-----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, RmRNSKqktWfz30C6ltiSzoYjn7mG5ioISnK4ZTZk82FHtP4yw8/Mrp5cP/j1S2dE 1xCzfj8KL/AvzAtBE3rZsA== 0000950152-98-009071.txt : 19981123 0000950152-98-009071.hdr.sgml : 19981123 ACCESSION NUMBER: 0000950152-98-009071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCS HEALTHCARE INC CENTRAL INDEX KEY: 0001004990 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98753178 BUSINESS ADDRESS: STREET 1: 3201 ENTERPRISE PKWY STREET 2: STE 2200 CITY: BEACHWOOD STATE: OH ZIP: 44122 BUSINESS PHONE: 2165143350 MAIL ADDRESS: STREET 1: 1400 MCDONALD INVESTMENT CENTER STREET 2: 800 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 10-Q 1 NCS HEALTHCARE, INC. 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 September 30, 1998 Commission File Number- 0-27602 NCS HealthCare, Inc. - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware No. 34-1816187 -------------------------------- ------------------ (State or other jurisdiction (IRS employer of 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 mark whether the registrant: 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirement for the past 90 days. Yes X No __ Common Stock Outstanding - - ------------------------ Indicate the number of shares outstanding of each of the Issuers' classes of common stock, as of the latest practical date. Class A Common Stock, $ .01 par value -- 13,973,462 shares as of November 6, 1998 Class B Common Stock, $ .01 par value -- 6,206,631 shares as of November 6, 1998 1 2 NCS HEALTHCARE, INC. AND SUBSIDIARIES INDEX Page ---- Part I. Financial Information: Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets- September 30, 1998 and June 30, 1998 3 Condensed Consolidated Statements of Income- Three months ended- September 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows- Three months ended- September 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements - September 30, 1998 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Part II. Other Information: Item 2. Changes in Securities and Use of Proceeds 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 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) September 30, June 30, ASSETS 1998 1998 --------------- ------------ Current Assets: Cash and cash equivalents $ 17,842 $ 21,186 Accounts receivable, less allowances 159,180 142,325 Inventories 48,442 43,784 Other 15,293 14,224 --------- --------- Total current assets 240,757 221,519 Property and equipment, at cost net of accumulated depreciation and amortization 47,368 43,593 Goodwill, less accumulated amortization 339,576 340,209 Other assets 20,298 18,469 -------- -------- Total assets $647,999 $623,790 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 32,795 $ 34,131 Accrued expenses and other liabilities 34,468 38,026 -------- -------- Total current liabilities 67,263 72,157 Line of credit 173,000 147,800 Long-term debt, excluding current portion 3,420 3,879 Convertible subordinated debentures 100,000 102,753 Other 9,478 9,867 Stockholders' Equity: Preferred stock, par value $ .01 per share, 1,000,000 shares authorized; none issued - - Common stock, par value $ .01 per share: Class A - 50,000,000 shares authorized; 13,886,071 and 13,334,639 shares issued and outstanding at September 30, 1998 and June 30, 1998, respectively 139 133 Class B - 20,000,000 shares authorized; 6,206,631 and 6,463,244 shares issued and outstanding at September 30, 1998 and June 30, 1998, respectively 62 65 Paid-in capital 261,213 258,462 Retained earnings 33,424 28,674 -------- -------- Total stockholders' equity 294,838 287,334 -------- -------- Total liabilities and stockholders' equity $647,999 $623,790 ======== ========
Note A: The balance sheet at June 30, 1998 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 4 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Three Months Ended September 30, ----------------------- 1998 1997 -------- -------- Revenues $172,846 $103,711 Cost of revenues 128,990 77,485 -------- -------- Gross profit 43,856 26,226 Selling, general and administrative expenses 31,044 19,353 -------- -------- Operating income 12,812 6,873 Interest expense, net 4,478 501 -------- -------- Income before income taxes 8,334 6,372 Income tax expense 3,584 2,740 -------- -------- Net income $ 4,750 $ 3,632 ======== ======== Net income per share - basic $ 0.24 $ 0.20 ======== ======== Net income per share - diluted $ 0.24 $ 0.20 ======== ======== Shares used in the computation - basic 20,085 18,378 Shares used in the computation - diluted 20,171 18,615
See notes to condensed consolidated financial statements. 4 5 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Three Months Ended September 30, ------------------------- 1998 1997 ---------- --------- Operating activities Net income $ 4,750 $ 3,632 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 5,746 3,302 Changes in assets and liabilities, net of effects of assets and liabilities acquired: Accounts receivable, net (17,747) (12,849) Accrued expenses and other liabilities (5,103) 1,437 Other, net (5,727) (3,745) ------- -------- Net cash used in operating activities (18,081) (8,223) Investing activities Purchases of businesses (425) (12,161) Capital expenditures for property and equipment, net (6,350) (4,239) Other (3,438) (1,180) ------- -------- Net cash used in investing activities (10,213) (17,580) Financing activities Proceeds from convertible subordinated debentures, net -- 97,250 Borrowings on line-of-credit 25,200 21,499 Payments on line-of-credit -- (31,784) Repayment of long-term debt (250) (658) Proceeds from issuance of long-term debt -- 343 ------- -------- Net cash provided by financing activities 24,950 86,650 ------- -------- Net increase (decrease) in cash and cash equivalents (3,344) 60,847 Cash and cash equivalents at beginning of period 21,186 8,160 ------- -------- Cash and cash equivalents at end of period $ 17,842 $ 69,007 ======== ========
See notes to condensed consolidated financial statements. 5 6 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending June 30, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June 30, 1998 (File No. 000-27602). 2. On August 13, 1997, the Company issued $100,000,000 of convertible subordinated debentures (debentures) due 2004. Net proceeds to the Company were approximately $97,250,000, net of underwriting discounts and expenses. The debentures carry an interest rate of 5 3/4% and are convertible into shares of Class A Common Stock. A portion of the proceeds from the debenture offering was used to repay approximately $21,000,000 of outstanding indebtedness under short-term borrowings. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. Each of the Company's wholly-owned subsidiaries has unconditionally guaranteed, jointly and severally, the Company's payment obligations under the debentures. Accordingly, summarized financial information regarding the guarantor subsidiaries has not been presented because management of the Company believes that such information would not be meaningful to investors. In July 1998, $2,753,000 of 8% convertible subordinated debentures due in fiscal 1999 were converted into 273,707 shares of Class A Common Stock. During July 1998, the Company amended its credit facility increasing the total commitment from $150,000,000 to $245,000,000. 3. During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring charge of $8,900,000 primarily related to: 1) the adoption of a formal plan of restructuring to consolidate certain pharmacy sites in similar geographies; 2) the buyout of existing employment agreements with the prior owners of certain acquired businesses; 3) the write-off of certain financing fees; and 4) additional acquisition related expenses. The Company has adopted a formal plan of restructuring that will combine pharmacies in close proximity in order to improve operating efficiencies. As a result of the plan, 17 pharmacy sites will be consolidated into either a new or existing location and a total of 149 employees will be terminated. As of September 30, 1998, six site consolidations had been completed with the remainder expected to be completed by the end of fiscal 1999. 6 7 Details of the nonrecurring charge are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-Cash Charge Activity At 6/30/98 Activity At 9/30/98 ------------------------- ------------- ------ -------- ---------- -------- ---------- (In millions) Site Consolidations Severance packages cash $ .5 $ -- $ .5 $ -- $ .5 Lease terminations cash .7 -- .7 .1 .6 Asset impairments non-cash 3.5 (3.5) -- -- -- Other cash .6 (.4) .2 -- .2 Buyout of employment agreements cash .9 (.2) .7 .5 .2 Write-off financing fees non-cash 1.3 (1.3) -- -- -- Other Cash 1.0 (.8) .2 .1 .1 Non-cash .4 (.4) -- -- -- Total $ 8.9 $ (6.6) $ 2.3 $ .7 $ 1.6 ====== ====== ===== ==== =====
4. Significant acquisitions completed by the Company during fiscal 1998 include Cheshire LTC Pharmacy, Inc. in Cheshire, Connecticut, PharmaSource Healthcare, Inc. in Norcross, Georgia, Marco & Company, LLC in Billings, Montana, MedStar Pharmacy, Inc. in Benson, North Carolina, Greenwood Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation based in Sharon, Pennsylvania, Medical Pharmacy in Bakersfield, California, Robcin Enterprises, Inc. in Independence, Missouri, Apple Institutional Services in Salisbury, Maryland and the institutional pharmacy assets of Walgreen Co., an Illinois corporation. The aggregate purchase price for all businesses acquired during fiscal 1998 was $188,854,000 consisting of $171,083,000 in cash, $959,000 of debt and $16,812,000 of Class A Common Stock of the Company. The Cheshire LTC Pharmacy, Inc. and MedStar Pharmacy, Inc. acquisitions were accounted for as pooling of interests transactions, however the impact of these transactions on the Company's historical financial statements is not material; consequently, prior period financial statements have not been restated for these transactions. All other acquisitions have been accounted for as purchase transactions. Unaudited pro forma data, as though the Company had purchased each of these businesses as of July 1, 1997, are set forth below:
Three Months Three Months Ended Ended September 30, 1998 September 30, 1997 ------------------ ------------------ (In thousands, except per share information) Revenues $ 172,938 $ 143,585 Net income $ 4,756 $ 3,410 Net income per share - basic $ 0.24 $ 0.17 Net income per share - diluted $ 0.24 $ 0.17
The pro forma information does not intend to be indicative of operating results which would have occurred had the acquisitions been made at the beginning of the respective periods or of results which may occur in the future. The primary pro forma adjustments reflect amortization of goodwill acquired and interest costs. The pro forma information does not give effect to any potential synergies anticipated by the Company as a result of the acquisitions such as improvements in gross margin attributable to the Company's purchasing leverage and increased operating efficiencies. 7 8 5. The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) which replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the requirements of SFAS No. 128. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended September 30, ------------------------------ 1998 1997 -------- --------- Numerator: Numerator for basic earnings per share - net income $ 4,750 $ 3,632 Effect of dilutive securities: Convertible debentures -- -- ------- ------- Numerator for diluted earnings per share $ 4,750 $ 3,632 ======= ======= Denominator: Denominator for basic earnings per share - weighted average common shares 20,085 18,378 Effect of dilutive securities: Stock options 86 237 Convertible debentures -- -- ------- ------- Dilutive potential common shares 86 237 ------- ------- Denominator for diluted earnings per share 20,171 18,615 ======= ======= Basic earnings per share $ 0.24 $ 0.20 ======= ======= Diluted earnings per share $ 0.24 $ 0.20 ======= =======
The Company has $100,000,000 of convertible subordinated debentures outstanding at September 30, 1998 that are convertible into 3,058,000 shares of Class A Common Stock that were not included in the computation of diluted earnings per share as their effect would be antidilutive. The Company had $103,678,000 of convertible subordinated debentures outstanding at September 30, 1997 that were convertible into 3,424,000 shares of Class A Common Stock that were not included in the computation of diluted earnings per share as their effect would be antidilutive. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Revenues for the three months ended September 30, 1998 increased 66.7% to $172,846,000 from $103,711,000 recorded in the comparable period in fiscal 1998. The increase in revenues during the first quarter of fiscal 1999 over the comparable prior year period is primarily attributed to two factors: the Company's acquisition program and internal growth. Of the $69,135,000 increase for the three months ended September 30, 1998, $45,600,000 of the increase is attributable to revenues for the first three months of fiscal 1999 including a full period of operations for fiscal 1998 acquisitions. These fiscal 1998 acquisitions include Cheshire LTC Pharmacy, Inc. in August 1997, PharmaSource Healthcare, Inc. in September 1997, Marco & Company, LLC in December 1997, MedStar Pharmacy, Inc. in January 1998, Medical Pharmacy, Robcin Enterprises, Inc. and Greenwood Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation in February 1998, Apple Institutional Services in March 1998 and the institutional pharmacy assets of Walgreens Co. in June 1998. Internal growth accounted for $23,535,000 of the increase as the Company's existing operations continued to grow through marketing efforts to new and existing clients, increased drug utilization of long-term care facility residents, and the growth and integration of new and existing products and services. The total number of beds serviced by the Company as of September 30, 1998 increased 52% to 251,000 beds, from 165,000 beds at September 30, 1997. Cost of revenues for the three months ended September 30, 1998 increased 66.5% to $128,990,000, from $77,485,000 recorded in the comparable period in fiscal 1998. Cost of revenues as a percentage of revenues for the three month period ended September 30, 1998 was 74.6%, compared to 74.7% during the prior fiscal year. The decrease in cost of revenues as a percentage of revenues is primarily the result of the timing of acquisitions. At the time of acquisition, the gross margins of the acquired companies are typically lower than the Company as a whole, however, the Company is typically able to increase the gross margins of the acquired companies through more advantageous purchasing terms and the use of formulary management. The Company's leverage associated with purchasing pharmaceuticals, formulary management program and leveraging of production costs positively impacted gross margins during the past year. However, these improvements were partially offset by the lower margins of companies acquired during the past year. Selling, general and administrative expenses for the three months ended September 30, 1998 increased 60.4% to $31,044,000, from $19,353,000 recorded in the comparable period in fiscal 1998. Selling, general and administrative expenses as a percentage of revenues was 18.0% for the three month period ended September 30, 1998, compared to 18.7% during the comparable period in fiscal 1998. The percentage decrease for the three months ended September 30, 1998 is a result of creating operational efficiencies with acquisitions and the ability to leverage overhead expenses over a larger revenue base. At the time of acquisition, the selling, general and administrative expenses of the acquired companies are typically higher than the Company as a whole. The Company has been able to create operational efficiencies with acquisitions as selling, general and administrative expenses as a percentage of revenues has decreased seven quarters in a row. The increase in selling, general, and administrative expenses in absolute dollars is mainly attributable to expenses associated with the operations of businesses acquired during the prior fiscal year. The Company had net interest expense of $4,478,000 for the three months ended September 30, 1998, compared to net interest expense of $501,000 in the comparable period in fiscal 1998. The increase is primarily attributable to increased borrowing on the Company's revolving credit facility during fiscal 1998 and 1999 and a full three months of interest expense during the three months ended September 30, 1998 on $100,000,000 of convertible subordinated debentures issued by the Company in August 1997. The additional funds were primarily used for acquisitions. 9 10 During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring charge of $8,900,000 primarily related to: 1) the adoption of a formal plan of restructuring to consolidate certain pharmacy sites in similar geographies; 2) the buyout of existing employment agreements with the prior owners of certain acquired businesses; 3) the write-off of certain financing fees; and 4) additional acquisition related expenses. The Company has adopted a formal plan of restructuring that will combine pharmacies in close proximity in order to improve operating efficiencies. As a result of the plan, 17 pharmacy sites will be consolidated into either a new or existing location and a total of 149 employees will be terminated. As of September 30, 1998, six site consolidations has been completed with the remainder expected to be completed by the end of fiscal 1999. Details of the nonrecurring charge are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-Cash Charge Activity At 6/30/98 Activity At 9/30/98 ------------------------- ------------- ---------- -------- ---------- -------- ---------- (In millions) Site Consolidations Severance packages cash $ .5 $ -- $ .5 $ -- $ .5 Lease terminations cash .7 -- .7 .1 .6 Asset impairments non-cash 3.5 (3.5) -- -- -- Other cash .6 (.4) .2 -- .2 Buyout of employment agreements cash .9 (.2) .7 .5 .2 Write-off financing fees non-cash 1.3 (1.3) -- -- -- Other Cash 1.0 (.8) .2 .1 .1 Non-cash .4 (.4) -- -- -- ------- ----- ---- ----- Total $ 8.9 $ (6.6) $ 2.3 $ .7 $ 1.6 ====== ======= ===== ==== =====
Liquidity and Capital Resources Net cash used in operating activities increased to $18,081,000 for the three months ended September 30, 1998, as compared to $8,223,000 during the comparable period in fiscal 1998. Net cash used in operating activities increased from the comparable period in fiscal 1998 primarily due to an increase in accounts receivable and a decrease in accrued expenses and accounts payable. The increase in accounts receivable is mainly attributable to a 12.8% increase in sales during the three months ended September 30, 1998, as compared to the three months ended June 30, 1998. Net cash used in investing activities decreased to $10,213,000 during the three months ended September 30, 1998, as compared to $17,580,000 during the comparable period in fiscal 1998. The decrease is primarily the result of a decrease in cash used for acquisitions, partially offset by an increase in capital expenditures. Significant capital expenditures during the three months ended September 30, 1998 included computer and information systems equipment, computer software, furniture and fixtures, leasehold improvements, medication carts and delivery vehicles. The Company continues to invest in converting all sites to a common operating system. Net cash provided by financing activities decreased to $24,950,000 during the three months ended September 30, 1998, from $86,650,000 during the comparable period in fiscal 1998. The decrease is a result of the Company completing a $100,000,000 convertible subordinated debenture offering during August 1997. In August 1997, the Company issued $100 million of convertible subordinated debentures due 2004. The debentures carry an interest rate of 5 3/4%. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. The Company's ability to make payments of principal and interest on the debentures will depend on its ability to 10 11 receive distributions of cash from its subsidiaries. Each of the Company's wholly-owned subsidiaries has guaranteed the Company's payment obligations under the debentures, so long as such subsidiary is a member of an affiliated group (within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as amended) which includes the Company. The satisfaction by the Company's subsidiaries of their contractual guarantees, as well as the payment of dividends and certain loans and advances to the Company by such subsidiaries, may be subject to certain statutory or contractual restrictions, are contingent upon the earnings of such subsidiaries and are subject to various business considerations. The Company expects to meet future financing needs principally through the use of its revolving credit facility. In June 1998, the Company entered into a four-year, $150,000,000 revolving credit facility ("the Credit Facility") with a bank, which replaced the existing $135,000,000 revolving credit facility. Under the Credit Facility, the Company also has available a $10,000,000 swing line revolving facility. In June 1998, the Company entered into a $50,000,000 bridge facility agreement ("the Bridge Facility") due December 31, 1998. Effective July 13, 1998, the Credit Facility was amended increasing the total commitment from $150,000,000 to $245,000,000 and was syndicated to a consortium of 11 banks. Also effective July 13, 1998, the Bridge Facility was paid with funds under the Credit Facility and was terminated. The Credit Facility bears interest at a variable rate based upon the Eurodollar rate plus a spread of 37.5 to 162.5 basis points, dependent upon the Company's Interest Coverage Ratio. The Credit Facility contains certain debt covenants including Interest Coverage Ratio and minimum consolidated net worth. As of September 30, 1998 the Company had $173,000,000 outstanding under the Credit Facility. The Company believes that its cash and available sources of capital, including funds available under the Credit Facility, are sufficient to meet its normal operating requirements. New Accounting Standards The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") which replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. All share and per share information included in the accompanying financial statements have been restated to conform to the requirements of SFAS No. 128. The Financial Accounting Standards Board recently issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for the reporting of financial information about reportable segments in annual and interim financial statements. SFAS No. 131 also requires disclosure of revenues from each group of products and services, geographic areas and major customers. Currently, the Company does not expect the adoption of SFAS N0. 131 to have a significant impact on the Company's reporting and disclosures. In April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." This SOP is effective for fiscal 2000 and requires that start-up costs and organization costs be expensed as incurred and that such costs capitalized previously be expensed as a cumulative effect of change in accounting principle. The Company has not completed its evaluation of the impact of SOP 98-5 on its fiscal 2000 financial statements. The Company will continue to capitalize and amortize start-up costs and organization costs during fiscal 1999. 11 12 Year 2000 Compliance Computer systems in use after the beginning of the year 2000 will need to accept four-digit entries in the date code field in order to distinguish 21st century dates from 20th century dates. Consequently, many companies face significant uncertainties because of the need to upgrade or replace their currently installed computer systems to comply with such "Year 2000" requirements. Various systems could be affected ranging from complex information technology ("IT") computer systems to non-IT devices such as an individual machine's programmable logic controller. The Company has reviewed all internal IT systems and believes its currently installed systems are Year 2000 compliant. However, there can be no assurance that coding errors or other defects will not be discovered in the future. The Company is currently in the process of reviewing all non-IT devices for Year 2000 compliance. The Company expects to complete this review process by January 31, 1999. Costs related to the Year 2000 issue are funded through operating cash flows. Through the first quarter of fiscal 1999 costs related to the Year 2000 issue have been immaterial to the financial results of the Company. Future costs related to Year 2000 issues are also expected to be immaterial to the financial results of the Company. Estimates of costs are based on currently available information and developments may occur that could increase the costs related to Year 2000 issues. The Company is currently determining the extent to which it may be impacted by any third parties' failure to remediate their own Year 2000 issues. The Company has initiated formal communications with all significant customers, suppliers, payors and other third parties to determine the extent, if any, to which the Company's interface systems could be impacted by those third-parties' failure to remediate their own Year 2000 issues. The Company will continue these communications throughout fiscal 1999. At this stage of the review no assurance can be given that the failure by one or more third parties to become Year 2000 compliant will not have a material adverse impact on its operations. The Company intends to develop contingency plans for significant third parties' determined to be at high risk of noncompliance or business disruptions. The contingency plans will be developed on a case-by-case basis. Judgments regarding contingency plans are themselves subject to may variables and uncertainties. There can be no assurance that the Company will correctly anticipate the level, impact or duration of noncompliance by third parties, or that its contingency plan will be sufficient to mitigate the impact. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not possible to anticipate all possible future outcomes, especially when third parties are involved, there could be circumstances in which the Company's operations could be interrupted. In addition, disruptions in the economy in general resulting from Year 2000 issues could also adversely impact the Company. Disclosure Regarding Forward-Looking Statements Certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q, including, but not limited to, those regarding the Company's financial position, business strategy, acquisition strategy and other plans and objectives for future operations and any other statements that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have expected effects on its business or operations. Among the factors that could cause actual results to differ materially from the Company's expectations include the availability and cost of attractive acquisition candidates, continuation of various trends in the long-term care market (including the trend toward consolidation), competition among providers of long-term care pharmacy services, the availability of capital for acquisitions and capital requirements, changes in regulatory requirements, reform of the health care delivery system, disruption to the operations of the Company resulting from Year 2000 issues and other factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered into derivitave financial instruments for trading purposes. The Company's primary market risk exposure relates to interest rates 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 $173,000,000 on its revolving credit facility at September 30, 1998 which is subject to a variable rate of interest based on the Eurodollar rate. Assuming borrowings at September 30, 1998, a one-hundred basis point change in interest rates would impact net interest expense by approximately $1,700,000 per year. 12 13 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following information is furnished as to all equity securities of the Company sold during the first fiscal quarter that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). (a) On July 1, 1998, the Company issued 273,707 shares of its Class A Common Stock to one stockholder in connection with the conversion of a Non-Negotiable 8% Convertible Promissory Note ("the Note"). The Note was convertible at a rate of $10.06 per share without additional consideration by the holder thereof. Exemption from registration is claimed under Section 3(a)(9) of the Securities Act. (b) On August 4, 1998 the Company issued 21,112 shares of its Class A Common Stock to one stockholder in connection with the acquisition of certain assets of Pharmacy Specialized Services, LLC. Exemption from registration is claimed under Section 4(2) of the Securities Act. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Numbers Exhibit ------- ------- 15.1 Independent Accountants' Review Report 15.2 Independent Accountants' Acknowledgment Letter 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended September 30, 1998. 13 14 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: November 16, 1998 By /s/ Kevin B. Shaw ---------------------------------------- Kevin B. Shaw President, Chief Executive Officer and Director (Principal Executive Officer) Date: November 16, 1998 By /s/ Gerald D. Stethem ----------------------------------------------- Gerald D. Stethem Chief Financial Officer (Principal Financial and Accounting Officer) 14 EX-15 2 EXHIBIT 15 1 EXHIBIT 15.1 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders NCS HealthCare, Inc. and Subsidiaries We have reviewed the accompanying condensed consolidated balance sheet of NCS HealthCare, Inc. and subsidiaries (the Company) as of September 30, 1998, and the related condensed consolidated statements of income and cash flows for the three-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of NCS HealthCare, Inc. and subsidiaries as of June 30, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended, not presented herein, and in our report dated August 6, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Cleveland, Ohio /s/ Ernst & Young LLP October 28, 1998 15 2 EXHIBIT 15.2 October 28, 1998 The Board of Directors and Stockholders NCS HealthCare, Inc. and Subsidiaries We are aware of the incorporation by reference in the Registration Statements (Form S-8 No. 333-49417; Form S-3 No. 333-63437; Form S-3 No. 333-47293; Form S-3/A No. 333-29565 and Form S-3/A No. 333-35551) of NCS HealthCare, Inc. of our report dated October 28, 1998, relating to the unaudited condensed consolidated interim financial statements of NCS HealthCare, Inc. and subsidiaries that are included in its Form 10-Q for the quarter ended September 30, 1998. /s/ Ernst & young LLP 16 EX-27 3 EXHIBIT 27
5 0001004990 N/A 1,000 U.S. DOLLARS 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 1 17,842 0 177,712 18,532 48,442 240,757 75,635 28,267 647,999 67,263 278,177 0 0 201 294,637 647,999 172,846 172,846 128,990 128,990 0 147 4,887 8,334 3,584 4,750 0 0 0 4,750 .24 .24
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