<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
VITALINK PHARMACY SERVICES, INC.
COMMISSION FILE NUMBER 0-19820
Incorporated in Delaware E.I. 37-0903482
1250 E. Diehl Road, Suite 208, Naperville, Illinois 60563
Telephone: (630) 245-4811
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 twelve months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
25,365,400 Common Shares were outstanding as of April 14, 1997.
This report contains 10 pages.
<PAGE> 2
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The consolidated balance sheet as of February 28, 1997, the consolidated income
statements for the three and nine month periods ended February 28, 1997 and
February 29, 1996, and the consolidated statements of cash flows for the nine
month periods ended February 28, 1997 and February 29, 1996, have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
February 28, 1997, and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's May 31, 1996 Annual Report to
Shareholders and the Form S-4 with respect to the merger consummated on
February 12, 1997 with GranCare's institutional pharmacy business, TeamCare,
previously filed with the Commission. The results of operations for the three
and nine month periods ended February 28, 1997 and February 29, 1996, and cash
flows for the nine months ended February 28, 1997 and February 29, 1996, are
not necessarily indicative of the operating results or cash flows for the full
year.
2
<PAGE> 3
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
February 28, 1997 May 31, 1996
------------------- ------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 10,630 $ 889
Receivables (net of allowance of $17,898 and $2,163) 70,529 20,093
Inventories 24,572 7,426
Deferred income taxes 4,514 1,138
Other 1,139 330
---------------- -----------
TOTAL CURRENT ASSETS 111,384 29,876
DUE FROM PARENT 9,770 16,910
PROPERTY AND EQUIPMENT, AT COST (net of accumulated depreciation) 22,752 8,191
PHARMACY CONTRACTS (net of amortization of $3,908 and $3,044) 39,985 6,187
GOODWILL (net of amortization of $3,407 and $2,146) 338,282 31,194
OTHER ASSETS (net of amortization of $4,307 and $3,292) 5,890 3,565
---------------- -----------
TOTAL ASSETS $ 528,063 $ 95,923
================ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 32,362 $ 3,918
Accrued expenses 22,118 2,403
State income taxes payable 811 725
Current portion of long-term debt 4,650 -
---------------- -----------
TOTAL CURRENT LIABILITIES 59,941 7,046
---------------- -----------
LONG-TERM DEBT 105,832 -
---------------- -----------
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES 21,054 2,578
---------------- -----------
STOCKHOLDERS' EQUITY
Common stock (80,000,000 and 30,000,000 shares authorized,
25,329,600 and 13,979,700 shares issued and outstanding,
$.01 par value) 253 140
Contributed capital 280,634 38,155
Retained earnings 60,349 48,004
---------------- -----------
TOTAL STOCKHOLDERS' EQUITY 341,236 86,299
---------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 528,063 $ 95,923
================ ===========
Note: The balance sheet at May 31, 1996 has been taken from the audited financial statements at that date.
</TABLE>
3
<PAGE> 4
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28 February 29 February 28 February 29
------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES
Affiliates and their patients $20,720 $16,982 $58,062 $48,541
Non-affiliates and their patients 49,052 19,515 94,430 53,776
------- ------- ------ ------
Total net revenues 69,772 36,497 152,492 102,317
COST OF GOODS SOLD 36,351 18,610 78,510 51,592
------- ------- ------- -------
GROSS PROFIT 33,421 17,887 73,982 50,725
-------- ------- ------- -------
OPERATING EXPENSES
Payroll expenses 15,446 7,604 33,031 21,315
Selling, general and
administrative expenses 6,007 3,052 12,815 8,475
Provision for doubtful accounts 1,090 474 2,441 1,636
Depreciation and amortization 2,404 1,111 4,999 3,193
------ ------ ----- -----
Total operating expenses 24,947 12,241 53,286 34,619
------- ------- ------ ------
INCOME FROM OPERATIONS 8,474 5,646 20,696 16,106
INTEREST INCOME AND OTHER, NET 257 227 802 794
INTEREST EXPENSE (340) (14) (393) (39)
------- ------ ------ ----
INCOME BEFORE ALLOCATION
OF INCOME TAXES 8,391 5,859 21,105 16,861
INCOME TAX ALLOCATION 3,644 2,373 8,760 6,818
------ ----- ------ ------
NET INCOME $4,747 $ 3,486 $12,345 $ 10,043
======= ======= ======== =========
AVERAGE SHARES OUTSTANDING 17,511 13,975 15,140 13,975
======= ======= ======= =======
EARNINGS PER SHARE 0.27 $0.25 $0.82 $0.72
===== ===== ===== =====
</TABLE>
4
<PAGE> 5
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 29,
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,345 $ 10,043
Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization 4,999 3,193
Provision for doubtful accounts 2,441 1,636
Increase in net deferred taxes 428 644
Changes in assets and liabilities, net of acquisitions:
Changes in receivables (10,067) (9,722)
Changes in inventories (1,356) (501)
Changes in other current assets (365) (141)
Changes in accounts payable and accrued expenses 7,285 1,644
Changes in state income taxes payable 86 (324)
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,796 6,472
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (3,106) (2,834)
Decrease in Due from Parent 7,140 4,430
Acquisition of pharmacy businesses, net of cash acquired (102,691) (5,286)
Deferred payments on previous acquisitions (1,856) (2,275)
Other items, net (1,605) (472)
--------- ----------
NET CASH USED IN INVESTING ACTIVITIES (102,118) (6,437)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of debt (1,337) (38)
Net borrowings under revolving credit agreement 97,400 -
--------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 96,063 (38)
--------- ----------
NET INCREASE (DECREASE) IN CASH 9,741 (3)
CASH AT BEGINNING OF PERIOD 889 198
--------- ----------
CASH AT END OF PERIOD $ 10,630 $ 195
========= ==========
</TABLE>
5
<PAGE> 6
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(IN THOUSANDS)
MERGERS AND ACQUISITIONS
Fiscal 1997
On February 12, 1997, the Company merged with TeamCare, GranCare's
institutional pharmacy business, by acquiring all of the outstanding shares of
GranCare, Inc. after the spin-off of its skilled nursing business. The Company
issued approximately 11.3 million shares of common stock and funded the
redemption of $100 million face value of GranCare senior subordinated notes.
The 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 $351,000 was allocated to the net
assets acquired based on their estimated fair values at the date of the merger.
The excess of the purchase price over the fair value of net assets acquired
was approximately $222,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 40 years.
The purchase price has been allocated on a preliminary basis to the net assets
purchased and liabilities assumed as presented below. The allocation is
subject to adjustment should new or additional facts about the business become
known.
<TABLE>
<S> <C>
Working capital $19,204
Property and equipment 12,850
Pharmaceutical Supply Agreement 34,262
Other assets 2,240
Goodwill 300,959
Other liabilities (18,515)
--------
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 merger
had occurred at the beginning of fiscal 1996, after giving effect to
amortization of goodwill, increased interest expense on the acquisition debt
and related income tax effects.
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
February 28, 1997 May 31, 1996
----------------- -------------------
<S> <C> <C>
Net revenues $336,497 $360,939
Net income $16,034 $16,747
Earnings per share $0.63 $0.66
</TABLE>
The pro forma information is presented for informational purposes only and is
not necessarily indicative of results that would have occurred had the merger
been effective at the beginning of fiscal 1996, nor is the pro forma
information necessarily indicative of results that will be obtained in the
future.
On July 31, 1997, the Company acquired Medisco Pharmacies, Inc., located in San
Bernardino, California for $5,291 in cash plus the assumption of $2,510 in
liabilities and future payments totaling $1,150.
6
<PAGE> 7
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(IN THOUSANDS)
MERGERS AND ACQUISITIONS (CONTINUED)
Fiscal 1996
On November 3, 1995, the Company acquired the institutional pharmacy business
of Brentview Clinical Pharmacy, located in Los Angeles, California for $3,206
in cash plus the assumption of $45 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 in cash plus
the assumption of $105 in liabilities and future contingent payments based on
the achievement of certain future profitability objectives.
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. Goodwill, representing the excess of acquisition
costs over the fair market value of acquired net assets, is amortized over 40
years.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its on-going capital requirements and operating needs from
operating cash flows. Cash flows provided by operating activities were $15,796
in the nine months ended February 28, 1997, compared to $6,472 in the year
earlier period. Operating cash flows not used to acquire pharmacies or invest
in new property and equipment are held in the form of a receivable due from
Manor Care. The balance due is classified as due from parent on the
consolidated balance sheets and totalled approximately $9,800 at February 28,
1997.
Except for the TeamCare 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.
7
<PAGE> 8
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(IN THOUSANDS)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In connection with the TeamCare merger, the Company entered into a five-year
revolving credit agreement with various banks providing for unsecured
borrowings of up to $200,000. Funds to redeem $98,230 of GranCare's $100,000
face value senior subordinated notes were obtained through borrowings under the
credit agreement. The $1,770 balance of the untendered notes was assumed by the
Company. Under the credit agreement, the Company may borrow initially at
LIBOR plus 0.25%. A fee of 0.15% per annum is charged on the $200,000
commitment. The terms of the credit agreement contain, among other provisions,
requirements for maintaining defined levels of net worth, annual capital
expenditures and interest coverage and debt-to-equity ratios. At February 28,
1997, there were $97,400 in borrowings outstanding under the credit agreement.
On June 1, 1991, the Company entered into an "Intercompany Debt and Credit
Agreement" with Manor Care pursuant to which Manor Care provides the Company
with a line of credit of $10,000. To date, the line of credit has not been
utilized and the entire $10,000 balance on the line of credit remains available
to the Company.
Funds from the credit agreements, 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.
RESULTS OF OPERATIONS
Net revenues for the three months ended February 28, 1997 were $69,772, an
increase of $33,275 or 91.2% over the same period last year. For the nine
months ended February 28,1997, net revenues were $152,492, an increase of
$50,175 or 49.0% over the year earlier period. The increase in net revenues
was principally attributable to the inclusion of TeamCare revenues effective
February 1, 1997. Excluding TeamCare revenues, net revenues for the three and
nine month periods ended February 28, 1997 increased 29.0% and 26.8%,
respectively, from year earlier periods. At February 28, 1997, the Company
provided services to approximately 172,000 institutional beds. At February 29,
1996, the Company provided services to approximately 48,500 beds. At the date
of the merger, TeamCare served approximately 115,000 beds.
8
<PAGE> 9
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(IN THOUSANDS)
RESULTS OF OPERATIONS (CONTINUED)
Gross profit for the three months ended February 28, 1997 was $33,421, an
increase of $15,534 or 86.8% over the same period last year. For the nine
months ended February 28, 1997, gross profit was $73,982, representing an
increase of 45.8% over the year earlier period. The gross profit margins for
the three and nine months ended February 28, 1997 were 47.9% and 48.5%,
respectively, compared to 49.0% and 49.6% for the comparable periods last year.
The increase in gross profit is largely attributable to the inclusion of
TeamCare results effective February 1, 1997.
Operating expenses increased $12,706 to $24,947 or 35.8% of net revenues in the
third quarter of fiscal 1997 compared to $12,241 or 33.5% of net revenues in
the third quarter of fiscal 1996. The increase in operating expenses as a
percentage of net revenues reflects TeamCare's historically higher operating
expenses as a percentage net revenues and the amortization for one month of
goodwill associated with the TeamCare merger.
The increase in interest expense for the three and nine months ended February
28, 1997 is due to interest expense incurred during February on borrowings
under the credit agreement used to fund the TeamCare merger. The interest rate
on borrowings under the credit agreement is LIBOR plus 0.25%.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
On February 27, 1997, a Form 8-K was filed in connection with the consummation
of the merger with TeamCare on February 12, 1997.
9
<PAGE> 10
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITALINK PHARMACY SERVICES, INC.
(Registrant)
Date: April 14, 1997 By:
---------------------------
Scott T. Macomber
Vice President, Finance and
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<CASH> 10,630
<SECURITIES> 0
<RECEIVABLES> 70,529
<ALLOWANCES> 17,898
<INVENTORY> 24,572
<CURRENT-ASSETS> 111,384
<PP&E> 22,752
<DEPRECIATION> 5,910
<TOTAL-ASSETS> 528,063
<CURRENT-LIABILITIES> 59,941
<BONDS> 0
0
0
<COMMON> 253
<OTHER-SE> 340,983
<TOTAL-LIABILITY-AND-EQUITY> 528,063
<SALES> 69,772
<TOTAL-REVENUES> 69,772
<CGS> 36,351
<TOTAL-COSTS> 24,947
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,090
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> 8,391
<INCOME-TAX> 3,644
<INCOME-CONTINUING> 4,747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,747
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
