**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2004**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                                    to                                     **

 

**Commissionfile number 001-14049**

 

**IMS HealthIncorporated**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                             |   | **06-1506026**                       |
|------------------------------------------|--------|--------------------------------------|
| (State of Incorporation)                 |   | (I.R.S. Employer Identification No.) |
|                                     |   |                                 |
| **1499 Post Road, Fairfield, CT**        |   | **06824**                            |
| (Address of principal executive offices) |   | (Zip Code)                           |

 

Registrant’s telephone number, including area code              **(203) 319-4700**

 

**Not Applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Sections 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

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

 

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

 

| **Title  of Class**                    |   | **Shares  Outstanding  At March 31, 2004** |
|----------------------------------------|--------|-------------------------------------------------|
| Common Stock, par value $.01 per share |   | 234,982,943                                     |

 

 

----

 

**IMS HEALTH 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, 2004 and December 31, 2003 |   |
|                                                                                                           |   |
| Condensed Consolidated Statements of Income  Three Months Ended March 31, 2004 and 2003                   |   |
|                                                                                                           |   |
| Condensed Consolidated Statements of Cash Flows  Three Months Ended March 31, 2004 and 2003               |   |
|                                                                                                           |   |
| Notes to Condensed Consolidated Financial  Statements                                                          |   |
|                                                                                                           |   |
| **Item 2. Management’s Discussion and Analysis of Financial Condition  and Results of Operations**        |   |
|                                                                                                           |   |
| **Item 3. Quantitative and Qualitative  Disclosures About Market Risk**                                        |   |
|                                                                                                           |   |
| **Item 4. Controls and Procedures**                                                                            |   |
|                                                                                                           |   |
| **PART II.   OTHER INFORMATION**                                                                          |   |
|                                                                                                           |   |
| **Item  1. Legal Proceedings**                                                                                 |   |
|                                                                                                           |   |
| **Item 2. Changes in  Securities, Use of Proceeds and Issuer Purchases of Equity Securities**                  |   |
|                                                                                                           |   |
| **Item 6. Exhibits and Reports on Form 8-K**                                                                   |   |
|                                                                                                           |   |
| **SIGNATURES**                                                                                                 |   |
|                                                                                                           |   |
| **EXHIBITS**                                                                                                   |   |

 

2

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**PART I**. FINANCIALINFORMATION

**Item I****. FINANCIALSTATEMENTS**

 

**IMS HEALTH INCORPORATED**

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

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

 
|                                                                                                                                             |   | **As of  March 31,  2004** |          | **As of  December 31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------------|------------------------------------|--------|
| **Assets:**                                                                                                                                      |   |                            | ** **    |                               |   |
| **Current Assets:**                                                                                                                              |   |                            | ** **    |                               |   |
| Cash and cash equivalents                                                                                                                        |   | **$**                           | **352,406**   | ** **                         | $      | 344,432 |   |
| Short-term marketable securities                                                                                                                 |   | **40,164**                      | ** **    | 40,108                             |   |
| Accounts receivable, net of allowances of  $4,538 and $4,429 in 2004 and  2003, respectively                                                     |   | **290,286**                     | ** **    | 271,268                            |   |
| Other current assets                                                                                                                             |   | **125,680**                     | ** **    | 123,121                            |   |
| **Total Current  Assets**                                                                                                                        |   | **808,536**                     | ** **    | 778,929                            |   |
| Securities and other investments                                                                                                                 |   | **11,071**                      | ** **    | 14,988                             |   |
| TriZetto equity investment (Note 8)                                                                                                              |   | **41,152**                      | ** **    | 42,742                             |   |
| Property, plant and equipment, net of  accumulated depreciation of $177,420 and $174,472 in 2004 and 2003,  respectively                         |   | **140,851**                     | ** **    | 141,282                            |   |
| Computer software                                                                                                                                |   | **201,542**                     | ** **    | 198,558                            |   |
| Goodwill                                                                                                                                         |   | **249,301**                     | ** **    | 247,958                            |   |
| Other assets                                                                                                                                     |   | **215,854**                     | ** **    | 219,881                            |   |
| **Total Assets**                                                                                                                                 |   | **$**                           | **1,668,307** | ** **                         | $      | 1,644,338 |   |
|                                                                                                                                             |   |                            |          |                               |   |
| **Liabilities, Minority  Interests and Shareholders’ Equity:**                                                                              |   |                            | ** **    |                               |   |
| **Current  Liabilities:**                                                                                                                        |   |                            | ** **    |                               |   |
| Accounts payable                                                                                                                                 |   | **$**                           | **48,802**    | ** **                         | $      | 47,513 |   |
| Accrued and other current liabilities                                                                                                            |   | **151,772**                     | ** **    | 190,478                            |   |
| Short-term debt                                                                                                                                  |   | **318,982**                     | ** **    | 409,941                            |   |
| Accrued income taxes                                                                                                                             |   | **104,886**                     | ** **    | 67,369                             |   |
| Short-term deferred tax liability                                                                                                                |   | **9,501**                       | ** **    | 9,248                              |   |
| Deferred revenues                                                                                                                                |   | **107,157**                     | ** **    | 112,076                            |   |
| **Total Current  Liabilities**                                                                                                                   |   | **741,100**                     | ** **    | 836,625                            |   |
| Postretirement and postemployment benefits                                                                                                       |   | **88,646**                      | ** **    | 86,920                             |   |
| Long-term debt (Note 10)                                                                                                                         |   | **353,244**                     | ** **    | 152,050                            |   |
| Other liabilities                                                                                                                                |   | **220,143**                     | ** **    | 277,313                            |   |
| **Total Liabilities**                                                                                                                            |   | **$**                           | **1,403,133** | ** **                         | $      | 1,352,908 |   |
|                                                                                                                                             |   |                            |          |                               |   |
| **Commitments and Contingencies (Note 9)**                                                                                                       |   |                            | ** **    |                               |   |
| **Minority Interests**                                                                                                                           |   | **$**                           | **102,226**   | ** **                         | $      | 101,853 |   |
|                                                                                                                                             |   |                            | ** **    |                               |   |
| **Shareholders’  Equity:**                                                                                                                  |   |                            | ** **    |                               |   |
| Common Stock, par value $.01, authorized  800,000 shares; issued 335,045 shares at March 31, 2004 and  December 31, 2003, respectively |   | **$**                           | **3,350**     | ** **                         | $      | 3,350 |   |
| Capital in excess of par                                                                                                                         |   | **484,982**                     | ** **    | 490,297                            |   |
| Retained earnings                                                                                                                                |   | **1,865,874**                   | ** **    | 1,789,503                          |   |
| Treasury stock, at cost, 100,062 and 96,706  shares at March 31, 2004 and December 31, 2003, respectively                              |   | **(2,125,644**                  | **)**         | (2,032,748                         | )      |
| Cumulative translation adjustment                                                                                                                |   | **(42,246**                     | **)**         | (37,255                            | )      |
| Minimum pension liability adjustment, net  of taxes of $10,806 at March 31, 2004 and December 31, 2003,  respectively                  |   | **(21,963**                     | **)**         | (21,963                            | )      |
| Unrealized loss on changes in fair value of  cash flow hedges, net of tax                                                                        |   | **(2,193**                      | **)**         | (2,299                             | )      |
| Unrealized gains on investments, net of  taxes of $425 and $373 at March 31, 2004 and December 31, 2003,  respectively                 |   | **788**                         | ** **    | 692                                |   |
| **Total Shareholders’  Equity**                                                                                                             |   | **$**                           | **162,948**   | ** **                         | $      | 189,577 |   |
| **Total Liabilities,  Minority Interests and Shareholders’ Equity**                                                                         |   | **$**                           | **1,668,307** | ** **                         | $      | 1,644,338 |   |

 

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

 

3

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## **IMS HEALTH INCORPORATED**

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

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

 
|                                                                                                    |   | **Three  Months Ended  March 31,** |        |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-------------|
|                                                                                                    |   | **2004**                                |        | **2003** |   |
|                                                                                                    |   |                                    |        |   |   |
| **Operating Revenue**                                                                                   |   | **$**                                   | **361,576** | ** ** | $ | 313,917 |   |
|                                                                                                    |   |                                    | ** **  |   |   |
| Operating costs                                                                                         |   | **149,554**                             | ** **  | 137,256 |   |
| Selling and administrative expenses                                                                     |   | **94,084**                              | ** **  | 81,493 |   |
| Depreciation and amortization                                                                           |   | **21,706**                              | ** **  | 16,798 |   |
| Severance,  impairment and other charges                                                                |   | **—**                              | ** **  | 37,220 |   |
| **Operating Income**                                                                                    |   | **96,232**                              | ** **  | 41,150 |   |
| Interest income                                                                                         |   | **962**                                 | ** **  | 1,263 |   |
| Interest expense                                                                                        |   | **(4,271**                              | **)**       | (4,054 | ) |
| Gains (losses) from investments, net                                                                    |   | **6,453**                               | ** **  | (876 | ) |
| Loss on issuance of investees’ stock, net                                                          |   | **—**                              | ** **  | (315 | ) |
| Other income (expense), net                                                                             |   | **2,777**                               | ** **  | (10,803 | ) |
| **Non-Operating Income (Loss), Net**                                                                    |   | **5,921**                               | ** **  | (14,785 | ) |
| Income before provision for income taxes                                                                |   | **102,153**                             | ** **  | 26,365 |   |
| Provision for income taxes (Note 12)                                                                    |   | **(20,109**                             | **)**       | (64,349 | ) |
| TriZetto equity loss, net of income taxes  of $624 and $215 for 2004 and 2003, respectively             |   | **(966**                                | **)**       | (333 | ) |
| TriZetto  impairment charge, net of income taxes of $9,565 for 2003                                     |   | **—**                              | ** **  | (14,842 | ) |
| **Income (Loss) from Continuing Operations**                                                            |   | **81,078**                              | ** **  | (53,159 | ) |
| Income from discontinued operations, net of  income taxes of $1,237 for 2003 (Note 6)                   |   | **—**                              | ** **  | 2,779 |   |
| Gain on  discontinued operations (Note 6)                                                               |   | **—**                              | ** **  | 495,053 |   |
| **Net Income**                                                                                          |   | **$**                                   | **81,078**  | ** ** | $ | 444,673 |   |
|                                                                                                    |   |                                    |        |   |   |
| **Basic Earnings Per Share of Common Stock:**                                                           |   |                                    | ** **  |   |   |
| Income (loss) from continuing operations                                                                |   | **$**                                   | **0.35**    | ** ** | $ | (0.20 | ) |
| Income from discontinued operations                                                                     |   | **—**                              | ** **  | 1.92 |   |
| **Basic Earnings Per Share of Common Stock**                                                            |   | **$**                                   | **0.35**    | ** ** | $ | 1.71 |   |
|                                                                                                    |   |                                    | ** **  |   |   |
| **Diluted Earnings Per Share of Common Stock:**                                                         |   |                                    | ** **  |   |   |
| Income (loss) from continuing operations                                                                |   | **$**                                   | **0.34**    | ** ** | $ | (0.20 | ) |
| Income from discontinued operations                                                                     |   | **—**                              | ** **  | 1.91 |   |
| **Diluted Earnings Per Share of Common Stock**                                                          |   | **$**                                   | **0.34**    | ** ** | $ | 1.71 |   |
|                                                                                                    |   |                                    |        |   |   |
| Weighted average number of shares  outstanding – basic                                             |   | **235,005**                             | ** **  | 259,414 |   |
| Dilutive effect of shares issuable as of  period-end under stock option plans                           |   | **5,097**                               | ** **  | 615 |   |
| Adjustment of shares outstanding applicable  to exercised and cancelled stock options during the period |   | **274**                                 | ** **  | 1 |   |
| **Weighted Average Number of Shares  Outstanding – Diluted**                                       |   | **240,376**                             | ** **  | 260,030 |   |

 

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

 

4

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**IMSHEALTH INCORPORATED**

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

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

 
|                                                                                     |   | **Three  Months Ended March 31,** |        |
|------------------------------------------------------------------------------------------|--------|----------------------------------------|-------------|
|                                                                                     |   | **2004**                               |        | **2003** |   |
| **Cash Flows from Operating Activities:**                                                |   |                                   |        |   |   |
| Net income                                                                               |   | **$**                                  | **81,078**  | ** ** | $ | 444,673 |   |
| Less income from discontinued operations  and gain on disposal                           |   | **—**                             | ** **  | (497,832 | ) |
| Income (loss) from continuing operations                                                 |   | **81,078**                             | ** **  | (53,159 | ) |
| **Adjustments to  reconcile net income to net cash provided by operating activities:**   |   |                                   | ** **  |   |   |
| Depreciation and amortization                                                            |   | **21,706**                             | ** **  | 16,798 |   |
| Bad debt expense                                                                         |   | **400**                                | ** **  | 1,344 |   |
| Nielsen Media Research interest receivable                                               |   | **—**                             | ** **  | (689 | ) |
| Deferred income taxes                                                                    |   | **7,640**                              | ** **  | 7,940 |   |
| (Gains) losses from investments, net                                                     |   | **(6,453**                             | **)**       | 876 |   |
| Loss on issuance of investees’ stock, net                                           |   | **—**                             | ** **  | 315 |   |
| TriZetto equity loss, net                                                                |   | **966**                                | ** **  | 333 |   |
| TriZetto impairment charge, net                                                          |   | **—**                             | ** **  | 14,842 |   |
| Minority interests in net income of  consolidated companies                              |   | **1,179**                              | ** **  | 2,695 |   |
| Non-cash stock compensation charges                                                      |   | **563**                                | ** **  | 623 |   |
| Non-cash portion of severance, impairment  and other charges                             |   | **—**                             | ** **  | 4,959 |   |
| Change in assets and liabilities, excluding  effects from acquisitions and dispositions: |   |                                   | ** **  |   |   |
| Net increase in accounts receivable                                                      |   | **(21,962**                            | **)**       | (25,195 | ) |
| Net (increase) decrease in inventory                                                     |   | **(272**                               | **)**       | 20 |   |
| Net increase in prepaid expenses and other  current assets                               |   | **(10,710**                            | **)**       | (10,056 | ) |
| Net increase in accounts payable                                                         |   | **1,828**                              | ** **  | 4,661 |   |
| Net decrease in accrued and other current  liabilities                                   |   | **(36,738**                            | **)**       | (5,002 | ) |
| Net (decrease) increase in accrued  severance, impairment and other charges              |   | **(2,030**                             | **)**       | 24,321 |   |
| Net decrease in deferred revenues                                                        |   | **(4,177**                             | **)**       | (4,569 | ) |
| Net (decrease) increase in accrued income  taxes                                         |   | **(15,111**                            | **)**       | 46,973 |   |
| Net decrease (increase) in pension assets  (net of liabilities)                          |   | **167**                                | ** **  | (225 | ) |
| Net decrease in other long-term assets                                                   |   | **3,245**                              | ** **  | 1,160 |   |
| Net tax benefit on stock option exercises                                                |   | **3,722**                              | ** **  | — |   |
| **Net Cash Provided by Operating Activities**                                            |   | **25,041**                             | ** **  | 28,965 |   |
| **Cash Flows Used in Investing Activities:**                                             |   |                                   | ** **  |   |   |
| Capital expenditures                                                                     |   | **(4,524**                             | **)**       | (5,069 | ) |
| Additions to computer software                                                           |   | **(17,181**                            | **)**       | (19,461 | ) |
| Investments in short-term marketable  securities                                         |   | **(56**                                | **)**       | (10,262 | ) |
| Payments for acquisitions of businesses,  net of cash acquired                           |   | **(3,878**                             | **)**       | (47,249 | ) |
| Proceeds from sales of investments, net                                                  |   | **10,712**                             | ** **  | — |   |
| Other investing activities, net                                                          |   | **(2,215**                             | **)**       | (6,737 | ) |
| **Net Cash Used in Investing Activities**                                                |   | **(17,142**                            | **)**       | (88,778 | ) |
| **Cash Flows Provided by Financing  Activities:**                                        |   |                                   | ** **  |   |   |
| Net increase (decrease) in debt                                                          |   | **97,793**                             | ** **  | (101,275 | ) |
| Borrowings under private placement                                                       |   | **—**                             | ** **  | 150,000 |   |
| Payments for purchase of treasury stock                                                  |   | **(138,851**                           | **)**       | — |   |
| Proceeds from exercise of stock options                                                  |   | **36,337**                             | ** **  | 909 |   |
| Dividends paid                                                                           |   | **(4,707**                             | **)**       | (4,903 | ) |
| Proceeds from employee stock purchase plan                                               |   | **18**                                 | ** **  | 14 |   |
| Increase in cash overdrafts                                                              |   | **11,249**                             | ** **  | 1,878 |   |
| Payments to minority interests                                                           |   | **(806**                               | **)**       | (2,076 | ) |
| **Net Cash Provided by Financing Activities**                                            |   | **1,033**                              | ** **  | 44,547 |   |
| Effect of Exchange Rate Changes                                                          |   | **(958**                               | **)**       | 1,368 |   |
| **Increase in Cash  and Cash Equivalents**                                               |   | **7,974**                              | ** **  | (13,898 | ) |
| **Cash and Cash Equivalents, Beginning of  Period**                                      |   | **344,432**                            | ** **  | 264,732 |   |
| **Cash and Cash Equivalents, End of Period**                                             |   | **$**                                  | **352,406** | ** ** | $ | 250,834 |   |

 

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

 

5

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**IMSHEALTH INCORPORATED**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

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

 

The accompanying CondensedConsolidated Financial Statements (unaudited) have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and Article 10 of Regulation S-X underthe Securities and Exchange Act of 1934, as amended.  The Condensed Consolidated Financial Statements (unaudited) donot include all the information and notes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  In the opinion ofmanagement, all adjustments, all of which are of a normal recurring nature,considered necessary for a fair presentation of financial position, results ofoperations and cash flows for the periods presented have been included.  The results of operations for interimperiods are not necessarily indicative of the results expected for the fullyear.  The Condensed ConsolidatedFinancial Statements (unaudited) and related notes should be read in conjunctionwith the Consolidated Financial Statements and related notes of IMS HealthIncorporated (the “Company” or “IMS”) included in its 2003 Annual Report onForm 10-K.  Certain prior year amountshave been reclassified to conform to the 2004 presentation.  Amounts presented in the Condensed ConsolidatedFinancial Statements (unaudited) may not add due to rounding.

 

**Note 2.       Basis of Presentation**

 

The Company is a leading global provider ofinformation solutions to the pharmaceutical and healthcare industries.  The Company’s revenues are derived primarilyfrom the sale of a broad line of market information, sales management andconsulting services to the pharmaceutical and healthcare industries.  The Company’s information products aredeveloped to meet client needs by using data secured from a worldwide networkof suppliers in the markets where operations exist.  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;

 

•      brandand launch management and other to support client needs relative to marketsegmentation and positioning and life cycle management for prescription andover-the-counter pharmaceutical products; and

 

•      consultingand services that use in-house capabilities and methodologies to assistpharmaceutical clients in analyzing and evaluating market trends, strategiesand tactics, and to help in the development and implementation of customizedsoftware applications and data warehouse tools.

 

The Company operates in more than 100countries.  The Company also owns aventure capital unit, Enterprise Associates, LLC (“Enterprises”), which isfocused on investments in emerging businesses, and a 25.9% equity interest inThe TriZetto Group, Inc. (“TriZetto”), at March 31, 2004.

 

The Company is managed on a global business model withglobal leaders for the majority of its critical business processes andaccordingly has one reportable segment.

 

6

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Management believes that important measures of theCompany’s financial condition and results of operations include operatingrevenue, constant dollar revenue growth, operating income, operating margin andcash flows.

 

Until February 6, 2003, the Company also included the CognizantTechnology Solutions Corporation Segment (“CTS”), which provides customInformation Technology (“IT”) design, development, integration and maintenanceservices.  CTS is a publicly tradedcorporation on the Nasdaq national market system.  The Company owned 55.3% of the common shares outstanding of CTS(92.5% of the outstanding voting power) as of December 31, 2002, andaccounted for CTS as a consolidated subsidiary.  On February 6, 2003, the Company divested CTS through asplit-off transaction, and as a result, the Company’s share of CTS results arepresented as discontinued operations for 2003 through the date of divestiture(see Note 6).

 

**Note 3.  Summary of Recent Accounting Pronouncements**

 

In January 2003, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 46, “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51,” (“FIN 46”).  FIN 46 requires all Variable InterestEntities (“VIEs”) to be consolidated by the primary beneficiary.  The primary beneficiary is the entity thatholds the majority of the beneficial interests in the VIE.  In addition, FIN 46 expands disclosure requirementsfor both VIEs that are consolidated as well as VIEs from which the entity isthe holder of a significant amount of the beneficial interest, but not themajority.  In December 2003, theFASB issued Interpretation 46R, “Consolidation of Variable Interest Entities”(revised December 2003), (“FIN 46R”) which further clarified theprovisions of FIN 46 and delayed the effective date for applying the provisionsof FIN 46 until the end of the first quarter of 2004 for interests held bypublic entities in VIEs or potential VIEs created before February 1, 2003.  The adoption of FIN 46R did not have amaterial impact on the Company’s financial position, results of operations orcash flows for the three months ended March 31, 2004.

 

In December 2003, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employer’sDisclosures about Pensions and Other Postretirement Benefits,” an amendment ofSFAS Nos. 87, “Employers’ Accounting for Pensions”, 88, “Employers’ Accountingfor Settlements and Curtailments of Defined Benefit Pension Plans and for Terminationof Benefits,” and 106, “Employers’ Accounting for Postretirement Benefits OtherThan Pensions,” and a revision of SFAS No. 132.  SFAS No. 132 (revised 2003) requires additional disclosures aboutthe assets, obligations, cash flows, and net periodic benefit cost of definedbenefit pension plans and other postretirement benefit plans, but does notchange the measurement or recognition of such plans.  The new disclosure requirements contained in SFAS No. 132 (revised2003) are effective for fiscal years ending after December 15, 2003, witha delayed effective date for certain disclosures, for foreign plans, and fornon-public entities.  The Company hasadopted all aspects of SFAS No. 132 (revised 2003) for all foreign andnon-foreign plans, with the exception of the estimated future benefit paymentdisclosure.  This requirement is firsteffective for fiscal years ending after June 15, 2004.  Additionally the Company is required todisclose components of the net benefit cost in the quarterly financial statementsbeginning with the first quarter of 2004. This interim disclosure information is included in Note 11.  The adoption of SFAS No. 132 (revised 2003)did not have a material impact on the Company’s financial position, results ofoperations or cash flows for the three months ended March 31, 2004.

 

7

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In January 2004, the FASB issued StaffPosition No. (“FSP”) FAS 106-1, “Accounting and Disclosure Requirements Relatedto the Medicare Prescription Drug, Improvement and Modernization Act of2003.”  The Company has elected to deferthe adoption of the new accounting requirements related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003, (the “Act”) inaccordance with FSP FAS 106-1.  Allmeasures of the accumulated postretirement benefit obligation or net periodicpostretirement benefit cost in the financial statements or accompanying notesdo not reflect the effects of the Act on the plan.  Specific authoritative guidance on the accounting for the Act ispending, and the guidance, when issued, could require the Company to changepreviously reported information.

 

**Note 4.       Summary of Significant Accounting Policies**

 

*Stock-based compensation.*  SFASNo. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure – anamendment of FASB Statement No. 123” 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 Companyhas chosen to continue applying APB Opinion No. 25, and related interpretationsin accounting for its plans.  If thecompensation cost for the Company’s stock-based compensation plans wasdetermined based on the fair value at the grant dates for awards under those plans,consistent with the method of SFAS No. 123, the Company’s net income andearnings per share would have been reduced to the pro forma amounts indicatedbelow for the three months ended March 31:

 
|                |   |                                                                                                               |   | **Three  months ended March 31,** |       |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|
|                |   |                                                                                                               |   | **2004**                               |       | **2003** |   |
| Net Income:         |   | As reported                                                                                                        |   | **$**                                  | **81,078** | ** ** | $ | 444,673 |   |
|                |   | Add:   Stock-based employee compensation expense included in reported net  income, net of tax                 |   | **744**                                | ** ** | 623 |   |
|                |   | Deduct:   Total stock-based employee compensation expense under fair value  method for all awards, net of tax |   | **(5,362**                             | **)**      | (6,106 | ) |
|                |   | Pro forma                                                                                                          |   | **$**                                  | **76,460** | ** ** | $ | 439,190 |   |
| Earnings Per Share: |   |                                                                                                               |   |                                   | ** ** |   |   |
| Basic               |   | As reported                                                                                                        |   | **$**                                  | **0.35**   | ** ** | $ | 1.71 |   |
|                |   | Pro forma                                                                                                          |   | **$**                                  | **0.33**   | ** ** | $ | 1.69 |   |
| Diluted             |   |                                                                                                               |   |                                   | ** ** |   |   |
|                |   | As reported                                                                                                        |   | **$**                                  | **0.34**   | ** ** | $ | 1.71 |   |
|                |   | Pro forma                                                                                                          |   | **$**                                  | **0.32**   | ** ** | $ | 1.69 |   |

 

For a description of the Company’s other criticalaccounting policies, please refer to the Company’s 2003 Annual Report on Form10-K as filed with the Securities and Exchange Commission.

 

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**Note 5.       Acquisitions**

 

The Company makes acquisitions in order to expand its products,services and geographic reach.  TheCompany made no acquisitions during the three months ended March 31, 2004;however it made certain payments related to acquisitions completed during 2002and 2003.

 

During the three months ended March 31, 2003, the Companycompleted two acquisitions for an aggregate cost of $52,938.  These acquisitions were Data NicheAssociates, Inc. (U.S.) and Azyx Polska Geopharma Information Services,Sp.z.o.o. (Poland).  These acquisitionswere accounted for under the purchase method of accounting.  The aggregate purchase price for eachacquisition has been allocated to the assets and liabilities acquired based ontheir respective fair values.  TheCondensed Consolidated Financial Statements (unaudited) include the results ofthese acquired companies subsequent to the closing of the acquisitions.  Had these acquisitions occurred as ofJanuary 1, 2004 or 2003, the impact on the Company’s results of operationswould not have been significant. Goodwill of approximately $31,973 was recorded in connection with theseacquisitions, of which $26,990 is deductible for tax purposes.

 

During the three months ended March 31, 2003, the Company alsoentered into an agreement to purchase the Azyx business in Portugal.  However, at the time, the completion of thisacquisition was contingent upon the Company getting regulatory approval fromPortugal.  The Company receivedregulatory approval for the Azyx business in Portugal during July 2003,and the acquisition was completed during the third quarter of 2003.

 

**Note 6.       CTS Split-Off**

 

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

 

As a result of this exchange offer, during the three months endedMarch 31, 2003, the Company recorded a net gain from discontinuedoperations of $495,053.  This gain wasbased on the Company’s closing market price on February 6, 2003multiplied by the 36,540 shares of IMS common shares accepted in the offer, netof the Company’s carrying value of CTS and after deducting direct andincremental expenses related to the exchange offer.

 

During the first quarter of 2003, the Company recorded direct andincremental costs related to the CTS Split-Off of approximately $17,300,consisting primarily of investment advisor, legal and accounting fees.  During the fourth quarter of 2003, theCompany reversed $1,834 of expenses as a true up of actual costs incurred.  This reversal resulted in an increase to thegain from discontinued operations of $1,834.

 

In accordance with the provisions of SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” for the period fromJanuary 1, 2003 through the disposition date the Company 

 

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recorded the results of CTS and the gain on disposal as income fromdiscontinued operations net of income taxes in the Condensed ConsolidatedStatements of Income (unaudited).

 

If, contrary to expectations, the CTS distribution were not to qualifyas tax free under Section 355 of the Internal Revenue Code, then, ingeneral, a corporate tax would be payable by the Company based on the difference between(x) the fair market value of the CTS class B common stock at the time ofthe exchange offer and (y) the Company’s adjusted tax basis in such class Bcommon stock.  Pursuant to the distributionagreement entered into between the Company and CTS in connection with thedistribution, CTS agreed to indemnify the Company in the event the transaction is taxableas a result of a breach of certain representations made by CTS, subject tocertain exceptions.  In the opinion ofmanagement and based on the opinion of tax counsel, McDermott, Will &Emery, it is not probable, but may be reasonably possible, that the Companywill incur liability for this matter and as such the Company has not accrued forthis potential liability.  The Companyestimates that the aggregate tax liability in this regard is not expected toexceed $215,725.

 

**Note 7.       Goodwill and Intangible Assets**

** **

During the three months ended March 31, 2004, theCompany recorded additional goodwill of $3,474 related primarily to earn-outagreements.  As of March 31, 2004,goodwill amounted to $249,301.

 

 

All of the Company’s acquired intangibles are subject to amortization.  Intangibleasset amortization expense was $2,763 and $2,017 during the three months endedMarch 31, 2004 and 2003, respectively.  At March 31, 2004,intangible assets were primarily composed of Customer Relationships, Databasesand Trade Names (principally included in Other assets) and Computer software.  Thegross carrying amounts and related accumulated amortization of theseintangibles were $63,053 and $15,173, respectively, at March 31, 2004 and$62,323 and $5,225, respectively, at March 31, 2003.  These intangibles are amortized over periodsranging from two to fifteen years with a weighted average life of 7.3years.  The weighted averageamortization periods of the acquired intangibles by asset class are listed inthe following table:

 
| **Intangible Asset Type**        |   | **Weighted  average  amortization (years) period** |   |
|----------------------------------|--------|----------------------------------------------------|--------|
| Customer Relationships           |   | 7.9                                                |   |
| Computer Software and Algorithms |   | 9.8                                                |   |
| Databases                        |   | 4.9                                                |   |
| Trade Names                      |   | 3.7                                                |   |
| Other                            |   | 4.5                                                |   |
| Weighted average                 |   | 7.3                                                |   |

 

Customer relationships accounted for the largest portion of theCompany’s acquired intangibles at March 31, 2004.  In accordance with the principles of SFASNo. 142, “Goodwill and Other Intangible Assets” and Statement of Financial Accounting ConceptsNo. 7, “Using Cash Flow Information and Present Value in AccountingMeasurements,” when determining the value of customer relationships forpurposes of allocating the purchase price of an acquisition, the Company looksat existing customer contracts of the acquired business to determine if theyrepresent a reliable future source of income and 

 

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hence, a valuable intangible asset for the Company.  The Company determines the fair value of thecustomer relationships based on the estimated future benefits the Companyexpects from the acquired customer contracts. In performing its evaluation and estimation of the useful life ofcustomer relationships, the Company looks to the historical growth rate ofoperating revenue of the acquired company’s existing customers as well as thehistorical attrition rates.

 

Amortization expense associated with intangible assetsat March 31, 2004 is estimated to be $2,630 for each of the last threequarters of 2004 and approximately $10,521 for each year beginning in 2005through 2009.

 

**Note 8.       Investments in Equity Investees**

 

The Company’s investment in TriZetto is accounted forunder the equity method of accounting. The Company’s share of the adjusted operating results of TriZetto forthe three months ended March 31, 2004 and 2003, amounted to a loss of $966(net of a deferred tax benefit of $624) and $333 (net of a deferred tax benefitof $215), respectively.

 

The Company performs a periodicassessment in accordance with its policy to determine whether another-than-temporary decline in fair value has occurred.  Based on this assessment, an impairmentcharge of $14,842, net of taxes of $9,565, was recorded in the first quarter of2003, to write down the Company’s investment in TriZetto following thecontinued significant decline in the market value of TriZetto shares below theCompany’s carrying value.  The Companyconcluded that these declines were other-than-temporary in accordance withStaff Accounting Bulletin (“SAB”) No. 59, “Views on Accounting for NoncurrentMarketable Equity Securities,” and the impairment charge recorded brought theCompany’s book value in TriZetto down to TriZetto’s March 31, 2003 marketvalue.  As of March 31, 2004, themarket value of TriZetto exceeded the carrying value by approximately $52,955.

 

**Note 9.           Contingencies**

 

The Company and its subsidiaries are involved in legaland tax proceedings, claims and litigation arising in the ordinary course ofbusiness.  Management periodicallyassesses the Company’s liabilities and contingencies in connection with thesematters based upon the latest information available.  For those matters where management currently believes it isprobable that the Company will incur a loss and that the probable loss or rangeof loss can be reasonably estimated, the Company has recorded reserves in theconsolidated financial statements based on its best estimates of suchloss.  In other instances, because ofthe uncertainties related to either the probable outcome or the amount or rangeof loss, management is unable to make a reasonable estimate of a liability, ifany.  However, even in many instanceswhere the Company has recorded a reserve, the Company is unable to predict withcertainty the final outcome of the matter or whether resolution of the matterwill materially affect the Company’s results of operations, financial positionor cash flows.  As additionalinformation becomes available, the Company adjusts its assessment and estimatesof such liabilities accordingly.

 

The Company routinely enters into agreements with its customers to selldata that the Company acquires in the normal course of business.  In these customer agreements the Companyagrees to indemnify and hold harmless the customers for any damages they maysuffer as a result of potential 

 

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intellectual property infringement claims.  These indemnities typically have terms of approximately twoyears.  The Company has not accrued aliability with respect to these matters, as the exposure is considered remote.

 

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

 

*Legacyand Related Matters*

 

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

 

In November 1996, the company then known as The Dun &Bradstreet Corporation (“D&B”) separated into three public companies byspinning-off ACNielsen Corporation (“ACNielsen”) and Cognizant Corporation(“Cognizant”) (the “1996 Spin-Off”). Pursuant to the agreements effecting the 1996 Spin-Off, among other things,certain liabilities, including contingent liabilities relating to the IRIAction (defined below) and tax liabilities arising out of certain priorbusiness transactions (the “D&B Legacy Tax Matters”), described more fullybelow, were allocated among D&B, ACNielsen and Cognizant.

 

In June 1998, Cognizant separated into two public companies byspinning off IMS (the “1998 Spin-Off”) and then changed its name to NielsenMedia Research, Inc. (“NMR”).  As aresult of the 1998 Spin-Off, the Company and NMR are jointly and severallyliable for all liabilities of Cognizant under the agreements effecting the 1996Spin-Off.  As between themselves,however, the Company and NMR agreed that IMS will assume 75%, and NMR willassume 25%, of any payments to be made in respect of the IRI Action, includingany legal fees and expenses related thereto incurred in 1999 or thereafter (IMSagreed to be responsible for legal fees and expenses incurred during1998).  In addition, the Company and NMRagreed they would share equally Cognizant’s share of liability arising out ofthe D&B Legacy Tax Matters after the Company paid the first $130,000 ofsuch liability.  NMR’s aggregateliability for payments in respect of the IRI Action and the D&B Legacy TaxMatters shall not exceed $125,000.

 

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

 

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

 

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

 

The complaint alleges various violations of the antitrust laws of theUnited States, including alleged violations of Sections 1 and 2 of the ShermanAct.  The complaint also alleges a claimof tortious interference with a contract and a claim of tortious interferencewith a prospective business relationship. These latter claims relate to the acquisition by the defendants ofSurvey Research Group Limited (“SRG”). IRI alleges that SRG violated an alleged agreement with IRI when itagreed to be acquired by the defendants and that the defendants induced SRG tobreach that agreement.

 

IRI’s complaint originally sought damages in excess of$350,000, which amount IRI has asked to be trebled under the antitrustlaws.  IRI has since revised itsallegation of damages upwards to approximately $650,000, which IRI has alsoasked to be trebled.  IRI has filed withthe court the report of its expert who has opined that IRI suffered damages ofbetween $581,600 and $651,700 from the defendants’ alleged practices.  IRI also seeks punitive damages in anunspecified amount.  In April 2004, the court scheduled discovery toend on November 1, 2004 and set a trial date for April 18, 2005.  Discovery is continuing.

 

In connection with the 1996 Spin-Off, D&B (now Donnelley),ACNielsen and Cognizant (now NMR) entered into an Indemnity and Joint DefenseAgreement pursuant to which they agreed (i) to certain arrangementsallocating liabilities that may arise out of or in connection with the IRIAction, and (ii) to conduct a joint defense of such action.  In particular, the Indemnity and JointDefense Agreement provides that, in the event of a settlement or adversejudgment, (a) ACNielsen will assume exclusive liability for liabilities up toan amount to be calculated by an investment banking firm, at the time suchliabilities, if any, become payable, pursuant to a specified solvency testdesigned to permit ACNielsen to pay the maximum amount of the liabilitypossible while remaining a viable company (the “ACN Maximum Amount”), and (b)Cognizant and D&B will share liability equally for any amounts in excess ofthe ACN Maximum Amount.

 

The Indemnity and Joint Defense Agreement furtherprovides that, at the time of any settlement of or adverse judgment in the IRIAction, ACNielsen initially is to determine the amount that it will pay, whichamount may be less than the ACN Maximum Amount (the “ACN Payment”).  The Indemnity and Joint Defense Agreementthen provides for D&B and Cognizant to each pay IRI 50% of the differencebetween the settlement or judgment amount and the ACN Payment, and forACNielsen to issue a secured note (the “ACN Note”), subject to certain limits,to each of D&B and Cognizant for the amount of their payment.  The principal amount of each ACN Note issuedto D&B and Cognizant, however, is limited to 50% of the difference betweenthe ACN Maximum Amount and the ACN Payment, and is subject to a furtherlimitation that it cannot exceed 50% of the amount of any proceeds from anyrecapitalization plan designed to maximize ACNielsen’s claims paying ability.  The ACN Notes would become payable upon thecompletion of any such recapitalization plan. The Indemnity and Joint Defense Agreement also provides that if itbecomes necessary to post any bond pending an 

 

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appeal of an adverse judgment, then D&B andCognizant shall obtain the bond required for the appeal, and each shall pay 50%of the costs of such bond, if any, which cost will be added to IRI liabilitiesto be allocated under the Indemnity and Joint Defense Agreement.

 

As noted above, as between the Company and NMR, the Company isresponsible for 75% of Cognizant’s share of any liabilities arising out of theIRI Action and NMR is responsible for 25% of any such liabilities; providedthat NMR’s aggregate liability for payments in respect of the IRI Action andthe D&B Legacy Tax Matters shall not exceed $125,000.  To date, NMR has made payments ofapproximately $41,000 relating to the D&B Legacy Tax Matters.

 

On February 19, 2001, ACNielsen announced that it merged with awholly-owned subsidiary of VNU N.V. Pursuant to the Indemnity and Joint Defense Agreement, VNU is to beincluded with ACNielsen for purposes of determining the ACN Maximum Amount.  We are unable to predict at this time theoutcome of the IRI Action or the financial condition of ACNielsen and VNU N.V.at the time of any such outcome (and hence we cannot estimate the ACN MaximumAmount and the portion of any judgment to be paid by VNU N.V. and ACNielsenunder the Indemnity and Joint Defense Agreement).  Nonetheless, management presently believes that the risk that theCompany will incur any material liabilities with respect to the IRI litigationis remote and, therefore no liability in respect of this matter has beenaccrued in the Company’s financial statements. Further, management believes that, in the event the Company must advancesums to satisfy IRI liabilities pending the consummation of anyrecapitalization plan by ACNielsen or VNU N.V., the Company will have sufficientfinancial resources and borrowing capacity to meet such obligations withoutmaterially affecting its results of operations or financial position, but anysuch advance may have a material effect on the Company’s cash flows in theperiod in which it is made.

 

*D&B Legacy and Related TaxMatters. *During the second quarter of 2003, theIRS issued an agent’s final examination report seeking to disallow certainroyalty expense deductions claimed by D&B on its 1995 and 1996 tax returnsin connection with a partnership established in 1993.  In January of 2004, the IRS issued an agent’s finalexamination report seeking to reallocate certain items of partnership incomeand expense as well as disallow certain items of partnership expense on thepartnership’s 1997 tax return during which year Cognizant was a partner in thepartnership.  In January 2004, thepartnership and the Company received agent’s final examination reports seekingto reverse items of partnership income and loss and disallow certain royaltyexpense deductions claimed by the Company on its 1998 and 1999 tax returnsarising from the Company’s participation in the partnership.  If the IRS were to ultimately prevail in theforegoing positions, the Company’s share of the total liability for 1995 and1996 would be approximately $41,300, its liability for 1997 would beapproximately $17,800, and its aggregate liability for 1998 and 1999 would beapproximately $26,900 (all net of income tax benefit).  If the IRS were to take a comparableposition with respect to all of the Company’s tax years subsequent to 1999 andultimately prevail, the Company’s additional liability would be approximately$43,500 (net of income tax benefit).

 

In addition, in the second quarter of 2003, the IRS issued anadditional agent’s final examination report to the partnership described aboveseeking to reallocate certain partnership income to D&B for 1996.  D&B II and the Company believe that thepositions taken by the IRS in this report are inconsistent with the IRS’sdenial of the royalty expense deductions described above.  If the IRS were 

 

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to ultimately prevail in this matter, the Company’s share of theliability for 1996 would be approximately $20,800 (net of income tax benefit).

 

In addition, the IRS has asserted penalties for the years describedabove based on its interpretation of applicable law.  If the IRS were to prevail in its assertion of penalties andinterest thereon, the Company’s share of such penalties and interest would beapproximately $8,300 for 1995 and 1996 and its aggregate liability for 1998 and1999 would be approximately $9,900 (all net of income tax benefit).  D&B II and the Company dispute thisinterpretation.

 

D&B II, as the agent for Donnelley in the D&B Legacy TaxMatters, has filed protests relating to the proposed assessments for 1995 and1996 with the IRS Office of Appeals. D&B II will attempt to resolve these matters at the appeals phasebefore proceeding to litigation if necessary. The Company has filed protests relating to the proposed assessments for1997, 1998 and 1999 with the IRS Office of Appeals and will attempt to resolvethese matters at the appeals phase before proceeding to litigation ifnecessary.

 

During the first quarter of 2003, the Company increased its reserve toits anticipated share of the probable liability in connection with theforegoing tax matters (to approximately $133,145).  In the opinion of management, it is not probable, but may bereasonably possible that the Company will have additional liability of $18,200in excess of the amount reserved for these matters.  Accordingly, based on information currently available, managementdoes not believe that these matters will have a material adverse effect on theCompany’s consolidated financial position or results of operations but may havea material adverse effect on cash flows in the period in which any such amountsare paid.

 

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

 

*Sharing Dispute. *In May 2000, the Company paid $212,291to the IRS in connection with a D&B Legacy Tax Matter.  Pursuant to the terms of the 1998 Spin-Off,NMR was liable for a portion of this amount but was not obligated to pay the Companyfor its share until January 2, 2001. In December 2000, the Company requested reimbursement from NMR inthe amount of $41,136, which represented NMR’s share of the liability accordingto the Company’s calculations.  OnJanuary 2, 2001, NMR made a payment of $10,530 but refused to pay theremaining $30,606 based on its interpretation of the applicableagreements.  At March 31, 2003, theCompany had a receivable of $36,805, which included the outstanding principaland accumulated accrued interest of $6,199. During the three months ended March 31, 2003, $689 of interestincome was accrued in accordance with the terms of the applicableagreements.  This amount was reflectedin Other receivable in the Condensed Consolidated Statements of FinancialPosition (unaudited).  On April 29,2003, a panel from the American Arbitration Association International Centerfor Dispute Resolution issued an award in favor of the Company and ordered thatNMR pay the Company the entire principal balance plus simple 9% interest fromJanuary 2, 2001, together with all legal fees and costs incurred by theCompany in connection with the arbitration. On April 30, 2003, the Company received $37,025 from NMR insatisfaction of the principal amount plus interest from January 2, 2001 throughApril 30, 2003.  On May 16, 2003,the Company received an 

 

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additional $1,332 from NMR as reimbursement of the Company’s legal feesand costs in connection with the arbitration.

 

*MattersBefore the European Commission*

 

In December 2000, National Data Corporation (now NDCHealthCorporation, “NDC”) filed a complaint against the Company with the EuropeanCommission (the “Commission”), requesting that the Commission initiate aproceeding against the Company for an alleged infringement of Article 82of the EC Treaty.  Article 82 ofthe EC Treaty relates to abuses of a dominant position that adversely affectcompetition.  The complaint concerned anIMS geographic mapping structure used for the reporting of regional sales datain Germany, which the German courts have ruled is copyright protected.  In addition to seeking a formal Commissionproceeding against the Company, the complaint requested that the Commission grantinterim relief requiring the Company to grant NDC a compulsory license toenable NDC to use this structure in its competing regional sales data servicein Germany.

 

In March 2001, the Commission initiated formal proceedings againstthe Company in this matter and in July 2001, the Commission orderedinterim measures against the Company pending a final decision (the “InterimDecision”).  Under the Interim Decision,the Company was ordered to grant a license of the geographic mapping structureon commercially reasonable terms without delay to NDC and to any othercompetitor then present in the German regional sales data market that requesteda license.

 

In August 2001, the Company filed an appeal with the Court ofFirst Instance (“CFI”) seeking the annulment of the Interim Decision in itsentirety (the “Annulment Appeal”).  InOctober 2001, the President of the CFI suspended the Interim Decisionpending a judgment on the Annulment Appeal. In April 2002, the European Court of Justice (“ECJ”) denied anappeal by NDC attempting to overturn the CFI’s October 2001 suspension.

 

In October 2002, the CFI postponed further consideration of theAnnulment Appeal until after the ECJ decides certain questions separatelyreferred to it by a German court that is presiding over certain litigation thatthe Company is maintaining against NDC in Germany.  In the German litigation, the Company is seeking an injunctionand damages against NDC for misappropriation of the Company’s intellectualproperty rights (the “Infringement Claim”).

 

In August 2003, the Commission withdrew its Interim Decision andthen subsequently (in October 2003), the Commission applied to the CFI tohave the Annulment Appeal declared moot in its entirety.  Most recently, in April 2004, the ECJrendered its decision in the case referred to it by the German court.  This will permit the CFI to move forwardwith its consideration of the Annulment Appeal and the German court to moveforward with its consideration of the Infringement Claim against NDC.

 

The Company intends to continue to vigorously assert that its refusalto grant licenses for the use of its copyright protected geographic mappingstructure to its direct competitors in Germany, which compete in the samemarket for which the copyright exists, is not in contravention ofArticle 82 of the EC Treaty. Management of the Company is unable to predict at this time the finaloutcome of this 

 

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matter or whether the resolution of this matter could materially affectthe Company’s future results of operations, cash flows or financial position.

 

*OtherContingencies*

 

*Contingent Consideration.* Under the terms of the purchase agreements related to acquisitions madein 2002 and 2001, the Company may be required to pay additional amounts ascontingent consideration based on the achievement of certain targets during2003 to 2007.  Any additional paymentswill be recorded as goodwill in accordance with EITF No. 95-8, “Accounting forContingent Consideration Paid to the Shareholders of an Acquired Enterprise ina Purchase Business Combination.”  As ofMarch 31, 2004, approximately $3,000 was earned and paid under thesecontingencies.  Based on currentestimates, management expects the remaining additional contingent paymentsunder these agreements to total approximately $12,000.  It is expected that these contingentpayments will be resolved within a specified time period after the end of eachrespective calendar year from 2004 through 2007.

 

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

 

*Synavant Spin-Off. *In August 2000, the Company spun off Synavant,Inc.  Pursuant to the terms of thatspin-off, Synavant undertook to be jointly and severally liable to the otherparties to the 1996 Spin-Off for any future liabilities of Cognizant under theterms of that spin-off and to NMR for any future liabilities of the Companyunder the 1998 Spin-Off.  However, asbetween the Company and Synavant, each agreed to bear 50% of the Company’sshare of any future liability arising out of the IRI Action or the D&BLegacy Tax Matters (net of the liability borne by NMR), up to a maximumliability of $9,000 for Synavant.  Inconnection with the acquisition of Synavant by Dendrite International, Inc., onJune 16, 2003, Synavant satisfied its current and future liabilities tothe Company in respect of the IRI Action and the D&B Legacy Tax Matters bypaying $8,345 to the Company of which approximately $4,900 represented anadjustment to the Synavant Spin dividend, approximately $2,200 represented thereimbursement of previously expensed legal fees and approximately $1,100 was aprepayment of Synavant’s future 50% share of legal fees associated with the IRIlitigation.

 

If, contrary to expectations, the spin-off of Synavant were not toqualify as tax free under Section 355 of the Internal Revenue Code, then,in general, a corporate tax would be payable by the consolidated group, ofwhich the Company is a common parent and Synavant is a member, based on 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 Synavantcommon stock.  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 onthe opinion of tax counsel, McDermott, Will & Emery, it is not probable,but may be reasonably possible, that the 

 

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Company will incur liability for this matter.  The Company estimates that the aggregate tax liability in thisregard is not expected to exceed $100,000.

 

*CTS Split-Off.* The Company completed the CTS Split-Off exchange offer onFebruary 6, 2003 (see Note 6).  If,contrary to expectations, the CTS distribution were not to qualify as tax freeunder Section 355 of the Internal Revenue Code, then, in general, acorporate tax would be payable by the Company based on the difference between(x) the fair market value of the CTS class B common stock at the time ofthe exchange offer and (y) the Company’s adjusted tax basis in such class Bcommon stock.  Pursuant to thedistribution agreement entered into between the Company and CTS in connection with thedistribution, CTS agreed to indemnify the Company in the event the transaction is taxableas a result of a breach of certain representations made by CTS, subject tocertain exceptions.  In the opinion ofmanagement and based on the opinion of tax counsel, McDermott, Will &Emery, it is not probable, but may be reasonably possible, that the Companywill incur liability for this matter. The Company estimates that the aggregate tax liability in this regard isnot expected to exceed $215,725.

 

*Other Litigation. *On January 17, 2003, the Company was served with a summons in a newlitigation matter (the “Douglas Litigation”). Also named as defendants in this litigation are approximately 60software vendors from which the Company purchased prescription data in the1990’s (and, for many of these vendors, from which the Company continues to purchase data).  In this action, it was alleged theCompanymisappropriated the trade secrets (i.e., prescription data) of thousands ofpharmacies in the United States and used this information either withoutauthorization or outside the scope of any authorization.  This same conduct was alleged to breachcontracts between the Company and the software vendors from which theCompany had purchasedthis prescription data.

 

The action was brought in state court in southernIllinois (Circuit Court of the 20th Judicial Circuit) by twopharmacies.  Plaintiffs sought classaction status, representing all pharmacies whose data was sold to the Companyby their pharmacy dispensary software vendors from 1990 to the present.  The pharmacies were seeking $100,000 inactual damages plus an unspecified amount of unjust enrichment damages (i.e.,share of the Company profits) derived from use of the prescription data by theCompany and the other defendants, or, in the alternative, a reasonable royaltypaid for the use of the prescription data. However, the Company believed and continues to believe that itspractices with respect to the acquisition and use of this prescription data areconsistent with applicable law and industry practices, and that the claims werewithout merit.

 

The Company was a defendant in another litigation brought in statecourt in southern Illinois (Circuit Court of the 20th JudicialCircuit) (the “Mayberry Litigation”). This lawsuit was originally brought in 1994 against Mayberry Systems, asmall developer of pharmacy dispensary software in the Midwest.  Two pharmacy customers alleged MayberrySystems was taking prescription data from their systems without authorization,and selling it to others (including the Company).  The Company was subsequently added to the lawsuit in 1996,alleging that the Company knew or should have known that Mayberry Systems wastaking the data and selling it without authorization (i.e., misappropriation oftrade secrets).  The lawsuit was latercertified as a class action on behalf of all former and current customers ofMayberry Systems (approximately 350 pharmacies).  Plaintiffs were demanding damages in the amount of $20,000 pluspunitive damages and attorney’s fees.

 

18

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Although the Company believed that the two actions described above werewithout merit, the Company pursued a joint settlement of the cases.  During the third quarter of 2003, theCompany proposed a preliminary settlement agreement with the plaintiffs’counsel on both the actions which was subject to several significantcontingencies.  On February 17,2004, the Illinois state court approved the proposed settlement.  The period for the filing of appeals andmotions for rehearing expired on March 18, 2004.  As a result of the resolution of the significant contingenciesrelated to the settlement, in the fourth quarter of 2003, the Company recordeda pre-tax charge of $10,636, net of $5,500 to be reimbursed under the Company’sinsurance coverage.  Under thesettlement, the Company will make certain cash payments, provide certainproduct credits and enter into certain agreements for the purchase of dataoriginating from the independent pharmacy plaintiffs.  This will provide the Company the opportunity to acquire new datafor new offerings while eliminating the costs and risks of litigation.  During the first quarter of 2004, theCompany paid approximately $7,400 related to this settlement and received$5,500 from insurance coverage.

 

During the second quarter of 2003 and up to the date of this filing,the Company has been served with 65 complaints filed with the Labor Court inFrankfurt, Germany.  The plaintiffs aremostly part of a group of approximately 110 employees of GIC Global InformationTechnology and Consulting GmbH (“GIC Global”) whose employment was terminatedin the second quarter of 2003 in connection with GIC Global’s insolvencyproceedings.  GIC Global is owned byformer senior managers of what was once the Company’s data processing center inFrankfurt, Germany.  GIC Globalpurchased the assets and business of the Frankfurt data processing center fromthe Company in September 2000 as part of a management buyout.  Thereafter, the Company moved its dataprocessing to its data center in the United States.  The plaintiffs are seeking reemployment and/or severance from theCompany.

 

As of the date of this filing, a total of 25 of the complaintsdescribed above were dismissed by the Labor Court and one complaint wasvoluntarily withdrawn.  OnApril 13, 2004, a judgment on one of the complaints was rendered againstthe Company in the amount of approximately $100, which judgment the Companyintends to appeal.  Pending actions ontwo additional complaints are scheduled to be heard before the Labor Court inMay and October 2004, respectively.

 

Although the Company continues to believe that these claims are withoutmerit and intends to vigorously defend the remaining actions, on April 13,2004, the Company entered into settlements with 54 (which settlement superceded18 of the 25 dismissals described above) of the GIC plaintiffs in the aggregateamount of approximately $200 in order to avoid the potential future costs ofnumerous appeals.  The Company hasaccrued approximately $300 with respect to these settlements and the one judgmentthe Company intends to appeal but has not accrued a liability with respect tothe two remaining actions, because management currently believes that theCompany’s exposure to any material loss with respect to those remaining actionsis remote.

 

**Note 10.       Financial Instruments**

** **

* ForeignExchange Risk Management*

* *

The Company transacts business in more than 100countries and is subject to risks associated with changing foreign exchangerates.  The Company’s objective is toreduce earnings and cash flow volatility associated with foreign exchange ratechanges.  Accordingly, the Companyenters into 

 

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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’s policy to enter into foreign currency transactionsonly to the extent necessary to meet its objectives as stated above.  The Company does not enter into foreigncurrency transactions for investment or speculative purposes.  The principal currencies hedged are theEuro, the Japanese Yen, the British Pound, the Swiss Franc and the CanadianDollar.

 

The impact of foreign exchange risk management activities on pre-taxincome in the three months ended March 31, 2004 was a net gain of $4,369,and a net loss in the three months ended March 31, 2003 of $7,702,respectively.  In addition, atMarch 31, 2004, the Company had approximately $455,639 in foreign exchangeforward contracts outstanding with various expiration dates throughJune 2004 relating to non-functional currency assets and liabilities.  Foreign exchange forward contracts arerecorded at estimated fair value.  Theestimated fair values of the forward contracts are based on quoted marketprices.  Unrealized and realized gainsand losses on these contracts are not deferred and are included in theCondensed Consolidated Statements of Income (unaudited) in Other expense, net.

 

 *Fair Value of Financial Instruments*

 

At March 31, 2004, the Company’s financial instruments includedcash, cash equivalents, short-term marketable securities, accounts receivables,accounts payable, short-tem debt, long-term debt and foreign currency forwardcontracts.  At March 31, 2004, thefair values of cash, cash equivalents, accounts receivables, accounts payableand short-term debt approximated carrying values due to the short-term natureof these instruments.  The contractualvalue of the Company’s foreign currency forward contracts was approximately$455,639 at March 31, 2004, and all contracts mature in 2004.  The estimated fair values of the forwardcontracts were determined based on quoted market prices.  

 

*CreditConcentrations*

 

The Company continually monitors its positions with,and the credit quality of, the financial institutions which are counterpartiesto its financial instruments and does not anticipate non-performance by thecounterparties.  The Company would notrealize a material loss as of March 31, 2004 in the event of non-performanceby any one counterparty.  The Companyenters into transactions only with financial institution counterparties whichhave primarily credit ratings of A or better. In addition, the Company limits the amount of credit exposure with anyone institution.

 

The Company maintains accounts receivable balances ($290,286****and$271,268, net of allowances, at March 31, 2004 and December 31, 2003,respectively), principally from customers in the pharmaceutical industry.  The Company’s trade receivables do notrepresent significant concentrations of credit risk at March 31, 2004 dueto the high quality of its customers and their dispersion across manygeographic areas.

 

*Lines of Credit and Liquidity*

 

The Company had borrowing arrangements with severaldomestic and international banks to provide lines of credit up to $612,500 atMarch 31, 2004.  Total borrowingsunder these existing lines 

 

20

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were $506,400 and $407,600 at March 31, 2004 andDecember 31, 2003, respectively, of which $306,400 and $407,600 wereclassified as short-term, and $200,000 and $0 were classified as long-term asof March 31, 2004 and December 31, 2003, respectively.

 

On April 5, 2004, the Company entered into a $700,000 revolvingcredit facility with a syndicate of 12 banks (the “Unsecured Facility”).  The Unsecured Facility replaced theCompany’s lines of credit with several domestic and international banks.  The Unsecured Facility is comprised of$430,000 of short-term lines that expire April 2005 and $270,000 oflong-term lines expiring April 2007. In general, rates for borrowing under both the short-term and long-termcomponents are LIBOR plus 45 basis points and can vary based on the Company’sDebt to EBITDA ratio.  The weightedaverage interest rates for the short-term lines were 1.52% and 1.61% atMarch 31, 2004 and December 31, 2003, respectively.  The weighted average interest rates for thelong-term lines were 1.77% and 1.84% at March 31, 2004 andDecember 31, 2003, respectively. In addition, the Company will pay a commitment fee on the unused portionof the short-term and long-term facilities of 0.08% and 0.10%, respectively.

 

The Company defines long-term lines as those where the lines arenon-cancelable for more than 365 days from the balance sheet date by thefinancial institutions except for specified violations of the provisions of theagreement.  Borrowings under thesethree-year facilities are short-term in nature; however, the Company has the abilityand the intent to refinance the short-term borrowings as they come due.  At March 31, 2004, the Companyreclassified $200,000 of its short-term debt outstanding as long-term debt inaccordance with the provisions of SFAS No. 6, “Classification of Short-TermObligations Expected to be Refinanced.”

 

Total debt of $672,226 and $561,991 at March 31,2004 and December 31, 2003, respectively, included $150,000 of five-yearprivate placement debt (as further discussed below), and $15,826 and $4,391 atMarch 31, 2004 and December 31, 2003, respectively, related primarilyto cash overdrafts, certain capital leases, mortgages and an adjustment to thecarrying amount of fair value hedged debt. At March 31, 2004, the Company had $0 and $106,100 available underits long and short-term lines of credit, respectively.

 

During the fourth quarter of 2001, the Company renegotiated withseveral banks and entered into three-year lines of credit for borrowings of upto $175,000.  Borrowings had maturitydates of up to 90 days from their inception. These lines of credit were due to mature in 2004 and as such $175,000was reclassified to short-term debt as of December 31, 2003.

 

In March and April 2002, the Company entered into interestrate swaps on a portion of its variable rate debt portfolio.  These arrangements convert the variableinterest rates to a fixed interest rate on a notional amount of $75,000 andmature at various times from March 2005 through April 2006.  The fixed rates range from 4.05% to 5.08%.  The interest rate swaps are accounted for ascash flow hedges and any changes in fair value are recorded in OtherComprehensive Income, in the Condensed Consolidated Statements of Shareholders’Equity (unaudited).  The fair values aredetermined based on estimated prices quoted by financial institutions.  The mark-to-market adjustment for the threemonths ended March 31, 2004 was an unrealized net loss of $106.

 

21

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In January 2003, the Company closed a private placementtransaction pursuant to which the Company issued $150,000 of five-year debt toseveral highly rated insurance companies at a fixed rate of 4.60%.  The proceeds were used to pay downshort-term debt.  The Company alsoswapped $100,000 of its fixed rate debt to floating rate based on six-month LIBORplus a margin of approximately 107 basis points.  These swaps have been accounted for as fair value hedges underthe provisions of SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  The fair values aredetermined based on estimated prices quoted by financial institutions.  The cumulative fair value adjustment to theswap as of March 31, 2004 was an increase of $3,244.

 

The Company’s financing arrangements provide for certain covenants andevents of default customary for similar instruments, including in the case ofits main bank arrangements and the 2003 private placement transaction,covenants to maintain specific ratios of consolidated total indebtedness toEBITDA and of EBITDA to certain fixed charges. At March 31, 2004, the Company was in compliance with thesefinancial debt covenants and anticipates that it will remain in compliance withthe covenants over the term of the borrowing arrangements.

 

**Note 11.       Pension and Postretirement Benefits**

 
| **Components of Net Periodic Benefit  Cost for  three months ended March 31,** |     | **Pension Benefits** |     | **Other Benefits** |     |
|-------------------------------------------------------------------------------------|----------|----------------------|----------|--------------------|----------|
|                                                                                | **2004** |                 | **2003** |               | **2004** |   | **2003** |   |
| Service  cost                                                                       |     | $                    | 3,605    |               | $        | 2,995 |   | $ | 54 |   | $ | 36 |   |
| Interest  cost                                                                      |     | 3,595                |     | 3,053              |     | 209 |   | 190 |   |
| Expected  return on plan assets                                                     |     | (3,962               | )        | (3,415             | )        | — |   | — |   |
| Amortization  of prior service cost (credit)                                        |     | (24                  | )        | 56                 |     | (247 | ) | (247 | ) |
| Amortization  of transition obligation                                              |     | (23                  | )        | (3                 | )        | — |   | — |   |
| Amortization  of net loss                                                           |     | 1,174                |     | 571                |     | 149 |   | 113 |   |
| Net  periodic benefit cost                                                          |     | $                    | 4,365    |               | $        | 3,257 |   | $ | 165 |   | $ | 92 |   |

 

**Note 12.       Income Taxes**

 

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

 

For the threemonths ended March 31, 2004 the Company’s effective tax rate was impactedby approximately $15,600 primarily due to a favorable partial U.S. auditsettlement.  For the three months endedMarch 31, 2003 the Company’s effective tax rate was impacted byapproximately $69,600 due to the Company’s reassessment, based on informationreceived in April 2003, of its liability associated with certain D&BLegacy Tax Matters and related subsequent transactions.  This is more fully described in Note 9.  Further, the effective tax rate was affectedby the favorable settlement of a non-U.S. audit which approximated $13,900.

 

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

 

22

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The Companyaccrues for tax loss contingencies in the period in which they are probable andestimable in accordance with SFAS No. 5, “Accounting for Contingencies.”  These reserves are included in currentincome taxes payable to the extent the related amounts are expected to be paidwithin the next twelve-month period.  Ifthe Company expects the liability to be settled beyond one year, these amountsare classified as a separate long-term liability.

 

**Note 13.       IMS Health Capital Stock**

 

On February 10, 2004, the Board of Directors authorized a stockrepurchase program to buy up to 10,000 shares.

 

On April 15, 2003, the Board of Directors authorized a stockrepurchase program to buy up to 10,000 shares. As of March 31, 2004, approximately 130 shares remained availablefor repurchase under the April 2003 program.

 

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

 

During the three months ended March 31, 2004, the Companyrepurchased approximately 5,457 shares of outstanding common stock under theseprograms, including the repurchase of 4,600 shares on January 9, 2004 pursuant to anaccelerated share repurchase program (“ASR”). The ASR agreement provides for the final settlement of the contract ineither cash or additional shares of the Company’s common stock at the Company’ssole discretion.** **The Company’s final settlement amount will increase(decrease) based on an increase (decrease) in the Company’s share price overthe settlement period.  The total costof the shares repurchased during the three months ended March 31, 2004 was$138,851.

 

As discussed in Note 6, during the three months ended March 31,2003, the Company completed the CTS Split-Off exchange offer and accepted36,540 IMS common shares tendered in exchange for all 11,291 CTS common sharesthat the Company owned.

 

The Company re-issued approximately 2,087treasury shares under option exercises for proceeds of $36,337 during the threemonths ended March 31, 2004.  Inaddition, the Company paid dividends of $0.02 per share for a total of $4,707during the three months ended March 31, 2004.

 

**Note 14.       Comprehensive Income**

** **

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

 
|                                                |   | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------------|--------|-----------------------------------------|------------|
|                                                |   | **2004**                                |       | **2003** |   |
| **Net Income**                                      |   | **$**                                   | **81,078** | ** ** | $ | 444,673 |   |
| Other comprehensive income, net of taxes:           |   |                                    | ** ** |   | ** ** |
| Unrealized gains (losses) on:                       |   |                                    | ** ** |   | ** ** |
| Available-for-sale equity securities                |   | **(71**                                 | **)**      | (116 | ) |
| Reclassification adjustment                         |   | **219**                                 | ** ** | 359 |   |
| Tax benefit on above                                |   | **(52**                                 | **)**      | (85 | ) |
| Change in unrealized gains (losses) on  investments |   | **96**                                  | ** ** | 158 |   |
| Foreign currency translation gains (losses)         |   | **(4,991**                              | **)**      | 4,809 |   |
| Changes in fair value of cash flow hedges           |   | **106**                                 | ** ** | (42 | ) |
| Total other comprehensive income (loss)             |   | **(4,789**                              | **)**      | 4,925 |   |
| **Comprehensive Income**                            |   | **$**                                   | **76,289** | ** ** | $ | 449,598 |   |

 

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

 

During the three months ended March 31, 2003, theCompany recorded $37,220 of severance, impairment and other charges (the “firstquarter charge”) as a component of operating income.  These charges were incurred due to a number of business andstrategic factors affecting the Company:

 

•      severance-relatedcharges of $9,958 were incurred in an effort to streamline operations andincrease productivity through a worldwide reduction in headcount ofapproximately 80 employees.  This reductionin headcount was primarily focused on upgrading the skills and capabilities ofour employee base as we transform the business to provide new and enhancedanalytical and consulting offerings to our customers.  The reduction in headcount also led to charges for impairedleases in the U.S. and U.K. for office space no longer being used by theCompany and for which the Company has not been able to obtain subleases atrates comparable to the terms of its lease obligations.  These severance benefits were calculatedpursuant to the terms of established employee protection plans, in accordancewith local statutory minimum requirements or individual employee contracts, asapplicable;

 

•      contract-relatedcharges of $22,307 were incurred for impaired data supply, data processing andimpaired lease contracts in the Company’s U.S. and Japanese operations.  An impairment for a data supply contract inthe U.S. was realized due to the fact that in the first quarter of 2003 we determinedthat expected revenues under a co-marketing agreement with a data supplierwould not be generated, but the Company was still required to make paymentsunder the terms of the contract.  TheCompany also realized an impairment for a data processing contract in Japanrelated to a weekly data product in Japan that was discontinued at the end ofthe first quarter of 2003, due to the interruption in data supply; and

 

•      asset write-downs of $4,955 were recorded towrite-down certain computer software primarily in the U.S. and Japan to its netrealizable value.  In the U.S., adecision to change the underlying technology in a product required thewrite-down of a previous version.  InJapan, the termination of the weekly data product required the write-down ofthe software used for that product.

 
|                           |   | **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               |   | (683                           | )      | (1,176                        | )      | —                 |   | (1,859    | )      |
| Adjustments                    |   | (1,746                         | )      | 67                            |   | 1,679                  |   | —    |   |
| Balance at March 31, 2004 |   | $                              | 1,332  |                          | $      | 14,151                 |   | $         | 0      |   | $ | 15,483 |   |

 

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The cash portion of the first quarter chargeamounted to $30,586, of which the Company paid approximately $13,244 during2003 and $1,859 during the three months ended March 31, 2004, relatedprimarily to employee termination benefits and contract-related charges.  The remaining accrual of $15,483 atMarch 31, 2004 relates to lease obligations and continuing paymentsrelated to employee termination benefits.

 

The Company expects thatcash outlays will be applied against the $15,483 balance remaining in the firstquarter charge at March 31, 2004 as follows:

 
| **Year Ended  December 31,** |   | **Cash  Outlays** |   |
|-----------------------------------|--------|-------------------|--------|
| 2004                              |   | $                 | 4,033  |   |
| 2005                              |   | 7,917             |   |
| 2006                              |   | 923               |   |
| 2007                              |   | 752               |   |
| 2008                              |   | 228               |   |
| Thereafter                        |   | 1,630             |   |
| Total                             |   | $                 | 15,483 |   |

 

During the nine months endedDecember 31, 2003, the Company reversed approximately $1,750 of severancerelated charges originally included in the first quarter charge due to theCompany’s refinement of estimates.  TheCompany also recorded additional charges during 2003 of approximately $1,700related primarily to a software impairment.

 

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

 
|                              |   | **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                 |   | (123                           | )      | (48                           | )      | —                   |   | (171      | )      |
| Adjustments                       |   | (688                           | )      | (274                          | )      | 962                      |   | —    |   |
| Balance  at March 31, 2004   |   | $                              | 2,488  |                          | $      | 6,800                    |   | $         | 0      |   | $ | 9,288 |   |

 

Approximately $39,652 was charged to expense in the fourth quarter of2001 related to a worldwide reduction in headcount.  This included $33,376 of severance benefits that were calculatedpursuant to the terms of established employee protection plans in accordancewith local statutory minimum requirements or individual employee contracts, asapplicable.  This also included $6,277of severance benefits for approximately 175 employees that were recorded aspart of the Program in

 

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accordance with EITF Statement No. 94-3, “Liability Recognition ofCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in Restructuring).”

 

The Company recorded $15,827 in contract-related charges, including$7,493 in payments to exit data supply and processing contracts and $8,334related to onerous lease obligations. These costs are incremental and either relate to existing contractualobligations that do not have any future economic benefit or represent acontract cancellation penalty.  Theyrelate, in part, to the decision in the fourth quarter of 2001 to close down orvacate leased facilities in order to consolidate functions geographically aspart of the Program.

 

Approximately $17,723 was charged to expense in the fourth quarter of2001 to write down deferred software costs to their net realizable value.  These write-downs resulted from theCompany’s decision to abandon certain products or introduce new regional orglobal platforms.  The Company alsocharged $4,243 of goodwill to expense in the fourth quarter of 2001 as a resultof the decision to cease product offerings as well as increased competition incertain markets.

 

Approximately $17,170 of the 2001 charge relates to GIC and resultedfrom the Company’s decision to exit the GIC relationship and accelerate thetransition of certain data processing functions that were rendered by GIC tothe IMS Global Data Center.  Of thetotal GIC charge, approximately $14,600 is for lease and other assetimpairments with the remaining balance of $2,570 representing contracttermination payments to be made to GIC.

 

As of March 31, 2004, the Company paid approximately $55,726 underthe Program.  Total terminations underthe Program were 535.  Although thetotal number of terminations from the Program was lower than the original planby approximately 18%, due to a change in the mix of actual employeeterminations, the Company has experienced a higher level of severance costs peremployee, thereby offsetting any cost savings from fewer actualterminations.  As expected, all actionsunder the Program were completed by December 31, 2002.  The remaining accrual of $9,288 atMarch 31, 2004 related primarily to a facility shutdown and employeetermination payments.

 

The adjusted cash portion of the 2001 charge amounted to $65,014,primarily for severance payments and contract terminations.  The non-cash portion amounted to $29,602 andis composed primarily of asset write-offs. The Company expects that cash outlays will be applied against the $9,288balance remaining in the Program at March 31, 2004 as follows: 

 
| **Year Ended  December 31,** |   | **Cash  Outlays** |   |
|-----------------------------------|--------|-------------------|--------|
| 2004                              |   | $                 | 3,631  |   |
| 2005                              |   | 1,754             |   |
| 2006                              |   | 1,754             |   |
| 2007                              |   | 2,149             |   |
| Total                             |   | $                 | 9,288  |   |

 

The Company expects that future results willbenefit from the Program and the first quarter charge to the extent of thecontract-related charges and asset write-downs primarily through 2007.  The Company’s severance actions related to ashifting of resources around the Company and as such are

 

26

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not expected to generate material costsavings.  The income statement linesthat will be impacted in future periods are Operating costs for thecontract-related charges and Depreciation and amortization for the assetwrite-downs.  However, the Company doesnot expect a material impact on future cash flows due to the fact that theCompany is still contractually obligated to continue to make payments underimpaired contracts.

 

**Note 16.**                      Operationsby Business Segment

 

Operating segments are defined as components of an enterprise aboutwhich financial information is available that is evaluated on a regular basisby the chief operating decision maker, or decision making groups, in decidinghow to allocate resources to an individual segment and in assessing performanceof the segment.  The Company operates aglobally consistent business model, offering pharmaceutical businessinformation, software and related services to its customers in more than 100countries.  See Note 1.

 

The Company maintains regional geographic management to facilitatelocal execution of its global strategies. However, the Company maintains global leaders for the majority of itscritical business processes; and the most significant performance evaluationsand resource allocations made by the Company’s chief operating decision makersare made on a global basis.  As such,the Company has concluded that it maintains one operating and reportablesegment.

 

**Geographic Financial Information:**

 

The following represents selected geographic information for theregions in which the Company operates as of and for the three months endedMarch 31, 2004 and 2003:

 
|                                        |   | **Americas  (1)** |       | **Europe  (2)** |       | **Asia  Pacific  (3)** |       | **Corporate  &  Other** |       | **Total  IMS** |       |
|---------------------------------------------|--------|-------------------|------------|-----------------|------------|------------------------|------------|-----------------------------|------------|----------------|------------|
| **Three months ended March 31, 2004:** |   |              |       |            |       |                   |       |                        |       |           |       |
| Operating revenue (4)                       |   | $                 | 166,911    |            | $          | 142,704                |       | $                           | 51,961     |           | —     |   | $ | 361,576 |   |
| Operating  income (5)                       |   | $                 | 72,770     |            | $          | 23,890                 |       | $                           | 28,698     |           | $          | (29,126 | ) | $ | 96,232 |   |
| **Three months ended March 31, 2003:** |   |              | ** ** |            | ** ** |                   | ** ** |                        | ** ** |           | ** ** |
| Operating  revenue (4)                      |   | $                 | 151,305    |            | $          | 114,009                |       | $                           | 48,603     |           | —     |   | $ | 313,917 |   |
| Operating  income (5)                       |   | $                 | 67,492     |            | $          | 16,356                 |       | $                           | 28,616     |           | $          | (71,314 | ) | $ | 41,150 |   |

 

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**Notes toGeographic Financial Information:**

 

*(1)**       Americas includes theUnited States, Canada and Latin America.*

 

*(2)**       Europe includes countriesin Europe, the Middle East and Africa.*

 

*(3)**       Asia Pacific includesJapan, Australia and other countries in the Asia Pacific region.*

 

*(4)**       Operating revenue relatesto external customers and is primarily based on the location of thecustomer.  The operating revenue for thegeographic regions includes the impact of foreign exchange in convertingresults into U.S. Dollars.*

 

(5)          *Operating income for the three geographic regionsdoes not reflect the allocation of certain expenses that are maintained inCorporate and Other and as such, is not a true measure of the respective regions’profitability.  For the three monthsended March 31, 2003, Severance, impairment and other charges of $17,369,$5,040 and*

 

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*$11,081for the Americas, Europe and Asia Pacific, respectively, are presented inCorporate and Other.  The operatingincome for the geographic segments includes the impact of foreign exchange inconverting results into U.S. Dollars.*

 

A summary of theCompany’s operating revenue by product line, as of and for the three months endedMarch 31, 2004 and 2003 is presented below:

 
|                                   |   | **Three  Months Ended  March 31,** |        |
|----------------------------------------|--------|-----------------------------------------|-------------|
|                                   |   | **2004**                                |        | **2003** |   |
| Sales  force effectiveness             |   | **$**                                   | **167,129** |   | $ | 152,362 |   |
| Portfolio  optimization                |   | **$**                                   | **113,102** |   | $ | 100,450 |   |
| Brand  and launch management and other |   | **$**                                   | **48,780**  |   | $ | 39,624 |   |
| Consulting  and services               |   | **$**                                   | **32,565**  |   | $ | 21,481 |   |
| Total  Operating revenue               |   | **$**                                   | **361,576** |   | $ | 313,917 |   |

 

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**Item 2****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

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

 

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

 

***Our Business***

 

IMS HealthIncorporated (“we”, “us” or “our”) is a leading global provider of informationsolutions to the pharmaceutical and healthcare industries.  Our revenues are derived primarily from thesale of a broad line of market information, sales management and consultingservices to the pharmaceutical and healthcare industries.  Our information products are developed tomeet client needs by using data secured from a worldwide network of suppliersin the markets where operations exist. Key information products include:

 

•      sales force effectiveness to optimize sales forceproductivity and territory management;

 

•      portfolio optimization to provide clients withinsights into market opportunity and business development assessment;

 

•      brand and launch management and other to supportclient needs relative to market segmentation and positioning and life cyclemanagement for prescription and over-the-counter pharmaceutical products; and

 

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

 

We operate in morethan 100 countries.  We also own aventure capital unit, Enterprise Associates, LLC (“Enterprises”), which isfocused on investments in emerging businesses, and a 25.9% equity interest inThe TriZetto Group, Inc. (“TriZetto”), at March 31, 2004.

 

We manage on aglobal business model with global leaders for the majority of our criticalbusiness processes and accordingly have one reportable segment.

 

We believe that important measures of our financialcondition and results of operations include operating revenue, constant dollarrevenue growth, operating income, operating margin and cash flows.

 

**Split-Offof Cognizant Technology Solutions Corporation Segment (“CTS”)**

 

Until February 6, 2003, we also included CTS,which provides custom Information Technology (“IT”) design, development,integration and maintenance services. CTS is a publicly traded corporation on the Nasdaq national marketsystem.  We owned 55.3% of the commonshares outstanding of CTS (92.5% of the outstanding voting power) as ofDecember 31, 2002, and accounted for CTS as a consolidatedsubsidiary.  On February 6, 2003,we divested CTS through a split-off transaction, and as a result, during thefirst quarter of 2003, we recorded a net gain from discontinued operations of$495,053.  Our share of CTS results arepresented as discontinued operations for 2003

 

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through the date ofdivestiture (see Note 6 to the unaudited Condensed Consolidated FinancialStatements).

 

**OperatingResults**

 

*Referencesto constant dollar results. *Wereport results in U.S. Dollars but we do business on a global basis.  Exchange rate fluctuations affect the rateat which we translate foreign revenues and expenses into U.S. Dollars and haveimportant effects on our results.  Inorder to illustrate these effects, the discussion of our business in thisreport sometimes describes the magnitude of changes in constant dollarterms.  We believe this informationfacilitates a comparative view of business growth.  In the first quarter of 2004, the U.S. Dollar was generallyweaker against other currencies compared to the first quarter of 2003, sogrowth at constant dollar exchange rates was lower than growth at actualcurrency exchange rates.  See “HowExchange Rates Affect Our Results” below and the discussion of “Market Risk” inthe Management Discussion and Analysis in our annual report on Form 10-K forthe year ended December 31, 2003 for a more complete discussion regardingthe impact of foreign currency translation on our business.

 

**Summary ofOperating Results**

 
|                                     |   | **Three  months ended March 31,** |        | **% Variance** |   |
|------------------------------------------|--------|----------------------------------------|-------------|----------------|--------|
|                                     |   | **2004**                               |        | **2003**       |   | **2004  vs. 2003** |   |
| Operating  revenue                       |   | **$**                                  | **361,576** |           | $      | 313,917 |   | 15.2 | % |
| Operating  costs                         |   | **149,554**                            |        | 137,256        |   | 9.0 | % |
| Selling  and administrative expenses     |   | **94,084**                             |        | 81,493         |   | 15.5 | % |
| Depreciation  and amortization           |   | **21,706**                             |        | 16,798         |   | 29.2 | % |
| Severance,  impairment and other charges |   | **—**                             |        | 37,220         |   | n/a |   |
| Operating  income                        |   | **$**                                  | **96,232**  |           | $      | 41,150 |   | 133.9 | % |

 

***Operating Income***

 

Our operating income for the first quarter of 2004 grew 133.9% to$96,232 from $41,150 for the first quarter of 2003.  The change was largely the result of $37,220 in severance,impairment and other charges we recorded in the first quarter of 2003.  Absent the impact of severance, impairmentand other charges, our operating income increased by 22.8% at reported exchangerates and 16.1% at constant dollar terms, primarily due to an increase in ouroperating revenue.

 

***Operating Revenue***

 

Our operating revenue for the first quarter of 2004 grew 15.2% to$361,576 from $313,917 in the first quarter of 2003.  On a constant dollar basis our operating revenue growth was7.5%.  The increase in our operatingrevenue resulted from growth in revenue in all four of our product and servicecategories, together with the effect of currency translation.

 

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**Summary of Operating Revenue**

 
|                                   |   | **Three  months ended March 31,** |        | **% Variance  2004 vs 2003** |   |
|----------------------------------------|--------|----------------------------------------|-------------|------------------------------|--------|
|                                   |   | **2004**                               |        | **2003**                     |   | **Reported  Rates** |   | **Constant  Dollar** |   |
| Sales  force effectiveness             |   | **$**                                  | **167,129** |                         | $      | 152,362 |   | 10 | % | 3 | % |
| Portfolio  optimization                |   | **$**                                  | **113,102** |                         | $      | 100,450 |   | 13 | % | 5 | % |
| Brand  and launch management and other |   | **$**                                  | **48,780**  |                         | $      | 39,624 |   | 23 | % | 13 | % |
| Consulting  and services               |   | **$**                                  | **32,565**  |                         | $      | 21,481 |   | 52 | % | 44 | % |
| Operating  Revenue                     |   | **$**                                  | **361,576** |                         | $      | 313,917 |   | 15 | % | 8 | % |

 

•                  *Sales Force Effectiveness* revenue grewprimarily due to Core Xponent offerings in Canada and the United States, growthin Asia and Latin America, and acquisitions. Revenue growth in areas outside of Japan was partially offset by adecline in revenue in Japan as compared to the first quarter of 2003.

 

•                  *Portfolio Optimization* revenue grewprimarily due to strong demand for certain of our core products, including ournext generation MIDAS offering, called MIDAS Quantum; KnowledgeLink, ourproprietary search engine; and NPA Market-Dynamics, our premier longitudinal offeringin the United States.

 

•                  *Brand Management, Launch Management and other productlines* revenue grew primarily due to Prescriber Profiler and MarketPrognosis in the United States and weekly data sales in Europe.

 

•                  *Consulting and Services* revenue grewstrongly across all our service lines, especially in our Management Consultingservice line.

 

***Operating Costs***

 

Our operating costs include data processing costs, the costs of datacollection and production, and costs attributable to personnel involved inproduction, data management and the processing and delivery of ourservices.  Our operating costs grew 9.0%to $149,554 in the first quarter of 2004, from $137,256 in the first quarter of2003.  The increase in our operatingcosts was primarily due to**foreigncurrency translation.  The effectof foreign currency translation increased our operating costs by approximately$10,000 for the first quarter of 2004 as compared to the first quarter of2003.  Excluding the effect of thechange in foreign currency translation, our operating costs grew 1.9% in thefirst quarter of 2004 as compared to the first quarter of 2003.

 

Although our operating costs decreased as a percent of revenue in thefirst quarter of 2004 as compared to the first quarter of 2003, our operatingcosts generally have increased at a rate greater than operating revenues ineach of the last two full fiscal years. This increase has been due to the impact of foreign currencytranslation, higher data collection costs to support revenue growth, andacquisitions.

 

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***Selling and Administrative Expenses***

 

Our selling and administrative expenses consist primarily of the costsattributable to sales, marketing, client service and administration, including humanresources, legal, management and finance. Our selling and administrative expenses grew 15.5% in the first quarterof 2004, to $94,084 from $81,493 in the first quarter of 2003, primarily due tothe following factors:

 

•                  *ForeignCurrency Translation*: The effect of foreign currency translationincreased our selling and administrative expenses by approximately $8,000 forthe first quarter of 2004 as compared to the first quarter of 2003.  Excluding the effect of the change inforeign currency translation, our selling and administrative expenses grew 6.1%in the first quarter of 2004 as compared to the first quarter of 2003.

 

•                  *Sales and Marketing*: Sales and marketingexpense increased by $4,319 in the first quarter of 2004, compared to the firstquarter of 2003 to support operating revenue growth.

 

***Depreciation and Amortization***

 

Our depreciation and amortization charges increased 29.2% to $21,706 inthe first quarter of 2004, from $16,798 in the first quarter of 2003, primarilydue to computer software amortization associated with new products, whichincreased by $4,595 in the first quarter of 2004 compared to the first quarterof 2003.

 

***Severance, Impairment and Other Charges***

 

During the first quarter of 2003, we recorded a $37,220 pretax chargefor Severance, impairment and other charges, consisting primarily of severancecharges of approximately $9,958 for approximately 80 employees, charges to exitdata supply and processing contracts of $16,500, lease obligations associatedwith abandoned properties of $5,807, and approximately $4,955 to write downcomputer software to its net realizable value. For more detail concerning these changes see Note 8 to the ConsolidatedFinancial Statements and the discussion of “Severance, Impairment and OtherCharges” in the Management Discussion and Analysis, both in our Annual Reporton Form 10-K for the year ended December 31, 2003.

 

***Trends in our Operating Margins***

 

Our operating margin for the first quarter of 2004 was 26.6%, ascompared to 13.1% in the first quarter of 2003.  The improvement in our operating margins was primarily due to theabsence in 2004 of the Severance, impairment and other charges of $37,220recorded in the first quarter of 2003.

 

Operating margins generally have declined over the past two years andmay continue to decline in future periods as we invest in acquisitions and newproducts and services to drive future revenue growth.

 

Recent acquisitions have had an adverse effect on our operating marginsdue to the fact that some of our acquisitions of small, niche businesses havehistorically experienced lower operating margins than ours, and the revenue andcost synergies that we incorporate into our business plans are not allimmediately realized.  We also experiencehigher intangible amortization in the first year after

 

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completing an acquisition and may incur additional costs in integratingthe acquired operations into ours, both of which tend to increase our costs andthus decrease our operating margins in the initial year of each completedacquisition.

 

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

 

Our non-operating income grew 140.0 % to a net gain of $5,921 in thefirst quarter of 2004 from a net loss of $14,785 in the first quarter of2003.  The increase in our non-operatingincome was primarily due to the following factors:

 

•                  *Gains fromInvestments*: We had gains from investment of $6,453 during the firstquarter of 2004, primarily as a result of the sale of investments in theEnterprises portfolio.  Losses frominvestment in the first quarter of 2003 were $876.

 

•                  *Other Income*:Other income (expense), net, increased primarily due to net foreign exchangegains of $4,369 in the first quarter of 2004, compared with net foreignexchange losses of $7,702 in the first quarter of 2003.

 

***Taxes***

 

For the three months ended March 31, 2004, our effective tax ratewas impacted byapproximately $15,600 primarily due to a favorable partial U.S. auditsettlement.  For the three monthsended March 31, 2003, our effective tax rate was impacted by approximately$69,600 due to our reassessment, based on information received inApril 2003, of our liability associated with certain D&B Legacy TaxMatters and related subsequent transactions. This is more fully described in Note 9 to the Condensed ConsolidatedFinancial Statements (unaudited). Further, our effective tax rate for the three months endedMarch 31, 2003 was affected by the favorable settlement of a non-U.S.audit which approximated $13,900.

 

For all periods presented, our effective tax rate was reduced as aresult of global tax planning initiatives. While we intend to continue to seek global tax planning initiatives,there can be no assurance that we will be able to successfully implement suchinitiatives to reduce or maintain our overall tax rate.

 

***TriZetto***

 

In the first quarter of 2003, we recorded an impairment charge of$14,842, net of taxes of $9,565, to write down our investment in TriZettofollowing the continued significant decline in the market value of TriZetto sharesbelow our carrying value.  We concludedthat this decline was other-than-temporary in accordance with SAB No. 59,“Views on Accounting for Noncurrent Marketable Equity Securities.”  As of March 31, 2003, TriZetto sharesclosed at $4.13 compared to our book value per share of $6.14 prior torecording the impairment charge.  As ofMarch 31, 2004, the market value of TriZetto exceeded our carrying valueby approximately $52,955.  There can beno assurance that TriZetto shares will continue to trade above our carryingvalue or that further impairment charges will not be required.

 

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A charge for TriZetto equity loss, net, of $966 and $333 was recordedin the first quarter of 2004 and 2003, respectively.  We do not control TriZetto and our results may be significantlyaffected by our share of its income or losses.

 

## **Operating Results by Geographic Region**

 

The following represents selected geographicinformation for the regions in which we operate for the three months endedMarch 31, 2004 and 2003:

 
|                                         |   | **Americas  (1)** |       | **Europe  (2)** |       | **Asia  Pacific  (3)** |       | **Corporate  &  Other** |       | **Total  IMS** |       |
|----------------------------------------------|--------|-------------------|------------|-----------------|------------|------------------------|------------|-----------------------------|------------|----------------|------------|
| **Three  months ended March 31, 2004:** |   |              |       |            |       |                   |       |                        |       |           |       |
| Operating revenue (4)                        |   | $                 | 166,911    |            | $          | 142,704                |       | $                           | 51,961     |           | —     |   | $ | 361,576 |   |
| Operating  income (5)                        |   | $                 | 72,770     |            | $          | 23,890                 |       | $                           | 28,698     |           | $          | (29,126 | ) | $ | 96,232 |   |
| **Three  months ended March 31, 2003:** |   |              | ** ** |            | ** ** |                   | ** ** |                        | ** ** |           | ** ** |
| Operating  revenue (4)                       |   | $                 | 151,305    |            | $          | 114,009                |       | $                           | 48,603     |           | —     |   | $ | 313,917 |   |
| Operating  income (5)                        |   | $                 | 67,492     |            | $          | 16,356                 |       | $                           | 28,616     |           | $          | (71,314 | ) | $ | 41,150 |   |

 

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**Notes toGeographic Financial Information:**

 

*(1)**             Americas includes theUnited States, Canada and Latin America.*

 

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

 

*(3)**             Asia Pacific includesJapan, Australia and other countries in the Asia Pacific region.*

 

*(4)**             Operating revenuerelates to external customers and is primarily based on the location of thecustomer.  The operating revenue for thegeographic regions includes the impact of foreign exchange in converting resultsinto U.S. Dollars.*

 

(5)                *Operating income for the three geographic regionsdoes not reflect the allocation of certain expenses that are maintained inCorporate and Other and as such, is not a true measure of the respectiveregions’ profitability.  For the threemonths ended March 31, 2003, Severance, impairment and other charges of$17,369, $5,040 and $11,081 for the Americas, Europe and Asia Pacific,respectively, are presented in Corporate and Other.  The operating income for the geographic segments includes theimpact of foreign exchange in converting results into U.S. Dollars.*

 

***Americas Region***

 

Operating revenue growthin the Americas region was 10.3% in the first quarter of 2004, compared to thefirst quarter of 2003, primarily due to strong performance in the consultingand services business, and the sales force effectiveness and portfoliooptimization business lines.

 

Operating income growthin the Americas region was 7.8% in the first quarter of 2004, compared to thefirst quarter of 2003.  Operating incomegrowth lagged revenue growth due to investment in global consultingcapabilities and higher data collection costs to support new products.

 

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***Europe Region***

 

Operating revenue growthin the Europe region was 25.2% in the first quarter of 2004, compared to thefirst quarter of 2003, primarily due to strong growth in the consulting andservices business and the sales force effectiveness business line, as well asforeign exchange.

 

Operating income in theEurope region increased by 46.1% in the first quarter of 2004, compared to thefirst quarter of 2003.  The operatingincome growth in 2004 was primarily driven by operating revenue growth andforeign exchange.

 

***Asia Pacific Region***

 

Operating revenue in theAsia Pacific region increased 6.9% in the first quarter of 2004, compared tothe first quarter of 2003.  Operatingrevenue in Japan was adversely affected by continuing data supplier issues thatimpacted weekly product revenue; this was more than offset by strong growth inother countries in the Asia Pacific region and foreign exchange.

 

Operating income in the Asia Pacific region increasedby 0.3% in the first quarter of 2004, compared to the first quarter of 2003,primarily due to the operating revenue issues discussed above.  The decline in our operating margin in theregion was due to the impact of the revenue declines in Japan as well as ourdecision to invest in developing new products and services in Japan to generatefuture revenues to replace and grow those revenues lost from the weeklyproduct.

 

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

 

We operate globally, deriving a significant portion ofour operating income from non-U.S. operations. As a result, fluctuations in the value of foreign currencies relative tothe U.S. Dollar may increase the volatility of our U.S. Dollar operatingresults.  We enter into forward foreigncurrency contracts to partially offset the effect of currency fluctuations.  In 2004, foreign currency translationincreased our U.S. Dollar revenue growth by approximately 7.7 percentagepoints, while the impact on our operating income growth was an approximateincrease of 6.7 percentage points.

 

Our non-U.S. monetary assets are maintained in currencies other thanthe U.S. Dollar, principally the Euro, the Japanese Yen, the British Pound, theSwiss Franc and the Canadian Dollar. Where monetary assets are held in the functional currency of the localentity, changes in the value of these currencies relative to the U.S. Dollarare charged or credited to Cumulative translation adjustment in our CondensedConsolidated Statements of Shareholders’ Equity (unaudited).  The effect of exchange rate changes during2004 decreased our U.S. Dollar amount of Cash and cash equivalents by $958.

 

***Liquidity and Capital Resources***

 

On February 6, 2003, we divested CTS through a split-offtransaction, and as a result, our share of CTS results are presented asdiscontinued operations for 2003 through the date of divestiture (see Note 6 toour unaudited Condensed Consolidated Financial Statements).

 

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Our cash and cash equivalents increased $7,974 during the first quarter of 2004 to $352,406 at March 31, 2004compared to $344,432 at December 31, 2003.  The increase primarily reflects cash we generated from operatingactivities of $25,041, offset by cashused in investing activities of $17,142.  Including the change in short-termmarketable securities, which is included in cash used in investing activities,our cash and cash equivalents and short-term marketable securities increased to$392,570 at March 31, 2004 compared to $384,540 at December 31, 2003,an increase of $8,030.

 

Wecurrently expect that we will use our cash and cash equivalents primarily tofund:

 

•      development of software to be used in our newproducts and capital expenditures to expand and upgrade our informationtechnology capabilities and to build or acquire facilities to house our growingbusiness (we currently expect to spend approximately $80,000 during 2004 forsoftware development and capital expenditures);

 

•      acquisitions;

 

•      share repurchases;

 

•      dividends to our shareholders (if dividendscontinue at our first quarter of 2004 levels, we would expect dividends for2004 to be $0.08 per share or approximately $19,000); and

 

•      payments for tax relatedmatters, including the D&B Legacy Tax Matters discussed further in Note 9to our Condensed Consolidated Financial Statements (unaudited).

 

Net cash provided byoperating activities amounted to $25,041for the three months ended March 31, 2004, a decrease of $3,924 over the comparable period in2003.  The decrease relates primarily tothe funding of accounts payable and accrued and other current liabilitiesduring the three months ended March 31, 2004.

 

Net cash used ininvesting activities amounted to $17,142for the three months ended March 31, 2004, a decrease in cash used of $71,636 over the comparable period in2003.  The lower cash requirementsduring the first three months of 2004 relate primarily to the fact that we onlymade payments of $3,878 for acquisitions during the first three months of 2004,compared to payments made for acquisitions of $47,249 during the comparableperiod in 2003.  We also had proceedsfrom the sale of investments, net of $10,712 in the first quarter of 2004, withno comparable receipt in 2003, and $10,206 reduction in funding requirementsfor short-term marketable securities for the first quarter of 2004 comparedwith 2003.

 

Net cash provided byfinancing activities amounted to $1,033for the three months ended March 31, 2004, a decrease of $43,514 over the comparable period in2003.  This decrease was primarily dueto payments of $138,851 for the purchase of our stock during the first threemonths of 2004, offset by a $49,068 net increase in our borrowings and a$35,428 increase in proceeds we received from the exercise of stock options byour employees during the first three months of 2004 compared with thecomparable period in 2003.

 

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Our financing activities include cash dividends we paid of $0.02 pershare quarterly, which amounted to $4,707 and $4,903 during the first threemonths of 2004 and 2003, respectively. The payments and level of cash dividends made by us are reviewedquarterly and are subject to the discretion of our Board of Directors.  Any future dividends, other than the $0.02per share dividend for the first quarter of 2004, which was declared by ourBoard of Directors in February 2004, will be based on, and affected by, anumber of factors, including our operating results and financial requirements.

 

**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 9 toour Condensed Consolidated Financial Statements (unaudited) for the periodended March 31, 2004.  We do not knowof any material tax or other contingencies, other than those described in Note9 to our Condensed Consolidated Financial Statements (unaudited).

 

These contingencies may have a material effect onour liquidity, capital resources or results of operations.  Althoughwe have established reserves for D&B Legacy Tax Matters in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting forContingencies”, the actual 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 otherpurposes.

 

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**

 

Our share repurchase program has been developed to buy opportunistically,when we believe that our share price provides us with an attractive use of ourcash flow and debt capacity.

 

On February 10, 2004, our Board of Directors authorized a stockrepurchase program to buy up to 10,000 shares.

 

On April 15, 2003, our Board of Directors authorized a stockrepurchase program to buy up to 10,000 shares. As of March 31, 2004, approximately 130 shares remained availablefor repurchase under the April 2003 program.

 

On July 19, 2000, our Board of Directors authorized a stockrepurchase program to buy up to 40,000 shares. We completed this program in June 2003 at a total cost of $868,314.

 

During the three months ended March 31, 2004, we repurchasedapproximately 5,457 shares of outstanding common stock under these programs,including the repurchase of 4,600 shares on January 9, 2004

 

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pursuant to anaccelerated share repurchase program (“ASR”). The ASR agreement provides for the final settlement of the contract ineither cash or additional shares of our common stock at our sole discretion.** **Ourfinal settlement amount will increase (decrease) based on an increase(decrease) in our share price over the settlement period.  The total cost of the shares repurchasedduring the three months ended March 31, 2004 was $138,851.

 

Shares acquired through our repurchase programs described above areopen-market purchases or privately negotiated transactions in compliance withSecurities and Exchange Commission Rule 10b-18.

 

**Debt**

 

In recentyears, we have increased debt levels to balance appropriately the objective ofgenerating an attractive cost of capital with providing us a reasonable amountof financial flexibility.  AtMarch 31, 2004, our debt totaled $672,226, and management does not believethat this level of debt poses a material risk to us due to the followingfactors:

 

•      in each of the last two years, we have generatedstrong net cash provided by operating activities in excess of $300,000;

 

•      at March 31, 2004, we had $392,570 inworldwide cash and cash equivalents and short-term marketable securities;

 

•      at March 31, 2004, we had $106,100 of unuseddebt capacity under our existing bank credit facilities; and

 

•      we believe that we have the ability to obtainadditional debt capacity outside of our existing debt arrangements.

 

We had borrowingarrangements with several domestic and international banks to provide lines ofcredit up to $612,500 at March 31, 2004. Total borrowings under these existing lines were $506,400 and $407,600 atMarch 31, 2004 and December 31, 2003, respectively, of which $306,400and $407,600 were classified as short-term and $200,000 and $0 were classifiedas long-term as of March 31, 2004 and December 31, 2003,respectively.

 

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.  The UnsecuredFacility is comprised of $430,000 of short-term lines that expireApril 2005 and $270,000 of long-term lines expiring April 2007.  In general, rates for borrowing under boththe short-term and long-term components are LIBOR plus 45 basis points and canvary based on our Debt to EBITDA ratio. The weighted average interest rates for our short-term lines were 1.52%and 1.61% at March 31, 2004 and December 31, 2003, respectively.  The weighted average interest rates for ourlong-term lines were 1.77% and 1.84% at March 31, 2004 andDecember 31, 2003, respectively. In addition, we will pay a commitment fee on the unused portion of theshort-term and long-term facilities of 0.08% and 0.10%, respectively.

 

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We define long-term lines as those where the lines are non-cancelablefor more than 365 days from the balance sheet date by the financialinstitutions except for specified violations of the provisions of theagreement.  Borrowings under thesethree-year facilities are short-term in nature; however, we have the abilityand the intent to refinance the short-term borrowings as they come due.  At March 31, 2004, we reclassified$200,000 of our short-term debt outstanding as long-term debt in accordancewith the provisions of SFAS No. 6, “Classification of Short-Term ObligationsExpected to be Refinanced.”

 

Our total debt of $672,226 and $561,991 at March 31, 2004 andDecember 31, 2003, respectively, included $150,000 of five-year privateplacement debt (as further discussed below), and $15,826 and $4,391 at March 31,2004 and December 31, 2003, respectively, related primarily to cashoverdrafts, certain capital leases, mortgages and an adjustment to the carryingamount of fair value hedged debt.  AtMarch 31, 2004, we had $0 and $106,100 available under our long andshort-term lines of credit, respectively.

 

During the fourth quarter of 2001, we renegotiated with several banksand entered into three-year lines of credit for borrowings of up to$175,000.  Borrowings had maturity datesof up to 90 days from their inception. These lines of credit were due to mature in 2004 and as such $175,000was reclassified to short-term as of December 31, 2003.

 

In March and April 2002, we entered intointerest rate swaps on a portion of our variable rate debt portfolio.  These arrangements convert the variableinterest rates to a fixed interest rate on a notional amount of $75,000 andmature at various times from March 2005 through April 2006.  The fixed rates range from 4.05% to5.08%.  We accounted for the interestrate swaps as cash flow hedges and we recorded any changes in fair value inOther Comprehensive Income, in our Condensed Consolidated Statements ofShareholders’ Equity (unaudited).  Wedetermine the fair values based on estimated prices quoted by financialinstitutions.  The mark-to-marketadjustment for the three months ended March 31, 2004 was an unrealized netloss of $106.

 

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 fair values basedon estimated prices quoted by financial institutions.  The cumulative fair value adjustment to the swap as ofMarch 31, 2004 was an increase of $3,244.

 

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, 2004, wewere in compliance with these financial debt covenants and we anticipate thatwe will remain in compliance with the covenants over the term of the borrowingarrangements.

 

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**Severance, Impairment and Other Charges**

 

During the three months ended March 31, 2003, werecorded $37,220 of severance, impairment and other charges (the “first quartercharge”) as a component of operating income. We incurred these charges due to a number of business and strategicfactors affecting us:

 

•      severance-related charges of $9,958 were incurredin an effort to streamline operations and increase productivity through aworldwide reduction in headcount of approximately 80 employees.  This reduction in headcount was primarilyfocused on upgrading the skills and capabilities of our employee base as wetransform the business to provide new and enhanced analytical and consultingofferings to our customers.  Thereduction in headcount also led to charges for impaired leases in the U.S. andU.K. for office space no longer being used by us and for which we had not beenable to obtain subleases at rates comparable to the terms of our leaseobligations.  These severance benefitswere calculated pursuant to the terms of established employee protection plans,in accordance with local statutory minimum requirements or individual employeecontracts, as applicable;

 

•      contract-related charges of $22,307 were incurredfor impaired data supply, data processing and impaired lease contracts in ourU.S. and Japanese operations.  Animpairment for a data supply contract in the U.S. was realized due to the factthat in the first quarter of 2003 we determined that expected revenues under aco-marketing agreement with a data supplier would not be generated, but we arestill required to make payments under the terms of the contract.  We also realized an impairment for a dataprocessing contract in Japan related to a weekly data product in Japan that wasdiscontinued at the end of the first quarter of 2003, due to the interruptionin data supply; and

 

•      asset write-downs of $4,955were recorded to write-down certain of our computer software primarily in theU.S. and Japan to its net realizable value. In the U.S., our decision to change the underlying technology in aproduct required the write-down of a previous version.  In Japan, the termination of our weekly dataproduct required the write-down of our software used for that product.

 
|                            |   | **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               |   | (683                           | )      | (1,176                        | )      | —                 |   | (1,859    | )      |
| Adjustments                     |   | (1,746                         | )      | 67                            |   | 1,679                  |   | —    |   |
| Balance  at March 31, 2004 |   | $                              | 1,332  |                          | $      | 14,151                 |   | $         | 0      |   | $ | 15,483 |   |

 

The cash portion of the first quarter chargeamounted to $30,586, of which we paid approximately $13,244 during 2003 and$1,859 during the three months ended March 31, 2004, related primarily toemployee termination benefits and contract-related charges.  The remaining accrual of $15,483 atMarch 31, 2004 relates to lease obligations and continuing paymentsrelated to employee termination benefits.

 

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We expect that cash outlays will be applied against the $15,483 balanceremaining in the first quarter charge at March 31, 2004 as follows: 

 
| **Year Ended  December 31,** |   | **Cash  Outlays** |   |
|-----------------------------------|--------|-------------------|--------|
| 2004                              |   | $                 | 4,033  |   |
| 2005                              |   | 7,917             |   |
| 2006                              |   | 923               |   |
| 2007                              |   | 752               |   |
| 2008                              |   | 228               |   |
| Thereafter                        |   | 1,630             |   |
| Total                             |   | $                 | 15,483 |   |

 

During the nine months endedDecember 31, 2003, we reversed approximately $1,750 of severance relatedcharges originally included in the first quarter charge due to our refinementof estimates.  We also recordedadditional charges during 2003 of approximately $1,700 related primarily to asoftware impairment.

 

We expect that future results will benefitfrom the first quarter charge to the extent of the contract-related charges andasset write-downs primarily through 2007. Our severance actions related to a shifting of resources and as such arenot expected to generate material cost savings.  The income statement lines that will be impacted in futureperiods are Operating costs for the contract-related charges and Depreciationand amortization for the asset write-downs. However, we do not expect a material impact on future cash flows due tothe fact that we are still contractually obligated to continue to make paymentsunder impaired contracts.

 

***Recently Issued Accounting Standards***

 

In January 2003, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 46, “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51,” (“FIN 46”).  FIN 46 requires all Variable InterestEntities (“VIEs”) to be consolidated by the primary beneficiary.  The primary beneficiary is the entity thatholds the majority of the beneficial interests in the VIE.  In addition, FIN 46 expands disclosurerequirements for both VIEs that are consolidated as well as VIEs from which theentity is the holder of a significant amount of the beneficial interest, butnot the majority.  InDecember 2003, the FASB issued Interpretation 46R, “Consolidation ofVariable Interest Entities” (revised December 2003), (“FIN 46R”) whichfurther clarified the provisions of FIN 46 and delayed the effective date forapplying the provisions of FIN 46 until the end of the first quarter of 2004for interests held by public entities in VIEs or potential VIEs created beforeFebruary 1, 2003.  The adoption ofFIN 46R did not have a material impact on our financial position, results ofoperations or cash flows for the three months ended March 31, 2004.

 

In December 2003, theFASB issued SFAS No. 132 (revised 2003), “Employer’s Disclosures about Pensionsand Other Postretirement Benefits,” an amendment of SFAS Nos. 87, “Employers’Accounting for Pensions”, 88, “Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination of Benefits,”and 106, “Employers’ Accounting for Postretirement Benefits Other ThanPensions,” and a revision of SFAS No. 132. SFAS No. 132 (revised 2003) requires additional disclosures about theassets, obligations, cash flows, and net

 

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periodic benefit cost of defined benefit pension plansand other postretirement benefit plans, but does not change the measurement orrecognition of such plans.  The newdisclosure requirements contained in SFAS No. 132 (revised 2003) are effectivefor fiscal years ending after December 15, 2003, with a delayed effectivedate for certain disclosures, for foreign plans, and for non-publicentities.  We have adopted all aspectsof SFAS No. 132 (revised 2003) for all foreign and non-foreign plans, with theexception of the estimated future benefit payment disclosure.  This requirement is first effective forfiscal years ending after June 15, 2004. Additionally, we are required to disclose components of the net benefitcost in quarterly financial statements beginning with the first quarter of2004.  This interim disclosureinformation is included in Note 11 to the Condensed Consolidated FinancialStatements (unaudited).  The adoption ofSFAS No. 132 (revised 2003) did not have a material impact on our financialposition, results of operations or cash flows for the three months endedMarch 31, 2004.

 

In January 2004, the FASB issued StaffPosition No. (“FSP”) FAS 106-1, “Accounting and Disclosure Requirements Relatedto the Medicare Prescription Drug, Improvement and Modernization Act of2003.”  We have elected to defer theadoption of the new accounting requirements related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003, (the “Act”) inaccordance with FSP FAS 106-1.  Allmeasures of the accumulated postretirement benefit obligation or net periodicpostretirement benefit cost in the financial statements or accompanying notesdo not reflect the effects of the Act on the plan.  Specific authoritative guidance on the accounting for the Act ispending, and the guidance, when issued, could require us to change previouslyreported information.

 

***Forward-LookingStatements***

 

This Quarterly Report on Form 10-Q, as well as information included inoral statements or other written statements made or to be made by us, containstatements that, in our opinion, may constitute “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  The words such as “believe,”“expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “project,”“estimate,” “will,” “may,” “should,” “future,” “predicts,” “potential,”“continue” and similar expressions identify these forward-looking statements,which appear in a number of places in this Quarterly Report and include, butare not limited to, all statements relating to plans for future growth andother business development activities as well as capital expenditures,financing sources, dividends and the effects of regulation and competition,foreign currency conversion and all other statements regarding the intent,plans, beliefs or our expectations or our directors or officers.  Investors are cautioned that suchforward-looking statements are not assurances for future performance or eventsand involve risks and uncertainties that could cause actual results anddevelopments to differ materially from those covered in such forward-looking statements.  These risks and uncertainties include, butare not limited to:

 

•      risks associated withoperating on a global basis, including fluctuations in the value of foreigncurrencies relative to the U.S. Dollar, and the ability to successfully hedge suchrisks – we derived approximately 61% of our operating revenue in 2003 fromnon-U.S. operations;

 

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•      to the extent we seek growththrough acquisitions, alliances or joint ventures, the ability to identify,consummate and integrate acquisitions, alliances and ventures on satisfactoryterms;

 

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

 

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

 

•      our ability to successfullymaintain historic effective tax rates;

 

•      competition, particularly inthe markets for pharmaceutical information;

 

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

 

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

 

•      deterioration in economicconditions, particularly in the pharmaceutical, healthcare, or other industriesin which our customers may operate;

 

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

 

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

 

•      conditions in the securitiesmarkets that may affect the value or liquidity of portfolio investments,including the investment in TriZetto and management’s estimates of lives ofassets, recoverability of assets, fair market value, estimates and liabilitiesand accrued income tax benefits and liabilities;

 

•      to the extent unforeseencash needs arise, the ability to obtain financing on favorable terms; and

 

•      terrorist activity, thethreat of such activity, and responses to and results of such activity andthreats, including but not limited to effects, domestically and/orinternationally, on us, our

 

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personnel and facilities,our customers and suppliers, financial markets and general economic conditions.

 

Consequently, all the forward-looking statements contained in thisQuarterly Report on Form 10-Q are qualified by the information containedherein, including, but not limited to, the information contained under thisheading and our Condensed Consolidated Financial Statements (unaudited) andnotes thereto for the three months ended March 31, 2004 and by thematerial set forth under the headings “Business” and “Factors That May AffectFuture Results” in our Annual Report on Form 10-K for the year endedDecember 31, 2003.  We are under noobligation to publicly release any revision to any forward-looking statementcontained or incorporated herein to reflect any future events or occurrences.

 

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

 

Information in response to this Item is set forth in “Note 10.Financial Instruments” in the Notes to the Condensed Consolidated FinancialStatements (unaudited) on pages 19 through 22 hereof.

 

**Item 4****. Controls and Procedures**

 

(a)                                  Evaluation of Disclosure Controls andProcedures

 

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

 

The Company’s Chief Executive Officer and****Chief Financial Officer have evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as such term is defined inRules 13a-14c and 15d-14c under the Exchange Act) as of March 31, 2004(the “Evaluation Date”).  Based on suchevaluation, such officers have concluded that, as of the Evaluation Date, theCompany’s disclosure controls and procedures are effective in alerting them ona timely basis to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicfilings under the Exchange Act.

 

(b)                                 Changes in Internal Control over FinancialReporting

 

Therehave been no changes in our internal control over financial reporting thatoccurred during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II****.  OTHERINFORMATION**

 

**Item1. Legal Proceedings**

 

Information inresponse to this Item is incorporated by reference to the information set forthin “Note 9. Contingencies” in the Notes to the Condensed Consolidated FinancialStatements (unaudited) on pages 11 through 19 hereof.

 

**Item2.  Changesin Securities, Use of Proceeds and Issuer Purchases of Equity Securities**

 
| **Period**                |   | **Total  Number  of Shares  Purchased(1)** |   | **Average  Price Paid  per Share** |   | **Total  Number of Shares  Purchased Under  Publicly Announced  Programs** |   | **Maximum  Number of  Shares that May Yet Be  Purchased Under the  Programs(2)** |   |
|---------------------------|--------|--------------------------------------------|--------|------------------------------------|--------|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|
|                      |   |                                       |   |                               |   |                                                                       |   |                                                                             |   |
| January 1-31,  2004  |   | 5,456,950                                  |   | 25.44                              | (3)    | 5,456,950                                                                  |   | 10,130,000                                                                       |   |
| February 1-28,  2004 |   | —                                     |   | —                             |   | —                                                                     |   | 10,130,000                                                                       |   |
| March 1-31,  2004    |   | —                                     |   | —                             |   | —                                                                     |   | 10,130,000                                                                       |   |
| **Total**                 |   | 5,456,950                                  |   | 25.44                              | (3)    | 5,456,950                                                                  |   | 10,130,000                                                                       |   |

 

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(1)          All shares wererepurchased through the Company’s publicly announced stock repurchase programs.

 

(2)          On April 15, 2003,the Company announced a stock repurchase program to buy up to 10,000,000 sharesof the Company’s common stock.  As ofMarch 31, 2004, approximately 130,000 shares remained available forrepurchase under the April 2003 program. On February 10, 2004, the Company announced a stock repurchaseprogram to buy up to 10,000,000 shares of the Company’s common stock.  As of March 31, 2004, no shares hadbeen purchased under the February 2004 program.

 

(3)          4,600,000 of thetotal shares purchased during the period were purchased on January 9, 2004pursuant to an accelerated share repurchase program (“ASR”).  The ASR agreement provides for the final settlementof the contract in either cash or additional shares of the Company’s commonstock at the Company’s sole discretion.** **The Company’s final settlementamount will increase (decrease) based on an increase (decrease) in theCompany’s share price over the settlement period.

 

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

 

(a)                           Exhibits:

 
| **Exhibit  Number** |   | **Description  of Exhibits**                                                                                                                                                                                                         |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                 |
| 10.1                |   | Three Year Credit  Agreement among IMS Health Incorporated, IMS AG and IMS Japan K.K., as  borrowers, the Lenders parties thereto, and Wachovia Bank, National  Association, as administrative agent, dated as of April 5, 2004 |
|                |   |                                                                                                                                                                                                                                 |
| 10.2                |   | 364-Day Credit  Agreement among IMS Health Incorporated, the Lenders parties thereto, and  Wachovia Bank, National Association, as administrative agent, dated as of  April 5, 2004                                             |
|                |   |                                                                                                                                                                                                                                 |
| 31.1                |   | CEO 302 Certification  pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                 |
| 31.2                |   | CFO 302 Certification  pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                 |
| 32.1                |   | Joint CEO/CFO  Certification Required Under Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                      |

 

 

(b)                Reports on 8-K:

 

A report on Form 8-K wasfiled on February 10, 2004 to present under Item 12, Results of Operationsand Financial Condition, the Press Release regarding IMS Health’s financialresults for its 2003 fiscal year and fourth quarter.

 

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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 3, 2004 |   | Nancy E. Cooper                 |
|              |   | Senior Vice President  and      |
|              |   | Chief Financial Officer         |
|              |   | (principal financial  officer)  |
|              |   |                            |
|              |   |                            |
|              |   |  /s/ Leslye G.  Katz       |   |
| Date: May 3, 2004 |   | Leslye G. Katz                  |
|              |   | Vice President,  Controller     |
|              |   | (principal accounting  officer) |

 

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# **EXHIBIT**INDEX

 
| **Exhibit  Number** |   | **Description  of Exhibits**                                                                                                                                                                                                         |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                 |
| 10.1                |   | Three Year Credit  Agreement among IMS Health Incorporated, IMS AG and IMS Japan K.K., as  borrowers, the Lenders parties thereto, and Wachovia Bank, National  Association, as administrative agent, dated as of April 5, 2004 |
|                |   |                                                                                                                                                                                                                                 |
| 10.2                |   | 364-Day Credit  Agreement among IMS Health Incorporated, the Lenders parties thereto, and  Wachovia Bank, National Association, as administrative agent, dated as of  April 5, 2004                                             |
|                |   |                                                                                                                                                                                                                                 |
| 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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