<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT
Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED].
For the transition period from _______________ to _____________
Commission File 001-10968
A. Full title of the plan and the address of the plan, if different
from that of the issuer named below:
GRANCARE, INC. 401(k) SAVINGS PLAN
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office.
PARAGON HEALTH NETWORK, INC.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
<PAGE>
Page No.
Items 1-3 not applicable under ERISA Filing.
Item 4. Financial Statements and Exhibits.
Index to Financial Statements 1
Signature Page 3
Index to Exhibits 5
<PAGE>
Audited Financial Statements and
Supplemental Schedules
GranCare, Inc. 401(k) Savings Plan
Years ended December 31, 1997 and 1996
with Report of Independent Auditors
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Audited Financial Statements
and Supplemental Schedules
Years ended December 31, 1997 and 1996
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Statements of Net Assets Available for Benefits............................ 3
Statements of Changes in Net Assets Available for Benefits
with Supplemental Fund Information....................................... 4
Notes to Financial Statements.............................................. 6
Supplemental Schedules
Item 27a - Schedule of Assets Held for Investment Purposes*................ 13
Item 27d - Schedule of Reportable Transactions*............................ 14
</TABLE>
* All other schedules are omitted because they are not applicable.
1
<PAGE>
Report of Independent Auditors
The Board of Directors
GranCare, Inc. 401(k) Savings Plan
We have audited the accompanying statements of net assets available for benefits
of GranCare, Inc. 401(k) Savings Plan (the "Plan") as of December 31, 1997 and
1996 and the related statements of changes in net assets available for benefits
with supplemental fund information for the years then ended. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan as of
December 31, 1997 and 1996 and the changes in net assets available for benefits
for the years then ended in conformity with generally accepted accounting
principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplemental schedules
listed in the Table of Contents are presented for the purpose of additional
analysis and are not a required part of the basic financial statements but are
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The fund information in the statements of changes in net
assets available for benefits is presented for purposes of additional analysis
rather than to present the changes in net assets available for benefits of
1
<PAGE>
each fund. The supplemental schedules and fund information have been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ERNST & YOUNG LLP
June 17, 1998
2
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Statements of Net Assets Available For Benefits
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------
<S> <C> <C>
ASSETS
Investments - at fair value (Note 3):
Money Market Fund $ 6,293,870 $ 6,153,034
Income Fund of America 7,466,435 8,148,471
Investment Company of America 10,643,620 10,694,266
Company Stock Fund 3,052,587 2,285,665
Loan Fund 4,398 22,810
----------------------------
27,460,910 27,304,246
Contributions receivable:
Participants 400,485 255,833
Company 1,093,451 2,340,467
----------------------------
1,493,936 2,596,300
Interest and dividends receivable 1,490 1,402
----------------------------
Net assets available for benefits $28,956,336 $29,901,948
============================
</TABLE>
See accompanying notes.
3
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Statement of Changes in Net Assets Available for Benefits with Supplemental Fund
Information
Year ended December 31, 1997
<TABLE>
<CAPTION>
SUPPLEMENTAL INFORMATION BY FUND
=====================================================================
INVESTMENT MONEY COMPANY
INCOME FUND COMPANY OF MARKET STOCK
OF AMERICA AMERICA FUND FUND LOAN FUND TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Additions to net assets attributed to:
Contributions:
Participants $ 1,730,180 $ 2,364,964 $ 1,174,843 $ 632,693 $ - $ 5,902,680
Company 107,928 136,010 1,589,705 80,609 - 1,914,252
Rollovers 23,236 30,794 309,680 3,113 - 366,823
Interest 4,791 6,525 319,985 3,805 - 335,106
Dividends 1,062,689 1,117,204 - - - 2,179,893
Net appreciation in fair value
of investments (Note 3) 750,628 1,782,713 - 914,338 - 3,447,619
Other receipts 59,156 122,765 4,384 22,466 5,165 213,936
----------------------------------------------------------------------------------
Total additions 3,738,608 5,560,975 3,398,597 1,657,024 5,165 14,360,369
Deductions from net assets attributed to:
Benefits paid to participants 1,971,432 2,386,321 1,152,459 412,126 - 5,922,338
Benefits paid to TeamCare participants 2,946,669 4,285,447 1,091,181 655,562 - 8,978,859
Administrative expenses 145,067 151,308 88,395 1,554 - 386,324
Loan payments - - - - 18,460 18,460
----------------------------------------------------------------------------------
Total deductions 5,063,168 6,823,076 2,332,035 1,069,242 18,460 15,305,981
----------------------------------------------------------------------------------
Net increase (decrease) prior to
interfund transfers (1,324,560) (1,262,101) 1,066,562 587,782 (13,295) (945,612)
Interfund transfers in (out) 69,206 74,462 (137,876) (675) (5,117) -
----------------------------------------------------------------------------------
Increase (decrease) in net assets
available for benefits (1,255,354) (1,087,639) 928,686 587,107 (18,412) (945,612)
Net assets available for benefits,
beginning of year 8,367,614 10,892,079 8,281,675 2,337,770 22,810 29,901,948
----------------------------------------------------------------------------------
Net assets available for benefits, end of year $ 7,112,260 $ 9,704,440 $ 9,210,361 $ 2,924,877 $ 4,398 $ 28,956,336
==================================================================================
</TABLE>
4
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Statement of Changes in Net Assets Available for Benefits with Supplemental Fund
Information
Year ended December 31, 1996
<TABLE>
<CAPTION>
Supplemental Information by Fund
---------------------------------------------------------------------
Investment Money
Income Fund Company of Market Company Stock
of America America Fund Fund Loan Fund Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Additions to net assets attributed to:
Contributions:
Participants $1,999,482 $2,737,442 $ 1,341,715 $ 850,502 $ - $6,929,141
Company 254,335 346,707 2,281,405 103,096 - 2,985,543
Interest 6,521 8,496 277,214 3,626 - 295,857
Dividends 705,525 575,256 - - - 1,280,781
Net appreciation in fair value of investments
(Note 3) 223,408 839,983 - 313,232 - 1,376,623
Other - - (5,820) 5,893 - 73
---------------------------------------------------------------------------------
Total additions 3,189,271 4,507,884 3,894,514 1,276,349 - 12,868,018
Deductions from net assets attributed to:
Benefits paid to participants 842,620 918,566 385,300 207,369 - 2,353,855
Loan payments - - (10,396) - 10,396 -
---------------------------------------------------------------------------------
Total deductions 842,620 918,566 374,904 207,369 10,396 2,353,855
---------------------------------------------------------------------------------
Net increase (decrease) prior to interfund
transfers 2,346,651 3,589,318 3,519,610 1,068,980 (10,396) 10,514,163
Interfund transfers in (out) 571,318 796,230 (1,286,890) (80,658) - -
---------------------------------------------------------------------------------
Increase (decrease) in net assets available of
benefits 2,917,969 4,385,548 2,232,720 988,322 (10,396) 10,514,163
Net assets available for benefits, beginning
of year 5,449,645 6,506,531 6,048,955 1,349,448 33,206 19,387,785
---------------------------------------------------------------------------------
Net assets available for benefits, end of year $8,367,614 $10,892,079 $ 8,281,675 $2,337,770 $ 22,810 $29,901,948
=================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Notes to Financial Statements
December 31, 1997
1. PLAN DESCRIPTION
The following description of GranCare, Inc. 401(k) Savings Plan (the "Plan")
provides only general information. Participants should refer to the "GranCare
Savings Plan Summary Plan Description", copies of which are available from the
Plan Administrator, for a more complete description of the Plan's provisions.
GENERAL
The Plan is a defined contribution 401(k) plan for eligible employees of
GranCare, Inc. and subsidiaries ("GranCare"). On November 4, 1997, GranCare
consummated a merger with Living Centers of America, Inc. ("LCA") following
LCA's leveraged recapitalization. In connection with the closing of these
transactions, LCA changed its name to Paragon Health Network, Inc. ("Paragon")
and became the Plan sponsor. GranCare and Paragon are referred to herein as the
"Company".
The Plan was amended in February 1997 in conjunction with the sale of GranCare's
institutional pharmacy division, TeamCare, Inc. ("TeamCare"), to Vitalink
Pharmacy Services, Inc. ("Vitalink"). During 1997, assets in the Plan relating
to employees of TeamCare were transferred to Vitalink sponsored benefit plans or
other options at the election of the participants.
Employees become eligible to participate in the 401(k) component of the Plan
upon completion of one year of service and at least 1,000 hours of service.
Employees must be age 21 or older to participate in the Plan. The Plan is
subject to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA").
CONTRIBUTIONS
An eligible employee may authorize pre-tax payroll deductions for the purposes
of the Plan of amounts up to 15% of eligible compensation or the Internal
Revenue Service maximum (adjusted annually for the cost of living), whichever is
less. The Company contributes, on a quarterly basis, an amount equal to 25% of
the first 4% of each participant's contribution to the Plan. To receive the
Company matching contributions, the participant must be employed on the last day
of each calendar quarter.
6
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Notes to Financial Statements (continued)
1. PLAN DESCRIPTION (CONTINUED)
CONTRIBUTIONS (CONTINUED)
In addition to the contributions to the 401(k) portion of the Plan, discussed in
the preceding paragraph, the Company also makes a profit sharing contribution
annually. Employees do not need to participate in the 401(k) component of the
Plan to receive a profit sharing contribution. The annual contribution is at the
discretion of management. The 1997 annual contribution is equal to 1% of total
compensation and the 1996 annual contribution is equal to 2% of total
compensation and 2% of pay earned over one-half of the Social Security wage
base. To receive the Company profit sharing contribution, the employee must be
employed on the last day of the Plan year and have completed two years of
employment and worked at least 1,000 hours per year.
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contribution, the
Company's contribution and an allocation of Plan earnings based on the
participant's account balance.
VESTING
Participants have a nonforfeitable interest at all times in the value of their
individual account. Company contributions immediately vest when contributed to
the participants' individual accounts.
INVESTMENT OPTIONS
The Plan provides four investment options to participants. Upon enrollment in
the Plan, a participant may direct employer and employee contributions to be
invested 100% in any one, or in multiples of 1%, in any of the following:
Company Stock Fund (Paragon Health Network, Inc. common stock), two available
stock mutual funds of equity securities (Income Fund of America and Investment
Company of America, referred to as pooled equity funds), and a Money Market
Fund. Participants may change their investment elections more than once each
plan year; however, any requested change is effective at the beginning of the
next quarter. The Plan's investments are held and transactions are executed by
the Trustee.
7
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Notes to Financial Statements (continued)
1. PLAN DESCRIPTION (CONTINUED)
PAYMENT OF BENEFITS
On termination of service, a participant may receive a lump-sum amount equal to
the vested value in his or her account, or upon death, disability, or retirement
elect to receive annual installments over a ten year period. The participant's
contributions may also be withdrawn for certain hardship situations.
LOANS
The Plan document does not provide for loans to participants. However, the Plan
accepted the loans on the accompanying statements of net assets available for
benefits, in connection with a merger of another plan. The loans bear interest
at 10%. They are secured by the account balances of the participant and are
generally payable over five years.
ADMINISTRATIVE EXPENSES
Prior to 1997, administrative expenses were paid by the Plan sponsor. In 1997
certain administrative expenses were paid by the Plan.
2. SUMMARY OF ACCOUNTING POLICIES
INVESTMENT VALUATION AND INCOME RECOGNITION
The Plan's investments in the Company Stock Fund and pooled equity funds are
stated at fair value as reported by United Missouri Bank, N.A. (the "Trustee")
and are based on quoted market prices on the last day of the plan year.
Purchases and sales of securities are recorded on a trade-date basis. Interest
income is recorded on the accrual basis. Dividends are recorded on the ex-
dividend date.
8
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Notes to Financial Statements (continued)
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in accordance 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.
3. INVESTMENTS
The Plan's investments are held by a bank administered trust fund and are
presented in the following table. Investments that represent 5% or more of the
Plan's net assets are separately identified:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------
NUMBER OF FAIR NUMBER OF FAIR
SHARES/UNITS VALUE SHARES/UNITS VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund $ 6,293,870 $ 6,153,034
Income Fund of America:
Income Fund of America 419,260 7,450,252 493,114 8,146,250
Money Market Fund 16,183 2,221
----------- -----------
7,466,435 8,148,471
Investment Company of America:
Investment Company of America 376,754 10,643,308 441,255 10,691,617
Money Market Fund 312 2,649
----------- -----------
10,643,620 10,694,266
Company Stock Fund:
Paragon Health Network, Inc. Stock 51,996 3,051,593 - -
GranCare, Inc. Stock - - 110,266 1,971,004
Money Market Fund 994 314,661
----------- -----------
3,052,587 2,285,665
</TABLE>
9
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
During 1997 and 1996, the Plan's investments (including investments bought,
sold, and held during the year) appreciated in value by $3,447,679 and
$1,376,623, respectively, as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Investments at fair value as determined by
quoted market price:
Income Fund of America $ 750,628 $ 223,408
Investment Company of America 1,782,713 839,983
Company Stock Fund 914,338 313,232
-------------------------
Net change in fair value $3,447,679 $1,376,623
=========================
</TABLE>
Transactions in the common stock of the Plan sponsor for the years ended
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------
<S> <C> <C> <C> <C>
Aggregate purchases
- GranCare, Inc. 197,613 $2,216,181 44,071 $734,223
- Paragon Health Network, Inc. 2,263 118,224 - -
Aggregate sales and distributions
to participants
- GranCare, Inc. 70,882 801,214 10,863 282,057
- Paragon Health Network, Inc. 5,248 187,542 - -
</TABLE>
4. PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA.
10
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Notes to Financial Statements (continued)
5. DIFFERENCES BETWEEN FINANCIAL STATEMENTS AND FORM 5500
The following is a reconciliation of net assets available for benefits per the
financial statements to Form 5500:
<TABLE>
<CAPTION>
December 31,
1997
------------------
<S> <C>
Net assets available for benefits per the financial
statements $28,956,336
Amounts allocated to withdrawn participants (1,481,079)
------------------
Net assets available for benefits per the Form 5500 $27,475,257
==================
</TABLE>
The following is a reconciliation of benefits paid to participants per the
financial statements to the Form 5500:
<TABLE>
<CAPTION>
Year ended
December 31,
1997
-----------------
<S> <C>
Benefits paid to participants per the financial
statements $14,901,197
Less: Amounts allocated on Form 5500 to
withdrawn participants at December 31, 1996 (1,647,287)
Add: Amounts allocated on Form 5500 to
withdrawn participants at December 31, 1997 1,481,079
-----------------
Benefits paid to participants per the Form 5500 $14,734,989
=================
</TABLE>
Amounts allocated to withdrawn participants are recorded on the Form 5500 for
benefit claims that have been processed and approved for payment prior to
year-end but not yet paid. Amounts allocated to withdrawn participants do not
include hardship withdrawals as these amounts are paid when requested.
11
<PAGE>
GranCare, Inc. 401(K) Savings Plan
Notes To Financial Statements (Continued)
6. RELATED PARTY TRANSACTIONS
One of the investment vehicles available to employees, the Company Stock Fund,
contains the stock of Paragon Health Network, Inc., the Plan sponsor. Prior to
GranCare's merger with Paragon, the Plan held stock of GranCare. The cost,
market value, and number of shares held by the Plan as well as net appreciation
is more fully described in Note 3.
Participant contributions which have been allocated to the Income Fund of
America, the Investment Company of America, and the Company Stock Fund are
temporarily invested in the Plan Trustee's Money Market Fund until such time as
shares of those investment vehicles can be purchased.
In connection with the sale of TeamCare in February 1997 (see Note 1), the Plan
received 61,173 shares of Vitalink common stock in exchange for 127,977 shares
of GranCare common stock. All Vitalink shares held by the Plan were sold in
June 1997 and proceeds were used to acquire GranCare common stock.
7. INCOME TAX STATUS
The Internal Revenue Service ruled on September 11, 1995 that the Plan qualifies
under Section 401(a) of the Internal Revenue Code (IRC) and, therefore, the
related trust is not subject to tax under present income tax law. The Plan has
been amended since receiving the determination letter. The Plan is required to
operate in conformity with the IRC to maintain its qualification. The Plan
Administrator is not aware of any course of action or series of events that have
occurred that might adversely affect the Plan's qualified status.
12
<PAGE>
SUPPLEMENTAL SCHEDULES
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Item 27a - Schedule of Assets Held for Investment Purposes
December 31, 1997
<TABLE>
<CAPTION>
CURRENT
IDENTITY OF ISSUE OR BORROWER DESCRIPTION OF INVESTMENT COST VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
* United Missouri Bank, N.A. Money Market Fund $ 6,293,870 $ 6,293,870
Income Fund of America Pooled Equity Funds,
419,260 units 6,749,995 7,450,252
* United Missouri Bank, N.A. Money Market Funds 16,183 16,183
Investment Company of America, Pooled Equity Funds,
376,754 units 8,831,846 10,643,308
* United Missouri Bank, N.A. Money Market Funds 312 312
* Common Stock Fund Paragon Health Network,
Inc. Common Stock,
51,996 shares 1,867,058 3,051,593
* United Missouri Bank, N.A. Money Market Funds 994 994
* Loans to Participants - 4,398
-----------------------------------
$ 23,760,258 $ 27,460,910
===================================
</TABLE>
* Represents party-in-interest to the Plan.
13
<PAGE>
GranCare, Inc. 401(k) Savings Plan
Item 27d - Schedule of Reportable Transactions
Year ended December 31, 1997
<TABLE>
<CAPTION>
===================================================================================================================================
Current Value
Description of Purchase Selling Cost of on Transaction Net Gain
Identity of Party Asset Price Price Asset Date (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
Category (iii) - Series of securities transactions in excess of 5% of plan assets.
<S> <C> <C> <C> <C> <C> <C>
United Missouri Bank:*
Money Market Fund Money Market $ 26,424,661 $ - $ 26,424,661 $ 26,424,661 $ -
Money Market Fund Money Market - 27,252,725 27,252,725 27,252,725 -
Income Fund of America Pooled Equity Fund 3,431,021 3,431,021 3,431,021 -
Income Fund of America Pooled Equity Fund - 4,877,647 4,217,192 4,877,647 660,455
Investment Company of
America Pooled Equity Fund 4,275,061 - 4,275,061 4,275,061 -
Investment Company of
America Pooled Equity Fund - 6,476,125 4,864,858 6,476,125 1,611,267
Company Stock Fund* GranCare, Inc.
Common Stock 2,216,181 - 2,216,181 2,216,181 -
Company Stock Fund* GranCare, Inc.
Common Stock - 760,053 801,214 760,053 (41,161)
Company Stock Fund Vitalink Pharmacy
Services, Inc. 353,917 - 353,917 353,917 -
Company Stock Fund Vitalink Pharmacy
Services, Inc. - 1,480,024 2,624,147 1,480,024 (1,144,123)
</TABLE>
There were no category (i), (ii) or (iv) reportable transactions during the year
ended December 31, 1997.
* Represents party-in-interest to the Plan.
14
<PAGE>
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Trustees (or other persons who administer the Plan) have duly caused this annual
report to be signed by the undersigned "hereunto duly authorized."
GRANCARE, INC. 401(K) SAVINGS PLAN
By /s/ Ann Weiser
----------------------------------
Ann Weiser, Senior Vice President and
Chief Human Resource Officer
Date: June 29, 1998
<PAGE>
EXHIBIT INDEX
Item
- ----
23 Consent of Ernst & Young LLP, Independent Auditors
<PAGE>
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.333-39485) pertaining to the GranCare, Inc. 401(k) Savings Plan of
Paragon Health Network, Inc. of our report dated June 17, 1998, with respect to
the financial statements and schedules of the GranCare, Inc. 401(k) Savings Plan
included in this Annual Report (Form 11-K) for the year ended December 31, 1997.
Ernst & Young LLP
Atlanta, Georgia
June 25, 1998
