3%.  Acquisitions made during 2004 and2005 contributed 3.6 percentage points and 3.5 percentage points of reportedoperating revenue growth and constant dollar growth, respectively.  The increase in our operating revenueresulted from growth in revenue in all three of our business lines, togetherwith the effect of currency translation. On a constant dollar basis, all business lines grew.

 

28

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**Summaryof Operating Revenue**

 
| ** **                 | ** ** | ** **                            | ** **  | ** **       | ** ** | **% Variance**     | ** ** |
|----------------------------|------------|---------------------------------------|-------------|------------------|------------|--------------------|------------|
| ** **                 | ** ** | **Three months ended March 31,** | ** **  | **2005 vs 2004** | ** ** |
| ** **                 | ** ** | **2005**                              | ** **  | **2004**         | ** ** | **Reported Rates** | ** ** | **Constant Dollar** | ** ** |
| Sales force  effectiveness | ** ** | **$**                                 | **199,945** |             | $          | 179,678            |       | 11.3 | % | 8.2 | % |
| Portfolio  optimization    | ** ** | **$**                                 | **125,490** |             | $          | 114,789            |       | 9.3 | % | 6.2 | % |
| Launch, brand  and other   | ** ** | **$**                                 | **85,549**  |             | $          | 67,109             |       | 27.5 | % | 23.3 | % |
| Operating  Revenue         | ** ** | **$**                                 | **410,984** |             | $          | 361,576            |       | 13.7 | % | 10.3 | % |

 

•      *Sales Force Effectiveness* revenue grew primarily due to DDDdata offerings and Sales and Account Management consulting engagements inEurope, Xponent and the suite of new long-term care products in the UnitedStates, and steady growth in all of the other regions.

 

•      *Portfolio Optimization* revenue grew primarily due to strongdemand for certain of our core products, including our next generation MIDASoffering, called MIDAS Quantum.  Inaddition we had strong growth in our Hospital Audits in the US and Europe aswell as in the Portfolio Development consulting practice area in Europe, AsiaPacific and the United States.

 

•      *Launch Management, Brand Management and other product lines*revenue grew primarily due to Pricing and Reimbursement, Promotion Managementand Performance Management consulting revenue in the United States and Europeas well as Consumer Health in Europe.

 

Consulting and servicesrevenue, as included in the business lines above, was $54,638 in the firstquarter of 2005, up 63.3% from $33,462 in the first quarter of 2004 (up 58.5%on a constant-dollar basis).

 

***OperatingCosts***

 

Our operating costsinclude data processing costs, the costs of data collection and production, andcosts attributable to personnel involved in production, data management and theprocessing and delivery of our consulting and services offerings.  Our operating costs grew 20.1% to $183,357 inthe first quarter of 2005, from $152,688 in the first quarter of 2004.  The increase in our operating costs wasprimarily due to**foreign currency translation,increased cost of data, increases in costs related to consulting and services,and operating costs of acquired businesses. The effect of foreign currency translation increased our operating costsby approximately $6,000 for the first quarter of 2005.  Excluding the effect of the change in foreigncurrency translation, our operating costs grew 16.3% in the first quarter of2005 as compared to the first quarter of 2004.

 

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

 

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***Sellingand Administrative Expenses***

 

Our selling andadministrative expenses consist primarily of the costs attributable to sales,marketing, and administration, including human resources, legal, management andfinance.  Our selling and administrativeexpenses grew 16.6% in the first quarter of 2005, to $106,078 from $90,950 inthe first quarter of 2004:

 

•      *Foreign Currency Translation*: The effect of foreign currencytranslation increased our selling and administrative expenses by approximately$4,000 for the first quarter of 2005 as compared to the first quarter of2004.  Excluding the effect of the changein foreign currency translation, our selling and administrative expenses grew12.4% in the first quarter of 2005 as compared to the first quarter of 2004.

 

•      *Sales and Marketing*: Sales and marketing expense increasedby approximately $2,000 in the first quarter of 2005, compared to the firstquarter of 2004 to support revenue growth.

 

•      *Consulting*: Consulting and services expenses increased by approximately $4,000 inthe first quarter of 2005, compared to the first quarter of 2004 to support thegrowth in this revenue stream.

 

***Depreciationand Amortization***

 

Our depreciation andamortization charges increased 13.7% to $24,677 in the first quarter of 2005,from $21,706 in the first quarter of 2004, primarily due to computer softwareamortization associated with new products which increased by approximately$2,000, and amortization of intangibles related to recent acquisitions, whichincreased by approximately $1,500 in the first quarter of 2005 compared to thefirst quarter of 2004.

 

***Trendsin our Operating Margins***

 

Our operating margin forthe first quarter of 2005 was 23.6%, as compared to 26.6% in the first quarterof 2004.  The decrease in our operatingmargins for the first quarter of 2005 is primarily due to continuinginvestments in new products and consulting and services capabilities, increasedcost of data, and operating income declines in Japan, driven primarily by theramp-up in the sales and product support services needed to support customerreadiness programs for new offerings.

 

Recent acquisitions alsohave had an adverse effect on our operating margins due to the fact that someof our small business acquisitions have historically experienced loweroperating margins than ours, and the revenue and cost synergies that weincorporate into our business plans are not all immediately realized.  We also experience higher intangibleamortization in the first year after completing an acquisition and may incuradditional costs in integrating the acquired operations into ours, both ofwhich tend to increase our costs and thus decrease our operating margins in theinitial year of each completed acquisition.

 

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

 

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***Non-OperatingIncome***

 

Our non-operating incomeincreased 37% to $8,134 in the first quarter of 2005 from $5,921 in the firstquarter of 2004.  The increase in ournon-operating income was primarily due to the following factors:

 

•      *Interest Expense, net*: Net interest expense for the firstquarter was $3,798 in 2005, compared with $3,309 in 2004, primarily due tohigher debt levels and interest rates.

 

•      *Gains from Investments, net*: We had gains from investmentsof $2,671 during the first quarter of 2005, primarily as a result of adivestiture of an interest we had in a German company.  Gains from investment of $6,453 in the firstquarter of 2004 were primarily from the sale of investments within theEnterprise portfolio.

 

•      *Other Income, net*: Other income, net, increased by $6,484primarily due to net foreign exchange gains of $11,236 in the first quarter of2005, compared with net foreign exchange gains of $4,369 in the first quarterof 2004.

 

***Taxes***

 

Forthe three months ended March 31, 2005, our effective tax rate was reducedprimarily due to a favorable non-U.S. audit settlement of approximately $29,300.  Also in the first quarter of 2005, $67,100 oftax expense was recorded related to the decision to repatriate approximately$647,000 of foreign earnings back to the U.S. during 2005 under the AmericanJobs Creation Act of 2004 (“AJCA”).  For the three months ended March 31,2004, our effective tax rate was reduced primarily due to a favorable partialU.S. audit settlement of approximately $15,600.

 

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

 

## **OperatingResults by Geographic Region**

## ** **

The following representsselected geographic information for the regions in which we operate for thethree months ended March 31, 2005 and 2004:

 
| ** **                                   | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended March 31, 2005:** |       |              |       |            |       |                  |       |                            |       |           |       |
| Operating Revenue (4)                        |       | $                 | 176,957    |            | $          | 175,409               |       | $                               | 58,618     |           | —     |   | $ | 410,984 |   |
| Operating Income  (5)                        |       | $                 | 65,706     |            | $          | 17,945                |       | $                               | 28,065     |           | $          | (14,844 | ) | $ | 96,872 |   |
| **Three  months ended March 31, 2004:** | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                       |       | $                 | 167,252    |            | $          | 142,344               |       | $                               | 51,980     |           | —     |   | $ | 361,576 |   |
| Operating Income  (5)                        |       | $                 | 64,855     |            | $          | 18,437                |       | $                               | 28,867     |           | $          | (15,927 | ) | $ | 96,232 |   |

 

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**Notes to Geographic FinancialInformation:**

 

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

* *

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

* *

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

* *

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

* *

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

 

***Americas Region***

 

Operating revenue growthin the Americas region was 5.8% in the first quarter of 2005, compared to thefirst quarter of 2004, primarily due to strong performance in consulting andservices within the launch and brand management and other business lines andcontinued overall strength of the sales force effectiveness business line.

 

Operating income in theAmericas region grew 1.3% in the first quarter of 2005, compared to the firstquarter of 2004.  The operating incomegrowth reflects revenue growth in the region, partially offset by increasedcost of data and investment in consulting capabilities.

 

***EuropeRegion***

 

Operating revenue growthin the Europe region was 23.2% in the first quarter of 2005, compared to thefirst quarter of 2004, primarily due to strong growth in our consulting andservices products related to all of our business lines, in addition to growthin core sales force effectiveness and portfolio optimization data sales, as wellas foreign exchange.

 

Operating income in theEurope region decreased by 2.7% in the first quarter of 2005, compared to thefirst quarter of 2004.  The decline inoperating income in the first quarter of 2005 was primarily driven by operatingrevenue growth offset by increased cost of data and investments in theconsulting business.

 

***Asia Pacific Region***

 

Operatingrevenue in the Asia Pacific region increased 12.8% in the first quarter of2005, compared to the first quarter of 2004, due to continued strong growth inthe region, including moderate growth in Japan, and foreign exchange.

 

Operatingincome in the Asia Pacific region decreased by 2.8% in the first quarter of2005, compared to the first quarter of 2004, primarily due to increasedinvestments in new products and data costs in Japan.

 

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

### ** **

IMS operates globally,deriving a significant portion of its operating income from non-U.S.operations.  As a result, fluctuations inthe value of foreign currencies relative to the U.S. dollar may increase thevolatility of U.S. dollar operating results. IMS enters into forward foreign currency contracts to partially offsetthe effect of currency fluctuations.  In2005, foreign currency translation increased U.S. dollar revenue growth byapproximately 3.3 percentage points, while impact on operating income growthwas an approximate increase of 1.9 percentage points.

 

Non-U.S. monetary assetsare maintained in currencies other than the U.S. dollar, principally the Euro,the Japanese Yen, the British Pound, the Swiss Franc, and the AustralianDollar.  Where monetary assets are heldin the functional currency of the local entity, changes in the value of thesecurrencies relative to the U.S. dollar are charged or credited to Cumulativetranslation adjustment in the Consolidated Statements of Shareholders’Equity.  The effect of exchange ratechanges during 2005 decreased the U.S. dollar amount of Cash and cashequivalents by $5,680.

 

***Liquidityand Capital Resources***

*** ***

Our cash and cashequivalents decreased $43,576during the first quarter of 2005 to $401,327at March 31, 2005 compared to $444,903 at December 31, 2004.  The decrease reflects cash used by operatingactivities of $38,116 and investingactivities of $42,235, offset by cash provided by financing activitiesof $42,455.  Including the change in short-term marketablesecurities, which is included in cash used in investing activities, our cashand cash equivalents and short-term marketable securities decreased to $408,075at March 31, 2005 compared to $459,956 at December 31, 2004, adecrease of $51,881.

 

We currently expect that we willuse our cash and cash equivalents primarily to fund:

 

•      development ofsoftware to be used in our new products and capital expenditures to expand andupgrade our information technology capabilities and to build or acquirefacilities to house our growing business (we currently expect to spendapproximately $95,000 to $105,000 during 2005 for software development andcapital expenditures);

 

•      acquisitions;

 

•      sharerepurchases;

 

•      dividends toour shareholders (we expect 2005 dividends will be $0.08 per share orapproximately $18,000); 

 

•      paymentsfor tax related matters, including the D&B Legacy Tax Matters discussedfurther in Note 8 to our Condensed Consolidated Financial Statements(Unaudited).  Payments for certain of theD&B Legacy Tax Matters could be up to approximately $61,000 prior to September 30,2005; and

 

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•      pensionand other postretirement benefit plan contributions (we currently expectcontributions to U.S. and non-U.S. pension and other postretirement benefitplans to total approximately $23,700 in 2005).

 

Net cash used byoperating activities amounted to $38,116for the three months ended March 31, 2005, an increase in cash used of $61,520 over the comparable period in2004.  The increase relates primarily tothe income tax impact of cash repatriation and the funding of accountsreceivable and prepaid expenses during the three months ended March 31,2005.

 

Net cash used ininvesting activities amounted to $42,235for the three months ended March 31, 2005, an increase in cash used of $26,730 over the comparable period in2004.  The increase during the firstthree months of 2005 relates primarily to the fact that we made payments of$62,455 for acquisitions during the first three months of 2005, compared topayments made for acquisitions of $3,878 during the comparable period in 2004.  We also had proceeds from the sale ofinvestments of $3,023 in the first quarter of 2005, compared to $10,712 in thefirst quarter of 2004.  These amountswere partially offset by $37,414 of proceeds from the sale of our investment inTriZetto (see Note 7 of the Condensed Consolidated Financial Statements(unaudited)) and an $8,361 reduction in funding requirements for short-termmarketable securities for the first three months of 2005 compared to 2004.

 

Net cash provided byfinancing activities amounted to $42,455for the three months ended March 31, 2005, an increase of $41,422 over the comparable period in2004.  This increase in cash provided wasprimarily due to a decrease of $46,271 in purchases of our stock during thefirst quarter of 2005 compared to the first quarter of 2004.  Refer to the Stock Repurchase Programs section forfurther information on our variance between the first quarters of 2005 and2004.

 

Our financing activitiesinclude cash dividends we paid of $0.02 per share quarterly, which amounted to$4,570 and $4,707 during the first three months of 2005 and 2004,respectively.  The payments and level ofcash dividends made by us are reviewed quarterly and are subject to thediscretion of our Board of Directors. Any future dividends, other than the $0.02 per share dividend for thefirst quarter of 2005, which was declared by our Board of Directors in February 2005,will be based on, and affected by, a number of factors, including our operatingresults and financial requirements.

 

As discussed under theTaxes section, we will repatriate approximately $647,000 of foreign earningsback to the U.S. during 2005 under the AJCA. Foreign earnings repatriated under the AJCA would increase liquidity inthe U.S., with a corresponding reduction in liquidity at our foreignsubsidiaries.  Some foreign subsidiarieswould be required to borrow in order to repatriate their earnings to theU.S.  We expect our significant positiveforeign cash flows would be sufficient to repay any foreign debt and replenishforeign cash balances over time.  Shouldwe decide not to repatriate foreign earnings under the AJCA, we would meet U.S.liquidity needs through ongoing cash flows, external borrowings, or both.  We utilize a variety of tax planning andfinancing strategies in an effort to ensure that our worldwide cash isavailable in the locations in which it is needed.

 

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**Tax andother Contingencies**

 

Weare exposed to certain known tax and other contingencies that are material toour investors.  The facts and circumstances surrounding thesecontingencies and a discussion of their effect on us are included in Note 8 toour Condensed Consolidated Financial Statements (Unaudited) for the periodended March 31, 2005.  We do notknow of any material tax or other contingencies, other than those described inNote 8 to our Condensed Consolidated Financial Statements (Unaudited).

 

Thesecontingencies may have a material effect on our liquidity, capitalresources or results of operations.  Although we have established reservesfor D&B Legacy Tax Matters in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 5, “Accounting for Contingencies”, theactual liability may exceed the amount of the reserve.  We have not established any reserves inrespect of the other contingencies.  In addition, even where our reservesare adequate, the incurrence of any of these liabilities may have a materialeffect on our liquidity and the amount of cash available to us for other purposes.

 

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

 

**Stock Repurchase Programs**

 

On December 14, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  As of March 31, 2005, approximately6,659 of the 10,000 shares remained available for repurchase under the December 2004program.

 

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

 

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

 

During the three monthsended March 31, 2005, the Company repurchased approximately 3,928 sharesof outstanding Common Stock at a total cost of approximately $92,580 underthese programs.  During the three monthsended March 31, 2004, the Company repurchased approximately 5,457 sharesof outstanding Common Stock at a total cost of approximately $138,851,including the repurchase of 4,600 shares on January 9, 2004 pursuant to an acceleratedshare repurchase program (“ASR”).  Asrequired under the ASR agreement, the Company paid an additional $942 of cashin May 2004 as the final settlement amount based on an increase in ourshare price over the settlement period.  Sharesacquired through the repurchase programs described above are open-marketpurchases or privately negotiated transactions in compliance with Securitiesand Exchange Commission Rule 10b-18.

 

The Company re-issuedapproximately 1,287 treasury shares under option exercises for proceeds ofapproximately $23,856 during the threemonths ended March 31, 2005.  Inaddition, the Company

 

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paiddividends of $0.02 per share for a total of approximately $4,570 during thethree months ended March 31, 2005.

 

**Debt**

 

In recent years, we have increased debt levels tobalance appropriately the objective of generating an attractive cost of capitalwith providing us a reasonable amount of financial flexibility.  At March 31, 2005, our debt totaled$731,490, and management does not believe that this level of debt poses amaterial risk to us due to the following factors:

 

•      ineach of the last two years, we have generated strong net cash provided byoperating activities in excess of $350,000;

 

•      atMarch 31, 2005, we had $408,075 in worldwide cash and cash equivalents andshort-term marketable securities;

 

•      atMarch 31, 2005, we had $116,500 of unused debt capacity under our existingbank credit facilities; and

 

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

 

On April 5, 2004, weentered into a $700,000 revolving credit facility with a syndicate of 12 banks(the “Unsecured Facility”).  TheUnsecured Facility replaced our lines of credit with several domestic andinternational banks.  On March 9,2005, we renegotiated with the syndicate of 12 banks to amend and restate theUnsecured Facility (the “Amended and Restated Facility”).  The terms of the Amended and RestatedFacility extended the maturity of the facility in its entirety to a term offive years, maturing March 2010, reduced the borrowing margins andincreased subsidiary borrowing limits. Total borrowings under these existing lines were $583,500 and $476,400at March 31, 2005 and December 31, 2004, respectively, all of whichwere classified as long-term.  We definelong-term lines as those where the lines are non-cancelable for more than 365days from the balance sheet date by the financial institutions except forspecified, objectively measurable violations of the provisions of theagreement.  In general, rates forborrowing under the Amended and Restated Facility are LIBOR plus 40 basispoints and can vary based on our Debt to EBITDA ratio.  The weighted average interest rates for ourlines were 3.24% and 2.83% at March 31, 2005 and December 31, 2004,respectively.  In addition, we arerequired to pay a commitment fee on any unused portion of the facilities of0.09%.

 

Our total debt of$731,490 and $626,670 at March 31, 2005 and December 31, 2004,respectively, included $150,000 of private placement debt (as further discussedbelow), and an adjustment to the carrying amount of fair value hedgeddebt.  At March 31, 2005, we hadapproximately $116,500 available under our existing bank credit facilities.

 

In March and April 2002,we entered into interest rate swaps on a portion of our variable rate debtportfolio.  $50,000 of these swapsmatured in March 2005.  Theremaining arrangement converts the variable interest rates to a fixed interestrate of 5.08% on a notional amount of $25,000 and matures in April 2006.  We accounted for the interest rate swaps ascash flow hedges and recorded any

 

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changes in fair value inOther Comprehensive Income (see Note 13). We determine the fair values based on estimated prices quoted byfinancial institutions.  The fair valuesof these swaps were $(489) and $(1,022) as of March 31, 2005 and December 31,2004, respectively.

 

In January 2003, weclosed a private placement transaction pursuant to which we issued $150,000 offive-year debt to several highly rated insurance companies at a fixed rate of4.60%.  We used the proceeds to pay downshort-term debt.  We also swapped$100,000 of our fixed rate debt to floating rate based on six-month LIBOR plusa margin of approximately 107 basis points. We accounted for these swaps as fair value hedges under the provisionsof SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  We determined the fairvalues based on estimated prices quoted by financial institutions.  The fair value of the swap was $(2,011) and$270 as of March 31, 2005 and December 31, 2004, respectively.

 

Our financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of our main bank arrangements andthe 2003 private placement transaction, covenants to maintain specific ratiosof consolidated total indebtedness to EBITDA and of EBITDA to certain fixedcharges.  At March 31, 2005, we werein compliance with these financial debt covenants and we anticipate that wewill remain in compliance with the covenants over the term of the borrowingarrangements.

 

**Severance, Impairment and Other Charges**

 

Duringthe fourth quarter of 2004, the Company recorded $36,890 of Severance,impairment and other charges as a component of operating income.  As a result of leveraging prior investmentsin technology and process improvements, the Company committed to a plan toeliminate selected positions involved primarily in production anddevelopment.  The plan resulted in acharge for one-time termination benefits relating to a headcount reduction ofapproximately 465 employees located primarily in Europe and the U.S.  These severance benefits werecalculated pursuant to the terms of established employee protection plans, inaccordance with local statutory minimum requirements or individual employeecontracts, as applicable.

 

All of the 2004 fourthquarter charge will be settled in cash. The Company currently expects that all termination actions under thisplan will be completed by the end of 2005.

 

| ** **                        | ** ** | **Severance Related  Charges** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| Charge at  December 31, 2004 |       | $                              | 36,890     |   |
| 2004 utilization                  |       | (452                           | )          |
| 2005 utilization                  |       | (5,559                         | )          |
| Balance at  March 31, 2005   |       | $                              | 30,879     |   |

 

TheCompany currently expects that a substantial portion of the cash outlaysrelating to the 2004 fourth quarter charge will be applied against theremaining March 31, 2005 balance during the remainder of 2005 and 2006.

 

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Thebenefits from the 2004 severance actions will be partially offset by headcountadditions in selected locations.  Thebenefits will be realized primarily in Operating costs and Selling and administrativeexpense, with a partial year of benefit realized in 2005 and a full year ofbenefit realized in 2006.  See Note 14 ofour Condensed Consolidated Financial Statements (Unaudited) for a descriptionof our 2001 and 2003 restructuring programs.

 

***RecentlyIssued Accounting Standards***

 

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payment”, which is a revisionof SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS No. 123R establishes standards forthe accounting of transactions in which an entity exchanges its equityinstruments for goods or services, or incurs liabilities in exchange for goodsor services that are based on the fair value of the entity’s equity instrumentsor that may be settled by the issuance of equity instruments.  SFAS No. 123R focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  SFAS No. 123Rrequires a public entity to measure the cost of all employee share-basedpayments, including grants of employee stock options, using a fair-value basedmethod, such as the Black-Scholes option valuation model at the date of thegrant.  The resulting cost is then recognizedas compensation cost in the Consolidated Statements of Income over the serviceperiod during which an employee is required to provide service in exchange forthe award (usually the vesting period). In April 2005, the Securities and Exchange Commission deferred theeffective date of SFAS No. 123R to the first annual reporting periodbeginning after June 15, 2005.  TheCompany is currently evaluating the impact of SFAS No. 123R; however,based upon outstanding as well as future anticipated stock-based award grantsthrough December 31, 2006, the Company expects that the adoption under themodified prospective method will have approximately an $0.11 to $0.12 fullydiluted earnings per share impact on its consolidated results of operations forthe year ending December 31, 2006. For a description of the Company’smodel and assumptions used to calculate the fair value of the Company’sstock-based awards, refer to Note 13 of the Company’s 2004 Annual Report on Form 10-Kas filed with the Securities and Exchange Commission.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets-AnAmendment of APB Opinion No. 29.” SFAS No. 153 amends APB Opinion No. 29, “Accounting forNonmonetary Transactions,” to eliminate the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance.  SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange.  SFAS No. 153 iseffective for nonmonetary exchanges occurring in fiscal periods beginning afterJune 15, 2005.  The adoption of SFASNo. 153 is not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows for the year ending December 31,2006.

 

***Forward-Looking Statements***

*** ***

This Quarterly Report on Form 10-Q,as well as information included in oral statements or other written statementsmade or to be made by us, contain statements that, in our opinion, mayconstitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. The words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,”“likely,”

 

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“project,” “estimate,” “will,”“may,” “should,” “future,” “predicts,” “potential,” “continue” and similarexpressions identify these forward-looking statements, which appear in a numberof places in this Quarterly Report and include, but are not limited to, allstatements relating to plans for future growth and other business developmentactivities as well as capital expenditures, financing sources, dividends andthe effects of regulation and competition, foreign currency conversion and allother statements regarding our intent, plans, beliefs or expectations or thoseof our directors or officers.  Investorsare cautioned that such forward-looking statements are not assurances forfuture performance or events and involve risks and uncertainties that couldcause actual results and developments to differ materially from those coveredin such forward-looking statements. These risks and uncertainties include, but are not limited to:

 

•      risksassociated with operating on a global basis, including fluctuations in thevalue of foreign currencies relative to the U.S. dollar, and the ability tosuccessfully hedge such risks – we derived approximately 64% of our operatingrevenue in 2004 from non-U.S. operations;

 

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

 

•      ourability to develop new or advanced technologies, including sophisticatedinformation systems, software and other technology used to deliver our 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 our customers or suppliers;

 

•      ourability to maintain and defend our intellectual property rights injurisdictions around the world;

 

•      ourability to successfully maintain historic effective tax rates;

 

•      competition,particularly in the markets for pharmaceutical information;

 

•      regulatory,legislative and enforcement initiatives to which we are 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 we anticipate to be an increasingly important tool in thedesign, development and marketing of pharmaceuticals;

 

•      regulatory,legislative and enforcement initiatives to which our customers 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 our customers operate;

 

•      consolidationin the pharmaceutical industry and the other industries in which our customersoperate;

 

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•      theimposition of additional restrictions on our use of or access to data, or therefusal by data suppliers to provide data to us;

 

•      conditionsin the securities markets that may affect the value or liquidity of portfolioinvestments; and management’s estimates of lives of assets, recoverability ofassets, fair market value, estimates and liabilities and accrued income taxbenefits 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 us, our personnel and facilities, our customers andsuppliers, financial markets and general economic conditions.

 

Consequently, all theforward-looking statements contained in this Quarterly Report on Form 10-Qare qualified by the information contained herein, including, but not limitedto, the information contained under this heading and our Condensed ConsolidatedFinancial Statements (Unaudited) and notes thereto for the three months ended March 31,2005 and by the material set forth under the headings “Business” and “FactorsThat May Affect Future Results” in our Annual Report on Form 10-K forthe year ended December 31, 2004. We are under no obligation to publicly release any revision to anyforward-looking statement contained or incorporated herein to reflect anyfuture events or occurrences.

 

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**Item 3.****    Quantitative and****Qualitative Disclosures About Market Risk**

 

Information in responseto this Item is set forth in “Note 9. Financial Instruments” in the Notes tothe Condensed Consolidated Financial Statements (Unaudited) on pages 18through 20 hereof.

 

**Item 4.****    Contr****ols and Procedures**

 

(a)   Evaluation of Disclosure Controls andProcedures

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports that the Company files or submits to the SEC under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto the Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as the Company’sare designed to do, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 

TheCompany’s Chief Executive Officer and****ChiefFinancial Officer have evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-14c and 15d-14cunder the Exchange Act) as of March 31, 2005 (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s periodic filings under the ExchangeAct.

 

(b)   Changes in Internal Control over FinancialReporting

 

There have been no changes in the Company’s internalcontrol over financial reporting that occurred during the period covered bythis report that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II.  OT****HER INFORMATION**

 

**Item 1. L****egal Proceedings**

 

Information in responseto this Item is incorporated by reference to the information set forth in “Note8. Contingencies” in the Notes to the Condensed Consolidated FinancialStatements (Unaudited) on pages 10 through 18 hereof.

 

**Item 2.  Cha****nges in Securities, Use of Proceeds and Issuer Purchasesof Equity Securities**

 
| **Period**                | ** ** | **Total Number  of Shares  Purchased(1)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased Under  Publicly Announced  Programs** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Programs(2)** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
|                      |       |                                      |       |                               |       |                                                                      |       |                                                                                 |       |
| January 1-31,  2005  |       | 1,212,250                                 |       | 22.66                              |       | 1,212,250                                                                 |       | 9,374,700                                                                            |       |
| February 1-28,  2005 |       | 1,275,900                                 |       | 23.43                              |       | 1,275,900                                                                 |       | 8,098,800                                                                            |       |
| March 1-31,  2005    |       | 1,440,300                                 |       | 24.37                              |       | 1,440,300                                                                 |       | 6,658,500                                                                            |       |
| **Total**                 |       | 3,928,450                                 |       | 23.54                              |       | 3,928,450                                                                 |       | 6,658,500                                                                            |       |

 

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

 

(2)   OnFebruary 10, 2004, the Company announced a stock repurchase program to buyup to 10,000,000 shares of the Company’s common stock. As of January 31, 2005,this program was complete.  On December 14,2004, the Company announced a stock repurchase program to buy up to 10,000,000shares of the Company’s common stock. Unless terminated earlier by resolution of the Company’s Board ofDirectors, this program will expire when the Company has repurchased all sharesauthorized for repurchase thereunder. As of March 31, 2005, 3,341,500shares had been purchased under the December 2004 program.

 

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**Item 6. Exhibits**

 

(a)   Exhibits:

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                        |
| 10.1                |       | Agreement of Limited  Liability Company of IMS Health Licensing Associates, L.L.C. by and among IMS  Health Incorporated, Coordinated Management Systems, Inc., IMS AG,  Utrecht-America Finance Co. and Edam, L.L.C., dated as of March 17, 2005 |
|                |       |                                                                                                                                                                                                                                                        |
| 10.2                |       | Third Amended and  Restated IMS Health Guaranty by IMS Health Incorporated in favor of  Utrecht-America Finance Co. and Edam, LLC, effective as of March 17,  2005                                                                                     |
|                |       |                                                                                                                                                                                                                                                        |
| 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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**SIGNATURES**

 

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

 

 
|                   | IMS Health Incorporated               |
|------------------------|---------------------------------------|
|                   |                                  |
|                   |                                  |
|                   |                                  |
|                   |                                  |
|                   | By:                                   |  /s/ Nancy E.  Cooper |   |
| Date: May 6, 2005 |  Nancy E. Cooper                 |
|                   |  Senior Vice  President and      |
|                   |  Chief Financial  Officer        |
|                   |  (principal  financial officer)  |
|                   |                                  |
|                   |                                  |
|                   |  /s/ Leslye G.  Katz             |   |
| Date: May 6, 2005 |  Leslye G. Katz                  |
|                   |  Vice President,  Controller     |
|                   |  (principal  accounting officer) |
|                        |                                       |  |  |  |

 

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# **EXHIBIT** INDEX

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                        |
| 10.1                |       | Agreement of Limited  Liability Company of IMS Health Licensing Associates, L.L.C. by and among IMS  Health Incorporated, Coordinated Management Systems, Inc., IMS AG,  Utrecht-America Finance Co. and Edam, L.L.C., dated as of March 17, 2005 |
|                |       |                                                                                                                                                                                                                                                        |
| 10.2                |       | Third Amended and  Restated IMS Health Guaranty by IMS Health Incorporated in favor of  Utrecht-America Finance Co. and Edam, LLC, effective as of March 17,  2005                                                                                     |
|                |       |                                                                                                                                                                                                                                                        |
| 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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