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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
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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
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VITALINK PHARMACY SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 37-0903482
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1250 East Diehl Road,
Naperville, Illinois
Suite 208 60563
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code (630) 245-4800
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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
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(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
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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
$213,070,904 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.
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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.
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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
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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
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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
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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.
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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.
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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 (the "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 appealed by GranCare before the Delaware Supreme
Court.
On September 5, 1997, 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 (the "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. ("Living Centers of America"), 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 and the release of all claims associated with 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 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 Shareholders Agreement. The Non-
Competition Agreement and the Shareholders Agreement are 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.
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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
Fiscal 1997 High Low
August $25.00 $20.50
November 24.88 20.75
February 24.63 21.13
May 21.50 16.25
Fiscal 1996 High Low
August $17.50 $14.75
November 19.50 14.75
February 25.38 16.88
May 24.50 19.00
The Company has not paid, and does not anticipate paying in the
foreseeable future, any dividends to holders of its common stock.
As of August 14, 1997, there were 475 record holders and approximately
4,500 beneficial holders of Vitalink Common Stock.
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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.
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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 120,017 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 $ 11,680
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%, respectively, 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 Agreement has an initial term of five years and is
automatically renewed for an additional year upon each anniversary.
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 tax 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
-------- ------- -------
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 $ 1,776 $ 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>
Fiscal Year ended May 31, 1997 1996
---- ----
(unaudited; in thousands, except per share data)
<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 "Stock Option Plan").
The Stock Option Plan was terminated in fiscal 1997 in connection with the
adoption of the Incentive Plan. Under the Stock Option Plan, 420,000 shares were
reserved for issuance upon exercise of granted options. The Stock Option 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.
<PAGE>
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
Shares Exercise Price Shares Exercise 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-$2.07 149,982 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.
EXECUTIVE OFFICERS OF THE COMPANY
The name, age, title, present principal occupation, and other material
occupations, positions, offices and employment of each of the executive officers
of the Company are set forth below. The business address of Ms. DeNardo,
Mr. Horner, Mr. Macomber and Mr. Thompson is 1250 East Diehl Road,Suite 208
Naperville, Illinois 60563. Mr. Bainum's address is 11555 Darnestown Road,
Gaithersburg, Maryland 20878.
Stewart Bainum, Jr. (51) is Chairman of the Board of Directors of the
Company, a position he has held since February 1997. He has served as Vice
Chairman of the Company since December 1994. He was Chairman of the Company from
September 1991 to December 1994, Chief Executive Officer from March 1989 to
December 1994, and President from March 1987 to September 1991. Mr. Bainum has
been Chairman of the Board and Chief Executive Officer of Manor Care, Inc. since
March 1987 and President of Manor Care, Inc. since June 1989. He has served as a
Director of the Company since 1991, of Manor Care, Inc. since 1981 and of
ManorCare Health Services, Inc. (a wholly owned subsidiary of Manor Care, Inc.,
formerly known as Manor Healthcare Corp.) since 1976.
Donna L. DeNardo (45) is President and Chief Operating Officer of the
Company, a position she has held since September 1991. She also served as a
Director of the Company from September 1991 to February 1997. She was Vice
President and General Manager of the Company from December 1989 to September
1991; Vice President of Manor Healthcare Corp. from December 1989 to September
1991 and has held various management positions with Manor Healthcare Corp. from
1977 through December 1989, including Senior Regional Director of Nursing
Facility Operations and Nursing Facility Administrator.
Robert W. Horner, III (36) is Senior Vice President, General Counsel and
Secretary of the Company, positions he has held since April 1997, November 1996
and January 1997 respectively. Mr. Horner served as Director of Legal Affairs
and Secretary with In Home Health, Inc. from April 1996 to November 1996. From
August 1994 to April 1996 he served as an in house counsel with Manor Care.
From 1991 to 1993 he practiced as a corporate and health care attorney with the
law firms of Arter and Hadden and Ice, Miller, Donadio and Ryan.
Scott T. Macomber (42) is Senior Vice President, Chief Financial Officer and
Treasurer of the Company, positions he has held since April 1997, September 1991
and December 1996, respectively. Mr. Macomber served as Vice President, Finance
from September 1991 to February 1997. He was Vice President, Corporate Finance
for Manor Care from June 1990 to March 1992 and previously held various
acquisition and development positions within Manor Care for more than 10 years.
Stephen A. Thompson (42) is Senior Vice President, Human Resources and
Administration of the Company, a position he has held since July 1997. Mr.
Thompson served as Vice President, Human Resources and Administration of the
Company from August 1995 to July 1997. He was Senior Director, Professional
Relations, of the Company from March 1992 to August 1995, and held human
resources positions with Manor Care, Inc. and Manor Healthcare Corp. from 1986
to 1992.
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 the Company")
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 present; 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 from 1992 to December 1996; 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 from 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 present; 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 present; 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.
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 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) Includes 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, $0 for Mr. Tomasso, $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 1996, 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 the Stock Option
Plan in September 1991. Under the Stock Option Plan, 1,000,000 shares of Common
Stock had been reserved for issuance upon exercise of options granted
thereunder and 506,100 shares have been granted to date. No additional shares
have been granted pursuant to the Stock Option Plan.
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 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 Unexercisable Exercisable 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 $19.125 per share. The
value is calculated on the basis of the difference between the option
per share exercise price and $19.125 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 103% 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." The Company has not made any contributions to the New
401(k) Plan 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.
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<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. 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, 1997 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. 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 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 4,975 (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) 1.9
All directors and officers
as a group (14 persons) 1,703,096(10) 6.7
- ------------
</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 August 14, 1997.
(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 August 14, 1997. Beneficial ownership of
the shares held as custodian for Mr. Macomber's minor children is disclaimed.
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<PAGE>
(5) Includes 70 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 August 14, 1997.
(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 August 14, 1997.
(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 August 14, 1997.
(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 August 14, 1997.
(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 August 14, 1997.
The following table also sets forth, as of August 14, 1997 the amount of
Manor Care Common Stock beneficially owned by (1) each director, (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 (3) *
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 137,925 (8) *
Robert L. Parker 0 *
James H. Rempe 61,162 (9) *
Gary U. Rolle 0 *
All directors and officers
as a group (14 members) 15,726,892 (10) 23.6
- -----------------
*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 August
14, 1997 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 August 14, 1997 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 247 and 154 shares, respectively, 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 August 14, 1997 and
668 and 540 shares, respectively, which Mr. Buckley has the right to receive
upon termination of his employment with Manor Care 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
provision 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 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 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 entered into a Non-
Competition Agreement, whereby Manor Care and GranCare agreed 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 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. Pursuant to the
Termination and Release Agreement, the Non-Competition Agreement will be
automatically terminated and certain payments made upon the consummation of the
merger between Living Centers of America and GranCare. The Termination and
Release Agreement is described above under "Legal Proceedings."
The Company and Manor Care 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. Pursuant to
the Termination and Release Agreement, the Shareholders Agreement will be
automatically terminated upon the consummation of the merger between Living
Centers of America and GranCare. The Termination and Release Agreement is
described above under "Legal Proceedings."
Under the Shareholders Agreement, Manor Care 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 Interim Services Agreement (the "Interim Services Agreement")
is for one year from the time of the GranCare Merger. Under this contemplated
Interim Services 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 Interim Services
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" and to the Termination and Release Agreement
described above under "Legal Proceedings."
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.
As a result of the GranCare Merger, the Company assumed several
agreements to lease operating facilities which were entered into between
GranCare and current Company employees.
Under a leasing agreement between GranCare and Company employee
Diane Schlapper, rental expenses were $26,952 in the four months ended May 31,
1997. Future minimum payments for the lease, which expires in 2005, are
$646,840 at September 30, 2005.
Under two leasing agreements between GranCare and Company employee
Charles Cooper, rental expenses were $21,180 and $8,705 respectively in the four
months ended May 31, 1997. Future minimum payments for the leases, which both
expire in 1998, are $70,367 and $28,927 respectively at June 30, 1998.
Under a leasing agreement between GranCare and Company employee
Peter Emery, rental expenses were $6000 in the four months ended May 31, 1997.
Future minimum payments for the lease, which expires in 2001, is $54,000 at
June 30, 2001.
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 Amended and Restated By-Laws.
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: October 9, 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 October 9, 1997
- ----------------------------- (principal executive officer)
Donna L. DeNardo
/s/ SCOTT T. MACOMBER Senior Vice President, Chief October 9, 1997
- ----------------------------- Financial Officer and Treasurer
Scott T. Macomber (principal financial and
accounting officer)
/s/ STEWART BAINUM, JR. Chairman and Director October 9, 1997
- -----------------------------
Stewart Bainum, Jr.
/s/ ESSEL W. BAILEY, JR. Director October 9, 1997
- -----------------------------
Essel W. Bailey, Jr.
/s/ JOSEPH R. BUCKLEY Director October 9, 1997
- -----------------------------
Joseph R. Buckley
/s/ JOEL S. KANTER Director October 9, 1997
- -----------------------------
Joel S. Kanter
/s/ JAMES A. MACCUTCHEON Director October 9, 1997
- -----------------------------
James A. MacCutcheon
/s/ ROBERT L. PARKER Director October 9, 1997
- -----------------------------
Robert L. Parker
/s/ JAMES H. REMPE Director October 9, 1997
- -----------------------------
James H. Rempe
/s/ GARY U. ROLLE Director October 9, 1997
- -----------------------------
Gary U. Rolle
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF VITALINK PHARMACY SERVICES, INC.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Vitalink Pharmacy Services, Inc.'s
annual report to shareholders included in this Form 10-K/A, and have issued our
report thereon dated June 27, 1997. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index in Item 14(a)2 is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the consolidated financial statements. The
schedule has been subjected to the auditing procedures applied in the audits of
the consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
June 27, 1997
<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 INDEX
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.
3.2 Amended and Restated By-Laws.
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.
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
VITALINK PHARMACY SERVICES, INC.
(Hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Office. The registered office of the Corporation shall be
in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Additional Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
Section 3. Registered Agent. The registered agent of the Corporation shall be
United States Corporation Company.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place. Meetings of stockholders for any purpose may be
held at such time and place, within or without the State of Delaware, as the
Board of Directors may fix from time to time and as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders shall be held on
any date in the month of September, October, November or December in each year
at 9:00 A.M. or at such other time and such date and time as shall be
designated, from time to time, by the Board of Directors and stated in the
notice of the meeting. At such annual meeting, the stockholders shall elect a
board of directors and transact such other business as may properly be brought
before the meeting.
1
<PAGE>
Section 3. Notice of Annual Meeting. Written notice of the annual meeting
stating the place, date and time thereof shall be given to each stockholder
entitled to vote at such meeting not less than 10 nor more than 50 days prior to
the meeting.
Section 4. List of Stockholders. The officer in charge of the stock ledger of
the Corporation or the transfer agent shall prepare and make, at least 10 days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting, either at a place
within the city where the meeting is to be held (other than the place of the
meeting), which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
Section 5. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Board or the
Chief Executive Officer or by a majority of the entire Board of Directors; and
shall be called by the Chief Executive Officer or Secretary at the request in
writing of a majority of the Board of Directors. Such request shall state the
purpose or purposes of the proposed meeting.
Section 6. Notice of Special Meeting. Written notice of a special meeting
stating the place, date and time thereof and the purpose or purposes for which
the special meeting is called, shall be given to each stockholder entitled to
vote at such meeting not less than 10 nor more than 50 days prior to the
meeting.
Section 7. Presiding Officer; Order of Business.
Meetings of stockholders shall be presided over by the Chief Executive Officer,
or if he is not present, by the Chairman of the Board, or, if he is not present,
by such person who may have been chosen by the Board of Directors or, if none of
such persons is present, by a chairman to be chosen by the stockholders owning a
majority of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote at the meeting and who are present in person or
by proxy. The Secretary of the Corporation or, if he is not present, an
Assistant Secretary, or if he is not present, such person who may have been
chosen by the Board of Directors, shall act as secretary of meetings of
stockholders, but if none of such persons is present, the stockholders owning a
majority of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote at the meeting and who are present in person or
by proxy shall choose any person present to act as secretary of the meeting.
2
<PAGE>
Section 8. Quorum. The holders of a majority of shares of capital stock of the
Corporation issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall be necessary to, and shall constitute a
quorum for, the transaction of business at all meetings of the stockholders,
except as otherwise provided by statute or by the Certificate of Incorporation.
If, however, a quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken, until a quorum shall
be present or represented. Even if a quorum shall be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken, until a date which is not more than 30 days after the date of the
original meeting. At such adjourned meeting, at which a quorum shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally called. If the adjournment is for more than 30
days or, if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 9. Voting.
(a) At any meeting of stockholders, every stockholder having the right to vote
shall be entitled to vote in person or by proxy. Except as otherwise provided
by law or the Certificate of Incorporation, each stockholder of record shall be
entitled to one vote for each share of capital stock registered in his name on
the books of the Corporation.
(b) All elections shall be determined by a plurality vote and, except as
otherwise provided by law or the Certificate of Incorporation, all other matters
shall be determined by a vote of a majority of the shares present or represented
by proxy and actually voting on such other matters.
ARTICLE III
DIRECTORS
Section 1. General Powers; Number; Tenure. The business of the Corporation
shall be managed by its Board of Directors which may exercise all powers of the
Corporation and perform all lawful acts and things as are not by law, the
Certificate of Incorporation or these Bylaws directed or required to be
exercised or performed by the stockholders. The number of directors
constituting the whole Board of Directors shall be not less than 3 nor more than
8. Thereafter, within the limits above specified, the number of directors shall
be determined by the Board of Directors. The directors shall be elected at the
annual meeting of the stockholders, except as provided
3
<PAGE>
in Section 2 of this Article, and each director elected shall hold office until
his successor is elected and shall qualify. Directors need not be stockholders.
Section 2. Vacancies. If any vacancies occur in the Board of Directors, or if
any new directorships are created, they may be filled by a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director. Each director so chosen shall hold office until the next annual
meeting of stockholders and until his successor is duly elected and shall
qualify. If there are no directors in office, any officer or stockholder may
call a special meeting of stockholders in accordance with the provisions of the
Certificate of Incorporation or these Bylaws, at which meeting such vacancies
shall be filled. A vacancy created by the removal of a director by the
stockholders may be filled by the stockholders.
Section 3. Removal; Resignation.
(a) A director may be removed for cause by the procedure hereinafter provided.
Before any director may be removed for cause, written charges specifying the
alleged cause, signed by at least one director, shall be filed with the
Secretary, a copy thereof shall be served on the director charged, and he shall
be given the opportunity, at a meeting of the Board of Directors held not less
than 5 days after such service, to be heard on the subject of such charges. The
affirmative vote of a majority of the entire Board of Directors shall be
necessary to effect such removal.
(b) Any director may resign at any time by giving written notice to the Board
of Directors, the Chairman of the Board or the Chief Executive Officer of the
Corporation. Unless otherwise specified in such written notice, a resignation
shall take effect upon delivery thereof to the Board of Directors or the
designated officer. It shall not be necessary for a resignation to be accepted
before it becomes effective.
Section 4. Place of Meeting. The Board of Directors may hold meetings either
within or without the State of Delaware.
Section 5. Meetings. Meetings of the Board of Directors may be called by the
Chairman of the Board of Directors, the Chief Executive Officer or a majority of
the Board of Directors on at least 2 days' prior written notice delivered to
each director, either personally or by mail, by facsimile, or by telegram. The
notice shall set forth the time, date, place and purpose of each such meeting.
Section 6. Quorum. At all meetings of the Board of Directors three-quarters
(3/4) of the number of directors then in office shall constitute a quorum for
the transaction of business and the act of a majority of the directors present
at any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by law or the
Certificate of Incorporation or these Bylaws. If a quorum is not present at any
meeting of the Board of Directors, the directors present may adjourn the
meeting, from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
4
<PAGE>
Section 7. Compensation. Directors shall be entitled to such compensation for
their services as directors and to such reimbursement for any reasonable
expenses incurred in attending directors' meetings as may from time to time be
fixed by the Board of Directors. The compensation of directors may be on such
basis as is determined by the Board of Directors. Any director may waive
compensation for any meeting. Any director receiving compensation under these
provisions shall not be barred from serving the Corporation in any other
capacity and receiving reasonable compensation for such other services.
Section 8. Action by Consent. Any action required or permitted to be taken at
any meeting of the Board of Directors may be taken without a meeting if a
written consent to such action is signed by all members of the Board of
Directors and such written consent is filed with the minutes of the proceedings.
ARTICLE IV
COMMITTEES
Section 1. Committees. The Board of Directors, by resolutions adopted by a
majority of the whole Board, may appoint such committee or committees as it
shall deem advisable and with such functions and duties as the Board of
Directors shall prescribe.
Section 2. Vacancies; Changes; Discharge. The Board of Directors shall have
the power at any time to fill vacancies in, to change the membership of, and to
discharge any such committee.
Section 3. Compensation. Members of any committee shall be entitled to such
compensation for their services as members of any such committee and to such
reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. Any
member may waive compensation for any meeting.
Section 4. Action by Consent. Any action required or permitted to be taken at
any meeting of any committee of the Board of Directors may be taken without a
meeting if a written consent to such action is signed by all members of the
committee and such written consent is filed with the minutes of its proceedings.
ARTICLE V
NOTICES
Section 1. Form; Delivery. Whenever, under the provisions of law, the
Certificate of Incorporation or these Bylaws, notice is required to be given to
any director or stockholder, it shall not be construed to mean personal notice
unless otherwise specifically provided, but such notice may be given in writing,
by mail,
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addressed to such director or stockholder, at his address as it appears
on the records of the Corporation, with postage thereon prepaid. Notice to a
director may also be given personally or by facsimile or telegram sent to his
address as it appears on the records of the Corporation. Notice given by mail
shall be deemed given three business days following the deposit of a notice in
the United States mail; notice given via personal delivery shall be deemed given
when actually received; notice given by telecopy shall be deemed given upon
receipt of a machine-generated confirmation of successful completion of
transmission of the telecopy message and notice delivered via overnight courier
will be deemed delivered the following business day.
Section 2. Waiver. Whenever any notice is required to be given under the
provisions of law, the Certificate of Incorporation or these Bylaws, a written
waiver thereof, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed to be equivalent to
such notice. In addition, any stockholder who attends a meeting of stockholders
in person, or is represented at such meeting by proxy, without protesting prior
to the commencement of the meeting the lack of notice thereof to him, or any
director who attends a meeting of the Board of Directors without protesting,
prior to the commencement of the meeting, such lack of notice, shall be
conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Designations. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, a Chief Executive
Officer, a President, a Secretary and a Treasurer. The Board of Directors may
also choose one or more Executive or Senior Vice Presidents, one or more
additional vice presidents, one or more assistant secretaries and assistant
treasurers, and such other officers and agents as it shall deem necessary. All
officers of the Corporation shall hold their offices for such terms and shall
exercise such power and perform such duties as shall from time to time be
determined by the Board of Directors. Any number of offices may be held by the
same person, unless the Certificate of Incorporation or these Bylaws otherwise
provide.
Section 2. Term of Office; Removal. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman, a
Chief Executive Officer, a President, a Secretary and a Treasurer and such other
officers as the Board of Directors shall deem appropriate. The officers of the
Corporation shall hold office until their successors are chosen and shall
qualify. Any officer elected or appointed by the Board of Directors may be
removed, with or without cause, at any time by the affirmative vote of a
majority of the directors then in office. Such removal shall not prejudice the
contract rights, if any, of the person so removed. Any vacancy occurring in any
office of the Corporation may be filled for the unexpired portion of the term by
the Board of Directors.
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Section 3. Compensation. The salaries of all officers of the Corporation shall
be fixed by the Board of Directors.
Section 4. The Chairman of the Board. The Chairman shall preside at all
meetings of the Board of Directors which he shall attend.
Section 5. (a) The Chief Executive Officer. The Chief Executive Officer shall
have general charge of the business and affairs of the Corporation subject to
the policies of the Board of Directors. It shall be the Chief Executive
Officer's duty to attend to the business of the Corporation and maintain strict
supervision over all of its affairs and interests. The Chief Executive Officer
shall keep the Board of Directors fully advised about the affairs and conditions
of the Corporation, and shall manage and operate the business of the Corporation
pursuant to and in accordance with such policies as may be prescribed from time
to time by the Board of Directors. The Chief Executive Officer shall, subject
to the approval of the Board, hire and fix the compensation of all employees and
agents of the Corporation (other than the officers listed in this Article VI,
unless such power is delegated to the Chief Executive Officer by the Board of
Directors), and any persons thus hired shall be removable at the Chief Executive
Officer's pleasure. Unless the Board of Directors by resolution shall otherwise
provide, the Chief Executive Officer may delegate in writing such of the Chief
Executive Officer's powers as the Chief Executive Officer deems appropriate to
other officers, employees, and agents of the Corporation. The Chief Executive
Officer shall preside at all meetings of the stockholders. The Chief Executive
Officer shall have and exercise direct charge of the general supervision of all
business and affairs of the Corporation and subject to the control of the Board
of Directors shall perform all duties incident to the office of the Chief
Executive Officer of a corporation, and such other duties as may be assigned by
the Board of Directors.
(b) Unless otherwise prescribed by the Board of Directors, the Chief Executive
Officer shall have full power and authority on behalf of the Corporation to
attend, act and vote at any meeting of security holders of other corporations in
which the Corporation may hold securities. At such meeting, the Chief Executive
Officer shall possess and may exercise any and all rights and powers incident to
the ownership of such securities which the Corporation might have possessed and
exercised if it had been present. The Board of Directors may from time to time
confer like powers upon any other person or persons.
Section 6. The President. The President shall be the Chief Operating Officer
of the Corporation and shall perform all duties incident to the office of the
President, subject to the direction of the Chief Executive Officer and the Board
of Directors.
Section 7. The Vice Presidents. The Vice President (or in the event there be
more than one, the Vice Presidents in the order designated, or in the absence of
any designation, then in the order of their election) shall, in the absence of
the President or in the event of his disability, perform the duties and exercise
the powers of
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the President and shall generally assist the Chief Executive Officer and the
President and perform such other duties and have such other powers as may from
time to time be prescribed by the Chief Executive Officer and the Board of
Directors.
Section 8. The Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all votes and the
proceedings of the meetings in a book to be kept for that purpose and shall
perform like duties for committees, if required. He shall give, or cause to be
given, notice of all meetings of stockholders and special meetings of the Board
of Directors, and shall perform such other duties as may from time to time be
prescribed by the Chief Executive Officer and the Board of Directors. He shall
have custody of the seal of the Corporation and he, or an Assistant Secretary,
shall have authority to affix the same to any instrument requiring it and, when
so affixed, the seal may be attested by his signature or by the signature of
such Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing thereof by his signature.
Section 9. The Assistant Secretary. The Assistant Secretary (or in the event
there be more than one, the Assistant Secretaries in the order designated, or in
the absence of any designation, then in the order of their election) shall, in
the absence of the Secretary or in the event of his disability, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as may from time to time be prescribed by the
Chief Executive Officer and the Board of Directors.
Section 10. The Treasurer. The Treasurer shall have the custody of the
corporate funds and other valuable effects, including securities, and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may from time
to time be designated by the Board of Directors. He shall disburse the funds of
the Corporation as may be ordered by the Chief Executive Officer and the Board
of Directors, taking proper vouchers for such disbursements, and shall render to
the Chief Executive Officer at annual meetings of the Board, or whenever he may
require it, an account of all of the Treasurer's transactions as Treasurer and
of the financial condition of the Corporation. The Treasurer shall have such
other duties and have such other powers as may from time to time be prescribed
by the Chief Executive Officer and the Board of Directors.
Section 11. The Assistant Treasurer. The Assistant Treasurer (or in the event
there shall be more than one, the Assistant Treasurers in the order designated,
or in the absence of any designation, then in the order of their election)
shall, in the absence of the Treasurer or in the event of his disability,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as may from time to time be
prescribed by the Chief Executive Officer and the Board of Directors.
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ARTICLE VII
INDEMNIFICATION OF
OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
Section 1. Action, Other Than by or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding or investigation, whether civil, criminal or administrative, and
whether external or internal to the Corporation (other than a judicial action or
suit brought by or in the right of the Corporation) by reason of the fact that
he is or was a director, officer, employee or trustee of the Corporation, or
that, being or having been such a director, officer, employee or trustee, he is
or was serving at the request of the Corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise (all such persons being referred to hereafter as an
"Agent"), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding, or any appeal therein, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding -- whether by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent --
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, that he had reasonable cause to believe that his conduct was
unlawful.
Section 2. Action, by or in the Right of the Corporation. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed judicial action or suit brought by
or in the right of the Corporation to procure a judgment in its favor by reason
of the fact that he is or was an Agent (as defined above) against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense, settlement or appeal of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable for gross negligence or misconduct in the
performance of his duty to the Corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or other such court shall deem proper.
Section 3. Determination of Right of Indemnification. No indemnification under
Section 1 or 2 of this Article VII (unless ordered by a court) shall be made by
the
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Corporation unless a determination is reasonably and promptly made (i) by
the Board by a majority vote of directors who were not parties to such action,
suit or proceedings, even though less than a quorum or (ii) if there are no such
directors or if such directors so direct, by independent legal counsel in a
written opinion, or (iii) by the stockholders, that such person did not act in
good faith and in a manner that such person reasonably believed to be in or not
opposed to the best interests of the Corporation, or, with respect to any
criminal proceeding, that such person believed or had reasonable cause to
believe that his conduct was unlawful.
Section 4. Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that an
Agent has been successful on the merits or otherwise, including the dismissal of
an action without prejudice or the settlement of an action without admission of
liability, in defense of any proceeding or in defense of any claim, issue or
matter therein, or on appeal from any such proceeding, action, claim or matter,
such Agent shall be indemnified against all expenses incurred in connection
therewith.
Section 5. Advances of Expenses. Except as limited by Section 6 of this
Article, expenses incurred in defending any civil, criminal, administrative or
investigative action, suit or proceeding or investigation or any appeal therein
shall be paid by the Corporation in advance of the final disposition of such
matter, if the Agent shall undertake to repay such amount in the event that it
is ultimately determined, as provided herein, that such person is not entitled
to indemnification. Notwithstanding the foregoing, no advance shall be made by
the Corporation if a determination is reasonably and promptly made by the Board
of Directors by a majority vote of disinterested directors, or (if there are no
such directors or such directors so direct) by independent legal counsel in a
written opinion, that, based upon the facts known to the Board or counsel at the
time such determination is made, such person did not act in good faith and in a
manner that such person believed to be in or not opposed to the best interests
of the Corporation, or, with respect to any criminal proceeding, that such
person believed or had reasonable cause to believe his conduct was unlawful. In
no event shall any advance be made in instances where the Board or independent
legal counsel reasonably determines that such person deliberately breached his
duty to the Corporation or its shareholders.
Section 6. Right of Agent to Indemnification Upon Application; Procedure Upon
Application. Any indemnification under Sections 1, 2, and 4, or advance under
Section 5 of this Article, shall be made promptly, and in any event within
ninety days, upon the written request of the Agent, unless with respect to
applications under Sections 1, 2, and 5, a determination is reasonably and
promptly made by the Board of Directors by a majority vote of disinterested
directors that such Agent acted in a manner set forth in such Sections as to
justify the Corporation's not indemnifying or making an advance to the Agent.
In the event there are no such disinterested directors, the Board of Directors
shall promptly direct that independent legal counsel shall decide whether the
Agent acted in the manner set forth in such Sections as to justify the
Corporation's not indemnifying or making an advance to the Agent. The right
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to indemnification or advances as granted by this Article shall be enforceable
by the Agent in any court of competent jurisdiction, if the Board or independent
legal counsel denies the claim, in whole or in part, or if no disposition of
such claim is made within ninety days. The Agent's expenses incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
Section 7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in this
Article is held by a court of competent jurisdiction to be unavailable to an
indemnitee in whole or in part, the Corporation shall, in such an event, after
taking into account, among other things, contributions by other directors and
officers of the Corporation pursuant to indemnification agreements or otherwise,
and in the absence of personal enrichment, acts of intentional fraud or
dishonesty or criminal conduct on the part of the Agent, contribute to the
payment of Agent's losses to the extent that, after other contributions are
taken into account, such losses exceed: (i) in the case of a director of the
Corporation or any of its subsidiaries who is not an officer of the Corporation
or any of such subsidiaries, the amount of fees paid to him for serving as a
director during the 12 months preceding the commencement of the suit, proceeding
or investigation; or (ii) in the case of a director of the Corporation or any of
its subsidiaries who is also an officer of the Corporation or any of such
subsidiaries, the amount set forth in clause (i) plus 5% of the aggregate cash
compensation paid to said director for service in such office(s) during the 12
months preceding the commencement of the suit, proceeding or investigation; or
(iii) in the case of an officer of the Corporation or any of the subsidiaries,
5% of the aggregate cash compensation paid to such officer for service in such
office(s) during the 12 months preceding the commencement of such suit,
proceeding or investigation.
Section 8. Other Rights and Remedies. The indemnification provided by this
Article shall not be deemed exclusive of, and shall not affect, any other rights
to which an Agent seeking indemnification may be entitled under any Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be an
Agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. All rights to indemnification under this Article shall be
deemed to be provided by a contract between the Corporation and the Agent who
serves in such capacity at any time while these Bylaws and other relevant
provisions of the general corporation law and other applicable law, if any, are
in effect. Any repeal or modification thereof shall not affect any rights or
obligations then existing.
Section 9. Insurance. Upon resolution passed by the Board, the Corporation may
purchase and maintain insurance on behalf of any person who is or was an Agent
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this
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Article. The Corporation may create a trust fund, grant a security interest or
use other means (including, without limitation, a letter of credit) to ensure
the payment of such sums as may become necessary to effect indemnification as
provided herein.
Section 10. Constituent Corporations. For the purposes of this Article,
references to "the Corporation" include all constituent corporations absorbed in
a consolidation or merger as well as the resulting or surviving corporation, so
that any person who is or was a director, officer, employee, or trustee of such
a constituent corporation or who, being or having been such a director, officer,
employee or trustee, is or was serving at the request of such constituent
corporation as a director, officer, employee, trustee of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.
Section 11. Other Enterprises, Fines, and Serving at Corporation's Request.
For purposes of this Article, references to "other enterprises" in Sections 1
and 7 shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit plan;
and references to "serving at the request of the Corporation" shall include any
service by Agent as director, officer, employee, trustee or agent of the
Corporation which imposes duties on, or involves services by, such Agent with
respect to any employee benefit plan, its participants, or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed to be in
the interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Article.
Section 12. Savings Clause. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Agent as to expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement with respect
to any action, suit, appeal, proceeding or investigation, whether civil,
criminal or administrative, and whether internal or external, including a grand
jury proceeding and an action or suit brought by or in the right of the
Corporation, to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated, or by any other applicable law.
ARTICLE VIII
STOCK CERTIFICATES
Section 1. Form; Signatures.
(a) Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by the Chief Executive Officer or the President and the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation,
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exhibiting the number, and class (and series, if any), of shares owned by him,
and bearing the seal of the Corporation. Such seal may be a facsimile. Where a
certificate is manually signed (i) by transfer agent other than the Corporation
or its employee or (ii) by a registrar other than the Corporation or its
employee, the signature of any such officer may be a facsimile. In case any
officer who has signed, or whose facsimile signature was placed on, a
certificate shall have ceased to be such officer before such certificate is
issued, it may nevertheless be issued by the Corporation with the same effect as
if he were such officer at the date of its issue.
(b) All stock certificates representing shares of capital stock which are
subject to restrictions on transfer or to other restrictions, may have imprinted
thereon a notation to such effect, as shall be determined by the Board of
Directors.
Section 2. Registration of Transfer. Upon surrender to the Corporation or any
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation or its transfer agent to issue
a new certificate to the person entitled thereto, to cancel the old certificate
and to record the transaction upon its books.
Section 3. Registered Stockholders.
(a) Except as otherwise provided by law, the Corporation shall be entitled to
recognize the exclusive right of a person who is registered on its books as the
owner of shares of capital stock to receive dividends or other distributions and
to vote as such owner, a person who is registered on its books as the owner of
shares of its capital stock. The Corporation shall not be bound to recognize
any equitable or legal claim to or interest in such shares on the part of any
other person.
(b) Stockholders are responsible for giving written notice to the Corporation
or the transfer agent and registrar, if any, of any change or name or address,
and failure to do so shall relieve the Corporation, its directors, officers and
agents, and its transfer agent and registrar, if any, of liability for failure
to send notices or pay dividends or other distributions to a name or address
other than the name or address appearing on the stock ledger maintained by the
Corporation or by the transfer agent and registrar, if any.
Section 4. Record Date. In order that the Corporation may determine the
stockholders of record who are entitled to notice of or vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend, or to make a determination of the stockholders of record for any other
proper purpose, the Board of Directors may, in advance, fix a date as the record
date for any such determination. Such date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to the
date of any other action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of
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stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 5. Lost, Stolen or Destroyed Certificates. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation which is claimed to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate, the Board of Directors may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as it shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate claimed to have been
lost, stolen or destroyed.
ARTICLE IX
GENERAL PROVISIONS
Section 1. Dividends. Subject to the provisions of the Certificate of
Incorporation, dividends upon the outstanding capital stock of the Corporation
may be declared by the Board of Directors at any meeting, pursuant to law, and
may be paid in cash, in property, or in shares of the Corporation's capital
stock.
Section 2. Reserves. The Board of Directors shall have full power, subject to
the provisions of law and the Certificate of Incorporation, to determine whether
any, and, if so, what part, of the funds legally available for the payment of
dividends shall be declared as dividends and paid to the stockholders of the
Corporation. The Board of Directors may fix a sum which may be set aside or
reserved over and above the paid-in capital of the Corporation for working
capital or as a reserve for any proper purpose, and may, from time to time,
increase, diminish or vary such fund in its absolute judgment and discretion.
Section 3. Fiscal Year. The fiscal year of the Corporation shall begin on June
1 in each calendar year and end on May 31 in the following calendar year.
Section 4. Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, and the words "Corporate Seal, Delaware".
ARTICLE X
AMENDMENTS
These Bylaws may be altered, amended or repealed or new Bylaws may be adopted
(a) at any annual or special meeting of stockholders at which a quorum is
present or represented, by the affirmative vote of a majority of the shares
entitled to vote, provided
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notice of the proposed alteration, amendment or repeal be contained in the
notice of such meeting; or (b) by the affirmative vote of a majority of the
whole Board of Directors at any meeting of the Board provided that notice of the
proposal to make, alter or repeal these Bylaws, or to adopt new Bylaws, was
included in the notice of the directors' meeting at which such action takes
place.
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EXHIBIT 10.31
FOR SETTLEMENT PURPOSES ONLY
TERMINATION AND RELEASE AGREEMENT
---------------------------------
THIS TERMINATION AND RELEASE AGREEMENT (the "Agreement") dated
as of September 3, 1997, by and among GranCare, Inc., a Delaware corporation
("GranCare"), Manor Care, Inc., a Delaware corporation ("Manor Care"), Vitalink
Pharmacy Services, Inc., a Delaware corporation ("Vitalink;" together with Manor
Care and GranCare, referred to collectively herein as the "Transaction
Parties"), and, solely for the purpose of making the representations and
warranties set forth in Section 7 hereof and obtaining and granting the release
contained in Section 8 hereof, Apollo Management, L.P., a Delaware limited
partnership ("Apollo") and Living Centers of America, Inc., a Delaware
corporation ("LCA").
W I T N E S S E T H:
-------------------
WHEREAS, in connection with the consummation of the transactions
contemplated by that certain Amended and Restated Agreement and Plan of
Distribution dated as of September 3, 1996 (the "Distribution Agreement") and
that certain Amended and Restated Agreement and Plan of Merger dated as of
September 3, 1996 (the "Vitalink Merger Agreement"), GranCare, Vitalink and
Manor Care executed and delivered a Non-Competition
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Agreement, dated as of February 12, 1997 (the "Non-Competition Agreement");
WHEREAS, GranCare desires to obtain the flexibility to pursue such
strategic initiatives as it may determine from time to time to present the best
alternatives then available to GranCare free from the limitations that Vitalink
has asserted are imposed by the Non-Competition Agreement; and
WHEREAS, the Transaction Parties desire to terminate the
Non-Competition Agreement on the terms and subject to the conditions
contemplated by this Agreement.
NOW THEREFORE, in consideration of the premises and covenants set forth
herein, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
Section 1. As of the Closing Date (as defined below), the
---------
Non-Competition Agreement shall be terminated and have no further force and
effect with respect to any of the Transaction Parties.
Section 2. At the Closing (as defined below) of the transactions
---------
contemplated by this Agreement, GranCare shall pay to Vitalink and Manor Care,
in cash by wire transfer of immediately available funds, the sums of $18,500,000
and $500,000, respectively (collectively, the "Termination Fee") in
consideration of the cancellation and termination of the Non-Competition
Agreement.
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Section 3. In recognition of the intention of the Transaction Parties
---------
to terminate the Non-Competition Agreement as of the Closing Date, the
Transaction Parties will, concurrently with the execution of this document,
execute stipulations and proposed orders in the forms attached hereto as
Schedule 3.1 which orders will, inter alia, vacate the preliminary injunction
issued in the Litigation (as defined in Section 8 hereof), and the stipulation
and order to be filed in the Court of Chancery for the State of Delaware (the
"Chancery Court Stipulation) will provide that GranCare will not consummate the
LCA Transactions (as defined in the Chancery Court Stipulation) in their present
or any alternative form except contemporaneously with or subsequent to the
payment of the Termination Fee as contemplated by this Agreement. The
Transaction Parties shall use commercially reasonable efforts to secure the
entry of such orders. Nothing in this Agreement or the proposed Chancery Court
Stipulation shall constitute a waiver by LCA or Apollo of any rights with
respect to GranCare conferred upon them by the GranCare Merger Agreement (as
defined in the Proxy Statement/Prospectus (as defined below)).
Section 4. In furtherance of the reciprocal obligations of GranCare and
---------
Vitalink pursuant to Article IV of the Distribution Agreement, following the
Closing, GranCare and Vitalink will cooperate fully with each other in
completing any audits and/or the preparation of any necessary filings regarding
prior financial or fiscal periods. Such cooperation shall include, but is not
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limited to, GranCare requesting (if so requested by Vitalink) Ernst & Young to
perform audit work for Vitalink at Vitalink's expense. The foregoing agreement
shall be subject at all times to the other provisions of the Distribution
Agreement.
Section 5. The consummation of the transactions contemplated hereby
---------
(the "Closing") shall occur at the offices of Powell, Goldstein, Frazer & Murphy
LLP, or at such other location as the Transaction Parties may agree, on such
date as GranCare shall select following the fulfillment or waiver of all
conditions to such Closing; provided, however, that in no event shall the
Closing be effective (the "Closing Date") later than the first to occur of
either the Effective Time of the Mergers (as defined in Amendment No. 2 to the
Joint Proxy Statement/Prospectus of GranCare and LC A (the "Proxy
Statement/Prospectus")) or July 31, 1998.
Section 6. The obligation of the Transaction Parties to consummate the
---------
transactions contemplated by this Agreement is subject only to the fulfillment
or waiver of the following conditions:
(i) The waiver or fulfillment of all of the conditions to
the consummation of the LCA Transactions in the form
described in the Proxy Statement/Prospectus or any
alternative form. This condition may be waived by
GranCare in its sole discretion.
(ii) The waiver or fulfillment of all of the conditions to
the termination of that certain Shareholders Agreement,
dated as of February 12, 1997, by and between Manor
Care and
4
<PAGE>
Vitalink. This condition may be waived by Manor Care in
its sole discretion.
Section 7. The parties hereto do hereby represent and warrant as
---------- follows:
(i) Manor Care is duly organized, validly existing and in
good standing under the laws of the State of Delaware
and has the requisite corporate power and authority to
carry on its business as now being conducted. Manor
Care has the requisite corporate power and authority to
enter into this Agreement and consummate the
transactions contemplated hereby. The execution and
delivery of this Agreement by Manor Care and the
consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate
action on the part of Manor Care. This Agreement has
been duly executed and delivered by Manor Care and
constitutes a valid and binding obligations of Manor
Care enforceable against Manor Care in accordance with
its terms.
(ii) Vitalink is duly organized, validly existing and in
good standing under the laws of the State of Delaware
and has the requisite corporate power and authority to
carry on its business as now being conducted. Vitalink
has the requisite corporate power and authority to
enter into this Agreement and consummate the
transactions contemplated hereby. The execution and
delivery of this Agreement by Vitalink and the
consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate
action on the part of Vitalink. This Agreement has been
duly executed and delivered by Vitalink and constitutes
a valid and binding obligation of Vitalink enforceable
against Vitalink in accordance with its terms.
(iii) GranCare is duly organized, validly existing and in
good standing under the laws of the State of Delaware
and has the requisite corporate power and authority to
carry on its
5
<PAGE>
business as now being conducted. GranCare has the
requisite corporate power and authority to enter into
this Agreement and consummate the transactions
contemplated hereby. The execution and delivery of this
Agreement by GranCare and the consummation of the
transactions contemplated hereby have been duly
authorized by all necessary corporate action on the
part of GranCare. This Agreement has been duly executed
and delivered by GranCare and constitutes a valid and
binding obligation of GranCare enforceable against
GranCare in accordance with its terms.
(iv) Apollo is duly organized, validly existing and in good
standing under the laws of the State of Delaware and
has the requisite power and authority under its
organizational documents to carry on its business as
now being conducted. Apollo has the requisite power and
authority to enter into this Agreement solely for the
purpose of granting and obtaining the release contained
in Section 8 hereof. The execution and delivery of this
Agreement by Apollo and the granting of the release
contemplated hereby have been duly authorized by all
necessary action on the part of Apollo. This Agreement
has been duly executed and delivered by Apollo and
constitutes a valid and binding obligation of Apollo
enforceable against Apollo in accordance with its
terms.
(v) LCA is duly organized, validly existing and in good
standing under the laws of the State of Delaware and
has the requisite corporate power and authority to
carry on its business as now being conducted. LCA has
the requisite corporate power and authority to enter
into this Agreement solely for the purpose of granting
and obtaining the release contained in Section 8
hereof. The execution and delivery of this Agreement by
LCA and the granting of the release contemplated hereby
have been duly authorized by all necessary corporate
action on the part of LCA. This Agreement has been duly
executed and delivered by LCA enforceable against LCA
in accordance with its terms.
6
<PAGE>
Section 8. Effective as of the Closing Date, and simultaneously with
---------
the payment of the Termination Fee , each of GranCare, Apollo and LCA, as one
party, and Manor Care and Vitalink, as the other party, do hereby settle,
release and discharge the other party; the other party's past or present
officers, directors, employees, partners, principals, counsel, investment
bankers, agents, controlling persons, if any; the other party's past or present
affiliates; and the other party's past and present affiliates' respective past
or present officers, directors, employees, partners, principals, counsel,
investment bankers, agents, controlling persons, if any, (but nothing herein
shall constitute a release or waiver of any claims by GranCare, Apollo and LCA
against one another) of and from any and all manner of claims, actions or
proceedings of any nature which have been, could have been, or could be brought
in any local, state or federal court, administrative agency or other tribunal,
including but not limited to, those arising under common law, federal law, or
state statutory law, including the state and federal securities laws, in law or
in equity, suits, debts, liens, contracts, agreements, promises, liability,
claims, demands, damages, loss, cost or expense, of any nature whatsoever, known
or unknown, fixed or contingent, including all claims for incidental,
consequential, punitive or exemplary damages or other equitable relief
(including injunctive relief) arising out of any of the foregoing, which each
now has or may hereafter have against any of the foregoing, by reason of any
matter, cause or thing whatsoever from
7
<PAGE>
the beginning of time to the date hereof, arising out of or relating to the
Non-Competition Agreement, including, without limitation, in the case of the
Transaction Parties, any claims and causes of action that were or could have
been asserted by any or all of them against any or all of the other Transaction
Parties directly related to or arising out of the Non-Competition Agreement ,
including claims or causes of action that were or could have been asserted in
that certain litigation commenced by Manor Care and Vitalink in the Court of
Chancery in and for the County of New Castle, State of Delaware, entitled
Vitalink Pharmacy Services, Inc. and Manor Care, Inc. v. GranCare, Inc. f/k/a
- -----------------------------------------------------------------------------
New GranCare, Inc., Civil Action No. 15744, and all proceedings before the Court
- ------------------
of Chancery of the State of Delaware and the Supreme Court of the State of
Delaware (collectively, the "Litigation"), and, in the case of Apollo and LCA,
any claims that could have been asserted by either or both of them against Manor
Care and/or Vitalink, or by Manor Care and/or Vitalink against Apollo or LCA
arising out of or relating to the Litigation or the actions of any released
party in connection therewith or the actions of Apollo or LCA in connection with
the various proposed transactions described in the Proxy Statement/Prospectus,
except claims and causes of action arising out of or relating to any breach of
- ------
or failure to perform any obligation under this Agreement or any document or
instrument delivered pursuant to or in connection with this Agreement. For
purposes of this Agreement, the term
8
<PAGE>
"affiliates" shall have the meaning as defined in Rule 12b-2 under the
Securities Exchange Act of 1934. Nothing herein shall constitute a release or
termination of any written contract among the parties hereto other than the
Non-Competition Agreement or a release by any party of any claims by such party
against such party's own employees, officers and directors.
Section 9. At the Closing, the Transaction Parties shall execute and
---------
deliver any agreements and other documents contemplated by this Agreement
necessary to give effect to the consummation of the transactions contemplated
hereby and GranCare shall pay to Vitalink and Manor Care the Termination Fee.
Effective as of the Closing Date, Manor Care, Vitalink and GranCare, in
recognition of the termination and discharge of the Non-Competition Agreement,
shall take such action as shall be necessary to dismiss with prejudice the
Litigation.
Section 10. This Agreement shall be governed by the laws of the State of
----------
Delaware (regardless of the law that might otherwise govern under applicable
Delaware principles of conflicts of law) as to all matters, including but not
limited to matters of validity, construction, effect, performance and remedies.
Section 11. This Agreement shall be binding on and inure to the benefit
----------
of the parties hereto and their respective legal representatives, successors and
assigns including, without limitation, any successor by
9
<PAGE>
operation of law to any of such parties. Nothing in this Agreement, expressed or
implied, is intended to confer on any persons other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
Section 12. In case any one or more of the provisions contained in this
----------
Agreement should be invalid, illegal or unenforceable in any respect against a
party hereto, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired thereby
and such invalidity, illegality or unenforceability shall only apply as to such
party in the specific jurisdiction where such judgment shall be made.
Section 13. All notices and other communications hereunder shall be in
----------
writing and shall be deemed to have been duly given when delivered in person, by
facsimile transmission with confirmation of receipt, or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties as follows:
if to GranCare:
GranCare, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Attention: General Counsel
if to Manor Care:
Manor Care, Inc.
11555 Darnestown Road
10
<PAGE>
Gaithersburg, Maryland 20878
Attention: General Counsel
if to Vitalink:
Vitalink Pharmacy Services, Inc.
1250 E. Diehl Road
Naperville, Illinois 60563
Attention: General Counsel
if to Apollo:
c/o Apollo Management, L.P.
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Peter P. Copses
if to LCA:
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Attention: General Counsel
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 14. This Agreement may be executed in two or more counterparts,
----------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Section 15. This Agreement may be amended, modified or supplemented
----------
only with the written agreement of GranCare, Vitalink and
11
<PAGE>
Manor Care and, with respect to any amendments to Section 7 or Section 8 hereof,
the written agreement of Apollo and LCA.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Termination
and Release Agreement as of the date first written above.
MANOR CARE, INC.
By: /s/ Stewart Bainum, Jr.
---------------------------------------
Stewart Bainum, Jr.
Chief Executive Officer
VITALINK PHARMACY SERVICES, INC.
By: /s/ Donna L. DeNardo
---------------------------------------
Donna L. DeNardo
President
GRANCARE, INC.
By: /s/ M. Scott Athans
---------------------------------------
M. Scott Athans
Chief Executive Officer
The undersigned has executed this Termination and Release Agreement
solely for the purpose of making the representations and warranties set forth in
Section 7 and obtaining and granting the release contained in Section 8
hereinabove.
APOLLO MANAGEMENT, L.P.
By: AIF Management, Inc.
Its: General Partner
13
<PAGE>
By: /s/ Peter P. Copses
---------------------------------------
Name: Peter P. Copses
Title: Vice President
The undersigned has executed this Termination and Release Agreement
solely for the purpose of making the representations and warranties set forth in
Section 7 and obtaining and granting the release contained in Section 8
hereinabove.
LIVING CENTERS OF AMERICA, INC.
By: /s/ Edward Kuntz
---------------------------------------
Edward Kuntz
Chief Executive Officer
14
<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 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.,
October 6, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 3,660
<SECURITIES> 0
<RECEIVABLES> 79,745
<ALLOWANCES> 4,872
<INVENTORY> 25,193
<CURRENT-ASSETS> 120,017
<PP&E> 22,908
<DEPRECIATION> 7,186
<TOTAL-ASSETS> 516,805
<CURRENT-LIABILITIES> 46,011
<BONDS> 99,170
0
0
<COMMON> 254
<OTHER-SE> 348,277
<TOTAL-LIABILITY-AND-EQUITY> 516,805
<SALES> 274,038
<TOTAL-REVENUES> 274,038
<CGS> 140,426
<TOTAL-COSTS> 100,503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,411
<INTEREST-EXPENSE> 2,154
<INCOME-PRETAX> 32,061
<INCOME-TAX> 13,744
<INCOME-CONTINUING> 18,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,317
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
