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FORM 10-K
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 (FEE REQUIRED)
For the fiscal year ended May 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to ___________
Commission File Number 0-19820
VITALINK PHARMACY SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 37-0903482
------------------------------- ----------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1250 East Diehl Road, Naperville, Illinois
Suite 208 60563
------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (630) 245-4800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was
$282,091,169 as of June 30, 1998 based upon a closing price of $22.06 per share.
The number of shares of Vitalink's Common Stock outstanding at June 30,
1998 was 26,259,466.
Doc. No. 33109
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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 five 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. or 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, 1998, Manor Care owned approximately 50% of
Vitalink's common stock par value $.01 per share (the "Common Stock").
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 September 30, 1997, the Company acquired Home Care Medical Equipment,
Inc. ("Home Care") located in Oklahoma City, Oklahoma in exchange for 351,318
shares of the Company's common stock. In August 1998, 24,266 shares were
returned to the Company due to a closing balance sheet adjustment.
On October 15, 1997, the Company announced that it had hired an investment
banker to review strategic alternatives available to Vitalink. On April 26, 1998
the Company announced that it had entered into a definitive agreement to merge
with Genesis Health Ventures, Inc. The Merger was consummated on August 28,
1998.
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 170,000 beds from 57 institutional pharmacies, including five
regional infusion pharmacies, as of May 31, 1998. 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 five regional infusion pharmacies, as of July 1998. 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.
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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
-----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Manor Care Affiliated Beds................ 19,300 23,000 24,000
GranCare/Paragon/Mariner Affiliated Beds.. -- 15,000 14,000
Non-Manor Care and Non-GranCare
Affiliated Beds......................... 30,600 134,000 132,000
------ ------- -------
Total beds serviced.................. 49,900 172,000 170,000
====== ======= =======
</TABLE>
In the past six fiscal years, the Company has acquired TeamCare, as well as
eight other institutional pharmacies and two regional infusion pharmacies.
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 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
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services, disposable medical supplies and durable medical equipment such as
orthotics and prosthetics. In fiscal 1998, ancillary products and services
accounted for approximately 8% 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 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 1998, the Company received approximately 60% 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 35% of net revenues from Medicaid direct bill.
Dependence on Key Customers
Net revenue from Manor Care and its patients (including revenues pursuant
to government reimbursement programs) accounted for approximately 19%, 29% and
48% of total net revenues in fiscal 1998, 1997, and 1996, respectively. In
connection with the February 12, 1997 merger with GranCare, Inc. a California
corporation ("GranCare"), the Company assumed existing pharmaceutical supply
agreements between TeamCare and GranCare (now Mariner Post-Acute Network
"Mariner") to provide pharmaceutical supplies and services to substantially all
of Mariner's nursing facilities. Net revenues for fiscal 1998 and 1997 from
Mariner facilities and their patients accounted for approximately 12% and 7%,
respectively, of total net revenues.
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The agreements with Mariner afford the Company the right to provide
all pharmaceutical supplies and consulting services to all of the GranCare
facilities which were in existence on the date of the merger. The master
agreement which controlled such supply agreements was a rolling five year
agreement which provided for automatic one year renewals as of each March 1
during the remaining term of the agreement. On November 25, 1997 the Company
received notice that GranCare would not be renewing the agreement. As a result,
the agreement with Mariner will terminate on February 28, 2002.
Pursuant to four master agreements with Manor Care, Vitalink has the
right to provide pharmaceutical products and services, enteral and parenteral
therapy supplies and services, urological and ostomy products, intravenous
products and services and pharmacy consulting services to all facilities
operated by Manor Care. The terms of the four master agreements with Manor Care
are described below.
Master Agreement for Pharmacy Services. On June 1, 1991 Vitalink and Manor
Care entered into the Pharmacy Services Agreement pursuant to which Vitalink has
the option to provide pharmaceutical services to any and all nursing facilities
owned or licensed by Manor Care. The option is exercisable from time to time as
Vitalink establishes the capability to serve additional facilities operated by
Manor Care. The Pharmacy Services Agreement calls for each individual nursing
facility to enter into a separate agreement with Vitalink which defines the
scope of services, duties and obligations of Vitalink and compensation related
thereto. Pricing for services and products is determined on a market-by-market
basis and is subject to reimbursement limitations depending on the payor source.
The Pharmacy Services Agreement was amended on September 19, 1997 to extend the
term thereof to September 30, 2002, to implement an automatic extension as
described below and to update the billing rates set forth therein. The initial
term of each of the Pharmacy Services Agreement, as amended, and the individual
pharmacy agreements is 11 years and four months, with an automatic renewal of
one additional year as of each October 1 during the remaining term of the
agreement. The automatic renewal may be terminated by either party upon written
notice to the other at least 90 days prior to each October 1 during the
remaining term of the Pharmacy Services Agreement. The individual facility
agreements can be terminated by Manor Care under various circumstances,
including the failure of Vitalink to provide services which conform to generally
accepted pharmacy practices or upon 30 days' notice in the event Manor Care no
longer owns or holds the license to the facility upon the sale of such facility
to a third party. The Pharmacy Services Agreement was amended on April 26, 1998
to allow assignment thereof to assignees meeting certain qualifications as set
forth in such amendment.
Master Agreement for Infusion Therapy Services. On June 1, 1991, Vitalink
and Manor Care entered into the Infusion Therapy Services Agreement pursuant to
which Vitalink has the option to provide infusion therapy products and services
to any and all nursing facilities owned or licensed by Manor Care. The option is
exercisable from time to time as Vitalink establishes the capability to serve
additional facilities operated by Manor Care. The Infusion Therapy Services
Agreement calls for each individual nursing facility to enter into a separate
agreement with Vitalink which defines the scope of services, duties and
obligations of Vitalink and compensation related thereto. Pricing for services
and products is determined on a market-by-market basis and is subject to
reimbursement limitations depending on the payor source. The Infusion Therapy
Services Agreement was amended on September 19, 1997 to extend the term thereof
to September 30, 2002, to implement an automatic extension as described below
and to update the billing rates set forth therein. The initial term of each of
the Pharmacy Services Agreement, as amended, and the individual pharmacy
agreements is 11 years and four months, with an automatic renewal of one
additional year as of each October 1 during the remaining term of the agreement.
The automatic renewal may be terminated by either party upon written notice to
the other at least 90 days prior to each October 1 during the remaining term of
the Infusion Therapy Services Agreement. The individual facility agreements can
be terminated by Manor Care under various circumstances, including the failure
of Vitalink to provide services which conform to generally accepted pharmacy
practices or upon 30 days' notice in the event Manor Care no longer owns or
holds the license to the facility upon the sale of such facility to a third
party. The Infusion Therapy Services Agreement was amended on April 26, 1998 to
allow assignment thereof to assignees meeting certain qualifications as set
forth in such amendment.
Master Pharmacy Consulting Agreement. On June 1, 1991 Vitalink and Manor
Care entered into the Master Pharmacy Consulting Agreement whereby Vitalink
agreed to develop and implement a program to provide all consultant pharmacy
services to any and all nursing facilities owned or licensed by Manor Care that
Vitalink is capable of servicing. The Master Pharmacy Consulting Agreement calls
for each individual nursing facility to enter
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into a separate Consultant Pharmacy Services Agreement (the "Consultant Pharmacy
Services Agreement") with Vitalink which defines the scope of services, the
duties and obligations of Vitalink and compensation related thereto. Each
nursing facility is billed monthly by Vitalink based on its number of licensed
beds. The Master Pharmacy Consulting Agreement was amended on September 19, 1997
to extend the term thereof to September 30, 2002, to implement an automatic
extension as described below and to amend the billing rates set forth therein.
The initial term of each of the Master Pharmacy Consulting Agreement, as
amended, and the individual Consultant Pharmacy Services Agreements is 11 years
and four months, with an automatic renewal of one additional year as of each
October 1 during the remaining term of the agreement. The automatic renewal may
be terminated by either party upon written notice to the other at least 90 days
prior to each October 1 during the remaining term of the Master Pharmacy
Consulting Agreement. The individual facility agreements can be terminated by
Manor Care under various circumstances, including the failure by Vitalink to
provide services which conform to generally accepted pharmacy practices or upon
30 days' notice in the event Manor Care no longer owns or holds the license to
such facility upon the sale of such facility to a third party. The Master
Pharmacy Consulting Agreement was amended on April 26, 1998 to allow assignment
thereof to assignees meeting certain qualifications as set forth in such
amendment.
Pharmacy Services Consultant Agreement. On May 31, 1991, Vitalink and Manor
Care entered into the Pharmacy Services Consultant Agreement (the "Pharmacy
Services Consulting Agreement") whereby Vitalink agreed to assist Manor Care at
the corporate level in establishing uniform pharmacy delivering standards for
all of its nursing facilities, including those not serviced by Vitalink. Such
assistance takes the form of advising Manor Care on compliance with applicable
laws, rules, regulations, providing in-services to Manor Care corporate staff on
all phases of pharmacy services, and consulting with Manor Care at the corporate
level on all operating policies and procedure concerning administration and
record keeping of pharmaceuticals at its nursing facilities. No pharmacy
consulting services are provided to individual nursing facilities under this
agreement. For the services provided under the Pharmacy Services Consultant
Agreement, Manor Care pays Vitalink an annual fee, initially $10.00 per long
term care bed operated by Manor Care. The initial term of the agreement is ten
years, with automatic renewal for successive five-year periods; however, either
party may notify the other of its intent not to so renew upon 90 days' written
notice. The Pharmacy Services Consultant Agreement was amended on September 19,
1997 to change all references therein from long term care to skilled nursing.
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
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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.
In recent years, a number of legislative proposals have been introduced in
Congress that would contemplate changes in the health care system, either
nationally or at the state level. The Balanced Budget Act of 1997, (the
"Balanced Budget Act") signed into law on August 5, 1997, seeks to achieve a
balanced federal budget by, among other things, reducing federal spending on the
Medicare and Medicaid programs. With respect to Medicare, the law mandates
establishment of a prospective payment system ("PPS") for Medicare skilled
nursing facilities ("SNFs") under which facilities will be paid a federal per
diem rate for most covered nursing facility services (including
pharmaceuticals). Physician services, certain nurse practitioner and physician
assistant services, among others, are not included in the per diem rate. The PPS
will be phased in over three cost reporting periods, starting with cost
reporting periods beginning on or after July 1, 1998. The Balanced Budget Act
institutes consolidated billing for SNF services for most non-physician Part B
items and services for SNF residents, the implementation of which has been
delayed indefinitely. In the Conference Report accompanying the Balance Budget
Act, the conferees specifically note that, to ensure that the frail elderly
residing in SNFs receive needed and appropriate medication therapy, the
Secretary of the Department of Health and Human Services is to consider, as part
of the PPS for SNFs, the results of studies conducted by independent
organizations, including those which examine appropriate payment mechanisms and
payment rates for medication therapy, and develop case mix adjustments that
reflect the needs of such patients.
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, 1998, the Company had approximately 3,500 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 had 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.
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Insurance
Until the time of the 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 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, 1998, Vitalink had 57 leased pharmacies (including the five 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.
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, 1998.
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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 "VLTK". 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):
<TABLE>
<CAPTION>
Market Price Per Share
Fiscal 1998 High Low
----------- ---- ---
<S> <C> <C>
August............. $19.88 $17.13
November........... 23.81 18.75
February........... 25.88 20.44
May................ 21.69 19.56
Fiscal 1997 High Low
----------- ---- ---
August............. $25.00 $20.50
November........... 24.88 20.75
February........... 24.63 21.13
May................ 21.50 16.25
</TABLE>
The Company has not paid, and does not anticipate paying for the
foreseeable future, any dividends to holders of its Common Stock.
As of June 30, 1998, there were 756 record holders and approximately 3,000
beneficial holders of Vitalink Common Stock.
ITEM 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
Year Ended May 31
-----------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Summary of Operations Data
<S> <C> <C> <C> <C> <C>
Net revenues...................... $499,357 $274,038 $141,115 $112,257 $98,569
Income from operations............ 48,947 33,109 22,301 18,726 14,995
Net income........................ 23,668 18,317 13,870 11,680 9,204
Earnings per share
Basic..................... 0.92 1.03 0.99 0.84 0.66
Diluted................... 0.91 1.02 0.98 0.83 0.66
Average shares outstanding
Basic..................... 25,637 17,727 13,976 13,975 13,975
Diluted................... 26,051 18,035 14,135 14,009 13,976
Balance Sheet Data (at period end)
Total assets...................... 533,957 516,805 95,923 80,713 69,587
Working capital................... 97,026 74,006 22,830 15,202 14,103
Due from affiliate................ ------- 1,053 16,910 16,888 8,167
Long term debt.................... 74,317 104,873 ------- ------- ------
Stockholders' equity.............. 393,296 348,531 86,299 72,379 60,699
</TABLE>
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ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(dollars in thousands)
Fiscal 1998 Compared to 1997 - Net Revenues for fiscal 1998 were $499,357, an
increase of $255,319, or 82% over fiscal 1997. The increase in net revenues was
principally attributable to the inclusion of TeamCare revenues for the entire
fiscal 1998 as compared to only four months in fiscal 1997. At May 31, 1998, the
Company provided services to approximately 170,000 institutional beds versus
172,000 institutional beds at May 31, 1997.
Gross profit for fiscal 1998 was $239,438, an increase of $105,826, or 79%
over fiscal 1997. The increase was principally attributable to the inclusion of
TeamCare results for the entire fiscal 1998 as compared to only four months in
fiscal 1997. The gross profit margin declined slightly to 48% from 49%
principally resulting from comparably less profitable new accounts and
reimbursement reductions from certain third party payers.
Operating expenses increased $89,988 to $190,491, or 38% of net revenues in
fiscal 1998 compared to $100,503, or 37% of net revenues in fiscal 1997. The
increase was principally attributable to the inclusion of TeamCare results for
the entire fiscal 1998 as compared to only four months in fiscal 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, TeamCare's higher selling, general and administration costs and
the amortization of goodwill and pharmacy contracts arising from the TeamCare
merger. Included in fiscal 1998 operating expenses is an unusual item
representing a non-recurring pre-tax charge of $3,087 relating to the August
1997 resignation of the Company's Chief Executive Officer ($2,737) and the
consolidation of all corporate functions at the Company's Naperville, Illinois
headquarters ($350).
The increase in interest expense is largely attributable to interest
expense incurred on the Vitalink Credit Facility used to consummate the TeamCare
Merger. The effective income tax rate in fiscal 1997 increased to 45% compared
to 43% in fiscal 1997 due to the tax non-deductibility of goodwill from the Team
Care merger.
Fiscal 1997 Compared to 1996 - Net Revenues for fiscal 1997 were $274,038, an
increase of $132,923, or 94% over fiscal 1996. The increase in net revenues was
principally attributable to the inclusion of the TeamCare revenues effective
February 1, 1997. At May 31, 1997, the Company provided services to
approximately 172,000 institutional beds versus 49,900 institutional beds at May
31, 1996.
Gross profit for fiscal 1997 was $133,612, an increase of $63,619, or 91%
over fiscal 1996. The increase was largely attributable to the inclusion of
TeamCare results effective February 1, 1997. The gross profit margin declined
slightly to 49% from 50% principally resulting from comparably less profitable
new accounts and reimbursement reductions from certain State Medicaid programs.
Operating expenses increased $52,811 to $100,503, or 37% of net revenues in
fiscal 1997 compared to $47,692 or 34% 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, TeamCare's higher selling,
general and administration costs and the amortization of goodwill and pharmacy
contracts arising from the TeamCare merger.
The increase in interest expense is largely attributable to interest
expense incurred on $97.4 million drawn in February, 1997 on the Vitalink Credit
Facility and used to consummate the TeamCare Merger. The effective income tax
rate in fiscal 1997 increased to 43% compared to 40% in fiscal 1996 due to the
tax non-deductibility of goodwill from the TeamCare merger.
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 $32,252
in fiscal 1998 compared with $2,537 in the prior year period. Effective October
1, 1997, the Company assumed responsibility of managing all of its cash
activities through the implementation of an integrated cash management program.
Previously, the Company's cash activities, except for the activities of the
TeamCare pharmacies, were managed through an arrangement with Manor Care Inc.
("Manor Care").
9
<PAGE>
In connection with the TeamCare merger, the Company entered into a credit
facility (the "Credit Facility") with various banks providing for unsecured
borrowings of up to $200,000. Funds used to redeem substantially all of
GranCare's $100,000 face value senior subordinated notes were obtained through
borrowings under the Credit Facility. At May 31, 1998, there were $68,500 in
borrowings outstanding under the Credit Facility and the Company was in
compliance with the terms of the Credit Facility.
At May 31, 1998, $131,500 was available under the Credit Facility and
$10,214 of cash was available for general corporate working capital, potential
acquisitions of pharmacies, and the internal development of additional
pharmacies and capital expenditures. The Company believes that its cash
balances, cash flows from operations and available credit sources will be
adequate to meet the Company's foreseeable capital and other requirements.
Except for the issuance of the Company's common stock to acquire TeamCare
and Home Care, previously acquired businesses were financed with operating cash
flows or borrowings under the Credit Facility. The purchase contracts for
acquisitions generally stipulate future payments contingent upon achievement of
future profitability objectives.
Year 2000 Compliance
The Company has assessed and continues to assess the potential impact of
the situation commonly referred to as the "Year 2000 Issue". The Year 2000
Issue, which affects most corporations, concerns the inability of information
systems, primarily computer software programs, to properly recognize and process
data-sensitive information relating to the year 2000 and beyond. The Company is
in the process of determining the costs and expenditures associated with the
Year 2000 Issue and has system improvement initiatives underway to ensure that
the Company's computer systems will be Year 2000 compliant. The Company is
expected to incur approximately $1,000 over the next few years to address this
issue. The failure by third party payers, such as private insurers, managed care
organizations, health maintenance organizations and federal and state government
agencies that administer Medicare and/or Medicaid, to adequately address the
Year 2000 Issue could adversely affect the Company.
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. (the "Company", a Delaware Corporation) and subsidiaries
as of May 31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended May 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
July 3, 1998 (except with respect to the matter discussed in Note 13, as to
which the date is August 28, 1998)
11
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Year Ended May 31, 1998 1997 1996
==========================================================================================
<S> <C> <C> <C>
Net Revenues $ 499,357 $ 274,038 $ 141,115
Cost of Goods Sold 259,919 140,426 71,122
- ------------------------------------------------------------------------------------------
Gross Profit 239,438 133,612 69,993
- ------------------------------------------------------------------------------------------
Operating Expenses
Payroll expenses 117,525 61,463 29,255
Selling, general & administrative expenses 42,936 25,102 11,662
Provision for doubtful accounts 8,180 4,411 2,412
Unusual item 3,087 - -
Depreciation and amortization 18,763 9,527 4,363
- ------------------------------------------------------------------------------------------
Total operating expenses 190,491 100,503 47,692
- ------------------------------------------------------------------------------------------
Income from Operations 48,947 33,109 22,301
Interest Income and Other, Net 908 1,106 1,003
Interest Expense (6,550) (2,154) (51)
- ------------------------------------------------------------------------------------------
Income before Income Taxes 43,305 32,061 23,253
Income Taxes 19,637 13,744 9,383
- ------------------------------------------------------------------------------------------
Net Income $ 23,668 $ 18,317 $ 13,870
==========================================================================================
Average Shares Outstanding--Basic 25,637 17,727 13,976
==========================================================================================
Average Shares Outstanding--Diluted 26,051 18,035 14,135
==========================================================================================
Earnings Per Share--Basic $ 0.92 $ 1.03 $ 0.99
==========================================================================================
Earnings Per Share--Diluted $ 0.91 $ 1.02 $ 0.98
==========================================================================================
</TABLE>
See notes to consolidated financial statements
12
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
As of May 31, 1998 1997
===============================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 10,214 $ 3,660
Receivables (net of allowances of $9,831 and $4,872) 91,223 79,745
Inventories 26,655 25,193
Deferred income taxes 9,299 9,590
Other 4,174 1,829
- -------------------------------------------------------------------------------
Total current assets 141,565 120,017
- -------------------------------------------------------------------------------
Property and equipment, at cost (net of accumulated
depreciation) 25,490 22,908
Due from affiliate - 1,053
Pharmacy contracts (net of amortization of $7,725
and $4,579) 17,900 39,313
Goodwill (net of amortization of $14,174 and $5,705) 342,560 326,884
Other assets (net of amortization of $5,983 and $4,689) 6,442 6,630
- -------------------------------------------------------------------------------
Total Assets $533,957 $516,805
===============================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 16,207 $ 22,867
Accrued expenses 26,032 20,979
Current portion of long-term debt 2,300 2,165
- -------------------------------------------------------------------------------
Total Current liabilities 44,539 46,011
- -------------------------------------------------------------------------------
Long term debt 74,317 104,873
Deferred income taxes 20,273 15,352
Other long term liabilities 1,532 2,038
Stockholders' equity
Common stock (80,000,000 shares authorized,
26,189,969 and 25,402,510 shares issued and
outstanding, $.01 par value) 262 254
Contributed capital 303,045 281,956
Retained earnings 89,989 66,321
- -------------------------------------------------------------------------------
Total stockholders' equity 393,296 348,531
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $533,957 $516,805
===============================================================================
</TABLE>
See notes to consolidated financial statements
13
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
------------------ Contributed Retained
Shares Amount Capital Earnings
===================================================================================================
<S> <C> <C> <C> <C>
Balance, May 31, 1995 13,975,000 $ 140 $ 38,105 $ 34,134
- ---------------------------------------------------------------------------------------------------
Net income - - - 13,870
Exercise of stock options 4,700 - 50 -
- ---------------------------------------------------------------------------------------------------
Balance, 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
- ---------------------------------------------------------------------------------------------------
Net income - - - 23,668
Exercise of stock options 449,339 4 5,383 -
Stock issued for business acquired 331,820 4 6,996 -
Value of converted stock options in business acquired - - 5,934 -
Tax benefit from exercise of stock options - - 2,518 -
Stock grants 6,300 - 258 -
- ---------------------------------------------------------------------------------------------------
Balance, May 31, 1998 26,189,969 $ 262 $ 303,045 $ 89,989
===================================================================================================
</TABLE>
See notes to consolidated financial statements
14
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended May 31, 1998 1997 1996
==============================================================================================================
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 23,668 $ 18,317 $ 13,870
Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization 18,763 9,527 4,363
Provision for doubtful accounts 8,180 4,411 2,412
Change in net deferred income taxes, net of acquisitions 10,085 2,076 712
Changes in assets and liabilities, net of acquisitions:
Change in receivables (19,734) (22,341) (8,661)
Change in inventories (775) (1,690) (450)
Change in other current assets (2,396) (1,780) (1,346)
Change in accounts payable and accrued expenses (5,539) (5,983) 1,559
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 32,252 2,537 12,459
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures (10,835) (4,648) (3,537)
Decrease (increase) in due from affiliate, net 1,053 15,857 (22)
Acquisition of pharmacy businesses, net of cash acquired (5,755) (102,691) (5,531)
Deferred payments on previous acquisitions (2,019) (1,856) (2,030)
Payment for termination of Non-Competition Agreement 18,500 - -
Other items, net (2,011) (1,366) (644)
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,067) (94,704) (11,764)
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Principal payments of debt (2,173) (3,255) (54)
Proceeds from long-term borrowings 1,059 - -
(Repayments) borrowings under revolving credit facility (28,900) 97,400 -
Issuance of common stock 5,383 793 50
- --------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (24,631) 94,938 (4)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Cash 6,554 2,771 691
Cash at Beginning of Period 3,660 889 198
- --------------------------------------------------------------------------------------------------------------
Cash at End of Period $ 10,214 $ 3,660 $ 889
==============================================================================================================
</TABLE>
See notes to consolidated financial statements
15
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
(1) Summary of Significant Accounting Policies
Organization -- Vitalink Pharmacy Services, Inc. (the "Company" or "Vitalink")
owns and operates, directly or through its subsidiaries, institutional
pharmacies. As of May 31, 1998, Manor Care, Inc. ("Manor Care") directly or
indirectly owned approximately 50% of the Company's common stock. Manor Care,
through its wholly-owned subsidiary ManorCare Health Services, Inc., operates
nursing facilities, which the Company services. Prior to Vitalink's February 12,
1997 acquisition of GranCare, Inc.'s ("GranCare") institutional pharmacy
business, TeamCare ("the TeamCare Merger" - see Acquisitions), Manor Care's
ownership interest was approximately 82%. Upon consummation of the TeamCare
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. On May 30, 1998 Manor Care
purchased 4,484 shares of Company stock at $22.30 per share from Essel W.
Bailey, Jr, a Director of the Company. Unless the context otherwise requires,
Manor Care shall mean Manor Care and its subsidiaries other than the Company. On
April 26, 1998, the Company's Board of Directors voted to approve the Merger
Agreement between the Company and Genesis Health Ventures, Inc. ("Genesis").
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 payers or others for services and supplies provided.
Net revenues from Medicaid and Medicare programs were $176,258 and $23,829,
respectively, for the year ended May 31, 1998, $87,432 and $13,876,
respectively, for the year ended May 31, 1997 and $40,250 and $8,151,
respectively, for the year ended May 31, 1996. Accounts receivable from Medicaid
and Medicare programs were 22% and 8%, respectively, of total accounts
receivable at May 31, 1998 and 19% and 11%, respectively, of total accounts
receivable at May 31, 1997.
Net revenues from Paragon Health Network ("Paragon"), GranCare's successor
company, were $61,879 and $20,368 for the years ended May 31, 1998 and 1997,
respectively. Accounts receivable outstanding from Paragon were 9% and 15%,
respectively, of total accounts receivable at May 31, 1998 and 1997.
Cash Equivalents -- Cash equivalents consist of highly liquid investments which
are readily convertible into cash and have maturities of three months or less.
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>
===============================================================================
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 3,601 $ 2,190
Furniture, fixtures and equipment 23,280 18,137
Vehicles 2,709 2,765
Computer equipment 8,576 7,002
- -------------------------------------------------------------------------------
38,166 30,094
Less accumulated depreciation (12,676) (7,186)
- -------------------------------------------------------------------------------
Property and equipment $ 25,490 $22,908
===============================================================================
</TABLE>
16
<PAGE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Leasehold improvements 5 to 10 years
Furniture, fixtures and equipment (including computer equipment) 3 to 8 years
Vehicles 2 to 3 years
- --------------------------------------------------------------------------------
</TABLE>
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 10
years. The recoverability of these assets is evaluated quarterly and whenever
events and circumstances indicate that the asset value 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.
Amortization expense charged to operations for goodwill and pharmacy contracts,
respectively, was $8,466 and $3,280 in 1998, $3,559 and $1,535 in 1997, $786 and
$928 in 1996.
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.
Reclassifications -- Certain reclassifications have been made in the prior year
financial statements to conform to the current year presentation.
Impact of New Accounting Pronouncements -- In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130 "Reporting Comprehensive
Income" ("SFAS 130"), which is effective for fiscal year beginning after
December 15, 1997. The statement establishes standards for reporting and display
of comprehensive income and its components. The Company is in the process of
determining the timing and impact of adoption.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
Company has until fiscal 2000 to adopt this statement. The Company has not
determined when it will adopt this statement nor has it determined the impact of
adoption.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
About Pension and Other Postretirement Benefits" ("SFAS 132"), which is
effective for fiscal years beginning after December 31, 1997. This statement
revises employers' disclosures about pension and other postretirement benefit
plans; however it does not change the measurement or recognition of those plans.
The Company is in the process of determining the timing and impact of adoption.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Hedging Activities" ("SFAS 133"), which addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is in the process of determining the
timing and impact of adoption.
17
<PAGE>
(2) Related Party Transactions
Manor Care -- On June 1, 1991, the Company 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. Pricing for products and services is determined
on a market-by-market basis. The agreements call for each Manor Care facility to
enter into a separate agreement that defines the scope of services, duties and
obligations. The agreements, which had a ten-year term commencing June 1, 1991,
were amended on September 19, 1997 to extend the term to September 30, 2002. The
Company also entered into an agreement dated May 31, 1991, whereby the Company
assists Manor Care at a corporate level with establishing uniform pharmacy
delivery standards for Manor Care's nursing facilities.
Revenues from sales to Manor Care nursing facilities and patients were
$91,057, $76,526 and $64,302, respectively, for the three years ended May 31,
1998. Fees from consulting services to Manor Care and Manor Care facilities are
charged based on an annual fee per bed and totaled $3,712, $3,342 and $2,764,
respectively, for the three years ended May 31, 1998.
Manor Care has provided the Company with various administrative services
under an Administrative Services Agreement. Prior to fiscal 1998, Manor Care
provided cash management, payroll and payables processing, employee benefit,
insurance, legal, accounting, tax, information systems and certain other
administrative services. Cash receipts and requirements of the Company, with the
exception of the TeamCare Pharmacies, were processed by Manor Care's cash
management system. In fiscal 1998, under the Administrative Services Agreement,
Manor Care provided insurance, tax and other administrative services.
Administrative fees of $262, $640 and $595, respectively, for the three years
ended May 31, 1998, were charged to the Company 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.
Prior to fiscal year 1998, Manor Care obtained and provided insurance
coverage for group health, auto, general liability, property casualty and
workers' compensation through its self-insurance and external insurance programs
and charged the Company based on the relative percentage of insurance costs
incurred by Manor Care on the Company's behalf. In fiscal 1998, Manor Care
provided group health coverage for the four months ended September 30, 1997. As
of October 1, 1997, the Company provided its own group health coverage to all
Company employees. Total insurance costs allocated to the Company by Manor Care
were $538, $2,051 and $1,777, respectively, for the three years ended May 31,
1998. 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 these related party transactions is included in the "Due
from affiliate" amount in the accompanying consolidated balance sheets. Amounts
"Due from affiliate" have no set repayment terms and accrue interest based on an
average three-month Treasury Bill rate plus 100 basis points. Manor Care
credited the Company with interest income of $188, $922 and $972, respectively,
for the three years ended May 31, 1998 relating to the average balance "Due from
affiliate".
As of October 1, 1997, the Company implemented its own cash management
system and received direct payment for the delivery of products and services to
Manor Care and certain patients in Manor Care operated facilities. As a result,
receivables representing $4,458 of amounts billed in the last month of fiscal
1998 are included in the consolidated balance sheet and classified as
"Receivables". Additionally, Manor Care pays certain tax amounts on the
Company's behalf and the Company subsequently reimburses Manor Care. At May 31,
1998, $1,112 of state tax payments that Manor Care remitted on the Company's
behalf are classified as "Accounts Payable".
On June 10, 1998, Manor Care and Health Care and Retirement Corporation
announced a definitive agreement to merge the two companies in an exchange of
shares (the "Manor Care merger"). The Company's management anticipates that the
Manor Care merger will not adversely affect the Company.
18
<PAGE>
Other - The Company leases operating facilities from various employees. Rental
expense under the non-cancelable operating leases was approximately $528, $353
and $290, respectively, for the three years ended May 31, 1998. Future minimum
lease payments for leases, which expire through 2005, are $2,510 at May 31,
1998.
(3) Income Taxes
In prior years, an agreement existed whereby the Company joined with Manor
Care in the filing of a consolidated Federal tax return. Accordingly, the
Company had accrued taxes payable and receivable from Manor Care in the "Due
from affiliate" account, until January 31, 1997, based on the statutory rate
applied to income before taxes after considering appropriate tax credits. As a
result of the TeamCare Merger, effective February 1, 1997, the Company commenced
filing on a separate company basis. 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>
===============================================================================================================
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Federal $ 13,798 $ 9,762 $ 7,459
State 2,980 2,262 1,722
- ---------------------------------------------------------------------------------------------------------------
Deferred Federal 2,321 1,396 164
State 538 324 38
- ---------------------------------------------------------------------------------------------------------------
Income Taxes $ 19,637 $ 13,744 $ 9,383
===============================================================================================================
Deferred tax assets (liabilities) are comprised of the following at May 31:
===============================================================================================================
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities
Depreciation $ (3,214) $ (1,122) $ (941)
Amortization of intangibles (11,517) (17,906) (390)
Other (12,333) (999) (598)
- ---------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (27,064) (20,027) (1,929)
- ---------------------------------------------------------------------------------------------------------------
Gross deferred tax assets
Reserve for doubtful accounts 7,275 7,813 964
Acquisition costs 6,126 3,864 -
Other 2,690 2,588 187
- ---------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 16,091 14,265 1,151
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $(10,973) $ (5,762) $ (778)
===============================================================================================================
</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>
===============================================================================================================
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of Federal tax benefit 5.3% 5.2% 4.9%
Amortization of intangibles 4.8% 2.4% 0.1%
Other 0.2% 0.3% 0.3%
- ---------------------------------------------------------------------------------------------------------------
Effective income tax rate 45.3% 42.9% 40.3%
===============================================================================================================
</TABLE>
Cash paid for state income taxes was $3,216, $1,975 and $1,210,
respectively, for the three years ended May 31, 1998. Since filing on a separate
company basis effective February 1, 1997, cash paid for Federal income taxes was
$8,500 and $4,500, respectively, for the year ended May 31, 1998 and the four
months ended May 31, 1997.
19
<PAGE>
(4) Accrued Expenses
Accrued expenses are as follows:
<TABLE>
<CAPTION>
====================================================================================
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Payroll and incentive compensation $10,649 $ 8,663
Acquisition related accruals 7,031 6,251
Other 8,352 6,065
- ------------------------------------------------------------------------------------
Accrued expenses $26,032 $20,979
====================================================================================
</TABLE>
A substantial portion of the "Acquisition related accruals" was recorded
as a result of the TeamCare Merger purchase price allocation and represents
various facility exit, involuntary employee termination and employee relocation
and other merger-related costs ("merger costs"). In fiscal 1998, $4,878 of
merger costs were paid and charged to the "Acquisition related accrual". The
"Acquisition related accrual" was increased during fiscal 1998 for various
amounts that affected the carrying value of "Goodwill" and acquired TeamCare
assets and liabilities.
(5) Leases
The Company operates certain property and equipment under leases that have
initial or remaining terms in excess of one year. Rental expense under non-
cancelable operating leases was $6,761, $3,515 and $1,373, respectively, for the
three years ended May 31, 1998. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
==================================================================================================
Capital Operating
Fiscal year ended May 31, Leases Leases
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 937 $ 4,471
2000 917 3,774
2001 424 3,231
2002 184 2,429
2003 - 1,288
Thereafter - 1,573
- ---------------------------------------------------------------------------------------------------
Total minimum lease payments $2,462 $16,766
===================================================================================================
Less amounts representing interest 288
- ---------------------------------------------------------------------------------------------------
Present value of lease payments 2,174
- ---------------------------------------------------------------------------------------------------
Current portion 778
- ---------------------------------------------------------------------------------------------------
Lease obligations included in long term debt $1,396
===================================================================================================
</TABLE>
(6) Long Term Debt
In connection with the TeamCare Merger, the Company entered into a five-
year $200,000 revolving credit facility (the "Credit Facility"), which expires
February 12, 2002, with various banks. The Company had $68,500 and $97,400
outstanding under the Credit Facility at May 31, 1998 and 1997, respectively.
The interest rate was LIBOR plus .25% until April 24, 1998, at which time the
rate was reduced to LIBOR plus .225%. The weighted average interest rate was
6.14% in fiscal 1998 and 6.05% in fiscal 1997.
Amounts drawn under the Credit Facility were used to redeem, through a
tender offer, $98,230 of GranCare's $100,000 9-3/8% senior subordinated notes.
The Company was subject to a 0.15% facility fee until April 24, 1998, at which
time it was reduced to .125%, 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. The Company was in compliance with the terms of the Credit Facility at
May 31, 1998 and 1997.
In connection with the TeamCare Merger, the Company assumed $1,770 of
untendered GranCare 9-3/8% senior subordinated notes due September 15, 2005. The
notes require semi-annual interest payments. A premium
20
<PAGE>
of $600 was recorded to reflect the fair market value of the notes at the date
of the TeamCare Merger.
Also assumed in the TeamCare Merger were various notes payable totaling
$3,635 at May 31, 1998 and $5,230 at May 31, 1997. The weighted average interest
rate on the notes was 7.08% in fiscal 1998 and 7.03% in fiscal 1997 and their
annual maturities over the next five years are as follows: $1,524, $1,638, $210,
$173 and $90.
Vitalink has a $1,000 standby letter of credit related to contractual
requirements with ValueRx, Inc., as a result of the Company's assumption of a
contract 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, which
terminates on September 1, 1998.
Interest paid was $6,085, $1,538 and $51, respectively, for the three years
ended May 31, 1998. The carrying amounts on Vitalink's long term debt
approximate fair value.
On February 12, 1998, the Company entered in to an interest rate swap
agreement that covers $20,000 of the Credit Facility. The swap agreement fixes
the LIBOR rate at 5.70% through the term of the Credit Facility. The fair value
of the swap agreement, which is based on discounted future cash flows, is $96.
(7) Acquisitions
Fiscal 1998 - On September 30, 1997, Vitalink acquired Home Care Medical
Equipment, Inc. ("Home Care") located in Oklahoma City, Oklahoma in exchange for
351,318 shares of the Company's common stock.
On July 11, 1997, the Company acquired certain assets of the institutional
pharmacy and medical supply businesses of Nationwide Pharmacies, Inc., located
in Upper Marlboro, Maryland for $5,550 in cash plus the assumption of $30 in
liabilities and future contingent payments not to exceed $400 based on the
achievement of certain future profitability objectives.
Fiscal 1997 - On February 12, 1997, the Company merged with TeamCare, GranCare's
institutional pharmacy business, by acquiring all of the outstanding shares of
GranCare, Inc. after the spin-off of its skilled nursing business. The Company
issued approximately 11,400,000 shares of common stock and funded the redemption
of $98,230 of $100,000 face value of GranCare senior subordinated notes. The
merger was accounted for using the purchase method of accounting with an
effective date of February 1, 1997 and, accordingly, the results of operations
of TeamCare have been included in the consolidated financial statements since
February 1, 1997. The purchase price of $338,434 was allocated to the net assets
acquired based on their estimated fair values at the date of the merger. The
excess of the purchase price over the fair value of net assets acquired was
$303,322 and has been recorded as goodwill, which is being amortized on a
straight-line basis over 40 years.
In September 1997, the Company reached a settlement in its lawsuit against
GranCare to enforce a Non-Competition Agreement that the parties entered into as
part of the Company's acquisition of TeamCare. Under the terms of a Termination
and Release Agreement by and between the Company, GranCare, Manor Care, Apollo
Management L.P. and Living Centers of America, Inc., GranCare agreed to pay
$18,500 to Vitalink in consideration for the cancellation of and termination of
the Non-Competition Agreement.
In November 1997, Vitalink received the $18,500 payment from GranCare. In
addition, on November 24, 1997, the Company received a notice of non-renewal
from GranCare which effectively terminates the pharmaceutical supply agreement
between Vitalink and GranCare on February 28, 2002. The Company was also
notified that it had been released from its limited guarantee to Health
Retirement Properties Trust that was entered into in connection with the
TeamCare acquisition. Accordingly, Vitalink reduced the amount of the purchase
price previously allocated to the GranCare relationship (pharmaceutical supply
agreement) from $34,262 to $15,785 and reduced the amortization period from 20
years to 6 years.
21
<PAGE>
The purchase price has been allocated to the net assets purchased and
liabilities assumed as presented below:
<TABLE>
<S> <C>
========================================================================
Working capital $ 21,072
Property and equipment 12,832
Pharmaceutical supply agreement 15,785
Other assets 484
Goodwill 303,322
Other liabilities (15,061)
- ------------------------------------------------------------------------
Purchase price $338,434
========================================================================
</TABLE>
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and TeamCare as if the merger
had occurred at the beginning of fiscal 1996, after giving effect to
amortization of goodwill, increased interest expense on the acquisition debt and
related income tax effects.
<TABLE>
<CAPTION>
=======================================================================================
Fiscal Year ended May 31 1997 1996
- ---------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $458,043 $360,939
Net income $ 21,630 $ 16,078
Earnings per share - basic $ 0.85 $ 0.63
Earnings per share - diluted $ 0.83 $ 0.62
=======================================================================================
</TABLE>
The pro forma information is presented for informational purposes only and
is not necessarily indicative of results that would have occurred had the merger
been effective at the beginning of 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 in cash plus the assumption of $2,510 in
liabilities and future payments totaling $1,150.
Fiscal 1996 -- On November 3, 1995, the Company acquired the institutional
pharmacy business of Brentview Clinical Pharmacy, located in Los Angeles,
California for $3,206 in cash plus the assumption of $45 in liabilities and
future contingent payments based on the achievement of future profitability
objectives.
On July 6, 1995, the Company acquired the infusion therapy business of Home
Intravenous Care, Inc., located in Loveland, Colorado, for $2,325 in cash plus
the assumption of $105 in liabilities and future contingent payments based on
the achievement of certain future profitability objectives.
The above acquisitions were accounted for under the purchase method of
accounting with the assets recorded at their estimated fair market values at the
date of acquisition. Except for the TeamCare merger, the other acquisitions
described above are not material to the Company's financial position nor 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 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.
Other -- Other assets include noncompete covenants totaling $1,186 and $1,585,
respectively, at May 31, 1998 and 1997. 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 $13,040, $6,491 and $2,641, respectively, for the three years ended
May 31, 1998.
22
<PAGE>
(8) Contingencies and Compensating Balances
The Company is subject to 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 such 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 $2,400, plus additional uncapped amounts based on future
performance.
(9) Pension, Profit Sharing and Incentive Plans
The Company participated in the various pension and profit sharing plans of
Manor Care and contributed through Manor Care to certain welfare plans through
September 1997. In July 1997, the Company's Board of Directors approved a new
profit sharing plan for all Vitalink employees. All participants of the Manor
Care profit sharing plan converted to the new profit sharing plan in October
1997. Subsequent to the TeamCare Merger, the Company established an interim
profit sharing plan for the former TeamCare employees, who also converted to the
new profit sharing plan in October 1997. The provision for these plans amounted
to $1,276, $652 and $433, respectively, for the three years ended May 31, 1998.
All vested benefits under retirement plans are funded or accrued.
The Company also has incentive compensation plans for management personnel
and officers based primarily on the achievement of certain profitability levels.
Incentive compensation expense was $2,095, $1,538 and $1,003, respectively, for
the three years ended May 31, 1998.
(10) 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, 1998, 261,707 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 Key
Executive Stock Option and Appreciation Rights Plan (the "Plan"). The Plan was
terminated in fiscal 1997 in connection with the adoption of the 1996 Incentive
Plan. Under the Plan, 420,000 shares were reserved for issuance upon exercise of
the granted options. The Plan provided for the granting of options at prices
equal to the market value of the stock at grant date. In addition, a stock
appreciation right could be granted with a stock option. At the election of the
Board, the stock appreciation right may be paid in cash or shares of common
stock or a combination thereof in an amount equal to the difference between the
option exercise price and the then market value of the shares subject to the
option. Options granted are not exercisable during either the first one or two
years after the grant date and vest over periods of 48 to 96 months. The options
expire from 5 to 10 years after the grant date. In fiscal 1994, the Board of
Directors adopted and the shareholders approved an increase in the number of
shares reserved for issuance to one million shares.
In February 1997, in conjunction with the TeamCare 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.
23
<PAGE>
The following table summarizes stock option transactions for the three
fiscal years ended May 31:
<TABLE>
<CAPTION>
=================================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 1,611,847 $ 16.13 501,400 $ 14.59 497,100 $ 13.23
Options exercised (449,339) 11.98 (54,583) 14.92 (4,700) 10.47
Options granted 245,460 17.97 55,000 23.75 109,000 19.12
Options converted
from GranCare options - - 1,121,030 16.31 - -
Options cancelled (57,267) 15.45 (11,000) 14.34 (100,000) 13.00
- -----------------------------------------------------------------------------------------------------------------
Options outstanding,
at end of year 1,350,701 $ 17.72 1,611,847 $ 16.13 501,400 $ 14.59
- -----------------------------------------------------------------------------------------------------------------
Option price range
at end of year $1.97 - $27.06 $0.99 - $27.06 $10.06 - $19.88
Option price range
of exercised shares $0.99 - $22.33 $10.75 - $17.00 $10.06 - $12.75
Options available for grant
at end of year 261,707 449,900 493,900
- -----------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $9.54 $12.60 $8.52
=================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding as of
May 31, 1998:
<TABLE>
<CAPTION>
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.59 - $2.07 4,515 5.5 years $ 2.06 4,515 $ 2.06
$ 10.06 - $15.13 264,350 4.5 years 12.03 141,423 11.88
$ 16.11 - $22.33 997,162 7.0 years 18.70 670,923 19.03
$ 23.36 - $27.06 84,674 7.0 years 24.79 48,634 25.60
- -----------------------------------------------------------------------------------------------------------------
1,350,701 $ 17.72 865,495 $ 18.14
=================================================================================================================
</TABLE>
24
<PAGE>
In fiscal 1997, the Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards 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 the SFAS 123, the Company's net earnings would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings - as reported $ 23,668 $ 18,317 $ 13,870
Net earnings - pro forma $ 23,309 $ 18,168 $ 13,721
Basic earnings per share - as reported $ 0.92 $ 1.03 $ 0.99
Basic earnings per share - pro forma $ 0.91 $ 1.02 $ 0.98
Diluted earnings per share - as reported $ 0.91 $ 1.02 $ 0.98
Diluted earnings per share - pro forma $ 0.89 $ 1.01 $ 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 a risk-free interest rate 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 were 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.
(11) Earnings Per Share
In February 1997, the FASB issued SFAS 128, "Earnings per Share" ("SFAS
128"). SFAS 128 establishes standards for computing and presenting earnings per
share (EPS) and simplifies the standards for computing EPS previously found in
APB 15, "Earnings per Share". It replaces the presentation of primary EPS with a
basic presentation of EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures.
SFAS 128 was effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. In accordance with the
requirements of SFAS 128, the Company has restated all prior period EPS data
presented.
Basic EPS is computed by dividing net income by the weighted-average number
of common shares outstanding during the year. Diluted EPS is based upon the
weighted-average number of common shares and the dilutive effect of potential
stock option exercises.
25
<PAGE>
The following table illustrates the reconciliation of weighted average
shares used in computing basic diluted earnings per share:
<TABLE>
<CAPTION>
================================================================================
(amounts in thousands, except EPS data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS Computation
Net income $ 23,668 $ 18,317 $ 13,870
================================================================================
Shares:
Weighted average shares outstanding 25,637 17,727 13,976
================================================================================
Basic EPS $ 0.92 $ 1.03 $ 0.99
================================================================================
Diluted EPS Computation
Net income $ 23,668 $ 18,317 $ 13,870
================================================================================
Shares:
Weighted shares outstanding 25,637 17,727 13,976
Dilutive stock options 414 308 159
- --------------------------------------------------------------------------------
Weighted shares assuming dilution 26,051 18,035 14,135
================================================================================
Diluted EPS $ 0.91 $ 1.02 $ 0.98
================================================================================
</TABLE>
The effect of dilutive stock options was computed using the treasury stock
method and average market price during the periods presented. Stock options to
purchase 247,950, 146,614 and 63,000 shares of the Company's common stock during
the three years ended May 31, 1998 were excluded in the computation of diluted
earnings per share because the exercise price of the options exceeded the
average market price of the common shares for the period.
(12) Unusual Item
Included in fiscal 1998 operating expenses is an unusual item representing
a non-recurring pre-tax charge of $3,087 relating to the August 1997 resignation
of the Company's Chief Executive Officer ($2,737) and the consolidation of all
corporate functions at the Company's Naperville, Illinois headquarters ($350).
(13) Subsequent Event
On April 26, 1998, the Company's Board of Directors voted to approve the
Merger Agreement between the Company and Genesis Health Ventures, Inc.
("Genesis"). Genesis has offered $22.50 per share to acquire all of the
Company's common stock. The Company's shareholders are permitted to elect to
receive either $22.50 per share in cash or $22.50 per share in a dividend
yielding convertible preferred stock with the preferred stock to account for 50%
of the total consideration. Manor Care has elected to exchange all of its
Vitalink shares for the preferred stock. The merger was consummated on
August 28, 1998.
26
<PAGE>
(14) Quarterly Financial Data
The following table summarizes the quarterly financial data for the fiscal
year ended May 31, 1998 and 1997:
<TABLE>
<CAPTION>
==============================================================================
Income Basic
Quarter Net from Net Earnings
Ended Revenues Operations Income Per Share
==============================================================================
Fiscal 1998 (unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
August $118,258 $ 9,125 $ 3,954 $0.16
November 123,257 12,690 6,162 0.24
February 129,715 13,657 6,672 0.26
May 128,127 13,475 6,880 0.26
- ------------------------------------------------------------------------------
$499,357 $48,947 $23,668 $0.92
==============================================================================
==============================================================================
Fiscal 1997 (unaudited)
- ------------------------------------------------------------------------------
August $ 39,373 $ 5,965 $ 3,712 $0.27
November 43,346 6,257 3,886 0.28
February 69,772 8,474 4,747 0.27
May 121,547 12,413 5,972 0.24
- ------------------------------------------------------------------------------
$274,038 $33,109 $18,317 $1.03 *
==============================================================================
</TABLE>
*Does not add due to rounding and the effect of weighted shares.
27
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
The following items will be incorporated by reference in the Company's Proxy
Statement currently required to be filed pursuant to Regulation 14A by
September 28, 1998:
Item 10 Directors and Executive Officers of Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
28
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) 1. Financial Statements
Included herewith:
Report of Independent Public Accountants 11
Consolidated Statements of Income 12
Consolidated Balance Sheets 13
Consolidated Statements of Stockholders' Equity 14
Consolidated Statements of Cash Flows 15
Notes to Consolidated Financial Statements 16-27
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.
2.8 Agreement and Plan of Merger dated as of April 26, 1998, as
amended, between the Company, Genesis Health Ventures, Inc. and V
Acquisition Corporation. Annex A to the Proxy Statement dated
July 28, 1998 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 By-Laws. Exhibit 3.2 to Registration Statement No. 33-43261 is
incorporated herein by reference.
4.1 Form of Old GranCare, Inc.'s 9-3/8% Senior Subordinated Notes due
2005 (the "Senior Subordinated Notes") which were assumed by the
Company by operation of law as a consequence of the Merger (as
filed with Old GranCare's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 and 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 and 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.
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
and 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 and 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 and
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 and 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 and 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 and 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 and 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 Consulting Agreement by and between the Company and Donna L.
DeNardo, dated April 26, 1998.
10.32 Consulting Agreement by and between the Company and Robert W.
Horner, III, dated April 26, 1998.
10.33 Consulting Agreement by and between the Company and Scott T.
Macomber, dated April 26, 1998.
10.34 Consulting Agreement by and between the Company and Thomas J.
Santoro, dated April 26, 1998.
10.35 Consulting Agreement by and between the Company and Stephen A.
Thompson, dated April 26, 1998.
10.36 Agreement by and between the Company and Donna L. DeNardo,
dated April 26, 1998.
10.37 Agreement by and between the Company and Robert W. Horner, III,
dated April 26, 1998.
10.38 Agreement by and between the Company and Scott T. Macomber,
dated April 26, 1998.
10.39 Agreement by and between the Company and Thomas J. Santoro,
dated April 26, 1998.
10.40 Agreement by and between the Company and Stephen A. Thompson,
dated April 26, 1998.
10.41 Amendment dated as of April 26, 1998 to the Master Agreement
for Pharmacy Services, dated as of June 1, 1991.
10.42 Amendment dated as of April 26, 1998 to the Master Pharmacy
Consulting Agreement, dated as of June 1, 1991.
10.43 Amendment dated as of April 26, 1998 to the Master Agreement
for Infusion Therapy Products and Services, dated as of
June 1, 1991.
10.44 Termination and Release Agreement dated September 3, 1997 between
the Company, Manor Care, GranCare, Apollo Management L.P. and
Living Centers of America, Inc. Exhibit 10.31 to Form 10 K/A for
the year ended May 31, 1997.
13 1997 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule
29
<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: August 28, 1998 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 August 28, 1998
- -------------------------------- Officer (principal executive
Donna L. DeNardo officer)
/s/ Scott T. Macomber Senior Vice President, Chief August 28, 1998
- -------------------------------- Financial Officer and Treasurer
Scott T. Macomber (principal financial and
accounting officer)
/s/ Stewart Bainum, Jr. Chairman and Director August 28, 1998
- --------------------------------
Stewart Bainum, Jr.
/s/ Essel W. Bailey, Jr. Director August 28, 1998
- --------------------------------
Essel W. Bailey, Jr.
/s/ Joseph R. Buckley Director August 28, 1998
- --------------------------------
Joseph R. Buckley
/s/ Anil K. Gupta Director August 28, 1998
- --------------------------------
Anil K. Gupta
/s/ James A. MacCutcheon Director August 28, 1998
- --------------------------------
James A. MacCutcheon
/s/ James H. Rempe Director August 28, 1998
- --------------------------------
James H. Rempe
</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 in Vitalink Pharmacy Services, Inc.'s Form
10-K, and have issued our report thereon dated July 3, 1998 (except with respect
to the matter discussed in Note 13, as to which the date is August 28, 1998).
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.
July 3, 1998
<PAGE>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
SCHEDULE II
<TABLE>
<CAPTION>
Balance At Charged Balance At
Beginning To Profit Write- End Of
Description Of Period And Loss Offs Period
----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended May 31, 1998 $4,872 $8,180 $(3,221) $9,831
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
</TABLE>
<PAGE>
EXHIBIT INDEX
10.31 Consulting Agreement by and between the Company and Donna L. DeNardo,
dated April 26, 1998.
10.32 Consulting Agreement by and between the Company and Robert W. Horner,
III, dated April 26, 1998.
10.33 Consulting Agreement by and between the Company and Scott T. Macomber,
dated April 26, 1998.
10.34 Consulting Agreement by and between the Company and Thomas J. Santoro,
dated April 26, 1998.
10.35 Consulting Agreement by and between the Company and Stephen A. Thompson,
dated April 26, 1998.
10.36 Agreement by and between the Company and Donna L. DeNardo, dated April
26, 1998.
10.37 Agreement by and between the Company and Robert W. Horner, III, dated
April 26, 1998.
10.38 Agreement by and between the Company and Scott T. Macomber, dated April
26, 1998.
10.39 Agreement by and between the Company and Thomas J. Santoro, dated April
26, 1998.
10.40 Agreement by and between the Company and Stephen A. Thompson, dated April
26, 1998.
10.41 Amendment dated as of April 26, 1998 to the Master Agreement for Pharmacy
Services, dated as of June 1, 1991.
10.42 Amendment dated as of April 26, 1998 to the Master Pharmacy Consulting
Agreement, dated as of June 1, 1991.
10.43 Amendment dated as of April 26, 1998 to the Master Agreement for Infusion
Therapy Products and Services, dated as of June 1, 1991.
<PAGE>
EXHIBIT 10.31
CONSULTING AGREEMENT
This Consulting Agreement, dated this 26th day of April, 1998, by and
between VITALINK PHARMACY SERVICES, INC., a Delaware corporation (hereinafter
referred to as the "Company") and DONNA L. DENARDO (hereinafter referred to as
the "Consultant").
WHEREAS, the Company desires to retain the Consultant to carry out the
services set forth in this Agreement, and the Consultant is willing to provide
such services;
NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, it is agreed as follows:
1. Engagement as Consultant. The Company engages the Consultant to render
consulting services to the Company for the period (the "Consulting Period")
beginning on the date of his or her termination of employment with the Company
(the "Effective Date") and ending on the day preceding the first anniversary of
the Effective Date; provided, however, that this Agreement shall be of no force
and effect if the date of the Consultant's termination of employment is after
April 30, 1999.
2. Consulting Services. During the Consulting Period, the Consultant will
perform the following services, as reasonably requested by the Chief Executive
Officer of the Company: advice and consultation relating to operational and
personnel issues. The Consultant shall not be required to maintain any office
hours. The parties anticipate that the Consultant's performance of requested
services hereunder will consume no more than 1000 hours per year. The Company
will provide office support services to the Consultant at a site to be mutually
agreeable to the Consultant and the Company. The Consultant shall perform all
such services personally.
3. Other Activities. The Consultant shall be free to accept employment
with any organization and to engage in any business enterprise on the
Consultant's own behalf during the Consulting Period, provided such employment
or other activities do not prevent the satisfactory performance of the
consulting services described in Section 2.
4. Compensation for Services. As compensation for the services to be
rendered by the Consultant hereunder, the Company shall pay to the Consultant
$17,916.67 per month, payable no later than the last day of the applicable
month. If
<PAGE>
-2-
the Consultant's services are involuntarily terminated for any reason (including
death and disability), all compensation for the remainder of the term of the
Consulting Period shall be due and payable in a lump sum in cash within 30 days
after such termination.
5. Reimbursement for Expenses. The Company shall reimburse the Consultant
promptly for the Consultant's reasonable out-of-pocket expenses of performing
the consulting services described herein. The Consultant shall provide monthly a
particularized statement of any such expenses with customary documentation to
the Company's Chief Executive Officer, for reimbursement.
6. Disclosure and Use of Information. The Consultant recognizes and
acknowledges that the Company's and its affiliates' present and prospective
clients, contracts, development plans, operating data, policies and personnel,
as they may exist from time to time, are valuable, special and unique assets of
the Company's business. Throughout the Consulting Period and for a period of one
year after its termination or expiration for whatever cause or reason, the
Consultant shall not directly or indirectly, or cause others to, make use of or
disclose to others any information relating to the business of the Company that
has not otherwise been made public, including but not limited to the Company's
and its affiliates' present or prospective clients, contracts, development
plans, operating data and policies.
7. Notices. Any notice, request or demand given under this Agreement
shall be in writing, and shall be delivered personally to the recipient or sent
by certified, registered or overnight mail to his/her residence in the case of
the Consultant, or to its principal office in the case of the Company.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of the parties under this
Agreement shall inure to the benefit of and shall be binding upon their
respective successors and, in the case of the Company, assigns. The obligations
of the Consultant hereunder may not be assigned or delegated.
10. Independent Contractor. The Consultant acknowledges that the
Consultant's engagement under this Agreement is
<PAGE>
-3-
as an independent contractor and not as an employee of the Company. Accordingly,
the Consultant shall be responsible for the payment of all income, self-
employment and other taxes on amounts payable to the Consultant hereunder, and
the Company shall not withhold any federal, state or local income, payroll or
other taxes from the payments made under this Agreement. Nothing in this
Agreement shall be construed to authorize the Consultant to incur any debt,
liability or obligation of any nature for or on behalf of the Company.
11. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought.
12. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of Illinois without giving effect to the principles
thereof relating to conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES,INC.
/s/ Robert W. Horner, III By: /s/ Scott T. Macomber
- --------------------------- ---------------------------
Witness: CONSULTANT:
/s/ Stephen A. Thompson /s/ Donna L. DeNardo
- --------------------------- -------------------------------
Donna L. DeNardo
<PAGE>
EXHIBIT 10.32
CONSULTING AGREEMENT
--------------------
This Consulting Agreement, dated this 26th day of April, 1998, by and
between VITALINK PHARMACY SERVICES, INC., a Delaware corporation (hereinafter
referred to as the "Company") and ROBERT W. HORNER, III (hereinafter referred to
as the "Consultant").
WHEREAS, the Company desires to retain the Consultant to carry out the
services set forth in this Agreement, and the Consultant is willing to provide
such services;
NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, it is agreed as follows:
1. Engagement as Consultant. The Company engages the Consultant to render
consulting services to the Company for the period (the "Consulting Period")
beginning on the date of his or her termination of employment with the Company
(the "Effective Date") and ending 18 months after the Effective Date; provided,
however, that this Agreement shall be of no force and effect if the date of the
Consultant's termination of employment is after April 30, 1999.
2. Consulting Services. During the Consulting Period, the Consultant will
perform the following services, as reasonably requested by the Chief Executive
Officer of the Company: advice and consultation relating to legal and regulatory
issues. The Consultant shall not be required to maintain any office hours. The
parties anticipate that the Consultant's performance of requested services
hereunder will consume no more than 1000 hours per year. The Company will
provide office support services to the Consultant at a site to be mutually
agreeable to the Consultant and the Company. The Consultant shall perform all
such services personally.
3. Other Activities. The Consultant shall be free to accept employment with
any organization and to engage in any business enterprise on the Consultant's
own behalf during the Consulting Period, provided such employment or other
activities do not prevent the satisfactory performance of the consulting
services described in Section 2.
4. Compensation for Services As compensation for the services to be
rendered by the Consultant hereunder, the Company shall pay to the Consultant
$18,750 per month, payable no later than the last day of the applicable month.
If the
<PAGE>
-2-
Consultant's services are involuntarily terminated for any reason (including
death and disability), all compensation for the remainder of the term of the
Consulting Period shall be due and payable in a lump sum in cash within 30 days
after such termination.
5. Reimbursement for Expenses. The Company shall reimburse the Consultant
promptly for the Consultant's reasonable out-of-pocket expenses of performing
the consulting services described herein. The Consultant shall provide monthly a
particularized statement of any such expenses with customary documentation to
the Company's Chief Executive Officer, for reimbursement.
6. Disclosure and Use of Information. The Consultant recognizes and
acknowledges that the Company's and its affiliates' present and prospective
clients, contracts, development plans, operating data, policies and personnel,
as they may exist from time to time, are valuable, special and unique assets of
the Company's business. Throughout the Consulting Period and for a period of one
year after its termination or expiration for whatever cause or reason, the
Consultant shall not directly or indirectly, or cause others to, make use of or
disclose to others any information relating to the business of the Company that
has not otherwise been made public, including but not limited to the Company's
and its affiliates' present or prospective clients, contracts, development
plans, operating data and policies.
7. Notices. Any notice, request or demand given under this Agreement shall
be in writing, and shall be delivered personally to the recipient or sent by
certified, registered or overnight mail to his/her residence in the case of the
Consultant, or to its principal office in the case of the Company.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of the parties under this
Agreement shall inure to the benefit of and shall be binding upon their
respective successors and, in the case of the Company, assigns. The obligations
of the Consultant hereunder may not be assigned or delegated.
10. Independent Contractor. The Consultant acknowledges that the
Consultant's engagement under this Agreement is
<PAGE>
-3-
as an independent contractor and not as an employee of the Company. Accordingly,
the Consultant shall be responsible for the payment of all income, self-
employment and other taxes on amounts payable to the Consultant hereunder, and
the Company shall not withhold any federal, state or local income, payroll or
other taxes from the payments made under this Agreement. Nothing in this
Agreement shall be construed to authorize the Consultant to incur any debt,
liability or obligation of any nature for or on behalf of the Company.
11. Entire Agreement. This instrument contains the entire agreement of the
parties. It may be changed only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension, or
discharge is sought.
12. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of Illinois without giving effect to the principles
thereof relating to conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first set forth above.
Attest: VITALINK PHARMACY SERVICES,INC.
/s/ Jeanne M. Barlett By: /s/ Scott T. Macomber
- ----------------------------- -----------------------------
Witness: CONSULTANT:
/s/ Jeanne M. Barlett /s/ Robert W. Horner, III
- ----------------------------- --------------------------------
Robert W. Horner, III
<PAGE>
EXHIBIT 10.33
CONSULTING AGREEMENT
--------------------
This Consulting Agreement, dated this 26th day of April, 1998, by and
between VITALINK PHARMACY SERVICES, INC., a Delaware corporation (hereinafter
referred to as the "Company") and SCOTT T. MACOMBER (hereinafter referred to as
the "Consultant").
WHEREAS, the Company desires to retain the Consultant to carry out the
services set forth in this Agreement, and the Consultant is willing to provide
such services;
NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, it is agreed as follows:
1. Engagement as Consultant. The Company engages the Consultant to render
consulting services to the Company for the period (the "Consulting Period")
beginning on the date of his or her termination of employment with the Company
(the "Effective Date") and ending 18 months after the Effective Date; provided,
however, that this Agreement shall be of no force and effect if the date of the
Consultant's termination of employment is after April 30, 1999.
2. Consulting Services. During the Consulting Period, the Consultant will
perform the following services, as reasonably requested by the Chief Executive
Officer of the Company: advice and consultation relating to financial and
merger/acquisition issues. The Consultant shall not be required to maintain any
office hours. The parties anticipate that the Consultant's performance of
requested services hereunder will consume no more than 1000 hours per year. The
Company will provide office support services to the Consultant at a site to be
mutually agreeable to the Consultant and the Company. The Consultant shall
perform all such services personally.
3. Other Activities. The Consultant shall be free to accept employment with
any organization and to engage in any business enterprise on the Consultant's
own behalf during the Consulting Period, provided such employment or other
activities do not prevent the satisfactory performance of the consulting
services described in Section 2.
4. Compensation for Services As compensation for the services to be
rendered by the Consultant hereunder, the Company shall pay to the Consultant
$21,666.67 per month, pay-
<PAGE>
-2-
able no later than the last day of the applicable month. If the Consultant's
services are involuntarily terminated for any reason (including death and
disability), all compensation for the remainder of the term of the Consulting
Period shall be due and payable in a lump sum in cash within 30 days after such
termination.
5. Reimbursement for Expenses. The Company shall reimburse the Consultant
promptly for the Consultant's reasonable out-of-pocket expenses of performing
the consulting services described herein. The Consultant shall provide monthly a
particularized statement of any such expenses with customary documentation to
the Company's Chief Executive Officer, for reimbursement.
6. Disclosure and Use of Information. The Consultant recognizes and
acknowledges that the Company's and its affiliates' present and prospective
clients, contracts, development plans, operating data, policies and personnel,
as they may exist from time to time, are valuable, special and unique assets of
the Company's business. Throughout the Consulting Period and for a period of one
year after its termination or expiration for whatever cause or reason, the
Consultant shall not directly or indirectly, or cause others to, make use of or
disclose to others any information relating to the business of the Company that
has not otherwise been made public, including but not limited to the Company's
and its affiliates' present or prospective clients, contracts, development
plans, operating data and policies.
7. Notices. Any notice, request or demand given under this Agreement shall
be in writing, and shall be delivered personally to the recipient or sent by
certified, registered or overnight mail to his/her residence in the case of the
Consultant, or to its principal office in the case of the Company.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of the parties under this
Agreement shall inure to the benefit of and shall be binding upon their
respective successors and, in the case of the Company, assigns. The obligations
of the Consultant hereunder may not be assigned or delegated.
<PAGE>
-3-
10. Independent Contractor. The Consultant acknowledges that the
Consultant's engagement under this Agreement is as an independent contractor and
not as an employee of the Company. Accordingly, the Consultant shall be
responsible for the payment of all income, self-employment and other taxes on
amounts payable to the Consultant hereunder, and the Company shall not withhold
any federal, state or local income, payroll or other taxes from the payments
made under this Agreement. Nothing in this Agreement shall be construed to
authorize the Consultant to incur any debt, liability or obligation of any
nature for or on behalf of the Company.
11. Entire Agreement. This instrument contains the entire agreement of the
parties. It may be changed only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension, or
discharge is sought.
12. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of Illinois without giving effect to the principles
thereof relating to conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES,INC.
/s/ Robert W. Horner, III By: /s/ Donna L. DeNardo
- ----------------------------- ------------------------------
Witness: CONSULTANT:
/s/ Stephen A. Thompson /s/ Scott T. Macomber
- ------------------------------ ---------------------------------
Scott T. Macomber
<PAGE>
EXHIBIT 10.34
CONSULTING AGREEMENT
This Consulting Agreement, dated this 26th day of April, 1998, by and
between VITALINK PHARMACY SERVICES, INC., a Delaware corporation (hereinafter
referred to as the "Company") and THOMAS J. SANTORO (hereinafter referred to as
the "Consultant").
WHEREAS, the Company desires to retain the Consultant to carry out the
services set forth in this Agreement, and the Consultant is willing to provide
such services;
NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, it is agreed as follows:
1. Engagement as Consultant. The Company engages the Consultant to render
consulting services to the Company for the period (the "Consulting Period")
beginning on the date of his or her termination of employment with the Company
(the "Effective Date") and ending on the day preceding the first anniversary of
the Effective Date; provided, however, that this Agreement shall be of no force
and effect if the date of the Consultant's termination of employment is after
April 30, 1999.
2. Consulting Services. During the Consulting Period, the Consultant will
perform the following services, as reasonably requested by the Chief Executive
Officer of the Company: advice and consultation relating to financial issues,
accounts receivable and payable, and banking issues. The Consultant shall not be
required to maintain any office hours. The parties anticipate that the
Consultant's performance of requested services hereunder will consume no more
than 1000 hours per year. The Company will provide office support services to
the Consultant at a site to be mutually agreeable to the Consultant and the
Company. The Consultant shall perform all such services personally.
3. Other Activities. The Consultant shall be free to accept employment
with any organization and to engage in any business enterprise on the
Consultant's own behalf during the Consulting Period, provided such employment
or other activities do not prevent the satisfactory performance of the
consulting services described in Section 2.
4. Compensation for Services. As compensation for the services to be
rendered by the Consultant hereunder, the Company shall pay to the Consultant
$11,250 per month, payable
<PAGE>
-2-
no later than the last day of the applicable month. If the Consultant's services
are involuntarily terminated for any reason (including death and disability),
all compensation for the remainder of the term of the Consulting Period shall be
due and payable in a lump sum in cash within 30 days after such termination.
5. Reimbursement for Expenses. The Company shall reimburse the Consultant
promptly for the Consultant's reasonable out-of-pocket expenses of performing
the consulting services described herein. The Consultant shall provide monthly a
particularized statement of any such expenses with customary documentation to
the Company's Chief Executive Officer, for reimbursement.
6. Disclosure and Use of Information. The Consultant recognizes and
acknowledges that the Company's and its affiliates' present and prospective
clients, contracts, development plans, operating data, policies and personnel,
as they may exist from time to time, are valuable, special and unique assets of
the Company's business. Throughout the Consulting Period and for a period of one
year after its termination or expiration for whatever cause or reason, the
Consultant shall not directly or indirectly, or cause others to, make use of or
disclose to others any information relating to the business of the Company that
has not otherwise been made public, including but not limited to the Company's
and its affiliates' present or prospective clients, contracts, development
plans, operating data and policies.
7. Notices. Any notice, request or demand given under this Agreement
shall be in writing, and shall be delivered personally to the recipient or sent
by certified, registered or overnight mail to his/her residence in the case of
the Consultant, or to its principal office in the case of the Company.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of the parties under this
Agreement shall inure to the benefit of and shall be binding upon their
respective successors and, in the case of the Company, assigns. The obligations
of the Consultant hereunder may not be assigned or delegated.
<PAGE>
-3-
10. Independent Contractor. The Consultant acknowledges that the
Consultant's engagement under this Agreement is as an independent contractor and
not as an employee of the Company. Accordingly, the Consultant shall be
responsible for the payment of all income, self-employment and other taxes on
amounts payable to the Consultant hereunder, and the Company shall not withhold
any federal, state or local income, payroll or other taxes from the payments
made under this Agreement. Nothing in this Agreement shall be construed to
authorize the Consultant to incur any debt, liability or obligation of any
nature for or on behalf of the Company.
11. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought.
12. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of Illinois without giving effect to the principles
thereof relating to conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES,INC.
/s/ Robert W. Horner, III By: /s/ Scott T. Macomber
- --------------------------- ---------------------------
Witness: CONSULTANT:
/s/ Stephen A. Thompson /s/ Thomas J. Santoro
- --------------------------- ------------------------------
Thomas J. Santoro
<PAGE>
EXHIBIT 10.35
CONSULTING AGREEMENT
This Consulting Agreement, dated this 26th day of April, 1998, by and
between VITALINK PHARMACY SERVICES, INC., a Delaware corporation (hereinafter
referred to as the "Company") and STEPHEN A. THOMPSON (hereinafter referred to
as the "Consultant").
WHEREAS, the Company desires to retain the Consultant to carry out the
services set forth in this Agreement, and the Consultant is willing to provide
such services;
NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, it is agreed as follows:
1. Engagement as Consultant. The Company engages the Consultant to render
consulting services to the Company for the period (the "Consulting Period")
beginning on the date of his or her termination of employment with the Company
(the "Effective Date") and ending on the day preceding the first anniversary of
the Effective Date; provided, however, that this Agreement shall be of no force
and effect if the date of the Consultant's termination of employment is after
April 30, 1999.
2. Consulting Services. During the Consulting Period, the Consultant will
perform the following services, as reasonably requested by the Chief Executive
Officer of the Company: advice and consultation relating to personnel issues,
including severance, consolidation and relocation issues. The Consultant shall
not be required to maintain any office hours. The parties anticipate that the
Consultant's performance of requested services hereunder will consume no more
than 1000 hours per year. The Company will provide office support services to
the Consultant at a site to be mutually agreeable to the Consultant and the
Company. The Consultant shall perform all such services personally.
3. Other Activities. The Consultant shall be free to accept employment
with any organization and to engage in any business enterprise on the
Consultant's own behalf during the Consulting Period, provided such employment
or other activities do not prevent the satisfactory performance of the
consulting services described in Section 2.
4. Compensation for Services. As compensation for the services to be
rendered by the Consultant hereunder, the Company shall pay to the Consultant
$16,666.67 per month, pay-
<PAGE>
-2-
able no later than the last day of the applicable month. If the Consultant's
services are involuntarily terminated for any reason (including death and
disability), all compensation for the remainder of the term of the Consulting
Period shall be due and payable in a lump sum in cash within 30 days after such
termination.
5. Reimbursement for Expenses. The Company shall reimburse the Consultant
promptly for the Consultant's reasonable out-of-pocket expenses of performing
the consulting services described herein. The Consultant shall provide monthly a
particularized statement of any such expenses with customary documentation to
the Company's Chief Executive Officer, for reimbursement.
6. Disclosure and Use of Information. The Consultant recognizes and
acknowledges that the Company's and its affiliates' present and prospective
clients, contracts, development plans, operating data, policies and personnel,
as they may exist from time to time, are valuable, special and unique assets of
the Company's business. Throughout the Consulting Period and for a period of one
year after its termination or expiration for whatever cause or reason, the
Consultant shall not directly or indirectly, or cause others to, make use of or
disclose to others any information relating to the business of the Company that
has not otherwise been made public, including but not limited to the Company's
and its affiliates' present or prospective clients, contracts, development
plans, operating data and policies.
7. Notices. Any notice, request or demand given under this Agreement
shall be in writing, and shall be delivered personally to the recipient or sent
by certified, registered or overnight mail to his/her residence in the case of
the Consultant, or to its principal office in the case of the Company.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of the parties under this
Agreement shall inure to the benefit of and shall be binding upon their
respective successors and, in the case of the Company, assigns. The obligations
of the Consultant hereunder may not be assigned or delegated.
<PAGE>
-3-
10. Independent Contractor. The Consultant acknowledges that the
Consultant's engagement under this Agreement is as an independent contractor and
not as an employee of the Company. Accordingly, the Consultant shall be
responsible for the payment of all income, self-employment and other taxes on
amounts payable to the Consultant hereunder, and the Company shall not withhold
any federal, state or local income, payroll or other taxes from the payments
made under this Agreement. Nothing in this Agreement shall be construed to
authorize the Consultant to incur any debt, liability or obligation of any
nature for or on behalf of the Company.
11. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought.
12. Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of Illinois without giving effect to the principles
thereof relating to conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES,INC.
/s/ Robert W. Horner, III By:/s/ Donna L. DeNardo
- --------------------------- ----------------------------
Witness: CONSULTANT:
/s/ Scott T. Macomber /s/ Stephen A. Thompson
- --------------------------- -------------------------------
Stephen A. Thompson
<PAGE>
EXHIBIT 10.36
AGREEMENT
---------
This Agreement ("Agreement") dated this 26th day of April, 1998 between
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Company") and
DONNA L. DENARDO (the "Employee").
WHEREAS, the Employee is an officer entitled to compensation and other
benefits from the Company pursuant to an employment agreement and the various
benefit plans and programs of the Company; and
WHEREAS, the Company is currently engaged in negotiations with Genesis
Health Ventures, Inc., a Delaware corporation ("Genesis"), which may lead to the
merger of the Company into a wholly owned subsidiary of Genesis (the "Merger");
and
WHEREAS, in order to enter into an agreement with Genesis on mutually
satisfactory terms the Company wishes to limit certain benefits that may become
payable to the Employee under the existing employment agreement and benefit
plans and programs; and
WHEREAS, in order to enable the Company and Genesis to reach agreement, the
Employee is willing to agree to the limitation on benefits set forth in this
Agreement conditioned on the consummation of the Merger;
NOW, THEREFORE, the Employee and the Company agree as follows:
1. Subject to Section 3 of this Agreement, in the event that any
compensation or benefits payable to the Employee by the Company and its
successors and affiliates would constitute an "excess parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), such compensation and benefits shall be reduced (by the minimum
possible amounts) until no amount payable to the Employee constitutes an "excess
parachute payment" within the meaning of Section 280G of the Code. Such
reduction shall be made in any manner which is mutually agreeable to the Company
and the Employee. If, as a result of subsequent events or conditions, it is
determined that compensation and benefits have been reduced by more than the
minimum amount required to prevent any payments from constituting an "excess
parachute payment," then an additional payment shall be promptly made by the
Company to the Employee in an amount equal to the additional
<PAGE>
-2-
amount that can be paid without causing any payments to constitute an "excess
parachute payment." All determinations required to be made under this Agreement,
including whether an amount would result in an "excess parachute payment" and
the assumptions to be utilized in arriving at such determination, shall be made
by a Certified Public Accounting firm jointly agreed to by the Company and the
Employee. The Company shall pay all costs of such Certified Public Accounting
firm in making such determinations.
2. Subject to Section 3 of this Agreement, the Employee agrees to waive his
or her right to receive any tax gross-up payment for the excise tax imposed by
Section 4999 of the Code (or any similar tax that may hereafter be imposed)
under any plan, program, agreement or arrangement of the Company.
3. This Agreement shall become effective if, and only if, the Merger is
consummated on or before December 31, 1998.
4. This Agreement shall be governed by and interpreted under the laws of
the State of Illinois without giving effect to the principles thereof relating
to the conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES, INC.
/s/ Robert W. Horner, III By: /s/ Scott T. Macomber
- ------------------------------- -------------------------------
Witness: EMPLOYEE:
/s/ Stephen A. Thompson /s/ Donna L. DeNardo
- ------------------------------- ------------------------------------
<PAGE>
EXHIBIT 10.37
AGREEMENT
---------
This Agreement ("Agreement") dated this 26th day of April, 1998 between
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Company") and
ROBERT W. HORNER, III (the "Employee").
WHEREAS, the Employee is an officer entitled to compensation and other
benefits from the Company pursuant to an employment agreement and the various
benefit plans and programs of the Company; and
WHEREAS, the Company is currently engaged in negotiations with Genesis
Health Ventures, Inc., a Delaware corporation ("Genesis"), which may lead to the
merger of the Company into a wholly owned subsidiary of Genesis (the "Merger");
and
WHEREAS, in order to enter into an agreement with Genesis on mutually
satisfactory terms the Company wishes to limit certain benefits that may become
payable to the Employee under the existing employment agreement and benefit
plans and programs; and
WHEREAS, in order to enable the Company and Genesis to reach agreement, the
Employee is willing to agree to the limitation on benefits set forth in this
Agreement conditioned on the consummation of the Merger;
NOW, THEREFORE, the Employee and the Company agree as follows:
1. Subject to Section 3 of this Agreement, in the event that any
compensation or benefits payable to the Employee by the Company and its
successors and affiliates would constitute an "excess parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), such compensation and benefits shall be reduced (by the minimum
possible amounts) until no amount payable to the Employee constitutes an "excess
parachute payment" within the meaning of Section 280G of the Code. Such
reduction shall be made in any manner which is mutually agreeable to the Company
and the Employee. If, as a result of subsequent events or conditions, it is
determined that compensation and benefits have been reduced by more than the
minimum amount required to prevent any payments from constituting an "excess
parachute payment," then an additional payment shall be promptly made by the
Company to the Employee in an amount equal to the additional
<PAGE>
-2-
amount that can be paid without causing any payments to constitute an "excess
parachute payment." All determinations required to be made under this Agreement,
including whether an amount would result in an "excess parachute payment" and
the assumptions to be utilized in arriving at such determination, shall be made
by a Certified Public Accounting firm jointly agreed to by the Company and the
Employee. The Company shall pay all costs of such Certified Public Accounting
firm in making such determinations.
2. Subject to Section 3 of this Agreement, the Employee agrees to waive his
or her right to receive any tax gross-up payment for the excise tax imposed by
Section 4999 of the Code (or any similar tax that may hereafter be imposed)
under any plan, program, agreement or arrangement of the Company.
3. This Agreement shall become effective if, and only if, the Merger is
consummated on or before December 31, 1998.
4. This Agreement shall be governed by and interpreted under the laws of
the State of Illinois without giving effect to the principles thereof relating
to the conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES, INC.
/s/ Jeanne M. Barlett By: /s/ Scott T. Macomber
- ---------------------------------- -------------------------------------
Witness: EMPLOYEE:
/s/ Jeanne M. Barlett /s/ Robert W. Horner, III
- ---------------------------------- -----------------------------------------
<PAGE>
EXHIBIT 10.38
AGREEMENT
---------
This Agreement ("Agreement") dated this 26th day of April, 1998 between
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Company") and
SCOTT T. MACOMBER (the "Employee").
WHEREAS, the Employee is an officer entitled to compensation and other
benefits from the Company pursuant to an employment agreement and the various
benefit plans and programs of the Company; and
WHEREAS, the Company is currently engaged in negotiations with Genesis
Health Ventures, Inc., a Delaware corporation ("Genesis"), which may lead to the
merger of the Company into a wholly owned subsidiary of Genesis (the "Merger");
and
WHEREAS, in order to enter into an agreement with Genesis on mutually
satisfactory terms the Company wishes to limit certain benefits that may become
payable to the Employee under the existing employment agreement and benefit
plans and programs; and
WHEREAS, in order to enable the Company and Genesis to reach agreement, the
Employee is willing to agree to the limitation on benefits set forth in this
Agreement conditioned on the consummation of the Merger;
NOW, THEREFORE, the Employee and the Company agree as follows:
1. Subject to Section 3 of this Agreement, in the event that any
compensation or benefits payable to the Employee by the Company and its
successors and affiliates would constitute an "excess parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), such compensation and benefits shall be reduced (by the minimum
possible amounts) until no amount payable to the Employee constitutes an "excess
parachute payment" within the meaning of Section 280G of the Code. Such
reduction shall be made in any manner which is mutually agreeable to the Company
and the Employee. If, as a result of subsequent events or conditions, it is
determined that compensation and benefits have been reduced by more than the
minimum amount required to prevent any payments from constituting an "excess
parachute payment," then an additional payment shall be promptly made by the
Company to the Employee in an amount equal to the additional
<PAGE>
-2-
amount that can be paid without causing any payments to constitute an "excess
parachute payment." All determinations required to be made under this Agreement,
including whether an amount would result in an "excess parachute payment" and
the assumptions to be utilized in arriving at such determination, shall be made
by a Certified Public Accounting firm jointly agreed to by the Company and the
Employee. The Company shall pay all costs of such Certified Public Accounting
firm in making such determinations.
2. Subject to Section 3 of this Agreement, the Employee agrees to waive his
or her right to receive any tax gross-up payment for the excise tax imposed by
Section 4999 of the Code (or any similar tax that may hereafter be imposed)
under any plan, program, agreement or arrangement of the Company.
3. This Agreement shall become effective if, and only if, the Merger is
consummated on or before December 31, 1998.
4. This Agreement shall be governed by and interpreted under the laws of
the State of Illinois without giving effect to the principles thereof relating
to the conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES, INC.
/s/ Robert W. Horner, III By: /s/ Donna L. DeNardo
- ---------------------------------- -------------------------------------
Witness: EMPLOYEE:
/s/ Stephen A. Thompson /s/ Scott T. Macomber
- ---------------------------------- -----------------------------------------
<PAGE>
EXHIBIT 10.39
AGREEMENT
---------
This Agreement ("Agreement") dated this 26th day of April, 1998 between
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Company") and
THOMAS J. SANTORO (the "Employee").
WHEREAS, the Employee is an officer entitled to compensation and other
benefits from the Company pursuant to an employment agreement and the various
benefit plans and programs of the Company; and
WHEREAS, the Company is currently engaged in negotiations with Genesis
Health Ventures, Inc., a Delaware corporation ("Genesis"), which may lead to the
merger of the Company into a wholly owned subsidiary of Genesis (the "Merger");
and
WHEREAS, in order to enter into an agreement with Genesis on mutually
satisfactory terms the Company wishes to limit certain benefits that may become
payable to the Employee under the existing employment agreement and benefit
plans and programs; and
WHEREAS, in order to enable the Company and Genesis to reach agreement, the
Employee is willing to agree to the limitation on benefits set forth in this
Agreement conditioned on the consummation of the Merger;
NOW, THEREFORE, the Employee and the Company agree as follows:
1. Subject to Section 3 of this Agreement, in the event that any
compensation or benefits payable to the Employee by the Company and its
successors and affiliates would constitute an "excess parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), such compensation and benefits shall be reduced (by the minimum
possible amounts) until no amount payable to the Employee constitutes an "excess
parachute payment" within the meaning of Section 280G of the Code. Such
reduction shall be made in any manner which is mutually agreeable to the Company
and the Employee. If, as a result of subsequent events or conditions, it is
determined that compensation and benefits have been reduced by more than the
minimum amount required to prevent any payments from constituting an "excess
parachute payment," then an additional payment shall be promptly made by the
Company to the Employee in an amount equal to the additional
<PAGE>
-2-
amount that can be paid without causing any payments to constitute an "excess
parachute payment." All determinations required to be made under this Agreement,
including whether an amount would result in an "excess parachute payment" and
the assumptions to be utilized in arriving at such determination, shall be made
by a Certified Public Accounting firm jointly agreed to by the Company and the
Employee. The Company shall pay all costs of such Certified Public Accounting
firm in making such determinations.
2. Subject to Section 3 of this Agreement, the Employee agrees to waive his
or her right to receive any tax gross-up payment for the excise tax imposed by
Section 4999 of the Code (or any similar tax that may hereafter be imposed)
under any plan, program, agreement or arrangement of the Company.
3. This Agreement shall become effective if, and only if, the Merger is
consummated on or before December 31, 1998.
4. This Agreement shall be governed by and interpreted under the laws of
the State of Illinois without giving effect to the principles thereof relating
to the conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES, INC.
/s/ Robert W. Horner, III By: /s/ Scott T. Macomber
- ---------------------------------- -------------------------------------
Witness: EMPLOYEE:
/s/ Stephen A. Thompson /s/ Thomas J. Santoro
- ---------------------------------- -----------------------------------------
<PAGE>
EXHIBIT 10.40
AGREEMENT
---------
This Agreement ("Agreement") dated this 26th day of April, 1998 between
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Company") and
STEPHEN A. THOMPSON (the "Employee").
WHEREAS, the Employee is an officer entitled to compensation and other
benefits from the Company pursuant to an employment agreement and the various
benefit plans and programs of the Company; and
WHEREAS, the Company is currently engaged in negotiations with Genesis
Health Ventures, Inc., a Delaware corporation ("Genesis"), which may lead to the
merger of the Company into a wholly owned subsidiary of Genesis (the "Merger");
and
WHEREAS, in order to enter into an agreement with Genesis on mutually
satisfactory terms the Company wishes to limit certain benefits that may become
payable to the Employee under the existing employment agreement and benefit
plans and programs; and
WHEREAS, in order to enable the Company and Genesis to reach agreement, the
Employee is willing to agree to the limitation on benefits set forth in this
Agreement conditioned on the consummation of the Merger;
NOW, THEREFORE, the Employee and the Company agree as follows:
1. Subject to Section 3 of this Agreement, in the event that any
compensation or benefits payable to the Employee by the Company and its
successors and affiliates would constitute an "excess parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), such compensation and benefits shall be reduced (by the minimum
possible amounts) until no amount payable to the Employee constitutes an "excess
parachute payment" within the meaning of Section 280G of the Code. Such
reduction shall be made in any manner which is mutually agreeable to the Company
and the Employee. If, as a result of subsequent events or conditions, it is
determined that compensation and benefits have been reduced by more than the
minimum amount required to prevent any payments from constituting an "excess
parachute payment," then an additional payment shall be promptly made by the
Company to the Employee in an amount equal to the additional
<PAGE>
-2-
amount that can be paid without causing any payments to constitute an "excess
parachute payment." All determinations required to be made under this Agreement,
including whether an amount would result in an "excess parachute payment" and
the assumptions to be utilized in arriving at such determination, shall be made
by a Certified Public Accounting firm jointly agreed to by the Company and the
Employee. The Company shall pay all costs of such Certified Public Accounting
firm in making such determinations.
2. Subject to Section 3 of this Agreement, the Employee agrees to waive his
or her right to receive any tax gross-up payment for the excise tax imposed by
Section 4999 of the Code (or any similar tax that may hereafter be imposed)
under any plan, program, agreement or arrangement of the Company.
3. This Agreement shall become effective if, and only if, the Merger is
consummated on or before December 31, 1998.
4. This Agreement shall be governed by and interpreted under the laws of
the State of Illinois without giving effect to the principles thereof relating
to the conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Attest: VITALINK PHARMACY SERVICES, INC.
/s/ Robert W. Horner, III By: /s/ Donna L. DeNardo
- ---------------------------------- -------------------------------------
Witness: EMPLOYEE:
/s/ Scott T. Macomber /s/ Stephen A. Thompson
- ---------------------------------- -----------------------------------------
<PAGE>
EXHIBIT 10.41
AMENDMENT TO
------------
MASTER AGREEMENT FOR PHARMACY SERVICES
--------------------------------------
AGREEMENT made and entered into as of the 26th day of April, 1998 by and
between Vitalink Pharmacy Services, Inc. ("Vitalink") and ManorCare Health
Services, Inc. ("MCHS").
WHEREAS, Vitalink and MCHS have previously entered into that certain Master
Agreement for Pharmacy Services dated June 1, 1991 (the "Master Agreement"); and
WHEREAS, Vitalink and MCHS desire to amend the Master Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein, and other
good and sufficient consideration, receipt of which is acknowledged, the parties
agree as follows:
1. Section 12 of the Pharmacy Agreement which is attached as Exhibit A to
the Master Agreement is replaced in its entirety by the following new Section
12:
12. NON ASSIGNMENT. This Agreement may not be assigned, nor may any
duties or obligations be subcontracted to any other person or
entity without the prior written consent of the other party,
which such consent shall not be unreasonably withheld. For the
purposes of this Section 12, Facility shall not be required to
consent to more that one (1) assignment of this Agreement, and
may reasonably withhold its consent to the assignment of this
Agreement by Contractor if the proposed assignee is not able to
demonstrate to Facility's reasonable satisfaction that the
proposed assignee:
. is a financially responsible and reputable regional or
national provider of pharmacy services;
. provides service and/or quality levels at least comparable to
those currently provided by Contractor;
. is in material compliance with applicable state and federal
laws, rules and regulations;
. currently possesses, or will possess at the time services are
to be provided, systems, protocols, policies and procedures
which are compatible with and in compliance with those
utilized by Facility and MCHS.
2. Each Pharmacy Agreement for the Facilities shall be deemed to have been
amended consistently with the terms, conditions and obligations contained
herein.
1
<PAGE>
3. Except as specifically provided herein, the Master Agreement remains in
full force and effect.
IN WITNESS WHEREOF, the parties enter into this Agreement on the date first
above written.
VITALINK PHARMACY SERVICES, INC.
ATTEST: /s/ Robert W. Horner, III By: /s/ Scott T. Macomber
-------------------------------- --------------------------------
Secretary
Title: Senior Vice President
------------------------------
MANORCARE HEALTH SERVICES, INC.
ATTEST: /s/ Leo H. Phillips, Jr. By: /s/ James H. Rempe
-------------------------------- --------------------------------
Assistant Secretary
Title: Senior Vice President
------------------------------
2
<PAGE>
EXHIBIT 10.42
AMENDMENT TO
------------
MASTER PHARMACY CONSULTING AGREEMENT
------------------------------------
AGREEMENT made and entered into as of the 26th day of April, 1998 by and
between Vitalink Pharmacy Services, Inc. ("Vitalink") and ManorCare Health
Services, Inc. ("MCHS").
WHEREAS, Vitalink and MCHS have previously entered into that certain Master
Pharmacy Consulting Agreement dated June 1, 1991 (the "Master Agreement"); and
WHEREAS, Vitalink and MCHS desire to amend the Master Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein, and other
good and sufficient consideration, receipt of which is acknowledged, the parties
agree as follows:
1. Section 9.B. of the Consultant Pharmacy Services Agreement which is
attached as Exhibit A to the Master Agreement is replaced in its entirety by the
following new Section 9.B.:
B. Unless specifically provided otherwise in this Agreement, the
parties shall not assign or subcontract to any other entity or
person this Agreement or any of the duties or obligations under
this Agreement without the written, prior consent of the other
party, which such consent shall not be unreasonably withheld. For
the purposes of this Section 9.B., Facility shall not be required
to consent to more that one (1) assignment of this Agreement, and
may reasonably withhold its consent to the assignment of this
Agreement if the proposed assignee is not able to demonstrate to
Facility's reasonable satisfaction that the proposed assignee:
. is a financially responsible and reputable regional or
national provider of consultant pharmacy services;
. provides service and/or quality levels at least comparable to
those currently provided to Facility;
. is in material compliance with applicable state and federal
laws, rules and regulations; and
. currently possesses, or will possess at the time services are
to be provided, systems, protocols, policies and procedures
which are compatible with and in compliance with those
utilized by Facility and MCHS.
2. Each Consultant Pharmacy Services Agreement for the Facilities shall be
deemed to
1
<PAGE>
have been amended consistently with the terms, conditions and obligations
contained herein.
3. Except as specifically provided herein, the Master Agreement remains in
full force and effect.
IN WITNESS WHEREOF, the parties enter into this Agreement on the date first
above written.
VITALINK PHARMACY SERVICES, INC.
ATTEST: /s/ Robert W. Horner, III By: /s/ Scott T. Macomber
-------------------------- -----------------------------------
Secretary
Title: Senior Vice President
--------------------------------
MANORCARE HEALTH SERVICES, INC.
ATTEST: /s/ Leo H. Phillips, Jr. By: /s/ James H. Rempe
------------------------- -----------------------------------
Assistant Secretary Title: Senior Vice President
--------------------------------
2
<PAGE>
EXHIBIT 10.43
AMENDMENT TO
------------
MASTER AGREEMENT FOR INFUSION THERAPY PRODUCTS AND SERVICES
-----------------------------------------------------------
AGREEMENT made and entered into as of the 26th day of April, 1998 by and
between Vitalink Pharmacy Services, Inc. ("Vitalink") and ManorCare Health
Services, Inc. ("MCHS").
WHEREAS, Vitalink and MCHS have previously entered into that certain Master
Agreement for Infusion Therapy Products and Services dated June 1, 1991 (the
"Master Agreement"); and
WHEREAS, Vitalink and MCHS desire to amend the Master Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein, and other
good and sufficient consideration, receipt of which is acknowledged, the parties
agree as follows:
1. Section 12 of the Infusion Therapy Services Agreement which is attached
as Exhibit A to the Master Agreement is replaced in its entirety by the
following new Section 12:
12. NON ASSIGNMENT. This Agreement may not be assigned, nor may any
duties or obligations be subcontracted to any other person or
entity without the prior written consent of the other party,
which such consent shall not be unreasonably withheld. For the
purposes of this Section 12, Facility shall not be required to
consent to more that one (1) assignment of this Agreement, and
may reasonably withhold its consent to the assignment of this
Agreement by Contractor if the proposed assignee is not able to
demonstrate to Facility's reasonable satisfaction that the
proposed assignee:
. is a financially responsible and reputable regional or
national provider of infusion therapy products and services;
. provides service and/or quality levels at least comparable to
those currently provided by Contractor;
. is in material compliance with applicable state and federal
laws, rules and regulations; and
. currently possesses, or will possess at the time services are
to be provided, systems, protocols, policies and procedures
which are compatible with and in compliance with those
utilized by Facility and MCHS.
2. Each Infusion Therapy Services Agreement for the Facilities shall be
deemed to have
1
<PAGE>
been amended consistently with the terms, conditions and obligations contained
herein.
3. Except as specifically provided herein, the Master Agreement remains in
full force and effect.
IN WITNESS WHEREOF, the parties enter into this Agreement on the date first
above written.
VITALINK PHARMACY SERVICES, INC.
ATTEST: /s/ Robert W. Horner, III By: /s/ Scott T. Macomber
------------------------------- --------------------------------
Secretary
Title: Senior Vice President
-----------------------------
MANORCARE HEALTH SERVICES, INC.
ATTEST: /s/ Leo H. Phillips, Jr. By: /s/ James H. Rempe
------------------------------- --------------------------------
Assistant Secretary
Title: Senior Vice President
-----------------------------
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 10,214
<SECURITIES> 0
<RECEIVABLES> 91,223
<ALLOWANCES> 9,831
<INVENTORY> 26,655
<CURRENT-ASSETS> 141,565
<PP&E> 25,490
<DEPRECIATION> 12,676
<TOTAL-ASSETS> 533,957
<CURRENT-LIABILITIES> 44,539
<BONDS> 74,317
0
0
<COMMON> 262
<OTHER-SE> 393,034
<TOTAL-LIABILITY-AND-EQUITY> 533,957
<SALES> 499,357
<TOTAL-REVENUES> 499,357
<CGS> 259,919
<TOTAL-COSTS> 450,410
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,180
<INTEREST-EXPENSE> 6,550
<INCOME-PRETAX> 43,305
<INCOME-TAX> 19,637
<INCOME-CONTINUING> 23,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,668
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.91
</TABLE>
