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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 August 30, 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
incorporation or organization)
  
(I.R.S. Employer
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 – 34,695,987 shares
outstanding as of October 2, 2002
 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
NDCHealth Corporation and Subsidiaries
 
(In thousands, except per share data)
    
Three Months Ended
  
    
August 30, 2002
     
August 31, 2001
  
Revenues
   
$
100,082
 
   
$
84,156
 
Operating expenses:
                  
Cost of service
   
 
51,801
 
   
 
39,094
 
Sales, general and administrative
   
 
20,153
 
   
 
20,986
 
Depreciation and amortization
   
 
7,609
 
   
 
6,581
 
    
  
    
 
79,563
 
   
 
66,661
 
    
  
Operating income
   
 
20,519
 
   
 
17,495
 
Other income (expense):
                  
Interest and other income
   
 
278
 
   
 
351
 
Interest and other expense
   
 
(3,240
)
   
 
(2,320
)
Minority interest in losses
   
 
378
 
   
 
326
 
    
  
    
 
(2,584
)
   
 
(1,643
)
    
  
Income before income taxes and equity in losses of affiliated companies
   
 
17,935
 
   
 
15,852
 
Provision for income taxes
   
 
6,458
 
   
 
5,707
 
Income before equity in losses of affiliated companies
   
 
11,477
 
   
 
10,145
 
Equity in losses of affiliated companies
   
 
(312
)
   
 
(1,114
)
Net income
   
$
11,165
 
   
$
9,031
 
    
  
Basic earnings per share:
   
$
0.32
 
   
$
0.27
 
    
  
Diluted earnings per share:
   
$
0.32
 
   
$
0.25
 
    
  
 
See Notes to Unaudited Consolidated Financial Statements.

2

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NDCHealth Corporation and Subsidiaries
 
(In thousands)
    
Three Months Ended
  
    
August 30, 2002
     
August 31, 2001
  
Cash flows from operating activities:
                  
Net income
   
$
11,165
 
   
$
9,031
 
Adjustments to reconcile net income to cash provided by
operating activities:
                  
Equity in losses of affiliated companies
   
 
312
 
   
 
1,114
 
Depreciation and amortization
   
 
7,609
 
   
 
6,581
 
Deferred income taxes
   
 
286
 
   
 
(91
)
Provision for bad debts
   
 
722
 
   
 
609
 
Other, net
   
 
1,191
 
   
 
108
 
Changes in assets and liabilities which provided (used) cash,
net of the effects of acquisitions:
                  
Accounts receivable, net
   
 
(5,196
)
   
 
(281
)
Prepaid expenses and other assets
   
 
(1,728
)
   
 
(135
)
Accounts payable and accrued liabilities
   
 
(8,692
)
   
 
(12,693
)
Deferred income
   
 
739
 
   
 
5,039
 
Income taxes
   
 
(395
)
   
 
1,786
 
    
  
Net cash provided by operating activities
   
 
6,013
 
   
 
11,068
 
    
  
Cash flows from investing activities:
                  
Capital expenditures
   
 
(12,902
)
   
 
(5,795
)
Other investing activities
   
 
(5,073
)
   
 
—  
 
Investments and other non-current assets
   
 
—  
 
   
 
1,459
 
    
  
Net cash used in investing activities
   
 
(17,975
)
   
 
(4,336
)
    
  
Cash flows from financing activities:
                  
Net principal payments under capital lease arrangements
and other long-term debt
   
 
(439
)
   
 
(1,443
)
Net issuances related to stock activities
   
 
567
 
   
 
1,675
 
Dividends paid
   
 
(1,388
)
   
 
(1,359
)
    
  
Net cash used in financing activities
   
 
(1,260
)
   
 
(1,127
)
    
  
Cash flows from discontinued operations:
                  
Cash provided by tax benefits of discontinued operations
   
 
5,343
 
   
 
4,548
 
Cash used in discontinued operations
   
 
(290
)
   
 
(3,341
)
    
  
Net cash provided by discontinued operations
   
 
5,053
 
   
 
1,207
 
    
  
(Decrease) increase in cash and cash equivalents
   
 
(8,169
)
   
 
6,812
 
Cash and cash equivalents, beginning of period
   
 
13,447
 
   
 
12,420
 
    
  
Cash and cash equivalents, end of period
   
$
5,278
 
   
$
19,232
 
    
  
 
See Notes to Unaudited Consolidated Financial Statements.

3

CONSOLIDATED BALANCE SHEETS
NDCHealth Corporation and Subsidiaries
 
(In thousands, except share data)
    
August 30, 2002
     
May 31, 2001
  
ASSETS
   
(Unaudited)
         
Current assets:
                  
Cash and cash equivalents
   
$
5,278
 
   
$
13,447
 
Accounts receivable
   
 
81,510
 
   
 
76,161
 
Allowance for doubtful accounts
   
 
(6,742
)
   
 
(5,710
)
    
  
Accounts receivable, net
   
 
74,768
 
   
 
70,451
 
    
  
Income tax receivable
   
 
2,627
 
   
 
2,229
 
Deferred income taxes
   
 
13,512
 
   
 
19,987
 
Prepaid expenses and other current assets
   
 
25,723
 
   
 
23,258
 
    
  
Total current assets
   
 
121,908
 
   
 
129,372
 
    
  
Property and equipment, net
   
 
108,813
 
   
 
101,566
 
Intangible assets, net
   
 
380,504
 
   
 
377,322
 
Deferred income taxes
   
 
19,939
 
   
 
21,403
 
Investments
   
 
13,802
 
   
 
13,497
 
Other
   
 
14,756
 
   
 
15,024
 
    
  
Total Assets
   
$
659,722
 
   
$
658,184
 
    
  
LIABILITIES AND STOCKHOLDERS' EQUITY
                  
Current liabilities:
                  
Line of credit
   
$
91,000
 
   
$
91,000
 
Short-term borrowings
   
 
11,375
 
   
 
11,906
 
Current portion of long-term debt
   
 
5,725
 
   
 
963
 
Obligations under capital leases
   
 
1,501
 
   
 
1,296
 
Accounts payable and accrued liabilities
   
 
63,578
 
   
 
76,047
 
Deferred income
   
 
21,876
 
   
 
21,089
 
    
  
Total current liabilities
   
 
195,055
 
   
 
202,301
 
    
  
Long-term debt
   
 
146,756
 
   
 
151,910
 
Obligations under capital leases
   
 
1,352
 
   
 
1,779
 
Other long-term liabilities
   
 
24,393
 
   
 
22,592
 
    
  
Total liabilities
   
 
367,556
 
   
 
378,582
 
    
  
Commitments and contingencies
                  
Minority interest in equity of subsidiaries
   
 
21,591
 
   
 
21,856
 
Stockholders’ 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;
                  
    34,695,769 and 34,643,922 shares issued, respectively.
   
 
4,337
 
   
 
4,330
 
Capital in excess of par value
   
 
212,907
 
   
 
212,026
 
Retained earnings
   
 
63,971
 
   
 
54,194
 
Deferred compensation and other
   
 
(6,283
)
   
 
(6,743
)
Other comprehensive income
   
 
(4,357
)
   
 
(6,061
)
    
  
Total stockholders’ equity
   
 
270,575
 
   
 
257,746
 
    
  
Total Liabilities and Stockholders’ Equity
   
$
659,722
 
   
$
658,184
 
    
  
 
See Notes to Unaudited Consolidated Financial Statements.

4

NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
NDCHealth Corporation, which may be referred to in this Report as the “Company”, “NDCHealth”, “we”, “our”, or “us”, provides network based information processing services and systems to healthcare providers and payers; and information management products and solutions primarily to pharmaceutical manufacturers. We classify our business into two reportable segments: Information Management and Network Services and Systems. Our consolidated financial statements include the accounts of the Company and majority-owned and controlled subsidiaries. Significant inter-company transactions have been eliminated in consolidation.
 
Our fiscal year begins on the Saturday closest to June 1 and ends on the Friday closest to May 31, except for fiscal 2002 which began Friday, June 1. Interim quarters typically consist of thirteen weeks ending the Friday closest to the last calendar day of August, November, and February. Unless otherwise noted, all references in this report to a particular year mean our fiscal year.
 
We have prepared the financial statements included herein, 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 we believe the disclosures are adequate to make the information presented not misleading. In addition, certain reclassifications have been made to the fiscal 2002 consolidated financial statements to conform to the fiscal 2003 presentation.
 
You should read these financial statements in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended May 31, 2002.
 
In the opinion of management, these financial statements reflect all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. Because of the seasonality inherent in our business, our interim results are not necessarily indicative of our anticipated results for the full fiscal year.
 
In accordance with recent Securities and Exchange Commission guidance, those accounting policies that management believes are the most critical and require complex management judgment are discussed below. Further discussion of the application of these critical accounting policies 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, 2002.
 
Revenue – In accordance with criteria set forth in Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” and Statement of Position No. 97-2, “Software Revenue Recognition” we recognize revenue when persuasive evidence of an agreement exists, delivery

5

 
and performance has occurred, there is a fixed and determinable sales price, and collectibility is reasonably assured.
 
Within the 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 delivered over a period of time with multiple deliverables is recognized ratably over the term of the contract, typically using a straight-line model. In some instances, we are able to support the fair value of the elements of the arrangement and thus, revenue for these separable deliverable products and services is recognized based on the delivery of those elements. Revenue for single deliverable products and services is recognized when obligations to the customer have been fulfilled, which is typically upon delivery. Typically, these database information reporting contracts average 1 to 3 years. 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. If it is determined that we will incur a loss on a contract, the loss is recognized at the time of determination. Typically, these service contracts average 6 to 12 months.
 
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, we receive revenue from software licenses and related maintenance and support agreements. Revenue related to software utilized by the customer to pr