-----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, GBlQFUGMXPBpti6YUg7XEowiJ/GIBXjSp4UaWWupewPMJEoMkUpxEcO3vtMSqruD YahD9G8vqaSNKoIbC/Zq1Q== 0000950152-02-001024.txt : 20020414 0000950152-02-001024.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950152-02-001024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020213 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: 1934 Act SEC FILE NUMBER: 000-27602 FILM NUMBER: 02540341 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 l92675ae10-q.txt NCS HEALTHCARE, INC. 10-Q/QUARTER END 12-31-01 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, 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 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 - 18,461,599 shares as of February 7, 2002 Class B Common Stock, $ .01 par value - 5,255,210 shares as of February 7, 2002 1 NCS HEALTHCARE, INC. AND SUBSIDIARIES INDEX
PAGE Part I. Financial Information: Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets- December 31, 2001 and June 30, 2001 3 Condensed Consolidated Statements of Operations Three and six months ended- December 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows- Six months ended- December 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements - December 31, 2001 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 12 Part II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
2 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, 2001 2001 --------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 38,196 $ 39,464 Accounts receivable, less allowances 90,450 94,447 Inventories 31,925 32,770 Other 3,722 3,301 ---------- ----------- Total current assets 164,293 169,982 Property and equipment, at cost net of accumulated depreciation and amortization 31,250 34,019 Goodwill, less accumulated amortization 302,193 301,907 Other assets 8,412 8,063 --------- --------- Total assets $506,148 $513,971 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line of credit in default $ 206,130 $ 206,130 Convertible subordinated debentures in default 102,228 102,107 Accounts payable 52,821 56,349 Accrued expenses and other liabilities 28,002 21,925 ---------- ----------- Total current liabilities 389,181 386,511 Long-term debt, excluding current portion 785 825 Other 105 140 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; 18,461,599 and 18,421,845 shares issued and outstanding at December 31, 2001 and June 30, 2001, respectively 184 184 Class B - 20,000,000 shares authorized; 5,255,210 and 5,294,964 shares issued and outstanding at December 31, 2001 and June 30, 2001, respectively 53 53 Paid-in capital 271,943 271,943 Accumulated deficit (156,103) (145,685) ---------- ------------ Total stockholders' equity 116,077 126,495 --------- ------------ Total liabilities and stockholders' equity $506,148 $ 513,971 ======== ===========
Note A: The balance sheet at June 30, 2001 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 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, 2001 2000 2001 2000 ---- ---- ---- ---- Revenues $161,708 $157,461 $319,544 $316,483 Cost of revenues 135,327 128,788 265,983 259,773 ---------- ---------- ----------- ---------- Gross profit 26,381 28,673 53,561 56,710 Selling, general and administrative expenses 25,089 27,413 50,420 54,414 ---------- ---------- ----------- ---------- Operating income 1,292 1,260 3,141 2,296 Interest expense, net 6,456 8,363 13,409 16,412 ---------- ---------- ----------- ---------- Loss before income taxes (5,164) (7,103) (10,268) (14,116) Income tax expense 75 100 150 200 ---------- ---------- ----------- ---------- Net loss $ (5,239) $ (7,203) $ (10,418) $(14,316) ========== ========== =========== ========== Net loss per share - basic $ (0.22) $ (0.31) $ (0.44) $ (0.61) ========== ========== =========== ========== Net loss per share - diluted $ (0.22) $ (0.31) $ (0.44) $ (0.61) ========== ========== =========== ========== Average shares outstanding - basic 23,717 23,562 23,717 23,356 ========== ========== =========== ========== Average shares outstanding - diluted 23,717 23,562 23,717 23,356 ========== ========== =========== ==========
See notes to condensed consolidated financial statements. 4 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 2001 2000 ----------------------------------- OPERATING ACTIVITIES Net loss $ (10,418) $ (14,316) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 6,574 12,764 Changes in assets and liabilities, net of effects of assets and liabilities acquired: Accounts receivable, net (1,026) 905 Accounts payable and other liabilities 6,302 17,945 Other, net 424 4,477 ----------------------------------- Net cash provided by operating activities 1,856 21,775 ----------------------------------- INVESTING ACTIVITIES Capital expenditures for property and equipment, net (2,728) (1,483) Other (120) (362) ----------------------------------- Net cash used in investing activities (2,848) (1,845) ----------------------------------- FINANCING ACTIVITIES Repayment of long-term debt (276) (356) ----------------------------------- Net cash used in financing activities (276) (356) ----------------------------------- Net increase (decrease) in cash and cash equivalents (1,268) 19,574 Cash and cash equivalents at beginning of period 39,464 16,387 ----------------------------------- Cash and cash equivalents at end of period $ 38,196 $ 35,961 ===================================
See notes to condensed consolidated financial statements. 5 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (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, 2001 are not necessarily indicative of the results that may be expected for the year ending June 30, 2002. 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, 2001. 2. In June 1998, the Company entered into a four-year revolving credit agreement (Credit Facility). The Credit Facility, as amended, has an available commitment of $207 million, provides all Company assets as security, limits the availability of the Credit Facility to use for working capital only, requires Lender approval on future acquisitions, bears interest at a variable rate and contains certain debt covenants including an Interest Coverage Ratio and minimum consolidated net worth requirements. At December 31, 2001, the Company is in violation of certain financial covenants of the Credit Facility. On April 21, 2000, the Company received a formal notice of default from the senior lenders. 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% (7.0% at December 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 senior lenders. 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 at December 31, 2001 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. The Company elected to not make the semi-annual $2.875 million interest payments due February 15, 2001 and August 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 December 31, 2001, the amount of principal and accrued interest is $107.9 million. 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 $2.2 million 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 $102.2 million and the related accrued interest will be classified as a current liability. 6 3. 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, --------------------------- --------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- (in thousands, except per share information) Numerator: Numerator for basic earnings per share - net loss $ (5,239) $ (7,203) $ (10,418) $ (14,316) Effect of dilutive securities: Convertible debentures - - - - --------------------------- --------------------------- Numerator for diluted earnings per share $ (5,239) $ (7,203) $ (10,418) $ (14,316) =========================== =========================== Denominator: Denominator for basic earnings per share - weighted average common shares 23,717 23,562 23,717 23,356 --------------------------- --------------------------- Effect of dilutive securities: Stock options - - - - Convertible debentures - - - - --------------------------- --------------------------- Dilutive potential common shares - - - - --------------------------- --------------------------- Denominator for diluted earnings per share 23,717 23,562 23,717 23,356 =========================== =========================== Basic earnings per share: Net loss per share $ (0.22) $ (0.31) $ (0.44) $ (0.61) =========================== =========================== Diluted earnings per share Net loss per share $ (0.22) $ (0.31) $ (0.44) $ (0.61) =========================== ===========================
At December 31, 2001 and 2000, the Company had 1,954,798 and 1,958,632, 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. The Company had $102,228,000 and $102,000,000 of convertible subordinated debentures outstanding at December 31, 2001 and 2000, respectively, that were convertible into 3,258,104, shares of Class A Common Stock, that were not included in the computation of diluted earnings per share as their effect would be antidilutive for all periods presented. 4. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. The Company adopted SFAS No. 141 on July 1, 2001. The Company has elected early adoption of SFAS No. 142 effective July 1, 2001. Under SFAS No. 142, goodwill and other indefinite lived intangible assets will no longer be amortized. Under this non-amortization approach, goodwill and other indefinite lived intangible assets will be reviewed for impairment using a fair value based approach as of the beginning of the year in which SFAS No. 142 is adopted. The Company was required to complete the initial step of the transitional impairment test by December 31, 2001 and is required to complete the final step of the transitional impairment test by the end of the current fiscal year. Going forward, these assets will be tested for impairment on an annual basis or upon the occurrence of certain triggering events as defined by SFAS No. 142. Any impairment loss resulting from the transitional impairment test will be recorded as a 7 cumulative effect of a change in accounting principle as of the beginning of the current fiscal year. The Company has completed the initial step of the transitional impairment test, which indicates that the goodwill of the Company is potentially impaired. As a result, the Company is required to complete the final step of the transitional impairment test. The Company does expect that it will be required to recognize an impairment loss as a result of the adoption of SFAS No. 142. The amount of the impairment loss is not known at this time; however, it could be material to the Company's financial position. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective July 1, 2001. A reconciliation of previously reported net loss and loss per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows:
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 ---- ---- ---- ---- (IN THOUSANDS) Net Loss: As reported $ (5,239) $ (7,203) $(10,418) $(14,316) Goodwill amortization - 2,611 - 5,236 -------- -------- -------- -------- As adjusted $ (5,239) $ (4,592) $(10,418) $ (9,080) ======== ======== ======== ======== Basic and Diluted Loss Per Share: As reported $ (0.22) $ (0.31) $ (0.44) $ (0.61) Goodwill amortization - 0.12 - 0.22 -------- -------- -------- -------- As adjusted $ (0.22) $ (0.19) $ (0.44) $ (0.39) ======== ======== ======== ========
The gross carrying amount and accumulated amortization of intangible assets subject to amortization was $11,334,000 and $7,801,000, respectively, at December 31, 2001. Intangible assets that will continue to be amortized under SFAS No. 142 consist primarily of non-compete covenants, deferred debenture issuance costs and capitalized loan fees. Amortization expense for the three and six month periods ended December 31, 2001 was $463,000 and $1,078,000, respectively. The estimated amortization expense for each of the five fiscal years subsequent to June 30, 2001 is as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT 2002 $1,980,000 2003 1,082,000 2004 879,000 2005 394,000 2006 201,000 8 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, 2001 was $5,239,000 or $0.22 per diluted share compared to net loss of $7,203,000 or $0.31 per diluted share for the three months ended December 31, 2000. Net loss for the six months ended December 31, 2001 was $10,418,000 or $0.44 per diluted share compared to net loss of $14,316,000 or $0.61 per diluted share for the six months ended December 31, 2000. The results for the three and six month periods ended December 31, 2001 reflect the adoption of Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets," which resulted in discontinuing the amortization of goodwill. If SFAS No. 142 would have been effective for the quarter ended December 31, 2000, net loss would have been $4,592,000 and net loss per share would have been $0.19, excluding $2,611,000 of goodwill amortization. If SFAS No. 142 would have been effective for the six months ended December 31, 2000, net loss would have been $9,080,000 and net loss per share would have been $0.39, excluding $5,236,000 of goodwill amortization. Revenues for the three months ended December 31, 2001 increased $4,247,000 or 2.7% to $161,708,000 from $157,461,000 recorded in the comparable period in fiscal 2001. Revenues for the six months ended December 31, 2001 increased $3,061,000 or 1.0% to $319,544,000 from $316,483,000 recorded in the comparable period in fiscal 2001. The increase in revenue from the prior fiscal year is primarily attributable to pharmaceutical inflation over the last year and the increased utilization of higher priced drugs. Cost of revenues for the three months ended December 31, 2001 increased $6,539,000 or 5.1% to $135,327,000 from $128,788,000 recorded in the comparable period in fiscal 2001. Cost of revenues as a percentage of revenues for the three month period ended December 31, 2001 was 83.7%, compared to 81.8% for the same period during the prior fiscal year. Cost of revenues for the six months ended December 31, 2001 increased $6,210,000 or 2.4% to $265,983,000 from $259,773,000 recorded in the comparable period in fiscal 2001. Cost of revenues as a percentage of revenues for the six month period ended December 31, 2001 was 83.2%, compared to 82.1% for the same period during the prior fiscal year. The decline in gross margin as a percentage of revenues was primarily due to an unfavorable change in product mix, the continued shift toward lower margin payer sources such as Medicaid and third party insurance, and lower Medicaid and insurance reimbursement levels. Medicaid and insurance revenues accounted for 59.8% of revenues in the three months ended December 31, 2001 versus 57.0% for the same period during the prior fiscal year. Medicaid and insurance revenues accounted for 59.6% of revenues in the six months ended December 31, 2001 versus 56.0% for the same period during the prior fiscal year. Selling, general and administrative expenses for the three months ended December 31, 2001 decreased by $2,324,000 or 8.5% to $25,089,000, from $27,413,000 recorded in the comparable period in fiscal 2001. Selling, general and administrative expenses as a percentage of revenues was 15.5% for the three month period ended December 31, 2001, compared to 17.4% during the comparable period in fiscal 2001. Selling, general and administrative expenses for the six months ended December 31, 2001 decreased by $3,994,000 or 7.3% to $50,420,000, from $54,414,000 recorded in the comparable period in fiscal 2001. Selling, general and administrative expenses as a percentage of revenues was 15.8% for the six month period ended December 31, 2001, compared to 17.2% during the comparable period in fiscal 2001. As discussed above, the Company adopted SFAS No. 142 effective July 1, 2001 and accordingly discontinued the amortization of goodwill. If SFAS No. 142 would have been effective for the six months ended December 31, 2000, selling, general and administrative expenses would have been $49,178,000 or 15.5% of sales compared to $50,420,000 or 15.8 % of sales for the six months ended December 31, 2001. The increase in expenses from the prior year is primarily a result of increases in professional fees related to restructuring activities and bad debt expense, partially offset by a decrease in operating expenses as a result of efforts by the Company to reduce pharmacy operating and overhead expenses. If SFAS No. 142 would have been effective for the three months ended December 31, 2000, selling, general and administrative expenses would have been $24,802,000 or 15.8% of sales compared to $25,089,000 or 15.5 % of sales for the three months ended December 31, 2001. The increase in expenses from the prior year is primarily a 9 result of an increase in professional fees related to restructuring activities, partially offset by a decrease in operating expenses as a result of efforts by the Company to reduce pharmacy operating and overhead expenses and a decrease in bad debt expense. As noted above, bad debt expense for the six months ended December 31, 2001 increased in comparison to the comparable period in the prior year. However, the Company was able to lower its bad debt expense during the three months ended December 31, 2001, causing a decrease in comparison to the comparable period in the prior fiscal year. The decrease in bad debt expense this quarter is primarily a result of improved collection trends and improved accounts receivable aging characteristics. Days sales outstanding on net accounts receivable decreased to 52 days at December 31, 2001 from 54 days at September 30, 2001 and 55 days at June 30, 2001. The Company had net interest expense of $6,456,000 and $13,409,000, respectively, for the three and six month periods ended December 31, 2001, compared to net interest expense of $8,363,000 and $16,412,000, respectively, during the comparable period in fiscal 2001. The decrease is primarily attributable to a decrease in interest rates during the past year. As discussed below, the Company is in default on 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. Liquidity and Capital Resources Net cash provided by operating activities decreased to $1,856,000 during the six months ended December 31, 2001 from $21,775,000 in the comparable period in fiscal 2001. The decrease in net cash provided by operating activities resulted primarily from an increase in accounts payable in the prior year 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 ultimate outcome of these negotiations is uncertain and could have a material adverse effect on the Company. Net cash used in investing activities increased to $2,848,000 during the six months ended December 31, 2001 from $1,845,000 recorded in the comparable period in fiscal 2001. The increase is primarily the result of increased capital expenditures during the current period. Net cash used in financing activities decreased to $276,000 during the six months ended December 31, 2001 from $356,000 recorded in the comparable period in fiscal 2001. In August 1997, the Company issued $100 million of convertible subordinated debentures due 2004. The debentures carry an interest rate of 5 3/4%. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. The Company's ability to make payments of principal and interest on the debentures will depend on its ability to receive distributions of cash from its subsidiaries. Each of the Company's wholly-owned subsidiaries has guaranteed the Company's payment obligations under the debentures, so long as such subsidiary is a member of an affiliated group (within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as amended) that includes the Company. The satisfaction by the Company's subsidiaries of their contractual guarantees, as well as the payment of dividends and certain loans and advances to the Company by such subsidiaries, may be subject to certain statutory or contractual restrictions, are contingent upon the earnings of such subsidiaries and are subject to various business considerations. The Company elected to not make the semi-annual $2.875 million interest payments due February 15, 2001 and August 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 December 31, 2001, the amount of principal and accrued interest is $107.9 million. 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 $2.2 million of the Company's 5 10 3/4% Convertible Subordinated Debentures due 2004 are also in default. Until the defaults are resolved, convertible subordinated debentures of $102.2 million 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). The Credit Facility, as amended, has an available commitment of $207 million, provides all Company assets as security, limits the availability of the Credit Facility to use for working capital only, requires Lender approval on future acquisitions, bears interest at a variable rate and contains certain debt covenants including an Interest Coverage Ratio and minimum consolidated net worth requirements. At December 31, 2001, the Company is in violation of certain financial covenants of the Credit Facility. On April 21, 2000, the Company received a formal notice of default from the senior lenders. 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% (7.0% at December 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 senior lenders. 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 at December 31, 2001 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 twenty-four months 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. Brown, Gibbons, Lang & Company Securities, Inc. (BGL&Co.) is acting as the Company's financial advisor in its continuing discussions with the Company's senior lenders and with an ad hoc committee of holders of the 5 3/4% Convertible Subordinated Debentures due 2004, with respect to the defaults and to restructuring options. BGL&Co. is also discussing various strategic alternatives with third parties. No decision has been made to enter into any transaction or as to what form any transaction might take. NCS can give no assurance with respect to the outcome of these discussions or negotiations. The Company's effective income tax rate for the three and six month periods ended December 31, 2001 and 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. Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. The Company adopted SFAS No. 141 on July 1, 2001. The Company has elected early adoption of SFAS No. 142 effective July 1, 2001. Under SFAS No. 142, goodwill and other indefinite lived intangible assets will no longer be amortized. Under this non-amortization approach, goodwill and other indefinite lived intangible assets will be reviewed for impairment using a fair value based approach as of the beginning of the year in which SFAS No. 142 is adopted. The Company was required to 11 complete the initial step of the transitional impairment test by December 31, 2001 and is required to complete the final step of the transitional impairment test by the end of the current fiscal year. Going forward, these assets will be tested for impairment on an annual basis or upon the occurrence of certain triggering events as defined by SFAS No. 142. Any impairment loss resulting from the transitional impairment test will be recorded as a cumulative effect of a change in accounting principle as of the beginning of the current fiscal year. The Company has completed the initial step of the transitional impairment test, which indicates that the goodwill of the Company is potentially impaired. As a result, the Company is required to complete the final step of the transitional impairment test. The Company does expect that it will be required to recognize an impairment loss as a result of the adoption of SFAS No. 142. The amount of the impairment loss is not known at this time; however, it could be material to the Company's financial position. 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, changes in reimbursement levels from State Medicaid programs and third-party insurance plans, the Company's negotiations with its senior lenders regarding its revolving 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, implementation of newly issued accounting standards, other factors and risks and uncertainties described in the Company's SEC reports. 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, 2001, which is subject to a variable rate of interest based on the Prime Rate. Assuming borrowings at December 31, 2001, a one-hundred basis point change in interest rates would impact net interest expense by approximately $2,061,300 per year. 12 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 11, 2001 (the "Annual Meeting"), the stockholders voted to elect Jon H. Outcalt and Richard L. Osborne each to an additional three-year term as Director of the Company. Votes were cast as follows: VOTES JON H. OUTCALT RICHARD L. OSBORNE ----- -------------- ------------------ For 67,792,851 67,803,611 Withheld 186,787 176,027 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: Kevin B. Shaw and Boake A. Sells. 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 December 31, 2001. 13 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 13, 2002 By /s/ Kevin B. Shaw ---------------------------------------- Kevin B. Shaw President, Chief Executive Officer, Secretary and Director Date: February 13, 2002 By /s/ William B. Byrum --------------------------------------------- William B. Byrum Executive Vice President and Chief Operating Officer Date: February 13, 2002 By /s/ Gerald D. Stethem ----------------------------------------------- Gerald D. Stethem Senior Vice President and Chief Financial Officer
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