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, 2001
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 (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 - 18,421,845 shares as of May 10, 2001
Class B Common Stock, $ .01 par value - 5,294,964 shares as of May 10, 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-
March 31, 2001 and June 30, 2000 3
Condensed Consolidated Statements of Operations
Three and nine months ended-
March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended-
March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements - March 31, 2001 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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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)
March 31, June 30,
2001 2000
--------------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 42,162 $ 16,387
Accounts receivable, less allowances 103,310 120,849
Inventories 28,657 37,086
Other 7,076 5,322
----------- -----------
Total current assets 181,205 179,644
Property and equipment, at cost
net of accumulated depreciation and amortization 36,941 45,164
Goodwill, less accumulated amortization 304,295 311,876
Other assets 7,982 9,979
----------- -----------
Total assets $530,423 $546,663
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit in default $206,130 $206,130
Convertible subordinated debentures in default 102,116 -
Accounts payable 59,226 44,857
Accrued expenses and other liabilities 26,804 22,522
---------- ---------
Total current liabilities 394,276 273,509
Long-term debt, excluding current portion 1,126 1,291
Convertible subordinated debentures - 102,000
Other 138 158
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
March 31, 2001 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
March 31, 2001 and June 30, 2000, respectively 53 58
Paid-in capital 271,945 271,650
Accumulated deficit (137,299) (102,175)
-------- --------
Total stockholders' equity 134,883 169,705
--------- ---------
Total liabilities and stockholders' equity $530,423 $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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4
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 154,890 $ 170,462 $ 471,373 $ 533,976
Cost of revenues 127,214 139,043 386,987 424,833
--------- --------- --------- ---------
Gross profit 27,676 31,419 84,386 109,143
Selling, general and administrative expenses 40,476 30,333 94,890 94,675
Charge to increase allowance for doubtful accounts -- -- -- 11,885
Nonrecurring and other special charges -- 5,462 -- 33,414
--------- --------- --------- ---------
Operating loss (12,800) (4,376) (10,504) (30,831)
Interest expense, net 7,907 6,440 24,319 18,560
--------- --------- --------- ---------
Loss before income taxes (20,707) (10,816) (34,823) (49,391)
Income tax expense 100 12,122 300 3,326
--------- --------- --------- ---------
Net loss $ (20,807) $ (22,938) $ (35,123) $ (52,717)
========= ========= ========= =========
Net loss per share - basic $ (0.88) $ (1.03) $ (1.50) $ (2.50)
========= ========= ========= =========
Net loss per share - diluted $ (0.88) $ (1.03) $ (1.50) $ (2.50)
========= ========= ========= =========
Shares used in the computation - basic 23,717 22,302 23,475 21,116
Shares used in the computation - diluted 23,717 22,302 23,475 21,116
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
March 31,
--------------------
2001 2000
--------------------
OPERATING ACTIVITIES
Net loss $(35,123) $(52,717)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Non-cash portion of special and nonrecurring charges -- 36,054
Non-cash portion of fixed asset impairment charge 2,106 --
Depreciation and amortization 18,642 20,780
Deferred income taxes -- 1,693
Changes in assets and liabilities:
Accounts receivable, net 17,539 (2,291)
Accrued expenses and other liabilities 19,404 (12,724)
Other, net 6,675 22,383
--------------------
Net cash provided by operating activities 29,243 13,178
INVESTING ACTIVITIES
Capital expenditures for property and equipment, net (2,790) (4,863)
Other (177) (5,484)
--------------------
Net cash used in investing activities (2,967) (10,347)
FINANCING ACTIVITIES
Line-of-credit, net -- (8,570)
Repayment of long-term debt (501) (3,296)
--------------------
Net cash used in financing activities (501) (11,866)
--------------------
Net increase (decrease) in cash and cash equivalents 25,775 (9,035)
Cash and cash equivalents at beginning of period 16,387 29,424
--------------------
Cash and cash equivalents at end of period $ 42,162 $ 20,389
====================
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States 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 accounting principles generally accepted in the United States
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, 2001 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. At March 31, 2001 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 (excluding facility fee) increased to
the Prime Rate plus 2.25% (10.25% at March 31, 2001). 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.
3. The Company did not remit 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). On April 6, 2001, the Company received a
formal Notice of Default and Acceleration and Demand for Payment from the
Indenture Trustee. The Indenture Trustee declared the entire principal and
any accrued interest thereon to be immediately due and payable and demanded
immediate payment of such amounts. If such payments are not made, the
Indenture Trustee reserves the right to pursue remedial measures in
accordance with the Indenture, including, without limitation, collection
activities. As of March 31, 2001, the amount of principal and accrued
interest is $103,584,000. The Company is currently in discussions with an
ad hoc committee of debenture holders regarding a possible restructuring of
this indebtedness. The timing and ultimate outcome of these negotiations is
uncertain and could have a material adverse effect on the Company. As a
result of the above noted debentures being in default, an additional
$2,116,000 of the Company's 5 3/4% Convertible Subordinated Debentures due
2004 are also in default. Until the defaults are resolved, convertible
subordinated debentures of $102,116,000 and the related accrued interest
will be classified as a current liability.
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.
5. Selling, general and administrative expenses for the three and nine month
periods ended March 31, 2001 included $13,183,000 for bad debt expense for
non-core businesses which had been either sold or shut down (exited
businesses), fixed asset impairment charges and additional expenses related
to restructuring activities. The Company recorded $10,043,000 of additional
bad debt expense to fully reserve for remaining accounts receivable of
non-core and non-strategic businesses exited during the past twelve months.
These businesses were ancillary to the core pharmacy operations and as part
of the restructuring activities were either sold, if there was an available
buyer, or shut down. The Company recorded additional expenses related to
restructuring
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activities of approximately $1,034,000, primarily for lease terminations
associated with the continuing implementation and execution of strategic
restructuring and consolidation activities. At March 31, 2001,
approximately $950,000 is included in accrued expenses related to these
expenses. The Company recorded a fixed asset impairment charge of
$2,106,000 in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long Lived Assets and for Long
Lived Assets to be Disposed Of" (SFAS No. 121). This charge relates
primarily to changes in asset values resulting from the impact of
restructuring activities and changes in operational processes under
restructured operations.
6. 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 loss of the related
business units was $18,800,000 and $7,900,000, respectively, for the nine
months ended March 31, 2001. The carrying amount of assets held for sale as
of March 31, 2001 was $5,800,000. Through March 31, 2001, 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 March 31, 2001, 436 employees have been
terminated.
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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 3/31/01
----------- ------------- ------------ -------- ---------- -------- ----------
(in thousands)
Site Consolidations
Severance/compensation related Cash $ 1,300 $(1,000) $ 300 $ (200) $ 100
Lease terminations Cash 2,800 (400) 2,400 (800) 1,600
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 $ (1,400) $2,600
======= ======== ====== ======== ======
7. 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Numerator:
Numerator for basic earnings per share - net income $ (20,807) $ (22,938) $ (35,123) $ (52,717)
Effect of dilutive securities:
Convertible debentures - - - -
------------- ------------- ------------- -------------
Numerator for diluted earnings per share $ (20,807) $ (22,938) $ (35,123) $ (52,717)
============= ============= ============= =============
Denominator:
Denominator for basic earnings per share -
Weighted average common shares 23,717 22,302 23,475 21,116
------------- ------------- ------------- -------------
Effect of dilutive securities:
Stock options - - - -
Convertible debentures - - - -
------------- ------------- ------------- -------------
Dilutive potential common shares - - - -
------------- ------------- ------------- -------------
Denominator for diluted earnings per share 23,717 22,302 23,475 21,116
============= ============= ============= =============
Basic earnings per share $ (0.88) $ (1.03) $ (1.50) $ (2.50)
============= ============= ============= =============
Diluted earnings per share $ (0.88) $ (1.03) $ (1.50) $ (2.50)
============= ============= ============= =============
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At March 31, 2001 and 2000, respectively, the Company has 1,958,632 and
1,335,944 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 March 31, 2001 and 2000, respectively, that were convertible
into 3,258,104 and 3,058,104 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 March 31, 2001, excluding bad debt expense
for non-core businesses which had been either sold or shut down (exited
businesses), fixed asset impairment charges and additional expenses related to
restructuring activities, was $7,624,000 or $0.32 per diluted share compared to
net loss, excluding restructuring, other related charges and a non-cash charge
to record a valuation allowance against the Company's net deferred tax assets,
of $3,555,000 or $0.16 per diluted share for the three months ended March 31,
2000. Net loss for the nine months ended March 31, 2001, excluding bad debt
expense for exited businesses, fixed asset impairment charges and additional
expenses related to restructuring activities, was $21,940,000 or $0.93 per
diluted share compared to net loss, excluding restructuring, other related
charges and a non-cash charge to record a valuation allowance against the
Company's net deferred tax assets, of $2,810,000 or $0.13 per diluted share for
the nine months ended March 31, 2000. Total net loss for the three and nine
month periods ended March 31, 2001 was $0.88 and $1.50, respectively, compared
to net loss of $1.03 and $2.50 during the comparable periods in fiscal 2000.
Operating results of the Company have been negatively effected by the ongoing
difficulty of the operating environment in the long-term care industry. In
particular, the long-term care industry has been adversely 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 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
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Revenues for the three months ended March 31, 2001 decreased $15,572,000 or 9.1%
to $154,890,000 from $170,462,000 recorded in the comparable period in fiscal
2000. Revenues for the nine months ended March 31, 2001 decreased $62,603,000 or
11.7% to $471,373,000 from $533,976,000 recorded in the comparable period in
fiscal 2000. Approximately $7,698,000 and $34,871,000, respectively, of the
decrease in revenues during the three and nine month periods ended March 31,
2001 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 March 31,
2001, the Company has disposed of three ancillary operations that were not
contributing to the overall financial performance of the Company. The remaining
$7,874,000 and $27,732,000, respectively, of the decrease in revenues for the
three and nine month periods ended March 31, 2001 is attributable to the
Company's pharmacy operations and is related to net bed loss during the period
and revenue pressure associated with the continued 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 and accounts with unacceptable credit risk.
Cost of revenues for the three months ended March 31, 2001 decreased $11,829,000
or 8.5% to $127,214,000 from $139,043,000 recorded in the comparable period in
fiscal 2000. Cost of revenues for the nine months ended March 31, 2001 decreased
$37,846,000 or 8.9% to $386,987,000 from $424,833,000 recorded in the comparable
period in fiscal 2000. Cost of revenues as a percentage of revenues for the
three and nine month periods ended March 31, 2001 was 82.1% and 82.1%,
respectively, compared to 81.6% and 79.6% for the comparable periods during the
prior fiscal year.
The decrease in gross margins during the three months ended March 31, 2001 is
primarily due to a continued shift toward lower margin payer sources including
Medicaid and insurance. In addition, the decrease in gross margins is due to the
impact of the implementation of the Health Care Financing Administration Federal
Upper Limits (FUL's). The FUL's were implemented in December 2000 and reflected
lower reimbursement from State Medicaid programs. Gross margins for the nine
month period ended March 31, 2001 were significantly effected by the impact of
the PPS reimbursement system. 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, gross margins were impacted by the continued shift towards lower
margin payer sources and the implementation of the FUL's discussed above.
Selling, general and administrative expenses for the three months ended March
31, 2001 increased by $10,143,000 or 33.4% to $40,476,000 from $30,333,000
recorded in the comparable period in fiscal 2000. Selling, general and
administrative expenses for the nine months ended March 31, 2001 increased by
$215,000 or 0.2% to $94,890,000 from $94,675,000 recorded in the comparable
period in fiscal 2000. Selling, general and administrative expenses as a
percentage of revenues was 26.1% and 20.1% for the three and nine month periods
ended March 31, 2001, respectively, compared to 17.8% and 17.7% during the
comparable periods in fiscal 2000. Excluding bad debt expense for exited
businesses, fixed asset impairment charges and additional expenses related to
restructuring activities, selling, general and administrative expenses for the
three months ended March 31, 2001 decreased $3,040,000 or 10.0% to $27,293,000
from $30,333,000 recorded in the comparable period in fiscal 2000. Selling,
general and administrative expenses for the nine months ended March 31, 2001
decreased $12,968,000 or 13.7% to $81,707,000 from $94,675,000 recorded in the
comparable period in fiscal 2000. Excluding bad debt expense for exited
businesses, fixed asset impairment charges and additional expenses related to
restructuring activities, selling, general and administrative expenses as a
percentage of revenues was 17.6% and 17.3% for the three and nine month periods
ended March 31, 2001, respectively, compared to 17.8% and 17.7% during the
comparable periods in fiscal 2000. This 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, the
restructuring or sale of certain non-core ancillary lines of business and
continuing its employee reduction plan. These decreases were partially offset by
increases in bad debt expense for continuing businesses and professional fees
related to restructuring activities.
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Selling, general and administrative expenses for the three and nine month
periods ended March 31, 2001 included $13,183,000 for bad debt expense for
exited businesses, fixed asset impairment charges and additional expenses
related to restructuring activities. The Company recorded $10,043,000 of
additional bad debt expense to fully reserve for remaining accounts receivable
of non-core and non-strategic businesses exited during the past twelve months.
These businesses were ancillary to the core pharmacy operations and as part of
the restructuring activities were either sold, if there was an available buyer,
or shut down. While the Company has continued collection efforts on these
receivables, collection has been much more difficult than anticipated. The
Company recorded additional expenses related to restructuring activities of
approximately $1,034,000, primarily for lease terminations associated with the
continuing implementation and execution of strategic restructuring and
consolidation activities. At March 31, 2001, approximately $950,000 is included
in accrued expenses related to these expenses. The Company recorded a fixed
asset impairment charge of $2,106,000 in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed Of" (SFAS No. 121). This charge
relates primarily to changes in asset values resulting from the impact of
restructuring activities and changes in operational processes under restructured
operations.
The Company had net interest expense of $7,907,000 and $24,319,000 for the three
and nine month periods ended March 31, 2001, respectively, compared to net
interest expense of $6,440,000 and $18,560,000 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 nine month periods
ended March 31, 2001 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 loss of the related business units was $18,800,000 and
$7,900,000, respectively, for the nine months ended March 31, 2001. The carrying
amount of assets held for sale as of March 31, 2001 was $5,800,000. Through
March 31, 2001, 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.
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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 March 31, 2001, 436 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 3/31/01
----------- ------------- ------------- -------- ---------- -------- ----------
(in thousands)
Site Consolidations
Severance/compensation related Cash $ 1,300 $(1,000) $ 300 $ (200) $ 100
Lease terminations Cash 2,800 (400) 2,400 (800) 1,600
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 $ (1,400) $2,600
======= ========= ====== ========= ======
Liquidity and Capital Resources
Net cash provided by operating activities increased to $29,243,000 during the
nine months ended March 31, 2001 from $13,178,000 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 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 are uncertain and could have a negative impact on the
Company's liquidity.
Net cash used in investing activities decreased to $2,967,000 during the nine
months ended March 31, 2001 from $10,347,000 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 $501,000 during the nine
months ended March 31, 2001 from $11,866,000 recorded in the comparable period
in fiscal 2000. The change is primarily attributable to the Company making net
payments of $8,570,000 on its line of credit in the prior year period with no
similar payments this year.
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In August 1997, the Company issued $100 million of convertible subordinated
debentures due 2004 (the "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 did not remit 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). On April 6, 2001, the Company received a formal Notice of
Default and Acceleration and Demand for Payment from the Indenture Trustee. The
Indenture Trustee declared the entire principal and any accrued interest thereon
to be immediately due and payable and demanded immediate payment of such
amounts. If such payments are not made, the Indenture Trustee reserves the right
to pursue remedial measures in accordance with the Indenture, including, without
limitation, collection activities. As of March 31, 2001, the amount of principal
and accrued interest is $103,584,000. The Company is currently in discussions
with an ad hoc committee of debenture holders regarding a possible restructuring
of this indebtedness. The timing and ultimate outcome of these negotiations is
uncertain and could have a material adverse effect on the Company. As a result
of the above noted debentures being in default, an additional $2,116,000 of the
Company's 5 3/4% Convertible Subordinated Debentures due 2004 are also in
default. Until the defaults are resolved, convertible subordinated debentures of
$102,116,000 and the related accrued interest will be classified as a current
liability.
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 March 31, 2001 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 (excluding
facility fee) increased to the Prime Rate plus 2.25% (10.25% at March 31, 2001).
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.
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 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.
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The Company's effective income tax rate for the three month and nine month
periods ended March 31, 2001 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 March 31, 2001
which is currently subject to a variable rate of interest based on the Prime
Rate. Assuming borrowings at March 31, 2001, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
March 31, 2001.
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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: May 15, 2001 By /s/ Kevin B. Shaw
----------------------------------------
Kevin B. Shaw
President, Chief Executive Officer and Director
Date: May 15, 2001 By /s/ William B. Byrum
---------------------------------------------
William B. Byrum
Chief Operating Officer
Date: May 15, 2001 By /s/ Gerald D. Stethem
-----------------------------------------------
Gerald D. Stethem
Chief Financial Officer
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