<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
----------------
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 001-12100
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>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<C> <S>
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.
================================================================================
<PAGE>
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.
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>
1
<PAGE>
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>
- --------
(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%. $112.0 million of the
increase is attributable to acquisitions completed. 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 $88.6
million over 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). The overall increase
was partially offset by a $40.8 million 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%. $92.6 million of the increase was 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. The
increases were partially offset by a reduction in expenses of $41.5 million
from facilities divested. 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.
2
<PAGE>
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.
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."
3
<PAGE>
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 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
4
<PAGE>
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.
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
5
<PAGE>
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.
6
<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 31, 1996
7
