-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DGGnF6KGdkQNFN0rRLWWprCUSgdaD+DbjP993ZsHH/GO4urjfubl1BN67UMCd3N/ lnQnqOkCJ4rmnhobrjOWFQ== 0000950152-99-001140.txt : 19990217 0000950152-99-001140.hdr.sgml : 19990217 ACCESSION NUMBER: 0000950152-99-001140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCS HEALTHCARE INC CENTRAL INDEX KEY: 0001004990 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 341816187 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27602 FILM NUMBER: 99542359 BUSINESS ADDRESS: STREET 1: 3201 ENTERPRISE PKWY STREET 2: STE 2200 CITY: BEACHWOOD STATE: OH ZIP: 44122 BUSINESS PHONE: 2165143350 MAIL ADDRESS: STREET 1: 1400 MCDONALD INVESTMENT CENTER STREET 2: 800 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 10-Q 1 NCS HEALTHCARE, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1998 Commission File Number- 0-27602 ------- NCS HealthCare, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware No. 34-1816187 - -------------------------------- -------------------------------------- (State or other jurisdiction of (IRS employer identification number) incorporation or organization) 3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122 - --------------------------------------------------------- (Address of principal executive offices and zip code) (216) 378-6800 - ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirement for the past 90 days. Yes X No __ --- Common Stock Outstanding - ------------------------ Indicate the number of shares outstanding of each of the Issuers' classes of common stock, as of the latest practical date. Class A Common Stock, $ .01 par value -- 14,094,634 shares as of February 11, 1999 Class B Common Stock, $ .01 par value -- 6,155,151 shares as of February 11, 1999 1 2 NCS HEALTHCARE, INC. AND SUBSIDIARIES INDEX Page Part I. Financial Information: Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets- December 31, 1998 and June 30, 1998 3 Condensed Consolidated Statements of Income- Three and six months ended- December 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows- Six months ended- December 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements - December 31, 1998 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Part II. Other Information: Item 2. Changes in Securities and Use of Proceeds 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION)
(Unaudited) (Note A) December 31, June 30, ASSETS 1998 1998 -------- -------- Current Assets: Cash and cash equivalents $ 21,341 $ 21,186 Accounts receivable, less allowances 179,868 142,325 Inventories 50,545 43,784 Other 16,019 14,224 -------- -------- Total current assets 267,773 221,519 Property and equipment, at cost net of accumulated depreciation and amortization 50,958 43,593 Goodwill, less accumulated amortization 339,910 340,209 Other assets 21,148 18,469 -------- -------- Total assets $679,789 $623,790 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 35,213 $ 34,131 Accrued expenses and other liabilities 40,335 38,026 -------- -------- Total current liabilities 75,548 72,157 Line of credit 190,500 147,800 Long-term debt, excluding current portion 2,816 3,879 Convertible subordinated debentures 100,000 102,753 Other 9,561 9,867 Stockholders' Equity: Preferred stock, par value $ .01 per share, 1,000,000 shares authorized; none issued - - Common stock, par value $ .01 per share: Class A - 50,000,000 shares authorized; 14,043,154 and 13,334,639 shares issued and outstanding at December 31, 1998 and June 30, 1998, respectively 140 133 Class B - 20,000,000 shares authorized; 6,206,631 and 6,463,244 shares issued and outstanding at December 31, 1998 and June 30, 1998, respectively 62 65 Paid-in capital 262,394 258,462 Retained earnings 38,768 28,674 -------- -------- Total stockholders' equity 301,364 287,334 -------- -------- Total liabilities and stockholders' equity $679,789 $623,790 ======== ========
Note A: The balance sheet at June 30, 1998 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 4 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------------- -------------------------- 1998 1997 1998 1997 -------------------------- -------------------------- Revenues $178,030 $114,508 $350,876 $218,219 Cost of revenues 132,630 85,469 261,620 162,954 -------------------------- -------------------------- Gross profit 45,400 29,039 89,256 55,265 Selling, general and administrative expenses 31,806 21,229 62,850 40,582 -------------------------- -------------------------- Operating income 13,594 7,810 26,406 14,683 Interest expense, net 4,302 754 8,779 1,255 -------------------------- -------------------------- Income before income taxes 9,292 7,056 17,627 13,428 Income tax expense 3,949 3,034 7,533 5,774 -------------------------- -------------------------- Net income $ 5,343 $ 4,022 $ 10,094 $ 7,654 ========================== ========================== Net income per share - basic $ 0.27 $ 0.21 $ 0.50 $ 0.41 ========================== ========================== Net income per share - diluted $ 0.26 $ 0.21 $ 0.50 $ 0.41 ========================== ========================== Shares used in the computation - basic 20,162 18,900 20,138 18,639 Shares used in the computation - diluted 20,466 19,113 20,382 18,887
See notes to condensed consolidated financial statements. 4 5 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended December 31, --------------------------- 1998 1997 --------------------------- OPERATING ACTIVITIES Net income $ 10,094 $ 7,654 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 11,415 7,009 Changes in assets and liabilities, net of effects of assets and liabilities acquired: Accounts receivable, net (39,410) (22,365) Accrued expenses and other liabilities 3,216 (1,053) Other, net (8,556) (8,022) --------------------------- Net cash used in operating activities (23,241) (16,777) --------------------------- INVESTING ACTIVITIES Purchases of businesses (425) (11,607) Capital expenditures for property and equipment, net (12,758) (9,582) Other (5,569) (4,785) --------------------------- Net cash used in investing activities (18,752) (25,974) --------------------------- FINANCING ACTIVITIES Proceeds from convertible subordinated debentures, net - 97,250 Borrowings on line-of-credit 42,700 21,499 Payments on line-of-credit - (31,784) Repayment of long-term debt (961) (3,575) Proceeds from issuance of long-term debt 73 213 Proceeds from exercise of stock options 336 - --------------------------- Net cash provided by financing activities 42,148 83,603 --------------------------- Net increase in cash and cash equivalents 155 40,852 Cash and cash equivalents at beginning of period 21,186 8,160 --------------------------- Cash and cash equivalents at end of period $ 21,341 $ 49,012 ===========================
See notes to condensed consolidated financial statements. 5 6 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended December 31, 1998 are not necessarily indicative of the results that may be expected for the year ending June 30, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June 30, 1998 (File No. 000-27602). 2. On August 13, 1997, the Company issued $100,000,000 of convertible subordinated debentures (debentures) due 2004. Net proceeds to the Company were approximately $97,250,000, net of underwriting discounts and expenses. The debentures carry an interest rate of 5 3/4% and are convertible into shares of Class A Common Stock. A portion of the proceeds from the debenture offering was used to repay approximately $21,000,000 of outstanding indebtedness under short-term borrowings. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. Each of the Company's wholly- owned subsidiaries has unconditionally guaranteed, jointly and severally, the Company's payment obligations under the debentures. Accordingly, summarized financial information regarding the guarantor subsidiaries has not been presented because management of the Company believes that such information would not be meaningful to investors. In July 1998, $2,753,000 of 8% convertible subordinated debentures due in fiscal 1999 were converted into 273,707 shares of Class A Common Stock. During July 1998, the Company amended its credit facility increasing the total commitment from $150,000,000 to $245,000,000. 3. During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring charge of $8,900,000 primarily related to: 1) the adoption of a formal plan of restructuring to consolidate certain pharmacy sites in similar geographies; 2) the buyout of existing employment agreements with the prior owners of certain acquired businesses; 3) the write-off of certain financing fees; and 4) additional acquisition related expenses. The Company has adopted a formal plan of restructuring that will combine pharmacies in close geographical proximity in order to improve operating efficiencies. As a result of the plan, 17 pharmacy sites will be consolidated into either new or existing locations and an estimated total of 149 employees will be terminated. As of December 31, 1998, nine site consolidations were completed, with the remainder expected to be completed by the end of fiscal 1999. 6 7 Details of the nonrecurring charge are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 12/31/98 ----------- ------------- -------------- -------- ---------- -------- ----------- (In millions) Site Consolidations Severance packages Cash $ .5 $ - $ .5 $(.1) $ .4 Lease terminations Cash .7 -- .7 (.2) .5 Asset impairments Non-cash 3.5 (3.5) -- -- -- Other Cash .6 (.4) .2 -- .2 Buyout of employment agreements Cash .9 (.2) .7 (.5) .2 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 $(.9) $1.4 ====== ===== ==== === ====
4. Significant acquisitions completed by the Company during fiscal 1998 include Cheshire LTC Pharmacy, Inc. in Cheshire, Connecticut, PharmaSource Healthcare, Inc. in Norcross, Georgia, Marco & Company, LLC in Billings, Montana, MedStar Pharmacy, Inc. in Benson, North Carolina, Greenwood Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation based in Sharon, Pennsylvania, Medical Pharmacy in Bakersfield, California, Robcin Enterprises, Inc. in Independence, Missouri, Apple Institutional Services in Salisbury, Maryland and the institutional pharmacy assets of Walgreen Co., an Illinois corporation. The aggregate purchase price for all businesses acquired during fiscal 1998 was $188,854,000 consisting of $171,083,000 in cash, $959,000 of debt and $16,812,000 of Class A and Class B Common Stock of the Company. The Cheshire LTC Pharmacy, Inc. and MedStar Pharmacy, Inc. acquisitions were accounted for as pooling of interests transactions, however the impact of these transactions on the Company's historical financial statements is not material; consequently, prior period financial statements have not been restated for these transactions. All other acquisitions have been accounted for as purchase transactions. Unaudited pro forma data, as though the Company had purchased each of these businesses as of July 1, 1997, are set forth below:
Six Months Six Months Ended Ended December 31, 1998 December 31, 1997 ----------------- ----------------- (In thousands, except per share information) Revenues $ 350,968 $ 292,692 Net income $ 10,100 $ 7,220 Net income per share - basic $ 0.50 $ 0.37 Net income per share - diluted $ 0.49 $ 0.36
The pro forma information does not intend to be indicative of operating results that would have occurred had the acquisitions been made at the beginning of the respective periods or of results that may occur in the future. The primary pro forma adjustments reflect amortization of goodwill acquired and interest costs. The pro forma information does not give effect to any potential synergies anticipated by the Company as a result of the acquisitions such as improvements in gross margin attributable to the Company's purchasing leverage and increased operating efficiencies. 7 8 5. The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), which replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the requirements of SFAS No. 128. The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------ ---------------------- 1998 1997 1998 1997 ------------------------ ---------------------- Numerator: Numerator for basic earnings per share - net income $ 5,343 $ 4,022 $10,094 $ 7,654 Effect of dilutive securities: Convertible debentures - - - - ------------------------ ---------------------- Numerator for diluted earnings per share $ 5,343 $ 4,022 $10,094 $ 7,654 ======================== ====================== Denominator: Denominator for basic earnings per share - weighted average common shares 20,162 18,900 20,138 18,639 ------------------------ ---------------------- Effect of dilutive securities: Stock options 304 213 244 248 Convertible debentures - - - - ------------------------ ---------------------- Dilutive potential common shares 304 213 244 248 ------------------------ ---------------------- Denominator for diluted earnings per share 20,466 19,113 20,382 18,887 ======================== ====================== Basic earnings per share $ 0.27 $ 0.21 $ 0.50 $ 0.41 ======================== ====================== Diluted earnings per share $ 0.26 $ 0.21 $ 0.50 $ 0.41 ======================== ======================
The Company has $100,000,000 of convertible subordinated debentures outstanding at December 31, 1998 that are convertible into 3,058,000 shares of Class A Common Stock that were not included in the computation of diluted earnings per share as their effect would be antidilutive. The Company had $102,753,000 of convertible subordinated debentures outstanding at December 31, 1997 that were convertible into 3,332,000 shares of Class A Common Stock that were not included in the computation of diluted earnings per share as their effect would be antidilutive. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Revenues for the three months ended December 31, 1998 increased 55.5% to $178,030,000 from $114,508,000 recorded in the comparable period in fiscal 1998. Revenues for the six months ended December 31, 1998 increased 60.8% to $350,876,000 from $218,219,000 recorded in the comparable period in fiscal 1998. The increase in quarter and year to date revenues during fiscal 1999 over the comparable prior year period is primarily attributed to two factors: the Company's acquisition program and internal growth. Of the $132,657,000 increase for the six months ended December 31, 1998, $84,891,000 of the increase is attributable to a full period of operations for fiscal 1998 acquisitions. These fiscal 1998 acquisitions include Cheshire LTC Pharmacy, Inc. in August 1997, PharmaSource Healthcare, Inc. in September 1997, Marco & Company, LLC in December 1997, MedStar Pharmacy, Inc. in January 1998, Medical Pharmacy, Robcin Enterprises, Inc. and Greenwood Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation in February 1998, Apple Institutional Services in March 1998 and the institutional pharmacy assets of Walgreens Co. in June 1998. Internal growth accounted for $47,766,000 of the increase as the Company's existing operations continued to grow through marketing efforts to new and existing clients, increased drug utilization of long-term care facility residents and the growth and integration of new and existing products and services. The total number of beds serviced by the Company as of December 31, 1998 increased 48% to 253,000 beds, from 171,000 beds at December 31, 1997. Of the $63,522,000 increase in revenues for the three months ended December 31, 1998, $39,648,000 was due to the fiscal 1998 acquisitions noted above and internal growth accounted for $23,874,000 of the increase. Cost of revenues for the three months ended December 31, 1998 increased 55.2% to $132,630,000 from $85,469,000 recorded in the comparable period in fiscal 1998. For the six months ended December 31, 1998, cost of revenues increased 60.5% to $261,620,000 from $162,954,000 recorded in the comparable period in fiscal 1998. Cost of revenues as a percentage of revenues for the three and six month periods ended December 31, 1998 was 74.5% and 74.6%, respectively, compared to 74.6% and 74.7% for the comparable periods during the prior fiscal year. The decrease in cost of revenues as a percentage of revenues is primarily the result of the timing of acquisitions. At the time of acquisition, the gross margins of the acquired companies are typically lower than the Company as a whole; however, the Company is typically able to increase the gross margins of the acquired companies through more advantageous purchasing terms and the use of formulary management. The Company's leverage associated with purchasing pharmaceuticals, formulary management program and leveraging of production costs positively impacted gross margins during the past year. However, these improvements were partially offset by the lower margins of companies acquired during the past year. Selling, general and administrative expenses for the three months ended December 31, 1998 increased 49.8% to $31,806,000, from $21,229,000 recorded in the comparable period in fiscal 1998. For the six months ended December 31, 1998, selling, general and administrative expenses increased 54.9% to $62,850,000 from $40,582,000 recorded in the comparable period in fiscal 1998. Selling, general and administrative expenses as a percentage of revenues was 17.9% for both the three and six month periods ended December 31, 1998, compared to 18.5% and 18.6% during the comparable periods in fiscal 1998. The percentage decrease for the three and six month periods ended December 31, 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 able to create operational efficiencies with acquisitions as selling, general and administrative expenses as a percentage of revenues have decreased eight quarters in a row. The increase in selling, general, and administrative expenses in absolute dollars is mainly attributable to expenses associated with the operations of businesses acquired during the prior fiscal year. 9 10 The Company had net interest expense of $4,302,000 and $8,779,000 for the three and six month periods ended December 31, 1998, compared to net interest expense of $754,000 and $1,255,000 during the comparable periods in fiscal 1998. The increase is primarily attributable to increased borrowing on the Company's revolving credit facility during fiscal 1998 and 1999 and a full six months of interest expense during the six months ended December 31, 1998 on $100,000,000 of convertible subordinated debentures issued by the Company in August 1997. The additional funds were primarily used for acquisitions. During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring charge of $8,900,000 primarily related to: 1) the Company adopting a formal plan of restructuring to consolidate certain pharmacy sites in similar geographies; 2) the buyout of existing employment agreements with the prior owners of certain acquired businesses; 3) the write-off of certain financing fees; and 4) additional acquisition related expenses. The Company adopted a formal plan of restructuring that will combine pharmacies in close geographical proximity in order to improve operating efficiencies. As a result of the plan, 17 pharmacy sites will be consolidated into either new or existing locations and an estimated total of 149 employees will be terminated as a result of the plan. As of December 31, 1998, nine site consolidations were completed with the remainder expected to be completed by the end of fiscal 1999. Details of the nonrecurring charge are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 12/31/98 ----------- ------------- ------ -------- ---------- -------- ----------- (In millions) Site Consolidations Severance packages Cash $ .5 $ -- $ .5 $ (.1) $ .4 Lease terminations Cash .7 -- .7 (.2) .5 Asset impairments Non-cash 3.5 (3.5) -- -- -- Other Cash .6 (.4) .2 -- .2 Buyout of employment agreements Cash .9 (.2) .7 (.5) .2 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 $(.9) $1.4 ==== ===== ==== ==== ====
Liquidity and Capital Resources Net cash used in operating activities was $23,241,000 for the six months ended December 31, 1998, as compared to $16,777,000 during the comparable period in fiscal 1998. The increase in net cash used in operating activities was primarily due to an increase in accounts receivable. The increase in accounts receivable from June 30, 1998 is mainly attributable to a 16.2% increase in sales during the three months ended December 31, 1998, as compared to the three months ended June 30, 1998. Net cash used in investing activities decreased to $18,752,000 during the six months ended December 31, 1998, as compared to $25,974,000 during the comparable period in fiscal 1998. The decrease is primarily the result of a decrease in cash used for acquisitions, partially offset by an increase in capital expenditures. Significant capital expenditures during the six months ended December 31, 1998 included computer and information systems equipment, computer software, furniture and fixtures, leasehold improvements, medication carts and delivery vehicles. The Company continues to invest in converting all sites to a common operating system. 10 11 Net cash provided by financing activities decreased to $42,148,000 during the six months ended December 31, 1998, from $83,603,000 during the comparable period in fiscal 1998. The decrease is a result of the Company completing a $100,000,000 convertible subordinated debenture offering during August 1997. In August 1997, the Company issued $100 million of convertible subordinated debentures due 2004. The debentures carry an interest rate of 5 3/4%. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. The Company's ability to make payments of principal and interest on the debentures will depend on its ability to receive distributions of cash from its subsidiaries. Each of the Company's wholly-owned subsidiaries has guaranteed the Company's payment obligations under the debentures, so long as such subsidiary is a member of an affiliated group (within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as amended) that includes the Company. The satisfaction by the Company's subsidiaries of their contractual guarantees, as well as the payment of dividends and certain loans and advances to the Company by such subsidiaries, may be subject to certain statutory or contractual restrictions, are contingent upon the earnings of such subsidiaries and are subject to various business considerations. The Company expects to meet future financing needs principally through the use of its revolving credit facility. In June 1998, the Company entered into a four year, $150,000,000 revolving credit facility (the "Credit Facility") with a bank, which replaced the existing $135,000,000 revolving credit facility. Under the Credit Facility, the Company also has available a $10,000,000 swing line revolving facility. In June 1998, the Company entered into a $50,000,000 bridge facility agreement (the "Bridge Facility") due December 31, 1998. Effective July 13, 1998, the Credit Facility was amended increasing the total commitment from $150,000,000 to $245,000,000 and was syndicated to a consortium of 11 banks. Also effective July 13, 1998, the Bridge Facility was paid with funds under the Credit Facility and was terminated. The Credit Facility bears interest at a variable rate based upon the Eurodollar rate plus a spread of 37.5 to 162.5 basis points, dependent upon the Company's Interest Coverage Ratio. The Credit Facility contains certain debt covenants including Interest Coverage Ratio and minimum consolidated net worth. As of December 31, 1998, the Company had $190,500,000 outstanding under the Credit Facility. The Company believes that its cash and available sources of capital, including funds available under the Credit Facility, are sufficient to meet its normal operating requirements. New Accounting Standards The Financial Accounting Standards Board recently issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for the reporting of financial information about reportable segments in annual and interim financial statements. SFAS No. 131 also requires disclosure of revenues from each group of products and services, geographic areas and major customers. Currently, the Company does not expect the adoption of SFAS N0. 131 to have a significant impact on the Company's reporting and disclosures. In April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." This SOP requires that start-up and organization costs be expensed as incurred, and that such previously capitalized costs be written-off as a cumulative effect of change in accounting principle upon adoption. The SOP is effective for fiscal years beginning after December 15, 1998 or the Company's fiscal year ended June 30, 2000. The Company plans to adopt this SOP in the first quarter of fiscal 2000 and will continue to capitalize and amortize start-up costs and organization costs during fiscal 1999. The Company currently estimates the adoption of the SOP will result in a charge of approximately $6,000,000, net of tax, which will be recorded as a cumulative effect of change in accounting principle. Year 2000 Readiness Disclosure Computer systems in use after the beginning of the year 2000 will need to accept four-digit entries in the date code field in order to distinguish 21st century dates from 20th century dates. Consequently, many companies face significant uncertainties because of the need to upgrade or replace their currently installed computer systems to comply with such "Year 2000" requirements. Various systems could be affected ranging from complex information technology ("IT") computer systems to non-IT devices, such as an individual machine's programmable logic controller. 11 12 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 non-IT devices for Year 2000 compliance. The Company expects to complete this review and assessment process by June 30, 1999. Testing of devices and resolution of noncompliance issues, if any, is expected to be completed by September 30, 1999. The Company is currently determining the extent to which it may be impacted by any third parties' failure to remediate their own Year 2000 issues. The Company is assessing and reviewing relationships with all significant customers, suppliers, payors and other third parties to determine the extent, if any, to which the Company's interface systems could be impacted by those third-parties' failure to remediate their own Year 2000 issues. The Company expects to complete this review and assessment by June 30, 1999. At this stage of the review no assurance can be given that the failure by one or more third parties to become Year 2000 compliant will not have a material adverse impact on its operations. The Company intends to develop contingency plans for significant third parties' determined to be at high risk of noncompliance or business disruption before September 30, 1999. The contingency plans will be developed on a case-by-case basis. Judgments regarding contingency plans are themselves subject to many variables and uncertainties. There can be no assurance that the Company will correctly anticipate the level, impact or duration of noncompliance by third parties, or that its contingency plan will be sufficient to mitigate the impact. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not possible to anticipate all possible future outcomes, especially when third parties are involved, there could be circumstances in which the Company's operations could be interrupted. If the federal and state healthcare reimbursement agencies or their intermediaries fail to implement Year 2000 compliant technologies before December 31, 1999, a significant cash flow problem may result. These agencies and intermediaries have Year 2000 plans in place and we continue to monitor the status of these projects. All of these government agencies have stated that interim procedures would be implemented if their Year 2000 solutions are not in place by January 1, 2000. In addition, disruptions in the economy in general resulting from Year 2000 issues could also adversely impact the Company. The majority of costs related to Year 2000 readiness issues will be expensed as incurred and are expected to be funded through operating cash flows. Through the second quarter of fiscal 1999 costs related to the Year 2000 issue have been immaterial to the financial results of the Company. Future costs related to Year 2000 issues are also expected to be immaterial to the financial results of the Company. Estimates of costs are based on currently available information and developments may occur that could increase the costs related to Year 2000 issues. Disclosure Regarding Forward-Looking Statements Certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q, including, but not limited to, those regarding the Company's financial position, business strategy, acquisition strategy, Year 2000 readiness disclosure and other plans and objectives for future operations and any other statements that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have expected effects on its business or operations. Among the factors that could cause actual results to differ materially from the Company's expectations include the availability and cost of attractive acquisition candidates, continuation of various trends in the long-term care market (including the trend toward consolidation), competition among providers of long-term care pharmacy services, the availability of capital for acquisitions and capital requirements, changes in regulatory requirements, reform of the health care delivery system, disruption to the operations of the Company resulting from Year 2000 issues and other factors. 12 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risk exposure relates to interest rate risk. The Company has managed its interest rate risk by balancing its exposure between fixed and variable rates while attempting to minimize its interest costs. The Company has a balance of $190,500,000 on its revolving credit facility at December 31, 1998 which is subject to a variable rate of interest based on the Eurodollar rate. Assuming borrowings at December 31, 1998, a one-hundred basis point change in interest rates would impact net interest expense by approximately $1,900,000 per year. 13 14 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following information is furnished as to all equity securities of the Company sold during the second fiscal quarter that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). (a) On October 19, 1998, the Company issued 87,391 shares of its Class A Common Stock to sixteen stockholders in connection with the acquisition of certain assets of PharmaSource Healthcare, Inc. Exemption from registration is claimed under Section 4(2) of the Securities Act. (b) On November 10, 1998, the Company issued 23,600 shares of its Class B Common Stock to one stockholder upon the exercise of options at $6.19 per share. Exemption from registration is claimed under Section 3(b) and Rule 701 of the Securities Act. (c) On December 1, 1998, the Company issued 46,092 shares of its Class B Common Stock to one stockholder upon the exercise of options at $4.09 per share. Exemption from registration is claimed under Section 3(b) and Rule 701 of the Securities Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of stockholders of the Company held on November 23, 1998 (the "Annual Meeting"), the stockholders voted to elect Jon H. Outcalt and Richard L. Osborne each to an additional three-year term as a Director of the Company. Votes were cast as follows: VOTES JON H. OUTCALT RICHARD L.OSBORNE ----- -------------- ----------------- For 68,098,805 68,118,855 Withheld 249,750 229,700 In addition, stockholders voted in favor of a proposal to approve and adopt the NCS HealthCare, Inc. 1998 Performance Plan (the "1998 Plan") at the Annual Meeting. The number of votes cast for, against and abstentions with respect to the 1998 Plan are set forth below: FOR AGAINST ABSTAIN --- ------- ------- 61,106,043 5,376,937 26,888 For a description of the bases used in tabulating the above-referenced votes, see the Company's definitive proxy statement used in connection with the Annual Meeting. The term of office of the following Directors of the Company continued after the Annual Meeting: A. Malachi Mixon III, Boake A. Sells, Kevin B. Shaw, and Phyllis K. Wilson. 14 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Numbers Exhibit ------- ------- *10.1 The NCS HealthCare, Inc. 1998 Performance Plan (A) 15 Independent Accountants' Review Report 15.2 Independent Accountants' Acknowledgment Letter 27 Financial Data Schedule * Management compensatory plan. (A) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-8 (Reg. No. 333-70741). (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended December 31, 1998. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NCS HealthCare, Inc. (Registrant) Date: February 16, 1999 By /s/ Kevin B. Shaw -------------------------------- Kevin B. Shaw President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 16, 1999 By /s/ Gerald D. Stethem -------------------------------- Gerald D. Stethem Chief Financial Officer (Principal Financial and Accounting Officer) 16 EX-15.1 2 EXHIBIT 15.1 1 EXHIBIT 15.1 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders NCS HealthCare, Inc. and Subsidiaries We have reviewed the accompanying condensed consolidated balance sheet of NCS HealthCare, Inc. and subsidiaries (the Company) as of December 31, 1998, and the related condensed consolidated statements of income, and the condensed consolidated statements of cash flows for the six month periods ended December 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of NCS HealthCare, Inc. and subsidiaries as of June 30, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended, not presented herein, and in our report dated August 6, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Cleveland, Ohio /s/ Ernst & Young LLP February 12, 1999 17 EX-15.2 3 EXHIBIT 15.2 1 EXHIBIT 15.2 February 12, 1999 The Board of Directors and Stockholders NCS HealthCare, Inc. and Subsidiaries We are aware of the incorporation by reference in the Registration Statements (Form S-8 No. 333-49417; Form S-3 No. 333-63437; Form S-3 No. 333-47293; Form S-3/A No. 333-29565; Form S-3/A No. 333-35551; Form S-8 No. 333-70741 and Form S-8 No. 333-72243) of NCS HealthCare, Inc. of our report dated February 12, 1999, relating to the unaudited condensed consolidated interim financial statements of NCS HealthCare, Inc. and subsidiaries that are included in its Form 10-Q for the quarter ended December 31,1998. /s/ Ernst & Young LLP 18 EX-27 4 EXHIBIT 27
5 0001004990 NCS HEALTHCARE 1,000 6-MOS JUN-30-1999 JUL-01-1998 DEC-31-1999 21,341 0 198,023 18,155 50,545 267,773 82,690 31,732 679,789 75,548 293,316 0 0 202 301,162 679,789 350,876 350,876 261,620 261,620 0 573 9,575 17,627 7,533 10,094 0 0 0 10,094 .50 .50
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