NDCHEALTH CORP - 10-Q Quarterly Report

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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 February 28, 2003

o 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
(State or other jurisdiction of
incorporation or organization)

58-0977458
(I.R.S. Employer
Identification No.)

NDC Plaza, Atlanta, Georgia
(Address of principal executive offices)

30329-2010
(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 o.

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

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 – 34,837,463 shares
outstanding as of March 19, 2003

CONSOLIDATED STATEMENTS OF OPERATIONS
NDCHealth Corporation and Subsidiaries

(In thousands, except per share data)

	Three Months Ended

	February 28, 2003			March 1, 2002


Revenues	$	109,007		$	89,268


Operating expenses:
Cost of service	53,130			44,410
Sales, general and administrative	22,341			19,344
Depreciation and amortization	7,842			5,948
Restructuring, impairment and other charges	2,283			—

	85,596			69,702


Operating income	23,411			19,566


Other income (expense):
Interest and other income	343			445
Interest and other expense	(7,766		)	(2,511		)
Minority interest in losses	185			607
Loss related to investments	(14,955		)	—
Early extinguishment of debt charges	(1,438		)	—

	(23,631		)	(1,459		)


Income (loss) before income taxes and equity in losses of affiliated companies	(220		)	18,107
Provision for income taxes	3,121			6,518

Income (loss) before equity in losses of affiliated companies	(3,341		)	11,589
Equity in losses of affiliated companies	(359		)	(344		)

Net income (loss)	$	(3,700	)	$	11,245


Basic earnings (loss) per share:	$	(0.11	)	$	0.33

Diluted earnings (loss) per share:	$	(0.11	)	$	0.31

See Notes to Condensed Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS
NDCHealth Corporation and Subsidiaries

(In thousands, except per share data)

	Nine Months Ended

	February 28, 2003			March 1, 2002


Revenues	$	314,375		$	258,877


Operating expenses:
Cost of service	156,881			127,356
Sales, general and administrative	64,555			57,592
Depreciation and amortization	22,952			18,426
Restructuring, impairment and other charges	2,283			—

	246,671			203,374


Operating income	67,704			55,503


Other income (expense):
Interest and other income	1,088			1,140
Interest and other expense	(14,682		)	(7,156		)
Minority interest in losses	1,216			1,680
Loss related to investments	(14,955		)	—
Early extinguishment of debt charges	(2,359		)	—

	(29,692		)	(4,336		)


Income before income taxes and equity in losses of affiliated companies	38,012			51,167
Provision for income taxes	16,886			18,420

Income before equity in losses of affiliated companies	21,126			32,747
Equity in losses of affiliated companies	(984		)	(1,750		)

Net income	$	20,142		$	30,997


Basic earnings per share:	$	0.58		$	0.91


Diluted earnings per share:	$	0.58		$	0.87

See Notes to Condensed Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
NDCHealth Corporation and Subsidiaries

(In thousands)

	Nine Months Ended

	February 28, 2,003			March 1, 2,002


Cash flows from operating activities:
Net income	$	20,142		$	30,997
Adjustments to reconcile net income to cash provided by operating activities:
Equity in losses of affiliated companies	984			1,750
Non-cash restructuring, impairment and other charges	2,283			—
Non-cash early extinguishment of debt charges	1,217			—
Loss related to investments	14,955			—
Depreciation and amortization	22,952			18,426
Deferred income taxes	12,072			2,303
Provision for bad debts	2,115			1,552
Other, net	5,333			(364		)
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:
Accounts receivable, net	(5,307		)	(2,018		)
Prepaid expenses and other assets	(8,612		)	(4,482		)
Accounts payable and accrued liabilities	(1,304		)	(6,275		)
Accrued interest on long-term debt	6,490			1,816
Deferred income	(3,896		)	4,695
Income taxes	857			667

Net cash provided by operating activities	70,281			49,067

Cash flows from investing activities:
Capital expenditures	(31,767		)	(23,398		)
Investing activities and other non-current assets	(13,831		)	(15,897		)

Net cash used in investing activities	(45,598		)	(39,295		)

Cash flows from financing activities:
Net (repayments) borrowings under lines of credit	(91,000		)	50,000
Net principal payments under capital lease arrangements and other long-term debt	(1,888		)	(2,135		)
Net cash from refinancing activities	168,070			—
Net issuances related to stock activities	1,283			6,192
Dividends paid	(4,170		)	(4,089		)

Net cash provided by financing activities	72,295			49,968

Cash flows from discontinued operations:
Cash provided by tax benefits of discontinued operations	6,106			15,596
Cash used in discontinued operations	(4,393		)	(6,649		)

Net cash provided by discontinued operations	1,713			8,947

Increase in cash and cash equivalents	98,691			68,687
Cash and cash equivalents, beginning of period	13,447			12,420

Cash and cash equivalents, end of period	$	112,138		$	81,107

See Notes to Condensed Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS
NDCHealth Corporation and Subsidiaries

(In thousands, except share data)

	February 28, 2003			May 31, 2002


ASSETS
Current assets:
Cash and cash equivalents	$	112,138		$	13,447

Accounts receivable	81,087			76,161
Allowance for doubtful accounts	(8,631		)	(5,710		)

Accounts receivable, net	72,456			70,451

Income tax receivable	4,369			2,229
Deferred income taxes	5,294			19,987
Prepaid expenses and other current assets	27,099			23,258

Total current assets	221,356			129,372


Property and equipment, net	116,690			101,566
Intangible assets, net	380,813			377,322
Deferred income taxes	13,607			21,403
Investments	8,100			13,497
Other	30,226			15,024


Total Assets	$	770,792		$	658,184


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	—		$	91,000
Short-term borrowings	—			11,906
Current portion of long-term debt	9,819			963
Obligations under capital leases	1,534			1,296
Accounts payable and accrued liabilities	79,660			76,047
Deferred income	20,739			21,089

Total current liabilities	111,752			202,301


Long-term debt	322,903			151,910
Obligations under capital leases	847			1,779
Deferred income	8,432			—
Other long-term liabilities	21,885			22,592

Total liabilities	465,819			378,582


Commitments and contingencies

Minority interest in equity of subsidiaries	22,463			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;34,828,992 and 34,643,922 shares issued, respectively.	4,354			4,330
Capital in excess of par value	213,996			212,026
Retained earnings	70,166			54,194
Deferred compensation and other	(5,874		)	(6,743		)
Other comprehensive income	(132		)	(6,061		)

Total stockholders’ equity	282,510			257,746


Total Liabilities and Stockholders’ Equity	$	770,792		$	658,184

See Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED 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 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 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 our database information reporting 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. Typically, the terms of these database information reporting contracts average 1 to 3 years. When we are able to support the fair value of the elements of the arrangement, 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. 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 transaction fees charged for network services. This revenue is recognized at the time services are rendered. Additionally, we receive revenue from the sale of software licenses and subscription fees from related maintenance and support agreements. Revenue related to software utilized by the customer 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 upon the date that the software is in operation at the customer site where vendor specific objective evidence (VSOE) has been established for the undelivered elements of the customer contract, which typically is maintenance and customer support. In these cases, the maintenance and customer support revenue is recognized over the term of the contract. Where VSOE cannot be established for undelivered elements within the contract, the revenue is recognized upon acceptance over the remaining term of the contract.

Intangible assets - Intangible assets represent goodwill, customer base, and proprietary technology acquired in connection with acquisitions. Customer base acquired is amortized over the estimated useful life 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.

We regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of intangibles may warrant revision or may not be recoverable. When factors indicate that intangibles with finite lives should be evaluated for possible impairment, we compare the estimated fair value to the carrying value in accordance with SFAS 142, “Goodwill and Other Intangible Assets”. If such evaluation indicates a potential impairment, cash flows discounted using our cost of equity are used to measure fair value in determining the amount of these assets that should be written off. In management’s opinion, the goodwill and identifiable intangible assets were appropriately valued at February 28, 2003 and May 31, 2002.

Capitalized software – Capitalized software consists of development costs for software held for sale to our customers as well as software used internally to provide services to our customers. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 86, “Accounting for

the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” capitalization of costs begins when technological feasibility has been established, and ends when the product is available for general release to customers. Completed projects capitalized under SFAS No. 86 are amortized after reaching the point of general availability using the greater of the amount computed using the straight-line method or the ratio that current revenues bear to the total of current and anticipated revenues, based on the estimated useful life of the software, normally five years. The net realizable value of software capitalized under SFAS No. 86 is monitored to ensure that the investment will be recovered through the future sales of products.

In accordance with Statement of Position (“SOP”) 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,” capitalization of costs begins when the application development phase has been initiated, and ends when the product is available for general use. Completed projects capitalized under SOP 98-1 are amortized using the straight-line method, normally five years. The net realizable value of software capitalized under SOP 98-1 is monitored to ensure that the investment will be recovered through its future use.

Allowance for doubtful accounts- Allowance for doubtful accounts reflects management’s estimate of probable losses based principally on historical experience and specific review and analysis. All accounts or portions thereof deemed to be uncollectible or to require excessive collection costs are written off against the allowance.

Data costs – We purchase data from a variety of sources primarily for use in our information products and services. These costs are typically held in deferred cost at the time of purchase and expensed during one, or over several, months as products utilizing the data are delivered to customers. Occasionally product offerings are expanded by modifying current products for a new market. In these cases, additional or new types of data costs may be incurred in developing the database for these new products and the additional data costs are deferred. These data costs are then amortized over the average life of the contracts for the new products, generally one to three years.

Investments – 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. 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 stockholders’ equity. In accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” 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, equity, or consolidation method, whichever is appropriate for the particular investment. The appropriate method is determined by our ability to exercise significant influence over the investee, through either 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 No. 18, “Equity Method of Accounting for Investments in Common Stock,” transition 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. If our level of investment increases to a level such that we directly or indirectly control the entity, the entity’s results would be consolidated into our consolidated financial statements.

Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make other estimates and assumptions in addition to those discussed above. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.

NOTE 2 - EARNINGS PER SHARE:

Basic earnings per share is computed by dividing reported net earnings available to common stockholders by weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing reported net earnings available to common stockholders 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. Our convertible debt was retired on December 26, 2002 and therefore can no longer be converted. 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

	February 28, 2003						March 1, 2002

	Loss		Shares		Per Share		Income		Shares	Per Share

Basic EPS:
Income (Loss)	($3,700	)	34,623		($0.11	)	$	11,245	34,135	$	0.33


Effect of Dilutive Securities:
Stock Options and Restricted Stock	—		—				—		1,446

	(3,700	)	34,623				11,245		35,581
Convertible debt	—		—				1,242		4,140


Diluted EPS:
Income (Loss) plus assumed conversions	($3,700	)		34,623	($0.11	)	$	12,487	39,721	$	0.31

	Nine months Ended

	February 28, 2003					March 1, 2002

	Income		Shares	Per Share		Income		Shares	Per Share

Basic EPS:
Income	$	20,142	34,561	$	0.58	$	30,997	34,045	$	0.91


Effect of Dilutive Securities:
Stock Options and Restricted Stock	—		362			—		1,550

	20,142		34,923			30,997		35,595
Convertible debt	—		—			—		—


Diluted EPS:
Income plus assumed conversions	$	20,142	34,923	$	0.58	$	30,997	35,595	$	0.87

Outstanding options to purchase 4,207,000 shares of the Company’s common stock were not included in the computation of diluted earnings per share in the three months ended February 28, 2003 because the effect would be antidilutive due to the operating loss. Outstanding options to purchase 46,000 shares of the Company’s common stock were not included in the computation of diluted earnings per share in the three months ended March 1, 2002 because the options’ exercise prices were greater than the average market price of the Company’s common stock and therefore were antidilutive. Outstanding options to purchase 1,960,000 and 31,000 shares of the Company’s common stock were excluded because they were antidilutive for the nine months ended February 28, 2003 and March 1, 2002, respectively. For the three months ended February 28, 2003 and March 1, 2002, dividends declared per common share were $0.04. For the nine months ended February 28, 2003 and March 1, 2002, dividends declared per common share were $0.12.

NOTE 3 – INTANGIBLE ASSETS:

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard addresses the financial accounting and reporting for acquired goodwill and other intangible assets. As required by the standard, goodwill and certain other indefinite life intangible assets are no longer amortized. These assets are tested for impairment, at least annually, and impairment losses recognized as appropriate. Intangible assets, readily identifiable with determinable useful lives, are amortized using the straight-line method over their useful lives.

During the second quarter, we performed our annual impairment testing on our recorded goodwill and other indefinite life unamortized intangible assets by comparing the fair value of the assets with their carrying value. These tests did not indicate any impairment losses.

The table below presents goodwill and intangible assets by asset class.

(In thousands)	As of February 28, 2003						As of May 31, 2002

	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total


Amortized intangible assets
Customer base	$	56,869	($14,542	)	$	42,327	$	55,892	($11,085	)	$	44,807
Proprietary technology	24,154		(11,230	)	12,924		26,107		(9,816	)	16,291
Other	900		(129	)	771		900		(17	)	883

Total	81,923		(25,901	)	56,022		82,899		(20,918	)	61,981


Unamortized intangible assets
Goodwill and other indefinite life unamortized intangibles	324,791		—		324,791		315,341		—		315,341


Total Intangible Assets	$	406,714	$(25,901	)	$	380,813	$	398,240	($20,918	)	$	377,322

The aggregate amortization expense for the quarter ended February 28, 2003 and estimated amortization expense for the next five fiscal years is as follows:

Aggregate Amortization Expense	(In thousands)


For the quarter ended February 28, 2003	$	1,781
For the nine months ended February 28, 2003	5,227

Estimated Amortization Expense


For year Ending May 30, 2003	$	7,008
For year Ending May 28, 2004	8,967
For year Ending May 27, 2005	7,395
For year Ending June 02, 2006	6,853
For year Ending June 01, 2007		6,739

The changes in the carrying amount of goodwill and other indefinite life unamortized intangibles for the nine months ended February 28, 2003 are as follows:

Goodwill and other indefinite life unamortized intangibles (In thousands)	Information Management		Network Services and Systems		Total

Balance as of May 31, 2002	$	66,661	$	248,680	$	315,341
Purchase price adjustments	4,478		4,972		9,450

Balance as of February 28, 2003	$	71,139	$	253,652	$	324,791

Purchase price adjustments resulted from the recording of deferred tax liabilities related to final valuation of intangible assets acquired as part of our acquisitions and foreign currency translation.

NOTE 4 – DEBT:

In November 2002, we completed a refinancing that includes a $225 million senior secured credit facility and the issuance of $200 million of 10 1/2% Senior Subordinated Notes due 2012 in an unregistered offering pursuant to Rule 144A under the Securities Act of 1933. We intend to offer to exchange the unregistered notes for substantially identical registered senior subordinated notes following the end of our 2003 fiscal year.

The $225 million senior secured credit facility consists of a $100 million five-year revolving credit facility and a $125 million six-year term loan. This secured credit facility replaced our $150 million unsecured revolving line of credit and became effective on November 26, 2002. The $100 million revolving credit facility is available for working capital and general corporate purposes and has a variable interest rate based on market rates. As of February 28, 2003, no borrowings were outstanding under the revolving credit facility. The $125 million term loan has a variable interest rate tied to LIBOR with a floor of six percent. The credit facility contains certain financial and non-financial covenants customary for financings of this nature, such as requiring us to maintain a certain leverage ratio of debt to EBITDA. EBITDA is defined in the credit agreement as income before equity in losses of affiliated companies, plus income taxes, interest expense, depreciation and amortization, and certain other non-cash losses on asset disposition, less minority interest in losses. As of February 28, 2003, we were in compliance with all restrictive covenants.

The $200 million senior subordinated notes are unsecured subordinated obligations of NDCHealth Corporation and its significant subsidiaries, will mature on December 1, 2012, and are classified as fixed rate borrowings. As of February 28, 2003, the fair market value of the notes is approximately $208 million. The notes bear interest at 10 1/2% per annum.

We received $118.5 million in proceeds from the $125 million term loan, net of $6.5 million in costs related to the entire $225 million credit facility. Issuance of the $200 million senior subordinated notes provided $192.8 million in proceeds, net of $7.2 million in debt issuance costs. The $13.7 million of costs associated with the refinancing are included in other assets and are being amortized over the life of the respective facility and notes.

We used $91 million of the net proceeds from borrowings under the credit facility and the notes to repay all indebtedness outstanding under our previous revolving credit facility. As a result of the retirement of this credit facility, we incurred $0.8 million in early extinguishment charges. During December 2002 we used $145.9 million of the net proceeds to redeem our outstanding 5% convertible subordinated notes due November 2003. The $145.9 million incurred for redemption consisted of $143.8 million in principal, $1.1 million in accrued interest and $1.0 million in early redemption premium. As a result of the redemption of the notes, we also incurred a charge of $0.4 million for the write-off of debt issuance costs.

As of February 28, 2003 and May 31, 2002, long-term debt consisted of the following:

(In thousands)	February 28, 2003		May 31, 2002

10 1/2% Senior subordinated notes – mature on December 1, 2012	$	200,000	$	—
Term loan – variable due in quarterly installments until November 2008	125,000		—
Convertible notes - mature on November 1, 2003	—		143,750
Note Payable – Silicon Valley Bank Prime – Various 36 month maturities at Bank Prime Rate Plus 1%	—		1,256
Third Party Note – Due February 1, 2003	—		11,906
Mortgage payable – due in monthly installments until May 15, 2005 with interest at 6.87%	2,752		2,886
TechRx Note Payable – Due 2004	28		45
Promissory notes issued in consideration for acquisitions:
Spring Anesthesia Group, Inc. – 7.6% due August 2003	4,831		4,831
Hadley Hutt Computing Ltd. – 6.97% due June 2003	111		105

	332,722		164,779
Less: Short-term borrowings	—		11,906
Less: Current maturities	9,819		963

Net long-term debt	$	322,903	$	151,910

NOTE 5 – SEGMENT INFORMATION:

Segment information for the three and nine months ended February 28, 2003 and March 1, 2002 is presented below. We operate our business as two reportable segments: Network Services and Systems, which we offer to healthcare providers and payers; and Information Management, which we offer primarily to pharmaceutical manufacturers. Network Services and Systems provides electronic connectivity to the NDCHealth 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. Other includes results from divested businesses, losses related to investments, and charges related to the early extinguishment of debt. There has been no significant change in the composition of the reportable segments from the presentation of fiscal 2002 segment information included in our Annual Report on Form 10-K for the year ended May 31, 2002.

Quarter Ended February 28, 2003 (In thousands)	Information Management		Network Services and Systems		Other			Totals

Revenues	$	41,020	$	67,987	$	—		$	109,007

Income (loss) before income taxes and equity in losses of affiliated companies	6,749		9,424		(16,393		)	(220		)

Depreciation and amortization	2,529		5,313		—			7,842

Segment assets		147,655		623,137		—			770,792

Quarter Ended March 1, 2002 (In thousands)	Information Management		Network Services and Systems		Other			Totals

Revenues	$	38,943	$	50,218	$	107		$	89,268

Income (loss) before income taxes and equity in losses of affiliated companies	6,903		11,391		(187		)	18,107

Depreciation and amortization	2,619		3,329		—			5,948

Segment assets		142,483		425,590		—			568,073

The following presents information about revenues from different geographic regions for the three months ended February 28, 2003 and March 1, 2002:

(In thousands)	2003		2002

Revenues:
United States	$	104,038	$	85,047
All other	4,969		4,221

Total revenues	$	109,007	$	89,268

Nine months Ended February 28, 2003 (In thousands)	Information Management		Network Services and Systems		Other			Totals

Revenues	$	114,694	$	199,681	$	—		$	314,375

Income (loss) before income taxes and equity in losses of affiliated companies	18,354		36,972		(17,314		)	38,012

Depreciation and amortization	14,922		8,030		—			22,952

Segment assets		147,655		623,137		—			770,792

Nine months Ended March 1, 2002 (In thousands)	Information Management		Network Services and Systems		Other			Totals

Revenues	$	110,226	$	144,291	$	4,360		$	258,877

Income (loss) before income taxes and equity in losses of affiliated companies	17,562		34,175		(570		)	51,167

Depreciation and amortization	8,471		9,955		—			18,426

Segment assets		142,483		425,590		—			568,073

The following presents information about revenues from different geographic regions for the nine months ended February 28, 2003 and March 1, 2002:

(In thousands)	2003		2002

Revenues:
United States	$	300,166	$	245,996
All other	14,209		12,881

Total revenues	$	314,375	$	258,877

NOTE 6 – COMMITMENTS AND CONTINGENCIES:

In May 2002, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with TechRx under which we agreed to acquire TechRx 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 is expected to close on or about May 30, 2003, if certain conditions are met, we will acquire the remaining shares in TechRx from minority shareholders for cash, NDCHealth shares or a combination of cash and NDCHealth shares. The amount of the payment to TechRx shareholders will be determined based upon the satisfaction of certain financial and operational milestones by TechRx as set forth in the Merger Agreement. We currently expect the net purchase price for the balance of the TechRx equity outstanding to be in the range of approximately $100 million to $130 million.

We have been involved in litigation related to our divested Physician and Hospital Support Services and Hospital Management Services (PHSS) units. A Final Judgment Order was entered on August 29, 2002 in one action, in the Circuit Court of Cook County, Chancery Division, in our favor on all counts, providing that no post closing adjustment or payment shall be made by either party and each party waived any right to appeal. In related arbitration before the American Arbitration Association, parties have executed a Consent Order, providing that no payment to any opposing party is to be made by us. In a third related matter, pending in the Superior Court of Dekalb County, Georgia, the parties have reached a tentative agreement to dismiss the matters without prejudice.

We are involved in litigation both before the European Commission and the German courts with IMS Health relating to the format in which prescription data is delivered to pharmaceutical companies in Germany. In the proceedings before the European Commission, we are alleging that to the extent this format is copyrighted by IMS Health, the format constitutes an industry standard and an essential facility to competition and must be made available to competitors of IMS Health. 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 proceedings before the German courts, IMS Health has alleged copyright infringement against each of Pharma Intranet Information AG (PI), the company from whom we purchased certain assets of our German business, and us, and we each have contested the validity of IMS Health’s alleged copyright. In these proceedings, IMS Health obtained an injunction from the Frankfurt Regional Court to prevent each of PI and 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. On September 17, 2002 the Frankfurt Court of Appeals issued a judgment in the main proceedings against PI. While validating a copyright in the structure, the Court held that IMS Health has no standing to sue to enforce the copyright. The Court also determined that IMS Health does not own the copyright. The Court further denied IMS Health’s claims under the EU Database Directive for protection of the data structure involved. Finally, the Court found that PI breached the German Act Against Unfair Trade

Practices (UGW) by reason of identically copying the data structure. We have not sold or used the data structure initially used by PI. We do not own PI and PI is no longer actively conducting business.

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.

NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION:

Supplemental cash flow disclosures are as follows:

	Nine months ended

(in thousands)	February 28, 2003		March 1, 2002

Net income taxes paid	$	696	$	696
Interest paid	6,836		7,180
Capital leases entered into in exchange for property and equipment	—		2,151
Non-cash investment in MedUnite, Inc.		—		37,458

NOTE 8 – COMPREHENSIVE INCOME:

The components of comprehensive income are as follows:

	Three months ended

(in thousands)	February 28, 2003			March 1, 2002

Net income		($3,700	)	$	11,245
Foreign currency translation adjustment	3,560			(1,137		)
Unrealized holding gain, net of tax	56			—

Total comprehensive income		($84	)	$	10,108

	Nine months ended

(in thousands)	February 28, 2003			March 1, 2002

Net income	$	20,142		$	30,997
Foreign currency translation adjustment	5,955			(1,113		)
Unrealized holding loss, net of tax	(26		)	—

Total comprehensive income	$	26,071		$	29,884

NOTE 9 – CONSOLIDATING FINANCIAL DATA OF SUBSIDIARY GUARANTORS:

In November 2002, we issued $200 million aggregate principal amount of 10 1/2% senior subordinated notes due 2012. Our material subsidiaries, which include NDC Health Information Services (Arizona) Inc., The Computer Place, Inc., NDCHealth Intellectual Property Corp, HISIP Corp., NDCIP, Inc., NDCHealth Licensing, Inc., NDC Acquisition Corp., NDC of Canada, Inc. and TechRx Incorporated, have fully and unconditionally guaranteed the notes on a joint and several basis. NDC Health Information Services (Arizona) Inc., The Computer Place, Inc., NDCHealth Intellectual Property Corp, HISIP Corp., NDCIP, Inc., NDCHealth Licensing, Inc., NDC Acquisition Corp. and NDC of Canada, Inc. are wholly-owned subsidiaries of our company. We currently own 63% of the outstanding capital stock of TechRx Incorporated and, if certain conditions are met, we will acquire the remaining 37% during the fourth quarter of fiscal 2003.

Presented below is our consolidating financial data, including the combined financial data for our subsidiary guarantors and our subsidiary non-guarantors.

Statement of Operations for the Three Months Ended February 28, 2003 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors		Subsidiary Non- Guarantors			Eliminations			Consolidated


Revenues	$	45,904		$	61,288	$	6,497		$	(4,682	)	$	109,007

Cost of service	15,704			34,647		5,338			(2,559		)	53,130
Other operating expenses	11,257			20,590		1,765			(1,146		)	32,466

Operating income (loss)	18,943			6,051		(606		)	(977		)	23,411

Other income (expense)	(29,724		)	27,695		133			(21,735		)	(23,631		)

Income (loss) before income taxes and equity in losses of affiliated companies	(10,781		)	33,746		(473		)	(22,712		)	(220		)

Provision for income taxes	(679		)	4,255		(455		)	—			3,121

Income (loss) before equity in losses of affiliated companies	(10,102		)	29,491		(18		)	(22,712		)	(3,341		)
Equity in losses of affiliated companies	(359		)	—		—			—			(359		)

Net income (loss)	$	(10,461	)	$	29,491	$	(18	)	$	(22,712	)	$	(3,700	)

Statement of Operations for the Three Months Ended March 1, 2002 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidated


Revenues	$	40,211		$	44,416		$	4,641		$	89,268

Cost of service	14,166			26,600			3,644			44,410
Other operating expenses	9,139			13,921			2,232			25,292

Operating income (loss)	16,906			3,895			(1,235		)	19,566

Other income (expense)	(1,882		)	(25		)	448			(1,459		)

Income (loss) before income taxes and equity in losses of affiliated companies	15,024			3,870			(787		)	18,107
Provision for income taxes	5,409			1,443			(334		)	6,518

Income (loss) before equity in losses of affiliated companies	9,615			2,427			(453		)	11,589
Equity in losses of affiliated companies	(4		)	—			(340		)	(344		)

Net income (loss)	$	9,611		$	2,427		$	(793	)	$	11,245

Statement of Operations for the Nine months Ended February 28, 2003 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors		Subsidiary Non- Guarantors			Eliminations			Consolidated


Revenues	$	133,910		$	172,900	$	20,211		$	(12,646	)	$	314,375

Cost of service	45,911			100,272		16,175			(5,477		)	156,881
Other operating expenses	27,540			59,875		7,096			(4,721		)	89,790


Operating income (loss)	60,459			12,753		(3,060		)	(2,448		)	67,704

Other income (expense)	(35,433		)	36,604		1,071			(31,934		)	(29,692		)

Income (loss) before income taxes and equity in losses of affiliated companies	25,026			49,357		(1,989		)	(34,382		)	38,012
Provision for income taxes	12,211			7,089		(2,212		)	(202		)	16,886

Income (loss) before equity in losses of affiliated companies	12,815			42,268		223			(34,180		)	21,126
Equity in losses of affiliated companies	(984		)	—		—			—			(984		)

Net income (loss)	$	11,831		$	42,268	$	223		$	(34,180	)	$	20,142

Statement of Operations for the Nine months Ended March 1, 2002 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidated


Revenues	$	117,516		$	125,896		$	15,465		$	258,877

Cost of service	41,984			73,389			11,983			127,356
Other operating expenses	26,601			42,184			7,233			76,018

Operating income (loss)	48,931			10,323			(3,751		)	55,503

Other income (expense)	(5,627		)	(58		)	1,349			(4,336		)

Income (loss) before income taxes and equity in losses of affiliated companies	43,304			10,265			(2,402		)	51,167
Provision for income taxes	15,589			3,863			(1,032		)	18,420

Income (loss) before equity in losses of affiliated companies	27,715			6,402			(1,370		)	32,747
Equity in losses of affiliated companies	(1,410		)	-			(340		)	(1,750		)

Net income (loss)	$	26,305		$	6,402		$	(1,710	)	$	30,997

Statement of Cash Flows for the Nine months Ended February 28, 2003 (in thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non- Guarantors			Eliminations			Consolidated

Cash flows from operating activities:
Net income (loss)	$	11,831		$	42,268		$	223		$	(34,180	)	$	20,142

Adjustments to reconcile net income (loss) to cash provided by operating activities:	24,454			19,531			20,835			(2,909		)	61,911
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:	15,628			(14,411		)	(20,448		)	7,459			(11,772		)

Net cash provided by (used in) operating activities	51,913			47,388			610			(29,630		)	70,281

Cash flows from investing activities:	(24,359		)	(20,796		)	(443		)	—			(45,598		)

Cash flows from financing activities:	74,181			(31,036		)	(480		)	29,630			72,295

Cash flows from discontinued operations:	—			—			1,713			—			1,713

Increase (decrease) in cash and cash equivalents	101,735			(4,444		)	1,400			—			98,691
Cash and cash equivalents, beginning of period	4,400			7,387			1,660			—			13,447

Cash and cash equivalents, end of period	$	106,135		$	2,943		$	3,060		$	—		$	112,138

Statement of Cash Flows for the Nine months Ended March 1, 2002 (in thousands)	NDCHealth Corporation		Subsidiary Guarantors		Subsidiary Non- Guarantors		Consolidated

Cash flows from operating activities:
Net income (loss)	$ 26,305		$ 6,402		$ (1,710	)	$ 30,997

Adjustments to reconcile net income (loss) to cash provided by operating activities:	(12,735	)	13,437		22,965		23,667
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:	25,005		(7,025	)	(23,577	)	(5,597	)

Net cash provided by (used in) operating activities	38,575		12,814		(2,322	)	49,067

Cash flows from investing activities:	(28,934	)	(9,611	)	(750	)	(39,295	)

Cash flows from financing activities:	52,053		(1,483	)	(602	)	49,968

Cash flows from discontinued operations:	—		—		8,947		8,947

Increase (decrease) in cash and cash equivalents	61,694		1,720		5,273		68,687
Cash and cash equivalents, beginning of period	10,695		72		1,653		12,420

Cash and cash equivalents, end of period	$ 72,389		$ 1,792		$ 6,926		$ 81,107

Balance Sheet as of February 28, 2003 (in thousands)	NDCHealth Corporation		Subsidiary Guarantors			Subsidiary Non- Guarantors			Eliminations			Consolidated


Assets
Current assets:
Cash and cash equivalents	$	106,135	$	2,943		$	3,060		$	—		$	112,138
Accounts receivable	37,459		33,800			3,212			(2,015		)	72,456
Income taxes	8,170		(97		)	1,590			—			9,663
Prepaid expenses and other current assets	35,361		10,459			5,721			(24,442		)	27,099

Total current assets	187,125		47,105			13,583			(26,457		)	221,356


Property and equipment, net	52,975		60,489			3,123			103			116,690
Intangible assets, net	152,316		120,316			50,145			58,036			380,813
Investments	345,963		264			32,933			(371,060		)	8,100
Intercompany receivables	119,755		3,766			(47,668		)	(75,853		)	—
Other	60,562		—			2,196			(18,925		)	43,833

Total Assets	$	918,696	$	231,940		$	54,312		$	(434,156	)	$	770,792


Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit	$	—	$	—		$	—		$	—		$	—
Short-term borrowings	—		—			—			—			—

Current portion of long-term debt	10,521		1,157			3,454			(3,779		)	11,353
Accounts payable and accrued liabilities	47,651		30,751			9,643			(8,385		)	79,660
Deferred income	2,488		16,706			1,545			—			20,739

Total current liabilities	60,660		48,614			14,642			(12,164		)	111,752


Long-term liabilities	368,446		89,888			5,470			(109,737		)	354,067

Total liabilities	429,106		138,502			20,112			(121,901		)	465,819


Minority interest in equity of subsidiaries	—		201			9,149			13,113			22,463

Stockholders’ equity	489,590		93,237			25,051			(325,368		)	282,510


Total Liabilities and Stockholders’ Equity	$	918,696	$	231,940		$	54,312		$	(434,156	)	$	770,792

Balance Sheet as of May 31, 2002 (in thousands)	NDCHealth Corporation		Subsidiary Guarantors		Subsidiary Non- Guarantors			Eliminations			Consolidated


Assets
Current assets:
Cash and cash equivalents	$	4,400	$	7,387	$	1,660		$	—		$	13,447
Accounts receivable	30,224		36,906		5,180			(1,859		)	70,451
Income taxes	13,828		272		6,812			1,304			22,216
Prepaid expenses and other current assets	20,516		11,464		2,857			(11,579		)	23,258

Total current assets	68,968		56,029		16,509			(12,134		)	129,372


Property and equipment, net	47,806		50,600		3,057			103			101,566
Intangible assets, net	154,099		124,871		44,608			53,744			377,322
Investments	358,826		—		37,559			(382,888		)	13,497
Inter-company	148,050		—		(28,063		)	(119,987		)	—
Other	33,487		3,500		18,904			(19,464		)	36,427

Total Assets	$	811,236	$	235,000	$	92,574		$	(480,626	)	$	658,184


Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit	$	91,000	$	—	$	—		$	—		$	91,000
Short-term borrowings	—		11,906		—			—			11,906
Current portion of long-term debt	997		1,630		—			(368		)	2,259
Accounts payable and accrued liabilities	40,318		30,211		13,624			(8,106		)	76,047
Deferred income	5,453		14,800		836			—			21,089

Total current liabilities	137,768		58,547		14,460			(8,474		)	202,301


Long-term liabilities	194,476		119,681		10,073			(147,949		)	176,281

Total liabilities	332,244		178,228		24,533			(156,423		)	378,582


Minority interest in equity of subsidiaries	—		—		10,630			11,226			21,856

Stockholders’ equity	478,992		56,772		57,411			(335,429		)	257,746


Total Liabilities and Stockholders’ Equity	$	811,236	$	235,000	$	92,574		$	(480,626	)	$	658,184

NOTE 10 – INVESTMENTS:

During July 2001, in exchange for the contribution of the assets of our physician network services business, we received an 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 offered a nationwide EDI-based transaction system to connect providers and payers. We exclusively marketed MedUnite’s physician network services to customers who use our physician practice management systems. As a provider of physician practice management software, our objective in our alliance with MedUnite was to provide additional application capabilities for our physician customers.

On August 19, 2002, the financial advisors to MedUnite’s Board of Directors shared with us that they had evaluated several preliminary proposals related to a recapitalization plan and selected parties with which they intended to proceed with further evaluation, discussions, and negotiation of a potential recapitalization transaction. In addition, we understood that other parties indicated their interest in potentially submitting a proposal to MedUnite. At that time, the net carrying value of our investment was approximately $52.6 million consisting of $44.7 million in equity, $5.4 million in convertible debt, and $2.5 million in promissory notes and accrued interest. Based upon the information received from MedUnite’s financial advisors, as well as an updated evaluation of MedUnite’s results and of capital market conditions, we determined that the fair value of our investment in MedUnite had declined and that such decline was not

temporary. Therefore, in accordance with the provisions of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” we reduced the carrying value of our equity investment by way of a $41.0 million non-cash charge reflected in our financial statements for the year ended May 31, 2002. After the adjustment, our investment in MedUnite had a carrying value of approximately $12.2 million at May 31, 2002.

As we began the 2003 fiscal year, we continued to believe that our investment in MedUnite was recoverable. At the completion of the second quarter of fiscal year 2003, we believed our investment in MedUnite was appropriately valued at approximately $12.2 million, consisting of $4.2 million in equity, $5.4 million in convertible debt, and $2.6 million in promissory notes and accrued interest.

On December 31, 2002 ProxyMed, Inc. purchased MedUnite and in exchange for our equity investment in MedUnite of $4.2 million, we received two convertible debt issues totaling $2.4 million from ProxyMed. Our remaining investment in MedUnite consisting of $5.4 million in convertible debt and $2.6 million in promissory notes and accrued interest; and trade receivables from MedUnite of $1.2 million not included in the carrying value of our investment, were restructured into a $2.2 million 3 year note from ProxyMed. In order to determine the appropriate carrying value of the consideration received from ProxyMed in exchange for our interest in MedUnite, several factors were considered. Our valuation considered the interest rates of the debt and note, our current borrowing rate, and the financial condition of ProxyMed and their ability to satisfy the terms of the debt and notes. Accordingly, during the third quarter we recorded a charge of $12.5 million to record the loss on the value of our investment and to reserve trade receivables. $11.6 million related to our investment basis is included in Loss related to investments and $0.9 million of the charge related to trade receivables is included in Restructuring, impairment and other charges.

In conjunction with the sale of our interest in MedUnite to ProxyMed, we also evaluated other aspects of our MedUnite relationship. As part of this evaluation we identified an additional $1.4 million of trade receivables that we believe became uncollectible as a result of the change in relationship with MedUnite. Accordingly, a charge of $1.4 million is included in Restructuring, impairment and other charges in the third quarter to reserve for these receivables. Because of on-going, and the potential for future, claims related to our investment in MedUnite and the impairment of other related assets, an additional charge of $3.3 million was recorded during the third quarter. This charge is included in Loss related to investments.

NOTE 11 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

We adopted the provisions of Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in the first quarter of fiscal 2003. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and requires that discontinued operations

be measured at the lower of the carrying amount or fair value less cost to sell. The adoption of SFAS 144 has not had a material impact on our results of operations or financial position.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections,” which clarifies the criteria under which extinguishments of debt can be considered as extraordinary and rescinds the related Statement Nos. 4, 44, and 64 and also makes technical corrections to other Statements of Financial Standards. We have adopted this statement and accordingly have recorded charges related to the extinguishment of debt as ordinary expense.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies Emerging Issues Task Force (“EITF”) 94-3. We believe that the adoption of this statement will not have a material effect on our future results of operations. However, the statement will likely change the timing of recognition of any future restructuring activity.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS 148 provides transition guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” We currently account for stock-based compensation in accordance with APB No. 25, “Accounting for Stock Issued to Employees” and the disclosure requirements of SFAS 123.

In January 2003, the Emerging Issues Task Force published EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of this issue will not have a material effect on our future results of operations.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results could differ materially from those set forth in these forward-looking statements as a result of various factors, including those set forth herein under the caption “Forward-Looking Information.”

For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report.

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.

General

We are a leading provider of value-added electronic health information processing services for pharmacy, pharmaceutical manufacturer, hospital, physician, and payer markets. Today, we are connected to 85% of U.S. and Canadian pharmacies, 25% of U.S. non-government hospitals and over 1,000 government and commercial payers in the U.S. We provide information services to more than 100 pharmaceutical manufacturers in the U.S. and are expanding internationally, in The United Kingdom and Germany. We have sold systems to 100,000 physicians, 30% of U.S pharmacies, and 20% of U.K. pharmacies. We believe that our connectivity and relationships across multiple segments of the healthcare industry (pharmacy, pharmaceutical manufacturers, hospitals, physicians, payers, and distributors) position 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 from 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 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 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 offer information processing 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 and physician offices are the entry and exit points for information to and from our 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. We generate Network Services and Systems revenue from recurring transaction processing fees, recurring maintenance fees and support fees and software license revenue.

Our Information Management segment provides customers with solutions from our 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 align and appropriately compensate their sales force, 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. We generate Information Management revenue from subscription fees and project consulting fees.

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.

Key Events

In order to position the Company for future growth, we made great strides developing a pipeline of new products, many of which have recently been released or are planned for release during the next several quarters. New products include Rx Safety Advisor, Pharmacy Aide, and new TechRx platforms for pharmacies, Medisoft Version 8 and electronic script services for physicians, ePREMIS for hospitals, messaging and payor analytical solutions for pharmaceutical manufacturers, and Global Trends and new retail products for international customers. We expect expenses related to the introduction of these new products to increase faster than revenue in the near term. We expect this increase in expense to revenue ratio to reverse as customer implementation of these products accelerates.

In our Network Services and Systems business segment, a product delay during the third quarter in our physician business unit and HIPAA related system freezes among selected customers caused revenues to be lower than our expectation. In the physician business unit, due to a delay in the introduction of Medisoft Version 8 in the quarter, our production operation was unable to fulfill all of the record level of orders we had received. Further, physician transaction revenue from MedUnite did not grow as planned. In other network markets, we noted that some customers had implemented policies to freeze their information system development to prepare for HIPAA privacy regulations that become effective in April, 2003. Our Information Management segment continues to be impacted by the lack of discretionary spending among the pharmaceutical manufacturers, and domestic product revenue growth was offset by lower revenue in our lower margin consulting services. As a result of these factors, the acceleration of revenue growth for the third quarter of fiscal 2003 did not materialize at expected levels.

Operating Performance

A comparison of the third quarter ending February 28, 2003 to the third quarter ending March 1, 2002 financial results shows the following:

• Including recently acquired businesses, revenue grew 22.1% to $109.0 million from $89.3 million. Excluding acquired and divested businesses, revenue grew 11.0% to $99.0 million from $89.2 million.

• Operating income grew 19.4% to $23.4 million from $19.6 million.

• Operating income margin decreased slightly to 21.5% from 21.9%.

• Net income decreased to ($3.7) million from $11.2 million.

• Diluted EPS decreased to ($0.11) from $0.31.

A comparison of the first nine months ending February 28, 2003 to the first nine months ending March 1, 2002 financial results shows the following:

• Including recently acquired businesses, revenue grew 21.4% to $314.4 million from $258.9 million. Excluding acquired and divested businesses, revenue grew 11.7% to $284.4 million from $254.5 million.

• Operating income grew 22.0% to $67.7 million from $55.5 million.

• Operating income margin increased slightly to 21.5% from 21.4%.

• Net income decreased to $20.1 million from $31.0 million.

• Diluted EPS decreased to $0.58 from $0.87.

Application of Critical Accounting Policies

Critical accounting policies are those policies that can have a significant impact on the presentation of our financial position and results of operations and demand the most significant use of subjective estimates and management judgment. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Specific risks inherent in our application of these critical policies are described below. For all of these policies, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require

adjustment. These policies often require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Additional information concerning our accounting policies can be found in “Note 1 - Summary of Significant Accounting Policies.”

Revenue

Although we have several sources of revenue, in all cases, we recognize revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery and performance has occurred, and collectibility is probable. The most variable of these factors between our various businesses is determining when delivery and performance has occurred.

In 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 products providing pharmaceutical information. These include products where delivery is completed at one point in time and products where delivery is made over a period of time. Revenue for products involving a single delivery is recognized when obligations to the customer have been fulfilled, which is typically upon delivery. Products that are delivered over a period of time, usually 1 to 3 years, are generally unique in nature and therefore require more complex judgment to determine appropriate revenue recognition. In most cases, information of a similar type is delivered at equal intervals over a fixed period of time in which case revenue is recognized over the term of the contract using a straight-line model.

Our consulting services are typically provided for a fixed fee over a specific period of time. Because the terms of these contracts are very specific, revenue for these services is recognized using the percentage-of-completion model over the term of the contract. If we determine that we will incur a loss on a contract, we recognize the loss at the time the determination is made. These contracts typically average 6 to 12 months.

In our Network Services and Systems segment, the primary source of revenue is transaction fees charged for network services. We provide these services to our pharmacy, hospital, physician, and payer customers. These fees are generally based on the volume of services we provide to each individual customer. In most instances, this fee is charged per transaction and type of transaction while in some instances, these services are provided to large customers for a fixed monthly fee, regardless of each month’s actual transaction volume. Revenue for these services is recognized each month as the services are rendered.

In our systems businesses, we also receive revenue from software licenses and related maintenance and support agreements. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 97-2, “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” These SOP’s provide guidance on applying accounting principles generally accepted in the United States for software revenue recognition transactions. Based on these authoritative statements, we recognize revenue as follows.

Revenues from the sale of software licenses and implementation services are recognized upon the date that the software is in operation at the customer site where vendor specific objective evidence (VSOE) has been established for the undelivered elements of the customer

contract, which typically is maintenance. In these cases, the maintenance revenue is recognized over the term of the maintenance contract. Where VSOE cannot be established for undelivered elements within the contract, the revenue related to license fees and implementation services are deferred and recognized upon acceptance over the remaining term of the contract, typically two or three years.

The software we license to our customers is generally one of two types. The most common software type performs functions such as scheduling and billing and is used by our customers to manage their businesses and connect to our network. Because this type of software has stand alone functionality (meaning that connection to our network is not required for the software to be functional), we recognize revenue for sales of these type products that are customer installed when the product is shipped. For products of this type that are installed by us or one of our affiliates, we recognize revenue when the software is installed. The other type of software is software used by our customers to process transactions through our network. Because this software provides value to our customers only to the extent that they are utilizing our network services, revenue is recognized over the estimated life of the network services contract rather than when the software is installed.

We provide software maintenance and customer support to our customers on both an as needed and long term basis. Services provided outside a maintenance contract are on an as requested basis and revenue is recognized as the services are provided. Revenue for services provided on a long term basis is recognized ratably over the terms of the contract.

Many of our physician systems are sold indirectly through value added resellers (VARs). Because the VARs provide many of the services that we would otherwise provide (such as contract support, advertising, etc.), we provide them allowances to cover their cost of providing these services. We record revenue in accordance with Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products,” which requires that certain allowances be treated as reductions in revenue and allows other allowances, for which we receive quantifiable benefits, to be recorded as revenue and sales expense.

Intangible assets

Intangible assets are created when the purchase price of an acquired business exceeds the value of its physical assets. For any significant business we acquire, we obtain a valuation from an independent specialist who assists in the identification of any specific intangibles and provides assistance in our determination of an estimated value and life for each. Goodwill exists where our purchase price exceeds the value of tangible assets plus these specifically identified intangible assets.

Specifically identified intangible assets primarily represent proprietary technology and customer relationships. Identified intangibles are assigned a value, generally that which was estimated in the valuation, and amortized over the estimated life. Because of the complexity of assumptions and judgment used in estimating the value and life of these assets, there is significant risk that their actual value and life may vary from the original estimate. We periodically evaluate whether events and circumstances have occurred that indicate the carrying

amount of intangibles may warrant revision or may not be recoverable. When factors indicate that an intangible should be evaluated for possible impairment, we estimate the present value of future cash flows associated with the asset over its remaining life. We may determine that an intangible asset has diminished or has no remaining value prior to it being fully amortized. In this instance, we would be required to incur a charge to earnings to impair the asset.

SFAS 142, “Goodwill and Other Intangible Assets,” requires that goodwill no longer be amortized but be reviewed for impairment on a regular basis. We completed impairment tests during the second quarter of 2003 by comparing the present value of the estimated future cash flows of each of our reporting units to the book value of that unit’s assets. Our reporting units are defined as our Pharmacy, Hospital, and Physician businesses in our Network Services and Systems segment plus our total Information Management segment. For each of our reporting units, we found that the estimated fair value exceeded the net book value of the unit and therefore no impairment was necessary.

If the estimated current value of future cash flows of any unit had been lower than its book value, we would have performed additional tests to determine the magnitude of impairment, if any. Any impairment would require a non-cash charge to earnings in the period in which the impairment was identified. We will conduct these same tests going forward at least annually to ensure that goodwill carried on our balance sheet is properly valued.

Capitalized software

Internally developed software held as property on our balance sheet consists of two types: software that we develop for sale to our customers and software that we develop for internal use in providing services to our customers. The costs associated with developing software are capitalized differently depending on whether the software is for sale or for internal use. In each instance, in accordance with SFAS 86 or SOP 98-1 costs are capitalized only when the project has reached the point of technological feasibility or the application development stage. Costs incurred prior to this point are charged to earnings as expense.

For software sold to our customers, in accordance with SFAS 86 we capitalize both direct and indirect development costs such as programmers’ salaries, outside contractor costs, computer time, and allocated facility costs. Completed projects capitalized under SFAS 86 are amortized after reaching the point of general availability using the greater of the amount computed using the straight-line method or the ratio that current revenues bear to the total of current and anticipated revenues, based on the estimated useful life of the project, normally five years. The life used for amortization is based on the projected period of time that we will sell the product.

For software used internally, in accordance with SOP 98-1 direct development costs such as programmers’ salaries and fees paid to others for development are capitalized. Completed projects capitalized under SOP 98-1 are amortized using the straight-line method. The life used for amortization is based on the projected period of time that we will use the software to provide services.

The actual useful life of the product or software may be longer or shorter than the estimated useful life. If the actual life is longer, we would continue to realize value from the

asset while no longer recognizing a corresponding expense. If the actual life is shorter and we determine that the investment will not be recovered through the future sales of products or services, a non-cash charge to earnings could be required. The net realizable value of capitalized software is monitored on a periodic basis to ensure that the investment will be recovered through the future sale of products or in the case of internal software, through use.

Allowance for doubtful accounts

In the ordinary course of business, we extend credit to our customers for products and services they purchase from us. Monies due us are shown on our balance sheet as Accounts receivable. While we collect the vast majority of these receivables, we historically have been unable to collect a fraction of the accounts, or portions thereof. Allowance for doubtful accounts reflects our best estimate of the amounts that will be uncollectible and is determined by reviewing the aging of our accounts receivable. As we review our accounts as part of our collections process, accounts or portions thereof deemed to be uncollectible or to require excessive collection costs are written off to the allowance. Because our allowance is based on estimated uncollectibility, amounts that are actually uncollectible could be higher or lower. If the amounts are lower than expected, a credit to earnings could result whereas if the amounts are higher, an additional charge to earnings could be required. Our provision for bad debt expense over the past two years has been less than 0.7% of total revenue.

Data costs

We purchase data from a variety of sources primarily for use in our information products. This data is used in a variety of products and services as described above under “Revenue.” These data costs are typically held in deferred cost at the time of purchase with the majority expensed during one, or over several, months depending on the timing of payments for the data and as products utilizing the data are delivered to customers. Occasionally, we expand our product offerings by modifying our current products for a new market. In these cases, additional or new types of data costs may be incurred in developing the history database for these new products and we defer the additional data costs. These data costs are then amortized over the average life of the contracts for the new products, generally one to three years.

Investments

We consider and selectively enter into a variety of alliances, joint ventures and investments. As such, we maintain investments in both privately held and publicly traded entities.

Our investments in privately held entities are accounted for under either the cost, equity, or consolidation method, whichever is appropriate for the 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. We regularly review our investments for impairment issues and propriety of current accounting treatment. The primary method we use to determine whether or not an impairment issue exists is to compare the valuation of our investment with the underlying value of the entity in which we have an investment. We can determine the underlying value of the entity based on a number of factors, including: the

execution of business strategy and the steps that it has and is taking in the execution of that strategy, and the entity’s subsequent financing activity. If we determine that an impairment issue exists, we would realize the loss in Other income (expense) in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” If we determine that our accounting treatment should change from the cost to equity method, in accordance with the provisions of Accounting Principles Board Opinion No. 18, “Equity Method of Accounting for Investments in Common Stock” we would be required to retroactively restate our previously issued financial statements as if we had always accounted for the investment under the equity method. If our level of investment increased to a level such that we directly or indirectly controlled the entity, we would consolidate the entity’s results into our consolidated financial statements.

As reflected in the financial statements filed with this report, we have taken pre-tax non-cash charges of approximately $17.2 million related to our investments including MedUnite. The charges are reflected in Loss related to investments totaling approximately $14.9 million and Restructuring, impairment and other charges totaling approximately $2.3 million. Loss related to investments includes a write down of the net carrying value of our investment of approximately $11.6 million and provisions for other liabilities totaling approximately $3.3 million. Restructuring, impairment and other charges were incurred to reserve for receivables related to our investment.

Our investments in publicly traded entities are classified as available-for-sale securities and are reported at fair value and unrealized gains and losses are reported, net of taxes, as a component of stockholders’ equity. For example, if the market price of our investment has declined but we believe that the decline is only temporary because the underlying value of the business is higher than the market indicates, we will report the value of our investment at the price indicated by the market and report any change in the investment’s value as an unrealized holding loss. When a decline is determined to be other than temporary, we realize the gain or loss in Other income (expense).

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make other estimates and assumptions in addition to those discussed above. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.

Financial Review

We operate our business as two fundamental segments: Network Services and Systems; and Information Management. Network Services and Systems provides electronic connectivity to our NDCHealth 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.

(In millions, except per share data)

	Third Quarter Ended

	February 28, 2003			March 1, 2002			Change

Revenue:
Information Management	$	41.0		$	39.0		$	2.0		5.1	%
Network Services and Systems	68.0			50.2			17.8			35.5	%

Subtotal Revenue	109.0			89.2			19.8			22.2	%
Other	—			0.1			(0.1		)	(100.0	%)

Total Revenue	$	109.0		$	89.3		$	19.7		22.1	%


Operating Income (Loss):
Information Management	$	9.2		$	7.2		$	2.0		27.8	%
Network Services and Systems	14.2			12.6			1.6			12.7	%

Subtotal Operating Income	23.4			19.8			3.6			18.2	%
Other	—			(0.2		)	0.2			100.0	%

Total Operating Income	$	23.4		$	19.6		$	3.8		19.4	%


Net Income (Loss)	$	(3.7	)	$	11.2		$	(14.9	)	(133.0	%)


Diluted Earnings (Loss) Per Share	$	(0.11	)	$	0.31		$	(0.42	)	(135.5	%)

(In millions, except per share data)

	Nine Months Ended

	February 28, 2003		March 1, 2002			Change

Revenue:
Information Management	$	114.7	$	110.2		$	4.5		4.1	%
Network Services and Systems	199.7		144.3			55.4			38.4	%

Subtotal Revenue	314.4		254.5			59.9			23.5	%
Other	—		4.4			(4.4		)	(100.0	%)

Total Revenue	$	314.4	$	258.9		$	55.5		21.4	%


Operating Income (Loss):	$	21.9	$	18.3		$	3.6		19.7	%
Information Management	$	21.9	$	18.3		$	3.6		19.7	%
Network Services and Systems	45.8		37.8			8.0			21.2	%

Subtotal Operating Income	67.7		56.1			11.6			20.7	%
Other	—		(0.6		)	0.6			100.0	%

Total Operating Income	$	67.7	$	55.5		$	12.2		22.0	%


Net Income	$	20.1	$	31.0		$	(10.9	)	(35.2	%)


Diluted Earnings Per Share	$	0.58	$	0.87		$	(0.29	)	(33.3	%)

Revenue

Total revenue increased $19.7 million, or 22.1%, to $109.0 million in the third quarter of 2003 from $89.3 million in the third quarter of 2002. On a segment basis, Information Management revenue grew $2.0 million, or 5.1%, to $41.0 million in the third quarter of 2003 from $39.0 million in the third quarter of 2002. Revenue from our core information products and international products grew, but was offset by a decline in research and consulting services revenue which was impacted by the lack of discretionary spending by pharmaceutical manufacturers. Network Services and Systems revenue grew $17.8 million, or 35.5%, to $68.0 million in the third quarter of 2003 from $50.2 million in the third quarter of 2002. The increase was due to increased revenue from our TechRx pharmacy systems business acquired at the end of 2002 and increased transaction volumes and growth in customer base in our existing pharmacy and physician businesses. Revenue from TechRx and ScriptLINE, both acquired at the end of fiscal year 2002, was approximately $10.0 million in the third quarter of 2003. Revenue from divested businesses (Other) accounted for $0.1 million in the third quarter of 2002. Excluding the acquired and divested businesses, revenue grew 11.0% to $99.0 million in the third quarter of 2003 from $89.2 million in the third quarter of 2002.

Total revenue for the first nine months of 2003 increased $55.5 million, or 21.4% to $314.4 million from $258.9 million in the first nine months of 2002. On a segment basis, Information Management revenue grew $4.5 million, or 4.1%, to $114.7 million in the first nine months of 2003 from $110.2 million in the first nine months of 2002. Network Services and Systems revenue grew $55.4 million, or 38.4%, to $199.7 million in the first nine months of 2003 from $144.3 million in the first nine months of 2002 of which TechRx and ScriptLINE, both acquired at the end of fiscal year 2002, contributed approximately $30.0 million. Revenue from divested businesses (Other) accounted for $4.4 million in the first nine months of 2002. Excluding the acquired and divested businesses, revenue grew 11.7% to $284.4 million in the first nine months of 2003 from $254.5 million in the first nine months of 2002.

Operating Income

Operating income grew $3.8 million, or 19.4%, to $23.4 million in the third quarter of 2003 from $19.6 million in the third quarter of 2002. The increase was due primarily to increased revenue and cost savings efforts.

Information Management operating income increased $2.0 million, or 27.8%, to $9.2 million in the third quarter of 2003 from $7.2 million in the third quarter of 2002. The increase was primarily due to increased revenue, which allows us to leverage our infrastructure, and cost savings discussed below. Network Services and Systems operating income increased $1.6 million, or 12.7%, to $14.2 million in the third quarter of 2003 from $12.6 million in the third quarter of 2002. Included in Operating income for Network Services and Systems are ($2.3) in charges in the third quarter of 2003 related to our investment in MedUnite. Operating income from divested businesses (Other) accounted for ($0.2) million in the third quarter of 2002.

Operating income for the first nine months of 2003 increased $12.2 million, or 22.0%, to $67.7 million from $55.5 million in the first nine months of 2002. Information Management operating income increased $3.6 million, or 19.7%, to $21.9 million in the first nine months of

2003 from $18.3 million in the first nine months of 2002. Network Services and Systems operating income increased $8.0 million, or 21.2%, to $45.8 million in the first nine months of 2003 from $37.8 million in the first nine months of 2002. Included in Operating income for Network Services and Systems are ($2.3) in charges in the first nine months of 2003 related to the sale of our investment in MedUnite. Operating income from divested businesses (Other) accounted for ($0.6) million in the first nine months of 2002.

More information concerning segments can be found in Note 5 of the Notes to Unaudited Consolidated Financial Statements.

Cost of Service

Cost of service (COS) includes compensation, computer operations, data costs, consulting services, telecommunications, customer support, and application maintenance expenses. As a percentage of revenue, COS expense was 48.7% and 49.7% in the third quarters of 2003 and 2002, respectively, and 49.9% and 49.2% in the first nine months of 2003 and 2002, respectively. This increase in expense margin in the first nine months of 2003 is due primarily to higher expense margins of TechRx partially offset by lower compensation costs. Absolute COS expense increased $8.7 million, or 19.6%, from the third quarter of 2002 and increased $29.5 million, or 23.2% from the first nine months of 2002. We expect that COS expense, as a percentage of revenue, will increase in the remainder of 2003 as expenses related to bringing new products to market are incurred.

Sales, General and Administrative

Sales, general and administrative (SG&A) expense consists primarily of salaries, wages and expenses relating to sales, marketing, administrative and management employees, employee training costs, and occupancy of leased space directly related to these functions. As a percentage of revenue, SG&A expense was 20.5% and 21.7% in the third quarters of 2003 and 2002, respectively, and 20.5% and 22.2% in the first nine months of 2003 and 2002, respectively. The decline in expense margin during the third quarter of 2003 and during the first nine months of 2003 is due to centralization efforts and cost containments. Absolute SG&A expense increased $3.0 million, or 15.5%, from the third quarter of 2002 and increased $7.0 million, or 12.1% from the first nine months of 2002. We expect that SG&A expense, as a percentage of revenue, will increase as we continue to invest in our sales and marketing programs for the roll out of new products.

Income Taxes

Our annual effective income tax rate is currently 36%. Certain capital losses related to the loss on investments during the third quarter may not be deductible for tax purposes, and therefore have not been provided in the provision for income taxes, resulting in a tax expense although we have recorded a loss for the quarter.

Operating Expenses

Our most significant operating expenses are compensation, data costs, depreciation and amortization, and communications expense. Together these expenses represented 63% and 67% of our operating expenses in the third quarters of 2003 and 2002, respectively, and 64% and 69% in the first nine months of 2003 and 2002, respectively.

Expenses that we classify as Cost of service include compensation, computer operations, data costs, consulting services, telecommunications, customer support, and application maintenance expenses. In Sales, general and administrative we include compensation, sales, marketing, administration, and corporate overhead expenses.

Compensation Expense

As a service organization, compensation is our largest expense and we must continue to monitor it closely. In general, we are not always able to pass our inflationary cost increases on to our customers. As our costs go up, we must find new ways to operate our business in order to reduce costs and improve productivity. This includes addressing under-performing projects, products and people.

As a percent of revenue, compensation expense, which includes incentive pay, commissions, and related fringe benefits, has been decreasing. This decrease is due to increased productivity as a result of our training initiatives and cost control efforts, divestiture of less productive businesses, and the scalability of our business model. We will continue to look for ways to improve efficiencies, including centralization, in our businesses. Compensation expense is included in both Cost of service and Sales, general and administrative expense.

	Third Quarter Ended

(In millions)	February 28, 2003			March 1, 2002

Compensation expense	$	27.5		$	24.0
Revenue	$	109.0		$	89.3
Percent of Revenue	25.2		%	26.9		%

	Nine Months Ended

(In millions)	February 28, 2003			March 1, 2002

Compensation expense	$	83.5		$	76.7
Revenue	$	314.4		$	258.9
Percent of Revenue	26.6		%	29.6		%

Data Costs

We buy data from various sources to supplement our own data collection efforts. Data costs have been increasing due to increasing cost to purchase data. Data costs fluctuate throughout the year due to the varying amount of prescription data acquired. Data costs as a

percent of revenue fluctuates slightly throughout the year as a result of the varying amount of prescription data acquired and the seasonality of our revenue. We are actively pursuing programs to contain the increase in data costs. Data costs are included in Cost of service expense.

	Third Quarter Ended

(In millions)	February 28, 2003			March 1, 2002

Data cost	$	14.6		$	13.3
Revenue	$	109.0		$	89.3
Percent of Revenue	13.4		%	14.9		%

	Nine Months Ended

(In millions)	February 28, 2003			March 1, 2002

Data cost	$	38.9		$	33.7
Revenue	$	314.4		$	258.9
Percent of Revenue	12.4		%	13.0		%

Depreciation and Amortization

Depreciation and amortization expense increased from the third quarter of 2002 to the third quarter of 2003 in terms of dollars and as a percent of revenue, and increased from the first nine months of 2002 to the first nine months of 2003 in terms of dollars and as a percent of revenue primarily as a result of the TechRx and ScriptLINE acquisitions. We expect Depreciation and amortization expense to increase year over year for the remainder of 2003 as a result of the TechRx and ScriptLINE acquisitions and in the future as newly developed products are placed in service.

	Third Quarter Ended

(In millions)	February 28, 2003			March 1, 2002

Depreciation and amortization	$	7.8		$	5.9
Revenue	$	109.0		$	89.3
Percent of Revenue	7.2		%	6.6		%

	Nine Months Ended

(In millions)	February 28, 2003			March 1, 2002

Depreciation and amortization	$	23.0		$	18.4
Revenue	$	314.4		$	258.9
Percent of Revenue	7.3		%	7.1		%

Communication Costs

Communication costs increased from the third quarter of 2002 to the third quarter of 2003 in total dollars and decreased as a percent of revenue. Communication costs increased from the first nine months of 2002 to the first nine months of 2003 in total dollars and decreased as a percent of revenue. This increase in total communication costs is due to the inclusion of TechRx operating expenses in the financial results beginning in 2003. We continue to look at new technologies that will allow us to provide superior service to our customers at reduced cost. However, because competition in the telecommunications industry has resulted in historically low communications costs, we do not expect future reductions in communications costs to be as significant as they were during the past year. Communication costs are included primarily in Cost of service expense.

	Third Quarter Ended

(In millions)	February 28, 2003		March 1, 2002

Communication cost	$ 3.9		$ 3.6
Revenue	$ 109.0		$ 89.3
Percent of Revenue	3.6	%	4.0	%

	Nine Months Ended

(In millions)	February 28, 2003			March 1, 2002

Communication cost	$	12.7		$	11.7
Revenue	$	314.4		$	258.9
Percent of Revenue	4.0		%	4.5		%

Software Costs

Software costs consist of expenses related to the development of new products and maintenance and enhancement of existing 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.

Our current focus is developing new products such as Rx Safety Advisor, Pharmacy Aide, ePREMIS, Global Trends, and a next generation pharmacy systems platform being developed by TechRx. While higher than 2002, excluding TechRx, during 2003 capitalized software development costs, as a percentage of revenue, is on a declining trend as these new products are completed and placed into service. Looking forward, we expect this trend to continue.

Software maintenance expense for the first nine months of 2003, excluding TechRx, has decreased approximately $1.9 million from the first nine months of 2002. Savings have been achieved through the implementation of expense controls, such as the consolidation of data center management, and a shift in focus from maintenance and enhancement of existing products to the development of new products. These cost saving initiatives and shift in focus are reflected in the decrease in total net software expense, excluding TechRx, from 2002 to 2003.

	Third Quarter Ended

(In millions)	February 28, 2003						March 1, 2002

	Including TechRx			Excluding TechRx

Total costs associated with software development	$	9.3		$	5.4		$	4.5
Less: capitalization of internally developed software	(7.6		)	(3.8		)	(2.9		)

Capitalization as a % of revenue					3.7	%		3.3	%

Net software development expense	1.7			1.6			1.6
Software maintenance expense	2.2			1.8			2.4

Total net software expense	$	3.9		$	3.4		$	4.0

Revenue	$	109.0		$	101.5		$	89.3
Percent of Revenue	3.6		%	3.3		%	4.5		%

	Nine Months Ended

(In millions)	February 28, 2003						March 1, 2002

	Including TechRx			Excluding TechRx

Total costs associated with software development	$	27.3		$	15.7		$	13.3
Less: capitalization of internally developed software	(7.6		)	(3.8		)	(2.9		)

Capitalization as a % of revenue					3.8	%		3.3	%

Net software development expense	5.4			4.8			4.8
Software maintenance expense	7.2			6.0			7.9

Total net software expense	$	12.6		$	10.8		$	12.7

Revenue	$	314.4		$	291.2		$	258.9
Percent of Revenue	4.0		%	3.7		%	4.9		%

Liquidity and Capital Resources

Payments from our customers are our greatest source of liquidity. Additional sources of liquidity include our credit facility, issuances of common stock and other instruments, financing under capital lease arrangements, and vendor financing. The cash provided by these sources has a variety of uses. Most importantly, we must pay our employees and vendors for the services and materials they supply. Additional uses include expenditures for new capital equipment, development of additional products, investments in alliances, business acquisitions, payment of taxes, payment of dividends, and extension of credit to our customers.

Our operating cash requirements are generally satisfied with our customer receipts because we receive a higher level of cash from our customers than we expend for payments of salaries and other recurring operating costs. Excess cash that we generate after satisfying all of our continuing operating requirements is shown on our Statement of Cash Flows as Net cash provided by operating activities. This measure takes into account items such as non-cash

expenses included in our operating income, cash used to extend credit to our customers, and cash provided by our vendors extending credit to us.

Net cash provided by operating activities was $70.3 million for the first nine months of fiscal year 2003, an increase from $49.1 million in the first nine months of fiscal year 2002. Net income adjusted for non-cash items including Equity in losses of affiliated companies, restructuring, impairment and other charges, early extinguishment of debt charges, Loss related to investments, and Depreciation and amortization was $62.5 million in the first nine months of 2003 compared to $51.2 million in the first nine months of 2002 providing $11.3 million of the increase. Net operating loss carry-forwards related to our continuing operations allowed us to reduce our cash tax payments by $12.1 million in the first nine months of 2003. The majority of the benefit received from NOL’s in 2002 was provided by discontinued operations and therefore is not included in Net cash provided by operating activities. An emerging item in 2003 is Accrued interest on long term debt. In November 2002 we completed a refinancing, that is discussed in detail below, which significantly increased our interest expense from the prior year. Because interest payments on the $200 million note are made on June 1 and December 1 of each year, we had a significant amount of accrued interest on our balance sheet at February 28, 2003. Cash payment of this interest will be made in the first quarter of fiscal 2004. Other significant differences between the first nine months of 2003 and 2002 are Accounts receivable which used $5.3 million of cash in 2003 versus $2.0 million of cash in 2002, Prepaid and other current assets which used $8.6 million of cash in 2003 versus $4.5 million of cash in 2002, Accounts payable which used $1.3 million of cash in 2003 versus $6.3 million of cash in 2002, and Deferred income where a decrease in 2003 used $3.9 million of cash, versus an increase in 2002 which provided $4.7 million of cash. During the latter half of 2002, we centralized our billing and accounts receivable functions. Although this has resulted in an increase in Accounts receivable due to transition issues, we expect that this increase will subside and the benefits of this initiative will be faster billing to our customers and improved collections of Accounts receivable. The changes in Deferred income result from the timing difference between billing customers for services as required by their contracts and our recognition of related revenue. Net cash provided by operating activities is expected to be in the range of $85 to $90 million for the full 2003 fiscal year.

The nature of an information services business is such that it requires a substantial continuing investment in technology equipment and product development in order to expand the business. We are generally able to internally fund these investments from excess cash generated from operations. Additionally, historically we have also expanded our business through acquisitions and strategic investments in other businesses. The cash we use to expand our business is shown as Net cash used in investing activities. Capital expenditures, which reflect our investment in equipment and product development such as software costs discussed above, were $31.8 million in the first nine months of 2003 and $23.4 million in the first nine months of 2002. The increase in Capital expenditures in 2003 is due primarily to TechRx. TechRx Capital expenditures were $13.1 million in the first nine months of 2003 and primarily represent the continuing investment in the next generation pharmacy systems platform. We expect that Capital expenditures will be in the range of $40 to $45 million for the full 2003 fiscal year. We used $13.8 million of cash in the first nine months of 2003 for Investing activities and other non-current assets, which primarily represents payment of merger related costs associated with our

acquisition of a controlling interest in TechRx in 2002 and $4.1 million for the acquisition of German pharmaceutical data related to the development of a new informatics product.

The acquisition of a controlling interest in TechRx in 2002 was the first step of an agreement to acquire all outstanding shares of TechRx in a two-step transaction. Under the second step, which will close on or about May 30, 2003 if certain conditions are met, we will acquire the remaining equity in TechRx from minority stockholders for cash, shares of our common stock, or a combination of cash and shares of our common stock. The amount of the payment to TechRx shareholders will be determined based upon the satisfaction of certain financial and operational milestones by TechRx. Based on results for the first nine months of 2003, we currently expect the net purchase price for the balance of the TechRx equity outstanding to be in the range of approximately $100 million to $130 million.

The $225 million senior secured credit facility consists of a $100 million five-year revolving credit facility and a $125 million six-year term loan. This secured credit facility replaced our $150 million unsecured revolving line of credit and became effective on November 26, 2002. The $100 million revolving credit facility is available for working capital and general corporate purposes and has a variable interest rate based on market rates. As of February 28, 2003, no borrowings were outstanding under the revolving credit facility. The $125 million term loan has a variable interest rate based on market rates with a floor of six percent. The credit facility contains certain financial and non-financial covenants customary for financings of this nature, such as requiring us to maintain a certain leverage ratio of debt to EBITDA. EBITDA is defined in the credit agreement as income before equity in losses of affiliated companies, plus income taxes, interest expense, depreciation and amortization, and certain other non-cash losses on asset disposition, less minority interest in losses. As of February 28, 2003, we were in compliance with all restrictive covenants.

The $200 million senior subordinated notes are unsecured subordinated obligations of NDCHealth Corporation and its significant subsidiaries, $200 million aggregate principal amount, will mature on December 1, 2012, and are classified as fixed rate borrowings. As of February 28, 2003, the fair market value of the notes is approximately $208 million. The notes bear interest at 10 1/2% per annum.

We used $91 million of the net proceeds from borrowings under the credit facility and the notes to repay all indebtedness outstanding under our previous revolving credit facility. As a result of the retirement of this credit facility, we incurred $0.8 million in early extinguishment charges. $145.9 million of the net proceeds were used for redemption of our 5% convertible subordinated notes due November 2003. The redemption amount consisted of $143.8 million in principal, $1.1 million in accrued interest, and $1.0 million in early redemption premium. As a result of the redemption of the notes, we also incurred a charge of $0.4 million for the write-off of debt issuance costs.

Stock activities provide us an additional source of liquidity. Stock activities are primarily related to the exercises of employee stock options and issues under the employee stock purchase plan. In the first nine months of 2003, issuance of shares of our common stock generated $1.3 million versus $6.2 million in the first nine months of 2002. Although the issuance of additional shares provides us with liquidity, it results in a dilution of each individual stockholder’s equity in the Company. As mentioned above, the acquisition of the remaining shares of TechRx may be paid in cash, shares of our common stock, or a combination of both. The number of our shares issued to TechRx shareholders, if any, will depend on the acquisition price, the trading price of our shares at the time of the transaction, and the form of payment made to TechRx shareholders. We intend to register any shares to be used in the second step of the acquisition during fiscal 2003. Another use of cash is the payment of dividends. Cash used for payment of dividends was $4.2 million in the first nine months of 2003 and $4.1 million in the first nine months of 2002.

Net operating loss carry-forwards related to our discontinued operations allowed us to reduce our cash tax payments by $6.1 million in the first nine months of 2003 and $15.6 million in the first nine months of 2002. We do not expect any additional benefit from NOL’s related to our discontinued operations. Discontinued operations also used $4.4 million in the first nine months of 2003, primarily in the settling of liabilities, versus $6.6 million in the first nine months of 2002.

We believe that our current level of cash on hand, future cash flows from operations, and our credit facility are sufficient to meet our operating needs for the remainder of 2003.

Outlook

Based on the current economic environment, third quarter results, and the timing and expense associated with new product introductions, we estimate that for the full fiscal year 2003, total company revenue will grow 22% to 23% over the previous year and will be in the range of approximately $430 to $435 million. We expect diluted earnings per share to be in the range of $1.34 to $1.39, excluding the impact of the loss on the company’s investments including MedUnite of $0.41 per share and excluding the total charges related to early extinguishment of debt of approximately $0.04 per share. Including these charges, we expect diluted earnings per share to be in the range of $0.89 to $0.94 per share. Net cash provided by operating activities is expected to be in the range of $85 to $90 million for the full 2003 fiscal year. We have reviewed prospective compliance with our loan covenants for the next several quarters and believe that, at currant levels of operations, we will remain in compliance with all financial covenants.

Forward-Looking Information

This report contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of future capital expenditures, the likelihood of our success in developing and introducing new products and expanding our business, the timing of the introduction of new and modified products or services, financing plans, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost and timing of product upgrades and new product introductions, expected pricing levels, the timing and cost of planned capital expenditures, expected outcomes of pending litigation and expected synergies relating to acquisitions, joint ventures and alliances. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

• intense competition;

• consolidation in the health care industry;

• our ability to continue our expansion in new and existing markets;

• defaults in payment or a material reduction in purchases of our products by large customers;

• promotion of new products that may not be profitable;

• interruptions in some of our information services;

• our ability to adequately protect our proprietary technology;

• integration of our recent and future business combinations and strategic relationships;

• developments in complex state and federal regulations;

• changes in the U.S. healthcare environment;

• adverse rulings in litigation matters;

• additional capital requirements;

• substantial tax liability based on the loss of the tax-free status of our spin-off;

• changes in general economic and political conditions due to terrorist attacks, military action in the Middle East, or other events;

• economic and market conditions in the pharmaceutical manufacturing industry; and

• our ability to accelerate revenue growth during the remainder of fiscal 2003.

For further discussion of the factors noted above and other relevant factors, please see the information set forth under the caption “Additional Factors That May Affect Future

Performance” in our Annual Report on Form 10-K for the year ended May 31, 2002, which are incorporated herein by this reference.

We believe our forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

We believe that revenue excluding acquired and divested businesses is an additional meaningful measure of operating performance. However, this pro forma information will necessarily be different from comparable information provided by other companies and should not be used as an alternative to our operating and other financial information, as determined under accounting principles generally accepted in the United States of America.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the second quarter, we completed a refinancing that includes a $225 million senior secured credit facility. At the end of the third quarter, $125 million was outstanding at an interest rate of six percent. This loan has a variable interest rate based on market rates with a floor of six percent. Accordingly, we are exposed to the impact of interest rate movement. We have performed an interest rate sensitivity analysis over the near term with a 10% change in interest rates. Based on this analysis, our Net income would be impacted by approximately $0.5 million annually, which is not material. We do not expect any material interest rate risk from changes in interest rates.

ITEM 4 – CONTROLS AND PROCEDURES

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures and have concluded that these controls and procedures effectively ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely manner. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Part II

ITEM 1 - LEGAL PROCEEDINGS

be made by either party and each party waived any right to appeal. In related arbitration before the American Arbitration Association, parties have executed a Consent Order, providing that no payment to any opposing party is to be made by us. In a third related matter, pending in the Superior Court of Dekalb County, Georgia, the parties have reached a tentative agreement to dismiss the matters without prejudice.

ITEM 2 - CHANGES IN SECURITIES

On December 26, 2002 we redeemed all of our outstanding 5% convertible subordinated notes due November 2003. Thirty thousand dollars of bonds were converted to 864 shares of NDCHealth common stock, the remainder of $143,720,000 were redeemed for cash.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon our senior securities during the quarter ended February 28, 2003.

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 on Form 8-K were filed during the quarter ending February 28, 2003. The items reported, any financial statements filed, and the dates of any such reports are listed below.

(i) NDCHealth Corporation’s Current Report on Form 8-K filed on December 18, 2002, reporting as an exhibit under Item 7 the Company’s press release dated December 18, 2002 and under Item 9 the Company’s release of financial information including revenue and earnings expectations for the remainder of the fiscal year.

(ii) NDCHealth Corporation’s Current Report on Form 8-K filed on January 2, 2003, reporting as an exhibit under Item 7 the Company’s press release dated January 2, 2003 announcing the Company’s sale of its investment in MedUnite to ProxyMed and the expected related financial impact.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			NDCHealth Corporation

			(Registrant)

		By:	/s/ DAVID H. SHENK

			David H. Shenk Vice President & Corporate Controller (Chief Accounting Officer)

Date: March 24, 2003

CERTIFICATIONS

I, Walter M. Hoff, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NDCHealth Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 24, 2003
			/s/ WALTER M. HOFF

			Walter M. Hoff Chief Executive Officer

CERTIFICATIONS

I, Randolph L.M. Hutto, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NDCHealth Corporation;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: March 24, 2003
			/s/ RANDOLPH L.M. HUTTO

			Randolph L.M. Hutto Chief Financial Officer