<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
VITALINK PHARMACY SERVICES, INC.
COMMISSION FILE NUMBER 0-19820
Incorporated in Delaware E.I. 37-0903482
1250 E. Diehl Road, Suite 208, Naperville, Illinois 60563
Telephone: (708) 505-1320
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-- --
13,979,700 Common Shares were outstanding as of January 14, 1997.
This report contains 10 pages.
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
The consolidated balance sheet as of November 30, 1996, the consolidated income
statements for the three and six month periods ended November 30, 1996 and
November 30, 1995, and the consolidated statements of cash flows for the six
month periods ended November 30, 1996 and November 30, 1995, have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
November 30, 1996, and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's May 31, 1996 Annual Report to
Shareholders, previously filed with the Commission. The results of operations
for the three and six month periods ended November 30, 1996 and November 30,
1995, and cash flows for the six months ended November 30, 1996 and November
30, 1995, are not necessarily indicative of the operating results or cash flows
for the full year.
2
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
November 30, 1996 May 31, 1996
----------------- -------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,137 $ 889
Receivables (net of allowances of $3,199 and $2,163) 23,086 20,093
Inventories 9,650 7,426
Deferred income taxes 1,576 1,138
Other 454 330
--------- ---------
TOTAL CURRENT ASSETS 35,903 29,876
DUE FROM PARENT 13,417 16,910
PROPERTY AND EQUIPMENT, AT COST (net of accumulated depreciation) 9,495 8,191
PHARMACY CONTRACTS (net of amortization of $3,523 and $3,044) 6,108 6,187
GOODWILL (net of amortization of $2,602 and $2,146) 36,269 31,194
OTHER ASSETS (net of amortization of $3,865 and $3,292) 4,301 3,565
--------- ---------
TOTAL ASSETS $ 105,493 $ 95,923
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,327 $ 3,918
Accrued expenses 2,607 2,403
State income taxes payable 824 725
--------- ---------
TOTAL CURRENT LIABILITIES 7,758 7,046
--------- ---------
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES 3,838 2,578
STOCKHOLDERS' EQUITY --------- ---------
Common stock (30,000,000 shares authorized, 13,979,700
and 13,975,000 shares issued and outstanding, $.01 par value) 140 140
Contributed capital 38,155 38,155
Retained earnings 55,602 48,004
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 93,897 86,299
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 105,493 $ 95,923
========= =========
</TABLE>
Note: The balance sheet at May 31, 1996 has been taken from the audited
financial statements at that date.
3
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1996 1995 1996 1995
---- ---- ----- ----
<S> <C> <C> <C> <C>
NET REVENUES
Affiliates and their patients $19,098 $16,163 $37,342 $31,559
Non-affiliates and their patients 24,248 17,835 45,377 34,261
------- ------- ------- -------
Total net revenues 43,346 33,998 82,719 65,820
COST OF GOODS SOLD 22,154 17,009 42,159 32,982
------- ------- ------- -------
GROSS PROFIT 21,192 16,989 40,560 32,838
OPERATING EXPENSES ------- ------- ------- -------
Payroll expenses 9,387 7,091 17,585 13,711
Selling, general and administrative expenses 3,465 2,821 6,807 5,423
Provision for doubtful accounts 735 632 1,351 1,162
Depreciation and amortization 1,348 1,055 2,595 2,082
------- ------- -------- -------
Total operating expenses 14,935 11,599 28,338 22,378
------- ------- -------- -------
INCOME FROM OPERATIONS 6,257 5,390 12,222 10,460
INTEREST INCOME AND OTHER, NET 281 269 545 567
INTEREST EXPENSE (42) (12) (53) (25)
INCOME BEFORE ALLOCATION ------- ------- -------- -------
OF INCOME TAXES 6,496 5,647 12,714 11,002
INCOME TAX ALLOCATION 2,610 2,281 5,116 4,445
------- ------- ------- -------
NET INCOME $ 3,886 $ 3,366 $ 7,598 $ 6,557
======= ======= ======== =======
AVERAGE SHARES OUTSTANDING 13,980 13,975 13,980 13,975
======= ======= ======== =======
EARNINGS PER SHARE $ 0.28 $ 0.24 $ 0.54 $ $0.47
======= ======= ======== =======
</TABLE>
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
1996 1995
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,598 $ 6,557
Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization 2,595 2,082
Provision for doubtful accounts 1,351 1,162
Increase (decrease) in net deferred taxes (3) 384
Changes in assets and liabilities, net of acquisitions
Change in receivables (2,487) (6,500)
Change in inventories (1,558) 534
Change in other current assets (95) (145)
Change in accounts payable and accrued expenses (734) 1,270
Change in state income taxes payable 99 (481)
----------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,766 4,863
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (1,927) (1,768)
Decrease in Due from Parent 3,493 2,899
Acquisition of pharmacy businesses (5,291) (5,286)
Deferred payment on previous acquisition (900) (447)
Other items, net (556) (113)
----------- -------------
NET CASH USED IN INVESTING ACTIVITIES (5,181) (4,715)
CASH FLOWS FROM FINANCING ACTIVITIES: ----------- -------------
Principal payments of debt (1,337) (26)
---------- -------------
NET INCREASE IN CASH 248 122
CASH AT BEGINNING OF PERIOD 889 198
----------- ------------
CASH AT END OF PERIOD $ 1,137 $ 320
=========== ============
</TABLE>
5
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996
(UNAUDITED)
ACQUISITIONS AND DIVESTITURES
Fiscal 1997
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 totalling $1,150,000.
Fiscal 1996
On November 3, 1995, the Company acquired the institutional pharmacy business
of Brentview Clinical Pharmacy, located in Lost 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.
The above acquisitions are accounted for under the purchase method of
accounting with the assets recorded at their estimated fair market values at
the date of acquisition. The estimated fair market values of pharmacy
contracts acquired are amortized over the expected remaining lives of 10 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its on-going capital requirements and operating needs from
operating cash flows. Cash flows provided by operating activities were
$6,766,000 in the first six months of fiscal 1997 compared to $4,863,000 in the
year earlier period. 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 parent on the
consolidated balance sheets and totalled approximately $13,400,000 at November
30, 1996.
Acquired businesses were paid for with operating cash flows. The purchase
contracts for acquisitions generally stipulate future payments contingent upon
achievement of future profitability objectives.
In connection with the acquisition of Medisco, Vitalink made payments of
$1,144,000 in August, 1996 to pay-off certain liabilities assumed.
Effective June 1, 1995, the Company assumed the responsibility of billing the
revenues and collecting the receivables derived from the private pay residents
of Manor Care facilities. Previously, the Company was paid monthly for these
services by Manor Care which in turn billed and collected the receivables from
private pay residents. The Company had paid Manor Care a 3% administrative fee
on the related revenues for this service. The increase in accounts receivable
during the first six months of fiscal 1996 is primarily the result of this
change.
6
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On June 1, 1991, the Company entered into an "Intercompany Debt and Credit
Agreement" with Manor Care, Inc. pursuant to which Manor Care, Inc. provides
the Company with a line of credit of $10,000,000. To date, the line of credit
has not been utilized and the entire $10,000,000 balance on the line of credit
remains available to the Company. The line of credit and approximately
$14,500,000 of cash and amounts due from the Company's parent 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 cash generated from operations, the $10,000,000 line
of credit and the remaining amounts due from the Company's parent will be
adequate to meet the Company's foreseeable capital and other cash requirements.
RESULTS OF OPERATIONS
Net revenues for the three months ended November 30, 1996, were $43,346,000, an
increase of $9,348,000 or 27.5% over the year earlier period. For the six
months ended November 30, 1996, net revenues were $82,719,000, an increase of
$16,899,000, or 25.7% over the same period last year. The increase in net
revenues was principally attributable to increases in the number of nursing
facility beds serviced by the Company and the continuing rise in patient acuity
levels which results in increased revenues per bed. At November 30, 1996, the
Company provided services to approximately 54,300 nursing facility beds,
including 20,600 Manor Care beds and 33,700 non-affiliate beds. At November
30, 1995, the Company provided services to approximately 47,300 beds, including
17,300 Manor Care beds and 30,000 non-affiliate beds.
Increases in beds serviced were achieved through acquisitions and marketing
efforts to customers in existing markets and service to new and existing
affiliate facilities.
Gross profit for the three months ended November 30, 1996 was $21,192,000, an
increase of $4,203,000 or 24.7% over the same period last year. For the six
months ended November 30, 1996, gross profit was $40,560,000, an increase of
$7,722,000 or 23.5% over the year earlier period. The gross profit margins for
the three and six months ended November 30, 1996, were 48.9% and 49.0%,
respectively, compared to 50.0% and 49.9% for the same periods last year.
7
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996
(UNAUDITED)
RESULTS OF OPERATIONS (CONTINUED)
Operating expenses increased $3,336,000 to $14,935,000 or 34.5% of net revenues
for the three months ended November 30, 1996 compared to $11,599,000 or 34.1%
of net revenues for the year earlier period. For the six months ended November
30, 1996, operating expenses increased $5,960,000 to $28,338,000 or 34.3% of
net revenues compared to $22,378,000 or 34.0% of net revenues for the same
period last year. Payroll and selling, general and administrative expenses
increased to support the growth in beds serviced and reflect the cost of
increased marketing efforts.
Interest income and other, net, which consists principally of interest earned
on the balance due from parent, changed slightly reflecting the small change in
the average balance due from parent and the interest rate. The interest earned
on the loan is equal to the average 3-month Treasury Bill rate plus 100 basis
points.
SUBSEQUENT EVENT
On January 8, 1997, the Company's Form S-4 Registration Statement previously
filed with the Securities and Exchange Commission in connection with its
previously announced and pending merger of GranCare, Inc. was declared
effective. On September 3, 1996, the Company entered into a definitive
agreement to merge GranCare's institutional pharmacy business, conducted
through its TeamCare subsidiary, with and into Vitalink. Subsequent to
GranCare's spin-off of its skilled nursing business, Vitalink will issue
approximately 11.6 million shares of Vitalink Common Stock in exchange for all
of the outstanding shares and stock options of GranCare and refinance
GranCare's $100.0 million Senior Subordinated Notes. The purchase price is
estimated to approximate $355 million and the merger will be accounted for
using the purchase method of accounting. The Boards of Directors of both
companies have approved the merger, but the merger is subject to, among other
conditions, the approval of GranCare's shareholders. If consummated, the
merger is expected to be completed on or about February 10, 1997.
8
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VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger between
Vitalink Pharmacy Services, Inc. and GranCare, Inc.
dated September 3, 1996, as amended. Incorporated by
reference to Annex B to the Company's Amendment No. 1 to
the Registration Statement on Form S-4, file No.
333-19097, filed with the Securities and Exchange
Commission on January 8, 1997.
(b) There were no reports filed on Form 8-K for the
three months ended November 30, 1996.
9
<PAGE> 10
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITALINK PHARMACY SERVICES, INC.
(Registrant)
Date: January 14, 1997 By: /s/ Scott T. Macomber
--------------------------------
Scott T. Macomber
Vice President, Finance and
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 1,137
<SECURITIES> 0
<RECEIVABLES> 23,086
<ALLOWANCES> 3,199
<INVENTORY> 9,650
<CURRENT-ASSETS> 35,903
<PP&E> 9,495
<DEPRECIATION> 0
<TOTAL-ASSETS> 105,493
<CURRENT-LIABILITIES> 7,758
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 93,897
<TOTAL-LIABILITY-AND-EQUITY> 105,493
<SALES> 43,346
<TOTAL-REVENUES> 43,346
<CGS> 22,154
<TOTAL-COSTS> 37,089
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 735
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 6,496
<INCOME-TAX> 2,610
<INCOME-CONTINUING> 3,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,886
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
