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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the transition period from _______________ to _______________ Commission
file number 0-19411
SUMMIT CARE CORPORATION
(Exact name of Company as specified in its charter)
California 95-3656297
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2600 W. Magnolia Blvd., Burbank, CA 91505-3031
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 841-8750
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
None on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(TITLE OF CLASS)
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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates* as of August
30, 1996 was $100,125.
The number of shares outstanding of Registrant's common stock as of August 30,
1996: 6,772,800.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for its annual meeting of
shareholders to be held on December 12, 1996, which will be filed with the
Commission within 120 days of the Company's last fiscal year end, are
incorporated by reference in Part III of this Form 10-K.
* Without acknowledging that any individual director of the Company is an
affiliate, the shares over which they have voting control have been included
as owned by affiliates solely for purposes of this computation.
The exhibit index is located on Page 47.
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PART I
ITEM 1. BUSINESS
GENERAL
Summit Care Corporation (the "Company") principally operates skilled
nursing care centers and assisted living centers located in California, Texas
and Arizona. The skilled nursing care centers provide subacute,
rehabilitative, specialty medical and skilled nursing care. The assisted
living centers provide room and board, social and minor medical services in a
secure environment and, in selected situations, provide care to early stage
Alzheimer's residents. The Company also operates pharmacies which service
skilled nursing care centers, assisted living centers and acute hospitals, both
affiliated and non-affiliated, throughout a substantial portion of Southern
California, as well as mail order services to affiliated skilled nursing care
centers outside of the Southern California area. In addition, the Company is a
minority partner in a joint venture that manages subacute care units in acute
hospitals. The Company is incorporated under the laws of the State of
California.
At June 30, 1996, the Company operated 34 skilled nursing care centers
with 4,472 beds. Currently, the Company operates 35 skilled nursing care
centers with 4,638 beds. Thirteen centers are in California with 1,551 beds;
twenty-one centers are in Texas with 2,937 beds and one center in Arizona with
150 beds. Within its skilled nursing care centers, the Company has established
separate units for specialty medical care and subacute: fourteen units are
dedicated to Alzheimer's and 35 units for patients requiring services for such
complex medical needs as oncology, pulmonary cardiac complications, wounds,
respiratory therapy and intensive physical, speech and occupational therapies.
The Company operates four assisted living centers with 468 beds in
California. Included in two of the centers are units dedicated to the needs of
early stage Alzheimer's residents.
At June 30, 1996, the Company operated two pharmacies in Southern
California. The pharmacies provide pharmaceutical products and services to 46
non-affiliated skilled nursing care centers, assisted living centers and acute
hospitals located in Southern California. The pharmacies also provide products
and services to the Company's skilled nursing care and assisted living centers.
The joint venture in which the Company is a minority partner is currently
managing subacute units in four acute hospitals.
During fiscal year 1996, the Company opened 182 new beds in three
skilled nursing care centers, and in August 1996, subsequently opened another
166 new beds in two skilled nursing care centers. A new center with 108 beds
was opened in January 1996 in Fresno, California. This center offers services
to Alzheimer's residents in 52 beds and to subacute/skilled nursing residents
in 56 beds. The other 74 beds added in fiscal year 1996 were expansion
projects at two skilled nursing care centers in Texas. The new beds opened in
August 1996, represent 110 beds in a newly constructed skilled nursing care
center in Fort Worth, Texas and 56 additional beds at the new Fresno center.
Construction is continuing on the Fort Worth center to add another 100
beds later in fiscal 1997. In addition, plans have been developed or are in
the process of being developed to construct and open 195 new beds in four
centers. It is presently estimated that the new beds will be open by the
summer of 1997.
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The growth in the number of centers and beds by acquisition and
construction is shown in the following table:
YEAR ENDED JUNE 30,
-------------------
1994 1995 1996 1997*
---- ---- ---- -----
Centers
-------
Acquired 2 13 -- --
Constructed -- 1 1 2
----- ----- ----- -----
Total 2 14 1 2
===== ===== ===== =====
Owned 1 7 1 2
Leased -
With Option to Purchase -- 7 ** -- --
With No Purchase Option 1 -- -- --
----- ----- ----- -----
Total 2 14 1 2
===== ===== ===== =====
Beds
----
Acquired 282 1,670 -- --
Constructed in New Centers -- 118 108 279
Constructed in Existing Centers 24 74 74 182
----- ----- ----- ----
Total 306 1,862 182 461
==== ====== ==== ====
Owned 230 976 182 461
Leased -
With Option to Purchase -- 812 ** -- --
With No Purchase Option 76 74
----- ----- ----- -----
Total 306 1,862 182 461
==== ===== ==== ====
* Centers and beds planned to open by the summer of 1997.
** One center with 90 beds was purchased in July 1996 upon exercise of
an option to purchase.
In April 1994, OrNda HealthCorp ("OrNda") acquired the Company's then
majority shareholder, Summit Health, Ltd. ("SHL"). The Company completed a
common stock offering in June 1994, which reduced OrNda's percentage ownership
to below 50%. OrNda owned 7.5% Exchangeable Subordinated Notes ("OrNda Notes")
exchangeable into all of its equity interest in the Company's common stock, at
the option of the holders. In August 1995, OrNda redeemed 100% of the
outstanding OrNda Notes in exchange for all of its equity interest in the
Company's common stock. OrNda currently has no position in the Company's
common stock.
In December 1995, the Company issued $55 million of Senior Secured
Notes ("New Notes") and in July 1996, issued another $15 million of New Notes.
The New Notes are payable as follows:
ANNUAL AMOUNT
-------------
December 15, 2000 $ 7,000,000
December 15, 2001 5,000,000
December 15, 2003 9,600,000
December 15, 2004 9,600,000
December 15, 2005 9,600,000
December 15, 2006 9,600,000
December 15, 2007 9,600,000
December 15, 2010 10,000,000
----------
$70,000,000
===========
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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. The New Notes are secured by certain real estate
in a collateral pool shared, on the basis of dollars committed, with the
investors holding the Company's $25 million Senior Secured Notes and the
lenders under the Company's $40 million bank line of credit. Proceeds from the
New Notes were used to payoff bank debt ($55,000,000) and for construction
through June 30, 1996 ($6,000,000), and $9,000,000 was invested in short-term,
high quality financial instruments. Subsequently, $2,022,000 of the invested
funds was used in the exercise of the purchase option in July 1996. The
balance is expected to be used for future construction projects. Concurrent
with the issuance of the New Notes, the Company reduced its bank line of credit
from $60,000,000 to $40,000,000 at more favorable interest rates and reduced
the bank line's repayment period following the revolving commitment from four
years to three years.
OPERATIONS
The Company provides long-term care services at its skilled nursing
care centers, assisted living centers and pharmacies, and manages such services
at acute hospitals through its joint venture. Long-term care services provided
by the Company are of five types.
SKILLED NURSING CARE. Skilled nursing care is offered in each of the
Company's 35 skilled nursing care centers and at the four units managed by the
Company's joint venture. Skilled nursing care services consist of
round-the-clock care by registered nurses, licensed practical or vocational
nurses and certified aides, room and board, special nutritional programs and
related medical or other services that may be prescribed by a physician. Each
skilled nursing care center has one or more physicians acting as medical
director and has agreements with hospitals for the transfer of patients
requiring emergency treatment. Each center also has a licensed administrator
responsible for all activities in the skilled nursing center and a director of
nursing responsible for nursing services.
The Company has a corporate quality assurance department whose licensed
nurses, dietitians and medical records technicians supervise services in the
skilled nursing care centers. The Company is seeking to become accredited by
the Joint Commission on Accreditation of Health Care Organizations in each of
its centers. Accreditation has been achieved at the two centers surveyed by
the Commission to date and nine additional centers are scheduled at this time
for survey.
The Company believes education, training and development provide tools
that enhance the effectiveness of its employees. The Company's administrators,
directors of nursing and department supervisors are trained to recruit
employees who meet specific standards. All employees attend a 16-hour general
orientation. Administrators and department supervisors receive at least 40
hours of training annually. Other personnel receive twelve hours of training
annually, primarily in customer service. Clinical training for licensed
nurses, including supervision skills, is conducted by the Company to ensure
each licensed nurse meets the skill competency standards. An eight-hour
quality improvement program is conducted at each center for employees at all
levels in the center on a yearly basis.
REHABILITATIVE CARE. Rehabilitative care is provided in each of the
Company's 35 skilled nursing care centers by outside contractors.
Rehabilitative care consists of respiratory, physical, speech and occupational
therapies and are provided by therapists generally assigned to each center.
The Company provides management and oversight of each center's rehabilitative
care through the use of corporate therapists and therapy administration.
SUBACUTE AND SPECIALTY MEDICAL SERVICES. The Company continues to
focus on extending its specialty and subacute services as a means of increasing
revenues and operating margins. Such services are generally reimbursed at
rates higher than those for routine skilled nursing care and basic assisted
living services. The services allow the Company to treat a greater range of
patient acuities, which the Company believes results in increased occupancy at
its centers. The Company's goal is to offer care to patients of the highest
acuity level permitted by a center's physical plant and employee skill levels.
Each skilled nursing care center is certified for participation in the Medicare
reimbursement program and contracts with a physician as medical director who
has a practice specialty related to the subacute or specialty medical services
offered at the center.
The Company provides wound care, hospice care, oncology services,
pulmonary cardiac services, infection control, pain management and infusion,
enteral nutrition therapy and other specialty medical services in separate
units at all of its skilled nursing care centers. Also, the Company operates
units for the care of residents in various stages of Alzheimer's. There
currently are sixteen Alzheimer's units (fourteen in skilled nursing care
centers and two in assisted living centers) with a total of 497 beds and 35
units with 845 beds providing subacute and specialty medical services.
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PHARMACEUTICAL PRODUCTS AND SERVICES. The Company provides
pharmaceutical products and services through the operation of two pharmacies in
Southern California. The pharmacies service 46 non-affiliated skilled nursing
care centers, assisted living centers and acute hospitals located throughout a
substantial portion of Southern California, as well as all of the Company's
skilled nursing care and assisted living centers. Pharmacists are on call 24
hours a day to ensure the availability of medication whenever it is needed.
The pharmacies provide prescription drugs, enteral nutrition therapy services
and infusion therapy services, including nutrition, pain management, antibiotic
and hydration.
ASSISTED LIVING SERVICES. The four assisted living centers operated by
the Company are located in California and have 468 beds, with 86 beds dedicated
to early stage Alzheimer's. Aside from the Alzheimer's units, assisted living
services consist of basic room and board, social activities and assistance with
activities of daily living such as dressing and bathing. The Company has
developed plans to construct and open 135 beds dedicated to assisted living.
These new beds represent two projects, each located on a campus with an
existing skilled nursing care center or assisted living center. It is expected
that these new beds will open in the summer of 1997.
SOURCE OF REVENUE. The Company's skilled nursing care centers receive
payment for health care services from federally assisted Medicaid programs,
from the federal Medicare program, from programs operated by preferred provider
organizations, health maintenance organizations, the Veterans Administration
and directly from patients or their responsible parties or insurers. The
assisted living centers receive payment entirely from private individuals, some
of whom depend upon supplemental Social Security payments as their primary
source of income. The following table sets forth for the Company's skilled
nursing care and assisted living centers the approximate percentages of gross
revenues (excluding revenues from operation of the pharmacies) derived from the
various sources of payment for the period indicated.
YEAR ENDED JUNE 30,
-----------------------------------
1994 1995 1996
-----------------------------------
Private/Managed Care 31.4% 32.4% 30.2%
Medicare 32.0 30.7 36.5
----- ----- -----
Subtotal 63.4 63.1 66.7
Medicaid 36.6 36.9 33.3
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Changes in the quality mix between Medicaid and either Medicare,
managed care or private pay can significantly affect profitability. Quality
mix represents revenues from Medicare, managed care and private pay patients as
a percentage of gross revenues excluding pharmacy revenues. Medicare, managed
care and private pay patients constitute the most profitable categories and
Medicaid patients the least profitable. The Company has consistently
maintained a high ratio of Medicare, managed care and private pay patients
relative to Medicaid patients; however, no assurance can be given that the
Company's quality mix will not change.
Specialty medical, subacute, rehabilitative and pharmacy revenues
generally represent the most profitable types of services because the principal
payors for such services are Medicare and managed care and, in the case of
pharmacy revenues, the skilled nursing care centers. The following tables set
forth the approximate percentages of gross revenues and the amounts for these
types of revenues:
YEAR ENDED JUNE 30,
-----------------------------------
1994 1995 1996
-----------------------------------
Specialty medical, subacute
and rehabilitative revenues 36.4% 36.8% 43.0%
Pharmacy revenues 9.9 8.9 7.9
----- ----- -----
46.3% 45.7% 50.9%
===== ===== =====
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YEAR ENDED JUNE 30,
---------------------------------------------
1994 1995 1996
---------------------------------------------
Specialty medical, subacute
and rehabilitative revenue $39,225,000 $57,116,000 $ 87,829,000
Pharmacy revenues 10,692,000 13,822,000 16,193,000
----------- ----------- ------------
$49,917,000 $70,938,000 $104,022,000
=========== =========== ============
The pharmacy revenues in the above tables exclude revenues from
affiliated skilled nursing care and assisted living centers. While the Company
has consistently maintained a high percentage of specialty medical, subacute,
rehabilitative and pharmacy revenues relative to total gross revenues, no
assurance can be given that these high percentages will not change.
EMPLOYEES. At June 30, 1996, the Company had approximately 3,900
full-time equivalent employees. None of the Company's employees are covered by
collective bargaining agreements and the Company considers the relations with
its employees to be good. The Company is subject to both federal minimum wage
and applicable federal and state wage and hour laws and maintains various
employee benefit plans.
As a result of increases in the specialty and subacute services
provided by the Company (which require greater expenditures for equipment,
supplies and independent contractor clinicians than basic nursing services, but
which generally yield a higher margin), salaries and related employee benefits
as a percentage of operating expenses have decreased during the last three
years. Salaries and related employee benefits accounted for approximately 53%,
56% and 57% of the Company's expenses (excluding rental, depreciation and
amortization and interest) for fiscal years 1996, 1995 and 1994, respectively.
COMPETITION. The Company operates in a highly competitive industry.
The Company's skilled nursing care and assisted living centers are located in
communities that also are served by similar centers operated by others. Some
competing centers provide services not offered by the Company and some are
operated by entities having greater financial and other resources than the
Company. In addition, some are operated by non-profit organizations or
government agencies supported by endowments, charitable contributions, tax
revenues and other sources not available to the Company. Furthermore, cost
containment efforts, which encourage more efficient utilization of acute care
hospital services, have resulted in decreased hospital occupancy in recent
years. As a result, a significant number of acute care hospitals have
converted portions of their facilities to other purposes, including specialty
and subacute units. In California, Texas and Arizona a certificate of need is
no longer required in order to build or expand a nursing center, which is
another factor increasing competition. The Company's pharmacies also operate
in a highly competitive environment and compete with regional and local
pharmacies, medical supply companies and pharmacies operated by other long-term
care chains. The Company also may encounter competition in acquiring or
developing new centers.
INSURANCE. The Company maintains general and professional, property,
casualty, health, directors and officers, automobile, crime, employee's and
workers' compensation coverage that the Company believes is adequate. The
Company's workers' compensation insurance for its California and Arizona
employees is funded by Company payments to a rental captive insurance company,
Meridian Insurance Company Ltd. ("Meridian"), which is partially owned by
persons who sold their interests in SHL to OrNda and resigned their
directorships in the Company. The funds received by Meridian pay for claims up
to $250,000 per claim and for the purchase of reinsurance coverage for amounts
in excess of the per claim limit and for annual aggregate claim amounts in
excess of a $1,300,000 stop loss. Texas employees are covered by a policy for
employer's excess and occupational indemnity for risks in excess of $150,000 up
to $1,000,000 per occurrence and $3,000,000 annually in the aggregate. The
Company pays for claims up to $150,000 per occurrence.
The Company's services subject it to liability risk. Malpractice
claims may be asserted against the Company if its services are alleged to have
resulted in patient injury or other adverse effects, the risk of which is
greater for higher acuity patients, such as those treated by the Company's
specialty and subacute services, than for traditional long-term care patients.
The Company has from time to time been subject to malpractice claims and other
litigation in the ordinary course of its business. While the Company believes
that the ultimate resolution of all pending legal proceedings will not have a
material adverse effect on the Company's business or financial condition, there
can be no assurance that future claims will not have such an effect on the
Company. Its current policy for general and professional liability coverages
has limits of $1,000,000 per occurrence and $2,000,000 and $3,000,000 in the
aggregate per year, respectively, and carries a self-insured retention of
$5,000 and $100,000 per occurrence, respectively, and a $300,000 annual
aggregate loss limit. In addition, the Company has an umbrella policy which
provides additional insurance of $8,000,000 per occurrence and $8,000,000
aggregate per year over its primary general and professional policy, its
automobile liability policy and its employer liability policy.
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Although the Company has not been subject to any judgments or
settlements in excess of its self-insured retention or insurance limits, there
can be no assurance that claims for damages in excess of its coverage limits
will not arise in the future.
Prior to OrNda's acquisition of SHL, the Company was co-insured under
common policies with SHL with respect to general and professional, workers'
compensation, group health and property and casualty. Currently, with the
exception of workers' compensation, the Company is insured with independent
companies. Until December 31, 1994, the Company's general and professional
liability risks were insured by Meridian for losses limited to $2,000,000 per
occurrence and $2,000,000 annual aggregate losses. Also, until December 31,
1994 Tristar Risk Management (formerly TOPA Insurance Company) which is
partially owned by a person who was formerly a shareholder of SHL and formerly
a director of the Company, insured the Company's workers' compensation risks in
California. The Company's co-insured position with SHL with respect to group
health, property and casualty policies was discontinued effective July 1, 1994.
REGULATION
LICENSURE. The Company's skilled nursing care centers, assisted living
centers and pharmacies are subject to various regulatory and licensing
requirements of state and local authorities in California, Texas and Arizona.
Each skilled nursing care center is licensed by either the California
Department of Health Services, the Texas Department of Health or the Arizona
Department of Health Services, as applicable, each assisted living center is
licensed by the California Department of Social Services and the pharmacies are
licensed by the California Board of Pharmacy. All licenses must be renewed
annually, and failure to comply with applicable rules, laws and regulations
could lead to loss of licenses. In granting, monitoring and renewing licenses,
these agencies consider, among other things, the physical condition of the
facility, the qualifications of the administrative and nursing staffs, the
quality of care and the compliance with applicable laws and regulations. In
addition to a variety of state licensing and other laws governing the storage,
handling, sale or dispensing of drugs, and the supervising of a duly licensed
pharmacist, the pharmacies are subject to federal regulation under the Food,
Drug and Cosmetic Act and the Prescription Drug Marketing Act. Moreover, the
Company is required to register its pharmacies with the United States Drug
Enforcement Administration, and to comply with requirements imposed by that
agency with respect to security and reporting of inventories and transactions.
Such regulatory and licensing requirements are subject to change, and there can
be no assurance that the Company will continue to be able to maintain necessary
licenses or that it will not incur substantial costs in doing so. Failure to
comply with licensing requirements could result in the loss of the right to
payment by Medicare or Medicaid as well as the right to conduct the business of
the licensed entity.
REIMBURSEMENT. The Company's skilled nursing care centers are subject
to various requirements for participation in government-sponsored health care
funding programs, such as Medicare and Medicaid. To receive Medicare and
Medicaid payments, each center must also comply with a number of rules
regarding charges and claims procedures. Medicare is a health insurance
program operated by the federal government for the aged and certain chronically
disabled individuals. Medicare utilizes a cost-based reimbursement system for
free-standing nursing facilities which, subject to limits fixed for the
particular geographic area on the costs for routine services (excluding capital
related expenses), reimburses nursing facilities for reasonable direct and
indirect allowable costs incurred in providing services (as defined by the
program). Effective October 1, 1993, nursing facilities are no longer paid a
return on equity under Medicare. Allowable costs normally include
administrative and general costs as well as operating costs and rental,
depreciation and interest expenses. Reimbursement is subject to retrospective
audit adjustment. An interim rate based upon estimated costs is paid by
Medicare during the cost reporting period and a cost settlement is made
following an audit of the actual costs as reported in the filed cost report.
Such adjustments may result in additional payments being made to the Company or
in recoupments from the Company. To the extent that the Company's costs exceed
certain limits known as the Medicare Routine Cost Limits, the Company may
submit exception requests seeking reimbursement for such excess costs from
Medicare. To date, the Company has filed four exception requests. Approval
has been received on one and the others are subject to the government
completing their audit of the Medicare cost reports for fiscal year 1995.
There is no assurance the Company will be able to recover such excess costs
under the pending requests or any future requests. If the Company files
exception requests on a regular basis in the future and fails to recover the
excess costs covered by such requests, such failure could adversely affect the
Company's financial position and results of operations. In addition, the
Company purchases respiratory therapy services and physical therapy services
and is subject to payment limits for such therapy services imposed by Medicare.
To the extent the Company's actual costs exceed such payment limits, the excess
costs will be denied. Occupational therapy and speech therapy services are
purchased by the Company from third-party vendors and are not subject to
specific Medicare payment limits; however, the cost of such services has come
under additional scrutiny, and it is possible a portion of such costs may be
disallowed by the Medicare program in the future. To the extent that costs of
therapy services exceed payment limits and are disallowed by Medicare, the
Company has contractual arrangements with third-party vendors to recover such
costs from the vendors. The Company maintains reserves to cover retroactive
audit adjustments. Medicare will reimburse certain products, such as enteral
and parenteral
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nutrition, provided by a pharmacy directly to Medicare beneficiaries who are
not eligible for inpatient services based on a fee screen amount.
Medicaid is a medical assistance program for the indigent, operated by
individual states with financial participation by the federal government.
California, Texas and Arizona each have Medicaid programs. While the
California, Texas and Arizona programs differ in certain respects, all are
subject to federally imposed requirements. Approximately 50% of the funds
available under the California program, approximately 63% of the funds
available under the Texas program and approximately 66% of the funds available
under the Arizona program are provided by the federal government under a
matching program.
Under Medi-Cal, California currently provides for reimbursement of most
routine and ancillary services at free-standing skilled nursing care centers at
a flat daily rate, as determined by the California Department of Health
Services, based on median costs of skilled nursing care centers, classified by
number of beds and geographic location. Under its Medicaid program, Texas
currently provides for reimbursement at a flat daily rate, as determined by the
Texas Department of Human Services, based on the combination of the mean costs,
median costs and appraised value of assets of skilled nursing care centers,
classified by the required level of patient care. The Texas legislature has
enacted legislation requiring the Department of Human Services to base its
Medicaid payments for long-term care on minimum data sets. It is unclear at
the present time how the Department will implement changes from the current
Texas Index of Level of Effort (TILE) system to use of minimum data sets.
Arizona has adopted a managed care approach to providing skilled nursing and
other kinds of care to the indigent. Under the Arizona system, beneficiaries
enroll in a managed care plan in their area. That managed care plan, which is
responsible for providing 90 days of inpatient skilled nursing care, contracts
with nursing facilities to provide varying degrees of care, depending upon the
needs of the beneficiaries, at negotiated, per diem rates. After the 90 days
of skilled nursing care coverage have been exhausted, the beneficiary is
enrolled in a county-operated managed care plan, which also pays skilled
nursing care centers based on a negotiated per diem rate for each of two levels
of service.
Medi-Cal will reimburse a pharmacy for drugs supplied to patients based
on the cost of the drug plus an additional amount which varies depending on the
type of drugs supplied.
Effective October 1, 1990, the Omnibus Budget Reconciliation Act of
1987 ("OBRA") was implemented. Among other things, it eliminated the different
certification standards for "skilled" and "intermediate care" nursing
facilities under the Medicare and Medicaid programs in favor of a single
"nursing facility" standard. OBRA also mandated an increase in the level of
services nursing centers must provide in order to participate in Medicare and
Medicaid. This change, the cost of which was partially offset by Medicaid rate
increases in California, Texas and Arizona and an increase in the routine cost
limits under Medicare, thus far has not had a significant impact on the
Company.
OBRA also requires that substantial additional regulations be
promulgated, covering, among other things, licensure requirements for
administrators, enforcement policies and procedures and the use of restraints
and certain drugs. While the Company believes that it is in substantial
compliance with the current requirements of OBRA, it is unable to predict how
future interpretation and enforcement of regulations promulgated under OBRA by
the state and federal governments may affect the Company in the future.
The Omnibus Budget Reconciliation Act of 1993 (the "OBRA 93") impacts
Medicare reimbursement for skilled nursing services in two ways, both of which
are expected to have a minimal effect on the Company's earnings. First, the
current limits on the portion of the Medicare reimbursement known as "routine
service costs" (excluding capital related expenses) will be frozen for two
consecutive years beginning with the Company's 1995 fiscal year. Second, the
return on equity included in Medicare reimbursement has been eliminated
beginning October 1, 1993.
Governmental funding for health care programs is subject to statutory
and regulatory changes, administrative rulings, interpretations of policy,
determinations by intermediaries and governmental funding restrictions, all of
which may materially increase or decrease program reimbursement to health care
centers. Since 1972, Congress has consistently attempted to curb federal
spending on such programs. Recent actions include limitations or freezes on
payments to skilled nursing care centers under the Medicare and Medicaid
programs. The Company expects that there will continue to be a number of state
and federal proposals to limit Medicare and Medicaid reimbursement for health
care services. The Company cannot at this time predict whether any of such
proposals will be adopted and no assurance can be given that future funding
levels of Medicare and Medicaid programs will remain comparable to present
levels. Reimbursement limits or other changes in the reimbursement policies as
a result of budget cuts or other government action could materially and
adversely affect the Company's results of operations. See "Pending Matters
That Affect Health Care Operations," discussed below. In addition, in
California, the Department of Health Services intends to shift Medi-Cal
beneficiaries in selected service areas into managed
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care plans. If this occurs in the service areas of the Company's centers and
if the plans call for covering long-term care, it could have a substantial
unfavorable impact on the Company's revenues.
In addition, the Company's cash flow could be materially adversely
affected by periodic government program funding delays or budgetary shortfalls.
The Company received approximately 9% of its revenues during the fiscal year
ended June 30, 1996 from Medi-Cal. Medi-Cal delayed payments for approximately
30 days and nursing center rate increases for several months in 1991 and
delayed nursing center rate increases for approximately 30 days in 1992. The
Company believes that it will be able to cover any Medi-Cal payment delays that
may occur in the future from cash on hand or by borrowing under its $40,000,000
bank line of credit. However, given the percentage of the Company's revenues
derived from Medi-Cal, there can be no assurance that rate freezes or future
delays in payments from Medi-Cal will not have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
While federal statutes do not provide states with authority to curtail
funding of Medicaid reimbursement programs solely due to budget deficiencies,
some states nevertheless have curtailed funding for this reason. No assurance
can be given that they will not continue to do so or that future funding levels
of Medicaid programs will remain comparable to present levels. On June 16,
1990, the United States Supreme Court ruled that health care providers may
bring suit in federal court to enforce the Medicaid Act's requirement that the
states reimburse skilled nursing care centers at rates adequate to cover the
costs of efficiently and economically operated centers. Operators of skilled
nursing care centers have used the federal courts to require California and
Texas to adequately fund their Medicaid programs.
COMPLIANCE. The Company believes that its centers are in substantial
compliance with the various applicable regulatory and licensing requirements of
state and local authorities in California, Texas and Arizona, and of the
Medicare and Medicaid programs, including the requirements of OBRA. In the
ordinary course of its business, however, the Company from time to time
receives notices from state and federal agencies of failure to comply with
various requirements. The Company endeavors to take prompt corrective action
and, in most cases, the Company and the reviewing agency agree on remedial
steps. The reviewing agency may also take action against a center, which can
include the imposition of fines, denial of payment for new patients at the
center, decertification and loss of participation in the Medicare or Medicaid
programs and, in extreme circumstances, revocation of a center's license. In
certain circumstances, certain egregious failures to comply by one or more
centers with program rules may subject the Company's centers to exclusion from
participation in the Medicare and Medicaid programs.
ANTI-KICKBACK LAWS. The Company is also subject to federal and state
laws which govern financial and other arrangements between health care
providers. Federal law, as well as the law in California, Texas and Arizona
and other states, prohibits direct or indirect payments in some cases or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
federal "Anti-kickback law" which prohibits, among other things, the offer,
payment, solicitation or receipt of any form of remuneration in return for, or
to induce, the referral of Medicare and Medicaid patients. A wide array of
relationships and arrangements, including ownership interests in a company by
persons who refer or are in a position to refer patients, as well as personal
service agreements have, under certain circumstances, been alleged or have been
found to violate these provisions. Certain arrangements, such as the provision
of services for less than fair market value compensation, may also violate such
laws. Because of the law's broad reach, the federal government has published
regulations, known commonly as "safe harbors," which set forth the requirements
under which certain relationships will not be considered to violate the law.
One of these safe harbors protects investment interests in certain large
publicly traded entities which meet certain requirements regarding the
marketing of their securities and the payment of returns on the investment. A
second safe harbor protects payments for management services which are set in
advance at a fair market rate and which do not vary with the value or volume of
services referred, so long as there is a written contract which meets certain
requirements. A safe harbor for discounts, which focuses primarily on
appropriate disclosure, is also available. A violation of the federal
Anti-kickback law and similar state law could result in the loss of eligibility
to participate in Medicare or Medicaid, or in criminal penalties.
In addition, the federal government and some states restrict certain
business relationships between physicians and other providers of health care
services. OBRA 93 contained provisions which greatly expanded the then
existing federal prohibition on physician referrals to entities with which a
physician has a financial relationship. Effective January 1, 1995, OBRA 93 has
prohibited any physician with a financial relationship (defined as a direct or
indirect ownership or investment interest or compensation arrangement) with an
entity from making a referral for a Medicare or Medicaid (along with certain
other federal payment programs) "designated health service" to that entity, and
prohibits that entity from billing for such services. "Designated health
services" do not include skilled nursing services, but do include many services
which nursing facilities provide to their patients including therapy and
enteral and parenteral nutrition. In addition, exceptions exist for
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physician ownership in publicly traded companies which at the end of a
company's most recent fiscal year end or on average during the past three years
have shareholder equity exceeding $75,000,000 and for the payment of fair
market compensation for the provision of personal services, so long as various
requirements are met.
California also has a state statute which limits the ability of
physicians to refer patients for certain specified services to an entity with
which it has a financial interest which includes most ownership or compensation
arrangements. A broad exception applies for referrals to certain licensed
providers, including nursing centers. Many states, including California,
prohibit business corporations and other persons or entities not licensed to
practice medicine from providing, or holding themselves out as a provider of,
medical care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs and civil and criminal penalties. These laws, their
construction and level of enforcement, vary from state to state.
Each of the Company's skilled nursing care centers has at least one
medical director who is a licensed physician. The medical directors may from
time to time refer their patients to the Company's centers in their independent
professional judgment. The physician anti-referral restrictions and
prohibitions could, among other things, require the Company to modify its
contractual arrangements with its medical directors or prohibit its medical
directors from referring patients to the Company. From time to time, the
Company has sought guidance as to the interpretation of these laws, and
believes that such arrangements are consistent with legal requirements.
However, there can be no assurance that such laws will ultimately be
interpreted in a manner consistent with the practices of the Company.
ENVIRONMENTAL REGULATION. The Company is also subject to a wide
variety of federal, state and local environmental and occupational health and
safety laws and regulations. Among the types of regulatory requirements faced
by health care providers are: air and water quality control requirements;
waste management requirements; specific regulatory requirements applicable to
asbestos, polychlorinated biphenyls, and radioactive substances; requirements
for providing notice to employees and members of the public about hazardous
materials and wastes; and certain other requirements.
In its role as owner and/or operator of properties or centers, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including
any such substances that may have migrated off, or emitted, discharged, leaked,
escaped or been transported from, the property. Ancillary to the Company's
operations are, in various combinations, the handling, use, storage,
transportation, disposal and/or discharge of hazardous, infectious, toxic,
radioactive, flammable and other hazardous materials, wastes, pollutants or
contaminants. Such activities may result in damage to individuals, property or
the environment; may interrupt operations and/or increase their costs; may
result in legal liability, damages, injunctions or fines; may result in
investigations, administrative proceedings, penalties or other governmental
agency actions; and may not be covered by insurance. There can be no assurance
that the Company will not encounter such risks in the future, and such risks
may result in material adverse consequences to the operations or financial
condition of the Company.
PENDING MATTERS THAT AFFECT HEALTH CARE OPERATIONS. In recent years,
an increasing number of legislative proposals have been introduced in Congress
and various state legislatures that would affect major reforms of the health
care system. Among the proposals under consideration are insurance market
reforms to increase the availability of group health insurance to small
businesses, requirements that all businesses offer health insurance coverage to
their employees, the provision of federal tax credits to individuals for the
purchase of health insurance and the creation of a single government health
insurance plan that would cover all citizens. In addition, the Clinton
administration has promulgated proposals including cutbacks to certain Medicare
and Medicaid programs and has proposed steps to permit greater flexibility in
the administration of Medicaid. In June 1995, a joint resolution was adopted
by Congress to reduce Medicare expenditures by $270 billion and Medicaid
expenditures by $180 billion over the seven-year period between 1995 and 2002.
A portion of such Medicare and Medicaid reductions would likely reduce the
level of payments received by skilled nursing facilities and could adversely
impact revenues received by the Company under the Medicare and Medicaid
Programs. Until legislation is adopted implementing the budget resolution, the
scope of such proposed reductions is unclear. Any reduction in federal
Medicaid expenditures would likely result in reductions in state Medicaid
expenditures because Medicaid is jointly funded by the federal and state
governments. In California, the Department of Health Services has established
plans to enroll many Medi-Cal recipients in managed care plans. These plans
have the option of covering long-term care in addition to other services, which
could materially and adversely affect the Company's revenues. Changes in the
reimbursement levels under Medicare or Medicaid and changes in applicable
governmental regulations could materially and adversely affect the Company's
results of operations. It is uncertain at this time what health care reform
legislation will ultimately be enacted and implemented or whether other changes
in the administration or interpretation of the governmental health care
programs will occur. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs, if enacted, will not have a material adverse
effect on the results of operations of the Company.
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In August 1996, legislation was signed into law that will increase
minimum wages from $4.25 per hour to $4.75 per hour on October 1, 1996 and to
$5.15 per hour on September 1, 1997. In addition, an initiative statute
entitled "Minimum Wage Increase" has qualified for the November 5, 1996
California ballot. The initiative statute, Proposition 210, proposes to
increase the current state minimum wage of $4.25 per hour to $5.00 per hour on
March 1, 1997 and then to $5.75 per hour on March 1, 1998 for all industries.
Proposition 210, if passed, would affect minimum wages for California employees
only. The Company believes that these wage increases will not have a material
adverse effect on the Company's operations.
Two other initiative measures, Proposition 214 and Proposition 216,
have also qualified for the November 5, 1996 California ballot which may impact
the Company's operations and finances. Both propositions propose additional
regulation of health care businesses. Among other matters, Proposition 214
requires health care businesses to make tax returns and other information
public, to disclose certain financial information to consumers including
administrative costs, and to publicly disclose the outcome of all complaints,
arbitrations and lawsuits. Health care businesses would also be required to
provide for minimum staffing of health care facilities which may require the
Company's facilities to have physician staff. The initiative statute would
also require the Company and its facilities to show just cause before
discharging or demoting any certified care giver. Proposition 214 authorizes
public and private enforcement actions for violations of its provisions.
Proposition 216 also regulates health care businesses and addresses certain
matters similar to those contained in Proposition 214. In addition,
Proposition 216 requires that taxes be assessed on facilities which reduce or
eliminate services, and assesses taxes on facilities involved in sales or
mergers. Similar to Proposition 214, it authorizes public and private
enforcement actions.
The growth in health care spending has caused the private sector,
Medicare and state Medicaid programs, to reshape the financing of health care
services for their beneficiaries. One of the most significant changes to the
financing of health care services which the Company anticipates is the shift to
managed care. The federal Medicare program, state Medicaid programs and
private insurers are anticipated to place greater reliance on managed care
alternatives in the future. Providers are generally willing to discount
charges for services to managed care plan patients because managed care plans
can direct (or strongly influence) the flow of patients. The Company believes
that while it is likely that it will service an increasing proportion of
managed care enrollees in the future at payment rates which may not be as
favorable as those presently in effect, the expansion of managed care may also
increase the volume of patients served.
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ITEM 2. PROPERTIES
EXISTING FACILITIES
At June 30, 1996, the Company owned or leased 34 skilled nursing care
(35 as of August 1996) and four assisted living centers. In addition, the
Company owns its corporate headquarters and leases space in buildings at which
it operates its pharmacy business, located in Pasadena and Yorba Linda,
California. The following table sets forth certain information concerning the
skilled nursing care centers and assisted living centers operated by the
Company as of June 30, 1996.
Specialty Average
Total and Occupancy
Licensed Subacute for F.Y.E. Owned/
Location Beds Beds 06/30/96 Leased
-------- -------- -------- ---------- ------
SKILLED NURSING CARE CENTERS:
California:
Woodland Reseda 157 30 88% Leased
Royalwood Torrance 110 22 93% Leased
Valley Fresno 99 12 94% Owned
Villa Maria Santa Maria 88 24 91% Owned
Earlwood Torrance 87 20 93% Owned
Sharon Los Angeles 86 39 91% Leased(1)
Bay Crest Torrance 80 47 92% Leased
Fountain Orange 179 53 92% Owned
Carehouse Santa Ana 174 40 97% Owned
Palm Grove Garden Grove 129 48 91% Leased(1)
Anaheim Anaheim 99 22 96% Leased
Devonshire Hemet 99 15 95% Owned
Willow Creek Fresno 108 86 41% Owned(2)
Texas:
Coronado Abilene 235 21 86% Owned
West Side White Settlement 220 28 85% Owned
The Woodlands Houston 206 22 93% Owned
Colonial Tyler Tyler 172 20 85% Owned
Colonial Manor New Braunfels 160 44 85% Owned
Guadalupe Valley Seguin 152 49 88% Leased(3)
Town & Country Boerne 131 18 81% Owned
Clairmont - Longview Longview 182 56 92% Owned
Clairmont - Beaumont Beaumont 148 24 79% Owned
Clairmont - Tyler Tyler 120 24 86% Owned
Oakland Manor Giddings 120 50 62% Leased(3)
Southern Manor Hallettsville 120 50 78% Leased(3)
Southwood Austin 120 18 84% Owned
Comanche Trail Big Spring 119 28 75% Leased(3)
Heritage Oaks Lubbock 114 56 92% Owned
Lubbock Lubbock 117 10 94% Owned
Monument Hill La Grange 111 47 92% Leased(3)
Live Oak George West 100 36 86% Leased(3)
Oak Manor Flatonia 90 38 63% Owned
Oak Crest Rockport 90 29 88% Leased(3)
Arizona:
Phoenix Living Center Phoenix 150 72 87% Leased(4)
ASSISTED LIVING CENTERS:
California:
Carson Carson 230 60 78% Owned
Spring Torrance 51 -- 90% Owned
Hemet Hemet 100 26 79% Owned(5)
Fountain Orange 87 -- 75% Owned
----- -----
4,940 1,284
===== =====
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(1) The Company's leases for its Sharon and Palm Grove centers require
that OrNda guarantee the Company's obligations under each lease.
(2) Center opened January 8, 1996.
(3) Leased with options to purchase ranging from July 1996 to February
2005. The option to purchase Oak Crest was exercised in July 1996.
(4) Subleased to the Company by OrNda.
(5) Building owned by the Company with real property held under a ground
lease extending to June 2030.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to malpractice claims and other litigation in
the ordinary course of business. In the opinion of its management, the
ultimate resolution of all pending legal proceedings will not have a material
adverse effect on the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of its fiscal year ended June 30, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, who are not also directors are:
Name Position Age
---- -------- ---
David G. Schumacher, Jr. Sr. Vice President - Operations and
Chief Operating Officer 40
Derwin L. Williams Sr. Vice President - Finance, 59
Chief Financial Officer and Treasurer
Melodye Stok Vice President - Controller, Chief 50
Accounting Officer and Secretary
David G. Schumacher, Jr., has been Sr. Vice President - Operations and
Chief Operating Officer of Summit Care Corporation since January 1, 1996.
Prior to joining Summit, Mr. Schumacher was the Vice President of Operations at
Arbor Health Care Company. He also spent ten years in various operations
capacities at Manor Care.
Derwin L. Williams was appointed Vice President - Finance and Chief
Financial Officer of the Company on July 1, 1993, Treasurer on May 10, 1994 and
Senior Vice President - Finance on December 8, 1995. Previously he has served
in the same position at three other nursing home companies: Hallmark Health
Service, Inc. from November 1989 to February 1992; Care Enterprises from April
1980 to August 1987; and Flagg Industries, Inc. from June 1978 to March 1980.
Mr. Williams has also served in various capacities specializing in Medicare
reimbursement for the Company in 1992 and 1993 and for Beverly Enterprises in
1988 and 1989. He is also a certified public accountant.
Melodye Stok was appointed Secretary of the Company on December 9,
1994 and Vice President - Controller and Chief Accounting Officer on July 1,
1993. Previously she served as the Vice President - Finance of the Company
from October 1990 to June 1993. She was also the Controller of the Company
from January 1986 to October 1990. Prior to that, she was the Controller of
Flagg Industries, Inc. from May 1979 to February 1985.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Stock Market under
the symbol SUMC. On August 30, 1996, the Company had approximately 1,200
shareholders of record.
The table below sets forth high and low bid prices as reported by the
National Association of Securities Dealers, Inc. High and low bid prices
reflect inter-dealer prices, without retail markup, markdown or commissions,
and may not necessarily represent actual transactions.
COMMON STOCK
--------------------------
HIGH LOW
---- ---
FISCAL 1996:
1st Quarter $ 25-1/2 $ 16-3/4
2nd Quarter 24-1/2 19-3/8
3rd Quarter 24 16-1/2
4th Quarter 25-3/4 19-1/4
FISCAL 1995:
1st Quarter $ 24 $ 17-3/4
2nd Quarter 23 15
3rd Quarter 23-3/4 18-1/2
4th Quarter 23-3/4 17-1/4
No dividends have been paid or are expected to be paid in the
foreseeable future on the Company's common stock, as the Company's Board of
Directors intends to retain earnings for the use in its business. The Company
is restricted from the payment of dividends (other than dividends payable in
common stock) or to acquire its common stock by its bank line of credit
agreement and senior secured note agreements to the extent that such payments
exceed $5,000,000 plus 50% of the Company's net income after June 30, 1995.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes certain selected financial data of the Company
and should be read in conjunction with the related Consolidated Financial
Statements of the Company and accompanying Notes to Consolidated Financial
Statements:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Consolidated Income Statement Data (year ended):
Net revenues $176,062 $137,026 $97,599 $83,992 $72,483
Income before provision for income taxes 11,761 12,498 10,177 8,247 5,026
Net income 7,309 7,511 6,167 5,023 3,086
Earnings per share (1) 1.06 1.10 1.20 1.00 .92
Consolidated Balance Sheet Data (at June 30):
Total assets 223,052 184,480 114,915 73,369 41,489
Long-term debt 10,374 89,788 32,025 30,331 4,929
Shareholders' equity 81,286 73,813 66,361 31,337 26,314
Other Data:
Nursing centers operated:
Licensed beds (at June 30) 4,472 4,294 2,534 2,228
Average occupancy (year ended) 86.7% 86.9% 88.9% 90.3% 91.1%
Assisted living centers operated:
Licensed beds (at June 30) 468 468 468 468
Average occupancy (year ended) 78.7% 77.9% 73.7% 72.5% 72.7%
Total centers operated:
Licensed beds (at June 30) 4,940 4,762 3,002 2,696
Average occupancy (year ended) 85.9% 85.9% 86.5% 87.2% 88.0%
(1) Earnings per share are based on the weighted average number of shares
of common stock outstanding and common stock equivalents arising from
stock options, which were 6,895,661 for the year ended June 30, 1996,
6,837,991 for the year ended June 30, 1995, 5,156,780 for the year
ended June 30, 1994, 5,028,936 for the year ended June 30, 1993 and
3,357,814 for the year ended June 30, 1992. The effect of common
stock equivalents arising from stock options on the computation of
earnings per share is not significant.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
TWELVE MONTHS ENDED JUNE 30, 1996 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1995
Net revenues increased $39,036 or 28.5% from $137,026 in fiscal 1995
to $176,062 in the fiscal year 1996. The increase occurred due to the
following:
AMOUNT PERCENT
------- -------
1. Acquisitions in fiscal year 1995 $13,228 33.9%
2. Rehabilitative and other specialty services 11,527 29.5
3. Increased census days and revenue rates 8,017 20.5
4. New beds opened in fiscal years 1995 and 1996 3,614 9.3
5. Pharmacy operations 2,650 6.8
------- -----
$39,036 100.0%
======= =====
Average occupancy was 85.9% in the fiscal years ended June 30, 1996
and 1995, and new beds were opened in both fiscal years. Excluding acquisitions
and newly constructed beds, the average occupancy was 88.4% in the fiscal year
ended June 30, 1996 and 89.0% in the fiscal year ended June 30, 1995. The
Company's quality mix (revenues from Medicare, managed care and private pay
patients as a percentage of gross revenues excluding pharmacy revenues) was
66.7% in the fiscal year ended June 30, 1996 and 63.1% in the fiscal year ended
June 30, 1995.
Expenses, consisting of salaries and benefits, supplies, purchased
services, provision for doubtful accounts and other as a percent of net
revenues increased from 82.0% of net revenues in the fiscal year ended June 30,
1995 to 84.6% in the fiscal year ended June 30, 1996. Total salaries and
employee related benefits were 44.4% of net revenues in the fiscal year ended
June 30, 1996 compared to 46.1% of net revenues in the fiscal year ended June
30, 1995. Expenses increased $36,552 or 32.5% from $112,377 in the fiscal year
ended June 30, 1995 to $148,929 in the fiscal year ended June 30, 1996 for the
following reasons:
AMOUNT PERCENT
------- -------
1. Rehabilitative and other specialty services $10,906 29.8%
2. Acquisitions in fiscal year 1995 10,454 28.6
3. Salaries and benefits 7,592 20.8
4. Expenses relating to new beds opened
in fiscal years 1995 and 1996 3,202 8.8
5. Other expenses 4,398 12.0
------- -----
$36,552 100.0%
======= =====
Income before rental, depreciation and amortization and interest
expense, net of interest income, increased $2,484 or 10.1% from $24,649 in the
fiscal year ended June 30, 1995 to $27,133 in the fiscal year ended June 30,
1996 and was 15.4% of net revenues in the fiscal year ended June 30, 1996
compared to 18.0% in the fiscal year ended June 30, 1995.
Rental, depreciation and amortization and interest expense, net of
interest income, increased by $3,221 or 26.5% from $12,151 in the fiscal year
ended June 30, 1995 to $15,372 in the fiscal year ended June 30, 1996.
Substantially all of this increase was due to depreciation and amortization,
rent and interest expense related to acquisitions and newly constructed beds in
fiscal years 1995 and 1996.
The Company's effective tax rate was 37.9% of income in the fiscal
year ended June 30, 1996 and 39.9% of income in the fiscal year ended June 30,
1995. Net income after taxes decreased $202 or 2.7% from $7,511 in the fiscal
year ended June 30, 1995 to $7,309 in the fiscal year ended June 30, 1996.
TWELVE MONTHS ENDED JUNE 30, 1995 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1994
Net revenues increased by $39,427, or 40.4%, from $97,599 in fiscal
1994 to $137,026 in fiscal 1995. This increase occurred primarily due to
acquisitions (89.7%) and increased pharmacy operations (6.8%). The remaining
3.5% increase was due to increased use of rehabilitative and other specialty
services offset slightly by a decrease in census days due to 102 beds being
removed from service. Average occupancy decreased to 85.9% in fiscal 1995 from
86.5% in fiscal 1994 including acquisitions. Excluding acquisitions and newly
constructed beds, average occupancy was 89.0% in fiscal 1995. The Company's
quality mix was 63.1% in fiscal 1995 and 63.4% in fiscal 1994.
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Expenses, consisting of salaries and benefits, supplies, purchased
services, provision for doubtful accounts and other as a percent of net
revenues declined from 82.6% of revenues in fiscal 1994 to 82.0% in fiscal
1995. Total salaries and employee related benefits were 47.1% of net revenues
in fiscal 1994 compared to 46.1% of net revenues in fiscal 1995. Expenses
increased $31,760 or 39.4% from $80,617 in fiscal 1994 to $112,377 in fiscal
1995. Acquisitions represented 90.3% of this increase, pharmacy costs
increased 3.2% due to new business, rehabilitative and other specialty service
costs rose 5.4% due to a greater utilization of such services during the twelve
months ended June 30, 1995, and other expenses increased 1.1%.
Income before rental, depreciation and amortization and interest
expenses net of interest income increased $7,667 or 45.2% from $16,982 in
fiscal 1994 to $24,649 in fiscal 1995 and was 18.0% of revenues in fiscal 1995
compared to 17.4% in fiscal 1994.
Rental, depreciation and amortization and interest expense net of
interest income increased by $5,346 or 78.6% from $6,805 in fiscal 1994 to
$12,151 in fiscal 1995. Substantially all of this increase was due to
depreciation and amortization, rent and interest expense related to new
acquisitions.
The Company's effective tax rate was 39.9% of income for fiscal 1995
compared to 39.4% for fiscal 1994. Net income after taxes increased $1,344 or
21.8% from $6,167 in fiscal 1994 to $7,511 in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $2,658 in cash and cash equivalents
and working capital of $13,906. Cash and cash equivalents decreased $443 for
the year ended June 30, 1996.
Net cash provided by operating activities decreased $2,424 from $7,014
for the year ended June 30, 1995 to $4,590 for the year ended June 30, 1996.
The decrease is attributable primarily to an increase in amounts owing from the
Company's Medicare fiscal intermediary which amounts are included in other
current assets.
Accounts receivable, less allowance for doubtful accounts, increased
$7,594 for the year ended June 30, 1996, primarily as a result of acquiring
thirteen skilled nursing care centers and opening two centers constructed by
the Company. The Company's average accounts receivable days outstanding were
39 at the end of fiscal year 1996 and were 32 at the end of fiscal years 1995
and 1994. The increase in accounts receivable days outstanding were primarily
due to an increase in Medicare and managed care revenues.
For the year ended June 30, 1996, the Company added $26,558 to its
property and equipment and $418 to its notes receivable. The additions to
property and equipment were primarily for the construction of skilled nursing
centers in Fresno, California, and in Ft. Worth, Texas, or $13,927, and the
renovation and replacement of furnishings and equipment at the remaining
centers and the pharmacies, or $12,631.
The addition to property and equipment and notes receivable totaling
$26,976 were primarily financed with a combination of new long- term debt in
the form of senior secured notes, the bank line of credit and net cash provided
by operating activities. 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.
The Company believes that it has sufficient capital resources and cash
flow from its existing operations to service long-term debt due within one year
of $2,985, to make normal recurring capital replacements, additions and
improvements of approximately $11,600 planned for the next 12 months, to
develop properties over the next 12 months costing approximately $11,500 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
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and open 195 new beds in four centers by the summer 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 PRONOUNCEMENTS
In March 1995, Statement of Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for 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 will adopt SFAS 121 in the first quarter of fiscal
year 1997 and, based on current circumstances, does not believe the effect of
adoption will be material.
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 fair value method been used.
18
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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,
1996. 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, 1996 and 1995, and the consolidated results of its
operations and cash flows for each of the three years in the period ended June
30, 1996, 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 19, 1996
19
20
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
-------- -------- -------
Net revenues $176,062 $137,026 $97,599
Expenses:
Salaries and benefits 78,233 63,171 45,962
Supplies 18,071 15,374 11,476
Purchased services 37,963 22,234 14,611
Provision for doubtful accounts 2,241 1,330 828
Other expenses 12,421 10,268 7,740
Rental 2,656 1,691 1,388
Rental to related parties -- 450 225
Depreciation and amortization 6,142 5,249 2,949
Interest (net of interest income,
$522, $513 and $404, respectively) 6,574 4,761 2,243
-------- -------- -------
164,301 124,528 87,422
-------- -------- -------
Income before provision for income taxes 11,761 12,498 10,177
Provision for income taxes 4,452 4,987 4,010
-------- -------- -------
Net income $ 7,309 $ 7,511 $ 6,167
======== ======== =======
Earnings per share $ 1.06 $ 1.10 $ 1.20
======== ======== =======
See accompanying notes
20
21
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30,
--------------------------------
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 2,658 $ 3,101
Accounts receivable, less allowance for doubtful
accounts: 1996 - $2,084; 1995 - $989; 27,930 20,336
Supplies inventory, at cost 2,058 2,176
Other current assets 13,032 4,570
-------- --------
Total current assets 45,678 30,183
Property and equipment, at cost:
Land and land improvements 16,018 13,653
Buildings and leasehold improvements 136,907 123,723
Furniture and equipment 18,668 14,967
Construction in progress 15,043 8,868
-------- --------
186,636 161,211
Less accumulated depreciation and amortization 21,713 16,999
-------- --------
164,923 144,212
Notes receivable, less allowance for doubtful accounts:
1996 - $268; 1995 - $184 4,845 4,460
Other assets 7,606 5,625
-------- --------
$223,052 $184,480
======== ========
See accompanying notes
21
22
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
JUNE 30,
-------------------------------
1996 1995
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank $ 4,165 $ 2,972
Accounts payable 19,895 10,972
Employee compensation and benefits 3,738 4,008
Income taxes payable 989 1,061
Long-term debt due within one year 2,985 1,009
-------- -------
Total current liabilities 31,772 20,022
Long-term debt 107,389 88,779
Deferred income taxes 2,605 1,866
-------- --------
Total liabilities 141,766 110,667
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;
6,772,800 and 6,759,300 issued and outstanding,
respectively 51,486 51,322
Retained earnings 29,800 22,491
-------- --------
Total shareholders' equity 81,286 73,813
-------- --------
$223,052 $184,480
======== ========
See accompanying notes
22
23
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
THREE YEARS ENDED JUNE 30, 1996
Common Stock
--------------------- Retained
Shares Amount Earnings Total
------ ------ -------- -----
Balances at June 30, 1993 5,015,000 $22,524 $ 8,813 $31,337
Net income -- -- 6,167 6,167
Exercise of stock options 3,600 38 -- 38
Issuance of common stock, net 1,725,000 28,819 -- 28,819
--------- ------- ------- -------
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
========= ======= ======= =======
See accompanying notes
23
24
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
----------------------------------------------
1996 1995 1994
-------- -------- --------
Operating activities:
Net income $ 7,309 $ 7,511 $ 6,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,142 5,249 2,949
(Increase) in accounts receivable (7,594) (6,907) (4,014)
Decrease (increase) in supplies inventory 118 (623) (507)
(Increase) in other assets (10,705) (1,740) (2,652)
Increase in accounts payable 8,923 2,512 4,437
(Decrease) increase in employee compensation
and benefits (270) 478 1,004
(Decrease) increase in income taxes payable (72) 577 (50)
Increase (decrease) in deferred income tax liability 739 (43) 178
-------- -------- --------
Total adjustments (2,719) (497) 1,345
-------- -------- --------
Net cash provided by operating activities 4,590 7,014 7,512
-------- -------- --------
Investing activities:
Issuance of notes receivable (916) (2,089) (1,313)
Principal payments of notes receivable 498 962 544
Additions to property and equipment (26,558) (9,004) (15,505)
Acquisitions of nursing centers -- (51,178) --
Additions to other assets -- (3,279) --
-------- -------- --------
Net cash used in investing activities (26,976) (64,588) (16,274)
Financing activities:
Increase (decrease) in payable to bank 1,193 826 (741)
Principal payments on long-term debt (49,914) (38,225) (22,090)
Proceeds from long-term debt 70,500 76,520 18,048
Net (expenses) proceeds from sale of common stock -- (251) 28,819
Net proceeds on exercise of stock options 164 192 38
-------- -------- --------
Net cash provided by financing activities 21,943 39,062 24,074
-------- -------- --------
(Decrease) increase in cash and cash equivalents (443) (18,512) 15,312
Cash and cash equivalents at beginning of year 3,101 21,613 6,301
-------- -------- --------
Cash and cash equivalents at end of year $ 2,658 $ 3,101 $ 21,613
======== ======== ========
See accompanying notes
24
25
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDING JUNE 30,
-----------------------------------
1996 1995 1994
---- -------- --------
Supplemental disclosures of non-cash investing
and financing activities:
Acquisition notes payable $ -- $ (2,814) $ (5,736)
Acquisition of nursing care centers -- 2,814 5,736
Acquisition of nursing care centers
under capital leases -- 16,654 --
Capital lease obligations -- (16,654) --
See accompanying notes
25
26
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. 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 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"). The Company completed a common stock
offering in June 1994, which reduced OrNda's percentage ownership to below 50%.
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.
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 70 percent, 68 percent, and 69 percent of the
Company's revenues in the years ended June 30, 1996, 1995 and 1994 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. 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:
Building 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 period covered by the right.
INTANGIBLE ASSETS: Goodwill of $2,321, less accumulated amortization
of $116, is included in other assets at June 30, 1996 and is amortized over 35
years using the straight-line method.
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 6,895,661 for the year ended
June 30, 1996, 6,837,991 for the year ended June 30, 1995 and 5,156,780 for the
year ended June 30, 1994. The effect of common stock equivalents arising from
stock options on the computation of earnings per share is not significant.
26
27
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
RECENT ACCOUNTING PRONOUNCEMENTS: In March 1995, Statement of
Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived
Assets and for 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 will adopt SFAS 121 in the
first quarter of fiscal year 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
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 fair value method been used.
RECLASSIFICATIONS: Certain amounts have been reclassified to conform
with 1996 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 is
$5,786. The fair value of $6,065 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 $110,374 carrying
value of long-term debt is based on the original face value (issue amount).
The fair value of $94,931 is based on present value of the underlying cash
flows discounted at the Company's incremental borrowing rate.
3. MATERIAL TRANSACTIONS WITH RELATED ENTITIES
ORNDA HEALTHCORP AND SUMMIT HEALTH LTD.: The Company has an agreement
with OrNda under which the Company leases a portion of its corporate office
space to OrNda and shares the cost of building services with OrNda. The
agreement also requires OrNda to provide tax accounting to the Company. The
Company's reimbursement to OrNda for these services, less rental income from
OrNda for the space, approximated $50 for the year ended June 30, 1996, $23 for
the year ended June 30, 1995 and $350 for the year ended June 30, 1994. The
Company believes that the amount reimbursed is reasonable for the services
provided. The agreement which expires in March 1997 also indemnifies 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 will survive the termination of the
agreement. Certain provisions of this agreement have been 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).
27
28
At June 30, 1996, the net amount due from OrNda for transactions
between the Company and OrNda was $602 and is included in Other Current Assets
(see Note 5).
SUMMIT PROPERTIES AND SIERRA LAND GROUP, INC.: Prior to the
acquisition of SHL by OrNda in April 1994, certain owners of Summit Properties
and Sierra Land Group, Inc. ("Sierra"), collectively (the affiliates), also
were principal shareholders of SHL, some of whom were also directors of the
Company. OrNda acquired their ownership interest in SHL and those who were
directors of the Company resigned as directors. In January 1994, the Company
entered into a ten-year sub-lease of a nursing care center leased by SHL from
Sierra. The Company believes the monthly lease payments of $37 are reasonable
for the market area. Lease payments to OrNda and SHL were $450 for each of the
years ended June 30, 1996 and 1995 and $225 for the year ended June 30, 1994.
INSURANCE COVERAGE: Prior to OrNda's acquisition of SHL, the Company
was co-insured under common policies with SHL with respect to general and
professional, workers' compensation, group health and property and casualty.
Currently, with the exception of workers' compensation, the Company is insured
with independent companies. The Company rents a captive insurance company,
Meridian Insurance Company Ltd. ("Meridian"), which is partially owned by
persons who sold their interests in SHL to OrNda and resigned their
directorships in the Company, for the purpose of providing reinsurance coverage
for its workers' compensation claims up to $250 per occurrence and $1,300 on an
annual aggregate basis. Until December 31, 1994, the Company's general and
professional liability risks were insured by Meridian for losses limited to
$2,000 per occurrence and $2,000 annual aggregate losses. Also, until December
31, 1994, Tristar Risk Management (formerly TOPA Insurance Company), which is
partially owned by a person who was formerly a shareholder of SHL and formerly
a director of the Company, insured the Company's workers' compensation risks in
California. The Company's co-insured position with SHL with respect to group
health, property and casualty policies was discontinued effective July 1, 1994.
Amounts incurred by the Company for premium expense payable to insurance
companies during the time they were affiliated with the Company were $1,605 and
$3,015 for the years ended June 30, 1995 and 1994, respectively.
4. ACQUISITIONS AND CONSTRUCTION ACTIVITY
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 56 beds at the same site. Total cost of construction including the
original purchase price (see this note, Fiscal Year 1994) was $13,005,
including an estimated $300 to complete construction after June 30, 1996 (see
Note 11).
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 the senior secured 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 (see Note 11).
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 (see Note 11).
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.
28
29
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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).
FISCAL YEAR 1994: The Company acquired a 206-bed skilled nursing care
center located in the Houston, Texas metropolitan area on December 1, 1993, for
$6,742 consisting of $1,042 in cash, the assumption of existing debt of $4,523
and a new note to the seller for $1,177. On January 4, 1994, the Company
assumed operation of a 76-bed skilled nursing care center under a ten-year
sub-lease with OrNda (see Note 3) requiring monthly lease payments of $37.
Also, in January 1994, the Company purchased a former psychiatric hospital in
Fresno, California, for $4,200 in cash (see this note, Fiscal Year 1996). In
June 1994, construction was completed on a 114-bed skilled nursing care center
located in Lubbock, Texas, which had been a former hospital and was acquired
from Summit Properties in May 1992 for $900 in cash. The cost of construction
was $4,582 paid in cash. The new center opened for operations in July 1994.
5. OTHER CURRENT ASSETS
Other current assets as of June 30 consist of the following:
1996 1995
-------- --------
Due from third party
payors $ 8,055 $ 804
Deferred tax assets 1,810 1,114
Notes receivable 672 640
Prepaid expenses 952 1,008
Other receivables 1,543 1,004
------- -------
$13,032 $ 4,570
======= =======
29
30
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, 1996 1995
-------- ------- -------
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 $76,660 at June 30, 1996. $55,000 $ --
Secured revolving bank line of credit expires September 30,
1997, variable interest rates from 6.56% to 8.25% in the
year ending June 30, 1996, convertible to term loan due in
equal quarterly principal payments through September 2000,
secured by property and equipment with a book value of
approximately $8,385 at June 30, 1996. 6,000 39,500
8.96% senior secured notes, due 2002, interest only, payable
semi-annually through December 1997, annual principal
payments of $4,150 thereafter, secured by property with a
book value of approximately $34,736 at June 30, 1996. 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 $26,758 at June 30, 1996. 15,680 16,282
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 $6,378 at June 30, 1996. 5,231 5,166
Promissory note, less imputed interest of $109 in the year
ended June 30, 1996, at 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
$3,175 at June 30, 1996. 2,304 2,616
Mortgage note payable, variable interest rates from
8.25% to 9.0% in year ended June 30, 1996, due in equal
monthly principal installments through March 2001, secured
by property and equipment with a book value of approximately
$2,798 at June 30, 1996. 1,159 1,224
Less current portion (2,985) (1,009)
-------- -------
Non-current portion $107,389 $88,779
======== =======
Future maturities of long-term debt (including capital lease
obligations) are as follows: years ending June 30, 1997 - $2,985; 1998 -
$8,501; 1999 - $10,682; 2000 - $10,467; 2001 - $10,873; and thereafter -
$66,866.
30
31
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In June 1994, the Company obtained a $25,000 bank line of credit
secured by property, equipment and accounts receivable. In November 1994, the
Company obtained a $20,000 short-term, unsecured line of credit from a bank.
In February 1995, an amendment to the Company's secured bank line of credit was
consummated which increased the commitment from $25,000 to $60,000. In
December 1995, the Company amended the secured bank line of credit which
reduced the commitment to $40,000, converted accounts receivable from
collateral to a negative pledge, extended the revolver to September 30, 1997
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, 1996, loans outstanding were $6,000 which was used
to finance the construction described in Note 4 (see Note 11).
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 $8,701, $6,033, and $3,172 in fiscal years 1996,
1995 and 1994, respectively, of which $1,605, $759 and $525 in 1996, 1995 and
1994 were capitalized as part of the ongoing construction projects. Interest
payments were $7,874, $5,712 and $3,165 in fiscal years 1996, 1995 and 1994,
respectively.
7. INCOME TAXES
The Company filed consolidated Federal income tax returns with SHL and
combined state tax returns with SHL and Sierra pursuant to a tax-sharing
agreement for the periods prior to the Company's initial public offering of
common stock completed on March 18, 1992. The Company's tax sharing agreement
with SHL provides for the indemnification of the Company for any final
determination of tax, interest and penalties which may be due as a result of
audits for tax years through June 30, 1991. SHL also indemnified the Company
for any Federal income taxes, interest and penalties that may be finally
determined to be payable by SHL or its affiliates for the year ended June 30,
1992, that is allocable to SHL or its affiliates other than the Company.
However, the Company as a member of the SHL consolidated group is jointly and
severally liable for group Federal income tax liabilities related to periods
prior to March 18, 1992. In the event that SHL is not able to discharge any
such liabilities fully, the Company could be held responsible for any unpaid
portion. Between March 18, 1992 and April 19, 1994, the date SHL was acquired
by OrNda, the Company filed a combined California return with SHL and Sierra,
but filed a separate Federal income tax return. Subsequent to April 19, 1994,
the Company files separate California and Federal income tax returns.
The provision for income taxes consists of the following:
YEARS ENDED JUNE 30, 1996 1995 1994
-------------------- ------ ------ ------
Federal:
Current $3,611 $4,359 $3,276
Deferred 19 (277) (97)
------ ------ -------
3,630 4,082 3,179
State:
Current 798 952 844
Deferred 24 (47) (13)
------ ------ --------
822 905 831
------ ------ ------
$4,452 $4,987 $4,010
====== ====== ======
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
31
32
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
financial statement purposes in future years. Temporary differences are
primarily attributable to reporting for income tax purposes 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:
1996 1995
-------------------- --------------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
------- ------- ------- -------
INCOME TAXES
------------
Deferred tax liabilities:
Tax over book depreciation $ -- $(3,136) $ -- $(2,220)
Other -- (137) -- (300)
------- ------- ------ -------
Total deferred tax liabilities -- (3,273) -- (2,520)
Deferred tax assets:
Bad debt and vacation and
deferred compensation benefits 1,810 330 1,114 288
State tax -- 338 -- 366
------ ------- ------ -------
Total deferred tax assets 1,810 668 1,114 654
------ ------- ------ -------
Net deferred tax assets (liabilities) $1,810 $(2,605) $1,114 $(1,866)
====== ======= ====== ========
A reconciliation of the provision for income taxes with the amount
computed using the Federal statutory rate is as follows:
YEARS ENDED JUNE 30, 1996 1995 1994
-------------------- ---- ---- ----
Federal rate 35.0% 35.0% 34.0%
State taxes, net of Federal tax benefit 4.5 4.7 5.4
Tax credits (1.6) (0.8) (0.3)
Other, net -- 1.0 0.3
---- ---- ----
37.9% 39.9% 39.4%
==== ==== ====
Total income tax payments during fiscal years 1996, 1995 and 1994 were
$3,904, $4,876 and $4,183, respectively.
33
33
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 schedule 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, 1996
------------------- -----
Land and improvements $ 1,605
Buildings and improvements 23,601
Equipment and furnishings 2,009
-------
27,215
Less accumulated amortization 1,450
-------
$25,765
=======
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, 1996, are as follows:
OPERATING CAPITAL
LEASES LEASES TOTAL
--------- -------- -----
Year Ending June 30,
--------------------
1997 $ 2,684 $ 3,646 $ 6,330
1998 2,351 3,329 5,680
1999 2,362 4,634 6,996
2000 2,109 4,297 6,406
2001 1,888 350 2,238
Thereafter 10,397 3,846 14,243
------- ------- -------
Total minimum lease
payments 21,791 20,102 41,893
Less amount representing
interest -- 4,422 4,422
------- ------- ------
Present value of net
minimum lease payments
included in long-term debt.
See Note 6. $21,791 $15,680 $37,471
======= ======= =======
33
34
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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. SHAREHOLDERS' EQUITY
On June 16, 1994, the Company completed a common stock offering of
1,725,000 shares at a price of $17.75. The net proceeds of this transaction
were $28,819.
Effective July 1, 1991, the Company adopted a stock option plan
authorizing 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 fair market value at the date of the grant. The terms of each option and
the increments in which it 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.
The following summarizes activity in the stock option plan:
Years Ended June 30, 1996 1995 1994
- -------------------- ---------------------- ----------------------- ----------------------------
NUMBER RANGE NUMBER RANGE NUMBER RANGE
OF SHARES OF PRICES OF SHARES OF PRICES OF SHARES OF PRICES
---------------------- ----------------------- -----------------------
Options at beginning 523,000 $10.50-19.94 256,000 $10.50-15.75 105,500 $10.38-10.62
of year
Changes during year:
Granted 504,000 $21.00 284,500 $19.94 159,500* $14.37-15.75
Exercised (13,500) $10.50-14.37 (15,700) $10.50-14.37 (3,600) $10.38-10.62
Canceled (45,000) $19.94-21.00 (1,800) $10.50-14.37 (5,400) $10.38-10.62
Options outstanding
at end of year 968,500 $10.50-21.00 523,000 $10.50-19.94 256,000 $10.50-15.75
Options available for
grant at end of year 398,700 57,700 5,400
Options exercisable at
end of year 161,600 58,100 24,900
*Of these options to purchase, 15,000 shares of common stock were granted
contingent upon shareholder approval of the amendment to the plan, which
approval was received on December 9, 1994.
34
35
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. SUBSEQUENT EVENT
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 (see Note 6). The proceeds from the July 1996 Notes were used to repay
$6,000 in bank credit line loans, there now being no outstanding bank credit
line loans, and the balance of $9,000 was invested in short-term, high credit
quality financial instruments.
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 56
additional beds at its skilled nursing care center in Fresno, California, which
initially opened in January 1996 with 108 beds (see Note 4).
12. UNAUDITED QUARTERLY INFORMATION
Following is a summary of unaudited quarterly results of operations
from the years ended June 30, 1996 and 1995:
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
YEAR ENDED JUNE 30, 1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
------------------------ -------- -------- -------- -------- -----
Net revenues $27,219 $33,625 $37,077 $39,105 $137,026
Income before income taxes 2,668 2,895 3,163 3,772 12,498
Net income 1,617 1,726 1,901 2,267 7,511
Earnings per share $ 0.24 $ 0.25 $ 0.28 $ 0.33 $ 1.10
See accompanying notes
35
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The information required by Part III of Form 10-K (Items 10 through
13) is set forth in the Company's definitive proxy statement for its Annual
Meeting of Shareholders to be held on December 12, 1996, which will be filed
with the Commission pursuant to Regulation 14A within 120 days of the Company's
last fiscal year, and such information is incorporated herein by reference.
See also "Executive Officers of the Registrant" in Part I of this report for
certain information concerning the Company's executive officers who are not
also directors of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Pages
-----
(a) Financial Statements and Financial Statement Schedules:
(1) Financial Statements:
Report of Independent Auditors 19
Consolidated Statements of Income for each of the three years
ended June 30, 1996 20
Consolidated Balance Sheets at June 30, 1996 and 1995 21 - 22
Consolidated Statements of Shareholders' Equity
for each of the three years ended June 30, 1996 23
Consolidated Statements of Cash Flows for each of the three years
ended June 30, 1996 24 - 25
Notes to Consolidated Financial Statements 26 - 35
(2) Financial Statement Schedules:
VIII Valuation and Qualifying Accounts 46
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Company's
consolidated financial statements and notes thereto.
(3) Exhibits
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws. (1)
4.1 Form of Common Stock Certificate. (3)
10.1(a) Summit Care Corporation Stock Option Plan (1) as amended by Amendment to Summit Care Corporation Stock
Option Plan. (6)
10.2(a) Form of Summit Care Corporation Stock Option Agreement. (1)
10.3 Tax Sharing Agreement among Sierra Land Group, Inc., SHL and the Company, dated May 17, 1991 (1), as
amended by Amendment to Tax Sharing Agreement, dated as of February 5, 1992. (6)
36
37
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
10.4 Agreement Regarding Shared Services and Other Matters between SHL and the Company, dated as of February 5, 1992. (6)
10.5(a) Form of Directors and Officers Indemnity Agreement. (1)
10.7 Palmcrest Convalescent Home (now known as Palm Grove Convalescent Center): Convalescent Hospital Lease, dated
November 20, 1969, between Palmcrest Associates, Ltd., and Century Convalescent Centers, as amended by Lease of
Convalescent Hospital Facility (as amended), dated September 1, 1979, by which SHL and its appointed nominee
Royalwood Convalescent Hospital, Inc. (now Summit Care - California, Inc.) are substituted as lessees. (1)
10.8 Anaheim Care Center: Lease, dated June 1, 1995,, between Sam Menlo, Trustee of the Menlo Trust U/T/I 5/22/83 and
Summit Care - California, Inc., doing business as Anaheim Care Center.
10.9 Sharon Care Center: Lease, dated May 1, 1987, between Jozef Nabel and Marie Gabrielle Nabel, as tenants in common,
and Summit Care - California, Inc. (1)
10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964, between Jack H. Cramer and Walter Lee Brown (together,
as lessors) and Albert J. Allasandra, as amended by Amendment to Lease and Right of First Refusal to Purchase,
dated May 23, 1969, by which Aljar Corporation is substituted as lessee, and as further amended by Amendment to
Agreement of Lease and Right of First Refusal, dated November 18, 1974, and as further amended by Second Amendment
to Agreement of Lease and Right of First Refusal and Assignment of Lease, dated July 10, 1979, by which National
Accommodations, Inc. (now SHL) is substituted as lessee (1), assigned to the Company by Assignment of Lease, dated
March 9, 1992, between SHL and the Company. (6)
10.11 Bay Crest Convalescent Hospital: Lease, dated March 1, 1980, between South Bay Sanitarium and Convalescent
Hospital and Garnet Convalescent Hospital, Inc. (now Summit Care - California, Inc.), (6) and Amendment to Lease
dated March 1, 1994.
10.12 Brier Oak Convalescent Center: Lease Agreement, dated February 18, 1985, between Bernard Bubman, Arnold Friedman,
Irene Weiss and Sunset Motel and Development Co. (collectively, as lessors), and Summit Care - California, Inc. (1)
10.13 Valley Palms Convalescent Hospital: Lease, dated March 16, 1982, between Uni-Cal Associates and Valley Palms
Convalescent, Inc. (now Summit Care - California, Inc.). (1)
10.14 Marina Care Center: Standard Industrial Lease - Net, dated March 1, 1989, between Summit Properties and Summit
Care - California, Inc., as modified by Addendum to Standard Industrial Lease - Net. (1)
10.15 Phoenix Resident Hotel: Lease, dated July 29, 1977, between Sierra Land & Livestock, Inc. and Southwest Hotels,
Inc., as modified by Addendum to Lease dated August 11, 1983, assigned to the Company by Assignment of Lease, dated
July 1, 1982, between Southwest Hotels, Inc. and the Company. (1)
10.16 Sublease of Phoenix Retirement Hotel: Sublease, dated July 1, 1987, between the Company and Phoenix McDowell
Properties, Inc. (1), as assigned by Assignment of Sublease, dated March 9, 1992, between the Company and Summit
Health Ltd. (7)
10.17 Sublease of Marina Care Center: Nursing Home Sublease Agreement, dated March 7, 1989, between Summit Care -
California, Inc. and 5240 Sepulveda, Inc. (1), as assigned by Assignment of Sublease, dated March 9, 1992,
between Summit Care - California, Inc. and Summit Health Ltd. (7)
10.18 Sublease of Valley Palms Care Center: Nursing Home Sublease Agreement, dated May 11, 1989, between Summit Care -
California, Inc. and Trinity Health Systems (1), as assigned by Assignment of Sublease, dated March 9, 1992, between
Summit Care - California, Inc. and Summit Health Ltd. (7)
37
38
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
10.19 Sublease of Brier Oak Terrace Care Center: Nursing Home Sublease Agreement, dated April 1, 1989, between Summit
Care - California, Inc. and Brier Oak Hospital, Inc. (1), as assigned by Assignment of Sublease, dated March 9, 1992,
between Summit Care - California, Inc. and Summit Health Ltd. (7)
10.20 Sublease of Pharmacy: Standard Sublease, dated August 1, 1989, between St. Luke Medical Center and Mediscript, Inc.,
as modified by Addendum of the same date. (1)
10.21 Hemet Resident Hotel: Ground Lease dated June 25, 1980, between Genes, Ltd., and SHL, assigned to the Company by
Assignment of Lease dated March 9, 1992, between SHL and the Company. (6)
10.22 Summit Care Corporation Note Purchase Agreement dated as of December 15, 1992; 8.95% Senior Secured Notes
Due 2002. (8)
10.23 Loan Agreement and Term Note made and entered into by and between Summit Care Corporation, and Union Bank dated as
of March 28, 1994. (9)
10.24 Seller Note for purchase of The Woodlands. (10)
10.25 HUD Note for purchase of The Woodlands. (10)
10.26 Sublease with Summit Health Ltd., for Phoenix Living Center dated January 1994. (10)
10.27 Real Estate Lien Note - $3,000,000 dated September 30, 1994 and Security Agreement dated September 30, 1994. (11)
10.28 Warranty Deed - Oak Manor, Flatonia dated September 30, 1994. (11)
10.29 Live Oak Nursing Center, George West, Texas Lease Agreement dated July 19, 1991; Assignment of Lease With Option to
Purchase dated September 30, 1994 and Consent To Assignment Of Leasehold Estate of Live Oak Nursing Center, George
West, Texas dated August 15, 1994. (11)
10.30 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement dated February 28, 1989; Assignment Of Lease With
Option To Purchase dated September 30, 1994 and Consent To Assignment Of leasehold Estate Of Guadalupe Valley
Nursing Center, Sequin, Texas dated August 15, 1994. (11)
10.31 Southern Manor Nursing Center, Hallettsville, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment
Of Lease With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and
Agreement Re Option dated September 30, 1994. (11)
10.32 Monument Hill Nursing Center, LaGrange, Texas Lease Agreement dated October 20, 1986; Option Agreement dated
October 20, 1986; Assignment of Option dated September 1, 1988; Assignment Of Lease With Option To Purchase dated
September 30, 1994 and Consent To Assignment Of Leasehold Estate Of Monument Hill Nursing Center, LaGrange, Texas
dated September 1, 1988. (11)
10.33 Oak Crest Nursing Center, Rockport, Texas Nursing Home Lease Agreement dated October 18, 1990 and Consent To
Assignment And Assumption Agreement dated October 5, 1994. (11)
10.34 Oakland Manor Nursing Center, Giddings, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment Of Lease
With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re
Option dated September 30, 1994. (11)
10.35 David Lake Agreement Of Purchase And Sale Of Assets dated October 16, 1994. (11)
38
39
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
10.36 Woodland Convalescent Center Lease Agreement dated January 16, 1995. (12)
10.37 Purchase of Comanche Trails Nursing Center by Summit Care Corporation from Select Care Enterprises dated
December 1, 1994. (13)
10.38 $70,000,000 Note Purchase Agreement dated as of December 15, 1995 among Summit Care Corporation and the several
purchasers listed on the acceptance form at the end thereof. (14)
10.39 $25,000,000 Amended and Restated Note Purchase Agreement dated as of December 15, 1995 among Summit Care Corporation
and the several purchasers listed on the acceptance form at the end thereof. (14)
10.40 Third Amended and Restated Credit Agreement dated as of December 15, 1995 among Summit Care Corporation, the Lenders
named therein, and Bank of Montreal, as the Agent, amending and modifying that certain Second Amended and Restated
Credit Agreement, dated as of February 6, 1995, among Summit Care Corporation, the lenders named therein, and The
First National Bank of Chicago, as the agent for the lenders named therein. (14)
10.41 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $18,071,429, made by Summit Care
Corporation in favor of John Hancock Mutual Life Insurance Company.* (14)
* In reliance on Instruction 2 to Item 601 of Regulation S-K, the Registrant has omitted agreements substantially
identical to Exhibit 10.41. The omitted agreements and their material terms that differ from those in
Exhibit 10.41 are as follows:
a. 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $1,571,428, made by Summit Care
Corporation in favor of John Hancock Variable Life Insurance Company;
b. 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $2,357,143, made by Summit
Care Corporation in favor of Mellon Bank, N.A., as Trustee for AT&T Master Pension Trust;
c. 7.38% Note, dated December 20, 1995, in the aggregate principal amount of $5,500,000, made by Summit Care
Corporation in favor of Principal Mutual Life Insurance Company;
d. 7.52% Note, dated December 20, 1995, in the aggregate principal amount of $3,929,000, made by Summit
Care Corporation in favor of Principal Mutual Life Insurance Company;
e. 8.09% Note, dated December 20, 1995, in the aggregate principal amount of $7,857,000, made by Summit Care
Corporation in favor of Principal Mutual Life Insurance Company;
f. 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $5,107,050, made by Summit
Care Corporation in favor of Massachusetts Mutual Life Insurance Company;
g. 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $5,107,050, made by Summit Care
Corporation in favor of Massachusetts Mutual Life Insurance Company;
h. 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $5,499,900, made by Summit
Care Corporation in favor of Massachusetts Mutual Life Insurance Company.
10.42 Amended and Restated 8.96% Senior Secured Note due 2002, dated December 31, 1992, in the aggregate principal amount
of $5,000,000, made by Summit Care Corporation in favor of Northwestern National Life Insurance Company.**
**In reliance on Instruction 2 to Item 601 of Regulation S-K, the Registrant has omitted agreements substantially
identical to Exhibit 10.42. The omitted agreements and their material terms that differ from those in Exhibit 10.42
are as follows:
39
40
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
a. Amended and Restated 8.96% Senior Secured Note due 2002, dated December 31, 1992, in the aggregate
principal amount of $5,000,000, made by Summit Care Corporation in favor of Northern Life Insurance Company;
b. Amended and Restated 8.96% Senior Secured Note due 2002, dated December 31, 1992, in the aggregate
principal amount of $2,000,000, made by Summit Care Corporation in favor of North Atlantic Life Insurance Company;
c. Amended and Restated 8.96% Senior Secured Note due 2002, dated December 31, 1992, in the aggregate
principal amount of $10,000,000, made by Summit Care Corporation in favor of John Hancock Mutual Life Insurance
Company;
d. Amended and Restated 8.96% Senior Secured Note due 2002, dated December 31, 1992, in the aggregate
principal amount of $3,000,000, made by Summit Care Corporation in favor of USG Annuity & Life Company.
10.43 Note, dated December 20, 1995, in the aggregate principal amount of $7,000,000, made by Summit Care Corporation in
favor of Banque Paribas.*** (14)
***In reliance on Instruction 2 to Item 601 of Regulation S-K, the Registrant has omitted agreements substantially
identical to Exhibit 10.43. The omitted agreements and a description of how their material terms differ from those
in Exhibit 10.43 are as follows:
a. Note, dated December 20, 1995, in the aggregate principal amount of $7,000,000, made by Summit Care
Corporation in favor of The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency;
b. Note, dated December 20, 1995, in the aggregate principal amount of $13,000,000, made by Summit Care
Corporation in favor of Bank of Montreal;
c. Note, dated December 20, 1995, in the aggregate principal amount of $13,000,000, made by Summit Care
Corporation in favor of Union Bank.
10.44 Guaranty in favor of certain note purchasers listed therein, dated as of December 15, 1995, executed by Summit Care
Pharmacy, Inc., a California corporation and Summit Care-Texas No. 2, Inc., a Texas corporation and Summit Care-Texas
No. 3, Inc., a Texas corporation.**** (14)
****In reliance on Instruction 2 to Item 601 of Regulation S-K, the Registrant has omitted an agreement substantially
identical to Exhibit 10.44. The omitted agreement and its material terms that differ from those in Exhibit 10.44 is
the Guaranty in favor of certain note purchasers listed therein, dated as of December 15, 1995, executed by Summit
Care-California, Inc., a California corporation.
10.45 Amended and Restated Guaranty in favor of certain note purchasers listed therein, dated as of December 15, 1995,
executed by Summit Care Pharmacy, Inc., a California corporation, Summit Care-Texas No. 2, Inc., a Texas corporation,
Summit Care-Texas No. 2, Inc., a Texas corporation.***** (14)
*****In reliance on Instruction 2 to Item 601 of Regulation S-K, the Registrant has omitted an agreement
substantially identical to Exhibit 10.45. The omitted agreement and its material terms that differ from those in
Exhibit 10.45 is the Amended and Restated Guaranty in favor of certain note purchasers listed therein, dated as of
December 15, 1995, executed by Summit Care-California, Inc., a California corporation.
10.46 Second Amended and Restated Guaranty dated as of December 15, 1995 executed by Summit Care Pharmacy, Inc., a
California corporation, Summit Care-Texas No. 2, Inc., a Texas corporation and Summit Care-Texas No. 3, Inc.,
a Texas corporation in favor of the Bank of Montreal.****** (14)
******In reliance on Instruction 2 to Item 601 of Regulation S-K, the Registrant has omitted an agreement
substantially identical to Exhibit 10.46. The omitted agreement and its material terms that differ from those in
40
41
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
Exhibit 10.46 is the Second Amended and Restated Guaranty dated as of December 15, 1995 executed by Summit
Care-California, Inc., a California corporation, in favor of the Bank of Montreal.
10.47 Collateral Account Agreement, dated as of December 15, 1995, by and between Summit Care Corporation, Summit
Care-California, Inc., a California corporation, Summit Care - Texas No. 2, Inc., a Texas corporation and Harris
Trust and Savings Bank. (14)
10.48 Intercreditor Agreement dated as of December 15, 1995 by and among the Bank of Montreal, Harris Trust and Savings
Bank, and acknowledged and agreed to by Summit Care Corporation, Summit Care-California, Inc., a California
corporation, Summit Care - Texas No. 2, Inc., a Texas corporation, Summit Care - Texas No. 3, Inc., a Texas corporation
and Summit Care Pharmacy, Inc., a California corporation. (14)
10.49 Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security Agreement, Financing
Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care - Texas No. 2, Inc., a Texas
corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with respect to
the Lubbock-Heritage facility.******* (14)
*******In reliance on Instruction 2 to Item 601 of Regulation S-K, the Registrant has omitted agreements substantially
identical to Exhibit 10.49. The omitted agreements and their material terms that differ from those in Exhibit 10.49
are as follows:
a. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care - Texas
No. 2, Inc., a Texas corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and
Savings Bank, with respect to the Kendall facility;
b. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care -
Texas No. 2, Inc., a Texas corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust
and Savings Bank, with respect to the Taylor facility;
c. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Tarrant-Westside facility;
d. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Fayette facility;
e. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Smith-Clairmont facility;
f. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Gregg facility;
g. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents,
Security Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit
Care Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Jefferson facility;
41
42
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
h. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Smith-Colonial facility;
i. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Comal facility;
j. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Lubbock-Hospitality facility;
k. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with
respect to the Travis facility;
l. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit
Care-California, Inc., a California corporation to Chicago Title Insurance Company, as trustee, for the
benefit of the Harris Trust and Savings Bank, with respect to the Orange-Carehouse facility;
m. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit
Care-California, Inc., a California corporation, to the Chicago Title Insurance Company, as trustee, for the
benefit of the Harris Trust and Savings Bank, with respect to the Riverside-Assisted Living facility;
n. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust and Savings
Bank, with respect to the Fresno-Valley Convalescent facility;
o. Assignment of Leasehold Deed of Trust and Amended and Restated Leasehold Deed of Trust, Assignment of
Rents, Security Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by
Summit Care Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust
and Savings Bank, with respect to the Los Angeles-Carson facility;
p. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust and Savings
Bank, with respect to the Los Angeles-Earlwood facility;
q. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust and Savings
Bank, with respect to the Los Angeles-Spring facility;
r. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust and Savings
Bank, with respect to the Orange-Fountain Care facility;
42
43
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
s. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust and Savings
Bank, with respect to the Orange-Fountain Assisted Living facility;
t. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust and Savings
Bank, with respect to the Riverside-Hemet Convalescent facility;
u. Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care
Corporation to the Chicago Title Insurance Company, as trustee, for the benefit of the Harris Trust and Savings
Bank, with respect to the Santa Barbara facility;
v. Deed of Trust, Assignment of Rents, Security Agreement, Financing Statement and Fixture Filing, dated as
of December 15, 1995, executed by Summit Care-California, Inc., a California corporation to the Chicago Title
Insurance Company, as trustee, for the benefit of the Harris Trust and Savings Bank, with respect to the
Fresno-Willow Creek facility;
w. Deed of Trust, Assignment of Rents, Security Agreement, Financing Statement and Fixture Filing, dated
as of December 15, 1995, executed by Summit Care Corporation to Martha Harris, Esq., as trustee, for the benefit
of the Harris Trust and Savings Bank, with respect to the Tarrant-City View facility;
10.50 Lease Termination Agreement regarding purchase of Oak Crest Nursing Center.
22 List of the Company's Significant Subsidiaries.
(1) Filed as exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-40778) originally filed on May 23, 1991, and
incorporated herein by reference.
(2) Filed as exhibit to Amendment No. 1 to the Company's Registration
Statement on June 6, 1991, and incorporated herein by reference.
(3) Filed as exhibit to Amendment No. 2 to the Company's Registration
Statement on July 3, 1991, and incorporated herein by reference.
(4) Filed as exhibit to Amendment No. 3 to the Company's Registration
Statement on February 6, 1992, and incorporated herein by reference.
(5) Filed as exhibit to Amendment No. 4 to the Company's Registration
Statement on February 12, 1992, and incorporated herein by reference.
(6) Filed as exhibit to Amendment No. 5 to the Company's Registration
Statement on March 10, 1992, and incorporated herein by reference.
(7) Filed as exhibit to Amendment No. 6 to the Company's Registration
Statement on March 18, 1992, and incorporated herein by reference.
(8) Filed as an exhibit to Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1992, and incorporated herein by reference.
(9) Filed as exhibit to Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1994, and incorporated herein by reference.
43
44
SUMMIT CARE CORPORATION
OTHER INFORMATION (CONTINUED)
(10) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended September 31, 1994 and incorporated herein by
reference.
(12) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended December 31, 1994 and incorporated herein by
reference.
(13) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1995 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended December 31, 1995 and incorporated herein by
reference.
(a) Exhibits identified by this footnote represent management contracts
or compensatory plans or arrangements required to be specifically
identified pursuant to Item 14 of Form 10-K.
44
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ WILLIAM C. SCOTT Chairman of the Board, August 30, 1996
------------------------------ Chief Executive Officer and
William C. Scott President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ DERWIN L. WILLIAMS Sr. Vice President - Finance, August 30, 1996
--------------------------------- Chief Financial Officer and
Derwin L. Williams Treasurer
(Principal Financial Officer)
/s/ MELODYE STOK Vice President - Controller August 30, 1996
-------------------------------- and Secretary
Melodye Stok (Principal Accounting Officer)
/s/ DONALD AMARAL Director August 30, 1996
----------------------------
Donald Amaral
/s/ JOHN A. BRENDE Director August 30, 1996
------------------------------
John A. Brende
/s/ WILLIAM J. CASEY Director August 30, 1996
-------------------------------
William J. Casey
/s/ GARY MASSIMINO Director August 30, 1996
----------------------------
Gary Massimino
/s/ KEITH B. PITTS Director August 30, 1996
----------------------------
Keith B. Pitts
45
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SUMMIT CARE CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
----------- ----------- ---------- --------- ---------- ----------
ACCOUNTS RECEIVABLE:
YEAR ENDED JUNE 30, 1996
Allowance for doubtful $ 989 $2,157 $ 38 $(1,100) $2,084
accounts
YEAR ENDED JUNE 30, 1995
Allowance for doubtful $ 653 $1,146 $ 22 $ (832) $ 989
accounts
YEAR ENDED JUNE 30, 1994
Allowance for doubtful $ 636 $ 828 $ 16 $ (827) $ 653
accounts
NOTES RECEIVABLE:
YEAR ENDED JUNE 30, 1996
Allowance for notes $ 184 $ 84 $ -- $ -- $ 268
receivable
YEAR ENDED JUNE 30, 1995
Allowance for notes $ -- $ 184 $ -- $ -- $ 184
receivable
YEAR ENDED JUNE 30, 1994
Allowance for notes $ -- $ -- $ -- $ -- $ --
receivable
(1) Recoveries of amounts written off.
(2) Write-offs of uncollectible accounts.
46
47
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996
EXHIBIT INDEX
BEGIN ON
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
- ------ -------------
3.1 Amended and Restated Articles of Incorporation. Incorporated
by Reference
3.2 Amended and Restated Bylaws. Incorporated
by Reference
4.1 Form of Common Stock Certificate. Incorporated
by Reference
10.1 Summit Care Corporation Stock Option Plan as amended by Amendment Incorporated
to Summit Care Corporation Stock Option Plan. by Reference
10.2 Form of Summit Care Corporation Stock Option Agreement. Incorporated
by Reference
10.3 Tax Sharing Agreement among Sierra Land Group, Inc., SHL and the Company, Incorporated
dated May 17, 1991, as amended by Amendment to Tax Sharing Agreement, by Reference
dated as of February 5, 1992.
10.4 Agreement Regarding Shared Services and Other Matters between SHL and the Incorporated
Company, dated as of February 5, 1992. by Reference
10.5 Form of Directors and Officers Indemnity Agreement.
10.7 Palmcrest Convalescent Home (now known as Palm Grove Convalescent Center): Incorporated
Convalescent Hospital Lease, dated November 20, 1969, between Palmcrest by Reference
Associates, Ltd., and Century Convalescent Centers, as amended by Lease of
Convalescent Hospital Facility (as amended), dated September 1, 1979, by
which SHL and its appointed nominee Royalwood Convalescent Hospital, Inc.
(now Summit Care - California, Inc.) are substituted as lessees.
10.8 Anaheim Care Center: Lease, dated June 1, 1995,, between Sam Menlo, Trustee 53 - 92
of the Menlo Trust U/T/I 5/22/83 and Summit Care - California, Inc., doing business
as Anaheim Care Center.
10.9 Sharon Care Center: Lease, dated May 1, 1987, between Jozef Nabel and Marie Incorporated
Gabrielle Nabel, as tenants in common, and Summit Care - California, Inc. by Reference
47
48
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996
EXHIBIT INDEX
BEGIN ON
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
- ------ -------------
10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964, between Jack H. Incorporated
Cramer and Walter Lee Brown (together, as lessors) and Albert J. Allasandra, by Reference
as amended by Amendment to Lease and Right of First Refusal to Purchase, dated
May 23, 1969, by which Aljar Corporation is substituted as lessee, and as further
amended by Amendment to Agreement of Lease and Right of First Refusal, dated
November 18, 1974, and as further amended by Second Amendment to Agreement of
Lease and Right of First Refusal and Assignment of Lease, dated July 10, 1979,
by which National Accommodations, Inc. (now SHL) is substituted as lessee,
assigned to the Company by Assignment of Lease, dated March 9, 1992, between SHL
and the Company.
10.11 Bay Crest Convalescent Hospital: Lease, dated March 1, 1980, between South Bay 93 - 97
Sanitarium and Convalescent Hospital and Garnet Convalescent Hospital, Inc.
(now Summit Care - California, Inc.), and Amendment to Lease dated March 1, 1994.
10.12 Brier Oak Convalescent Center: Lease Agreement, dated February 18, 1985, Incorporated
between Bernard Bubman, Arnold Friedman, Irene Weiss and Sunset Motel and by Reference
Development Co. (collectively, as lessors), and Summit Care -California,
Inc.
10.13 Valley Palms Convalescent Hospital: Lease, dated March 16, 1982, between Incorporated
Uni-Cal Associates and Valley Palms Convalescent, Inc. (now Summit Care - by Reference
California, Inc.).
10.14 Marina Care Center: Standard Industrial Lease - Net, dated March 1, 1989, Incorporated
between Summit Properties and Summit Care - California, Inc., as modified by Reference
by Addendum to Standard Industrial Lease - Net.
10.15 Phoenix Resident Hotel: Lease, dated July 29, 1977, between Sierra Land & Incorporated
Livestock, Inc. and Southwest Hotels, Inc., as modified by Addendum to Lease by Reference
dated August 11, 1983, assigned to the Company by Assignment of Lease, dated
July 1, 1982, between Southwest Hotels, Inc. and the Company.
10.16 Sublease of Phoenix Retirement Hotel: Sublease, dated July 1, 1987, between Incorporated
the Company and Phoenix McDowell Properties, Inc., as assigned by by Reference
Assignment of Sublease, dated March 9, 1992, between the Company and
Summit Health Ltd.
48
49
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996
EXHIBIT INDEX
BEGIN ON
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
- ------ -------------
10.17 Sublease of Marina Care Center: Nursing Home Sublease Agreement, dated Incorporated
March 7, 1989, between Summit Care - California, Inc. and 5240 Sepulveda, by Reference
Inc., as assigned by Assignment of Sublease, dated March 9, 1992,
between Summit Care - California, Inc. and Summit Health Ltd.
10.18 Sublease of Valley Palms Care Center: Nursing Home Sublease Agreement, Incorporated
dated May 11, 1989, between Summit Care - California, Inc. and Trinity by Reference
Health Systems, as assigned by Assignment of Sublease, dated March 9,
1992, between Summit Care - California, Inc. and Summit Health Ltd.
10.19 Sublease of Brier Oak Terrace Care Center: Nursing Home Sublease Agreement, Incorporated
dated April 1, 1989, between Summit Care - California, Inc. and Brier Oak by Reference
Hospital, Inc., as assigned by Assignment of Sublease, dated March 9, 1992,
between Summit Care - California, Inc. and Summit Health Ltd.
10.20 Sublease of Pharmacy: Standard Sublease, dated August 1, 1989, between St. Incorporated
Luke Medical Center and Mediscript, Inc., as modified by Addendum of the by Reference
same date.
10.21 Hemet Resident Hotel: Ground Lease dated June 25, 1980, between Genes, Incorporated
Ltd., and SHL, assigned to the Company by Assignment of Lease dated March by Reference
9, 1992, between SHL and the Company.
10.22 Summit Care Corporation Note Purchase Agreement dated as of December Incorporated
1.95%9Senior Secured Notes Due 2002. by Reference
10.23 Loan Agreement and Term Note made and entered into by and between Summit Care Incorporated
Corporation, and Union Bank dated as of March 28, 1994. by Reference
10.24 Seller Note for purchase of The Woodlands.
Incorporated
by Reference
10.25 HUD Note for purchase of The Woodlands.
Incorporated
by Reference
10.26 Sublease with Summit Health Ltd., for Phoenix Living Center dated Incorporated
January 1994. by Reference
10.27 Real Estate Lien Note - $3,000,000 dated September 30, 1994 and Security Incorporated
Agreement dated September 30, 1994. by Reference
49
50
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996
EXHIBIT INDEX
BEGIN ON
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
- ------ -------------
10.28 Warranty Deed - Oak Manor, Flatonia dated September 30, 1994. Incorporated
by Reference
10.29 Live Oak Nursing Center, George West, Texas Lease Agreement dated July 19, 1991; Incorporated
Assignment of Lease With Option to Purchase dated September 30, 1994 and Consent by Reference
To Assignment Of Leasehold Estate of Live Oak Nursing Center, George West, Texas
dated August 15, 1994.
10.30 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement dated February 28, 1989; Incorporated
Assignment Of Lease With Option To Purchase dated September 30, 1994 and Consent by Reference
To Assignment Of Leasehold Estate Of Guadalupe Valley Nursing Center, Sequin, Texas dated
August 15, 1994.
10.31 Southern Manor Nursing Center, Hallettsville, Texas Nursing Home Lease Agreement dated Incorporated
June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; by Reference
Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated
September 30, 1994.
10.32 Monument Hill Nursing Center, LaGrange, Texas Lease Agreement dated October 20, 1986; Incorporated
Option Agreement dated October 20, 1986; Assignment of Option dated September 1, 1988; by Reference
Assignment Of Lease With Option To Purchase dated September 30, 1994 and Consent To
Assignment Of Leasehold Estate Of Monument Hill Nursing Center, LaGrange, Texas dated
September 1, 1988.
10.33 Oak Crest Nursing Center, Rockport, Texas Nursing Home Lease Agreement dated October 18, Incorporated
1990 and Consent To Assignment And Assumption Agreement dated October 5, 1994. by Reference
10.34 Oakland Manor Nursing Center, Giddings, Texas Nursing Home Lease Agreement dated Incorporated
June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; by Reference
Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated
September 30, 1994.
10.35 David Lake Agreement Of Purchase And Sale Of Assets dated October 16, 1994. Incorporated
by Reference
10.36 Woodland Convalescent Center Lease Agreement dated January 16, 1995. Incorporated
by Reference
10.37 Agreement of Purchase and Sale of Assets and Closing Escrow Agreement of Comanche Trails Incorporated
Nursing Center by Summit Care Corporation from Select Care Enterprises dated December 1,1994. by Reference
50
51
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996
EXHIBIT INDEX
BEGIN ON
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
- ------ -------------
10.38 $70,000,000 Note Purchase Agreement dated as of December 15, 1995 among Summit Care Corp- Incorporated
oration and the several purchasers listed on the acceptance form at the end thereof. by Reference
10.39 $25,000,000 Amended and Restated Note Purchase Agreement dated as of December 15, 1995 Incorporated
among Summit Care Corporation and the several purchasers listed on the acceptance form at by Reference
end thereof.
10.40 Third Amended and Restated Credit Agreement dated as of December 15, 1995 among Summit Incorporated
Care Corporation, the Lenders named therein, and Bank of Montreal, as the Agent, amending and by Reference
modifying that certain Second Amended and Restated Credit Agreement, dated as of February
6, 1995, among Summit Care Corporation, the lenders named therein, and The First National Bank
of Chicago, as the agent for the lenders named therein.
10.41 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $18,071,429, made Incorporated
by Summit Care Corporation in favor of John Hancock Mutual Life Insurance Company. by Reference
10.42 Amended and Restated 8.96% Senior Secured Note due 2002, dated December 31, 1992, in the Incorporated
aggregate principal amount of $5,000,000, made by Summit Care Corporation in favor of by Reference
Northwestern National Life Insurance Company.
10.43 Note, dated December 20, 1995, in the aggregate principal amount of $7,000,000, made by Summit Incorporated
Care Corporation in favor of Banque Paribas. by Reference
10.44 Guaranty in favor of certain note purchasers listed therein, dated as of December 15, 1995, executed Incorporated
by Summit Care Pharmacy, Inc., a California corporation and Summit Care-Texas No. 2, Inc., a by Reference
Texas corporation and Summit Care-Texas No. 3, Inc., a Texas corporation.
10.45 Amended and Restated Guaranty in favor of certain note purchasers listed therein, dated as of Incorporated
December 15, 1995, executed by Summit Care Pharmacy, Inc., a California corporation, Summit by Reference
Care-Texas No. 2, Inc., a Texas corporation, and Summit Care-Texas No. 3, Inc., a Texas
corporation.
10.46 Second Amended and Restated Guaranty dated as of December 15, 1995 executed by Summit Care Incorporated
Pharmacy, Inc., a California corporation, Summit Care-Texas No. 2, Inc., a Texas corporation and by Reference
Summit Care-Texas No. 3, Inc., a Texas corporation in favor of the Bank of Montreal.
10.47 Collateral Account Agreement, dated as of December 15, 1995, by and between Summit Care Incorporated
Corporation, Summit Care-California, Inc., a California corporation, Summit Care - Texas No. 2, by Reference
Inc., a Texas corporation and Harris Trust and Savings Bank.
51
52
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996
EXHIBIT INDEX
BEGIN ON
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
- ------ -------------
10.48 Intercreditor Agreement dated as of December 15, 1995 by and among the Bank of Montreal, Harris Incorporated
Trust and Savings Bank, and acknowledged and agreed to by Summit Care Corporation, Summit by Reference
Care-California, Inc., a California corporation, Summit Care - Texas No. 2, Inc., a Texas
corporation, Summit Care - Texas No. 3, Inc., a Texas corporation and Summit Care Pharmacy,
Inc., a California corporation.
10.49 Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Incorporated
Security Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, by Reference
executed by Summit Care - Texas No. 2, Inc., a Texas corporation to Martha Harris, Esq.,
as trustee, for the benefit of the Harris Trust and Savings Bank, with respect to the
Lubbock-Heritage facility.
10.50 Lease Termination Agreement regarding purchase of Oak Crest Nursing Center. 98 - 100
22 List of the Company's Significant Subsidiaries. Incorporated
by Reference
52