-----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, GrVl6u16V98c1LPVwkPjCCYKn535bLG0rMp3zaCmozeM4nSoFFY6pgyW7dqHfZLn edy6HFNJEHmHZDXYMVa3PA== 0000950152-01-502036.txt : 20010516 0000950152-01-502036.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950152-01-502036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: 1638638 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 l87999ae10-q.txt NCS HEALTHCARE 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 March 31, 2001 Commission File Number- 0-27602 ------- NCS HealthCare, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware No. 34-1816187 - -------------------------------------- ----------------------------------- (State or other jurisdiction of (IRS employer incorporation or organization) 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 May 10, 2001 Class B Common Stock, $ .01 par value - 5,294,964 shares as of May 10, 2001 2 NCS HEALTHCARE, INC. AND SUBSIDIARIES INDEX Page ---- Part I. Financial Information: Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets- March 31, 2001 and June 30, 2000 3 Condensed Consolidated Statements of Operations Three and nine months ended- March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows- Nine months ended- March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements - March 31, 2001 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 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) March 31, June 30, 2001 2000 --------------- --------- ASSETS Current Assets: Cash and cash equivalents $ 42,162 $ 16,387 Accounts receivable, less allowances 103,310 120,849 Inventories 28,657 37,086 Other 7,076 5,322 ----------- ----------- Total current assets 181,205 179,644 Property and equipment, at cost net of accumulated depreciation and amortization 36,941 45,164 Goodwill, less accumulated amortization 304,295 311,876 Other assets 7,982 9,979 ----------- ----------- Total assets $530,423 $546,663 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line of credit in default $206,130 $206,130 Convertible subordinated debentures in default 102,116 - Accounts payable 59,226 44,857 Accrued expenses and other liabilities 26,804 22,522 ---------- --------- Total current liabilities 394,276 273,509 Long-term debt, excluding current portion 1,126 1,291 Convertible subordinated debentures - 102,000 Other 138 158 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 March 31, 2001 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 March 31, 2001 and June 30, 2000, respectively 53 58 Paid-in capital 271,945 271,650 Accumulated deficit (137,299) (102,175) -------- -------- Total stockholders' equity 134,883 169,705 --------- --------- Total liabilities and stockholders' equity $530,423 $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 NINE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 ---- ---- ---- ---- Revenues $ 154,890 $ 170,462 $ 471,373 $ 533,976 Cost of revenues 127,214 139,043 386,987 424,833 --------- --------- --------- --------- Gross profit 27,676 31,419 84,386 109,143 Selling, general and administrative expenses 40,476 30,333 94,890 94,675 Charge to increase allowance for doubtful accounts -- -- -- 11,885 Nonrecurring and other special charges -- 5,462 -- 33,414 --------- --------- --------- --------- Operating loss (12,800) (4,376) (10,504) (30,831) Interest expense, net 7,907 6,440 24,319 18,560 --------- --------- --------- --------- Loss before income taxes (20,707) (10,816) (34,823) (49,391) Income tax expense 100 12,122 300 3,326 --------- --------- --------- --------- Net loss $ (20,807) $ (22,938) $ (35,123) $ (52,717) ========= ========= ========= ========= Net loss per share - basic $ (0.88) $ (1.03) $ (1.50) $ (2.50) ========= ========= ========= ========= Net loss per share - diluted $ (0.88) $ (1.03) $ (1.50) $ (2.50) ========= ========= ========= ========= Shares used in the computation - basic 23,717 22,302 23,475 21,116 Shares used in the computation - diluted 23,717 22,302 23,475 21,116
See notes to condensed consolidated financial statements. 4 5 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended March 31, -------------------- 2001 2000 -------------------- OPERATING ACTIVITIES Net loss $(35,123) $(52,717) Adjustments to reconcile net loss to net cash provided by operating activities: Non-cash portion of special and nonrecurring charges -- 36,054 Non-cash portion of fixed asset impairment charge 2,106 -- Depreciation and amortization 18,642 20,780 Deferred income taxes -- 1,693 Changes in assets and liabilities: Accounts receivable, net 17,539 (2,291) Accrued expenses and other liabilities 19,404 (12,724) Other, net 6,675 22,383 -------------------- Net cash provided by operating activities 29,243 13,178 INVESTING ACTIVITIES Capital expenditures for property and equipment, net (2,790) (4,863) Other (177) (5,484) -------------------- Net cash used in investing activities (2,967) (10,347) FINANCING ACTIVITIES Line-of-credit, net -- (8,570) Repayment of long-term debt (501) (3,296) -------------------- Net cash used in financing activities (501) (11,866) -------------------- Net increase (decrease) in cash and cash equivalents 25,775 (9,035) Cash and cash equivalents at beginning of period 16,387 29,424 -------------------- Cash and cash equivalents at end of period $ 42,162 $ 20,389 ====================
See notes to condensed consolidated financial statements. 5 6 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended March 31, 2001 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. At March 31, 2001 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 (excluding facility fee) increased to the Prime Rate plus 2.25% (10.25% at March 31, 2001). 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. 3. The Company did not remit 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). On April 6, 2001, the Company received a formal Notice of Default and Acceleration and Demand for Payment from the Indenture Trustee. The Indenture Trustee declared the entire principal and any accrued interest thereon to be immediately due and payable and demanded immediate payment of such amounts. If such payments are not made, the Indenture Trustee reserves the right to pursue remedial measures in accordance with the Indenture, including, without limitation, collection activities. As of March 31, 2001, the amount of principal and accrued interest is $103,584,000. The Company is currently in discussions with an ad hoc committee of debenture holders regarding a possible restructuring of this indebtedness. The timing and ultimate outcome of these negotiations is uncertain and could have a material adverse effect on the Company. As a result of the above noted debentures being in default, an additional $2,116,000 of the Company's 5 3/4% Convertible Subordinated Debentures due 2004 are also in default. Until the defaults are resolved, convertible subordinated debentures of $102,116,000 and the related accrued interest will be classified as a current liability. 4. 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. 5. Selling, general and administrative expenses for the three and nine month periods ended March 31, 2001 included $13,183,000 for bad debt expense for non-core businesses which had been either sold or shut down (exited businesses), fixed asset impairment charges and additional expenses related to restructuring activities. The Company recorded $10,043,000 of additional bad debt expense to fully reserve for remaining accounts receivable of non-core and non-strategic businesses exited during the past twelve months. These businesses were ancillary to the core pharmacy operations and as part of the restructuring activities were either sold, if there was an available buyer, or shut down. The Company recorded additional expenses related to restructuring 6 7 activities of approximately $1,034,000, primarily for lease terminations associated with the continuing implementation and execution of strategic restructuring and consolidation activities. At March 31, 2001, approximately $950,000 is included in accrued expenses related to these expenses. The Company recorded a fixed asset impairment charge of $2,106,000 in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of" (SFAS No. 121). This charge relates primarily to changes in asset values resulting from the impact of restructuring activities and changes in operational processes under restructured operations. 6. 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 loss of the related business units was $18,800,000 and $7,900,000, respectively, for the nine months ended March 31, 2001. The carrying amount of assets held for sale as of March 31, 2001 was $5,800,000. Through March 31, 2001, 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 March 31, 2001, 436 employees have been terminated. 7 8 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 3/31/01 ----------- ------------- ------------ -------- ---------- -------- ---------- (in thousands) Site Consolidations Severance/compensation related Cash $ 1,300 $(1,000) $ 300 $ (200) $ 100 Lease terminations Cash 2,800 (400) 2,400 (800) 1,600 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 $ (1,400) $2,600 ======= ======== ====== ======== ======
7. 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 NINE MONTHS ENDED MARCH 31, MARCH 31, --------------------------- --------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Numerator: Numerator for basic earnings per share - net income $ (20,807) $ (22,938) $ (35,123) $ (52,717) Effect of dilutive securities: Convertible debentures - - - - ------------- ------------- ------------- ------------- Numerator for diluted earnings per share $ (20,807) $ (22,938) $ (35,123) $ (52,717) ============= ============= ============= ============= Denominator: Denominator for basic earnings per share - Weighted average common shares 23,717 22,302 23,475 21,116 ------------- ------------- ------------- ------------- Effect of dilutive securities: Stock options - - - - Convertible debentures - - - - ------------- ------------- ------------- ------------- Dilutive potential common shares - - - - ------------- ------------- ------------- ------------- Denominator for diluted earnings per share 23,717 22,302 23,475 21,116 ============= ============= ============= ============= Basic earnings per share $ (0.88) $ (1.03) $ (1.50) $ (2.50) ============= ============= ============= ============= Diluted earnings per share $ (0.88) $ (1.03) $ (1.50) $ (2.50) ============= ============= ============= =============
8 9 At March 31, 2001 and 2000, respectively, the Company has 1,958,632 and 1,335,944 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 March 31, 2001 and 2000, respectively, that were convertible into 3,258,104 and 3,058,104 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. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net loss for the three months ended March 31, 2001, excluding bad debt expense for non-core businesses which had been either sold or shut down (exited businesses), fixed asset impairment charges and additional expenses related to restructuring activities, was $7,624,000 or $0.32 per diluted share compared to net loss, excluding restructuring, other related charges and a non-cash charge to record a valuation allowance against the Company's net deferred tax assets, of $3,555,000 or $0.16 per diluted share for the three months ended March 31, 2000. Net loss for the nine months ended March 31, 2001, excluding bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, was $21,940,000 or $0.93 per diluted share compared to net loss, excluding restructuring, other related charges and a non-cash charge to record a valuation allowance against the Company's net deferred tax assets, of $2,810,000 or $0.13 per diluted share for the nine months ended March 31, 2000. Total net loss for the three and nine month periods ended March 31, 2001 was $0.88 and $1.50, respectively, compared to net loss of $1.03 and $2.50 during the comparable periods in fiscal 2000. Operating results of the Company have been negatively effected by the ongoing difficulty of the operating environment in the long-term care industry. In particular, the long-term care industry has been adversely 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 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 10 11 Revenues for the three months ended March 31, 2001 decreased $15,572,000 or 9.1% to $154,890,000 from $170,462,000 recorded in the comparable period in fiscal 2000. Revenues for the nine months ended March 31, 2001 decreased $62,603,000 or 11.7% to $471,373,000 from $533,976,000 recorded in the comparable period in fiscal 2000. Approximately $7,698,000 and $34,871,000, respectively, of the decrease in revenues during the three and nine month periods ended March 31, 2001 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 March 31, 2001, the Company has disposed of three ancillary operations that were not contributing to the overall financial performance of the Company. The remaining $7,874,000 and $27,732,000, respectively, of the decrease in revenues for the three and nine month periods ended March 31, 2001 is attributable to the Company's pharmacy operations and is related to net bed loss during the period and revenue pressure associated with the continued 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 and accounts with unacceptable credit risk. Cost of revenues for the three months ended March 31, 2001 decreased $11,829,000 or 8.5% to $127,214,000 from $139,043,000 recorded in the comparable period in fiscal 2000. Cost of revenues for the nine months ended March 31, 2001 decreased $37,846,000 or 8.9% to $386,987,000 from $424,833,000 recorded in the comparable period in fiscal 2000. Cost of revenues as a percentage of revenues for the three and nine month periods ended March 31, 2001 was 82.1% and 82.1%, respectively, compared to 81.6% and 79.6% for the comparable periods during the prior fiscal year. The decrease in gross margins during the three months ended March 31, 2001 is primarily due to a continued shift toward lower margin payer sources including Medicaid and insurance. In addition, the decrease in gross margins is due to the impact of the implementation of the Health Care Financing Administration Federal Upper Limits (FUL's). The FUL's were implemented in December 2000 and reflected lower reimbursement from State Medicaid programs. Gross margins for the nine month period ended March 31, 2001 were significantly effected by the impact of the PPS reimbursement system. Margin pressure resulted from continued Medicare Part A pricing pressure, lower than anticipated gross margins on PPS related contracts and reduced acuity levels and census at customer facilities. In addition, gross margins were impacted by the continued shift towards lower margin payer sources and the implementation of the FUL's discussed above. Selling, general and administrative expenses for the three months ended March 31, 2001 increased by $10,143,000 or 33.4% to $40,476,000 from $30,333,000 recorded in the comparable period in fiscal 2000. Selling, general and administrative expenses for the nine months ended March 31, 2001 increased by $215,000 or 0.2% to $94,890,000 from $94,675,000 recorded in the comparable period in fiscal 2000. Selling, general and administrative expenses as a percentage of revenues was 26.1% and 20.1% for the three and nine month periods ended March 31, 2001, respectively, compared to 17.8% and 17.7% during the comparable periods in fiscal 2000. Excluding bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, selling, general and administrative expenses for the three months ended March 31, 2001 decreased $3,040,000 or 10.0% to $27,293,000 from $30,333,000 recorded in the comparable period in fiscal 2000. Selling, general and administrative expenses for the nine months ended March 31, 2001 decreased $12,968,000 or 13.7% to $81,707,000 from $94,675,000 recorded in the comparable period in fiscal 2000. Excluding bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, selling, general and administrative expenses as a percentage of revenues was 17.6% and 17.3% for the three and nine month periods ended March 31, 2001, respectively, compared to 17.8% and 17.7% during the comparable periods in fiscal 2000. This 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, the restructuring or sale of certain non-core ancillary lines of business and continuing its employee reduction plan. These decreases were partially offset by increases in bad debt expense for continuing businesses and professional fees related to restructuring activities. 11 12 Selling, general and administrative expenses for the three and nine month periods ended March 31, 2001 included $13,183,000 for bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities. The Company recorded $10,043,000 of additional bad debt expense to fully reserve for remaining accounts receivable of non-core and non-strategic businesses exited during the past twelve months. These businesses were ancillary to the core pharmacy operations and as part of the restructuring activities were either sold, if there was an available buyer, or shut down. While the Company has continued collection efforts on these receivables, collection has been much more difficult than anticipated. The Company recorded additional expenses related to restructuring activities of approximately $1,034,000, primarily for lease terminations associated with the continuing implementation and execution of strategic restructuring and consolidation activities. At March 31, 2001, approximately $950,000 is included in accrued expenses related to these expenses. The Company recorded a fixed asset impairment charge of $2,106,000 in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of" (SFAS No. 121). This charge relates primarily to changes in asset values resulting from the impact of restructuring activities and changes in operational processes under restructured operations. The Company had net interest expense of $7,907,000 and $24,319,000 for the three and nine month periods ended March 31, 2001, respectively, compared to net interest expense of $6,440,000 and $18,560,000 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 nine month periods ended March 31, 2001 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 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 loss of the related business units was $18,800,000 and $7,900,000, respectively, for the nine months ended March 31, 2001. The carrying amount of assets held for sale as of March 31, 2001 was $5,800,000. Through March 31, 2001, 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. 12 13 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 March 31, 2001, 436 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 3/31/01 ----------- ------------- ------------- -------- ---------- -------- ---------- (in thousands) Site Consolidations Severance/compensation related Cash $ 1,300 $(1,000) $ 300 $ (200) $ 100 Lease terminations Cash 2,800 (400) 2,400 (800) 1,600 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 $ (1,400) $2,600 ======= ========= ====== ========= ======
Liquidity and Capital Resources Net cash provided by operating activities increased to $29,243,000 during the nine months ended March 31, 2001 from $13,178,000 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 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 are uncertain and could have a negative impact on the Company's liquidity. Net cash used in investing activities decreased to $2,967,000 during the nine months ended March 31, 2001 from $10,347,000 recorded in 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 $501,000 during the nine months ended March 31, 2001 from $11,866,000 recorded in the comparable period in fiscal 2000. The change is primarily attributable to the Company making net payments of $8,570,000 on its line of credit in the prior year period with no similar payments this year. 13 14 In August 1997, the Company issued $100 million of convertible subordinated debentures due 2004 (the "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 did not remit 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). On April 6, 2001, the Company received a formal Notice of Default and Acceleration and Demand for Payment from the Indenture Trustee. The Indenture Trustee declared the entire principal and any accrued interest thereon to be immediately due and payable and demanded immediate payment of such amounts. If such payments are not made, the Indenture Trustee reserves the right to pursue remedial measures in accordance with the Indenture, including, without limitation, collection activities. As of March 31, 2001, the amount of principal and accrued interest is $103,584,000. The Company is currently in discussions with an ad hoc committee of debenture holders regarding a possible restructuring of this indebtedness. The timing and ultimate outcome of these negotiations is uncertain and could have a material adverse effect on the Company. As a result of the above noted debentures being in default, an additional $2,116,000 of the Company's 5 3/4% Convertible Subordinated Debentures due 2004 are also in default. Until the defaults are resolved, convertible subordinated debentures of $102,116,000 and the related accrued interest will be classified as a current liability. 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 March 31, 2001 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 (excluding facility fee) increased to the Prime Rate plus 2.25% (10.25% at March 31, 2001). 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. 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 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. 14 15 The Company's effective income tax rate for the three month and nine month periods ended March 31, 2001 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. 15 16 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 March 31, 2001 which is currently subject to a variable rate of interest based on the Prime Rate. Assuming borrowings at March 31, 2001, a one-hundred basis point change in interest rates would impact net interest expense by approximately $2,061,300 per year. 16 17 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended March 31, 2001. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NCS HealthCare, Inc. (Registrant) Date: May 15, 2001 By /s/ Kevin B. Shaw ---------------------------------------- Kevin B. Shaw President, Chief Executive Officer and Director Date: May 15, 2001 By /s/ William B. Byrum --------------------------------------------- William B. Byrum Chief Operating Officer Date: May 15, 2001 By /s/ Gerald D. Stethem ----------------------------------------------- Gerald D. Stethem Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----