10-K 1 l84091ae10-k.txt NCS HEALTHCARE, INC. FORM 10-K 1 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, 2000 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 22, 2000, the registrant had 17,423,747 shares of Class A Common Stock, par value $.01 per share, and 5,807,283 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 $5,027,682 (based upon the closing price of $0.28125 per share of Class A Common Stock on the NASDAQ SmallCap Market on September 22, 2000). For purposes of this calculation, the registrant deems the 649,831 shares of Class A Common Stock and the 4,704,996 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. 1 2 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 2000 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, 2000. 2 3 NCS HEALTHCARE, INC. 2000 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I
ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 13 ITEM 3. LEGAL PROCEEDINGS 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY 14 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 15 ITEM 6. SELECTED FINANCIAL DATA 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 49 ITEM 11. EXECUTIVE COMPENSATION 49 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 50
3 4 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 various ancillary health care services to complement its core pharmacy services, including infusion therapy, nutrition management, software services, 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, 2000, the Company had completed a total of 49 acquisitions (other than fold-in acquisitions). There were no significant acquisitions during fiscal 2000. As a result of these acquisitions, the Company has expanded its geographic presence into 34 states serving approximately 227,000 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 $8.0 billion for 2000. 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 2030, 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. 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. 1 5 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 $3.8 billion for 2000. 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 Part 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 two years 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. BUSINESS STRATEGY NCS' business strategy has three elements: first, to focus on strong internal growth based on the Company's technology capabilities. Second, to leverage its operating efficiencies by automating formerly manual processes such as third party billing, purchasing compliance, cost compliance, claim reconciliation, third party cash posting, and formulary interchanges. Finally, to establish a technology foundation to add pharmaceutical manufacturers as customers for sales of clinical data. Since its inception, the Company has completed over 49 acquisitions (other than fold-in acquisitions). Having established a solid management foundation and a network of operating businesses, NCS is positioned to pursue internal growth opportunities by adding market share, developing operating efficiencies and extending its business model to data sales. 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, 2000, approximately 84% of the Company's revenues were derived from providing pharmacy and consultant pharmacy services to long-term care facilities. An additional 3% of revenues were derived from providing infusion therapy services and the remaining 13% were 2 6 primarily derived from providing various other products and services, including nutrition management, hospital pharmacy 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, 2000, the Company provided its services from 72 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. As of June 30, 2000, approximately 83% of the Company's pharmacy customer base was converted to the Concord DX system, the Company's proprietary computer system. The Company utilizes the Concord DX system to control its work flow 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. 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. 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 3 7 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 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. 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 213 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 and Medicare Part B products and services. Finally, NCS offers specialized educational services that aid facilities in the training of their staff. 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. 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 one additional member. 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. 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 83% of NCS' pharmacy customer base. In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot"). For the past 12 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, in May 2000, the Company introduced its web-based eASTRAL, which is an enhancement to its software offerings and designed to perform the following: (1) improve a nursing home's ability to adapt to PPS, (2) enhance the communication between nursing homes and NCS, and (3) improve a nursing home's ability to conform to regulatory requirements. NCS' eASTRAL modules follow: EMEDMANAGER allows on-line pre-fill edit reviews. These reviews give the nursing home formulary recommendations, alternative medications and potential savings. With access to this type of critical information they can make more informed clinical and financial decisions. 4 8 PAYOR STATUS REPORTS have become critically important for nursing homes to allow them to manage so they can minimize their Medicare Part A costs. Using eASTRAL, NCS' customers can make adjustments to patient status through an internet connection. ORDER STATUS REPORT provides information on the status of each patient's medication orders, eliminating the need for the nursing staff to contact the pharmacy for this information. NDC REPORT is available through the web. This report provides information needed to complete Section U of the MDS for any long-term patient. EBILL offers on-line invoice reviews. This is an important feature, especially for regional or national chains that perform facility to facility cost comparisons. DRUG FACT provides detailed information on any medication, including its use, side effects, storage, precautions, interactions and instructions for use. REFILL ORDERS allows nursing homes to order refill on-line. Other software applications offered by NCS are: 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. These capabilities continue to distinguish NCS from others in the institutional pharmacy industry. As nursing homes become more sophisticated, their interest in and need for these capabilities will increase. The Company believes it is uniquely positioned to deliver on these requests. 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 20 Account Executives, seven National Account Managers and a Vice President of Sales and Marketing. While the National Account Managers train and oversee the Account Executives, they are also responsible for selling to national chain accounts along with the Vice President of Sales and Marketing; 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 400 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 four-person team who reports to the Vice President of Sales and 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 5 9 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, 2000, NCS had contracts to provide services to approximately 227,000 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, 2000, NCS had contracts to manage hospital pharmacies in 14 states. As of June 30, 2000, 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 intense. 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. 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, 2000, the Company's payor mix was approximately 42% Medicaid, 1% Medicare, 18% 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 6 10 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. 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. 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 7 11 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 three-year period beginning July 1, 1998. Each Medicare Part 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. On November 29, 1999, Congress enacted the Balanced Budget Reconciliation Act of 1999 (`BBRA') in response to concerns that the PPS rates did not adequately reflect the high medication costs of high acuity patients. The BBRA increases the federal per diem rates by 20% for 15 high acuity categories (RUGs) under Extensive Services, Special Care, Clinically Complex and High and Medium Rehab (effective October 1, 2000). In addition, it increases the per diem payment by four percent for all acuity categories (calculated exclusive of the 20% RUG increase) for the years commencing October 1, 2000 and 2001. BBRA also allows SNFs to elect transition to full federal PPS rates on or after December 15, 1999 instead of participating in the three-year transition period 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. 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 8 12 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 1998, federal and state government authorities sought and obtained various documents and records from a Herrin, 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, 2000, the Company had approximately 3,100 full-time employees. None of its employees are represented by a union. The Company considers relations with its employees to be good. 9 13 ITEM 2. PROPERTIES The Company presently maintains its executive offices in approximately 27,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in 2005 with an unaffiliated third party. NCS currently considers this space to be sufficient for its corporate headquarters operations. As of June 30, 2000, the Company leased or owned 86 properties in 34 states with a total square footage of 738,000 square feet ranging in size from approximately 500 square feet to approximately 38,000 square feet. The terms of the leases relating to these properties vary in length remaining, from one month to fourteen 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 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, governmental 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 inventory record keeping and 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. During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS Indiana), a wholly-owned subsidiary of the Company, reached a settlement with the USA-Indiana regarding the previously disclosed federal investigation of the Company's facility in Indianapolis, Indiana. Under the terms of the settlement, the Company paid $4,100,000 to the USA-Indiana. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1,500,000 will be payable to the USA-Indiana. In January 1998, federal and state government authorities sought and obtained various documents and records from a Herrin, 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. It is possible that the imposition of significant fines or other remedies in connection with the resolution of this matter could have a material effect on the Company's financial condition and results of operations. On June 7, 1999, a lawsuit was filed against the Company in the Superior Court of Norfolk County, Massachusetts. Plaintiffs were certain selling stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS acquired on September 17, 1997. The complaint alleged 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. On January 21, 2000, the Company reached a settlement of this litigation. Under the terms of the settlement, the Company issued 1,750,000 Class A Common Shares and a $2,000,000 convertible subordinated debenture maturing on August 15, 2004. The note and accrued "payment-in-kind" interest will be convertible into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00 per share. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 14 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 64 Chairman of the Board of Directors Kevin B. Shaw 43 President, Chief Executive Officer and Director Gerald D. Stethem 36 Chief Financial Officer William B. Byrum 56 Executive Vice President and Chief Operating Officer John P. DiMaggio 37 Senior Vice President Michael J. Mascali 40 Senior Vice President Thomas Bryant Mangum 49 Senior Vice President A. Malachi Mixon III 60 Director Richard L. Osborne 62 Director Boake A. Sells 63 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.). 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. 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. 11 15 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.). 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 SmallCap Market under the symbol NCSS. Prior to December 8, 1999, the Company's Class A Common Stock was traded on the Nasdaq National Market. The following table sets forth, for the two fiscal years ended June 30, 2000, the high and low sale prices per share for the Class A Common Stock, as reported on the Nasdaq SmallCap Market and the Nasdaq National Market. These prices do not include retail markups, markdowns or commissions. HIGH LOW ---- --- 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 2000 First Quarter $ 5.63 $ 1.78 Second Quarter 3.84 1.53 Third Quarter 3.19 1.47 Fourth Quarter 1.81 0.56 The Company has been advised by the Nasdaq Listing Qualifications Department that recent bid prices for its Class A Common Stock no longer meet the criteria required (minimum bid price of $1.00 per share) for continued inclusion on the Nasdaq SmallCap Market. If the Company is unable to meet the criteria on or before October 9, 2000, its common stock will be traded on the OTC Bulletin Board. On September 22, 2000, the last sale price of the Class A Common Stock as reported by Nasdaq was $0.28125 per share. As of September 22, 2000, there were approximately 238 holders of record of the Class A Common Stock, and approximately 35 holders of record of Class B Common Stock. This figure does not include stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms and banks. 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"). 12 16 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30, ------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues $113,281 $ 275,040 $ 509,064 $ 717,825 $ 694,530 Cost of revenues 82,415 205,536 380,217 540,547 556,757 -------- --------- --------- --------- --------- Gross profit 30,866 69,504 128,847 177,278 137,773 Selling, general and administrative expenses (1) 22,236 51,153 93,895 139,522 126,969 Special charge to increase allowance for doubtful accounts (2) - - - 32,384 44,623 Nonrecurring charges (2) 2,811 - 8,862 8,115 51,136 -------- --------- --------- --------- --------- Operating income (loss) 5,819 18,351 26,090 (2,743) (84,955) Interest (expense) income, net (1,611) 1,576 (5,745) (18,301) (26,243) -------- --------- --------- --------- --------- Income (loss) before income taxes 4,208 19,927 20,345 (21,044) (111,198) Income tax (expense) benefit (1,852) (8,655) (9,014) 7,640 (3,326) -------- --------- --------- --------- --------- Income (loss) before accounting change 2,356 11,272 11,331 (13,404) (114,524) Cumulative effect of accounting change (1) - - - (2,921) - -------- --------- --------- --------- --------- Net income (loss) $ 2,356 $ 11,272 $ 11,331 $ (16,325) $(114,524) ======== ========= ========= ========= ========= Net income (loss) per share - basic $ 0.28 $ 0.70 $ 0.59 $ ( 0.81) $ ( 5.31) ======== ========= ========= ========= ========= Net income (loss) per share - diluted $ 0.26 $ 0.69 $ 0.58 $ ( 0.81) $ ( 5.31) ======== ========= ========= ========= ========= Income (loss) before accounting change - basic $ 0.28 $ 0.70 $ 0.59 $ ( 0.66) $ ( 5.31) ======== ========= ========= ========= ========= Income (loss) before accounting change - diluted $ 0.26 $ 0.69 $ 0.58 $ ( 0.66) $ ( 5.31) ======== ========= ========= ========= ========= Weighted average common shares outstanding - basic 8,462 15,991 19,100 20,200 21,551 ======== ========= ========= ========= ========= Weighted average common shares outstanding - diluted 8,995 16,843 19,372 20,200 21,551 ======== ========= ========= ========= ========= YEAR ENDED JUNE 30, ------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents $ 21,460 $ 8,160 $ 21,186 $ 29,424 $ 16,387 Working capital 48,336 53,164 149,362 197,395 (93,865) Total assets 110,668 321,030 623,790 699,499 546,663 Line of credit - 10,285 147,800 214,700 206,130 Long-term debt, excluding current portion 1,961 8,043 3,879 1,936 1,291 Convertible subordinated debentures 6,549 4,813 102,753 100,000 102,000 Stockholders' equity 91,100 253,226 287,334 276,434 169,705
(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. For 2000, represents a special charge to increase the allowance for doubtful accounts and nonrecurring, restructuring and other special charges associated with the continuing implementation and execution of strategic restructuring and consolidation activities, the planned disposition of certain non-core and/or non-strategic assets, impairment of certain assets and other nonrecurring items. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 13 17 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, 1998 1999 2000 ---- ---- ---- Revenue 100.0% 100.0% 100.0% Cost of revenues 74.7 75.3 80.2 ----- ----- ----- Gross margin 25.3 24.7 19.8 Selling, general and administrative expenses 18.5 19.4 18.3 Special charge to increase allowance for doubtful accounts - 4.5 6.4 Nonrecurring charges 1.7 1.2 7.3 ----- ----- ----- Operating income (loss) 5.1 (0.4) (12.2) Interest expense, net (1.1) (2.6) (3.8) ----- ----- ----- Income (loss) before income taxes 4.0 (3.0) (16.0) Cumulative effect of accounting change - (0.4) - Income tax (expense) benefit (1.8) 1.1 (0.5) ----- ----- ----- Net income (loss) 2.2% (2.3)% (16.5)% ====== ===== =====
YEARS ENDED JUNE 30, 2000 AND 1999 The net loss for the year ended June 30, 2000 was $114.5 million or $5.31 per diluted share compared to a net loss of $16.3 million or $0.81 per diluted share for the year ended June 30, 1999. 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. The net loss for the year ended June 30, 2000, excluding nonrecurring, restructuring, other special charges and a non-cash charge related to a valuation allowance recorded against the Company's net deferred tax assets, was $9.5 million or $0.44 per diluted share compared to net income of $17.9 million or $0.88 per share in the prior year, excluding special and nonrecurring charges and the effect of adopting SOP 98-5. Operating results for the year ended June 30, 2000 continued to be negatively impacted by the implementation of Medicare's Prospective Payment System (PPS). The adverse impact of the implementation of PPS under the Balanced Budget Act of 1997 for Medicare residents of skilled nursing facilities has been significantly greater than anticipated resulting in a difficult operating environment in the long-term care industry. PPS created numerous changes to reimbursement policies applicable to skilled nursing facilities under Medicare Part A. Prior to the implementation of 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 on a cost plus basis. This change in reimbursement policies has resulted in a substantial reduction in reimbursement for skilled nursing facilities. Consequently, the Company has experienced revenue and margin 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 significant reduction in the utilization of other therapies such as speech, occupational and physical rehabilitation. With the implementation of PPS, 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 reducing the average length of stay for Medicare residents. Resident acuity level has also decreased as these facilities have attempted to avoid high acuity patients, negatively impacting the overall utilization of drugs, particularly those with higher costs such as infusion therapy. These outcomes have negatively impacted nursing facilities and the institutional pharmacy services industry as a whole. For Medicare certified skilled nursing facilities, PPS has caused significant earnings and cash flow pressure. Some facilities have sought bankruptcy protection or consolidation as a method of reducing costs and increasing operating efficiencies causing the Company to experience some bed loss as a result. For the Company, operating processes for administering and executing PPS related activities were significantly different than operating processes prior to the implementation of PPS. Contracting processes, data gathering, and operational dispensing processes for Medicare A residents all underwent significant change resulting in higher costs and lower margins for the Company. These costs were in addition to the impact of costs associated with customers bankruptcies and deteriorating financial condition. On November 29, 1999, Congress enacted the Balanced Budget Refinement Act in an attempt to provide relief to skilled nursing facilities by 14 18 providing a temporary increase in reimbursement rates effective April 1, 2000, pending appropriate revisions to the PPS System, particularly for higher acuity residents. Even with these changes, a very difficult operating environment remains and management continues to react to pressures in the current PPS environment. The Company is reducing operating and overhead expenses, has accelerated efforts to consolidate and/or close pharmacy locations, is terminating uneconomic accounts and applying stricter standards in accepting new business. Revenues for the year ended June 30, 2000 decreased $23.3 million or 3.2% to $694.5 million from $717.8 million for the year ended June 30, 1999. Approximately $20.5 million of the decrease in revenue from the prior fiscal year is attributable to a decrease in revenue from the Company's allied and ancillary services. This decrease is due to decisions by management to terminate uneconomic accounts and the shutdown or sale of certain non-strategic or unprofitable operations. During April 2000, the Company disposed of two ancillary operations that were not contributing to the overall financial performance of the Company. The remaining $2.8 million of the revenue decrease is attributable to the Company's pharmacy operations and is related to net bed loss during the period. Although the Company added new customers during the year ended June 30, 2000 through its sales and marketing efforts, the number of beds served by the Company declined due to decisions by management to terminate uneconomic accounts as well as general bed loss typically experienced in a competitive environment. Cost of revenues for the year ended June 30, 2000 increased $16.2 million or 3.0% to $556.8 million from $540.6 million for the year ended June 30, 1999. Cost of revenues as a percentage of revenues increased to 80.2% for the year ended June 30, 2000 from 75.3% for the year ended June 30, 1999. Gross margins during the year ended June 30, 2000 were significantly affected by the impact of the PPS reimbursement system. The margin pressure resulted from continued Medicare Part A pricing pressure, lower than anticipated gross margins on PPS related contracts and reduced acuity levels at customer facilities. In addition, the Company's payor mix has continued to shift towards lower margin payors, including Medicaid and insurance. Selling, general and administrative expenses for the year ended June 30, 2000 decreased $12.5 million or 9.0% to $127.0 million from $139.5 million for the year ended June 30, 1999. Selling, general and administrative expenses as a percentage of revenues decreased from 19.4% for the year ended June 30, 1999 to 18.3% for the year ended June 30, 2000. The decrease in expenses from the prior fiscal year is a result of efforts by the Company to reduce operating and overhead costs by accelerating the consolidation and/or closing of pharmacy locations and continuing its employee reduction plan. Excluding the effects of the nonrecurring, restructuring and special charges described below, operating income for the year ended June 30, 2000 decreased $27.0 million or 71.4% to $10.8 million from $37.8 million for the year ended June 30, 1999. Excluding the effects of the nonrecurring, restructuring and special charges, operating income as percentage of sales was 1.6% for the year ended June 30, 2000 and 5.3% for the year ended June 30, 1999. The decrease is related to the implementation of PPS as discussed above. During fiscal 2000, the Company recorded nonrecurring, restructuring and special charges of $95.8 million. A special charge of $44.6 million was recorded to increase the allowance for doubtful accounts, and nonrecurring, restructuring and other special charges of $51.2 million were recorded in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations, the planned disposition of certain non-core and/or non-strategic assets, impairment of certain assets and other nonrecurring items. The special charge to increase the allowance for doubtful accounts resulted from the continuing negative changes observed in industry and customer trends during the year ended June 30, 2000, and a change in the method of estimating the allowance necessary for accounts receivable. The financial condition of the Company's primary customer base and general industry trends continued to deteriorate throughout the year. Due to the negative trends that the Company's customers are facing, management re-evaluated the method of estimating the allowances necessary for these and other customers. The total provision for doubtful accounts, including the amounts included in the special charge, was $53.8 million for the year ended June 30, 2000. The Company continued its plan of restructuring to consolidate certain pharmacy sites in order to improve operating efficiencies. During the year ended June 30, 2000, the Company decided to consolidate thirteen additional pharmacy sites into either a new or existing location. The Company also decided to shutdown locations associated with certain ancillary services. During the year ended June 30, 2000, the Company recorded nonrecurring charges of $9.7 million related to these site consolidations and location shutdowns, inclusive of $ 1.1 million of additional costs incurred on site consolidations previously announced. As of June 30, 2000, twelve pharmacy sites and six ancillary service locations were consolidated into either a new or existing location or shutdown. The remaining site consolidations and location shutdowns were completed as of August 2000. During the year ended June 30, 2000 the Company adopted a formal exit plan to dispose of certain non-core and/or non-strategic assets. The Company recorded nonrecurring charges of $30.7 million related to the planned disposition of assets primarily consisting of impairment to goodwill and property and equipment. Total revenue and operating income of the related business units was $59.3 million and $1.5 million, respectively, for the year ended June 30, 2000. During April 2000, the Company disposed of two ancillary operations. The carrying amount of assets held for sale at June 30, 2000 was $7.6 million. 15 19 The remaining $10.8 million of the nonrecurring charge primarily relates to severance incurred during the year associated with the Company's expense reduction initiatives, additional asset impairments, costs related to a settlement with federal authorities regarding the investigation of the Company's Indianapolis, Indiana facility and other nonrecurring expenses. During December 1999, the Company reached a settlement with the U.S. Attorney's office in the Southern District of Indiana regarding the federal investigation of the Company's facility in Indianapolis, Indiana. As a result, the Company recorded the settlement amount as a nonrecurring charge. Under the terms of the settlement, the Company paid $4.1 million to the U.S. Attorney's office. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1.5 million will be payable to the U.S. Attorney's office. See "Certain Regulatory Investigations and Legal Proceedings". Employee severance costs included in the nonrecurring charges relate to the termination of 472 employees. As of June 30, 2000, 404 employees have been terminated. Details of the fiscal 2000 nonrecurring, restructuring and special charges and related activity are as follows:
Nonrecurring Reserve Description Cash/non-cash Charge Activity At 6/30/00 ----------- ------------- ------ -------- ---------- (In millions) Site Consolidations Severance/compensation related Cash $ 1.3 $ (1.0) $ .3 Lease terminations Cash 2.8 (.4) 2.4 Asset impairments Non-cash 4.4 (4.4) -- Other Cash 1.2 (.6) .6 Special increase to allowance for doubtful accounts Non-cash 44.6 (44.6) -- Disposition of Assets Asset impairment Non-cash 30.2 (30.2) -- Other Cash .5 (.2) .3 Other Cash 6.6 (6.2) .4 Non-cash 4.2 (4.2) -- ----- ------ ----- Total $95.8 $(91.8) $ 4.0 ===== ====== =====
The Company had net interest expense of $26.2 million for the year ended June 30, 2000, compared to net interest expense of $18.3 million for the year ended June 30, 1999. The increase is primarily attributable to increased average borrowings on the Company's revolving credit facility, an increase in interest rates and other finance related charges during fiscal 2000 as compared to the prior year. The additional funds borrowed in fiscal 1999 were primarily used for working capital purposes, to fund internal growth and capital expenditures for infrastructure improvement. 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. 16 20 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. 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% . During the fourth quarter of fiscal 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. The acquisition related items primarily pertain to specific receivable collectibility issues 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 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, four additional pharmacy sites were consolidated into either a new or existing location. During the year ended June 30, 1999, the Company recorded nonrecurring charges of $4.7 million before tax related to the new site consolidations, inclusive of $0.2 million of 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. 17 21 The remaining $3.4 million before tax of the nonrecurring charge primarily relates to severance incurred during the fourth quarter of fiscal 1999 associated with the Company's expense reduction initiatives, additional acquisition related and other expenses. Employee severance costs included in the nonrecurring charge relate to the termination of 120 employees. As of June 30, 2000 all 120 employees have been terminated. Details of the fourth quarter fiscal 1999 special and nonrecurring charge and related activity are as follows:
Nonrecurring Reserve Reserve Description Cash/non-cash Charge Activity At 6/30/99 Activity At 6/30/00 ----------- ------------- ------ -------- ---------- -------- ---------- (In millions) Site Consolidations Severance/compensation related Cash $ 2.1 $(1.5) $ .6 $ (.6) $ -- Lease terminations Cash .6 (.1) .5 (.4) .1 Asset impairments Non-cash 1.5 (1.5) -- -- -- Other Cash .5 (.5) -- -- -- Special increase to allowance For doubtful accounts Non-cash 32.4 (32.4) -- -- -- Other Cash 3.4 (2.7) .7 (.5) .2 ----- ------ ----- ------ ---- Total $40.5 $(38.7) $ 1.8 $ (1.5) $ .3 ===== ======= ===== ======= ====
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. 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, 15 pharmacy sites were consolidated into either a new or existing location as of June 30, 2000. 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. All of the employee terminations under the plan have occurred as of June 30, 2000. 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. Details of the fourth quarter fiscal 1998 nonrecurring charge and related activity are as follows:
Nonrecurring Reserve Reserve Description Cash/non-cash Charge Activity At 6/30/99 Activity At 6/30/00 ----------- ------------- ------ -------- ---------- -------- ---------- (In millions) Site Consolidations Severance packages Cash $ .5 $ (.5) $ -- $ -- $ -- Lease terminations Cash .7 (.4) .3 (.3) -- Asset impairments Non-cash 3.5 (3.5) -- -- -- Other Cash .6 (.6) -- -- --
18 22
Buyout of employment agreements Cash .9 (.8) .1 (.1) -- Write-off financing fees Non-cash 1.3 (1.3) -- -- -- Other Cash 1.0 (.9) .1 (.1) -- Non-cash .4 (.4) -- -- -- ----- ----- ---- ------ ---- Total $8.9 $(8.4) $ .5 $ (.5) $ -- ==== ====== ==== ====== ====
19 23 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by (used in) operating activities was $(14.8) million, $(24.0) million and $10.8 million in fiscal 1998, 1999 and 2000, respectively. The increase in net cash provided by operating activities during fiscal 2000 was primarily due to a slower growth rate in accounts receivable, a decrease in inventory and refunds received from federal and state income tax authorities offset by a decrease in accounts payable and accrued expenses. The slower growth rate in accounts receivable from June 30, 1999 is mainly attributable to slower internal sales growth during the year ended June 30, 2000 and increased collection efforts by the Company. However, the Company continues to experience slower payment trends by customers as a result of the implementation of PPS. 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 was 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. The Company purchases the majority of its inventory through a primary pharmaceutical supplier, and the terms of the related contracts are an integral part of the Company's future liquidity. Net cash used in investing activities was $202.8 million, $35.0 million and $11.8 million in fiscal 1998, 1999 and 2000, respectfully. The decrease in fiscal 2000 is primarily a result of a decrease in capital expenditures. The decrease in fiscal 1999 is primarily the result of fewer business acquisitions during 1999 as compared to the prior year. The Company made capital expenditures of $24.0 million, $29.4 million and $6.7 million in fiscal 1998, 1999 and 2000, respectfully. Significant capital expenditures made during the year ended June 30, 2000 include capitalized software costs associated with the Concord DX operating system, computer equipment, leasehold improvements and medication carts. 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 pharmacy sites to the Concord DX system. Additionally, other capital expenditures during 1999 were made for furniture and fixtures, leasehold improvements, medication carts and delivery vehicles. Net cash provided by (used in) financing activities was $230.7 million, $67.2 million and $(12.0) million in fiscal 1998, 1999 and 2000, respectfully. Cash used in financing activities in fiscal 2000 is a result of the Company's efforts to pay down the outstanding revolving credit facility balance. 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. During fiscal 1998, cash provided by financing activities was 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. 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. 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. 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. 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. At June 30, 2000 the Company is in violation of certain financial covenants of the credit agreement related to its revolving credit facility. On April 21, 2000, the Company received a formal notice of default from the bank group. As a result of the notice of default, the interest rate on the revolving credit facility increased to the Prime Rate plus 2.25% (11.75% at June 30, 2000). In addition, the Company will not be permitted to obtain any further funds under the credit facility until the defaults have been waived by the bank group. The Company is currently in discussions to obtain waivers of the covenant violations and to amend the credit agreement. Until the amendment to the credit agreement is obtained, the borrowings of $206.1 million under the credit facility will be classified as a current liability. Failure to obtain the waiver and amendment could have a material adverse effect on the Company. If the waiver and amendment are not obtained, the Company's lenders may accelerate the maturity of the Company's obligations and/or exercise other remedies under the credit agreement including exercising their rights with respect to the 20 24 pledged collateral. Such action could also result in the acceleration of the maturity of the Company's convertible subordinated debentures. Subject to obtaining the necessary waivers and amendments, the Company expects to meet future financing needs principally through the use of its revolving credit facility and cash generated from operations. The Company has implemented measures to improve cash flows generated from operating activities, including reductions in operating and overhead costs by accelerating the consolidation and/or closing of pharmacy locations and continuing its employee reduction plan, and more aggressive collection and inventory reduction efforts. However, the Company may require additional capital resources for internal working capital needs and may need to incur additional indebtedness to meet these requirements. Additional funds are currently not available under the revolving credit facility as described above and there can be no assurances that additional funds will be available. The Company has engaged financial advisors and legal counsel to assist in exploring various capital restructuring and strategic alternatives with third parties. At this time, no decision has been made to enter into a transaction or as to what form a transaction might take. There is no assurance that any such transaction will be consummated. The Company's effective income tax expense (benefit) rates were 44.3%, (36.3)% and 3.0% for the years ended June 30, 1998, 1999 and 2000, respectively. During fiscal 1998 and 1999, 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. During fiscal 2000, the tax rate differs from the federal statutory rate primarily as a result of the recording of a full valuation allowance against the Company's net deferred tax assets consisting primarily of net operating loss carryforwards. CERTAIN REGULATORY INVESTIGATIONS AND LEGAL PROCEEDINGS In January 1997, governmental 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 inventory record keeping and 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. During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS Indiana), a wholly-owned subsidiary of the Company, reached a settlement with the USA-Indiana regarding the previously disclosed federal investigation of the Company's facility in Indianapolis, Indiana. Under the terms of the settlement, the Company paid $4.1 million to the USA-Indiana. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1.5 million will be payable to the USA-Indiana. In January 1998, federal and state government authorities sought and obtained various documents and records from a Herrin, 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. It is possible that the imposition of significant fines or other remedies in connection with the resolution of this matter could have a material effect on the Company's financial condition and results of operations. On June 7, 1999, a lawsuit was filed against the Company in the Superior Court of Norfolk County, Massachusetts. Plaintiffs were certain selling stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS acquired on September 17, 1997. The complaint alleged 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. On January 21, 2000, the Company reached a settlement of this litigation. Under the terms of the settlement, the Company issued 1,750,000 Class A Common Shares and a $2,000,000 convertible subordinated debenture maturing on August 15, 2004. The note and accrued "payment-in-kind" interest will be convertible into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00 per share. YEAR 2000 READINESS DISCLOSURE In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the 21 25 Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. Costs related to Year 2000 readiness issues have been expensed as incurred and have been immaterial to the financial results of the Company. The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its customers, suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. 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, 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. These forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company may differ materially from those expressed or implied by any such forward-looking statements. Among the factors that could cause actual results to differ materially from the Company's expectations include continuation of various trends in the long-term care market (including the trend toward consolidation and the impact of the Balanced Budget Act of 1997), competition among providers of long-term care pharmacy services, the Company's negotiations with its bank group related to the waiver and amendment of its credit facility, changes in regulatory requirements, reform of the health care delivery system, litigation matters, other factors and 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 $206.1 million on its revolving credit facility at June 30, 2000, which is subject to a variable rate of interest based on the Prime rate. Assuming borrowings at June 30, 2000, a one-hundred basis point change in interest rates would impact net interest expense by approximately $2.1 million per year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements Report of Independent Auditors 26 Consolidated Balance Sheets at June 30, 1999 and 2000 27 Consolidated Statements of Operations for each of the three years in the period ended June 30, 2000 29 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 30, 2000 30 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2000 33 Notes to Consolidated Financial Statements 33 22 26 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, 1999 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2000. 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, 1999 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in violation of certain financial covenants under its revolving credit facility. As a result of the covenant violations, the Company's lenders may accelerate the maturity of the Company's obligations under the revolving credit facility. This factor raises substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to this matter is also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts or classifications of liabilities that may result from the outcome of this uncertainty. 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 18, 2000 Ernst & Young LLP Cleveland, Ohio 23 27 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS
JUNE 30, -------- 1999 2000 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 29,424 $ 16,387 Trade accounts receivable, less allowance for doubtful accounts of $38,880 and $53,926 as of June 30, 1999 and 2000 160,168 120,849 Inventories 49,244 37,086 Deferred income taxes 19,901 -- Prepaid expenses and other current assets 26,496 5,322 -------- -------- Total current assets 285,233 179,644 PROPERTY, PLANT AND EQUIPMENT Land 204 204 Buildings 2,206 2,212 Machinery, equipment and vehicles 31,129 29,212 Computer equipment and software 37,458 39,025 Furniture, fixtures and leasehold improvements 23,394 21,775 -------- -------- 94,391 92,428 Less accumulated depreciation and amortization 35,275 47,264 -------- -------- 59,116 45,164 Goodwill, less accumulated amortization of $22,803 and $33,620 as of June 30, 1999 and 2000 343,247 311,876 Other assets, less accumulated amortization of $3,286 and $5,250 as of June 30, 1999 and 2000 11,903 9,979 --------- ---------- TOTAL ASSETS $699,499 $546,663 ======== ========
See accompanying notes 24 28 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, -------- 1999 2000 -------- -------- CURRENT LIABILITIES Line of credit in default $ -- $206,130 Trade accounts payable 50,061 44,857 Accrued compensation and related expenses 15,798 7,115 Other accrued expenses 18,499 14,756 Current portion of long-term debt 3,480 651 -------- -------- Total current liabilities 87,838 273,509 Line of credit 214,700 -- Long-term debt, excluding current portion 1,936 1,291 Convertible subordinated debentures 100,000 102,000 Deferred income taxes 18,209 - Other long-term liabilities 382 158 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; 14,277,492 and 17,176,486 shares issued and outstanding at June 30, 1999 and 2000, respectively 143 172 Class B -- 20,000,000 shares authorized; 6,005,280 and 5,807,283 shares issued and outstanding at June 30, 1999 and 2000, respectively 60 58 Paid-in capital 263,882 271,650 Retained earnings (deficit) 12,349 (102,175) -------- --------- 276,434 169,705 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $699,499 $546,663 ======== ========
See accompanying notes 25 29 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, ------------------- 1998 1999 2000 ---- ---- ---- Revenues $509,064 $717,825 $694,530 Cost of revenues 380,217 540,547 556,757 -------- -------- ------- Gross profit 128,847 177,278 137,773 Selling, general and administrative expenses 93,895 139,522 126,969 Special charge to increase allowance for doubtful accounts -- 32,384 44,623 Nonrecurring charges 8,862 8,115 51,136 -------- -------- ------- Operating income (loss) 26,090 (2,743) (84,955) Interest expense (8,199) (19,864) (29,808) Interest income 2,454 1,563 3,565 -------- -------- ------- Income (loss) before income taxes 20,345 (21,044) (111,198) Income tax (expense) benefit (9,014) 7,640 (3,326) Cumulative effect of accounting change, net of taxes -- (2,921) -- -------- -------- ------- Net income (loss) $ 11,331 $ (16,325) $(114,524) ========= ========= ========== Earnings (loss) per share data: Earnings (loss) per common share - basic $ 0.59 $ (0.81) $ (5.31) ======== ========== ========== Earnings (loss) per common share - diluted $ 0.58 $ ( 0.81) $ (5.31) ======== ========== ========== Weighted average number of common shares outstanding - basic 19,100 20,200 21,551 ======= ======= ======= Weighted average number of common shares outstanding - diluted 19,372 20,200 21,551 ======= ======= ======
See accompanying notes 26 30 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
CLASS A CLASS B RETAINED COMMON COMMON PAID-IN EARNINGS STOCKHOLDERS' STOCK STOCK CAPITAL (DEFICIT) EQUITY ----- ----- ------- -------- ------ 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 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 ===== ==== ======== ======== ========
27 31 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION) (CONTINUED)
CLASS A CLASS B RETAINED COMMON COMMON PAID-IN EARNINGS STOCKHOLDERS' STOCK STOCK CAPITAL (DEFICIT) EQUITY ------- ------- ------- -------- ------------ Balance at June 30, 1999 $143 $ 60 $263,882 $ 12,349 $276,434 Issuance of 2,203,844 shares of Class A Common Stock for business combinations 22 -- 6,811 -- 6,833 Issuance of 497,153 shares of Class A Common Stock for profit sharing plan 5 -- 957 -- 962 Conversion of 197,997 shares of Class B Common Stock to 197,997 shares of Class A Common Stock 2 (2) -- -- -- Net (loss) -- -- -- (114,524) (114,524) ---- ---- -------- --------- -------- Balance at June 30, 2000 $172 $ 58 $271,650 $(102,175) $169,705 ==== ==== ======== ========== ========
See accompanying notes 28 32 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30, ------------------- 1998 1999 2000 ---- ---- ---- OPERATING ACTIVITIES Net income (loss) $ 11,331 $ (16,325) (114,524) 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 38,555 Depreciation and amortization 16,454 23,512 28,678 Provision for doubtful accounts 2,279 35,568 53,825 Deferred income taxes 47 (3,665) 2,937 Cumulative effect of accounting change, net of taxes -- 2,921 -- Non-cash profit sharing expense -- 450 962 Changes in assets and liabilities, net of effects of assets and liabilities acquired: Trade accounts receivable (55,086) (58,702) (10,309) Inventories (12,098) (5,759) 12,151 Trade accounts payable 18,040 15,930 (5,204) Accrued expenses 1,543 (2,366) (11,251) Prepaid expenses and other (2,585) (17,042) 14,948 --------- ---------- ---------- Net cash provided by (used in) operating activities (14,846) (23,992) 10,768 INVESTING ACTIVITIES Capital expenditures for property, plant and equipment (24,019) (29,400) (6,616) Proceeds from sales of assets 1,183 300 621 Purchases of businesses (171,083) (653) -- Other (8,872) (5,264) (5,766) --------- ---------- ---------- Net cash used in investing activities (202,791) (35,017) (11,761) FINANCING ACTIVITIES Proceeds from issuance of long-term debt 13 1,664 -- Repayment of long-term debt (4,135) (1,675) (3,474) Borrowings on line-of-credit 169,299 108,325 91,300 Payments on line-of-credit (31,784) (41,425) (99,870) Proceeds from convertible subordinated debentures 97,250 -- -- Proceeds from issuance of common stock and exercise of stock options 20 358 -- --------- ---------- ---------- Net cash provided by (used in) financing activities 230,663 67,247 (12,044) --------- ---------- ---------- Net (decrease) increase in cash and cash equivalents 13,026 8,238 (13,037) Cash and cash equivalents at beginning of period 8,160 21,186 29,424 --------- ---------- ---------- Cash and cash equivalents at end of period $ 21,186 $ 29,424 $ 16,387 ========= ========== ========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 5,076 $ 20,179 $ 28,975 ========= ========== ========== Income taxes $ 8,533 $ 1,792 $ 404 ========= ========== ==========
See accompanying notes 29 33 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000 (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, regulatory assistance and certain ancillary health care services including infusion therapy and nutrition management. MANAGEMENT'S PLAN TO CONTINUE AS A GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. As shown in the accompanying consolidated financial statements, the Company has incurred net losses of $16,325 and $114,524 for the years ended June 30, 1999 and 2000, respectively. At June 30, 2000 the Company's working capital was $(93,865), primarily as a result of classifying borrowings of $206,130 under the revolving credit facility as a current liability. As discussed in Note 2 of Notes to the Consolidated Financial Statements, as of June 30, 2000, the Company is in violation of certain financial covenants of the credit agreement related to its revolving credit facility and has received a formal notice of default from its bank group. The Company will not be permitted to obtain any further funds under the credit facility until the defaults have been waived by the bank group or an amendment to the credit agreement is obtained. All borrowings under the credit agreement have been classified as a current liability. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company is currently in discussions with its bank group regarding the default under its credit facility. The Company has been and continues to focus on reducing overhead and operating costs by accelerating efforts to consolidate and/or close pharmacy and ancillary service locations, the shutdown or sale of certain non-strategic and/or unprofitable operations, and continuing its employee reduction plan. In addition, the Company continues to review the profitability of its customer base and is terminating uneconomic accounts as well as applying stricter standards in accepting new business. The Company has made considerable efforts in these areas over the past eighteen months. The Company has also engaged financial advisors and legal counsel to assist in exploring various capital restructuring and strategic alternatives with third parties. At this time, no decision has been made to enter into a transaction or as to what form a transaction might take. There is no assurance that any such transaction will be consummated. Given the foregoing, no assurances can be given that the Company will be able to maintain its current level of operations, or that its financial condition and prospects will not be materially and adversely effected over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 and 42% and 1%, respectively, for the year ended June 30, 2000. 30 34 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, 2000 $ 38,880 $ 53,825 $ -- $ (38,779) $ 53,926 1999 18,427 35,568 -- (15,115) 38,880 1998 13,275 2,279 6,354 (3,481) 18,427
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, 2000 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 exclusively, inventories would have been $764 and $827 higher at June 30, 1999 and 2000, respectively. 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, including amortization of capital leased assets, was $7,813, $11,420 and $15,110 for the years ended June 30, 1998, 1999 and 2000, 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 expected 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. 31 35 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. 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 2000, the fair value of the $100 million convertible subordinated debt was $45 million and $12 million, respectively, based on quoted market prices. START-UP COSTS In April 1998, the AcSEC 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. 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. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, Statement of Financial Standards (SFAS) No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of the FASB Statement No. 133," amended Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to have a material effect on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The objective of SAB No. 101 is to provide further guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. The Company is required to follow the guidance in SAB No. 101 no later than the fourth quarter of its fiscal year 2001. The SEC has recently indicated that it intends to issue further guidance with respect to adoption of specific issues addressed by SAB No. 101. Until such time as this additional guidance is issued, the Company is unable to address the impact, if any, it may have. However, based on current guidance, the Company believes the adoption of SAB No. 101 will not have a material impact on the Company's financial position or results of operations. The Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. 32 36 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. MATERIAL RISKS AND UNCERTAINTIES The Company has observed significant negative industry and customer trends during the fiscal year ended June 30, 2000. These trends primarily relate to increased bankruptcies and significant financial difficulties recently experienced by the Company's skilled nursing facility customers primarily as a result of greater than expected adverse impact with regard to 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, 2000 (see Note 11 Special and Nonrecurring Charges). Should the negative trends continue in future periods at levels significantly exceeding those estimated by the Company, additional provisions for accounts receivable recorded as of June 30, 2000 could be required. The Company purchases the majority of its inventory through one primary pharmaceutical supplier representing a concentration of risk to the Company. 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 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. The credit facility contains certain debt covenants including an Interest Coverage Ratio and minimum consolidated net worth requirements. 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. At June 30, 2000, the Company is in violation of certain financial covenants of the credit agreement related to its revolving credit facility. On April 21, 2000, the Company received a formal notice of default from the bank group. As a result of the notice of default, the interest rate on the revolving credit facility increased to the Prime Rate plus 2.25% (11.75% at June 30, 2000). In addition, the Company will not be permitted to obtain any further funds under the credit facility until the defaults have been waived by the bank group. The Company is currently in discussions to obtain waivers of the covenant violations and to amend the credit agreement. Until the amendment to the credit agreement is obtained, the borrowings of $206,130 under the credit facility will be classified as a current liability. 33 37 3. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, -------- 1999 2000 ---- ---- Notes payable to former owners of acquired companies maturing through July, 2001, at interest rates ranging from 5% to 8% $2,788 $ 17 2% note payable to Pennsylvania Industrial Development Authority due in monthly installments through June, 2010, and secured through an interest in a building of the Company 505 468 Collateralized lease obligations with interest ranging from 7% to 16% due monthly through April 2004 1,709 1,226 Other 414 231 ------ ----- Total long-term debt 5,416 1,942 Less current portion 3,480 651 ------ ------ Long-term debt, excluding current portion $1,936 $1,291 ====== ======
The aggregate maturities of the long-term debt for each of the five years subsequent to June 30, 2000 are as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT --------------------------- ------ 2001 $ 651 2002 472 2003 253 2004 136 2005 25 Thereafter 405 ------ $1,942 ====== 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, 2000 consists of:
1998 1999 2000 ---- ---- ---- CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL ------- -------- ----- ------- -------- ----- ------- -------- ----- Federal $6,792 $ 55 $6,847 $(3,994) $(3,218) $(7,212) $ (56) $2,505 $2,449 State and local 2,175 (8) 2,167 (1,929) (447) (2,376) 445 432 877 ------ ------ ------ ------- ------- ------- ------- ------ ------ $8,967 $ 47 $9,014 $(5,923) $(3,665) $(9,588) $ 389 $2,937 $3,326 ====== ====== ====== ======= ======= ======= ======= ====== ======
Reconciliations of income taxes at the United States Federal statutory rate to the effective income tax rate for the three years ended June 30, 2000 are as follows:
1998 1999 2000 ---- ---- ---- Income taxes (benefit) at the United States statutory rate $7,121 $(9,070) $(37,807) State and local income taxes 1,414 (1,544) (2,989) Amortization of nondeductible intangible assets 604 640 561 Valuation allowance increase 0 0 35,993 Nondeductible nonrecurring charges (See Note 11) 0 0 6,725 Other - net (125) 386 843 ------ ------- -------- Total provision for income tax expense (benefit) 9,014 (9,588) 3,326 Income tax benefit from cumulative effect of accounting change -- 1,948 -- ------ ------- -------- Net provision (benefit) excluding benefit related to cumulative effect of accounting change $9,014 $(7,640) $ 3,326 ====== ======= =========
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets are as follows:
JUNE 30, -------- 1999 2000 ---- ---- Deferred tax assets (liabilities): Allowance for doubtful accounts $ 15,440 $22,087 Accrued expenses and other 6,090 5,464 Loss carryforwards 1,963 33,765 Depreciable assets and other (3,122) (1,662) Intangibles (18,678) (23,661) Valuation allowance -- (35,993) --------- ------- Net deferred tax assets $ 1,693 $ -- ========= =======
The evaluation of the realizability of the Company's net deferred tax assets in future periods is made based upon historical and projected operating performance and other factors for generating future taxable income, such as intent and ability to sell assets. At this time, the Company has concluded that the realization of deferred tax assets is not deemed to be "more likely than not" and, consequently, established a valuation allowance during the year ended June 30, 2000 for its net deferred tax asset. At June 30, 2000 the Company has net operating loss carryforwards of $83.5 million for income tax purposes that expire in years 2010 through 2020. U.S. tax laws limit the annual utilization of tax loss carryforwards of acquired businesses. 35 39 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, 2000 are as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT --------------------------- ------ 2001 $ 6,026 2002 4,843 2003 3,638 2004 2,247 2005 3,051 Thereafter 3,458 ------ $23,263 ======= Total rent expense under all operating leases for the years ended June 30, 1998, 1999 and 2000 was $6,577, $9,214 and $9,762, 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 compensation. 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 $740, $1,035 and $962 for the years ended June 30, 1998, 1999 and 2000, respectively. 7. RELATED PARTY TRANSACTIONS The Company leases 14 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 $1,128, $1,340 and $1,197 was incurred under these leasing arrangements in the years ended June 30, 1998, 1999 and 2000, respectively. 8. STOCKHOLDERS' EQUITY/CONVERTIBLE SUBORDINATED DEBENTURES 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. During fiscal 1998, $2,061 of the Company's convertible subordinated debentures were converted into 204,880 shares of Class A Common Stock. During fiscal 1999, $2,754 of the Company's convertible subordinated debentures were converted into 273,707 shares of Class A Common Stock. 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. On August 3, 1999 the Company amended its line of credit agreement entering into several restrictive covenants including a restriction on the declaration and payment of cash dividends to shareholders. 36 40 During fiscal 2000, in connection with an acquisition agreement, the Company issued a $2,000 convertible subordinated debenture maturing on August 15, 2004. The note and accrued "payment-in-kind" interest will be convertible into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00 per share. 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. 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 nonqualified stock options have a term of five years and became 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 non qualified stock 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 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. During fiscal 2000 the Company granted 494,250 and 290,500 nonqualified stock options at an exercise price of $4.25 and $1.47 per share respectively, the market values of the stock on the date of the grants. The 494,250 nonqualified stock options have a term of five years and become exercisable in thirds on August 1 2001, 2002 and 2003. The 290,500 nonqualified stock options have a term of five years and become exercisable in halves on January 28, 2001 and 2002. The Company's stock option activity and related information for the years ended June 30 is summarized as follows:
1998 1999 2000 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- -------- -------- -------- -------- Outstanding at beginning of year 566,825 $ 14.74 535,188 $ 14.64 846,694 $ 15.82 Granted -- -- 430,250 15.69 784,750 3.22 Exercised (2,637) 7.49 (73,237) 4.87 -- -- Forfeited (29,000) 19.64 (45,507) 18.63 (334,335) 12.32 --------- ------ --------- ------- --------- ----- Outstanding at end of year 535,188 $ 14.64 846,694 $15.82 1,297,109 $ 9.14 ------- ======== ------- ====== --------- ======= Exercisable at end of year 185,604 237,872 266,441 ======== ======== =======
Information regarding stock options outstanding as of June 30, 2000 is summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------------------------------- ----------------------------------- WEIGHTED AVERAGE NUMBER WEIGHTED REMAINING NUMBER WEIGHTED RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT AVERAGE EXERCISE PRICES JUNE 30, 2000 EXERCISE PRICE LIFE (IN YEARS) JUNE 30, 2000 EXERCISE PRICE --------------- -------------- -------------- --------------- -------------- -------------- $ 1.47 - $ 1.47 259,250 $ 1.47 4.58 -- $ -- 4.25 - 7.33 515,085 4.61 4.22 96,085 6.20 15.00 - 16.50 261,274 15.29 2.84 48,652 16.50 18.50 - 20.00 261,500 19.51 2.35 121,704 20.00 --------------- ------- ------ -------- ------- ------ $ 1.47 - $20.00 1,297,109 $ 9.14 3.64 266,441 $ 14.39 =============== ========= ======= ======== ========= =======
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 1.964; and a weighted-average expected option life ranging from 4 to 4.5 years. The weighted average fair value of options granted during fiscal 1999 and 2000 was $7.65 and $1.97 per share, respectively. 38 42 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. 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):
1998 1999 2000 ---- ---- ---- Net income (loss) - basic $ 10,876 $ (17,029) $ (115,577) Net income (loss) - diluted $ 10,876 $ (17,029) $ (115,577) Earnings per share - basic $ 0.57 $ (0.84) $ (5.36) Earnings per share - diluted $ 0.56 $ (0.84) $ (5.36)
10. ACQUISITIONS 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 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 acquisition 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. The Company issued 2,203,844 shares of Class A Common Stock valued at $6,833 and a $2,000 convertible subordinated debenture maturing on August 15, 2004 under contingent purchase price arrangements during fiscal 2000. As of June 30, 2000, no material contingencies remain from the Company's acquisition agreements. There were no significant acquisitions during the fiscal year ended June 30, 2000 and 1999. 11. SPECIAL AND NONRECURRING CHARGES During fiscal 2000, the Company recorded nonrecurring, restructuring and special charges of $95,800. A special charge of $44,600 was recorded to increase the allowance for doubtful accounts and nonrecurring, restructuring and other special charges of $51,200 were recorded in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations, the planned disposition of certain non-core and/or non-strategic assets, impairment of certain assets and other nonrecurring items. The special charge to increase the allowance for doubtful accounts resulted from continuing negative changes observed in industry and customer trends during the year ended June 30, 2000, and a change in the method of estimating the allowance necessary for accounts receivable. The financial condition of the Company's primary customer base and negative industry trends continued to deteriorate throughout the year. Due to the negative trends that the Company's customers are facing, management re-evaluated the method of estimating the allowances necessary for these and other customers. The total provision for doubtful accounts, including the amounts included in the special charge, was $53,825 for the year ended June 30, 2000. The Company continued its plan of restructuring to consolidate certain pharmacy sites in order to improve operating efficiencies. During the year ended June 30, 2000, the Company decided to consolidate thirteen additional pharmacy sites into either a new or existing location. The Company also decided to shutdown locations associated with certain ancillary services. During the year ended June 30, 2000, the Company recorded nonrecurring charges of $9,700 related to these site consolidations and location shutdowns, inclusive of $1,100 of additional costs incurred on site consolidations previously announced. As of June 39 43 30, 2000 twelve pharmacy sites and six ancillary service locations were consolidated into either a new or existing location or shutdown. The remaining site consolidations and location shutdowns were completed as of August 2000. During the year ended June 30, 2000, the Company adopted a formal exit plan to dispose of certain non-core and/or non-strategic assets. The Company recorded nonrecurring charges of $30,700 related to the planned disposition of assets primarily consisting of impairment to goodwill and property and equipment. Total revenue and operating income of the related business units was $59,300 and $1,500, respectively, for the year ended June 30, 2000. During April 2000, the Company disposed of two ancillary operations. The carrying amount of assets held for sale as of June 30, 2000 was $7,600. The remaining $10,800 of the nonrecurring charge primarily relates to severance incurred during the year associated with the Company's expense reduction initiatives, additional asset impairments, costs related to a settlement with federal authorities regarding the investigation of the Company's Indianapolis, Indiana facility and other nonrecurring expenses. During December 1999, the Company reached a settlement with the U.S. Attorney's office in the Southern District of Indiana regarding the federal investigation of the Company's facility in Indianapolis, Indiana. As a result, the Company recorded the settlement amount as a nonrecurring charge. Under the terms of the settlement, the Company paid $4,100 to the U.S. Attorney's office. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1,500 will be payable to the U.S. Attorney's office. See Note 13. Employee severance costs included in the nonrecurring charges relate to the termination of 472 employees. As of June 30, 2000, 404 employees have been terminated. Details of the fiscal 2000 nonrecurring, restructuring and special charges and related activity are as follows:
Nonrecurring Reserve Description Cash/Non-cash Charge Activity At 6/30/00 ----------- ------------- ------ -------- ---------- Site Consolidations Severance/compensation related Cash $ 1,300 $ (1,000) $ 300 Lease terminations Cash 2,800 (400) 2,400 Asset impairments Non-cash 4,400 (4,400) -- Other Cash 1,200 (600) 600 Special increase to allowance for doubtful accounts Non-cash 44,600 (44,600) -- Disposition of Assets Asset impairment Non-cash 30,200 (30,200) -- Other Cash 500 (,200) 300 Other Cash 6,600 (6,200) 400 Non-cash 4,200 (4,200) -- -------- -------- -------- Total $ 95,800 $(91,800) $ 4,000 ======== ======== ========
During the fourth quarter of fiscal 1999 the Company recorded special and nonrecurring charges of $40,500. A special charge of $32,400 was recorded to increase the allowance for doubtful accounts, and nonrecurring charges of $8,100 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. The acquisition related items primarily pertain to specific receivable collectibility issues relating to previous utilization of "legacy" systems, and other nonrecurring issues which have resulted in potentially uncollectible accounts receivable. 40 44 During the fourth quarter of fiscal 1999, the Company adopted a 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, four additional pharmacy sites were consolidated into either a new or existing location. During the year ended June 30, 1999, the Company recorded nonrecurring charges of $4,700 related to the new site consolidations, inclusive of $200 of additional costs incurred on the site consolidations announced in the prior year. These costs consist of $2,100 related to employee severance and other compensation related expenses, $600 related to lease termination costs and $2,000 related to asset impairments and other miscellaneous costs. The remaining $3,400 of the nonrecurring charge primarily relates to severance incurred during the fourth quarter of fiscal 1999 associated with the Company's expense reduction initiatives, additional acquisition related and other expenses. Employee severance costs included in the nonrecurring charge relate to the termination of 120 employees. As of June 30, 2000 all 120 employees have been terminated. Details of the fourth quarter fiscal 1999 special and nonrecurring charge and related activity are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/99 Activity At 6/30/00 ----------- ------------- ------ -------- ---------- -------- ---------- Site Consolidations Severance/compensation related Cash $ 2,100 $ (1,500) $ 600 $ (600) $ -- Lease terminations Cash 600 (100) 500 (400) 100 Asset impairments Non-cash 1,500 (1,500) -- -- -- Other Cash 500 (500) -- -- -- Special increase to allowance For doubtful accounts Non-cash 32,400 (32,400) -- -- -- Other Cash 3,400 (2,700) 700 (500) 200 -------- -------- -------- -------- -------- Total $ 40,500 $(38,700) $ 1,800 $ (1,500) $ 300 ======== ======== ======== ======== ========
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, 15 pharmacy sites were consolidated into either a new or existing location. The Company recorded nonrecurring charges of $5,300 related to the site consolidations during the year ended June 30, 1998, which consists 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. All of the employee terminations under the plan have occurred as of June 30, 2000. 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 entered into a new $150,000 revolving credit facility and a $50,000 bridge facility (June 1998 facilities) that replaced the existing $135,000 revolving credit facility. The June 1998 facilities were replaced in July 1998 by a $245,000 revolving credit facility. Approximately $1,300 of the nonrecurring charge relates to the write-off of deferred financing fees on the $135,000 revolving credit facility and certain financing fees associated with the June 1998 facilities. The remaining $1,400 of the nonrecurring charge primarily relates to additional acquisition related expenses. Details of the fourth quarter fiscal 1998 nonrecurring charge and related activity are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/99 Activity At 6/30/00 ----------- ------------- ------ -------- ---------- -------- ---------- Site Consolidations Severance packages Cash $ 500 $ (500) $ -- $ -- $ -- Lease terminations Cash 700 (400) 300 (300) -- Asset impairments Non-cash 3,500 (3,500) -- -- -- Other Cash 600 (600) -- -- --
41 45
Buyout of employment agreements Cash 900 (800) 100 (100) -- Write-off financing fees Non-cash 1,300 (1,300) -- -- -- Other Cash 1,000 (900) 100 (100) -- Non-Cash 400 (400) -- -- -- ------- ------- ------- ------- ---- Total $ 8,900 $(8,400) $ 500 $ (500) $ -- ======= ======= ======= ======= ====
42 46 12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1998 1999 2000 ---- ---- ---- Numerator: Numerator for basic earnings per share - net income (loss) $ 11,331 $ (16,325) $ (114,524) Effect of dilutive securities: Convertible debentures -- -- -- ----------- ----------- ----------- Numerator for diluted earnings per share $ 11,331 $ (16,325) $ (114,524) =========== =========== =========== Denominator: Denominator for basic earnings per share - weighted average common shares 19,100 20,200 21,551 Effect of dilutive securities: Stock options 272 -- -- Convertible debentures -- -- -- ----------- ----------- ----------- Dilutive potential common shares 272 -- -- ----------- ----------- ----------- Denominator for diluted earnings per share 19,372 20,200 21,551 =========== =========== =========== Basic earnings per share: Income (loss) before accounting change $ 0.59 $ (0.66) $ (5.31) Cumulative effect of change in accounting principle -- (0.15) -- ----------- ----------- ----------- Net income (loss) per share $ 0.59 $ (0.81) $ (5.31) =========== =========== =========== Diluted earnings per share: Income (loss) before accounting change $ 0.58 $ (0.66) $ (5.31) Cumulative effect of change in accounting principle -- (0.15) -- ----------- ----------- ----------- Net income (loss) per share $ 0.58 $ (0.81) $ (5.31) =========== =========== ===========
At June 30, 2000, the Company has $102,000 of convertible subordinated debentures outstanding that are convertible into 3,258,104 shares of Class A Common Stock and 1,297,109 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. 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 During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS Indiana), a wholly-owned subsidiary of the Company, reached a tentative settlement with the U.S. Attorney's office in the Southern District of Indiana (USA-Indiana) regarding the previously disclosed federal investigation of the Company's facility in Indianapolis, Indiana. Under the terms of the settlement, the Company paid $4,100 to the USA-Indiana. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1,500 will be payable to the USA-Indiana. The Company's facility in Herrin, Illinois 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 fines or other remedies in connection with the Illinois matter could have a material effect on the Company's financial condition and results of operations. 43 47 On January 21, 2000, the Company reached a settlement related to litigation with certain selling shareholders of the PharmaSource Group, Inc. regarding amounts payable under the terms of an earn-out provision in the acquisition agreement. Under the terms of the tentative settlement, the Company issued 1,750,000 Class A Common Shares and a $2,000 convertible subordinated debenture maturing on August 15, 2004. The note and accrued "payment-in-kind" interest will be convertible into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00 per share. 44 48 14. QUARTERLY DATA (UNAUDITED) Selected quarterly data for the years ended June 30, 1999 and 2000:
YEAR ENDED JUNE 30, 1999 ------------------------ 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 (c) -- -- -- 32,384 32,384 Nonrecurring charge (c) -- -- -- 8,115 8,115 Operating income (loss) 11,055 11,111 11,354 (36,263) (2,743) Cumulative effect of accounting change (b) (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)
YEAR ENDED JUNE 30, 2000 ------------------------ FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Revenues $ 184,191 $ 179,323 $ 170,462 $ 160,554 $ 694,530 Gross profit 40,300 37,424 31,419 28,630 137,773 Special charge to increase allowance (d) for doubtful accounts -- 11,885 -- 32,738 44,623 Nonrecurring charge (d) -- 27,952 5,462 17,722 51,136 Operating income (loss) 8,260 (34,715) (4,376) (54,124) (84,955) Net income (loss) (e) $ 1,528 $ (31,307) $ (22,938) $ (61,807) $(114,524) Earnings per share - basic (a) $ 0.08 $ (1.51) $ (1.03) $ (2.70) $ (5.31) Earnings per share - diluted (a) $ 0.08 $ (1.51) $ (1.03) $ (2.70) $ (5.31)
(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) Effective July 1, 1998, the Company adopted 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. (c) Special and nonrecurring charges of $40,499 before taxes and $24,299 after taxes, or $1.20 per 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 cumulative effect of adopting SOP 98-5, was $10,895 or $0.54 per both basic and diluted share. (d) Nonrecurring, restructuring and special charges of $95,759 were recorded during the fiscal year ended June 30, 2000. The charges consist of a special charge to increase the allowance for doubtful accounts and nonrecurring, restructuring and other special charges associated with the continuing implementation and execution of strategic restructuring and consolidation activities, the planned disposition of certain non-core and/or non-strategic assets, impairment of certain assets and other nonrecurring items. (e) Net loss for the year ended June 30, 2000 excluding nonrecurring, restructuring and special charges and a non-cash charge to record a full valuation allowance against the Company's net deferred tax assets was $9,505 or $0.44 per basic and diluted share. 45 49 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 2000 (the "2000 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 2000 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 2000 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 2000 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 2000 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. 46 50 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 2000 Consolidated Financial Statements of NCS HealthCare, Inc. and subsidiaries 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, 2000. 47 51 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, 2000 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 /s/ KEVIN B. SHAW President, Chief Executive Officer and Director Kevin B. Shaw (Principal Executive Officer) /s/ WILLIAM B. BYRUM Chief Operating Officer William B. Byrum (Principal Executive Officer) /s/ GERALD D. STETHEM Chief Financial Officer Gerald D. Stethem (Principal Financial Officer) /s/ A. MALACHI MIXON III A. Malachi Mixon III Director /s/ BOAKE A. SELLS Boake A. Sells Director /s/ RICHARD L. OSBORNE Richard L. Osborne Director Date: September 28, 2000
48 52
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 5 3/4% 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 53
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 (I) 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 August 3, 1999, among the Company, (I) its subsidiaries and KeyBank National Association *10.18 Separation Agreement, effective June 11, 1999, between (I) Jeffrey R. Steinhilber and the Company
E-2 54 21.1 Subsidiaries of the Company 23.0 Consent of Independent Auditors 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. (I) Incorporated herein by reference to the appropriate exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1999. E-3