<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 September 30, 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 of (IRS employer
incorporation or organization) identification number)
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 - 18,080,229 shares as of November 7, 2000
Class B Common Stock, $ .01 par value - 5,362,807 shares as of November 7, 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-
September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations-
Three months ended-
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows-
Three months ended-
September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements - September 30, 2000 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</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)
SEPTEMBER 30, JUNE 30,
2000 2000
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 34,104 $ 16,387
Accounts receivable, less allowances 125,810 120,849
Inventories 30,163 37,086
Other 7,057 5,322
---------- -----------
Total current assets 197,134 179,644
Property and equipment, at cost
net of accumulated depreciation and amortization 42,583 45,164
Goodwill, less accumulated amortization 309,221 311,876
Other assets 8,986 9,979
---------- -----------
TOTAL ASSETS $557,924 $546,663
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit in default $206,130 $206,130
Accounts payable 61,408 44,857
Accrued expenses and other liabilities 24,314 22,522
--------- ----------
Total current liabilities 291,852 273,509
Long-term debt, excluding current portion 1,191 1,291
Convertible subordinated debentures 102,000 102,000
Other 82 158
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; 17,948,290
and 17,176,486 shares issued and outstanding at
September 30, 2000 and June 30, 2000, respectively 179 172
Class B - 20,000,000 shares authorized; 5,494,746
and 5,807,283 shares issued and outstanding at
September 30, 2000 and June 30, 2000, respectively 55 58
Paid-in capital 271,853 271,650
Accumulated deficit (109,288) (102,175)
--------- ---------
Total stockholders' equity 162,799 169,705
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $557,924 $546,663
======== ========
</TABLE>
Note A: The balance sheet at June 30, 2000 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
SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Revenues $ 159,022 $ 184,191
Cost of revenues 130,985 143,891
--------- ---------
Gross profit 28,037 40,300
Selling, general and administrative expenses 27,001 32,040
--------- ---------
Operating income 1,036 8,260
Interest expense, net 8,049 5,670
--------- ---------
Income (loss) before income taxes (7,013) 2,590
Income tax expense 100 1,062
--------- ---------
Net income (loss) $ (7,113) $ 1,528
========= =========
Net income (loss) per share - basic $ (0.31) $ 0.08
========= =========
Net income (loss) per share - diluted $ (0.31) $ 0.08
========= =========
Shares used in the computation - basic 23,150 20,322
========= =========
Shares used in the computation - diluted 23,150 20,322
========= =========
</TABLE>
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>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (7,113) $ 1,528
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,433 6,300
Changes in assets and liabilities :
Accounts receivable, net (4,961) (4,294)
Accrued expenses and other liabilities 18,667 (3,196)
Other, net 5,189 6,438
-------------------------
Net cash provided by operating activities 18,215 6,776
-------------------------
INVESTING ACTIVITIES
Capital expenditures for property and equipment, net (555) (2,329)
Other 273 (1,753)
-------------------------
Net cash used in investing activities (282) (4,082)
-------------------------
FINANCING ACTIVITIES
Line-of-credit, net -- (11,580)
Repayment of long-term debt (216) (182)
-------------------------
Net cash used in financing activities (216) (11,762)
-------------------------
Net increase (decrease) in cash and cash equivalents 17,717 (9,068)
Cash and cash equivalents at beginning of period 16,387 29,424
-------------------------
Cash and cash equivalents at end of period $ 34,104 $ 20,356
=========================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 three month period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2001. 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, 2000.
2. During fiscal 2000, the Company recorded nonrecurring, restructuring and
special charges of $95,800,000. A special charge of $44,600,000 was recorded
to increase the allowance for doubtful accounts and nonrecurring,
restructuring and other special charges of $51,200,000 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 other nonrecurring items.
The special charge to increase the allowance for doubtful accounts resulted
from continuing negative changes observed in industry and customer trends
during the year ended June 30, 2000, and a change in the method of
estimating the allowance necessary for accounts receivable. The financial
condition of the Company's primary customer base and negative industry
trends continued to deteriorate throughout the year. Due to the negative
trends that the Company's customers are facing, management re-evaluated the
method of estimating the allowances necessary for these and other customers.
The total provision for doubtful accounts, including the amounts included in
the special charge, was $53,825,000 for the year ended June 30, 2000.
The Company continued its plan of restructuring to consolidate certain
pharmacy sites in order to improve operating efficiencies. As a result, the
Company consolidated thirteen additional pharmacy sites into either a new or
existing location. The Company also shutdown six locations associated with
certain ancillary services. During the year ended June 30, 2000, the Company
recorded nonrecurring charges of $9,700,000 related to these site
consolidations and location shutdowns, inclusive of $1,100,000 of additional
costs incurred on site consolidations previously announced.
During the year ended June 30, 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 $30,700,000 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 $7,500,000 and $300,000, respectively, for the quarter
ended September 30, 2000. The carrying amount of assets held for sale as of
September 30, 2000 was $6,300,000. Through September 30, 2000, the Company
has disposed of three ancillary service operations.
The remaining $10,800,000 of the nonrecurring charge primarily relates to
severance incurred during the year associated with the Company's expense
reduction initiatives, additional asset impairments, costs related to a
settlement with federal authorities regarding the investigation of the
Company's Indianapolis, Indiana facility and other nonrecurring expenses.
During December 1999, the Company reached a 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. As a
result, the Company recorded the settlement amount as a nonrecurring charge.
Under the terms of the settlement, the Company paid $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
6
<PAGE> 7
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.
Employee severance costs included in the nonrecurring charges relate to the
termination of 472 employees. As of September 30, 2000, 432 employees have
been terminated.
Details of the fiscal 2000 nonrecurring, restructuring and special charges
and related activity are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 9/30/00
----------- ------------- ------------- -------- ------------ ------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ 1,300 $(1,000) $ 300 $ (100) $ 200
Lease terminations Cash 2,800 (400) 2,400 (300) 2,100
Asset impairments Non-cash 4,400 (4,400) -- -- --
Other Cash 1,200 (600) 600 (100) 500
Special increase to allowance
for doubtful accounts Non-cash 44,600 (44,600) -- -- --
Disposition of Assets
Asset impairment Non-cash 30,200 (30,200) -- -- --
Other Cash 500 (200) 300 -- 300
Other
Cash 6,600 (6,200) 400 -- 400
Non-cash 4,200 (4,200) -- -- --
------- -------- ------ ------ ------
Total $95,800 $(91,800) $4,000 $ (500) $3,500
======= ========= ====== ======= ======
</TABLE>
7
<PAGE> 8
3. 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
SEPTEMBER 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share - net income (loss) $ (7,113) $ 1,528
Effect of dilutive securities:
Convertible debentures -- --
-----------------------
Numerator for diluted earnings per share $ (7,113) $ 1,528
=======================
Denominator:
Denominator for basic earnings per share -
Weighted average common shares 23,150 20,322
-----------------------
Effect of dilutive securities:
Stock options -- --
Convertible debentures -- --
-----------------------
Dilutive potential common shares -- --
-----------------------
Denominator for diluted earnings per share 23,150 20,322
=======================
Basic earnings per share:
Net income (loss) per share $ (0.31) $ 0.08
=======================
Diluted earnings per share:
Net income (loss) per share $ (0.31) $ 0.08
=======================
</TABLE>
At September 30, 2000 and 1999, the Company has 1,297,109 and 1,335,944,
respectively, 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 September 30, 2000 and
1999, respectively, that were convertible into 3,258,104 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.
4. 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.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
The net loss for the three months ended September 30, 2000 was $7,113,000 or
$0.31 per diluted share compared to net income of $1,528,000 or $0.08 per
diluted share for the three months ended September 30, 1999.
Operating results during the past year were negatively impacted by the
implementation of Medicare's Prospective Payment System (PPS). The adverse
impact of the implementation of PPS under the Balanced Budget Act of 1997 for
Medicare residents of skilled nursing facilities has been significantly greater
than anticipated resulting in a difficult operating environment in the long-term
care industry. PPS created numerous changes to reimbursement policies applicable
to skilled nursing facilities under Medicare Part A. Prior to the implementation
of 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 on a cost plus basis. This change in reimbursement policies has
resulted in a substantial reduction in reimbursement for skilled nursing
facilities. Consequently, the Company has experienced revenue and margin
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 significant reduction
in the utilization of other therapies such as speech, occupational and physical
rehabilitation. With the implementation of PPS, 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 reducing the average length of stay for Medicare residents. Resident acuity
level has also decreased as these facilities have attempted to avoid high acuity
patients, negatively impacting the overall utilization of drugs, particularly
those with higher costs such as infusion therapy.
These outcomes have negatively impacted nursing facilities and the institutional
pharmacy services industry as a whole. For Medicare certified skilled nursing
facilities, PPS has caused significant earnings and cash flow pressure. Some
facilities have sought bankruptcy protection or consolidation as a method of
reducing costs and increasing operating efficiencies causing the Company to
experience bed loss as a result. For the Company, operating processes for
administering and executing PPS related activities were significantly different
than operating processes prior to the implementation of PPS. Contracting
processes, data gathering, and operational dispensing processes for Medicare A
residents all underwent significant change resulting in higher costs and lower
margins for the Company. These costs were in addition to the impact of costs
associated with customer bankruptcies and deteriorating financial condition. On
November 29, 1999, Congress enacted the Balanced Budget Refinement Act (BBRA) in
an attempt to provide relief to skilled nursing facilities by providing a
temporary increase in reimbursement rates effective April 1, 2000, particularly
for higher acuity residents. This temporary rate increase will remain in place
pending appropriate revisions to the PPS system. In addition, high acuity
residents under the BBRA were provided additional increases effective October 1,
2000. Even with these changes, a very difficult operating environment remains
and management continues to react to pressures in the current PPS environment.
During the past year, the Company has reduced operating and overhead expenses,
accelerated efforts to consolidate and/or close pharmacy locations, terminated
uneconomic accounts and began applying stricter standards in accepting new
business.
Revenues for the three months ended September 30, 2000 decreased $25,169,000 or
13.7% to $159,022,000 from $184,191,000 recorded in the comparable period in
fiscal 2000. Approximately $15,605,000 of the decrease in revenue from the prior
fiscal year 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 shutdown or sale of certain non-strategic
or unprofitable operations. Through September 30, 2000, the Company has disposed
of three ancillary operations that were not contributing to the overall
financial performance of the Company. The remaining $9,564,000 of the revenue
decrease is attributable to the Company's pharmacy operations and is related to
net bed loss during the period and revenue pressure associated with the
implementation of the PPS system. Although the Company added new customers
during the past year through its sales and marketing efforts, the number of beds
served by the Company declined due to decisions by management to terminate
uneconomic accounts.
9
<PAGE> 10
Cost of revenues for the three months ended September 30, 2000 decreased
$12,906,000 or 9.0% to $130,985,000 from $143,891,00 recorded in the comparable
period in fiscal 2000. Cost of revenues as a percentage of revenues for the
three month period ended September 30, 2000 was 82.4%, compared to 78.1% for the
same period during the prior fiscal year. Gross margins during the past year
have been significantly affected by the impact of the PPS reimbursement system.
The margin pressure resulted from continued Medicare Part A pricing pressure,
lower than anticipated gross margins on PPS related contracts and reduced acuity
levels at customer facilities. In addition, the Company's payor mix has
continued to shift towards lower margin payors, including Medicaid and
insurance.
Selling, general and administrative expenses for the three months ended
September 30, 2000 decreased by $5,039,000 or 15.7% to $27,001,000, from
$32,040,000 recorded in the comparable period in fiscal 2000. Selling, general
and administrative expenses as a percentage of revenues was 17.0% for the three
month period ended September 30, 2000, compared to 17.4% during the comparable
period in fiscal 2000. The decrease in expenses from the prior year 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 its
employee reduction plan. These decreases were partially offset by increases in
bad debt expense and professional fees.
The Company had net interest expense of $8,049,000 for the three month period
ended September 30, 2000, compared to net interest expense of $5,670,000 during
the comparable period in fiscal 2000. The increase is primarily attributable to
an increase in interest rates and other finance related charges during the three
month period ended September 30, 2000 as compared to the prior year. As
discussed below, the Company is in default of its line of credit agreement and
is currently being charged a default interest rate. The Company will continue to
pay the default interest rate as long as it is in default of its line of credit
agreement.
During fiscal 2000, the Company recorded nonrecurring, restructuring and special
charges of $95,800,000. A special charge of $44,600,000 was recorded to increase
the allowance for doubtful accounts and nonrecurring, restructuring and other
special charges of $51,200,000 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 other nonrecurring
items.
The special charge to increase the allowance for doubtful accounts resulted from
continuing negative changes observed in industry and customer trends during the
year ended June 30, 2000, and a change in the method of estimating the allowance
necessary for accounts receivable. The financial condition of the Company's
primary customer base and negative industry trends continued to deteriorate
throughout the year. Due to the negative trends that the Company's customers are
facing, management re-evaluated the method of estimating the allowances
necessary for these and other customers. The total provision for doubtful
accounts, including the amounts included in the special charge, was $53,825,000
for the year ended June 30, 2000.
The Company continued its plan of restructuring to consolidate certain pharmacy
sites in order to improve operating efficiencies. As a result, the Company
consolidated thirteen additional pharmacy sites into either a new or existing
location. The Company also shutdown six locations associated with certain
ancillary services. During the year ended June 30, 2000, the Company recorded
nonrecurring charges of $9,700,000 related to these site consolidations and
location shutdowns, inclusive of $1,100,000 of additional costs incurred on site
consolidations previously announced.
During the year ended June 30, 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 $30,700,000 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 $7,500,000 and
$300,000, respectively, for the quarter ended September 30, 2000. The carrying
amount of assets held for sale as of September 30, 2000 was $6,300,000. Through
September 30, 2000, the Company has disposed of three ancillary service
operations.
The remaining $10,800,000 of the nonrecurring charge primarily relates to
severance incurred during the year associated with the Company's expense
reduction initiatives, additional asset impairments, costs related to a
settlement with federal authorities regarding the investigation of the Company's
Indianapolis, Indiana facility and other nonrecurring expenses.
10
<PAGE> 11
During December 1999, the Company reached a 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. As a result, the Company
recorded the settlement amount as a nonrecurring charge. Under the terms of the
settlement, the Company paid $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.
Employee severance costs included in the nonrecurring charges relate to the
termination of 472 employees. As of September 30, 2000, 432 employees have been
terminated.
Details of the fiscal 2000 nonrecurring, restructuring and special charges and
related activity are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 9/30/00
----------- ------------- ------ -------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ 1,300 $(1,000) $ 300 $ (100) $ 200
Lease terminations Cash 2,800 (400) 2,400 (300) 2,100
Asset impairments Non-cash 4,400 (4,400) -- -- --
Other Cash 1,200 (600) 600 (100) 500
Special increase to allowance
for doubtful accounts Non-cash 44,600 (44,600) -- -- --
Disposition of Assets
Asset impairment Non-cash 30,200 (30,200) -- -- --
Other Cash 500 (200) 300 -- 300
Other
Cash 6,600 (6,200) 400 -- 400
Non-cash 4,200 (4,200) -- -- --
------- --------- ------- ------- -------
Total $95,800 $(91,800) $4,000 $ (500) $3,500
======= ========= ====== ======= ======
</TABLE>
Liquidity and Capital Resources
Net cash provided by operating activities increased to $18,215,000 during the
three months ended September 30, 2000 from $6,776,000 recorded in the comparable
period in fiscal 2000. The increase in net cash provided by operating activities
resulted primarily from an increase in accounts payable due to an interim
modification of payment terms negotiated with a major Company supplier. The
Company is continuing its negotiations with this supplier to achieve a permanent
modification in payment terms. The timing and the ultimate outcome of these
negotiations is uncertain.
Net cash used in investing activities decreased to $282,000 during the three
months ended September 30, 2000 from $4,082,000 recorded in the comparable
period in fiscal 2000. The decrease is primarily the result of reduced capital
expenditures during the current period.
Net cash used in financing activities decreased to $216,000 during the three
months ended September 30, 2000 from $11,762,000 recorded in the comparable
period in fiscal 2000. The change is attributable to the Company making net
payments of $11,580,000 on its line of credit in the prior year period with no
similar payments this year.
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
11
<PAGE> 12
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.
In June 1998, the Company entered into a four-year, $150 million revolving
credit facility (the "Credit Facility") with a bank, which replaced the existing
$135 million revolving agreement. Effective July 13, 1998, the Credit Facility
was amended increasing the total commitment from $150 million to $245 million
and was syndicated to a consortium of 11 banks. Effective August 3, 1999, the
Credit Facility was amended to reduce the available commitment from $245 million
to $235 million, provide all of the Company assets as security, limit the
availability of the facility to use for working capital only, require Lender
approval on future acquisitions, and modify covenants and the variable interest
rate basis. The amended Credit Facility bears interest at a variable rate based
upon the Eurodollar rate plus a spread of 150 to 275 basis points, dependent
upon the Company's ratio of Total Funded Debt to EBITDA.
At September 30, 2000 the Company is in violation of certain financial covenants
of the credit agreement related to the 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 Credit Facility increased to the
Prime Rate plus 2.25% (11.75% at September 30, 2000). 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 including
exercising their rights with respect to the pledged collateral. Such action
could also result in the acceleration of the maturity of the Company's
convertible subordinated debentures. Subject to obtaining the necessary waivers
and amendments, the Company expects to meet future financing needs principally
through the use of the Credit Facility and cash generated from operations. The
Company has implemented measures to improve cash flows generated from operating
activities, including reductions in operating and overhead costs by accelerating
the consolidation and/or closing of pharmacy locations and continuing its
employee reduction plan, and more aggressive collection and inventory reduction
efforts. However, the Company may require additional capital resources for
internal working capital needs and may need to incur additional indebtedness to
meet these requirements. Additional funds are currently not available under the
Credit Facility as described above and there can be no assurances that
additional funds will be available.
The Company has engaged financial advisors and legal counsel to assist in
exploring various capital restructuring and strategic alternatives with third
parties. At this time, no decision has been made to enter into a transaction or
as to what form a transaction might take. There is no assurance that any such
transaction will be consummated.
The Company's effective income tax rate for the three months ended September 30,
2000 differs from the federal statutory rate primarily as a result of the
recording of a full valuation allowance against the Company's net deferred tax
assets consisting primarily of net operating loss carryforwards.
Certain Regulatory Investigations and Legal Proceedings
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.
12
<PAGE> 13
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 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, 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. These forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting the Company and are
subject to uncertainties and factors (including, but not limited to, those
specified below) which are difficult to predict and, in many instances, are
beyond the control of the Company. As a result, actual results of the Company
may differ materially from those expressed or implied by any such
forward-looking statements. 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,
negotiations regarding payment terms with suppliers, changes in regulatory
requirements and Federal and State reimbursement levels, reform of the health
care delivery system, litigation matters, other factors and risks and
uncertainties described in the Company's SEC reports.
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 September 30,
2000, which is subject to a variable rate of interest based on the Eurodollar
rate. Assuming borrowings at September 30, 2000, a one-hundred basis point
change in interest rates would impact net interest expense by approximately
$2,061,300 per year.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBERS EXHIBIT
------- -------
10.1 Salary Continuation Agreement dated September 29, 2000
between the Company and Jon H. Outcalt.
10.2 Salary Continuation Agreement dated September 29, 2000
between the Company and Kevin B. Shaw.
10.3 Salary Continuation Agreement dated October 25, 2000
between the Company and William B. Byrum.
27.1 Financial Data Schedule
(A) Incorporated herein, by reference to the appropriate exhibit
to the Company's Annual Report on Form 10-K for the year
ended June 30, 2000.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended September 30, 2000.
14
<PAGE> 15
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: November 14, 2000 By /s/ Kevin B. Shaw
----------------------------------
Kevin B. Shaw
President, Chief Executive Officer
and Director
Date: November 14, 2000 By /s/ William B. Byrum
----------------------------------
William B. Byrum
Chief Operating Officer
Date: November 14, 2000 By /s/ Gerald D. Stethem
----------------------------------
Gerald D. Stethem
Chief Financial Officer
15
