Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the Quarterly Period Ended August 27, 2004

OR

For the transition period from                      to                     

Commission File No. 001-12392

NDCHealth Corporation

(Exact name of registrant as specified in charter)

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   ¨.

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, Par Value $.125 – 35,984,862 shares

outstanding as of October 1, 2004

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

2

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

3

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1—Nature of Operations

NDCHealth Corporation (“NDCHealth,” the “Company,” or “we” and other similar pronouns) conducts its business through three reportable segments: Network Services and Systems, Information Management and Pharmacy Benefit Services. The Network Services and Systems segment provides network based information processing services and systems to healthcare providers, including pharmacies, hospitals and physicians, in the U.S. and Canada. The Information Management segment provides data products and solutions primarily to pharmaceutical manufacturers. The Pharmacy Benefit Services segment, a consolidated subsidiary of which we maintain a 49% controlling ownership interest, provides various pharmacy benefit plan services primarily to healthcare payers.

Note 2—Summary of Significant Accounting Policies

Basis of Consolidation

The Condensed Consolidated Financial Statements include the accounts of NDCHealth Corporation and its majority-owned and controlled companies. Significant inter-company transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. Our fiscal year begins on the Saturday closest to June 1 and ends on the Friday closest to May 31. 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 to a particular year shall mean the Company’s fiscal year.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of our significant accounting policies and other information, you should read this report in conjunction with our financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended May 28, 2004 filed with the SEC.

In May 2004, we made the decision to divest our European businesses. As a result, our financial statements have been prepared with our European businesses’ assets and liabilities, results of operations, and cash flows displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Earnings Per Share

SFAS No. 128, “Earnings per Share,” requires a dual presentation of basic and diluted earnings (loss) per share (“EPS”). Basic earnings per share is computed by dividing reported Net Income (Loss) by weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing reported Net Income (Loss) by weighted average shares outstanding during the period and the impact of securities that, if exercised, would have a dilutive effect on earnings per share. All options with an exercise price less than the average market share price for the period have a dilutive effect on earnings per share.

5

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

The following tables set forth the computation of basic and diluted earnings for the three months ending August 27, 2004 and August 29, 2003:

Income from Continuing Operations of $1.1 million and $7.9 million in the first three months of fiscal 2005 and 2004 resulted in basic earnings per share of $0.03 and $0.23 and diluted earnings per share of $0.03 and $0.22, respectively.

Outstanding options to purchase 2,247,000 and 2,521,000 shares of common stock were not included in the computation of diluted earnings per share in the first three months of fiscal years 2005 and 2004, respectively, because the options’ exercise prices were greater than the average market price of NDCHealth common stock for those periods. For the three months ended August 27, 2004 and August 29, 2003, dividends declared per common share were $0.04.

Stock Options

We have chosen the disclosure option under SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”) and SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123,” and continue to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our plans. Accordingly, no compensation cost has been recognized for options granted under the plans. The weighted average fair value of options granted during the three months ended August 27, 2004 and August 29, 2003 was approximately $6.41 and $9.10, respectively. Had compensation cost for these plans been recognized based on the fair value of the options at the grant dates in accordance with SFAS No. 123, the effect on our Net (Loss) Income and (Loss) Earnings Per Share would have been as follows:

6

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

New Accounting Pronouncements

In January 2004, the FASB issued Financial Staff Position (“FSP”) 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” As permitted by FSP No. 106-1, we elected to defer recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) until authoritative guidance on accounting for the new federal subsidy was issued. In May 2004, the FASB issued FSP No. 106-2, which provides accounting guidance for this new subsidy. The Company sponsors a number of postretirement benefit plans and we have determined that there is no impact to us as a result of FSP No. 106-2.

Note 3—Discontinued Operations

During the fourth fiscal quarter of 2004, NDCHealth’s management performed a review of our European businesses to determine alternatives to mitigate losses associated with these operations. As a result of this review, our board of directors authorized the disposition of our European businesses. Accordingly, our financial statements have been prepared with the net assets and liabilities, results of operations, and cash flows of these operations displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation.

The Company is negotiating with interested buyers, and anticipates consummating a transaction by the end of December 2004. The operating loss from the European businesses was $0.5 million, or $0.01 per share, in the first quarter of fiscal 2005. Based on negotiations late in the first quarter of fiscal 2005, management believes the Company will most likely receive lower than previously expected total transaction proceeds. As a result, the carrying value of this asset was reduced, which increased the Loss from Discontinued Operations by $7.6 million, or $0.21 per share. As a result, total Loss from Discontinued Operations for the first quarter of fiscal 2005 was $8.1 million, or $0.22 per diluted share.

The operating results of our Discontinued Operations are summarized as follows:

The Net Loss from Discontinued Operations for the three months ended August 27, 2004 and August 29, 2003 is net of a tax benefit of $0.1 million in both periods.

7

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

The total assets and liabilities of Discontinued Operations are summarized as follows:

Material contingent liabilities related to Discontinued Operations are discussed in Note 8—Commitments and Contingencies.

Note 4—Restructuring and Other Charges

We took several actions in fiscal 2004 to reduce our workforce and eliminate redundant operations and activities. Consequently, in the first quarter of fiscal 2004 we recorded a charge of $1.4 million for severance related costs. Approximately $0.1 million of this severance cost was a non-cash charge related to modified stock options. Additionally, we incurred costs of $0.1 million related to lease terminations.

We did not incur any Restructuring and Other Charges in the first quarter of fiscal 2005.

The following table shows the fiscal 2005 activity related to restructuring liabilities from prior periods, which are included in Other Accrued Liabilities in the Condensed Consolidated Balance Sheets:

Note 5—Goodwill

The changes in the carrying amount of Goodwill for the three months ended August 27, 2004 are as follows:

8

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

We assess the recoverability of goodwill on at least an annual basis during the Company’s second quarter, or more frequently if circumstances suggest potential impairment. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

Note 6—Intangible Assets, Net

The table below presents Intangible Assets by asset class:

The aggregate amortization expense for the three months ended August 27, 2004 was $2.5 million and estimated amortization expense for the next five fiscal years is as follows:

9

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 7—Segment Information

Segment information for the three months ended August 27, 2004 and August 29, 2003 is presented below. We operate our business as three fundamental reportable segments: Network Services and Systems, which we offer to healthcare providers and payers; Information Management, which we offer primarily to pharmaceutical manufacturers; and Pharmacy Benefit Services, which we offer to third party payers. 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 analytic services primarily to pharmaceutical manufacturers. Pharmacy Benefit Services provides prescription benefit management services. Other includes fiscal 2004 Restructuring and Other Charges. The information presented below excludes Discontinued Operations. There has been no significant change in the composition of the reportable segments from the presentation of fiscal 2004 segment information included in our Annual Report on Form 10-K for the fiscal year ended May 28, 2004 filed with the SEC.

Note 8—Commitments And Contingencies

Our Board of Directors has authorized the disposition of our European operations in Germany and the United Kingdom, which are now recorded as discontinued operations. We currently provide pharmaceutical information services solutions to our European customers, pharmaceutical companies, through our German business. In this regard, we deliver the prescription data we receive from our data suppliers in a variety of products to our customers to assist them in operating their businesses. We deliver this prescription data to our customers in an electronic format. The specific electronic format within which such prescription data is actually delivered to such pharmaceutical companies in Germany is the subject matter of current litigation both before the European Commission and the German courts with IMS Health.

In the proceedings before the European Commission instituted by us on December 19, 2000, we are alleging that to the extent, and only 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 (“ECJ”) stayed this decision pending a complete review of the underlying substantive matters. Those matters are still proceeding.

10

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

In proceedings before the German courts instituted by IMS Health on December 21, 2000, IMS Health has alleged copyright infringement against each of Pharma Intranet Information AG, or 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. The case against us remains pending before the Frankfurt Regional Court at this time. On April 29, 2004, and upon referral by the Frankfurt Regional Courts on questions involving interpretations of European Competition laws, the European Court of Justice in Luxembourg, found in favor of the Company, finding that if IMS Health holds a valid, enforceable copyright, then the Company should be entitled to a compulsory license from IMS Health to the extent it can demonstrate that it offers “a new product” in circumstances where IMS Health is “capable of eliminating all competition on the relevant market.” This clarification of law has been referred back to the Frankfurt Regional Court and is pending review.

On October 14, 2003, we filed suit in the 96th Judicial District Court, Tarrant County, Texas, against 1-Rex, Inc., FDS, Inc., Healthcare Computer Corporation, Freedom Drug Stores, Inc., Freedom Data Services, Inc. and William Rex Akers (collectively the “Defendants”) for breach of contract, misappropriation of trade secrets, fraud, and negligent misrepresentation, seeking unspecified damages for Defendants’ wrongful conduct. On March 5, 2004, Defendants filed a counterclaim against us, asserting claims for tortious interference with a prospective contract, violations of Section 15.05(b) of the Texas Business and Commerce Code, civil conspiracy, and seeking a declaratory judgment in connection with various claims made by us. Defendants seek over $25 million in damages, plus attorneys’ fees, pre-judgment and post-judgment interest, and punitive damages. We intend to vigorously prosecute our causes of action against the Defendants, have denied all liability and damages sought in the counterclaim, and are vigorously defending the claims asserted against us.

On April 7, 2004, a putative class action captioned Garfield v. NDCHealth Corp. et al. was filed on behalf of all purchasers of NDCHealth Corporation common stock during the period October 1, 2003 through March 31, 2004 against NDCHealth and two of the Company’s officers, Walter Hoff and Randolph Hutto, in the United States District Court for the Northern District of Georgia. The Complaint alleges that the Company employed improper revenue recognition practices in violation of Generally Accepted Accounting Principles. The Complaint was filed shortly after NDCHealth’s April 1, 2004 announcement that it would delay the release of its fiscal third quarter financial results pending the completion of a special independent review of the timing of recognition of revenue related to sales of NDCHealth’s physician practice management systems through value added resellers. On August 9, 2004, the Complaint was amended to extend the putative class period to include the period from August 21, 2002 through April 19, 2004 and to add additional claims related to the timing of the Company’s write-down of its investment in MedUnite. On September 1, 2004, the Complaint was amended further to include Charles W. Miller, David H. Shenk, James W. FitzGibbons and Lee Adrean, each an officer of the Company, and Ernst & Young LLP, the Company’s independent registered public accounting firm, as additional defendants. As amended, the Complaint asserts violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act. The lawsuit seeks unspecified damages, attorney’s fees and costs, and prejudgment interest. The Company intends to vigorously defend itself.

11

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

On April 22, 2004, another putative class action captioned Datwani v. NDCHealth Corp., et al. was filed on behalf of all purchasers of NDCHealth common stock during the period October 1, 2003 through March 31, 2004 against NDC, Hoff and Hutto in the United States District Court for the Eastern District of Pennsylvania. The allegations in this lawsuit are similar to those made in the Garfield action described above. The lawsuit was voluntarily dismissed by the plaintiffs on July 20, 2004.

On April 28, 2004, a lawsuit was filed against us in the General Court of Justice, Superior Court Division, in the State of North Carolina, County of Forsyth, by Carolina Coupon Clearing, Inc d/b/a Carolina Services Company, Inc. (“CSC”). CSC has sued us for alleged unfair trade practices under N.C. Gen. Stat. §75-1.1, alleged tortious interference and the supposed breach of certain alleged contracts. CSC seeks: i.) temporary, preliminary, and permanent injunctions against us; ii.) damages in excess of $20,000; iii.) treble damages pursuant to N.C. Gen. Stat. §75-16; iv.) reasonable attorneys’ fees; and v.) incidental and consequential damages. We have removed CSC’s lawsuit to federal district court and answered the lawsuit by denying CSC’s legal claims and denying CSC is owed any damages. We have also filed a counterclaim asserting that: 1) to the extent one of the agreements at issue is an enforceable contract between CSC and us, CSC has breached such contract; and 2) CSC has committed unfair trade practices under N.C. Gen. Stat. §75-1.1. We deny any liability to CSC and intend to vigorously defend against CSC’s claims, as well as vigorously prosecute our counterclaims. The parties are presently discussing settlement of this matter, however we are unable to predict the eventual outcome of the settlement.

The Internal Revenue Service (“IRS”) is currently auditing our fiscal year 2001 consolidated federal income tax return. The primary issue is a worthless stock loss deduction claimed as a result of the divestiture of the management services business (“PHSS”). This deduction created a net operating loss which was used to offset most of the tax liability for fiscal years 2002 and 2003. In fiscal year 2001, we provided a tax contingency reserve of approximately 50% of the $25.0 million tax benefit claimed for the worthless stock loss deduction. We believe that our current reserve of the ultimate settlement of this issue is properly stated as of August 27, 2004. However, if the worthless stock loss and certain other issues are settled in the IRS’ favor, we estimate that we would incur an incremental tax expense of $12.8 million and would have to pay approximately $8.0 million of additional cash taxes, excluding interest and penalties. This expense, if incurred, would be reflected in the results from Discontinued Operations as PHSS was treated as a Discontinued Operation beginning in Fiscal 2000. We are unable to predict the timing of the completion of this audit.

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 9—Comprehensive (Loss) Income

Comprehensive (loss) income includes unrealized gains and losses which are excluded from the Condensed Consolidated Statements of Operations. The components of comprehensive (loss) income are as follows:

12

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 10—Retirement Benefits

The NDCHealth noncontributory defined benefit pension plan (the “Plan”) covers substantially all of our United States employees who have met the eligibility provisions of the Plan as of May 31, 1998. The defined benefit pension plan was closed to new participants beginning June 1, 1998, and benefit accruals for years of service ceased on July 31, 1998. Additionally, benefit accruals for compensation level increases ceased on June 30, 2003. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974, as amended.

Net periodic pension cost for our pension plan during the first quarters of fiscal 2005 and 2004 included the following components:

The expense listed above relates to continuing operations. There were no pension costs related to discontinued operations.

We have not made any pension contributions during the fiscal year to date. We presently anticipate contributing $1.8 million to fund our pension plan during the remainder of our 2005 fiscal year.

Note 11—Consolidating Financial Data Of Subsidiary Guarantors

In fiscal year 2003, we issued $200 million aggregate principal amount of 10 ¹/2% senior subordinated notes due 2012. Our wholly-owned, material subsidiaries, which include NDC Health Information Services (Arizona) Inc., and NDC of Canada, Inc., have fully and unconditionally guaranteed the notes on a joint and several basis.

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

13

NDCHealth Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)