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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
November 4, 1997
Date of report (Date of earliest event reported)
PARAGON HEALTH NETWORK, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 001-10968 74-2012902
(State or other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
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ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA
(Address Of Principal Executive Offices)
30346
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 393-0199
LIVING CENTERS OF AMERICA, INC.
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
The information required by this item was "previously reported" (as defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) in the
Registrant's Registration Statement on Form S-4, as amended (Registration No.
333-36525), filed with the Securities and Exchange Commission on September 26,
1997 (the "Registration Statement on Form S-4"). The purpose of this amendment
is to update the Pro Forma Condensed Consolidated Financial Statements, relating
to the Recapitalization Merger and the GranCare Merger as defined herein, to the
Registrant's fiscal year ended September 30, 1997. The following Pro Forma
Condensed Consolidated Financial Statements are included herewith:
PARAGON HEALTH NETWORK, INC.
Pro Forma Condensed Consolidated Balance
Sheet (unaudited) as of September 30, 1997........................4
Pro Forma Condensed Consolidated Statement
of Income (unaudited) for the year ended
September 30, 1997.................................................6
2
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PARAGON HEALTH NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On November 4, 1997, the Company engaged in two merger transactions.
First, pursuant to an agreement and plan of merger among Apollo Management, L.P.
("Apollo Management," and together with certain of its affiliates, "Apollo"),
Apollo LCA Acquisition Corp. (a corporation owned by certain Apollo affiliates
and other investors, "Apollo Sub") and Living Centers of America, Inc. ("LCA"),
Apollo Sub was capitalized with $240 million in cash and was merged with and
into LCA (the "Recapitalization Merger"). In the Recapitalization Merger, LCA
was the surviving corporation and was renamed Paragon Health Network, Inc.
("Paragon"). Second, pursuant to an agreement and plan of merger among LCA,
GranCare, Inc. ("GranCare"), Apollo Management and LCA Acquisition Sub, Inc., a
wholly owned subsidiary of Paragon ("LCA Sub"), GranCare merged with LCA Sub
with GranCare surviving as a wholly owned subsidiary of Paragon (the "GranCare
Merger," and collectively with the Recapitalization Merger, the "Mergers"). The
GranCare Merger was accounted for using the purchase method of accounting.
The consummation of the Mergers required aggregate proceeds of
approximately $1.4 billion. The funds required for the Mergers and related
transaction fees and expenses were provided primarily by: (i) proceeds of
approximately $449 million from the offering (the "Offering") of $275 million in
Senior Subordinated Notes and $294 million in Senior Subordinated Discount Notes
(collectively, the "Notes"); (ii) borrowings by the Company of approximately
$740 million under a new senior credit facility which provides for aggregate
commitments of up to $890 million (the "Senior Credit Facility"); and (iii) the
equity investment by Apollo and certain other investors (collectively with
Apollo, the "Apollo Investors") of approximately $240 million (the "Apollo
Investment").
The accompanying unaudited pro forma statement of income for the year ended
September 30, 1997 gives effect to the above transactions as if they occurred on
October 1, 1996. The accompanying unaudited pro forma balance sheet gives
effect to the above transactions as if they occurred on September 30, 1997. The
unaudited pro forma financial statements are not necessarily indicative of the
operating results that would have been achieved had the Mergers been consummated
as of those dates, nor are they necessarily indicative of future operating
results. The unaudited pro forma financial statements should be read in
conjunction with the consolidated financial statements of LCA and the related
notes thereto appearing in the Registrant's Form 10-K for the year ended
September 30, 1997.
3
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PARAGON HEALTH NETWORK, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
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<CAPTION>
LCA GRANCARE PRO FORMA PARAGON
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $14,355 $13,692 $1,188,872 (1a) $ 19,432
240,000 (1b)
(735,223)(1c)
(288,000)(1d)
(285,097)(2a)
(39,539)(2b)
(60,168)(3)
(14,460)(4)
(15,000)(6)
Accounts receivable, less allowance for doubtful accounts............. 211,989 228,774 -- 440,763
Supplies.............................................................. 21,237 1,838 -- 23,075
Notes receivable...................................................... 2,223 20,917 -- 23,140
Prepaid expenses and other current assets............................. 13,131 18,112 -- 31,243
Deferred income taxes................................................. 24,294 13,474 -- 37,768
-------- -------- --------- ----------
Total current assets................................................ 287,229 296,807 (8,615) 575,421
Property and equipment................................................. 512,500 263,432 -- 775,932
Less accumulated depreciation....................................... (210,117) (62,582) -- (272,699)
-------- -------- --------- ----------
302,383 200,850 -- 503,233
Other assets:
Restricted investments, at fair value................................. 51,976 40,822 -- 92,798
Goodwill.............................................................. 196,120 59,021 98,063 (2c) 378,921
25,717 (3)
Other................................................................. 36,659 41,193 (1,409)(2a) 123,122
31,679 (2b)
15,000 (6)
-------- -------- --------- ----------
Total assets........................................................ $874,367 $638,693 $160,435 $1,673,495
======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt................ $ 43,196 $ 4,530 ($40,333)(1d) $ 4,993
(2,400)(2a)
Accounts payable and accrued expenses.................................. 75,063 87,675 (3,144)(2b) 190,599
31,005 (4)
Accrued payroll and related expenses................................... 66,866 19,426 -- 86,292
-------- -------- --------- ----------
Total current liabilities........................................... 185,125 111,631 (14,872) 281,884
Long-term debt.......................................................... 252,763 365,578 1,188,872 (1a) 1,275,440
(247,667)(1d)
(284,106)(2a)
Minority interests...................................................... 733 -- -- 733
Deferred income taxes and other noncurrent liabilities.................. 32,908 18,854 (15,284)(3) 18,292
(18,186)(4)
Long-term insurance reserves............................................ 27,555 9,642 -- 37,197
Commitments and contingencies........................................... -- -- -- --
Stockholders' Equity:
Preferred stock; $0.01 par value....................................... -- -- -- --
Series A - Junior participating preferred stock; $0.01 par value....... -- -- -- --
Common stock; $0.01 par value.......................................... 608 24 178 (1b) 406
(551)(1c)
(24)(2c)
171 (2c)
Capital surplus........................................................ 226,972 125,232 239,822 (1b) 492,264
(205,410)(1c)
(125,232)(2c)
230,880 (2c)
Retained earnings...................................................... 164,650 1,564 (546,453)(1c) (432,965)
(4,716)(2b)
(1,564)(2c)
(19,167)(3)
(27,279)(4)
Unrealized gain on investments, net of income taxes.................... 244 6,710 (6,710)(2c) 244
Equity component of minimum pension liability.......................... -- (542) 542 (2c)
Treasury stock, at cost................................................ (17,191) -- 17,191 (1c) --
-------- -------- --------- ----------
375,283 132,988 (448,322) 59,949
-------- -------- --------- ----------
Total liabilities and stockholders' equity...........................$874,367 $638,693 $160,435 $1,673,495
======== ======== ========= ==========
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See Notes to Unaudited Pro Forma Condensed Consolidated
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PARAGON HEALTH NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Recapitalization of and investment by the Apollo Investors in LCA pursuant
to the Recapitalization Merger:
(a) New borrowings by LCA to fund share repurchase and retirement of debt.
(b) Infusion of capital into LCA by the Apollo Investors in exchange for
17.8 million shares (adjusted for three-for-one stock split declared
in November 1997) of Paragon Common Stock.
(c) Repurchase of approximately 54.5 million shares (adjusted for three-
for-one stock split declared in November 1997) of LCA Common Stock and
retirement of LCA treasury stock.
(d) Retirement of existing LCA debt.
(2) Merger of LCA Sub into GranCare pursuant to the GranCare Merger:
(a) Retirement of certain existing GranCare debt.
(b) Payment of deferred financing fees on new debt and other financing
related fees, net of related income tax benefits of $3.1 million.
(c) Exchange and retirement of GranCare Common Stock for Paragon Common
Stock valued at $231.1 million (17,114,866 shares (adjusted for three-
for-one stock split declared in November 1997) of Paragon Common Stock
to be received by GranCare stockholders at an estimated fair value of
$13.50 per share (adjusted for three-for-one stock split declared in
November 1997), based upon the price to be paid by the Apollo
Investors for shares of Paragon Common Stock in the Recapitalization
Merger), and resulting elimination of GranCare equity and allocation
of purchase price in excess of net assets to goodwill. The allocation
of purchase price is preliminary and no adjustment has been made to
revalue GranCare's assets and liabilities to fair value, nor to assign
value to identifiable intangible assets. The Company is in the process
of quantifying the revaluation of these balances, however, it is not
completed at this time. Pro forma goodwill represents 22% of pro forma
total assets. The carrying value of goodwill will be reviewed if the
facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, the carrying
value of the goodwill will be reduced by the estimated shortfall of
cash flows as determined by comparing the carrying amount of the asset
to its fair value. Fair value is based on market prices where
available, an estimate of market value, or determined by various
valuation techniques (including discounted cash flows).
(3) Estimated recapitalization and related costs of $31.2 million, net of
related income tax benefits of $3.7 million, and settlement and lease
restructuring costs of $29.0 million (consisting of the $19.0 million
termination fees (the "Termination Fees") payable to Vitalink and Manor
Care, Inc. ("Manor Care") as well as the $10.0 million restructuring
payment to Health and Retirement Properties Trust ("HRPT")) and net of
related income tax benefits of $11.6 million. The settlement and lease
restructuring costs are being paid in connection with the GranCare Merger.
(4) Estimated costs totaling $45.5 million, net of related income tax benefits
of $18.2 million, related to change of control and severance payments and
other related merger expenses to be paid in connection with the GranCare
Merger. $14.5 million of these costs are expected to be paid upon
consummation of the Mergers and the remaining $31.0 million paid subsequent
to closing. Not included in such estimated costs is up to $11.0 million
that certain parties allege will be due upon consummation of the Mergers as
accelerated "earnouts" under acquisition agreements to which LCA is a
party. Paragon intends to vigorously defend against any claim for
accelerated payment of such amounts.
(5) The annual maturities of total long-term debt in the next five fiscal years
are as follows (in thousands):
1998 .............................................$ 4,993
1999 ............................................. 29,654
2000 ............................................. 50,599
2001 ............................................. 52,922
2002 ............................................. 69,451
Thereafter ....................................... 1,072,814
The classification of current and non-current portions of pro forma long-
term debt is based on the actual maturities of retained debt, the stated
terms of each tranche of the Senior Credit Facility and the 10-year term of
the Notes.
(6) Payment of security deposit to lessor.
5
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PARAGON HEALTH NETWORK, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
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<CAPTION>
Other
LCA GranCare TeamCare Pro Forma Paragon
Historical Historical Historical (1) Adjustments (2) Pro Forma
---------- ---------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues............................................ $1,140,288 $877,631 $(81,478) - $1,936,441
Operating expenses (excluding items shown below)........ 960,794 775,817 (7) (68,309) - 1,668,302
Rent.................................................... 42,489 43,159 (1,557) 500 (3) 84,591
Depreciation and amortization........................... 39,309 23,440 (1,834) 4,126 (4) 65,041
Merger and other related costs.......................... 2,588 28,300 (8) - - 30,888
---------- -------- ------- --------- --------
Income from operations.................................. 95,108 6,915 (9,778) (4,626) 87,619
Interest expense and finance charges.................... 21,492 34,691 (1,397) 68,669 (5) 123,455
Interest income......................................... (4,640) (6,159) - - (10,799)
---------- -------- ------- --------- --------
Income (loss) before income taxes,
equity earnings/minority interest and
extraordinary charge................................... 78,256 (21,617) (8,381) (73,295) (25,037)
Income taxes............................................ 33,604 (820)(8) (3,353) (27,668)(6) 1,763
Equity earnings/minority interest....................... (735) - - - (735)
---------- -------- ------- --------- --------
Net income (loss) before
extraordinary charge.................................. $43,917 $(20,797) $(5,028) $(45,627) $(27,535)
========== ======== ======= ========= ========
Net income (loss) before extraordinary
charge per common and common equivalent
share................................................. $ 0.74 $ (0.82) $ (0.67)
========== ======== ========
Weighted average number of common and
common equivalent shares outstanding.................. 59,325 25,333 41,049
========== ======== ========
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See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
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PARAGON HEALTH NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(1) Reflects elimination of Old GranCare's institutional pharmacy business
("TeamCare" or the "Institutional Pharmacy Business") operating results for
the twelve month period ended September 30, 1997. TeamCare was spun off by
GranCare in February 1997 in connection with the Vitalink Merger.
(2) Excludes estimated pre-tax change of control, severance and merger costs of
$45.5 million and estimated pre-tax recapitalization and related costs of
$51.7 million, which amount includes the $19.0 million Termination Fees
payable to Vitalink and Manor Care, Inc. ("Manor Care") as well as the
$10.0 million restructuring payment to HRPT, each of which will be paid
upon consummation of the Transactions.
(3) Represents incremental rent on lease restructuring.
(4) Represents goodwill amortization on transaction goodwill based on 30-year
period.
(5) Interest expense-pro forma adjustments for interest expense are as follows
(in thousands):
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<CAPTION>
<S> <C>
Elimination of amortization of deferred financing fees included in historical amounts........ $ (745)
Amortization of deferred financing fees on new debt over a weighted average 8.1-year period.. 3,923
Elimination of historical interest expense on debt replaced by the Financings................ (41,908)
Commitment fees on unused portion of the Revolving Credit Facility........................... 750
Interest expense on $1.19 billion in new debt at an average estimated interestrate of 8.95%.. 106,649
--------
$ 68,669
---------
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A 12.5 basis point increase or decrease in the average interest rate on the
variable rate debt issued in connection with the Mergers would change pro
forma interest expense and finance charges by $0.9 million and pro forma
net income by $0.5 million.
(6) Income taxes are adjusted to reflect tax provision effect of pro forma
adjustments, less non-deductible goodwill, at an estimated effective tax
rate of 40%.
(7) Includes $8.0 million pre-tax charge, recorded in the quarter ended June
30, 1997, associated with a change in accounting estimate related to
allowance for doubtful accounts. Also includes $18.5 million pre-tax
charge, recorded in the quarter ended September 30, 1997, for an additional
provision for doubtful accounts. During and following the quarter ended
September 30, 1997, management reviewed in greater detail GranCare's
allowance for doubtful accounts and concluded that an additional charge was
necessary. The allowance for doubtful accounts for GranCare reflects the
methodology utilized by LCA.
(8) The $28.3 million merger and other related cost charge relates to the spin-
off of TeamCare in February, 1997. Such amount excludes a $4.8 million
extraordinary debt extinguishment charge, which resulted from debt
repayments associated with the Vitalink Merger. The provision for income
taxes is affected by $19.0 million of these merger expenses that are not
tax deductible.
7
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
PARAGON HEALTH NETWORK, INC.
By: /s/ Ronald W. Fleming
---------------------------
Ronald W. Fleming
Vice President, Controller and
Chief Accounting Officer
Dated: January 19, 1998
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