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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION NO 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] FOR THE FISCAL YEAR ENDED JUNE 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE TRANSITION PERIOD FROM _________________________
TO ___________________
COMMISSION FILE NUMBER 0-27602
NCS HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1816187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
3201 Enterprise Parkway, Beachwood, Ohio 44122
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 378-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, par value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 20, 2001, the registrant had 18,461,599 shares of Class A
Common Stock, par value $.01 per share, and 5,255,210 shares of Class B Common
Stock, par value $.01 per share, issued and outstanding. As of that date, the
aggregate market value of these shares, which together constitute all of the
voting stock of the registrant, held by non-affiliates was $3,194,173 (based
upon the closing price of $0.17 per share of Class A Common Stock on the Pink
Sheets Electronic Quotation Service on September 20, 2001). For purposes of this
calculation, the registrant deems the 301,117 shares of Class A Common Stock and
the 4,626,438 shares of Class B Common Stock held by all of its Directors and
executive officers to be the shares of Class A Common Stock and Class B Common
Stock held by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Stockholders to be held in 2001 are
incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form 10-K is
as of June 30, 2001.
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NCS HEALTHCARE, INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY 14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 17
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 47
ITEM 11. EXECUTIVE COMPENSATION 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 48
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PART I
ITEM 1. BUSINESS
GENERAL
NCS HealthCare, Inc. (the "Company" or "NCS") is a leading independent
provider of pharmacy services to long-term care institutions including skilled
nursing facilities, assisted living facilities and other institutional health
care settings. The Company purchases and dispenses prescription and
non-prescription pharmaceuticals and provides client facilities with related
management services, automated medical record keeping, drug therapy evaluation
and regulatory assistance. The Company also provides consultant pharmacist
services, including monitoring the control, distribution and administration of
drugs within the long-term care facility, assisting in compliance with
applicable state and federal regulations, therapeutic monitoring and drug
utilization review services. The Company also provides various ancillary health
care services to complement its core pharmacy services, including infusion
therapy, nutrition management, software services, and other services. The
Company is considered to operate principally in one business segment.
NCS entered the long-term care pharmacy services industry in 1986 with the
acquisition of Modern Pharmacy Consultants, Inc. in Northeastern Ohio. Through
June 30, 2001, the Company had completed a total of 49 acquisitions (other than
fold-in acquisitions). There were no significant acquisitions during fiscal
2001. As a result of these acquisitions, the Company has expanded its geographic
presence into 33 states serving approximately 209,000 residents.
On February 14, 1996, the Company issued 4,476,000 shares of Class A
Common Stock at $16.50 per share in connection with its initial public offering.
A portion of the net proceeds from the stock issuance was used to repay
approximately $27,000,000 of outstanding indebtedness under long and short-term
borrowings. The remaining proceeds were used to fund business acquisitions.
On October 4, 1996, the Company issued 4,235,000 shares of Class A Common
Stock at $31.00 per share in connection with a public offering. A portion of the
net proceeds was used to repay approximately $7,000,000 of outstanding
indebtedness under short-term borrowings. The remaining proceeds were used to
fund business acquisitions.
On August 13, 1997, the Company issued $100,000,000 of convertible
subordinated debentures due 2004. Net proceeds to the Company were approximately
$97,250,000 net of underwriting discounts and expenses. The debentures carry an
interest rate of 5 3/4% and are convertible into shares of Class A Common Stock
at any time prior to maturity at $32.70 per share. A portion of the proceeds
from the debenture offering was used to repay approximately $21,000,000 of
outstanding indebtedness under short-term borrowings. The remaining proceeds
were used to fund business acquisitions.
MARKET OVERVIEW
Institutional pharmacies purchase, repackage and distribute
pharmaceuticals to residents of long-term care facilities such as skilled
nursing facilities, assisted living facilities and other institutional health
care settings. Unlike hospitals, most long-term care facilities do not have
on-site pharmacies but depend instead on outside sources to provide the
necessary products and services. In response to a changing regulatory
environment and other factors, the sophistication and breadth of services
required by long-term care facilities have increased dramatically in recent
years. Today, in addition to providing pharmaceuticals, institutional pharmacies
provide consultant pharmacy services, which include monitoring the control,
distribution and administration of drugs within the long-term care facility and
assisting in compliance with applicable state and federal regulations, as well
as therapeutic monitoring and drug utilization review services. With the average
long-term care facility patient taking seven to nine medications per day, high
quality, cost-efficient systems for dispensing and monitoring patient drug
regimens are critical. Providing these services places the institutional
pharmacy in a central role of influencing the effectiveness and cost of care.
Based on data from industry sources, the Company estimates that the U.S.
market for pharmacy services (including consulting services and related
supplies) in long-term care and assisted living facilities will approximate $8.0
billion for 2001. The Company believes that the market is growing and will
continue to grow well into the 21st century. The number of long-term care
facility residents is rising as a result of demographic trends. According to the
Administration on Aging, it is estimated that by the year 2030, the number of
Americans who will be 85 or older, the segment of the population that comprises
the largest percentage of residents at long-term care facilities, will triple.
The number of medications taken per day by long-term care facility residents is
also increasing due to (i) advances in medical technology which have resulted in
the availability of new drug therapy regimens and (ii) the generally higher
acuity levels of residents as a result of both payors' efforts to have care
delivered in the lowest cost setting and the generally older, and consequently
sicker, population of long-term care facility residents.
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Cost containment pressures in the hospital sector are also beginning to
create opportunities for institutional pharmaceutical companies among rural
hospitals as evidenced by an increasing trend towards outsourcing pharmaceutical
services in this market. Based on data from industry sources, the Company
estimates that the U.S. institutional pharmaceutical market for rural hospitals
will approximate $3.8 billion for 2001.
The institutional pharmacy market has undergone significant consolidation
over the last few years. Prior to the 1970's, pharmacy needs of long-term care
facilities were fulfilled by local retail pharmacies. Since then, the pharmacy
and information needs of long-term care facilities have grown substantially and
regulatory requirements and the reimbursement environment have become more
complex. Institutional pharmacy companies, both independent and captive (those
owned by an operator of long-term care facilities), have proven to be better
positioned to meet these changing market demands. As a result, over the past 25
years the proportion of the market served by retail pharmacies has steadily
declined, and institutional pharmacies have become the dominant providers of
pharmacy services to the long-term care market.
There are several factors that drove the consolidation among providers of
long-term care pharmaceutical services. All of these factors relate to the
advantages that large institutional providers have over retail and small
institutional providers.
Scale Advantages. Larger pharmacies are able to (i) realize
advantages associated with size, including purchasing power, service
breadth, more sophisticated sales and marketing programs and formulary
management capabilities, (ii) achieve efficiencies in administrative
functions and (iii) access the capital resources necessary to invest in
critical computer systems and automation.
Ability to Serve Multi-site Customers and Managed Care Payors.
As a result of their ability to serve long-term care customers with
several physical locations, larger pharmacies possess a significant
competitive advantage over their smaller counterparts. Additionally,
the Company believes that there are significant opportunities for
full-service institutional pharmacies with a comprehensive range of
services and regional coverage to provide a spectrum of health care
products and services to managed care payors.
Regulatory Expertise and Systems Capabilities. Long-term care
facilities are demanding more sophisticated and specialized services
from pharmacy providers due, in part, to the implementation in 1990 of
the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA
regulations, which were designed to upgrade and standardize care in
nursing facilities, mandated strict new standards relating to planning,
monitoring and reporting on the progress of patient care to include,
among other things, prescription drug therapy. More recently, the
implementation of Medicare's Prospective Payment System (PPS) has
required that long-term care facilities estimate the total cost of stay
of a resident prior to admission. The facilities, in turn, rely on
their ancillary providers, such as institutional pharmacy vendors, to
help them manage the costs of care of their Medicare Part A covered
residents. As a result, long-term care administrators increasingly seek
experienced pharmacists and specialized providers with computerized
information and documentation systems designed to monitor patient care
and control the facilities' and payors' costs.
Changing Reimbursement Environment. The long-term care market
has undergone significant change over the last two years as Medicare's
new Prospective Payment System has been implemented. This reimbursement
change which was mandated by the Balanced Budget Act of 1997 pays
nursing homes a flat rate for all services, a significant departure
from the prior cost-based system. In order to assist long-term care
customers with this new regulation, institutional pharmacy providers
must be able to offer sophisticated PPS contracts that include
cost-effective formularies.
BUSINESS STRATEGY
The Company expects that the evolution of the institutional pharmacy
industry will follow the path taken by the retail pharmacy industry. Therefore,
it is anticipated that prescription margins will continue to face downward
pressure over time. Institutional pharmacies that remain successful will need
strong internal revenue growth to leverage increased volume over its existing
cost base, a low cost production structure and the ability to leverage size and
technology to establish pharmaceutical manufacturers as purchasers of clinical
data.
Over 80% of the skilled nursing home patient population can be accessed
through the Company's 70 existing pharmacy sites. These sites currently serve
approximately 209,000 patients in 33 states. Accordingly, NCS is positioned to
pursue revenue growth opportunities through its existing infrastructure. The
Company has developed an efficient operating structure and can significantly
benefit by leveraging incremental volume through existing operational sites. And
finally, NCS' investment in common information systems has established a
platform to diversify its revenue stream by assisting drug manufacturers in
better understanding prescribing trends and changes in the competitive landscape
across the long-term care and assisted living population.
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SERVICES
The Company primarily provides institutional pharmacy products and
services to long-term care facility residents. The Company also provides various
ancillary health care services to complement its core pharmacy service,
including infusion therapy, nutrition management, software services, and other
services. For the year ended June 30, 2001, approximately 88% of the Company's
revenues were derived from providing pharmacy and consultant pharmacy services
to long-term care facilities. An additional 4% of revenues were derived from
providing infusion therapy services and the remaining 8% were primarily derived
from providing various other products and services, including nutrition
management, hospital pharmacy management, oxygen and Medicare Part B services.
Pharmacy Services. The Company's core business is providing pharmaceutical
dispensing services to residents of long-term care facilities and other
institutions. The Company purchases, repackages and dispenses prescription and
non-prescription medication in accordance with physician orders and delivers
such prescriptions at least daily to long-term care facilities to be
administered to residents by the nursing staffs of these facilities. The Company
typically serves facilities within a two hour drive time of its distribution
facility and provides 24 hour coverage 365 days per year. As of June 30, 2001,
the Company provided its services from 70 sites in 33 states.
Upon receipt of a doctor's order, the information is entered into the
Company's management information system, which automatically reviews the order
for patient-specific allergies and potentially adverse interactions with other
medications the patient is receiving. Following this analysis, a report on each
order is produced for review by a Company pharmacist, who performs a prospective
drug utilization analysis of the order and, if appropriate, substitutes generic
drugs approved for equivalence by the U.S. Food and Drug Administration ("FDA").
In addition, subject to the prescribing physician's approval, the pharmacist may
make therapeutic substitutions based on guidelines established by the Company's
Therapeutic Formulary Committee.
NCS provides pharmaceuticals to its clients through a unit dose
distribution system. The Company divides the pharmaceuticals received in bulk
form from its suppliers into unit dose packages for its customers. The unit dose
format is designed to reduce errors, improve control over the distribution of
pharmaceuticals and save nursing administration time relative to the bulk
systems traditionally used by retail pharmacies.
As of June 30, 2001, 93% of the Company's pharmacy operating facilities
were converted to the Concord DX system, the Company's proprietary computer
system. The Company utilizes the Concord DX system to control its work flow and
improve operating efficiencies. In most cases, the Company uses its bar-coding
system where a bar code label is applied to each unit dose package. Through bar
coding, information relating to the contents and destination of each unit dose
package distributed can be automatically entered into the Concord DX system.
This bar code technology enables the Company to monitor pharmaceuticals
throughout the production and distribution process, thereby reducing errors,
improving pharmacy control and enhancing production efficiency. At the request
of the Company, certain manufacturers have begun to provide pharmaceuticals that
are pre-packaged and bar coded.
As an additional service, NCS furnishes its clients with information
captured by its computerized medical records and documentation system. This
system captures patient care information, which is used to create monthly
management and quality assurance reports. The Company believes that this system
of information management, combined with the unit dose delivery system, improves
the efficiency and controls in nursing administration and reduces the likelihood
of drug-related adverse consequences.
Consultant Pharmacy Services. Federal and state regulations mandate that
long-term care facilities improve the quality of patient care by retaining
consultant pharmacist services to monitor and report on prescription drug
therapy. The OBRA legislation implemented in 1990 seeks to further upgrade and
standardize health care by mandating more stringent standards relating to
planning, monitoring and reporting on the progress of prescription drug therapy
as well as facility-wide drug usage. Noncompliance with these regulations may
result in monetary sanctions as well as the potential loss of the facility's
ability to participate in Medicare and Medicaid reimbursement programs.
NCS provides consulting services that help clients comply with federal and
state regulations applicable to long-term care facilities. The Company's
services include: (i) reviewing each patient's drug regimen to assess the
appropriateness and efficacy of drug therapies, including a review of the
patient's medical records, monitoring drug interactions with other drugs or
food, monitoring lab results and recommending alternate therapies or
discontinuing unnecessary drugs; (ii) participating on the Pharmacy and
Therapeutics, Quality Assurance and other committees of the Company's clients;
(iii) inspecting medication carts and storage rooms; (iv) monitoring and
reporting at least quarterly on facility-wide drug usage and drug administration
systems and practices; (v) developing and maintaining the client's
pharmaceutical policy and procedure manuals; and (vi) assisting the long-term
care facility in complying with state and federal regulations as they pertain to
patient care.
Additionally, NCS offers a specialized line of consulting services which
help long-term care facilities enhance care and reduce and contain costs as well
as comply with state and federal regulations. Under this service line, the
Company provides: (i)
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data required for OBRA and other regulatory purposes, including reports on
psychotropic drug usage (chemical restraints), antibiotic usage (infection
control) and other drug usage; (ii) plan of care programs that assess each
patient's state of health upon admission and monitor progress and outcomes using
data on drug usage as well as dietary, physical therapy and social service
inputs; (iii) counseling related to appropriate drug usage and implementation of
drug protocols; (iv) on-site continuing education seminars for the long-term
care facilities' staff on topics such as drug information relating to clinical
indications, adverse drug reactions, drug protocols and special geriatric
considerations in drug therapy, information and training on intravenous drug
therapy and updates on OBRA and other regulatory compliance issues; (v) mock
regulatory reviews for nursing staffs; and (vi) nurse consultant services and
consulting for dietary, social services and medical records.
Infusion Therapy. Infusion therapy is the intravenous delivery of
medication. The Company's infusion therapy services include pain management,
antibiotic therapy and chemotherapy for long-term care residents and home care
patients. NCS prepares the product and delivers it to the long-term care
facility to be administered to the patient by the nursing staff. Since the
proper administration of infusion therapy requires a highly trained nursing
staff, the Company provides education and certification programs to its clients
in order to assure proper staff training and compliance with regulatory
requirements.
Nutrition Management. NCS assists long-term care facilities in menu
planning, purchasing and managing their dietary operations. Because the food
service area is typically one of the principal areas of regulatory violations,
this is an area of critical concern to long-term care facility operators.
Currently, NCS provides this service to 158 long-term care facility customers.
Other. The Company provides long-term care facilities with assistance in
complying with regulations concerning healthy and sanitary environments. The
Company also assists its customers with various regulatory compliance matters
and products and services relating to Medicare Part B products, oxygen and other
miscellaneous services. Finally, NCS offers specialized educational services
that aid facilities in the training of their staff. These services include
surveys to prepare facilities for state reviews and training on appropriate
nursing techniques in infusion therapy, wound care management and restorative
nursing.
FORMULARY MANAGEMENT
NCS employs formulary management techniques designed to assist physicians
in making the best clinical decision on the appropriate drug therapy for
patients at the lowest cost. Under the Company's formulary programs, NCS
pharmacists assist prescribing physicians in designating the use of particular
drugs from among therapeutic alternatives (including generic substitutions) and
in the use of more cost-effective delivery systems and dosage forms. The
formulary takes into account such factors as pharmacology, safety and toxicity,
efficacy, drug administration, quality of life and other considerations specific
to the elderly population of long-term care facilities.
Successful implementation of formulary guidelines is dependent upon close
interaction between the pharmacist and the prescribing physician. NCS seeks to
attract and retain highly trained clinical pharmacists and encourages their
active participation in the caring for residents of long-term care facilities,
including consultation with the facilities' medical staff and other prescribing
physicians, to increase the likelihood that the most efficacious, safe and
cost-effective drug therapy is prescribed. The Company's formulary program is
directed by the NCS Pharmacy and Therapeutic Committee, which is comprised of
NCS clinical pharmacists, a registered nurse and a physician. The Company
believes that adherence to the NCS formulary guidelines provides the most cost
effective therapy to the resident and strengthens the Company's purchasing power
with pharmaceutical manufacturers.
MANAGEMENT INFORMATION SYSTEMS
An integral part of NCS' operations is its proprietary management
information system called "Concord DX," which has extensive capabilities
designed to improve operating efficiencies and controls both internally and at
the customer level. In conjunction with the unit dose distribution system and
the use of a bar-coding label system on unit dose packages, Concord DX is able
to monitor pharmaceuticals within NCS throughout the production and distribution
process. At the customer level, Concord DX automatically screens prescription
orders received from physicians for patient-specific allergies and potentially
adverse reactions given other medications the patient may be receiving. Concord
DX is also used to create individual patient medical records and monthly
management and quality assurance reports for NCS' customers. To date, Concord DX
has been implemented in 93% of our pharmacy operating facilities.
In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot").
For the past 13 years, Rescot has developed one of the premier pharmacy systems
used for managing patient and pharmacy data. Rescot has been instrumental in the
design and implementation of Concord DX.
In addition to these internal capabilities, in May 2000, the Company
introduced its web-based eASTRAL(TM), which is an enhancement to its software
offerings and designed to perform the following functions: (1) improve a nursing
home's ability
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to adapt to PPS, (2) enhance the communication between nursing homes and NCS,
and (3) improve a nursing home's ability to conform to regulatory requirements.
NCS' eASTRAL(TM) modules follow:
EMEDMANAGER allows on-line pre-fill edit reviews. These reviews provide
the nursing home formulary recommendations, alternative medications and
information on potential cost savings. With access to this type of critical
information they can make more informed clinical and financial decisions.
PAYOR STATUS REPORTS have become critically important for nursing homes
to assist them in controlling their Medicare Part A costs. Through the use of
eASTRAL(TM), our customers can make adjustments to patient status through an
internet connection.
ORDER STATUS REPORT provides information on the status of each
patient's medication orders, eliminating the need for the nursing staff to
contact the pharmacy for this information.
NDC REPORT is available through the web. This report provides
information needed to complete Section U of the MDS for any long-term patient.
eBILL offers on-line invoice reviews. This is an important feature,
especially for regional or national nursing home chains that perform facility to
facility cost comparisons.
DRUG FACT provides detailed information on any medication, including
its use, side effects, storage, precautions, interactions and instructions for
use.
REFILL ORDERS allows nursing homes to refill orders on-line.
Other software applications offered by NCS are:
NCS ON-LINE is the core product in ASTRAL(TM). It improves
profitability by dramatically reducing nursing time associated with ordering
medicines and printing pharmacy reports. NCS On-Line provides a real time
connection to NCS for ordering, reviewing med sheets and generating reports.
Patient care and customer cost control is enhanced by reducing the amount of
nursing time associated with clerical functions.
PROVIEW improves a nursing home's profitability by enhancing the
facility's ability to make economic admission decisions. ProView analyzes the
costs and revenues associated with a resident prior to admission. In this era of
prospective pay, it allows our customers to evaluate all financial aspects
related to admitting a resident prior to admission.
OSCAR is an on-line survey tool, which compares a facility's state
surveys over time and across regions. By using OSCAR, a nursing facility can
quickly gain perspective as to how they are performing relative to their history
and their state, regional or national competitors. NCS updates this quarterly
and it has improved our customers' ability to conform to regulations.
We believe that these capabilities distinguish NCS from others in the
institutional pharmacy industry. As nursing homes become more sophisticated,
their interest in and need for these capabilities will increase. The Company
believes it is uniquely positioned to fulfill those needs.
SALES AND MARKETING
In marketing to prospective customers, NCS has organized the selling
efforts of each formerly independent location into a single sales force
consisting of Account Executives, Divisional Sales Managers, National Account
Managers and a Chief Development Officer (CDO). The National Account Managers,
along with the CDO, are responsible for selling to national chains and other
strategically significant accounts. The Account Executives report directly to
the Divisional Sales Managers and are trained in each of the Company's products
and services. Typically, they sell these services throughout their respective
geographic territories most of which consist of approximately 400 long-term care
facilities. These individuals are paid base salaries with commissions comprising
up to 75% of a successful salesperson's compensation. The Company believes that
long-term care facilities change institutional pharmacies fairly infrequently,
but when a change is made, it is generally the result of a competitor's ability
to offer better service or a broader array of products and services.
Additionally, in the PPS environment, price competition is becoming an
increasingly significant factor.
The marketing function also reports to the CDO. This function is
responsible for the overall branding of the Company through trade advertising,
direct telemarketing, educational seminars, industry press releases, industry
trade shows and competitive information.
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PURCHASING
NCS purchases pharmaceuticals primarily through a national wholesale
distributor, with whom it has negotiated a prime vendor contract, and directly
from certain pharmaceutical manufacturers. The Company also is a member of
industry buying groups that contract with manufacturers for volume-based
discounted prices which are passed through to the Company by its wholesale
distributor. More recently, the Company has formed a group purchasing
organization with two other large pharmaceutical buyers in the long-term care
and acute care industries. The Company anticipates that it will purchase the
majority of its pharmaceuticals through this new organization. The new
organization utilizes the same wholesale distributor as the Company. The Company
has numerous sources of supply available to it and has not experienced any
difficulty in obtaining pharmaceuticals or other products and supplies used in
the conduct of its business.
CUSTOMERS
At June 30, 2001, NCS had contracts to provide services to more than
209,000 residents in 33 states. These contracts, as is typical in the industry,
are generally for a period of one year but can be terminated by either party for
any reason upon thirty days written notice. Over the past few years, NCS has
expanded its customer base to also include rural hospitals. As of June 30, 2001,
no individual customer or market group represented more than 5% of the total
sales of the Company's institutional pharmacy business.
COMPETITION
Competition among providers of pharmacy services to long-term care
facilities is intense. The Company believes that it is one of the top four
national independent institutional pharmacies in the Country. Institutional
pharmacies compete principally on the basis of quality, cost effectiveness and
service level. In the geographic areas it serves, the Company competes with
local retail pharmacies, captive pharmacies and local, regional and national
institutional pharmacies. The Company competes with several other companies with
similar marketing strategies, some of which have greater resources than the
Company.
REIMBURSEMENT AND BILLING
As is generally the case for long-term care facility services, NCS
receives payments through reimbursement from Medicaid and Medicare programs and
directly from individual residents (private pay), private third-party insurers
and long-term care facilities. For the fiscal year ended June 30, 2001, the
Company's payor mix was approximately 48% Medicaid, 1% Medicare, 16% private
pay, 16% third-party insurance and other and 19% long-term care facilities,
including amounts for which the long-term care facility receives reimbursement
under Medicare Part A. Medicare and Medicaid are highly regulated. The failure
of NCS and/or its client institutions to comply with applicable reimbursement
regulations could adversely affect the Company's business.
Private Pay. For those residents who are not covered by
government-sponsored programs or private insurance, NCS generally bills the
patient or other responsible party on a monthly basis. Depending upon local
market practices, NCS may alternatively bill private residents through the
long-term care facility. Pricing for private pay residents is based on
prevailing regional market rates or "usual and customary" charges.
Medicaid. The Medicaid program is a federal-state cooperative program
designed to enable states to provide medical assistance to aged, blind or
disabled individuals, or to members of families with dependent children whose
income and resources are insufficient to meet the costs of necessary medical
services. State participation in the Medicaid program is voluntary. To become
eligible to receive federal funds, a state must submit a Medicaid "state plan"
to the Secretary of Health and Human Services (HHS) for approval. The federal
Medicaid statute specifies a variety of requirements that the state plan must
meet, including requirements relating to eligibility, coverage of services,
payment and administration. For residents eligible for Medicaid, the Company
bills the individual state Medicaid program or, in certain circumstances state
designated managed care or other similar organizations. Medicaid programs are
funded jointly by the federal government and individual states and are
administered by the states. The reimbursement rates for pharmacy services under
Medicaid are determined on a state-by-state basis subject to review by the
Health Care Financing Administration and applicable federal law. Federal
regulations and the regulations of certain states establish "upper limits" for
reimbursement for certain prescription drugs under Medicaid. In most states
pharmacy services are priced at the lower of "usual and customary" charges or
cost (which generally is defined as a function of average wholesale price and
may include a profit percentage) plus a dispensing fee. Most states establish a
fixed dispensing fee that is adjusted to reflect associated costs on an annual
or less frequent basis.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care
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facility pharmacy services. Any future changes in such reimbursement programs or
in regulations relating thereto, such as reductions in the allowable
reimbursement levels or the timing of processing of payments, could adversely
affect the Company's business. The annual increase in the federal share would
vary from state to state based on a variety of factors. Such provisions, if
ultimately signed into law, could adversely affect the Company's business.
Additionally, any shift from Medicaid to state designated managed care could
adversely affect the Company's business due to historically lower reimbursement
rates for managed care.
Medicare. The Medicare program is a federally funded and administered
health insurance program for individuals age 65 and over or for certain
individuals who are disabled. The Medicare program consists of two parts:
Medicare Part A, which covers, among other things, inpatient hospital, skilled
long-term care facility, home health care and certain other types of health care
services; and Medicare Part B, which covers physicians' services, outpatient
services and certain items and services provided by medical suppliers. Medicare
Part B also covers a limited number of specifically designated prescription
drugs.
Medicare Part B provides benefits covering, among other things, outpatient
treatment, physicians' services, durable medical equipment ("DME"), orthotics,
prosthetic devices and medical supplies. Products and services covered for
Medicare Part B eligible residents in the long-term care facility include, but
are not limited to, enteral feeding products, ostomy supplies, urological
products, orthotics, prosthetics, surgical dressings, tracheostomy care supplies
and a limited number of other medical supplies. All claims for DME, prosthetics,
orthotics, prosthetic devices, including enteral therapy and medical supplies
("DMEPOS") are submitted to and paid by four regional carriers known as Durable
Medical Equipment Regional Carriers ("DMERCs"). The DMERCs establish coverage
guidelines, allowable utilization frequencies and billing procedures for DMEPOS.
Payment is based on a fee schedule, which varies depending on the state in which
the patient receiving the items resides. Payments for Medicare Part B products
to eligible suppliers, which include long-term care facilities and suppliers
such as NCS, are made on a per-item basis directly to the supplier. In order to
receive Medicare Part B reimbursement payments, suppliers must meet certain
conditions set by the federal government. NCS, as an eligible supplier, either
bills Medicare directly for Part B covered products for each patient or,
alternatively, assists the long-term care facility in meeting Medicare Part B
eligibility requirements and prepares bills on behalf of the facility. For Part
B services, such as physical, speech and occupational therapy, long-term care
facilities bill Medicare for reimbursement of the amounts paid to NCS for these
services. Medicare limits such reimbursement to the reasonable amount that would
have been paid if provider employees had furnished the services. To date,
Medicare has published "salary equivalency guidelines" for physical and
respiratory therapy services. Medicare does not currently have salary
equivalency guidelines for other therapy services, but may disallow payment for
rates that substantially exceed rates paid for such services by other providers
in the same area. Moreover, Medicare is likely to issue salary equivalency
guidelines for occupational and speech therapy services in the near future.
Medicare Part B also has an annual deductible as well as a co-payment obligation
on behalf of the patient, and the portion not covered by Medicare is billed
directly to the patient or appropriate secondary payor.
Third-Party Insurance. Third-party insurance includes funding for
residents covered by private plans, veterans' benefits, workers' compensation
and other programs. The resident's individual insurance plan is billed monthly
and rates are consistent with those for other private pay residents.
Long-Term Care Facilities. In addition to occasional private patient
billings and those related to drugs for Medicare eligible residents, long-term
care facilities are billed directly for consulting services, certain
over-the-counter medications and bulk house supplies.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
service, are subject to extensive federal, state and local laws and regulations.
These laws and regulations cover required qualifications, day-to-day operations,
reimbursement and the documentation of activities. NCS continuously monitors the
effects of regulatory activity on its operations.
Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within that state be licensed by the state board
of pharmacy. The Company currently has pharmacy licenses in each of the states
in which it operates a pharmacy. In addition, the Company's pharmacies are
registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.
Long-term care facilities are also separately required to be licensed in
the states in which they operate and, if serving Medicare or Medicaid patients,
must be certified to ensure compliance with applicable program participation
requirements. Long-term care facilities are also subject to the long-term care
facility reforms of OBRA, which impose strict compliance standards relating to
the quality of care for long-term care operations, including vastly increased
documentation and reporting requirements. In addition, pharmacists, nurses and
other health professionals who provide services on the Company's behalf are in
most cases required to obtain and maintain professional licenses and are subject
to state regulation regarding professional standards of conduct.
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Federal and State Laws Affecting the Repackaging, Labeling and Interstate
Shipping of Drugs. Federal and state laws impose certain repackaging, labeling
and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail. A drug repackager must register with the FDA. The Company
believes that it holds all required registrations and licenses and that its
repackaging operations are in compliance with applicable state and federal
requirements.
Medicare and Medicaid. For an extensive period of time, the long-term care
facility pharmacy business has operated under regulatory and cost containment
pressures from state and federal legislation primarily affecting Medicaid and
Medicare.
The Medicare program establishes certain requirements for participation of
providers and suppliers in the Medicare program. Pharmacies are not subject to
such certification requirements. Skilled long-term care facilities and suppliers
of DMEPOS, however, are subject to specified standards. Failure to comply with
these requirements and standards may adversely affect an entity's ability to
participate in the Medicare program and receive reimbursement for services
provided to Medicare beneficiaries. See "Reimbursement and Billing."
Federal law and regulations contain a variety of requirements relating to
the furnishing of prescription drugs under Medicaid. First, states are given
broad authority, subject to certain standards, to limit or to specify conditions
as to the coverage of particular drugs. Second, federal Medicaid law establishes
standards affecting pharmacy practice. These standards include general
requirements relating to patient counseling and drug utilization review and more
specific requirements for long-term care facilities relating to drug regimen
reviews for Medicaid patients in such facilities. Recent regulations clarify
that, under federal law, a pharmacy is not required to meet the general
standards for drugs dispensed to long-term care facility residents if the
long-term care facility complies with the drug regimen review requirements.
However, the regulations indicate that states may nevertheless require
pharmacies to comply with the general standards, regardless of whether the
long-term care facility satisfies the drug regimen review requirement, and the
states in which the Company operates currently require its pharmacies to comply
therewith. Third, federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid residents. See
"Reimbursement and Billing - Medicaid."
In addition to requirements imposed by federal law, states have
substantial discretion to determine administrative, coverage, eligibility and
payment policies under their state Medicaid programs which may affect the
Company's operations. For example, some states have enacted "freedom of choice"
requirements which prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers that deal with the long-term care facility. Such
limitations may increase the competition that the Company faces in providing
services to long-term care facility patients.
Prospective Payment System. The Balanced Budget Act of 1997 (BBA),
enacted on August 5, 1997, mandated the implementation of a prospective payment
system (PPS) for skilled nursing facilities (SNFs) providing care for Medicare
Part A patients, effective for all SNFs whose cost reporting period begins on or
after July 1, 1998.
Under the new PPS, SNFs receive a single per diem payment for all
Medicare Part A covered SNF services. The new single, per diem federal rate was
phased in over a three-year period that began on July 1, 1998. Each Medicare
Part A covered patient is designated into one of 44 resource utilization group
(RUG), or case-mix categories, as defined by the Health Care Financing
Administration (HCFA). The per diem payment associated with each RUG category
encompasses all costs of furnishing covered skilled nursing services including
routine, ancillary and capital-related costs. PPS incorporates payment for
pharmacy within the nursing component (as a non-therapy ancillary) of the
federal per diem and adjusts costs by the nursing index.
On November 29, 1999, Congress enacted the Balanced Budget
Reconciliation Act of 1999 (BBRA) in response to concerns that the PPS rates
did not adequately reflect the high medication costs of high acuity patients.
The BBRA increases the federal per diem rates by 20% for 15 high acuity
categories (RUGs) under Extensive Services, Special Care, Clinically Complex and
High and Medium Rehab (effective October 1, 2000). In addition, it increases the
per diem payment by four percent for all acuity categories (calculated exclusive
of the 20% RUG increase) for the years commencing October 1, 2000 and 2001. BBRA
also allows SNFs to elect transition to full federal PPS rates on or after
December 15, 1999 instead of participating in the three-year transition period.
On December 15, 2000, Congress enacted the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 (BIPA). BIPA, effective April
2001, will further increase reimbursement by means of a 6.7% rate increase for
certain high-acuity rehabilitation patients, a 16.66% across the board increase
in the nursing component of the federal rate for all patients, and for fiscal
year 2001, a 3.16% rate increase for all patients.
Referral Restrictions. The Company is subject to federal and state laws
that govern financial and other arrangements between health care providers.
These laws include the federal anti-kickback statute, which prohibits, among
other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration directly or indirectly in return for or to induce the referral
of an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in
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part under Medicare or Medicaid. Many states have enacted similar statutes that
are not necessarily limited to items and services for which payment is made by
Medicare or Medicaid. Violations of these laws may result in fines, imprisonment
and exclusion from the Medicare and Medicaid programs or other state-funded
programs. Federal and state court decisions interpreting these statutes are
limited, but have generally construed the statutes broadly. Recent Federal
legislation has increased the enforcement and penalties for violation of these
statutes.
Federal regulations establish "Safe Harbors," which give immunity from
criminal or civil penalties to parties in good faith compliance. While the
failure to satisfy all the criteria for a specific Safe Harbor does not
necessarily mean that an arrangement violates the federal statute, the
arrangement is subject to review by the HHS Office of Inspector General ("OIG"),
which is charged with administering the federal anti-kickback statute. Beginning
January 1, 1997, the Secretary of Health and Human Services began issuing
written advisory opinions regarding the applicability of certain aspects of the
anti-kickback statute to specific arrangements or proposed arrangements.
Advisory opinions will be binding as to the Secretary and the party requesting
the opinion.
The OIG has issued "Fraud Alerts" identifying certain questionable
arrangements and practices, which it believes, may implicate the federal
anti-kickback statute. The OIG has issued a Fraud Alert providing its views on
certain joint venture and contractual arrangements between health care
providers. The OIG has recently issued a Fraud Alert concerning prescription
drug marketing practices that could potentially violate the federal
anti-kickback statute. Pharmaceutical marketing activities may implicate the
federal anti-kickback statute because drugs are often reimbursed under the
Medicaid program. According to the Fraud Alert, examples of practices that may
implicate the statute include certain arrangements under which remuneration is
made to pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have recently undertaken enforcement actions
against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arise
under state consumer protection laws that generally prohibit false advertising,
deceptive trade practices and the like. Further, a number of the states involved
in these enforcement actions have requested that the FDA exercise greater
regulatory oversight in the area of pharmaceutical promotional activities by
pharmacists. It is not possible to determine whether the FDA will act in this
regard or what effect, if any, FDA involvement would have on the Company's
operations.
The Company believes its contract arrangements with other health care
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with the
Company's interpretation and application.
Environmental Matters. In operating its facilities, NCS makes every effort
to comply with environmental laws. No major difficulties have been encountered
in effecting compliance. In addition, no material capital expenditures for
environmental control facilities are expected. While the Company cannot predict
the effect, which any future legislation, regulations or interpretations may
have upon its operations, it does not anticipate any changes that would have a
material adverse impact on its operations.
General. In the ordinary course of its business, the Company is subject to
inspections, audits, inquiries and similar actions by governmental authorities
responsible for enforcing the laws and regulations to which the Company is
subject.
EMPLOYEES
As of June 30, 2001, the Company had approximately 2,640 full-time
employees. None of its employees are represented by a union. The Company
considers relations with its employees to be good.
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ITEM 2. PROPERTIES
The Company presently maintains its executive offices in approximately
27,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in
2005 with an unaffiliated third party. NCS currently considers this space to be
sufficient for its corporate headquarters operations.
As of June 30, 2001, the Company leased or owned 81 properties in 33
states with a total square footage of 758,000 square feet ranging in size from
approximately 500 square feet to approximately 38,000 square feet. The terms of
the leases relating to these properties vary in length remaining, from one month
to fourteen years and, in some cases, include options to extend. For information
concerning the Company's rental obligations, see Note 5 (Operating Leases) of
the Notes to Consolidated Financial Statements, which is set forth at Item 8 of
this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is subject to
inspections, audits, inquiries and similar actions by governmental authorities
responsible for enforcing the laws and regulations to which the Company is
subject.
In January 1998, federal and state government authorities sought and
obtained various documents and records from a Herrin, Illinois pharmacy operated
by a wholly-owned subsidiary of the Company. The Company has cooperated fully
and continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law
at that facility. The Company has reached a tentative settlement with the
USA-Illinois regarding this investigation and the details are currently being
finalized. Accordingly, the Company has recorded the tentative settlement amount
in the fiscal 2001 consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY*
The name, age and positions of each of the Company's executive officers
are as follows:
NAME AGE POSITION
Jon H. Outcalt 65 Chairman of the Board of Directors
Kevin B. Shaw 44 President, Chief Executive Officer, Secretary and Director
William B. Byrum 57 Executive Vice President and Chief Operating Officer
Gerald D. Stethem 37 Senior Vice President and Chief Financial Officer
Mary Beth Levine 41 Senior Vice President and General Counsel
John P. DiMaggio 38 Senior Vice President
Michael J. Mascali 41 Senior Vice President
Thomas Bryant Mangum 50 Senior Vice President
Richard L. Osborne 63 Director
Boake A. Sells 64 Director
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Jon H. Outcalt, Chairman of the Board, is a founding principal of NCS
and has served as Chairman of the Board since 1986. He was a Senior Vice
President of Alliance Capital Management L.P., a global investment management
company, from 1975 to December 1995. Mr. Outcalt serves on the Board of
Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts
for the automotive and other industries, and Ohio Savings Financial Corporation,
a savings and loan holding company. He is a graduate of Trinity College (B.A.)
and the Wharton Graduate School of Business (M.B.A.).
Kevin B. Shaw, President, Chief Executive Officer and a Director of the
Company, is a founding principal of NCS and has served as President, Secretary
and a Director of the Company since 1986 and as Chief Executive Officer since
December 1995. Prior to joining the Company, he was employed by McKinsey &
Company and Owens Corning Fiberglas. Mr. Shaw is a graduate of Harvard College
(B.A.) and Stanford Graduate School of Business (M.B.A.).
William B. Byrum, Executive Vice President and Chief Operating Officer,
joined the Company in September 1995. From April 1993 to September 1995, Mr.
Byrum was President and Chief Executive Officer of Corinthian Healthcare
Systems, Inc., an institutional pharmacy, prior to its acquisition by the
Company. From 1991 to April 1993, he was Vice President of Development
(Acquisitions) for Hook-SupeRx, Inc. Prior to 1991, Mr. Byrum was Vice
President, Store Operations at the Hook Drug Division of Hook-SupeRx, Inc.,
serving in various management positions. Mr. Byrum is a graduate of Purdue
University with a B.S. in Pharmacy.
Gerald D. Stethem, Senior Vice President and Chief Financial Officer,
joined NCS in November 1994 and served as Controller until February 1998, at
which time he was named Chief Financial Officer. He was previously with Ernst &
Young LLP, an auditing and accounting firm, where he served as a Manager in the
firm's Entrepreneurial Services Group. He is a graduate of Ohio State University
with a B.A. in Accounting.
Mary Beth Levine, Senior Vice President and General Counsel, joined NCS
in July 1999 as Legal Counsel and served in that capacity until June 2000, at
which time she was named General Counsel. She was previously an associate with
the Cleveland, Ohio law firm of Benesch, Friedlander, Coplan & Aronoff, joining
that firm in 1987. She is a graduate of Northwestern University (B.A, M.A) and
Case Western University School of Law (J.D).
John P. DiMaggio, Senior Vice President, joined the Company in December
1992 and served as Management Information Systems Director of the Company until
December 1994. Mr. DiMaggio served as Vice President of Information Systems of
the Company from December 1994 to November 1998, at which time he assumed his
current position as Senior Vice President of Information Systems. Mr. DiMaggio
has an M.B.A. in Finance from the Katz Graduate School of Business and a B.S.
Degree in Computer Science from the University of Pittsburgh.
Michael J. Mascali, Senior Vice President, joined the Company in
October 1995. Mr. Mascali was a Regional Vice President of Operations from
October 1995 to February 1998. From February 1998 to January 1999, he was Senior
Vice President of Compliance and from January 1999 to May 1999 he was Senior
Vice President of Operations, at which time he assumed his current position as
Senior Vice President of Compliance. From May 1989 to October 1995, Mr. Mascali
was a director of pharmacy for Synetic and Pharmacy Corporation of America in
Connecticut, a long term care pharmacy. Mr. Mascali graduated from St. John's
University with a B.S. in Pharmacy.
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Thomas Bryant Mangum, Senior Vice President, joined the Company in June
1998. From November 1996 to June 1998, Mr. Mangum was Senior Director of
Pharmacy for Tenet HealthCare System, an owner and manager of acute care
hospitals. From November 1995 to November 1996, he was Vice President of
Pharmacy services for Premier, Inc., a group purchasing organization for acute
care hospitals, where he had responsibility for pharmaceutical contract
negotiations. From 1990 to November 1995, Mr. Mangum was Associate Vice
President of Pharmacy and Nutrition Services for SunHealth, a group purchasing
organization for acute care hospitals. He is a graduate of University of North
Carolina Pharmacy School and currently serves on the Pharmacy School Board.
Richard L. Osborne, a Director of the Company since 1986, is currently
serving as the Professor for the Practice of Management at the Weatherhead
School of Management, Case Western Reserve University, Cleveland, Ohio. Mr.
Osborne serves on the Board of Directors of Myers Industries, Inc., a
manufacturer of plastic and rubber parts for the automotive and other
industries, New Horizons Worldwide, Inc., a provider of computer training
services, and Ohio Savings Financial Corporation, a savings and loan holding
company. He is a graduate of Bowling Green State University (B.S.) and Case
Western Reserve University (M.S.).
Boake A. Sells, a Director of the Company since November 1993, has been
a self-employed private investor since June 1992. He was Chairman of the Board,
President and Chief Executive Officer of Revco D.S., Inc. from September 1987 to
June 1992, and was formerly President and Chief Operating Officer of Dayton
Hudson Corporation and President and Chief Operating Officer of Cole National
Corporation. Mr. Sells is a Director of Harrah's Entertainment, Inc., a leading
casino gaming company. He is a graduate of University of Iowa (B.A.) and Harvard
Graduate School of Business (M.B.A.).
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock is traded on the Pink Sheets Electronic
Quotation Service under the symbol NCSS. Between December 8, 1999 and October 9,
2000, the Company's Class A Common Stock was traded on the Nasdaq SmallCap
Market. Prior to December 8, 1999, the Company's Class A Common Stock was traded
on the Nasdaq National Market. The following table sets forth, for the two
fiscal years ended June 30, 2001, the high and low sale prices per share for the
Class A Common Stock, as reported on the Pink Sheets Electronic Quotation
Service, the Nasdaq SmallCap Market and the Nasdaq National Market. These prices
do not include retail markups, markdowns or commissions.
HIGH LOW
---- ---
2000
First Quarter $ 5.63 $ 1.78
Second Quarter 3.84 1.53
Third Quarter 3.19 1.47
Fourth Quarter 1.81 0.56
2001
First Quarter $ 0.69 $ 0.25
Second Quarter 0.47 0.09
Third Quarter 0.50 0.16
Fourth Quarter 0.35 0.17
On September 20, 2001, the last sale prices of the Class A Common Stock
as reported by the Pink Sheets Electronic Quotation Service was $0.17 per share.
As of September 20, 2001, there were approximately 228 holders of record of the
Class A Common Stock, and approximately 21 holders of record of Class B Common
Stock. This figure does not include stockholders with shares held under
beneficial ownership in nominee name or within clearinghouse positions of
brokerage firms and banks.
The Company has never declared or paid cash dividends on its Class A
Common Stock. The Company currently intends to retain any earnings for use in
its business and therefore does not anticipate paying any dividends in the
foreseeable future. Any determination to pay cash dividends in the future will
be at the discretion of the Board of Directors after taking into account various
factors, including the Company's financial condition, results of operations,
current and anticipated cash needs and plans for expansion. On August 3, 1999
the Company amended its line of credit agreement entering into several
restrictive covenants including a restriction on declaration and payment of cash
dividends to shareholders.
There were no equity securities of the Company issued during the fourth
fiscal quarter that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30,
-------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues $ 626,328 $ 694,530 $ 717,825 $ 509,064 $ 275,040
Cost of revenues 514,483 556,757 540,547 380,217 205,536
--------- --------- --------- --------- ---------
Gross profit 111,845 137,773 177,278 128,847 69,504
Selling, general and
administrative expenses (1), (3) 123,271 126,969 139,522 93,895 51,153
Special charge to increase allowance
for doubtful accounts (2) - 44,623 32,384 - -
Nonrecurring charges (2) - 51,136 8,115 8,862 -
--------- --------- --------- --------- ---------
Operating income (loss) (11,426) (84,955) (2,743) 26,090 18,351
Interest (expense) income, net (31,714) (26,243) (18,301) (5,745) 1,576
--------- --------- --------- --------- ---------
Income (loss) before income taxes (43,140) (111,198) (21,044) 20,345 19,927
Income tax (expense) benefit (370) (3,326) 7,640 (9,014) (8,655)
--------- --------- --------- --------- ---------
Income (loss) before accounting change (43,510) (114,524) (13,404) 11,331 11,272
Cumulative effect of accounting change (1) - - (2,921) - -
--------- --------- --------- --------- ---------
Net income (loss) $ (43,510) $(114,524) $ (16,325) $ 11,331 $ 11,272
========= ========= ========= ========= =========
Net income (loss) per share - basic $ (1.85) $ (5.31) $ (0.81) $ 0.59 $ 0.70
========= ========= ========= ========= =========
Net income (loss) per share - diluted $ (1.85) $ (5.31) $ (0.81) $ 0.58 $ 0.69
========= ========= ========= ========= =========
Income (loss) before accounting
change - basic $ (1.85) $ (5.31) $ (0.66) $ 0.59 $ 0.70
========= ========= ========= ========= =========
Income (loss) before accounting
change - diluted $ (1.85) $ (5.31) $ (0.66) $ 0.58 $ 0.69
========= ========= ========= ========= =========
Weighted average common
shares outstanding - basic 23,535 21,551 20,200 19,100 15,991
========= ========= ========= ========= =========
Weighted average common
shares outstanding - diluted 23,535 21,551 20,200 19,372 16,843
========= ========= ========= ========= =========
YEAR ENDED JUNE 30,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 39,464 $ 16,387 $ 29,424 $ 21,186 $ 8,160
Working capital (216,529) (93,865) 197,395 149,362 53,164
Total assets 513,971 546,663 699,499 623,790 321,030
Line of credit 206,130 206,130 214,700 147,800 10,285
Long-term debt, excluding current portion 825 1,291 1,936 3,879 8,043
Convertible subordinated debentures 102,107 102,000 100,000 102,753 4,813
Stockholders' equity $ 126,495 $ 169,705 $ 276,434 $ 287,334 $ 253,226
(1) Selling, general and administrative expenses for 1999 include $11,503
of pre-tax costs that would have been capitalized prior to the adoption
of SOP 98-5, "Reporting on the Costs of Start-up Activities." The
cumulative effect of accounting change represents start-up costs, net
of tax, that were previously capitalized as of June 30, 1998.
(2) For 1998, represents a nonrecurring charge related to restructuring and
other nonrecurring expenses in connection with the implementation and
execution of strategic restructuring and consolidation initiatives of
certain operations and other nonrecurring items. For 1999, represents a
special charge to increase the allowance for doubtful accounts and
other nonrecurring charges in association with the implementation and
execution of strategic restructuring and consolidation initiatives of
certain operations and other nonrecurring items. For 2000, represents a
special charge to increase the allowance for doubtful accounts and
nonrecurring, restructuring and other special charges associated with
the continuing implementation and execution of strategic restructuring
and consolidation activities, the planned disposition of certain
non-core and/or non-strategic assets, impairment of certain assets and
other nonrecurring items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Selling, general and administrative expenses for the year ended June
30, 2001 includes the following: 1) $10,043 of additional bad debt
expense to fully reserve for remaining accounts receivable of non-core
and non-strategic businesses exited by the Company, 2) $1,034 of
restructuring and other related charges associated with the continuing
implementation and execution of strategic restructuring and
consolidation activities and 3) $2,106 in fixed asset impairment
charges recorded 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," relating primarily to
changes in asset values resulting from the impact of restructuring
activities and changes in operational processes under restructured
operations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations, expressed as a percentage of total
revenues.
YEAR ENDED JUNE 30,
-------------------
2001 2000 1999
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 82.1 80.2 75.3
----- ----- -----
Gross margin 17.9 19.8 24.7
Selling, general and administrative expenses 19.7 18.3 19.4
Special charge to increase allowance for doubtful accounts - 6.4 4.5
Nonrecurring charges - 7.3 1.2
----- ----- -----
Operating loss (1.8) (12.2) (0.4)
Interest expense, net (5.1) (3.8) (2.6)
----- ----- -----
Loss before income taxes (6.9) (16.0) (3.0)
Cumulative effect of accounting change - - (0.4)
Income tax (expense) benefit - (0.5) 1.1
----- ----- -----
Net loss (6.9)% (16.5)% (2.3)%
===== ===== =====
YEARS ENDED JUNE 30, 2001 AND 2000
Net loss for the year ended June 30, 2001 was $43.5 million or $1.85 per
share compared to a net loss of $114.5 million or $5.31 per share for the year
ended June 30, 2000.
Net loss for the year ended June 30, 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 $30.3 million or $1.29 per share compared to net loss, excluding
nonrecurring, restructuring, other special charges and a non-cash charge related
to a valuation allowance recorded against the Company's net deferred tax assets,
of $9.5 million or $0.44 per share for the year ended June 30, 2000.
Operating results of the Company have been negatively affected 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 these
reimbursement changes. 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 their 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. These legislative
changes were intended to improve the financial condition of skilled nursing
facilities; however, institutional
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pharmacies are not a direct beneficiary of such reimbursement changes.
Accordingly, a difficult operating environment remains and management continues
to react to pressures in the current environment. Over the past twenty-four
months, the Company has made considerable efforts in reducing overhead and
operating costs by accelerating efforts to consolidate and /or close pharmacy
and ancillary service locations, the shutdown or sale of certain non-strategic
and/or unprofitable operations, and continuing its employee reduction plan. In
addition, the Company continues to review the profitability of its customer base
and has terminated uneconomic accounts and began applying stricter standards in
accepting new business.
Revenues for the year ended June 30, 2001 decreased $68.2 million or
9.8% to $626.3 million from $694.5 million for the year ended June 30, 2000.
Approximately $46.9 million of the decrease in revenue from the prior fiscal
year is attributable to a decrease in revenue from the Company's allied and
ancillary services. This decrease is due to decisions by management to terminate
uneconomic accounts and the shutdown or sale of certain non-strategic or
unprofitable operations. Through June 30, 2001, the Company has disposed of
three ancillary operations that were not contributing to the overall financial
performance of the Company. The remaining $21.3 million of the decrease in
revenue is attributable to the Company's pharmacy operations and is related to
net bed loss during the year and revenue pressure associated with the continued
implementation of the PPS. 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 year ended June 30, 2001 decreased $42.3 million
or 7.6% to $514.5 million from $556.8 million for the year ended June 30, 2000.
Cost of revenues as a percentage of revenues increased to 82.1% for the year
ended June 30, 2001 from 80.2% for the year ended June 30, 2000. Gross margins
for the year ended June 30, 2001 continued to be 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, reduced acuity levels and census at customer facilities, a continued
shift toward lower margin payer sources including Medicaid and insurance and
lower Medicaid and insurance reimbursement. This includes the impact of the
implementation of the Health Care Financing Administration Federal Upper Limits
(FUL's) which were implemented in December 2000 and reflected lower
reimbursement from State Medicaid programs.
Selling, general and administrative expenses for the year ended June 30,
2001 decreased $3.7 million or 2.9% to $123.3 million from $127.0 million for
the year ended June 30, 2000. Selling, general and administrative expenses as a
percentage of revenues increased from 18.3% for the year ended June 30, 2000 to
19.7% for the year ended June 30, 2001. 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
year ended June 30, 2001 decreased $16.9 million or 13.3% to $110.1 million from
$127.0 million for the year ended June 30, 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 decreased from 18.3% for the year ended
June 30, 2000 to 17.6% for the year ended June 30, 2001. The decrease in
expenses from the prior fiscal year is a result of efforts by the Company to
reduce operating and overhead costs, including 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.
Selling, general and administrative expenses for the year ended June 30,
2001 included $13.2 million for bad debt expense for exited businesses, fixed
asset impairment charges and additional expenses related to restructuring
activities. The Company recorded $10.0 million of additional bad debt expense to
fully reserve for remaining accounts receivable of non-core and non-strategic
businesses exited during the past eighteen 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 $1.1
million, primarily for lease terminations associated with the continuing
implementation and execution of strategic restructuring and consolidation
activities. At June 30, 2001, approximately $0.8 million is included in accrued
expenses related to these expenses. For the year ended June 30, 2001, the
Company recorded a fixed asset impairment charge of $2.1 million 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.
Operating income for the year ended June 30, 2001, excluding bad debt
expense for exited businesses, fixed asset impairment charges and additional
expenses related to restructuring activities, was $1.8 million or 0.3% of
revenues compared to operating income, excluding nonrecurring, restructuring and
special charges described below of $10.8 million or 1.6% of revenues for the
year ended June 30, 2000. The decrease is primarily a result of a decrease in
gross margins as described above and increases in bad debt expense for
continuing businesses and professional fees related to restructuring activities,
partially offset by a decrease in operating expenses as a result of efforts by
the Company to reduce operating and overhead costs, including 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.
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The Company had net interest expense of $31.7 million for the year ended
June 30, 2001, compared to net interest expense of $26.2 million for the year
ended June 30, 2000. The increase is primarily attributable to an increase in
interest rates and other finance related charges during fiscal year 2001. 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.
YEARS ENDED JUNE 30, 2000 AND 1999
The net loss for the year ended June 30, 2000 was $114.5 million or $5.31
per diluted share compared to a net loss of $16.3 million or $0.81 per diluted
share for the year ended June 30, 1999. The net loss for the year ended June 30,
1999 before the cumulative effect adjustment to adopt the Accounting Standards
Executive Committee Statement of Position 98-5 (SOP 98-5) "Reporting on the
Costs of Start-up Activities," was $13.4 million or $0.66 per diluted share.
The net loss for the year ended June 30, 2000, excluding nonrecurring,
restructuring, other special charges and a non-cash charge related to a
valuation allowance recorded against the Company's net deferred tax assets, was
$9.5 million or $0.44 per diluted share compared to net income of $17.9 million
or $0.88 per share in the prior year, excluding special and nonrecurring charges
and the effect of adopting SOP 98-5.
As discussed above, operating results for the year ended June 30, 2000
were negatively impacted by the implementation of Medicare's Prospective Payment
System.
Revenues for the year ended June 30, 2000 decreased $23.3 million or
3.2% to $694.5 million from $717.8 million for the year ended June 30, 1999.
Approximately $20.5 million of the decrease in revenue from the prior fiscal
year is attributable to a decrease in revenue from the Company's allied and
ancillary services. This decrease is due to decisions by management to terminate
uneconomic accounts and the shutdown or sale of certain non-strategic or
unprofitable operations. During April 2000, the Company disposed of two
ancillary operations that were not contributing to the overall financial
performance of the Company. The remaining $2.8 million of the revenue decrease
is attributable to the Company's pharmacy operations and is related to net bed
loss during the period. Although the Company added new customers during the year
ended June 30, 2000 through its sales and marketing efforts, the number of beds
served by the Company declined due to decisions by management to terminate
uneconomic accounts as well as general bed loss typically experienced in a
competitive environment.
Cost of revenues for the year ended June 30, 2000 increased $16.2 million
or 3.0% to $556.8 million from $540.6 million for the year ended June 30, 1999.
Cost of revenues as a percentage of revenues increased to 80.2% for the year
ended June 30, 2000 from 75.3% for the year ended June 30, 1999. Gross margins
during the year ended June 30, 2000 were significantly affected by the impact of
the PPS reimbursement system. The margin pressure resulted from continued
Medicare Part A pricing pressure, lower than anticipated gross margins on PPS
related contracts and reduced acuity levels at customer facilities. In addition,
the Company's payor mix has continued to shift towards lower margin payors,
including Medicaid and insurance.
Selling, general and administrative expenses for the year ended June 30,
2000 decreased $12.5 million or 9.0% to $127.0 million from $139.5 million for
the year ended June 30, 1999. Selling, general and administrative expenses as a
percentage of revenues decreased from 19.4% for the year ended June 30, 1999 to
18.3% for the year ended June 30, 2000. The decrease in expenses from the prior
fiscal year is a result of efforts by the Company to reduce operating and
overhead costs by accelerating the consolidation and/or closing of pharmacy
locations and continuing its employee reduction plan.
Excluding the effects of the nonrecurring, restructuring and special
charges described below, operating income for the year ended June 30, 2000
decreased $27.0 million or 71.4% to $10.8 million from $37.8 million for the
year ended June 30, 1999. Excluding the effects of the nonrecurring,
restructuring and special charges, operating income as percentage of sales was
1.6% for the year ended June 30, 2000 and 5.3% for the year ended June 30, 1999.
The decrease is related to the implementation of PPS as discussed above.
During fiscal 2000, the Company recorded nonrecurring, restructuring and
special charges of $95.8 million. A special charge of $44.6 million was recorded
to increase the allowance for doubtful accounts, and nonrecurring, restructuring
and other special charges of $51.2 million 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 the 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 general 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 $53.8 million for the year ended June 30, 2000.
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20
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 $9.7 million related to these site
consolidations and location shutdowns, inclusive of $1.1 million 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 $30.7 million related to the planned
disposition of assets primarily consisting of impairment to goodwill and
property and equipment. Through June 30, 2001, the Company has disposed of three
ancillary service operations that were not contributing to the overall financial
performance of the Company. Total revenue and operating income of the related
business units was $59.3 million and $1.5 million, respectively, for the year
ended June 30, 2000. The carrying amount of assets held for sale at June 30,
2000 was $7.6 million. At June 30, 2001, the Company no longer has any assets
held for sale.
The remaining $10.8 million 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 $4.1 million 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 $1.5 million will be payable to the U.S. Attorney's office. See
"Certain Regulatory Investigations and Legal Proceedings".
Employee severance costs included in the nonrecurring charges relate to
the termination of 472 employees. As of June 30, 2001, all terminations
associated with these restructuring activities have been completed.
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 6/30/01
----------- ------------- ------ -------- ---------- -------- ----------
(In millions)
Site Consolidations
Severance/compensation related Cash $ 1.3 $(1.0) $ .3 $ (.3) $ --
Lease terminations Cash 2.8 (.4) 2.4 (1.7) .7
Asset impairments Non-cash 4.4 (4.4) -- -- --
Other Cash 1.2 (.6) .6 (.4) .2
Special increase to allowance
for doubtful accounts Non-cash 44.6 (44.6) -- -- --
Disposition of Assets
Asset impairment Non-cash 30.2 (30.2) -- -- --
Other Cash .5 (.2) .3 (.3) --
Other
Cash 6.6 (6.2) .4 (.3) .1
Non-cash 4.2 (4.2) -- -- --
----- ------ ------ ------ ----
Total $95.8 $(91.8) $ 4.0 $ (3.0) $1.0
===== ====== ====== ====== ====
During the fourth quarter of fiscal 1999 the Company recorded special and
nonrecurring charges of $40.5 million before tax ($24.3 million net of tax). A
special charge of $32.4 million before tax was recorded to increase the
allowance for doubtful
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21
accounts, and nonrecurring charges of $8.1 million before tax were recorded in
connection with the implementation and execution of strategic restructuring and
consolidation initiatives of certain operations and other nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers primarily
as a result of the implementation of the Medicare Prospective Payment System.
The acquisition related items primarily pertain to specific receivable
collectibility issues relating to previous utilization of "legacy" systems, and
other nonrecurring issues that have resulted in potentially uncollectible
accounts receivable.
During the fourth quarter of fiscal 1999, the Company adopted a plan of
restructuring to consolidate certain pharmacy sites in similar geographies. The
plan is a continuation of the plan adopted in fiscal 1998 to combine pharmacies
in close proximity in order to improve operating efficiencies. As a result of
the new exit plan, four additional pharmacy sites were consolidated into either
a new or existing location. During the year ended June 30, 1999, the Company
recorded nonrecurring charges of $4.7 million before tax related to the new site
consolidations, inclusive of $0.2 million of additional costs incurred on the
site consolidations announced in the prior year. These costs consist of $2.1
million related to employee severance and other compensation related expenses,
$0.6 million related to lease termination costs and $2.0 million related to
asset impairments and other miscellaneous costs.
The remaining $3.4 million before tax of the nonrecurring charge primarily
relates to severance incurred during the fourth quarter of fiscal 1999
associated with the Company's expense reduction initiatives, additional
acquisition related and other expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees. As of June 30, 2001, all terminations associated
with these restructuring activities have been completed.
Details of the fourth quarter fiscal 1999 special and nonrecurring charge
and related activity are as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 6/30/01
----------- ------------- ------ -------- ---------- -------- ----------
(In millions)
Site Consolidations
Severance/compensation related Cash $ 2.1 $(2.1) $ -- $ -- $ --
Lease terminations Cash .6 (.5) .1 (.1) --
Asset impairments Non-cash 1.5 (1.5) -- -- --
Other Cash .5 (.5) -- -- --
Special increase to allowance
For doubtful accounts Non-cash 32.4 (32.4) -- -- --
Other Cash 3.4 (3.2) .2 (.2) --
----- ------ ----- ------ ------
Total $40.5 $(40.2) $ .3 $ (.3) $ --
===== ====== ===== ====== ======
The Company had net interest expense of $26.2 million for the year ended
June 30, 2000, compared to net interest expense of $18.3 million for the year
ended June 30, 1999. The increase is primarily attributable to increased average
borrowings on the Company's revolving credit facility, an increase in interest
rates and other finance related charges during fiscal 2000 as compared to the
prior year. The additional funds borrowed in fiscal 1999 were primarily used for
working capital purposes, to fund internal growth and capital expenditures for
infrastructure improvement.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $(24.0) million,
$10.8 million and $27.8 million in fiscal 1999, 2000 and 2001, respectively. The
increase in net cash provided by operating activities during fiscal 2001
primarily resulted from a decrease in inventory as a result of the Company's
inventory reduction efforts, a slower growth rate in accounts receivable 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. The increase in net
cash provided by operating activities during fiscal 2000 was primarily due to a
slower growth rate in accounts receivable, a decrease in inventory as a result
of the Company's inventory reduction efforts
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and refunds received from federal and state income tax authorities offset by a
decrease in accounts payable and accrued expenses. The slower growth rate in
accounts receivable during fiscal 2000 and 2001 is mainly attributable to slower
internal sales growth and increased collection efforts by the Company. However,
the Company continues to experience slower payment trends by certain customers
as a result of the implementation of PPS.
Net cash used in investing activities was $35.0 million, $11.8 million and
$4.1 million in fiscal 1999, 2000 and 2001, respectfully. The decrease in fiscal
2000 and 2001 is primarily a result of a decrease in capital expenditures.
The Company made capital expenditures of $29.4 million, $6.6 million and
$3.4 million in fiscal 1999, 2000 and 2001, respectfully. Significant capital
expenditures made during the years ended June 30, 2001 and 2000 include
capitalized software costs associated with the Concord DX operating system,
computer equipment, leasehold improvements and medication carts. Significant
capital expenditures during the year ended June 30, 1999 included computer and
information systems equipment and computer software as the Company continued to
invest in converting all pharmacy sites to the Concord DX system. Additionally,
other capital expenditures during 1999 were made for furniture and fixtures,
leasehold improvements, medication carts and delivery vehicles.
Net cash provided by (used in) financing activities was $67.2 million,
$(12.0) million, and $(0.7) million in fiscal 1999, 2000 and 2001, respectfully.
The decrease in fiscal 2001 is primarily attributable to the Company making net
payments of $8.6 million on its line of credit in fiscal 2000 with no similar
payments this year. The net proceeds during 1999 were primarily obtained from
the revolving credit agreement to fund working capital needs resulting from
internal growth and infrastructure investments in a common operating system.
In August 1997, the Company issued $100 million of convertible
subordinated debentures due 2004. The debentures carry an interest rate of 5
3/4%. The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. The Company's ability to make payments of
principal and interest on the debentures will depend on its ability to receive
distributions of cash from its subsidiaries. Each of the Company's wholly-owned
subsidiaries has guaranteed the Company's payment obligations under the
debentures, so long as such subsidiary is a member of an affiliated group
(within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as
amended) which 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 elected to not make the semi-annual $2.875 million interest
payments due February 15, 2001 and August 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
June 30, 2001, the amount of principal and accrued interest is $105.0 million.
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 $2.1 million 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 $102.1 million 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). The Credit Facility, as amended, has an available
commitment of $207 million, provides all Company assets as security, limits the
availability of the facility to use for working capital only, requires Lender
approval on future acquisitions, bears interest at a variable rate and contains
certain debt covenants including an Interest Coverage Ratio and minimum
consolidated net worth requirements.
At June 30, 2001 the Company is in violation of certain financial
covenants of 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% (9.0% at June 30, 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 at June 30,
2001 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.
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During the past twenty-four months 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.
Brown, Gibbons, Lang & Company L.P. (BGL&Co.) is acting as the Company's
financial advisor in its continuing discussions with the Company's senior
lenders and with an ad hoc committee of holders of the 5 3/4% Convertible
Subordinated Debentures due 2004, with respect to the defaults and to
restructuring options. BGL&Co. is also discussing various strategic alternatives
with third parties. No decision has been made to enter into any transaction or
as to what form any transaction might take. NCS can give no assurance with
respect to the outcome of these discussions or negotiations.
The Company's effective income tax expense (benefit) rates were (36.3)%,
3.0% and 0.9% for the years ended June 30, 1999, 2000 and 2001, respectively.
During fiscal 1999, the tax rate differs from the federal statutory rate
primarily as a result of state and local income taxes and the non-deductibility
of certain acquisition costs. During fiscal 2000 and 2001, the tax rate 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.
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
Under SFAS No. 142, goodwill and indefinite lived intangible assets will
no longer be amortized. Under this non-amortization approach, goodwill and
indefinite lived intangible assets will be reviewed for impairment using a fair
value based approach upon the initial adoption of the Statement. Going forward,
these assets will be tested for impairment on an annual basis or upon the
occurrence of certain triggering events as defined by the Statement. The Company
is required to adopt SFAS No. 142 effective July 1, 2002. The Company is
currently evaluating all intangible assets in relation to the provisions of SFAS
No. 142 to determine the impact the adoption of SFAS No. 142 will have on the
Company's results of operations and financial position. At this time, the impact
of the adoption of SFAS No. 142 is not known; however, the Company does expect
that it will be required to recognize an impairment loss upon the adoption of
SFAS No. 142. Any impairment loss recorded as a result of the adoption of SFAS
No. 142 would be recognized as a cumulative effect of a change in accounting
principle. Application of the non-amortization provisions of the Statement is
expected to significantly increase net income of the Company. The Company is
currently evaluating the possibility of early adopting SFAS No. 142 effective
July 1, 2001. If the Company does early adopt the provisions of SFAS No. 142,
any impairment charge required from the adoption would be recorded in the fiscal
2002 first quarter financial statements of the Company and the non-amortization
provisions of the Statement would be effective July 1, 2001.
CERTAIN REGULATORY INVESTIGATIONS AND LEGAL PROCEEDINGS
In January 1997, governmental authorities requested information from the
Company in connection with an audit and investigation of the circumstances
surrounding the apparent drug-related homicide of a non-management employee of
one of the Company's pharmacies. The information provided relates to the
Company's inventory and the possible theft of controlled substances from this
pharmacy. The review identified inadequacies in inventory record keeping and
control at this pharmacy. In a meeting with governmental authorities in August
1997, the Company discussed its findings and those of the government and
documented corrective measures taken by the Company. In September 1998, the
Company was notified by the United States Department of Justice, United States
Attorney for the Southern District of Indiana ("USA-Indiana") that the United
States Drug Enforcement Administration had referred this matter to the Office of
the USA-Indiana for possible legal action involving certain numerous alleged
violations of federal law. The USA-Indiana invited the Company to contact the
Office of the USA-Indiana in an effort to resolve the matter. The Company
subsequently contacted the Office of the USA-Indiana and discussions regarding a
possible settlement of this matter ensued.
During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS
Indiana), a wholly-owned subsidiary of the Company, reached a settlement with
the USA-Indiana regarding the previously disclosed federal investigation of the
Company's facility in Indianapolis, Indiana. Under the terms of the settlement,
the Company paid $4.1 million to the USA-Indiana. The Company also agreed to
maintain its current level of spending in connection with its compliance systems
and
23
24
procedures for a period of three years. If the Company does not comply with the
terms of the accord, an additional $1.5 million will be payable to the
USA-Indiana.
In January 1998, federal and state government authorities sought and
obtained various documents and records from a Herrin, Illinois pharmacy operated
by a wholly-owned subsidiary of the Company. The Company has cooperated fully
and continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law
at that facility. The Company has reached a tentative settlement with the
USA-Illinois regarding this investigation and the details are currently being
finalized. Accordingly, the Company has recorded the tentative settlement amount
in the fiscal 2001 consolidated financial statements.
On June 7, 1999, a lawsuit was filed against the Company in the Superior
Court of Norfolk County, Massachusetts. Plaintiffs were certain selling
stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS
acquired on September 17, 1997. The complaint alleged breach of contract and
unfair business practices arising out of NCS' non-payment of certain amounts
allegedly payable under the terms of an earn-out provision included in the
acquisition agreement. On January 21, 2000, the Company reached a settlement of
this litigation. Under the terms of the settlement, the Company issued 1,750,000
Class A Common Shares and a $2 million convertible subordinated debenture
maturing on August 15, 2004. The note and accrued "payment-in-kind" interest
will be convertible into a maximum of 200,000 Class A Common Shares at a
conversion price of $8.00 per share.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into this
Annual Report on Form 10-K, 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.
24
25
ITEM 7a. 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 $206.1 million on its revolving credit facility at June 30, 2001,
which is subject to a variable rate of interest based on the Prime rate.
Assuming borrowings at June 30, 2001, a one-hundred basis point change in
interest rates would impact net interest expense by approximately $2.1 million
per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements
Report of Independent Auditors 26
Consolidated Balance Sheets at June 30, 2000 and 2001 27
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2001 29
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 2001 30
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 2001 32
Notes to Consolidated Financial Statements 33
25
26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NCS HealthCare, Inc.
We have audited the accompanying consolidated balance sheets of NCS
HealthCare, Inc. and subsidiaries as of June 30, 2000 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NCS HealthCare, Inc. and subsidiaries at June 30, 2000 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company is in violation of certain
financial covenants under its revolving credit facility. As a result of the
covenant violations, the Company's lenders may accelerate the maturity of the
Company's obligations under the revolving credit facility. In addition, the
Company is in default on its 5 3/4% Convertible Subordinated Debentures due
2004. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plan in regard to this matter is also
described in Note 1. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, effective
July 1, 1998, the Company changed its method of accounting for start-up costs.
August 15, 2001 Ernst & Young LLP
Cleveland, Ohio
26
27
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
JUNE 30,
2001 2000
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 39,464 $ 16,387
Trade accounts receivable, less allowance for
doubtful accounts of $28,332 and $53,926 as of
June 30, 2001 and 2000 94,447 120,849
Inventories 32,770 37,086
Prepaid expenses and other current assets 3,301 5,322
-------- --------
Total current assets 169,982 179,644
PROPERTY, PLANT AND EQUIPMENT
Land 130 204
Buildings 2,397 2,212
Machinery, equipment and vehicles 23,039 29,212
Computer equipment and software 34,817 39,025
Furniture, fixtures and leasehold improvements 18,685 21,775
-------- --------
79,068 92,428
Less accumulated depreciation and amortization 45,049 47,264
-------- --------
34,019 45,164
Goodwill, less accumulated amortization of $44,176
and $33,620 as of June 30, 2001 and 2000 301,907 311,876
Other assets, less accumulated amortization of
$6,878 and $5,520 as of June 30, 2001 and 2000 8,063 9,979
-------- --------
TOTAL ASSETS $513,971 $546,663
======== ========
See accompanying notes
27
28
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30,
2001 2000
--------- ---------
CURRENT LIABILITIES
Line of credit in default $ 206,130 $ 206,130
Convertible subordinated debentures in default 102,107 --
Trade accounts payable 56,349 44,857
Accrued compensation and related expenses 7,715 7,115
Other accrued expenses 13,754 14,756
Current portion of other long-term debt 456 651
--------- ---------
Total current liabilities 386,511 273,509
Long-term debt, excluding current portion 825 1,291
Convertible subordinated debentures in default -- 102,000
Other long-term liabilities 140 158
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share; 1,000,000
shares authorized; none issued -- --
Common stock, $.01 par value per share:
Class A -- 50,000,000 shares authorized; 18,421,845
and 17,176,486 shares issued and outstanding at
June 30, 2001 and 2000, respectively 184 172
Class B -- 20,000,000 shares authorized; 5,294,964
and 5,807,283 shares issued and outstanding
at June 30, 2001 and 2000, respectively 53 58
Paid-in capital 271,943 271,650
Accumulated deficit (145,685) (102,175)
--------- ---------
126,495 169,705
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 513,971 $ 546,663
========= =========
See accompanying notes
28
29
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
2001 2000 1999
--------- --------- ---------
Revenues $ 626,328 $ 694,530 $ 717,825
Cost of revenues 514,483 556,757 540,547
--------- --------- ---------
Gross profit 111,845 137,773 177,278
Selling, general and administrative expenses 123,272 126,969 139,522
Special charge to increase allowance for doubtful accounts -- 44,623 32,384
Nonrecurring charges -- 51,136 8,115
--------- --------- ---------
Operating loss (11,427) (84,955) (2,743)
Interest expense (34,300) (29,808) (19,864)
Interest income 2,587 3,565 1,563
--------- --------- ---------
Loss before income taxes (43,140) (111,198) (21,044)
Income tax (expense) benefit (370) (3,326) 7,640
Cumulative effect of accounting change, net of taxes -- -- (2,921)
--------- --------- ---------
Net loss $ (43,510) $(114,524) $ (16,325)
========= ========= =========
Loss per share data:
Loss per common share - basic $ (1.85) $ (5.31) $ (0.81)
========= ========= =========
Loss per common share - diluted $ (1.85) $ (5.31) $ (0.81)
========= ========= =========
Weighted average number of common
shares outstanding - basic 23,535 21,551 20,200
========= ========= =========
Weighted average number of common
shares outstanding - diluted 23,535 21,551 20,200
========= ========= =========
See accompanying notes
29
30
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
CLASS A CLASS B RETAINED
COMMON COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) EQUITY
----- ----- ------- -------- ------
Balance at July 1, 1998 $133 $ 65 $258,462 $ 28,674 $287,334
Exercise of stock options
(3,545 shares of Class
A Common Stock and
69,692 shares of Class
B Common Stock) -- -- 823 -- 823
Issuance of 114,134
shares of Class A
Common Stock and
return of 7,572 shares of
Class B Common Stock
for business combinations 1 -- 1,397 -- 1,398
Issuance of 31,383
shares of Class A
Common Stock
for profit sharing plan 1 -- 449 -- 450
Conversion of 520,084
shares of Class B
Common Stock to
520,084 shares of
Class A Common Stock 5 (5) -- -- --
Conversion of convertible
subordinated debentures
(273,707 shares of Class
A Common Stock) 3 -- 2,751 -- 2,754
Net loss -- -- -- (16,325) (16,325)
----- ---- ------------ --------- ----------
Balance at June 30, 1999 $143 $ 60 $263,882 $ 12,349 $276,434
Issuance of 2,203,844
shares of Class A
Common Stock
for business combinations 22 -- 6,811 -- 6,833
Issuance of 497,153
shares of Class A
Common Stock
for profit sharing plan 5 -- 957 -- 962
Conversion of 197,997
shares of Class B
Common Stock to
197,997 shares of
Class A Common Stock 2 (2) -- -- --
Net loss -- -- -- (114,524) (114,524)
----- ---- ------------ --------- ---------
Balance at June 30, 2000 $172 $ 58 $271,650 $(102,175) $169,705
See accompanying notes
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31
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
CLASS A CLASS B RETAINED
COMMON COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) EQUITY
----- ----- ------- -------- ------
Balance at June 30, 2000 $172 $ 58 $271,650 $(102,175) $169,705
--
Issuance of 733,040
shares of Class A
Common Stock
for profit sharing plan 7 -- 293 -- 300
Conversion of 512,319
shares of Class B
Common Stock to
512,319 shares of
Class A Common Stock 5 (5) -- -- --
Net loss -- -- -- (43,510) (43,510)
---- ---- -------- --------- --------
Balance at June 30, 2001 $184 $ 53 $271,943 $(145,685) $126,495
==== ==== ======== ========= ========
See accompanying notes
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32
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES
Net loss $ (43,510) $(114,524) $ (16,325)
Adjustments to reconcile net income loss to net
cash provided by (used in) operating
activities:
Non-cash portion of fixed asset impairment charge 2,106 -- --
Non-cash portion of nonrecurring charges -- 38,555 1,486
Depreciation and amortization 24,993 28,678 23,512
Provision for doubtful accounts 31,101 53,825 35,568
Deferred income taxes -- 2,937 (3,665)
Cumulative effect of accounting change, net of taxes -- -- 2,921
Non-cash profit sharing expense 300 962 450
Changes in assets and liabilities, net of
effects of assets and liabilities acquired:
Trade accounts receivable (8,570) (10,309) (58,702)
Inventories 4,316 12,151 (5,759)
Trade accounts payable 17,363 (5,204) 15,930
Accrued expenses (295) (11,251) (2,366)
Prepaid expenses and other 21 14,948 (17,042)
--------- --------- ---------
Net cash provided by (used in) operating
activities 27,825 10,768
(23,992)
INVESTING ACTIVITIES
Capital expenditures for property, plant
and equipment (3,359) (6,616) (29,400)
Proceeds from sales of assets 250 621 300
Purchases of businesses -- -- (653)
Other (978) (5,766) (5,264)
--------- --------- ---------
Net cash used in investing activities (4,087) (11,761) (35,017)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- -- 1,664
Repayment of long-term debt (661) (3,474) (1,675)
Borrowings on line-of-credit -- 91,300 108,325
Payments on line-of-credit -- (99,870) (41,425)
Proceeds from issuance of common stock and
exercise of stock options -- -- 358
--------- --------- ---------
Net cash provided by (used in) financing activities (661) (12,044) 67,247
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 23,077 (13,037) 8,238
Cash and cash equivalents at beginning of period 16,387 29,424 21,186
--------- --------- ---------
Cash and cash equivalents at end of period $ 39,464 $ 16,387 $ 29,424
========= ========= ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 31,655 $ 28,975 $ 20,179
========= ========= =========
Income taxes $ 355 $ 404 $ 1,792
========= ========= =========
See accompanying notes
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33
NCS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NCS HealthCare, Inc. (the Company) operates in one primary business
segment providing a broad range of health care services primarily to long-term
care institutions including skilled nursing facilities, assisted living
facilities and other institutional health care settings. The Company purchases
and dispenses prescription and non-prescription pharmaceuticals and provides
client facilities with related management services, automated medical record
keeping, drug therapy evaluation, regulatory assistance and certain ancillary
health care services including infusion therapy and nutrition management.
MANAGEMENT'S PLAN TO CONTINUE AS A GOING CONCERN
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the ordinary course of business. As shown in the
accompanying consolidated financial statements, the Company has incurred net
losses of $114,524 and $43,510 for the years ended June 30, 2000 and 2001,
respectively. At June 30, 2001 the Company's working capital deficit was
$(216,529), primarily as a result of classifying $206,130 under the revolving
credit facility and $102,107 of convertible subordinated debentures as a current
liability. As discussed in Note 2, as of June 30, 2001, the Company is in
violation of certain financial covenants of the credit agreement related to its
revolving credit facility and has received a formal notice of default from its
bank group. 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 or an
amendment to the credit agreement is obtained. As discussed in Note 8, as of
June 30, 2001 the Company is in default on $102,107 of its 5 3/4% Convertible
Subordinated Debentures due 2004. All borrowings under the credit agreement and
the convertible subordinated debentures have been classified as a current
liability. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
The Company is currently in discussions with its bank group and with an
ad hoc committee of holders of the 5 3/4% Convertible Subordinated Debenture due
2004, with respect to the defaults and to restructuring options. Over the past
twenty-four months, the Company has made considerable efforts in reducing
overhead and operating costs by accelerating efforts to consolidate and /or
close pharmacy and ancillary service locations, the shutdown or sale of certain
non-strategic and/or unprofitable operations, and continuing its employee
reduction plan. In addition, the Company continues to review the profitability
of its customer base and is terminating uneconomic accounts as well as applying
stricter standards in accepting new business. The Company has also engaged
financial advisors and legal counsel to assist in exploring various capital
restructuring and strategic alternatives with third parties. At this time, no
decision has been made to enter into a transaction or as to what form a
transaction might take. There is no assurance that any such transaction will be
consummated. Given the foregoing, no assurances can be given that the Company
will be able to maintain its current level of operations, or that its financial
condition and prospects will not be materially and adversely affected over the
next twelve months. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when products or services are provided to the
customer. A significant portion of the Company's revenues from sales of
pharmaceutical and related products is reimbursable from Medicaid and Medicare
programs. The Company monitors its receivables from these and other third-party
payor programs and reports such revenues at the net realizable amount expected
to be received from third-party payors. Revenue from Medicaid and Medicare
programs accounted for 39% and 3%, respectively, of the Company's net patient
revenue for the year ended June 30, 1999, 42% and 1%, respectively, for the year
ended June 30, 2000 and 48% and 1%, respectively, for the year ended June 30,
2001.
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34
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Movement of the allowance for doubtful accounts is as follows:
Write-offs,
Balance at Provision for Net of
Beginning of Doubtful Recoveries Balance at
Period Accounts and Other End of Period
------ -------- --------- -------------
Fiscal Year
Ended June 30,
2001 $ 53,926 $ 31,101 $ (56,695) $ 28,332
2000 $ 38,880 $ 53,825 $ (38,779) $ 53,926
1999 $ 18,427 $ 35,568 $ (15,115) $ 38,880
CASH EQUIVALENTS
The Company considers all investments in highly liquid instruments with
original maturities of three months or less at the date purchased to be cash
equivalents. Investments in cash equivalents are carried at cost, which
approximates market value.
INVENTORIES
Inventories for all business units consist primarily of purchased
pharmaceuticals and medical supplies and are stated at the lower of cost or
market. Cost is determined by using the last-in, first-out (LIFO) method for 4%
of the June 30, 2001 net inventory balance and by using the first-in, first-out
(FIFO) method for the remaining 96%. If the FIFO inventory valuation method had
been used exclusively, inventories would have been $827 and $636 higher at June
30, 2000 and 2001, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation on
property, plant and equipment is computed using the straight-line method over
the estimated useful lives of the assets, which are as follows:
Buildings 30 years
Machinery, equipment and vehicles 5 - 10 years
Computer equipment and software 3 - 5 years
Furniture, fixtures and leasehold improvements 3 - 10 years
Depreciation expense, including amortization of capital leased assets, was
$11,420, $15,110, and $11,979 for the years ended June 30, 1999, 2000 and 2001,
respectively.
In February 2001, the Company recorded a fixed asset impairment charge of
$2,106 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.
GOODWILL, INTANGIBLES AND OTHER ASSETS
Intangible assets consist primarily of goodwill. Costs in excess of the
fair value of net assets acquired in purchase transactions are classified as
goodwill and amortized using the straight-line method over periods up to 40
years.
The carrying value of goodwill is evaluated if circumstances indicate a
possible impairment in value. If undiscounted cash flows over the remaining
amortization period indicate that goodwill may not be recoverable, the carrying
value of goodwill will be reduced by the estimated shortfall of cash flows on a
discounted basis.
Debt issuance costs are included in other assets and are amortized using
the effective interest method over the life of the related debt.
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35
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the expected enacted tax rates and laws
that apply in the periods in which the deferred tax asset or liability is
expected to be realized or settled.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 9, the alternative fair value accounting provided under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings per Share." Under this accounting standard, basic earnings per share
are computed based on the weighted average number of shares of Class A and Class
B shares outstanding during the period. Diluted earnings per share include the
dilutive effect of stock options and subordinated convertible debentures.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of all financial instruments of the Company approximates
the amounts presented on the consolidated balance sheet with the exception of
the $100 million convertible subordinated debt. As of June 30, 2000 and 2001,
the fair value of the $100 million convertible subordinated debt was $12
million, based on quoted market prices.
START-UP COSTS
In April 1998, the AcSEC issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities," which requires the Company to
expense start-up costs as incurred. The Company early adopted SOP 98-5 effective
as of July 1, 1998 and has reported the initial adoption as a cumulative effect
of a change in accounting principle in the Consolidated Statement of Operations
for the year ended June 30, 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
Under SFAS No. 142, goodwill and indefinite lived intangible assets will
no longer be amortized. Under this non-amortization approach, goodwill and
indefinite lived intangible assets will be reviewed for impairment using a fair
value based approach upon the initial adoption of the Statement. Going forward,
these assets will be tested for impairment on an annual basis or upon the
occurrence of certain triggering events as defined by the Statement. The Company
is required to adopt SFAS No. 142 effective July 1, 2002. The Company is
currently evaluating all intangible assets in relation to the provisions of SFAS
No. 142 to determine the impact the adoption of SFAS No. 142 will have on the
Company's results of operations and financial position. At this time, the impact
of the adoption of SFAS No. 142 is not known; however, the Company does expect
that it will be required to recognize an impairment loss upon the adoption of
SFAS No. 142. Any impairment loss recorded as a result of the adoption of SFAS
No. 142 would be recognized as a cumulative effect of a change in accounting
principle. Application of the non-amortization provisions of the Statement is
expected to significantly increase net income of the Company. The Company is
evaluating the possibility of early adopting SFAS No. 142 effective July 1,
2001. If the Company does early adopt the provisions of SFAS No. 142, any
impairment charge required from the adoption would be recorded in the fiscal
2002 first quarter financial statements of the Company and the non-amortization
provisions of the Statement would be effective July 1, 2001.
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36
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results can differ from these estimates.
MATERIAL RISKS AND UNCERTAINTIES
The Company has observed significant negative industry and customer trends
during the fiscal years ended June 30, 2000 and 2001. These trends primarily
relate to increased bankruptcies and significant financial difficulties recently
experienced by the Company's skilled nursing facility customers primarily as a
result of greater than expected adverse impact with regard to implementation of
the Medicare Prospective Payment System (PPS) under the Balanced Budget Act of
1997. Should the negative trends continue in future periods at levels
significantly exceeding those estimated by the Company, additional provisions
for accounts receivable recorded as of June 30, 2001 could be required.
The Company purchases the majority of its inventory through one primary
pharmaceutical supplier representing a concentration of risk to the Company.
2. LINE OF CREDIT
In June 1998, the Company entered into a four-year revolving credit
agreement (the credit facility). The credit facility, as amended, has an
available commitment of $207 million, provides all Company assets as security,
limits the availability of the facility to use for working capital only,
requires Lender approval on future acquisitions, bears interest at a variable
rate and contains certain debt covenants including an Interest Coverage Ratio
and minimum consolidated net worth requirements.
At June 30, 2001, the Company is in violation of certain financial
covenants of 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 revolving credit facility increased to the
Prime Rate plus 2.25% (9.00% at June 30, 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 $206,130 under the credit facility at June 30, 2001 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.
36
37
3. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30,
--------
2001 2000
---- ----
Notes payable to former owner of an acquired company
maturing in July, 2000, at an interest rate of 5% $ -- $ 17
2% note payable to Pennsylvania Industrial Development Authority due in monthly
installments through June, 2010, and secured through an interest
in a building of the Company 425 468
Collateralized lease obligations with interest ranging
from 7% to 16% due monthly through April, 2004 707 1,226
Other 149 231
------ ------
Total long-term debt 1,281 1,942
Less current portion 456 651
------ ------
Long-term debt, excluding current portion $ 825 $1,291
====== ======
The aggregate maturities of the long-term debt for each of the five years
subsequent to June 30, 2001 are as follows:
FISCAL YEAR ENDING JUNE 30, AMOUNT
--------------------------- ------
2002 $ 456
2003 256
2004 184
2005 62
2006 64
Thereafter 259
-------
$1,281
=======
4. INCOME TAX EXPENSE
Income tax expense (benefit), including the income tax benefit related to
the cumulative effect of accounting change, for each of the three years ended
June 30, 2001 consists of:
2001 2000 1999
---- ---- ----
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
Federal $ -- $ -- $ -- $ (56) $ 2,505 $2,449 $(3,994) $(3,218) $(7,212)
State and local 370 -- 370 445 432 877 (1,929) (447) (2,376)
----- ----- ------- ------- ------- ----- ------- ------- -------
$ 370 $ -- $ 370 $ 389 $ 2,937 $3,326 $(5,923) $(3,665) $(9,588)
===== ===== ======= ======= ======= ===== ======= ======= =======
Reconciliations of income taxes at the United States Federal statutory
rate to the effective income tax rate for the three years ended June 30, 2001
are as follows:
2001 2000 1999
---- ---- ----
Income taxes benefit at the United States statutory rate $(14,668) $(37,807) $ (9,070)
State and local income taxes (2,327) (2,989) (1,544)
Amortization of nondeductible intangible assets 532 561 640
Increase in valuation allowance 16,770 35,993 --
Nondeductible nonrecurring charges (See Note 11) -- 6,725 --
Other - net 63 843 386
-------- -------- --------
Total provision for income tax expense (benefit) 370 3,326 (9,588)
Income tax benefit from cumulative effect of accounting change -- -- 1,948
-------- -------- --------
Net provision (benefit) excluding benefit related to cumulative
effect of accounting change $ 370 $ 3,326 $ (7,640)
======== ======== ========
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38
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows:
JUNE 30,
2001 2000
---- ----
Deferred tax assets (liabilities):
Allowance for doubtful accounts $11,082 $22,087
Accrued expenses and other 4,825 5,464
Loss carryforwards 65,477 33,765
Depreciable assets and other (2,245) (1,662)
Intangibles (25,863) (23,661)
Valuation allowance (53,276) (35,993)
------- --------
Net deferred tax assets $ -- $ --
======= ========
The evaluation of the realizability of the Company's net deferred tax
assets in future periods is made based upon historical and projected operating
performance and other factors for generating future taxable income, such as
intent and ability to sell assets. At this time, the Company has concluded that
the realization of deferred tax assets is not deemed to be "more likely than
not" and, consequently, established a valuation allowance during the years ended
June 30, 2000 and 2001 equal to its net deferred tax asset.
At June 30, 2001 the Company has net operating loss carryforwards of
$162.6 million for income tax purposes that expire in years 2010 through 2021.
U.S. tax laws limit the annual utilization of tax loss carryforwards of acquired
businesses.
5. OPERATING LEASES
The Company is obligated under operating leases primarily for office
facilities and equipment. Future minimum lease payments under noncancelable
operating leases as of June 30, 2001 are as follows:
FISCAL YEAR ENDING JUNE 30, AMOUNT
--------------------------- ------
2002 $ 5,954
2003 4,671
2004 3,329
2005 2,282
2006 1,567
Thereafter 2,543
------
$20,346
=======
Total rent expense under all operating leases for the years ended June 30,
1999, 2000 and 2001 was $9,214, $9,762 and $8,698, respectively.
6. PROFIT-SHARING PLAN
The Company maintains a profit sharing plan with an Internal Revenue Code
Section 401(k) feature covering substantially all of its employees. Under the
terms of the plan, the Company will match up to 20% of the first 10% of eligible
employee compensation. Effective January 1, 1999 the Company amended the profit
sharing plan to provide for the Company match to be contributed as the Company's
common stock. Effective October 1, 2000 the Company amended the profit sharing
plan to return the Company match back to a cash contribution.
The Company's aggregate contributions to the plan and related expense were
$1,035, $962 and $852 for the years ended June 30, 1999, 2000 and 2001,
respectively.
7. RELATED PARTY TRANSACTIONS
The Company currently leases 10 of its facilities from entities affiliated
with former owners of certain businesses acquired, who are employees of the
Company. The buildings are used for operations of the Company. Rent expense of
$1,340, $1,197 and $888 was incurred under these leasing arrangements in the
years ended June 30, 1999, 2000 and 2001, respectively.
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39
8. STOCKHOLDERS' EQUITY/CONVERTIBLE SUBORDINATED DEBENTURES
Holders of Class A Common Stock and holders of Class B Common Stock are
entitled to one and ten votes, respectively, in corporate matters requiring
approval of the shareholders of the Company. No dividend may be declared or paid
on the Class B Common Stock unless a dividend of equal or greater amount is
declared or paid on the Class A Common Stock.
On August 3, 1999 the Company amended its line of credit agreement
entering into several restrictive covenants including a restriction on the
declaration and payment of cash dividends to shareholders.
On August 13, 1997, the Company issued $100,000 of convertible
subordinated debentures (1998 debentures) due 2004. Net proceeds to the Company
were approximately $97,250, net of underwriting discounts and expenses. The 1998
debentures carry an interest rate of 5 3/4% and are convertible into shares of
Class A Common Stock at any time prior to maturity at $32.70 per share. A
portion of the proceeds from the debenture offering was used to repay
approximately $21,000 of outstanding indebtedness under short-term borrowings.
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. Each of the Company's wholly-owned
subsidiaries has unconditionally guaranteed, jointly and severally, the
Company's payment obligations under the 1998 debentures. Accordingly, summarized
financial information regarding the guarantor subsidiaries has not been
presented because management of the Company believes that such information would
not be meaningful to investors.
The Company elected not to make the semi-annual $2,875 interest payments
due February 15, 2001 and August 15, 2001 on the 1998 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 June 30, 2001, the amount of principal and accrued interest is
$105,002. 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.
During fiscal 2000, in connection with an acquisition agreement, the
Company issued a $2,000 convertible subordinated debenture maturing on August
15, 2004. The note and accrued "payment-in-kind" interest will be convertible
into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00
per share. During fiscal 2001, $107 of accrued interest was converted to
principal. As a result of the 1998 debentures being in default, these debentures
are also in default at June 30, 2001.
Until the defaults on the debentures are resolved, convertible
subordinated debentures of $102,107 and the related accrued interest will be
classified as a current liability.
9. STOCK OPTIONS
During the period from 1987 through 1995, the Company granted stock
options to certain directors and key employees which provide for the purchase of
1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71
to $6.19 per share, which represented fair market values on the dates the grants
were made.
During fiscal 1995, the Company adopted an Employee Stock Purchase and
Option Plan that authorized 100,000 shares of Class A Common Stock for awards of
stock options to certain key employees. During fiscal 1995 and 1996 the Company
granted 11,520 and 7,458 options, respectively, at an exercise price of $6.19
and $7.33 per share, respectively, under the provisions of this plan. These
exercise prices represented fair market values on the dates the grants were
made.
In January 1996, the Company adopted a Long Term Incentive Plan (the Plan)
to provide up to 700,000 shares of Class A Common Stock for awards of incentive
and nonqualified stock options to officers and key employees of the Company.
During fiscal 1996 the Company granted 56,500 nonqualified stock options and
27,540 incentive stock options, all at $16.50 per share. The nonqualified stock
options have a term of five years and became exercisable in thirds on February
1, 1998, 1999 and 2000. The incentive stock options have a term of six years and
become exercisable in fifths each year on February 1, 1997, 1998, 1999, 2000 and
2001. During fiscal 1997 and 1999 the Company granted 301,250 and 345,250
nonqualified stock options, respectively, at an exercise price of $20.00 and
$15.00 per share, respectively, the market values of the stock on the dates of
the grant. The fiscal 1997 nonqualified stock options have a term of five years
and become exercisable in thirds on April 1, 1999, 2000 and 2001. The fiscal
1999 non qualified stock options have a term of five years and become
exercisable in thirds on November 1, 2000, 2001, and 2002.
39
40
In October 1998, the Company adopted the 1998 Performance Plan (the
Performance Plan) to provide up to 1,200,000 shares of Class A Common Stock for
awards of incentive and nonqualified options to directors, officers, and key
employees of the Company. During fiscal 1999, the Company granted 85,000
nonqualified stock options at an exercise price of $18.50 per share, the market
value of the stock on the date of the grant. These nonqualified stock options
have a term of five years and become exercisable in thirds on January 1, 2001,
2002 and 2003. During fiscal 2000, the Company granted 494,250 and 290,500
nonqualified stock options at an exercise price of $4.25 and $1.47 per share
respectively, the market values of the stock on the date of the grants. The
494,250 nonqualified stock options have a term of five years and become
exercisable in thirds on August 1 2001, 2002 and 2003. The 290,500 nonqualified
stock options have a term of five years and become exercisable in halves on
January 28, 2001 and 2002. During fiscal 2001 the Company granted 700,000
nonqualified stock options at an exercise price of $0.135, the market value of
the stock on the date of the grant. The options have a term of five years and
become exercisable in thirds on November 1, 2002, 2003 and 2004.
The Company's stock option activity and related information for the years
ended June 30 are summarized as follows:
2001 2000 1999
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year 1,297,109 $ 9.14 846,694 $ 15.82 535,188 $14.64
Granted 700,000 0.14 784,750 3.22 430,250 15.69
Exercised -- -- -- -- (73,237) 4.87
Forfeited (42,311) 5.80 (334,335) 12.32 (45,507) 18.63
---------- ------- --------- ------- ------- ------
Outstanding at
end of year 1,954,798 $ 5.99 1,297,109 $ 9.14 846,694 $15.82
--------- ====== --------- ======= ------- ======
Exercisable at
end of year 537,828 266,441 237,872
========== ========== =======
Information regarding stock options outstanding as of June 30, 2001 is
summarized as follows:
[---------------------------Options Outstanding-------------------------------] [--------Options Exercisable--------]
Weighted
Average
Number Weighted Remaining Number Weighted
Range of Outstanding Average Contractual Exercisable Average
Exercise prices at June 30, 2001 Exercise Price Life (in years) at June 30, 2001 Exercise Price
--------------- ---------------- -------------- --------------- ---------------- --------------
$ 0.14 - $ 0.14 698,000 $0.14 4.33 -- $ --
1.47 - 1.47 244,250 1.47 3.58 122,125 1.47
4.25 - 6.19 498,858 4.62 3.23 94,858 6.19
15.00 - 16.50 254,690 15.30 2.77 118,513 15.63
18.50 - 20.00 259,000 19.51 4.78 202,332 19.79
--------------- --------- ----- ---- ------- -------
$0.14 - $20.00 1,954,798 $5.99 3.81 537,828 $ 12.32
=============== ========= ===== ==== ======= =======
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a
volatility factor of the expected market price of the Company's Class A Common
Stock ranging from .482 to 1.964; and a weighted-average expected option life
ranging from 4 to 4.5 years. The weighted average fair value of options granted
during fiscal 1999, 2000 and 2001 was $7.65, $1.97 and $0.13 per share,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
40
41
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the three years ended June 30, 2001 is as follows (in
thousands except for earnings per share information):
2001 2000 1999
---- ---- ----
Net loss - basic $(44,554) $(115,577) $(17,029)
Net loss - diluted (44,554) (115,577) (17,029)
Earnings per share - basic (1.89) (5.36) (0.84)
Earnings per share - diluted $ (1.89) $ (5.36) $ (0.84)
10. ACQUISITIONS
There were no significant acquisitions during the fiscal years ended June
30, 1999, 2000 and 2001.
Certain of the Company's acquisition agreements provided for contingent
purchase price arrangements under which the purchase price paid may be
subsequently increased upon the achievement of specific operating performance
targets during post acquisition periods. The additional purchase price, payable
in cash or Company stock is recorded, if earned, upon resolution of the
contingent factors. The Company issued 2,203,844 shares of Class A Common Stock
valued at $6,833 and a $2,000 convertible subordinated debenture maturing on
August 15, 2004 under contingent purchase price arrangements during fiscal 2000.
As of June 30, 2001, no material contingencies remain from the Company's
acquisition agreements.
11. SPECIAL AND NONRECURRING CHARGES
During fiscal 2000, the Company recorded nonrecurring, restructuring and
special charges of $95,800. A special charge of $44,600 was recorded to increase
the allowance for doubtful accounts and nonrecurring, restructuring and other
special charges of $51,200 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 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 related to these site consolidations and
location shutdowns, inclusive of $1,100 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 related to the planned disposition of
assets primarily consisting of impairment to goodwill and property and
equipment. Through June 30, 2001, the Company has disposed of three ancillary
service operations that were not contributing to the overall financial
performance of the Company. Total revenue and operating income of the related
business units was $59,300 and $1,500, respectively, for the year ended June 30,
2000. The carrying amount of assets held for sale at June 30, 2000 was $7,600
million. At June 30, 2001, the Company no longer has any assets held for sale.
The remaining $10,800 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 to the U.S. Attorney's office.
The Company also agreed to maintain its current level of spending in connection
with its compliance
41
42
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 will be payable to the
U.S. Attorney's office. See Note 13.
Employee severance costs included in the nonrecurring charges relate to
the termination of 472 employees. As of June 30, 2001, all terminations
associated with these restructuring activities have been completed.
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 6/30/01
----------- ------------- ------------ -------- ---------- -------- ----------
(in thousands)
Site Consolidations
Severance/compensation related Cash $ 1,300 $(1,000) $ 300 $ (300) $ --
Lease terminations Cash 2,800 (400) 2,400 (1,700) 700
Asset impairments Non-cash 4,400 (4,400) -- -- --
Other Cash 1,200 (600) 600 (400) 200
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 (300) 100
Non-cash 4,200 (4,200) -- -- --
------- --------- ------ --------- ------
Total $95,800 $(91,800) $4,000 $ (3,000) $1,000
======= ========= ====== ========= ======
During the fourth quarter of fiscal 1999 the Company recorded special and
nonrecurring charges of $40,500. A special charge of $32,400 was recorded to
increase the allowance for doubtful accounts, and nonrecurring charges of $8,100
were recorded in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers primarily
as a result of the implementation of the Medicare Prospective Payment System.
The acquisition related items primarily pertain to specific receivable
collectibility issues relating to previous utilization of "legacy" systems, and
other nonrecurring issues that have resulted in potentially uncollectible
accounts receivable.
During the fourth quarter of fiscal 1999, the Company adopted a plan of
restructuring to consolidate certain pharmacy sites in similar geographies. The
plan is a continuation of the plan adopted in fiscal 1998 to combine pharmacies
in close proximity in order to improve operating efficiencies. As a result of
the new exit plan, four additional pharmacy sites were consolidated into either
a new or existing location. During the year ended June 30, 1999, the Company
recorded nonrecurring charges of $4,700 related to the new site consolidations,
inclusive of $200 of additional costs incurred on the site consolidations
announced in the prior year. These costs consist of $2,100 related to employee
severance and other compensation related expenses, $600 related to lease
termination costs and $2,000 related to asset impairments and other
miscellaneous costs.
The remaining $3,400 of the nonrecurring charge primarily relates to
severance incurred during the fourth quarter of fiscal 1999 associated with the
Company's expense reduction initiatives, additional acquisition related and
other expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees. As of June 30, 2001, all terminations associated
with these restructuring activities have been completed
42
43
Details of the fourth quarter fiscal 1999 special and nonrecurring charge
and related activity are as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 6/30/01
----------- ------------- ------------ -------- ---------- -------- ----------
(In thousands)
Site Consolidations
Severance/compensation related Cash $ 2,100 $(2,100) $ -- $ -- $ --
Lease terminations Cash 600 (500) 100 (100) --
Asset impairments Non-cash 1,500 (1,500) -- -- --
Other Cash 500 (500) -- -- --
Special increase to allowance
for doubtful accounts Non-cash 32,400 (32,400) -- -- --
Other Cash 3,400 (3,200) 200 (200) --
------- -------- ------ ------- -----
Total $40,500 $(40,200) $ 300 $ (300) $ --
======= ======== ====== ======= =====
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12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2001 2000 1999
---- ---- ----
Numerator:
Numerator for basic earnings per share - net loss $ (43,510) $ (114,524) $ (16,325)
Effect of dilutive securities:
Convertible debentures -- -- --
----------- ----------- -----------
Numerator for diluted earnings per share $ (43,510) $ (114,524) $ (16,325)
=========== =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average common shares 23,535 21,551 20,200
Effect of dilutive securities:
Stock options -- -- --
Convertible debentures -- -- --
----------- ----------- -----------
Dilutive potential common shares -- -- --
----------- ----------- -----------
Denominator for diluted earnings per share 23,535 21,551 20,200
=========== =========== ===========
Basic earnings per share:
Loss before accounting change $ (1.85) $ (5.31) $ (0.66)
Cumulative effect of change in accounting principle -- -- (0.15)
----------- ----------- -----------
Net loss per share $ (1.85) $ (5.31) $ (0.81)
=========== =========== ===========
Diluted earnings per share:
Loss before accounting change $ (1.85) $ (5.31) $ (0.66)
Cumulative effect of change in accounting principle -- -- (0.15)
----------- ----------- -----------
Net loss per share $ (1.85) $ (5.31) $ (0.81)
=========== =========== ===========
At June 30, 2001, the Company has $102,107 of convertible subordinated
debentures outstanding that are convertible into 3,258,104 shares of Class A
Common Stock and 1,954,798 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. At June 30, 2000, the Company had $102,000 of
convertible subordinated debentures outstanding that are convertible into
3,258,104 shares of Class A Common Stock and 1,297,109 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. At June 30,
1999 the Company had $100,000 of convertible subordinated debentures outstanding
that are convertible into 3,058,104 shares of Class A Common Stock and 846,694
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.
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45
13. CONTINGENCIES
During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS
Indiana), a wholly-owned subsidiary of the Company, reached a tentative
settlement with the U.S. Attorney's office in the Southern District of Indiana
(USA-Indiana) regarding the previously disclosed federal investigation of the
Company's facility in Indianapolis, Indiana. Under the terms of the settlement,
the Company paid $4,100 to the USA-Indiana. The Company also agreed to maintain
its current level of spending in connection with its compliance systems and
procedures for a period of three years. If the Company does not comply with the
terms of the accord, an additional $1,500 will be payable to the USA-Indiana.
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 in the Southern District of Illinois
(USA-Illinois) concerning the alleged violations of federal law at that
facility. The Company has reached a tentative settlement with the USA-Illinois
regarding this investigation and the details are currently being finalized.
Accordingly, the Company has recorded the tentative settlement amount in the
fiscal 2001 consolidated financial statements.
On January 21, 2000, the Company reached a settlement related to
litigation with certain selling shareholders of the PharmaSource Group, Inc.
regarding amounts payable under the terms of an earn-out provision in the
acquisition agreement. Under the terms of the tentative settlement, the Company
issued 1,750,000 Class A Common Shares and a $2,000 convertible subordinated
debenture maturing on August 15, 2004. The note and accrued "payment-in-kind"
interest will be convertible into a maximum of 200,000 Class A Common Shares at
a conversion price of $8.00 per share.
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46
14. QUARTERLY DATA (UNAUDITED)
Selected quarterly data for the years ended June 30, 2000 and 2001:
YEAR ENDED JUNE 30, 2000
------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Revenues $ 184,191 $ 179,323 $ 170,462 $ 160,554 $ 694,530
Gross profit 40,300 37,424 31,419 28,630 137,773
Special charge to increase allowance (b)
for doubtful accounts -- 11,885 -- 32,738 44,623
Nonrecurring charge (b) -- 27,952 5,462 17,722 51,136
Operating income (loss) 8,260 (34,715) (4,376) (54,124) (84,955)
Net income (loss) (c) $ 1,528 $ (31,307) $ (22,938) $ (61,807) $(114,524)
Earnings per share - basic (a) $ 0.08 $ (1.51) $ (1.03) $ (2.70) $ (5.31)
Earnings per share - diluted (a) $ 0.08 $ (1.51) $ (1.03) $ (2.70) $ (5.31)
YEAR ENDED JUNE 30, 2001
------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Revenues $ 159,022 $ 157,461 $ 154,890 $ 154,955 $ 626,328
Gross profit 28,037 28,673 27,676 27,459 111,845
Operating income (loss) (d) 1,036 1,260 (12,800) (923) (11,427)
Net loss $ (7,113) $ (7,203) $ (20,807) $ (8,387) $ (43,510)
Earnings per share - basic (a) $ (0.31) $ (0.31) $ (0.88) $ (0.35) $ (1.85)
Earnings per share - diluted (a) $ (0.31) $ (0.31) $ (0.88) $ (0.35) $ (1.85)
(a) Earnings per share is calculated independently for each quarter and the sum
of the quarters may not necessarily be equal to the full year earnings per
share amount.
(b) Nonrecurring, restructuring and special charges of $95,759 were recorded
during the fiscal year ended June 30, 2000. The charges consist of a
special charge to increase the allowance for doubtful accounts and
nonrecurring, restructuring and other special charges associated with the
continuing implementation and execution of strategic restructuring and
consolidation activities, the planned disposition of certain non-core
and/or non-strategic assets, impairment of certain assets and other
nonrecurring items.
(c) Net loss for the year ended June 30, 2000 excluding nonrecurring,
restructuring and special charges and a non-cash charge to record a full
valuation allowance against the Company's net deferred tax assets was
$9,505 or $0.44 per basic and diluted share.
(d) The operating loss for the year ended June 30, 2001 includes the following:
1) $10,043 of additional bad debt expense to fully reserve for remaining
accounts receivable of non-core and non-strategic businesses exited by the
Company, 2) $1,034 of restructuring and other related charges associated
with the continuing implementation and execution of strategic restructuring
and consolidation activities and 3) $2,106 in fixed asset impairment
charges recorded 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," relating primarily to changes in
asset values resulting from the impact of restructuring activities and
changes in operational processes under restructured operations.
46
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information regarding Directors appearing under the caption "Election
of Directors" in the Company's Definitive Proxy Statement to be used in
connection with the Annual Meeting of Stockholders to be held in 2001 (the "2001
Proxy Statement") is incorporated herein by reference, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A. Information required by this item as to the executive officers of the
Company is included as Item 4A of Part I of this Annual Report on Form 10-K as
permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information
required by Item 405 of Regulation S-K is set forth in the 2001 Proxy Statement
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to "Executive Compensation" in the 2001 Proxy Statement, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to "Stock Ownership of Principal Holders and Management" in the 2001 Proxy
Statement, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable the information required by this item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the 2001 Proxy Statement,
since such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year
pursuant to Regulation 14A.
47
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
The 2001 Consolidated Financial Statements of NCS HealthCare,
Inc. and subsidiaries are included in Part II, Item 8.
2. Financial Statement Schedules.
All financial statement schedules for the Company and its
subsidiaries have been included in the consolidated financial
statements or the related footnotes, or they are either
inapplicable or not required.
3. Exhibits
See the Index to Exhibits at page E-1 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 2001.
48
49
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
By: /s/ JON H. OUTCALT
Jon H. Outcalt
Chairman of the Board of Directors
Date: September 27, 2001
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title
/s/ JON H. OUTCALT Chairman of the Board of Directors
Jon H. Outcalt
/s/ KEVIN B. SHAW President, Chief Executive Officer, Secretary and Director
Kevin B. Shaw (Principal Executive Officer)
/s/ WILLIAM B. BYRUM Chief Operating Officer
William B. Byrum (Principal Executive Officer)
/s/ GERALD D. STETHEM Senior Vice President and Chief Financial Officer
Gerald D. Stethem (Principal Financial Officer)
/s/ BOAKE A. SELLS
Boake A. Sells Director
/s/ RICHARD L. OSBORNE
Richard L. Osborne Director
Date: September 27, 2001
49
50
INDEX OF EXHIBITS
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
2.1 Asset Purchase Agreement, dated as of July 31, 1996, by and
among the Company, NCS HealthCare of Oregon, Inc., IPAC
Pharmacy, Inc. and Prestige Care, Inc. (A)
2.2 Agreement of Merger, dated August 13, 1996, by and among the
Company, Northside Pharmacy, Inc., Willis V. Smith, The
Willis Vernon Smith Unitrust, dated as of August 8, 1996,
Charles Oliver and NCS HealthCare of Oklahoma, Inc. (B)
2.3 Asset Purchase Agreement, dated August 13, 1996, by an among
NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation,
Med-Equip Homecare Equipment Service, Inc., an Oklahoma
corporation, Gail Benjamin, Willis V. Smith and John Tarr (B)
2.4 Asset Purchase Agreement, dated August 13, 1996, by and
among Thrifty Medical of Tulsa, L.L.C., an Oklahoma limited
liability company, Willis V. Smith, Charles Oliver and NCS
HealthCare of Oklahoma, Inc., an Oklahoma corporation (B)
2.5 Stock Purchase Agreement, dated August 13, 1996, by and among
the Willis Vernon Smith Unitrust Dated August 8, 1996,
Charles Oliver, Willis V. Smith and the Registrant (B)
2.6 Asset Purchase Agreement, dated December 29, 1997, by and
among the Company, NCS HealthCare of New York, Inc., Thrift Drug,
Inc., Fay's Incorporated and Eckerd Corporation (C)
2.7 Asset Purchase Agreement, dated April 10, 1998, among the
Company, NCS Acquisition Sub, Inc., Walgreens Advance Care,
Inc. and Walgreen Co. Incorporated and Eckerd Corporation (D)
3.1 Amended and Restated Certificate of Incorporation of the
Company (E)
3.2 Amended By-Laws of the Company
(E)
4.1 Specimen certificate of the Company's Class A Common Stock (E)
4.2 Specimen certificate of the Company's Class B Common Stock (E)
4.3 Form of 5 3/4% Convertible Subordinated Debentures due 2004 (F)
4.4 Indenture, dated August 13, 1997, between the Company and National
City Bank, as Trustee (F)
* 10.1 Deferred Compensation Agreement, dated as of January 1, 1994,
by and between Modern Pharmacy Consultants, Inc. and
Phyllis K. Wilson (E)
* 10.2 1996 Long Term Incentive Plan (C)
* 10.3 Aberdeen Group, Inc. 1995 Amended and Restated Employee Stock
Purchase and Option Plan (C)
E-1
51
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
* 10.4 Amended and Restated Stock Option Agreement, dated as of
December 3, 1993, by and between Aberdeen Group, Inc. and
Richard L. Osborne (E)
* 10.5 Amended and Restated Stock Option Agreement, dated as of
December 29, 1994, by and between Aberdeen Group, Inc. and
Jeffrey R. Steinhilber (E)
10.6 Lease Agreement, dated as of July 16, 1990, by and among
Crow-O'Brien-Woodhouse I Limited Partnership, Aberdeen Group,
Inc. and Van Cleef Properties, Inc. (E)
10.7 Lease Agreement, dated as of January 1, 1996, by and between
PR Realty and Nursing Center Services, Inc. (E)
10.8 Industrial Lease Agreement dated as of May 28, 1993 by and
between Industrial Developments International, Inc. and
Corinthian Pharmaceutical Systems, Inc. (E)
10.9 Lease Agreement, dated as of January 17, 1995, by and among
Calvin Hunsicker, Brenda Hunsicker and Aberdeen Group, Inc. (E)
10.10 Form of Indemnity Agreement by and between the Company and
each of its Directors and Executive Officers (E)
*10.11 Employment and Noncompetition Agreement, dated as of
September 1, 1995, by and between Aberdeen Group, Inc. and
William B. Bryum (E)
10.12 Credit Agreement, dated as of June 1, 1998, among the Company, (G)
the lending institutions named therein and KeyBank National
Association, as the Swing Line Lender, Letter of Credit Issuer
and Administrative Agent
10.13 Letter Agreement, dated June 1, 1998, between the Company (G)
and KeyBank National Association regarding Capital Markets
Bridge Facility
10.14 Amendment No. 1, dated as of July 13, 1998, to the Credit (G)
Agreement, dated as of June 1, 1998, among the Company, the
lending institutions named therein and KeyBank National
Association, as the Swing Line Lender, Letter of Credit Issuer
and Administrative Agent
10.15 Amendment No. 2, dated March 3, 1999, to the Credit Agreement dated (H)
as of June 1, 1998 among the Company and the Lenders named therein,
NBD Bank and National City Bank, as co-agents, and KeyBank National
Association , as a Lender, the Swing Line Lender, the Letter of Credit
Issuer and as Administrative Agent
10.16 Amendment No. 3, dated August 3, 1999, to the Credit Agreement dated (I)
as of June 1, 1998 among the Company and the Lenders named therein,
NBD Bank and National City Bank, as co-agents, and KeyBank National
Association , as a Lender, the Swing Line Lender, the Letter of Credit
Issuer and as Administrative Agent
10.17 Security Agreement, dated August 3, 1999, among the Company, its (I)
subsidiaries and KeyBank National Association
*10.18 Separation Agreement, effective June 11, 1999, between Jeffrey R. (I)
Steinhilber and the Company
E-2
52
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
* 10.19 Salary Continuation Agreement dated September 29, 2000 between the
Company and Jon H. Outcalt (J)
* 10.20 Salary Continuation Agreement dated September 29, 2000 between the
Company and Kevin B. Shaw (J)
* 10.21 Salary Continuation Agreement dated October 25, 2000 between the
Company and William B. Byrum. (J)
* 10.22 Employment Agreement dated July 1, 2001 between the Company
and William B. Byrum
* 10.23 Amendment to Salary Continuation Agreement dated August 21, 2001
between the Company and Jon H. Outcalt
* 10.24 Amendment to Salary Continuation Agreement dated August 21, 2001
between the Company and Kevin B. Shaw
21.1 Subsidiaries of the Company
23.0 Consent of Independent Auditors
* Management contract or compensatory plan or arrangement
(A) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report in Form 8-K, dated August 1, 1996 (File No.
0-027602).
(B) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated August 15, 1996 (File No.
0- 027602).
(C) Incorporated herein by reference to the appropriate exhibit to the Company's
Current report on Form 8-K, dated January 30, 1998.
(D) Incorporated herein by reference to the appropriate exhibit to the Company's
Current report on Form 8-K, dated June 1, 1998.
(E) Incorporated herein by reference to the appropriate exhibit to the Company's
Registration Statement on Form S-1 declared effective on February 13, 1996
(Reg. No. 33-80455).
(F) Incorporated herein by reference to the appropriate exhibit to the Company's
Registration Statement on Form S-3, as amended (Reg. No. 333-35551).
(G) Incorporated herein by reference to the appropriate exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.
(H) Incorporated herein by reference to the appropriate exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999.
(I) Incorporated herein by reference to the appropriate exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999.
(J) Incorporated herein by reference to the appropriate exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000.
E-3