SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2002
Commission File Number- 0-27602
-------
NCS HealthCare, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 34-1816187
- ------------------------------------ -----------------------------------
(State or other jurisdiction (IRS employer identification umber)
of incorporation or organization)
3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122
----------------------------------------------------------
(Address of principal executive offices and zip code)
(216) 378-6800
-----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
2) has been subject to such filing requirement for the past 90 days.
Yes X No __
--
Common Stock Outstanding
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practical date.
Class A Common Stock, $ .01 par value - 18,461,599 shares as of May 10, 2002
Class B Common Stock, $ .01 par value - 5,255,210 shares as of May 10, 2002
1
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
March 31, 2002 and June 30, 2001 3
Condensed Consolidated Statements of Operations
Three and nine months ended-
March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended-
March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements - March 31, 2002 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED) (NOTE A)
MARCH 31, JUNE 30,
2002 2001
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 42,238 $ 39,464
Accounts receivable, less allowances 88,913 94,447
Inventories 31,248 32,770
Other 2,636 3,301
--------- ---------
Total current assets 165,035 169,982
Property and equipment, at cost
net of accumulated depreciation and amortization 29,617 34,019
Goodwill, less accumulated amortization 301,589 301,907
Other assets 7,831 8,063
--------- ---------
Total assets $ 504,072 $ 513,971
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit in default $ 206,130 $ 206,130
Convertible subordinated debentures in default 102,361 102,107
Accounts payable 49,260 56,349
Accrued expenses and other liabilities 30,988 21,925
--------- ---------
Total current liabilities 388,739 386,511
Long-term debt, excluding current portion 490 825
Other 89 140
Stockholders' Equity:
Preferred stock, par value $ .01 per share, 1,000,000
shares authorized; none issued -- --
Common stock, par value $ .01 per share:
Class A - 50,000,000 shares authorized; 18,461,599
and 18,421,845 shares issued and outstanding at
March 31, 2002 and June 30, 2001, respectively 184 184
Class B - 20,000,000 shares authorized; 5,255,210
and 5,294,964 shares issued and outstanding at
March 31, 2002 and June 30, 2001, respectively 53
53
Paid-in capital 271,943 271,943
Accumulated deficit (157,426) (145,685)
--------- ---------
Total stockholders' equity 114,754 126,495
--------- ---------
Total liabilities and stockholders' equity $ 504,072 $ 513,971
========= =========
Note A: The balance sheet at June 30, 2001 has been derived from the audited
consolidated financial statements at that date, but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues $ 163,816 $ 154,890 $ 483,360 $ 471,373
Cost of revenues 137,398 127,214 403,381 386,987
--------- --------- --------- ---------
Gross profit 26,418 27,676 79,979 84,386
Selling, general and administrative expenses 21,576 40,476 71,996 94,890
--------- --------- --------- ---------
Operating income (loss) 4,842 (12,800) 7,983 (10,504)
Interest expense, net 6,090 7,907 19,499 24,319
--------- --------- --------- ---------
Loss before income taxes (1,248) (20,707) (11,516) (34,823)
Income tax expense 75 100 225 300
--------- --------- --------- ---------
Net loss $ (1,323) $ (20,807) $ (11,741) $ (35,123)
========= ========= ========= =========
Net loss per share - basic $ (0.06) $ (0.88) $ (0.50) $ (1.50)
========= ========= ========= =========
Net loss per share - diluted $ (0.06) $ (0.88) $ (0.50) $ (1.50)
========= ========= ========= =========
Shares used in the computation - basic 23,717 23,717 23,717 23,475
Shares used in the computation - diluted 23,717 23,717 23,717 23,475
See notes to condensed consolidated financial statements.
4
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net loss $(11,741) $(35,123)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Non-cash portion of fixed asset impairment charge -- 2,106
Loss on sale of exited business 537 --
Depreciation and amortization 9,828 18,642
Changes in assets and liabilities, net of effects of assets and
liabilities acquired:
Accounts receivable, net (1,704) 17,539
Accounts payable and other liabilities 7,405 19,404
Other, net 2,023 6,675
-------- --------
Net cash provided by operating activities 6,348 29,243
-------- --------
INVESTING ACTIVITIES
Capital expenditures for property and equipment, net (3,912) (2,790)
Other 677 (177)
-------- --------
Net cash used in investing activities (3,235) (2,967)
-------- --------
FINANCING ACTIVITIES
Repayment of long-term debt (339) (501)
-------- --------
Net cash used in financing activities (339) (501)
-------- --------
Net increase in cash and cash equivalents 2,774 25,775
Cash and cash equivalents at beginning of period 39,464 16,387
-------- --------
Cash and cash equivalents at end of period $ 42,238 $ 42,162
======== ========
See notes to condensed consolidated financial statements.
5
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended March 31, 2002 are not necessarily indicative of
the results that may be expected for the year ending June 30, 2002. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
June 30, 2001.
2. 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 Credit 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 March 31, 2002, 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 senior lenders. 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% (7.0% at March 31, 2002). 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 senior
lenders. 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 March 31, 2002 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.
The Company elected to not make the semi-annual $2.875 million interest
payments due February 15 and August 15, 2001 and February 15, 2002 on the
Company's 5 3/4% Convertible Subordinated Debentures due 2004 (Debentures).
On April 6, 2001, the Company received a formal Notice of Default and
Acceleration and Demand for Payment from the Indenture Trustee. The
Indenture Trustee declared the entire principal and any accrued interest
thereon to be immediately due and payable and demanded immediate payment of
such amounts. If such payments are not made, the Indenture Trustee reserves
the right to pursue remedial measures in accordance with the Indenture,
including, without limitation, collection activities. As of March 31, 2002,
the amount of principal and accrued interest is $109.3 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 $2.4 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 $102.4
million and the related accrued interest will be classified as a current
liability.
6
3. The following table sets forth the computation of basic and diluted earnings
per share in accordance with Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS No. 128):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Numerator for basic earnings per share - net income $ (1,323) $(20,807) $(11,741) $(35,123)
Effect of dilutive securities:
Convertible debentures -- -- -- --
-------- -------- -------- --------
Numerator for diluted earnings per share $ (1,323) $(20,807) $(11,741) $(35,123)
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share -
Weighted average common shares 23,717 23,717 23,717 23,475
-------- -------- -------- --------
Effect of dilutive securities:
Stock options -- -- -- --
Convertible debentures -- -- -- --
-------- -------- -------- --------
Dilutive potential common shares -- -- -- --
-------- -------- -------- --------
Denominator for diluted earnings per share 23,717 23,717 23,717 23,475
======== ======== ======== ========
Basic earnings per share $ (0.06) $ (0.88) $ (0.50) $ (1.50)
======== ======== ======== ========
Diluted earnings per share $ (0.06) $ (0.88) $ (0.50) $ (1.50)
======== ======== ======== ========
</Table>
At March 31, 2002 and 2001, respectfully, the Company has 2,522,582 and
1,958,632 employee stock options that are potentially dilutive that were not
included in the computation of diluted earnings per share as their effect
would be antidilutive for all periods presented. The Company had
$102,361,000 and $102,116,000 of convertible subordinated debentures
outstanding at March 31, 2002 and 2001, respectively, that were convertible
into 3,258,104 shares of Class A Common Stock, respectively, that were not
included in the computation of diluted earnings per share as their effect
would be antidilutive for all periods presented.
4. 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. The Company adopted SFAS No. 141 on July 1, 2001.
The Company has elected early adoption of SFAS No. 142 effective July 1,
2001. Under SFAS No. 142, goodwill and other indefinite lived intangible
assets will no longer be amortized. Under this non-amortization approach,
goodwill and other indefinite lived intangible assets will be reviewed for
impairment using a fair value based approach as of the beginning of the year
in which SFAS No. 142 is adopted. The Company was required to complete the
initial step of the transitional impairment test by December 31, 2001 and is
required to complete the final step of the transitional impairment test by
the end of the current fiscal year. Going forward, these assets will be
tested for impairment on an annual basis or upon the occurrence of certain
triggering events as defined by SFAS No. 142. Any impairment loss resulting
from the transitional impairment test will be recorded as a
7
cumulative effect of a change in accounting principle as of the beginning of
the current fiscal year. The Company has completed the initial step of the
transitional impairment test, which indicates that the goodwill of the
Company is potentially impaired. As a result, the Company is required to
complete the final step of the transitional impairment test. The Company
does expect that it will be required to recognize an impairment loss as a
result of the adoption of SFAS No. 142. The amount of the impairment loss is
not known at this time; however, it could be material to the Company's
financial position.
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill effective July 1, 2001. A reconciliation of previously reported
net loss and loss per share to the amounts adjusted for the exclusion of
goodwill amortization net of the related income tax effect follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(IN THOUSANDS)
Net Loss:
As reported $ (1,323) $ (20,807) (11,741) $ (35,123)
Goodwill amortization -- 2,544 -- 7,780
---------- ---------- ---------- ----------
As adjusted $ (1,323) $ (18,263) $ (11,741) $ (27,343)
========== ========== ========== ==========
Basic and Diluted Loss Per Share:
As reported $ (0.06) $ (0.88) $ (0.50) $ (1.50)
---------- ---------- ---------- ----------
Goodwill amortization -- 0.11 -- 0.34
---------- ---------- ---------- ----------
As adjusted $ (0.06) $ (0.77) $ (0.50) $ (1.16)
========== ========== ========== ==========
The gross carrying amount and accumulated amortization of intangible assets
subject to amortization was $11,284,000 and $8,188,000, respectively, at
March 31, 2002. Intangible assets that will continue to be amortized under
SFAS No. 142 consist primarily of non-compete covenants, deferred debenture
issuance costs and capitalized loan fees. Amortization expense for the three
and nine month periods ended March 31, 2002 was $437,000 and $1,515,000,
respectively. The estimated amortization expense for each of the five fiscal
years subsequent to June 30, 2001 is as follows:
FISCAL YEAR
ENDING JUNE 30, AMOUNT
- --------------- ------
2002 $1,980,000
2003 1,082,000
2004 879,000
2005 394,000
2006 201,000
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net loss for the three months ended March 31, 2002 was $1,323,000 or $0.06 per
diluted share compared to net loss of $20,807,000 or $0.88 per diluted share for
the three months ended March 31, 2001. Net loss for the nine months ended March
31, 2002 was $11,741,000 or $0.50 per diluted share compared to net loss of
$35,123,000 or $1.50 per diluted share for the nine months ended March 31, 2001.
Excluding bad debt expense for exited businesses, fixed asset impairment charges
and additional expenses related to restructuring activities, net loss for the
three and nine months ended March 31, 2001 would have been $7,624,000 and
$21,940,000 and net loss per diluted share would have been $0.32 and $0.93,
respectively.
The results for the three and nine month periods ended March 31, 2002 reflect
the adoption of Statements of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets,"
which resulted in discontinuing the amortization of goodwill. If SFAS No. 142
would have been effective for the quarter ended March 31, 2001, net loss would
have been $18,263,000 and net loss per share would have been $0.77, excluding
$2,544,000 of goodwill amortization. If SFAS No. 142 would have been effective
for the nine months ended March 31, 2001, net loss would have been $27,343,000
and net loss per share would have been $1.16, excluding $7,780,000 of goodwill
amortization.
Revenues for the three months ended March 31, 2002 increased $8,926,000 or 5.8%
to $163,816,000 from $154,890,000 recorded in the comparable period in fiscal
2001. Revenues for the nine months ended March 31, 2002 increased $11,987,000 or
2.5% to $483,360,000 from $471,373,000 recorded in the comparable period in
fiscal 2001. The increase in revenue from the prior fiscal year is primarily
attributable to pharmaceutical inflation over the last year and the increased
utilization of higher priced drugs.
Cost of revenues for the three months ended March 31, 2002 increased $10,184,000
or 8.0% to $137,398,000 from $127,214,000 recorded in the comparable period in
fiscal 2001. Cost of revenues for the nine months ended March 31, 2002 increased
$16,394,000 or 4.2% to $403,381,000 from $386,987,000 recorded in the comparable
period in fiscal 2001. Cost of revenues as a percentage of revenues for the
three and nine months ended March 31, 2002 was 83.9% and 83.5%, respectively,
compared to 82.1% and 82.1%, respectively, for the comparable periods during the
prior fiscal year. The decline in gross margin as a percentage of revenues was
primarily due to an unfavorable change in product mix, the continued shift
toward lower margin payer sources such as Medicaid and third party insurance
plans, and lower Medicaid and third party insurance reimbursement levels.
Medicaid and third party insurance revenues accounted for 60.1% of revenues in
the three months ended March 31, 2002 versus 58.5% for the same period during
the prior fiscal year. Medicaid and third party insurance revenues accounted for
59.8% of revenues in the nine months ended March 31, 2002 versus 56.8% for the
same period during the prior fiscal year.
Selling, general and administrative expenses for the three months ended March
31, 2002 decreased by $18,900,000 or 46.7% to $21,576,000 from $40,476,000
recorded in the comparable period in fiscal 2001. Selling, general and
administrative expenses for the nine months ended March 31, 2002 decreased by
$22,894,000 or 24.1% to $71,996,000 from $94,890,000 recorded in the comparable
period in fiscal 2001. Selling, general and administrative expenses as a
percentage of revenues was 13.2% and 14.9% for the three and nine month periods
ended March 31, 2002, respectively, compared to 26.1% and 20.1% during the
comparable periods in fiscal 2001.
Selling, general and administrative expenses for the three and nine months ended
March 31, 2001 included $13,183,000 for bad debt expense for exited businesses,
fixed asset impairment charges and additional expenses related to restructuring
activities. The Company recorded $10,043,000 of additional bad debt expense to
fully reserve for remaining accounts receivable of non-core and non-strategic
businesses exited during the twelve months ended March 31, 2001. These
businesses were ancillary to the core pharmacy operations and as part of the
restructuring activities were either sold, if there was an available buyer, or
shut down. While the Company has continued collection efforts on these
receivables, collection has been much more difficult than anticipated. The
Company recorded additional expenses related to restructuring activities of
approximately $1,034,000, primarily for lease terminations associated with the
continuing implementation and execution of strategic restructuring and
consolidation activities. The Company recorded a fixed asset impairment charge
of $2,106,000 in accordance with
9
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.
As discussed above, the Company adopted SFAS No. 142 effective July 1, 2001 and
accordingly discontinued the amortization of goodwill. If SFAS No. 142 would
have been effective for the three and nine months ended March 31, 2001, selling,
general and administrative expenses would have been $37,932,000 and $87,110,000,
respectively.
Excluding the impact of the adoption of SFAS No. 142 and bad debt expense for
exited businesses, fixed asset impairment charges and additional expenses
related to restructuring activities, selling, general and administrative
expenses for the three months ended March 31, 2001 would have been $24,749,000
or 16.0% of sales compared to $21,576,000 or 13.2% of sales for the three months
ended March 31, 2002. Excluding the impact of the adoption of SFAS No. 142 and
bad debt expense for exited businesses, fixed asset impairment charges and
additional expenses related to restructuring activities, selling, general and
administrative expenses for the nine months ended March 31, 2001 would have been
$73,927,000 or 15.7% of sales compared to $71,996,000 or 14.9% of sales for the
nine months ended March 31, 2002. The decrease in expenses from the prior year
is a result of efforts by the Company to reduce operating and overhead costs and
a decrease in bad debt expense, partially offset by an increase in professional
fees related to restructuring activities. The decrease in bad debt expense is
primarily a result of improved collection trends and improved accounts
receivable aging characteristics. Days sales outstanding on net accounts
receivable decreased to 49 days at March 31, 2002 from 52 days at December 31,
2001 and 55 days at June 30, 2001.
The Company had net interest expense of $6,090,000 and $19,499,000 for the three
and nine months ended March 31, 2002, respectively, compared to net interest
expense of $7,907,000 and $24,319,000 during the comparable periods in fiscal
2001. The decrease is primarily attributable to a decrease in interest rates
during the past year. As discussed below, the Company is in default on 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.
Liquidity and Capital Resources
Net cash provided by operating activities decreased to $6,348,000 during the
nine months ended March 31, 2002 from $29,243,000 recorded in the comparable
period in fiscal 2001. The decrease in net cash provided by operating activities
resulted primarily from an increase in accounts payable in the prior year 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. In addition, there are other
contractual obligations between the Company and this supplier under which the
supplier owes the Company certain amounts. These amounts are currently being
withheld by the supplier causing the Company to have receivables from the
supplier. These receivables have been netted against accounts payable to the
supplier for financial reporting purposes. While the Company believes that the
receivables arising from these contractual obligations are collectible, they are
being withheld as part of the continuing negotiations. The timing and ultimate
outcome of these negotiations are uncertain and could have a material adverse
effect on the Company.
Net cash used in investing activities increased to $3,235,000 during the nine
months ended March 31, 2002 from $2,967,000 recorded in the comparable period in
fiscal 2001. The increase is primarily the result of increased capital
expenditures during the current period.
Net cash used in financing activities decreased to $339,000 during the nine
months ended March 31, 2002 from $501,000 recorded in the comparable period in
fiscal 2001.
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
10
receive distributions of cash from its subsidiaries. Each of the Company's
wholly-owned subsidiaries has guaranteed the Company's payment obligations under
the debentures, so long as such subsidiary is a member of an affiliated group
(within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as
amended) that includes the Company. The satisfaction by the Company's
subsidiaries of their contractual guarantees, as well as the payment of
dividends and certain loans and advances to the Company by such subsidiaries,
may be subject to certain statutory or contractual restrictions, are contingent
upon the earnings of such subsidiaries and are subject to various business
considerations.
The Company elected to not make the semi-annual $2.875 million interest payments
due February 15 and August 15, 2001 and February 15, 2002 on the Company's 5
3/4% Convertible Subordinated Debentures due 2004 (Debentures). On April 6,
2001, the Company received a formal Notice of Default and Acceleration and
Demand for Payment from the Indenture Trustee. The Indenture Trustee declared
the entire principal and any accrued interest thereon to be immediately due and
payable and demanded immediate payment of such amounts. If such payments are not
made, the Indenture Trustee reserves the right to pursue remedial measures in
accordance with the Indenture, including, without limitation, collection
activities. As of March 31, 2002, the amount of principal and accrued interest
is $109.3 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 $2.4 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
$102.4 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 Credit 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 March 31, 2002, 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 senior lenders. 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% (7.0% at March 31, 2002). 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 senior lenders. 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 March 31, 2002 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 will be
required to meet future financing needs principally through the use of cash
generated from operations.
During the past three years 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 Securities, Inc. (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.
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The Company's effective income tax rate for the three and nine months ended
March 31, 2002 and 2001 differs from the federal statutory rate primarily as a
result of the recording of a full valuation allowance against the Company's net
deferred tax assets consisting primarily of net operating loss carryforwards.
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. The Company adopted SFAS No. 141 on July 1, 2001.
The Company has elected early adoption of SFAS No. 142 effective July 1, 2001.
Under SFAS No. 142, goodwill and other indefinite lived intangible assets will
no longer be amortized. Under this non-amortization approach, goodwill and other
indefinite lived intangible assets will be reviewed for impairment using a fair
value based approach as of the beginning of the year in which SFAS No. 142 is
adopted. The Company was required to complete the initial step of the
transitional impairment test by December 31, 2001 and is required to complete
the final step of the transitional impairment test by the end of the current
fiscal year. Going forward, these assets will be tested for impairment on an
annual basis or upon the occurrence of certain triggering events as defined by
SFAS No. 142. Any impairment loss resulting from the transitional impairment
test will be recorded as a cumulative effect of a change in accounting principle
as of the beginning of the current fiscal year. The Company has completed the
initial step of the transitional impairment test, which indicates that the
goodwill of the Company is potentially impaired. As a result, the Company is
required to complete the final step of the transitional impairment test. The
Company does expect that it will be required to recognize an impairment loss as
a result of the adoption of SFAS No. 142. The amount of the impairment loss is
not known at this time; however, it could be material to the Company's financial
position.
Disclosure Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference into this Quarterly
Report on Form 10-Q, including, but not limited to, those regarding the
Company's financial position, business strategy and other plans and objectives
for future operations and any other statements that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of the Company, or
industry results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Company believes that the expectations reflected in these forward-looking
statements are reasonable, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have expected effects on its business or
operations. These forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting the Company and are
subject to uncertainties and factors (including, but not limited to, those
specified below) which are difficult to predict and, in many instances, are
beyond the control of the Company. As a result, actual results of the Company
may differ materially from those expressed or implied by any such
forward-looking statements. Among the factors that could cause actual results to
differ materially from the Company's expectations include continuation of
various trends in the long-term care market (including the trend toward
consolidation and the continued impact of the Balanced Budget Act of 1997),
competition among providers of long-term care pharmacy services, changes in
reimbursement levels from State Medicaid programs and third-party insurance
plans, the Company's negotiations with its senior lenders regarding its
revolving 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 and contractual obligations with suppliers,
changes in regulatory requirements and Federal and State reimbursement levels,
reform of the health care delivery system, litigation matters, implementation of
newly issued accounting standards, other factors and risks and uncertainties
described in the Company's SEC reports.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that are
entered into during the normal course of business. The Company has not entered
into derivative financial instruments for trading purposes.
The Company's primary market risk exposure relates to interest rate risk. The
Company has managed its interest rate risk by balancing its exposure between
fixed and variable rates while attempting to minimize its interest costs. The
Company has a balance of $206,130,000 on its revolving credit facility at March
31, 2002 which is currently subject to a variable rate of interest based on the
Prime Rate. Assuming borrowings at March 31, 2002, a one-hundred basis point
change in interest rates would impact net interest expense by approximately
$2,061,300 per year.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NCS HealthCare, Inc.
(Registrant)
Date: May 15, 2002 By /s/ Kevin B. Shaw
-----------------------------------
Kevin B. Shaw
President, Chief Executive Officer
and Director
Date: May 15, 2002 By /s/ William B. Byrum
-----------------------------------
William B. Byrum
Executive Vice President and
Chief Operating Officer
Date: May 15, 2002 By /s/ Gerald D. Stethem
-----------------------------------
Gerald D. Stethem
Senior Vice President and
Chief Financial Officer
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