<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A*
AMENDMENT NO. 1
----------------
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE
REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-19571
GRANCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-4299210
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA 30346
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 393-0199
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 NEW YORK STOCK EXCHANGE
9 3/8% SENIOR SUBORDINATED NOTES DUE 2005 NEW YORK STOCK EXCHANGE
</TABLE>
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 X No
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. [_]
As of March 18, 1996, there were 24,136,374 shares of the registrant's
Common Stock outstanding. The aggregate market value of the voting stock held
by nonaffiliates of the registrant on March 18, 1996 was $401,493,284.
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* The purpose of this Amendment No. 1 on Form 10-K/A to the Annual Report on
Form 10-K of GranCare, Inc. is to amend Items 6 and 7 and certain Notes to
the Audited Financial Statements of the Company.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1991(7) 1992(8) 1993(8) 1994(8) 1995(8)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL
DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA(9):
Net revenues............ $290,958 $434,638 $611,689 $717,471 $816,462
Expenses
Operating expenses (ex-
cluding items shown
below)................ 239,057 357,189 506,542 589,245 669,512
Rent and property...... 27,284 35,998 42,446 44,291 51,206
Depreciation and amor-
tization.............. 5,064 6,922 12,349 16,440 21,611
Interest expense and
financing charges..... 7,256 7,908 19,601 21,481 27,054
Nonrecurring costs--
merger and other (1993
and 1995);
other (1992)(1)....... -- 1,114 4,573 -- 11,750
Restructuring costs(2). -- -- -- 8,200 --
--------- --------- --------- --------- ---------
Total expenses......... 278,661 409,131 585,511 679,657 781,133
--------- --------- --------- --------- ---------
Income before income
taxes and extraordinary
item................... 12,297 25,507 26,178 37,814 35,329
Income taxes............ 3,950 8,701 10,089 13,524 14,765
--------- --------- --------- --------- ---------
Income before extraordi-
nary item.............. 8,347 16,806 16,089 24,290 20,564
Extraordinary item--gain
on settlement of debt
(1991);
loss on early extin-
guishment of debt
(1993)(3).............. (2,928) -- 1,285 -- --
--------- --------- --------- --------- ---------
Net income.............. $ 11,275 $ 16,806 $ 14,804 $ 24,290 $ 20,564
========= ========= ========= ========= =========
Pro forma income tax
data(4):
Income before income
taxes and
extraordinary charge.. $ 12,297 $ 25,507 $ 26,178 n/a n/a
Income taxes........... 4,060 10,157 10,874 n/a n/a
--------- --------- ---------
Income before
extraordinary
charge(5)............. 8,237 15,350 15,304 n/a n/a
Extraordinary
charge(5)............. (1,757) -- 1,285 n/a n/a
--------- --------- ---------
Pro forma net income.... $ 9,994 $ 15,350 $ 14,019 n/a n/a
========= ========= =========
Net income per common
and common equivalent
share(4):
Primary:
Income before
extraordinary item... $0.59 $0.97 $0.84 $1.07 $0.86
Extraordinary item.... 0.24 -- (.07) -- --
--------- --------- --------- --------- ---------
Net income............ $0.83 $0.97 $0.77 $1.07 $0.86
========= ========= ========= ========= =========
Fully diluted:
Income before
extraordinary item... $0.53 $0.90 $0.80 $1.07 $0.86
Extraordinary item.... 0.22 -- (.07) -- --
--------- --------- --------- --------- ---------
Net income............ $0.75 $0.90 $0.73 $1.07 $0.86
========= ========= ========= ========= =========
STATISTICAL DATA(9):
Average licensed beds.. -- (6) 11,358 15,103 16,112 16,148
Average occupancy...... -- (6) 86% 87% 88% 87%
BALANCE SHEET DATA(9):
Working capital........ $ 22,821 $ 31,483 $ 59,688 $ 89,626 $123,030
Total assets........... 115,437 242,656 390,881 520,193 645,161
Long-term debt,
including current
portion............... 52,948 96,770 202,650 243,231 339,605
Shareholders' equity... 12,760 54,230 86,971 161,417 172,599
Partners equity........ 320 4,988 -- -- --
</TABLE>
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(1) The $1.1 million non-recurring charge in 1992 consisted of expenses
related to a retirement agreement reached with an employee of CompuPharm
and terminated negotiations regarding the possible sale of CompuPharm.
Such expenses were incurred prior to the merger of GranCare and CompuPharm
in December 1993 (the "CompuPharm Merger"), after which CompuPharm became
a wholly owned subsidiary of GranCare. The $4.6 million merger costs in
1993 relate to the CompuPharm Merger. The $11.75 million charge in 1995
relates to the Evergreen Merger and other one time costs.
(2) The $8.2 million restructuring charge in 1994 is related to the Company's
formal plan of restructuring announced in August 1994. See Note 12 of
Notes to the Consolidated Financial Statements for information on the 1994
restructuring.
1
<PAGE>
(3) The $2.9 million extraordinary gain in 1991 resulted from an Evergreen
settlement of debt. The Company's extraordinary debt extinguishment charge
of $1.3 million in 1993 resulted from debt repayments associated with the
CompuPharm Merger.
(4) Prior to June 30, 1993, the Evergreen predecessor entity consisted of two
partnerships and, accordingly, Evergreen was not subject to federal or
state income taxes. For informational purposes, the selected historical
consolidated financial data for the years 1991 through 1993 include a pro
forma presentation that includes a provision for income taxes as if
Evergreen had been a taxable corporation for these periods. Such pro forma
calculations were based on the income tax laws and rates in effect during
those periods, and FASB Statement No. 109. Earnings per share for 1991,
1992 and 1993 are based on pro forma net income.
(5) See note (3) above relating to the extraordinary items. The pro forma
reduction to the 1991 gain is due to an income tax provison adjustment
resulting from the fact that Evergreen was not a taxable entity during
1991.
(6) These numbers are not available from Evergreen for fiscal 1991 and,
accordingly, the Company is unable to report such numbers on a
consolidated basis.
(7) The ARA Living Centers-Pacific, Inc. ("ARA") acquisition occurred on
September 27, 1991 and, therefore, (i) the operating results of the ARA
facilities are included in the historical operating results of the Company
for the fourth quarter of 1991 and (ii) the assets and liabilities of the
ARA facilities, as adjusted for related financing transactions, are
included in the balance sheet of the Company as of December 31, 1991.
(8) All acquisitions which occurred in 1991, 1992, 1993, 1994 and 1995, except
for the CompuPharm, Inc. ("CompuPharm") acquisition and Evergreen merger,
are reflected from the date of each acquisition in the historical
operating results of the Company and the assets and liabilities relating
to these acquisitions are included in the balance sheets of the Company
since that time. See note (9) below and Note 3 to the consolidated
financial statements for a discussion of the CompuPharm and Evergreen
mergers.
(9) All years have been restated for the December 28, 1993 merger with
CompuPharm and for the July 20, 1995 merger with Evergreen. See Notes 1
and 3 to the consolidated financial statements for a description of these
combinations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in September 1987. Since its inception, the
Company has grown rapidly through acquisitions of long-term care facilities
and specialty medical businesses such as institutional pharmacy operations. In
April 1995, the Company acquired Cornerstone, a contract management firm that
specializes in the implementation and management of subacute and other
specialized medical programs in acute care hospitals. In addition, on July 20,
1995, the Company acquired Evergreen Healthcare, Inc. ("Evergreen") by merger
in a transaction accounted for as a pooling-of-interests for financial
reporting purposes.
At the time of the Merger, the Company operated 78 long-term care facilities
and Evergreen operated 64 long-term care facilities. The Company believes that
the Merger will enable the Company to expand its presence into new geographic
areas, develop new cluster markets, increase its pharmacy and home health
business and provide a basis for improving the payor mix of the acquired
facilities. As a result of the Cornerstone acquisition, the Company acquired
92 contracts with acute care hospitals to manage subacute skilled nursing
units, geriatric mental health programs and geriatric primary care networks.
The Company believes that the acquisition of Cornerstone will allow the
Company to further develop its subacute programs and to receive referrals for
its long-term care facilities through Cornerstone's relationships with acute
care providers in certain markets.
A principal element of the Company's strategy involves the development of a
continuum of post-acute health care services in selected geographic markets.
Accordingly, in 1994, the Company developed market-area specific plans for
each of its operating entities, based upon an evaluation of the lines of
business in which it should participate, the manner in which these businesses
should operate and how its support services should be organized. As a result
of this evaluation, the Company identified certain facilities that did not fit
the ongoing strategic plans of the Company and developed a revised operational
structure to support its ongoing businesses. These changes formed the basis of
a restructuring program adopted by the Board of Directors in August 1994.
2
<PAGE>
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain health care costs by limiting reimbursement
rates, increasing case management review and negotiating reduced contract
pricing. Government payors, such as state-administered Medicaid programs and,
to a lesser extent, the federal Medicare program, generally provide more
restricted coverage and lower reimbursement rates than private pay sources.
For the year ended December 31, 1995, the percentage of the Company's revenues
derived from Medicaid and Medicare programs were 44.7% and 30.2%,
respectively, of the Company's net revenues.
The Company derives its revenues by providing (i) skilled nursing, (ii)
pharmacy, therapy, subacute and other specialty medical services and (iii)
contract management of specialty medical programs for acute care hospitals. In
general, the Company generates higher revenues and profitability from the
provision of specialty medical services than from routine skilled nursing
care, and the Company believes that this trend will continue. The Company
seeks to enhance its operating margins by increasing the proportion of its
revenues derived from specialty medical services.
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of patient revenues, certain
revenue data for the periods indicated:
REVENUE COMPOSITION/PERCENTAGE OF PATIENT REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994(1) 1993
------- --------- -------
<S> <C> <C> <C>
Skilled nursing and subacute care:
Routine services............................... 53.8% 57.6% 60.2%
Therapy, subacute and other ancillary servic-
es(2)......................................... 19.8 18.3 19.9
------- ------- -------
73.6% 75.9% 80.1%
------- ------- -------
Pharmacy(2)..................................... 23.5 23.8 19.6
Contract management............................. 2.9 0.3 0.3
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
</TABLE>
REVENUES PER PATIENT DAY DERIVED FROM SKILLED NURSING AND SUBACUTE CARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994(1) 1993
------- ------- -------
<S> <C> <C> <C>
Routine skilled nursing............................. $ 87.07 $ 79.52 $ 78.07
Specialty medical services(3)....................... 35.65 27.69 27.59
------- ------- -------
$122.72 $107.21 $105.66
======= ======= =======
</TABLE>
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(1) Excludes results of operations from August 1 through December 31, 1994 for
facilities divested or to be divested as part of the restructuring plan.
(2) Before elimination of intercompany sales.
(3) Excludes pharmacy and other specialty medical revenue from beds not
operated by the Company.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company's net revenues for 1995 were $816.5 million compared to $717.5
million for 1994, an increase of $99.0 million, or 13.8%. This increase is
primarily attributable to acquisitions completed and, to a lesser extent,
same-store growth. On a same-store basis, net revenues increased 5.0%. Same-
store growth increased $27.8 million from increases in specialty medical
services provided and an increase in average daily rates due to an improved
payor mix, but was adversely affected by a decrease in the level of
reimbursement rates implemented in the State of Indiana in August 1994.
Specialty medical revenues increased to 46.2% compared to 42.4% for the same
period in 1994. This was the result of growth in the number of Medicare
residents which utilize higher margin ancillary services (physical,
respiratory, occupational and speech therapy).
3
<PAGE>
The overall increase was partially offset by a decrease in revenues resulting
from the divestiture of certain business units and the loss of the pharmacy
division's contract with the State of New Jersey. Included in net revenues for
1995 and 1994 were $1.8 million and $0.8 million, respectively, relating to
routine cost limit exceptions. While the Company has applied for these
exceptions, and has only recognized a portion of the estimated recovery, there
can be no assurance that the actual revenues from routine cost limit
exceptions will equal those amounts recognized by the Company in 1994 and
1995.
Operating expenses (excluding rent and property expenses) for 1995 were
$669.5 million compared to $589.2 million for 1994, an increase of $80.3
million, or 13.6%. This increase was primarily attributable to acquisitions,
as well as costs associated with an increase of specialty medical services
provided, and the duplicate Evergreen overhead incurred prior to the Merger.
On a same-store basis, operating expenses increased $29.2 million. Specialty
medical revenues generate additional costs from the higher staffing levels
required to care for the higher acuity Medicare residents. The additional
ancillary services (physical, respiratory, occupational and speech therapy)
utilized generate additional costs in line with the growth realized in the
specialty medical revenues. This increase was partially offset by a reduction
in costs from the dispositions of certain business units, more appropriate
staffing given patient acuity levels at skilled nursing facilities and an
increased use of third-party vendors for therapy services.
Rent and property expenses for 1995 were $51.2 million compared to $44.3
million for 1994, an increase of $6.9 million, or 15.6%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
Depreciation and amortization expenses for 1995 were $21.6 million compared
to $16.4 million for 1994, an increase of $5.2 million, or 31.7%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment,
partially offset by depreciation and amortization expenses related to divested
business units.
Interest expense and financing charges for 1995 were $27.1 million compared
to $21.5 million in 1994, an increase of $5.6 million, or 26.0%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions, the issuance of $100 million of Senior
Subordinated Notes and, to a lesser extent, borrowings to fund working
capital.
In 1995, the Company recorded a merger and other one-time costs charge of
$11.8 million. Those costs include professional fees (legal, accounting and
investment bankers) of $5.1 million, personnel costs (severance and
relocation) of $3.2 million, a directors and officers policy of $0.5 million,
other deferred acquisition costs of $1.1 million, a divestiture charge of $1.5
million for certain Evergreen facilities which do not fit the Company's
strategy and another charge of $0.4 million relating to CompuPharm converting
Evergreen's pharmacy to their system. In 1994, the Company recorded a
restructuring charge of $8.2 million in connection with a restructuring plan
adopted by the Board of Directors in August 1994. See page 29, "Liquidity and
Capital Resources."
Income taxes for 1995 were $14.8 million compared to $13.5 million for 1994.
As a result of the foregoing, net income for 1995 was $20.6 million compared
to $24.3 million for 1994, a decrease of $3.7 million, or 15.2%.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company's net revenues for 1994 were $717.5 million compared to $611.7
million for 1993, an increase of $105.8 million, or 17.3%. This increase is
primarily attributable to acquisitions completed and, to a lesser extent,
same-store growth. On a same-store basis, net revenues increased 6.7%. Same-
store revenue growth resulted from increases in specialty medical services
provided and an increase in average daily rates due to an improved payor mix,
but was adversely affected by a decrease in the level of reimbursement rates
implemented in the State of Indiana in August 1994. Specialty medical revenues
increased to 42.4% compared to 39.8% for the same period in 1993. This was the
result of growth in the number of Medicare residents which utilize higher
margin ancillary services (physical, respiratory, occupational and speech
therapy). The overall increase was partially offset by a decrease in revenues
resulting from the divestiture of certain business units. Included in net
revenues for 1994 and 1993 were $0.8 million and $1.9 million, respectively,
relating to routine cost limit exceptions.
4
<PAGE>
Operating expenses (excluding rent and property expenses) for 1994 were
$589.2 million compared to $506.5 million for 1993, an increase of $82.7
million, or 16.3%. This increase was primarily attributable to acquisitions,
as well as costs associated with an increase of specialty medical services
provided, and a $1.0 million charge in connection with the relocation of the
Company's corporate offices. Specialty medical revenues generate additional
costs from the higher staffing levels required to care for the higher acuity
Medicare residents. The additional ancillary services (physical, respiratory,
occupational and speech therapy) utilized generate additional costs in line
with the growth realized in the specialty medical revenues. This increase was
partially offset by a reduction in costs from the dispositions of certain
business units, more appropriate staffing given patient acuity levels at
skilled nursing facilities and an increased use of third-party vendors for
therapy services.
Rent and property expenses for 1994 were $44.3 million compared to $42.4
million for 1993, an increase of $1.9 million, or 4.5%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
Depreciation and amortization expenses for 1994 were $16.4 million compared
to $12.3 million for 1993, an increase of $4.1 million, or 33.3%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment,
partially offset by depreciation and amortization expenses related to divested
business units.
Interest expense and financing charges for 1994 were $21.5 million compared
to $19.6 million in 1993, an increase of $1.9 million, or 9.7%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions and, to a lesser extent, borrowings to fund
working capital. Higher rates on floating rate debt also increased interest
expense.
In 1994 the Company recorded a restructuring charge of $8.2 million in
connection with a restructuring plan adopted by the Board of Directors in
August 1994. See page 29, "Liquidity and Capital Resources."
Income taxes for 1994 were $13.5 million compared to $10.1 million for 1993.
As a result of the foregoing, net income for 1994 was $24.3 million compared
to $14.8 million for 1993, an increase of $9.5 million, or 64.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at December 31, 1995 was $17.7
million in cash and cash equivalents compared to $28.6 million at December 31,
1994, a decrease of $10.9 million. The decrease in cash and cash equivalents
was due primarily to acquisitions of businesses and equipment and partially
offset by proceeds from long-term debt borrowings and cash provided by
operations. Payments received by the Company from the Medicaid and Medicare
programs are the Company's largest source of cash from operations.
Accounts receivable at December 31, 1995 were $173.1 million compared to
$128.1 million at December 31, 1994, an increase of $45.0 million. The
Company's accounts receivable include receivables from third-party
reimbursement programs, primarily Medicaid and Medicare settlements. The
Company receives payment for skilled nursing services based on rates set by
individual state Medicaid programs. Although payment cycles for these programs
vary, payments generally are made within 30 to 60 days of services provided,
except in Illinois, where the Medicaid program delays payments for 120 days.
The federal Medicare program, a cost-reimbursement system, pays interim rates,
based on estimated costs of services, on a 30 to 45-day basis. Final cost
settlements, based on the difference between audited costs and interim rates,
are paid following final cost report audits by Medicare fiscal intermediaries.
Because of the cost report and audit process, final settlement may not occur
until up to 24 months after services are provided. The Company accounts for
such open cost reports by taking appropriate reserves to offset potential
audit adjustments. Management has no knowledge of any material pending claims
or unsettled matters pertaining to such cost reports. Specialty medical
services generally increase the amount of payments received on a delayed
basis. Pharmacy and other services provided to third parties are billed on
terms negotiated with individual customers, which often are tied to their
reimbursement
5
<PAGE>
cycles. If the expansion of specialty medical revenues continues at historic
rates, or if the Company is successful in expanding its specialty medical
programs in the Evergreen facilities, average days receivable likely will
equal or exceed current levels and will require additional working capital.
In addition to principal and interest payments on its long-term
indebtedness, the Company has significant rent obligations relating to its
leased facilities, as well as property expenses (principally property taxes
and insurance) relating to all of its facilities. The Company's estimated
principal payments, cash interest payments, rent and property expense
obligations for 1996 are approximately $100.0 million.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate
the addition of specialty medical services, and to improve the physical
appearance of its facilities for marketing purposes. Total capital
expenditures for the year ended December 31, 1995 were $23.5 million,
excluding $2.5 million of capital expenditures reimbursed by Health and
Retirement Properties Trust ("HRPT"). The Company will continue to make such
capital expenditures during 1996 as required, especially to expand the
specialty medical programs at the Evergreen facilities, and the Company is not
currently able to quantify such amount.
While federal regulations do not provide states with grounds to curtail
payments under their Medicaid reimbursement programs due to state budget
deficiencies or delays in enactment of new budgets, states have nevertheless
curtailed payments in such circumstances in the past. In particular, some
states have delayed the payment of significant amounts owed to health care
providers such as the Company for health care services provided under their
respective Medicaid programs.
The Company maintains a $150.0 million credit facility with a syndicate of
banks for whom First Union National Bank of North Carolina acts as lead bank,
which may be used for working capital, other general corporate purposes and
acquisitions. As of December 31, 1995, $37.7 million was outstanding under the
credit facility. The Company will be able to borrow under the credit facility
through June 1998, at which time it will convert to a term loan, unless it is
refinanced or extended. Upon conversion, the amount then outstanding will be
payable in equal quarterly installments through June 2002.
In September 1995, the Company completed an offering of $100 million
aggregate principal amount of its 9 3/8% Senior Subordinated Notes due 2005.
The net proceeds from this offering were used to pay outstanding amounts under
the credit facility.
The Company believes that its cash from operations, existing working capital
and available borrowings under its line of credit will be sufficient to fund
the fixed obligations, capital expenditures and other obligations referred to
above, as well as to repay certain indebtedness when due, and further expand
the Company's business. However, in the event that the Company continues to
grow through acquisitions, the Company may need to raise additional capital,
either through borrowings, sale-leaseback financings or the sale of debt or
equity securities, to finance the acquisition price and any additional working
capital and capital expenditure requirements related to such acquisitions.
In conjunction with a 1990 acquisition, the Company borrowed $15.0 million
under a promissory note agreement with HRPT. The note is secured by mortgages
on two facilities and 1,000,000 shares of HRPT common stock owned by the
Company. The HRPT note had a balance of $8.7 million, with an interest rate of
13.75% at December 31, 1994. During 1995, the Company renegotiated the note
with HRPT, whereby the principal balance of the promissory note was increased
to $11.5 million, resulting in additional proceeds to the Company. Minimum
interest on the note is 11.5% per year payable monthly in arrears. Additional
interest is payable commencing on January 1, 1996, in an amount equal to 75%
of the percentage increase in the Consumer Price Index, with certain defined
limitations. Principal payments will begin two years after the date of the
note on a 30-year direct reduction basis, with the remaining balance due
December 31, 2010.
6
<PAGE>
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents.
Subsequent to December 31, 1994, the existing Master Lease Documents were
amended. Under the amended lease arrangements, minimum rent for the aggregate
facilities is the annual sum of $11,550,000, payable in equal monthly
installments. In addition, beginning January 1, 1996, the amended lease
agreement provides for additional rent to be paid monthly, in advance, based
on 75% of the increase in the Consumer Price Index multiplied by the minimum
rent due, provided, however, that the maximum rent (minimum rent plus
additional rent) each January shall be limited to a 2% increase over the total
monthly rent paid in the prior December. The operating leases for 17
facilities expire on December 28, 2010, and there are two 10 year renewal
options. The leases for seven facilities expire in June 2006 and there are two
10 1/2-year renewal options. The Company has subleased seven of the 24
facilities to unrelated parties. Following the Distribution and Merger, New
GranCare will succeed to the obligations of the Company to HRPT.
The Company is a beneficial owner of 1,000,000 shares of stock of HRPT,
which are held in trust and pledged as collateral for the obligations of two
of the Company's subsidiaries under mortgage notes and lease obligations with
HRPT. The pledge agreement strictly limits GranCare's ability to sell the
shares until its obligations to HRPT are satisfied, which will not be until
the year 2010. As a result, these shares cannot be sold to meet other
financial obligations. In addition, such mortgage notes and lease obligations
contain provisions that restrict, upon the occurrence of an event of default
thereunder, the ability of such subsidiaries to make dividends, loans or
advances to the Company. In accordance with FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the HRPT
stock is carried at fair market value, with unrealized gains and losses
reported as a separate component of equity. The Credit Facility and indenture
pursuant to which the Company's 9 3/8% Senior Subordinated Notes due 2005 were
issued also contain restrictions on the ability of the Company to pay
dividends to its shareholders upon the failure to satisfy certain financial
covenants.
The Company maintains a captive insurance subsidiary to provide reinsurance
for its obligations under workers' compensation and general and professional
liability plans. These obligations are funded with long-term, fixed income
investments, which are not available to satisfy other obligations of the
Company.
As of December 31, 1995, the Company had recorded the following charges
against the $8.2 million restructuring reserve recognized in the third quarter
of 1994: (i) the write-off of certain unamortized financing fees; (ii)
operating gains and losses from the facilities to be divested for the period
of August 1, 1994 through December 31, 1995; (iii) gains and losses from the
sale of facilities and; (iv) severance and other personnel-related costs. The
net restructuring reserve balance at December 31, 1995 is $500,000. The
Company believes that the provisions for the restructuring continue to be
adequate and will not require material adjustment in future periods. See Note
12 of Notes to the Consolidated Financial Statements.
IMPACT OF INFLATION
The health care industry is labor-intensive. Wages and other labor costs are
especially sensitive to inflation. In addition, the Company operates a
majority of its facilities pursuant to operating leases which contain
provisions for increased rent, based upon inflation. Increases in wages and
other labor costs and rent expense as a result of inflation, without a
corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company.
Both the Medicare and Medicaid programs operate under routine cost limits or
targeted ceilings. These limits are usually adjusted on an annual basis
utilizing numerous inflation indexes. Each State can operate under a different
index resulting in the adjustments to the targeted ceilings being different in
each State. The Company cannot predict the level of the expected increase each
year and each of these programs is subject to changes in regulation,
retroactive rate adjustments and government funding which could adversely
affect the amounts paid to the Company.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRANCARE, INC.
/s/ Jerry A. Schneider
By: _________________________________
JERRY A. SCHNEIDER EXECUTIVE VICE
PRESIDENT AND CHIEF FINANCIAL
OFFICER (DULY AUTHORIZED OFFICER
AND PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Dated: December 23, 1996
8
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GRANCARE, INC.
Reports of Independent Auditors........................................... F-2
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993............................................................ F-4
Consolidated Balance Sheets as of December 31, 1995 and 1994.............. F-5
Consolidated Statements of Shareholders' and Partners' Equity for the
years ended December 31, 1995, 1994 and 1993............................. F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993...................................................... F-8
Notes to Consolidated Financial Statements................................ F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
GranCare, Inc.
We have audited the consolidated balance sheets of GranCare, Inc. (the
Company) as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' and partners' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of Evergreen Healthcare, Inc., (Evergreen) which became a
wholly-owned subsidiary in 1995, as of December 31, 1994 and for the years
ended December 31, 1994 and 1993. The Evergreen amounts represent 21% of the
consolidated total assets at December 31, 1994, and 38% and 26% of
consolidated net income for the years ended December 31, 1994 and 1993,
respectively. The financial statements were audited by other auditors, whose
reports have been furnished to us, and our opinion, with respect to the
consolidated financial statements as of and for the years ended December 31,
1994 and 1993, insofar as it relates to data included for Evergreen, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of GranCare, Inc. at December
31, 1995 and 1994, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes. Also, as discussed in Note 2 to the consolidated financial statements,
effective December 31, 1993, the Company changed its method of accounting for
its marketable equity security investments.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evergreen Healthcare, Inc.:
We have audited the consolidated balance sheet of Evergreen Healthcare, Inc.
and subsidiaries as of December 31, 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1994 and the six-month period ended December 31, 1993 and
the related combined statements of operations, partners' equity and cash flows
of Evergreen Healthcare LTD, L.P., Predecessor to Evergreen Healthcare, Inc.,
for the six month period ended June 30, 1993 (not presented separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 the 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 consolidated and combined financial statements referred
to above present fairly, in all material respects, the financial position of
Evergreen Healthcare, Inc. and subsidiaries as of December 31, 1994 and the
results of operations and cash flows of Evergreen Healthcare, Inc. and
subsidiaries for the year ended December 31, 1994, and the six-month period
ended December 31, 1993 and the related combined statements of operations,
partners' equity and cash flows of Evergreen Healthcare LTD., L.P.,
predecessor to Evergreen Healthcare, Inc., for the six month period ended June
30, 1993, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
August 17, 1995
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
DOLLARS AND SHARES IN
THOUSANDS, EXCEPT PER
SHARE DATA
<S> <C> <C> <C>
REVENUES
Net patient revenues............................... $811,402 $701,783 $609,250
Investment and other income........................ 5,060 15,688 2,439
-------- -------- --------
Total revenues..................................... 816,462 717,471 611,689
EXPENSES
Operating expenses:
Salary and related............................... 360,530 322,471 289,276
Rent and property................................ 51,206 44,291 42,446
Other operating.................................. 308,982 266,774 217,266
-------- -------- --------
720,718 633,536 548,988
Depreciation and amortization...................... 21,611 16,440 12,349
Interest expense and financing charges............. 27,054 21,481 19,601
Nonrecurring costs--merger and other costs......... 11,750 -- 4,573
Restructuring costs (Note 12)...................... -- 8,200 --
-------- -------- --------
Total expenses..................................... 781,133 679,657 585,511
-------- -------- --------
Income before income taxes and extraordinary
charge............................................ 35,329 37,814 26,178
Income taxes....................................... 14,765 13,524 10,089
-------- -------- --------
Income before extraordinary charge................. 20,564 24,290 16,089
Extraordinary charge--loss on early extinguishment
of debt, net of income tax benefit of $856........ -- -- 1,285
-------- -------- --------
Net income......................................... $ 20,564 $ 24,290 $ 14,804
======== ======== ========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Primary:
Income before extraordinary charge............... $ 0.86 $ 1.07 $ 0.88
Extraordinary charge............................. -- -- (.07)
-------- -------- --------
Net income....................................... $ 0.86 $ 1.07 $ 0.81
======== ======== ========
Fully diluted:
Income before extraordinary charge............... $ 0.86 $ 1.07 $ 0.84
Extraordinary charge............................. -- -- (.07)
-------- -------- --------
Net income....................................... $ 0.86 $ 1.07 $ 0.77
======== ======== ========
Weighted average number of common and common equiv-
alent shares outstanding:
Primary.......................................... 23,794 22,631 18,205
======== ======== ========
Fully diluted.................................... 23,919 24,966 19,241
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1994
-------- --------
DOLLARS IN
THOUSANDS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 17,738 $ 28,611
Accounts receivable, less allowance for doubtful accounts
(1995--$10,856 and 1994--$9,892)........................ 173,068 128,121
Inventories.............................................. 13,527 11,125
Prepaid expenses and other current assets................ 16,498 14,344
Deferred income taxes (Note 7)........................... 10,933 7,395
-------- --------
Total current assets....................................... 231,764 189,596
Property and equipment:
Land and improvements.................................... 10,238 10,937
Buildings and improvements............................... 192,875 185,293
Equipment................................................ 66,929 53,662
-------- --------
270,042 249,892
Less accumulated depreciation............................ (55,689) (42,042)
-------- --------
214,353 207,850
Other assets:
Investments, at fair value (Notes 4 and 11).............. 30,305 20,353
Goodwill (accumulated amortization: 1995--$5,535; 1994--
$1,959)................................................. 120,946 58,418
Other intangibles (accumulated amortization: 1995--
$8,051; 1994--$5,940)................................... 9,793 11,501
Other (Note 2)........................................... 38,000 32,475
-------- --------
Total assets............................................... $645,161 $520,193
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $ 72,935 $ 59,411
Accrued wages and related liabilities.................... 24,069 22,643
Interest payable......................................... 6,793 3,683
Income taxes payable (Note 7)............................ -- 2,667
Notes payable and current maturities of long-term debt
(Notes 3, 4 and 11)..................................... 4,937 11,566
-------- --------
Total current liabilities.................................. 108,734 99,970
Long-term debt (Notes 3, 4 and 11)......................... 334,668 231,665
Deferred income taxes (Note 7)............................. 16,735 15,496
Other...................................................... 12,425 11,645
Commitments and contingencies (Notes 5 and 6)
Shareholders' equity (Notes 2 and 8):
Common stock; no par value; 50,000,000 shares authorized
(shares issued: 1995--23,948,728 and 1994--23,173,429).. 134,699 132,141
Treasury stock, at cost (1995--915,000 shares and 1994--
200,000 shares)......................................... (18,700) (5,030)
Equity component of minimum pension liability............ (465) (364)
Unrealized gain on investments (net of income taxes:
1995--$3,453; 1994--$2,250)............................. 5,206 3,375
Retained earnings........................................ 51,859 31,295
-------- --------
172,599 161,417
-------- --------
Total liabilities and shareholders' equity................. $645,161 $520,193
======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
COMPUPHARM EQUITY
CONVERTIBLE COMPONENT UNREALIZED
COMMON PREFERRED TREASURY OF MINIMUM GAIN ON RETAINED PARTNERS'
STOCK STOCK STOCK PENSION LIABILITY INVESTMENTS EARNINGS EQUITY TOTAL
------- ----------- -------- ----------------- ----------- -------- --------- -----
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1993................... $65,039 $24 $(6,221) $(294) $ -- $(4,318) $ 5,550 $59,780
Issuance of 170,284
shares of common
stock on exercise of
warrants and options
(Note 8)............. 884 -- -- -- -- -- -- 884
Issuance of 6,000
shares of common
stock................ 80 -- -- -- -- -- -- 80
Dividends on
CompuPharm
Convertible preferred
stock................ -- -- -- -- -- (182) -- (182)
GranCare and
CompuPharm pooling
transactions (Note
3):
Retirement of
CompuPharm treasury
stock.............. (1,191) -- 1,191 -- -- -- -- --
Conversion of
CompuPharm
convertible
preferred stock.... 24 (24) -- -- -- -- -- --
Conversion of
CompuPharm
convertible debt... 350 -- -- -- -- -- -- 350
Exercise of
CompuPharm
warrants........... 1,660 -- -- -- -- -- -- 1,660
Exercise of
CompuPharm non-
compensatory
options............ 150 -- -- -- -- -- -- 150
Reverse acquisition
transaction (Note 3):
Issuance of common
stock for
partnership
interest........... 6,656 -- -- -- -- -- (6,656) --
Issuance of common
stock for assets of
affiliated
partnership........ 2,105 -- -- -- -- -- -- 2,105
Issuance of common
stock for
acquisition of
minority interest
of NHI............. 5,693 -- -- -- -- -- -- 5,693
Final distribution
to former general
and limited
partners........... (490) -- -- -- -- -- -- (490)
Distributions to
partners............. -- -- -- -- -- -- (864) (864)
Unrealized gain on
investments, net of
income taxes of
$2,800............... -- -- -- -- 4,200 -- -- 4,200
Net income............ -- -- -- -- -- 12,834 1,970 14,804
Four months of
CompuPharm 1993 net
income included in
both 1992 and 1993
(Note 3)............. -- -- -- -- -- (1,329) -- (1,329)
Minimum pension
liability adjustment. -- -- -- 130 -- -- -- 130
------- --- ------- ----- ----- ------- ------- -------
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
COMPUPHARM EQUITY
CONVERTIBLE COMPONENT UNREALIZED
COMMON PREFERRED TREASURY OF MINIMUM GAIN ON RETAINED PARTNERS'
STOCK STOCK STOCK PENSION LIABILITY INVESTMENTS EARNINGS EQUITY TOTAL
-------- ----------- -------- ----------------- ----------- -------- --------- -----
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993................... 80,960 -- (5,030) (164) 4,200 7,005 -- 86,971
Issuance of 221,655
shares of common
stock on exercise of
warrants and options
(Note 8)............. 1,603 -- -- -- -- -- -- 1,603
Issuance of 1,000,000
shares of common
stock in connection
with LTC acquisition
(Note 3)............. 20,000 -- -- -- -- -- -- 20,000
Issuance of 5,048
shares of common
stock on conversion
of debt issued in
connection with
Winyah acquisition
(Note 3)............. 100 -- -- -- -- -- -- 100
Issuance of 2,421,875
shares of common
stock in public of-
fering............... 28,478 -- -- -- -- -- -- 28,478
Issuance of 77,500
shares of common
stock in connection
with HS Healthcare
acquisition (Note 3). 1,000 -- -- -- -- -- -- 1,000
Unrealized loss on in-
vestments, net of in-
come taxes of $550... -- -- -- -- (825) -- -- (825)
Net income............ -- -- -- -- -- 24,290 -- 24,290
Minimum pension lia-
bility adjustment.... -- -- -- (200) -- -- -- (200)
-------- ---- -------- ----- ------ ------- ---- --------
Balances at December 31,
1994................... 132,141 -- (5,030) (364) 3,375 31,295 -- 161,417
Issuance of 769,799
shares of common
stock on exercise
warrants and options
(Note 8)............. 2,476 -- -- -- -- -- -- 2,476
Issuance of 5,500
shares of common
stock................ 82 -- -- -- -- -- -- 82
Repurchase of 715,000
shares of common
stock................ -- -- (13,670) -- -- -- -- (13,670)
Unrealized gain on in-
vestments, net of in-
come taxes of $1,203. -- -- -- -- 1,831 -- -- 1,831
Net income............ -- -- -- -- -- 20,564 -- 20,564
Minimum pension lia-
bility adjustment.... -- -- -- (101) -- -- -- (101)
-------- ---- -------- ----- ------ ------- ---- --------
Balances at December 31,
1995................... $134,699 $-- $(18,700) $(465) $5,206 $51,859 $-- $172,599
======== ==== ======== ===== ====== ======= ==== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 20,564 $24,290 $14,804
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts.................. 6,281 7,918 3,592
Depreciation and amortization.................... 21,611 16,440 12,349
Gain on sale of assets........................... (829) (12,518) (1,672)
Deferred income taxes............................ 1,171 (333) 922
Amortization of deferred financing costs......... 531 522 373
Restructuring costs.............................. -- 8,200 --
Changes in operating assets and liabilities net
of effects of acquisitions
(Note 3):
Accounts receivable............................ (49,018) (33,491) (29,548)
Prepaid expenses and other current assets...... (3,215) 1,992 (4,270)
Accounts payable, accrued wages and other
accrued expenses.............................. 15,388 2,145 6,461
Interest payable............................... 3,110 769 2,704
Income taxes payable........................... (3,199) (883) (5,870)
Other.......................................... (3,400) (1,320) 714
-------- ------- -------
Net cash provided by operating activities.......... 8,995 13,731 559
INVESTING ACTIVITIES
Acquisition of businesses (net of cash acquired of
$2,469 in 1994 and $10 in 1993)................... (68,467) (49,414) (19,273)
Purchases of property and equipment................ (23,495) (14,938) (20,918)
Proceeds from disposition of assets................ 4,155 13,726 374
Purchases of investments........................... (6,944) (6,978) (4)
Repayments (advances) of notes receivable.......... 943 (1,610) 3,009
Other.............................................. (1,972) (2,212) (1,251)
-------- ------- -------
Net cash used in investing activities.............. (95,780) (61,426) (38,063)
FINANCING ACTIVITIES
Issuance of stock.................................. 82 29,063 1,140
Payment of stock issuance costs.................... -- (585) --
Proceeds from exercise of warrants and options..... 2,776 1,603 584
Purchase of treasury stock......................... (13,670) -- --
Long-term debt payments............................ (177,870) (23,207) (14,580)
Proceeds from long-term debt borrowings............ 270,018 44,787 66,900
Advances (repayments) of short-term notes payable.. -- (600) 2,598
Payment of debt issuance costs..................... (5,424) (1,136) (3,763)
Payment of dividends on preferred stock............ -- -- (261)
Distributions to former general and limited
partners.......................................... -- -- (1,354)
-------- ------- -------
Net cash provided by financing activities.......... 75,912 49,925 51,264
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (10,873) 2,230 13,760
Less CompuPharm increase in cash for period January
1, 1993 through April 30, 1993 (Note 3)........... -- -- (1,687)
Cash and cash equivalents at beginning of year..... 28,611 26,381 14,308
-------- ------- -------
Cash and cash equivalents at end of year........... $ 17,738 $28,611 $26,381
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.................................... $ 22,566 $20,712 $15,300
======== ======= =======
Income taxes paid................................ $ 17,964 $14,406 $12,035
======== ======= =======
</TABLE>
See accompanying notes.
F-8
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION
ACQUISITIONS
The 1995, 1994 and 1993 acquisitions (see Note 3) had the following effects
on cash:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Fair values of assets acquired (net of cash re-
ceived)......................................... $(75,317) $(90,713) $(48,392)
Fair values of liabilities assumed............... 6,850 20,299 29,119
-------- -------- --------
(68,467) (70,414) (19,273)
Issuance of stock................................ -- 21,000 --
-------- -------- --------
Net effect on cash............................... $(68,467) $(49,414) $(19,273)
======== ======== ========
</TABLE>
NONCASH TRANSACTIONS
In connection with the acquisition of Professional Health Care Management,
Inc. (PHCM) in October 1992, GranCare issued 45,000 shares of GranCare Series D
Exchangeable Preferred Stock (the Series D Preferred Stock), which had an
aggregate liquidation preference of $9,000,000. In January 1993, the Series D
Preferred Stock was converted into two promissory notes and, in April 1993,
GranCare prepaid the notes using proceeds from its 6.5% Subordinated Debenture
offering.
As part of the 1993 NHI reverse acquisition (see Note 3), approximately
7,200,000 common shares (GranCare equivalent), which is net of treasury shares
retired, were issued.
Plant and equipment acquired under financing notes and capital lease
arrangements aggregated approximately $1,021,000, $3,222,000, and $4,904,000 in
1995, 1994, and 1993 respectively.
See accompanying notes.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
GranCare, Inc. (GranCare or the Company) merged with Evergreen Healthcare,
Inc. (Evergreen) on July 20, 1995 (the Merger). On that date, GranCare issued
approximately 9,673,000 shares of its common stock in exchange for the
approximately 12,500,000 shares of Evergreen common stock then outstanding
based on an exchange ratio of its shares of GranCare common stock for each
share of Evergreen common stock.
The consolidated financial statements give retroactive effect to the Merger,
which has been accounted for using the pooling-of-interests method and, as a
result, the financial position, results of operations and cash flows are
presented as if the combining companies had been consolidated for all periods
presented. The consolidated statements of shareholders' and partners' equity
also reflect retroactive combination of the accounts of GranCare and Evergreen
for all periods presented, with adjustments to outstanding shares based on the
exchange ratio.
Prior to the June 30, 1993 National Heritage, Inc. (NHI) reverse acquisition
transaction described in Note 3, the historical Evergreen entity included in
these consolidated financial statements consisted of: (a) Evergreen Healthcare
Ltd., L.P. (ELP), a limited partnership and; (b) Omega/Indiana Pharmacy, L.P.
(OLP), also a limited partnership. Prior to the June 30, 1993 transaction, ELP
had a September 30 fiscal year-end and OLP had a calendar year-end.
Evergreen amounts for the 1994 and 1993 consolidated financial statements
have been conformed to the Company's December 31 year-end.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Consolidation The Company operates approximately 136 leased and
owned long-term health care facilities that provide skilled nursing and
residential care services in 15 states. In addition, the Company also owns and
operates or serves 30 institutional pharmacies, a specialty hospital geriatric
services company, which manages approximately 100 geriatric care units in
acute hospitals in 18 states, and home health operations in three states.
The facilities and pharmacy divisions represented approximately 72% and 23%,
respectively, of the total net revenues of the Company. Substantially all of
the facilities and pharmacies receive benefits under the Medicare and Medicaid
programs. These programs are highly regulated and subject to periodic change.
The consolidated financial statements include the accounts of GranCare and
all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in affiliates in which the
Company has less than a 50% interest are accounted for by the equity method.
Use of Estimates The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents The Company considers all highly liquid instruments
purchased with original maturity dates of three months or less to be cash
equivalents.
Inventories Inventories are stated at the lower of cost, using the first-in,
first-out method, or market value. Inventories consist primarily of purchased
pharmaceuticals and various medical equipment of the pharmacies and supplies
used in the care of residents in long-term care facilities.
Property and Equipment Property and equipment are recorded at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets as stated below. Leases and leasehold improvements that
have been capitalized are amortized over the lives of the leases. Amortization
of these assets is included in depreciation expense.
<TABLE>
<S> <C>
Buildings and improvements.................... 8-35 years
Equipment..................................... 5-7 years
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115 (Statement No. 115), "Accounting for Certain Investments in
Debt and Equity Securities." As permitted under Statement No. 115, GranCare
elected the early adoption of provisions of the new standard as of December
31, 1993, and recognized the unrealized gain ($4,200,000, net of income taxes)
as a direct component of equity (see Note 11). Evergreen adopted the new
standard on July 1, 1994.
Goodwill and Other Intangibles In connection with the Company's
acquisitions, costs in excess of the amounts assigned to identifiable assets
acquired, less liabilities assumed, are recorded as goodwill. Goodwill is
amortized on a straight-line basis principally over a period of 35 years.
Goodwill recorded in the Cornerstone acquisition (unamortized balance of
$48,721,000 at December 31, 1995) is being amortized over 25 years. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows of the acquired
entity over the remaining amortization period, the Company's carrying value of
the goodwill is reduced by the estimated shortfall of cash flows.
Other intangibles, which primarily were obtained in connection with the
Company's acquisitions, mainly represent covenants not to compete and lease
contract rights that are amortized over the terms of the noncompetition
agreements and leases, respectively.
Other Assets The Company defers financing costs incurred to obtain long-term
debt and amortizes such costs using the straight-line method over the term of
the related obligation. An investment in an unconsolidated affiliate at
December 31, 1995 consists of a 28% owned interest in Alternative Living
Services, Inc. (ALS), which is recorded using the equity method. In 1994, the
Company's 53% interest in ALS was consolidated with the Company. The remaining
other assets are individually not significant in their impact to the Company.
Stock Based Compensation The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and intends to continue to do so.
Net Patient Revenues Patient revenues are reported in the period in which
services are provided. Net patient revenues reflect contractual discounts and
the results of other arrangements for providing services at less than
established rates. Contractual adjustments include differences between
established billing rates and amounts estimated by management as reimbursable
under various cost reimbursement formulas or service contracts.
The administrative procedures related to the Medicare and Medicaid cost
reimbursement programs, in effect, generally preclude final determination of
amounts due the Company until cost reimbursement reports, filed by the
Company, are audited or otherwise reviewed and settled with the applicable
administrative agencies. Normal estimation differences between final
settlements and amounts accrued in previous years are reported in current net
patient revenues. Actual results could differ from these estimates. Included
in accounts receivable are settlement amounts due from Medicare and Medicaid
programs totalling $45,764,000 and $20,204,000 at December 31, 1995 and 1994,
respectively. In the opinion of management, adequate provision has been made
for adjustments, if any, that might result from subsequent review. The
Medicare and Medicaid cost reimbursement programs approximated 75%, 76% and
77% of net patient revenues for the years ended December 31, 1995, 1994 and
1993, respectively.
Earnings Per Share Earnings per share are computed based on the weighted
average common and (if dilutive) common equivalent shares outstanding, which
include options and warrants, and in the case of fully diluted earnings per
share, convertible subordinated debentures. The earnings per share amounts are
based on the combined historical weighted average common and dilutive common
equivalent shares of GranCare and Evergreen pre-merger adjusted for the .775
exchange ratio. Also, Evergreen's pre-merger historical amounts for periods in
which it was a partnership are based on the equivalent shares of Evergreen
common stock using the terms of the Evergreen exchange transaction described
in Note 3.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma earnings per share for 1993 is computed by dividing pro forma net
income by the weighted average number of common and common equivalent shares
outstanding for the period.
Pro Forma Income Taxes As indicated in Note 1, prior to June 30, 1993, the
Evergreen predecessor entity consisted of two partnerships and, accordingly,
Evergreen was not subject to federal or state income taxes. The following
table presents unaudited pro forma financial information for the year ended
December 31, 1993, that includes a provision for income taxes as if Evergreen
had been a taxable corporation for the period. Such pro forma calculation was
based on the income tax laws and rates in effect during the period, and FASB
Statement No. 109.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
---------------------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C>
Pro Forma data (unaudited):
Income before income taxes and extraordinary
charge............................................ $26,178
Income taxes....................................... 10,874
Income before extraordinary charge................. 15,304
Extraordinary charge............................... 1,285
-------
Net income......................................... $14,019
=======
Net income per common and common equivalent share:
Primary............................................ $ .77
=======
Fully diluted...................................... $ .73
=======
</TABLE>
Impact of Recently Issued Accounting Standards In March 1995, the FASB
issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to the
carrying amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The Company will adopt
Statement No. 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
NOTE 3. ACQUISITIONS, DISPOSITIONS AND MERGERS
1993 Acquisitions and Dispositions Effective January 1, 1993, GranCare
acquired all of the capital stock of Coordinated Home Health, Inc., and the
operations of Coordinated Nursing Services, Inc. and Infusion Plus, Inc.
(collectively, Coordinated) for $1,600,000 in cash and a promissory note for
$485,000.
On January 28, 1993, GranCare completed the acquisition of Colter Village,
two health care facilities consisting of a skilled nursing facility and a
retirement living center for $6,750,000.
On March 31, 1993, GranCare acquired Bella Vita, a 126-bed skilled nursing
facility in Colorado, for $3,740,000.
On April 1, 1993, GranCare acquired all of the capital stock of Pacific
Therapies, Inc., and the operations of Pacific Therapies Co. (collectively,
Pacific Therapies), which provide physical, occupational and speech therapy
services, for $1,000,000 in cash and a promissory note for $384,000.
On April 19, 1993, GranCare acquired the operations of Patient Therapy
Systems, Inc., which provides therapy beds and therapy services to patients
directly and under agreements and arrangements with nursing facilities, for
$400,000 in cash.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 30, 1993, GranCare acquired four skilled nursing facilities located
in Wisconsin for $3,500,000 in cash and $13,000,000 in mortgage notes.
On June 23, 1993, GranCare acquired all of the capital stock of Brim Medical
Equipment and Supplies, Inc., an enteral and urological supply company, for
$1,400,000, payable in installments of various amounts, without interest
through July 1, 1998.
On June 30, 1993, GranCare acquired all of the capital stock of Winyah
Dispensary, LTC of North Carolina and Winyah Dispensary-Midlands, Inc., for
$2,500,000 in convertible promissory notes, and the operations of Winyah
Dispensary for $3,650,000 in cash and promissory notes in the aggregate sum of
$2,600,000 (collectively, Winyah). Winyah provides institutional pharmacy
services in North and South Carolina. In connection with these transactions,
GranCare recorded $8,218,000 in goodwill.
On September 30, 1993, CompuPharm acquired the operations of Medication
Delivery Systems, Inc. (MDS), an institutional pharmacy, for a purchase price
of $1,750,000 plus transaction costs.
NHI Reverse Acquisition Effective June 30, 1993, Evergreen became a public
company and acquired the remaining 90% common stock ownership of NHI, an
existing public company, in a reverse acquisition transaction. (Note:
Evergreen had previously acquired 10% of NHI in October 1992.) The following
transactions were part of the reverse acquisition:
. The partners of the Evergreen partnerships (i.e., ELP and OLP as
referred to in Note 1) and an affiliated partnership under common
control (ERP) received 5,032,108 common shares (restated to GranCare
equivalent shares), which was net of 1,240,000 shares held in treasury
that were retired, in exchange for their partnership interests in the
three partnerships.
. The ERP partnership, which previously was not part of the historical
Evergreen entity, transferred its assets to Evergreen as part of the
exchange. Such assets consisted of: (i) a limited partnership interest
in the Evergreen partnerships, and (ii) a 48% ownership in NHI. (Note:
ERP had also acquired its interest in NHI in October 1992.)
. The remaining 42% owners of NHI received 2,141,325 common shares
(restated to GranCare equivalent shares), excluding shares held in
treasury by NHI.
The exchange of common stock for partnership interests in predecessor
partnerships (i.e., ELP and OLP) was recorded at book value, because it was
merely a legal restructuring. The receipt of ERP assets for common stock also
was recorded at book value, because this was a transfer among entities under
common control. ERP's book value included $2,100,000 in goodwill recorded in
connection with its purchase of a 48% interest in NHI.
The acquisition of the NHI 42% minority stockholders' interests was
accounted for as a purchase and, in connection therewith, $2,691,000 in
goodwill was recorded. The operations of NHI have been included in the
consolidated results of Evergreen from June 30, 1993 forward.
The 1993 acquisitions described above were all accounted for as purchases
and, accordingly, the consolidated financial statements of the Company include
the operations of such acquired entities since the respective dates of their
acquisition.
During 1993, GranCare also divested nine facilities.
1994 Acquisitions and Dispositions On March 1, 1994, GranCare acquired the
operations of PPCP, Inc. (PPCP), which provides institutional pharmacy
services, for $3,800,000 in cash and adjustable subordinated promissory notes
in the aggregate sum of $1,449,000. In connection with this transaction,
$4,518,000 was recorded as goodwill.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 1, 1994, GranCare acquired the operations of Merit Pharmacy, Inc.
(Merit), which provides institutional pharmacy services, for $600,000 in cash
and a subordinated promissory note for $1,184,000. In connection with this
transaction, GranCare recorded $1,817,000 in goodwill.
On June 7, 1994, Evergreen acquired substantially all of the assets of two
Illinois limited partnerships, Health Care Fund Limited Partnership and Health
Care Fund II Limited Partnership, as well as two related companies, H.S.
Healthcare, Inc. and H.S. Systems, Inc. (collectively referred to as HS
Healthcare). Evergreen paid approximately $22,571,000 cash (of which
$7,687,000 was financed through revolving credit borrowings) in exchange for
the assets acquired and liabilities assumed. The Company also paid $3,000,000
in cash and issued 77,500 shares (restated) of common stock valued at
$1,000,000 to the general partners of the partnerships and sole shareholders
of the related companies in consideration for their agreement not to compete
with the Company for a period of ten years.
Effective July 1, 1994, GranCare acquired substantially all of the assets
and assumed certain liabilities of Long Term Care Pharmaceutical Services
Corporation I and Long Term Care Pharmaceutical Services Corporation III
(collectively, LTC), an institutional pharmacy business based in Indiana, for
$16,000,000 cash and 1,000,000 shares of GranCare common stock valued at $20
per share, or $20,000,000. In the event the market price of the common stock
was not at least equal to $20 per share at a specified date in 1995, the
Company was obligated to issue additional consideration to bring the value of
the common stock to $20,000,000. The purchase agreement also contains a
contingent earnout provision, in the form of a subordinated promissory note,
under which an additional $5,500,000 could be paid-provided certain future
operating results are attained. In connection with this transaction, GranCare
recorded $27,402,000 goodwill.
Also effective July 1, 1994, GranCare acquired the operations of Ricketts
Drug, Inc., an institutional pharmacy based in Virginia, for $4,111,000 in
cash. In connection with this transaction, GranCare recorded $2,355,000 in
goodwill.
Effective July 25, 1994, GranCare acquired leasehold interests in two long-
term health care facilities in South Carolina for $38,000.
Effective September 30, 1994, GranCare acquired leasehold interests in five
additional long-term health care facilities in South Carolina for $150,000.
The above-described 1994 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
During 1994, GranCare also divested three facilities (exclusive of the
restructuring described in Note 12) and Pacific Therapies, acquired in 1993.
The sale of Pacific Therapies to an unrelated entity for approximately
$11,700,000 in cash and assumption of approximately $1,100,000 in debt and
certain other liabilities resulted in a gain of approximately $8,800,000. The
gain is reported in investment and other income in the Consolidated Statements
of Income.
1995 Acquisitions and Dispositions In January 1995, GranCare acquired a
leasehold interest in a long-term facility in Arizona for $150,000.
In April 1995, GranCare acquired Cornerstone Health Management Company
(Cornerstone), a management company specializing in the implementation and
management of geriatric specialty programs for acute care hospitals, for
$53,213,000.
In November 1995, GranCare acquired Innovative Pharmacy Services, Inc., an
institutional pharmacy based in Wisconsin, for $10,000,000 in cash and stock.
In December 1995, GranCare acquired the operations of both Pharmcare, Inc.
and American Pharmaceutical Inc., two institutional pharmacies based in
Northern California, for $4,700,000 and $1,200,000, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, GranCare also divested one facility (exclusive of the
restructuring described in Note 12).
In July 1995, in accordance with contractual obligation to the former owners
of LTC, the Company repurchased 715,000 shares of its common stock.
Summarized below are the unaudited pro forma consolidated results of
operations for GranCare had the 1995 Cornerstone acquisition occured as of
January 1, 1994, and the 1994 LTC and HS Healthcare acquisitions and the June
30, 1993 NHI reverse acquisition occurred as of January 1, 1993:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
-------- --------
DOLLARS IN
THOUSANDS EXCEPT
PER SHARE DATA
<S> <C> <C>
Total revenues......................................... $786,846 $711,622
Income before extraordinary charge..................... 26,738 19,926
Net income............................................. 26,738 18,641
Net income per share:
Primary.............................................. 1.15 .91
Fully diluted........................................ 1.15 .87
</TABLE>
Pro forma information for other 1995, 1994 and 1993 acquisitions and
divestitures is not presented because their operating results, either
individually or in the aggregate, do not have a material effect on the pro
forma operating results presented above.
The above results are based upon certain assumptions and estimates which the
Company believes are reasonable, and do not reflect any benefit which might be
achieved from combined operations. The unaudited pro forma results do not
necessarily represent results which would have occurred if the acquisitions
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
MERGERS
CompuPharm Merger On December 28, 1993, GranCare acquired, through merger,
all of the outstanding common stock of CompuPharm, Inc. ("CompuPharm") in
exchange for 2,462,795 shares of GranCare's common stock. CompuPharm is a
provider of institutional pharmacy services.
GranCare's merger with CompuPharm was accounted for as a pooling-of-
interests business combination and, accordingly, the consolidated financial
statements for all periods prior to the merger have been restated to include
the historical balances of GranCare and CompuPharm as if the two companies had
always been combined. For purposes of restating the December 31, 1992
financial statements to reflect the merger, CompuPharm's annual financial
statements for the fiscal year ended April 30, 1993 were used. The 1993
consolidated financial statements, however, include CompuPharm balances as of,
and for the year ended, December 31, 1993. As such, both the 1993 and 1992
consolidated financial statements include operating results and cash flows
relating to CompuPharm for the four months ended April 30, 1993, (consisting
of revenues and net income of $24,200,000 and $1,300,000, respectively) which
are adjusted through a separate line item in the consolidated statements of
shareholders' equity and cash flows.
A reconciliation of consolidated total revenues, income before extraordinary
charge and net income to amounts applicable to the separate companies prior to
the date of combination (effectively, December 31, 1993) is presented together
with the Evergreen merger table included below.
Evergreen Merger On July 20, 1995, GranCare acquired, through merger,
substantially all of the outstanding common stock of Evergreen in exchange for
approximately 9,673,000 shares of GranCare common stock based on a .775
exchange ratio. The Evergreen merger is accounted for as a pooling-of-
interests business combination and, accordingly, the consolidated financial
statements of all periods prior to the merger have been restated to include
the historical balances of GranCare and Evergreen as if the two companies had
always been combined.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company incurred certain costs relating to completion of the Merger and
other one-time costs and recognized an $11.8 million charge in the third
quarter of 1995, as required under the pooling-of-interests accounting method.
The following is a summary of the Merger and other one-time costs:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
DOLLARS IN
THOUSANDS
<S> <C>
Merger costs:
Investment banking fees.................................... $ 4,100
Legal and other fees....................................... 1,469
Executive severance........................................ 1,100
Planned divestitures of certain facilities................. 1,500
Other one-time costs:
Relocation................................................. 1,626
Integration................................................ 850
Other deferred acquisition costs........................... 1,105
-------
Total........................................................ $11,750
=======
</TABLE>
As of December 31, 1995, the remaining reserve balance relating to the
Merger and other one-time costs was $2.4 million.
A reconciliation of consolidated total revenues, income before extraordinary
charge, and net income to amounts applicable to the separate pooled companies
prior to the dates of combination (including both the December 1993 CompuPharm
and July 1995 Evergreen mergers) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
-------- --------
DOLLARS IN
THOUSANDS EXCEPT
PER SHARE DATA
<S> <C> <C>
TOTAL REVENUES
GranCare................................................... $549,220 $434,117
CompuPharm................................................. -- 73,853
-------- --------
GranCare, pre-Evergreen merger............................. 549,220 507,970
Evergreen.................................................. 168,251 103,719
-------- --------
$717,471 $611,689
======== ========
INCOME BEFORE EXTRAORDINARY CHARGE(1)
GranCare................................................... $ 15,179 $ 10,697
CompuPharm................................................. -- 1,472
-------- --------
GranCare, pre-Evergreen merger............................. 15,179 12,169
Evergreen(2)............................................... 9,111 3,920
-------- --------
$ 24,290 $ 16,089
======== ========
NET INCOME
GranCare................................................... $ 15,179 $ 10,697
CompuPharm................................................. -- 187
-------- --------
GranCare, pre-Evergreen merger............................. 15,179 10,884
Evergreen(2)............................................... 9,111 3,920
-------- --------
$ 24,290 $ 14,804
======== ========
NET INCOME PER SHARE (FULLY-DILUTED BASIS)
GranCare................................................... $ 1.08 $ 1.03
CompuPharm(3).............................................. n/a n/a
GranCare, pre-Evergreen merger............................. 1.08 .83
Evergreen(4)............................................... .82 n/a
-------- --------
$ 1.07 $ .77
======== ========
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(1) After non-recurring merger costs of $2,149,000 for GranCare and $2,424,000
for CompuPharm in 1993.
(2) Evergreen's income before extraordinary charge and net income exclude
Merger and other costs of approximately $11,750,000. This charge was
recorded by the Company in the third quarter of 1995.
(3) Earnings per share for CompuPharm prior to the merger was not applicable
because it was not a public company.
(4) Earnings per share for Evergreen prior to June 30, 1993 was not applicable
because it was not a public company.
NOTE 4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994
-------- --------
DOLLARS IN
THOUSANDS
<S> <C> <C>
SENIOR DEBT
Mortgage notes payable:
Omega...................................................... $ 58,800 $ 58,800
Other (principally HRPT and FINOVA) in installments which
include interest ranging from 8% to 11.5%................. 32,376 31,477
Revolving loan under bank credit facility bearing interest
based on LIBOR or prime rate............................... 37,700 45,900
Evergreen Credit Facility................................... -- 12,686
Evergreen revenue bonds..................................... 13,445 13,850
Notes payable in installments which include interest ranging
from 6.9% to 13.75%; final maturities in 1996 through 2010. 28,991 10,788
Capitalized lease obligations (less imputed interest of $570
in 1995 and $421 in 1994).................................. 4,622 4,964
Other....................................................... 2,400 3,385
-------- --------
Total senior debt............................................ 178,334 181,850
SUBORDINATED DEBT
Senior subordinated notes; interest due semi-annually at 9
3/8%, principal due
September 15, 2005......................................... 100,000 --
Convertible subordinated debentures; interest due semi-annu-
ally at 6.5%, principal due January 15, 2003............... 60,000 60,000
Other notes payable......................................... 1,271 1,381
-------- --------
Total subordinated debt...................................... 161,271 61,381
-------- --------
Total debt................................................... 339,605 243,231
Less short-term notes payable and current maturities of long-
term debt................................................... 4,937 11,566
-------- --------
$334,668 $231,665
======== ========
</TABLE>
On August 14, 1992, PHCM entered into a $58,800,000 loan agreement with
Omega Healthcare Investors, Inc. (Omega). The loan is secured by mortgages on
certain health care facilities, and by the personal property used in
connection with the operation of those facilities, as well as certain other
intangibles, including the licenses for these facilities, to the extent
permitted by Michigan law, and accounts receivable in excess of $1,000,000.
The minimum interest rate on the loan is 13% per year, of which 12% is payable
monthly in cash and 1% is deferred. The cash interest rate will increase in
each subsequent year based upon a specified
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
formula tied to either; (i) the percentage change in the Consumer Price Index
published by the United States Department of Labor, or; (ii) the change in
Gross Revenues (as defined in the loan agreement); however, the increase
cannot be more than the interest for the prior fiscal year multiplied by 1.05.
The 1% of deferred interest will accrue on an annual basis and will be
cumulative on an annual basis as long as the loan remains outstanding.
Quarterly principal payments of $1,470,000 are required beginning October 1,
2002, with the remaining balance plus the deferred interest due in August
2007. The loan agreement also contains certain restrictive covenants,
including, but not limited to, restrictions on PHCM incurring additional debt,
prepayment and minimum net worth requirements. As of December 31, 1995, the
interest rate was 13.9%, including the 1% deferred interest.
In conjunction with a 1990 acquisition, GranCare borrowed $15,000,000 under
a promissory note agreement with HRPT. The note is secured by mortgages on two
facilities and 1,000,000 shares of HRPT common stock owned by GranCare. The
HRPT note had a balance of $8,750,000, with an interest rate of 13.75% at
December 31, 1994.
During 1995, GranCare renegotiated the note with HRPT, whereby the principal
balance of the promissory note was increased to $11,500,000, resulting in
additional proceeds to GranCare. Minimum interest on the note is 11.5% per
year payable monthly in arrears. Additional interest is payable commencing on
January 1, 1996, in an amount equal to 75% of the percentage increase in the
Consumer Price Index, with certain defined limitations. Principal payments
will begin two years after the date of the note on a 30-year direct reduction
basis, with the remaining balance due December 31, 2010.
On January 29, 1993, GranCare completed a public offering of $60,000,000
aggregate principal amount of its 6.5% Convertible Subordinated Debentures due
2003 (the Debentures). The Debentures are convertible into common stock of
GranCare at any time prior to redemption or final maturity, at a conversion
price of $27.145 per share, subject to adjustment upon the occurrence of
certain events. Interest on the Debentures is payable semi-annually on January
and July 15th. Approximately $15,600,000 of the net proceeds of $57,700,000
was used to repay certain indebtedness, and the remaining $42,100,000 was used
for general corporate purposes, including the further expansion of specialty
medical services and acquisitions.
In conjunction with the 1993 acquisition of four skilled nursing facilities
in Wisconsin, as described in Note 3, GranCare entered into an $11,000,000
mortgage loan agreement with FINOVA. Interest accrues on the mortgage note at
an adjustable rate of 2% over prime, with installments of principal and
interest due monthly through April 2001, with final payment due May 2001. The
mortgage note cannot be prepaid until 90 days prior to the end of the term
without a prepayment penalty.
At the end of 1993, a subsidiary of GranCare, GranCare Health Services, Inc.
entered into a $50,000,000 revolving credit agreement with a syndicate of
banks. In 1994, the agreement was amended to increase the line of credit to
$80,000,000. This credit agreement terminated on March 29, 1995.
On March 29, 1995, the Company entered into an agreement with First Union
National Bank of North Carolina (First Union) pursuant to which First Union
provided the Company with a $175 million revolving line of credit (the Credit
Facility). The Company has used the proceeds from the Credit Facility to pay
off its previous line of credit, fund the acquisition of Cornerstone and for
general working capital purposes. In September 1995, concurrent with the High
Yield Debt offering the Credit Facility was reduced to $150 million. Amounts
outstanding under the Credit Facility bear interest based on LIBOR or prime
rates (7.6% and 8.85%, respectively, at December 31, 1995). Amounts
outstanding as of June 30, 1998 may convert to a term loan with equal
quarterly installments due through the final maturity date of June 30, 2002.
No principal payments are required under the Credit Facility prior to the June
30, 1998 conversion date.
Evergreen maintained a revolving credit facility and a working capital
facility (the Evergreen Credit Facility) in the aggregate maximum amount of
$55,000,000 from a syndicate of banks, $45,000,000 of which was to be used for
acquisitions and $10,000,000 of which was to be used for working capital
purposes. The Evergreen Credit facility was terminated at the merger. Six
nursing home facilities were refinanced via mortgage debt in March 1995 for
$16,500,000, including the facilities held as collateral under the revolving
credit facility. Therefore, the
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company has classified the borrowings under the revolving credit facility as
long-term debt in the Company's consolidated balance sheet at December 31,
1994. The Evergreen Credit Facility described above was entered into on June
7, 1994, as a refinancing of an existing $6,000,000 revolving credit facility
with the same bank.
On September 29, 1995, the Company closed the sale of $100 million aggregate
principal amount if its' 9 3/8% Senior Subordinated Notes due 2005 (Notes) in
an underwritten public offering (Notes Offering). After paying underwriter
fees and commissions, the approximately $96 million realized by the Company
from the sale of the Notes was used to pay outstanding indebtedness under its'
Credit Facility.
The Evergreen revenue bonds include a $9,100,000 Series 1993A taxable
adjustable demand issue that requires semiannual interest payments at a
variable rate (5.95% at December 31, 1995) and annual principal payments
through August 15, 2013. The remaining revenue bonds bear interest at fixed
rates ranging from 7.75% to 9.5% through 2001-2002, and which are subject to
change after such dates. These bonds mature in 2015; however, they may be
redeemed by the bondholders on various dates in the years 2001, 2002, 2011 and
2012.
Certain of these notes payable and related agreements contain covenant
restrictions on additional debt, intercompany loans, dividends and the
maintenance of certain financial ratios. The Company has pledged certain
accounts receivable, leasehold interests and substantially all property and
equipment as collateral under the various debt agreements.
Maturities of debt and obligations under capital leases at December 31,
1995, are summarized as follows:
<TABLE>
<CAPTION>
DEBT CAPITAL LEASES TOTAL
-------- -------------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Year ending December 31,
1996................................... $ 3,331 $2,053 $ 5,384
1997................................... 2,477 1,302 3,779
1998................................... 6,443 1,140 7,583
1999................................... 1,785 659 2,444
2000................................... 8,959 38 8,997
Thereafter............................... 311,988 -- 311,988
-------- ------ --------
Total minimum payments................... 334,983 5,192 340,175
Less amounts representing interest....... -- 570 570
-------- ------ --------
Total obligations........................ $334,983 $4,622 $339,605
======== ====== ========
</TABLE>
NOTE 5. OPERATING LEASES
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents.
Subsequent to December 31, 1994, the existing Master Lease Documents were
amended. Under the amended lease arrangements, minimum rent for the aggregate
facilities is the annual sum of $11,550,000, payable in equal monthly
installments. In addition, beginning January 1, 1996, the amended lease
agreement provides for additional rent to be paid monthly, in advance, based
on 75% of the increase in the Consumer Price Index multiplied by the minimum
rent due, provided, however, that the maximum rent (minimum rent plus
additional rent) each January shall be limited to a 2% increase over the total
monthly rent paid in the prior December. The operating leases for 17
facilities expire on December 28, 2010, and there are two 10 year renewal
options. The leases for seven facilities expire in June 2006 and there are two
10 1/2-year renewal options. The Company has subleased seven of the 24
facilities to unrelated parties.
The Company leases additional health care facilities, certain other
facilities, office space, and equipment from other unrelated parties.
Substantially all the leases are operating leases which expire at various
dates and generally contain options to renew for various terms. Certain leases
also contain purchase options. Rents generally are subject to increase based
on the Consumer Price Index, occupancy rates, Medicaid reimbursement rates or
at stated amounts specified in the lease agreements.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of GranCare's minimum commitments under operating leases at
December 31, 1995, follows:
<TABLE>
<CAPTION>
YEAR ENDING DOLLARS
DECEMBER 31, IN
------------ THOUSANDS
<S> <C>
1996......................................................... $ 43,310
1997......................................................... 43,069
1998......................................................... 42,331
1999......................................................... 37,510
2000......................................................... 26,175
Thereafter..................................................... 179,066
--------
Total minimum lease payments................................... $371,461
========
</TABLE>
Aggregate future minimum lease payments to be received under noncancelable
subleases are $5,263,000 for the year ended December 31, 1996 and $43,675,000
thereafter.
Total rent expense for all operating leases, net of sublease income,
aggregated $41,058,000, $35,632,000 and $34,872,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
The Company is currently having discussions with the landlord of 18 of its'
skilled nursing facilities. The Company expects to receive a favorable
adjustment to current lease commitments in return for an additional capital
investment and extension of the lease term.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings arising in the normal course of
business. Management believes, based in part upon discussions with legal
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
The Company, through its wholly-owned subsidiary, GCI Indemnity, Inc.,
maintains a captive insurance company for the purpose of paying worker's
compensation claims. The Company maintains reinsurance contracts to minimize
its insurance exposure. The Company accepts the first $350,000 of loss and
loss adjustment expense liability per occurrence for worker's compensation
risks. The Company estimates this liability on case-basis estimates of losses
reported prior to the date of the balance sheets and includes estimates of
losses for claims incurred but not reported. The Company's estimated liability
for worker's compensation claims is reported in the accompanying balance
sheets as other long term liabilities. Investments held by the captive
insurance company are reported in other assets section of the accompanying
balance sheets.
NOTE 7. INCOME TAXES
Effective January 1, 1993, the Company, except for CompuPharm and Evergreen,
prospectively adopted FASB Statement of Financial Accounting Standards No. 109
(Statement No. 109), "Accounting for Income Taxes." CompuPharm and Evergreen
adopted Statement No. 109 on May 1, 1991 and July 1, 1993, respectively. The
Company (excluding CompuPharm and Evergreen) previously accounted for income
taxes under FASB Statement No. 96. There was no cumulative effect of adopting
Statement No. 109.
As described in Note 1, prior to June 30, 1993, the predecessor Evergreen
entities were partnerships and as such were not subject to corporate income
taxes. Accordingly, the accompanying 1993 Consolidated Statement of Income
does not include any income tax expense relating to $1,970,000 of pre-tax
income earned by these partnerships.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
CURRENT
Federal.......................................... $11,880 $11,025 $ 7,388
State............................................ 1,714 2,832 1,779
------- ------- -------
13,594 13,857 9,167
DEFERRED
Federal.......................................... 1,133 (317) 778
State............................................ 38 (16) 144
------- ------- -------
1,171 (333) 922
------- ------- -------
$14,765 $13,524 $10,089
======= ======= =======
</TABLE>
At December 31, 1995, the Company and its subsidiaries have approximately
$19,900,000 of federal net operating loss carryforwards (including the
remaining $970,000 NHI NOL acquired by Evergreen) and various state income tax
net operating loss carryforwards expiring at various dates through 2008.
Approximately $11,340,000 of such amount represents acquired federal net
operating loss carryforwards, the use of which is subject to both annual
dollar limitations and the general requirements that such carryforwards be
offset only against the taxable income of the acquired operations. The portion
of the net operating loss carryforwards not relating to acquired operations is
also subject to various limitations because of previous ownership changes. The
valuation allowance at December 31, 1995, pertains to nonacquired net
operating loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of the
cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1994
------- -------
DOLLARS IN
THOUSANDS
<S> <C> <C>
DEFERRED INCOME TAX LIABILITIES
Fixed asset basis differences............................... $17,318 $16,687
Workers' compensation insurance............................. -- 359
Deferred rent............................................... -- 349
Investments................................................. 3,276 2,250
Intangible asset basis differences.......................... 1,648 --
Deferred gain on sale of assets............................. 1,263 --
Other....................................................... 266 690
------- -------
Total deferred income tax liabilities......................... 23,771 20,335
DEFERRED INCOME TAX ASSETS
Vacation and compensation accruals.......................... 4,103 2,630
Deferred gain on sale of assets............................. -- 1,382
Accounts receivable reserves................................ 5,981 1,351
Deferred rent............................................... 426 587
Voluntary employees' benefit association.................... 507 190
Net operating loss carryforwards............................ 7,367 8,124
Intangible asset basis differences.......................... -- 117
Accrued merger costs........................................ 886 --
Workers' compensation and other insurance................... 2,088 --
Other....................................................... -- 1,567
------- -------
Total deferred income tax assets.............................. 21,358 15,948
Valuation allowance for deferred income tax assets............ (3,389) (3,714)
------- -------
Net deferred income tax assets................................ 17,969 12,234
------- -------
Net deferred income tax liabilities........................... $ 5,802 $ 8,101
======= =======
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance decreased as shown below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1994 1993
---- ------ ------
DOLLARS IN
THOUSANDS
<S> <C> <C> <C>
Recognition of NOL carryforwards as a reduction in income
tax expense............................................. $325 $ 325 $1,370
Initial recognition of deductible temporary differences
as a reduction in income tax expense.................... -- 665 --
Recognition of acquired NOLs and deductible temporary
differences as a reduction to goodwill.................. -- 2,548 1,200
---- ------ ------
$325 $3,538 $2,570
==== ====== ======
</TABLE>
Differences between GranCare's income tax expense and the amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 AMOUNT PERCENT 1994 AMOUNT PERCENT 1993 AMOUNT PERCENT
- ----------------------- ----------- ------- ----------- ------- ----------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
rate................... $12,365 35.0% $13,236 35.0% $ 9,163 35.0%
State tax, net of fed-
eral benefit........... 1,135 3.2 1,958 5.2 1,384 5.2
Nontaxable partnership
income................. -- -- -- -- (690) (2.6)
Merger costs............ 1,435 4.1 -- -- 1,600 6.1
Federal NOL--current.... (277) (.8) (277) (.7) (681) (2.6)
Federal NOL--deferred... -- -- -- -- (689) (2.6)
Reduction in valuation
allowance.............. -- -- (665) (1.8) -- --
State NOL, net of fed-
eral benefit........... (48) (.1) (48) (.1) (131) (.5)
Federal tax credits..... (88) (.3) (458) (1.2) (290) (1.1)
Other................... 243 .7 (222) (.6) 423 1.6
------- ---- ------- ---- ------- ----
$14,765 41.8% $13,524 35.8% $10,089 38.5%
======= ==== ======= ==== ======= ====
</TABLE>
NOTE 8. SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
The 2,462,795 shares of GranCare's common stock issued upon completion of
the December 28, 1993, merger with CompuPharm consisted of the following:
<TABLE>
<S> <C>
Outstanding shares of CompuPharm prior to merger.................. 601,885
Convertible CompuPharm debt converted to stock simultaneously with
the merger....................................................... 736,648
Convertible CompuPharm preferred stock converted to stock simulta-
neously with the merger.......................................... 283,816
CompuPharm common stock options exercised simultaneously with the
merger........................................................... 195,891
CompuPharm common stock warrants exercised simultaneously with the
merger........................................................... 644,555
---------
2,462,795
=========
</TABLE>
In connection with the Evergreen merger, 9,672,806 shares of GranCare common
stock were issued in the exchange.
Also in connection with the CompuPharm and Evergreen mergers, CompuPharm and
Evergreen stock options that remained outstanding were exchanged for options
to purchase GranCare stock with the same terms, except as adjusted for the
common stock exchange ratio. The GranCare options issued in connection with
the CompuPharm and Evergreen exchanges totaled approximately 587,200 and
214,000, respectively, and are included in the option table presented below,
based on their original issuance date by CompuPharm and Evergreen.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The warrants and options exercised at the time of the CompuPharm merger are
also shown in the accompanying warrant and option tables presented below based
on their converted share values.
On June 30, 1993, in connection with Evergreen's NHI acquisition, warrants
to purchase 46,500 common shares at $6.45 per share were issued to a former
NHI executive. These warrants are exercisable at any time prior to June 30,
1996. Through December 31, 1995, all had been exercised.
During 1989, 1990 and 1991, GranCare issued warrants to purchase shares of
common stock exercisable over periods from four to ten years after date of
issuance. The exercise prices are to be adjusted automatically upon the
occurrence of certain dilutive events. The following summarizes the warrants'
activity for the three years ended December 31, 1995 (including the CompuPharm
and NHI warrants described above):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Warrants outstanding at be-
ginning of year............ 765,033 890,016 1,549,355
Warrant price............... $.001 to $10.00 $.001 to $10.00 $.001 to $10.00
Warrants issued............. -- -- 46,500
Warrant price............... -- -- $6.45
Warrants exercised.......... (413,161) (124,983) (705,839)
Warrant price............... $.10 to $ 10.00 $ .10 to $ 6.77 $1.00 to $ 6.77
Warrants outstanding at end
of year.................... 351,872 765,033 890,016
Warrant price............... $.001 to $ 6.77 $.001 to $10.00 $.001 to $10.00
Warrants exercisable at end
of year.................... 351,872 765,033 890,016
</TABLE>
GranCare has a Stock Incentive Plan, adopted in 1991 and amended in 1992
(the 1991 Plan), which provides for the direct sale of shares, the granting of
stock options and the granting of limited stock appreciation rights to
selected employees, officers, directors and consultants of GranCare. The total
number of common shares that may be issued under the 1991 Plan is 2,500,000.
The direct sale of common shares under the 1991 Plan shall be at a price not
less than 85% of the fair market value of the common stock on the date the
right to purchase shares is granted.
Under the 1991 Plan, options are granted at an exercise price of not less
than 100% of fair market value at the date of grant, except for nonstatutory
options which are granted at an exercise price of not less than 85% of the
fair market value on the date of the grant.
Certain options are exercisable immediately, while others are subject to
vesting provisions whereby the options will be fully vested three to four
years after the date of grant. All options are non-transferable and expire
five to 10 years from the date of the grant. The Board of Directors, or a
committee appointed by the Board of Directors, may grant limited stock
appreciation rights in tandem with any stock options granted under the 1991
Plan. Limited stock appreciation rights are only exercisable with the consent
of the Board of Directors on and for the 60-day period following certain
events as defined in the 1991 Plan, and are payable in cash. No limited stock
appreciation rights have been issued under the 1991 Plan.
On May 3, 1994, GranCare adopted a Stock Option/Stock Issuance Plan (the
1994 Plan) which provides for the granting of incentive stock options, the
granting of limited stock appreciation rights, a salary reduction grant
program, and a stock issuance program for selected employees of GranCare. The
1994 Plan has an automatic grant program for the granting of options to non-
employee directors. The total number of common shares issuable under the 1994
Plan is 1,135,623 shares. The 1994 Plan contains a provision that provides
that each year, commencing with the 1995 calendar year, the common stock
available for grant under the 1994 Plan will automatically increase by an
amount equal to 1% of the shares of common stock outstanding on December 31st
of the immediately preceding calendar year.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The exercise price per share for incentive stock options cannot be less than
100% of the fair market value per share of GranCare's common stock on the
grant date. For non-statutory options, the exercise price per share may not be
less than 85% of such fair market value. No option shall have a maximum term
in excess of ten years from the grant date. The Plan Administrator, as
designated by the Board of Directors, will have complete discretion to grant
incentive stock options and limited stock appreciation rights, and to choose
individuals to participate in the salary reduction grant program. The Plan
Administrator may, at its discretion, sell shares of GranCare's common stock
at a price per share not less than 85% of fair market value in accordance with
the stock issuance program. Shares may also be issued solely as a bonus for
past services.
The Plan Administrator may, at its discretion, grant an employee with
incentive stock options the right to surrender all or part of an unexercised
option in exchange for a distribution from GranCare, or "limited stock
appreciation rights." The distribution will be an amount equal to the excess
of the fair market value of the number of shares on the surrender date, over
the aggregate price payable for such vested shares. No limited stock
appreciation rights have been issued under the 1994 Plan.
A summary of the activity under the plans (including the exchanged
CompuPharm and Evergreen options mentioned above) for the three years ended
December 31, 1995, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
---------------- ---------------- ---------------
<S> <C> <C> <C>
Options outstanding at be-
ginning of year.......... 2,267,618 1,808,742 1,172,092
Exercise price............ $0.76 to $ 21.00 $0.76 to $ 21.00 $0.76 to $12.50
Options granted........... 387,000 583,681 957,541
Exercise price............ $13.00 to $17.33 $12.90 to $20.50 $1.61 to $21.00
Options cancelled......... (155,605) (28,133) (16,000)
Exercise price............ $9.875 to $21.00 $9.875 to $13.25 $9.875
Options exercised......... (356,638) (96,672) (304,891)
Exercise price............ $1.53 to $ 16.50 $1.53 to $ 16.50 $0.76 to $9.875
Options outstanding at end
of year.................. 2,142,375 2,267,618 1,808,742
Exercise price............ $0.76 to $ 21.00 $0.76 to $ 21.00 $0.76 to $21.00
Options exercisable....... 1,185,709 1,116,869 700,769
Exercise price............ $0.76 to $ 21.00 $0.76 to $ 21.00 $0.76 to $21.00
</TABLE>
At December 31, 1995, an aggregate of 1,097,921 shares was available for
future grant under GranCare's stock incentive plans. Together with the
2,142,375 stock options and 351,872 warrants outstanding on that date, and the
2,210,351 issuable upon the conversion of GranCare's 6.5% convertible
subordinated debentures (see Note 4), approximately 5,800,000 shares of common
stock were reserved for future issuance.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company currently has two separate benefit plans covering employees of
GranCare. The defined benefit plan, which was amended as of December 31, 1986
to freeze benefits for all but certain unionized employees, covers certain
employees after reaching age 21 and completion of one year of service. During
1990, the accrual of benefits was suspended for the employees who continued to
accrue benefits after December 31, 1986.
At December 31, 1995 and 1994, the projected benefit obligations were
$588,000 and $497,000 respectively. Adjustments to recognize minimum pension
liability have been reflected in the Consolidated Statements of Shareholders'
and Partners' Equity.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other employees of the Company are covered by various defined contribution
plans. Company contributions are based on a certain percentage of wages, a
matching percentage of the participants' voluntary contributions, or at the
Company's discretion. During 1995, 1994 and 1993, the Company recognized
$1,645,000, $1,145,000 and $914,000, respectively, of expense related to these
plans.
NOTE 10. RELATED-PARTY TRANSACTIONS
In connection with various acquisitions, GranCare has incurred debt payable
to former owners who are now employees of GranCare. Such debt totaled
$3,779,000 and $3,856,000 at December 31, 1995 and 1994, respectively.
In 1994, GranCare sold three of its long-term care facilities to a former
employee of GranCare at an aggregate sales price of $3,000,000. GranCare
provided financing of $2,550,000 on these sales and recognized a total gain of
$2,373,000. In 1993, GranCare sold two of its long-term care facilities to an
individual previously engaged by GranCare as a consultant on various
acquisitions and divestitures. The sales price of the facilities sold in 1993
was $1,250,000, for which GranCare provided financing of $1,050,000 and
recognized a gain of $841,000.
Included in other assets in the accompanying Consolidated Balance Sheets at
December 31, 1995 and 1994, is a $2,850,000 and $1,500,000 note receivable,
respectively, resulting from working capital advances made to the owner of
certain facilities currently managed by the Company. The Company can advance
up to $3,000,000 under the agreement. The loan bears interest payable monthly
at 1% above the prime rate and is secured by the accounts receivable,
inventory and equipment of the managed facilities.
Evergreen had a management contract with NHI for the period from October 14,
1992 to June 30, 1993. Total amounts received from NHI under this management
contract approximated $1,000,000 for the six months ended June 30, 1993 and
are included in the 1993 Consolidated Statement of Income. This agreement
terminated upon consummation of the reverse acquisition on June 30, 1993, as
discussed in Note 3.
NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Cash and Cash Equivalents The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value. Cash equivalents at
December 31, 1994 include $1,200,000 in commercial paper securities. There
were no commercial paper securities at December 31, 1995.
Investments The carrying amount reported in the balance sheet for
investments approximates fair value. The investments in municipal bonds are
held by GranCare's captive insurance subsidiary and are restricted to use by
only that subsidiary, and are not available for general corporate purposes.
All investments are classified as "available for sale" for accounting purposes
and, therefore, are carried at fair value with unrealized gains and losses
recorded directly in equity.
In 1994, a gain of $1,561,000 was realized on the sale of an Evergreen
equity security that had no carrying value. There were no significant realized
gains or losses on sales of investments during 1995 and 1993. The investments
in municipal bonds generally mature within six years (e.g., 2000 to 2001).
Notes Payable and Long-Term Debt The carrying amounts of GranCare's
borrowing under the revolving loan and various mortgages and notes payable
approximate fair value. The fair value of GranCare's convertible subordinated
debentures and senior subordinated notes is based on their quoted market
price.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost basis and estimated fair values of GranCare's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT 1995 COST BASIS ESTIMATED FAIR VALUE 1994 COST BASIS ESTIMATED FAIR VALUE
-------------------- --------------- -------------------- --------------- --------------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 17,738 $ 17,738 $ 28,611 $ 28,611
Investments:
Marketable equity se-
curities............. 9,506 17,695 7,750 13,375
Municipal bonds....... 12,166 12,610 6,978 6,978
-------- -------- -------- --------
21,672 30,305 14,728 20,353
Notes payable and long-
term debt:
Revolving loan and
other debt........... 179,605 179,605 183,231 183,231
Convertible subordi-
nated debentures..... 60,000 52,200 60,000 50,400
Senior Subordinated
Notes................ 100,000 103,000 -- --
</TABLE>
- --------
Note: The cost basis is the carrying amount for all financial instruments
except for investments, as noted above.
NOTE 12. RESTRUCTURING
In August 1994, GranCare adopted and publicly announced a formal plan of
restructuring which includes the reorganization of GranCare's operations and
the sale of certain under-performing and non-strategic long-term health care
facilities. In connection with its commitment to this formal plan, GranCare
recognized an $8,200,000 restructuring charge in the third quarter of 1994,
consisting of the following components:
<TABLE>
<S> <C>
Actual and projected net operating losses of the facilities to
be sold, from the commitment date to their anticipated dis-
posal dates.................................................. $2,620,000
Less: Estimated gains from the sale of the facilities......... 2,250,000
----------
370,000
Personnel costs--termination and severance.................... 3,700,000
Professional fees--legal, accounting and appraisals--and other
exit costs................................................... 1,100,000
Write-off of unamortized financing fees resulting from re-
structuring.................................................. 2,400,000
Other......................................................... 630,000
----------
Total restructuring costs..................................... $8,200,000
==========
</TABLE>
The termination and severance benefits cover approximately 50 employees who
work or worked in the facilities to be divested or GranCare's corporate or
regional offices. As of the end of 1995, substantially all termination and
severance benefits have been paid to those employees.
Charges against the restructuring reserve in 1995 and 1994 included the
write-off of unamortized financing fees and operating gains and losses of the
facilities sold.
At December 31, 1995, the Company believes that the provisions for the
restructuring continue to be adequate and will not require material adjustment
in future periods.
NOTE 13. SUBSEQUENT EVENTS
In January 1996, the Company completed the acquisition of RN Services for
$2,350,000 in cash. RN Services provides home health services in the metro
Detroit area.
In February 1996, the Company, through its pharmacy divisions, regained a
major contract with the state of New Jersey to provide pharmaceuticals to
7,800 beds.
F-26
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY FINANCIAL RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET INCOME
REVENUES NET INCOME PER SHARE
----------------- ----------------- -------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1995 1994 1995 1994
-------- -------- ------ ------ ------ -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
First Quarter............. $191,681 $166,959 $6,079 $6,007 $ 0.25 $0.26
Second Quarter............ 204,426 172,497 7,713 7,192 0.32 0.31
Third Quarter............. 208,462 188,860 (518)(1) 3,401(2) (0.02) (0.14)
Fourth Quarter............ 211,893 189,155 7,290 7,690(3) 0.31 0.32
</TABLE>
- --------
(1) Includes one-time merger and other costs of $11.8 million.
(2) Includes the effects before income taxes of (a) an $8.2 million
restructuring charge, (b) an $8.8 million gain of the sale of Pacific
Therapies, Inc., (c) a $5.3 million reduction of revenues associated with
changes in estimates of prior year Medicare settlements and anticipated
collectability of receivables related to facilities to be divested and (d)
a $1.0 million charge relating to the relocation of the Company's
corporate offices and various related functions.
(3) Includes a pretax $1.9 million charge related to the Company's captive
insurance subsidiary.
S-1
<PAGE>
GRANCARE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ------------ ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1993:
Allowance for doubtful
accounts.............. 2,404 4,254 2,830(2) 2,429(1) 7,059
Year ended December 31,
1994:
Allowance for doubtful
accounts.............. 7,059 8,290 1,182(2) 6,639(1) 9,892
Restructuring reserve
for estimated losses
on
reorganization and
divestiture of facil-
ities................ -- 8,200 -- 3,658(3) 4,542
Year ended December 31,
1995:
Allowance for doubtful
accounts.............. 9,892 6,281 572(2) 5,889(1) 10,856
Restructuring reserve
for estimated losses
on
reorganization and
divestiture of facil-
ities................ 4,542 -- -- 4,042(3) 500
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowances recorded at date of acquisition.
(3) Writeoff of deferred loan and other related costs, operating results of the
facilities to be divested and gain or loss on the sale of those facilities.
S-2
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in: (a) the Registration
Statements on Form S-3 (No. 33-65092, No. 33-75414 and No. 33-96244) of
GranCare, Inc. and in the related Prospectuses; and (b) the Registration
Statements on Form S-8 (No. 33-94994, No. 33-94908, No. 33-82078, No. 33-47843
and No. 333-05041) of GranCare, Inc., pertaining to various option, warrants,
and restricted shares agreements/plans, of our report dated February 27, 1996,
with respect to the consolidated financial statements and schedule of
GranCare, Inc. included in this Annual Report (Form 10-K/A) for the year ended
December 31, 1995.
Ernst & Young LLP
Atlanta, Georgia
December 20, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Evergreen Healthcare, Inc.:
We consent to incorporation by reference in: (a) the Registration Statements
on Form S-3 (No. 33-65092, No. 33-75414 and No. 33-96244) of GranCare, Inc.
and in the related Prospectuses; and (b) the Registration Statements on Form
S-8 (No. 33-94994, No. 33-94908, No. 33-82078, No. 33-47843 and No. 333-05041)
of our report dated August 17, 1995, with respect to the consolidated balance
sheet of Evergreen Healthcare, Inc. and subsidiaries as of December 31, 1994
and the related consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1994 and the six-month period
ended December 31, 1993, and the related combined statements of operations,
partners' equity and cash flows of Evergreen Healthcare LTD., L.P.,
Predecessor to Evergreen Healthcare, Inc., for the six month period ended June
30, 1993, which report is incorporated by reference in the Annual Report on
Form 10-K/A of GranCare, Inc. for the year ended December 31, 1995 dated March
29, 1996.
KPMG Peat Marwick LLP
Indianapolis, Indiana
December 20, 1996