Exhibit 99(g)
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------- ------- -------- -------
Net revenues $53,972 $46,181 $108,507 $95,088
Expenses:
Salaries and benefits 24,132 22,309 47,742 43,386
Supplies 5,091 5,337 10,261 10,381
Purchased services 12,844 12,237 26,211 24,144
Provision for doubtful accounts 957 721 1,780 967
Other expenses 3,738 2,824 7,484 6,258
Rent 762 713 1,525 1,410
Depreciation and amortization 2,151 1,840 4,235 3,632
Interest (net of interest
income, $169 and $371 in 1997
and $179 and $393 in 1996,
respectively) 2,311 1,934 4,588 4,057
------- ------- -------- -------
51,986 47,915 103,826 94,235
------- ------- -------- -------
Income (loss) before provision
for income taxes 1,986 (1,734) 4,681 853
Provision (benefit) for income
taxes 784 (685) 1,849 337
------- ------- -------- -------
Net income (loss) 1,202 $(1,049) 2,832 $ 516
======= ======= ======== =======
Earnings (loss) per share:
Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08
======= ======= ======== =======
Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08
======= ======= ======== =======
See accompanying notes.
1
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, 1997 JUNE 30, 1997
------------------ --------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 1,702 $ 3,994
Accounts receivable, less allowance for
doubtful accounts:
December 1997 - $2,474;
June 1997 - $2,028 36,343 33,749
Supplies inventory, at cost 3,204 2,690
Other current assets 15,569 12,356
-------- --------
Total current assets 56,818 52,789
Property and equipment, at cost:
Land and land improvements 20,036 19,513
Buildings and leasehold improvements 175,078 161,080
Furniture and equipment 24,361 23,978
Construction in progress 5,298 5,947
-------- --------
224,773 210,518
Less accumulated depreciation and amortization 30,220 28,605
-------- --------
194,553 181,913
Notes receivable, less allowance for doubtful
accounts: December 1997 - $363; June 1997 - $322 6,842 6,859
Other assets 9,207 8,955
-------- --------
$267,420 $250,516
======== ========
NOTE: The balance sheet at June 30, 1997 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.
2
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank $ 2,985 $ 4,678
Accounts payable 36,776 29,586
Employee compensation and benefits 4,622 5,877
Income taxes payable 1,051 --
-------- --------
Total current liabilities 45,434 40,141
Long-term debt 129,754 121,452
Deferred income taxes 7,511 7,511
-------- --------
Total liabilities 182,699 169,104
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; 6,813 and 6,776 issued and outstanding,
respectively 52,020 51,543
Retained earnings 32,701 29,869
-------- --------
Total shareholders' equity 84,721 81,412
-------- --------
$267,420 $250,516
======== ========
NOTE: The balance sheet at June 30, 1997 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.
3
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
-------- --------
Operating activities:
Net income $ 2,832 $ 516
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,235 3,632
(Increase) in accounts receivable, net (2,594) (5,027)
(Increase) in supplies inventory (514) (66)
(Increase) in other current assets (3,152) (1,602)
Increase in accounts payable 7,190 6,805
(Decrease) increase in employee compensation
and benefits (1,255) 294
Increase (decrease) in income taxes payable 1,051 (989)
-------- --------
Total adjustments 4,961 3,047
-------- --------
Net cash provided by operating activities 7,793 3,563
-------- --------
Investing activities:
Issuance of notes receivable (2,281) (550)
Principal payments of notes receivable 2,294 253
Additions to property and equipment (6,706) (12,049)
Property and equipment related to purchase of
nursing center (4,209) --
(Increase) in other assets (470) (1,579)
-------- --------
Net cash (used in) investing activities (11,372) (13,925)
-------- --------
Financing activities:
(Decrease) in payable to bank (1,693) (1,229)
Principal payments on long-term debt (10,497) (8,435)
Proceeds from long-term debt 13,000 19,000
Proceeds from exercise of stock options 477 --
-------- --------
Net cash provided by financing activities 1,287 9,336
-------- --------
(Decrease) in cash and cash equivalents (2,292) (1,026)
Cash and cash equivalents at beginning of year 3,994 2,658
-------- --------
Cash and cash equivalents at end of the period $ 1,702 $ 1,632
======== ========
4
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(In thousands)
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,015 $5,161
Income taxes 808 1,654
Non cash investing and financing activities:
Acquisition of nursing care center under
capital lease 5,799 --
Capital lease obligation (5,799) --
See accompanying notes.
5
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 5), 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,
1997. 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 1998
presentations.
3. The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
-------- --------- ------- -------
Numerator:
Net income (loss) $1,202 $(1,049) $2,832 $ 516
Denominator:
Denominator for basic earnings
per share - weighted average
shares 6,802 6,775 6,789 6,774
Effect of stock options 58 66 46 80
------ ------- ------ ------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 6,860 6,841 6,835 6,854
Earnings per share:
Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08
====== ======= ====== ======
Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08
====== ======= ====== ======
6
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(Unaudited)
(In thousands)
4. Other current assets consist of the following:
December 31, 1997 June 30, 1997
----------------- -------------
Due from third-party payors $ 4,743 $ 2,491
Deferred tax assets 1,956 1,956
Notes receivable 1,257 1,253
Prepaid expenses 2,526 1,004
Income tax receivable 3,000 4,128
Other receivables 2,087 1,524
------- -------
$15,569 $12,356
======= =======
5. In December 1996, the Company recorded a special charge of $4,000
against revenues ($2,420 against net income) 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
ended December 31, 1996.
6. In July 1997, the Company opened its fifth assisted living center with
66 beds in Orange, California, at a total cost of construction of
$3,924. In September 1997, the Company exercised a purchase option in
the amount of $1,871 in its lease of a 111-bed skilled nursing care
center in La Grange, Texas. In November 1997, the Company opened 47
additional beds at one of its two skilled nursing care centers in
Lubbock, Texas, at an approximate cost of construction of $1,900. In
December 1997, the Company acquired the assets of a 194 bed skilled
nursing care center in McAllen, Texas at an approximate cost of $10,058.
The Company's bank line of credit was used to finance the two
construction projects, the exercise of the purchase option and $4,259 of
the acquisition cost of the McAllen center. The balance of the McAllen
acquisition cost of $5,799 was financed with a capitalized lease
obligation.
7. In December 1997, the Company amended its secured bank line of credit by
reducing the commitment from $40,000 to $33,000. One of the four lenders
was deleted from the credit agreement, and the revolving credit
termination date was extended one year to September 30, 1999. No other
terms and conditions were added, deleted or amended.
8. Recent Accounting Pronouncement: In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which is effective for fiscal years ending
after December 15, 1997. This Statement is not required to be applied to
interim financial statements in the initial year of its application.
SFAS 131 establishes standards for the way that public enterprises
report information about operating segments in annual financial
7
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(Unaudited)
(In thousands)
statements. It also requires that those enterprises report selected
information about operating segments in interim financial reports issued
to shareholders. Under existing accounting standards, the Company has
reported its operations as one line of business because substantially
all of its revenues have been derived from its skilled nursing care
centers and assisted living centers and closely related ancillary
services. The Company is presently evaluating the new standard in order
to determine its effect, if any, on the way the Company might report its
operations in the future.
9. Subsequent Event: On February 6, 1998, the Company and Fountain View,
Inc., a privately-held skilled nursing care company based in Los
Angeles, California, entered into a definitive merger agreement for
Fountain View to acquire the Company. According to the terms of the
merger agreement, the Company's shareholders will receive $21.00 per
share in cash for a total purchase price of approximately $274 million,
including the assumption of approximately $130 million of the Company's
debt.
On February 13, 1998, Fountain View commenced a cash tender offer for
all outstanding shares of the Company's stock at $21.00 per share.
Following consummation of the tender offer, subject to the terms and
conditions contained in the merger agreement, the Company will be merged
with a wholly owned subsidiary of Fountain View, and each remaining
outstanding share of the Company will be converted in the merger into
$21.00 in cash.
Fountain View has received a commitment from Heritage Fund II, L.P. for
$82 million of the equity financing necessary to complete the
transaction and a bank financing commitment from Bank of Montreal
covering an additional $250 million. Completion of the tender offer and
the merger are subject to customary conditions to closing, including the
receipt of any applicable regulatory approvals and the expiration of any
applicable regulatory waiting periods.
8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Summit Care Corporation
We have audited the accompanying consolidated balance sheets of Summit
Care Corporation and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Summit Care Corporation at June 30, 1997 and 1996, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
August 22, 1997
9
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
----------------------------
1997 1996 1995
----------------------------
Net revenues $197,927 $176,062 $137,026
Expenses:
Salaries and benefits 89,577 78,233 63,171
Supplies 20,160 18,071 15,374
Purchased services 51,520 37,963 22,234
Provision for doubtful accounts 2,530 2,241 1,330
Other expenses 15,722 12,421 10,268
Rental 2,864 2,656 1,691
Rental to related parties -- -- 450
Depreciation and amortization 7,393 6,142 5,249
Interest (net of interest income:
$645, $522 and $513, respectively) 7,973 6,574 4,761
-------- -------- --------
197,739 164,301 124,528
-------- -------- --------
Income before provision for income taxes 188 11,761 12,498
Provision for income taxes 119 4,452 4,987
-------- -------- --------
Net income $ 69 $ 7,309 $ 7,511
======== ======== ========
Earnings per share $ .01 $ 1.06 $ 1.10
======== ======== ========
See accompanying notes
10
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30,
-----------------
1997 1996
-----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,994 $ 2,658
Accounts receivable, less allowance for doubtful
accounts: 1997 - $2,028; 1996 - $2,084 33,749 27,930
Supplies inventory, at cost 2,690 2,058
Other current assets 12,356 13,032
-------- --------
Total current assets 52,789 45,678
Property and equipment, at cost:
Land and land improvements 19,513 16,018
Buildings and leasehold improvements 161,080 136,907
Furniture and equipment 23,978 18,668
Construction in progress 5,947 15,043
-------- --------
210,518 186,636
Less accumulated depreciation and amortization 28,605 21,713
-------- --------
181,913 164,923
Notes receivable, less allowance for doubtful accounts:
1997 - $322; 1996 - $268 6,859 4,845
Other assets 8,955 7,606
-------- --------
$250,516 $223,052
======== ========
See accompanying notes
11
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
JUNE 30,
-------------------
1997 1996
-------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank $ 4,678 $ 4,165
Accounts payable 29,586 19,895
Employee compensation and benefits 5,877 3,738
Income taxes payable -- 989
Long-term debt due within one year -- 2,985
-------- --------
Total current liabilities 40,141 31,772
Long-term debt 121,452 107,389
Deferred income taxes 7,511 2,605
-------- --------
Total liabilities 169,104 141,766
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value,
2,000,000 authorized shares, none issued
Common stock, no par value, 100,000,000 authorized
shares; 6,776,000 and 6,772,800 issued and
outstanding, respectively 51,543 51,486
Retained earnings 29,869 29,800
-------- --------
Total shareholders' equity 81,412 81,286
-------- --------
$250,516 $223,052
======== ========
See accompanying notes
12
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
THREE YEARS ENDED JUNE 30, 1997
Common Stock
------------------ Retained
Shares Amount Earnings Total
--------- -------- -------- --------
Balances at June 30, 1994 6,743,600 $51,381 $14,980 $66,361
Net income -- -- 7,511 7,511
Exercise of stock options 15,700 192 -- 192
Expenses on sale of common stock -- (251) -- (251)
--------- ------- ------- -------
Balances at June 30, 1995 6,759,300 51,322 22,491 73,813
Net income -- -- 7,309 7,309
Exercise of stock options 13,500 164 -- 164
--------- ------- ------- -------
Balances at June 30, 1996 6,772,800 51,486 29,800 81,286
Net income -- -- 69 69
Exercise of stock options 3,200 57 -- 57
--------- ------- ------- -------
Balances at June 30, 1997 6,776,000 $51,543 $29,869 $81,412
========= ======= ======= =======
See accompanying notes
13
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
--------------------------------
Operating activities:
Net income $ 69 $ 7,309 $ 7,511
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,393 6,142 5,249
(Increase) in accounts receivable (5,819) (7,594) (6,907)
(Increase) decrease in supplies inventory (632) 118 (623)
Decrease (increase) in other current assets 1,257 (8,429) (1,740)
Increase in accounts payable 9,691 8,923 2,512
Increase (decrease) in employee compensation
and benefits 2,139 (270) 478
(Decrease) increase in income taxes payable (989) (72) 577
Increase (decrease) in deferred income taxes 4,906 739 (43)
-------- -------- --------
Total adjustments 17,946 (443) (497)
-------- -------- --------
Net cash provided by operating activities 18,015 6,866 7,014
-------- -------- --------
Investing activities:
Issuance of notes receivable (3,142) (916) (2,089)
Principal payments of notes receivable 547 498 962
Additions to property and equipment (24,075) (26,558) (9,004)
Acquisitions of nursing centers -- -- (51,178)
Additions to other assets (1,657) (2,276) (3,279)
-------- -------- --------
Net cash used in investing activities (28,327) (29,252) (64,588)
Financing activities:
Increase in payable to bank 513 1,193 826
Principal payments on long-term debt (17,922) (49,914) (38,225)
Proceeds from long-term debt 29,000 70,500 76,520
Net expenses from sale of common stock -- -- (251)
Net proceeds on exercise of stock options 57 164 192
-------- -------- --------
Net cash provided by financing activities 11,648 21,943 39,062
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 1,336 (443) (18,512)
Cash and cash equivalents at beginning of year 2,658 3,101 21,613
-------- -------- --------
Cash and cash equivalents at end of year $ 3,994 $ 2,658 $ 3,101
======== ======== ========
See accompanying notes
14
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
----------------------------
1997 1996 1995
----------------------------
Supplemental disclosures of non-cash
investing and financing activities:
Acquisition notes payable $ -- $ -- $ (2,814)
Acquisition of nursing care centers -- -- 2,814
Acquisition of nursing care centers
under capital leases -- -- 16,654
Capital lease obligations -- -- (16,654)
See accompanying notes
15
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Summit Care Corporation ("Company" or "SCC")
provides a variety of health care services primarily to the elderly through the
operation of subacute, skilled nursing, Alzheimer's and assisted living units in
skilled nursing care centers and assisted living centers in California, Texas
and Arizona. These services include nursing care, lodging, food and certain
specialty medical services, including rehabilitation care, infusion therapy and
other ancillary services. The Company also provides specialty pharmaceutical and
infusion therapy services to other long-term care providers. In April 1994,
OrNda HealthCorp ("OrNda") acquired the Company's then majority shareholder,
Summit Health Ltd. ("SHL"). OrNda's 7.5% Exchangeable Subordinated Notes ("OrNda
Notes") were exchangeable into its equity interest in the Company's common
stock, at the option of the holders. OrNda redeemed 100% of the outstanding
OrNda Notes in exchange for its equity interest in the Company's common stock in
August 1995. OrNda currently has no position in the Company's common stock. In
January 1997, OrNda was merged into Tenet Healthcare Corporation ("Tenet").
BASIS OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated.
USE OF ESTIMATES. The preparation of the financial statements in
conformity 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.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out method) or market.
REVENUES. Approximately 72 percent, 70 percent and 68 percent of the
Company's revenues in the years ended June 30, 1997, 1996 and 1995 were derived
from funds under federal and state medical assistance programs, the continuation
of which are dependent upon governmental policies. These revenues are based, in
certain cases, upon cost reimbursement principles and are subject to audit.
Revenues are recorded on an accrual basis as services are performed at their
estimated net realizable value. Differences between final settlement and
estimated net realizable value accrued in prior years are reported as
adjustments to the current year's net revenues. These adjustments decreased net
revenues by $4,892 in fiscal 1997. A significant portion of the Company's
skilled nursing care center revenues is derived from government sponsored health
care programs such as Medicare and Medicaid. These programs are highly regulated
and are subject to budgetary and other constraints. While the Company's cash
flow could be adversely affected by periodic government program funding delays
or shortfalls, management does not believe there are any significant credit
risks associated with these government programs.
PROPERTY AND EQUIPMENT. Depreciation and amortization (straight-line
method) is based on the estimated useful lives of the individual assets as
follows:
Buildings and improvements 15-40 years
Leasehold improvements Shorter of lease term or estimated
useful life
Furniture and equipment 3-20 years
Amortization of capital leases is included in depreciation and
amortization expense. For leasehold improvements, where the Company has acquired
the right of first refusal to purchase or to renew the lease, amortization is
based on the lesser of the estimated useful lives and the period covered by the
right.
INTANGIBLE ASSETS. Goodwill of $2,321, less accumulated amortization of
$182, is included in other assets at June 30, 1997 and is amortized over 35
years using the straight-line method.
16
INSURANCE COVERAGE. The Company self insures for certain levels of
workers' compensation and general and professional liability coverage. The
Company utilizes a captive insurance company for the purpose of providing
reinsurance coverage for workers' compensation claims filed by its California
and Arizona employees in excess of a $250,000 self insurance retention per
occurrence and not subject to an annual aggregate limit. The Company has elected
under Texas law to decline to participate in the Texas workers' compensation
insurance program and maintains employer's excess and occupational indemnity
insurance on claims subject to a $150,000 self insurance retention per
occurrence with no annual aggregate limit. The Company maintains general and
professional liability insurance on a claims made basis, subject to a $100,000
self insurance retention per occurrence and $600,000 on an annual aggregate
basis.
Under both self insurance programs, the Company estimates its liability,
including potential legal fees and settlement amounts, based on claims filed and
estimates of claims incurred but not reported, utilizing historical experience
on an undiscounted basis. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the year of settlement.
EARNINGS PER SHARE. Earnings per share is based on the weighted average
number of shares of common stock outstanding and common stock equivalents
arising from stock options which were 6,818,247 for the year ended June 30,
1997, 6,895,661 for the year ended June 30, 1996 and 6,837,991 for the year
ended June 30, 1995. The effect of common stock equivalents arising from stock
options on the computation of earnings per share is not significant.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly
liquid investments with an original maturity of three months or less. The
Company places its temporary cash investments with high credit quality financial
institutions.
CASH MANAGEMENT. The Company utilizes a centralized cash management
system. Payable to bank represents checks outstanding.
ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("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 circumstances, 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.
RECENT ACCOUNTING PRONOUNCEMENTS. 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. In accordance with SFAS 123, the Company has provided pro
forma disclosure of what net income and earnings per share would have been had
the new fair value method been used (see Note 10).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which is effective for fiscal years ending after December 15, 1997,
including interim periods. Earlier adoption is not permitted. However, an entity
is permitted to disclose pro forma earnings per share amounts computed under
SFAS 128 in the notes to the financial statements in periods prior to adoption.
The statement requires restatement of all prior-period earnings per share data
presented after the effective date. SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
substantially similar to the standard recently issued by the International
Accounting Standards Committee entitled "International Accounting Standards,
Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998 and
has not determined the impact of adoption.
17
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years ending after December 15, 1997. SFAS 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements. It also requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Under existing accounting standards, the Company has reported its
operations as one line of business because substantially all of its revenues
have been derived from its skilled nursing care centers and assisted living
centers and closely related ancillary services. The Company is presently
evaluating the new standard in order to determine its effect, if any, on the way
the Company might report its operations in the future.
RECLASSIFICATIONS. Certain amounts have been reclassified to conform
with 1997 presentations.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair market value disclosures.
CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
NOTES RECEIVABLE (INCLUDING CURRENT PORTION). The carrying amount,
before the allowance for doubtful accounts, is $8,434. The fair value of $8,400
is estimated using discounted cash flow analyses, based on interest rates
currently being offered for notes with similar terms to borrowers of similar
credit quality.
LONG-TERM DEBT (INCLUDING CURRENT PORTION). The carrying value of
$121,452 of long-term debt is based on the original face value (issue amount).
The fair value of $120,300 is estimated based on the present value of the
underlying cash flows discounted at the Company's incremental borrowing rate.
3. MATERIAL TRANSACTIONS WITH RELATED ENTITIES
TENET HEALTHCARE CORPORATION, ORNDA HEALTHCORP AND SUMMIT HEALTH LTD.
The Company had an agreement with Tenet/OrNda, which expired in March 1997,
under which the Company leased a portion of its corporate office space to OrNda
and shared the cost of building services with OrNda. The agreement also required
OrNda to provide tax accounting to the Company. The Company's rental income from
OrNda for the space exceeded the payments to OrNda for services by $31 for the
year ended June 30, 1997. For the years ended June 30, 1996 and 1995, payments
to OrNda for services exceeded rental income for the space by $50 and $23,
respectively. The Company believes that the amount reimbursed for the services
provided and the rental income received are reasonable. The agreement also
indemnified the Company against any liability arising from its divestiture of
facilities, the net assets of which were purchased by SHL during the year ended
June 30, 1992. The provisions of the indemnification survive the termination of
the agreement. Certain provisions of this agreement were terminated or amended
as a result of the redemption on August 28, 1995 by OrNda of 100% of the OrNda
Notes in exchange for the Company's common stock (see Note 1).
In January 1994, the Company entered into a ten-year sub-lease of a
nursing care center with SHL. The Company believes the monthly lease payments of
$37 are reasonable for the market area. Lease payments to Tenet, OrNda and SHL
were $450 for each of the years ended June 30, 1997, 1996 and 1995.
At June 30, 1997, the net amount due from Tenet for transactions between
the Company and Tenet was $918 and is included in Other Current Assets (see
Note 5).
18
4. ACQUISITIONS AND CONSTRUCTION ACTIVITY
FISCAL YEAR 1997. In August 1996, the Company opened a 110-bed skilled
nursing care center in Fort Worth, Texas, and in June 1997, opened another 100
beds at the same site. Total cost of construction including the original
purchase price (see this Note, Fiscal Year 1995) was $12,012. On July 1, 1997,
the Company opened a 66-bed assisted living center in Orange, California,
dedicated to Alzheimer's and other patients with dementia. Total cost of
construction, which constituted renovation of an existing building on a campus
with a 172-bed skilled nursing center and a 72-bed assisted living center, was
$3,525. Cost of construction completed in the year ended June 30, 1997 was
financed with funds from $15 million of Senior Secured Notes ("Notes") issued in
July 1996 and with cash generated from operations. The Notes represented the
second and last issuance of $70 million of Notes. The first issuance of $55
million occurred in December 1995.
In July 1996, the Company exercised a purchase option in its lease of a
88-bed skilled nursing care center in Rockport, Texas. The purchase price of
$2,022 was financed with funds from the Notes.
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 $1,565 in cash. The pharmacy services nursing
centers in Texas operated by either the Company, the other LLC member or
non-affiliated nursing center owners. The Company accounts for its investment in
the LLC under the equity method of accounting. The Company's equity in earnings
of the LLC was insignificant during fiscal year 1997.
In June 1997, the Company purchased 10 acres of vacant land in Longview,
Texas for $648 in cash. The land will be used for new services which will
complement the 174-bed skilled nursing center currently owned and operated by
the Company.
FISCAL YEAR 1996. On January 8, 1996, the Company opened a 108-bed
skilled nursing care center in Fresno, California, and in August 1996, opened
another 51 beds at the same site. Total cost of construction including the
original purchase price was $14,024. In March 1996, the Company added 20
licensed beds to one of its two skilled nursing care centers in Beaumont, Texas,
increasing the center's total beds to 148. Total cost of construction was $785.
In June 1996, the Company also added 54 beds to its skilled nursing care center
in Longview, Texas, increasing the total beds to 182. Total cost of construction
was $1,860. Cost of construction completed in the year ended June 30, 1996 was
financed with funds from Notes issued in December 1995 and draws against the
Company's bank line of credit (see Note 6).
FISCAL YEAR 1995. On September 1, 1994, the Company purchased a 220-bed
skilled nursing care center in White Settlement (Fort Worth), Texas, for $11,925
in cash and a four-acre site for $1,500 in cash for construction of a 210-bed
skilled nursing care center located in Fort Worth, Texas, which began in May
1995.
The Company acquired on October 1, 1994 the leasehold interest in six
skilled nursing care centers and the real and personal property of a seventh
with a combined total of 783 beds located in various communities in Texas for
$30,938, including goodwill of $2,321. The purchase price consists of (i)
$11,470 in cash (of which $8,541 was funded under the Company's bank line of
credit), (ii) a $2,814 promissory note ($3,000 less a $186 discount) at 9%
interest (7% contract rate) fully amortized in seven years and (iii) a $16,654
capital lease obligation assumed by the Company. The leases on the six centers
range from eight to twenty-one years, include purchase options, the first
exercisable in July 1996, and the last exercisable in February 2005, and have
combined monthly payments of $159.
On December 1, 1994, the Company acquired four skilled nursing care
centers in three communities in East Texas with a combined total of 548 beds for
$27,000 in cash and, in a separate transaction, the leasehold interest in a
119-bed skilled nursing care center located in Big Spring, Texas, for $800 in
cash. Both transactions were funded under the Company's bank line of credit.
The Company's acquisitions have been accounted for as purchases and,
accordingly, the results of operations of the acquired centers have been
included in the consolidated statement of income since the date of acquisition.
19
The Company completed in May 1995 an addition of 74 beds to a 76-bed
nursing care center which is operated under a ten-year sub-lease with OrNda (see
Note 3).
5. OTHER CURRENT ASSETS
Other current assets as of June 30 consist of the following:
1997 1996
-----------------------
Due from third party payors $ 2,491 $ 8,055
Deferred tax assets 1,956 1,810
Notes receivable 1,253 672
Prepaid expenses 1,004 952
Income tax receivable 4,128 --
Other receivables 1,524 1,543
------- -------
$12,356 $13,032
======= =======
6. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 1997 1996
------------------------------------------------------------------------
Senior secured notes, at fixed interest rates from
7.38% to 8.14%, interest only payable semi-annually,
principal due from December 2000 to December 2010 in
various annual payments, secured by property and
equipment with a book value of approximately
$91,781 at June 30, 1997. $70,000 $55,000
Secured revolving bank line of credit expires
September 30, 1998, variable interest rates
approximating 7.44% in the year ending
June 30, 1997, convertible to a term loan due in
equal quarterly principal payments through
September 2001, secured by property and equipment
with a book value of approximately $6,556 at
June 30, 1997. 5,000 6,000
8.96% senior secured notes, due 2002, interest only,
payable semi-annually through June 1997, annual
principal payments of $4,150 beginning December 1997,
secured by property and equipment with a book
value of approximately $32,779 at June 30, 1997. 25,000 25,000
Present value of capital lease obligations at effective
interest rates from 7% to 9%, secured by property and
equipment with a book value of approximately $23,216
at June 30, 1997. 13,133 15,680
Mortgage and other note payable, fixed interest rates
from 7.75% to 9%, due in various monthly installments
through January 2026, secured by property and equipment
with a book value of approximately $7,379 at
June 30, 1997. 5,281 5,231
Promissory note, less imputed interest of $81 in the
year ended June 30, 1997, at an effective interest
rate of 9% due in October 2001, secured by the
leasehold interest in a nursing care center, with a
book value of approximately $3,060 at June 30, 1997. 1,944 2,304
20
Mortgage note payable, variable interest rates from
8.25% to 9.0% in year ended June 30, 1997, due in
equal monthly principal installments through
March 2001, secured by property and equipment with
a book value of approximately $2,816 at June 30, 1997. 1,094 1,159
Less current portion -- (2,985)
-------- --------
Non-current portion $121,452 $107,389
======== ========
Future maturities of long-term debt (including capital lease
obligations) are as follows: years ending June 30, 1998 - $-0-; 1999 - $8,699;
2000 - $13,788; 2001 - $17,187; 2002 - $10,904, and thereafter - $70,874.
In December 1995, the Company amended its secured bank line of credit
which reduced the commitment from $60,000 to $40,000, converted accounts
receivable from collateral to a negative pledge, extended the revolver to
September 30, 1997 (the revolver has been subsequently extended to September 30,
1998) and reduced the period of the term loan upon termination of the revolver
from four to three years. The interest rate is variable and at the Company's
option, will equal either the bank prime rate or the Eurodollar rate plus a
margin (reduced by the amendment) that varies depending on the ratio of certain
senior debt to earnings before certain interest, taxes, depreciation and
amortization. At June 30, 1997, credit line loans outstanding were $5,000 which
was used to finance the construction described in Note 4. At June 30, 1997, the
Company classified $6,997 of current debt maturities as long-term debt based on
its intent and ability to refinance these obligations under the bank line of
credit.
The bank line of credit loan agreement and the two senior secured note
agreements contain covenants that include requirements to comply with certain
financial tests and ratios and restrict the ability of the Company to incur
additional indebtedness. Also, the Company is restricted by the agreements from
the payment of dividends (other than dividends payable in common stock) or to
acquire its common stock to the extent that such payments exceed $5,000 plus 50%
of the Company's net income after June 30, 1995. The Company currently is
meeting all financial tests and ratios.
Interest expense was $10,296, $8,701 and $6,033 in fiscal years 1997,
1996 and 1995, respectively, of which $1,678, $1,605 and $759 in 1997, 1996 and
1995 were capitalized as part of the ongoing construction projects. Interest
payments were $10,124, $7,874 and $5,712 in fiscal years 1997, 1996 and 1995,
respectively.
7. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended June 30, 1997 1996 1995
------------------------------------------------
Federal:
Current $(3,979) $3,611 $4,359
Deferred 4,003 19 (277)
------- ------ ------
24 3,630 4,082
State:
Current (662) 798 952
Deferred 757 24 (47)
------- ------ ------
95 822 905
------- ------ ------
$ 119 $4,452 $4,987
======= ====== ======
Deferred income taxes result from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements and represent differences between income for tax purposes and income
for financial statement purposes in future years. Temporary differences are
primarily attributable to reporting for income tax purposes the excess of tax
over book depreciation, bad debts and vacation benefits. The current deferred
tax assets are included in other current assets (see Note 5). Significant
components of the Company's deferred tax liabilities and assets as of June 30
are as follows:
21
1997 1996
---- ----
Current Non-Current Current Non-Current
------- ----------- ------- -----------
Income Taxes
Deferred tax liabilities:
Tax over book depreciation $ -- $(7,858) $ -- $(3,136)
Other -- (264) -- (137)
------ ------- ------ -------
Total deferred tax liabilities -- (8,122) -- (3,273)
Deferred tax assets:
Vacation and deferred
compensation benefits and bad
debt 1,956 452 1,810 330
State tax -- 159 -- 338
------ ------- ------ -------
Total deferred tax assets 1,956 611 1,810 668
------ ------- ------ -------
Net deferred tax assets
(liabilities) $1,956 $(7,511) $1,810 $(2,605)
====== ======= ====== =======
A reconciliation of the provision for income taxes with the amount
computed using the federal statutory rate is as follows:
Years Ended June 30, 1997 1996
-------------------------------------------------------------
Federal rate 34.0% 35.0%
State taxes, net of federal tax
benefit 4.5 4.5
Tax credits -- (1.6)
Other, net 24.8 --
---- ----
63.3% 37.9%
==== ====
The increase in the effective tax rate was primarily due to certain
permanent differences between book income and taxable income. Total income tax
payments during fiscal years 1997, 1996 and 1995 were $1,828, $3,904 and $4,876,
respectively.
8. LEASES
The Company leases certain of its centers, equipment and its pharmacy
space under both noncancellable operating leases and capital leases. The leases
generally provide for payment of property taxes, insurance and repairs, and have
rent escalation clauses based upon the consumer price index or annual per bed
adjustments.
All capital leases contain purchase options, and the accompanying
balance sheet and following table have been prepared assuming such options will
be exercised (see Note 11). Some leases contain various renewal options and
extend up to the year 2030. Property and equipment includes the following
amounts for leases which have been capitalized:
Year Ended June 30, 1997
-----------------------------------------------------------------
Land and land improvements $ 1,400
Buildings and leasehold improvements 21,481
Furniture and equipment 2,405
-------
25,286
Less accumulated amortization 2,070
-------
$23,216
=======
22
The future minimum rental payments under noncancellable operating leases and
capital leases (including purchase options when expected to be exercised) that
have initial or remaining lease terms in excess of one year as of June 30, 1997,
are as follows:
Operating Capital
Year ending June 30, Leases Leases Total
-----------------------------------------------------------------------------
1998 $ 3,054 $ 3,321 $ 6,375
1999 2,995 4,634 7,629
2000 2,755 4,297 7,052
2001 2,513 350 2,863
2002 2,176 350 2,526
Thereafter 7,827 3,525 11,352
------- ------- -------
Total minimum lease payments 21,320 16,477 37,797
Less amount representing interest -- 3,344 3,344
------- ------- -------
Present value of net minimum lease
payments (capital lease amount
included in long-term debt - see Note 6) $21,320 $13,133 $34,453
======= ======= =======
9. CONTINGENCIES
The Company is subject to malpractice claims and other litigation arising in
the ordinary course of business. In the opinion of management, any liability
beyond amounts covered by insurance and the ultimate resolution of all pending
legal proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
10. STOCK OPTION PLAN
Effective July 1, 1991, the Company adopted a stock option plan authorizing
the issuance of 250,000 shares of common stock. The plan was amended on December
9, 1994 and again on December 8, 1995 to increase the authorized shares to
1,400,000. Options may be granted to key employees and directors of the Company.
Options granted to employees may be either incentive stock options or
nonstatutory options. Only non-qualified options may be granted to non-employee
directors. Options granted to non-employee directors are granted automatically
pursuant to a formula grant provision contained in the plan. The option price
per share for incentive stock options shall not be less than 85% of the fair
market value at the date of the grant. The terms of each option and the
increments in which each is exercisable are determined by a committee appointed
by the Board of Directors. No option may be exercised after ten years from the
date of the grant and no option may be granted under the plan after June 30,
2001.
23
The following summarizes activity in the stock option plan:
Years Ended June 30, 1997 1996 1995
- -------------------- ----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- ---------
Options at
beginning of
year 948,500 $18.91 523,000 $16.79 256,000 $12.97
Changes during
year:
Granted 112,000 $13.36 504,000 $21.15 284,500 $19.94
Exercised (3,200) $17.85 (13,500) $12.13 (15,700) $12.20
Canceled (26,800) $20.31 (65,000) $20.58 (1,800) $12.26
--------- ------- -------
Options
outstanding at
end of year 1,030,500 $18.27 948,500 $18.91 523,000 $16.79
========= ======= =======
Options
exercisable
at end of year 352,300 $17.10 161,600 $14.97 58,100 $12.26
Options
available for
grant at end
of year 333,500 418,700 57,700
The weighted average fair value per share of options granted during the year
was $6.72 and $10.14 for fiscal years 1997 and 1996, respectively. The exercise
prices for options outstanding at June 30, 1997 ranged from $10.50 to $22.50.
The weighted average remaining contractual life of these options is
approximately 8 years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) which uses an intrinsic
value method and, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, results in
no compensation expense. However, pro forma information regarding net income and
earnings per share is required by Statement of Financial Accounting Standards
No. 123, "Accounting and Disclosure of Stock-Based Compensation" (SFAS 123),
and, in the following disclosure, has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for
the years ended June 30, 1997 and 1996, respectively: risk-free interest rates
of 6.4% and 5.5%; dividend yields of zero percent for both years; volatility
factors of the expected market price of the Company's common stock of 48.4% and
46.8%; and a weighted average expected life of the options of 5 years.
Because the Company's stock options have characteristics significantly
different from those options used in the Black-Scholes option pricing model, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
stock options.
24
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
providing pro forma disclosure are not likely to be representative of the
effects on reported net income for future years. The Company's pro forma
information follows for the years ended June 30, 1997 and 1996:
1997 1996
---- ----
Pro forma net income (loss) $ (543) $6,914
Pro forma earnings (loss) per share $(0.08) $ 1.00
11. SUBSEQUENT EVENT
In September 1997, the Company exercised a purchase option in its lease
of a 111-bed skilled nursing care center in La Grange, Texas. The purchase
option price of $1,871 was financed by a draw on the Company's bank line of
credit (see Note 6).
12. UNAUDITED QUARTERLY INFORMATION
Following is a summary of unaudited quarterly results of operations from
the years ended June 30, 1997 and 1996:
Year ended June 30, 1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
------------------------ -------- -------- -------- -------- --------
Net revenues $ 48,907 $ 46,181 $ 52,012 $ 50,827 $197,927
Income (loss) before
income taxes 2,587 (1,734) 2,394 (3,059) 188
Net income (loss) 1,565 (1,049) 1,448 (1,895) 69
Earnings (loss) per share $ 0.23 $ (0.15) $ 0.21 $ (0.28) $ 0.01
Year ended June 30, 1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
------------------------ -------- -------- -------- -------- --------
Net revenues $ 41,270 $ 42,801 $ 45,232 $ 46,759 $176,062
Income before income taxes 3,924 3,400 2,077 2,360 11,761
Net income 2,359 2,043 1,327 1,580 7,309
Earnings per share $ 0.34 $ 0.30 $ 0.19 $ 0.23 $ 1.06
See accompanying notes
25