<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-12100
GRANCARE, INC.
(Exact name of registrant as specified in its charter)
California 95-4299210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
(Address of principal executive offices) (Zip Code)
(770) 393-0199
(Registrant's telephone number, including area code)
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
--------- --------
There were 23,677,925 shares outstanding of registrant's Common Stock, no par
value, as of November 12, 1996.
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<PAGE>
GRANCARE, INC.
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial statements (Unaudited):
Condensed Consolidated Balance Sheets-
September 30, 1996 and December 31, 1995................... 3
Condensed Consolidated Statements of Income-
Three Months Ended September 30, 1996 and 1995 and
Nine Months Ended September 30, 1996 and 1995.............. 5
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1996 and 1995.............. 6
Notes to Condensed Consolidated Financial Statements....... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
Three and Nine Months Ended September 30, 1996............. 9
PART II - OTHER INFORMATION
Signatures............................................................... 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 25,750 $ 17,738
Accounts receivable, less
allowance for doubtful accounts
(1996 - $13,848 and 1995 -
$10,856).................................... 218,529 173,068
Inventories................................... 17,833 13,527
Prepaid expenses and other current
assets...................................... 41,034 16,498
Deferred income taxes......................... 11,599 10,933
-------- --------
Total current assets........................ 314,745 231,764
Property and equipment........................ 276,441 270,042
Less accumulated depreciation............... (67,111) (55,689)
-------- --------
209,330 214,353
Other assets:
Investments, at fair value.................. 36,359 30,305
Goodwill, less accumulated
amortization (1996 - $9,184 and
1995 - $5,535)............................ 129,863 120,946
Other intagibles, less
accumulated amortization
(1996 - $9,788 and 1995 - $8,051)......... 8,573 9,793
Other....................................... 39,068 38,000
-------- --------
Total assets.................................. $737,938 $645,161
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses.................................. $ 84,291 $ 72,935
Accrued wages and related
liabilities............................... 20,461 24,069
Interest payable
Income taxes payable....................... 5,137 6,793
Notes payable and current.................. 7,059 -
maturities of long-term debt.............. 4,219 4,937
-------- --------
Total current liabilities............. 121,167 108,734
Long-term debt.................................. 384,905 334,668
Deferred income taxes........................... 15,628 16,735
Other........................................... 14,564 12,425
Shareholders' equity:
Common stock; no par value;
50,000,000 shares authorised
(shares issued:
1996-23,401,992 and
1995-23,948,728)..................... 125,401 134,699
Treasury stock (1996-200,000
shares and 1995-915,000 shares)........... (5,030) (18,700)
Equity component of minimum
pension liability......................... (465) (465)
Unrealized gain on investments net
of income taxes (1996 - $3,963
and 1995 - $3,453).................... 5,747 5,206
Retained earnings.......................... 76,021 51,859
-------- --------
201,674 172,599
-------- --------
Total liabilities and shareholders'
equity......................................... $737,938 $645,161
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date. See Notes to Condensed Consolidated Financial
Statements.
4
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars And Shares In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net patient revenues.............. $247,820 $206,066 $722,074 $600,195
Investment and other
revenue.......................... 20,551 2,396 23,579 4,374
-------- -------- -------- --------
Net revenues................. 268,371 208,462 745,653 604,569
Expenses:
Operating expenses................ 218,933 183,493 642,654 534,906
Depreciation and
amortization..................... 6,728 5,109 19,400 14,785
Interest expense and
financing charges................ 9,161 6,807 26,228 19,557
Merger and other
one-time charges................. 18,400 11,750 18,400 11,750
-------- -------- -------- --------
Total expenses............... 253,222 207,159 706,602 580,998
-------- -------- -------- --------
Income before income taxes............. 15,149 1,303 38,971 23,571
Income taxes........................... 5,757 1,821 14,809 10,297
-------- -------- -------- --------
Net income (loss)............ $ 9,392 ($518) $ 24,162 $ 13,274
======== ======== ======== ========
Net income (loss) per common
and common equivalent share:
Primary...................... $0.39 ($0.02) $1.01 $0.55
======== ======== ======== ========
Fully diluted................ $0.38 ($0.02) $0.98 $0.55
======== ======== ======== ========
Weighted average number of
common and common
equivalent shares outstanding:
Primary...................... 24,202 23,258 24,021 24,226
======== ======== ======== ========
Fully diluted................ 26,608 23,258 26,653 24,267
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 24,162 $ 13,274
Adjustments to reconcile net
income to net cash
(used in) provided by
operating activities:
Provision for doubtful accounts........ 5,132 4,321
Depreciation and amortization.......... 19,400 14,785
Gain on sale of investments and
other assets......................... (19,077) (600)
Non-cash one-time charges.............. 17,100 ---
Amortization of deferred financing
costs................................ 689 481
Changes in assets and liabilities
net of effect of acquisitions:
Accounts receivable.................. (55,785) (24,073)
Other current assets................. (8,604) (3,571)
Other noncurrent assets.............. (8,614) (11,901)
Accounts payable and accrued
expenses............................ (1,785) 15,933
Accrued wages and related
liabilities......................... (3,896) (1,587)
Interest payable..................... (1,656) 579
Income taxes payable................. 7,591 (487)
Other noncurrent liabilities......... 27 1,799
-------- ---------
Net cash (used in)
provided by operating activities.. (25,316) 8,953
INVESTING ACTIVITIES
Acquisition of businesses................. (11,231) (54,287)
Purchases of property and equipment....... (24,014) (17,022)
Proceeds from disposition of
property and equipment................... 994 4,155
Repayments of notes receivable............ --- 943
Net purchases and sales of
investments.............................. (3,365) (5,077)
Proceeds from sale of investment
in unconsolidated affiliate.............. 24,600 ---
Other..................................... (1,581) (435)
-------- ---------
Net cash used in investing
activities........................ (14,597) (71,723)
FINANCING ACTIVITIES
Proceeds from exercise of warrants
and options.............................. 2,284 1,242
Purchase of treasury stock................ --- (13,670)
Long-term debt payments................... (5,259) (176,303)
Proceeds from long-term debt
borrowings............................... 51,150 256,350
Payment of debt issuance costs............ (250) (4,447)
-------- ---------
Net cash provided by
financing activities.............. 47,925 63,172
-------- ---------
Net increase in cash and cash
equivalents.............................. 8,012 402
Cash and cash equivalents at
beginning of period...................... 17,738 28,611
-------- ---------
Cash and cash equivalents at end
of period................................ $ 25,750 $ 29,013
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars In Thousands)
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
In January 1996, the Company completed the acquisition of RN Health
Care Services, Inc. ("RN Services"), a home health care business located in
Detroit, Michigan, for $2,350 in cash. In conjunction with the acquisition, the
Company advanced $2,500 to the former owners in the form of a short-term note
secured by RN Services' accounts receivable.
In April 1996, the Company completed the acquisition of Jennings
Visiting Nurse Association, Inc. ("Jennings"), a home health care business based
in North Vernon, Indiana, for $937 in cash and a promissory note for $250.
In July 1996, the Company completed the acquisition of Emery Pharmacy,
Inc. ("Emery"), an institutional pharmacy located in Utica, New York, for $3,672
in cash and a promissory note in the amount of $1,458.
In September 1996, the Company completed the acquisition of RX
Corporation, an institutional pharmacy located in southern California, for
$1,800 in cash and a promissory note for $925.
The above 1996 acquisitions had the following effect on cash:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $(14,531)
Fair value of liabilities assumed 3,300
--------
Net effect on cash $(11,231)
========
</TABLE>
In conjunction with the sale of four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided purchase
money financing in the amount of $17,550 evidenced by an interest-bearing
promissory note, due and payable in 1997.
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the consolidated financial statements and the footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1995.
Note B - Change in Accounting Principle
- ---------------------------------------
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of. In accordance with
Statement No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets may be less than the carrying amounts of those assets. This new standard
had no effect on the financial statements.
Note C - Treasury Stock
- -----------------------
During the second quarter of 1996, the Company canceled 715,000 shares of
treasury stock which the Company had repurchased in July, 1995.
Note D - Contingent Earn-Out Provision
- --------------------------------------
The purchase agreement with respect to the 1994 acquisition of Long Term
Care Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical
Services Corporation III (collectively, "LTC"), contains a contingent earnout
provision for the two year period ended June 31, 1996. An additional $5.5
million could be paid to LTC provided certain operating results were obtained
for this period. Management has completed its analysis of the amount payable
under this provision and believes that the amount owing to LTC is $2.1 million,
which amount has been disputed by LTC.
Note E - Exit, Merger and Other One-Time Charges
- ------------------------------------------------
During the third quarter of 1996, management decided to close five
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The plan to exit
these activities, including providing appropriate notice as required by
regulations to residents, employees and authorities has commenced. The
facilities will be closed and operating activities will cease. The remaining net
book value of leasehold improvements at the dates of closure and the remaining
rent due to the landlord for periods after the dates of closure have been
charged to operations. Management expects to complete these closings in the
first quarter of 1997. The revenues and net operating losses of these facilities
are not significant. In addition, in the third quarter of 1996, the Company
recorded other charges as set forth in the following table, including a charge
for additional bad debt expense related to TeamCare. The charge for bad debt
expense is attributable to the increased risk of collection resulting from the
deterioration in the financial condition of certain customers. The notes
receivable written off are for loans made by the Company to a sublease lessee to
fund working capital. Accounts receivable from the facility under lease serve as
collateral for the working capital loans. During the third quarter of 1996, the
loans to the lessee began to significantly exceed the collateral, indicating
that the loan would not be recoverable. Accordingly, the Company decided to
terminate the sublease arrangement and to write off the loans which it concluded
would not be recoverable. The write-off of leasehold improvements, notes
receivable and bad debt expense are reflected in the accompanying balance sheet
as a direct reduction of the related asset. Rent expense and costs related to
the termination of the frozen pension plan and other items has been reflected in
accrued expenses as the accompanying balance sheet. The following is a summary
of the exit and other one-time charges (dollars in thousands):
<TABLE>
<CAPTION>
Exit costs:
<S> <C>
Rent expense for periods subsequent to closing........... $ 9,400
Book value of leasehold improvements at date of closing.. 1,200
Other
TeamCare bad debt expense................................ 2,900
Write-off of notes receivable............................ 3,000
Termination of frozen pension plan and other items....... 1,900
-------
$18,400
=======
</TABLE>
Note F - Proposed Transaction
- -----------------------------
The Company has entered into an Agreement and Plan of Merger between
Vitalink and the Company dated as of September 3, 1996. The form of the proposed
transactions are (1) the Company's skilled nursing facilities, along with its
contract management and home health businesses are to be reorganized into New
GranCare, Inc., a wholly-owned subsidiary of the Company ("New GranCare"), and
all of the shares of common stock of New GranCare are to be distributed to the
Company's shareholders in a tax-free spin-off; (2) the Company (then consisting
solely of the institutional pharmacy and related business known as TeamCare)
would merge into and be acquired by Vitalink through a tax-free exchange of
shares of common stock of Vitalink for shares of common stock of the Company;
and (3) New GranCare would become a public company upon the effectiveness of its
initial registration statement. Notwithstanding the legal structure of the
proposed transactions, for accounting/financial reporting purposes such
transactions will be treated as the spin-off of TeamCare and
reorganization/recapitalization of the Company into New GranCare as New GranCare
will continue the majority of the Company's businesses. New GranCare will
change its name to "GranCare, Inc." and be treated as the continuation of the
Company. The closing under the Agreement and Plan of Merger is subject to a
number of conditions, including approval of the transactions by the Company's
shareholders.
8
<PAGE>
ITEM 2. 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 this
regard, during 1996 the Company has acquired Jennings Visiting Nurse
Association, Inc., a home health agency in Indiana, RN Health Care Services,
Inc., a home health agency in Michigan, RX Corporation, a provider of
institutional pharmacy services in southern California, and Emery Pharmacy, a
provider of institutional pharmacy services in upstate New York, and acquired
leasehold interests in two skilled nursing facilities.
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 nine months
ended September 30, 1996, the percentage of the Company's net patient revenues
derived from Medicaid and Medicare programs were 38.6% and 38.6%, respectively,
of the Company's total revenues. For the year ended December 31, 1995, the
percentage of the Company's net patient revenues derived from Medicaid and
Medicare programs were 44.7% and 30.2%, respectively, of the Company's total
revenues.
The Company derives its revenues by providing skilled nursing, pharmacy,
therapy, subacute and other specialty medical services and 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. Accordingly, the Company has in the past
sought to enhance its operating margins by increasing the proportion of its
revenues derived from specialty medical services. While the Company intends to
continue pursuing this course, on September 3, 1996, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy
Services, Inc. ("Vitalink") pursuant to which Vitalink will acquire the
Company's institutional pharmacy business by merger (the "Merger"). See "Item
5-Other Information."
RESULTS OF OPERATIONS
The following tables set forth certain data for the periods indicated:
9
<PAGE>
<TABLE>
<CAPTION>
REVENUE COMPOSITION
PERCENTAGE OF PATIENT REVENUES
-----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 31,
1996 1995 1996 1995
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Skilled Nursing and Subacute Care:
Routine services................. 44.2% 53.9% 44.7% 54.8%
Specialty Medical:
Therapy, Subacute & Home Health.. 26.8% 20.6% 25.9% 19.4%
Pharmacy (1)..................... 25.6% 21.9% 25.9% 23.3%
Contract Management (1).......... 3.4% 3.6% 3.5% 2.5%
----------- ------------ ----------- ------------
Subtotal...................... 55.8% 46.1% 55.3% 45.2%
----------- ------------ ----------- ------------
Total......................... 100.0% 100.0% 100.0% 100.0%
============ ============ =========== ============
<CAPTION>
REVENUE COMPOSITION
DERIVED FROM SKILLED NURSING AND SUBACUTE CARE
-------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Routine skilled nursing................ $89.85 $87.60 $89.35 $87.02
Specialty medical services (2)......... 61.59 36.85 58.89 34.05
------------ ----------- ---------- ----------
Total............................ $151.44 $124.45 $148.24 $121.07
============ =========== ========== ==========
Average occupancy rate................. 85% 87% 85% 87%
</TABLE>
(1) Before elimination of intercompany sales.
(2) Excludes revenue from patients outside GranCare facilities.
The Company's net revenues for the three and nine month periods ended
September 30, 1996, were $268.4 and $745.7 million, respectively, compared to
$208.5 and $604.6 million for the same periods in 1995, a net increase of $59.9
and $141.1 million, respectively, or 28.7% and 23.3%. Included in net revenues
and classified as investment and other revenue for the three and nine month
periods ended September 30, 1996, is the approximate $18 million gain on the
sale of the Company's investment in an unconsolidated affiliate which occurred
in the third quarter of 1996. For the three and nine month periods, $24.0 and
$75.5 million, respectively, resulted from acquisitions and $24.9 million and
$69.0 million, respectively, was primarily attributable to same-store growth.
For the same periods, those increases were partially offset by loss of net
revenue of $7.0 million and $21.4 million, respectively, from facilities
divested. For the three and nine month periods, specialty medical revenues
increased $41.6 million and $123.6 million, respectively, over the same periods
in 1995. This was primarily the result of the growth in the number of Medicare
residents which utilize higher margin ancillary services (physical, respiratory,
occupational and speech therapy).
Operating expenses for the three and nine month periods ended September 30,
1996, were $218.9 and $642.7 million, respectively, compared to $183.5 and
$534.9 million for the same periods in 1995, a net increase of $35.4 and $107.8
million, respectively, or 19.3% and 20.2%. For the three and nine month periods,
$21.7 and $66.0 million, respectively, resulted from acquisitions and $21.1
million and $62.1 million, respectively was primarily attributable to same-store
growth increases in expenses. For the same periods, these increases were
partially offset by a reduction of expenses of $7.4 million and $20.3 million,
respectively, 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 aucillary services (physical,
respiratory, occupational and speech therapy) utilized generate additional costs
in line with the growth realized in the specialty medical revenues.
Depreciation and amortization expenses for the three and nine month periods
ended September 30, 1996, were $6.7 and $19.4 million, respectively, compared to
$5.1 million and $14.8 million for the same periods in 1995, an increase of $1.6
and $4.6 million, respectively, or 31.4% and 31.1%. This increase was primarily
the result of depreciation and amortization expenses attributable to businesses
acquired and additions to property and equipment.
Interest expense and financing charges for the three and nine month periods
ended September 30, 1996, were $9.2 and $26.6 million, respectively, compared to
$6.8 and $19.6 million for the same periods in 1995, an increase of $2.4 and
$6.6 million, respectively, or 35.3% and 33.7%. These increases were primarily
due to interest on additional indebtedness incurred in connection with
acquisitions, the September 1995 issuance of $100 million aggregate principal
amount of senior subordinated notes and, to a lesser extent, borrowings to fund
working capital.
10
<PAGE>
During the third quarter of 1996, the Company recorded exit and other
one-time costs of $18.4 million as a charge to operations. Approximately $10.6
million of this charge relates to management's decision to close five facilities
which are operated under long term operating leases, as these facilities did not
fit the Company's operating strategies. The $10.6 million reflects the remaining
net book value of leasehold improvements at the dates of closure and the
remaining rent due to the landlord for periods after the dates of closure. The
revenues and net operating losses of these facilities are not significant.
Approximately $3 million of the charge relates to the write-off of notes
receivable for loans made by the Company to a sublease lessee to fund working
capital. Accounts receivable from the facility under lease serve as collateral
for the working capital loans. During the third quarter of 1996, the loans to
the lessee began to significantly exceed the collateral, indicating that the
loan would not be recoverable. Accordingly, the Company decided to terminate the
sublease arrangement and to write off the loans which it concluded would not be
recoverable. In addition, in the third quarter of 1996, the Company recorded
$4.8 million of other charges which included $2.9 million of additional bad debt
expense related to TeamCare. The charge for bad debt expense was necessary to
provide for the increased risk of collection resulting from the deterioration in
the financial condition of certain customers in the third quarter of 1996. These
charges do not have a negative effect on short-term cash flow. In the third
quarter of 1995, the Company incurred certain costs related to the completion of
the pooling-of-interests with Evergreen on July 20, 1995 and other one-time
costs.
Income taxes for the three and nine month periods ended September 30,
1996, were $5.8 million and $14.8 million, respectively, compared to $1.8 and
$10.3 million for the same periods in 1995, an increase of $4.0 million and $4.5
million, respectively.
As a result of the foregoing, net income for (loss) the three and nine
month periods ended September 30, 1996, was $9.4 and $24.2 million,
respectively, compared to ($0.5) and $13.3 million for the same periods in 1995,
an increase of $9.9 and $10.9 million, respectively.
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. In accordance with
Statement No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets may be less than the carrying amounts of those assets. This new standard
had no effect on the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at September 30, 1996, was
$25.8 million in cash and cash equivalents compared to $17.7 million at
December 31, 1995, an increase of $8.1 million. On August 5, 1996, the Company
sold its entire interest in Alternative Living Services, Inc. ("ALS"), resulting
in net proceeds to the Company of approximately $24.6 million and an approximate
$18.0 million gain on the sale. The increase in cash and cash equivalents was
due primarily to proceeds realized from the sale of ALS. Payments received by
the Company from the Medicaid and Medicare programs are the Company's largest
source of cash from operations.
Accounts receivable at September 30, 1996, were $218.5 million compared
to $173.1 million at December 31, 1995, an increase of $45.4 million. The
Company's accounts receivable includes 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. Specialty medical services (including
pharmacy and other ancillary 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, average days receivable likely will equal or exceed current
levels and may require additional working capital.
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
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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.
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 anticipated principal payments, cash
interest payments, rent and property expense obligations for 1996 are estimated
at $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, 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 nine
month period ended September 30, 1996, were $24.0 million. The Company estimates
that capital expenditures for the year ending December 31, 1996, will be
approximately $32.0 million.
The Company maintains a $150.0 million credit facility with First Union
National Bank of North Carolina ("First Union") and a syndicate of banks which
may be used for working capital, other general corporate purposes and
acquisitions (the "Credit Facility"). As of September 30, 1996, approximately
$88.9 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 connection with the proposed Distribution (as defined in Item 5 below) and
Merger, the Company has received a commitment letter from First Union and Chase
Manhattan Bank with respect to a new $300 million credit facility (the "New
Credit Facility"). The New Credit Facility will be for the benefit of New
GranCare (as defined in Item 5 below) and will be used to pay off the existing
Credit Facility, redeem the Company's $60.0 million aggregate principal amount
of 6-1/2% Convertible Debentures, satisfy various expenses associated with the
Distribution and Merger, to fund New GranCare's acquisitions following the
Distribution and Merger and for New GranCare's general working capital
requirements.
The Company believes that its cash from operations, existing working capital
and available borrowings under the Credit Facility 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 (including an increase in the Credit Facility), 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.
The Company is a beneficial owner of 1,000,000 shares of stock of Health and
Retirement Properties Trust ("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 separate components of equity. The Credit Facility
and indenture pursuant to which the Notes 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 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 31, 1996 GRANCARE, INC.
/s/ Jerry A. Schneider
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Jerry A. Schneider
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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