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 December 31, 2000
Commission File Number- 0-27602
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NCS HealthCare, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 34-1816187
- ----------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS employer identification number)
3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122
- ----------------------------------------------------------
(Address of principal executive offices and zip code)
(216) 378-6800
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(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 - 18,421,845 shares as of February 9, 2001
Class B Common Stock, $ .01 par value - 5,294,964 shares as of February 9, 2001
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
December 31, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations
Three and six months ended-
December 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows-
Six months ended-
December 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements - December 31, 2000 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED) (NOTE A)
DECEMBER 31, JUNE 30,
2000 2000
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 35,961 $ 16,387
Accounts receivable, less allowances 119,944 120,849
Inventories 29,890 37,086
Other 8,042 5,322
--------- ---------
Total current assets 193,837 179,644
Property and equipment, at cost
net of accumulated depreciation and amortization 40,466 45,164
Goodwill, less accumulated amortization 306,762 311,876
Other assets 8,836 9,979
--------- ---------
Total assets $ 549,901 $ 546,663
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit in default $ 206,130 $ 206,130
Accounts payable 60,746 44,857
Accrued expenses and other liabilities 24,051 22,522
--------- ---------
Total current liabilities 290,927 273,509
Long-term debt, excluding current portion 1,161 1,291
Convertible subordinated debentures 102,000 102,000
Other 124 158
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; 18,421,845
and 17,176,486 shares issued and outstanding at
December 31, 2000 and June 30, 2000, respectively 184 172
Class B - 20,000,000 shares authorized; 5,294,964
and 5,807,283 shares issued and outstanding at
December 31, 2000 and June 30, 2000, respectively 53 58
Paid-in capital 271,944 271,650
Accumulated deficit (116,492) (102,175)
--------- ---------
Total stockholders' equity 155,689 169,705
--------- ---------
Total liabilities and stockholders' equity $ 549,901 $ 546,663
========= =========
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.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues $ 157,461 $ 179,323 $ 316,483 $ 363,514
Cost of revenues 128,788 141,899 259,773 285,790
------------ ------------ ------------ ------------
Gross profit 28,673 37,424 56,710 77,724
Selling, general and administrative 27,413 32,302 54,414 64,342
Charge to increase allowance for doubtful accounts -- 11,885 -- 11,885
Nonrecurring and other special charges -- 27,952 -- 27,952
------------ ------------ ------------ ------------
Operating income (loss) 1,260 (34,715) 2,296 (26,455)
Interest expense, net 8,363 6,450 16,412 12,120
------------ ------------ ------------ ------------
Loss before income taxes (7,103) (41,165) (14,116) (38,575)
Income tax expense (benefit) 100 (9,858) 200 (8,796)
------------ ------------ ------------ ------------
Net loss $ (7,203) $ (31,307) $ (14,316) $ (29,779)
============ ============ ============ ============
Net loss per share - basic $ (0.31) $ (1.51) $ (0.61) $ (1.45)
============ ============ ============ ============
Net loss per share - diluted $ (0.31) $ (1.51) $ (0.61) $ (1.45)
============ ============ ============ ============
Average shares outstanding - basic 23,562 20,738 23,356 20,530
============ ============ ============ ============
Average shares outstanding - diluted 23,562 20,738 23,356 20,530
============ ============ ============ ============
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
2000 1999
---------------------
OPERATING ACTIVITIES
Net loss $(14,316) $(29,779)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash portion of special and nonrecurring charges -- 33,108
Depreciation and amortization 12,764 13,901
Changes in assets and liabilities, net of effects of assets and
liabilities acquired:
Accounts receivable, net 905 (4,625)
Accounts payable and other liabilities 17,945 (9,136)
Other, net 4,477 (924)
---------------------
Net cash provided by operating activities 21,775 2,545
---------------------
INVESTING ACTIVITIES
Capital expenditures for property and equipment, net (1,483) (3,813)
Other (362) (3,737)
---------------------
Net cash used in investing activities (1,845) (7,550)
---------------------
FINANCING ACTIVITIES
Line-of-credit, net -- (10,200)
Repayment of long-term debt (356) (693)
---------------------
Net cash used in financing activities (356) (10,893)
---------------------
Net increase (decrease) in cash and cash equivalents 19,574 (15,898)
Cash and cash equivalents at beginning of period 16,387 29,424
---------------------
Cash and cash equivalents at end of period $ 35,961 $ 13,526
====================
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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 six month period ended December 31, 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 $13,700,000 and $300,000, respectively, for the six
months ended December 31, 2000. The carrying amount of assets held for sale
as of December 31, 2000 was $6,300,000. Through December 31, 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 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.
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Employee severance costs included in the nonrecurring charges relate to the
termination of 472 employees. As of December 31, 2000, 435 employees have
been terminated.
Details of the fiscal 2000 nonrecurring, restructuring and special charges
and related activity are as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 12/31/00
----------- ------------- ------ -------- ---------- -------- -----------
(in thousands)
Site Consolidations
Severance/compensation related Cash $ 1,300 $ (1,000) $ 300 $ (100) $ 200
Lease terminations Cash 2,800 (400) 2,400 (500) 1,900
Asset impairments Non-cash 4,400 (4,400) -- -- --
Other Cash 1,200 (600) 600 (300) 300
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 (100) 300
Non-cash 4,200 (4,200) -- -- --
------- --------- ------ --------- ------
Total $95,800 $ (91,800) $4,000 $ (1,000) $3,000
======= ========= ====== ========= ======
3. At December 31, 2000 the Company is in violation of certain financial
covenants of the credit agreement related to its revolving credit facility
(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%
(11.25% at December 31, 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 $206,100,000 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.
4. The Company does not plan to make the semi-annual $2,875,000 interest
payment due February 15, 2001 on the Company's 5 3/4% Convertible
Subordinated Debentures due 2004 (debentures). If the interest payment is
not made within thirty days after the due date, the Company will be in
default with respect to the debentures. In the event of default, the
Trustee or the holders of 25% of the outstanding debentures will be
entitled to declare the principal of all the debentures to be due and
payable immediately. Currently the amount of principal and accrued interest
is $102,875,000. The Company is currently in discussions with an ad hoc
committee of debenture holders regarding a possible restructuring of this
indebtedness. The February 15, 2001 interest payment is a part of these
negotiations. The timing and ultimate outcome of these negotiations is
uncertain and could have a material adverse effect on the Company.
5. 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.
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6. 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):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
2000 1999 2000 1999
------------------------ ------------------------
(in thousands, except per share information)
Numerator:
Numerator for basic earnings per share - net income $ (7,203) $ (31,307) $ (14,316) $ (29,779)
Effect of dilutive securities:
Convertible debentures -- -- -- --
------------------------ ------------------------
Numerator for diluted earnings per share $ (7,203) $ (31,307) $ (14,316) $ (29,779)
======================== ========================
Denominator:
Denominator for basic earnings per share -
weighted average common shares 23,562 20,738 23,356 20,530
------------------------ ------------------------
Effect of dilutive securities:
Stock options -- -- -- --
Convertible debentures -- -- -- --
------------------------ ------------------------
Dilutive potential common shares -- -- -- --
------------------------ ------------------------
Denominator for diluted earnings per share 23,562 20,738 23,356 20,530
======================== ========================
Basic earnings per share $ (0.31) $ (1.51) $ (0.61) $ (1.45)
======================== ========================
Diluted earnings per share $ (0.31) $ (1.51) $ (0.61) $ (1.45)
======================== ========================
At December 31, 2000 and 1999, the Company has 1,958,632 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 for all periods presented. The Company had
$102,000,000 and $100,000,000 of convertible subordinated debentures
outstanding at December 31, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net loss for the three months ended December 31, 2000 was $7,203,000 or $0.31
per diluted share compared to net loss, excluding special and nonrecurring
charges, of $784,000 or $0.04 per diluted share for the three months ended
December 31, 1999. Net loss for the six months ended December 31, 2000 was
$14,316,000 or $0.61 per diluted share compared to net income, excluding special
and nonrecurring charges, of $745,000 or $0.04 per diluted share for the six
months ended December 31, 1999.
Operating results during the past year were negatively effected by the continued
impact of 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.
Through the enactment of the Balanced Budget Refinement Act of 1999 on November
29, 1999 and the Benefits Improvement and Protection Act of 2000 on December 15,
2000, Congress has provided some relief to skilled nursing facilities. Both of
these actions restore a portion of the Medicare reimbursement for skilled
nursing facilities that had been unintentionally taken away with the passage of
the Balanced Budget Act of 1997. While these legislative changes are intended to
improve the financial condition of skilled nursing facilities, a very difficult
operating environment remains and management continues to react to pressures in
the current environment. During the past year, the Company has reduced operating
and overhead expenses, continued 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 December 31, 2000 decreased $21,862,000 or
12.2% to $157,461,000 from $179,323,000 recorded in the comparable period in
fiscal 2000. Revenues for the six months ended December 31, 2000 decreased
$47,031,000 or 12.9% to $316,483,000 from $363,514,000 recorded in the
comparable period in fiscal 2000. Approximately $12,470,000 and $28,075,000,
respectfully, of the decrease in revenues during the three and six month periods
ended December 31, 2000 over the comparable prior year periods is attributable
to a decrease in revenues 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 December 31, 2000, the Company has disposed of three ancillary
operations that were not contributing to the overall financial performance of
the Company. The remaining $9,392,000 and $18,956,000, respectfully, of the
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decrease in revenues for the three and six month periods ended December 31, 2000
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 competitive conditions and decisions by management to
terminate uneconomic accounts.
Cost of revenues for the three months ended December 31, 2000 decreased
$13,111,000 or 9.2% to $128,788,000 from $141,899,000 recorded in the comparable
period in fiscal 2000. Cost of revenues for the six months ended December 31,
2000 decreased $26,017,000 or 9.1% to $259,773,000 from $285,790,000 recorded in
the comparable period in fiscal 2000. Cost of revenues as a percentage of
revenues for the three and six month periods ended December 31, 2000 was 81.8%
and 82.1%, respectively, compared to 79.1% and 78.6% for the comparable periods
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
payor sources, including Medicaid and insurance. Gross margin for the three
months ended December 31, 2000 was 18.2% as compared to 17.6% for the three
months ended September 30, 2000. This improvement in gross margin is primarily
due to a favorable change in product mix, offset somewhat by the continued shift
toward lower margin payor sources described above.
Selling, general and administrative expenses for the three months ended December
31, 2000 decreased by $4,889,000 or 15.1% to $27,413,000 from $32,302,000
recorded in the comparable period in fiscal 2000. Selling, general and
administrative expenses for the six months ended December 31, 2000 decreased by
$9,928,000 or 15.4% to $54,414,000 from $64,342,000 recorded in the comparable
period in fiscal 2000. Selling, general and administrative expenses as a
percentage of revenues was 17.4% and 17.2% for the three and six month periods
ended December 31, 2000, respectively, compared to 18.0% and 17.7% during the
comparable periods 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
continuing 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 $8,363,000 and $16,412,000,
respectfully, for the three and six month periods ended December 31, 2000
compared to net interest expense of $6,450,000 and $12,120,000 during the
comparable periods in fiscal 2000. The increase is primarily attributable to an
increase in interest rates and other finance related charges during the three
and six month periods ended December 31, 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
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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 $13,700,000 and
$300,000, respectively, for the six months ended December 31, 2000. The carrying
amount of assets held for sale as of December 31, 2000 was $6,300,000. Through
December 31, 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
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 December 31, 2000, 435 employees have been
terminated.
Details of the fiscal 2000 nonrecurring, restructuring and special charges and
related activity are as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 12/31/00
----------- ------------- ------ -------- ---------- -------- -----------
(in thousands)
Site Consolidations
Severance/compensation related Cash $ 1,300 $ (1,000) $ 300 $ (100) $ 200
Lease terminations Cash 2,800 (400) 2,400 (500) 1,900
Asset impairments Non-cash 4,400 (4,400) -- -- --
Other Cash 1,200 (600) 600 (300) 300
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 (100) 300
Non-cash 4,200 (4,200) -- -- --
------- --------- ------ --------- ------
Total $95,800 $ (91,800) $4,000 $ (1,000) $3,000
======= ========= ====== ========= ======
Liquidity and Capital Resources
Net cash provided by operating activities increased to $21,775,000 during the
six months ended December 31, 2000 from $2,545,000 recorded in the comparable
period in fiscal 2000. The increase in net cash provided by operating activities
resulted primarily from a decrease in inventory as a result of the Company's
inventory reduction efforts and
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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
and could have a negative impact on the Company's liquidity.
Net cash used in investing activities decreased to $1,845,000 during the six
months ended December 31, 2000, as compared to $7,550,000 during 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 $356,000 during the six
months ended December 31, 2000 from $10,893,000 recorded in the comparable
period in fiscal 2000. The change is attributable to the Company making net
payments of $10,200,000 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 (debentures). 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.
The Company does not plan to make the semi-annual $2,875,000 interest payment
due February 15, 2001 on the debentures. If the interest payment is not made
within thirty days after the due date, the Company will be in default with
respect to the debentures. In the event of default, the Trustee or the holders
of 25% of the outstanding debentures will be entitled to declare the principal
of all the debentures to be due and payable immediately. Currently the amount of
principal and accrued interest is $102,875,000. The Company is currently in
discussions with an ad hoc committee of debenture holders regarding a possible
restructuring of this indebtedness. The February 15, 2001 interest payment is a
part of these negotiations. The timing and ultimate outcome of these
negotiations is uncertain and could have a material adverse effect on the
Company.
In June 1998, the Company entered into a four-year revolving credit agreement
(Credit Facility). Effective August 3, 1999, the Credit Facility was amended to
change the available commitment 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 December 31, 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% (11.25% at December 31, 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.
During the past year, the Company has implemented measures to improve cash
flows generated from operating activities, including reductions in operating and
overhead costs by continuing the consolidation and/or closing of pharmacy
locations, continuing its employee reduction plan, more
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aggressive collection activity and inventory reduction efforts, and an interim
modification of payment terms negotiated with a major Company supplier. 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's effective income tax rate for the three month and six month
periods ended December 31, 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 from 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.
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 regarding its credit facility, the Company's negotiations
with an ad hoc committee of holders of its 5 3/4% convertible subordinated
debentures due 2004, 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.
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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 December 31, 2000,
which is subject to a variable rate of interest based on the Eurodollar rate.
Assuming borrowings at December 31, 2000, a one-hundred basis point change in
interest rates would impact net interest expense by approximately $2,061,300 per
year.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of stockholders of the Company held on December 12, 2000
(the "Annual Meeting"), the stockholders voted to elect Kevin B. Shaw and Boake
A. Sells each to an additional three-year term as Director of the Company. Votes
were cast as follows:
VOTES KEVIN B. SHAW BOAKE A. SELLS
----- ------------- --------------
For 67,991,670 67,904,361
Withheld 432,583 519,892
In addition, stockholders voted in favor of a proposal to approve and adopt the
NCS HealthCare, Inc. 2000 Performance Plan (the "2000 Plan") at the Annual
Meeting. The number of votes cast for, against and abstentions with respect to
the 2000 Plan are set forth below:
FOR AGAINST ABSTAIN
--- ------- -------
55,580,333 948,716 64,355
For a description of the bases used in tabulating the above-referenced vote, see
the Company's definitive proxy statement used in connection with the Annual
Meeting.
The term of office of the following Directors of the Company continued after the
Annual Meeting: Jon H. Outcalt and Richard L. Osborne.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
10.1 The NCS HealthCare, Inc. 2000 Performance Plan
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended December 31, 2000.
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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: February 14, 2001 By /s/ Kevin B. Shaw
-----------------------------------------------
Kevin B. Shaw
President, Chief Executive Officer and Director
Date: February 14, 2001 By /s/ William B. Byrum
-----------------------------------------------
William B. Byrum
Chief Operating Officer
Date: February 14, 2001 By /s/ Gerald D. Stethem
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Gerald D. Stethem
Chief Financial Officer
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