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 March 1, 2002
--------------
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
------------
None
------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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 - 34,178,665 shares
outstanding as of March 18, 2002
----------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NDCHealth Corporation and Subsidiaries
(In thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
---------------------------------
March 1, February 28,
2002 2001
--------------- --------------
Revenues:
Information management $ 39,050 $ 35,342
Network services and systems 58,057 52,890
---------------------------------
97,107 88,232
---------------------------------
- ----------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 47,119 45,718
Sales, general and administrative 22,974 18,653
Depreciation and amortization 5,948 8,686
---------------------------------
76,041 73,057
---------------------------------
Operating income 21,066 15,175
- ----------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 445 101
Interest and other expense (2,511) (2,054)
Minority interest in losses 607 841
---------------------------------
(1,459) (1,112)
---------------------------------
Income before income taxes and equity in losses of affiliated companies 19,607 14,063
Provision for income taxes 7,058 5,414
- ----------------------------------------------------------------------------------------------------------------
Income before equity in losses of affiliated companies 12,549 8,649
Equity in losses of affiliated companies (340) -
- ----------------------------------------------------------------------------------------------------------------
Net income $ 12,209 $ 8,649
=================================
Basic earnings per share: $ 0.36 $ 0.26
---------------------------------
Diluted earnings per share: $ 0.34 $ 0.25
---------------------------------
See Notes to Unaudited Consolidated Financial Statements.
2
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
NDCHealth Corporation and Subsidiaries
(In thousands, except per share data)
- --------------------------------------------------------------------------------
Nine Months Ended
---------------------------------
March 1, February 28,
2002 2001
--------------- --------------
Revenues:
Information management $ 110,957 $ 100,557
Network services and systems 166,568 151,353
Divested businesses - 5,862
---------------------------------
277,525 257,772
---------------------------------
- ----------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of service 134,011 130,720
Sales, general and administrative 65,126 57,172
Depreciation and amortization 18,426 25,582
Restructuring and impairment charges - 2,156
---------------------------------
217,563 215,630
---------------------------------
Operating income 59,962 42,142
- ----------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 1,140 131
Interest and other expense (7,156) (5,690)
Minority interest in losses 1,680 724
---------------------------------
(4,336) (4,835)
---------------------------------
Income before income taxes, equity in losses of affiliated companies,
and discontinued operations 55,626 37,307
Provision for income taxes 20,025 14,438
- ----------------------------------------------------------------------------------------------------------------
Income before equity in losses of affiliated companies
and discontinued operations 35,601 22,869
Equity in losses of affiliated companies (340) -
- ----------------------------------------------------------------------------------------------------------------
Income before discontinued operations 35,261 22,869
Discontinued operations, net of income taxes - 8,323
- ----------------------------------------------------------------------------------------------------------------
Net income $ 35,261 $ 31,192
=================================
Basic earnings per share:
Income before discontinued operations $ 1.04 $ 0.70
---------------------------------
Discontinued operations $ - $ 0.25
---------------------------------
Basic earnings per share $ 1.04 $ 0.95
---------------------------------
Diluted earnings per share:
Income before discontinued operations $ 0.98 $ 0.67
---------------------------------
Discontinued operations $ - $ 0.25
---------------------------------
Diluted earnings per share $ 0.98 $ 0.92
---------------------------------
See Notes to Unaudited Consolidated Financial Statements.
3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NDCHealth Corporation and Subsidiaries
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
---------------------------------------------
March 1, February 28,
2002 2001
-------------------- ----------------------
Cash flows from operating activities:
Net income $ 35,261 $ 31,192
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in losses of affiliated companies 340 -
Non-cash restructuring and impairment charges - 930
Income from discontinued operations - (8,323)
Depreciation and amortization 18,426 25,582
Deferred income taxes 3,908 36,017
Provision for bad debts 1,552 490
Other, net (364) 718
Changes in assets and liabilities which provided (used) cash, net of the
effects of acquisitions:
Accounts receivable, net (2,018) (481)
Prepaid expenses and other assets (4,482) (8,929)
Accounts payable and accrued liabilities (4,459) (6,643)
Deferred income 4,695 760
Income taxes 667 (15,720)
---------------------------------------------
Net cash provided by operating activities 53,526 55,593
---------------------------------------------
Cash flows from investing activities:
Capital expenditures (23,398) (25,177)
Business acquisitions, net of acquired cash (2,800) (23,224)
Business divestiture - 20,000
Investments and other non-current assets (17,556) (18,092)
---------------------------------------------
Net cash used in investing activities (43,754) (46,493)
---------------------------------------------
Cash flows from financing activities:
Net short-term borrowings (repayments) 50,000 (68,500)
Net principal payments under capital lease arrangements
and other long-term debt (2,135) (2,126)
Net issuances related to stock activities 6,192 5,292
Dividends paid (4,089) (7,409)
---------------------------------------------
Net cash provided by (used in) financing activities 49,968 (72,743)
---------------------------------------------
Cash flows from discontinued operations:
Cash provided by tax benefits of discontinued operations 15,596 -
Cash (used in) provided by discontinued operations (6,649) 10,305
Cash dividend from Global Payments Inc. - 77,600
---------------------------------------------
Net cash provided by discontinued operations 8,947 87,905
---------------------------------------------
Increase in cash and cash equivalents 68,687 24,262
Cash and cash equivalents, beginning of period 12,420 1,789
---------------------------------------------
Cash and cash equivalents, end of period $ 81,107 $ 26,051
=============================================
See Notes to Unaudited Consolidated Financial Statements.
4
CONSOLIDATED BALANCE SHEETS
NDCHealth Corporation and Subsidiaries
(In thousands, except share data)
- -----------------------------------------------------------------------------------------------------------------------------------
March 1, May 31,
2002 2001
------------------ -------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 81,107 $ 12,420
Accounts receivable 67,168 70,648
Allowance for doubtful accounts (5,233) (6,628)
--------------------------------------
Accounts receivable, net 61,935 64,020
--------------------------------------
Income tax receivable 1,605 2,265
Deferred income taxes 16,736 29,539
Prepaid expenses and other current assets 21,534 18,788
--------------------------------------
Total current assets 182,917 127,032
--------------------------------------
Property and equipment, net 86,231 82,956
Intangible assets, net 190,828 221,757
Deferred income taxes 10,523 9,886
Investments 89,403 35,591
Other 16,626 10,990
--------------------------------------
Total Assets $ 576,528 $ 488,212
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 50,000 $ -
Current portion of long-term debt 178 170
Obligations under capital leases 1,189 2,586
Accounts payable and accrued liabilities 55,009 53,228
Deferred income 18,520 13,624
--------------------------------------
Total current liabilities 124,896 69,608
--------------------------------------
Long-term debt 151,433 151,567
Obligations under capital leases 2,647 1,108
Other long-term liabilities 18,995 23,044
------------------ -------------------
Total liabilities 297,971 245,327
--------------------------------------
Commitments and contingencies
Minority interest in equity of subsidiaries 10,858 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;
34,155,388 and 33,875,235 shares issued, respectively. 4,269 4,234
Capital in excess of par value 194,638 188,636
Retained earnings 79,564 48,392
Deferred compensation and other (6,076) (7,212)
Cumulative translation adjustment (4,696) (3,583)
--------------------------------------
Total shareholders' equity 267,699 230,467
--------------------------------------
Total Liabilities and Shareholders' Equity $ 576,528 $ 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 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 15 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 nine months ended February 28, 2001 would be
increased by $0.05 and $0.15, 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 March 1, 2002.
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
--------------------------------------------------------------------------------------
March 1, 2002 February 28, 2001
--------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Income $ 12,209 34,135 $ 0.36 $ 8,649 32,992 $ 0.26
======== ========
Effect of Dilutive Securities:
Stock Options --- 1,446 --- 1,356
--------------------- ----------------------
12,209 35,581 8,649 34,348
Convertible debt 1,243 4,140 --- ---
--------------------- ----------------------
Diluted EPS:
Income plus assumed conversions $ 13,452 39,721 $ 0.34 $ 8,649 34,348 $ 0.25
===============================================================================
For the three months ended February 28, 2001, convertible debt had an
antidilutive effect on diluted earnings per share; accordingly, diluted earnings
per share was not adjusted for convertible debt.
9
Nine Months Ended (Before Discontinued Operations)
----------------------------------------------------------------------------------
March 1, 2002 February 28, 2001
----------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Income $ 35,261 34,045 $ 1.04 $ 22,869 32,879 $ 0.70
========= =========
Effect of Dilutive Securities:
Stock Options --- 1,550 --- 1,057
--------------------------- ----------------------------
35,261 35,595 22,869 33,936
Convertible debt 3,729 4,140 --- ---
--------------------------- ----------------------------
Diluted EPS:
Income plus assumed
conversions $ 38,990 39,735 $ 0.98 $ 22,869 33,936 $ 0.67
==================================================================================
Nine Months Ended (After Discontinued Operations)
----------------------------------------------------------------------------------
March 1, 2002 February 28, 2001
----------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic EPS:
Net income $ 35,261 34,045 $ 1.04 $ 31,192 32,879 $ 0.95
========= =========
Effect of Dilutive Securities:
Stock Options --- 1,550 --- 1,057
--------------------------- ----------------------------
35,261 35,595 31,192 33,936
Convertible debt 3,729 4,140 --- ---
--------------------------- ----------------------------
Diluted EPS:
Net Income plus assumed
conversions $ 38,990 39,735 $ 0.98 $ 31,192 33,936 $ 0.92
==================================================================================
For the nine months ended February 28, 2001, 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 nine month periods ended March 1,
2002 and February 28, 2001 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
nine months ended February 28, 2001, 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.
Network
Quarter Ended March 1, 2002 Information Services and
(In thousands) Management Systems Other Totals
- -----------------------------------------------------------------------------------------------------------
Revenues $ 39,050 $ 58,057 $ - $ 97,107
Income before income taxes and
equity in losses of affiliated
companies 6,830 12,777 - 19,607
Depreciation and amortization 2,619 3,329 - 5,948
Segment assets 142,483 434,045 - 576,528
Network
Quarter Ended March 1, 2002 Information Services and
(In thousands) Management Systems Other Totals
- -----------------------------------------------------------------------------------------------------------
Revenues $ 35,342 $ 52,890 $ - $ 88,232
Income before income taxes and
equity in losses of affiliated
companies 5,072 8,991 - 14,063
Depreciation and amortization 3,983 4,703 - 8,686
Segment assets 128,334 364,895 - 493,229
The following presents information about the Company's revenues from different
geographic regions for the three months ended March 1, 2002 and February 28,
2001:
(In thousands) 2002 2001
- ---------------------------------------------------------------------------
Revenues:
United States $92,886 $85,713
All other 4,221 2,519
-----------------------
Total revenues $97,107 $88,232
=======================
11
Network
Nine Months Ended March 1, 2002 Information Services and
(In thousands) Management Systems Other Totals
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 110,957 $ 166,568 $ - $277,525
Income before income taxes, equity in losses of
affiliated companies, and discontinued
operations 16,762 38,864 - 55,626
Depreciation and amortization 8,480 9,946 - 18,426
Segment assets 142,483 434,045 - 576,528
Network
Nine Months Ended February 28, 2001 Information Services and
(In thousands) Management Systems Other Totals
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 100,557 $ 151,353 $ 5,862 $257,772
Income before income taxes, equity in losses of
affiliated companies, and discontinued
operations 13,174 26,005 (1,872) 37,307
Depreciation and amortization 11,973 13,340 269 25,582
Segment assets 128,334 364,895 - 493,229
The following presents information about the Company's revenues from different
geographic regions for the nine months ended March 1, 2002 and February 28,
2001:
(In thousands) 2002 2001
- ---------------------------------------------------------------
Revenues:
United States $264,644 $248,324
All other 12,881 9,448
---------------------------
Total revenues $277,525 $257,772
===========================
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 March 1, 2002, all payments relating to the cash
portion of the restructuring charges were complete.
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 financial statements for the nine
months ended February 28, 2001 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 and nine
months ended February 28, 2001 are summarized as follows:
Three months ended February 28, 2001
---------------------------------------------------
Global Management
(In thousands, except per share data): Payments Inc. Services Total
- -------------------------------------------------------------------------------------------------------
Revenue $ 53,770 $ - $ 53,770
Operating income 8,247 - 8,247
---------------------------------------------------
Net income from discontinued operations $ - $ - $ -
===================================================
Diluted earnings (loss) per share:
Total $ - $ - $ -
----------------------------------------------------
Nine months ended February 28, 2001
----------------------------------------------------
Global Management
(In thousands, except per share data): Payments Inc. Services Total
- -------------------------------------------------------------------------------------------------------
Revenue $223,592 $ 21,905 $ 245,497
Operating income 40,801 168 40,969
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 $ 0.50 $ - $ 0.50
----------------------------------------------------
Spin-off special charge $ (0.26) $ - $ (0.26)
----------------------------------------------------
Total $ 0.25 $ - $ 0.25
----------------------------------------------------
13
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow disclosures are as follows:
Nine months ended
---------------------------------
March 1, February 28,
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------
Net income taxes paid $ 696 $ 905
Interest paid 7,180 3,932
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
-------------------------------------
March 1, February 28,
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------
Net income $ 12,209 $ 8,649
Foreign currency translation adjustment (1,137) 875
Unrealized holding gain, net of tax - 164
----------- -------------
Total comprehensive income $ 11,072 $ 9,688
=========== =============
Nine months ended
-------------------------------------
March 1, February 28,
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------
Net income $ 35,261 $ 31,192
Foreign currency translation adjustment (1,113) 565
Unrealized holding gain (loss), net of tax - (2,410)
----------- -------------
Total comprehensive income $ 34,148 $ 29,347
=========== =============
14
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 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.
15
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 significant investments in two privately held
entities, each 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. This net investment was valued
at approximately $35.3 million at March 1, 2002. Our ability to exercise the
warrants and convert 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. 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. During the third quarter, we made an
additional investment on a pro-rata basis along with other founding members of
MedUnite. This net investment was valued at approximately $50.8 million at March
1, 2002.
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.
Additionally, we currently maintain an equity method investment in
Infopharm Limited, a joint venture with Cegedim, S.A. This investment was made
during the third quarter of fiscal 2002 when we contributed our United Kingdom
informatics business in exchange for a 50% ownership interest in Infopharm
Limited.
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.
16
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 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.
Revenue for network services, maintenance and support fees, and
database information reporting are generally recurring in nature and represent
approximately 75% of our total revenue. Revenue for software licenses and
consulting services tend to be non-recurring and represent approximately 25% of
our total revenue.
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
nine months ended February 28, 2001 would be increased by $0.05 and $0.15,
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 March 1, 2002.
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.
17
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, we became a
founding investor in MedUnite, along with leading national payers. Although this
transaction will result in the short term loss of approximately $10 million in
transaction revenue in the current year, the alliance should allow us to receive
a growing revenue stream from our physician system customers for network
services provided by MedUnite.
In order to provide a comparison to our continuing business results,
the fiscal 2001 financial information for the nine months ended February 28,
2001 presented below has been "normalized" by excluding revenues and operating
expenses related to divested businesses of $5.9 million and $5.5 million,
respectively; 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.
18
Three Months Ended
---------------------------------------------- -----------
(In millions) March 1, 2002 February 28, 2001 Change
---------------------- ------------------ -----------
Revenue:
Information Management $ 39.0 40.2% $ 35.3 40.0% 10.5%
Network Services and Systems 58.1 59.8% 52.9 60.0% 9.8%
------------------------------------------------------------
Total Revenue $ 97.1 100.0% $ 88.2 100.0% 10.1%
============================================================
Operating Income:
Information Management $ 7.1 33.6% $ 5.0 32.9% 42.0%
Network Services and Systems 14.0 66.4% 10.2 67.1% 37.3%
------------------------------------------------------------
Total Operating Income $ 21.1 100.0% $ 15.2 100.0% 38.8%
============================================================
Nine Months Ended
---------------------------------------------- -----------
(In millions) March 1, 2002 February 28, 2001 Change
---------------------- ---------------------- -----------
Revenue:
Information Management $ 110.9 40.0% $ 100.6 39.9% 10.2%
Network Services and Systems 166.6 60.0% 151.3 60.1% 10.1%
------------------------------------------------------------
Total Revenue $ 277.5 100.0% $ 251.9 100.0% 10.2%
============================================================
Operating Income:
Information Management $ 17.4 29.0% $ 14.5 33.0% 20.0%
Network Services and Systems 42.6 71.0% 29.5 67.0% 44.4%
------------------------------------------------------------
Total Operating Income $ 60.0 100.0% $ 44.0 100.0% 36.4%
============================================================
Consolidated
Total revenue for the third quarter of fiscal 2002 was $97.1 million, an
increase of $8.9 million, or 10%, from the prior year's third quarter. This
increase was the result of growth in transaction volumes in the pharmacy and
hospital markets, growth in our customer base, increased sales of our physician
systems, and new revenues from our expansion in Europe. This 10% increase over
the prior year's third quarter would have been 14% without the loss in revenue
related to MedUnite in the current year. Total revenue increased $5.0 million,
or 5%, from the prior quarter, also reflecting increasing volumes and customer
base.
Total revenue for the first nine months of fiscal 2002 increased to $277.5
million from $251.9 million in the prior year's first nine months. This increase
of $25.6 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 third quarter of fiscal 2002 from 52% in the third quarter of fiscal
2001 due to increased leverage of data costs and our infrastructure. COS expense
increased $1.4 million from the prior year's third quarter. This 3% 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.
19
COS expense for the first nine months of fiscal 2002, as a percentage of
revenue, decreased to 48% from 50% in the prior year's first nine months, again
due to the increased leverage of our infrastructure. COS expense increased $8.3
million from the prior year's first nine months. This increase of 7% 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 24% in the third quarter of fiscal 2002 from 21% in the
third quarter of fiscal 2001 due to increased investment in sales and marketing
programs, primarily in our physician business. SG&A expense increased $4.3
million, or 23%, in the third quarter of fiscal 2002 from the same quarter last
year reflecting this increased investment. 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, as a percentage of revenue, was 23% in the first nine months
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 $8.2 million, or 14%, in the first
nine months of fiscal 2002 from the prior year's first nine months. This
increase is reflective of the increased spending discussed above in the current
year and exceeds the increase in revenue as we invest in sales and marketing to
strengthen our growth.
Depreciation and amortization ("D&A") expense, as a percentage of revenue,
decreased to 6% in the third quarter of fiscal 2002 from 10% in the prior year's
third 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 been 9% in the current year's third quarter had SFAS 142 not been
adopted. D&A expense decreased $2.7 million from the prior year's third quarter.
D&A expense, as a percentage of revenue, decreased to 7% in the first nine
months of fiscal 2002 from 10% in the prior year's first nine months. This
decrease was attributable to SFAS 142 discussed above. D&A expense decreased
$6.9 million in the first nine months of fiscal 2002 from the prior year's first
nine months.
Operating income increased 39% to $21.1 million in the third quarter of
fiscal 2002 from $15.2 million in the third quarter of fiscal 2001. As a
percentage of revenue, the operating income margin increased to 22% in the
current year's third quarter from 17% in the prior year's third quarter due to
the decreased COS and D&A expense margins discussed above. Operating income
increased $1.2 million, or 6%, from this year's second quarter. This 6% increase
was greater than the 5% sequential increase in revenue, demonstrating our
ability to leverage the fixed costs inherent in our business model.
Operating income for the first nine months of fiscal 2002 increased 36% to
$60.0 million from $44.0 million in the prior year's first nine months. As a
percentage of revenue, the operating income margin increased to 22% in the first
nine months of fiscal 2002 from 17% the prior year's first nine months. This
increase is the result of the decreased COS and D&A expense margins discussed
above.
Total other expense increased to $1.5 million in the third quarter of
fiscal 2002 from $1.1 million in the prior year's third quarter. This $0.4
million increase was the net result of multiple factors including an increase of
$0.6 million in convertible debt interest expense that was previously
20
shared with Global Payments in the prior year, a decrease of $0.2 million in
minority interest credit, and an increase of $0.1 million in interest expense
resulting from our short term borrowings. The minority interest credit
represents the minority's share of losses attributable to subsidiaries
consolidated in our financial statements but not 100% owned by us.
Total other expense for the first nine months of fiscal 2002 decreased to
$4.3 million from $4.8 million in the prior year's first nine months. This
decrease was the net result of an increase in convertible debt interest expense
that was previously shared with Global Payments in the prior year, an increase
in minority interest credit, and interest income earned on our cash reserves in
the current year.
Income before income taxes ("IBIT") increased 39% to $19.6 million in the
third quarter of fiscal 2002 from $14.1 million in the third quarter of fiscal
2001 due to the increase in operating income discussed above. IBIT increased
$0.9 million from the current year's second quarter, reflecting the increased
operating income discussed above.
IBIT for the first nine months of fiscal 2002 increased 42% to $55.6
million from $39.2 million in the prior year's first nine months. This increase
is reflective of the increase in operating income and decrease in other expense
discussed above.
Equity in losses of affiliated companies represents our share of losses
incurred by Infopharm Limited, in which we have an equity investment. The loss
of $0.3 million in the third quarter of fiscal 2002 was expected as Infopharm is
in its start-up phase and is incurring operating losses.
Diluted earnings per share for the third quarter of fiscal 2002 increased
36% to $0.34 as compared to $0.25 for the prior year's third 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 international
operations reduced diluted earnings per share in the third quarter of fiscal
2002 by approximately $0.01. Diluted earnings per share increased $0.01 from the
current year's second quarter, reflecting the increased IBIT discussed above.
Diluted earnings per share for the first nine months of fiscal 2002
increased 38% to $0.98 from $0.71 in the prior year's first nine months.
Approximately $0.15 of this increase is attributable to the adoption of SFAS
142.
Information Management
Information Management revenue grew by 10% to $39.0 million in the third
quarter of fiscal 2002 from $35.3 million in the third quarter of fiscal 2001,
the result of our start-up operations in Western Europe, sales of additional
products to existing customers, market acceptance of new products, and growth in
new customers. Revenue increased $1.7 million, or 4%, from the current year's
second quarter. This increase was the result of the same factors discussed
above.
Information Management revenue for the first nine months of fiscal 2002
increased to $110.9 million from $100.6 million in the prior year's first nine
months. This increase of $10.3 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 third quarter of fiscal 2002 was $7.1 million
compared to $5.0 million in the third quarter of fiscal 2001. This 42% increase
in operating income was the result of increased
21
leverage of our data costs as revenue increased and the reduced amortization
expense resulting from our adoption of SFAS 142, partially offset by operating
losses in our European operations. Operating income increased $1.3 million from
the second quarter of fiscal 2002 reflecting the increase in revenue and the
leveraging of our data costs.
Operating income for the first nine months of fiscal 2002 increased to
$17.4 million from $14.5 million in the prior year's first nine months. This
increase of $2.9 million, or 20%, 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 10% to $58.1 million in the
third quarter of fiscal 2002 from $52.9 million in the prior year's third
quarter primarily due to increased demand for our value added services in the
pharmacy and hospital markets as well as growth in our physicians systems
business. This 10% increase over the prior year's third quarter would have been
16% without the loss in revenue related to MedUnite in the current year. Revenue
increased $3.4 million, or 6%, from the current year's second quarter.
Network Services and Systems revenue for the first nine months of fiscal
2002 increased to $166.6 million from $151.3 million in the prior year's first
nine months. This increase of $15.3 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 third quarter of fiscal 2002 was $14.0 million
compared to $10.2 million in the third quarter of fiscal 2001. This 37% increase
in operating income was reflective of the 10% increase in revenue, reduced
amortization expense resulting from our adoption of SFAS 142, and increased
leverage of our infrastructure. Operating income decreased $0.1 million from the
current year's second quarter, due to increased investment in sales and
marketing programs in our physician systems business.
Operating income for the first nine months of fiscal 2002 increased to
$42.6 million from $29.5 million in the prior year's first nine months. This
increase of $13.1 million, or 44%, was reflective of the increase in revenue,
reduced amortization expense and increased leverage of our infrastructure
discussed above.
Liquidity and Capital Resources
Cash flow generated from operations provides us with a significant source
of liquidity to meet our needs. At March 1, 2002, we had cash and cash
equivalents totaling $81.1 million. Net cash provided by operating activities
decreased $2.1 million to $53.5 million for the first nine months of fiscal 2002
compared to $55.6 million for the first nine 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 "Cash flows from discontinued operations." Additionally, changes in assets
and liabilities, other than Income taxes, used $6.3 million in the first nine
months of fiscal 2002 compared to $15.2 million in the first nine months of
fiscal 2001.
22
Net cash used in investing activities was $43.8 million for the first nine
months of fiscal 2002 compared to $46.5 million for the first nine months of
fiscal 2001. Capital expenditures were $1.8 million less in the first nine
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 for the full fiscal
year to be similar to the prior fiscal year. Net cash used in investing
activities increased $7.4 million, to $17.6 million, from the first six months
of the current fiscal year primarily due to an additional investment in
MedUnite. This additional investment was made on a pro-rata basis along with the
other founding members of MedUnite.
Net cash provided by financing activities was $50.0 million for the first
nine months of fiscal 2002 compared to the use of $72.7 million in the prior
year's first nine months. This change is due primarily to Net short-term
borrowings of $50.0 million in the current year versus payments of $68.5 million
in the prior year. During the third quarter of fiscal 2002, we exercised our
option to convert $50.0 million outstanding under our unsecured line of credit
to a term loan repayable in January 2003. During the third quarter of fiscal
2001, all of the borrowings outstanding under our previous unsecured line of
credit were repaid in full at the time of the spinoff of Global Payments. Cash
provided by stock activities increased to $6.2 million in the first nine months
of fiscal 2002 from $5.3 million in the first nine 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 $4.1 million in the first nine months of fiscal 2002 from
$7.4 million in the prior year's first nine months.
Net cash provided by discontinued operations was $8.9 million for the first
nine months of fiscal 2002 compared to $87.9 million for the first nine months
of fiscal 2001. This change is due primarily to the Cash dividend from Global
Payments Inc. of $77.6 million in the prior year. Deferred tax assets attributed
to our discontinued operations discussed above provided $15.6 million in the
first nine months of fiscal 2002. Net cash used in discontinued operations of
$6.6 million in the first nine months of fiscal 2002 consists of payments made
in the settling of liabilities of our discontinued operations. Cash provided by
discontinued operations of $10.3 million in the first nine months of fiscal 2001
consisted primarily of the net income from discontinued operations.
We previously had a credit facility with a one-year term providing a $50
million unsecured revolving line of credit and an 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. As
discussed above, we exercised this option during the third quarter and converted
$50 million outstanding under the unsecured line of credit to a term loan.
We believe that our current level of cash on hand, future cash flows from
operations, and the current term loan are sufficient to meet our operating 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
providing additional liquidity. This may be through the issuance of additional
debt or equity resulting in the replacement of all or a portion of the debt
outstanding, including the convertible debt, at the time of issuance.
23
Quantitative and Qualitative Disclosure About Market Risk
There have been no significant changes in our 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 the first, second, and
third 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 we are 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 nine months ended
March 1, 2002, 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, we are committed
to continuing to sustain quality earnings growth. Our strategy to attain growth
is to position our company for continued future success through ongoing
investment in new market opportunities as well as through strategic alliances
and acquisitions. We also intend to continue expansion into additional market
segments related to our two primary segments. We intend 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
operations, economic performance, financial condition, and sources of future
financing. These include, but are not limited to, statements regarding the
Company's business strategy and means to implement the strategy, the Company's
objectives, 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
24
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 September 11, 2001 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. Subsequent to this
ruling, IMS Health obtained an injunction from the Frankfurt Regional Court to
prevent us from distributing data in this format. A hearing to review this
injunction is scheduled for May 2002 in the Frankfurt Court of Appeals. We are
unable to predict whether IMS Health may be successful in overturning the EC
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
- ------------------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- --------------------------
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
None
(b) Reports Filed on Form 8-K:
NDCHealth Corporation's Current Report on Form 8-K dated December 19, 2001,
was filed on December 19, 2001, reporting as an exhibit under Item 7 the
Company's press release dated December 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
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(Registrant)
By: /s/ David H. Shenk
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David H. Shenk
Vice President & Corporate Controller
(Chief Accounting Officer)
Date: March 22, 2002
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