<PAGE>
 
=============================================================================== 

                                 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 March 31, 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 Identification No.)
 incorporation or organization)  


    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 23,234,624 shares outstanding of registrant's Common Stock, no par
value, as of May 15, 1996.

                                    Page 1

===============================================================================


<PAGE>
 
                                GRANCARE, INC.

                                     INDEX
                                     -----
<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
<S>                                                                     <C>
                         PART I - FINANCIAL INFORMATION


Item 1.   Financial Statements (Unaudited):
               Condensed Consolidated Balance Sheets-
               March 31, 1996 and December 31, 1995...................... 3

               Condensed Consolidated Statements of Income-
               Three Months Ended March 31, 1996 and 1995................ 5

               Condensed Consolidated Statements of Cash Flows-
               Three Months Ended March 31, 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 Months Ended March 31, 1996......................... 9


                          PART II - OTHER INFORMATION

                                                                             
Signatures.............................................................. 13
</TABLE>

                                       2
<PAGE>
 
                         PART I - FINANCIAL INFORMATION



ITEM 1.   FINANCIAL STATEMENTS
          --------------------

                                 GRANCARE, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars In Thousands)

<TABLE>
<CAPTION>
                                                                   March 31,     December 31,  
                                                                     1996           1995      
                                                                -------------    ------------  
                                                                 (Unaudited)        (Note)     
<S>                                                             <C>               <C>          
                        ASSETS                                                                                        
Current assets:                                                                               
 Cash and cash equivalents..................................         $ 15,508        $ 17,738 
 Accounts receivable, less allowance for doubtful accounts                                               
  (1996 - $10,869 and 1995 - $10,856).......................          198,916         173,068                                
 Inventories................................................           17,280          13,527  
 Prepaid expenses and other current assets                             35,313          16,498  
 Deferred income taxes......................................           10,933          10,933  
                                                                -------------    ------------  

  Total current assets......................................          277,950         231,764  
                                                                                               
Property and equipment......................................          261,104         270,042  
 Less accumulated depreciation..............................          (57,893)        (55,689) 
                                                                -------------    ------------  
                                                                      203,211         214,353  
Other assets:                                                                                  
 Investments, at fair value.................................           30,931          30,305  
 Goodwill, less accumulated amortization                                                       
  (1996 - $6,741 and 1995 - $5,535).........................          122,334         120,946  
 Other intangibles, less accumulated amortization
  (1996 - $8,762 and 1995 - $8,051).........................            9,383           9,793  
 Other......................................................           40,936          38,000  
                                                                -------------    ------------  
                                                                                               
Total assets................................................         $684,745        $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





                                       3

<PAGE>
 
                                 GRANCARE, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars In Thousands)

<TABLE>
<CAPTION>
                                                                   March 31,     December 31,  
                                                                     1996           1995      
                                                                -------------    ------------  
                                                                 (Unaudited)        (Note)     
<S>                                                              <C>            <C>          
           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued expenses....................           $ 72,007        $ 72,935 
 Accrued wages and related liabilities....................             25,341          24,069 
 Interest payable.........................................              4,786           6,793 
 Income taxes payable.....................................              2,834            ---- 
 Notes payable and current maturities of long-term debt...              4,131           4,937 
                                                                -------------    ------------  
                                                                                              
  Total current liabilities...............................            109,099         108,734 
                                                                                              
Long-term debt............................................            362,244         334,668 
Deferred income taxes.....................................             16,924          16,735 
Other.....................................................             13,412          12,425 
                                                                                              
Shareholders' equity:                                                                         
 Common stock; no par value; 50,000,000 shares authorized                                                                           
  (shares issued: 1996-24,139,374 and 1995-23,948,728)....            138,178         134,699 
 Treasury stock, at cost; 915,000 shares..................            (18,700)        (18,700)
 Equity component of minimum pension liability............               (465)           (465)
 Unrealized gain on investments net of income taxes (1996                            
  - $3,736 and 1995 - $3,453).............................              5,604           5,206 
 Retained earnings........................................             58,449          51,859 
                                                                -------------    ------------  
                                                                      183,066         172,599 
                                                                -------------    ------------  
 
Total liabilities and shareholders' equity................           $684,745        $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 
                                                            March 31,      
                                                       ------------------- 
                                                         1996       1995   
                                                       --------   -------- 
<S>                                                    <C>        <C>      
Revenues:                                                                  
 Net patient revenues.............................     $228,827   $190,981 
 Investment and other revenue.....................        1,184        700 
                                                       --------   -------- 
                                                                           
  Net revenues....................................      230,011    191,681 
                                                                           
Expenses:                                                                  
 Operating expenses...............................      205,075    171,095 
 Depreciation and amortization....................        6,158      4,717 
 Interest expense and financing charges...........        8,149      6,033 
                                                       --------   -------- 
  Total expenses..................................      219,382    181,845 
                                                       --------   -------- 
                                                                           
Income before income taxes........................       10,629      9,836 
Income taxes......................................        4,039      3,757 
                                                       --------   -------- 
                                                                           
  Net income......................................     $  6,590   $  6,079 
                                                       ========   ======== 
                                                                           
Net income per common and common equivalent share:
  Primary.........................................     $   0.28   $   0.25 
                                                       ========   ======== 
  Fully diluted...................................     $   0.28   $   0.25 
                                                       ========   ======== 
                                                                           
Weighted average number of common and common
 equivalent shares outstanding:
  Primary.........................................       23,785     24,122 
                                                       ========   ======== 
  Fully diluted...................................       26,324     24,173  
                                                       ========   ======== 
</TABLE>                                                                      

See Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
                                 GRANCARE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                             (Dollars In Thousands)
<TABLE>
<CAPTION>
                                                               Three Months Ended March 31,            
                                                               ---------------------------- 
                                                                   1996            1995    
                                                               ---------------------------- 
<S>                                                             <C>              <C>            
OPERATING ACTIVITIES                                                                            
 Net income..............................................        $  6,590         $  6,079      
 Adjustments to reconcile net income to net cash                                                                               
  provided by (used in) operating activities:                                                                       
  Provision for doubtful accounts........................           1,519            1,639      
  Depreciation and amortization..........................           6,158            4,717      
  (Gain) loss on sale of assets..........................             (57)              37      
  Amortization of deferred financing costs...............             227               66      
  Changes in assets and liabilities net of                                                                                    
   effect of acquisitions:                                                                      
   Accounts receivable...................................         (27,367)         (13,273)     
   Other current assets..................................          (2,890)            (959)     
   Other noncurrent assets...............................          (3,308)          (2,634)     
   Accounts payable and accrued expenses.................          (1,093)           3,615      
   Accrued wages and related liabilities.................           1,356               (5)     
   Interest payable......................................          (2,007)             (46)     
   Income taxes payable..................................           3,366             (754)     
   Other noncurrent liabilities..........................           1,044             (595)     
                                                                 --------         --------  
     Net cash used in operating activities...............         (16,462)          (2,113)     
                                                                                                
INVESTING ACTIVITIES                                                                            
 Acquisition of businesses...............................          (4,858)         (11,910)     
 Purchase of property and equipment......................          (9,010)          (5,910)     
 Proceeds from disposition of property and equipment.....             994            1,909      
 Other...................................................            (267)          (4,674)     
                                                                 --------         --------  
   Net cash used in investing activities.................         (13,141)         (20,585)     
                                                                                                
FINANCING ACTIVITIES                                                                            
 Proceeds from exercise of warrants and options..........           1,489              341      
 Long-term debt payments.................................          (2,100)          (9,109)                                     
 Proceeds from long-term debt borrowings.................          28,000           33,774      
 Repayments of short-term notes payable..................            ----           (5,908)     
 Payment of debt issuance costs..........................             (16)            ----      
                                                                 --------         --------
   Net cash provided by financing activities.............          27,373           19,098      
                                                                 --------         --------  
 Net decrease in cash and cash equivalents...............          (2,230)          (3,600)     
 Cash and cash equivalents at beginning of period........          17,738           28,611      
                                                                 --------         --------  
 Cash and cash equivalents at end of period..............        $ 15,508         $ 25,011      
                                                                 ========         ========
</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.

     Also in the first quarter of 1996, the Company acquired a leasehold
interest in a long-term health care facility located in Naperville, Illinois,
and a hospice business located in Detroit, Michigan.

     The above 1996 acquisitions had the following effect on cash:

          Fair value of assets acquired        ($5,115)
          Fair value of liabilities assumed        257
                                               -------
          Net effect on cash                   ($4,858)
                                               =======

     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 month period ended March 31, 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 - Credit Facility
------------------------

          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 proceeds from the Credit Facility to
pay off its previous line of credit, fund the $53.2 million acquisition of
Cornerstone and for general working capital purposes. On September 29, 1995, the
Company completed the sale of $100 million aggregate principal amount of its 9-
3/8% Senior Subordinated Notes due 2005 (the "Notes") in an underwritten public
offering. In connection therewith, the Credit Facility was amended and reduced
to $150 million. The net proceeds from the sale of the Notes were used to repay
amounts outstanding under the Credit Facility. As of March 31, 1996, $65.7
million of the Credit Facility had been utilized by the Company.

Note C - 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.

                                      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 April
1995, the Company acquired Cornerstone Health Management Company
("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 (the "Merger") in a
transaction accounted for as a pooling-of-interests for financial reporting
purposes.

     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 three months
ended March 31, 1996, the percentage of the Company's net patient revenues
derived from Medicaid and Medicare programs were 39.8% and 37.0%, respectively.
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.

     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. 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 income data for the periods indicated:


                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                              REVENUE COMPOSITION
                                        PERCENTAGE OF PATIENT REVENUES
                                        ------------------------------
                                              THREE MONTHS ENDED
                                                    MARCH 31,
                                           1996                 1995
                                        -----------         ------------
<S>                                     <C>               <C>
Skilled Nursing and Subacute Care:
  Routine services.................        46.3%                56.6%
Specialty Medical:
  Therapy, Subacute & Home Health..        24.8%                18.1%
  Pharmacy (1).....................        25.5%                25.3%
  Contract Management (1)..........         3.4%                   -
                                        -----------         ------------
     Subtotal......................        53.7%                43.4%
                                        -----------         ------------
     Total.........................       100.0%                100.0%
                                       ============         ============
 <CAPTION> 
                                             REVENUE PER PATIENT DAY
                                        DERIVED FROM SKILLED NURSING AND 
                                                  SUBACUTE CARE
                                        --------------------------------
                                               THREE MONTHS ENDED
                                                    MARCH 31,
                                           1996                  1995
                                        -----------         ------------
<S>                                    <C>                 <C> 
Routine skilled nursing............      $ 88.15               $ 86.83
Specialty medical services (2).....        53.72                 30.66
                                        -----------         ------------
  Total............................       $141.87              $117.49
                                        ===========         ============
Average occupancy rate.............         85%                   87%
</TABLE>

(1) Before elimination of intercompany sales.
(2) Excludes pharmacy and other specialty medical revenue from beds not operated
    by the Company.

     The Company's net revenues for the three month period ended March 31, 1996,
were $230.0 million, compared to $191.7 million for the same period in 1995, a
net increase of $38.3 million, or 20.0%. For the three month period, $25.5
million resulted from acquisitions and an additional $17.1 million was primarily
attributable to same-store growth. These increases were partially offset by loss
of net revenue of $4.3 million from facilities divested. For the three month 
period, specialty medical revenues increased $38.6 million over the same period
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 month period ended March 31, 1996, were
$205.1 million, compared to $171.1 million for the same period in 1995, a net
increase of $34.0 million, or 19.9%. For the three month period, $22.9 million
resulted from acquisitions and $15.2 million was primarily attributable to same
store growth. These increases were partially offset by a reduction of expenses
of $4.1 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.

     Depreciation and amortization expenses for the three month period ended
March 31, 1996, were $6.2 million, compared to $4.7 million for the same period
in 1995, an increase of $1.5 million, or 31.9%. 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 month period ended
March 31, 1996, were $8.1 million, compared to $6.0 million for the same period
in 1995, an increase of $2.1 million, or 35.0%. 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.

     Income taxes for the three month period ended March 31, 1996, were $4.0
million compared to $3.8 million for the same period in 1995, an increase of
$0.2 million.

     As a result of the foregoing, net income for the three month period ended
March 31, 1996, was $6.6 million, compared to $6.1 million for the same period
in 1995, an increase of $0.5 million.

                                       10


<PAGE>

 
     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 March 31, 1996, was $15.5
million in cash and cash equivalents compared to $17.7 million at December 31,
1995, a decrease of $2.2 million. The decrease in cash and cash equivalents was
due primarily to cash utilized by operations for the three-month period ended
March 31, 1996. In addition to cash flow from operations, the Company has
financed its working capital and liquidity needs through bank indebtedness.
Payments received by the Company from the Medicaid and Medicare programs are the
Company's largest source of cash from operations.

     Accounts receivable at March 31, 1996, were $198.9 million compared to
$173.1 million at December 31, 1995, an increase of $25.8 million. The Company's
accounts receivable include receivables from third-party reimbursement programs,
primarily Medicaid and Medicare. 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 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 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
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 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
three-month period ended March 31, 1996, were $9.0 million. The Company
estimates that capital expenditures for the year ending December 31, 1996, will
be approximately $32 million.

                                       11
<PAGE>
 

     The Company maintains a $150.0 million credit facility with a syndicate of
banks which may be used for working capital, other general corporate purposes
and acquisitions (the "Credit Facility"). As of March 31, 1996, approximately
$65.7 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.

     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.

                                       12
<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.

Date:  December 31, 1996               GRANCARE, INC.



                                       /s/ Jerry A. Schneider
                                       --------------------------------------
                                       Jerry A. Schneider
                                       Executive Vice President and Chief 
                                        Financial Officer
                                       (Duly Authorized Officer and Principal 
                                        Financial and Accounting Officer)

                                       13