UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2001
-----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 001-12392
---------
NDCHealth Corporation
---------------------
(Exact name of registrant as specified in charter)
DELAWARE 58-0977458
-------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
NDC Plaza, Atlanta, Georgia 30329-2010
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 404-728-2000
------------
National Data Corporation
------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [_].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, Par Value $.125 - 34,138,128 shares
---------------------------------------------------
Outstanding as of January 9, 2002
-----------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NDCHealth Corporation and Subsidiaries
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended November 30,
---------------------------------------------
2001 2000
--------------------- ---------------------
Revenues:
Information management $ 37,394 $ 33,917
Network services and systems 54,668 49,516
Divested businesses - 233
---------------------------------------------
92,062 83,666
---------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 45,057 41,662
Sales, general and administrative 21,166 18,385
Depreciation and amortization 5,897 8,683
Non-recurring charges - 2,156
---------------------------------------------
72,120 70,886
---------------------------------------------
Operating income 19,942 12,780
- --------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 344 13
Interest and other expense (2,325) (1,677)
Minority interest in loss (earnings) 747 (117)
---------------------------------------------
(1,234) (1,781)
---------------------------------------------
Income before income taxes and discontinued operations 18,708 10,999
Provision for income taxes 6,735 4,310
- --------------------------------------------------------------------------------------------------------------------------------
Income before discontinued operations 11,973 6,689
Discontinued operations, net of income taxes - (326)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 11,973 $ 6,363
---------------------------------------------
Basic earnings per share:
Income before discontinued operations $ 0.35 $ 0.20
---------------------------------------------
Discontinued operations $ - $ (0.01)
---------------------------------------------
Basic earnings per share $ 0.35 $ 0.19
---------------------------------------------
Diluted earnings per share:
Income before discontinued operations $ 0.33 $ 0.20
---------------------------------------------
Discontinued operations $ - $ (0.01)
---------------------------------------------
Diluted earnings per share $ 0.33 $ 0.19
---------------------------------------------
See Notes to Unaudited Consolidated Financial Statements.
2
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NDCHealth Corporation and Subsidiaries
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Six Months Ended November 30,
---------------------------------------------
2001 2000
--------------------- ---------------------
Revenues:
Information management $ 71,907 $ 65,215
Network services and systems 108,511 98,463
Divested businesses - 5,862
---------------------------------------------
180,418 169,540
---------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 86,892 85,002
Sales, general and administrative 42,152 38,519
Depreciation and amortization 12,478 16,896
Restructuring and impairment charges - 2,156
---------------------------------------------
141,522 142,573
---------------------------------------------
Operating income 38,896 26,967
- --------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 695 30
Interest and other expense (4,645) (3,636)
Minority interest in loss (earnings) 1,073 (117)
---------------------------------------------
(2,877) (3,723)
---------------------------------------------
Income before income taxes and discontinued operations 36,019 23,244
Provision for income taxes 12,967 9,024
- --------------------------------------------------------------------------------------------------------------------------------
Income before discontinued operations 23,052 14,220
Discontinued operations, net of income taxes - 8,323
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 23,052 $ 22,543
---------------------------------------------
Basic earnings per share:
Income before discontinued operations $ 0.68 $ 0.43
---------------------------------------------
Discontinued operations $ - $ 0.25
---------------------------------------------
Basic earnings per share $ 0.68 $ 0.69
---------------------------------------------
Diluted earnings per share:
Income before discontinued operations $ 0.64 $ 0.42
---------------------------------------------
Discontinued operations $ - $ 0.25
---------------------------------------------
Diluted earnings per share $ 0.64 $ 0.67
---------------------------------------------
See Notes to Unaudited Consolidated Financial Statements.
3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NDCHealth Corporation and Subsidiaries
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Six Months Ended November 30,
--------------------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 23,052 $ 22,543
Adjustments to reconcile net income to cash provided by
operating activities:
Non-cash restructuring and impairment charges - 930
Income from discontinued operations - (8,323)
Depreciation and amortization 12,478 16,896
Deferred income taxes 879 36,481
Provision for bad debts 984 366
Other, net 362 1,355
Changes in assets and liabilities which provided (used) cash, net of the
effects of acquisitions:
Accounts receivable, net 4,429 (2,344)
Prepaid expenses and other assets (3,473) (6,329)
Accounts payable and accrued liabilities (5,921) (5,683)
Deferred income 2,313 4,912
Income taxes 614 (23,203)
--------------------------------------
Net cash provided by operating activities 35,717 37,601
--------------------------------------
Cash flows from investing activities:
Capital expenditures (14,570) (20,472)
Business acquisitions, net of acquired cash - (23,224)
Business divestiture and sale of marketable securities - 20,000
Investments and other non-current assets (10,131) (13,506)
--------------------------------------
Net cash used in investing activities (24,701) (37,202)
--------------------------------------
Cash flows from financing activities:
Net repayments under lines of credit - (11,500)
Net principal payments under capital lease arrangements
and other long-term debt (1,922) (2,779)
Net issuances related to stock activities 4,814 2,513
Dividends paid (2,723) (4,931)
--------------------------------------
Net cash provided by (used in) financing activities 169 (16,697)
--------------------------------------
Net cash provided by discontinued operations 6,646 21,795
--------------------------------------
Increase in cash and cash equivalents 17,831 5,497
Cash and cash equivalents, beginning of period 12,420 1,789
--------------------------------------
Cash and cash equivalents, end of period $ 30,251 $ 7,286
======================================
See Notes to Unaudited Consolidated Financial Statements.
4
CONSOLIDATED BALANCE SHEETS
NDCHealth Corporation and Subsidiaries
(In thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------------------------
November 30, May 31,
2001 2001
------------------ ------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 30,251 $ 12,420
Accounts receivable 61,419 70,648
Allowance for doubtful accounts (5,155) (6,628)
------------------ ------------------
Accounts receivable, net 56,264 64,020
------------------ ------------------
Income tax receivable 1,655 2,265
Deferred income taxes 21,328 29,539
Prepaid expenses and other current assets 21,113 18,788
------------------ ------------------
Total current assets 130,611 127,032
------------------ ------------------
Property and equipment, net 83,353 82,956
Intangible assets, net 193,786 221,757
Deferred income taxes 12,231 9,886
Investments 79,330 35,591
Other 15,992 10,990
------------------ ------------------
Total Assets $ 515,303 $ 488,212
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 175 $ 170
Obligations under capital leases 1,427 2,586
Accounts payable and accrued liabilities 55,858 53,228
Deferred income 15,867 13,624
------------------ ------------------
Total current liabilities 73,327 69,608
------------------ ------------------
Long-term debt 151,479 151,567
Obligations under capital leases 2,658 1,108
Other long-term liabilities 20,321 23,044
------------------ ------------------
Total liabilities 247,785 245,327
------------------ ------------------
Commitments and contingencies
Minority interest in equity of subsidiaries 11,465 12,418
Shareholders' equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized, none issued - -
Common stock, par value $.125 per share; 200,000,000 shares authorized;
34,097,652 and 33,875,235 shares issued, respectively. 4,262 4,234
Capital in excess of par value 193,290 188,636
Retained earnings 68,721 48,392
Deferred compensation and other (6,661) (7,212)
Cumulative translation adjustment (3,559) (3,583)
------------------ ------------------
Total shareholders' equity 256,053 230,467
------------------ ------------------
Total Liabilities and Shareholders' Equity $ 515,303 $ 488,212
================== ==================
See Notes to Unaudited Consolidated Financial Statements.
5
NOTES TO UNAUDITED CONSOLIDATED
-------------------------------
FINANCIAL STATEMENTS
--------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
At the 2001 Annual Meeting of Stockholders held on October 25, 2001,
stockholders adopted a proposal to amend the Certificate of Incorporation of
National Data Corporation to change its name to NDCHealth Corporation, which is
referred to in this Report as the "Company" or "NDCHealth."
On January 31, 2001, the Company completed the spin-off of its eCommerce
business segment, Global Payments Inc. ("Global Payments"). Additionally, in the
third quarter of fiscal 2000, the Company decided to pursue the divestiture of
its management services business and account for the business as "discontinued
operations". As a result of the spin-off and divestiture, the Company's
financial statements have been prepared with Global Payments' and the management
services business' net assets, results of operations, and cash flows displayed
separately as "discontinued operations" with all historical financial statements
restated to conform to this presentation, in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations".
The Company provides network based information processing services and systems
and information management products and services to the healthcare market. The
principal markets for the Company's products and services are healthcare
providers, payers, managed care organizations, pharmaceutical manufacturers, and
distributors. NDCHealth classifies its business into two reportable segments:
Network Services and Systems and Information Management. The consolidated
financial statements include the accounts of the Company and majority-owned and
controlled subsidiaries.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 deals with, among
other things, amortization of goodwill. The Company adopted this new standard in
the first quarter of fiscal 2002. Because the adoption of SFAS 142 removed
certain differences between book and tax expense, the Company's estimated fiscal
2002 effective tax rate has been reduced to 36.0%. More information regarding
the Company's adoption of SFAS 142 can be found below under the heading
"Intangible assets."
Additionally, in the first quarter of fiscal 2002, the Company adopted a revised
fiscal calendar. Previously, each fiscal year began June 1 and ended May 31 with
interim quarters ending the last calendar day of every third month. Under the
new fiscal calendar, the fiscal year will begin on the Saturday closest to June
1, except for the current year which began Friday, June 1, and end on the Friday
closest to May 31. Interim quarters will typically consist of thirteen weeks
ending the Friday closest to the last calendar day of August, November, and
February. Because the revised fiscal calendar differs only slightly from the
previous calendar, the change created no significant differences between current
period and prior period operating results or financial position.
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In addition, certain reclassifications
have been made to the fiscal 2001 consolidated financial statements to conform
to the fiscal 2002 presentation.
6
It is suggested that these financial statements be read in conjunction with the
audited financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended May 31, 2001.
In the opinion of management, the information furnished reflects all adjustments
necessary to present fairly the financial position, results of operations, and
cash flows for the interim periods presented.
In accordance with recent Securities and Exchange Commission guidance, those
material accounting policies that management believes are the most critical and
require complex management judgment have been expanded and are discussed below.
Information regarding the Company's other accounting policies is included in the
Company's Annual Report on Form 10-K for the year ended May 31, 2001.
Investments - In a rapidly changing technology industry, the Company considers
- -----------
and selectively enters into a variety of alliances, joint ventures and
investments. The Company maintains investments in both publicly traded and
privately held entities. The investments in publicly traded entities are
classified as available-for-sale securities and are reported at fair value.
Unrealized gains and losses are reported, net of taxes, as a component of
shareholders' equity. Unrealized losses are charged against income when a
decline in fair value is determined to be other than temporary. The specific
identification method is used to determine the cost of securities sold. Realized
gains and losses on investments are included in other income/expense when
realized.
Investments in privately held entities are accounted for under either the cost
or equity method, whichever is appropriate for the particular investment. The
appropriate method is determined by the Company's ability to exercise
significant influence over the investee, through either quantity of voting stock
or other means. These investments are regularly reviewed for impairment issues
and propriety of current accounting treatment. In accordance with the provisions
of Accounting Principles Board Opinion No. 18 ("APB 18"), conversion from the
cost to equity method, due to changes in the Company's ability to influence the
investee or the level of investment, would require retroactive restatement of
previously issued financial statements as if the Company had always accounted
for the investment under the equity method.
Further discussion of the Company's investments can be found under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 16 of this report.
Revenue - Revenue within each reportable segment is recognized as appropriate
- -------
for each of the differing products and services.
Within the Network Services and Systems segment, the primary source of revenue
is per transaction fees charged for network services. This revenue is recognized
at the time services are rendered. Additionally, the Company receives revenue
from software licenses and related maintenance and support agreements. Revenue
related to software utilized by the customer to process transactions through the
Company's network is recognized ratably over the estimated life of the network
services relationship beginning on the date of customer acceptance of the
software. Revenue related to software with stand alone functionality is
recognized when obligations to the customer are fulfilled, which is typically
upon delivery or installation. Revenue related to software maintenance contracts
and customer support is recognized ratably over the terms of the contracts.
7
Within the Information Management segment, the Company has two primary sources
of revenue: database information reporting and consulting services. Database
information reporting typically involves the delivery of data providing
pharmaceutical information. Revenue for products and services with multiple
deliverables is recognized ratably over the terms of the contracts as
appropriate for the unique nature of the individual deliverables using either a
straight-line or units-of-delivery model. Revenue for single deliverable
products and services is recognized when obligations to the customer have been
fulfilled, which is typically upon delivery. Consulting services are typically
structured as fixed price service contracts. Revenue for these services is
recognized ratably over the contract term based on the percentage-of-completion
model. Typically, these contracts are short term in nature and average 6 to 12
months.
Intangible assets - Intangible assets primarily represent goodwill and customer
- -----------------
relationships associated with the Company's acquisitions. Customer relationships
acquired are amortized using the straight-line method over their estimated
useful lives ranging from 5 to 15 years. Goodwill represents the excess of the
cost of acquired businesses over the fair market value of their identifiable net
assets.
In July 2001, the Financial Accounting Standards Board issued SFAS 142 which
deals with, among other things, amortization of goodwill. The Company adopted
this new standard in the first quarter of fiscal 2002. SFAS 142 requires that
goodwill no longer be amortized but be reviewed for impairment on a regular
basis. As part of its adoption of SFAS 142, the Company completed its initial
impairment tests during the second quarter of fiscal 2002 and these tests
resulted in no impairment. The adoption of SFAS 142 removed certain differences
between book and tax expense; therefore the Company's estimated fiscal 2002
effective tax rate has been reduced to 36.0%. If amortization expense related to
goodwill that is no longer being amortized had been excluded from fiscal 2001
Operating expenses, and the effective tax rate had been 36.0%, diluted earnings
per share for the three and six months ended November 30, 2000 would be
increased by $0.05 and $0.10, respectively.
The Company regularly evaluates whether events and circumstances have occurred
that indicate the carrying amount of intangibles, other than goodwill, may
warrant revision or may not be recoverable. When factors indicate that
intangibles, other than goodwill, should be evaluated for possible impairment,
the Company uses an estimate of the future undiscounted net cash flows
associated with the asset over the remaining life of the asset in measuring
whether the asset is recoverable. If such evaluation indicates a potential
impairment, the Company uses discounted cash flows to measure fair value in
determining the amount of these assets that should be written off. In
management's opinion, the identifiable intangible assets are appropriately
valued at November 30, 2001.
8
NOTE 2 - EARNINGS PER SHARE:
Basic earnings per share is computed by dividing reported net earnings available
to common shareholders by weighted average shares outstanding during the period.
Diluted earnings per share is computed by dividing reported net earnings
available to common shareholders by weighted average shares outstanding during
the period and the impact of securities that, if exercised, and convertible debt
that, if converted, would have a dilutive effect on earnings per share. All
options with an exercise price less than the average market share price for the
period have a dilutive effect on earnings per share.
The following table sets forth the computation of basic and diluted earnings (in
thousands, except per share data):
Three Months Ended (Before Discontinued Operations)
--------------------------------------------------------------------------------------
November 30, 2001 November 30, 2000
--------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Income $ 11,973 34,066 $ 0.35 $ 6,689 32,889 $ 0.20
============== =============
Effect of Dilutive Securities:
Stock Options --- 1,616 --- 1,168
-------------- ------------- ------------- --------------
11,973 35,682 6,689 34,057
Convertible debt 1,243 4,140 --- ---
-------------- ------------- ------------- --------------
Diluted EPS:
Income plus assumed conversions $ 13,216 39,822 $ 0.33 $ 6,689 34,057 $ 0.20
============== ============= ============== ============= ============== =============
Three Months Ended (After Discontinued Operations)
--------------------------------------------------------------------------------------
November 30, 2001 November 30, 2000
------------------------------------------- ------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Net income $ 11,973 34,066 $ 0.35 $ 6,363 32,889 $ 0.19
============== =============
Effect of Dilutive Securities:
Stock Options --- 1,616 --- 1,168
------------- -------------- ------------- --------------
11,973 35,682 6,363 34,057
Convertible debt 1,243 4,140 --- ---
------------- -------------- ------------- --------------
Diluted EPS:
Net Income plus assumed conversions $ 13,216 39,822 $ 0.33 $ 6,363 34,057 $ 0.19
============= ============== ============== ============= ============== =============
For the three months ended November 30, 2000, convertible debt had an
antidilutive effect on diluted earnings per share before and after discontinued
operations; accordingly, diluted earnings per share was not adjusted for
convertible debt.
9
Six Months Ended (Before Discontinued Operations)
--------------------------------------------------------------------------------------
November 30, 2001 November 30, 2000
------------------------------------------- ------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Income $ 23,052 33,946 $ 0.68 $ 14,220 32,825 $ 0.43
============== =============
Effect of Dilutive Securities:
Stock Options --- 1,605 --- 916
-------------- ------------- ------------- --------------
23,052 35,551 14,220 33,741
Convertible debt 2,486 4,140 --- ---
-------------- ------------- ------------- --------------
Diluted EPS:
Income plus assumed conversions $ 25,538 39,691 $ 0.64 $ 14,220 33,741 $ 0.42
============== ============= ============== ============= ============== =============
Six Months Ended (After Discontinued Operations)
--------------------------------------------------------------------------------------
November 30, 2001 November 30, 2000
------------------------------------------- ------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Net income $ 23,052 33,946 $ 0.68 $ 22,543 32,825 $ 0.69
============== =============
Effect of Dilutive Securities:
Stock Options --- 1,605 --- 916
------------- -------------- ------------- --------------
23,052 35,551 22,543 33,741
Convertible debt 2,486 4,140 --- ---
------------- -------------- ------------- --------------
Diluted EPS:
Net Income plus assumed conversions $ 25,538 39,691 $ 0.64 $ 22,543 33,741 $ 0.67
============= ============== ============== ============= ============== =============
For the six months ended November 30, 2000, convertible debt had an antidilutive
effect on diluted earnings per share before and after discontinued operations;
accordingly, diluted earnings per share was not adjusted for convertible debt.
10
NOTE 3 - SEGMENT INFORMATION:
Segment information for the three month and six month periods ended November 30,
2001 and November 30, 2000 is presented below. NDCHealth operates its business
as two reportable segments: Network Services and Systems and Information
Management. Network Services and Systems provides electronic connectivity to our
intelligent network and system solutions throughout the healthcare industry.
Information Management provides management information, research, and consulting
services to pharmaceutical manufacturers, pharmacy chains and hospitals. For the
three months and six months ended November 30, 2000, Other includes results from
divested businesses other than those treated as discontinued operations; and
restructuring and impairment charges. There has been no significant change in
the composition of the reportable segments from the presentation of fiscal 2001
segment information included in the Company's Annual Report on Form 10-K for the
year ended May 31, 2001.
Quarter Ended November 30, 2001 Information Network Services
(In thousands) Management and Systems Other Totals
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 37,394 $ 54,668 $ - $ 92,062
Income before income taxes and discontinued
operations 5,814 12,894 - 18,708
Depreciation and amortization 2,808 3,089 - 5,897
Segment assets 142,900 372,403 - 515,303
Network
Quarter Ended November 30, 2000 Information Services and
(In thousands) Management Systems Other Totals
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 33,917 $ 49,516 $ 233 $ 83,666
Income before income taxes and discontinued
operations 4,646 8,544 (2,191) 10,999
Depreciation and amortization 4,048 4,590 45 8,683
Segment assets 116,536 350,426 - 466,962
The following presents information about the Company's revenues from different
geographic regions for the three months ended November 30, 2001 and November 30,
2000:
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Revenues:
United States $87,699 $80,107
All other 4,363 3,559
--------------------- --------------------
Total revenues $92,062 $83,666
===================== ====================
11
Six Months Ended November 30, 2001 Network
Information Services and
(In thousands) Management Systems Other Totals
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 71,907 $108,511 $ - $180,418
Income before income taxes and discontinued
operations 9,932 26,087 - 36,019
Depreciation and amortization 5,861 6,617 - 12,478
Segment assets 142,900 372,403 - 515,303
Network
Six Months Ended November 30, 2000 Information Services and
(In thousands) Management Systems Other Totals
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 65,215 $ 98,463 $ 5,862 $169,540
Income before income taxes and discontinued
operations 8,102 17,014 (1,872) 23,244
Depreciation and amortization 7,990 8,637 269 16,896
Segment assets 116,536 350,426 - 466,962
The following presents information about the Company's revenues from different
geographic regions for the six months ended November 30, 2001 and November 30,
2000:
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
Revenues:
United States $ 171,758 $162,611
All other 8,660 6,929
------------------------------------------
Total revenues $ 180,418 $169,540
==========================================
12
NOTE 4 - RESTRUCTURING AND IMPAIRMENT CHARGES:
The past two fiscal years represented a major transition period for the Company.
The decision was made to focus management attention on the core information
management and network services and systems as well as related Internet
initiatives. Accordingly, actions were initiated to eliminate non-core as well
as obsolete and redundant product and service offerings. In addition, the
Company accelerated clearinghouse integration, consolidation of locations, and
associated staff and expense reductions. Total restructuring and asset
impairment charges during the second quarter of fiscal 2000 were $34.4 million.
Of this total, approximately $10.5 million were cash items that were accrued at
the time the charges were incurred. As these actions were finalized and
implemented, an additional $2.2 million of restructuring and impairment charges
were incurred during the second quarter of fiscal 2001. Of this total,
approximately $1.2 million were cash items that were accrued at the time the
charges were incurred.
As of November 30, 2001, $0.1 million of the cash portion of the restructuring
charges remains accrued as a current liability on the balance sheet as follows:
(in thousands)
Original Current
Total FY01 Additions Payments Balance
- ---------------------------------------------------------------------------------------------------------------
Closed or planned closings of facilities $ 6,100 $ 160 $ 6,182 $ 78
Estimated costs for settlements on contracts 2,236 - 2,236 -
Severance and related costs 2,177 1,066 3,190 53
-------------------------------------------------------------
Total $10,513 $ 1,226 $11,608 $ 131
=============================================================
13
NOTE 5 - DISCONTINUED OPERATIONS:
On January 31, 2001, the Company completed the spin-off of its eCommerce
business segment, Global Payments. Additionally, in the third quarter of fiscal
2000, the Company made the decision to divest its management services business
and account for this business area as discontinued operations. As a result of
the spin-off and divestiture, the Company's November 30, 2000 financial
statements have been prepared with Global Payments' and the management services
business' net assets, results of operations, and cash flows displayed separately
as "discontinued operations".
The operating results of the discontinued operations for the three months and
six months ended November 30, 2000 are summarized as follows:
Three months ended November 30, 2000
------------------------------------------------------
(In thousands, except per share data): Global Payments Management Total
Inc. Services
- -----------------------------------------------------------------------------------------------------------------------------
Revenue $ 82,631 $ - $ 82,631
Operating income 15,972 - 15,972
Income from operations, net of tax 8,407 - 8,407
Spin-off special charge, net of tax (8,733) - (8,733)
------------------------------------------------------
Net loss from discontinued operations $ (326) $ - $ (326)
======================================================
Diluted earnings (loss) per share:
From operations $ 0.25 $ - $ 0.25
------------------------------------------------------
Spin-off special charge $ (0.27) $ - $ (0.27)
------------------------------------------------------
Total $ (0.01) $ - $ (0.01)
------------------------------------------------------
Six months ended November 30, 2000
------------------------------------------------------
(In thousands, except per share data): Global Payments Management Total
Inc. Services
- -----------------------------------------------------------------------------------------------------------------------------
Revenue $169,822 $ 21,905 $ 191,727
Operating income 32,554 168 32,722
Income from operations, net of tax 17,056 - 17,056
Spin-off special charge, net of tax (8,733) - (8,733)
------------------------------------------------------
Net income from discontinued operations $ 8,323 - $ 8,323
======================================================
Diluted earnings (loss) per share:
From operations $ 0.51 $ - $ 0.51
------------------------------------------------------
Spin-off special charge $ (0.27) $ - $ (0.27)
------------------------------------------------------
Total $ 0.25 $ - $ 0.25
------------------------------------------------------
14
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow disclosures are as follows:
Six months ended November 30,
------------------------------------------
(in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------
Net income taxes paid $ 188 $ 737
Interest paid 4,071 3,448
Capital leases entered into in exchange
for property and equipment 2,151 -
Non-cash investment in MedUnite, Inc. 37,458 -
Non-cash investment in TechRx Incorporated - 15,306
NOTE 7 - COMPREHENSIVE INCOME:
The components of comprehensive income are as follows:
Three months ended November 30,
---------------------------------------------
(in thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------
Net income $ 11,973 $ 6,363
Foreign currency translation adjustment (1,602) 23
Unrealized holding gain (loss), net of tax - (1,893)
------------------- ----------------
Total comprehensive income $ 10,371 $ 4,493
=================== ================
Six months ended November 30,
---------------------------------------------
(in thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------
Net income $ 23,052 $ 22,543
Foreign currency translation adjustment 24 58
Unrealized holding gain (loss), net of tax - (2,537)
------------------- ----------------
Total comprehensive income $ 23,076 $20,064
=================== ================
NOTE 8 - OTHER EVENTS:
On December 10, 2001, the Company announced an agreement to create Infopharm
Limited, a joint venture with Cegedim, S.A., to be headquartered in the United
Kingdom. Under this agreement, NDCHealth combined its United Kingdom informatics
business with that of Cegedim, S.A. to broaden its product offerings to
pharmaceutical manufacturers in the United Kingdom. This transaction closed
during the Company's third quarter.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced our
results, the following discussion should be read in conjunction with the
consolidated financial statements of NDCHealth and related notes appearing
elsewhere in this report.
NDCHealth classifies its business into two reportable segments: Network
Services and Systems and Information Management.
Network Services and Systems provides point of service systems, high
volume, network based information solutions and information management services
to the healthcare industry. Our products and services are provided to
pharmacies, physicians, hospitals, integrated delivery systems, managed care
organizations, payers, government healthcare agencies, distributors, clinics,
Internet portals, and other healthcare providers and related businesses and
include electronic claims processing, eligibility verification, claims
adjudication and payment systems, provision of administrative and clinical
services, and physician practice management systems. NDCHealth serves a diverse
customer base including more than 100,000 physicians. More than ninety percent
of the pharmacies in North America and twenty-five percent of the pharmacies in
the United Kingdom are linked to our value added services; approximately forty
percent of the nation's large (400+ beds) hospitals are NDCHealth customers; and
NDCHealth has value-added electronic connections to more than 1,000 commercial
and governmental healthcare payers.
Information Management products and services provided to pharmaceutical
manufacturers include database information reporting on prescription drug sales
and consulting services. Our customer base is comprised of over 100
pharmaceutical manufacturers. Additionally, we are in the early phases of
entering the German and U.K. information markets.
We believe that our presence in the pharmacy, managed care
organization, physician, hospital, pharmaceutical manufacturer, and healthcare
payer markets is broader than any other similar healthcare information company
and provides us with a strong competitive advantage.
In accordance with recent Securities and Exchange Commission guidance,
those material accounting policies that we believe are the most critical to an
investor's understanding of our financial results and condition and require
complex management judgment have been expanded and are discussed below.
Information regarding our other accounting policies is included in our Annual
Report on Form 10-K for the year ended May 31, 2001. Our consolidated financial
statements include the accounts of both NDCHealth and majority-owned and
controlled subsidiaries.
Investments - Operating in a rapidly changing technology industry, we
consider and selectively enter into a variety of alliances, joint ventures and
investments. We maintain investments in both publicly traded and privately held
entities. Our investments in publicly traded entities are classified as
available-for-sale securities and are reported at fair value. Unrealized gains
and losses are reported, net of taxes, as a component of shareholders' equity.
Unrealized losses are charged against income when a decline in fair value is
determined to be other than temporary. The specific identification method is
used to determine the cost of securities sold. Realized gains and losses on
investments are included in other income/expense when realized.
16
Investments in privately held entities are accounted for under either
the cost or equity method, whichever is appropriate for each particular
investment. The appropriate method is determined by our ability to exercise
significant influence over the investee, through either quantity of voting stock
or other means. These investments are regularly reviewed for impairment issues
and propriety of current accounting treatment. In accordance with the provisions
of APB 18, conversion from the cost to equity method, due to changes in our
ability to influence the investee or the level of investment, would require
retroactive restatement of previously issued financial statements as if we had
always accounted for the investment under the equity method.
We currently maintain investments in two privately held entities, both
of which are accounted for under the cost method. Our investment in TechRx
Incorporated was made during the first quarter of fiscal 2001 when the assets of
our pharmacy systems business were exchanged for common stock, comprising 8.4%
of the voting interest in TechRx Incorporated. Additionally, we received
non-voting convertible preferred stock and warrants which are convertible into
additional shares of non-voting convertible preferred stock. The exercise of the
warrants and the conversion of the preferred stock is dependent upon the
occurrence of certain future events outside of our control. Exercise of these
warrants in full would require an additional investment of approximately $18.5
million. This net investment was valued at approximately $35.3 million at
November 30, 2001. Our investment in MedUnite, Inc. was made during the first
quarter of fiscal 2002 when the assets of our physician network services
business were exchanged for a 17.9% equity position in MedUnite, Inc. This net
investment was valued at approximately $43.7 million at November 30, 2001.
TechRx Incorporated and MedUnite, Inc. are each in the start up phase
of operations and have incurred net losses prior to and since we have held
ownership interests. A change from the cost method to the equity method could be
required by an increase in our equity position or in the degree of influence we
have on these companies. As these companies have been incurring net losses since
the date of our initial investments, any restatement of historical financial
statements as a result of a change to the equity method would result in a
decrease in our previously reported income.
Revenue - Revenue within each reportable segment is recognized as
appropriate for each of the differing products and services.
Within our Network Services and Systems segment, our primary source of
revenue is per transaction fees charged for network services. We recognize this
revenue at the time services are rendered. Additionally, we receive revenue from
software licenses and related maintenance and support agreements. Revenue
related to software utilized by our customers to process transactions through
our network is recognized ratably over the estimated life of the network
services relationship beginning on the date of customer acceptance of the
software. Revenue related to software with stand alone functionality is
recognized when our obligations to the customer are fulfilled, which is
typically upon delivery or installation. Revenue related to software maintenance
contracts and customer support is recognized ratably over the terms of the
contracts.
Within our Information Management segment, we have two primary sources
of revenue: database information reporting and consulting services. Database
information reporting typically involves the delivery of data providing
pharmaceutical information. Revenue for products and services with multiple
deliverables is recognized ratably over the terms of the contracts as
appropriate for the unique nature of the individual deliverables using either a
straight-line or units-of-delivery model. Revenue for single deliverable
products and services is recognized when our obligations to the customer have
been fulfilled, which is typically upon delivery. Consulting services are
typically
17
structured as fixed price service contracts. Revenue for these services is
recognized ratably over the contract term based on the percentage-of-completion
model. Typically, these contracts are short term in nature and average 6 to 12
months.
Intangible assets - Intangible assets primarily represent goodwill and
customer relationships associated with our acquisitions. Customer relationships
acquired are amortized using the straight-line method over their estimated
useful lives ranging from 5 to 15 years. Goodwill represents the excess of the
cost of acquired businesses over the fair market value of their identifiable net
assets.
In July 2001, the Financial Accounting Standards Board issued SFAS 142
which deals with, among other things, amortization of goodwill. We adopted this
new standard in the first quarter of fiscal 2002. SFAS 142 requires that we no
longer amortize goodwill but review for impairment on a regular basis. As part
of our adoption of SFAS 142, we completed the initial impairment tests during
the second quarter of fiscal 2002 and these tests resulted in no impairment. The
adoption of SFAS 142 removed certain differences between book and tax expense;
therefore our estimated fiscal 2002 effective tax rate has been reduced to
36.0%. If amortization expense related to goodwill that is no longer being
amortized had been excluded from our fiscal 2001 Operating expenses, and our
effective tax rate had been 36.0%, diluted earnings per share for the three and
six months ended November 30, 2000 would be increased by $0.05 and $0.10,
respectively.
We regularly evaluate whether events and circumstances have occurred
that indicate the carrying amount of intangibles, other than goodwill, may
warrant revision or may not be recoverable. When factors indicate that
intangibles, other than goodwill, should be evaluated for possible impairment,
we use an estimate of the future undiscounted net cash flows associated with the
asset over the remaining life of the asset in measuring whether the asset is
recoverable. If this evaluation indicates a potential impairment, we use
discounted cash flows to measure fair value in determining the amount of these
assets that should be written off. In our opinion, the identifiable intangible
assets are appropriately valued at November 30, 2001.
Data costs - We purchase data from a variety of sources primarily for
use in our Information Management products and services. These costs are
typically held in inventory at the time of purchase and expensed the following
month as products utilizing the data are delivered to customers. Although the
cost of this data is expensed in the month of its initial use, the data remains
useful for products and services sold in subsequent periods.
Results of Operations
On January 31, 2001, we completed the spin-off of our eCommerce
business segment, Global Payments. Additionally, in the third quarter of fiscal
2000, we decided to pursue the divestiture of our management services business
and account for that business as "discontinued operations". As a result of the
spin-off and divestiture, our financial statements have been prepared with
Global Payments' and the management services business' net assets, results of
operations, and cash flows displayed separately as "discontinued operations."
The remainder of the discussion of the results of operations excludes these
discontinued operations.
During the first quarter of fiscal 2002, we sold our physician network
services business to MedUnite, Inc. As a result of this alliance, NDCHealth
became a founding investor in MedUnite, along with leading national payers.
Although this transaction will result in the short term loss of less than $10
million in transaction revenue in the current year, the alliance should allow us
to receive a
18
growing revenue stream from our physician system customers for network services
provided by MedUnite.
In order to provide a comparison to the continuing business results of
NDCHealth, the fiscal 2001 financial information presented below has been
"normalized" by excluding revenues and operating expenses related to divested
businesses of $0.2 million and $0.2 million, respectively, for the three months
ended November 30, 2000 and $5.9 million and $5.5 million, respectively, for the
six months ended November 30, 2000; in addition to restructuring and impairment
charges of $2.2 million and discontinued operations.
More information regarding our historical "normalized" results of
operations can be found under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in our Annual Report on Form
10-K for the year ended May 31, 2001.
Three Months Ended November 30,
---------------------------------------------- -----------
(In millions) 2001 2000 Change
---------------------- ---------------------- -----------
Revenue:
Information Management $ 37.4 41% $ 33.9 41% 10%
Network Services and Systems 54.7 59% 49.5 59% 11%
------------------------------------------------------------
Total Revenue $ 92.1 100% $ 83.4 100% 10%
============================================================
Operating Income:
Information Management $ 5.8 29% $ 5.3 35% 9%
Network Services and Systems 14.1 71% 9.7 65% 45%
------------------------------------------------------------
Total Operating Income $ 19.9 100% $ 15.0 100% 33%
============================================================
Six Months Ended November 30,
---------------------------------------------- -----------
(In millions) 2001 2000 Change
---------------------- ---------------------- -----------
Revenue:
Information Management $ 71.9 40% $ 65.2 40% 10%
Network Services and Systems 108.5 60% 98.5 60% 10%
------------------------------------------------------------
Total Revenue $180.4 100% $163.7 100% 10%
============================================================
Operating Income:
Information Management $ 10.3 26% $ 9.5 33% 8%
Network Services and Systems 28.6 74% 19.3 67% 48%
------------------------------------------------------------
Total Operating Income $ 38.9 100% $ 28.8 100% 35%
============================================================
Consolidated
Total revenue for the second quarter of fiscal 2002 was $92.1 million,
an increase of $8.7 million, or 10%, from the prior year's second quarter. This
increase was the result of growth in transaction volumes in the pharmacy and
hospital markets, growth in our customer base, and new revenues from our
expansion in Europe. Total revenue increased $3.7 million, or 4%, from the prior
quarter, also reflecting increasing volumes and customer base. Total revenue for
the second quarter was not significantly impacted by the events of September 11.
Our major operations centers, located in Atlanta, Phoenix, and Tulsa, were not
impacted by the attacks, our networks were never down, and our customer service
was uninterrupted. A small number of customers required their network traffic to
be
19
rerouted, a routine procedure for us. While we observed a decrease in network
traffic on September 11, traffic patterns returned to normal levels the
following day. As noted below under "Information Management," we also
experienced some delays in contract signings in late September and October.
Total revenue for the first half of fiscal 2002 increased to $180.4
million from $163.7 million in the prior year's first half. This increase of
$16.7 million, or 10%, was the result of increased transaction volumes and
growth in customer base in the pharmacy and hospital markets and increased
demand for our information management products driven by our expansion in Europe
and growth in domestic customer base.
Cost of service ("COS") expense, as a percentage of revenue, decreased
to 49% in the second quarter of fiscal 2002 from 50% in the second quarter of
fiscal 2001 due to increased leverage of our infrastructure. COS expense
increased $3.5 million from the prior year's second quarter. This 9% increase,
less than the 10% increase in revenue, demonstrates our ability to leverage the
fixed costs inherent in our business model while continuing to invest for our
future growth.
COS expense for the first half of fiscal 2002, as a percentage of
revenue, decreased to 48% from 49% in the prior year's first half, again due to
the increased leverage of our infrastructure. COS expense increased $6.9 million
from the prior year's first half. This increase of 9% was lower than our 10%
increase in revenue because of our ability to leverage our fixed costs.
Sales, general and administrative ("SG&A") expense, as a percentage of
revenue, increased to 23% in this year's second quarter from 22% in the prior
year's second quarter due to increased investment in sales and marketing
programs, primarily in our physician business. The increased leverage of our
infrastructure discussed above should allow us to selectively invest in other
areas, such as marketing, while continuing to improve total company operating
margin. SG&A expense increased $2.9 million, or 16%, in the second quarter of
fiscal 2002 from the same quarter last year, primarily due to the increased
marketing expense discussed above.
SG&A expense, as a percentage of revenue, was 23% in the first half of
both fiscal 2002 and fiscal 2001. This margin remained constant as spending in
preparation of the spin-off of Global Payments in the prior year was replaced
with the increased investments in sales and marketing programs discussed above
in the current year. SG&A expense increased $3.9 million, or 10%, in the first
half of fiscal 2002 from the prior year's first half. This increase is
reflective of the increased spending discussed above in the current year and is
consistent with the increase in revenue.
Depreciation and amortization ("D&A") expense, as a percentage of
revenue, decreased to 6% in the second quarter of fiscal 2002 from 10% in the
prior year's second quarter. This decrease was attributable to our adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
deals with, among other things, amortization of goodwill. D&A expense, as a
percentage of revenue, would have remained at 10% in the current year's first
quarter had SFAS 142 not been adopted. D&A expense decreased $2.7 million from
the prior year's second quarter.
D&A expense, as a percentage of revenue, decreased to 7% in the first
half of fiscal 2002 from 10% in the prior year's first half. This decrease was
attributable to SFAS 142 discussed above. D&A expense decreased $4.1 million in
the first half of fiscal 2002 from the prior year's first half.
Operating income increased 33% to $19.9 million in the second quarter
of fiscal 2002 from $15.0 million in the second quarter of fiscal 2001. As a
percentage of revenue, the operating income
20
margin increased to 22% in the current year's second quarter from 18% in the
prior year's second quarter due to the decreased COS and D&A expense margins
discussed above. Operating income increased $1.0 million, or 5%, from this
year's first quarter. This 5% increase was greater than the 4% increase in
revenue, demonstrating our ability to leverage the fixed costs inherent in our
business model.
Operating income for the first half of fiscal 2002 increased 35% to
$38.9 million from $28.8 million in the prior year's first half. As a percentage
of revenue, the operating income margin increased to 22% in the first half of
fiscal 2002 from 18% the prior year's first half. This increase is the result of
the decreased COS and D&A expense margins discussed above.
Total other expense decreased to $1.2 million in the second quarter of
fiscal 2002 from $1.8 million in the prior year's second quarter. This $0.6
million decrease was the net result of multiple factors, including an increase
in convertible debt interest expense that was previously shared with Global
Payments; the minority interest credit of $0.7 million in the current year which
represents the minority's share of losses attributable to subsidiaries
consolidated in our financial statements but not 100% owned by us; and $0.3
million in interest income earned on our cash reserves in the current year.
Total other expense for the first half of fiscal 2002 decreased to $2.9
million from $3.7 million in the prior year's first half. This decrease was the
result of the same factors discussed above.
Income before income taxes ("IBIT") increased 42% to $18.7 million in
the second quarter of fiscal 2002 from $13.2 million in the second quarter of
fiscal 2001 due to the increase in operating income and decrease in other
expense discussed above. IBIT increased $1.4 million from the current year's
first quarter, reflecting the increased operating income discussed above.
IBIT for the first half of fiscal 2002 increased 43% to $36.0 million
from $25.1 million in the prior year's first half. This increase is reflective
of the increase in operating income and decrease in other expense discussed
above.
Diluted earnings per share for the second quarter of fiscal 2002
increased 38% to $0.33 as compared to $0.24 for the prior year's second quarter.
Of the increase in diluted earnings per share, approximately $0.05 was
attributable to the adoption of SFAS 142. Additionally, losses in our start-up
operations in Europe reduced diluted earnings per share in the second quarter of
fiscal 2002 by approximately $0.01. Diluted earnings per share increased $0.02
from the current year's first quarter, reflecting the increased IBIT discussed
above.
Diluted earnings per share for the first half of fiscal 2002 increased
39% to $0.64 from $0.46 in the prior year's first half. Approximately $0.10 of
this increase is attributable to the adoption of SFAS 142.
Information Management
Information Management revenue grew by 10% to $37.4 million in the
second quarter of fiscal 2002 from $33.9 million in the second quarter of fiscal
2001 due to start-up operations in Western Europe and new products and services
being offered to both new and existing customers. Information Management
experienced some delays in contract signing in late September and October
following the events of September 11, however, volume returned to normal levels
in November. Because the majority of Information Management revenue is
recurring, these delays did not significantly impact
21
second quarter revenue. Revenue increased 8%, or $2.9 million, from the current
year's first quarter. This increase was reflective of the seasonal pattern seen
in the first quarter when revenue was depressed as a result of the slow summer
selling season and continued growth in the second quarter from both new and
existing customers.
Information Management revenue for the first half of fiscal 2002
increased to $71.9 million from $65.2 million in the prior year's first half.
This increase of $6.7 million, or 10%, was the result of new revenues from
start-up operations in Western Europe and new products and services being
offered to both new and existing customers.
Operating income for the second quarter of fiscal 2002 was $5.8 million
compared to $5.3 million in the second quarter of fiscal 2001. This 9% increase
in operating income was lower than the 10% increase in revenue because of
operating losses in our European operations, partially offset by the reduced
amortization expense resulting from our adoption of SFAS 142. Operating income
increased $1.3 million from the first quarter of fiscal 2002 reflecting the
increase in revenue from the seasonally low first quarter discussed above.
Operating income for the first half of fiscal 2002 increased to $10.3
million from $9.5 million in the prior year's first half. This increase of $0.8
million, or 8%, was reflective of the increase in revenue, reduced amortization
expense and losses in our European operations discussed above.
Network Services and Systems
Network Services and Systems revenue increased 11% to $54.7 million in
the second quarter of fiscal 2002 from $49.5 million in the prior year's second
quarter primarily due to increased demand for our services in the pharmacy and
hospital markets as well as growth in our physicians systems business. This 11%
increase over the prior year's second quarter would have been 19% without the
loss in revenue related to MedUnite in the current year. Revenue increased
slightly, $0.8 million, from the current year's first quarter. Sequential growth
was hindered due to the reduction in revenue from the physician network services
business sold to MedUnite in the prior quarter. We believe this reduction in
revenue to be temporary as the opportunity exists to increase revenue within our
existing customer base from new products developed by MedUnite.
Network Services and Systems revenue for the first half of fiscal 2002
increased to $108.5 million from $98.5 million in the prior year's first half.
This increase of $10.0 million, or 10%, was the result of growth in transaction
volumes in the pharmacy and hospital markets as well as growth in our physicians
systems business.
Operating income for the second quarter of fiscal 2002 was $14.1
million compared to $9.7 million in the second quarter of fiscal 2001. This 45%
increase in operating income was reflective of the 11% increase in revenue,
reduced amortization expense resulting from our adoption of SFAS 142, and
increased leverage of our infrastructure. Operating income decreased $0.3
million from the current year's first quarter, due to the transaction with
MedUnite discussed above.
Operating income for the first half of fiscal 2002 increased to $28.6
million from $19.3 million in the prior year's first half. This increase of $9.3
million, or 48%, was reflective of the increase in revenue, reduced amortization
expense and increased leverage of our infrastructure discussed above.
22
Liquidity and Capital Resources
Cash flow generated from operations provides us with a significant
source of liquidity to meet our needs. At November 30, 2001, we had cash and
cash equivalents totaling $30.3 million. Net cash provided by operating
activities decreased $1.9 million to $35.7 million for the first six months of
fiscal 2002 compared to $37.6 million for the first six months of fiscal 2001.
This difference is driven primarily by the source of deferred tax assets used to
reduce current tax payments. Deferred tax assets used in the prior year were
related to Restructuring and impairment charges and as such the cash provided by
the use of the assets is displayed in Cash flows from operating activities. The
deferred tax assets used in the current year are related to discontinued
operations, therefore the cash provided by the use of these assets is displayed
in Net cash provided by discontinued operations.
Net cash used in investing activities was $24.7 million for the first
six months of fiscal 2002 compared to $37.2 million for the first six months of
fiscal 2001. This change is primarily due to business acquisitions of $23.2
million, partially offset by $20.0 million in proceeds received from the
divestiture of the management services business, and higher capital expenditures
in the prior year. Capital expenditures were $5.9 million less in the first six
months of the current year than in the same period of the prior year. This
reduction is due mainly to timing of expenditures as we continue to invest in
capital expenditures related to growth in our business and acceleration of
certain strategic initiatives. We expect capital spending to accelerate for the
remainder of the fiscal year.
Net cash provided by financing activities was $0.2 million for the six
months of fiscal 2002 compared to the use of $16.7 million in the prior year's
first six months. This change is due primarily to net payments of $11.5 million
against the lines of credit in the prior year. Cash provided by stock activities
increased to $4.8 million in the first six months of fiscal 2002 from $2.5
million in the first six months of fiscal 2001. These stock activities are
primarily related to the exercises of employee stock options and issues under
the employee stock purchase plan. Additionally, because the amount of our
quarterly dividend was reduced in the third quarter of fiscal 2001 following the
spin-off of Global Payments, cash used for payment of dividends decreased to
$2.7 million in the first six months of fiscal 2002 from $4.9 million in the
prior year's first six months.
Net cash provided by discontinued operations was $6.6 million for the
first six months of fiscal 2002 compared to $21.8 million for the first six
months of fiscal 2001. Net cash provided in the current year consists of
payments made in the settling of liabilities of our discontinued operations
offset by the use of deferred tax assets attributed to our discontinued
operations discussed above. Net cash provided in fiscal 2001 consisted primarily
of the net income from discontinued operations.
We have a credit facility providing a $50 million unsecured revolving
line of credit which is available for working capital and general corporate
purposes. The facility has a one-year term, with the option for us to convert
any outstanding borrowings at the maturity date to a term loan repayable at the
first anniversary of the initial maturity date, or January 27, 2003. At November
30, 2001, there were no amounts outstanding under the facility. However, it is
our intention, as of the date of this Report, to exercise our option of
converting the facility to a term loan before the initial maturity date of
January 29, 2002. This option requires us to borrow the full amount available to
us under the facility before the initial maturity date. This amount will then be
converted to a term loan payable in full on or before January 27, 2003.
We believe that our current level of cash on hand, future cash flows
from operations, and the anticipated term loan to be obtained in January 2002
are sufficient to meet our operating and corporate
23
development needs in calendar year 2002. We expect to arrange new financing
before the maturity date of the term loan in January 2003 and are evaluating
various options for raising additional funds. This may be through the issuance
of additional debt or equity and could replace all or a portion of the debt
outstanding at the time of issuance.
Quantitative and Qualitative Disclosure About Market Risk
There have been no significant changes in NDCHealth's market risk from
that disclosed in our Annual Report on Form 10-K for the year ended May 31,
2001.
Forward Looking Results of Operations
The impact of the implementation of SFAS 142 in both the first and
second quarters was an addition of approximately $0.05 to diluted earnings per
share in each quarter. We estimate that the annual impact of SFAS 142 will be an
addition of approximately $0.20 to diluted earnings per share in fiscal 2002.
Additionally, we reduced the fiscal 2002 effective tax rate to 36.0% due to our
application of this new standard.
We believe that NDCHealth is well positioned to provide processing and
information products and services to the healthcare industry in the future.
Based on observed market conditions and our results for the six months ended
November 30, 2001, our expectation remains that revenue for fiscal year 2002
will be in the $375-385 million range resulting in diluted earnings per share in
the range of $1.30 to $1.34, including the impact of approximately $0.20 for the
SFAS 142 accounting change.
While past performance does not guarantee future results, the Company
is committed to continuing to sustain quality earnings growth. The Company's
strategy to attain growth is to position the Company for continued future
success through ongoing investment in new market opportunities as well as
through strategic alliances and acquisitions. The Company also intends to
continue expansion into additional market segments related to its two primary
segments. The Company intends to continue to make investments in new technology
infrastructure and productivity tools to ensure long-term competitiveness and
maximize operating capacity and efficiency.
Forward-Looking Information
When used in this Quarterly Report on Form 10-Q, in documents
incorporated herein and elsewhere by management of NDCHealth Corporation,
formerly National Data Corporation, ("NDCHealth" or the "Company"), from time to
time, the words "believes," "anticipates," "expects," "intends," "plans" and
similar expressions and statements that are necessarily dependent on future
events are intended to identify forward-looking statements concerning the
Company's business
24
operations, economic performance and financial condition, including in
particular the Company's business strategy and means to implement the strategy,
the Company's objectives, the amount of future capital expenditures, the
effective tax rate, the likelihood of the Company's success in developing and
introducing new products and expanding its business, and the timing of the
introduction of new and modified products or services. For such statements, the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 is applicable and invoked. Such
statements are based on a number of assumptions, estimates, projections or plans
that are inherently subject to significant risks, uncertainties and
contingencies that are subject to change. Actual revenues, revenue growth and
margins will be dependent upon all such factors and subject to risks related to
the implementation of changes by the Company, the failure to implement changes,
and customer acceptance of such changes or lack of change. There can be no
assurance of the expected benefits and prospects for alliances that may be
entered into from time to time. These alliances involve risks and uncertainties,
including market and customer acceptance of the relationship, the effect of
economic conditions, competition, pricing, and development difficulties. Actual
results of events could differ materially from those anticipated in the
Company's forward-looking statements as a result of a variety of factors,
including: (a) those set forth under the caption "Additional Factors that May
Affect Future Performance" in the Company's Annual Report on Form 10-K for the
period ended May 31, 2001 which are incorporated herein by this reference; (b)
those set forth elsewhere herein; (c) those set forth from time to time in the
Company's press releases and reports and other filings made with the Securities
and Exchange Commission; and (d) those set forth from time to time in the
Company's analyst calls and discussions. In addition, the Company is currently
unable to assess the impact, if any, on its financial performance that may
result from the economic effects of the recent or any future terrorist attacks
on the United States. The Company cautions that such factors are not exclusive.
Consequently, all of the forward-looking statements made herein are qualified by
these cautionary statements and readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof, or thereof. The Company undertakes no obligation to update
forward-looking or other statements or to publicly release the results of any
revisions of such forward-looking statements that may be made to reflect events
or circumstances after the date hereof, or thereof, as the case may be, or to
reflect the occurrence of unanticipated events.
25
Part II
ITEM 1 - PENDING LEGAL PROCEEDINGS
- ----------------------------------
We are involved in litigation related to our divested Physician and
Hospital Support Services and Hospital Management Services (PHSS) units. We have
obtained a ruling from the European Commission ordering IMS Health to license
its structure for organizing pharmaceutical sales data to us. We are unable to
predict whether IMS Health may be successful in overturning the EU ruling.
Additionally, we are party to a number of other claims and lawsuits incidental
to our business.
We believe that the ultimate outcome of such matters, in the aggregate,
will not have a material adverse impact on our financial position or liquidity.
ITEM 2 - CHANGES IN SECURITIES
- ------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 2001 Annual Meeting of Stockholders of NDCHealth Corporation, formerly
National Data Corporation, was held at the Company's offices in Atlanta, Georgia
on October 25, 2001. At the annual meeting, the stockholders of the Company
approved the following items:
1. Election of three directors in Class III to serve until the annual meeting
of stockholders in 2004, or until a successor is duly elected and
qualified. Votes cast were as follows: J. Veronica Biggins, For 29,311,091,
Withheld 689,474; Terri A. Dial, For 29,522,254, Withheld 478,311; and Kurt
M. Landgraf, For 29,521,934, Withheld 478,631; and
2. Adoption of a proposal to amend the Certificate of Incorporation of the
Company to change the name of the Company to "NDCHealth Corporation." Votes
cast were as follows: For 29,961,200, Against 22,850, Abstain from voting
16,515.
ITEM 5 - OTHER INFORMATION
- --------------------------
None
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
3(i) Restated Certificate of Incorporation of the Registrant.
10(i) 2002 Non-Employee Directors Compensation Plan.
(b) Reports Filed on Form 8-K:
NDCHealth Corporation's, formerly National Data Corporation, Current
Report on Form 8-K dated September 19, 2001, was filed on September 19,
2001, reporting as an exhibit under Item 7 the Company's press release
dated September 19, 2001 and under Item 9 the Company's release of
financial information including revenue and earnings expectations for
the remainder of the fiscal year.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NDCHealth Corporation
---------------------
(Registrant)
By: /s/ David H. Shenk
----------------------
David H. Shenk
Vice President & Corporate Controller
(Chief Accounting Officer)
Date: January 11, 2002
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