1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999
Commission File Number- 0-27602
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NCS HealthCare, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 34-1816187
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122
- ---------------------------------------------------------
(Address of principal executive offices and zip code)
(216) 378-6800
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(Registrant's telephone number, including area code)
* Indicate by check whether the registrant:
1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
2) has been subject to such filing requirement for the past 90 days.
Yes X No
--- ---
Common Stock Outstanding
- ------------------------
Indicate the number of shares outstanding of each of the Issuers' classes of
common stock, as of the latest practical date.
Class A Common Stock, $ .01 par value -- 14,140,595 shares as of May 12, 1999
Class B Common Stock, $ .01 par value -- 6,135,737 shares as of May 12, 1999
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
March 31, 1999 and June 30, 1998 3
Condensed Consolidated Statements of Income-
Three and nine months ended-
March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended-
March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements - March 31, 1999 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(Unaudited) (Note A)
March 31, June 30,
ASSETS 1999 1998
-------- --------
Current Assets:
Cash and cash equivalents $ 24,014 $ 21,186
Accounts receivable, less allowances 193,805 142,325
Inventories 50,609 43,784
Other 17,241 14,224
-------- --------
Total current assets 285,669 221,519
Property and equipment, at cost
net of accumulated depreciation and amortization 56,392 43,593
Goodwill, less accumulated amortization 338,914 340,209
Other assets 24,823 18,469
-------- --------
Total assets $705,798 $623,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 31,199 $ 34,131
Accrued expenses and other liabilities 42,257 38,026
-------- --------
Total current liabilities 73,456 72,157
Line of credit 212,700 147,800
Long-term debt, excluding current portion 2,514 3,879
Convertible subordinated debentures 100,000 102,753
Other 9,767 9,867
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;
14,126,176 and 13,334,639 shares issued and
outstanding at March 31, 1999 and June 30,
1998, respectively 141 133
Class B - 20,000,000 shares authorized;
6,135,787 and 6,463,244 shares issued and
outstanding at March 31, 1999 and June 30,
1998, respectively 61 65
Paid-in capital 262,517 258,462
Retained earnings 44,642 28,674
-------- --------
Total stockholders' equity 307,361 287,334
-------- --------
Total liabilities and stockholders' equity $705,798 $623,790
======== ========
Note A: The balance sheet at June 30, 1998 has been derived from the audited
consolidated financial statements at that date, but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1999 1998 1999 1998
--------------------- ---------------------
Revenues $184,611 $137,669 $535,487 $355,888
Cost of revenues 137,167 102,812 398,787 265,766
--------------------- ---------------------
Gross profit 47,444 34,857 136,700 90,122
Selling, general and administrative expenses 32,815 25,390 95,665 65,972
--------------------- ---------------------
Operating income 14,629 9,467 41,035 24,150
Interest expense, net 4,588 1,808 13,367 3,063
--------------------- ---------------------
Income before income taxes 10,041 7,659 27,668 21,087
Income tax expense 4,167 3,294 11,700 9,068
--------------------- ---------------------
Net income $ 5,874 $ 4,365 $ 15,968 $ 12,019
===================== =====================
Net income per share - basic $ 0.29 $ 0.22 $ 0.79 $ 0.64
===================== =====================
Net income per share - diluted $ 0.29 $ 0.22 $ 0.79 $ 0.63
===================== =====================
Shares used in the computation - basic 20,252 19,486 20,176 18,903
Shares used in the computation - diluted 23,410 19,757 20,338 19,219
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
March 31,
-----------------------
1999 1998
-----------------------
OPERATING ACTIVITIES
Net income $ 15,968 $ 12,019
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 17,505 11,708
Changes in assets and liabilities, net of effects
of assets and liabilities acquired:
Accounts receivable, net (52,372) (31,053)
Accrued expenses and other liabilities 1,215 7,539
Other, net (9,756) (16,972)
-----------------------
Net cash used in operating activities (27,440) (16,759)
-----------------------
INVESTING ACTIVITIES
Purchases of businesses (1,204) (108,116)
Capital expenditures for property and equipment, net (21,128) (14,953)
Other (11,390) (5,933)
-----------------------
Net cash used in investing activities (33,722) (129,002)
-----------------------
FINANCING ACTIVITIES
Proceeds from convertible subordinated debentures, net -- 97,250
Borrowings on line-of-credit 93,575 99,499
Payments on line-of-credit (28,675) (31,784)
Repayment of long-term debt (1,418) (3,763)
Proceeds from issuance of long-term debt 137 178
Proceeds from exercise of stock options 371 --
-----------------------
Net cash provided by financing activities 63,990 161,380
-----------------------
Net increase in cash and cash equivalents 2,828 15,619
Cash and cash equivalents at beginning of period 21,186 8,160
-----------------------
Cash and cash equivalents at end of period $ 24,014 $ 23,779
=======================
See notes to condensed consolidated financial statements.
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NCS HEALTHCARE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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, 1999 are not necessarily indicative
of the results that may be expected for the year ending June 30, 1999. 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, 1998.
2. 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 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 1998, $2,753,000 of 8% convertible subordinated debentures due in
fiscal 1999 were converted into 273,707 shares of Class A Common Stock.
During July 1998, the Company amended its credit facility increasing the
total commitment from $150,000,000 to $245,000,000.
3. During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8,900,000 primarily related to: 1) the adoption of a
formal plan of restructuring to consolidate certain pharmacy sites in
similar geographies; 2) the buyout of existing employment agreements with
the prior owners of certain acquired businesses; 3) the write-off of certain
financing fees; and 4) additional acquisition related expenses.
The Company has adopted a formal plan of restructuring that will combine
pharmacies in close geographical proximity in order to improve operating
efficiencies. As a result of the plan, 17 pharmacy sites will be
consolidated into either new or existing locations and an estimated total of
149 employees will be terminated. As of March 31, 1999, 13 site
consolidations were completed, with the remainder expected to be completed
by the end of fiscal 1999.
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Details of the nonrecurring charge, related activity and reserve balance are
as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 3/31/99
----------- ------------- ------------ -------- ---------- -------- ----------
(In millions)
Site Consolidations
Severance packages Cash $ .5 $ -- $ .5 $ (.2) $ .3
Lease terminations Cash .7 -- .7 (.3) .4
Asset impairments Non-cash 3.5 (3.5) -- -- --
Other Cash .6 (.4) .2 -- .2
Buyout of employment agreements Cash .9 (.2) .7 (.6) .1
Write-off financing fees Non-cash 1.3 (1.3) -- -- --
Other
Cash 1.0 (.8) .2 (.1) .1
Non-cash .4 (.4) -- -- --
---- ----- ---- ----- ----
Total $8.9 $(6.6) $2.3 $(1.2) $1.1
==== ===== ==== ===== ====
4. Significant acquisitions completed by the Company during fiscal 1998 include
Cheshire LTC Pharmacy, Inc. in Cheshire, Connecticut, PharmaSource
Healthcare, Inc. in Norcross, Georgia, Marco & Company, LLC in Billings,
Montana, MedStar Pharmacy, Inc. in Benson, North Carolina, Greenwood
Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation
based in Sharon, Pennsylvania, Medical Pharmacy in Bakersfield, California,
Robcin Enterprises, Inc. in Independence, Missouri, Apple Institutional
Services in Salisbury, Maryland and the institutional pharmacy assets of
Walgreen Co., an Illinois corporation. The aggregate purchase price for all
businesses acquired during fiscal 1998 was $188,854,000 consisting of
$171,083,000 in cash, $959,000 of debt and $16,812,000 of Class A and Class
B Common Stock of the Company.
The Cheshire LTC Pharmacy, Inc. and MedStar Pharmacy, Inc. acquisitions were
accounted for as pooling of interests transactions, however the impact of
these transactions on the Company's historical financial statements is not
material; consequently, prior period financial statements have not been
restated for these transactions. All other acquisitions have been accounted
for as purchase transactions.
Unaudited pro forma data, as though the Company had purchased each of these
businesses as of July 1, 1997, are set forth below:
Nine Months Nine Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
(In thousands, except per share information)
Revenues $537,099 $450,380
Net income $ 16,069 $ 11,437
Net income per share - basic $ 0.79 $ 0.59
Net income per share - diluted $ 0.79 $ 0.58
The pro forma information does not intend to be indicative of operating
results that would have occurred had the acquisitions been made at the
beginning of the respective periods or of results that may occur in the
future. The primary pro forma adjustments reflect amortization of goodwill
acquired and interest costs. The pro forma information does not give effect
to any potential synergies anticipated by the Company as a result of the
acquisitions such as improvements in gross margin attributable to the
Company's purchasing leverage and increased operating efficiencies.
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5. The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128), which replaces the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
exclude any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been presented, and where necessary, restated to
conform to the requirements of SFAS No. 128. The following table sets forth
the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1999 1998 1999 1998
------------------- -------------------
Numerator:
Numerator for basic earnings per share - net income $ 5,874 $ 4,365 $15,968 $12,019
Effect of dilutive securities:
Convertible debentures
819 -- -- --
------------------- -------------------
Numerator for diluted earnings per share $ 6,693 $ 4,365 $15,968 $12,019
=================== ===================
Denominator:
Denominator for basic earnings per share -
Weighted average common shares 20,252 19,486 20,176 18,903
------------------- -------------------
Effect of dilutive securities:
Stock options 99 271 162 316
Convertible debentures 3,059 -- -- --
------------------- -------------------
Dilutive potential common shares 3,158 271 162 316
=================== ===================
Denominator for diluted earnings per share 23,410 19,757 20,338 19,219
=================== ===================
Basic earnings per share $ 0.29 $ 0.22 $ 0.79 $ 0.64
=================== ===================
Diluted earnings per share $ 0.29 $ 0.22 $ 0.79 $ 0.63
=================== ===================
The Company had $100,000,0000 and $102,753,000 of convertible
subordinated debentures outstanding at March 31, 1999 and 1998,
respectively, that were convertible into 3,058,000 and 3,332,000 shares,
respectively, of Class A Common Stock that were not included in the
computation of diluted earnings per share as their effect would be
antidilutive for all periods presented except for the three months ended
March 31, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Revenues for the three months ended March 31, 1999 increased 34.1% to
$184,611,000 from $137,669,000 recorded in the comparable period in fiscal 1998.
Revenues for the nine months ended March 31, 1999 increased 50.5% to
$535,487,000 from $355,888,000 recorded in the comparable period in fiscal 1998.
The increase in quarter and year to date revenues during fiscal 1999 over the
comparable prior year period is primarily attributed to two factors: the
Company's acquisition program and internal growth. Of the $179,599,000 increase
for the nine months ended March 31, 1999, $107,752,000 of the increase is
attributable to a full period of operations for fiscal 1998 acquisitions. These
fiscal 1998 acquisitions include Cheshire LTC Pharmacy, Inc. in August 1997,
PharmaSource Healthcare, Inc. in September 1997, Marco & Company, LLC in
December 1997, MedStar Pharmacy, Inc. in January 1998, Medical Pharmacy, Robcin
Enterprises, Inc. and Greenwood Pharmacy and Managed Pharmacy Services,
affiliates of Eckerd Corporation in February 1998, Apple Institutional Services
in March 1998 and the institutional pharmacy assets of Walgreens Co. in June
1998. Internal growth accounted for $71,847,000 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 March 31, 1999
increased 16% to 258,000 beds, from 223,000 beds at March 31, 1998.
Of the $46,942,000 increase in revenues for the three months ended March 31,
1999, $22,830,000 was due to the fiscal 1998 acquisitions noted above and
internal growth accounted for $24,112,000 of the increase.
Cost of revenues for the three months ended March 31, 1999 increased 33.4% to
$137,167,000 from $102,812,000 recorded in the comparable period in fiscal
1998. For the nine months ended March 31, 1999, cost of revenues increased
50.1% to $398,787,000 from $265,766,000 recorded in the comparable period in
fiscal 1998. Cost of revenues as a percentage of revenues for the three and
nine month periods ended March 31, 1999 was 74.3% and 74.5%, respectively,
compared to 74.7% and 74.7% for the comparable periods during the prior fiscal
year.
The decrease in cost of revenues as a percentage of revenues is primarily the
result of the timing of acquisitions. At the time of acquisition, the gross
margins of the acquired companies are typically lower than the Company as a
whole; however, the Company is typically able to increase the gross margins of
the acquired companies through more advantageous purchasing terms and the use of
formulary management. The Company's leverage associated with purchasing
pharmaceuticals, formulary management program and leveraging of production costs
positively impacted gross margins during the past year. However, these
improvements were partially offset by the lower margins of companies acquired
during the past year.
Selling, general and administrative expenses for the three months ended March
31, 1999 increased 29.2% to $32,815,000, from $25,390,000 recorded in the
comparable period in fiscal 1998. For the nine months ended March 31, 1999,
selling, general and administrative expenses increased 45.0% to $95,665,000 from
$65,972,000 recorded in the comparable period in fiscal 1998. Selling, general
and administrative expenses as a percentage of revenues was 17.8% and 17.9% for
the three and nine month periods ended March 31, 1999, respectively, compared to
18.4% and 18.5% during the comparable periods in fiscal 1998. The percentage
decrease for the three and nine month periods ended March 31, 1999 is a result
of creating operational efficiencies with acquisitions and the ability to
leverage overhead expenses over a larger revenue base. 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
able to create operational efficiencies with acquisitions as selling, general
and administrative expenses as a percentage of revenues have decreased nine
quarters in a row. 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 prior fiscal year and the cost of
upgrading information systems as the Company converts all sites to a common
operating system.
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The Company had net interest expense of $4,588,000 and $13,367,000 for the
three and nine month periods ended March 31, 1999, compared to net interest
expense of $1,808,000 and $3,063,000 during the comparable periods in fiscal
1998. The increase is primarily attributable to increased borrowing on the
Company's revolving credit facility during fiscal 1998 and 1999 and a full nine
months of interest expense during the nine months ended March 31, 1999 on
$100,000,000 of convertible subordinated debentures issued by the Company in
August 1997. The additional funds were primarily used for acquisitions.
During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring
charge of $8,900,000 primarily related to: 1) the Company adopting a formal plan
of restructuring to consolidate certain pharmacy sites in similar geographies;
2) the buyout of existing employment agreements with the prior owners of certain
acquired businesses; 3) the write-off of certain financing fees; and 4)
additional acquisition related expenses.
The Company adopted a formal plan of restructuring that will combine pharmacies
in close geographical proximity in order to improve operating efficiencies. As a
result of the plan, 17 pharmacy sites will be consolidated into either new or
existing locations and an estimated total of 149 employees will be terminated as
a result of the plan. As of March 31, 1999, 13 site consolidations were
completed with the remainder expected to be completed by the end of fiscal 1999.
Details of the nonrecurring charge, related activity and reserve balance are
as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 3/31/99
----------- ------------- ------------ -------- ---------- -------- ----------
(In millions)
Site Consolidations
Severance packages Cash $ .5 $ -- $ .5 $ (.2) $ .3
Lease terminations Cash .7 -- .7 (.3) .4
Asset impairments Non-cash 3.5 (3.5) -- -- --
Other Cash .6 (.4) .2 -- .2
Buyout of employment agreements Cash .9 (.2) .7 (.6) .1
Write-off financing fees Non-cash 1.3 (1.3) -- -- --
Other
Cash 1.0 (.8) .2 (.1) .1
Non-cash .4 (.4) -- -- --
---- ----- ---- ----- ----
Total $8.9 $(6.6) $2.3 $(1.2) $1.1
==== ===== ==== ===== ====
Liquidity and Capital Resources
Net cash used in operating activities was $27,440,000 for the nine months ended
March 31, 1999, as compared to $16,759,000 during the comparable period in
fiscal 1998. The increase in net cash used in operating activities was primarily
due to an increase in accounts receivable. The increase in accounts receivable
from June 30, 1998 is mainly attributable to a 20.5% increase in sales during
the three months ended March 31, 1999, as compared to the three months ended
June 30, 1998.
Net cash used in investing activities decreased to $33,722,000 during the nine
months ended March 31, 1999, as compared to $129,002,000 during the comparable
period in fiscal 1998. 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 nine months ended
March 31, 1999 included computer and information systems equipment, computer
software, furniture and fixtures, leasehold improvements, medication carts and
delivery vehicles. The Company continues to invest in converting all sites to a
common operating system.
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Net cash provided by financing activities decreased to $63,990,000 during the
nine months ended March 31, 1999, from $161,380,000 during the comparable period
in fiscal 1998. The decrease is a result of the Company completing a
$100,000,000 convertible subordinated debenture offering during August 1997.
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) 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 expects to meet future financing needs principally through the use
of its revolving credit facility. In June 1998, the Company entered into a four
year, $150,000,000 revolving credit facility (the "Credit Facility") with a
bank, which replaced the existing $135,000,000 revolving credit facility. Under
the Credit Facility, the Company also has available a $10,000,000 swing line
revolving facility. In June 1998, the Company entered into a $50,000,000 bridge
facility agreement (the "Bridge Facility") due December 31, 1998. Effective July
13, 1998, the Credit Facility was amended to increase the total commitment from
$150,000,000 to $245,000,000 and was syndicated to a consortium of 11 banks.
Also effective July 13, 1998, the Bridge Facility was paid with funds under the
Credit Facility and was terminated. The Credit Facility bears interest at a
variable rate based upon the Eurodollar rate plus a spread of 37.5 to 162.5
basis points, dependent upon the Company's Interest Coverage Ratio. The Credit
Facility contains certain debt covenants including Interest Coverage Ratio and
minimum consolidated net worth as amended on March 3, 1999. As of March 31,
1999, the Company had $212,700,000 outstanding under the Credit Facility. The
Company believes that its cash and available sources of capital, including funds
available under the Credit Facility, are sufficient to meet its normal operating
requirements.
New Accounting Standards
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for the reporting of financial information about
reportable segments in annual and interim financial statements. SFAS No. 131
also requires disclosure of revenues from each group of products and services,
geographic areas and major customers. Currently, the Company does not expect the
adoption of SFAS No. 131 to have a significant impact on the Company's reporting
and disclosures.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." This SOP
requires that start-up and organization costs be expensed as incurred, and that
such previously capitalized costs be written-off as a cumulative effect of
change in accounting principle upon adoption. The SOP is effective for fiscal
years beginning after December 15, 1998 or the Company's fiscal year ended June
30, 2000. The Company plans to adopt this SOP in the first quarter of fiscal
2000 and will continue to capitalize and amortize start-up costs and
organization costs during fiscal 1999. The Company currently estimates the
adoption of the SOP will result in a charge of approximately $7,500,000, net of
tax, which will be recorded as a cumulative effect of change in accounting
principle.
Year 2000 Readiness Disclosure
Computer systems in use after the beginning of the year 2000 will need to accept
four-digit entries in the date code field in order to distinguish 21st century
dates from 20th century dates. Consequently, many companies face significant
uncertainties because of the need to upgrade or replace their currently
installed computer systems to comply with such "Year 2000" requirements. Various
systems could be affected ranging from complex information technology ("IT")
computer systems to non-IT devices, such as an individual machine's programmable
logic controller.
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The Company has reviewed all significant current and planned internal IT systems
and believes these systems are Year 2000 compliant. However, there can be no
assurance that coding errors or other defects will not be discovered
in the future. The Company is currently in the process of reviewing and
assessing all significant non-IT devices for Year 2000 compliance. The Company
expects to complete this review and assessment process by June 30, 1999. Testing
of devices and resolution of noncompliance issues, if any, is expected to be
completed by September 30, 1999.
The Company is currently determining the extent to which it may be impacted by
any third parties' failure to remediate their own Year 2000 issues. The Company
is assessing and reviewing relationships with all significant customers,
suppliers, payors and other third parties to determine the extent, if any, to
which the Company could be impacted by those third-parties' failure to remediate
their own Year 2000 issues. The Company expects to complete this review and
assessment by June 30, 1999. At this stage of the review no assurance can be
given that the failure by one or more third parties to become Year 2000
compliant will not have a material adverse impact on its operations.
The Company intends to develop contingency plans for significant third parties'
determined to be at high risk of noncompliance or business disruption before
September 30, 1999. The contingency plans will be developed on a case-by-case
basis. Judgments regarding contingency plans are themselves subject to many
variables and uncertainties. There can be no assurance that the Company will
correctly anticipate the level, impact or duration of noncompliance by third
parties, or that its contingency plan will be sufficient to mitigate the impact.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not
possible to anticipate all future outcomes, especially when third parties are
involved, there could be circumstances in which the Company's operations could
be interrupted. If the federal and state healthcare reimbursement agencies or
their intermediaries fail to implement Year 2000 compliant technologies before
December 31, 1999, a significant cash flow problem may result. These agencies
and intermediaries have Year 2000 plans in place and we continue to monitor the
status of these projects. All of these government agencies have stated that
interim procedures would be implemented if their Year 2000 solutions are not in
place by January 1, 2000. In addition, disruptions in the economy in general
resulting from Year 2000 issues could also adversely impact the Company.
The majority of costs related to Year 2000 readiness issues will be expensed as
incurred and are expected to be funded through operating cash flows. Through the
third quarter of fiscal 1999 costs related to the Year 2000 issue have been
immaterial to the financial results of the Company. Future costs related to Year
2000 issues are also expected to be immaterial to the financial results of the
Company. Estimates of costs are based on currently available information and
developments may occur that could increase the costs related to Year 2000
issues.
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, acquisition strategy, Year 2000
readiness disclosure 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. Among the factors that
could cause actual results to differ materially from the Company's expectations
include the availability and cost of attractive acquisition candidates,
continuation of various trends in the long-term care market (including the trend
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toward consolidation), competition among providers of long-term care pharmacy
services, the availability of capital for acquisitions and capital requirements,
changes in regulatory requirements, reform of the health care delivery system,
disruption to the operations of the Company resulting from Year 2000 issues and
other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 $212,700,000 on its revolving credit facility at March 31, 1999,
which is subject to a variable rate of interest based on the Eurodollar rate.
Assuming borrowings at March 31, 1999, a one-hundred basis point change in
interest rates would impact net interest expense by approximately $2,127,000 per
year.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Numbers Exhibit
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10.1 Amendment No. 2, dated March 3, 1999, to the
Credit Agreement dated 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.
15.1 Independent Accountants' Review Report
15.2 Independent Accountants' Acknowledgment Letter
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended March 31, 1999.
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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 17, 1999 By /s/ Kevin B. Shaw
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Kevin B. Shaw
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 17, 1999 By /s/ Gerald D. Stethem
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Gerald D. Stethem
Chief Financial Officer
(Principal Financial and Accounting Officer)
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