-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PIM95HJZdJ6WbtqyGFMpAbPEo6/Ci/DmwDvO0LJzTWLDo0XDkyqy7a1VgJtHGSaE yYSzUIGnZkU6tVqXSqzDNA== 0000950152-01-001051.txt : 20010223 0000950152-01-001051.hdr.sgml : 20010223 ACCESSION NUMBER: 0000950152-01-001051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCS HEALTHCARE INC CENTRAL INDEX KEY: 0001004990 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 341816187 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27602 FILM NUMBER: 1541707 BUSINESS ADDRESS: STREET 1: 3201 ENTERPRISE PKWY STREET 2: STE 2200 CITY: BEACHWOOD STATE: OH ZIP: 44122 BUSINESS PHONE: 2165143350 MAIL ADDRESS: STREET 1: 1400 MCDONALD INVESTMENT CENTER STREET 2: 800 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 10-Q 1 l86492ae10-q.txt NCS HEALTHCARE, INC. 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 2000 Commission File Number- 0-27602 ------- NCS HealthCare, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware No. 34-1816187 - ----------------------------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation or organization) (IRS employer identification number)
3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122 - ---------------------------------------------------------- (Address of principal executive offices and zip code) (216) 378-6800 - ---------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check whether the registrant: 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirement for the past 90 days. Yes X No __ --- Common Stock Outstanding - ------------------------ Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practical date. Class A Common Stock, $ .01 par value - 18,421,845 shares as of February 9, 2001 Class B Common Stock, $ .01 par value - 5,294,964 shares as of February 9, 2001 2 NCS HEALTHCARE, INC. AND SUBSIDIARIES INDEX
Page ---- Part I. Financial Information: Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets- December 31, 2000 and June 30, 2000 3 Condensed Consolidated Statements of Operations Three and six months ended- December 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows- Six months ended- December 31, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements - December 31, 2000 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED) (NOTE A) DECEMBER 31, JUNE 30, 2000 2000 --------- --------- ASSETS Current Assets: Cash and cash equivalents $ 35,961 $ 16,387 Accounts receivable, less allowances 119,944 120,849 Inventories 29,890 37,086 Other 8,042 5,322 --------- --------- Total current assets 193,837 179,644 Property and equipment, at cost net of accumulated depreciation and amortization 40,466 45,164 Goodwill, less accumulated amortization 306,762 311,876 Other assets 8,836 9,979 --------- --------- Total assets $ 549,901 $ 546,663 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line of credit in default $ 206,130 $ 206,130 Accounts payable 60,746 44,857 Accrued expenses and other liabilities 24,051 22,522 --------- --------- Total current liabilities 290,927 273,509 Long-term debt, excluding current portion 1,161 1,291 Convertible subordinated debentures 102,000 102,000 Other 124 158 Stockholders' Equity: Preferred stock, par value $ .01 per share, 1,000,000 shares authorized; none issued -- -- Common stock, par value $ .01 per share: Class A - 50,000,000 shares authorized; 18,421,845 and 17,176,486 shares issued and outstanding at December 31, 2000 and June 30, 2000, respectively 184 172 Class B - 20,000,000 shares authorized; 5,294,964 and 5,807,283 shares issued and outstanding at December 31, 2000 and June 30, 2000, respectively 53 58 Paid-in capital 271,944 271,650 Accumulated deficit (116,492) (102,175) --------- --------- Total stockholders' equity 155,689 169,705 --------- --------- Total liabilities and stockholders' equity $ 549,901 $ 546,663 ========= =========
Note A: The balance sheet at June 30, 2000 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 4 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues $ 157,461 $ 179,323 $ 316,483 $ 363,514 Cost of revenues 128,788 141,899 259,773 285,790 ------------ ------------ ------------ ------------ Gross profit 28,673 37,424 56,710 77,724 Selling, general and administrative 27,413 32,302 54,414 64,342 Charge to increase allowance for doubtful accounts -- 11,885 -- 11,885 Nonrecurring and other special charges -- 27,952 -- 27,952 ------------ ------------ ------------ ------------ Operating income (loss) 1,260 (34,715) 2,296 (26,455) Interest expense, net 8,363 6,450 16,412 12,120 ------------ ------------ ------------ ------------ Loss before income taxes (7,103) (41,165) (14,116) (38,575) Income tax expense (benefit) 100 (9,858) 200 (8,796) ------------ ------------ ------------ ------------ Net loss $ (7,203) $ (31,307) $ (14,316) $ (29,779) ============ ============ ============ ============ Net loss per share - basic $ (0.31) $ (1.51) $ (0.61) $ (1.45) ============ ============ ============ ============ Net loss per share - diluted $ (0.31) $ (1.51) $ (0.61) $ (1.45) ============ ============ ============ ============ Average shares outstanding - basic 23,562 20,738 23,356 20,530 ============ ============ ============ ============ Average shares outstanding - diluted 23,562 20,738 23,356 20,530 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 4 5 NCS HEALTHCARE, INC. AND SUBSIDIARES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 2000 1999 --------------------- OPERATING ACTIVITIES Net loss $(14,316) $(29,779) Adjustments to reconcile net loss to net cash provided by operating activities: Non-cash portion of special and nonrecurring charges -- 33,108 Depreciation and amortization 12,764 13,901 Changes in assets and liabilities, net of effects of assets and liabilities acquired: Accounts receivable, net 905 (4,625) Accounts payable and other liabilities 17,945 (9,136) Other, net 4,477 (924) --------------------- Net cash provided by operating activities 21,775 2,545 --------------------- INVESTING ACTIVITIES Capital expenditures for property and equipment, net (1,483) (3,813) Other (362) (3,737) --------------------- Net cash used in investing activities (1,845) (7,550) --------------------- FINANCING ACTIVITIES Line-of-credit, net -- (10,200) Repayment of long-term debt (356) (693) --------------------- Net cash used in financing activities (356) (10,893) --------------------- Net increase (decrease) in cash and cash equivalents 19,574 (15,898) Cash and cash equivalents at beginning of period 16,387 29,424 --------------------- Cash and cash equivalents at end of period $ 35,961 $ 13,526 ====================
See notes to condensed consolidated financial statements. 5 6 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended December 31, 2000 are not necessarily indicative of the results that may be expected for the year ending June 30, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June 30, 2000. 2. During fiscal 2000, the Company recorded nonrecurring, restructuring and special charges of $95,800,000. A special charge of $44,600,000 was recorded to increase the allowance for doubtful accounts and nonrecurring, restructuring and other special charges of $51,200,000 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 $53,825,000 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. As a result, the Company consolidated thirteen additional pharmacy sites into either a new or existing location. The Company also shutdown six locations associated with certain ancillary services. During the year ended June 30, 2000, the Company recorded nonrecurring charges of $9,700,000 related to these site consolidations and location shutdowns, inclusive of $1,100,000 of additional costs incurred on site consolidations previously announced. 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 $30,700,000 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 $13,700,000 and $300,000, respectively, for the six months ended December 31, 2000. The carrying amount of assets held for sale as of December 31, 2000 was $6,300,000. Through December 31, 2000, the Company has disposed of three ancillary service operations. The remaining $10,800,000 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 $4,100,000 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 $1,500,000 will be payable to the U.S. Attorney's office. 6 7 Employee severance costs included in the nonrecurring charges relate to the termination of 472 employees. As of December 31, 2000, 435 employees have been terminated. Details of the fiscal 2000 nonrecurring, restructuring and special charges and related activity are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 12/31/00 ----------- ------------- ------ -------- ---------- -------- ----------- (in thousands) Site Consolidations Severance/compensation related Cash $ 1,300 $ (1,000) $ 300 $ (100) $ 200 Lease terminations Cash 2,800 (400) 2,400 (500) 1,900 Asset impairments Non-cash 4,400 (4,400) -- -- -- Other Cash 1,200 (600) 600 (300) 300 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 -- 300 Other Cash 6,600 (6,200) 400 (100) 300 Non-cash 4,200 (4,200) -- -- -- ------- --------- ------ --------- ------ Total $95,800 $ (91,800) $4,000 $ (1,000) $3,000 ======= ========= ====== ========= ======
3. At December 31, 2000 the Company is in violation of certain financial covenants of the credit agreement related to its revolving credit facility (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 Credit Facility increased to the Prime Rate plus 2.25% (11.25% at December 31, 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 $206,100,000 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 pledged collateral. Such action could also result in the acceleration of the maturity of the Company's convertible subordinated debentures. 4. The Company does not plan to make the semi-annual $2,875,000 interest payment due February 15, 2001 on the Company's 5 3/4% Convertible Subordinated Debentures due 2004 (debentures). If the interest payment is not made within thirty days after the due date, the Company will be in default with respect to the debentures. In the event of default, the Trustee or the holders of 25% of the outstanding debentures will be entitled to declare the principal of all the debentures to be due and payable immediately. Currently the amount of principal and accrued interest is $102,875,000. The Company is currently in discussions with an ad hoc committee of debenture holders regarding a possible restructuring of this indebtedness. The February 15, 2001 interest payment is a part of these negotiations. The timing and ultimate outcome of these negotiations is uncertain and could have a material adverse effect on the Company. 5. 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. 7 8 6. The following table sets forth the computation of basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------ ------------------------ 2000 1999 2000 1999 ------------------------ ------------------------ (in thousands, except per share information) Numerator: Numerator for basic earnings per share - net income $ (7,203) $ (31,307) $ (14,316) $ (29,779) Effect of dilutive securities: Convertible debentures -- -- -- -- ------------------------ ------------------------ Numerator for diluted earnings per share $ (7,203) $ (31,307) $ (14,316) $ (29,779) ======================== ======================== Denominator: Denominator for basic earnings per share - weighted average common shares 23,562 20,738 23,356 20,530 ------------------------ ------------------------ Effect of dilutive securities: Stock options -- -- -- -- Convertible debentures -- -- -- -- ------------------------ ------------------------ Dilutive potential common shares -- -- -- -- ------------------------ ------------------------ Denominator for diluted earnings per share 23,562 20,738 23,356 20,530 ======================== ======================== Basic earnings per share $ (0.31) $ (1.51) $ (0.61) $ (1.45) ======================== ======================== Diluted earnings per share $ (0.31) $ (1.51) $ (0.61) $ (1.45) ======================== ========================
At December 31, 2000 and 1999, the Company has 1,958,632 and 1,335,944, respectively, 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 for all periods presented. The Company had $102,000,000 and $100,000,000 of convertible subordinated debentures outstanding at December 31, 2000 and 1999, respectively, that were convertible into 3,258,104 and 3,058,000 shares of Class A Common Stock, respectively, that were not included in the computation of diluted earnings per share as their effect would be antidilutive for all periods presented. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net loss for the three months ended December 31, 2000 was $7,203,000 or $0.31 per diluted share compared to net loss, excluding special and nonrecurring charges, of $784,000 or $0.04 per diluted share for the three months ended December 31, 1999. Net loss for the six months ended December 31, 2000 was $14,316,000 or $0.61 per diluted share compared to net income, excluding special and nonrecurring charges, of $745,000 or $0.04 per diluted share for the six months ended December 31, 1999. Operating results during the past year were negatively effected by the continued impact of 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 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 customer bankruptcies and deteriorating financial condition. Through the enactment of the Balanced Budget Refinement Act of 1999 on November 29, 1999 and the Benefits Improvement and Protection Act of 2000 on December 15, 2000, Congress has provided some relief to skilled nursing facilities. Both of these actions restore a portion of the Medicare reimbursement for skilled nursing facilities that had been unintentionally taken away with the passage of the Balanced Budget Act of 1997. While these legislative changes are intended to improve the financial condition of skilled nursing facilities, a very difficult operating environment remains and management continues to react to pressures in the current environment. During the past year, the Company has reduced operating and overhead expenses, continued efforts to consolidate and/or close pharmacy locations, terminated uneconomic accounts and began applying stricter standards in accepting new business. Revenues for the three months ended December 31, 2000 decreased $21,862,000 or 12.2% to $157,461,000 from $179,323,000 recorded in the comparable period in fiscal 2000. Revenues for the six months ended December 31, 2000 decreased $47,031,000 or 12.9% to $316,483,000 from $363,514,000 recorded in the comparable period in fiscal 2000. Approximately $12,470,000 and $28,075,000, respectfully, of the decrease in revenues during the three and six month periods ended December 31, 2000 over the comparable prior year periods is attributable to a decrease in revenues 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. Through December 31, 2000, the Company has disposed of three ancillary operations that were not contributing to the overall financial performance of the Company. The remaining $9,392,000 and $18,956,000, respectfully, of the 9 10 decrease in revenues for the three and six month periods ended December 31, 2000 is attributable to the Company's pharmacy operations and is related to net bed loss during the period and revenue pressure associated with the implementation of the PPS system. Although the Company added new customers during the past year through its sales and marketing efforts, the number of beds served by the Company declined due to competitive conditions and decisions by management to terminate uneconomic accounts. Cost of revenues for the three months ended December 31, 2000 decreased $13,111,000 or 9.2% to $128,788,000 from $141,899,000 recorded in the comparable period in fiscal 2000. Cost of revenues for the six months ended December 31, 2000 decreased $26,017,000 or 9.1% to $259,773,000 from $285,790,000 recorded in the comparable period in fiscal 2000. Cost of revenues as a percentage of revenues for the three and six month periods ended December 31, 2000 was 81.8% and 82.1%, respectively, compared to 79.1% and 78.6% for the comparable periods during the prior fiscal year. Gross margins during the past year have been 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 payor sources, including Medicaid and insurance. Gross margin for the three months ended December 31, 2000 was 18.2% as compared to 17.6% for the three months ended September 30, 2000. This improvement in gross margin is primarily due to a favorable change in product mix, offset somewhat by the continued shift toward lower margin payor sources described above. Selling, general and administrative expenses for the three months ended December 31, 2000 decreased by $4,889,000 or 15.1% to $27,413,000 from $32,302,000 recorded in the comparable period in fiscal 2000. Selling, general and administrative expenses for the six months ended December 31, 2000 decreased by $9,928,000 or 15.4% to $54,414,000 from $64,342,000 recorded in the comparable period in fiscal 2000. Selling, general and administrative expenses as a percentage of revenues was 17.4% and 17.2% for the three and six month periods ended December 31, 2000, respectively, compared to 18.0% and 17.7% during the comparable periods in fiscal 2000. The decrease in expenses from the prior year is a result of efforts by the Company to reduce operating and overhead costs by continuing the consolidation and/or closing of pharmacy locations and continuing its employee reduction plan. These decreases were partially offset by increases in bad debt expense and professional fees. The Company had net interest expense of $8,363,000 and $16,412,000, respectfully, for the three and six month periods ended December 31, 2000 compared to net interest expense of $6,450,000 and $12,120,000 during the comparable periods in fiscal 2000. The increase is primarily attributable to an increase in interest rates and other finance related charges during the three and six month periods ended December 31, 2000 as compared to the prior year. As discussed below, the Company is in default of its line of credit agreement and is currently being charged a default interest rate. The Company will continue to pay the default interest rate as long as it is in default of its line of credit agreement. During fiscal 2000, the Company recorded nonrecurring, restructuring and special charges of $95,800,000. A special charge of $44,600,000 was recorded to increase the allowance for doubtful accounts and nonrecurring, restructuring and other special charges of $51,200,000 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 $53,825,000 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. As a result, the Company consolidated thirteen additional pharmacy sites into either a new or existing 10 11 location. The Company also shutdown six locations associated with certain ancillary services. During the year ended June 30, 2000, the Company recorded nonrecurring charges of $9,700,000 related to these site consolidations and location shutdowns, inclusive of $1,100,000 of additional costs incurred on site consolidations previously announced. 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 $30,700,000 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 $13,700,000 and $300,000, respectively, for the six months ended December 31, 2000. The carrying amount of assets held for sale as of December 31, 2000 was $6,300,000. Through December 31, 2000, the Company has disposed of three ancillary service operations. The remaining $10,800,000 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 $4,100,000 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 $1,500,000 will be payable to the U.S. Attorney's office. Employee severance costs included in the nonrecurring charges relate to the termination of 472 employees. As of December 31, 2000, 435 employees have been terminated. Details of the fiscal 2000 nonrecurring, restructuring and special charges and related activity are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/00 Activity At 12/31/00 ----------- ------------- ------ -------- ---------- -------- ----------- (in thousands) Site Consolidations Severance/compensation related Cash $ 1,300 $ (1,000) $ 300 $ (100) $ 200 Lease terminations Cash 2,800 (400) 2,400 (500) 1,900 Asset impairments Non-cash 4,400 (4,400) -- -- -- Other Cash 1,200 (600) 600 (300) 300 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 -- 300 Other Cash 6,600 (6,200) 400 (100) 300 Non-cash 4,200 (4,200) -- -- -- ------- --------- ------ --------- ------ Total $95,800 $ (91,800) $4,000 $ (1,000) $3,000 ======= ========= ====== ========= ======
Liquidity and Capital Resources Net cash provided by operating activities increased to $21,775,000 during the six months ended December 31, 2000 from $2,545,000 recorded in the comparable period in fiscal 2000. The increase in net cash provided by operating activities resulted primarily from a decrease in inventory as a result of the Company's inventory reduction efforts and 11 12 an increase in accounts payable due to an interim modification of payment terms negotiated with a major Company supplier. The Company is continuing its negotiations with this supplier to achieve a permanent modification in payment terms. The timing and the ultimate outcome of these negotiations is uncertain and could have a negative impact on the Company's liquidity. Net cash used in investing activities decreased to $1,845,000 during the six months ended December 31, 2000, as compared to $7,550,000 during the comparable period in fiscal 2000. The decrease is primarily the result of reduced capital expenditures during the current period. Net cash used in financing activities decreased to $356,000 during the six months ended December 31, 2000 from $10,893,000 recorded in the comparable period in fiscal 2000. The change is attributable to the Company making net payments of $10,200,000 on its line of credit in the prior year period with no similar payments this year. In August 1997, the Company issued $100 million of convertible subordinated debentures due 2004 (debentures). The debentures carry an interest rate of 5 3/4%. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. The Company's ability to make payments of principal and interest on the debentures will depend on its ability to receive distributions of cash from its subsidiaries. Each of the Company's wholly-owned subsidiaries has guaranteed the Company's payment obligations under the debentures, so long as such subsidiary is a member of an affiliated group (within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as amended) that includes the Company. The satisfaction by the Company's subsidiaries of their contractual guarantees, as well as the payment of dividends and certain loans and advances to the Company by such subsidiaries, may be subject to certain statutory or contractual restrictions, are contingent upon the earnings of such subsidiaries and are subject to various business considerations. The Company does not plan to make the semi-annual $2,875,000 interest payment due February 15, 2001 on the debentures. If the interest payment is not made within thirty days after the due date, the Company will be in default with respect to the debentures. In the event of default, the Trustee or the holders of 25% of the outstanding debentures will be entitled to declare the principal of all the debentures to be due and payable immediately. Currently the amount of principal and accrued interest is $102,875,000. The Company is currently in discussions with an ad hoc committee of debenture holders regarding a possible restructuring of this indebtedness. The February 15, 2001 interest payment is a part of these negotiations. The timing and ultimate outcome of these negotiations is uncertain and could have a material adverse effect on the Company. In June 1998, the Company entered into a four-year revolving credit agreement (Credit Facility). Effective August 3, 1999, the Credit Facility was amended to change the available commitment 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 December 31, 2000 the Company is in violation of certain financial covenants of the credit agreement related to the 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 Credit Facility increased to the Prime Rate plus 2.25% (11.25% at December 31, 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 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 the Credit Facility and cash generated from operations. During the past year, the Company has implemented measures to improve cash flows generated from operating activities, including reductions in operating and overhead costs by continuing the consolidation and/or closing of pharmacy locations, continuing its employee reduction plan, more 12 13 aggressive collection activity and inventory reduction efforts, and an interim modification of payment terms negotiated with a major Company supplier. 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 Credit Facility as described above and there can be no assurances that additional funds will be available. The Company's effective income tax rate for the three month and six month periods ended December 31, 2000 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 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 from 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. Disclosure Regarding Forward-Looking Statements Certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q, including, but not limited to, those regarding the Company's financial position, business strategy 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 regarding its credit facility, the Company's negotiations with an ad hoc committee of holders of its 5 3/4% convertible subordinated debentures due 2004, negotiations regarding payment terms with suppliers, changes in regulatory requirements and Federal and State reimbursement levels, reform of the health care delivery system, litigation matters, other factors and risks and uncertainties described in the Company's SEC reports. 13 14 ITEM 3. 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 $206,130,000 on its revolving credit facility at December 31, 2000, which is subject to a variable rate of interest based on the Eurodollar rate. Assuming borrowings at December 31, 2000, a one-hundred basis point change in interest rates would impact net interest expense by approximately $2,061,300 per year. 14 15 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of stockholders of the Company held on December 12, 2000 (the "Annual Meeting"), the stockholders voted to elect Kevin B. Shaw and Boake A. Sells each to an additional three-year term as Director of the Company. Votes were cast as follows:
VOTES KEVIN B. SHAW BOAKE A. SELLS ----- ------------- -------------- For 67,991,670 67,904,361 Withheld 432,583 519,892
In addition, stockholders voted in favor of a proposal to approve and adopt the NCS HealthCare, Inc. 2000 Performance Plan (the "2000 Plan") at the Annual Meeting. The number of votes cast for, against and abstentions with respect to the 2000 Plan are set forth below:
FOR AGAINST ABSTAIN --- ------- ------- 55,580,333 948,716 64,355
For a description of the bases used in tabulating the above-referenced vote, see the Company's definitive proxy statement used in connection with the Annual Meeting. The term of office of the following Directors of the Company continued after the Annual Meeting: Jon H. Outcalt and Richard L. Osborne. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit ------ ------- 10.1 The NCS HealthCare, Inc. 2000 Performance Plan (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended December 31, 2000. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NCS HealthCare, Inc. (Registrant) Date: February 14, 2001 By /s/ Kevin B. Shaw ----------------------------------------------- Kevin B. Shaw President, Chief Executive Officer and Director Date: February 14, 2001 By /s/ William B. Byrum ----------------------------------------------- William B. Byrum Chief Operating Officer Date: February 14, 2001 By /s/ Gerald D. Stethem ----------------------------------------------- Gerald D. Stethem Chief Financial Officer 16 EX-10.1 2 l86492aex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 NCS HEALTHCARE, INC. 2000 PERFORMANCE PLAN 1. PURPOSE The NCS HealthCare, Inc. 2000 Performance Plan, as the same may be amended (the "Plan"), is designed to foster the long-term growth and performance of the Company by: (a) enhancing the Company's ability to attract and retain highly qualified employees and (b) motivating its Directors and employees to serve and promote the long-term interests of the Company and its stockholders through stock ownership and performance-based incentives. To achieve this purpose, the Plan provides authority for the grant of Stock Options, Restricted Stock, Stock Equivalent Units, Stock Appreciation Rights, Cash Awards and other stock and performance-based incentives. 2. DEFINITIONS (a) "AFFILIATE" means the same definition as under Rule 12b-2 under the Exchange Act. (b) "AWARD" means the grant of Stock Options, Restricted Stock, Stock Equivalent Units, Stock Appreciation Rights, Cash Awards, and other stock and performance-based incentives under this Plan. (c) "AWARD AGREEMENT" means any agreement between the Company and a Participant that sets forth terms, conditions, and restrictions applicable to an Award. (d) "BOARD OF DIRECTORS" means the Board of Directors of the Company. (e) "CASH AWARD" is defined in Section 6(b)(iv). (f) "CHANGE IN CONTROL" means, at any time after the date of the adoption of this Plan, the occurrence of any one or more of the following: (i) Any Person (other than any employee benefit plan or employee stock ownership plan of the Company, or any Person organized, appointed, or established by the Company, for or pursuant to the terms of any such plan), alone or together with any of its Affiliates, becomes the Beneficial Owner of 20% or more of the total outstanding voting power of the Company, as reflected by the power to vote in connection with the election of Directors, or commences or publicly announces an intent to commence a tender offer or exchange offer the consummation of which would result in the Person becoming the Beneficial Owner of 20% or more of the total outstanding voting power of the Company as reflected by the power to vote in connection with the election of Directors. For purposes of this Section 2(f)(i), the term "Person" means a person as defined by Section 13(d)(3) of the Exchange Act, and the term "Beneficial Owner" means a beneficial owner as defined by Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act. (ii) At any time during a period of 24 consecutive months, individuals who were Directors at the beginning of the period no longer constitute a majority of the members of the Board of Directors, unless the election, or the nomination for election by the Company's stockholders, of each Director who was not a Director at the beginning of the period is approved by at least a majority of the Directors who are in office at the time of the election or nomination and were either Directors at the beginning of the period or are Continuing Directors. (iii) A record date is established for determining stockholders entitled to vote upon (A) a merger or consolidation of the Company with another corporation (which is not an affiliate of the Company) in which the Company is not the surviving or continuing corporation or in which all or part of the outstanding capital stock of the Company is to be converted into or exchanged for cash, securities, or other property, (B) a sale or other disposition of all or substantially all of the assets of the Company, or (C) the dissolution or liquidation (but not partial liquidation) of the Company. 2 (g) "CLASS B COMMON STOCK" means the shares of Class B Common Stock, without par value, of the Company, including authorized and unissued shares of Class B Common Stock. (h) "CODE" means the Internal Revenue Code of 1986, or any law that supersedes or replaces it, as amended from time to time. (i) "COMMITTEE" means the Human Resources Committee of the Board of Directors, or any other committee of the Board of Directors that the Board of Directors or the Human Resources Committee authorizes to administer all or any aspect of this Plan. (j) "CLASS A COMMON STOCK" means the shares of Class A Common Stock, without par value, of the Company, including authorized and unissued shares of Class A Common Stock and shares of Class A Common Stock held in treasury. (k) "COMPANY" means NCS HealthCare, Inc., a Delaware corporation, and its direct and indirect subsidiaries. (l) "CONTINUING DIRECTOR" means a Director who was a Director prior to a Change in Control or was recommended or elected to succeed a Continuing Director by a majority of the Continuing Directors then in office. (m) "DIRECTOR" means a director of NCS HealthCare, Inc. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, and any law that supersedes or replaces it, as amended from time to time. (o) "FAIR MARKET VALUE" of Class A Common Stock means the value of the Class A Common Stock determined by the Committee, or pursuant to rules established by the Committee on a basis consistent with regulations under the Code. (p) "INCENTIVE STOCK OPTION" means a Stock Option that meets the requirements of Section 422 of the Code. (q) "NOTICE OF AWARD" means any notice by the Committee to a Participant that advises the Participant of the grant of an Award or sets forth terms, conditions, and restrictions applicable to an Award. (r) "PARTICIPANT" means any person to whom an Award has been granted under this Plan. (s) "PERFORMANCE OBJECTIVES" means the achievement of performance objectives, the outcomes of which are substantially uncertain when set, established pursuant to this Plan. Performance Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual Participant or the subsidiary, division, department or function within the Company in respect of which the Participant performs services. Any Performance Objectives applicable to Awards intended to qualify as "performance-based compensation" under Section 162(m) of the Code (the "Performance-Based Exception") shall be limited to specified levels of or increases in the Company's, or subsidiary's, or division's, or department's, or function's return on equity, earnings per share, total earnings, earnings growth, return on capital, operating measures (including, but not limited to, operating margin and operating costs) return on assets, or increase in the Fair Market Value of the Class A Common Stock. Except in the case of such an Award intended to qualify as Performance-Based Compensation, if the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Objectives unsuitable, the Committee may modify such Performance Objectives or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable. Before any payment of Performance-Based Compensation, the Committee shall certify that the Performance Objectives and any other material terms were in fact satisfied. The Committee shall have the discretion to adjust the determinations of the degree of attainment of the pre-established Performance Objectives; provided, however, that Awards which are designed to qualify for the 3 Performance-Based Exception, may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward). In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without obtaining stockholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining stockholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards that will not qualify for the Performance-Based Exception, the Committee may make such grants without satisfying the requirements of Code Section 162(m). (t) "PERSON" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a governmental authority. (u) "RESTRICTED STOCK" means an Award of Common Stock that are subject to restrictions or risk of forfeiture. (v) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, or any rule that supersedes or replaces it, as amended from time to time. (w) "STOCK APPRECIATION RIGHT" is defined in Section 6(b)(i). (x) "STOCK AWARD" is defined in Section 6(b)(ii). (y) "STOCK EQUIVALENT UNIT" means an Award that is valued by reference to the value of the Class A Common Stock. (z) "STOCK OPTION" is defined in Section 6(b)(iii). 3. ELIGIBILITY All Directors and employees of the Company and its Affiliates are eligible for the grant of Awards. The selection of any such persons to receive Awards will be within the discretion of the Committee. More than one Award may be granted to the same person. Notwithstanding the foregoing, any individual who renounces in writing any right that he or she may have to receive Awards under the Plan shall not be eligible to receive any Awards hereunder. 4. CLASS A COMMON STOCK AVAILABLE FOR AWARDS; ADJUSTMENT (a) Number of Shares of Common Stock. The aggregate amount of Class A Common Stock that may be subject to Awards, including Stock Options, granted under this Plan during the term of this Plan will be equal to Two Million (2,000,000) shares of Class A Common Stock, subject to any adjustments made in accordance with the terms of this Section 4. The assumption of obligations in respect of awards granted by an organization acquired by the Company, or the grant of Awards under this Plan in substitution for any such awards, will not reduce the amount of Class A Common Stock available in any fiscal year for the grant of Awards under this Plan. Class A Common Stock subject to an Award that is forfeited, terminated, or canceled without having been exercised (other than Class A Common Stock subject to a Stock Option that is canceled upon the exercise of a related Stock Appreciation Right) will again be available for grant under this Plan, without reducing the amount of Class A Common Stock available in any fiscal year for grant of Awards under this Plan. In addition, any Class A Common Stock which is retained to satisfy a Participant's withholding tax obligations or which is transferred to the Company by a Participant to satisfy such obligations or to pay all or any portion of the exercise price of the Award in accordance with the terms of the Plan, the Award Agreement or the Notice of Award, may be made available for reoffering under the Plan to any Participant. 4 (b) No Fractional Shares of Class A Common Stock. No fractional shares of Class A Common Stock will be issued, and the Committee will determine the manner in which the value of fractional shares of Class A Common Stock will be treated. (c) Adjustment. In the event of any change in the Class A Common Stock by reason of a merger, consolidation, reorganization, recapitalization, or similar transaction, including any transaction described under Section 424(a) of the Code, or in the event of a stock dividend, stock split, or distribution to stockholders (other than normal cash dividends), the Committee will have authority to adjust, in any manner that it deems equitable, the number and class of shares of Class A Common Stock that may be issued under this Plan, the number and class of shares of Class A Common Stock subject to outstanding Awards, the exercise price applicable to outstanding Awards, and the Fair Market Value of the Class A Common Stock and other value determinations applicable to outstanding Awards, including as may be allowed or required under Section 424(a) of the Code. 5. ADMINISTRATION (a) Committee. This Plan will be administered by the Committee. The Committee will, subject to the terms of this Plan, have the authority to: (i) select the eligible persons who will receive Awards, (ii) grant Awards, (iii) determine the number and types of Awards to be granted to eligible persons, (iv) determine the terms, conditions, vesting periods, and restrictions applicable to Awards, including timing and price, (v) adopt, alter, and repeal administrative rules and practices governing this Plan, (vi) interpret the terms and provisions of this Plan and any Awards granted under this Plan, including, where applicable, determining the method of valuing any Award and certifying as to the satisfaction of such Awards, (vii) prescribe the forms of any Notices of Award, Award Agreements, or other instruments relating to Awards, and (viii) otherwise supervise the administration of this Plan. (b) Delegation. The Committee may delegate any of its authority to any other person or persons that it deems appropriate. (c) Decisions Final. All decisions by the Committee, and by any other Person or Persons to whom the Committee has delegated authority, to the extent permitted by law, will be final and binding on all Persons. (d) No Liability. Neither the Committee nor any of its members shall be liable for any act taken by the Committee pursuant to the Plan. No member of the Committee shall be liable for the act of any other member. 6. AWARDS (a) Grant of Awards. The Committee will determine the type or types of Awards to be granted to each Participant and will set forth in the related Notice of Award or Award Agreement and the terms, conditions, vesting periods, and restrictions applicable to each Award. Awards may be granted singly or in combination or tandem with other Awards. Awards may also be granted in replacement of, or in substitution for, other awards granted by the Company, whether or not granted under this Plan; without limiting the foregoing, if a Participant pays all or part of the exercise price or taxes associated with an Award by the transfer of Class A Common Stock or the surrender of all or part of an Award (including the Award being exercised), the Committee may, in its discretion, grant a new Award to replace the Class A Common Stock that was transferred or the Award that was surrendered. The Company may assume obligations in respect of awards granted by any Person acquired by the Company or may grant Awards in replacement of, or in substitution for, any such awards. (b) Types of Awards. Awards may include, but are not limited to, the following: (i) Stock Appreciation Right means a right to receive a payment, in cash or Class A Common Stock, equal to the excess of (A) the Fair Market Value, or other specified valuation, of a specified number of Class A Common Stock on the date the right is exercised over (B) the Fair Market Value, or other specified valuation, of such Class A Common Stock on the date the right is granted, all as determined by the Committee. The right may be conditioned upon the occurrence of certain events, such as a Change in Control of the Company, or may be unconditional, as determined by the Committee. 5 (ii) Stock Award means an Award that is made in Class A Common Stock, Restricted Stock, or Stock Equivalent Units or that is otherwise based on, or valued in whole or in part by reference to, the Class A Common Stock. All or part of any Stock Award may be subject to conditions, restrictions, and risks of forfeiture, as and to the extent established by the Committee. Stock Awards may be based on the Fair Market Value of the Class A Common Stock, or on other specified values or methods of valuation, as determined by the Committee. (iii) Stock Option means a right to purchase a specified amount of Class A Common Stock, during a specified period, and at a specified exercise price, all as determined by the Committee. A Stock Option may be an Incentive Stock Option or a Stock Option that does not qualify as an Incentive Stock Option. In addition to the terms, conditions, vesting periods, and restrictions established by the Committee, Incentive Stock Options must comply with the requirements of Section 422 of the Code and regulations promulgated thereunder, including the requirement that the aggregate Fair Market Value of the Common Stock with respect to which the Incentive Stock Option first becomes exercisable in any calendar year shall not exceed $100,000 (measured as of the effective date of the award of an Incentive Stock Option). If any Incentive Stock Option granted under the Plan would cause such dollar limits to be exceeded, then the excess portion of such Incentive Stock Option shall become exercisable in the next or succeeding calendar year in which its exercisability would not violate the dollar limitations. The exercise price of a Stock Option that does not qualify as an Incentive Stock Option may be more or less than the Fair Market Value of the Common Stock on the date the Stock Option is granted. (iv) Cash Award means an award denominated in cash. All or part of any Cash Award may be subject to conditions established by the Committee, including but not limited to future service with the Company or the achievement of the Performance Objectives. (c) Limits on Awards. The maximum aggregate amount of Class A Common Stock (i) for which Stock Options may be granted, and (ii) with respect to which Stock Appreciation Rights may be granted, to any particular employee during any calendar year during the term of this Plan is 300,000 shares, subject to adjustment in accordance with Section 4(c) hereof. The maximum aggregate amount of cash which may be granted or awarded to any particular employee during any calendar year during the term of this Plan is $500,000. 7. DEFERRAL OF PAYMENT With the approval of the Committee, the delivery of the Class A Common Stock, cash, or any combination thereof subject to an Award may be deferred, either in the form of installments or a single future delivery. The Committee may also permit selected Participants to defer the receipt of some or all of their Awards, as well as other compensation, in accordance with procedures established by the Committee to assure that the recognition of taxable income is deferred under the Code. Deferred amounts may, to the extent permitted by the Committee, be credited as cash or Stock Equivalent Units. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents on Stock Equivalent Units. 8. PAYMENT OF EXERCISE PRICE The exercise price of a Stock Option (other than an Incentive Stock Option) and any Stock Award for which the Committee has established an exercise price may be paid in cash, by the transfer of Class A Common Stock, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods, as and to the extent permitted by the Committee. The exercise price of an Incentive Stock Option may be paid in cash, by the transfer of Class A Common Stock, or by a combination of these methods, as and to the extent permitted by the Committee but may not be paid by the surrender of all or part of an Award. The Committee may prescribe any other method of paying the exercise price that it determines to be consistent with applicable law and the purpose of this Plan. In the event Class A Common Stock that is Restricted Stock is used to pay the exercise price of a Stock Award, that amount of the Class A Common Stock issued upon the exercise of the Award equal to the amount of Class A Common Stock that is Restricted Stock that has been used to pay the exercise price will be subject to the same restrictions as the Restricted Stock. 9. TAXES ASSOCIATED WITH AWARD 6 Prior to the payment of an Award or upon the exercise or release thereof, the Company may withhold, or require a Participant to remit to the Company, an amount sufficient to pay any federal, state, and local taxes associated with the Award. The Committee may, in its discretion and subject to such rules as the Committee may adopt, permit a Participant to pay any or all taxes associated with the Award (other than an Incentive Stock Option) in cash, by the transfer of Class A Common Stock, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods. The Committee may permit a Participant to pay any or all taxes associated with an Incentive Stock Option in cash, by the transfer of Class A Common Stock, or by a combination of these methods or by any other method which does not disqualify the option as an Incentive Stock Option under applicable provisions of the Code. 10. TERMINATION OF EMPLOYMENT If the employment of a Participant terminates for any reason, all unexercised, deferred, and unpaid Awards may be exercisable or paid only in accordance with rules established by the Committee or as specified in the particular Award Agreement or Notice of Award. Such rules may provide, as the Committee deems appropriate, for the expiration, continuation, or acceleration of the vesting of all or part of the Awards. 11. TERMINATION OF AWARDS UNDER CERTAIN CONDITIONS The Committee may cancel any unexpired, unpaid, or deferred Awards at any time if the Participant is not in compliance with all applicable provisions of this Plan or with any Notice of Award or Award Agreement or if the Participant, without the prior written consent of the Company, engages in any of the following activities: (i) Renders services for an organization, or engages in a business, that is, in the judgment of the Committee, in competition with the Company. (ii) Discloses to anyone outside of the Company, or uses for any purpose other than the Company's business any confidential information or material relating to the Company, whether acquired by the Participant during or after employment with the Company, in a fashion or with a result that the Committee, in its judgment, deems is or may be injurious to the best interests of the Company. The Committee may, in its discretion and as a condition to the exercise of an Award, require a Participant to acknowledge in writing that he or she is in compliance with all applicable provisions of this Plan and of any Notice of Award or Award Agreement and has not engaged in any activities referred to in clauses (i) and (ii) above. 12. CHANGE IN CONTROL In the event of a Change in Control of the Company, unless and to the extent otherwise determined by the Board of Directors, (i) all Stock Appreciation Rights and Stock Options then outstanding will become fully exercisable as of the date of the Change in Control; (ii) all restrictions and conditions applicable to Restricted Stock and other Stock Awards will be deemed to have been satisfied as of the date of the Change in Control, and (iii) all Cash Awards shall be released and/or deemed to have been fully earned as of the date of the Change in Control. Any such determination by the Board of Directors that is made after the occurrence of a Change in Control will not be effective unless a majority of the Directors then in office are Continuing Directors and the determination is approved by a majority of the Continuing Directors. 13. AMENDMENT, SUSPENSION, OR TERMINATION OF THIS PLAN; AMENDMENT OF OUTSTANDING AWARDS (a) Amendment, Suspension, or Termination of this Plan. The Board of Directors may amend, suspend, or terminate this Plan at any time; provided, however, that in no event, without the approval of the Company's stockholders, shall any action of the Committee or the Board of Directors result in: (i) Increasing, except as provided in Section 4(c) hereof, the maximum amount of Class A Common Stock that may be subject to Awards granted under the Plan; or 7 (ii) Making any change which would cause any option granted under the Plan as an Incentive Stock Option not to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code; or (iii) Making any change which would eliminate the exemption provided by Rule 16b-3 for this Plan and for Awards granted under this Plan. (b) Amendment of Outstanding Awards. The Committee may, in its discretion, amend the terms of any Award, prospectively or retroactively, but no such amendment may impair the rights of any Participant without his or her consent. The Committee may, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Award. 14. AWARDS TO FOREIGN NATIONALS AND EMPLOYEES OUTSIDE THE UNITED STATES To the extent that the Committee deems appropriate to comply with foreign law or practice and to further the purpose of this Plan, the Committee may, without amending this Plan, (i) establish special rules applicable to Awards granted to Participants who are foreign nationals, are employed outside the United States, or both, including rules that differ from those established under this Plan, and (ii) grant Awards to such Participants in accordance with those rules. 15. NONASSIGNABILITY Unless otherwise determined by the Committee, (i) no Award granted under the Plan may be transferred or assigned by the Participant to whom it is granted other than by will, pursuant to the laws of descent and distribution, and (ii) an Award granted under this Plan may be exercised, during the Participant's lifetime, only by the Participant. 16. GOVERNING LAW The interpretation, validity, and enforcement of this Plan will, to the extent not otherwise governed by the Code or the securities laws of the United States, be governed by the laws of the State of Delaware. 17. NO RIGHTS AS EMPLOYEES/STOCKHOLDERS Nothing in the Plan or in any Award Agreement or Notice of Award shall confer upon any Participant any right to continue in the employ of the Company or an Affiliate, or to serve as a member of the Board of Directors or to be entitled to receive any remuneration or benefits not set forth in the Plan or such Award Agreement or Notice of Award, or to interfere with or limit either the right of the Company or an Affiliate to terminate the employment of such Participant at any time or the right of the stockholders of the Company to remove him or her as a member of the Board of Directors with or without cause. Nothing contained in the Plan or in any Award Agreement or Notice of Award shall be construed as entitling any Participant to any rights of a stockholder as a result of the grant of an Award until such time as Class A Common Stock is actually issued to such Participant pursuant to the exercise of a Stock Option, Stock Appreciation Right or other Stock Award. 18. EFFECTIVE AND TERMINATION DATES (a) Effective Date. This Plan was approved by the Board of Directors on September 29, 2000 and becomes effective upon adoption by the affirmative vote of the holders of a majority of the voting power of the Company represented by the Class A Common Stock and the Class B Common Stock, represented in person or by proxy, at any annual or special meeting of stockholders at which a quorum is present. The Plan shall be deemed to be adopted on the date of such stockholder meeting. (b) Termination Date. This Plan will continue in effect until midnight on November 1, 2010; provided, however, that Awards granted on or before that date may extend beyond that date and restrictions and other terms and conditions imposed on Restricted Stock or any other Award granted on or before that date may extend beyond such date. -----END PRIVACY-ENHANCED MESSAGE-----