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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION NO 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE TRANSITION PERIOD FROM _________________________
TO ___________________
COMMISSION FILE NUMBER 0-27602
NCS HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1816187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
3201 Enterprise Parkway, Beachwood, Ohio 44122
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 378-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, par value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
As of September 20, 1999, the registrant had 14,453,662 shares of Class A
Common Stock, par value $.01 per share, and 5,899,673 shares of Class B Common
Stock, par value $.01 per share, issued and outstanding. As of that date, the
aggregate market value of these shares, which together constitute all of the
voting stock of the registrant, held by non-affiliates was $37,416,868 (based
upon the closing price of $2.50 per share of Class A Common Stock on the NASDAQ
National Market on September 20, 1999). For purposes of this calculation, the
registrant deems the 483,595 shares of Class A Common Stock and the 4,902,993
shares of Class B Common Stock held by all of its Directors and executive
officers to be the shares of Class A Common Stock and Class B Common Stock held
by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Stockholders to be held in 1999 are
incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form 10-K is
as of June 30, 1999.
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NCS HEALTHCARE, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY 11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 45
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 46
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PART I
ITEM 1. BUSINESS
GENERAL
NCS HealthCare, Inc. (the "Company" or "NCS") is a leading independent
provider of pharmacy services to long-term care institutions including skilled
nursing facilities, assisted living facilities and other institutional health
care settings. The Company purchases and dispenses prescription and
non-prescription pharmaceuticals and provides client facilities with related
management services, automated medical record keeping, drug therapy evaluation
and regulatory assistance. The Company also provides a broad array of ancillary
health care services to complement its core pharmacy services, including
infusion therapy, physical, speech and occupational therapies, nutrition
management, software services, mobile diagnostics and other services. The
Company is considered to operate principally in one business segment.
NCS entered the long-term care pharmacy services industry in 1986 with the
acquisition of Modern Pharmacy Consultants, Inc. in Northeastern Ohio. Through
June 30, 1999, the Company had completed a total of 49 acquisitions (other than
fold-in acquisitions). There were no significant acquisitions during fiscal
1999. As a result of these acquisitions, the Company has expanded its geographic
presence into 34 states serving approximately 262,000 residents.
On February 14, 1996, the Company issued 4,476,000 shares of Class A
Common Stock at $16.50 per share in connection with its initial public offering.
A portion of the net proceeds from the stock issuance were used to repay
approximately $27,000,000 of outstanding indebtedness under long and short-term
borrowings. The remaining proceeds were used to fund business acquisitions.
On October 4, 1996, the Company issued 4,235,000 shares of Class A Common
Stock at $31.00 per share in connection with a public offering. A portion of the
net proceeds were used to repay approximately $7,000,000 of outstanding
indebtedness under short-term borrowings. The remaining proceeds were used to
fund business acquisitions.
On August 13, 1997, the Company issued $100,000,000 of convertible
subordinated debentures due 2004. Net proceeds to the Company were approximately
$97,250,000 net of underwriting discounts and expenses. The debentures carry an
interest rate of 5 3/4% and are convertible into shares of Class A Common Stock
at any time prior to maturity at $32.70 per share. A portion of the proceeds
from the debenture offering was used to repay approximately $21,000,000 of
outstanding indebtedness under short-term borrowings. The remaining proceeds
were used to fund business acquisitions.
MARKET OVERVIEW
Institutional pharmacies purchase, repackage and distribute
pharmaceuticals to residents of long-term care facilities such as skilled
nursing facilities, assisted living facilities and other institutional health
care settings. Unlike hospitals, most long-term care facilities do not have
on-site pharmacies but depend instead on outside sources to provide the
necessary products and services. In response to a changing regulatory
environment and other factors, the sophistication and breadth of services
required by long-term care facilities have increased dramatically in recent
years. Today, in addition to providing pharmaceuticals, institutional pharmacies
provide consultant pharmacy services, which include monitoring the control,
distribution and administration of drugs within the long-term care facility and
assisting in compliance with applicable regulations, as well as therapeutic
monitoring and drug utilization review services. With the average long-term care
facility patient taking seven to nine medications per day, high quality,
cost-efficient systems for dispensing and monitoring patient drug regimens are
critical. Providing these services places the institutional pharmacy in a
central role of influencing the effectiveness and cost of care.
Based on data from industry sources, the Company estimates that the U.S.
market for pharmacy services (including consulting services and related
supplies) in long-term care and assisted living facilities will approximate $6.5
billion for 1999. The Company believes that the market is growing due primarily
to three factors. First, the number of long-term care facility residents is
rising as a result of demographic trends. According to the Administration on
Aging, it is estimated that by the year 2000, over 35 million Americans, or one
in eight, will be 65 years or older. By 2030, it is estimated that the number of
Americans who will be 85 or older, the segment of the population that comprises
the largest percentage of residents at long-term care facilities, will triple.
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The second factor creating growth in the institutional pharmacy market is
the increasing number of medications taken per day by long-term care facility
residents. This increase is due to (i) advances in medical technology which have
resulted in the availability of new drug therapy regimens and (ii) the generally
higher acuity levels of residents as a result of both payors' efforts to have
care delivered in the lowest cost setting and the generally older, and
consequently sicker, population of long-term care facility residents.
The third factor is that hospitals are discharging patients earlier due to
funding pressures and cost containment efforts. Therefore, an increasing number
of patients are now receiving care outside of traditional hospitals in
alternative settings such as long-term care facilities. More recently, the
implementation of Medicare's Prospective Payment System (PPS) has hindered
hospital discharges of Medicare A residents. However, the Company believes that
this is a short-term situation and is not a lasting trend.
In addition, the cost containment pressures in the hospital sector are
also beginning to create opportunities for institutional pharmaceutical
companies among rural hospitals as evidenced by an increasing trend towards
outsourcing pharmaceutical services in this market. Based on data from industry
sources, the Company estimates that the U.S. institutional pharmaceutical market
for rural hospitals will approximate $4.0 billion for 1999.
The institutional pharmacy market has undergone significant consolidation
over the last few years. Prior to the 1970's, pharmacy needs of long-term care
facilities were fulfilled by local retail pharmacies. Since then, the pharmacy
and information needs of long-term care facilities have grown substantially and
regulatory requirements and the reimbursement environment have become more
complex. Institutional pharmacy companies, both independent and captive (those
owned by an operator of long-term care facilities), have proven to be better
positioned to meet these changing market demands. As a result, over the past 25
years the proportion of the market served by retail pharmacies has steadily
declined, and institutional pharmacies have become the dominant providers of
pharmacy services to the long-term care market.
There are several factors that drove the consolidation among providers of
long-term care pharmaceutical services. All of these factors relate to the
advantages that large institutional providers have over retail and small
institutional providers.
Scale Advantages. Larger pharmacies are able to (i) realize
advantages associated with size, including purchasing power, service
breadth, more sophisticated sales and marketing programs and formulary
management capabilities, (ii) achieve efficiencies in administrative
functions and (iii) access the capital resources necessary to invest in
critical computer systems and automation.
Ability to Serve Multi-site Customers and Managed Care Payors.
As a result of their ability to serve long-term care customers with
several physical locations, larger pharmacies possess a significant
competitive advantage over their smaller counterparts. Additionally,
the Company believes that there are significant opportunities for
full-service institutional pharmacies with a comprehensive range of
services and regional coverage to provide a spectrum of health care
products and services to managed care payors.
Regulatory Expertise and Systems Capabilities. Long-term care
facilities are demanding more sophisticated and specialized services
from pharmacy providers due, in part, to the implementation in 1990 of
the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA
regulations, which were designed to upgrade and standardize care in
nursing facilities, mandated strict new standards relating to planning,
monitoring and reporting on the progress of patient care to include,
among other things, prescription drug therapy. More recently, the
implementation of Medicare's Prospective Payment System (PPS) has
required that long-term care facilities estimate the total cost of stay
of a resident prior to admission. The facilities, in turn, rely on
their ancillary providers, such as institutional pharmacy vendors, to
help them manage the costs of care of their Medicare A-covered
residents. As a result, long-term care administrators increasingly seek
experienced pharmacists and specialized providers with computerized
information and documentation systems designed to monitor patient care
and control the facilities' and payors' costs.
Changing Reimbursement Environment. The long-term care market
has undergone significant change over the last year as Medicare's new
Prospective Payment System has been implemented. This reimbursement
change which was mandated by the Balanced Budget Act of 1997 pays
nursing homes a flat rate for all services, a significant departure
from the prior cost-based system. In order to assist long-term care
customers with this new regulation, institutional pharmacy providers
must offer sophisticated PPS contracts that include cost-effective
formularies.
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BUSINESS STRATEGY
NCS' strategy is to capitalize on industry trends and Company expertise to
strengthen its position as a leading provider of high quality, integrated
pharmacy and related services to institutional clients. The Company intends to
implement this strategy by leveraging its current base of business through
standardization of "best practices," cross marketing its services across its
customer base to generate internal growth, utilizing its proprietary technology
to deliver information and providing a broad array of ancillary health care
services to complement its core pharmacy services.
SERVICES
The Company has traditionally provided institutional pharmacy and infusion
products and services to long-term care facility residents. In recent years, NCS
has developed an array of services which address the increasing needs of
long-term care facilities to accommodate higher acuity admissions and manage
costs. NCS believes that it is one of the few companies capable of offering
customers the depth and breadth of these products and services. For the year
ended June 30, 1999, approximately 78% of the Company's revenues were derived
from providing pharmacy and consultant pharmacy services to long-term care
facilities. An additional 5% of revenues were derived from providing infusion
therapy services, 3% were derived from providing other therapy services and the
remaining 14% were primarily derived from providing various other products and
services, including nutrition management, oxygen and Medicare Part B services.
Pharmacy Services. The Company's core business is providing pharmaceutical
dispensing services to residents of long-term care facilities and other
institutions. The Company purchases, repackages and dispenses prescription and
non-prescription medication in accordance with physician orders and delivers
such prescriptions at least daily to long-term care facilities for
administration to residents by the nursing staffs of these facilities. The
Company typically serves facilities within a two hour drive time of its
distribution facility and provides 24 hour coverage 365 days per year. As of
June 30, 1999, the Company provided its services from 84 sites in 34 states. NCS
also provides its services through the management of third party institutional
pharmacies.
Upon receipt of a doctor's order, the information is entered into the
Company's management information system, which automatically reviews the order
for patient-specific allergies and potentially adverse interactions with other
medications the patient is receiving. Following this analysis, a report on each
order is produced for review by a Company pharmacist, who performs a prospective
drug utilization analysis of the order and, if appropriate, substitutes generic
drugs approved for equivalence by the U.S. Food and Drug Administration ("FDA").
In addition, subject to the prescribing physician's approval, the pharmacist may
make therapeutic substitutions based on guidelines established by the Company's
Therapeutic Formulary Committee.
NCS provides pharmaceuticals to its clients through a unit dose
distribution system. The Company divides the pharmaceuticals received in bulk
form from its suppliers into unit dose packages for its customers. The unit dose
format is designed to reduce errors, improve control over the distribution of
pharmaceuticals and save nursing administration time relative to the bulk
systems traditionally used by retail pharmacies.
At those sites at which Concord DX, the Company's proprietary computer
system, has been implemented, the Company utilizes its work flow control to
improve efficiencies. In most cases, the Company uses its bar-coding system.
Under this system, a bar code label is applied to each unit dose package.
Through bar coding, information relating to the contents and destination of each
unit dose package distributed can be automatically entered into the Concord DX
system. This bar code technology enables the Company to monitor pharmaceuticals
throughout the production and distribution process, thereby reducing errors,
improving pharmacy control and enhancing production efficiency. At the request
of the Company, certain manufacturers have begun to provide pharmaceuticals that
are pre-packaged and bar coded. At June 30, 1999, approximately 80% of the
Company's sites were converted to the Concord DX system.
As an additional service, NCS furnishes its clients with information
captured by its computerized medical records and documentation system. This
system captures patient care information, which is used to create monthly
management and quality assurance reports. The Company believes that this system
of information management, combined with the unit dose delivery system, improves
the efficiency and controls in nursing administration and reduces the likelihood
of drug-related adverse consequences.
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Consultant Pharmacy Services. Federal and state regulations mandate that
long-term care facilities improve the quality of patient care by retaining
consultant pharmacist services to monitor and report on prescription drug
therapy. The OBRA legislation implemented in 1990 seeks to further upgrade and
standardize health care by setting forth more stringent standards relating to
planning, monitoring and reporting on the progress of prescription drug therapy
as well as facility-wide drug usage. Noncompliance with these regulations may
result in monetary sanctions as well as the potential loss of the facility's
ability to participate in Medicare and Medicaid reimbursement programs.
NCS provides consulting services that help clients comply with federal and
state regulations applicable to long-term care facilities. The Company's
services include: (i) reviewing each patient's drug regimen to assess the
appropriateness and efficacy of drug therapies, including a review of the
patient's medical records, monitoring drug reactions to other drugs or food,
monitoring lab results and recommending alternate therapies or discontinuing
unnecessary drugs; (ii) participating on the Pharmacy and Therapeutics, Quality
Assurance and other committees of the Company's clients; (iii) inspecting
medication carts and storage rooms; (iv) monitoring and reporting at least
quarterly on facility-wide drug usage and drug administration systems and
practices; (v) developing and maintaining the client's pharmaceutical policy and
procedure manuals; and (vi) assisting the long-term care facility in complying
with state and federal regulations as they pertain to patient care.
Additionally, NCS offers a specialized line of consulting services which
help long-term care facilities enhance care and reduce and contain costs as well
as comply with state and federal regulations. Under this service line, the
Company provides: (i) data required for OBRA and other regulatory purposes,
including reports on psychotropic drug usage (chemical restraints), antibiotic
usage (infection control) and other drug usage; (ii) plan of care programs which
assess each patient's state of health upon admission and monitor progress and
outcomes using data on drug usage as well as dietary, physical therapy and
social service inputs; (iii) counseling related to appropriate drug usage and
implementation of drug protocols; (iv) on-site continuing education seminars for
the long-term care facilities' staff on topics such as drug information relating
to clinical indications, adverse drug reactions, drug protocols and special
geriatric considerations in drug therapy, information and training on
intravenous drug therapy and updates on OBRA and other regulatory compliance
issues; (v) mock regulatory reviews for nursing staffs; and (vi) nurse
consultant services and consulting for dietary, social services and medical
records.
Infusion Therapy. Infusion therapy is the intravenous delivery of
medication. The Company's infusion therapy services include pain management,
antibiotic therapy and chemotherapy for long-term care residents and home care
patients. NCS has received Joint Commission on the Accreditation of Healthcare
Organizations accreditation at four sites and accreditation with commendation at
another site. NCS prepares the product to be administered and delivers the
product to the long-term care facility for administration by the nursing staff.
Because the proper administration of infusion therapy requires a highly trained
nursing staff, the Company provides education and certification programs to its
clients in order to assure proper staff training and compliance with regulatory
requirements. NCS believes that, by enhancing the ability of client facilities
to administer infusion therapies, these programs have led to a greater use of
infusion therapies throughout the Company's long-term care facility customer
base.
Other Therapies. In 1993, the Company began providing physical, speech and
occupational therapy services. The Company currently provides these services to
residents of 72 long-term care facilities.
Nutrition Management. NCS assists long-term care facilities in menu
planning, purchasing and managing their dietary operations. Because the food
service area is typically one of the principal areas of regulatory violations,
this is an area of critical concern to long-term care facility operators.
Currently, NCS provides this service to 301 long-term care facility customers.
Other. The Company provides long-term care facilities with assistance in
complying with regulations concerning healthy and sanitary environments. The
Company also assists its customers with various regulatory compliance matters
and products and services relating to durable medical equipment ("DME"), oxygen,
mobile diagnostics and Medicare Part B products and services. Finally, NCS
offers specialized educational services that aid facilities in the training of
their staffs. These services include surveys to prepare facilities for state
reviews and training on appropriate nursing techniques in infusion therapy,
wound care management and restorative nursing.
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FORMULARY MANAGEMENT
NCS employs formulary management techniques designed to assist physicians
in making the best clinical choice of drug therapy for patients at the lowest
cost. Under the Company's formulary programs, NCS pharmacists assist prescribing
physicians in designating the use of particular drugs from among therapeutic
alternatives (including generic substitutions) and in the use of more
cost-effective delivery systems and dose forms. The formulary takes into account
such factors as pharmacology, safety and toxicity, efficacy, drug
administration, quality of life and other considerations specific to the elderly
population of long-term care facilities.
Successful implementation of formulary guidelines is dependent upon close
interaction between the pharmacist and the prescribing physician. NCS seeks to
attract and retain highly trained clinical pharmacists and encourages their
active participation in the caring for residents of long-term care facilities,
including consultation with the facilities' medical staff and other prescribing
physicians, to increase the likelihood that the most efficacious, safe and
cost-effective drug therapy is prescribed. The Company's formulary program is
directed by the NCS Formulary Committee, which is comprised of eight pharmacists
and two additional members. The Company believes that adherence to the NCS
formulary guidelines provides the most cost effective therapy to the resident
and strengthens the Company's purchasing power with pharmaceutical
manufacturers.
HUB AND SPOKE OPERATING NETWORK
The Company is in the process of consolidating its 84 pharmacy sites into
a hub and spoke operating network. Hub sites are responsible for the dispensing
of all maintenance medications, billing and accounting, customer service and
medical record keeping. Satellite sites are responsible only for the dispensing
of new prescriptions and local consulting services. The benefits of the
Company's hub and spoke model are increased quality, productivity, customer care
and formulary compliance. In addition, by moving to a hub and spoke model, the
Company believes that it can decrease its overall operating costs and working
capital needs.
MANAGEMENT INFORMATION SYSTEMS
An integral part of NCS' operations is its proprietary management
information system called "Concord DX", which has extensive capabilities
designed to improve operating efficiencies and controls both internally and at
the customer level. In conjunction with the unit dose distribution system and
the use of a bar-coding label system on unit dose packages, Concord DX is able
to monitor pharmaceuticals within NCS throughout the production and distribution
process. At the customer level, Concord DX automatically screens prescription
orders received from physicians for patient-specific allergies and potentially
adverse reactions given other medications the patient may be receiving. Concord
DX is also used to create individual patient medical records and monthly
management and quality assurance reports for NCS' customers. To date, Concord DX
has been implemented in 80% of NCS' customer base.
In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot").
For the past 11 years, Rescot has developed one of the premier pharmacy systems
used for managing patient and pharmacy data. Rescot has been instrumental in the
design and implementation of Concord DX.
In addition to these internal capabilities, NCS has added a suite of
software applications named ASTRAL designed to address customers' needs. Each of
the ASTRAL applications meets one of three goals: (1) improve the profitability
of the nursing home, (2) enhance the quality of care delivered, or (3) improve
the nursing home's ability to conform to regulatory requirements. NCS' current
ASTRAL modules are as follows:
NCS ON-LINE is the core product in ASTRAL. It improves profitability by
dramatically reducing nursing time associated with ordering medicines and
printing pharmacy reports. NCS On-Line provides a real time connection to NCS
for ordering, reviewing med sheets and generating reports. Patient care is
enhanced by reducing the amount of nursing time associated with clerical
functions.
PROVIEW improves a nursing home's profitability by enhancing the
facility's ability to make economic admission decisions. ProView analyzes the
costs and revenues associated with a resident prior to admission. In this era of
Prospective Pay, it is a valuable tool for ensuring that a customer
prospectively evaluates all financial aspects related to admitting a resident.
OSCAR is an on-line survey tool which compares a facility's state
surveys over time and across regions. By using OSCAR, a nursing facility can
quickly gain perspective as to how they are performing relative to their history
and their state, regional or national competitors. NCS updates this quarterly
and it has improved their customers' ability to conform to regulations.
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LIVEWELL is a clinical documentation and pharmacy ordering system
designed for the assisted living market. It enhances care by electronically
documenting the medical records and ordering functions.
In addition to the innovations currently being used by NCS customers,
the Company believes that the integration of other information systems within
the nursing home is a critical future customer need. The Company believes that
access to both clinical and financial information is a key factor in improving
care and managing costs. The Company believes that the ASTRAL system will
facilitate a unified NCS culture through improved site-to-site communication and
will enhance the Company's ability to deliver high quality, standardized
services throughout its geographic market.
SALES AND MARKETING
In marketing to prospective customers, NCS has organized the selling
efforts of each formerly independent location into a single sales force
consisting of 40 account executives, six regional sales managers and a vice
president of sales. While the six regional sales managers train and oversee the
account executives, they are also responsible for selling to regional and
national chain accounts along with the vice president of sales; thus making up
the national account team. Subsequently, all field sales representatives are
trained in each of the Company's products and services and sell these services
throughout their respective geographic territories. A typical territory consists
of approximately 250 long-term care facilities, and the salesperson follows an
eight-week call cycle. These individuals are paid base salaries with commissions
comprising up to 75% of a successful salesperson's compensation. The Company
believes that long-term care facilities change institutional pharmacies fairly
infrequently, but when a change is made, it is generally the result of a
competitor's ability to offer better service or a broader array of products and
services. Additionally, in the PPS environment, price competition is becoming an
increasing factor. The marketing team is comprised of a six-person team who
reports to the director of marketing. They are responsible for the overall
branding of the Company through trade advertising, direct telemarketing,
educational seminars, industry press releases, industry trade shows and
competitive information.
PURCHASING
NCS purchases pharmaceuticals primarily through a national wholesale
distributor, with whom it has negotiated a prime vendor contract, and directly
from certain pharmaceutical manufacturers. The Company also is a member of
industry buying groups that contract with manufacturers for volume-based
discounted prices which are passed through to the Company by its wholesale
distributor. More recently, the Company has formed a group purchasing
organization with two other large pharmaceutical buyers in the long-term care
and acute care industries. The Company anticipates that it will purchase the
majority of its pharmaceuticals through this new organization. The Company has
numerous sources of supply available to it and has not experienced any
difficulty in obtaining pharmaceuticals or other products and supplies used in
the conduct of its business.
CUSTOMERS
At June 30, 1999, NCS had contracts to provide services to approximately
262,000 residents in 34 states. These contracts, as is typical in the industry,
are generally for a period of one year but can be terminated by either party for
any reason upon thirty days written notice. Over the past two years, NCS has
expanded its customer base to also include rural hospitals and at June 30, 1999,
NCS had contracts to manage hospital pharmacies in 23 states. As of June 30,
1999, no individual customer or market group represented more than 5% of the
total sales of the Company's institutional pharmacy business.
COMPETITION
Competition among providers of pharmacy services to long-term care
facilities is highly competetive. The Company believes that it is one of the top
three national independent institutional pharmacies in the country.
Institutional pharmacies compete principally on the basis of quality, cost
effectiveness and service level. In the geographic areas it serves, the Company
competes with local retail pharmacies, captive pharmacies and local, regional
and national institutional pharmacies. The Company competes with several other
companies with similar marketing strategies, some of which have greater
resources than the Company.
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REIMBURSEMENT AND BILLING
As is generally the case for long-term care facility services, NCS
receives payments through reimbursement from Medicaid and Medicare programs and
directly from individual residents (private pay), private third-party insurers
and long-term care facilities. For the fiscal year ended June 30, 1999, the
Company's payor mix was approximately 39% Medicaid, 3% Medicare, 19% private
pay, 16% third-party insurance and other and 23% long-term care facilities,
including amounts for which the long-term care facility receives reimbursement
under Medicare Part A. Medicare and Medicaid are highly regulated. The failure
of NCS and/or its client institutions to comply with applicable reimbursement
regulations could adversely affect the Company's business.
Private Pay. For those residents who are not covered by
government-sponsored programs or private insurance, NCS generally bills the
patient or other responsible party on a monthly basis. Depending upon local
market practices, NCS may alternatively bill private residents through the
long-term care facility. Pricing for private pay residents is based on
prevailing regional market rates or "usual and customary" charges.
Medicaid. The Medicaid program is a federal-state cooperative program
designed to enable states to provide medical assistance to aged, blind or
disabled individuals, or to members of families with dependent children whose
income and resources are insufficient to meet the costs of necessary medical
services. State participation in the Medicaid program is voluntary. To become
eligible to receive federal funds, a state must submit a Medicaid "state plan"
to the Secretary of HHS for approval. The federal Medicaid statute specifies a
variety of requirements which the state plan must meet, including requirements
relating to eligibility, coverage of services, payment and administration. For
residents eligible for Medicaid, the Company bills the individual state Medicaid
program or, in certain circumstances state designated managed care or other
similar organizations. Medicaid programs are funded jointly by the federal
government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by the Health Care Financing
Administration and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
certain prescription drugs under Medicaid. In most states pharmacy services are
priced at the lower of "usual and customary" charges or cost (which generally is
defined as a function of average wholesale price and may include a profit
percentage) plus a dispensing fee. In addition, most states establish a fixed
dispensing fee which is adjusted to reflect associated costs on an annual or
less frequent basis.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care facility pharmacy services. Any future changes in such
reimbursement programs or in regulations relating thereto, such as reductions in
the allowable reimbursement levels or the timing of processing of payments,
could adversely affect the Company's business. The annual increase in the
federal share would vary from state to state based on a variety of factors. Such
provisions, if ultimately signed into law, could adversely affect the Company's
business. Additionally, any shift from Medicaid to state designated managed care
could adversely affect the Company's business due to historically lower
reimbursement rates for managed care.
Medicare. The Medicare program is a federally funded and administered
health insurance program for individuals age 65 and over or for certain
individuals who are disabled. The Medicare program consists of two parts:
Medicare Part A, which covers, among other things, inpatient hospital, skilled
long-term care facility, home health care and certain other types of health care
services; and Medicare Part B, which covers physicians' services, outpatient
services and certain items and services provided by medical suppliers. Medicare
Part B also covers a limited number of specifically designated prescription
drugs. Under the Balanced Budget Act of 1997, a prospective payment system (PPS)
was instituted for Medicare Part A reimbursement to skilled nursing facilities
(SNFs). The prospective payment is in the form of a federal per diem rate for
all covered SNF services. PPS began for SNFs whose costs reporting periods began
after July 1, 1998 and the federal rate will be phased in over four years. Fees
for pharmaceuticals provided to Medicare Part A patients are paid to the Company
by the long-term care facility on a monthly basis. Pricing is in the form of a
PPS contract that may include per diems, formulary requirements and risk sharing
components. Medicare Part A has a cost-sharing arrangement under which
beneficiaries must pay a portion of their costs. These non-covered co-payments
are billed by the facility directly to residents or the state Medicaid plan, as
the case may be.
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Medicare Part B provides benefits covering, among other things, outpatient
treatment, physicians' services, durable medical equipment ("DME"), orthotics,
prosthetic devices and medical supplies. Products and services covered for
Medicare Part B eligible residents in the long-term care facility include, but
are not limited to, enteral feeding products, ostomy supplies, urological
products, orthotics, prosthetics, surgical dressings, tracheostomy care supplies
and a limited number of other medical supplies. All claims for DME, prosthetics,
orthotics, prosthetic devices, including enteral therapy and medical supplies
("DMEPOS") are submitted to and paid by four regional carriers known as Durable
Medical Equipment Regional Carriers ("DMERCs"). The DMERCs establish coverage
guidelines, allowable utilization frequencies and billing procedures for DMEPOS.
Payment is based on a fee schedule, which varies depending on the state in which
the patient receiving the items resides. Payments for Medicare Part B products
to eligible suppliers, which include long-term care facilities and suppliers
such as NCS, are made on a per-item basis directly to the supplier. In order to
receive Medicare Part B reimbursement payments, suppliers must meet certain
conditions set by the federal government. NCS, as an eligible supplier, either
bills Medicare directly for Part B covered products for each patient or,
alternatively, assists the long-term care facility in meeting Medicare Part B
eligibility requirements and prepares bills on behalf of the facility. For Part
B services, such as physical, speech and occupational therapy, long-term care
facilities bill Medicare for reimbursement of the amounts paid to NCS for these
services. Medicare limits such reimbursement to the reasonable amount that would
have been paid if provider employees had furnished the services. To date,
Medicare has published "salary equivalency guidelines" for physical and
respiratory therapy services. Medicare does not currently have salary
equivalency guidelines for other therapy services, but may disallow payment for
rates that substantially exceed rates paid for such services by other providers
in the same area. Moreover, Medicare is likely to issue salary equivalency
guidelines for occupational and speech therapy services in the near future.
Medicare Part B also has an annual deductible as well as a co-payment obligation
on behalf of the patient, and the portion not covered by Medicare is billed
directly to the patient or appropriate secondary payor.
Third-Party Insurance. Third-party insurance includes funding for
residents covered by private plans, veterans' benefits, workers' compensation
and other programs. The resident's individual insurance plan is billed monthly
and rates are consistent with those for other private pay residents.
Long-Term Care Facilities. In addition to occasional private patient
billings and those related to drugs for Medicare eligible residents, long-term
care facilities are billed directly for consulting services, certain
over-the-counter medications and bulk house supplies.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
service, are subject to extensive federal, state and local laws and regulations.
These laws and regulations cover required qualifications, day-to-day operations,
reimbursement and the documentation of activities. NCS continuously monitors the
effects of regulatory activity on its operations.
Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within that state be licensed by the state board
of pharmacy. The Company currently has pharmacy licenses in each of the states
in which it operates a pharmacy. In addition, the Company's pharmacies are
registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.
Long-term care facilities are also separately required to be licensed in
the states in which they operate and, if serving Medicare or Medicaid patients,
must be certified to ensure compliance with applicable program participation
requirements. Long-term care facilities are also subject to the long-term care
facility reforms of OBRA, which impose strict compliance standards relating to
the quality of care for long-term care operations, including vastly increased
documentation and reporting requirements. In addition, pharmacists, nurses and
other health professionals who provide services on the Company's behalf are in
most cases required to obtain and maintain professional licenses and are subject
to state regulation regarding professional standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling and Interstate
Shipping of Drugs. Federal and state laws impose certain repackaging, labeling
and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail. A drug repackager must register with the FDA. The Company
believes that it holds all required registrations and licenses and that its
repackaging operations are in compliance with applicable state and federal
requirements.
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12
Medicare and Medicaid. For an extensive period of time, the long-term care
facility pharmacy business has operated under regulatory and cost containment
pressures from state and federal legislation primarily affecting Medicaid and
Medicare.
The Medicare program establishes certain requirements for participation of
providers and suppliers in the Medicare program. Pharmacies are not subject to
such certification requirements. Skilled long-term care facilities and suppliers
of DMEPOS, however, are subject to specified standards. Failure to comply with
these requirements and standards may adversely affect an entity's ability to
participate in the Medicare program and receive reimbursement for services
provided to Medicare beneficiaries. See "--Reimbursement and Billing."
Federal law and regulations contain a variety of requirements relating to
the furnishing of prescription drugs under Medicaid. First, states are given
broad authority, subject to certain standards, to limit or to specify conditions
as to the coverage of particular drugs. Second, federal Medicaid law establishes
standards affecting pharmacy practice. These standards include general
requirements relating to patient counseling and drug utilization review and more
specific requirements for long-term care facilities relating to drug regimen
reviews for Medicaid patients in such facilities. Recent regulations clarify
that, under federal law, a pharmacy is not required to meet the general
standards for drugs dispensed to long-term care facility residents if the
long-term care facility complies with the drug regimen review requirements.
However, the regulations indicate that states may nevertheless require
pharmacies to comply with the general standards, regardless of whether the
long-term care facility satisfies the drug regimen review requirement, and the
states in which the Company operates currently require its pharmacies to comply
therewith. Third, federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid residents. See
"--Reimbursement and Billing--Medicaid."
In addition to requirements imposed by federal law, states have
substantial discretion to determine administrative, coverage, eligibility and
payment policies under their state Medicaid programs which may affect the
Company's operations. For example, some states have enacted "freedom of choice"
requirements which prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers that deal with the long-term care facility. Such
limitations may increase the competition that the Company faces in providing
services to long-term care facility patients.
Prospective Payment System. The Balanced Budget Act of 1997 (BBA),
enacted on August 5, 1997, mandated the implementation of a prospective payment
system (PPS) for skilled nursing facilities (SNFs) providing care for Medicare
Part A patients, effective for all SNFs whose cost reporting period begins on or
after July 1, 1998.
Under the new PPS, SNFs receive a single per diem payment for all
Medicare Part A covered SNF services. The new single, per diem federal rate is
being phased in over a four-year period beginning July 1, 1998. Each Medicare A
covered patient is designated into one of 44 resource utilization group (RUG),
or case-mix categories, as defined by the Health Care Financing Administration
(HCFA). The per diem payment associated with each RUG category encompass all
costs of furnishing covered skilled nursing services including routine,
ancillary and capital-related costs. PPS incorporates payment for pharmacy
within the nursing component (as a non-therapy ancillary) of the federal per
diem and adjust costs by the nursing index.
Referral Restrictions. The Company is subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws include the federal anti-kickback statute, which prohibits, among
other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration directly or indirectly in return for or to induce the referral
of an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by Medicare or Medicaid. Violations of these
laws may result in fines, imprisonment and exclusion from the Medicare and
Medicaid programs or other state-funded programs. Federal and state court
decisions interpreting these statutes are limited, but have generally construed
the statutes broadly. Recent Federal legislation has increased the enforcement
and penalties for violation of these statutes.
Federal regulations establish "Safe Harbors," which give immunity from
criminal or civil penalties to parties in good faith compliance. While the
failure to satisfy all the criteria for a specific Safe Harbor does not
necessarily mean that an arrangement violates the federal statute, the
arrangement is subject to review by the HHS Office of Inspector General ("OIG"),
which is charged with administering the federal anti-kickback statute. Beginning
January 1, 1997, the Secretary of Health and Human Services began issuing
written advisory opinions regarding the applicability of certain aspects of the
anti-kickback statute to specific arrangements or proposed arrangements.
Advisory opinions will be binding as to the Secretary and the party requesting
the opinion.
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The OIG has issued "Fraud Alerts" identifying certain questionable
arrangements and practices which it believes may implicate the federal
anti-kickback statute. The OIG has issued a Fraud Alert providing its views on
certain joint venture and contractual arrangements between health care
providers. The OIG has recently issued a Fraud Alert concerning prescription
drug marketing practices that could potentially violate the federal
anti-kickback statute. Pharmaceutical marketing activities may implicate the
federal anti-kickback statute because drugs are often reimbursed under the
Medicaid program. According to the Fraud Alert, examples of practices that may
implicate the statute include certain arrangements under which remuneration is
made to pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have recently undertaken enforcement actions
against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arise
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices and the like. Further, a number of the states involved
in these enforcement actions have requested that the FDA exercise greater
regulatory oversight in the area of pharmaceutical promotional activities by
pharmacists. It is not possible to determine whether the FDA will act in this
regard or what effect, if any, FDA involvement would have on the Company's
operations.
The Company believes its contract arrangements with other health care
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with the
Company's interpretation and application.
Environmental Matters. In operating its facilities, NCS makes every effort
to comply with environmental laws. No major difficulties have been encountered
in effecting compliance. In addition, no material capital expenditures for
environmental control facilities are expected. While the Company cannot predict
the effect which any future legislation, regulations or interpretations may have
upon its operations, it does not anticipate any changes that would have a
material adverse impact on its operations.
General. In the ordinary course of its business, the Company is subject to
inspections, audits, inquiries and similar actions by governmental authorities
responsible for enforcing the laws and regulations to which the Company is
subject.
In January 1997, government authorities requested information from the
Company in connection with an audit and investigation of the circumstances
surrounding the apparent drug-related homicide of a non-management employee of
one of the Company's pharmacies. The information provided relates to the
Company's inventory and the possible theft of controlled substances from this
pharmacy. The review identified inadequacies in record keeping and inventory
control at this pharmacy. In a meeting with governmental authorities in August
1997, the Company discussed its findings and those of the government and
documented corrective measures taken by the Company. In September 1998, the
Company was notified by the United States Department of Justice, United States
Attorney for the Southern District of Indiana ("USA-Indiana") that the United
States Drug Enforcement Administration had referred this matter to the Office of
the USA-Indiana for possible legal action involving certain numerous alleged
violations of federal law. The USA-Indiana invited the Company to contact the
Office of the USA-Indiana in an effort to resolve the matter. The Company
subsequently contacted the Office of the USA-Indiana, and discussions regarding
a possible settlement of this matter ensued and are currently proceeding. No
specific settlement terms or amounts have yet been agreed upon by the parties.
In January 1998, federal and state government authorities sought and
obtained various documents and records from a Harrin, Illinois pharmacy operated
by a wholly-owned subsidiary of the Company. The Company has cooperated fully
and continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law,
but the Company has not received any written notification of these allegations.
Discussions regarding the government's investigation have ensued and are
currently proceeding between representatives of the USA-Illinois and the
Company.
EMPLOYEES
As of June 30, 1999, the Company had approximately 4,200 full-time
employees. None of its employees are represented by a union. The Company
considers relations with its employees to be good.
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ITEM 2. PROPERTIES
The Company presently maintains its executive offices in approximately
10,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in
2000 with an unaffiliated third party. NCS currently considers this space to be
sufficient for its corporate headquarters operations.
As of June 30, 1999, the Company leased or owned 101 properties in 34
states with a total square footage of 792,000 square feet ranging in size from
approximately 500 square feet to approximately 35,000 square feet. The terms of
the leases relating to these properties vary in length remaining, from one month
to ten years and, in some cases, include options to extend. For information
concerning the Company's rental obligations, see Note 5 (Operating Leases) of
the Notes to Consolidated Financial Statements, which is set forth at Item 8 of
this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
On June 7, 1999, a lawsuit was filed against the Company in the Superior
Court of Norfolk County, Massachusetts. Plaintiffs are certain selling
stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS
acquired on September 17, 1997. The complaint alleges breach of contract and
unfair business practices arising out of NCS' non-payment of certain amounts
allegedly payable under the terms of an earn-out provision included in the
acquisition agreement. Plaintiffs seek to compel payment of NCS stock worth
$17,385,223 based on the preliminary earn-out calculation.
Under the terms of the earn-out arrangement, amounts payable under the
earn-out are to be paid through the issuance of additional shares of Class A
Common Stock. If on the first anniversary of the date of issuance of the
earn-out shares, the per share price of the Company's Class A Common Stock is
less than $17.225 per share, then the Company will be required to issue
additional shares to compensate for the difference in value.
The case has been scheduled for pretrial on October 4, 1999, at which time
the court will set a discovery schedule and an order concerning the progression
of proceedings. NCS strongly believes that it has meritorious defenses against
the claim of the plaintiffs and believe, the earn-out, if any, is substantially
less than the amount claimed by the plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY*
The name, age and positions of each of the Company's executive officers
are as follows:
NAME AGE POSITION
- ---- --- --------
Jon H. Outcalt 63 Chairman of the Board of Directors
Kevin B. Shaw 42 President, Chief Executive Officer and Director
Phyllis K. Wilson 58 Executive Vice President and Director
Gerald D. Stethem 35 Chief Financial Officer
William B. Byrum 55 Executive Vice President and Chief Operating Officer
Marvin R. Richardson 42 Executive Vice President
Patrick Morris 39 Senior Vice President
John P. DiMaggio 36 Senior Vice President
Michael J. Mascali 39 Senior Vice President
Thomas Bryant Mangum 48 Senior Vice President
A. Malachi Mixon III 59 Director
Richard L. Osborne 61 Director
Boake A. Sells 62 Director
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Jon H. Outcalt, Chairman of the Board, is a founding principal of NCS and
has served as Chairman of the Board since 1986. He was a Senior Vice President
of Alliance Capital Management L.P., a global investment management company,
from 1975 to December 1995. Mr. Outcalt serves on the Board of Directors of
Myers Industries, Inc., a manufacturer of plastic and rubber parts for the
automotive and other industries, and Ohio Savings Financial Corporation, a
savings and loan holding company. He is a graduate of Trinity College (B.A.) and
the Wharton Graduate School of Business (M.B.A.).
Kevin B. Shaw, President, Chief Executive Officer and a Director of the
Company, is a founding principal of NCS and has served as President, Secretary
and a Director of the Company since 1986 and as Chief Executive Officer since
December 1995. Prior to joining the Company, he was employed by McKinsey &
Company and Owens Corning Fiberglas. Mr. Shaw is a graduate of Harvard College
(B.A.) and Stanford Graduate School of Business (M.B.A.).
Phyllis K. Wilson, R.PH., Executive Vice President and a Director of the
Company since November, 1993, is the founder of NCS' Columbus, Ohio operation.
From 1989 to June 1995, she was responsible for corporate development and
oversaw the Company's Ohio and Michigan operations. She is past President of the
Ohio State Board of Pharmacy and served on the Board from 1977 to 1985. Ms.
Wilson is a founding member of the American Society of Consultant Pharmacists
and is a graduate of Ohio State University with a B.S. in Pharmacy.
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Gerald D. Stethem, Chief Financial Officer, joined NCS in November, 1994
and served as Controller until February 1998, at which time he was named Chief
Financial Officer. He was previously with Ernst & Young LLP, an auditing and
accounting firm, where he served as a Manager in the firm's Entrepreneurial
Services Group. He is a graduate of Ohio State University with a B.A. in
Accounting.
William B. Byrum, Executive Vice President and Chief Operating Officer,
joined the Company in September 1995. From April 1993 to September 1995, Mr.
Byrum was President and Chief Executive Officer of Corinthian Healthcare
Systems, Inc., an institutional pharmacy, prior to its acquisition by the
Company. From 1991 to April 1993, he was Vice President of Development
(Acquisitions) for Hook-SupeRx, Inc. Prior to 1991, Mr. Byrum was Vice
President, Store Operations at the Hook Drug Division of Hook-SupeRx, Inc.,
serving in various management positions. Mr. Byrum is a graduate of Purdue
University with a B.S. in Pharmacy.
Marvin R. Richardson, Executive Vice President, joined NCS in June 1995 as
a Regional Vice President. From 1991 to 1995, Mr. Richardson was the founder and
President of Quality Health Care of Indiana, an institutional pharmacy, prior to
its acquisition by the Company. He is a graduate of Purdue University with a
B.S. in Pharmacy.
Patrick Morris, Senior Vice President, joined the Company in February
1997. Mr. Morris was with the law firm of Calfee, Halter & Griswold LLP,
Cleveland, Ohio from 1985 to February 1997, and was a partner in such firm from
1993 to February 1997. Mr. Morris is a graduate of Trinity College (B.A.) and
Case Western Reserve University School of Law (J.D.).
John P. DiMaggio, Senior Vice President, joined the Company in December
1992 and served as Management Information Systems Director of the Company until
December 1994. Mr. DiMaggio served as Vice President of Information Systems of
the Company from December 1994 to November 1998, at which time he assumed his
current position as Senior Vice President of Information Systems. Mr. DiMaggio
has an M.B.A. in Finance from the Katz Graduate School of Business and a B.S.
Degree in Computer Science from the University of Pittsburgh.
Michael J. Mascali, Senior Vice President, joined the Company in October
1995. Mr. Mascali was a Regional Vice President of Operations from October 1995
to February 1998. From February 1998 to January 1999, he was Senior Vice
President of Compliance and from January 1999 to May 1999 he was Senior Vice
President of Operations, at which time he assumed his current position as Senior
Vice President of Compliance. From May 1989 to October 1995, Mr. Mascali was a
director of pharmacy for Synetic and Pharmacy Corporation of America in
Connecticut, a long term care pharmacy. Mr. Mascali graduated from St. John's
University with a B.S. in Pharmacy.
Thomas Bryant Mangum, Senior Vice President, joined the Company in June
1998. From November 1996 to June 1998, Mr. Mangum was Senior Director of
Pharmacy for Tenet HealthCare System, an owner and manager of acute care
hospitals. From November 1995 to November 1996, he was Vice President of
Pharmacy services for Premier, Inc., a group purchasing organization for acute
care hospitals, where he had responsibility for pharmaceutical contract
negotiations. From 1990 to November 1995, Mr. Mangum was Associate Vice
President of Pharmacy and Nutrition Services for SunHealth, a group purchasing
organization for acute care hospitals. He is a graduate of University of North
Carolina Pharmacy School and currently serves on the Pharmacy School Board.
A. Malachi Mixon III, a Director of the Company since December 1994, has
been the Chief Executive Officer and a Director of Invacare Corporation since
1979 and, since 1983, its Chairman of the Board. Mr. Mixon also served as
President of Invacare Corporation from 1979 to 1996. Invacare Corporation is a
leading worldwide manufacturer and distributor of home health care products. He
serves as a Director of Lamson & Sessions Co., a supplier of engineered
thermoplastic products, and Sherwin-Williams Company, a producer and distributor
of coatings and related products, and is Chairman of the Board of Trustees of
The Cleveland Clinic Foundation, one of the world's leading health care
institutions. Mr. Mixon is a graduate of Harvard College (B.A.) and the Harvard
Graduate School of Business (M.B.A.).
Richard L. Osborne, a Director of the Company since 1986, has served as
the Executive Dean of the Weatherhead School of Management, Case Western Reserve
University, Cleveland, Ohio, since 1971. Mr. Osborne serves on the Board of
Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts
for the automotive and other industries, New Horizons Worldwide, Inc., a
provider of computer training services, and Ohio Savings Financial Corporation,
a savings and loan holding company. He is a graduate of Bowling Green State
University (B.S.) and Case Western Reserve University (M.S.).
Boake A. Sells, a Director of the Company since November 1993, has been a
self-employed private investor since June 1992. He was Chairman of the Board,
President and Chief Executive Officer of Revco D.S., Inc. from September 1987 to
June 1992, and was formerly President and Chief Operating Officer of Dayton
Hudson Corporation and President and Chief Operating Officer of Cole National
Corporation. Mr. Sells is a Director of Harrah's Entertainment, Inc., a leading
casino gaming company. He is a graduate of University of Iowa (B.A.) and Harvard
Graduate School of Business (M.B.A.).
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol NCSS. The following table sets forth, for the two fiscal years ended June
30, 1999, the high and low sale prices per share for the Class A Common Stock,
as reported on the Nasdaq National Market. These prices do not include retail
markups, markdowns or commissions.
HIGH LOW
---- ---
1998
First Quarter $ 29.13 $ 22.38
Second Quarter 27.50 22.25
Third Quarter 33.50 24.13
Fourth Quarter 32.88 27.00
1999
First Quarter $ 29.31 $ 16.50
Second Quarter 23.75 12.00
Third Quarter 23.44 9.44
Fourth Quarter 15.00 5.06
On September 23, 1999, the last sale price of the Class A Common Stock as
reported by Nasdaq was $ 2.1875 per share. As of September 23, 1999, there were
approximately 246 holders of record of the Class A Common Stock, and
approximately 41 holders of record of Class B Common Stock.
The Company has never declared or paid cash dividends on its Class A
Common Stock. The Company currently intends to retain any earnings for use in
its business and therefore does not anticipate paying any dividends in the
foreseeable future. Any determination to pay cash dividends in the future will
be at the discretion of the Board of Directors after taking into account various
factors, including the Company's financial condition, results of operations,
current and anticipated cash needs and plans for expansion. On August 3, 1999
the Company amended its line of credit agreement entering into several
restrictive covenants including a restriction on declaration and payment of cash
dividends to shareholders.
There were no equity securities of the Company issued during the fourth
fiscal quarter that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30,
-------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues $ 65,602 $ 113,281 $275,040 $ 509,064 $ 717,825
Cost of revenues 46,570 82,415 205,536 380,217 540,547
---------- ---------- -------- ---------- -----------
Gross profit 19,032 30,866 69,504 128,847 177,278
Selling, general and
administrative expenses (1) 14,539 22,236 51,153 93,895 139,522
Special charge to increase allowance
for doubtful accounts (2) - - - - 32,384
Nonrecurring charges (2) - 2,811 - 8,862 8,115
---------- ---------- -------- ---------- -----------
Operating income (loss) 4,493 5,819 18,351 26,090 (2,743)
Interest (expense) income, net (1,089) (1,611) 1,576 (5,745) (18,301)
---------- ---------- -------- ---------- -----------
Income (loss) before
income taxes 3,404 4,208 19,927 20,345 (21,044)
Income tax (expense) benefit (1,536) (1,852) (8,655) (9,014) 7,640
---------- ---------- -------- ---------- -----------
Income (loss) before accounting change 1,868 2,356 11,272 11,331 (13,404)
Cumulative effect of
accounting change (1) - - - - (2,921)
---------- ---------- -------- ---------- -----------
Net income (loss) $ 1,868 $ 2,356 $ 11,272 $ 11,331 $ (16,325)
========== ========== ======== ========== ===========
Net income (loss) per share - basic $ 0.32 $ 0.28 $ 0.70 $ 0.59 $ ( 0.81)
========== ========== ======== ========== ===========
Net income (loss) per share - diluted $ 0.28 $ 0.26 $ 0.69 $ 0.58 $ ( 0.81)
========== ========== ======== ========== ===========
Income (loss) before accounting
change - basic $ 0.32 $ 0.28 $ 0.70 $ 0.59 $ (0.66)
========== ========== ======== ========== ===========
Income (loss) before accounting
change - diluted $ 0.28 $ 0.26 $ 0.69 $ 0.58 $ (0.66)
========== ========== ======== ========== ===========
Weighted average common
shares outstanding - basic 5,818 8,462 15,991 19,100 20,200
========== ========== ======== ========== ===========
Weighted average common
shares outstanding - diluted 6,764 8,995 16,843 19,372 20,200
========== ========== ======== ========== ===========
YEAR ENDED JUNE 30,
-------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 286 $ 21,460 $ 8,160 $ 21,186 $ 29,424
Working capital 10,616 48,336 53,164 149,362 197,395
Total assets 38,595 110,668 321,030 623,790 699,499
Line of credit - - 10,285 147,800 214,700
Long-term debt, excluding
current portion 18,505 1,961 8,043 3,879 1,936
Convertible subordinated debentures 1,900 6,549 4,813 102,753 100,000
Stockholders' equity 8,117 91,100 253,226 287,334 276,434
(1) Selling, general and administrative expenses for 1999 include $11,503
of pre-tax costs that would have been capitalized prior to the adoption
of SOP 98-5, "Reporting on the Costs of Start-up Activities." The
cumulative effect of accounting change represents start-up costs, net
of tax, that were previously capitalized as of June 30, 1998.
(2) For 1996, represents a nonrecurring charge in connection with the
termination of certain compensation arrangements with the prior owners
of certain acquired businesses. For 1998, represents a nonrecurring
charge related to restructuring and other nonrecurring expenses in
connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and
other nonrecurring items. For 1999, represents a special charge to
increase the allowance for doubtful accounts, and other nonrecurring
charges in association with the implementation and execution of
strategic restructuring and consolidation initiatives of certain
operations and other nonrecurring items. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations, expressed as a percentage of total
revenues.
YEAR ENDED JUNE 30,
-------------------
1997 1998 1999
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 74.7 74.7 75.3
----- ----- -----
Gross margin 25.3 25.3 24.7
Selling, general and administrative expenses 18.6 18.5 19.4
Special charge to increase allowance for doubtful accounts - - 4.5
Nonrecurring charges - 1.7 1.2
----- ----- -----
Operating income (loss) 6.7 5.1 (0.4)
Interest (expense) income, net .6 (1.1) (2.6)
----- ----- -----
Income (loss) before income taxes 7.3 4.0 (3.0)
Cumulative effect of accounting change - - (0.4)
Income tax (expense) benefit (3.2) (1.8) 1.1
----- ----- -----
Net income (loss) 4.1% 2.2% (2.3)%
===== ===== =====
YEARS ENDED JUNE 30, 1999 AND 1998
The net loss for the year ended June 30, 1999 was $16.3 million or $0.81
per diluted share compared to net income of $11.3 million or $0.59 per diluted
share for the year ended June 30, 1998. The net loss for the year ended June 30,
1999 before the cumulative effect adjustment to adopt the Accounting Standards
Executive Committee Statement of Position 98-5 (SOP 98-5) "Reporting on the
Costs of Start-up Activities," was $13.4 million or $0.66 per diluted share
compared to net income of $11.3 million or $0.59 per diluted share in the prior
year.
Net income for the year ended June 30, 1999, excluding the special and
nonrecurring charges described below, and the effect of adopting SOP 98-5,
increased to $17.9 million or $0.88 per diluted share, from $16.6 million or
$0.86 per diluted share, excluding nonrecurring charges, in the prior year.
Revenues for the year ended June 30, 1999 increased 41.0% to $717.8
million from $509.1 million for the year ended June 30, 1998. The increase in
revenues over the prior fiscal year is primarily attributed to two factors: the
Company's acquisition program and internal growth. Of the $208.7 increase for
the year ended June 30, 1999, $113.4 million of the increase is attributable to
revenues for the fiscal year ended June 30, 1999 including 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 $95.3
million 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 June 30, 1999 increased 5.6% to 262,000 beds, from 248,000
beds at June 30, 1998.
Cost of revenues for the year ended June 30, 1999 increased $160.3 million
or 42.2% to $540.5 million from $380.2 million for the year ended June 30, 1998.
Cost of revenues as a percentage of revenues increased to 75.3% for the year
ended June 30, 1999 from 74.7% for the year ended June 30, 1998. The Company's
leverage associated with purchasing pharmaceuticals, formulary management
program and the leveraging of production costs positively impacted gross margins
during the year ended June 30, 1999. However, these improvements were offset by
gross margin reductions as a result of pricing pressures and a reduction in
higher margin services as more facilities served by the Company were subject to
the phased in implementation of the PPS reimbursement system during the last
three months of the fiscal year ended June 30, 1999.
Selling, general and administrative expenses for the year ended June 30,
1999 increased $45.6 million or 48.6% to $139.5 million from $93.9 million for
the year ended June 30, 1998. Selling, general and administrative expenses as a
percentage of revenues increased from 18.5% for the year ended June 30, 1998 to
19.4% for the year ended June 30, 1999.
15
19
Excluding the $11.5 million pre-tax increase for costs which would
otherwise have been capitalized prior to early adoption of SOP 98-5 during the
year ended June 30, 1999, selling, general and administrative expenses increased
$34.1 million or 36.3% to $128.0 million from $93.9 million for the year ended
June 30, 1998. Excluding the effects of early adoption of SOP 98-5, selling,
general and administrative expenses as a percentage of revenues decreased from
18.5% for the year ended June 30, 1998 to 17.8% for the year ended June 30,
1999. The percentage decrease for the year ended June 30, 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 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.
Excluding the effects of the early adoption of SOP 98-5 and the special
and nonrecurring charges as described below, operating income for the year ended
June 30, 1999 increased $14.3 million or 40.6% to $49.3 million from $35.0
million for the year ended June 30, 1998. This improvement is primarily
attributable to increased sales volume generated during the year from
acquisitions and internal growth. Excluding the effects of the early adoption of
SOP 98-5 during the year ended June 30, 1999 and the special and nonrecurring
charges, operating income as percentage of sales for the years ended June 30,
1999 and 1998 was 6.9%.
The adverse impact of the implementation of the Medicare Prospective
Payment System (PPS) under the Balanced Budget Act of 1997, for Medicare
residents of skilled nursing facilities was significantly greater than
anticipated. PPS has created numerous changes to reimbursement policies
applicable to skilled nursing under Medicare Part A. Prior to PPS, Medicare
reimbursed each skilled nursing facility based on that facility's actual
Medicare Part A costs plus a premium. Under PPS, Medicare pays skilled nursing
facilities a fixed fee per Medicare Part A patient day based on the acuity level
of the patient. The per diem rate covers all items and services furnished during
a covered stay for which reimbursement was formerly made separately under
Medicare. Consequently, the Company has experienced revenue pressure as a result
of nursing facilities attempting to manage pharmaceutical costs along with all
other costs associated with patient care under a simple per diem reimbursement
amount. In addition, there has been a reduction in utilization of other
therapies such as speech, occupational and physical rehabilitation.
Additionally, as a result of these changes, skilled nursing facilities have
become increasingly more reluctant to admit Medicare residents, especially those
requiring complex care, causing Medicare census in these facilities to weaken
and a reduction in the average length of stay for Medicare residents. These
factors have had the effect of significantly reducing overall occupancy in the
facilities served by the Company. The resident acuity level has also decreased
as these facilities have attempted to avoid high acuity patients negatively
impacting overall utilization of drugs, particularly those with higher cost such
as infusion therapy. For Medicare certified skilled nursing facilities with a
high cost structure, or those which are unable to cut costs, PPS has caused
significant earnings and cash pressure. Some facilities have sought
consolidation as a method of reducing costs and increasing efficiencies causing
the Company to experience some bed loss.
These outcomes have negatively impacted nursing facilities and the
institutional pharmacy services industry as a whole. Although there may be some
legislative relief for the Company's customers, management is positioning the
Company to succeed in the current PPS environment by adjusting its cost
structure appropriately. The Company is rapidly reducing operating and overhead
costs and accelerating the implementation of the hub and spoke fulfillment and
delivery model. Savings are expected to exceed $20 million on an annualized
basis, once implemented.
During the fourth quarter of 1999 the Company recorded special and
nonrecurring charges of $40.5 million before tax ($24.3 million net of tax). A
special charge of $32.4 million before tax was recorded to increase the
allowance for doubtful accounts, and nonrecurring charges of $8.1 million before
tax were recorded in connection with the implementation and execution of
strategic restructuring and consolidation initiatives of certain operations and
other nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers
primarily as a result of the implementation of the Medicare Prospective Payment
System ($12.9 million pre-tax charge, as described below). The acquisition
related items pertain to specific receivable collectibility issues related to
acquired operating systems, and other nonrecurring issues which have resulted in
potentially uncollectible receivables ($11.0 million and $8.5 million pre-tax
charges, respectively, as described below).
16
20
Accounts receivable collection and allowance adequacy is a continuous focus
of management. Bad debt provisions and allowances are continually monitored and
evaluated based on historical experience and projected future trends. Until
several months ago bad debt experience rates had remained relatively consistent
and the recorded provisions reflected this experience. However, during the last
three months of the fiscal year ended June 30, 1999, these same processes and
procedures identified trends indicating a significant change in the financial
viability in many of the Company's customers and accordingly an increase in the
amount of potentially uncollectible accounts.
The negative trends in the financial viability of the Company's customers
attributed primarily to a greater than expected adverse impact of the
implementation of PPS. PPS became effective for skilled nursing facilities on
July 1, 1998. PPS implementation coincides with each facility's cost reporting
period (fiscal year) beginning after June 30, 1998. Since a majority of these
facilities report on a December 31 year-end, most facilities were reimbursed
under the PPS provisions beginning January 1, 1999. The negative impact of PPS
reimbursement on the financial health of long-term care facilities became
evident during the last three months of the fiscal year ended June 30, 1999 with
a significant increase in the number of customers declaring bankruptcy or
liquidating assets as compared to historical trends. As a result of these recent
negative trends, a before tax increase of $12.9 million in the allowance for
doubtful accounts was required as of June 30, 1999. Management has reviewed the
Company's credit and collection processes, enhancing the policies and procedures
where necessary, in order to identify and mitigate future collection issues
under the PPS reimbursement system.
One of the Company's primary initiatives has been to integrate its pharmacy
operations under one common operating system, NCS' Concord DX system. At June
30, 1999, approximately 80% of the pharmacy sites have been successfully
converted to NCS' Concord DX system. Prior to conversion to Concord DX, acquired
pharmacies continued to use their historical operating and billing systems.
During the fiscal year ended June 30, 1999, the Company accelerated its focus on
conversion of all historical billing and operating systems to Concord DX. As
part of the conversion process, receivables billed under historical systems were
intensely scrutinized and any collectibility risk was further assessed at the
time of conversion. Accordingly, an $11.0 million pretax increase to the
allowance for doubtful accounts was recorded to allow for potentially
uncollectible accounts under historical systems.
The Company recorded additional special charges to increase the allowance
for doubtful accounts for numerous smaller items aggregating $8.5 million before
taxes. These special charge items primarily include uncollectible accounts
receivable acquired in business combinations in excess of allowances established
at time of acquisition, and uncollectible accounts receivable resulting from
system conversion and transitions to new service provider numbers subsequent to
acquisition.
During the fourth quarter of fiscal 1999, the Company adopted a new plan
of restructuring to consolidate certain pharmacy sites in similar geographies.
The plan is a continuation of the plan adopted in fiscal 1998 to combine
pharmacies in close proximity in order to improve operating efficiencies. As a
result of the new exit plan, 4 additional pharmacy sites will be consolidated
into either a new or existing location. During the year ended June 30, 1999, the
Company recorded nonrecurring charges of $4.7 million related to the new site
consolidations and additional costs incurred on the site consolidations
announced in the prior year. These costs consist of $2.1 million related to
employee severance and other compensation related expenses, $0.6 million related
to lease termination costs and $2.0 million related to asset impairments and
other miscellaneous costs. As of June 30, 1999, three site consolidations had
been completed with the remainder expected to be completed by the end of fiscal
2000.
17
21
The remaining $3.4 million of the nonrecurring charge primarily relates to
severance incurred during the fourth quarter associated with the Company's
expense reduction initiatives, additional acquisition related and other
miscellaneous expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees.
Details of the fourth quarter fiscal 1999 special and nonrecurring charge are as
follows:
Nonrecurring Reserve
Description Cash/Non-cash Charge Activity At 6/30/99
----------- ------------- ------------ -------- ----------
(In millions)
Site Consolidations
Severance/compensation related Cash $ 2.1 $ (1.5) $ .6
Lease terminations Cash .6 (.1) .5
Asset impairments Non-cash 1.5 (1.5) --
Other Cash .5 (.5) --
Special increase to allowance Non-cash 32.4 (32.4) --
for doubtful accounts
Other Cash 3.4 (2.7) .7
------- ------- -------
Total $ 40.5 $(38.7) $ 1.8
======= ======= =======
The Company had net interest expense of $18.3 million for the year ended
June 30, 1999, compared to net interest expense of $5.7 million during the year
ended June 30, 1998. The increase in expense is due to increased borrowings on
the line of credit and the issuance of $100 million of convertible subordinated
debentures in August 1997. These funds were used primarily for acquisitions.
18
22
YEARS ENDED JUNE 30, 1998 AND 1997
Revenues for the year ended June 30, 1998 increased 85.1% to $509.1
million from $275.0 million for the year ended June 30, 1997. The increase in
revenues over the prior fiscal year is primarily attributed to two factors: the
Company's acquisition program and internal growth. Of the $234.1 increase for
the year ended June 30, 1998, $69.2 million was due to the acquisitions of
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. In addition, $87.8 million of the increase
is attributable to revenues for the fiscal year ended June 30, 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,
Vangard 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 $77.1 million 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 June 30, 1998 increased 63% to 248,000 beds, from 152,000 beds
at June 30, 1997.
Cost of revenues for the year ended June 30, 1998 increased $174.7 million
or 85.0% to $380.2 million from $205.5 million for the year ended June 30, 1997.
Cost of revenues as a percentage of revenues were 74.7% for the years ended June
30, 1998 and June 30, 1997. The Company's leverage associated with purchasing
pharmaceuticals, formulary management program and the leveraging of production
costs positively impacted gross margins during the year ended June 30, 1998.
However, these improvements were offset by the lower margins of companies
acquired during the year ended June 30, 1998. 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.
Selling, general and administrative expenses for the year ended June 30,
1998 increased $42.7 million or 83.6% to $93.9 million from $51.2 million for
the year ended June 30, 1997. Selling, general and administrative expenses as a
percentage of revenues decreased from 18.6% for the year ended June 30, 1997 to
18.4% for the year ended June 30, 1998. The percentage decrease for the year
ended June 30, 1998 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 successful at creating operational efficiencies with
acquisitions as selling, general and administrative expenses as a percentage of
revenues has decreased six 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
current and prior fiscal year.
Excluding the nonrecurring charge described below, operating income for
the year ended June 30, 1998 increased $16.6 million or 90.5% to $35.0 million
from $18.4 million for the year ended June 30, 1997. This improvement is
primarily attributable to increased sales volume generated during the year from
acquisitions and internal growth. Excluding the nonrecurring charge described
below, operating income as percentage of sales for the year ended June 30, 1998
increased slightly to 6.9% from 6.7% for the year ended June 30, 1997.
During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8.9 million ($5.3 million net of tax) related to
restructuring and other nonrecurring expenses in connection with the
implementation and execution of strategic restructuring and consolidation
initiatives of certain operations and other nonrecurring items. As a result of
the plans described below, the Company expects to remove $1.5 million from its
cost structure in fiscal 1999. These savings are predominantly due to reduced
wage-related costs, reduced carrying costs of fixed assets, reduced rent charges
and other miscellaneous savings. The components of the nonrecurring charge are
described below.
19
23
During the fourth quarter of fiscal 1998, the Company adopted a formal
plan of restructuring to consolidate certain pharmacy sites in similar
geographies. The plan will combine pharmacies in close proximity in order to
improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites
will be consolidated into either a new or existing location. The Company
recorded nonrecurring charges of $5.3 million related to the site consolidations
during the year ended June 30, 1998, which consists of $0.5 million related to
employee severance costs in relation to the termination of 149 employees, $0.7
million related to lease termination costs and $4.1 million related to asset
impairments and other miscellaneous costs. As of June 30, 1999, fourteen site
consolidations had been completed with the remainder expected to be completed by
the end of fiscal 2000. All of the employee terminations under the plan have
occurred as of June 30, 1999.
Approximately $0.9 million of the nonrecurring charge relates to the
buyout of existing employment agreements with the prior owners of certain
acquired businesses.
In June 1998 the Company entered into a new $150 million revolving credit
facility and a $50 million bridge facility (June 1998 facilities) that replaced
the existing $135 million revolving credit facility. The June 1998 facilities
were replaced in July 1998 by a $245 million revolving credit facility.
Approximately $1.3 million of the nonrecurring charge relates to the write-off
of deferred financing fees on the $135 million revolving credit facility and
certain financing fees associated with the June 1998 facilities.
The remaining $1.4 million of the nonrecurring charge primarily relates to
additional acquisition related expenses.
The Company anticipates that the activities related to the costs included
in the reserve as of June 30, 1999 will be completed in fiscal 2000.
Details of the fourth quarter fiscal 1998 nonrecurring charge are as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 6/30/99
----------- ------------- ------------- -------- ---------- -------- ----------
(In millions)
Site Consolidations
Severance packages Cash $ .5 $ -- $ .5 $ (.5) $ --
Lease terminations Cash .7 -- .7 (.4) .3
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 $(1.8) $ .5
====== ====== ====== ===== ======
The Company had net interest expense of $5.7 million for the year ended
June 30, 1998, compared to net interest income of $1.6 million during the year
ended June 30, 1997. The increase in expense is due to increased borrowings on
the line of credit and the issuance of $100 million of convertible subordinated
debentures in August 1997. These funds were used primarily for acquisitions. The
net interest income position in fiscal 1997 is primarily attributable to the
reduction of long-term debt with funds from the Company's initial public
offering completed on February 14, 1996 and interest income earned on funds from
a secondary public offering completed by the Company on October 4, 1996.
20
24
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $8.3 million,
$(14.8) million and $(24.0) in fiscal 1997, 1998 and 1999, respectively. Cash
used in operating activities increased in fiscal 1999 due to increases in trade
accounts receivable, other current assets and inventories. The growth in
accounts receivable and inventory are primarily associated with internal sales
growth. Additionally, some accounts receivable growth is attributable to slower
payment trends by customers as a result of PPS implementation and other accounts
receivable issues previously described above. The increase in other current
assets primarily results from income tax refunds receivable at June 30, 1999.
These cash flow decreases were partially offset by increases in trade accounts
payable and accrued expenses. A majority of the trade accounts payable increase
is attributable to longer negotiated payment terms under a new primary
pharmaceutical supplier agreement implemented in June 1999. Cash provided by
operating activities decreased during fiscal 1998 due to increases in accounts
receivable and inventories primarily associated with internal sales growth.
These cash flow decreases were partially offset by increases in trade accounts
payable and accrued expenses.
Net cash used in investing activities decreased from $150.0 million in
fiscal 1997 and $202.8 million in fiscal 1998 to $35.0 million in fiscal 1999.
The decrease is primarily the result of fewer business acquisitions during 1999
as compared to the two previous years. The decrease is partially offset by an
increase in capital expenditures.
The Company made capital expenditures of $9.9 million in fiscal 1997,
$24.0 million in fiscal 1998 and $29.4 million in fiscal 1999. Significant
capital expenditures during the year ended June 30, 1999 primarily included
computer and information systems equipment and computer software as the Company
continued to invest in converting all sites to the Concord DX System. At June
30, 1999 a majority of the Company's sites had been converted. Additionally,
other capital expenditures during 1999 were made for furniture and fixtures,
leasehold improvements, medication carts and delivery vehicles. Significant
capital expenditures during the year ended June 30, 1998 included computer and
information systems equipment, computer software, furniture and fixtures at new
facilities in Pinellas Park, Florida and Van Nuys, California, leasehold
improvements, medication carts and delivery vehicles.
Net cash provided by financing activities increased from $128.4 million in
fiscal 1997 to $230.7 million in fiscal 1998 and then decreased to $67.2 million
in fiscal 1999. The increase in fiscal 1998 is primarily the result of funds
received from an offering of convertible subordinated debentures completed by
the Company on August 13, 1997 and an increase in funds borrowed under the
revolving credit facility. These funds were primarily utilized for acquisitions
in fiscal 1998. The decrease in cash provided by financing activities during
fiscal 1999 primarily results from reduced financing needs resulting from a
significant reduction in acquisition activity during 1999. The net proceeds
during 1999 were primarily obtained from the revolving credit agreement to fund
working capital needs resulting from internal growth and infrastructure
investments in a common operating system. Use of the revolving credit agreement
slowed to a net increase of $2.0 million during the fourth quarter of 1999 as a
result of reduced operating and overhead costs from strategic initiatives, more
favorable payment terms with the Company's new primary pharmaceutical supplier
and lower infrastructure investments in the conversion to a common operating
system.
In August 1997, the Company issued $100 million of convertible
subordinated debentures due 2004. The debentures carry an interest rate of 5
3/4%. The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. The Company's ability to make payments of
principal and interest on the debentures will depend on its ability to receive
distributions of cash from its subsidiaries. Each of the Company's wholly-owned
subsidiaries has guaranteed the Company's payment obligations under the
debentures, so long as such subsidiary is a member of an affiliated group
(within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as
amended) which includes the Company. The satisfaction by the Company's
subsidiaries of their contractual guarantees, as well as the payment of
dividends and certain loans and advances to the Company by such subsidiaries,
may be subject to certain statutory or contractual restrictions, are contingent
upon the earnings of such subsidiaries and are subject to various business
considerations.
The Company 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 million revolving credit facility (the "Credit Facility") with a
bank, which replaced the existing $135 million revolving agreement. Under the
Credit Facility, the Company also has available a $10 million swing line
revolving facility (the "Swing Line"). Also in June 1998, the Company entered
into a $50 million bridge facility agreement (the "Bridge Facility") due
December 31, 1998. Effective July 13, 1998, the Credit Facility was amended
increasing the total commitment from $150 million to $245 million and was
syndicated to a consortium of 11 banks. Also effective July 13, 1998 the Bridge
Facility was paid with funds under the amended Credit Facility and was
terminated. Effective August 3, 1999, the Credit Facility was amended to reduce
the available commitment from $245 million to $235 million, provide all of the
Company assets as security, limit the availability of the facility to use for
working capital only, require Lender approval on future acquisitions, and modify
covenants and the variable interest rate basis. The amended Credit Facility
bears interest at a variable rate based upon the Eurodollar rate plus a spread
of 150 to 275 basis points, dependent upon the Company's ratio of Total Funded
Debt to EBITDA. The Company believes that its cash and available sources of
capital, including funds available under its revolving credit facility, are
sufficient to meet its normal operating requirements.
21
25
The Company's effective income tax expense (benefit) rates were 43.4%, 44.3% and
(36.3)% for the years ended June 30, 1997, 1998 and 1999, respectively. The tax
rates differ from the federal statutory rate primarily as a result of state and
local income taxes and the non-deductibility of certain acquisition costs.
As discussed under the caption, "Business-Governmental Regulation," the
Company's facility in Indianapolis, Indiana has been the subject of an
investigation by federal authorities, and the Company has engaged in discussions
with representatives of the U.S. Attorney's office in Indianapolis concerning
the settlement of alleged violations of federal law at that facility. Company's
Herrin, Illinois facility is also under investigation by federal and state
authorities. It is possible that the imposition of significant fines or other
remedies in connection with the resolution of either of these matters could have
a material effect on the Company's financial condition and results of
operations.
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.
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 the process for review and assessment, device testing and resolution of
noncompliance issues, if any, by November 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 November 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
October 31, 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 future costs related to Year 2000 readiness issues will be
expensed as incurred and are expected to be funded through operating cash flows.
Through the year ended June 30, 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.
22
26
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into this
Annual Report on Form 10-K, including, but not limited to, those regarding the
Company's financial position, business strategy, acquisition 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. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include
the impact of the Prospective Payment System, 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 other capital requirements, changes in regulatory
requirements, reform of the health care delivery system, disruptions in the
Company's operations resulting from Year 2000 issues and other risks and
uncertainties described in the Company's SEC reports.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that are
entered into during the normal course of business. The Company has not entered
into derivative financial instruments for trading purposes. The Company's
primary market risk exposure relates to interest rate risk. The Company has
managed its interest rate risk by balancing its exposure between fixed and
variable rates while attempting to minimize its interest costs. The Company has
a balance of $214,700,000 on its revolving credit facility at June 30, 1999,
which is subject to a variable rate of interest based on the Eurodollar rate.
Assuming borrowings at June 30, 1999, a one-hundred basis point change in
interest rates would impact net interest expense by approximately $2,147,000 per
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements
Report of Independent Auditors 24
Consolidated Balance Sheets at June 30, 1998 and 1999 25
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1999 27
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 1999 28
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1999 30
Notes to Consolidated Financial Statements 31
23
27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NCS HealthCare, Inc.
We have audited the accompanying consolidated balance sheets of NCS
HealthCare, Inc. and subsidiaries as of June 30, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NCS HealthCare, Inc. and subsidiaries at June 30, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
July 1, 1998, the Company changed its method of accounting for start-up costs.
August 11, 1999
Cleveland, Ohio Ernst & Young LLP
24
28
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
JUNE 30,
--------
1998 1999
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 21,186 $ 29,424
Trade accounts receivable, less allowance for
doubtful accounts of $18,427 and $38,880 as of
June 30, 1998 and 1999 142,325 160,168
Inventories 43,784 49,244
Deferred income taxes 10,458 19,901
Prepaid expenses and other current assets 3,766 26,496
-------- --------
Total current assets 221,519 285,233
PROPERTY, PLANT AND EQUIPMENT
Land 129 204
Buildings 2,090 2,206
Machinery, equipment and vehicles 27,498 31,129
Computer equipment and software 22,340 37,458
Furniture, fixtures and leasehold improvements 17,502 23,394
-------- --------
69,559 94,391
Less accumulated depreciation and amortization 25,966 35,275
-------- --------
43,593 59,116
Goodwill, less accumulated amortization of $12,317
and $22,803 as of June 30, 1998 and 1999 340,209 343,247
Other assets, less accumulated amortization of
$2,117 and $3,286 as of June 30, 1998 and 1999 18,469 11,903
-------- --------
TOTAL ASSETS $623,790 $699,499
======== ========
See accompanying notes
25
29
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30,
--------
1998 1999
---- ----
CURRENT LIABILITIES
Trade accounts payable $ 34,131 50,061
Accrued compensation and related expenses 17,360 15,798
Other accrued expenses 19,118 18,499
Current portion of long-term debt 1,548 3,480
-------- --------
Total current liabilities 72,157 87,838
Line of credit 147,800 214,700
Long-term debt, excluding current portion 3,879 1,936
Convertible subordinated debentures 102,753 100,000
Deferred income taxes 9,127 18,209
Other long-term liabilities 740 382
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share; 1,000,000
shares authorized; none issued - -
Common stock, $.01 par value per share:
Class A -- 50,000,000 shares authorized; 13,334,639
and 14,277,492 shares issued and outstanding at
June 30, 1998 and 1999, respectively 133 143
Class B -- 20,000,000 shares authorized; 6,463,244
and 6,005,280 shares issued and outstanding
at June 30, 1998 and 1999, respectively 65 60
Paid-in capital 258,462 263,882
Retained earnings 28,674 12,349
-------- --------
287,334 276,434
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $623,790 $699,499
======== ========
See accompanying notes
26
30
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
-------------------
1997 1998 1999
---- ---- ----
Revenues $275,040 $509,064 $717,825
Cost of revenues 205,536 380,217 540,547
-------- -------- --------
Gross profit 69,504 128,847 177,278
Selling, general and administrative expenses 51,153 93,895 139,522
Special charge to increase allowance for doubtful accounts -- -- 32,384
Nonrecurring charges -- 8,862 8,115
-------- -------- --------
Operating income (loss) 18,351 26,090 (2,743)
Interest expense (1,143) (8,199) (19,864)
Interest income 2,719 2,454 1,563
-------- -------- --------
Income (loss) before income taxes 19,927 20,345 (21,044)
Income tax (expense) benefit (8,655) (9,014) 7,640
Cumulative effect of accounting change, net of taxes -- -- (2,921)
-------- -------- --------
Net income (loss) $ 11,272 $ 11,331 $ (16,325)
======== ======== ==========
Earnings (loss) per share data:
Earnings (loss) per common share - basic $ 0.70 $ 0.59 $ (0.81)
======== ======== ==========
Earnings (loss) per common share - diluted $ 0.69 $ 0.58 $ ( 0.81)
======== ======== ==========
Weighted average number of common
shares outstanding - basic 15,991 19,100 20,200
======== ======== ==========
Weighted average number of common
shares outstanding - diluted 16,843 19,372 20,200
======== ======== ==========
See accompanying notes
27
31
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
CLASS A CLASS B
COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----- ----- ------- -------- ------
Balance at June 30, 1996 $ 56 $ 66 $ 84,907 $ 6,071 $ 91,100
Issuance of 4,235,000
shares of Class A
Common Stock 42 -- 123,584 -- 123,626
Issuance of 1,099,369
shares of Class A
Common Stock and
385,722 shares of
Class B Common Stock
for business
combinations 11 3 25,478 -- 25,492
Conversion of 246,208
shares of Class B
Common Stock to
246,208 shares of
Class A Common Stock 2 (2) -- -- --
Conversion of convertible
subordinated debentures
(172,569 shares of Class
A Common Stock) 2 -- 1,734 -- 1,736
Net income -- -- -- 11,272 11,272
-------- -------- -------- -------- --------
Balance at June 30, 1997 113 67 235,703 17,343 253,226
Exercise of stock options
(2,637 shares of Class
A Common Stock) -- -- 20 -- 20
Issuance of 796,608
shares of Class A
Common Stock and
563,879 shares of
Class B Common Stock
for business combinations 8 6 16,798 -- 16,812
Conversion of 843,377
shares of Class B
Common Stock to
843,377 shares of
Class A Common Stock 8 (8) -- -- --
Conversion of convertible
subordinated debentures
and notes payable
(378,379 shares of Class
A Common Stock) 4 -- 5,941 -- 5,945
Net income -- -- -- 11,331 11,331
-------- -------- -------- -------- --------
Balance at June 30, 1998 133 65 258,462 28,674 287,334
28
32
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(CONTINUED)
CLASS A CLASS B
COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
Balance at June 30, 1998 $ 133 $ 65 $ 258,462 $ 28,674 $ 287,334
Exercise of stock options
(3,545 shares of Class
A Common Stock and
69,692 shares of Class
B Common Stock) -- -- 823 -- 823
Issuance of 114,134
shares of Class A
Common Stock and
payback of 7,572 shares of
Class B Common Stock
for business combinations 1 -- 1,397 -- 1,398
Issuance of 31,383
shares of Class A
Common Stock
for profit sharing plan 1 -- 449 -- 450
Conversion of 520,084
shares of Class B
Common Stock to
520,084 shares of
Class A Common Stock 5 (5) -- -- --
Conversion of convertible
subordinated debentures
(273,707 shares of Class
A Common Stock) 3 -- 2,751 -- 2,754
Net (loss) -- -- -- (16,325) (16,325)
--------- --------- --------- --------- ---------
Balance at June 30, 1999 $ 143 $ 60 $ 263,882 $ 12,349 $ 276,434
========= ========= ========= ========= =========
See accompanying notes
29
33
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-------------------
1997 1998 1999
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ 11,272 $ 11,331 $ (16,325)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Non-cash portion of nonrecurring charges -- 5,229 1,486
Depreciation and amortization 8,885 16,454 23,512
Provision for doubtful accounts 1,325 2,279 35,568
Deferred income taxes 1,147 47 (3,665)
Cumulative effect of accounting change, net of taxes -- -- 2,921
Non-cash profit sharing expense -- -- 450
Changes in assets and liabilities, net of effects of assets and
liabilities acquired:
Trade accounts receivable (22,932) (55,086) (58,702)
Inventories (3,796) (12,098) (5,759)
Trade accounts payable 2,447 18,040 15,930
Accrued expenses 9,762 1,543 (2,366)
Prepaid expenses and other 162 (2,585) (17,042)
--------- --------- ---------
Net cash provided by (used in) operating
activities 8,272 (14,846) (23,992)
INVESTING ACTIVITIES
Capital expenditures for property, plant
and equipment (9,893) (24,019) (29,400)
Proceeds from sales of assets 247 1,183 300
Purchases of businesses (137,080) (171,083) (653)
Other (3,237) (8,872) (5,264)
--------- --------- ---------
Net cash used in investing activities (149,963) (202,791) (35,017)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 159 13 1,664
Repayment of long-term debt (5,679) (4,135) (1,675)
Borrowings on line-of-credit 34,236 169,299 108,325
Payments on line-of-credit (23,951) (31,784) (41,425)
Proceeds from convertible subordinated debentures -- 97,250 --
Proceeds from issuance of common stock and
exercise of stock options 123,626 20 358
--------- --------- ---------
Net cash provided by financing activities 128,391 230,663 67,247
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (13,300) 13,026 8,238
Cash and cash equivalents at beginning of period 21,460 8,160 21,186
--------- --------- ---------
Cash and cash equivalents at end of period $ 8,160 $ 21,186 $ 29,424
========= ========= =========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 1,116 $ 5,076 $ 20,179
========= ========= =========
Income taxes $ 6,925 $ 8,533 $ 1,792
========= ========= =========
See accompanying notes
30
34
NCS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NCS HealthCare, Inc. (the Company) operates in one primary business
segment providing a broad range of health care services primarily to long-term
care institutions including skilled nursing facilities, assisted living
facilities and other institutional health care settings. The Company purchases
and dispenses prescription and non-prescription pharmaceuticals and provides
client facilities with related management services, automated medical record
keeping, drug therapy evaluation and regulatory assistance. The Company also
provides a broad array of ancillary health care services to complement its core
pharmacy services, including infusion therapy, physical, speech and occupational
therapies, nutrition management and mobile diagnostics.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when products or services are provided to the
customer. A significant portion of the Company's revenues from sales of
pharmaceutical and related products are reimbursable from Medicaid and Medicare
programs. The Company monitors its receivables from these and other third-party
payor programs and reports such revenues at the net realizable amount expected
to be received from third-party payors. Revenue from Medicaid and Medicare
programs accounted for 39% and 3%, respectively, of the Company's net patient
revenue for the year ended June 30, 1999.
Movement of the allowance for doubtful accounts is as follows:
Balance at Provision for Write-offs Balance at
Beginning of Doubtful Net of End of
Period Accounts Acquisitions Recoveries Period
------------- ------------- ------------- ------------ ----------
Fiscal Year
Ended June 30,
1999 $ 18,427 $35,568 $ -- $ (15,115) $ 38,880
1998 13,275 2,279 6,354 (3,481) 18,427
1997 3,629 1,325 9,846 (1,525) 13,275
CASH EQUIVALENTS
The Company considers all investments in highly liquid instruments with
original maturities of three months or less at the date purchased to be cash
equivalents. Investments in cash equivalents are carried at cost which
approximates market value.
INVENTORIES
Inventories for all business units consist primarily of purchased
pharmaceuticals and medical supplies and are stated at the lower of cost or
market. Cost is determined by using the last-in, first-out (LIFO) method for 5%
of the June 30, 1999 net inventory balance and by using the first-in, first-out
(FIFO) method for the remaining 95%. If the FIFO inventory valuation method had
been used, inventories would have been $619 and $764 higher at June 30, 1998 and
1999, respectively.
31
35
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation on
property, plant and equipment is computed using the straight-line method over
the estimated useful lives of the assets which are as follows:
Buildings 30 years
Machinery, equipment and vehicles 5 - 10 years
Computer equipment and software 3 - 5 years
Furniture, fixtures and leasehold improvements 3 - 10 years
Depreciation expense was $4,347, $7,813 and $11,420 for the years ended
June 30, 1997, 1998 and 1999, respectively.
GOODWILL, INTANGIBLES AND OTHER ASSETS
Intangible assets consist primarily of goodwill. Costs in excess of the
fair value of net assets acquired in purchase transactions are classified as
goodwill and amortized using the straight-line method over periods up to 40
years.
The carrying value of goodwill is evaluated if circumstances indicate a
possible impairment in value. If undiscounted cash flows over the remaining
amortization period indicate that goodwill may not be recoverable, the carrying
value of goodwill will be reduced by the estimated shortfall of cash flows on a
discounted basis.
Debt issuance costs are included in other assets and are amortized using
the effective interest method over the life of the related debt.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that apply
in the periods in which the deferred tax asset or liability is expected to be
realized or settled.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 9, the alternative fair value accounting provided under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Under this accounting standard, basic earnings per share
are computed based on the weighted average number of shares of Class A and Class
B shares outstanding during the period. Diluted earnings per share include the
dilutive effect of stock options and subordinated convertible debentures.
32
36
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of all financial instruments of the Company approximates
the amounts presented on the consolidated balance sheet with the exception of
the $100 million convertible subordinated debt. As of June 30, 1999 and 1998,
the fair value of the $100 million convertible subordinated debt was $45
million and $108 million, respectively, based on quoted market prices.
START-UP COSTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities", which requires the Company to expense start-up costs as incurred.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998, does not require restatement of prior periods and is applied
as of the beginning of the fiscal year in which the SOP is first adopted. The
Company early adopted SOP 98-5 effective as of July 1, 1998 and has reported the
initial adoption as a cumulative effect of a change in accounting principle
in the Consolidated Statement of Operations for the year ended June 30, 1999. In
accordance with the adoption requirements of SOP 98-5, the Company has also
restated its previously filed 1999 quarterly results to record the cumulative
effect adjustment in the first quarter and expense in the respective quarterly
results, those costs incurred and previously deferred in the first, second and
third quarters of fiscal 1999 (see Note 14 Quarterly Data, unaudited).
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This statement, which
becomes effective for the Company in fiscal 2000, requires that certain costs of
developing or obtaining software for internal use be capitalized. The
Corporation presently capitalizes the costs required to be capitalized under SOP
98-1 as well as certain conversion related costs that will be required to be
expensed on a prospective basis upon the adoption of SOP 98-1. The Company does
not expect to incur significant amounts of these conversion related costs in
future periods and consequently does not expect the statement to have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
which requires that an enterprise report the change in its equity during the
period from nonowner sources as other comprehensive income. The Company has
evaluated the statement and determined that there are no reportable other
comprehensive income items.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results can differ from these estimates.
SOP 94-6 MATERIAL RISKS AND UNCERTAINTIES
The Company has observed significant industry and customer trends during
the last three months of the fiscal year ended June 30, 1999. These trends
primarily relate to increased bankruptcies and significant financial
difficulties recently experienced by the Company's skilled nursing facilities
primarily as a result of greater than expected adverse impact with regard to
the implementation of the Medicare Prospective Payment System (PPS) under the
Balanced Budget Act of 1997. As a result of these negative trends, the Company
has substantially increased its allowance for doubtful accounts as of June 30,
1999 (see Note 11 Special and Nonrecurring Charges). Should the negative trends
continue in future periods at levels significantly exceeding those currently
estimated by the Company, additional provisions for the accounts receivable
recorded as of June 30, 1999 could be required.
2. LINE OF CREDIT
In June 1998, the Company entered into a four-year, $150 million revolving
credit facility (the credit facility) with a bank, which replaced the existing
$135 million revolving credit facility. Under the credit facility, the Company
also has available a $10 million swing line revolving facility (swing line).
Also in June 1998, the Company entered into a $50 million bridge facility
agreement (bridge facility) due December 31, 1998. Effective July 13, 1998, the
credit facility was amended increasing the total commitment from $150 million to
$245 million and was syndicated to a consortium of 11 banks. Also effective July
13, 1998, the bridge facility was paid with funds under the amended credit
facility and was terminated. The credit facility bears interest at a variable
rate (6.375% at June 30, 1999) 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 swing line bears interest at a money market rate (6.725% at June 30,
1999). At June 30, 1999 the credit facility contains certain debt covenants
including an Interest Coverage Ratio and minimum consolidated net worth
requirements. As of June 30, 1999 the Company had $214,700 outstanding under the
credit facility, and no balance outstanding under the swing line.
Effective August 3, 1999, the credit facility was amended to reduce the
available commitment from $245 million to $235 million, provide all of the
Company assets as security, limit the availability of the facility to use for
working capital only, require Lender approval on future acquisitions, and modify
covenants and the variable interest rate basis. The amended credit facility
bears interest at a variable rate based upon the Eurodollar rate plus a spread
of 150 to 275 basis points, dependent upon the Company's ratio of Total Funded
Debt to EBITDA.
33
37
3. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30,
--------
1998 1999
---- ----
Notes payable to former owners of acquired companies
maturing through July, 2001, at interest rates
ranging from 5% to 8% $3,666 $2,788
2% note payable to Pennsylvania Industrial Development
Authority due in monthly installments through
June, 2010, and secured through an interest 543 505
in a building of the Company
Collateralized lease obligations with interest ranging
from 7% to 16% due monthly through April, 2004 685 1,709
Other 533 414
-------- -------
Total long-term debt 5,427 5,416
Less current portion 1,548 3,480
------- ------
Long-term debt, excluding current portion $3,879 $1,936
====== ======
The aggregate maturities of the long-term debt for each of the five years
subsequent to June 30, 1999 are as follows:
FISCAL YEAR ENDING JUNE 30, AMOUNT
- --------------------------- ------
2000 $3,480
2001 635
2002 447
2003 249
2004 136
Thereafter 469
------
$5,416
======
34
38
4. INCOME TAX EXPENSE
Income tax expense (benefit), including the income tax benefit related to
the cumulative effect of accounting change, for each of the three years ended
June 30, 1999 consists of:
1997 1998 1999
---- ---- ----
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ----- ------- -------- -----
Federal $5,614 $ 887 $6,501 $6,792 $ 55 $6,847 $(3,994) $(3,218) $(7,212)
State and local 1,894 260 2,154 2,175 (8) 2,167 (1,929) (447) (2,376)
------ ------- ------ ------ ------ ------ ------- ------- -------
$7,508 $ 1,147 $8,655 $8,967 $ 47 $9,014 $(5,923) $(3,665) $(9,588)
====== ======= ====== ====== ====== ====== ======= ======= =======
Reconciliations of income taxes at the United States Federal statutory
rate to the effective income tax rate for the three years ended June 30, 1999
are as follows:
1997 1998 1999
---- ---- ----
Income taxes at the United States statutory rate $6,974 $7,121 $(9,070)
State and local income taxes 1,231 1,414 (1,544)
Goodwill amortization 521 604 640
Tax exempt interest (13) -- --
Other - net (58) (125) 386
------ ------ -------
Total provision for income tax expense (benefit) 8,655 9,014 (9,588)
Income tax benefit from cumulative effect of accounting change -- -- 1,948
------ ------ -----
Net provision excluding benefit related to cumulative effect of accounting change $8,655 $9,014 $(7,640)
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows:
JUNE 30,
--------
1998 1999
---- ----
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 6,872 $ 15,440
Accrued expenses and other 5,141 6,090
Loss carryforwards 2,064 1,963
Depreciable assets and other (551) (3,122)
Intangibles (12,195) (18,678)
--------- ---------
Net deferred tax assets $ 1,331 $ 1,693
========= =========
At June 30, 1999 the Company has net operating loss carryforwards of $4.9
million for income tax purposes that expire in years 2010 through 2012. U.S. tax
laws limit the annual utilization of tax loss carryforwards of acquired
entities.
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5. OPERATING LEASES
The Company is obligated under operating leases primarily for office
facilities and equipment. Future minimum lease payments under noncancelable
operating leases as of June 30, 1999 are as follows:
FISCAL YEAR ENDING JUNE 30, AMOUNT
- --------------------------- ------
2000 $5,514
2001 3,987
2002 3,122
2003 2,144
2004 1,339
Thereafter 2,133
-------
$18,239
=======
Total rent expense under all operating leases for the years ended June 30,
1997, 1998 and 1999 was $2,338, $6,577 and $9,214, respectively.
6. PROFIT-SHARING PLAN
The Company maintains a profit sharing plan with an Internal Revenue Code
Section 401(k) feature covering substantially all of its employees. Under the
terms of the plan, the Company will match up to 20% of the first 10% of eligible
employee contributions. Effective January 1, 1999 the Company amended the profit
sharing plan to provide for the Company match to be contributed as the Company's
common stock.
The Company's aggregate contributions to the plan and related expense were
$437, $740 and $1,035 for the years ended June 30, 1997, 1998 and 1999,
respectively.
7. RELATED PARTY TRANSACTIONS
The Company leases 16 of its facilities from entities affiliated with
former owners of certain businesses acquired, who are employees of the Company.
The buildings are used for operations of the Company. Rent expense of $1,004,
$1,128 and $1,340 was incurred under these leasing arrangements in the years
ended June 30, 1997, 1998 and 1999, respectively.
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40
8. STOCKHOLDER'S EQUITY
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 (net of underwriting discounts and expenses). A portion
of the net proceeds from the stock issuance was used to repay approximately
$7,000 of outstanding indebtedness under short-term borrowings.
Holders of Class A Common Stock and holders of Class B Common Stock are
entitled to one and ten votes, respectively, in corporate matters requiring
approval of the shareholders of the Company. No dividend may be declared or paid
on the Class B Common Stock unless a dividend of equal or greater amount is
declared or paid on the Class A Common Stock.
On August 3, 1999 the Company amended its line of credit agreement
entering into several restrictive covenants including a restriction on
declaration and payment of cash dividends to shareholders.
During fiscal 1995, the Company issued $1,900 of 8% convertible
subordinated debentures (1995 debentures) due 1997. The 1995 debentures were
converted into 188,952 shares of Class A Common Stock during fiscal 1996. During
fiscal 1996, the Company issued $7,000 of 8% and $925 of 7% convertible
subordinated debentures due 1998 and $5,000 of 10% convertible subordinated
debentures due 1996 (collectively, 1996 debentures). During fiscal 1996, $6,375
of the 1996 debentures were converted into 493,357 shares of Class A Common
Stock. During fiscal 1997, $1,736 of the 1996 debentures were converted into
172,569 shares of Class A Common Stock. During fiscal 1998, $2,061 of the 1996
debentures were converted into 204,880 shares of Class A Common Stock. The
remaining $2,754 of the 1996 debentures were converted into 273,707 shares of
Class A Common Stock during fiscal 1999.
On August 13, 1997, the Company issued $100,000 of convertible
subordinated debentures (1998 debentures) due 2004. Net proceeds to the Company
were approximately $97,250, net of underwriting discounts and expenses. The 1998
debentures carry an interest rate of 5 3/4% and are convertible into shares of
Class A Common Stock at any time prior to maturity at $32.70 per share. A
portion of the proceeds from the debenture offering was used to repay
approximately $21,000 of outstanding indebtedness under short-term borrowings.
The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. Each of the Company's wholly-owned
subsidiaries has unconditionally guaranteed, jointly and severally, the
Company's payment obligations under the 1998 debentures. Accordingly, summarized
financial information regarding the guarantor subsidiaries has not been
presented because management of the Company believes that such information would
not be meaningful to investors.
During fiscal 1998, notes payable due to former owners of $3,884 were
exchanged for 173,499 shares of Class A Common Stock.
37
41
9. STOCK OPTIONS
During the period from 1987 through 1995, the Company granted stock
options to certain directors and key employees which provide for the purchase of
1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71
to $6.19 per share, which represented fair market values on the dates the grants
were made. For options granted in 1987 with a tax-offset cash bonus feature, the
Company recognized compensation expense of $175 for the year ended June 30,
1996. During the year ended June 30, 1996, options were exercised for the
purchase of 890,333 shares of Class B Common Stock.
During fiscal 1995, the Company adopted an Employee Stock Purchase and
Option Plan which authorized 100,000 shares of Class A Common Stock for awards
of stock options to certain key employees. During fiscal 1995 and 1996 the
Company granted 11,520 and 7,458 options, respectively, at an exercise price of
$6.19 and $7.33 per share, respectively, under the provisions of this plan.
These exercise prices represented fair market values on the dates the grants
were made.
In January 1996, the Company adopted a Long Term Incentive Plan (the Plan)
to provide up to 700,000 shares of Class A Common Stock for awards of incentive
and nonqualified stock options to officers and key employees of the Company.
During fiscal 1996 the Company granted 56,500 nonqualified stock options and
27,540 incentive stock options, all at $16.50 per share, the price at the
initial public offering. The nonqualified stock options have a term of five
years and become exercisable in thirds on February 1, 1998, 1999 and 2000. The
incentive stock options have a term of six years and become exercisable in
fifths of each year on February 1, 1997, 1998, 1999, 2000 and 2001. During
fiscal 1997 and 1999 the Company granted 301,250 and 345,250 nonqualified stock
options, respectively, at an exercise price of $20.00 and $15.00 per share,
respectively, the market values of the stock on the dates of the grant. The
fiscal 1997 nonqualified stock options have a term of five years and become
exercisable in thirds on April 1, 1999, 2000 and 2001. The fiscal 1999 options
have a term of five years and become exercisable in thirds on November 1, 2000,
2001, and 2002.
In October 1998, the Company adopted the 1998 Performance Plan
(the Performance Plan) to provide up to 1,200,000 shares of Class A Common Stock
for awards of incentive and nonqualified stock options to directors, officers
and key employees of the Company. During fiscal 1999, the Company granted
85,000 nonqualified stock options at an exercise price of $18.50 per share,
the market value of the stock on the date of the grant. These nonqualified
stock options have a term of five years and become exercisable in thirds on
January 1, 2001, 2002 and 2003.
The Company's stock option activity and related information for the years
ended June 30 is summarized as follows:
1997 1998 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at
beginning of
year 267,575 $ 8.84 566,825 $ 14.74 535,188 $14.64
Granted 301,250 20.00 - -- 430,250 15.69
Exercised -- -- (2,637) 7.49 (73,237) 4.87
Forfeited (2,000) 16.50 (29,000) 19.64 (45,507) 18.63
------- -------- -------- ------- ------- ------
Outstanding at
end of year 566,825 $ 14.74 535,188 $14.64 846,694 $15.82
======= ======== ======== ======= ======= ======
Exercisable at
end of year 141,658 185,604 237,872
======= ======= =======
The weighted average fair value of options granted during fiscal 1997 and
1999 was $8.89 and $7.65 per share, respectively. Exercise prices for options
outstanding as of June 30, 1999 ranged from $7.33 to $20.00 for the options
granted in fiscal 1996, 1997, and 1998 and are $6.19 for the options granted
during the period from 1987 through 1995. The weighted-average remaining
contractual life of those options is 3.6 years for the options granted during
the fiscal years 1996, 1997, and 1999 and 5.2 years for the options granted
during the fiscal years 1987 through 1995 and 1999.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a
volatility factor of the expected market price of the Company's Class A Common
Stock ranging from .482 to .520; and a weighted-average expected option life
ranging from 4 to 4.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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42
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the three years ended June 30, 1999 is as follows (in
thousands except for earnings per share information):
1997 1998 1999
---- ---- ----
Net income (loss) - basic $11,120 $10,876 $(17,029)
Net income (loss) - diluted $11,400 $10,876 $(17,029)
Earnings per share - basic $ 0.70 $ 0.57 $ (0.84)
Earnings per share - diluted $ 0.68 $ 0.56 $ (0.84)
10. ACQUISITIONS
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 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.
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 Look Drug Store, Inc., HLF Adult Home Pharmacy, 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.
Certain of the Company's acquistion agreements provide for contingent
purchase price arrangements under which the purchase price paid may be
subsequently increased upon the achievement of specific operating performance
targets during post acquisition periods. The additional purchase price, payable
in cash or Company stock is recorded, if earned, upon resolution of the
contingent factors. Depending on the outcome of various contingent factors, the
purchase price contingently payable could have a material effect on the
Company's financial condition and results of operations.
There were no significant acquisitions during the fiscal year ended
June 30,1999. The following table summarizes the aggregate purchase price for
all businesses acquired during the fiscal years ended:
YEAR ENDED JUNE 30,
-------------------
1997 1998
---- ----
Cash $137,080 $171,083
Debt 3,804 959
Class A Common Stock 25,492 16,812
-------- --------
Total $166,376 $188,854
======== ========
The results of operations of all businesses acquired have been included in
the consolidated financial statements of the Company from the dates of the
respective acquisitions. All of the businesses acquired provide substantially
similar services as the existing company.
39
43
Unaudited pro forma data as though the Company had completed its secondary
public offering and had purchased all businesses at the beginning of the fiscal
year ended June 30, 1998 is set forth below:
1998*
-----
Revenues $608,186
Net income $ 10,433
Earnings per share - basic $ 0.53
Earnings per share - diluted $ 0.52
* Includes a one time nonrecurring charge of $8,862 ($5,317 net of tax).
(see Note 11)
The pro forma information does not intend to be indicative of operating
results which would have occurred had the acquisitions been made at the
beginning of the respective periods or of results which 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.
11. SPECIAL AND NONRECURRING CHARGES
During the fourth quarter of fiscal 1999, the Company recorded special and
nonrecurring charges of $40.5 million ($24.3 million net of tax). A special
charge of $32.4 million before tax was recorded to increase the allowance for
doubtful accounts, and nonrecurring charges of $8.1 million before tax were
recorded in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers primarily
as a result of the Medicare Prospective Payment System implementation. The
acquisition items encountered pertain to specific accounts receivable
collectibility issues identified relating to previous utilization of "legacy"
systems, and other nonrecurring issues which have resulted in potentially
uncollectible accounts receivable.
During the fourth quarter of fiscal 1999, the Company adopted a new plan
of restructuring to consolidate certain pharmacy sites in similar geographies.
The plan is a continuation of the plan adopted in fiscal 1998 to combine
pharmacies in close proximity in order to improve operating efficiencies. As a
result of the new exit plan, 4 additional pharmacy sites will be consolidated
into either a new or existing location. During the year ended June 30, 1999, the
Company recorded nonrecurring charges of $4.7 million related to the new site
consolidations and additional costs incurred on the site consolidations
announced in the prior year. These costs consist of $2.1 million related to
employee severance and other compensation related expenses, $0.6 million related
to lease termination costs and $2.0 million related to asset impairments and
other miscellaneous costs. As of June 30, 1999, three site consolidations had
been completed with the remainder expected to be completed by the end of fiscal
2000.
40
44
The remaining $3.4 million of the nonrecurring charge primarily relates to
severance incurred during the fourth quarter associated with the Company's
expense reduction initiatives, additional acquisition related and other
miscellaneous expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees.
Details of the fourth quarter fiscal 1999 special and nonrecurring charge are as
follows:
Nonrecurring Reserve
Description Cash/Non-cash Charge Activity At 6/30/99
----------- ------------- ------------ -------- ----------
Site Consolidations
Severance/compensation related Cash $ 2,100 $ (1,500) $ 600
Lease terminations Cash 600 (100) 500
Asset impairments Non-cash 1,500 (1,500) --
Other Cash 500 (500) --
Special increase to allowance Non-cash 32,400 (32,400) --
Other Cash 3,400 (2,700) 700
--------- -------- ---------
Total $ 40,500 $(38,700) $ 1,800
========= ======== =========
During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8.9 million ($5.3 million net of tax) related to
restructuring and other nonrecurring expenses in connection with the
implementation and execution of strategic restructuring and consolidation
initiatives of certain operations and other nonrecurring items. The components
of the nonrecurring charge are described below.
During the fourth quarter of fiscal 1998, the Company adopted a formal
plan of restructuring to consolidate certain pharmacy sites in similar
geographies. The plan combined pharmacies in close proximity in order to
improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites
will be consolidated into either a new or existing location. The Company
recorded nonrecurring charges of $5,300 related to the site consolidations which
consisted of $500 related to employee severance costs in relation to the
termination of 149 employees, $700 related to lease termination costs and $4,100
related to asset impairments and other miscellaneous costs. As of June 30, 1999,
fourteen site consolidations had been completed with the remainder expected to
be completed by the end of fiscal 2000. All employee terminations under the plan
have occurred as of June 30, 1999.
Approximately $900 of the nonrecurring charge relates to the buyout of
existing employment agreements with the prior owners of certain acquired
businesses.
In June 1998, the Company's new credit facility and bridge facility
replaced the existing $135 million revolving credit facility. The new credit
facility and bridge facility were replaced in July 1998 by a $245 million
revolving credit facility (see Note 2). Approximately $1.3 million of the
nonrecurring charge relates to the write-off of deferred financing fees on the
$135 million revolving credit facility and certain financing fees associated
with the new credit facility and bridge facility.
The remaining $1.4 million of the nonrecurring charge primarily relates to
additional acquisition related expenses.
41
45
The Company anticipates that the activities related to the costs included
in the reserve as of June 30, 1999 will be completed in fiscal 2000.
Details of the fourth quarter fiscal 1998 nonrecurring charge and activity
through June 30, 1999 are as follows:
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 6/30/99
----------- ------------- ------------- -------- ---------- -------- ----------
Site Consolidations
Severance packages Cash $ 500 $ -- $ 500 $ (500) $ --
Lease terminations Cash 700 -- 700 (400) 300
Asset impairments Non-cash 3,500 (3,500) -- -- --
Other Cash 600 (400) 200 (200) --
Buyout of employment agreements Cash 900 (200) 700 (600) 100
Write-off financing fees Non-cash 1,300 (1,300) -- -- --
Other
Cash 1,000 (800) 200 (100) 100
Non-cash 400 (400) -- -- --
------ ------- -------- ------- -------
Total $8,900 $(6,600) $ 2,300 $(1,800) $ 500
====== ======= ======== ======= =======
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12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
1997 1998 1999
---- ---- ----
Numerator:
Numerator for basic earnings per share - net income $11,272 $11,331 $ (16,325)
Effect of dilutive securities:
Convertible debentures 280 -- --
------- ------- ----------
Numerator for diluted earnings per share $11,552 $11,331 $ (16,325)
======= ======= ==========
Denominator:
Denominator for basic earnings per share -
weighted average common shares 15,991 19,100 20,200
Effect of dilutive securities:
Stock options 207 272 --
Convertible debentures 645 -- --
------- ------- ----------
Dilutive potential common shares 852 272 --
------- ------- ----------
Denominator for diluted earnings per share 16,843 19,372 20,200
======= ======= ==========
Basic earnings per share:
Income (loss) before accounting change $ 0.70 $ 0.59 $ (0.66)
Cumulative effect of change in accounting principle -- -- (0.15)
------- ------- ----------
Net income (loss) per share $ 0.70 $ 0.59 $ (0.81)
======= ======= ==========
Diluted earnings per share:
Income (loss) before accounting change $ 0.69 $ 0.58 $ (0.66)
Cumulative effect of change in accounting principle -- -- (0.15)
------- ------- ----------
Net income (loss) per share $ 0.69 $ 0.58 $ (0.81)
======= ======= ==========
At June 30, 1999 the Company has $100,000 of convertible subordinated debentures
outstanding that are convertible into 3,058,104 shares of Class A Common Stock
and 846,694 of 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. The Company had $102,753 of convertible subordinated
debentures outstanding at June 30, 1998 that are convertible into 3,331,937
shares of Class A Common Stock that were not included in the computation of
diluted earnings per share as their effect would be antidilutive.
13. CONTINGENCIES
The Company's facility in Indianapolis, Indiana has been the subject of
an investigation by federal authorities, and the Company has engaged in
discussions with representatives of the U.S. Attorney's office concerning the
alleged violations of federal law at that facility. It is possible that the
imposition of significant times or other remedies in connection with the Indiana
matter could have a material effect on the Company's financial condition and
results of operations.
The Company is involved from time to time in other litigation and
regulatory investigations on various matters relating to the conduct of its
business and acquisition related events. The Company is unable to predict the
ultimate outcome of these other various current litigation and regulatory
investigation matters. The Company intends to vigorously defend actions
currently pending. However, if the Company is unsuccessful in defending such
matters and insurance is unavailable or insufficient, the resolution of certain
lawsuits and regulatory investigations could have a material effect on the
Company's consolidated financial position, results of operations, and cash
flows.
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14. QUARTERLY DATA (UNAUDITED)
Selected quarterly data for the years ended June 30, 1998 and 1999:
YEAR ENDED JUNE 30, 1998
------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Revenues $ 103,711 $ 114,508 $ 137,669 $ 153,177 $ 509,064
Gross profit 26,226 29,039 34,857 38,725 128,847
Nonrecurring charge (b) -- -- -- 8,862 8,862
Operating income 6,873 7,810 9,467 1,940 26,090
Net income (loss) $ 3,632 $ 4,022 $ 4,365 $ (689) $ 11,331
Earnings per share - basic (a) $ 0.20 $ 0.21 $ 0.22 $ (0.03) $ 0.59
Earnings per share - diluted (a) $ 0.20 $ 0.21 $ 0.22 $ (0.03) $ 0.58
YEAR ENDED JUNE 30, 1999 (AS ORIGINALLY REPORTED)
-------------------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------- ------- -------
Revenues $172,846 $178,030 $184,611
Gross profit 43,856 45,400 47,444
Operating income (c) 12,812 13,594 14,629
Net income $ 4,750 $ 5,343 $ 5,874
Earnings per share - basic (a) $ 0.24 $ 0.27 $ 0.29
Earnings per share - diluted (a) $ 0.24 $ 0.26 $ 0.29
YEAR ENDED JUNE 30, 1999 (AS RESTATED)
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Revenues $ 172,846 $ 178,030 $ 184,611 $ 182,338 $ 717,825
Gross profit 43,856 45,400 47,444 40,578 177,278
Special charge to increase allowance
for doubtful accounts (d) -- -- -- 32,384 32,384
Nonrecurring charge (d) -- -- -- 8,115 8,115
Operating income (loss) (c) 11,055 11,111 11,354 (36,263) (2,743)
Cumulative effect of accounting change (c) (2,921) -- -- -- (2,921)
Net income (loss) $ 827 $ 3,915 $ 3,959 $ (25,026) $ (16,325)
Earnings per share - basic (a) $ 0.04 $ 0.19 $ 0.20 $ (1.23) $ (0.81)
Earnings per share - diluted (a) $ 0.04 $ 0.19 $ 0.20 $ (1.23) $ (0.81)
(a) Earnings per share is calculated independently for each quarter and the sum
of the quarters may not necessarily be equal to the full year earnings per
share amount.
(b) A nonrecurring charge of $8,862 before taxes and $5,317 after taxes, or
$0.28 per basic share and $0.27 per diluted share, was recorded during the
fourth quarter of 1998 related to restructuring and other nonrecurring
expenses in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items. For the year ended June 30, 1998, net income, excluding
this nonrecurring charge, was $16,648 or $0.87 per basic share and $0.86
per diluted share.
(c) Selling, general and administrative expenses as originally reported for the
first, second and third quarters of 1999 include pre-tax costs of $1,757,
$2,483 and $3,275, respectively, that would have been capitalized prior to
the adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities."
The $2,921 cumulative effect of accounting change represents start-up
costs, net of tax, that were previously capitalized as of June 30, 1998.
(d) Special and nonrecurring charges of $40,499 before taxes and $24,299 after
taxes, or $1.20 for both basic and diluted share, were recorded during the
fourth quarter of 1999. The special charges consists of an increase to the
allowance for doubtful accounts, and other nonrecurring charges in
association with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items. For the year ended June 30, 1999, net income, excluding
these nonrecurring charges and the effects of adopting SOP 98-5, was
$17,909 or $0.88 per basic and diluted share.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information regarding Directors appearing under the caption "Election
of Directors" in the Company's Definitive Proxy Statement to be used in
connection with the Annual Meeting of Stockholders to be held in 1999 (the "1999
Proxy Statement") is incorporated herein by reference, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A. Information required by this item as to the executive officers of the
Company is included as Item 4A of Part I of this Annual Report on Form 10-K as
permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information
required by Item 405 of Regulation S-K is set forth in the 1999 Proxy Statement
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to "Executive Compensation" in the 1999 Proxy Statement, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to "Stock Ownership of Principal Holders and Management" in the 1999 Proxy
Statement, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable the information required by this item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the 1999 Proxy Statement,
since such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year
pursuant to Regulation 14A.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
The 1999 Consolidated Financial Statements of NCS HealthCare,
Inc. are included in Part II, Item 8.
2. Financial Statement Schedules. All financial statement
schedules for the Company and its subsidiaries have been
included in the consolidated financial statements or the
related footnotes, or they are either inapplicable or not
required.
3. Exhibits
See the Index to Exhibits at page E-1 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
46
50
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NCS HEALTHCARE, INC.
By: /s/ JON H. OUTCALT
Jon H. Outcalt
Chairman of the Board of Directors
Date: September 28, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title
/s/ JON H. OUTCALT Chairman of the Board of Directors
Jon H. Outcalt
KEVIN B. SHAW President, Chief Executive Officer and Director
Kevin B. Shaw (Principal Executive Officer)
GERALD D. STETHEM Chief Financial Officer (Principal Financial
Gerald D. Stethem and Accounting Officer)
PHYLLIS K. WILSON Director
Phyllis K. Wilson
Director
A. Malachi Mixon III
Director
Boake A. Sells
Director
Richard L. Osborne
Date: September 28, 1999
47
51
INDEX OF EXHIBITS
Sequential
Exhibit No. Description Page
- ----------- ----------- ----
2.1 Asset Purchase Agreement, dated as of July 31, 1996, by and
among the Company, NCS HealthCare of Oregon, Inc., IPAC
Pharmacy, Inc. and Prestige Care, Inc. (A)
2.2 Agreement of Merger, dated August 13, 1996, by and among the
Company, Northside Pharmacy, Inc., Willis V. Smith, The
Willis Vernon Smith Unitrust, dated as of August 8, 1996,
Charles Oliver and NCS HealthCare of Oklahoma, Inc. (B)
2.3 Asset Purchase Agreement, dated August 13, 1996, by an among
NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation,
Med-Equip Homecare Equipment Service, Inc., an Oklahoma
corporation, Gail Benjamin, Willis V. Smith and John Tarr (B)
2.4 Asset Purchase Agreement, dated August 13, 1996, by and
among Thrifty Medical of Tulsa, L.L.C., an Oklahoma limited
liability company, Willis V. Smith, Charles Oliver and NCS
HealthCare of Oklahoma, Inc., an Oklahoma corporation (B)
2.5 Stock Purchase Agreement, dated August 13, 1996, by and among
the Willis Vernon Smith Unitrust Dated August 8, 1996,
Charles Oliver, Willis V. Smith and the Registrant (B)
2.6 Asset Purchase Agreement, dated December 29, 1997, by and
among the Company, NCS HealthCare of New York, Inc., Thrift
Drug, Inc., Fay's Incorporated and Eckerd Corporation (C)
2.7 Asset Purchase Agreement, dated April 10, 1998, among the
Company, NCS Acquisition Sub, Inc., Walgreens Advance Care,
Inc. and Walgreen Co. Incorporated and Eckerd Corporation (D)
3.1 Amended and Restated Certificate of Incorporation of the
Company (E)
3.2 Amended By-Laws of the Company (E)
4.1 Specimen certificate of the Company's Class A Common Stock (E)
4.2 Specimen certificate of the Company's Class B Common Stock (E)
4.3 Form of 53/4% Convertible Subordinated Debentures due 2004 (F)
4.4 Indenture, dated August 13, 1997, between the Company and National
City Bank, as Trustee (F)
* 10.1 Deferred Compensation Agreement, dated as of January 1, 1994,
by and between Modern Pharmacy Consultants, Inc. and
Phyllis K. Wilson (E)
* 10.2 1996 Long Term Incentive Plan (C)
* 10.3 Aberdeen Group, Inc. 1995 Amended and Restated Employee Stock
Purchase and Option Plan (C)
E-1
52
Sequential
Exhibit No. Description Page
- ----------- ----------- ----
* 10.4 Amended and Restated Stock Option Agreement, dated as of
December 3, 1993, by and between Aberdeen Group, Inc. and
Richard L. Osborne (E)
* 10.5 Amended and Restated Stock Option Agreement, dated as of
December 29, 1994, by and between Aberdeen Group, Inc. and
Jeffrey R. Steinhilber (E)
10.6 Lease Agreement, dated as of July 16, 1990, by and among
Crow-O'Brien-Woodhouse I Limited Partnership, Aberdeen Group,
Inc. and Van Cleef Properties, Inc. (E)
10.7 Lease Agreement, dated as of January 1, 1996, by and between
PR Realty and Nursing Center Services, Inc. (E)
10.8 Industrial Lease Agreement dated as of May 28, 1993 by and
between Industrial Developments International, Inc. and
Corinthian Pharmaceutical Systems, Inc. (E)
10.9 Lease Agreement, dated as of January 17, 1995, by and among
Calvin Hunsicker, Brenda Hunsicker and Aberdeen Group, Inc. (E)
10.10 Form of Indemnity Agreement by and between the Company and
each of its Directors and Executive Officers (E)
*10.11 Employment and Noncompetition Agreement, dated as of
September 1, 1996, by and between Aberdeen Group, Inc. and
William B. Bryum (E)
10.12 Credit Agreement, dated as of June 1, 1998, among the Company, (G)
the lending institutions named therein and KeyBank National
Association, as the Swing Line Lender, Letter of Credit Issuer
and Administrative Agent
10.13 Letter Agreement, dated June 1, 1998, between the Company (G)
and KeyBank national Association regarding Capital Markets
Bridge Facility
10.14 Amendment No. 1, dated as of July 13, 1998, to the Credit (G)
Agreement, dated as of June 1, 1998, among the Company, the
lending institutions named therein and KeyBank National
Association, as the Swing Line Lender, Letter of Credit Issuer
and Administrative Agent
10.15 Amendment No. 2, dated March 3, 1999, to the Credit Agreement (H)
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
10.16 Amendment No. 3, dated August 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
10.17 Security Agreement, dated as of August 3, 1999, among the
Company, its subsidiaries and KeyBank National Association
* 10.18 Separation Agreement, effective as of June 11, 1999, between
Jeffery R. Steinhilber and the Company
E-2
53
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(A) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report in Form 8-K, dated August 1, 1996 (File No.
0-027602).
(B) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated August 15, 1996 (File No.
0- 027602).
(C) Incorporated herein by reference to the appropriate exhibit to the
Company's Current report on Form 8-K, dated January 30, 1998.
(D) Incorporated herein by reference to the appropriate exhibit to the
Company's Current report on Form 8-K, dated June 1, 1998.
(E) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-1 declared effective on
February 13, 1996 (Reg. No. 33-80455).
(F) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-3, as amended (Reg. No.
333-35551).
(G) Incorporated herein by reference to the appropriate exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
(H) Incorporated herein by reference to the appropriate exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999.
E-3