<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
-----------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-19820
-------
VITALINK PHARMACY SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 37-0903482
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1250 East Diehl Road,
Naperville, Illinois
Suite 208 60563
------------------------------- -------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code (630) 245-4800
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was
$218,551,024 as of August 14, 1997 based upon a closing price of $19.50 per
share.
The number of shares of Vitalink's Common Stock outstanding at August 14,
1997 was 25,386,553.
<PAGE>
PART I
ITEM 1. Business.
General
Vitalink Pharmacy Services, Inc. (the "Company" or "Vitalink")
provides institutional pharmacy services to nursing facilities and other
institutions. Vitalink directly or through its wholly owned subsidiaries
presently operates 57 institutional pharmacies (including four regional infusion
pharmacies), and other pharmacy related businesses which, among other things,
specialize in pharmaceutical dispensing of individual medications, pharmacy
consulting (drug regimen review of potential medication interaction as well as
regulatory compliance with medication and administration guidelines), infusion
therapy and other ancillary products and services. The Company also provides
parenteral and enteral nutrition products to patients who qualify under Medicare
Part B and bills Medicare directly for these products.
In 1981 Vitalink was acquired by a subsidiary of Manor Care, Inc.
(Manor Care, Inc. and its subsidiary are referred to hereafter as "Manor Care"),
one of the nation's largest publicly owned providers of long-term care services.
Vitalink was included in the acquisition of Americana Healthcare Corporation,
which had incorporated the predecessor of Vitalink in 1967. The Company changed
its name from TotalCare Pharmacy Services, Inc. in January 1992.
Vitalink sold 2,475,000 shares of its common stock in an initial
public offering in 1992. As of May 31, 1997, Manor Care owned approximately
51.2% of Vitalink's common stock par value $.01 per share (the "Common Stock").
On February 12, 1997, the Company acquired TeamCare, Inc.
("TeamCare"), the institutional pharmacy business of GranCare, Inc., a
California corporation ("Old GranCare"), in a merger (the "GranCare Merger") for
consideration consisting of: (i) 0.478 of a share of Common Stock of the
Company, for each share of Old GranCare common stock, outstanding at the time of
the GranCare Merger; (ii) the incurrence or assumption by the Company on behalf
of Old GranCare of approximately $109 million of indebtedness; and (iii) the
issuance by the Company of options to purchase approximately 1,121,030 shares of
the Company's Common Stock (in connection with the assumption by the Company of
certain options granted to employees or former employees of Old GranCare). The
purchase price paid by the Company in connection with the GranCare Merger is
approximately $351 million.
In connection with the GranCare Merger, the Company acquired
approximately 33 institutional pharmacies and several related pharmacy
businesses. The GranCare Merger was accounted for using the purchase method of
accounting. Unless the context requires otherwise, as used hereafter, the terms
"Company" or "Vitalink" refer to the Company as comprised following the
completion of the GranCare Merger.
In connection with the GranCare Merger, Old GranCare's skilled
nursing business was transferred to New GranCare, Inc., a Delaware corporation
("New GranCare"), then a wholly owned subsidiary of Old GranCare, and all of New
GranCare's common stock was distributed at the time of the GranCare Merger to
the shareholders of Old GranCare (referred to hereafter as the "Spin-Off").
Following the Spin-Off, the name of New GranCare was changed to "GranCare,
Inc.," which became an independent company as of the time of the GranCare
Merger. Unless the context otherwise requires, all references to "GranCare"
hereafter refer to the company resulting from the Spin-Off, following the
aforementioned name change.
On July 14, 1997, the Company acquired substantially all of the
assets of Nationwide Pharmacies located in Upper Marlboro, Maryland, for
approximately $5,550,000 in cash and future contingent payments based on the
achievement of certain future profitability objectives.
On July 31, 1996, the Company acquired the institutional pharmacy
business of Medisco Pharmacies, Inc. located in San Bernardino, California for
(i) $5,291,000 in cash; (ii) the assumption of $2,510,000 in liabilities; and
(iii) future payments totaling $1,150,000.
<PAGE>
Institutional Pharmacy Industry
Institutional pharmacies purchase and distribute prescription and
non-prescription medications for residents in institutional settings, including
nursing facilities, assisted living facilities, correctional facilities,
retirement centers and other institutions. Institutional pharmacies also provide
consultant services, including evaluation of individual patient drug therapy and
monitoring of nursing facility drug administration, storage and control
practices to help ensure a sound pharmaceutical delivery system and compliance
with state and federal regulations.
A number of factors are expected to contribute to the continuing
expansion of the long-term care and institutional pharmacy industries, including
the growth in, and the greater affluence of, the U.S. elderly population, the
trend toward delivery of cost-efficient health care in non-hospital settings and
the increasing practice of early patient discharge from hospitals due to
cost-containment measures.
Pharmacy Operations
The Company provided institutional pharmacy services to facilities
with approximately 172,000 beds from 56 institutional pharmacies, including four
regional infusion pharmacies, as of May 31, 1997. (A 57th pharmacy was acquired
in July 1997.) The Company services each market in which it operates through a
hub pharmacy or, in cases where markets are geographically close, a satellite
pharmacy. A market generally consists of nursing facilities and other
institutions within a radius of up to 150 miles, depending on demographics and
travel times.
Vitalink has expanded from three pharmacies in 1981 to 57
institutional pharmacies, including four regional infusion pharmacies, as of
July 1997. The pharmacies are located in 20 states: California, Colorado,
Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, New Jersey, New
York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
Texas, Virginia and Wisconsin.
Management has developed a focused growth strategy that includes (i)
continued penetration of existing markets through selling more products to
existing customers and marketing directed to new customers; (ii) infusion
therapy revenue generation created by targeting specific nursing facilities and
home health care agencies; and (iii) acquisitions of pharmacies that can be
consolidated with existing Company pharmacies or serve as a more rapid entry
into new markets.
The table below sets forth the number of beds serviced by the Company
during the past three fiscal years:
<TABLE>
<CAPTION>
Year Ended May 31
-----------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Manor Care Affiliated Beds.......................................... 16,000 19,300 23,000
GranCare Affiliated Beds............................................. -- -- 15,000
Non-Manor Care and Non-GranCare
Affiliated Beds.................................................... 26,400 30,600 134,000
------ ------ -------
Total Beds Serviced....................................... 42,400 49,900 172,000
====== ====== =======
</TABLE>
In the past five fiscal years, the Company has acquired TeamCare, as
well as eight other institutional pharmacies and one regional infusion pharmacy.
Services Offered by the Company
Pharmacy Services - The basic service provided by the Company is the
customized filling of prescription and non-prescription medications for
individual patients pursuant to physician orders delivered to nursing
facilities. The Company maintains a 24-hour on-call availability for clinical
consultation and emergency delivery of medications as well as maintaining a
provision of emergency and contingency doses of medications at each nursing
facility. The Company uses a computerized medical records system that generates
monthly nursing facility medical records including preprinted physician order
forms, medication administration records and treatment records. As an additional
service to its nursing facility customers, the Company maintains and documents
ancillary orders such as diet orders, therapy orders and activity orders. The
Company has nurse consultants on staff to
2
<PAGE>
observe medication administration procedures, consult on medical records and
conduct in-service training programs as well as intravenous certification
programs.
Consultant Pharmacist Services - The Company provides to its nursing
facility customers trained consultant pharmacists whose primary responsibility
is to monitor and report on prescription drug therapy to help ensure quality
patient care. For a nursing facility to participate in the Medicare and Medicaid
reimbursement programs, it is required to have the services of a consultant
pharmacist.
The Company, in response to regulatory demands on nursing facilities,
has defined the primary responsibilities of its consultant pharmacists to
include: (i) monthly drug regimen reviews of each patient; (ii) participation on
key nursing facility committees; (iii) monthly inspection of medication carts
and storage rooms; (iv) monthly written review of facility medication
administration systems and practices; (v) development and maintenance of a
pharmaceutical policy and procedures manual; (vi) on-site educational seminars;
and (vii) assistance to the nursing facility in complying with state and federal
regulations on patient care. The Company charges nursing facilities for
consultant pharmacist services.
Infusion Therapy Products and Services - Infusion therapy basically
consists of a product (nutrient, antibiotic, chemotherapy or other drugs or
fluids) and the administration of the product (by tube, catheter or intravenous
means). Patients can receive these therapies at home or in a nursing facility at
a cost that is substantially less than hospital-based care. The trend toward
delivery of health care in the lowest cost setting and the increasing ability to
treat certain illnesses outside of hospitals represents an opportunity for
nursing facilities to attract infusion therapy patients.
The Company prepares the product to be administered, delivers the
product and, in most cases, trains others in administering infusion therapy.
Other Ancillary Services - The Company also provides its customers
with wound care products and services, disposable medical supplies and durable
medical equipment such as orthotics and prosthetics. In fiscal 1997, ancillary
products and services accounted for approximately 6% of the Company's net
revenues.
Purchasing
The Company purchases the drugs and supplies used in its pharmacies
directly from national wholesale distributors, based on prices obtained through
membership in purchasing groups and directly from pharmaceutical manufacturers.
Direct purchases from drug manufacturers generally allow greater price discounts
than purchase through wholesale distributors but require a significant lead time
between order and actual delivery. The advantage of buying through wholesale
distributors is daily delivery and the ability to more efficiently manage the
Company's inventory of drugs and supplies.
Reimbursement and Billing
The Company's computerized billing system enables it to bill for
products and services in a variety of ways. Charges for pharmacy services
provided to patients who are eligible for Medicare Part A are billed by the
Company to nursing facilities. The nursing facility, in turn, bills these
charges directly to Medicare. Under Part A, Medicare categorizes most of the
expenses related to pharmacy products as ancillary services, which are not
subject to the cost reimbursement ceilings under Medicare regulations. However,
the Company and Manor Care are subject to related party regulations that could
result in reimbursements for pharmacy services provided to Medicare Part A
patients in Manor Care nursing facilities equal to Vitalink's permitted fully
allocated costs of the services.
The federal Medicare program provides for reimbursement under two
separate programs, Part A and Part B. Part A provides benefits covering
inpatient hospital, nursing facility and home health services. Reimbursement for
nursing facility services under Part A is restricted to those eligible for Part
A coverage who have been discharged within thirty days from an acute care
hospital after a stay of at least three days and are in need of daily skilled
nursing or rehabilitation services.
Part B provides coverage for physician services and general
outpatient services, including therapies, as well as durable medical equipment.
Certain Vitalink infusion therapy products are eligible for Part B
3
<PAGE>
reimbursement based on Medicare-approved payment amounts. Part B coverage is
generally subject to an annual deductible of $100 and a statutorily mandated
co-payment thereafter. For patients who qualify under Medicare Part B and
receive PEN (parenteral and enteral) therapies and certain other products and
services, Vitalink bills Medicare Part B directly.
For patients qualifying for Medicaid reimbursement in all states in
which the Company has a pharmacy, the pharmacy bills Medicaid directly, as the
nursing facility cannot obtain reimbursement from Medicaid for pharmacy
services. Medicaid is a cooperative state-federal program for medical assistance
to the medically and categorically needy.
For patients who are eligible for Blue Cross/Blue Shield or other
insurance, the insurer is billed directly by the nursing facility or by
Vitalink. Patients not covered by insurance, Medicare or Medicaid are generally
billed directly by Vitalink.
For its fiscal year 1997, the Company received approximately 63% of
its net revenues from private pay sources, including commercial insurance,
managed care and Medicare Part A patients; 5% of net revenues from Medicare Part
B direct bill; and 32% of net revenues from Medicaid direct bill. Following the
GranCare Merger, the Company received approximately 60% of its net revenues from
private pay sources, 5% from Medicare Part B and 35% from Medicaid.
Dependence on Key Customers
Net revenue from Manor Care and its patients (including revenues
pursuant to government reimbursement programs) accounted for approximately 29%,
48% and 49% of total net revenues in fiscal 1997, 1996 and 1995, respectively.
In connection with the GranCare Merger, the Company assumed existing
pharmaceutical supply agreements between TeamCare and GranCare to provide
pharmaceutical supplies and services to substantially all of GranCare's nursing
facilities. Included in the Company's net revenues for fiscal 1997 are net
revenues from GranCare facilities and their patients of approximately
$20,369,000.
Under various master agreements with Manor Care discussed below, the
Company may at its option provide pharmaceutical, consulting and infusion
therapy products and services to any and all nursing facilities owned or
operated by Manor Care through May 2001 according to the terms of the agreements
and subject to each patient's right to designate his or her own pharmacy or
infusion therapy provider. Each master agreement, however, may be limited or
terminated under certain circumstances including with respect to any nursing
facilities disposed of by Manor Care. Additionally, while the Company hopes to
extend the duration of the master agreements, there can be no assurance that the
Company will be able to do so, or that, if it is able, the extended or new
agreements will be on terms no less favorable to the Company. Any material loss
of business from Manor Care would have a material adverse effect on the Company.
Pursuant to four agreements with Manor Care entered into on June 1,
1991, the Company provides pharmaceutical products and services, enteral and
parenteral therapy supplies and services, urological and ostomy products,
intravenous products and services and pharmacy consulting services to nursing
facilities operated by Manor Care. The Company is not restricted from providing
similar services to non-Manor Care facilities. The agreements have an initial
term of ten years.
Pursuant to the master agreement for pharmacy services and the master
agreement for infusion therapy services, the Company has the option to provide
pharmaceutical and infusion therapy products and services to nursing facilities
owned or licensed by Manor Care.
Pursuant to the master pharmacy consulting agreement, the Company
provides pharmacy consultant services to nursing facilities owned or licensed by
Manor Care that the Company is able to service. Each nursing facility is billed
monthly by the Company based on the number of beds serviced.
Pursuant to the pharmacy services consultant agreement, the Company
assists Manor Care at the corporate level in establishing uniform pharmacy
delivery standards for all of its nursing facilities including those not
serviced by the Company. Manor Care pays the Company an annual fee based on the
number of nursing facility beds operated by Manor Care.
4
<PAGE>
The Company does not believe that its present contractual
arrangements with Manor Care and GranCare with respect to the length of term are
comparable to those obtainable from third parties. Contracts with nursing
facilities not affiliated with Manor Care or GranCare are generally for a period
of one to two years and are terminable by either party for any reason upon
thirty days notice.
Pursuant to certain pharmaceutical supply agreements between TeamCare
and GranCare discussed above, the Company provides and/or has the right to
provide substantially all pharmaceutical supplies and services to substantially
all GranCare nursing facilities and the residents thereof. The agreements
referred to in the prior sentence have a variety of commencement dates and five-
year rolling terms. Depending upon the payor source, either the Company will
bill the payor source directly or the Company will bill the nursing facility,
which will then bill the payor source directly. Any material loss of business
from GranCare would have a material adverse affect on the Company.
Competition
The Company competes with numerous local and regional institutional
pharmacies, as well as the pharmacy operations owned by long-term care
providers. These competitors or potential competitors provide product and
service offerings similar to those provided by the Company. Two competitors are
larger and have greater financial resources than the Company. The competition
among pharmacies for long-term care customers and other patients has intensified
in recent years. Institutional pharmacies compete on the basis of price, quality
of service, breadth of service offerings and payment terms. The Company
currently has size, purchasing power, technical capabilities and financial
resources to compete in each of these areas, although there can be no assurance
that technological or market changes, consolidation in the long-term care and
institutional pharmacy industries or intensified competition will not affect the
Company's ability to maintain its current competitive position.
Quality Assurance
The Company maintains high standards of pharmaceutical dispensing and
record keeping. The Company conducts monthly quality assurance audits at each
nursing facility it services to assess the quality and accuracy of pharmacy
services to nursing facilities.
The consultant pharmacist visits each nursing facility routinely and
makes recommendations to the nursing staff concerning various phases of the
pharmaceutical services and patient care programs. The consultant pharmacist
reviews each patient's drug regimen monthly on-site to ensure the patient drug
therapy is appropriate and the facility is complying with state and federal
regulations. The consultant pharmacist reports irregularities to the patient's
attending physician and the nursing facility's director of nursing and
administration.
Government Regulation
Institutional pharmacies and nursing facilities are subject to
various federal and state regulations covering qualifications and day-to-day
operations, including documentation of activities. The Company's pharmacies are
each licensed by the states in which they operate and are registered with the
federal government pursuant to regulations covering controlled substances. The
nursing facilities served by the Company are separately required to be licensed
by the states in which they operate, and if they serve Medicare or Medicaid
patients, are required to be certified by the federal government.
Given that a substantial number of nursing facility patients are
covered by the Medicare and Medicaid programs, the Company is subject to
extensive regulation under the programs, including regulation relating to
persons covered, amount of coverage, reimbursement and pricing. As a result of
Manor Care's ownership of a substantial portion of the Company's outstanding
common stock, the Company and Manor Care are subject to related party
regulations that could result in reimbursement for pharmacy services provided to
Medicare Part A patients in Manor Care nursing facilities equal to Vitalink's
permitted fully allocated costs of the services.
Changes in Medicare and Medicaid programs, regulations,
reimbursements or interpretations of existing programs, regulations or
reimbursements, including changes intended to limit or decrease the growth of
Medicare and Medicaid expenditures, or changes in the state and federal laws
regulating institutional pharmacies could adversely affect the Company's
business.
5
<PAGE>
Various federal and state laws provide nursing facility patients with
the freedom to choose their own pharmacy provider. The Company markets its
services primarily to nursing facilities and acts as the pharmacy provider to
the patients in such facilities that do not otherwise choose their own provider.
Increases in the percentage of patients choosing their own provider or changes
in freedom-of-choice laws may adversely affect the Company's business.
Employees
At May 31, 1997, the Company had approximately 3,300 employees. The
Company believes it enjoys a good relationship with its employees. Automated
Pharmaceutical Services ("APS"), a subsidiary of the Company which recently
merged with TeamCare, is party to a collective bargaining agreement dated August
29, 1994, with the AFL-CIO covering approximately 50 employees. In addition, in
March 1996, an election was held at APS in Whippany, New Jersey among APS's
delivery drivers seeking representation by the International Laborers Union of
America. The drivers voted in favor of such representation and the Company
challenged the validity and result of such election. The National Labor
Relations Board certified the results of the election on August 21, 1996. The
Company commenced bargaining in late 1996 which continued until August 1997 but
no collective bargaining agreement was reached. As of August 22, 1997, the
Company received evidence that the union no longer has the majority support of
the Company's drivers. As a result, the Company no longer recognizes the union
as representative of its employees. The Company cannot predict the effect
continued union representation or organizational activities will have on the
Company's future activities. However, the Company has never experienced any work
stoppages as a result of such activity.
Insurance
Until the time of the GranCare Merger, insurance coverage was
principally maintained through Manor Care. The cost of the coverage was
allocated entirely to the Company when the coverage was specific to the Company
and otherwise was allocated between Manor Care and the Company. After the
GranCare Merger, all insurance except certain group health insurance was
obtained directly by Vitalink. In the opinion of the Company, its current
coverage is adequate given the risks associated with the operation of an
institutional pharmacy business of the Company's size.
ITEM 2. Properties.
The Company's corporate offices are located in Naperville, Illinois.
As of May 31, 1997, Vitalink had 56 leased pharmacies (including the four
regional infusion pharmacies) located in 20 states. The Company considers its
physical properties to be in good operating condition and suitable for the
purposes for which they are used.
ITEM 3. Legal Proceedings.
Vitalink is subject to regulatory and legal investigations, actions
or claims for damages that arise from time to time in the ordinary course of
business. Vitalink is defending any such investigations, actions and claims
against it and believes that these proceedings will not have a material adverse
effect on its financial condition.
On June 17, 1997 Vitalink and Manor Care filed a lawsuit against
GranCare to enforce a non-competition agreement which the parties entered into
on February 12, 1997 as part of the GranCare Merger. The agreement specifically
prohibits GranCare and Manor Care from becoming involved, directly or indirectly
in the institutional pharmacy business for three years.
On August 7, 1997 Vice Chancellor Jack B. Jacobs of the Delaware
Court of Chancery granted a preliminary injunction in favor of Vitalink and
Manor Care. Vice Chancellor Jacobs also denied GranCare's motion for summary
judgment. The decision was appealled by GranCare before the Delaware Supreme
Court.
On September 5, Vitalink announced that it had reached a settlement
of the lawsuit pending the fulfillment of certain conditions which resulted in
the withdrawal of the appeal. Under the terms of a Termination and Release
Agreement dated September 3, 1997 by and between the Company, GranCare, Manor
Care, Apollo Management L.P. and Living Centers of America, Inc., GranCare
agreed to pay $18,500,000 to Vitalink and $500,000 to Manor Care in
consideration of the cancellation and termination of the Non-Competition
Agreement dated February 12, 1997 by and between the Company, Manor Care and
GranCare (the "Non-Competition Agreement") and the release of all claims
associated the Non-Competition Agreement and/or its enforcement.
The Non-Competition Agreement automatically terminates as of the
closing of the merger by and between Living Centers of America, Inc. and
GranCare. Alternatively, in the event that such merger does not close,
GranCare may, at its sole discretion terminate the Non-Competition Agreement
upon payment of the above-noted amounts. In any event, termination of the
Non-Competition Agreement is contingent on the termination of the Shareholder's
Agreement. The Non-Competition Agreement is described below in "Certain
Relationships and Related Transactions--Agreements with Manor Care".
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended May 31, 1997.
<PAGE>
[MISSING TEXT???????]
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The shares of Vitalink's Common Stock are traded on the New York Stock
Exchange. Information on the high and low sales prices of Vitalink's Common
Stock during the past two years is as follows.
Market Price Data
Vitalink's common stock began trading on the New York Stock Exchange
under the symbol "VTK" effective February 13, 1997. Previously, the common stock
was traded on the NASDAQ Stock Market under the symbol "VTLK". The following
table sets forth the high and low sales price per share of Vitalink's common
stock for each quarter indicated, as reported in published financial sources
(rounded to the nearest cent):
Market Price Per Share
<TABLE>
<CAPTION>
Fiscal 1997 High Low
<S> <C> <C>
$25.00 $20.50
24.88 20.75
24.63 21.13
21.50 16.25
Fiscal 1996 High Low
$17.50 $14.75
19.50 14.75
25.38 16.88
24.50 19.00
</TABLE>
As of August 14, 1997, there were 475 record holders and approximately
4,500 beneficial holders of Vitalink Common Stock.
7
<PAGE>
ITEM 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues $274,038 $141,115 $112,257 $98,569 $65,714
Income From Operations 33,109 22,301 18,726 14,995 11,305
Net Income 18,317 13,870 11,680 9,204 7,341
Earnings Per Share 1.03 .99 .84 .66 .53
Total Assets 516,805 95,923 80,713 69,587 57,425
Working Capital 74,006 22,830 15,202 14,103 9,938
Due From Affiliate 1,053 16,910 16,888 8,167 10,276
Stockholders' Equity 348,531 86,299 72,379 60,699 51,495
Average Shares Outstanding 17,727 13,976 13,975 13,975 13,975
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Result of Operations.
Results of Operations
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues for fiscal 1997 were $274,038,000, an increase of
$132,923,000, or 94.2%, over fiscal 1996. The increase in net revenues was
principally attributable to the inclusion of the TeamCare revenues effective
February 1, 1997.
Excluding TeamCare revenues, net revenues for fiscal 1997 were
$38,357,000, or 27.2%, higher than fiscal 1996. The July 1996 acquisition of
Medisco Pharmacies, which served approximately 2,000 beds at the date of
acquisition, contributed $12,409,000 to the year-to-year increase in net
revenues. At May 31, 1997, the Company provided services to approximately
172,000 institutional beds versus 49,900 institutional beds at May 31, 1996. At
the date of the GranCare Merger, TeamCare serviced approximately 113,000
institutional beds. Included in fiscal 1997 net revenues are $3,342,000 in fees
for consulting services provided to Manor Care facilities and their patients
versus $2,764,000 in fiscal 1996.
8
<PAGE>
Gross profit for fiscal 1997 was $133,612,000, an increase of
$63,619,000, or 90.9%, over fiscal 1996. The increase was largely attributable
to the inclusion of TeamCare results effective February 1, 1997. The gross
profit margin declined to 48.8% from 49.6% principally resulting from comparably
less profitable new accounts and reimbursement reductions from certain state
Medicaid programs.
Operating expenses increased $52,811,000 to $100,503,000, or 36.7% of
net revenues in fiscal 1997 compared to $47,692,000, or 33.8% of net revenues in
fiscal 1996. The increase was principally attributable to the inclusion of
TeamCare results effective February 1, 1997. The increase in operating costs as
a percentage of net revenues is attributable to a variety of factors, including
TeamCare's higher payroll costs as a percentage of net revenues (25.3% versus
20.9%), TeamCare's higher selling, general and administration costs (10.7%
versus 8.4%) and the amortization of goodwill and pharmacy contracts arising
from the GranCare Merger ($3,090,000).
The increase in interest expense is largely attributable to interest
expense incurred on $97,400,000 drawn in February 1997 on the Vitalink Credit
Facility and used to consummate the GranCare Merger. The effective income tax
rate in fiscal 1997 increased to 42.9% compared to 40.3% in fiscal 1996 due to
the tax non-deductibility of goodwill arising from the GranCare Merger.
FISCAL 1996 COMPARED TO FISCAL 1995
Net revenues for fiscal 1996 were $141,115,000, an increase of
$28,858,000, or 25.7%, over fiscal 1995. The increase in net revenues was
principally attributable to increases in the number of nursing facility beds
serviced by the Company and increased revenues per bed from higher patient
acuity levels. At May 31, 1996, the Company provided services to approximately
49,900 institutional beds.
Increases in beds serviced were achieved through acquisitions,
start-ups in Oklahoma City and St. Petersburg and marketing efforts to customers
in existing markets. In the first quarter, the Company acquired Home Intravenous
Care, Inc., located in Loveland, Colorado. Brentview Clinical Pharmacy, located
in Los Angeles, California, was acquired in the second quarter. In fiscal 1996,
these two acquisitions contributed net revenues of $1,821,000 and $3,305,000,
respectively. Included in fiscal 1996 revenues from Manor Care facilities and
their patients are $2,764,000 in fees charged for consulting services as
compared with $2,285,000 charged in fiscal 1995.
Gross profit for fiscal 1996 was $69,993,000, an increase of
$14,016,000, or 25.0%, over fiscal 1995. The gross profit margin decreased
slightly to 49.6% in fiscal 1996 compared to 49.9% in fiscal 1995.
Operating expenses increased $10,441,000 to $47,692,000, or 33.8% of
net revenues in fiscal 1996 compared to $37,251,000, or 33.2% of net revenues in
fiscal 1995. Both payroll and selling, general and administrative expenses
increased to support the growth in beds serviced. Payroll, as a percentage of
net revenues, increased to 20.7% from 19.7%, primarily resulting from
investments in staff for information systems and selling efforts. The increase
in depreciation and amortization is the result of the amortization of pharmacy
contracts, goodwill and noncompete agreements obtained in connection with
acquired businesses as well as depreciation on capital expenditures from
existing pharmacies.
The increase in interest income and other, net, which consists
principally of interest earned on the balance due from affiliate, is primarily
due to the higher average monthly balance due from affiliate resulting from
unused operating cash flows. The interest earned on the loan is equal to the
average three-month Treasury Bill rate plus 100 basis points. Interest income
and other, net for fiscal 1995 also includes a $50,000 gain on the sale of the
Company's retail operation located in Wisconsin.
Liquidity and Capital Resources
The Company meets its ongoing capital requirements and operating needs from
operating cash flows. Cash flows provided by operating activities were
$2,537,000 in fiscal 1997 compared to $12,459,000 in fiscal 1996. The reduction
in operating cash flows is largely the result of working capital changes related
to the
9
<PAGE>
GranCare Merger. Prior to the GranCare Merger, TeamCare did not carry a
receivable from the GranCare facilities they served as TeamCare was a wholly-
owned subsidiary of GranCare and all intercompany transactions were recorded in
an intercompany account. Subsequent to the GranCare Merger, GranCare began to
make payments to Vitalink for services provided to GranCare facilities. At May
31, 1997, accounts receivable due from GranCare totaled approximately $7,185,000
and are included in accounts receivable on the consolidated balance sheet at May
31, 1997. Vitalink also made payments to reduce the level of TeamCare accounts
payable and accrued expenses by approximately $9,900,000 subsequent to the
GranCare Merger. The Company does not anticipate any further material changes in
the relative level of its working capital at May 31, 1997. Operating cash flows
not used to acquire pharmacies or invest in new property and equipment is held
in the form of a receivable due from Manor Care. The balance due is classified
as due from affiliate on the consolidated balance sheets and totaled
approximately $1,053,000 at May 31, 1997.
Except for the GranCare Merger, previously acquired businesses were
paid for with operating cash flows. The purchase contracts for previous
acquisitions generally stipulate future payments contingent upon achievement of
future profitability objectives.
In connection with the GranCare Merger, the Company entered into the
Vitalink Credit Facility (the "Credit Facility") with various banks providing
for unsecured borrowings of up to $200 million. Funds to redeem $98,230,000 of
GranCare's $100 million face value senior subordinated notes were obtained
through borrowings under the Credit Facility. The $1,770,000 balance of the
untendered notes was assumed by the Company. Under the Credit Facility, the
Company may borrow initially at LIBOR plus 0.25%. A fee of 0.15% per annum is
charged on the $200 million commitment. The terms of the Credit Facility
contain, among other provisions, requirements for maintaining defined levels of
net worth, annual capital expenditures and consolidated leverage and debt-to-
equity ratios. At May 31, 1997, there were $97,400,000 in borrowings outstanding
under the credit agreement and the Company was in compliance with the terms of
the Credit Facility.
On February 12, 1997, the Company amended its "Intercompany Debt and
Credit Agreement" with Manor Care to, among other things, terminate its
$10,000,000 line of credit with Manor Care.
Funds from the Credit Facility, cash balances and amounts due from
Manor Care are available for general corporate purposes, including potential
acquisitions of pharmacies, the internal development of additional pharmacies,
working capital and capital expenditures. The Company believes that its cash
balances, amounts due from Manor Care, cash flows from operations and available
credit sources will be adequate to meet the Company's foreseeable capital and
other cash requirements in the near future.
10
<PAGE>
ITEM 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VITALINK PHARMACY SERVICES, INC.:
We have audited the accompanying consolidated balance sheets of Vitalink
Pharmacy Services, Inc. (a Delaware Corporation) and subsidiaries as of May 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended May 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vitalink Pharmacy Services,
Inc. and subsidiaries as of May 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
June 27, 1997
11
<PAGE>
<TABLE>
<CAPTION>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
====================================================================================================================================
Consolidated Statements of Income
(in thousands, except per share data)
- - ------------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31, 1997 1996 1995
------------------ ---- ---- ----
<S> <C> <C> <C>
Net Revenues $274,038 $141,115 $112,257
Cost of Goods Sold 140,426 71,122 56,280
Gross Profit 133,612 69,993 55,977
Operating Expenses
Payroll expenses 61,463 29,255 22,153
Selling, general and administrative expenses 25,102 11,662 9,573
Provision for doubtful accounts 4,411 2,412 1,772
Depreciation and amortization 9,527 4,363 3,753
Total operating expenses 100,503 47,692 37,251
Income from Operations 33,109 22,301 18,726
Interest Income and Other, Net 1,106 1,003 893
Interest Expense (2,154) (51) (57)
Income Before Income Taxes 32,061 23,253 19,562
Income Taxes 13,744 9,383 7,882
Net Income $ 18,317 $ 13,870 $ 11,680
-------- -------- --------
Weighted Average Shares Outstanding 17,727 13,976 13,975
Earnings Per Share $ 1.03 $ .99 $ .84
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<TABLE>
<CAPTION>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
====================================================================================================================================
Consolidated Balance Sheets
(in thousands, except per share data)
- - ------------------------------------------------------------------------------------------------------------------------------------
As of May 31, 1997 1996
------------- ---- ----
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalent $ 3,660 $ 889
Receivables (net of allowances of $4,872 and $2,163) 79,745 20,093
Inventories 25,193 7,426
Deferred income taxes 9,590 1,138
Other 1,829 330
Total current assets 120,217 29,876
Due from Affiliate 1,053 16,910
Property and Equipment, at Cost, Net of Accumulated Depreciation 22,908 8,191
Pharmacy Contracts (net of amortization of $4,579 and $3,044) 39,313 6,187
Goodwill (net of amortization of $5,705 and $2,146) 326,884 31,194
Other Assets (net of amortization of $4,689 and $3,292) 6,630 3,565
===============================================
TOTAL ASSETS $ 516,805 $ 95,923
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 22,867 $ 3,918
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
====================================================================================================================================
Consolidated Balance Sheets (Continued)
(in thousands, except per share data)
- - ------------------------------------------------------------------------------------------------------------------------------------
As of May 31, 1997 1996
------------- ---- ----
<S> <C> <C>
Accrued expenses 20,979 2,403
Income taxes payable -- 725
Current portion of long-term debt 2,165 --
Total current liabilities 46,011 7,046
Long-Term Debt 104,873 --
Deferred Income Taxes ($15,352 and $1,916) & Other Long-Term Liabilities 17,390 2,578
Stockholders' Equity
Common stock (80,000,000 shares authorized, 25,402,510 and 13,979,700
shares issued, $.01 par value) 254 140
Contributed capital 281,956 38,155
Retained earnings 66,321 48,004
Total stockholders' equity 348,531 86,299
===============================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $516,805 $ 95,923
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<TABLE>
<CAPTION>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
====================================================================================================================================
Consolidated Statements of Stockholders' Equity
(in thousands, except per share data)
- - ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Common Stock Contributed Retained
Shares Amount Capital Earnings
------ ------ ------- --------
<S> <C> <C> <C> <C>
Balance, May 31, 1994 13,975,000 $140 $38,105 $22,454
Net income -- -- -- 11,680
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1995 13,975,000 140 38,105 34,134
Net income -- -- -- 13,870
Exercise of stock options 4,700 -- 50 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance of May 31, 1996 13,979,700 140 38,155 48,004
Net income -- -- -- 18,317
Exercise of stock options 54,583 -- 793 --
Tax benefit from exercise of stock
options -- -- 130 --
Stock issued for business acquired 11,368,227 114 242,878 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1997 25,402,510 $254 $281,956 $66,321
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE>
<TABLE>
<CAPTION>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
====================================================================================================================================
Consolidated Statements of Cash Flows
(in thousands)
- - ------------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31, 1997 1996 1995
------------------ ---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 18,317 $ 13,870 $ 11,682
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 9,527 4,363 3,753
Provision for doubtful accounts 4,411 2,412 1,772
Gain on sale of business -- -- (50)
Decrease (increase) in deferred taxes, net of 2,076 712 (114)
acquisitions
Change in assets and liabilities, net of
acquisitions
Change in receivables (22,341) (8,661) (1,731)
Change in inventories (1,690) (450) (1,103)
Change in other assets (1,055) (1,163) (21)
Change in accounts payable and accrued (5,983) 1,559 242
expenses
Change in income taxes payable (725) (183) (84)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,537 12,459 14,344
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment in property and equipment (4,648) (3,537) (2,163)
Proceeds from sale of business -- -- 144
Decrease (increase) in due from affiliate, net 15,857 (22) (8,721)
Acquisition of pharmacy businesses (102,691) (5,531) (2,451)
Deferred payments on previous acquisitions (1,856) (2,030) (1,400)
Other items, net (1,366) (644) (107)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in ) Investing Activities (94,704) (11,764) (14,698)
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Principal payments of debt (3,255) (54) (56)
Exercise of stock options 793 50 --
Net borrowings under revolving credit agreement 97,400 -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used in) Financing Activities 94,938 (4) (56)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 2,771 691 (410)
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash at Beginning of Period 889 198 608
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash at End of Period $ 3,660 $ 889 $ 198
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
14
<PAGE>
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Organization
The Company owns and operates, directly or through its subsidiaries,
institutional pharmacies. As of May 31, 1997, Manor Care owned 51.2% of the
Company's common stock. Manor Care, through its wholly-owned subsidiary
ManorCare Health Services, Inc., operates nursing facilities. Prior to
Vitalink's February 12, 1997 acquisition of TeamCare, the institutional pharmacy
business of GranCare, Inc. (see Acquisitions), Manor Care's ownership interest
was 82.3%. Upon consummation of the GranCare Merger, Manor Care's ownership was
reduced to approximately 45%. On May 21, 1997, Manor Care completed the
purchase, through a tender offer, of 1,500,000 shares of Vitalink stock at
$20.00 per share bringing its ownership to 51.2%. Unless the context otherwise
requires, Manor Care shall mean Manor Care and its subsidiaries other than the
Company.
Principles of Consolidation
The consolidated financial statements include the accounts of
Vitalink Pharmacy Services, Inc. and all of its subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Revenue Recognition and Concentration of Credit Risk
The Company records revenues at the time services or supplies are
provided. Revenue is reported at the estimated net realizable amounts expected
to be received from individuals, third party payors or others for services and
supplies provided. Net revenues from Medicaid and Medicare programs were
$87,432,000 and $13,876,000, respectively, for the year ended May 31, 1997 and
$40,250,000 and $8,151,000, respectively, for the year ended May 31, 1996.
Accounts receivable outstanding on the consolidated balance sheets from Medicaid
and Medicare programs were 19% and 11%, respectively, of total accounts
receivable at May 31, 1997 and 25% and 9%, respectively, of total accounts
receivable at May 31, 1996.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market and are comprised primarily of products held for resale.
Property and Equipment
The components of property and equipment at May 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Leasehold improvements $ 2,190 $ 1,125
Furniture, fixtures and equipment 18,137 6,907
Vehicles 2,765 1,553
Computer equipment 7,002 3,199
- - -----------------------------------------------------------------------------------------------------
30,094 12,784
Less accumulated depreciation (7,186) (4,593)
------ ------
Property and equipment $ 22,908 $ 8,191
=====================================================================================================
</TABLE>
Property and equipment is recorded at cost, or if obtained through
acquisition, at the estimated fair market value at the date of acquisition.
Depreciation and amortization of property and equipment is computed using the
straight-line method over the following estimated useful lives:
15
<PAGE>
Leasehold improvements................................... 5-10 years
Furniture, fixtures and equipment
including computer equipment............................ 3-8 years
Vehicles................................................. 2-3 years
Capitalization Policies
Maintenance, repairs and minor replacements are charged to expense. Major
renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is recorded.
Goodwill and Pharmacy Contracts
Goodwill arising from business acquisitions is amortized on the
straight-line basis over 40 years. Pharmacy contracts, principally representing
the estimated value of acquired contracts to service customers, are amortized
over their estimated useful lives, not to exceed 20 years. The recoverability of
these assets is evaluated whenever events and circumstances indicate that the
value of assets may be impaired. The evaluation is based on comparing the
carrying value of the assets to the estimated undiscounted cash flows of the
acquired business or pharmacy contract. If the evaluation indicates that the
carrying value of the asset will not be fully recovered, the carrying value of
the asset will be adjusted accordingly. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in fiscal year
1997. Adoption of this statement did not impact the Company's consolidated
financial statements. Amortization expense charged to operations for goodwill
and pharmacy contracts, respectively, was $3,559,000 and $1,535,000 in 1997,
$786,000 and $928,000 in 1996 and $635,000 and $904,000 in 1995.
Earnings Per Common Share
Earnings per common share have been computed based on the weighted average
number of shares of common stock outstanding. The effect of outstanding stock
options on the computation is not material.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Impact of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share ("SFAS 128"), which is effective for interim
and annual periods ending after December 15, 1997. Early adoption of SFAS 128 is
prohibited. The statement replaces primary earnings per share with basic
earnings per share, as defined by the statement. The Company plans to adopt SFAS
128 in fiscal 1998. Had the Company adopted SFAS 128 in fiscal 1997, basic
earnings per share would have been the same as reported earnings per share and
diluted earnings per share would have been no more than 2% less in each of the
three years ended May 31, 1997.
Related Party Transactions
Manor Care
The Company provides pharmaceutical dispensing, infusion therapy and
pharmacy consulting services to nursing facilities owned and operated by Manor
Care and the patients of these facilities. Revenues from sales to
16
<PAGE>
Manor Care nursing facilities and patients, which are included in net revenues
in the consolidated statements of income, were $76,526,000, $64,302,000 and
$52,449,000, respectively, for the three years ended May 31, 1997. Fees from
consulting services to Manor Care and Manor Care facilities, which are included
in net revenues in the consolidated statements of income, are charged based on
an annual fee per bed and totaled $3,342,000, $2,764,000, and $2,285,000,
respectively, for the three years ended May 31, 1997. Prior to fiscal year 1996,
sales of pharmaceutical and infusion therapy products and services to Manor
Care's nursing facilities were made at prices charged to other customers less an
administrative fee equal to 3% of the private pay revenues derived from each
facility. The administrative fee was $485,000 for the year ended May 31, 1995.
Effective June 1, 1995, the Company ceased to pay Manor Care the 3%
administrative fee as the Company assumed the billing and collecting of private
pay revenues derived from Manor Care facilities.
The Company and Manor Care have entered into an Administrative Services
Agreement. Manor Care provides various services to the Company including, among
others, cash management, payroll and payables processing, employee benefit
plans, insurance, legal, accounting, tax, information systems and certain
administrative services, as required. Substantially all cash received by the
Company, with the exception of cash received by pharmacies acquired in the
GranCare Merger, (the "TeamCare Pharmacies"), is immediately deposited in and
combined with Manor Care's corporate funds through its cash management system.
Similarly, operating expenses, capital expenditures and other cash requirements
of the Company, with the exception of the TeamCare Pharmacies, are paid by Manor
Care and charged to the Company. Administrative fees of $640,000, $595,000 and
$551,000, respectively, for the three years ended May 31, 1997, were charged
based on a time allocation method which Manor Care utilized to charge
administrative services to all of its subsidiaries. Management believes that the
foregoing charges are reasonable allocations of the costs incurred by Manor Care
on the Company's behalf. It is anticipated that the Administrative Services
Agreement will be terminated within one year following the GranCare Merger as
the Company will be assuming direct in-house responsibility for the services
provided.
Prior to the GranCare Merger, Manor Care obtained and provided insurance
coverage for group health, auto, general liability, property casualty and
workers' compensation through its self-insurance and outside insurance programs
and charged the Company based on the relative percentage of insurance costs
incurred by Manor Care on the Company's behalf. After the GranCare Merger, all
insurance except certain group health was obtained directly by Vitalink. Total
insurance costs allocated were $2,051,000, $1,777,000 and $1,360,000,
respectively, for the three years ended May 31, 1997. Management believes that
the foregoing charges are reasonable allocations of the costs incurred by Manor
Care on the Company's behalf.
The net result of all intercompany transactions, plus tax allocations as
discussed in the next footnote regarding income taxes, is included in the due
from affiliate amount in the consolidated balance sheets. Due from affiliate has
no set repayment terms. However, the balance due accrues interest and it is
expected that repayment will occur as the Company requires cash.
Manor Care credited the Company with interest income of $922,000, $972,000
and $822,000, respectively, for the three years ended May 31, 1997 relating to
the average balance due from affiliate. The interest earned on the average
balance due from affiliate was calculated based on an average three-month
Treasury Bill rate plus 100 basis points. The average three-month Treasury Bill
rate was 5.08%, 5.13% and 5.23% in the three years ended May 31, 1997.
Following the GranCare Merger, the Company amended an Intercompany Debt and
Credit Agreement which, among other things, terminated a $10,000,000 line of
credit with Manor Care. There was no balance outstanding under this agreement at
May 31, 1997 or 1996.
The Company has entered into pharmacy, infusion therapy and consulting
services agreements with Manor Care, whereby the Company has the option to
provide pharmaceutical products and services, infusion therapy products and
services and pharmacy consulting services to Manor Care, Manor Care nursing
facilities and patients. The agreements have a ten-year term commencing June 1,
1991. The Company will continue to charge Manor Care for consulting services as
set forth above.
17
<PAGE>
GranCare
The Company's Board of Directors includes three Directors who are also
Directors of GranCare. In connection with the GranCare Merger, the Company
assumed certain rights and obligations under existing Pharmaceutical Supply
Agreements (the "Supply Agreement") between GranCare and TeamCare, whereby the
Company has rights to supply pharmaceutical and related goods to existing
GranCare facilities. The Supply Agreements have an initial term of five years
and is automatically renewed for an additional year upon each
anniversarythereof. Payment terms under the Supply Agreement are 30 days.
Included in net revenues for fiscal 1997, are net revenues from GranCare
facilities and their patients of $20,369,000. Included in accounts receivable at
May 31, 1997, are amounts due from GranCare facilities of $7,185,000. Vitalink
and GranCare have entered into an Interim Services Agreement (the "Interim
Services Agreement") which requires GranCare to provide various services to the
Company including, among others, tax and information systems, as required, for
the benefit of the TeamCare Pharmacies. The term of the agreement is for a one
year period subsequent to the GranCare Merger or for a lesser period if mutually
agreed to by both parties. The fees for the services are based on the direct and
indirect costs of providing such services.
Other
The Company leases operating facilities from various employees.
Rental expense under the non-cancelable operating leases was approximately
$353,000, $290,000 and $290,000, respectively, for the three years ended May 31,
1997. Future minimum lease payments for the leases, which expire from 1998 to
2005, are $2,417,000 at May 31, 1997.
Income Taxes
In prior years, an agreement existed whereby the Company joined with Manor
Care in the filing of a consolidated federal tax return. As a result of the
GranCare Merger, the Company will file on a separate company basis effective
with a short period return for the period February 1, 1997 through May 31, 1997.
Accordingly, the Company has accrued taxes payable to or benefits receivable
from Manor Care in the due from affiliate account up until the time of the
GranCare Merger, based on the statutory rate applied to income before taxes
after considering appropriate tax credits. Deferred taxes are recorded for the
tax effect of temporary differences between book and tax income.
The consolidated provisions for income taxes follows for the years ended May 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current
Federal $ 9,762 $ 7,459 $ 6,381
State 2,262 1,722 1,476
Deferred
Federal 1,396 164 20
State 324 38 5
- - ---------------------------------------------------------------------------
Income taxes $13,744 $ 9,383 $ 7,882
===========================================================================
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at May 31:
18
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross deferred tax liabilities
Depreciation $ (1,122) $ (941) $ (784)
Amortization of intangibles (17,906) (390) (269)
Other (999) (598) (266)
- - ---------------------------------------------------------------------------
Total gross deferred liabilities (20,027) (1,929) (1,319)
===========================================================================
Gross deferred tax assets
Reserve for doubtful accounts 7,813 964 747
Acquisition costs 3,864 0 0
Other 2,588 187 506
Total gross deferred tax assets (14,265) (1,151) (1,253)
Gross deferred tax assets
Total gross deferred tax assets 14,265 1,151 1,253
Net deferred tax liabilities $ (5,762) $ (778) $ (66)
</TABLE>
The Company expects the deferred tax assets to be realized through future
taxable income.
Reconciliation of the Federal statutory income tax rate and the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of Federal tax 5.2% 4.9% 4.9%
benefit
Amortization of intangibles 2.4% 0.1% 0.2%
Other 0.3% 0.3% 0.2%
Effective income tax rate 42.9% 40.3% 40.3%
</TABLE>
Cash paid for state income taxes was $1,975,000, $1,210,000 and $1,100,000,
respectively, for the three years ended May 31, 1997.
Accrued Expenses
Accrued expenses were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
------------------------------------------
<S> <C> <C>
Payroll and incentive compensation $ 8,663 $ 2,064
Acquisition related accruals 6,251 243
Insurance 925 --
Other 5,140 96
Accrued expenses $20,979 $ 2,403
</TABLE>
Long-Term Debt
In connection with the GranCare Merger, the Company entered into a five-year
$200 million revolving credit facility, which expires February 12, 2002, with
various banks. At May 31, 1997, the Company had drawn $97,400,000 under the
Credit Facility. The interest rate is LIBOR plus .25%. The weighted average
interest rate during fiscal 1997 was 6.05%.
Amounts drawn under the Credit Facility were used to redeem, through a
tender offer, $98,230,000 of GranCare's $100 million 9-3/8% senior subordinated
notes. The Company is subject to a 0.15% facility fee for the total amount of
the Credit Facility payable on a quarterly basis. The terms of the Credit
Facility contain, among other provisions, requirements for maintaining defined
levels of net worth, annual capital expenditures and interest coverage and
consolidated leverage ratios. At May 31, 1997, the Company was in compliance
with the terms of the Credit Facility.
In connection with the GranCare Merger, the Company assumed $1,770,000 of
untendered GranCare 9-3/8% senior subordinated notes due September 15, 2005. The
notes require semi-annual interest payments. A
19
<PAGE>
premium of $600,000 has been recorded to reflect the fair market value of the
notes at the date of the GranCare Merger.
Also assumed in the GranCare Merger were various notes payable totaling
$5,230,000 issued in connection with previously acquired pharmacy businesses.
The weighted average interest rate on the notes is 7.03% and their annual
maturities over the next five fiscal years are as follows: $1,850,000,
$1,942,000, $938,000, $211,000 and $173,000.
Vitalink has a $1,000,000 standby letter of credit related to contractual
requirements with the State of New Jersey. The Company is subject to an annual
fee of 0.375%, which is payable on a quarterly basis, on the letter of credit.
Interest paid was $1,538,000, $51,000 and $57,000, respectively, in the
three years ended May 31, 1997. The carrying amounts of Vitalink's long-term
debt approximate fair value.
Leases
The Company operates certain property and equipment under leases that have
initial or remaining terms in excess of one year. Rental expense under
noncancelable operating leases was $3,515,000, $1,373,000 and $1,086,000,
respectively, for the three years ended May 31, 1997. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
(in thousands)
<S> <C> <C>
Fiscal Year ended May 31,
1998 $ 465 $ 4,642
1999 421 3,711
2000 411 3,059
2001 395 2,622
2002 84 1,929
Thereafter -- 1,152
Total minimum lease payments $ 1,176 $ 17,115
Less amount representing interest (378)
Present value of lease payments 1,398
Current portion (315)
-------
Lease obligations included in long-term debt $ 1,083
-------
</TABLE>
Acquisitions
Fiscal Year 1997
On February 12, 1997, the Company merged with TeamCare, GranCare's
institutional pharmacy business, by acquiring all of the outstanding shares of
GranCare after the spin-off of its skilled nursing business. The Company issued
approximately 11.4 million shares of common stock and funded the redemption of
$98,230,000 of $100 million face value of GranCare senior subordinated notes.
The GranCare Merger was accounted for using the purchase method of accounting
with an effective date of February 1, 1997 and, accordingly, the results of
operations of TeamCare have been included in the consolidated financial
statements since February 1, 1997. The purchase price of $351 million was
allocated to the net assets acquired based on their estimated fair values at the
date of the GranCare Merger. The excess of the purchase price over the fair
value of net assets acquired was approximately $292 million and has been
recorded as goodwill, which is being amortized on a straight-line basis over 40
years.
20
<PAGE>
The purchase price has been allocated to the net assets purchased and
liabilities assumed as presented below.
<TABLE>
(in thousands)
- - ----------------------------------------------------------------------------
<S> <C>
Working capital....................................$ 21,066
Property and equipment...............................12,832
Pharmaceutical Supply Agreement......................34,262
Other assets..........................................2,240
Goodwill............................................292,496
Other liabilities .................................(11,896)
- - -----------------------------------------------------------------------------
Purchase price $351,000
</TABLE>
The following unaudited pro forma information presents a summary of
the consolidated results of operations of the Company and TeamCare as if the
GranCare Merger had occurred at the beginning of fiscal 1996, after giving
effect to amortization of goodwill and pharmacy contracts, increased interest
expense on the acquisition debt and related income tax effects.
<TABLE>
<CAPTION>
1997 1996
---- ----
-----------------------------------------------------------
(unaudited; in thousands, except per share data)
-----------------------------------------------------------
Fiscal Year ended May 31,
<S> <C> <C>
Net revenues $458,043 $360,939
Net income $ 21,630 $ 16,078
Earnings per share $ 0.85 $ 0.63
</TABLE>
The pro forma information is presented for informational purposes
only and is not necessarily indicative of results that would have occurred had
the GranCare Merger been effective at the beginning of 1996, nor is the pro
forma information necessarily indicative of the results that will be obtained in
the future.
On July 31, 1996, the Company acquired Medisco Pharmacies, Inc.,
located in San Bernardino, California for 5,291,000 in cash plus the assumption
of $2,510,000 in liabilities and future payments totaling $1,150,000.
Fiscal Year 1996
On November 3, 1995, the Company acquired the institutional pharmacy
business of Brentview Clinical Pharmacy, located in Los Angeles, California for
$3,206,000 in cash plus the assumption of $45,000 in liabilities and future
contingent payments based on the achievement of future profitability objectives.
On July 6, 1995, the Company acquired the infusion therapy business
of Home Intravenous Care, Inc., located in Loveland, Colorado, for $2,325,000 in
cash plus the assumption of $105,000 in liabilities and future contingent
payments based on the achievement of certain future profitability objectives.
Fiscal Year 1995
On April 27, 1995, the Company acquired the institutional pharmacy
business of Parker's Pharmacy, Inc., located in San Antonio, Texas, for
$2,451,000 in cash plus the assumption of $107,000 in liabilities.
The above acquisitions are accounted for under the purchase method of
accounting with the net assets recorded at their estimated fair market values at
the date of acquisition. The fiscal 1996 and 1995 acquisitions are not material
to the Company's financial position or results of operations on a pro forma
basis.
The estimated fair market values of pharmacy contracts acquired are
amortized over their expected remaining lives not to exceed 20 years including
estimated contract renewals. Goodwill, representing the excess of acquisition
costs over the fair market value of acquired assets, is amortized over 40 years.
Other assets include
21
<PAGE>
noncompete covenants totaling $1,585,000 and $1,681,000, respectively, at May
31, 1997 and 1996. Other assets are amortized over their estimated useful lives
ranging from 2 to 10 years.
Depreciation and amortization in the consolidated statements of
income include amortization of intangible assets of $6,491,000, $2,641,000 and
$2,449,000, respectively, for the three years ended May 31, 1997. The guaranteed
value of stock options granted to the sellers of acquired businesses was
considered part of the purchase price of the businesses. Included in deferred
income taxes and other long-term liabilities in the consolidated balance sheets
at May 31, 1997 and 1996 is $656,000 representing the guaranteed value of stock
options.
Capital Stock and Stock Options
In September 1991, the Company's sole shareholder and Board of
Directors authorized 10,000,000 shares of preferred stock at $.01 par value.
None of the preferred stock is issued and outstanding. The Board of Directors is
authorized to determine the rights of the preferred shares.
On July 10, 1996, the Board of Directors adopted and the shareholders
subsequently approved the Company's 1996 Long-Term Incentive Plan (the
"Incentive Plan"). The Incentive Plan provides for the granting of options,
stock appreciation rights, restricted and performance shares to key employees.
At May 31, 1997, 449,900 shares are reserved for issuance under the Incentive
Plan. Options issued are at prices equal to the market price at the date of
grant and have a term of ten years. Options that have been issued under the
Incentive Plan vest at a rate of 20% per year for the first five years after the
date of the grant.
In September 1991, the Board of Directors adopted the Company's 1991
Key Executive Stock Option and Appreciation Rights Plan (the "Plan"). The Plan
was terminated in fiscal 1997 in connection with the adoption of the 1996 Long-
Term Incentive Plan. Under the Plan, 420,000 shares were reserved for issuance
upon exercise of granted options. The Plan provided for the granting of options
at prices equal to the market value of the stock at grant date. In addition, a
stock appreciation right could be granted with a stock option. At the election
of the Board, the stock appreciation right may be paid in cash or shares of
common stock or a combination thereof in an amount equal to the difference
between the option exercise price and the then market value of the shares
subject to the option. Options granted are not exercisable during either the
first one or two years after the grant date and vest over periods of 48 to 96
months. The options expire from 5 to 10 years after the grant date. In fiscal
1994, the Board adopted and the shareholders approved an increase in the number
of shares reserved for issuance to 1,000,000.
In February 1997, in conjunction with the GranCare Merger, the
Company converted GranCare stock options into 1,121,030 of Company stock
options. These converted options may be used to acquire Company stock and the
option holders became fully vested as of February 12, 1997. The options expire
10 years after the date of the original grant.
The following summarizes stock option transactions for the three fiscal years
ended May 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
--------------- ---------------- ---------------- ---------------- ----------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price Shares
--------------- ---------------- ---------------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 501,400 $14.59 497,100 $13.23 398,600
Options exercised (54,583) 14.92 (4,700) 10.47 --
Options granted 55,000 23.75 109,000 19.12 126,000
Options converted from GranCare options 1,121,030 16.31 -- -- --
Options cancelled (11,000) 14.34 (100,000) 13.00 (27,500)
Options outstanding, end of year 1,611,847 $16.13 501,400 $14.59 497,100
Option price range at end of year $0.99-$27.06 $10.06-$19.88 $10.06-$17.00
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price Shares
------ ----- ------ ----- ------
<S> <C> <C> <C>
Option price range of exercised shares $10.75-$17.00 $10.06-$12.75 --
Options available for grant at end of year 449,000 493,900 503,500
Weighted average fair value of options granted $12.60 $8.52 --
during year
</TABLE>
The following table summarizes information about stock options outstanding as of
May 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - ----------------------- --------------------- ---------------------- ---------------------- ---------------------- ----------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- - ----------------------- --------------------- ---------------------- ---------------------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.99-$2.07 149,987 6.5 years $1.25 149,982 $1.25
10.06-15.13 330,741 5.5 years 12.08 147,109 $1.25
16.11-22.33 1,036,450 7.0 years 18.78 899,590 18.85
23.36-27.06 94,674 8.0 years 24.68 39,674 26.03
1,611,847 16.13 1,236,355 18.45
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"). Had compensation
expense for the Company's stock options been recognized based on the grant date
fair value consistent with the provisions of SFAS 123, the Company's net
earnings would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands, except per share data)
----------------------------------------------------------------
<S> <C> <C>
Net earnings--as reported $ 18,317 $ 13,870
Net earnings--pro forma $ 18,168 $ 13,721
Earnings per share--as reported $ 1.03 $ 0.99
Earnings per share--pro forma $ 1.02 $ 0.98
</TABLE>
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed risk-free interest rates of 6.3% to 6.9%,
expected volatility of 44.6%, dividend yield of zero and expected option lives
of four to six years.
The effects of applying SFAS 123 on this pro forma disclosure are not
likely to be representative of the effects on reported net income in future
years. Additionally, SFAS 123 does not apply to awards granted prior to 1996;
additional awards are anticipated in future years.
In 1993, options were granted to four of the former shareholders of
White, Mack and Wart, Inc. to purchase 100,000 shares of common stock at $10.88
per share. These options are not exercisable during the first two years after
the date of grant and then vest at the rate of 25% per year commencing at the
end of year two. The options expire six years after the date of grant.
23
<PAGE>
Contingencies and Compensating Balances
On June 17, 1997, Vitalink filed a lawsuit against GranCare to
enforce a non-competition agreement between the parties entered into in
connection with the GranCare Merger. The lawsuit seeks preliminary and permanent
orders blocking the proposed combination of GranCare with Living Centers of
America, Inc.
The Company is subject to various legal actions or claims for damages
that arise in the ordinary course of business. In the opinion of management and
counsel to the Company, the ultimate outcome of the litigation with GranCare and
other litigation will not have a material adverse effect on the Company's
financial position or results of operations.
In connection with acquisitions, contingent purchase price payments
exist up to an aggregate maximum of $2,800,000, plus additional uncapped amounts
based on future performance.
In connection with the GranCare Merger, Vitalink entered into a
limited guarantee with a term of 15 years to Health Retirement Properties Trust
("HRPT") of up to $15,000,000 for default mortgage obligations of GranCare
facility leases. In return, Vitalink is the beneficiary of a $15,000,000 letter
of credit from GranCare in the event that it defaults on any of its mortgages to
HRPT.
Compensating balances of $75,000 are required under certain debt
agreements of Manor Care.
Pension, Profit Sharing and Incentive Plans
The Company participates in the various pension and profit sharing
plans of Manor Care and contributes through Manor Care to certain welfare plans.
The provision for these plans amounted to $522,000, $433,000 and $317,000,
respectively, for the three years ended May 31, 1997. All vested benefits under
retirement plans are funded or accrued. In July 1997, the Company's Board of
Directors approved a new profit sharing plan for all Vitalink employees. All
participants in the Manor Care profit sharing plan will convert to the new
profit sharing plan in fiscal 1998. Subsequent to the GranCare Merger, the
Company established an interim profit sharing plan for former TeamCare
employees, who will also convert to the new profit sharing plan in 1998. The
provision for the interim plan was $130,000 in fiscal 1997.
The Company has incentive compensation plans for management personnel
and officers based primarily on new business development and achievement of
certain profitability levels. Incentive compensation expense was $1,538,000,
$1,003,000 and $968,000, respectively, for the three years ended May 31, 1997.
Quarterly Financial Data
(unaudited)
The following table summarizes the quarterly financial data for the fiscal years
ended May 31, 1997 and 1996:
<TABLE>
<CAPTION>
Income from
Quarter Ended Net Revenues Operations Net Income Per share
------------- ------------ ---------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal 1997
August $ 39,373 $ 5,965 $ 3,712 $ .27
November 43,346 6,257 3,886 .28
February 69,772 8,474 4,747 .27
May 121,547 12,413 5,972 .24
---------- ----------- ----------- -------
$ 274,038 $ 33,109 $ 18,317 $ 1.03*
Fiscal 1996
August $ 31,822 $ 5,070 $ 3,191 $ .23
November 33,998 5,390 3,366 .24
February 36,497 5,646 3,486 .25
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Income from
Quarter Ended Net Revenues Operations Net Income Per share
------------- ------------ ---------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
May 38,798 6,195 3,827 .27
$ 141,115 $ 22,301 $ 13,870 $ .99
</TABLE>
* Does not add due to rounding and effect of weighted shares.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's reporting officers and directors, and persons who own more than
ten percent of the Company's Common Stock, to file reports of ownership and
changes in ownership on Forms 3, 4, and 5 with the Securities and Exchange
Commission (the "Commission"), the NYSE and the Company. Based solely on the
Company's review of the forms filed with the Commission and written
representations from reporting persons that they were not required to file Form
5 for certain specified years, the Company believes that Manor Care, Ms. DeNardo
and Messrs. Burleson and Kanter filed late certain reports required under
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") during the fiscal year ended May 31, 1997. The Company believes that all
other of its reporting officers, directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them
during fiscal year ended May 31, 1997.
25
<PAGE>
The Company's By-laws permit the Board of Directors to determine from time
to time the aggregate number of directors constituting the entire Board, which
may not be less than three nor more than eight. Accordingly, at the coming
Annual Meeting of Stockholders, eight directors will be elected to serve until
the next Annual Meeting of Stockholders of the Company and until their
successors are duly elected and qualified. Pursuant to the terms of a
Shareholders Agreement entered into in connection with the GranCare Merger
between the Company and Manor Care, Manor Care. has agreed to vote all of the
shares held by it in favor of the election of the director nominees selected by
a majority of the directors initially designated by GranCare, or their
successors.
The following table sets forth information with respect to each current
director of the Company.
<TABLE>
<CAPTION>
Served as
Director Positions with the Company;
Name Age Since Business Experience; Other Directorships
---- --- ----- ----------------------------------------
<S> <C> <C> <C>
Essel W. Bailey, Jr.* 53 1997 Chief Executive Officer and Director of Omega Healthcare Investors, Inc. since 1992;
Managing Director of Principal Healthcare Finance Limited, a New Jersey company, since
1995; Director of Evergreen Healthcare from 1992 through 1995; Managing Director of Omega
Capital, Ltd. from 1986 to 1992.
Stewart Bainum, Jr. 51 1991 (see information above under "Executive Officers of Vitalink")
Joseph R. Buckley 49 1996 Executive Vice President, ManorCare since March 1996; President, Assisting Living
Division of ManorCare Health Services, Inc. from June 1995 to March 1996; Senior Vice
President, ManorCare from June 1990 to March 1996; Director of In Home Health, Inc.
since October 1995.
Joel S. Kanter* 40 1997 Director of GranCare from December 1990 to February 1997; President of Windy City, Inc.
since 1986; Director of I-Flow Corporation since March 1991; Director of Walnut Financial
Services, Inc. since February 1995; Director of Encore Medical Corporation since March
1995; Director of Osteoimplant Technology, Inc. since August 1995; President of Walnut
Capital Corporation and Walnut Financial Services since February 1995; Consultant to
Walnut Capital Corporation from 1988 to February 1995; Managing Director of the
Investors' Washington Services from March 1985 to 1986.
James A. MacCutcheon 45 1994 Treasurer since 1992 to February 1997; Executive Vice President, Chief Financial Officer
and Treasurer of Choice Hotels International, Inc. since October 1996; Senior Vice
President--Finance, Chief Financial Officer and Treasurer of Manor Care October 1987 to
October 1996.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Served as
Director Positions with the Company;
Name Age Since Business Experience; Other Directorships
---- --- ----- ----------------------------------------
<S> <C> <C> <C>
Robert L. Parker* 63 1997 Director of GranCare from July 1995 to February 1997; Director of Omega Healthcare
Investors, Inc. since 1992; Director of National Bank of Bethany, Oklahoma since
1994; Chairman of the Board of Directors of Omega Healthcare Investors, Inc. from
March 1992 to July 1995; Managing Director of Omega Capital, Ltd. from 1986 to 1992;
Senior Officer of Beverly Enterprises from January 1972 to December 1983.
James H. Rempe 67 1994 Secretary from 1991 through February 1997; Director of In Home Health, Inc. since October
1995; Senior Vice President, General Counsel and Secretary of Manor Care since December
1980.
Gary U. Rolle* 56 1997 Director of GranCare from February 1994 to February 1997; Executive Vice President and
Chief Investment Officer of Transamerica Investment Services since 1983; Chairman and
President of Transamerica Income Shares since 1988; Director of Transamerica Investors
since 1995; Director of Transamerica Occidental Life Insurance Company since 1983;
Director of Transamerica Assurance Company since 1983; Director of Transamerica Realty
Services since 1983; Director of Arbor Life Insurance Company since 1983; Chairman of the
Board of Separate Account Funds B & C since 1987; Member of the Board of Trustees of
Harvey Mudd College since 1995.
</TABLE>
- - -------------------
*Designated by GranCare.
ITEM 11. Executive Compensation.
The following table sets forth certain information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended May 31, 1997, 1996, and 1995, of Mr. Burleson, Ms. DeNardo,
Mr. Horner, Mr. Macomber and Mr. Thompson (the "Named Officers"), the only
executive officers of the Company who received compensation from the Company
during the fiscal year ended May 31, 1997. All other executive officers of the
Company also serve as officers of Manor Care and are compensated by Manor
Care, Inc.
27
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Stock Options All Other
Principal Position Year Salary Bonus Other Shares(#) Compensation(1)
------------------- ---- ------ ----- ----- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson 1997 $ 148,566 $ 0 (3) 0 $ 0
Chief Executive Officer 1996 __ __ __ __ __
(February 1997 to 1995 __ __ __ __ __
August 1, 1997)(2)
Donald C. Tomasso 1997 $ 0 $ 0 (3) 0 $ 0
Chief Executive Officer 1996 0 0 (3) 0 0
December 1994 to February 1997(4) 1995 0 0 (3) 0 0
Donna L. DeNardo 1997 $ 233,250 $ 186,600 (3) 18,300 $ 12,327
President and Chief 1996 186,101 82,815 (3) 20,000 10,924
Operating Officer 1995 169,762 83,523 (3) 30,000 9,000
Robert W. Horner, III 1997 $ 77,115 $ 46,269 (3) 6,000 $ 53,342 (6)
Senior Vice President, General 1996 __ __ __ __ __
Counsel and Secretary(5) 1995 __ __ __ __ __
Scott T. Macomber 1997 $ 147,671 $ 103,370 (3) 8,700 $ 8,044
Senior Vice President, Chief 1996 127,067 46,634 (3) 10,000 7,409
Financial Officer and Treasurer(7) 1995 118,885 47,435 (3) 15,000 7,197
Stephen A. Thompson 1997 $ 118,135 $ 70,881 (3) 5,900 $ 4,402
Senior Vice President, Human 1996 105,447 $ 36,906 (3) 10,500 4,024
Resources and Administration(8) 1995 -- -- -- -- --
</TABLE>
- - --------------------
(1) Represents amounts contributed by the Company for fiscal 1997, 1996, and
1995, for the Named Officers under the Manor Care, Inc. Retirement Savings
(the 401(k) Plan) and the Non-Qualified Savings Plan, which provide
retirement and other benefits to eligible employees, including the above
Named Officers. During fiscal 1997, the Company contributed $0 for Mr.
Burleson, $4,109 for Ms. DeNardo, $0 for Mr. Horner, $2,697 for Mr.
Macomber and $2,201 for Mr. Thompson under the 401(k) Plan; and, $0 for
Mr. Burleson, $8,218 for Ms. DeNardo, $0 for Mr. Horner, $5,347 for Mr.
Macomber and $2,201 for Mr. Thompson under the Non-Qualified Savings Plan.
(2) Mr. Burleson was appointed Chief Executive Officer of the Company on
February 12, 1997 and resigned August 1, 1997.
(3) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid to the
Named Officers.
(4) Due to Mr. Tomasso's status as an employee of Manor Care, the Company's
parent, Mr. Tomasso received no compensation from the Company during his
tenure as Chief Executive Officer.
(5) Mr. Horner was hired as Vice President and General Counsel in
November 1994, elected Secretary on January 17, 1997 and
promoted to Senior Vice President on April 9, 1997.
(6) Pertains to expenses incurred by the Company in connection with three
relocations by Mr. Horner during fiscal 1997.
28
<PAGE>
(7) Mr. Macomber was promoted to Senior Vice President on April 9, 1997.
(8) Mr. Thompson was promoted to Senior Vice President Human Resources and
Administration on July 14, 1997.
The Company's Board of Directors and stockholders adopted the Incentive
Plan in October 1996. Under the Incentive Plan 493,900 shares of Common Stock
have been reserved for issuance in connection with grants of the Company's
equity securities made thereunder.
The Company's Board of Directors and stockholders adopted Plan in
September 1991. Under the Stock Option Plan, 1,000,000 shares of Common Stock
have been reserved for issuance upon exercise of options granted thereunder.
The following tables set forth certain information at May 31, 1997, and
for the fiscal year then ended, concerning stock options granted to the Named
Officers. Two of the Named Officers exercised stock options pertaining to the
Common Stock of the Company during fiscal 1997. All Common Stock figures and
exercise prices have been adjusted to reflect stock dividends and stock splits
effective in prior fiscal years.
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rate of Stock
Price Appreciation
Individual Grants for Option Term (1)
--------------------------------------------------------------------- -------------------
Percentage of
Total Options
Granted to all
Number of Employees Exercise
Options In Fiscal Base Price Expiration
Name Granted 1997 Per Share Date 5%(2) 10%(3)
---- ------- ---- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson 0 (4) -- -- -- -- --
Donald C. Tomasso 0 (4) -- -- -- -- --
Donna L. DeNardo 18,300 (4) 33.33% $23.75 07/10/06 $273,402 $692,655
Robert W. Horner, III 6,000 (4) 10.91% $23.37 12/20/06 $ 88,200 $223,500
Scott T. Macomber 8,700 (4) 15.82% $23.75 07/10/06 $129,978 $329,295
Stephen A. Thompson 5,900 (4) 10.73% $23.75 07/10/06 $ 88,146 $223,315
</TABLE>
- - -------------------------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the price of the Company's Common Stock. Since options are granted
at market price, a zero percent gain in the stock price will result in no
realizable value to the option holders.
(2) A 5% per year appreciation in the stock price from $23.75 per share yields
$38.69 on the expiration date. A 5% per year appreciation in the stock
price from $23.37 per share yields $38.07 on the expiration date.
(3) A 10% per year appreciation in the stock price from $23.75 per share
yields $61.60 on the expiration date. A 10% per year appreciation in the
stock price from $23.37 per share yields $60.62 on the expiration date.
(4) The options granted vest at a rate of 20% per year commencing on the first
through the fifth anniversaries of the date of the stock option grant.
29
<PAGE>
AGGREGATED OPTION EXERCISES
IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired Number of Unexercised in-the-money Options
On Value Options at May 31, 1997 at May 31, 1997(1)
-- ----- ----------------------- ------------------
Name Exercise Realized Exercisable Exercisable Unexercisable
---- -------- -------- ----------- ----------- -------------
# $ Unexercisable
- - -------------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson __ __ 140,895 0 $314,781 $ 0
Donald C. Tomasso __ __ 0 0 0 0
Donna L. DeNardo 20,000 $115,000 42,170 111,130 $194,923 $425,452
Robert W. Horner, III __ __ 0 6,000 0 0
Scott T. Macomber 15,000 $58,200 20,250 58,450 $ 78,847 $221,803
Stephen A. Thompson __ __ 2,100 19,300 $ 9,563 $ 41,550
</TABLE>
- - ---------------------
(1) The closing price of the Company's Common Stock, as reported by the
New York Stock Exchange on May 30, 1997 was $19.50 per share. The
value is calculated on the basis of the difference between the option
per share exercise price and $19.50 per share, multiplied by the
number of shares of Common Stock underlying the option.
Employment Agreements
Mr. Burleson resigned his position as Chief Executive Officer of the
Company as of August 1, 1997. Under the agreement formerly existing between Gene
E. Burleson and the Company, his annual salary was $450,000. In connection with
Mr. Burleson's resignation, Mr. Burleson and the Company have entered into a
Separation Agreement and Mutual General Release dated July 24, 1997 (the
"Separation Agreement"). The Separation Agreement provides for payment of
$2,340,000, as well as certain attorneys fees and insurance premiums in exchange
for a complete release of any and all claims against the Company, a prohibition
against solicitation of Company employees by Mr. Burleson and a commitment by
Mr. Burleson to maintain the confidentiality of Company information, among other
commitments.
Under the terms of an agreement between Donna L. DeNardo and the Company,
her annual salary is presently $275,000. The agreement currently extends through
December 1, 1999. Ms. DeNardo is entitled to an annual bonus of up to 80% of her
base compensation based on the performance of the Company.
Under the terms of an agreement between Robert W. Horner, III and the
Company, his annual salary is presently $165,000. The Agreement currently
extends through January 23, 2000. Mr. Horner is entitled to an annual bonus of
up to 84.5% of his base compensation based on the performance of the Company.
Under the terms of an agreement between Scott T. Macomber and the Company,
his annual salary is presently $175,000. The Agreement currently extends through
January 23, 2000. Mr. Macomber is entitled to an annual bonus of up to 84.5% of
this base compensation based on the performance of the Company.
Retirement Plans
Effective January 1, 1992, the Company adopted 401(k) Plan, a defined
contribution retirement, saving and investment plan maintained by Manor Care for
its employees and the employees of its participating affiliated companies. The
401(k) Plan is qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"), and includes a cash or deferred arrangement under
Section 401(k) of the Code. All employees age 21 or over with at least one year
of service, and who have worked at least 1,000 hours during the year, are
eligible to participate. Subject to certain non-discrimination requirements,
each employee may contribute an amount to the 401(k) Plan on a pre-tax
30
<PAGE>
basis up to 15% of the employee's salary, but not more than the current federal
limit of $9,500. The Company will match contributions made by its employees
subject to certain limitations described in greater detail below. The amount of
the match will be equal to a percentage of the amount of salary reduction
contribution made on behalf of a participant during the plan year based upon a
formula that involves the profits of Manor Care for the year and the number of
years of service of the participant. In no event will the Company make a
matching contribution which exceeds 6% of a participant's salary. Amounts
contributed by the Company pursuant to the 401(k) Plan for the fiscal years
ended May 31, 1997, 1996, and 1995 for the Named Officers are included in the
Summary Compensation Table under the column headed "All Other Compensation."
Effective January 1, 1992, the Company adopted the Manor Care, Inc
Non-Qualified Savings maintained by Manor Care for its employees and the
employees of its participating affiliated companies. Certain select highly
compensated members of the management of the Company are eligible to participate
in the Non-Qualified Savings Plan. The Non-Qualified Savings Plan mirrors the
provisions of the 401(k) Plan, to the extent feasible, and is intended to
provide the participants with a pre-tax savings vehicle to the extent that
pre-tax savings are not permissible under the 401(k) Plan as a result of various
governmental regulations, such as non-discrimination testing. With the exception
of Messrs. Burleson and Horner, all of the Named Officers have elected to
participate in the Non-Qualified Savings Plan. Amounts contributed by the
Company pursuant to the Non-Qualified Savings Plan for the fiscal years ended
May 31, 1997, 1996, and 1995, for the Named Officers are included in the Summary
Compensation Table under the column headed "All Other Compensation."
The Company match under the 401(k) Plan and the Non-Qualified Savings Plan
is limited to a maximum aggregate of 6% of the annual salary of a participant.
Effective December 1993, participants were given the right to elect to receive
the Company matching contribution either in Manor Care stock or cash or a
combination of the foregoing. Likewise, participant contributions under the two
plans may not exceed the aggregate of 15% of the annual salary of a participant.
Effective February 15, 1997, the Company adopted the Vitalink Pharmacy
Services, Inc. 401(k) Profit Sharing Plan (the "New 401(k) Plan"), a defined
contribution retirement, saving and investment plan maintained by Vitalink
Pharmacy Services, Inc. for its new employees joining the Company following the
GranCare Merger. The Company adopted a resolution effective October 1, 1997 to
amend and restate the New 401(k) Plan to be renamed the Vitalink Pharmacy
Services, Inc. Retirement Savings and Investment Plan (the "Restated 401(k)
Plan"). The Restated 401(k) Plan is qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and includes a cash or
deferred arrangement under Section 401(k) of the Code. All pre-merger employees
currently on the 401(k) Plan will transfer to the Restated 401(k) Plan.
Employees (pre and post merger) age 21 or over with at least six months of
service, are eligible to participate. Subject to certain non-discrimination
requirements, each employee may contribute an amount to the Restated 401(k) Plan
on a pre-tax basis of up to 15% of the employee's salary, but not more than the
current federal limit of $9,500. The Company will match contributions made by
its employees subject to certain limitations described in greater detail below.
The amount of the match will be equal to a percentage of the amount of salary
reduction contribution made on behalf of a participant during the plan year for
the year and the number of years of service of the participant. In no event will
the Company make a matching contribution which exceeds 6% of a participant's
salary. Amounts contributed by the Company pursuant to the 401(k) Plan for the
fiscal year years ended May 31, 1997, 1996, and 1995 for the Named Officers are
included in the Summary Compensation Table under the column headed "All Other
Compensation." Contributions to the Company's New 401(k) Plan are due to be made
in December. Accordingly, the Company has not made any contributions to the New
401(k) Plan yet to date.
Effective October 1, 1997, the Company will adopt the Vitalink Pharmacy
Services, Inc. Non-Qualified Retirement Savings and Investment Plan (the "New
Non-Qualified Savings Plan") maintained by the Company for its employees.
Certain select highly compensated members of the management of the Company are
eligible to participate in the New Non-Qualified Savings Plan. The New Non-
Qualified Savings Plan mirrors the provisions of the Restated 401(k) Plan, to
the extent feasible, and is intended to provide the participants with a pre-tax
savings vehicle to the extent that pre-tax savings are not permissible under the
Restated 401(k) Plan as a result of various governmental regulations, such as
non-discrimination testing.
31
<PAGE>
The Company match under the Restated 401(k) Plan and the Non-Qualified
Savings Plan is limited to a maximum aggregate of 6% of the annual salary of a
participant. Effective December 1997, participants will receive the Company
matching contribution in cash. Likewise, participant contributions under the two
plans may not exceed the aggregate of 15% of the annual salary of a participant.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
As of August 14, the only greater than 5% beneficial owner of Common Stock
of the Company is ManorCare Health Services, Inc. a wholly-owned subsidiary of
Manor Care, Inc. (Hereinafter, as and when the context required, Manor Care,
Inc. and its subsidiaries are collectively referred to as "Manor Care, Inc.") As
of that date, Manor Care, owned beneficially 13,000,000 shares of Common Stock
of the Company, comprising 51.2% of the Company's Common Stock. The address of
Manor Care is 11555 Darnestown Road, Gaithersburg, Maryland 20878.
The following table sets forth, as of August 14, 1997 (the "Record Date"),
the amount of the Company's Common Stock beneficially owned by (1) each director
and nominee, (2) the chief executive officers of the Company during fiscal 1997
and the four other most highly compensated executive officers, and (3) all
officers and directors as a group.
<TABLE>
<CAPTION>
Number of Company
Name of Beneficial Owner Shares Beneficially Owned Percent of Class
- - ------------------------ ------------------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr. 0 *
Gene E. Burleson 419,945 (1) 1.7
Donald C. Tomasso 0 *
Donna L. DeNardo 59,602 (2) *
Robert W. Horner, III 13 (3) *
Scott T. Macomber 26,190 (4) *
Stephen A. Thompson 4,957 (5) *
Essel W. Bailey, Jr. 451,694 (6) 1.8
Joseph R. Buckley 0 *
Joel S. Kanter 155,929 (7) *
James A. MacCutcheon 0 *
Robert L. Parker 104,760 (8) *
James H. Rempe 0 *
Gary U. Rolle 479,988 (9) *
All directors and officers 1,703,096(10) 6.7
as a group (14 persons)
- - ------------
</TABLE>
* Indicates beneficial ownership of less than 1% of the issued and
outstanding Common Stock of the Company.
(1) Includes 140,895 shares of stock options currently exercisable.
(2) Includes 45,830 shares which Ms. DeNardo has the right to acquire pursuant
to stock options exercisable within 60 days of the Record Date.
(3) All shares included are held through the Company's 1995 Employee Stock
Purchase Plan (the "Purchase Plan").
(4) Includes 3,000 shares held jointly with Mr. Macomber's spouse. Also includes
1,200 shares owned by minor children of Mr. Macomber for which he is custodian
and 21,990 shares which Mr. Macomber has the right to acquire pursuant to stock
options exercisable within 60 days of the Record Date. Beneficial ownership of
the shares held as custodian for Mr. Macomber's minor children is disclaimed.
32
<PAGE>
(5) Includes 173 shares held through the Purchase Plan. Also includes, 4,905
shares which Mr. Thompson has the right to acquire pursuant to stock options
exercisable within 60 days of the Record Date.
(6) Includes 10,516 shares held through Mr. Bailey, Jr.'s family foundation.
Also includes 219,173 shares owned by his spouse.
(7) Includes 478 shares held through Club 21 Trust; 221 shares held through Club
21 Trust II; 221 shares held through Club 21 Trust III; 95,600 shares held
through Walnut Capital Corp. for which Mr. Kanter acts as President; 17,877
shares held through Windy City, Inc. for which Mr. Kanter acts as President; and
19,120 shares held by the Kanter Family Foundation for which Mr. Kanter acts as
President. Also includes 11,472 shares which Mr. Kanter has the right to acquire
pursuant to stock options exercisable within 60 days of the Record Date.
(8) Includes 97,112 shares held through trusts. Also includes 7,648 shares which
Mr. Parker has the right to acquire pursuant to stock options exercisable within
60 days of the Record Date.
(9) Includes 469,090 shares held through TransAmerica Corp. of which Mr. Rolle
is deemed an affiliate under federal securities laws. Also includes 10,516
shares which Mr. Rolle has the right to acquire pursuant to stock options
exercisable within 60 days of the Record Date.
(10) Includes a total of 243,256 shares which the officers, nominees and
directors included in the group have the right to acquire pursuant to stock
options exercisable within 60 days of the Record Date.
The following table also sets forth, as of the Record Date the amount of
Manor Care, Inc. Common Stock beneficially owned by (1) each director and
nominee, (2) the chief executive officers of the Company serving during fiscal
1997, and the four other most highly compensated executive officers and (3) all
officers and directors as a group.
33
<PAGE>
Number of Shares of
Manor Care, Inc.
Common Stock Shares
Name of Beneficial Owner Beneficially Owned Percent of Class(1)
- - ------------------------ ------------------ ------------------
Stewart Bainum, Jr. 15,269,851 (2) 15.2
Gene E. Burleson 0 *
Donald C. Tomasso 143,424 *
Donna L. DeNardo 6,466 (4) *
Robert W. Horner, III 0 *
Scott T. Macomber 6,032 (5) *
Stephen A. Thompson 401 (6) *
Essel W. Bailey, Jr. 0 *
Joseph R. Buckley 101,631 (7) *
Joel S. Kanter 0 *
James A. MacCutcheon 0 (8) *
Robert L. Parker ________ *
James H. Rempe 61,162 (9) *
Gary U. Rolle 0 *
All directors and officers 15,680,329 (10) 23.5
as a group ([14] members) -----
- - -----------------
*Indicates beneficial ownership of less than 1% of the issued and outstanding
Manor Care Common Stock.
(1) Percentages are based on a total of 66,709,912 shares outstanding on August
14, 1997.
(2) Includes 20,598 shares owned directly by Mr. Bainum, Jr. Also includes
5,417,761 shares owned by Bainum Associates Limited Partnership ("Bainum
Associates") and 4,415,250 shares owned by MC Investments Limited Partnership
("MC Investments"), in both of which Mr. Bainum, Jr. is managing general partner
with the sole right to dispose of the shares. Authority to vote such shares is
held by the voting general partner, Mr. B. Houston McCeney. Also includes
1,779,628 shares owned by Mid Pines Associates Limited Partnership ("Mid
Pines"), in which Mr. Bainum, Jr. is managing general partner and has shared
voting authority, and 3,567,869 shares held by Realty Investment in which Mr.
Bainum, Jr. has shared voting authority. Also includes 88,000 shares which Mr.
Bainum, Jr. has the right to acquire pursuant to stock options which are
presently exercisable or which become exercisable within 60 days after the
Record Date and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the Company
pursuant to the terms of the Manor Care, Inc. Retirement Savings and Investment
Plan (the "401(k) Plan") and the Manor Care, Inc. Non-Qualified Retirement
Savings and Investment Plan (the "Non-Qualified Savings Plan.
(3) Includes 40 shares held by adult children of Mr. Tomasso who share the same
household. Beneficial ownership of such shares is disclaimed. Also includes
135,984 shares which Mr. Tomasso has the right to acquire pursuant to stock
options which are presently exercisable or which become exercisable within 60
days after August 14, 1997, and 326 shares and 574 shares, repectively, which
Mr. Tomasso has the right to receive upon termination of his employment with
the Company pursuant to the terms of the 401(k) Plan and the Nonqualified
Savings Plan (based upon a report of each plan's trustee for June 1997).
(4) Includes 439 and 405 shares, respectively, which Ms. DeNardo has the right
to receive upon termination of her employment with the Company pursuant to the
terms of the 401(k) Plan and the Non-Qualified Savings Plan.
(5) Includes 4,500 shares Mr. Macomber has the right to acquire pursuant to
stock options which are exercisable within 60 days after the Record Date and 439
and 393 shares, respectively, which Mr. Macomber has the right to receive upon
termination of his employment with the Company pursuant to the terms of the
401(k) Plan and the Non-Qualified Savings Plan.
(6) Represents shares which Mr. Thompson has the right to receive upon
termination of his employment with the Company pursuant to the terms of the
401(k) plan and the Non-Qualified Savings Plan.
(7) Includes 100,423 shares Mr. Buckley has the right to acquire pursuant to
stock options which are exercisable within 60 days after the Record Date and
668 and 540 shares, respectively, which Mr. Buckley has the right to receive
upon termination of his employment with Manor Care, Inc. pursuant to the terms
of the 401(k) Plan and the Non-Qualified Savings Plan.
34
<PAGE>
(8) Includes 91,362 shares Mr. MacCutcheon has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after August 14, 1997.
(9) Includes 3,552 shares Mr. Rempe has the right to acquire pursuant to stock
options which are exercisable within 60 days after August 14, 1997, and 780
shares and 424 shares, respectively which Mr. Rempe has the right to receive
upon termination of his employment with Manor Care pursuant to the terms of the
401(k) Plan and Non-Qualified Savings Plan.
(10) Includes a total of 423,821 shares which the officers, nominees, and
directors included in the group have the right to acquire pursuant to stock
options which are presently exercisable within 60 days after August 14, 1997,
and a total of 3,403 and 3,329 shares, respectively, which such directors and
officers have the right to receive upon the termination of their employment
pursuant to the terms of the 401(k) Plan and the Non-Qualified Savings Plan.
ITEM 13. Certain Relationships and Related Transactions
Agreements with Manor Care
Pursuant to four agreements with Manor Care, each having an initial
ten-year term commencing June 1, 1991, the Company provides pharmaceutical
dispensing, infusion therapy and pharmacy consulting services to nursing
facilities owned and operated by Manor Care and the residents of these
facilities. Sales of pharmaceutical and infusion therapy products and services
to Manor Care's nursing facilities are made at prices based on the level of
service provided . Revenues from sales to Manor Care nursing facilities and
patients were $76,526,000 in fiscal year 1997. Fees from consulting services to
Manor Care and Manor Care facilities were charged in fiscal year 1997 based on
an annual fee per bed and amounted to $3,342,000.
The Company and Manor Care have entered into an Administrative Services
Agreement. The agreement is terminable upon 180 days prior notice by either
party. Manor Care provides various services to the Company, including among
others, cash management, payroll and payables processing, employee benefit
plans, insurance, legal, accounting, tax, information systems, and
administrative services as required. Substantially all cash received by the
Company is immediately deposited in and combined with Manor Care's corporate
funds through its cash management system, with the exception of cash received by
the TeamCare pharmacies acquired in the GranCare Merger. Under this agreement,
Vitalink has agreed to reimburse Manor Care for the direct costs of rendering
services to Vitalink. Where such direct costs cannot be separately measured,
Vitalink will pay a portion of the total cost based on Manor Care's current
practices for allocating those costs among its subsidiaries. For the year ended
May 31, 1997, administrative fees of $640,000 were charged to Vitalink. It is
anticipated that the Administrative Services Agreement will be terminated during
fiscal 1998 as the Company will be assuming direct in-house responsibility for
the services provided by Manor Care thereunder.
Prior to February 12, 1997, Manor Care provided insurance coverage for
group health, auto, general liability, property, casualty and workers
compensation. Manor Care, through its self-insurance and outside insurance
programs, charged the Company based on the relative percentage of insurance
costs incurred by Manor Care on the Company's behalf. Total insurance costs
allocated were $2,051,000 in fiscal 1997. Management believes that the foregoing
charge is a reasonable allocation of the costs incurred by Manor Care on the
Company's behalf. After the GranCare Merger, all insurance coverage with the
exception of certain group health coverage was independently obtained by
Vitalink.
Prior to the GranCare Merger, the Company and Manor Care were parties to an
Intercompany Debt and Credit Agreement whereby Manor Care provided the Company
with a Line of Credit of $10,000,000 (the "Line of Credit"), as well as cash
management services. The Intercompany Debt and Credit Agreement was amended on
February 12, 1997 and the Line of Credit was terminated. Pursuant to the
agreement, the Company is required to loan to Manor Care its excess cash, with
the exception of the cash received by the pharmacies operated by the Company's
TeamCare subsidiary. Manor Care credited the Company with interest income of
$922,000 in fiscal 1997 relating to the average balance "Due from Affiliate."
Interest earned was based on an
35
<PAGE>
average three month Treasury bill rate of 5.08% plus 100 basis points in fiscal
year 1997. At May 31, 1997, the balance "Due from Affiliate" was $1,053,000. The
Company anticipates terminating the Intercompany Debt and Credit Agreement
during fiscal 1998.
In prior years, a tax agreement existed whereby the Company joined with
Manor Care in the filing of a consolidated federal income tax return and had
reached agreement with Manor Care with respect to: (i) the conduct of tax audits
and the handling of tax controversies; (ii) the allocation of responsibility for
the filing of tax returns; and (iii) various other matters. The consolidated
return of Manor Care, which was computed in accordance with the provisions of
SFAS No. 109, was allocated among its subsidiaries on a separate company basis.
Up to January 31, 1997, the Company accrued taxes payable to or benefits
receivable from Manor Care, Inc. in the "Due from Affiliate" account, based on
the statutory rate applied to income before taxes after considering appropriate
tax credits. Deferred taxes are recorded for the tax effect of temporary
differences between book and tax income. Effective February 1, 1997, the Company
will file its tax return on a separate company basis, starting with a short
period return for the period February 1, 1997 through May 31, 1997.
The Company leases a portion of its Monticello, Illinois, pharmacy from Manor
Care, Inc. under an annual lease which currently expires on March 31, 1998. The
annual rental payable under the lease is currently $8,000.
In connection with the GranCare Merger, Manor Care, Inc. entered into a
Non-Competition Agreement (the "Non-Competition Agreement"), whereby Manor Care,
Inc. and GranCare agree not to engage in the institutional pharmacy business
within the United States during the three-year term of such agreement except
temporarily in connection with future acquisitions of skilled nursing businesses
that have an established pharmacy operation embedded in the acquired skilled
nursing business. Similarly, Vitalink has agreed not to engage in the skilled
nursing business during the three-year term of such agreement. In the event that
Manor Care, Inc. or GranCare shall, during the term of this agreement, acquire a
skilled nursing business that has as a component a pharmacy operation, it must
offer to sell such pharmacy operation to the Company upon the terms described in
this agreement. In the event the Company acquires a skilled nursing business in
conjunction with the acquisition of a pharmacy business, it must use
commercially reasonable efforts to divest itself of such skilled nursing
business within one year. In connection with the Termination and Release
Agreement between GranCare and the Company, this agreement will be automatically
terminated and certain payments made pursuant to the Termination and Release
Agreement upon the consummation of the merger between Living Centers of America,
Inc. and GranCare. The Termination and Release Agreement is described above
under "Legal Proceedings."
The Company and Manor Care, Inc. have entered into a Shareholders
Agreement (the "Shareholders Agreement") which provides for continuity in the
composition of the Vitalink Board of Directors during the three-year term of
such agreement. During the term of this agreement, Manor Care has agreed to vote
all shares of the Company's Common Stock beneficially owned by it in favor of
four nominees designated by the predecessor to GranCare prior to the GranCare
Merger, or their successors. Any vacancy on the Company's Board of Directors
created by the departure of a GranCare designated director will be filled by a
nominee selected by a majority of the then-remaining GranCare designated
directors. In connection with the Termination and Release Agreement between
GranCare and the Company, this agreement will be automatically terminated and
certain payments made pursuant to the Termination and Release Agreement upon the
consummation of the merger between Living Centers of America, Inc. and GranCare.
The Termination and Release Agreement is described above under "Legal
Proceedings."
Under the Shareholders Agreement, Manor Care, Inc. is also required to
limit its sales of the Company's Common Stock to transactions meeting the
conditions set forth in the Shareholders Agreement.
Agreements with GranCare
As contemplated by the GranCare Merger, the Company and GranCare are
parties to an interim services arrangement which establishes a framework for
GranCare to provide to Vitalink, as the successor to GranCare's institutional
pharmacy business following the GranCare Merger, certain services as may be
requested by the Company in order to ensure an orderly transition following the
GranCare Merger. The contemplated services are generally those that were
historically provided by GranCare on a centralized basis to its institutional
pharmacy business such as corporate tax and information systems services. No
written agreement has been executed as of the date hereof; however, the term of
the contemplated agreement is for one year from the time of the GranCare Merger.
Under this contemplated agreement, GranCare is to be reimbursed for all direct
and indirect costs and expenses incurred in connection with providing any
services, as well as the allocated portion of the base salaries of GranCare
employees actually providing services to the Company. In fiscal 1997, no
payments were made by the Company in connection with this contemplated
agreement.
36
<PAGE>
Pursuant to pharmaceutical supply agreements with GranCare facilities,
each having individual five-year terms, the Company provides pharmaceutical
supplies and services to certain GranCare skilled nursing facilities and the
residents thereof. Depending upon the payor source, either the Company will bill
the payor source directly or the skilled nursing facility will bill the payor
source and then pay the Company. Revenues from sales to GranCare skilled nursing
facilities and patients were $20,369,000 in fiscal 1997.
GranCare is also a party to the Non-Competition Agreement described above
under " - Agreements with Manor Care."
Other Agreements
The Company has agreed to indemnify, defend and hold harmless the present
and former officers of the predecessor to GranCare (including the four members
of the Company's Board of Directors originally designated by the predecessor to
GranCare) against all losses, claims, damages, expenses or liabilities arising
out of actions or omissions or alleged actions or omissions occurring at or
prior to the effective time of the GranCare Merger to the extent permitted or
required under applicable law and the corporate governance documents of the
predecessor to GranCare.
In December 1992, the Company entered into an agreement to lease an operating
facility from Harold Blumenkrantz, a former director and current employee of the
Company, and Mark Blumenkrantz, his son and also an employee of the Company.
Rental expenses under the non-cancelable operating lease were $290,000 per year
in the three years ended May 31, 1997. Future minimum lease payments for the
lease, which expires in 2002, are $1,616,000 at May 31, 1997.
37
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) 1. Financial Statements
Included on the following hereof:
Report of Independent Public Accountants 11
Consolidated Statements of Income 12
Consolidated Balance Sheets 12-13
Consolidated Statements of Stockholders' Equity 13
Consolidated Statements of Cash Flows 14
Notes to Consolidated Financial Statements 15-25
2. Financial Statement Schedule
The following Report and Schedule are filed
herewith on the pages indicated:
Report of Independent Public Accountants
Schedule ....................... A-1
Schedule II - Valuation and Qualifying
Accounts........................ A-2
3. Exhibits
2.1 Agreement and Plan of Merger dated as of September 3, 1996
(as amended), between the Company and GranCare, Inc. Annex B
to Registration Statement No. 333-19097 is incorporated
herein by reference.
2.2 Amended and Restated Agreement and Plan of Distribution,
dated as of September 3, 1996, between GranCare, Inc. and the
Company. Annex C to Registration Statement No. 333-19097 is
incorporated herein by reference.
2.3 Voting Agreement, dated as of September 3, 1996, between
Manor Care, Inc. and GranCare, Inc. Exhibit 2.3 to
Registration Statement No. 333-19097 is incorporated herein
by reference.
2.4 Shareholders Agreement, dated February 12, 1997, between the
Company and Manor Care, Inc. Exhibit 2.4 to Form 10-K for the
year ended May 31, 1997 is incorporated herein by reference.
2.5 Non-Competition Agreement, among the Company, Manor Care,
Inc. and GranCare, Inc., dated as of February 12, 1997.
Exhibit 2.5 to Form 10-K for the year ended May 31, 1997 is
incorporated herein by reference.
2.6 Form of Interim Services Agreement between the Company and
GranCare. Exhibit 2.6 to Registration Statement No. 333-19097
is incorporated herein by reference.
2.7 Tax Allocation and Indemnification Agreement, between the
Company and GranCare, Inc. dated as of February 12, 1997.
Exhibit 2.7 to Form 10-K for the year ended May 31, 1997 is
incorporated herein by reference.
3.1 Restated Articles of Incorporation. Exhibit 3.1 to
Registration Statement No. 33-43261 is incorporated herein by
reference.
38
<PAGE>
3.2 By-Laws. Exhibit 3.2 to Registration Statement No. 33-43261
is incorporated herein by reference.
4.1 Form of Old GranCare, Inc.'s 9-3/8% Senior Subordinated Notes
due 2005 (the "Senior Subordinated Notes") which were assumed
by the Company by operation of law as a consequence of the
GranCare Merger (as filed with Old GranCare's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1995 is incorporated herein by reference).
4.2 Indenture from Old GranCare to Marine Midland Bank, as
Trustee, dated November 15, 1995 (as filed with Old
GranCare's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995 is incorporated herein by
reference).
10.1 Administrative Services Agreement, dated as of June 1, 1991,
by and between the Company and Manor Care, Inc. Exhibit 10.1
to Registration Statement No. 33-43261 is incorporated herein
by reference.
10.2 Tax Agreement, dated as of June 1, 1991, by and between the
Company and Manor Care, Inc. Exhibit 10.2 to Registration
Statement No. 33-43261 is incorporated herein by reference.
10.3 Intercompany Debt and Credit Agreement, dated as of June 1,
1991, by and between the Company and Manor Care, Inc. Exhibit
10.3 to Registration Statement No. 33-43261 is incorporated
herein by reference.
10.4 Lease Agreement, dated as of June 1, 1991 by and between the
Company and Manor Healthcare Corp. Exhibit 10.5 to
Registration Statement No. 33-43261 is incorporated herein by
reference.
10.5 Master Agreement for Pharmacy Services, dated as of June 1,
1991, by and between the Company and Manor Healthcare Corp.
Exhibit 10.6 to Registration Statement No. 33-43261 is
incorporated herein by reference.
10.6 Master Pharmacy Consulting Agreement, dated as of June 1,
1991, by and between the Company and Manor Healthcare Corp.
Exhibit 10.7 to Registration Statement No. 33-43261 is
incorporated herein by reference.
10.7 Pharmacy Services Consultant Agreement, dated as of June 1,
1991, by and between the Company and Manor Healthcare Corp.
Exhibit 10.8 to Registration Statement No. 33-43261 is
incorporated herein by reference.
10.8 Master Agreement for Infusion Therapy Products and Services,
dated as of June 1, 1991, by and between Vitalink Billing
Services, Inc. and Manor Healthcare Corp. Exhibit 10.9 to
Registration Statement No. 33-43261 is incorporated herein by
reference.
10.9 Key Executive Stock Option and Appreciation Rights Plan.
Exhibit 10.10 to Registration Statement No. 33-43261 is
incorporated herein by reference.
10.10 Amendment to Key Executive Stock Option and Appreciation
Rights Plan. Annex A to the Proxy Statement dated August 20,
1993 is incorporated herein by reference.
10.11 Form of Executive Cash Incentive Plan. Exhibit 10.11 to Form
10-K for the year ended May 31, 1995 is incorporated herein
by reference.
10.12 Employment Agreement dated June 5, 1995, between Vitalink
Pharmacy Services, Inc. and Donna L. DeNardo. Exhibit 10.12
to Form 10-K for the year ended May 31, 1995 is incorporated
herein by reference.
10.13 Employment Agreement dated January 23, 1997, between the
Company and Robert W. Horner, III. Exhibit 10.13 to Form 10-K
for the year ended May 31, 1997 is incorporated herein by
reference.
10.14 Employment Agreement dated January 23, 1997, between the
Company and Scott T. Macomber. Exhibit 10.14 to Form 10-K for
the year ended May 31, 1997 is incorporated herein by
reference.
10.15 Employment Agreement dated November 30, 1995, between
Vitalink Pharmacy Services, Inc. and Harold Blumenkrantz.
Exhibit 10.15 to Form 10-K for the year ended May 31, 1996 is
incorporated herein by reference.
10.16 Separation Agreement and Mutual General Release dated July
24, 1997, between the Company and Gene E. Burleson. Exhibit
10.16 to Form 10-K for the year ended May 31, 1997 is
incorporated herein by reference.
39
<PAGE>
10.17 Vitalink Pharmacy Services, Inc. 1997 Non-Employee Director
Stock Compensation Plan. Exhibit 10.17 to Form 10-K for the
year ended May 31, 1997 is incorporated herein by reference.
10.18 Vitalink Pharmacy Services, Inc. Amended and Restated 1996
Long Term-Incentive Plan. Exhibit 10.18 to Form 10-K for the
year ended May 31, 1997 is incorporated herein by reference.
10.19 Stock Grant Plan for Key Management Employees. Exhibit 10.14
to Form 10-K for the year ended May 31, 1996 is incorporated
herein by reference.
10.20 Guarantee Agreement dated December 15, 1995, between Vitalink
Pharmacy Services, Inc. and Harold Blumenkrantz. Exhibit
10.16 to Form 10-K for the year ended May 31, 1996 is
incorporated herein by reference.
10.21 Acquisition Agreement, Agreement to Lease and Mortgage Loan
Agreement, dated December 28, 1990, by and among Health and
Rehabilitation Properties Trust ("HRPT") and Hostmasters,
Inc., AMS Holding Co., American Medical Services, Inc. and
AMS Properties, Inc. ("AMS"), as amended, through December
29, 1993 (as filed with Old GranCare's Registration Statement
No. 33-42595 is incorporated herein by reference).
10.22 Master Lease Document, dated December 28, 1990, between HRPT
and AMS (as filed with Old GranCare's Registration Statement
No. 33-42595 is incorporated herein by reference).
10.23 Form of Guaranty, dated December 28, 1990, by American
Medical Services, Inc. and each of its subsidiaries in favor
of HRPT (as filed with Old GranCare's Registration Statement
No. 33-42595 is incorporated herein by reference).
10.24 Amendment to Master Lease between HRPT and AMS, dated as of
December 29, 1993 (as filed with Old GranCare's Current
Report on Form 8-K dated January 13, 1994 is incorporated
herein by reference).
10.25 Amendment to Master Lease between HRPT and GCI Healthcare
Centers, Inc. ("GCI"), dated as of December 29, 1993 (as
filed with Old GranCare's Current Report on Form 8-K dated
January 13, 1994 is incorporated herein by reference).
10.26 Asset Purchase Agreement among Old GranCare, Long-Term Care
Pharmaceutical Services Corporation, Long-Term Care
Pharmaceutical Services Corporation III, CompuPharm LTC,
Inc., Lawrence H. Garatoni, individually and as Trustee,
Anthony Wright and Edward Spartz, individuals, dated as of
June 30, 1994, with Exhibits (as filed with Old GranCare's
Form 10-Q for the quarterly period ended June 30, 1994 is
incorporated herein by reference).
10.27 Asset Purchase Agreement between CompuPharm, Inc., GCI
Innovative Pharmacy, Inc. and Innovative Pharmacy Services,
Inc. dated as of September 15, 1995 (as filed with Old
GranCare's Form 10-Q for the quarterly period ended September
30, 1995 is incorporated herein by reference).
10.28 Assignment and Assumption Agreement dated December 6, 1995,
between CompuPharm, Inc. and HPI HealthCare Services, Inc.
regarding providing pharmaceutical services to the State of
New Jersey. Exhibit 10.48 to Old GranCare's Form 10-K for the
year ended December 31, 1995 is incorporated herein by
reference.
10.29 Consent and Amendment to Transaction Documents dated as of
December 31, 1996, among HRPT, AMS, GCI and GranCare, Inc.
Exhibit 10.29 to Form 10-K for the year ended May 31, 1997 is
incorporated herein by reference.
10.30 Limited Guaranty between the Company and HRPT. Exhibit 10.30
to Form 10-K for the year ended May 31, 1997 is incorporated
herein by reference.
10.31 Termination and Release Agreement dated September 3, 1997
between the Company, Manor Care, GranCare, Apollo Management
L.P. and Living Centers of America, Inc.
40
<PAGE>
13 1997 Annual Report to Stockholders. Exhibit 13 to Form 10-K for
the year ended May 31, 1997 is incorporated herein by reference.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the last quarter of the
fiscal year ended May 31, 1997.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 29, 1997 VITALINK PHARMACY SERVICES, INC.
By:/s/ Robert W. Horner, III
------------------------------
Robert W. Horner, III
Senior Vice President, General
Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ DONNA L. DENARDO President and Chief Operating Officer September 29, 1997
- - ----------------------------- (principal executive officer)
Donna L. DeNardo
/s/ SCOTT T. MACOMBER Senior Vice President, Chief September 29, 1997
- - ----------------------------- Financial Officer and Treasurer
Scott T. Macomber (principal financial and
accounting officer)
/s/ STEWART BAINUM, JR. Chairman and Director September 29, 1997
- - -----------------------------
Stewart Bainum, Jr.
/s/ ESSEL W. BAILEY, JR. Director September 29, 1997
- - -----------------------------
Essel W. Bailey, Jr.
/s/ JOSEPH R. BUCKLEY Director September 29, 1997
- - -----------------------------
Joseph R. Buckley
/s/ JOEL S. KANTER Director September 29, 1997
- - -----------------------------
Joel S. Kanter
/s/ JAMES A. MACCUTCHEON Director September 29, 1997
- - -----------------------------
James A. MacCutcheon
/s/ ROBERT L. PARKER Director September 29, 1997
- - -----------------------------
Robert L. Parker
/s/ JAMES H. REMPE Director September 29, 1997
- - -----------------------------
James H. Rempe
/s/ GARY U. ROLLE Director September 29, 1997
- - -----------------------------
Gary U. Rolle
</TABLE>
<PAGE>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SCHEDULE II
Additions
----------------------------
Balance At Charged Balance At
Beginning To Profit Write- End Of
Description Of Period And Loss Other 1 Offs Period
------------ ---------- --------- ------- ----- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended May 31, 1997 $ 2,163 $ 4,411 -- $ (1,702) $ 4,872
Year ended May 31, 1996 1,378 2,412 -- (1,627) 2,163
Year ended May 31, 1995 2,113 1,772 $ (1,019) (1,488) 1,378
</TABLE>
- - ----------
1 In fiscal year 1995, represents reclassification as discussed in
Registrant's consolidated financial statements included in its 1995 Annual
Report.
<PAGE>
EXHIBIT 21
List of Subsidiaries of Vitalink Pharmacy Services, Inc.
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
<S> <C>
1. TeamCare, Inc. Delaware
2. White, Mack & Wart, Inc. (d/b/a Propac Oregon
Pharmacy)
3. Vitalink Infusion Services, Inc. Delaware
4. Medisco Pharmacies, Inc. California
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated June 27, 1997, included in and incorporated by reference in
Vitalink Pharmacy Services, Inc.'s Form 10-K/A for the year ended May 31, 1997,
into the Company's previously filed Registration Statement Nos. 33-75310,
33-98992 and 333-19097.
ARTHUR ANDERSEN LLP
Washington, D.C.,
September 29, 1997
