<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000
Commission File Number- 0-27602
-------
NCS HealthCare, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 34-1816187
- --------------------------------------- -----------------------------------
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122
- ----------------------------------------------------------
(Address of principal executive offices and zip code)
(216) 378-6800
- ----------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check 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 requirement for the past 90 days.
Yes X No __
--
COMMON STOCK OUTSTANDING
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practical date.
Class A Common Stock, $ .01 par value -- 15,446,683 shares as of May 8, 2000
Class B Common Stock, $ .01 par value -- 5,799,793 shares as of May 8, 2000
<PAGE> 2
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
March 31, 2000 and June 30, 1999 3
Condensed Consolidated Statements of Operations
Three and nine months ended-
March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended-
March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements - March 31, 2000 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
(Unaudited) (Note A)
March 31, June 30,
ASSETS 2000 1999
--------------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,389 $ 29,424
Accounts receivable, less allowances 154,524 160,168
Inventories 38,568 49,244
Other 36,202 46,397
--------- ---------
Total current assets 249,683 285,233
Property and equipment, at cost
net of accumulated depreciation and amortization 49,914 59,116
Goodwill, less accumulated amortization 326,976 343,247
Other assets 11,151 11,903
--------- ---------
Total assets $ 637,724 $ 699,499
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit in default $ 206,130 $ --
Accounts payable 45,691 50,061
Accrued expenses and other liabilities 24,257 37,777
--------- ---------
Total current liabilities 276,078 87,838
Line of credit -- 214,700
Long-term debt, excluding current portion 1,898 1,936
Convertible subordinated debentures 102,000 100,000
Other 26,467 18,591
Stockholders' Equity:
Preferred stock, par value $ .01 per share, 1,000,000
shares authorized; none issued -- --
Common stock, par value $ .01 per share:
Class A - 50,000,000 shares authorized; 15,192,482
and 14,277,492 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively 152 143
Class B - 20,000,000 shares authorized; 5,799,793
and 6,005,280 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively 58 60
Paid-in capital 271,440 263,882
Retained earnings (accumulated deficit) (40,369) 12,349
--------- ---------
Total stockholders' equity 231,281 276,434
--------- ---------
Total liabilities and stockholders' equity $ 637,724 $ 699,499
========= =========
</TABLE>
Note A: The balance sheet at June 30, 1999 has been derived from the audited
consolidated financial statements at that date, but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 170,462 $ 184,611 $ 533,976 $ 535,487
Cost of revenues 139,043 137,167 424,833 398,787
--------- --------- --------- ---------
Gross profit 31,419 47,444 109,143 136,700
Selling, general and administrative expenses (1) 30,333 36,090 94,675 103,180
Charge to increase allowance for doubtful accounts -- -- 11,885 --
Nonrecurring and other special charges 5,462 -- 33,414 --
--------- --------- --------- ---------
Operating income (loss) (4,376) 11,354 (30,831) 33,520
Interest expense, net 6,440 4,588 18,560 13,367
--------- --------- --------- ---------
Income (loss) before income taxes (10,816) 6,766 (49,391) 20,153
Income tax expense 12,122 2,807 3,326 8,531
Cumulative effect of accounting change (1) -- -- -- (2,921)
--------- --------- --------- ---------
Net income (loss) $ (22,938) $ 3,959 $ (52,717) $ 8,701
========= ========= ========= =========
Net income (loss) per share - basic $ (1.03) $ 0.20 $ (2.50) $ 0.43
========= ========= ========= =========
Net income (loss) per share - diluted $ (1.03) $ 0.19 $ (2.50) $ 0.43
========= ========= ========= =========
Net income (loss) per share before cumulative
effect of accounting change - basic $ (1.03) $ 0.29 $ (2.50) $ 0.79
========= ========= ========= =========
Net income (loss) per share before cumulative
effect of accounting change - diluted $ (1.03) $ 0.29 $ (2.50) $ 0.79
========= ========= ========= =========
Shares used in the computation - basic 22,302 20,252 21,116 20,176
Shares used in the computation - diluted 22,302 20,352 21,116 20,338
</TABLE>
(1) As disclosed in the Form 10-K for the year ended June 30, 1999, selling,
general and administrative expenses as originally reported for the three
and nine month periods ended March 31, 1999 excluded pre-tax costs of
$3,275 and $7,515, respectively, that were capitalized prior to the
adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities." The
$2,921 cumulative effect of the accounting change represents start-up
costs, net of tax, that were previously capitalized as of June 30, 1998. As
a result of the restatement for the adoption of SOP 98-5, net income and
diluted earnings per share, were reduced by $1,915 and $0.10 from the
originally reported amounts of $5,874 and $0.29, respectively, for the
three months ended March 31, 1999. Net income and diluted earnings per
share, were reduced by $7,267 and $0.36 from the originally reported
amounts of $15,968 and $0.79, respectively, for the nine months ended March
31, 1999.
See notes to condensed consolidated financial statements.
4
<PAGE> 5
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
2000 1999
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(52,717) $ 8,701
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash portion of special and nonrecurring charges 36,054 --
Depreciation and amortization 20,780 17,505
Deferred income taxes 1,693 --
Cumulative effect of accounting change, net of taxes -- 2,921
Changes in assets and liabilities, net of effects of assets and
liabilities acquired:
Accounts receivable, net (2,291) (52,372)
Accrued expenses and other liabilities (12,724) (1,954)
Other, net 22,383 (9,756)
-----------------------
Net cash provided by (used in) operating activities 13,178 (34,955)
INVESTING ACTIVITIES
Purchases of businesses -- (1,204)
Capital expenditures for property and equipment, net (4,863) (21,128)
Other (5,484) (3,875)
-----------------------
Net cash used in investing activities (10,347) (26,207)
FINANCING ACTIVITIES
Line-of-credit, net (8,570) 64,900
Repayment of long-term debt (3,296) (1,418)
Proceeds from issuance of long-term debt -- 137
Proceeds from exercise of stock options -- 371
-----------------------
Net cash provided by (used in) financing activities (11,866) 63,990
-----------------------
Net increase (decrease) in cash and cash equivalents (9,035) 2,828
Cash and cash equivalents at beginning of period 29,424 21,186
-----------------------
Cash and cash equivalents at end of period $ 20,389 $ 24,014
=======================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended March
31, 2000 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2000. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended June 30, 1999.
2. As a result of the Company's second and third quarter financial
performance, the Company is in violation of certain financial covenants
of the credit agreement related to its revolving credit facility. On
April 21, 2000, the Company received a formal notice of default from
the bank group. As a result of the notice of default, the interest rate
on the revolving credit facility will increase to the Prime Rate plus
2%. In addition, the Company will not be permitted to obtain any
further funds under the credit facility until the defaults have been
waived by the bank group. The Company is currently in discussions to
obtain waivers of the covenant violations and to amend the credit
agreement. Until the amendment to the credit agreement is obtained, the
borrowings of $206,130,000 under the credit facility will be classified
as a current liability.
3. During the third quarter of fiscal 2000, the Company recorded
restructuring and other special charges of $5.5 million ($3.4 million
net of tax) associated with the continuing implementation and execution
of strategic restructuring and consolidation activities and the planned
disposition of non-core assets.
The Company continued its plan of restructuring to consolidate certain
pharmacy sites in close geographic proximity in order to improve
operating efficiencies. During the quarter, the Company decided to
consolidate three additional pharmacy sites into either a new or
existing location. During the three months ended March 31, 2000, the
Company recorded nonrecurring charges of $3.1 million before tax
related to these site consolidations and additional costs incurred on
site consolidations previously announced.
During the third quarter of fiscal 2000 the Company incurred additional
costs of $1.1 million before tax related to its previously announced
plan to dispose of non-core and/or non-strategic assets. The costs
consisted primarily of asset impairments.
The remaining $1.3 million before tax of the nonrecurring charge
primarily relates to severance incurred during the third quarter
associated with the Company's expense reduction initiatives, additional
asset impairments and other expenses.
Employee severance costs included in the nonrecurring charge relate to
the termination of 109 employees. As of March 31, 2000, 75 employees
have been terminated.
6
<PAGE> 7
Details of the third quarter fiscal 2000 restructuring and special charge,
related activity and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve
Description Cash/Non-cash Charge Activity At 3/31/00
----------- ------------- -------------- -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ .4 $ (.2) $ .2
Lease terminations Cash .8 (.1) .7
Asset impairments Non-cash 1.4 (1.4) --
Other Cash .5 (.3) .2
Disposition of Assets
Asset Impairment Non-cash 1.0 (1.0) --
Other Cash .1 (.1) --
Other
Cash 1.0 (.7) .3
Non-cash
.3 (.3) --
-------- -------- --------
Total $ 5.5 $ (4.1) $ 1.4
======== ======== ========
</TABLE>
. During the second quarter of fiscal 2000, the Company recorded special and
nonrecurring charges of $39.8 million ($26.9 million net of tax). A special
charge of $11.9 million before tax was recorded to increase the allowance
for doubtful accounts, and nonrecurring and other special charges of $27.9
million before tax were recorded in connection with the implementation and
execution of strategic restructuring and consolidation initiatives of
certain operations, the planned disposition of certain non-core and/or
non-strategic assets, impairment of certain assets, and costs related to a
tentative settlement with federal authorities regarding the investigation of
the Company's Indianapolis, Indiana facility.
The special charge to increase the allowance for doubtful accounts primarily
resulted from continuing negative changes observed in industry and customer
trends during the three months ended December 31, 1999. The circumstances of
the customer and industry trends primarily relate to bankruptcies and
significant financial difficulties that continue to be experienced by the
Company's customers primarily as a result of the implementation of the
Medicare Prospective Payment System. The total provision for doubtful
accounts, including the amounts included in the special charge, was $14.0
million for the three months ending December 31, 1999.
The Company continued its plan of restructuring to consolidate certain
pharmacy sites in close geographic proximity in order to improve operating
efficiencies. As a result, five additional pharmacy sites were consolidated
into either a new or existing location as of March 31, 2000. During the
three months ended December 31, 1999, the Company recorded nonrecurring
charges of $1.9 million before tax related to these site consolidations.
During the second quarter of fiscal 2000 the Company adopted a formal exit
plan to dispose of certain non-core and/or non-strategic assets. The Company
recorded nonrecurring charges of $17.4 million, before tax, related to the
planned disposition of assets primarily consisting of impairment to goodwill
and property and equipment. Total revenue and operating income of the
related business units was $25.9 million and $1.6 million, respectively, for
the nine month period ended March 31, 2000. During April 2000, the Company
disposed of two ancillary operations.
During December 1999, the Company reached a tentative settlement with the
U.S. Attorney's office in the Southern District of Indiana regarding the
federal investigation of the Company's facility in Indianapolis, Indiana.
Accordingly, in the second quarter of fiscal 2000, the Company recorded the
tentative settlement amount in the nonrecurring charge. Under the terms of
the settlement, the Company will pay $4,100,000 to the U.S Attorney's
office. The Company also agreed to maintain its current level of spending in
connection with its compliance
7
<PAGE> 8
systems and procedures for a period of three years. If the Company does not
comply with the terms of the accord, an additional $1,500,000 will be payable to
the U.S. Attorney's office. See Note 6.
The remaining $4.5 million before tax of the nonrecurring charge primarily
relates to severance incurred during the second quarter associated with the
Company's expense reduction initiatives, additional asset impairments and other
expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 230 employees. As of March 31, 2000, all 230 employees have been
terminated.
Details of the second quarter fiscal 2000 special and nonrecurring charge,
related activity and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve
Description Cash/Non-cash Charge Activity At 3/31/00
----------- ------------- ------ -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ .6 $ (.6) $ --
Lease terminations Cash .4 (.1) .3
Asset impairments Non-cash .7 (.7) --
Other Cash .2 (.1) .1
Special increase to allowance
for doubtful accounts Non-cash 11.9 (11.9) --
Disposition of Assets
Asset Impairment Non-cash 17.0 (17.0) --
Other Cash .4 -- .4
Other
Cash 5.1 (.7) 4.4
Non-cash
3.5 (3.5) --
----- ------ -----
Total $39.8 $(34.6) $ 5.2
===== ===== =====
</TABLE>
During the fourth quarter of fiscal 1999, the Company recorded special and
nonrecurring charges of $40.5 million ($24.3 million net of tax). A special
charge of $32.4 million before tax was recorded to increase the allowance
for doubtful accounts, and nonrecurring charges of $8.1 million before tax
were recorded in connection with the implementation and execution of
strategic restructuring and consolidation initiatives of certain operations
and other nonrecurring items.
The special charge to increase the allowance for doubtful accounts resulted
from significant changes observed in industry and customer trends during the
last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers
primarily as a result of the Medicare Prospective Payment System
implementation. The acquisition items encountered pertain to specific
accounts receivable collectibility issues identified relating to previous
utilization of "legacy" systems, and other nonrecurring issues which have
resulted in potentially uncollectible accounts receivable.
During the fourth quarter of fiscal 1999, the Company adopted a new plan of
restructuring to consolidate certain pharmacy sites in similar geographies.
The plan is a continuation of the plan adopted in fiscal 1998 to combine
pharmacies in close proximity in order to improve operating efficiencies. As
a result of the new exit plan, four pharmacy sites were consolidated into
either a new or existing location as of March 31, 2000. During the year
ended June 30, 1999, the Company recorded nonrecurring charges of $4.7
million before tax related to the new site consolidations and additional
costs incurred on site consolidations announced in the prior year.
8
<PAGE> 9
The remaining $3.4 million before tax of the nonrecurring charge primarily
relates to severance incurred during the fourth quarter associated with the
Company's expense reduction initiatives, additional acquisition related and
other expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees. As of March 31, 2000, all 120 employees have
been terminated.
Details of the fourth quarter fiscal 1999 special and nonrecurring charge,
related activity and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/99 Activity At 3/31/00
----------- ------------- ------ -------- ---------- -------- -----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ 2.1 $(1.5) $ .6 $ (.6) $--
Lease terminations Cash .6 (.1) .5 (.4) .1
Asset impairments Non-cash 1.5 (1.5) -- -- --
Other Cash .5 (.5) -- -- --
Special increase to allowance
For doubtful accounts Non-cash 32.4 (32.4) -- -- --
Other Cash 3.4 (2.7) .7 (.4) .3
----- ------ ----- ----- -----
Total $40.5 $(38.7) $ 1.8 $(1.4) $ .4
===== ===== ===== ===== =====
</TABLE>
During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8.9 million before tax primarily related to: 1) the
adoption of a formal plan of restructuring to consolidate certain pharmacy
sites in similar geographies; 2) the buyout of existing employment
agreements with the prior owners of certain acquired businesses; 3) the
write-off of certain financing fees; and 4) additional acquisition related
expenses.
The Company adopted a formal plan of restructuring to combine pharmacies in
close geographical proximity in order to improve operating efficiencies. As
a result of the plan, 17 pharmacy sites were to be consolidated into either
new or existing locations and an estimated total of 149 employees
terminated. As of March 31, 2000, 15 site consolidations were completed and
143 employees have been terminated.
Details of the fourth quarter fiscal 1998 nonrecurring charge, related
activity and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/99 Activity At 3/31/00
----------- ------------- ------ -------- ---------- -------- -----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance packages Cash $ .5 $(.5) $ -- $ -- $ --
Lease terminations Cash .7 (.4) .3 (.2) .1
Asset impairments Non-cash 3.5 (3.5) -- -- --
Other Cash .6 (.6) -- -- --
Buyout of employment agreements Cash .9 (.8) .1 -- .1
Write-off financing fees Non-cash 1.3 (1.3) -- -- --
Other
Cash 1.0 (.9) .1 (.1) --
Non-cash .4 (.4) -- -- --
---- ---- ---- ---- ----
Total $8.9 $(8.4) $ .5 $(.3) $ .2
==== ==== ==== ==== ====
</TABLE>
9
<PAGE> 10
4. The following table sets forth the computation of basic and diluted
earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per share - net income $(22,938) $ 3,959 $(52,717) $ 8,701
Effect of dilutive securities:
Convertible debentures -- -- -- --
-------- -------- -------- --------
Numerator for diluted earnings per share $(22,938) $ 3,959 $(52,717) $ 8,701
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share -
weighted average common shares 22,302 20,252 21,116 20,176
-------- -------- -------- --------
Effect of dilutive securities:
Stock options -- 100 -- 162
Convertible debentures -- -- -- --
-------- -------- -------- --------
Dilutive potential common shares -- 100 -- 162
-------- -------- -------- --------
Denominator for diluted earnings per share 22,302 20,352 21,116 20,338
======== ======== ======== ========
Basic earnings per share $ (1.03) $ 0.20 $ (2.50) $ 0.43
======== ======== ======== ========
Diluted earnings per share $ (1.03) $ 0.19 $ (2.50) $ 0.43
======== ======== ======== ========
</TABLE>
At March 31, 2000, the Company had 1,335,944 of employee stock options that
are potentially dilutive that were not included in the computation of
diluted earnings per share as their effect would be antidilutive. The
Company had $102,000,000 and $100,000,000 of convertible subordinated
debentures outstanding at March 31, 2000 and 1999, respectively, that were
convertible into 3,258,000 and 3,058,000 shares of Class A Common Stock,
respectively, that were not included in the computation of diluted earnings
per share as their effect would be antidilutive for all periods presented.
The 1,750,000 shares of Class A Common Stock that are to be issued to
certain selling shareholders of the PharmaSource Group, Inc. regarding an
earn-out provision in the acquisition agreement have been included in the
weighted average common shares for the three and nine month periods ended
March 31, 2000 (see Note 6).
5. The effective tax rate of (6.7%) for the nine months ended March 31, 2000
differs from the effective tax rate booked in prior periods due primarily to
the creation of a valuation allowance in the amount of $19,558,000. The
valuation allowance is principally composed of federal and state income tax
net operating loss carryforwards which management has determined are more
likely than not to expire unused.
6. During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS
Indiana), a wholly-owned subsidiary of the Company, reached a tentative
settlement with the U.S. Attorney's office in the Southern District of
Indiana (USA-Indiana) regarding the previously disclosed federal
investigation of the Company's facility in Indianapolis, Indiana. Under the
terms of the settlement, the Company will pay $4,100,000 to the USA-Indiana.
The Company also agreed to maintain its current level of spending in
connection with its compliance systems and procedures for a period of three
years. If the Company does not comply with the terms of the accord, an
additional $1,500,000 will be payable to the USA-Indiana. The Company
accrued the tentative settlement in the second quarter of fiscal 2000.
10
<PAGE> 11
The Company's facility in Herrin, Illinois has been the subject of an
investigation by federal authorities, and the Company has engaged in
discussions with representatives of the U.S. Attorney's office concerning
the alleged violations of federal law at that facility. It is possible that
the imposition of significant fines or other remedies in connection with the
Illinois matter could have a material effect on the Company's financial
condition and results of operations.
On January 21, 2000, the Company reached a tentative settlement related to
litigation with certain selling shareholders of the PharmaSource Group, Inc.
regarding amounts payable under the terms of an earn-out provision in the
acquisition agreement. Under the terms of the tentative settlement, the
Company will issue 1,750,000 Class A Common Shares and a $2,000,000
convertible subordinated debenture maturing on August 15, 2004. The note and
accrued "payment-in-kind" interest will be convertible into a maximum of
200,000 Class A Common Shares at a conversion price of $8.00 per share. The
settlement was recorded in the third quarter of fiscal 2000. The 1,750,000
Class A Common Shares were not issued as of March 31, 2000; however, they
have been included in the weighted average common shares for the three and
nine month periods ended March 31, 2000 (see Note 4).
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Operating results for the three and nine month periods ended March 31, 2000
continued to be negatively impacted by the implementation of Medicare's
Prospective Payment System (PPS). The adverse impact of the implementation of
the PPS under the Balanced Budget Act of 1997, for Medicare residents of skilled
nursing facilities was significantly greater than anticipated. PPS has created
numerous changes to reimbursement policies applicable to skilled nursing
facilities under Medicare Part A. Prior to PPS, Medicare reimbursed each skilled
nursing facility based on that facility's actual Medicare Part A costs plus a
premium. Under PPS, Medicare pays skilled nursing facilities a fixed fee per
Medicare Part A patient day based on the acuity level of the patient. The per
diem rate covers all items and services furnished during a covered stay for
which reimbursement was formerly made separately under Medicare. Consequently,
the Company has experienced revenue pressure as a result of nursing facilities
attempting to manage pharmaceutical costs along with all other costs associated
with patient care under a simple per diem reimbursement amount. In addition,
there has been a reduction in utilization of other therapies such as speech,
occupational and physical rehabilitation. Additionally, as a result of these
changes, skilled nursing facilities have become increasingly more reluctant to
admit Medicare residents, especially those requiring complex care, causing
Medicare census in these facilities to weaken and a reduction in the average
length of stay for Medicare residents. These factors have had the effect of
significantly reducing overall occupancy in the facilities served by the
Company. The resident acuity level has also decreased as these facilities have
attempted to avoid high acuity patients negatively impacting overall utilization
of drugs, particularly those with higher cost such as infusion therapy. For
Medicare certified skilled nursing facilities with a high cost structure, or
those which are unable to cut costs, PPS has caused significant earnings and
cash pressure. Some facilities have sought bankruptcy protection or
consolidation as a method of reducing costs and increasing efficiencies causing
the Company to experience some bed loss.
These outcomes have negatively impacted nursing facilities and the institutional
pharmacy services industry as a whole. The recent passing of the Balanced Budget
Refinement Act may provide some relief to skilled nursing facilities; however, a
very difficult environment remains and management continues to react to
pressures in the current PPS environment by adjusting its cost structure. The
Company is reducing operating and overhead expenses and accelerating the
consolidation and/or closing of pharmacy locations.
Revenues for the three months ended March 31, 2000 decreased $14,149,000 or 7.7%
to $170,462,000 from $184,611,000 recorded in the comparable period in fiscal
1999. Revenues for the nine months ended March 31, 2000 decreased $1,511,000 or
0.3% to $533,976,000 from $535,487,000 recorded in the comparable period in
fiscal 1999.
Approximately $12,000,000 of the decrease in revenue during the three month
period ended March 31, 2000 over the comparable prior year period is
attributable to a decrease in revenue from the Company's allied and ancillary
services. This decrease is due to decisions by management to terminate
uneconomic accounts and the wind-down of certain lines of business which the
Company has chosen to exit. During April 2000, the Company closed two ancillary
operations that were not contributing in a positive manner to the overall
performance of the Company. The remaining $2,100,000 of the revenue decrease is
attributable to the Company's pharmacy operations and is related to net bed loss
during the period. The total number of beds serviced by the Company as of March
31, 2000 was 250,000, down 3.1% from the 258,000 beds served at March 31, 1999,
and a 4.6% decrease from the 262,000 beds served at June 30, 1999. Although the
Company added a number of new customers during the three and nine month periods
ended March 31, 2000 through its sales and marketing efforts, the number of beds
served by the Company declined due to decisions by management to terminate
uneconomic accounts as well as general bed loss typically experienced in a
competitive environment. The decrease in revenue during the nine month period
ended March 31, 2000 over the comparable prior year period is attributable to
the decrease in revenue from the Company's allied and ancillary services
discussed above partially offset by a slight increase in revenue from the
Company's pharmacy operations.
Cost of revenues for the three months ended March 31, 2000 increased $1,876,000
or 1.4% to $139,043,000 from $137,167,000 recorded in the comparable period in
fiscal 1999. Cost of revenues for the nine months ended March 31, 2000 increased
$26,046,000 or 6.5% to $424,833,000 from $398,787,000 recorded in the comparable
period in fiscal 1999. Cost of revenues as a percentage of revenues for the
three and nine month periods ended March 31,
12
<PAGE> 13
2000 was 81.6% and 79.6%, respectively, compared to 74.3% and 74.5% for the
comparable periods during the prior fiscal year.
Gross margins during the three and nine month periods ended March 31, 2000 were
significantly effected by the impact of the PPS reimbursement system. The
current period margin pressure resulted from continued Medicare Part A pricing
pressure, lower than anticipated gross margins on PPS related contracts and
reduced acuity levels and census at customer facilities. In addition, the payor
mix has continued to shift towards lower margin payers including Medicaid and
insurance.
Selling, general and administrative expenses for the three months ended March
31, 2000 decreased by $5,757,000 or 16.0% to $30,333,000 from $36,090,000
recorded in the comparable period in fiscal 1999. Selling, general and
administrative expenses for the nine months ended March 31, 2000 decreased by
$8,505,000 or 8.2% to $94,675,000 from $103,180,000 recorded in the comparable
period in fiscal 1999. Selling, general and administrative expenses as a
percentage of revenues was 17.8% and 17.7% for the three and nine month periods
ended March 31, 2000, respectively, compared to 19.5% and 19.3% during the
comparable periods in fiscal 1999. Excluding the addition of $3,275,000 and
$7,515,000 of pre-tax costs in the three and nine month periods ended March 31,
1999, respectively, for costs that were capitalized prior to the adoption of
SOP-98-5, "Reporting on the Costs of Start-up Activities", selling, general and
administrative costs for the three months ended March 31, 2000 decreased
$2,482,000 or 7.6% to $30,333,000 from $32,815,000 recorded in the comparable
period in fiscal 1999. Selling, general and administrative costs for the nine
months ended March 31, 2000 decreased $990,000 or 1.0% to $94,675,000 from
$95,665,000 recorded in the comparable period in fiscal 1999. Excluding the
effects of the adoption of SOP 98-5, selling, general and administrative
expenses as a percentage of revenues was 17.8% and 17.7% for the three and nine
month periods ended March 31, 2000, respectively, compared to 17.8% and 17.9%
during the comparable periods in fiscal 1999. As a percentage of sales, selling,
general and administrative expenses are consistent with the comparable periods
in fiscal 1999. The decrease in gross expenses for the three and nine month
periods ended March 31, 2000 is a result of efforts by the Company to reduce
operating and overhead costs by accelerating the consolidation and/or closing of
pharmacy locations and continuing the employee reduction plan.
The Company had net interest expense of $6,440,000 and $18,560,000 for the three
and nine month periods ended March 31, 2000, respectively, compared to net
interest expense of $4,588,000 and $13,367,000 during the comparable periods in
fiscal 1999. The increase is primarily attributable to increased borrowing on
the Company's revolving credit facility and other finance related charges during
fiscal 2000 as compared to the same period in fiscal 1999. The additional funds
were primarily used to fund internal growth and capital expenditures for
infrastructure improvement.
During the third quarter of fiscal 2000, the Company recorded restructuring and
other special charges of $5.5 million ($3.4 million net of tax) associated with
the continuing implementation and execution of strategic restructuring and
consolidation activities and the planned disposition of non-core assets.
The Company continued its plan of restructuring to consolidate certain pharmacy
sites in close geographic proximity in order to improve operating efficiencies.
During the quarter, the Company decided to consolidate three additional pharmacy
sites into either a new or existing location. During the three months ended
March 31, 2000, the Company recorded nonrecurring charges of $3.1 million before
tax related to these site consolidations and additional costs incurred on site
consolidations previously announced.
During the third quarter of fiscal 2000 the Company incurred additional costs of
$1.1 million before tax related to its previously announced plan to dispose of
non-core and/or non-strategic assets. The costs consisted primarily of asset
impairments.
The remaining $1.3 million before tax of the nonrecurring charge primarily
relates to severance incurred during the third quarter associated with the
Company's expense reduction initiatives, additional asset impairments and other
expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 109 employees. As of March 31, 2000, 75 employees have been
terminated.
13
<PAGE> 14
Details of the third quarter fiscal 2000 restructuring and special charge,
related activity and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve
Description Cash/non-cash Charge Activity At 3/31/00
----------- ------------- ---------- -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ .4 $(.2) $ .2
Lease terminations Cash .8 (.1) .7
Asset impairments Non-cash 1.4 (1.4) --
Other Cash .5 (.3) .2
Disposition of Assets
Asset Impairment Non-cash 1.0 (1.0) --
Other Cash .1 (.1) --
Other
Cash 1.0 (.7) .3
Non-cash .3 (.3) --
---- ----- ----
Total $5.5 $(4.1) $1.4
==== ==== ====
</TABLE>
During the second quarter of fiscal 2000, the Company recorded special and
nonrecurring charges of $39.8 million ($26.9 million net of tax). A special
charge of $11.9 million before tax was recorded to increase the allowance for
doubtful accounts, and nonrecurring and other special charges of $27.9 million
before tax were recorded in connection with the implementation and execution of
strategic restructuring and consolidation initiatives of certain operations, the
planned disposition of certain non-core and/or non-strategic assets, impairment
of certain assets, and costs related to a tentative settlement with federal
authorities regarding the investigation of the Company's Indianapolis, Indiana
facility.
The special charge to increase the allowance for doubtful accounts primarily
resulted from continuing negative changes observed in industry and customer
trends during the three months ended December 31, 1999. The circumstances of the
customer and industry trends primarily relate to bankruptcies and significant
financial difficulties that continue to be experienced by the Company's
customers primarily as a result of the implementation of the Medicare
Prospective Payment System. The total provision for doubtful accounts, including
the amounts included in the special charge, was $14.0 million for the three
month period ending December 31, 1999.
The Company continued its plan of restructuring to consolidate certain pharmacy
sites in close geographic proximity in order to improve operating efficiencies.
As a result, five additional pharmacy sites were consolidated into either a new
or existing location as of March 31, 2000. During the three months ended
December 31, 1999, the Company recorded nonrecurring charges of $1.9 million
before tax related to these site consolidations.
During the second quarter of fiscal 2000 the Company adopted a formal exit plan
to dispose of certain non-core and/or non-strategic assets. The Company recorded
nonrecurring charges of $17.4 million before tax related to the planned
disposition of assets primarily consisting of impairment to goodwill and
property and equipment. Total revenue and operating income of the related
business units was $25.9 million and $1.6 million, respectively, for the nine
month period ended March 31, 2000. During April 2000, the Company disposed of
two ancillary operations.
During December 1999, the Company reached a tentative settlement with the U.S.
Attorney's office in the Southern District of Indiana regarding the federal
investigation of the Company's facility in Indianapolis, Indiana. Accordingly,
in the second quarter of fiscal 2000, the Company recorded the tentative
settlement amount in the nonrecurring charge. Under the terms of the settlement,
the Company will pay $4,100,000 to the U.S Attorney's office. The Company also
agreed to maintain its current level of spending in connection with its
compliance systems and procedures for a period of three years. If the Company
does not comply with the terms of the accord, an additional $1,500,000 will be
payable to the U.S. Attorney's office. See "Certain Regulatory Investigations
and Legal Proceedings".
14
<PAGE> 15
The remaining $4.5 million before tax of the nonrecurring charge primarily
relates to severance incurred during the second quarter associated with the
Company's expense reduction initiatives, additional asset impairments and other
expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 230 employees. As of March 31, 2000, all 230 employees have been
terminated.
Details of the second quarter fiscal 2000 special and nonrecurring charge,
related activity and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve
Description Cash/non-cash Charge Activity At 3/31/00
----------- ------------- ------------ -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ .6 $ (.6) $ --
Lease terminations Cash .4 (.1) .3
Asset impairments Non-cash .7 (.7) --
Other Cash .2 (.1) .1
Special increase to allowance
for doubtful accounts Non-cash 11.9 (11.9) --
Disposition of Assets
Asset Impairment Non-cash 17.0 (17.0) --
Other Cash .4 -- .4
Other
Cash 5.1 (.7) 4.4
Non-cash 3.5 (3.5) --
----- ------ -----
Total $39.8 $(34.6) $ 5.2
===== ===== =====
</TABLE>
During the fourth quarter of fiscal 1999, the Company recorded special and
nonrecurring charges of $40.5 million ($24.3 million net of tax). A special
charge of $32.4 million before tax was recorded to increase the allowance for
doubtful accounts, and nonrecurring charges of $8.1 million before tax were
recorded in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items.
The special charge to increase the allowance for doubtful accounts resulted from
significant changes observed in industry and customer trends during the last
three months of the fiscal year ended June 30, 1999, and items encountered from
recent acquisitions. The circumstances of the customer and industry trends
primarily relate to increased bankruptcies and significant financial
difficulties recently experienced by the Company's customers primarily as a
result of the Medicare Prospective Payment System implementation. The
acquisition items encountered pertain to specific accounts receivable
collectibility issues identified relating to previous utilization of "legacy"
systems, and other nonrecurring issues which have resulted in potentially
uncollectible accounts receivable.
During the fourth quarter of fiscal 1999, the Company adopted a new plan of
restructuring to consolidate certain pharmacy sites in similar geographies. The
plan is a continuation of the plan adopted in fiscal 1998 to combine pharmacies
in close proximity in order to improve operating efficiencies. As a result of
the new exit plan, four pharmacy sites were consolidated into either a new or
existing location as of March 31, 2000. During the year ended June 30, 1999, the
Company recorded nonrecurring charges of $4.7 million before tax related to the
new site consolidations and additional costs incurred on site consolidations
announced in the prior year.
The remaining $3.4 million before tax of the nonrecurring charge primarily
relates to severance incurred during the fourth quarter associated with the
Company's expense reduction initiatives, additional acquisition related and
other expenses.
15
<PAGE> 16
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees. As of March 31, 2000, all 111 employees have been
terminated.
Details of the fourth quarter fiscal 1999 special and nonrecurring charge,
related activity and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/non-cash Charge Activity At 6/30/99 Activity At 3/31/00
----------- ------------- ----------- -------- ---------- -------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ 2.1 $(1.5) $ .6 $ (.6) $ --
Lease terminations Cash .6 (.1) .5 (.4) .1
Asset impairments Non-cash 1.5 (1.5) -- -- --
Other Cash .5 (.5) -- -- --
Special increase to allowance
For doubtful accounts Non-cash 32.4 (32.4) -- -- --
Other Cash 3.4 (2.7) .7 (.4) .3
----- -----
Total $40.5 $(38.7) $ 1.8 $(1.4) $ .4
===== ===== ===== ===== =====
</TABLE>
During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring
charge of $8,900,000 before tax primarily related to: 1) the Company adopting a
formal plan of restructuring to consolidate certain pharmacy sites in similar
geographies; 2) the buyout of existing employment agreements with the prior
owners of certain acquired businesses; 3) the write-off of certain financing
fees; and 4) additional acquisition related expenses.
The Company adopted a formal plan of restructuring to combine pharmacies in
close geographical proximity in order to improve operating efficiencies. As a
result of the plan, 17 pharmacy sites were to be consolidated into either new or
existing locations and an estimated total of 149 employees terminated. As of
March 31, 2000, 15 site consolidations were completed and 143 employees have
been terminated.
Details of the fourth quarter fiscal 1998 nonrecurring charge, related activity
and reserve balance are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/non-cash Charge Activity At 6/30/99 Activity At 3/31/00
----------- ------------- ------ -------- ---------- -------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance packages Cash $ .5 $(.5) $ -- $ -- $ --
Lease terminations Cash .7 (.4) .3 (.2) .1
Asset impairments Non-cash 3.5 (3.5) -- -- --
Other Cash .6 (.6) -- -- --
Buyout of employment agreements Cash .9 (.8) .1 -- .1
Write-off financing fees Non-cash 1.3 (1.3) -- -- --
Other
Cash 1.0 (.9) .1 (.1) --
Non-cash .4 (.4) -- -- --
---- ----- ---- ---- ----
Total $8.9 $(8.4) $ .5 $(.3) $ .2
==== ==== ==== ==== ====
</TABLE>
16
<PAGE> 17
Liquidity and Capital Resources
Net cash provided by operating activities was $13,178,000 for the nine months
ended March 31, 2000, as compared to net cash used in operating activities of
$34,955,000 during the comparable period in fiscal 1999. The increase in net
cash provided by operating activities was primarily due to a slower growth rate
in accounts receivable, a decrease in inventory and refunds received from
federal and state income tax authorities offset by a decrease in accounts
payable and accrued expenses. The slower growth rate in accounts receivable from
June 30, 1999 is mainly attributable to slower internal sales growth during the
nine months ended March 31, 2000 and increased collection efforts by the
Company. Additionally, the Company continues to experience slower payment trends
by customers as a result of PPS implementation.
Net cash used in investing activities decreased to $10,347,000 during the nine
months ended March 31, 2000, as compared to $26,207,000 during the comparable
period in fiscal 1999. The decrease is primarily the result of reduced cash
outlays for information system equipment and building leasehold improvements.
The reduced levels of capital expenditures were achieved as a result of
decreased activity in the conversion of sites to a common operating system and
fewer build-outs required as the majority of the physical infrastructure of the
Company has been completed. To date, conversion to the common operating system,
Concord DX, has been implemented in over 80% of the Company's customer base.
Net cash used in financing activities increased to $11,866,000 during the nine
months ended March 31, 2000, from net cash provided by financing activities of
$63,990,000 during the comparable period in fiscal 1999. The increase in cash
used in financing activities is a result of the Company's efforts to pay down
the outstanding revolving credit facility balance using positive cash flow
generated from operating activities and decreasing cash reserves.
In August 1997, the Company issued $100 million of convertible subordinated
debentures due 2004. The debentures carry an interest rate of 5 3/4%. The
debentures are obligations of the Company. The operations of the Company arE
currently conducted principally through subsidiaries, which are separate and
distinct legal entities. The Company's ability to make payments of principal and
interest on the debentures will depend on its ability to receive distributions
of cash from its subsidiaries. Each of the Company's wholly-owned subsidiaries
has guaranteed the Company's payment obligations under the debentures, so long
as such subsidiary is a member of an affiliated group (within the meaning of
Section 279(g) of the Internal Revenue Code of 1986, as amended) that includes
the Company. The satisfaction by the Company's subsidiaries of their contractual
guarantees, as well as the payment of dividends and certain loans and advances
to the Company by such subsidiaries, may be subject to certain statutory or
contractual restrictions, are contingent upon the earnings of such subsidiaries
and are subject to various business considerations.
As a result of the Company's second and third quarter financial performance, the
Company is in violation of certain financial covenants of the credit agreement
related to its revolving credit facility. On April 21, 2000, the Company
received a formal notice of default from the bank group. As a result of the
notice of default, the interest rate on the revolving credit facility will
increase to the Prime Rate plus 2%. In addition, the Company will not be
permitted to obtain any further funds under the credit facility until the
defaults have been waived by the bank group. The Company is currently in
discussions to obtain waivers of the covenant violations and to amend the credit
agreement. Until the amendment to the credit agreement is obtained, the
borrowings of $206.1 million under the credit facility will be classified as a
current liability. Failure to obtain the waiver and amendment could have a
material adverse effect on the Company. If the waiver and amendment are not
obtained, the Company's lenders may accelerate the maturity of the Company's
obligations and/or exercise other remedies under the credit agreement. Such
action could also result in the acceleration of the maturity of the Company's
convertible subordinated debentures. Subject to obtaining the waiver and
amendment, the Company expects to meet future financing needs principally
through the use of its revolving credit facility and cash generated from
operations. The Company believes that its cash and available sources of capital,
including funds available under its revolving credit facility once the amendment
has been obtained, are sufficient to meet its normal operating requirements.
Certain Regulatory Investigations and Legal Proceedings
In the ordinary course of its business, the Company is subject to inspections,
audits, inquiries and similar actions by governmental authorities responsible
for enforcing the laws and regulations to which the Company is subject.
In January 1997, governmental authorities requested information from the Company
in connection with an audit and investigation of the circumstances surrounding
the apparent drug-related homicide of a non-management employee of
17
<PAGE> 18
one of the Company's pharmacies. The information provided relates to the
Company's inventory and the possible theft of controlled substances from this
pharmacy. The review identified inadequacies in record keeping and inventory
control at this pharmacy. In a meeting with governmental authorities in August
1997, the Company discussed its findings and those of the government and
documented corrective measures taken by the Company. In September 1998, the
Company was notified by the United States Department of Justice, United States
Attorney for the Southern District of Indiana ("USA-Indiana") that the United
States Drug Enforcement Administration had referred this matter to the Office of
the USA-Indiana for possible legal action involving certain numerous alleged
violations of federal law. The USA-Indiana invited the Company to contact the
Office of the USA-Indiana in an effort to resolve the matter. The Company
subsequently contacted the Office of the USA-Indiana and discussions regarding a
possible settlement of this matter ensued. During December 1999, the Company and
NCS HealthCare of Indiana, Inc. (NCS Indiana), a wholly-owned subsidiary of the
Company, reached a tentative settlement with the USA-Indiana regarding the
previously disclosed federal investigation of the Company's facility in
Indianapolis, Indiana. Under the terms of the settlement, the Company will pay
$4,100,000 to the USA-Indiana. The Company also agreed to maintain its current
level of spending in connection with its compliance systems and procedures for a
period of three years. If the Company does not comply with the terms of the
accord, an additional $1,500,000 will be payable to the USA-Indiana.
In January 1998, federal and state government authorities sought and obtained
various documents and records from a Herrin, Illinois pharmacy operated by a
wholly-owned subsidiary of the Company. The Company has cooperated fully and
continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law,
but the Company has not received any written notification of these allegations.
Discussions regarding the government's investigation have ensued and are
currently proceeding between representatives of the USA-Illinois and the
Company. It is possible that the imposition of significant fines or other
remedies in connection with the resolution of this matter could have a material
effect on the Company's financial condition and results of operations.
On June 7, 1999, a lawsuit was filed against the Company in the Superior Court
of Norfolk County, Massachusetts. Plaintiffs are certain selling stockholders of
the PharmaSource Group, Inc. ("PharmaSource"), which NCS acquired on September
17, 1997. The complaint alleges breach of contract and unfair business practices
arising out of NCS' non-payment of certain amounts allegedly payable under the
terms of an earn-out provision included in the acquisition agreement. On January
21, 2000, the Company reached a tentative settlement of this litigation. Under
the terms of the tentative settlement, the Company will issue 1,750,000 Class A
Common Shares and a $2,000,000 convertible subordinated debenture maturing on
August 15, 2004. The note and accrued "payment-in-kind" interest will be
convertible into a maximum of 200,000 Class A Common Shares at a conversion
price of $8.00 per share.
Year 2000 Readiness Disclosure
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. Costs related to
Year 2000 readiness issues have been expensed as incurred and have been
immaterial to the financial results of the Company. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its internal
systems or the products and services of third parties. The Company will continue
to monitor its mission critical computer applications and those of its
customers, suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
Disclosure Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference into this Quarterly
Report on Form 10-Q, including, but not limited to, those regarding the
Company's financial position, business strategy, Year 2000 readiness disclosure
and other plans and objectives for future operations and any other statements
that are not historical facts constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results,
18
<PAGE> 19
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, there can be no assurance that
the actual results or developments anticipated by the Company will be realized
or, even if substantially realized, that they will have expected effects on its
business or operations. Among the factors that could cause actual results to
differ materially from the Company's expectations include continuation of
various trends in the long-term care market (including the trend toward
consolidation and the impact of the Balanced Budget Act of 1997), competition
among providers of long-term care pharmacy services, the Company's negotiations
with its bank group related to the waiver and amendment of its credit facility,
changes in regulatory requirements, reform of the health care delivery system,
litigation matters, disruption to the operations of the Company resulting from
Year 2000 issues and other factors.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that are
entered into during the normal course of business. The Company has not entered
into derivative financial instruments for trading purposes. The Company's
primary market risk exposure relates to interest rate risk. The Company has
managed its interest rate risk by balancing its exposure between fixed and
variable rates while attempting to minimize its interest costs. The Company has
a balance of $206,130,000 on its revolving credit facility at March 31, 2000
which is currently subject to a variable rate of interest based on the Prime
Rate. Assuming borrowings at March 31, 2000, a one-hundred basis point change in
interest rates would impact net interest expense by approximately $2,061,300 per
year.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended March 31, 2000.
21
<PAGE> 22
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.
NCS HealthCare, Inc.
(Registrant)
Date: May 15, 2000 By /s/ Kevin B. Shaw
----------------------------------------
Kevin B. Shaw
President, Chief Executive Officer and Director
Date: May 15, 2000 By /s/ William B. Byrum
---------------------------------------------
William B. Byrum
Chief Operating Officer
Date: May 15, 2000 By /s/ Gerald D. Stethem
-----------------------------------------------
Gerald D. Stethem
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001004990
<NAME> N/A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 20,389
<SECURITIES> 0
<RECEIVABLES> 185,924
<ALLOWANCES> 31,400
<INVENTORY> 38,568
<CURRENT-ASSETS> 249,683
<PP&E> 94,041
<DEPRECIATION> 44,127
<TOTAL-ASSETS> 637,724
<CURRENT-LIABILITIES> 276,078
<BONDS> 310,028
0
0
<COMMON> 210
<OTHER-SE> 231,071
<TOTAL-LIABILITY-AND-EQUITY> 637,724
<SALES> 533,976
<TOTAL-REVENUES> 533,976
<CGS> 424,833
<TOTAL-COSTS> 424,833
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,204
<INTEREST-EXPENSE> 21,354
<INCOME-PRETAX> (49,391)
<INCOME-TAX> 3,326
<INCOME-CONTINUING> (52,717)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,717)
<EPS-BASIC> (2.50)
<EPS-DILUTED> (2.50)
</TABLE>
