SECURITIES AND EXCHANGE COMMISSION 	Washington, D.C. 20549 	FORM 10-Q X 		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 		For the period ended March 31, 1997 	OR 		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 		For the transition period from: 		Commission file number 0-19411 	SUMMIT CARE CORPORATION 	 (Exact name of Registrant as specified in its charter) 	California	95-3656297 	(State or other jurisdiction of	(I.R.S. Employer 	 incorporation or organization)	Identification No.) 	2600 W. Magnolia Blvd. 		 Burbank, California 91505-3031 	(address of principal executive offices) 	(818) 841-8750 	(Registrant's telephone number, including area code) Indicate by checkmark 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 	APPLICABLE ONLY TO ISSUERS INVOLVED IN 	BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by checkmark whether the Registrant (1) has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No 	APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 	Shares of Registrant's common stock outstanding at March 31, 1997 -- 6,772,800 	 SUMMIT CARE CORPORATION 	FORM 10-Q 	Quarter Ended 	 March 31, 1997 	TABLE OF CONTENTS 					Page of 					 Form 10-Q Part I - Financial Information 	Item 1.	Financial Statements 			Consolidated Statements of Income	 3 			Consolidated Balance Sheets	 4 			Consolidated Statements of Cash Flows	 6 			Notes to Consolidated Financial Statements	 8 	Item 2.	Management's Discussion and Analysis of Financial 			Condition and Results of Operations	 10 Part II - Other Information 	Item 6.	Exhibits and Reports on Form 8-K	 17 			Signatures	 18 	PART I 	SUMMIT CARE CORPORATION 	CONSOLIDATED STATEMENTS OF INCOME 	(Unaudited) 	 (In thousands, except per share data) 					Three Months Ended	 Nine Months Ended 					 March 31,	 March 31, 					 1997 	 1996 	 1997 	 1996 ---- ---- ---- ---- Net revenues	 $ 52,012	 $ 45,232	 $147,100	 $129,303 Expenses: 	Salaries and benefits 	 22,159	 19,934	 65,545	 57,651	 Supplies 	 4,750	 4,443	 15,131	 13,432	 Purchased services 	 13,375	 10,713	 37,519	 26,679	 Provision for doubtful accounts	 588	 694 	1,555 	1,445	 Other expenses	 4,022 	3,154	 10,280	 9,073	 Rental		 732	 664	 2,142	 1,977	 Depreciation and amortization	 1,893	 1,634	 5,525	 4,714	 Interest (net of interest income, 	 $85 and $478 in 1997 and $142 	and $405 in 1996, respectively)	 2,099	 1,919	 6,156	 4,931	 ------ ------ ------ ------ 				 49,618	 43,155	 143,853	 119,902 Income before provision for 	income taxes	 2,394	 2,077	 3,247	 9,401 Provision for income taxes	 946	 750 	 1,283 	 3,672 ------ ------ ------ ------ Net income 	 $1,448	 $1,327	 $1,964	 $5,729 ====== ====== ====== ====== Earnings per share	 $ .21	 $ .19	 $ .29	 $ .83 ====== ====== ====== ====== Weighted average number 	of shares of common 	stock outstanding	 6,828	 6,849	 6,829	 6,886 ====== ====== ====== ====== 	See accompanying notes 	 SUMMIT CARE CORPORATION 	CONSOLIDATED BALANCE SHEETS 	(In thousands) 	 March 31, 1997	 June 30, 1996 	 (Unaudited)	 (Note) -------------- ------------- ASSETS Current assets: 	Cash and cash equivalents	 $ 2,218	 $ 2,658 	 Accounts receivable, less allowance for 	 doubtful accounts: March 1997 - $1,584; 	 June 1996 - $2,084 	 34,786	 27,930 	Supplies inventory, at cost 	 2,261	 2,058 	Other current assets 	 10,708	 13,032 ------ ------ Total current assets	 49,973	 45,678 Property and equipment, at cost: 	Land and land improvements	 17,167	 16,018 	Buildings and leasehold improvements	 148,199	 136,907 	Furniture and equipment	 21,345	 18,668 	Construction in progress	 16,862	 15,043 ------- ------- 			 203,573	 186,636 	Less accumulated depreciation and amortization	 26,805	 21,713 ------- ------- 			 176,768	 164,923 Notes receivable	 4,756	 4,845 Other assets	 8,927	 7,606 ------- ------- 			 $240,424	 $223,052 ======== ======== NOTE: The balance sheet at June 30, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 	 See accompanying notes 	(Continued) 	SUMMIT CARE CORPORATION 	CONSOLIDATED BALANCE SHEETS (Continued) 	(In thousands) 	March 31, 1997	 June 30, 1996 	(Unaudited)	 (Note) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: 	Payable to bank	 $ 3,524	 $ 4,165 	Accounts payable	 28,265	 19,895 	Employee compensation and benefits	 3,479	 3,738 	Income taxes payable 	 598	 989 	Long-term debt due within one year	 960	 2,985 ------- ------- Total current liabilities	 36,826	 31,772 Long-term debt 	 117,743	 107,389 Deferred income taxes	 2,605	 2,605 ------- ------- Total liabilities	 157,174	 141,766 Commitments and contingencies Shareholders' equity: 	Preferred stock, no par value, 2,000 		authorized shares, none issued	--	-- 	Common stock, no par value, 100,000 		authorized shares, 6,773 issued and 		outstanding, in both periods	 51,486	 51,486 	Retained earnings	 31,764	 29,800 ------- ------- Total shareholders' equity 	 83,250	 81,286 ------- ------- 			 $240,424	 $223,052 ======== ======== NOTE: The balance sheet at June 30, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 	See accompanying notes 	 SUMMIT CARE CORPORATION 	 CONSOLIDATED STATEMENTS OF CASH FLOWS 	 (Unaudited) 	(Dollars in thousands) 	 Nine Months Ended 	 March 31, 	 1997 	 1996 ---- ---- Operating activities: 	Net income	 $ 1,964 $ 5,729 Adjustments to reconcile net income to net cash 		provided by (used in) operating activities 			Depreciation and amortization	 5,525 	 4,714 			(Increase) in accounts receivable, net	 (6,856) 	(9,127) 			(Increase) decrease in supplies inventory	 ( 203) 	 124 Decrease (increase) in other assets	 2,982 	 (8,411) 			Increase in accounts payable	 8,370 	 5,709 			(Decrease) in employee compensation 			 and benefits	 ( 259) 	(1,361) 			(Decrease) increase in income taxes payable 	 ( 391) 	 25 ----- ----- Total adjustments	 9,168 	 (8,327) ----- ----- 	Net cash provided by (used in) operating activities	 11,132 	 (2,598) ------ ------ Investing activities: 	Issuance of notes receivable	 ( 825)	 -- 	Principal payments of notes receivable	 386 	 503 	Additions to property and equipment 	(17,120)	 (17,836) 	Investment in limited liability company	 (1,701)	 -- ------- ------- Net cash used in investing activities	 (19,260)	 (17,333) ------- ------- Financing activities: 	(Decrease) increase in payable to bank	 ( 641)	 883 	Principal payments on long-term debt	 (15,671) 	(49,677) 	Proceeds from long-term debt	 24,000 	66,500 	 Proceeds from exercise of stock options	 -- 	 82 ------- ------- 	Net cash provided by financing activities	 7,688 	 17,788 ------- ------- (Decrease) in cash and cash equivalents	 ( 440)	 (2,143) Cash and cash equivalents at beginning of year	 2,658 	 3,101 ------- ------- Cash and cash equivalents at end of the period	 $ 2,218 	$ 958 ======= ======= 	SUMMIT CARE CORPORATION 	 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) 	(Unaudited) 	(Dollars in thousands) 	Nine Months Ended 	 March 31, 	 1997 	 1996 ---- ---- Supplemental disclosures of cash flow information: 		Cash paid during the period for: 			Interest	 $5,727	 $4,553			 Income taxes	 1,674 	3,653 	See accompanying notes 	SUMMIT CARE CORPORATION 	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 	(Unaudited) 	 (In thousands) 1.		The unaudited financial information included herein, in the opinion of management, reflects all adjustments (all of which are of a normal recurring nature except for a special charge recorded in December 1996, see Note 6.), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's annual report filed on Form 10-K for the year ended June 30, 1996. The interim financial information herein is not necessarily representative of that to be expected for a full year. 2.		Certain amounts have been reclassified to conform with fiscal 1996 presentations. 3.		Earnings per share are based on the weighted average number of shares of common stock outstanding, which was 6,829 for the nine months ended March 31, 1997 and 6,886 for the nine months ended March 31, 1996. 4.		Other current assets consist of the following: 				 March 31, 1997	 June 30, 1996 -------------- ------------- 			Due from third-party payors		 $ 5,002		 $ 8,055 			Deferred tax assets		 2,137	 	1,810 			Notes receivable		 1,201		 672 			Prepaid expenses		 2,133		 952 Other receivables		 235	 	 1,543 ------ ------ 					 $10,708		 $13,032 ======= ======= 5.	In July 1996, the Company issued $15 million Senior Secured Notes ("Notes") which represented the second and last issuance of $70 million of Notes. The first issuance of $55 million occurred in December 1995. The second series of notes have the same terms as the first series except that the interest rates are 0.05% higher than the fixed rates for the first series of notes. The proceeds from the July 1996 Notes were used to repay $6,000 in bank credit line loans and the balance of $9,000 was invested in short-term, high credit quality financial instruments. There are currently $2,000 in outstanding bank credit line loans. 		In July 1996, the Company exercised a purchase option in its lease of a 90-bed skilled nursing care center in Rockport, Texas. The purchase price of $2,022 was financed with funds from the Notes issued in July 1996 (see above). In August 1996, the Company opened 110 beds of its planned 210-bed skilled nursing care center in White Settlement (Fort Worth), Texas and opened 51 additional beds at its skilled nursing care center in Fresno, California, which initially opened in January 1996 with 108 beds. 	SUMMIT CARE CORPORATION 	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) 	(Unaudited) 	 (In thousands) 		In December 1996, the Company entered into a limited liability company ("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price for its 50% membership interest was $1,701 in cash. The pharmacy will service nursing centers in Texas operated by either the Company, the other LLC member or non-affiliated nursing center owners. 6.	In December 1996, the Company recorded a special charge of $4,000 against revenues and $2,420 against net income or $0.35 per share as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995 completed in the quarter ended December 31, 1996, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ending December 31, 1996. 7. The Company has current maturities of long-term debt of $6,021 that it intends to refinance with funds borrowed against its bank line of credit which has a revolver extending to September 30, 1998 followed by a three year payment period. Accordingly, this amount has been classified as long-term debt. 8.	In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" ("SFAS 121"), was issued. SFAS 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company believes, based on current circum- stances, that there are no indicators of impairment to its long-lived assets, and the Company presently has no expectations for disposing of any long-lived assets. 9.	Recent Accounting Pronouncement: In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if elected, would require companies to use a new fair value method of valuing stock-based compensation plans. The Company has elected to continue following present accounting rules under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" which uses an intrinsic value method and often results in no compensation expense. However, at the end of fiscal year 1997, in accordance with SFAS 123, the Company will provide pro forma disclosure of what net income and earnings per share would have been had the new value method been used. 	SUMMIT CARE CORPORATION 	FORM 10-Q 	MANAGEMENT'S DISCUSSION AND ANALYSIS OF 	 FINANCIAL CONDITION AND RESULTS OF OPERATIONS 	(Dollars in thousands) Results of Operations - --------------------- 	 Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996 	Net revenues increased $6,780 or 15.0% from $45,232 for the quarter ended March 31, 1996 to $52,012 for the quarter ended March 31, 1997. The increase occurred due to the following: 									 Amount	 Percent ------ ------- 	1.	Rehabilitative and other specialty services		 $1,343 	 19.8% 	2.	New beds opened in fiscal years 1996 and 1997	 3,376 	 49.8 3.	Increased census days and revenue rates		 1,407 	20.7 	4.	Pharmacy operations					 654 	 9.7 ----- ---- 									 $6,780 	 100.0% Average occupancy was 85.6% in the third quarter ended March 31, 1997 and 84.7% in the third quarter ended March 31, 1996. Excluding newly constructed beds, the average occupancy was 87.7% in the third quarter ended March 31, 1997. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 70.0% in the third quarter ended March 31, 1997 and 68.6% in the third quarter ended March 31, 1996. 	Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other as a percent of net revenues increased from 86.1% of net revenues in the third quarter ended March 31, 1996 to 86.3% in the third quarter ended March 31, 1997. Total salaries and employee related benefits were 42.6% of net revenues in the third quarter ended March 31, 1997 compared to 44.1% of net revenues in the third quarter ended March 31, 1996. Purchases of rehabilitative and other specialty services were 20.8% of net revenues in the third quarter ended March 31, 1997 compared to 20.7% of net revenues in the same period last year. Expenses increased $5,956 or 15.3% from $38,938 in the third quarter ended 	SUMMIT CARE CORPORATION 	FORM 10-Q 	MANAGEMENT'S DISCUSSION AND ANALYSIS OF 	FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.) March 31, 1996 to $44,894 in the third quarter ended March 31, 1997 for the following reasons: 									 Amount	 Percent ------ ------- 	1.	Rehabilitative and other specialty services		 $1,446	 24.3% 	2.	Expenses relating to new beds opened 		 in fiscal years 1996 and 1997			 2,858	 48.0 	3.	Salaries and benefits		 			 1,096 	18.4 4.	Other expenses					 556	 9.3 ------ ---- 									 $5,956	 100.0% ====== ====== 	Income before rental, depreciation and amortization and interest expense, net of interest income, increased $824 or 13.1% from $6,294 in the third quarter ended March 31, 1996 to $7,118 in the third quarter ended March 31, 1997 and was 13.7% of net revenues in the third quarter ended March 31, 1997 compared to 13.9% in the third quarter ended March 31, 1996. 	Rental, depreciation and amortization and interest expense, net of interest income, increased by $507 or 12.0% from $4,217 in the third quarter ended March 31, 1996 to $4,724 in the third quarter ended March 31, 1997. The increase was due to primarily depreciation of additions to property and equipment and interest expense related to higher long-term debt of $12,092. 	The Company's effective tax rate was 39.5% of income in the third quarter ended March 31, 1997 and 36.1% of income in the third quarter ended March 31, 1996. Net income after taxes increased $121 or 9.1% from $1,327 in the third quarter ended March 31, 1996 to $1,448 in the third quarter ended March 31, 1997. SUMMIT CARE CORPORATION 	FORM 10-Q 	MANAGEMENT'S DISCUSSION AND ANALYSIS OF 	FINANCIAL CONDITION AND RESULTS OF OPERATIONS 	(Dollars in thousands) Results of Operations - --------------------- Nine months Ended March 31, 1997 Compared to Nine months Ended March 31, 1996 	Net revenues increased $17,797 or 13.8% from $129,303 for the nine months ended March 31, 1996 to $147,100 for the nine months ended March 31, 1997. The increase occurred due to the following: 									 Amount	 Percent ------ ------- 	1.	Rehabilitative and other specialty services		 $6,000 	 33.7% 	2.	New beds opened in fiscal years 1996 and 1997	 9,295 	 52.2 	3.	Increased census days and revenue rates		 4,508 	 25.3 	4.	Pharmacy operations					 1,994 	 11.2 	5.	Special charge to Medicare revenues		 (4,000) 	(22.4) ------ ----- 									 $17,797 	100.0% 	The special charge to Medicare revenues reflects the result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ending December 31, 1996. Average occupancy was 84.5% in the nine months ended March 31, 1997 and 86.2% in the nine months ended March 31, 1996. Excluding newly constructed beds, the average occupancy was 86.9% in the nine months ended March 31, 1997. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 69.8% in the nine months ended March 31, 1997 and 66.0% in the nine months ended March 31, 1996. 	Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other as a percent of net revenues, before the effect of the special charge, increased from 83.7% of net revenues in the nine months ended March 31, 1996 to 86.1% in the nine months ended March 31, 1997. Total salaries and employee related benefits were 43.4% of net revenues, before the effect of the special charge, in the nine months ended March 31, 1997 compared to 44.6% of net revenues in the nine months ended March 31, 1996. Purchases of rehabilitation and other specialty services were 20.3% of net revenues, before the effect of the special charge, in the period ending March 31, 1997 compared with 18.0% of the net revenues 	SUMMIT CARE CORPORATION 	FORM 10-Q 	 MANAGEMENT'S DISCUSSION AND ANALYSIS OF 	FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.) in the same period last year. Expenses increased $21,750 or 20.1% from $108,280 in the nine months ended March 31, 1996 to $130,030 in the nine months ended March 31, 1997 for the following reasons: 									 Amount	 Percent ------ ------- 	1.	Rehabilitative and other specialty services		 $7,388	 34.0% 	2.	Expenses relating to new beds opened 		 in fiscal years 1996 and 1997		 8,485	 39.0 	3.	Salaries and benefits		 			 4,438	 20.4 4.	Other expenses					 1,439	 6.6 ------ ---- 									 $21,750	 100.0% 	Income before rental, depreciation and amortization and interest expense, net of interest income, decreased $3,953 or 18.8% from $21,023 in the nine months ended March 31, 1996 to $17,070 in the nine months ended March 31, 1997 and was 11.6% of net revenues in the nine months ended March 31, 1997 (and 13.9% of net revenues before the special charge to revenues) compared to 16.3% in the nine months ended March 31, 1996. 	Rental, depreciation and amortization and interest expense, net of interest income, increased by $2,201 or 18.9% from $11,622 in the nine months ended March 31, 1996 to $13,823 in the nine months ended March 31, 1997. This increase was due to primarily depreciation of additions to property and equipment and interest expense related to higher long-term debt of $12,092. 	The Company's effective tax rate was 39.5% of income in the nine months ended March 31, 1997 and 39.1% of income in the nine months ended March 31, 1996. Net income was $1,964 for the nine months ended March 31, 1997 including $2,420 for the special charge described earlier. Net income after taxes before the special charge, decreased $1,345 or 23.5% from $5,729 in the nine months ended March 31, 1996 to $4,384 in the nine months ended March 31, 1997. 	SUMMIT CARE CORPORATION 	FORM 10-Q 	 MANAGEMENT'S DISCUSSION AND ANALYSIS OF 	FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.) Selected Statistics are Shown Below: 	 Fiscal 				Increase 	 1997 	 1996 	(Decrease) ------------- ---------- 	Facilities in operation at: 		September 30	 39	 37	 2 		December 31	 39	 37	 2 		March 31	 39	 38	 1 	 	Nursing center beds at: 		September 30	 4,629	 4,294	 335 		December 31	 4,629	 4,294	 335 		March 31 	4,623	 4,418	 205 	Assisted living beds at: 		September 30	 468	 468	 0 December 31	 468	 468	 0 		March 31	 468	 468	 0 	Total beds at: 		September 30		 5,097	 4,762	 335 		December 31		 5,097	 4,762	 335 		March 31	 	 5,091	 4,886	 205 	Total occupancy: 		First quarter	 83.6%	 87.2%	 (3.6)% 		Second quarter	 84.4%	 86.8%	 (2.4)% 		Third quarter	 85.6%	 84.7%	 0.9 % 	Nursing center occupancy: 		(based on licensed beds) 		First quarter	 84.1%	 88.2%	 (4.1)% 		Second quarter	 84.9%	 87.6%	 (2.7)% 		Third quarter	 86.0%	 85.5%	 0.5 % 	Assisted living center occupancy: 		First quarter	 78.7%	 78.7%	 0% 		Second quarter	 79.6%	 79.3%	 .3% 		Third quarter	 81.2%	 77.6%	 3.6% 	Percentage of revenues from 		Private, managed care and 		Medicare (Quality Mix): 		First quarter	 69.9%		 64.0%	 5.9% 		Second quarter	 69.5%	 65.0%	 4.5% 		Third quarter	 70.0%	 68.6%	 1.4% 	Percentage of revenues from 		Medicaid: 	First quarter	 30.1%		 36.0%	 (5.9)% 	Second quarter	 30.5%		 35.0%	 (4.5)% 	Third quarter	 30.0% 		31.4%	 (1.4)% 	SUMMIT CARE CORPORATION 	FORM 10-Q 	MANAGEMENT'S DISCUSSION AND ANALYSIS OF 	FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.) Liquidity and Capital Resources - ------------------------------- 	At March 31, 1997, the Company had $2,218 in cash and cash equivalents and working capital of $13,147. During the nine months ended March 31, 1997, the Company's cash and cash equivalents decreased by $440. 	Net cash provided by operating activities increased $13,730 from a negative $2,598 in the first nine months of fiscal 1996 to a positive $11,132 in the first nine months of 1997. Net cash provided by operating activities, plus proceeds of $15,000 in new long-term debt and additional net credit line borrowings of $2,000, were used principally for capital expenditures of $17,120 for existing centers and the initial payoff of the line of credit of $6,000, the purchase of a lease option of $1,975, and the acquisition of a 50% interest in a limited liability company for $1,701. 	Accounts receivable increased $6,856 primarily due to an increase in Medicare and managed care revenues. At March 31, 1997 and March 31, 1996, the Company's average accounts receivable days outstanding were 39. 	Long-term debt consisted of mortgage indebtedness of $8,415 on three properties, $13,288 on five capitalized leases, $95,000 in senior secured debt (see next paragraph), and credit line borrowings of $2,000 totaling $118,703 as of March 31, 1997. 	In December 1995, the Company issued $55,000 of Senior Secured Notes ("New Notes"), the initial funding of $70,000 in New Notes. The remaining amount of $15,000 was issued in July 1996. In transactions related to the New Notes, the Company reduced its bank line of credit from $60,000 to $40,000 at more favorable interest rates and amended the indenture for its $25,000 Senior Secured Notes ("Current Notes"). Also, the bank line of credit's repayment period following the revolving commitment was reduced from four years to three years. Holders of the Current Notes and the New Notes and the Company's bank lenders have entered into an intercreditor agreement and collateral agreement which provide a security interest in certain real estate on a pari passu basis and except for certain permitted liens, a negative pledge on the Company's assets. The New Notes are payable at the end of the fifth year ($7,000), the end of the sixth year ($5,000), annually from the eighth year through the twelfth year ($48,000) and at the end of the fifteenth year ($10,000). The annual, fixed interest rate on each New Note ranges from 7.38% on the earliest maturing New Note to 8.14% on the last New Note to mature and averages 7.8% when weighted. 	SUMMIT CARE CORPORATION 	FORM 10-Q 	MANAGEMENT'S DISCUSSION AND ANALYSIS OF 	 FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.) 	(Dollars in thousands) 	The Company believes that it has sufficient cash flow from its existing operations and from its bank line of credit to service long-term debt due within one year of $6,981 (of which the Company intends to borrow $6,021 against its bank line of credit which has a revolver extending to September 30, 1998 followed by a three year payment period), to make normal recurring capital replacements, additions and improvements of approximately $13,500 planned for the next 12 months, to develop properties over the next 12 months costing approximately $5,500 and to meet other long-term working capital needs and obligations. The Company expects, on a selective basis, to pursue expansion of its existing centers and the acquisition or development of additional centers in markets where demographics and competitive factors are favorable. The Company currently has plans, or is developing plans, to construct and open 114 new beds in four centers by the fall of 1997. Impact of Inflation - ------------------- 	The health care industry is labor intensive. Wages and other expenses increase more rapidly during periods of inflation and when shortages in the labor market occur. In addition, suppliers pass along rising costs in the form of higher prices. Increases in reimbursement rates under Medicaid generally lag behind actual cost increases, so that the Company may have difficulty covering them in a timely fashion. Recent Accounting Pronouncement - ------------------------------- 	See Note 9 to Consolidated Financial Statements. 	PART II 	SUMMIT CARE CORPORATION 	OTHER INFORMATION 	Quarter Ended 	 March 31, 1997 Item 6.	EXHIBITS AND REPORTS ON FORM 8-K (a)	 Exhibits 		 NONE (b)	 Reports on Form 8-K 		NONE 	SUMMIT CARE CORPORATION 	SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 									SUMMIT CARE CORPORATION Date: May 14, 1997 	 			By: S/DERWIN L. WILLIAMS ------------------------ 								 Derwin L. Williams 								 Sr.Vice President-Finance 								and Chief Financial Officer Date: May 14, 1997		 		By: S/MELODYE STOK ----------------------- 								 Melodye Stok 								 Vice President-Controller 								 and Chief Accounting Officer