1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
UNITED STATES
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997
Commission File Number- 0-27602
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NCS HealthCare, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 34-1816187
- ------------------------------- -------------------------------------
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122
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(Address of principal executive offices and zip code)
(216) 514-3350
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(Registrant's telephone number, including area code)
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 requirement for the past 90 days.
Yes X No
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Common Stock Outstanding
- ------------------------
Indicate the number of shares outstanding of each of the Issuers' classes of
common stock, as of the latest practical date.
Class A Common Stock, $ .01 par value -- 11,709,473 shares as of November 7,
1997
Class B Common Stock, $ .01 par value -- 7,018,824 shares as of November 7,
1997
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
September 30, 1997 and June 30, 1997 3
Condensed Consolidated Statements of Income-
Three months ended-
September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows-
Three months ended-
September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements - September 30, 1997 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Part II. Other Information:
Item 2. Changes in Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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ITEM 1. FINANCIAL STATEMENTS
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(Unaudited) (Note A)
September 30, June 30,
ASSETS 1997 1997
------------- ---------
Current Assets:
Cash and cash equivalents $ 69,007 $ 8,160
Accounts receivable, less allowances 84,803 70,476
Inventories 24,902 22,281
Other 8,158 6,570
-------- --------
Total current assets 186,870 107,487
Property and equipment, at cost
net of accumulated depreciation and amortization 26,738 23,309
Goodwill, less accumulated amortization 195,750 180,723
Other assets 13,031 9,511
-------- --------
Total assets $422,389 $321,030
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ - $ 10,285
Accounts payable 16,064 15,054
Accrued expenses and other liabilities 29,659 28,984
-------- --------
Total current liabilities 45,723 54,323
Long-term debt 8,982 8,043
Convertible subordinated debentures 103,678 4,813
Other 611 625
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; 11,709,473
and 11,313,638 shares issued and outstanding at
September 30, 1997 and June 30, 1997, respectively 117 113
Class B - 20,000,000 shares authorized; 7,018,824
and 6,742,742 shares issued and outstanding at
September 30, 1997 and June 30, 1997, respectively 70 67
Paid-in capital 242,233 235,703
Retained earnings 20,975 17,343
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Total stockholders' equity 263,395 253,226
-------- --------
Total liabilities and stockholders' equity $422,389 $321,030
======== ========
<FN>
Note A: The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Three Months Ended
September 30,
---------------------------------
1997 1996
---------------------------------
Revenues $103,711 $43,042
Cost of revenues 77,485 31,854
---------------------------------
Gross profit 26,226 11,188
Selling, general and administrative expenses 19,353 7,654
---------------------------------
Operating income 6,873 3,534
Interest expense, net 501 123
---------------------------------
Income before income taxes 6,372 3,411
Income tax expense 2,740 1,501
---------------------------------
Net income $ 3,632 $ 1,910
=================================
Net income per share $ 0.20 $ 0.15
=================================
Shares used in the computation 18,597 12,594
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
September 30,
-----------------------------------
1997 1996
-----------------------------------
OPERATING ACTIVITIES
Net income $ 3,632 $ 1,910
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,302 1,291
Changes in assets and liabilities, net of effects of
assets and liabilities acquired:
Accounts receivable, net (12,849) (764)
Accrued expenses and other liabilities 1,437 3,139
Other, net (3,745) (960)
-----------------------------------
Net cash provided by (used in) operating activities (8,223) 4,616
INVESTING ACTIVITIES
Purchases of businesses (12,161) (25,775)
Capital expenditures for property and equipment, net (4,239) (1,269)
Other (1,180) (1,151)
-----------------------------------
Net cash used in investing activities (17,580) (28,195)
FINANCING ACTIVITIES
Proceeds from convertible subordinated debentures, net 97,250 -
Borrowings on line-of-credit 21,499 7,095
Payments on line-of-credit (31,784) -
Repayment of long-term debt (658) (97)
Proceeds from issuance of long-term debt 343 537
-----------------------------------
Net cash provided by financing activities 86,650 7,535
-----------------------------------
Net increase (decrease) in cash and cash equivalents 60,847 (16,044)
Cash and cash equivalents at beginning of period 8,160 21,460
-----------------------------------
Cash and cash equivalents at end of period $ 69,007 $ 5,416
===================================
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending June 30,
1998. 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, 1997 (File No. 0-27602).
2. On October 4, 1996, the Company completed a public offering of 4,235,000
shares of Class A Common Stock at $31 per share. The offering raised
approximately $123,600,000 (net of underwriting discounts and expenses). A
portion of the net proceeds from the stock issuance was used to repay
approximately $7,000,000 of outstanding indebtedness under short-term
borrowings.
3. On August 13, 1997, the Company issued $100,000,000 of convertible
subordinated debentures (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. 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 debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries,
which are separate and has distinct legal entities. Each of the Company's
wholly-owned subsidiaries has unconditionally guaranteed, jointly and
severally, the Company's payment obligations under the 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.
In July 1997, $1,135,000 of 8% convertible subordinated debentures due in
1998 were converted into 112,890 shares of Class A Common Stock.
During August 1997, the Company entered into a $135,000,000 credit facility
expiring July 2000.
4. Significant acquisitions completed by the Company during the three months
ended September 30, 1997 include Cheshire LTC Pharmacy, Inc. in Cheshire,
Connecticut and PharmaSource Healthcare, Inc. in Norcross, Georgia. The
aggregate purchase price for all businesses acquired during the three
months ended September 30, 1997 was $18,164,000 consisting of $12,161,000
in cash, $600,000 of debt and $5,403,000 of Class A Common Stock of the
Company.
The Cheshire LTC Pharmacy, Inc. acquisition was accounted for as a pooling
of interests transaction, however the impact of this transaction on the
Company's historical financial statements is not significant. Consequently,
prior period financial statements have not been restated for this
transaction.
Significant acquisitions completed by the Company during fiscal 1997
include Advanced Rx Services, Inc. in Northfield, New Jersey, IPAC
Pharmacy, Inc. in Portland, Oregon, Medical Arts Pharmacy in Grand Rapids,
Michigan, Northside Pharmacy, Inc. and Thrifty Medical Supply, Inc. in
Oklahoma City, Oklahoma, Thrifty Medical of Tulsa L.L.C. in Tulsa,
Oklahoma, Hudson Pharmacy of Wichita, Inc. in Wichita, Kansas, Spectrum
Health Services, Inc. in Tampa, Florida, Clinical Health Systems in
Vancouver, Washington, Rescot Systems Group, Inc. in Philadelphia,
Pennsylvania, W.P. Malone, Inc. in Arkadelphia, Arkansas, Long Term Care
Pharmacy Services in East Greenwich, Rhode Island, Eakles Drug Store, Inc.
in Hagerstown, Maryland, Pharmacare in
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Glendale, California, Advanced Pharmaceutical Services, Inc. in Tujunga,
California, Dahlin Pharmacy, Inc. in Paramount, California, Stoll Services,
Inc. in Modesto, California, Cooper Hall Pharmacy, Inc. in Mount Pleasant,
South Carolina, Hammer Incorporated in Des Moines, Iowa, Daven Drug in Los
Angeles, California, Medi-Centre Pharmacy in Lansing, Michigan, Vangard
Labs, Inc. in Glasgow, Kentucky, Long Term Care, Inc. in Williston,
Vermont, Look Drug Store, Inc. in Kaukauna, Wisconsin and HLF Adult Home
Pharmacy in Rochester, New York. The aggregate purchase price for all
businesses acquired during fiscal 1997 was $166,376,000 consisting of
$137,080,000 in cash, $3,804,000 of debt and $25,492,000 of Class A Common
Stock of the Company.
Unaudited pro forma data, as though the Company had completed its October
4, 1996 public offering and had purchased each of these businesses as of
July 1, 1996, are set forth below:
Three Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(In thousands, except per share information)
Revenues $ 108,937 $ 91,674
Net income $ 3,693 $ 2,900
Net income per common share $ 0.20 $ 0.16
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 1997
Results of Operations
Revenues for the three months ended September 30, 1997 increased 141.0% to
$103,711,000 from $43,042,000 recorded in the comparable period in fiscal 1997.
The increase in revenues during the first quarter of fiscal 1998 over the
comparable prior year period is primarily attributed to two factors: the
Company's acquisition program and internal growth. Of the $60,669,000 increase
for the three months ended September 30, 1997, $898,000 was due to the
acquisitions of Cheshire LTC Pharmacy, Inc. in August 1997 and PharmaSource
Healthcare, Inc. in September 1997. In addition, $43,465,000 of the increase is
attributable to revenues for the first three months of fiscal 1998 including a
full period of operations for fiscal 1997 acquisitions. These fiscal 1997
acquisitions include Advanced Rx Services, Inc. in July 1996, IPAC Pharmacy,
Inc., Medical Arts Pharmacy, Northside Pharmacy Inc., Med-Equip, Thrifty Medical
Supply, Inc. and Thrifty Medical of Tulsa L.L.C. in August 1996, Hudson Pharmacy
of Wichita, Inc. in September 1996, Spectrum Health Services, Inc. in October
1996, Clinical Health Systems in November 1996, Rescot Systems Group, Inc., W.P.
Malone, Inc., Long Term Care Pharmacy Services and Eakles Drug Store, Inc. in
January 1997, Pharmacare, Advanced Pharmaceutical Services, Inc. and Dahlin
Pharmacy, Inc. in February 1997, Stoll Services, Inc., Cooper Hall Pharmacy,
Inc., Hammer Incorporated, Daven Drug, and Medi-Centre Pharmacy in March 1997,
Vanguard Labs, Inc. in April 1997, Long Term Care, Inc. in May 1997 and Look
Drug Store, Inc. and HLF Adult Home Pharmacy in June 1997. Internal growth
accounted for $16,306,000 of the increase as the Company's existing operations
continued to grow through marketing efforts to new and existing clients,
increased drug utilization of long-term care facility residents, and the growth
and integration of new and existing products and services. The total number of
beds serviced by the Company as of September 30, 1997 increased 92% to 165,000
beds, from 86,000 beds at September 30, 1996.
Cost of revenues for the three months ended September 30, 1997 increased 143.3%
to $77,485,000, from $31,854,000 recorded in the comparable period in fiscal
1997. Cost of revenues as a percentage of revenues for the three month period
ended September 30, 1997 was 74.7%, compared to 74.0% during the prior fiscal
year.
The increase in cost of revenues as a percentage of revenues is primarily the
result of acquisitions because at the time of acquisition, the gross margins of
the acquired companies are typically lower than the Company as a whole. This is
the result of several factors, including less advantageous purchasing terms,
lack of formulary management and higher production costs.
Selling, general and administrative expenses for the three months ended
September 30, 1997 increased 152.8% to $19,353,000, from $7,654,000 recorded in
the comparable period in fiscal 1997. Selling, general and administrative
expenses as a percentage of revenues was 18.7% for the three month period ended
September 30, 1997, compared to 17.8% during the comparable period in fiscal
1997. The percentage increase for the three month period ended September 30,
1997 is primarily the result of acquisitions because at the time of acquisition,
the selling, general and administrative expenses of the acquired companies are
typically higher than the Company as a whole. The Company has been successful at
creating operational efficiencies with acquisitions as selling, general and
administrative expenses as a percentage of revenues decreased for the third
straight quarter. The increase in selling, general, and administrative expenses
in absolute dollars is mainly attributable to expenses associated with the
operations of businesses acquired during the current and prior fiscal year.
The Company had net interest expense of $501,000 for the three months ended
September 30, 1997, compared to net interest expense of $123,000 in the
comparable period in fiscal 1997. The increase is primarily attributable to the
reduction of long-term debt during the prior year with funds from the Company's
initial public offering completed on February 14, 1996 and additional interest
expense incurred in the current year on $100,000,000 of convertible subordinated
debentures issued by the Company in August 1997.
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Liquidity and Capital Resources
Net cash used in operating activities was $8,223,000 for the three months ended
September 30, 1997, as compared to net cash provided by operating activities of
$4,616,000 during the comparable period in fiscal 1997. Net cash used in
operating activities increased from the comparable period in fiscal 1997
primarily due to an increase in accounts receivable and inventory. The increase
in accounts receivable and inventory is mainly attributable to a 10.2% increase
in sales during the three months ended September 30, 1997, as compared to the
three months ended June 30, 1997.
Net cash used in investing activities decreased to $17,580,000 during the three
months ended September 30, 1997, as compared to $28,195,000 during the
comparable period in fiscal 1997. The decrease is primarily the result of a
decrease in cash used for acquisitions, partially offset by an increase in
capital expenditures. Significant capital expenditures during the three months
ended September 30, 1997 included computer and information systems equipment,
computer software, furniture and fixtures at a new facility in Pinellas Park,
Florida, leasehold improvements, medication carts and delivery vehicles.
Net cash provided by financing activities increased to $86,650,000 during the
three months ended September 30, 1997, from $7,535,000 during the comparable
period in fiscal 1997. The increase is primarily the result of funds received
from a convertible subordinated debenture offering completed on August 13, 1997.
The Company's future cash requirements and cash flow expectations are closely
related to its expansion plans. In August 1997, the Company issued $100,000,000
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. Also in August 1997, the Company
entered into a $135,000,000 credit facility expiring July 2000. The Company
believes that its cash and available sources of capital, including proceeds
from the issuance of the debentures and funds available under the credit
facility, are sufficient to meet its normal operating requirements and
acquisition needs through June 30, 1999.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FASB 128) which
establishes new standards for computing and presenting earnings per share. FASB
128 will be effective for the Company's December 31, 1997 financial statements
and will require a restatement of prior periods presented; earlier application
is not permitted. Under the new requirements, primary earnings per share will be
replaced by a more simply calculated basic earnings per share which will not
include the impact of any potentially dilutive securities. Diluted earnings per
share will be required to be disclosed and will be calculated using a
methodology not significantly different from that presently used to calculate
fully diluted earnings per share. The impact of the statement on earnings per
share for the quarters presented is not expected to be material.
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Factors That May Affect Future Results
Except for historical financial information contained in this Form 10-Q, the
statements made in this report are forward-looking statements. Factors that may
cause actual results to differ materially from those in the forward-looking
statements include the availability and cost of attractive acquisition
candidates, continuation of various trends in the long-term care market
(including the trend toward consolidation), competition among providers of
long-term care pharmacy services, the availability of capital for acquisitions
and capital requirements, changes in regulatory requirements and reform of the
health care delivery system.
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ITEM 2. CHANGES IN SECURITIES
The following information is furnished as to all equity securities of the
Company sold during the first fiscal quarter that were not registered under the
Securities Act of 1933, as amended (the "Securities Act").
(a) On July 1, 1997 the Company issued 3,292 shares of its Class A Common Stock
to one stockholder in connection with the acquisition of certain assets of
New England Pharmacy, Inc. Exemption from registration is claimed under
Section 4(2) of the Securities Act.
(b) On July 28, 1997 the Company issued 65,775 shares of its Class A Common
Stock to one stockholder in connection with the conversion of a
Non-Negotiable 8% Convertible Promissory Note. Exemption from registration
is claimed under Section 3(a)(9) of the Securities.
(c) On July 30, 1997 the Company issued 35,000 shares of its Class A Common
Stock to five stockholders in connection with the acquisition of certain
assets of VMI Software, Inc. Exemption from registration is claimed under
Section 4(2) of the Securities Act.
(d) On July 31, 1997 the Company issued 2,648 shares of its Class A Common
Stock to one stockholder in connection with the conversion of a
Non-Negotiable 8% Convertible Promissory Note. Exemption from registration
is claimed under Section 3(a)(9) of the Securities.
(e) On July 31, 1997 the Company issued 43,142 shares of its Class A Common
Stock to one stockholder in connection with the conversion of a
Non-Negotiable 8% Convertible Promissory Note. Exemption from registration
is claimed under Section 3(a)(9) of the Securities.
(f) On July 31, 1997 the Company issued 1,325 shares of its Class A Common
Stock to one stockholder in connection with the conversion of a
Non-Negotiable 8% Convertible Promissory Note. Exemption from registration
is claimed under Section 3(a)(9) of the Securities
(g) On August 1, 1997 the Company issued 276,082 shares of its Class B Common
Stock to four stockholders in connection with the merger of Cheshire LTC
Pharmacy, Inc. Exemption from registration is claimed under Section 4(2) of
the Securities Act.
(h) On August 13, 1997 the Company issued $100,000,000 of convertible
subordinated debentures due 2004. Exemption from registration is claimed
under Section 4(2) of the Securities Act.
(i) On September 19, 1997 the Company issued 244,653 shares of its Class A
Common Stock to sixteen stockholders in connection with the acquisition of
certain assets of PharmaSource Healthcare, Inc. Exemption from registration
is claimed under Section 4(2) of the Securities Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Numbers Exhibit
------- -------
4.1 Form of Convertible Subordinated Debenture due
September 30, 1996. (A)
4.2 Indenture, dated August 13, 1997, between the
Company and National City Bank, As Trustee. (B)
4.3 Form of 53/4% Convertible Subordinated Debentures
due 2004. (B)
10.1 Credit Agreement, dated August 1, 1997, by and
among the Company, the lending institutions named
therein and KeyBank National Association, as
Administrative Agent. (B)
11 Computation of Earnings Per Common Share
15 Independent Accountants' Review Report
27 Financial Data Schedule
(A) Incorporated herein by reference to the
appropriate exhibit to the Company's Registration
Statement on Form S-1 (Reg. No.33-80455).
(B) Incorporated herein by reference to the
appropriate exhibit to the Company's Registration
Statement on Form S-3, as amended (Reg. No.
333-35551).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended September 30, 1997.
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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: November 14, 1997 By /s/ Kevin B. Shaw
---------------------------------------
Kevin B. Shaw
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 14, 1997 By /s/ Jeffrey R. Steinhilber
----------------------------------------
Jeffrey R. Steinhilber
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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