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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended May 31, 2002
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Commission File No. 001-12392
NDCHealth Corporation
(Exact name of registrant as specified in its charter)
| Delaware |
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58-0977458 |
| (State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
| NDC Plaza Atlanta,
Georgia |
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30329-2010 |
| (Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area
code: (404) 728-2000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class
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Name of each exchange on which
registered
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| Common Stock, Par Value $.125 Per Share |
|
New York Stock Exchange |
| Series A Junior Participating Preferred Stock Purchase Rights |
|
New York Stock Exchange |
| 5% Convertible Subordinated Notes due 2003 |
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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 .
Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
The aggregate market value of the voting stock held by non-affiliates of the registrant was $704,973,267 based upon the last reported sale price on The New York
Stock Exchange on August 20, 2002 using beneficial ownership of stock rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned by all directors and officers of the registrant, some of whom may not be
held to be affiliates upon judicial determination.
The number of shares of the registrant’s common stock, par value $.125,
outstanding as of August 20, 2002 was 34,695,313 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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Form 10-K
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| Portions of the Company’s Definitive Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be held on October 24, 2002 |
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Part III |
NDCHEALTH CORPORATION
2002 FORM 10-K ANNUAL REPORT
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
When used in this report, the exhibits hereto, in documents incorporated herein and elsewhere by management of NDCHealth Corporation, 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 and financial condition. 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, sources
and cost of future financing, the effective tax rate, the likelihood of the Company’s success in developing and introducing new products and expanding its business, the timing of the introduction of new and modified products or services, the
ability to consummate and integrate acquisitions, and the expected benefits and prospects for acquisitions and alliances. 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 results subject to risks related to the performance of our various investments and alliances, including MedUnite, estimates of the valuation of these
investments, the application of accounting standards, the implementation of changes by the Company, the failure to implement changes, customer acceptance of such changes or lack of change and the availability and cost of necessary financing. 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 Item 7 of this report; (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. 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.
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PART I
General
NDCHealth Corporation is a leading healthcare information services company that services pharmacies, hospitals, physicians, payers, and pharmaceutical manufacturers. It is
a Delaware corporation incorporated in 1967. On October 25, 2001, our stockholders adopted a proposal to change our name from National Data Corporation to NDCHealth Corporation to create a strong brand identity in the healthcare marketplace.
Since the spin-off of Global Payments Inc. on January 31, 2001, we have operated solely as a network based
healthcare information company. We are a leading provider of value-added electronic health information processing services for pharmacy, pharmaceutical manufacturer, hospital, physician, and payer markets. Today, NDCHealth is connected to over 90%
of U.S. and Canadian pharmacies, more than 25% of the nation’s hospitals and over 1,000 healthcare payers. We provide services to more than 100 pharmaceutical manufacturers and have sold systems to more than 100,000 physicians and more than 25%
of U.K. pharmacies. We are in the early phases of expanding internationally by establishing information services businesses in Germany and the United Kingdom. We believe that our connectivity and relationships across multiple segments of healthcare
(pharmacy, pharmaceutical manufacturers, hospitals, physicians, payers, and distributors) positions us to provide integrated information solutions to improve the efficiency and effectiveness of healthcare.
As an integrated health information company, we are a leader in providing automated financial, administrative, and selective clinical
healthcare transactions and in delivering innovative information solutions that generate value for our customers. We are executing a business strategy to evolve a value added intelligent network and information products provider to an integrated
healthcare information solutions company. Our strategy is to continue to expand our markets connectivity and add new application content as we offer our customers high quality, quantifiable value-added information solutions in healthcare. We seek to
achieve this strategy by leveraging the assets of our two business segments, Network Services and Systems and Information Management, and growing a sustainable business model with a consistent base of recurring revenues.
Our NDCHealth Intelligent Network is the cornerstone of our Network Services and Systems segment and transmits information from healthcare
providers such as physicians, hospitals and pharmacies to third party payers including private insurance carriers, managed care organizations and government programs for reimbursement. We also link pharmaceutical manufacturers and wholesalers with
providers and payers. We offer information processes including claims submission and adjudication, customized validation and proprietary message editing, eligibility verification, remittance advice, referral authorization, prescription ordering, and
refill authorization. Our point-of-service systems in pharmacies, hospitals, and physician offices are the entry and exit points for information to and from our
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NDCHealth Intelligent Network. Through our network, we are partnering with our customers to improve efficiency and effectiveness in healthcare. Some examples include: real time eligibility
verification, drug formulary and inventory management, and facilitation of prompt payment for products and services.
Our Information Management segment provides customers with solutions from our NDCHealth Information Repository, a database of healthcare business information which includes pharmaceutical distribution, pharmaceutical sales, and
medical services information. We transform this large volume of drug sales, prescribing physician, and de-identified patient data into information solutions that can help our customers better analyze their markets, more effectively develop and
position their product offerings, and ultimately better understand the effectiveness of drug therapies.
The
integrated information solutions that we provide from our Network Services and Systems and Information Management segments enable us to partner with our customers to improve business performance and to enhance the quality of patient care. Our
applications help customers better manage revenue and accelerate cash flow, reduce overhead costs, react quickly to changing market conditions, improve business operations and streamline administrative processes. Our integrated business model
generates revenue consisting of recurring transaction processing fees, recurring maintenance and support fees, information management subscription fees, consulting services and software license revenue.
We believe that the healthcare market offers attractive opportunities for continued growth. As we execute our strategy, we seek to
increase both our penetration of existing markets and to enter new, related markets through the development of new integrated information solutions. Additionally, we are expanding our distribution channels and, where appropriate, partnering with
other companies with complementary products, services, development, and/or distribution capabilities to achieve our vision of being the leading integrated health information company.
Acquisitions, Investments and Strategic Alliances
From time to time, we have made acquisitions and investments and entered into strategic alliances in an effort to obtain a competitive advantage or an expanded presence in targeted markets.
During July 2001, in exchange for the assets of our physician network services business, we received an equity interest and became an
investor in MedUnite, Inc. along with the following leading U.S. health insurance companies: Aetna, Anthem, CIGNA, Health Net, Oxford, PacifiCare, and Wellpoint Health Networks. MedUnite offers a nationwide EDI-based transaction system to connect
providers and payers. We exclusively market MedUnite’s physician network services to customers who use our practice management systems. As a provider of physician practice management software, our objective in our alliance with MedUnite is to
provide additional application capabilities for our physician customers.
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We continue to believe that our relationship with MedUnite provides important
strategic value to NDCHealth. We believe that a recapitalized MedUnite will continue to offer us the ability to provide the additional application capabilities of MedUnite’s physician network services to our physician customers. Additionally,
we continue to believe there is the potential to increase the number of U.S. physicians who submit claims electronically and that such an increase should allow us to receive a growing revenue stream from our association with MedUnite.
During the third quarter of fiscal year 2002, we entered into a joint venture with Cegedim, S. A. to create Infopharm Limited.
Infopharm was created with the combination of NDC Pharma Services, Ltd., our United Kingdom informatics business, and Cegedim’s Infosante subsidiary, also a United Kingdom informatics business. Infopharm is headquartered in the United Kingdom
and provides sales and marketing information services to U.K. pharmaceutical companies.
In May 2002, we acquired
a controlling interest in TechRx Incorporated. TechRx is a leading provider of pharmacy software that automates the prescription fulfillment process. TechRx systems provide pharmacy customers with an integrated solution for in-store operations,
centralized processing and connectivity to payers and physicians.
We were formerly a minority shareholder in
TechRx and in the fourth quarter of fiscal 2002 entered into an Agreement and Plan of Merger under which we agreed to acquire the remaining stock in a two-step transaction. Under the first step, we acquired a controlling interest through the
purchase of additional common stock and the conversion of non-voting convertible preferred stock for an additional investment in TechRx common stock of approximately $51.0 million. Under the second step, which would close in the fourth quarter of
fiscal 2003, if certain conditions are met, we will acquire the remaining shares in TechRx from minority shareholders. The amount of the purchase price will be determined based upon the satisfaction of certain financial and operational milestones by
TechRx and is expected to be in the range of $100 million to $200 million.
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Also in May 2002, we acquired selected ScriptLINE assets from Arclight Systems,
LLC. ScriptLINE provides value-added edits for healthcare claims which enhance the profitability of pharmacies. ScriptLINE complements our existing pharmacy network services business and expands the comprehensive suite of edits available to
customers. We intend to integrate ScriptLINE into our existing pharmacy network platform to provide for efficient processing, customer support and product development operations.
In conjunction with the acquisition of the ScriptLINE assets, we entered into a strategic alliance with the Pharmaceutical Distribution and Provider Services segment of
Cardinal Health, Inc. to jointly market and develop products and services for the healthcare industry. Cardinal Health is a leading provider of products and services supporting the healthcare industry. As part of the alliance, NDCHealth editing
services under the ScriptLINE brand will continue to be offered to pharmacies exclusively by Cardinal Health. This strategic alliance also provides for joint development of additional marketing programs, products and services.
For additional information regarding our acquisitions, please see Note 2 of the Notes to the Consolidated Financial Statements.
We believe that selective acquisitions, investments and strategic alliances will continue to be important to our ability to compete effectively.
Products, Services and Distribution Channels
We conduct our business in two
primary segments, Network Services and Systems, which we offer to healthcare providers and payers, and Information Management which we offer to pharmaceutical manufactures. More information concerning segments can be found in “Note
12—Segment Information” in the Notes to Consolidated Financial Statements.
Network Services and Systems Solutions
We believe our NDCHealth Intelligent Network and point-of-service systems offer opportunities to streamline
our provider and payer customers’ workflow, improve their cash flow, provide real-time information to help providers better manage their practices, and give the healthcare industry methods to assure a higher quality of care at a lower cost. Our
NDCHealth Intelligent Network connects pharmacies and over 1,000 hospitals to hundreds of benefit plans, using batch and online connectivity. We process over two billion healthcare transactions annually. The point-of-service systems that we offer
help our customers improve efficiency and reduce costs while also serving as an additional source of transaction volume for our intelligent network.
We offer payers customized real-time electronic connectivity to our provider networks through the NDCHealth Intelligent Network for claims/encounter editing, submission and adjudication, eligibility
verification, remittance advice, referral authorization, and claim status and tracking.
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We believe that with the growing acceptance of healthcare technology and the need
to speed payment while reducing costs and improving the quality of care, there will be an increase in the number and types of electronic healthcare transactions. Many of the new transaction types may have broad impact across the healthcare
continuum. For example, new solutions such as electronic prescriptions create new information management needs as well as directly impacting the way physicians, hospitals, pharmacies and payers practice and do business. Other examples include
electronic referrals by physicians to hospitals and the increased use of medical data by physicians, hospitals and other providers to satisfy new types of healthcare information needs.
We are positioned to take advantage of these opportunities, and we have committed development resources to these emerging markets. Accordingly, we expect growth
opportunities from further automating our existing customers. This will happen as a result of the continued increase in transactions as the population ages and increased use of electronic transmission for both existing and new transaction sets. We
have developed and continue to expand distribution channels for our solutions through our direct sales force, alliance partners, value-added resellers, direct mail, and inside sales force.
Our primary competitors in providing Network Services and Systems solutions are providers’ own in-house solutions, WebMD, Misys, and Vitalworks.
Pharmacy Solutions
We offer solutions for the pharmacy industry which allow pharmacies to access customer service and marketing information, enhance the accuracy of reimbursements thereby reducing costs, efficiently and
accurately handle claims and better manage risks. Our pharmacy solutions include transaction processing, information management services, value-added pre-and post- transaction edit processes, payer adjudication services and, through our majority
interest in TechRx, in-store and chain-wide practice management systems.
We offer pharmacies transaction
processing solutions through our core clearinghouse connectivity between pharmacies and third party payers. We offer real-time claim adjudication through our Rx Claim Management Services. Additionally, NDC Pre & Post Editing performs real-time
validation and data management of pharmacy claim submission data to enhance the accuracy of claim pricing and minimize claim submission errors. These solutions will be enhanced with edits obtained from our ScriptLINE acquisition.
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Our NDC Market Share Services and NDC Pharmacy Market Analyzer products, along
with our Prescription Price Analyzer and Prescription Sales Analyzer, allow retail pharmacies to optimize their profitability and remain competitive. These solutions offer features such as market share information, cause and effect analyses and the
ability to effectively price prescription drugs and view prescription sales performance data.
Our Source ID and
Consensus solutions enable pharmacies to determine that prescriber databases and call files are current and complete. Source ID and Consensus help eliminate prescriber information inaccuracies, reduce errors, and maintain a high level of reliable
prescriber information on an ongoing basis.
Our recent agreements with TechRx, ScriptLINE and Cardinal Health
should bring us additional customers, expand the comprehensive suite of edits available to our existing customers, and enhance our pharmacy market position. We will be able to provide pharmacies with software that automates the prescription
fulfillment process, from order receipt and insurance adjudication to dispensing.
More than ninety percent of the
pharmacies in North America and twenty-five percent of the pharmacies in the United Kingdom use our value added services, totaling over 65,000 chain, independent, mail order, managed care and institutional outlets.
Our pharmacy solutions are currently offered in the United States, Canada and the United Kingdom through our direct sales force and
alliance partners. We compete with many companies; however, based on the number of pharmacies served, we believe that we are the largest provider of pharmacy systems and transaction processing solutions in North America, and a leading provider of
pharmacy systems in the United Kingdom.
Hospital Solutions
We have over 1,000 hospital and health system customers. We offer our customers solutions that facilitate compliance maintenance and monitoring, contract and
reimbursement management and administrative support.
Our solutions streamline the process for submitting hospital
and physician professional fee claims, allow providers to electronically transmit patient statements, allow other statement types to be professionally printed and mailed, and offer automated online applications that address the specific document
storage and retrieval needs of hospital and health system businesses. Over 80% of our hospital customers process claims through our NDCHealth Intelligent Network.
We recently began beta testing of ePremis, a new browser-based version of our hospital solution that helps ensure the accuracy and completeness of submitted claims.
This new product offers our customers an enhanced set of editing services that can be accessed from any terminal in the hospital, providing maximum flexibility and personnel
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efficiency. ePremis will be available as both a turn-key system installed in the hospital or as a remotely hosted application centrally managed by NDCHealth.
We compete with many companies in offering hospital solutions; however, we believe that we are among the largest providers of network
transaction solutions to hospitals in North America in terms of numbers of hospitals. Our hospital solutions are offered in the United States through our direct sales force as well as through multiple strategic alliances.
Physician Solutions
We provide physicians with the resources necessary to streamline both billing and other internal processes such as scheduling, increase productivity and optimize accurate reimbursement. We offer our physician customers the ability to
electronically submit claims to payers through our alliance with MedUnite, confirm a patient’s eligibility status and transmit patient statements to be professionally printed and mailed.
Our MediSoft, Lytec and Concept Practice Management solutions are used for scheduling, patient demographics, insurance claim printing, electronic claim submission,
accounts receivable tracking, and practice management reporting in healthcare practices and billing services.
Our
physician solutions are offered in the United States through value-added resellers, direct mail, our inside telemarketing sales force, and alliance partners. Our major competitors in providing physician solutions are WebMD, Mysis, Vitalworks, and
numerous smaller competitor solutions.
Information Management Solutions
We provide innovative decision-support solutions enabling pharmaceutical manufacturers to evaluate performance and develop strategies for improved marketing and sales
efforts. We collect data from retail pharmacies, drug wholesalers, our NDCHealth Intelligent Network, and manufacturers to give our customers a complete source of information on which to base their business decisions.
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Sales Compensation, Targeting and Profiling Products and Services
Our sales compensation solutions empower pharmaceutical manufacturers to be more competitive and profitable. We offer a suite
of products and services to monitor sales force performance, provide decision-support for sales compensation, sales force sizing and alignment, and improve sales detailing effectiveness through more accurate physician demographic information. The
following products and services are offered for the domestic United States and may be delivered to customers in a variety of media, including electronically via email, the Internet, CD-ROM’s, magnetic tape, and paper reports.
Our sales compensation offerings include:
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NDC Territory Manager is our projected zip code-level prescription information service designed as a sales performance measurement tool. NDC Territory
Manager reports projected, prescriber-linked retail prescription data for specific customer-defined markets and sales force alignments. |
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NDC Territory Analyzer, an online subscription service, functions as a personal information management department for determining sales force
compensation, identifying sales opportunities, allocating sales resources and measuring sales force performance for the customer defined markets and sales force alignments. |
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NDC Sales & Marketing Analyzer is a web-enabled decision-support tool enabling detailed analysis of sales, marketing and managed care performance by
customer-defined products and markets. |
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NDC Mail Order provides a comprehensive retail prescription market view that enables effective marketing strategies by tracking the prescriptions
dispensed by mail service pharmacies |
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NDC Practitioner Address and NDC Address Consensus help pharmaceutical manufacturers maximize the effectiveness of sales call files by providing accurate
up-to-date call file information to verify prescribers’ demographic information, and validate names and registration numbers as well as address information. |
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NDC Practitioner Validation Service (PVS) is the most comprehensive and reliable compliance service validating whether or not a practitioner is eligible
to receive samples in accordance with the Prescription Drug Marketing Act (PDMA). |
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NDC Pharmaceutical Rx Q&A+ and NDC Pharmaceutical Non-Retail Q&A+ are web-based decision support tools that allow pharmaceutical
manufacturers to access retail or non-retail sales information for their specific therapeutic markets from any web browser in the world. |
Our Physician Targeting & Profiling suite includes:
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NDC Prescriber Offering allows pharmaceutical manufacturers to identify, target and understand their high-potential prescribers using the industry’s
first projected prescriber level prescription database with products including NDC Prescriber, NDC Prescriber Profiles and NDC Prescriber Payer. |
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NDC LaunchTrac reports weekly prescribing activity for newly launched pharmaceutical products, line extensions and existing products. NDC eLaunchTrac
provides the same market intelligence electronically. |
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NDC Non-Retail is a comprehensive source for tracking wholesaler distribution sales data sold into non-retail institutions such as hospitals, clinics,
long-term care facilities, and mail order pharmacies. |
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NDC Institution Outflow provides information needed to measure and understand how hospital prescribing practices impact a pharmaceutical
manufacturer’s retail prescription sales. NDC Institution Outflow’s detailed reports enable companies to target hospitals and prescribers more effectively and enhance the accuracy of retail sales performance measurements.
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Our Managed Care Solutions link prescription information to the form of payment for targeting prescribers by
their plan affiliations, evaluating sales performance by managed care plans and monitoring contract compliance.
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NDC Payer Rx links prescriptions to the form of payment, whether third party plan, Medicare or cash, for profiling and targeting managed care plans and
prescribers, measuring territory sales performance by method of payment, and allocating sales and marketing resources. |
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NDC Managed Care Analyzer is a web-enabled analysis and decision-support tool that provides multiple levels of information on prescription activity among
third-party payers for pharmaceutical manufacturers to deploy sales resources, profile and target payers, or devise contract strategies and track plan performance. |
Marketing Research & Consulting Services
Our Research & Consulting business provides information, solutions and industry expertise to help sales and marketing professionals transform market data into successful marketing strategies.
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The NDC Pharmaceutical Audit Suite (PHAST) allows healthcare market researchers and executives to view the most complete and timely source of
pharmaceutical sales information across all therapeutic areas, geographies, classes of trade and manufacturers. PHAST is used for determining new market licensing, acquisition and R&D opportunities, evaluating co-promoting effectiveness,
forecasting, and tracking new product launches |
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NDC Patient Studies give researchers insight into patient behavior. Using comprehensive anonymized encrypted patient-linked longitudinal data,
manufacturers can understand the dynamics of patient compliance, persistency, product switching, patient share and counts as well as measuring the impact of direct to consumer (DTC) campaigns on patient use. |
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Market Segmentation and Product Positioning are custom studies that integrate prescribing information with primary research to determine physician
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attitudes to provide the most actionable understanding of physician prescribing patterns. |
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NDC DTC Planning and ROI Evaluation helps manufacturers predict and evaluate the effectiveness of promotions of all types.
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NDC AdoptRx helps manufacturers identify the prescribers who are most likely to adopt a new product, thus improving the effectiveness and accuracy of
physician detailing. |
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Outcomes Research provides customized research studies for providing a competitive advantage by investigating a wide range of disease treatment
information by managed care, physician, and hospital claims data. |
We provide information
management solutions to more than 100 pharmaceutical manufacturers.
Our information solutions are offered in the
United States and in early phase operations in the United Kingdom and Germany through our direct sales force. Our primary competitors in providing these solutions are IMS Health, Verispan, and Arclight.
Our Network Services and Systems solutions distributed to the pharmacy, hospital, physician, and payer markets have historically
represented between 55% and 60% of our total revenues. Our Information Management solutions have historically represented between 40% and 45% of our total revenue.
Healthcare Market
We believe that the integrated services
that we offer to the healthcare industry place us strategically in the center of a very dynamic marketplace. Because of our unique position, we manage healthcare related information from the point of patient contact through the point of payment and
maintain the high standards required for patient confidentiality.
There is a growing worldwide need in healthcare
for technology based services and comprehensive information solutions. We believe that our integrated solutions provide information and services useful in reducing administrative and other related healthcare costs and expenses and enhancing the
quality of care. Additionally, the aging worldwide population is driving demand for improved information technology services relating to the healthcare industry. Because a high percentage of healthcare transactions are still handled using manual,
paper-based methods, or are not being consistently performed, we believe that the healthcare industry is one of the largest untapped markets for providing integrated information solutions. Our solutions provide the tools to help providers and payers
reduce administrative expense and improve the clinical experience, while at the same time providing a robust source for statistical and analytical information required by our customers.
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Government Regulation
The healthcare industry is highly regulated and is subject to changing political, regulatory and other influences. These factors affect the purchasing practices and
operation of healthcare organizations including our customers. Federal and state legislatures and agencies periodically consider programs to reform or revise the U.S. healthcare system. These programs may contain proposals to increase governmental
involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. In some instances, regulatory change has a positive impact on our business representing potential for new
applications and services. However, we are unable to predict future proposals with any certainty or to predict the effect they would have on our business.
In addition, a number of recent legislative and regulatory changes may significantly impact our business. Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, Congress
required, among other things, the adoption of rules to establish standards and requirements for the electronic transmission of certain health information. These rules also govern the use, disclosure, and security of patient-identifiable health
information, and apply to certain of our operations as well as the operations of many of our customers. See a more detailed discussion in “Additional Factors That May Affect Future Performance.”
Operations and Systems Infrastructure
We operate multiple data and customer support facilities. The primary facilities are in Atlanta, Georgia; Phoenix and Gilbert, Arizona; Tulsa, Oklahoma; Pittsburgh, Pennsylvania; Toronto, Canada; the
United Kingdom; and Germany. During fiscal 2002, management of all of our U.S. data centers and communication network was centralized under our Chief Technology Officer. This centralization allows us to ensure control and consistency in technology,
procedures, and security throughout the Company.
Because of the large number and variety of our products and
services, we do not rely on a single technology to satisfy our sophisticated computer systems needs but instead employ technology that is suitable for each particular processing requirement. Given this approach, we utilize (i) fault-tolerant
computers for high volume, real-time transaction processing; (ii) client-server technology for end-user database applications; (iii) large scale transaction and batch data processing systems for central host system requirements; and (iv) HP, Compaq,
SUN, IBM, UNIX, Dell, NT and Windows-based systems for specialized communication and database applications systems. The larger systems are linked via high speed, fiber-optic based networked backbones for file exchange and inter-system communication
purposes; other systems use high speed LAN and WAN connections. The bulk of these system connections utilize the Internet TCP/IP architecture. We also maintain storage systems connected to the backbones, including robotic tape libraries and optical
storage for archival purposes. Our systems are supported using advanced network control by our experienced systems, operations and production control staffs.
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Our communications network is made up of numerous discrete networks, each
designed for a unique market requirement. We maintain four primary communications networks in addition to our support of the public Internet: a dial-up, short transaction network; a private line nationwide high bandwidth network; a frame relay
network; and a dial-up voice/data network for interactive and voice traffic. We also maintain a number of support services offering wireless, Internet and ISDN connectivity. The network environment supports a diverse set of telecommunication
protocols to respond to its diverse customer requirements.
Research and Development
During fiscal 2002, 2001, and 2000, we expended approximately $18.9 million, $17.5 million, and $20.7 million, respectively, on activities
relating to the development and improvement of new and existing products and services. In fiscal 2000 we began a restructuring program, which included the consolidation of clearinghouses and elimination of obsolete and redundant products and
services, as we focused on cost containment. The result was a decline in spending from 2000 to 2001 as we performed less maintenance on older products that had been eliminated. Instead, we focused on developing new products that would generate
additional revenue which is reflected in the increase in spending from 2001 to 2002. Additionally, the divestiture of our Physician services business in the first quarter of fiscal 2002, where historically we had expended more on maintenance
projects, allowed us to focus on the development of these new products.
We capitalize the cost of developing
software held for sale to our customers as well as software used internally to provide services to our customers. In accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” and
Statement of Position 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,” capitalization of costs begins when technological feasibility has been established, or during the application development
phase, and ends when the product is available for general release to customers. In accordance with these standards, approximately $12.0 million, $9.0 million, and $9.6 million of our total development expense were capitalized in fiscal 2002, 2001,
and 2000, respectively, resulting in net development expenses of approximately $6.9 million, $8.5 million, and $11.1 million, respectively. The increased capitalization in 2002 resulted from the increased level of new product development as
discussed below. Conversely, the reduction of spending on maintenance of older products resulted in lower net expense in 2002.
Newly
Added Products and Services
We are committed to providing solutions that allow our customers to improve their
efficiency, lower cost and enhance the overall quality and predictability of patient care outcomes. In keeping with this philosophy, this year we introduced several new products, some of which are described below.
14
NDC Prescription Price Reporter enables retail pharmacies to optimize
their cash prescription pricing in their regional market. This new product allows for the analysis of cash pricing for the top 250 multi-source brand/generic drugs for every dispensed quantity by geography. It also features web-delivery, providing
an easily accessible solution for pharmacies of all sizes.
NDC Pharmaceutical Audit Suite (PHAST) is an
audit tool that allows pharmaceutical manufacturers access to a combination of retail, institutional and mail order pharmaceutical sales data. This product is used for forecasting, competitive analysis, sales targeting and profiling and sales
performance measurement.
Institution Sales Analyzer is a comprehensive web-based data resource that
provides pharmaceutical manufacturers with capabilities to track and analyze sales information in U.S. non-retail institutions, including highly specific geographic and outlet-affiliated levels of detail. This data is important information for
pharmaceutical product managers, market research analysts and sales management responsible for a variety of strategic planning, sales and performance evaluations.
With our recent acquisition of a majority interest in TechRx, we have commenced the roll-out of a beta version of T-Rex One, a next generation pharmacy system, to
independent pharmacies. We expect to roll-out an enterprise version of T-Rex One to major chains in the Summer of 2003. The new system is designed to provide functionality to move certain processes from the individual pharmacy to central
locations and chain headquarters. The new applications are known in the industry as “central patient management,” “central processing” and “central fill” applications.
We recently began beta testing of ePremis, a new browser-based version of our hospital solution that helps ensure the accuracy and
completeness of submitted claims. This new product offers our customers an enhanced set of editing services that can be accessed from terminals throughout the hospital providing flexibility and personnel efficiency. ePremis will be available
as both a turn-key system installed in the hospital or as a remotely hosted application centrally managed by NDCHealth.
Additional products developed in 2002 include new pharmacy information solutions to help reduce pharmacy inventory shrinkage and new sophisticated real-time edits to help our pharmacy customers grow their revenues and reduce their
costs. We also introduced our “year in review” reference tool for the pharmaceutical industry; our weekly payor product; and a new syndicated medical repository which links physician diagnosis information to de-identified patient
prescription information.
Employees
On May 31, 2002 we had approximately 1,790 employees. Many of our employees are professionals or are highly skilled in technical areas specific to the healthcare industry,
and we believe that our current and future operations depend substantially on retaining such employees. Our employees are not represented by any labor union and we believe our employee relations to be good. We are very committed to sustaining a
workplace that enables all employees to contribute their full skills, talents, and knowledge toward company goals.
15
Our corporate headquarters are located in Atlanta, Georgia. We own and
occupy a six-story, 120,000 square foot building at One NDC Plaza, Atlanta, Georgia. There is no outstanding debt on the facility. Additionally, we own a fully occupied four-story, 82,000 square foot building at Four Corporate Square in Atlanta.
This facility is currently leased to Global Payments Inc. for a term ending January 31, 2004. There is an existing $2.9 million mortgage on this facility, which we assumed from the seller.
In addition to the above facilities, we lease or rent a total of 25 other facilities, including five we obtained with our recent acquisition of TechRx . Four facilities are
primary locations in Phoenix, Arizona; Gilbert, Arizona; Tulsa, Oklahoma; and Pittsburgh, Pennsylvania. The remaining 21 are sales and support offices including foreign locations in Canada, Germany and the United Kingdom. Through our recent
acquisition of a controlling interest in TechRx, we now have additional locations (included in the numbers above) in Atlanta; Birmingham, Alabama; Rockville, Maryland and Vancouver, Canada.
We believe that our properties are suitable and adequate for the business of NDCHealth as presently conducted. See Note 15 of the Notes to the Consolidated Financial
Statements for more information about leased properties.
Item 3.
LEGAL PROCEEDINGS
We are involved in litigation related to our divested Physician and
Hospital Support Services and Hospital Management Services (PHSS) units.
We are involved in litigation with IMS
Health relating to the format in which prescription data is delivered to pharmaceutical companies. In a proceeding before the European Commission we are alleging that to the extent this format is copyrighted by IMS, the format constitutes an
industry standard and an essential facility to competition and must be made available to competitors of IMS. We obtained a ruling from the European Commission ordering IMS Health to license its structure for organizing pharmaceutical sales data to
us. However, subsequent to this decision the Court of First Instance and later the European Court Of Justice stayed this decision pending a complete review of the underlying substantive matters.
In a proceeding in the German courts, IMS has alleged copyright infringement against us and we are contesting the validity of IMS’s alleged copyright. In these
proceedings, IMS Health obtained an injunction from the Frankfurt Regional Court to prevent us from distributing data in the contested format. On August 13, 2002, the Frankfurt Court of Appeals ruled in our favor by dismissing the preliminary
injunction against our use of the industry standard data structure. This decision is final and is not subject to further appeal by IMS Health. The underlying copyright claim, however, asserted by IMS Health against us remains before the Frankfurt
Court of Appeals for decision, and a hearing on the issue is scheduled for September 2002. We are unable to predict whether IMS Health may be successful in overturning the EC and Germany rulings or the timing of the final decisions.
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, liquidity or results of operations.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to
a vote of our security holders during the fourth quarter of the fiscal year ended May 31, 2002.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, titles, ages, and business experience
of all present executive officers of the Company are listed below. All officers hold office at the pleasure of the Board of Directors, unless they earlier retire or resign.
| Name
|
|
Business Experience
|
|
Age
|
| Walter M. Hoff |
|
President and Chief Executive Officer of NDCHealth since February 2001; Chief Executive Officer of NDC Health Information Services from August 1998 to January
2001; Executive Vice President of First Data Corporation from 1992 to 1998. Director of Metris Corporation. |
|
50 |
| |
| Randolph L.M. Hutto |
|
Executive Vice President and Chief Financial Officer of NDCHealth since November 2000; Executive Vice President and General Counsel of Per-Se Technologies from
1998 to 2000; Senior Vice President – Strategic Planning and Business Development of First Data Corporation from 1996 to 1998. |
|
53 |
| |
| Charles W. Miller |
|
Executive Vice President – Operations of NDCHealth since January 2000; various executive positions with McKesson from 1995 to 2000, most recently as Group
President – Enterprise Operations. |
|
57 |
| |
| Joseph J. Porfeli |
|
Executive Vice President – Sales and Marketing of NDCHealth since May 2002; Chairman and Chief Executive Officer of TechRx Incorporated from 1999 to 2002;
Chairman, President and Chief Executive Officer of REVIVE Technologies from 1997 to 1999. |
|
54 |
| |
| E. Christine Rumsey |
|
Vice President – Human Resources of NDCHealth since September 1999; Senior Vice President – Human Resources and Administration for McKesson from
January to September 1999; Senior Vice President – Human Resources for McKesson, from 1995 to 1999. |
|
51 |
17
| Name
|
|
Business Experience
|
|
Age
|
| David H. Shenk |
|
Vice President, Corporate Controller and Chief Accounting Officer of NDCHealth since January 1998; Corporate Controller of Rollins, Inc. from 1992 to
1997. |
|
54 |
| |
| Patricia A. Wilson |
|
General Counsel and Secretary of NDCHealth since October 2000; partner with Troutman Sanders LLP from 1988 to 2000. |
|
51 |
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is traded on the New York Stock Exchange under the ticker symbol “NDC.” The high and low sales prices and dividends declared per share of the Company’s common stock for each quarter during the last two fiscal years are
listed below. The amount of our quarterly dividend was reduced in the third quarter of fiscal 2001 due to the spin-off of Global Payments. While we have historically paid dividends to holders of our common stock, the declaration and payment of
future dividends will depend on many factors, including our earnings, financial condition, business needs, capital and surplus, and regulatory considerations, and is at the discretion of our Board of Directors.
| |
|
High
|
|
Low
|
|
Dividend Per Share
|
| Fiscal Year 2002 |
|
|
|
|
|
|
|
|
|
| |
| First Quarter |
|
$ |
38.99 |
|
$ |
29.00 |
|
$ |
.040 |
| Second Quarter |
|
|
38.98 |
|
|
30.43 |
|
|
.040 |
| Third Quarter |
|
|
34.90 |
|
|
28.20 |
|
|
.040 |
| Fourth Quarter |
|
|
37.24 |
|
|
27.74 |
|
|
.040 |
| |
| Fiscal Year 2001 |
|
|
|
|
|
|
|
|
|
| |
| First Quarter |
|
$ |
31.38 |
|
$ |
20.75 |
|
$ |
.075 |
| Second Quarter |
|
|
38.94 |
|
|
27.31 |
|
|
.075 |
| Third Quarter |
|
|
38.90 |
|
|
23.90 |
|
|
.040 |
| Fourth Quarter |
|
|
30.80 |
|
|
21.20 |
|
|
.040 |
The number of stockholders of record as of August 20, 2002 was
3,348.
18
On January 31, 2001, we completed the spin-off of Global Payments Inc. The
Company’s stockholders received 0.8 share of Global Payments Inc. common stock for each share of common stock held as of the January 19, 2001 record date. In light of the spin-off and the resulting change in sales price of our common stock, the
high and low sales prices of our common stock for the first three quarters of fiscal 2001 listed below have been adjusted to reflect the spin-off.
| |
|
High
|
|
Low
|
| Fiscal Year 2002 |
|
|
|
|
|
|
| |
| First Quarter |
|
$ |
38.99 |
|
$ |
29.00 |
| Second Quarter |
|
|
38.98 |
|
|
30.43 |
| Third Quarter |
|
|
34.90 |
|
|
28.20 |
| Fourth Quarter |
|
|
37.24 |
|
|
27.74 |
| |
| Fiscal Year 2001 |
|
|
|
|
|
|
| |
| First Quarter |
|
$ |
19.17 |
|
$ |
12.65 |
| Second Quarter |
|
|
23.79 |
|
|
16.69 |
| Third Quarter |
|
|
27.46 |
|