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S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
WASHINGTON D.C. 20549
FORM 10-K
(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, 1997
[ ] 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
S U M M I T C A R E C O R P O R A T I O N
(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
September 11, 1997 was $96,465,000.
The number of shares outstanding of Registrant's common stock as of September
11, 1997: 6,776,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for its annual meeting of
shareholders to be held on December 11, 1997, 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 42.
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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
in Southern California and Texas. In addition, the Company manages subacute care
units in acute hospitals. The Company is incorporated under the laws of the
State of California.
At June 30, 1997, the Company operated 35 skilled nursing care centers
with 4,631 beds. Thirteen centers are in California with 1,515 beds; twenty-one
centers are in Texas with 2,966 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: fifteen 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.
At fiscal year end, the Company operated four assisted living centers
with 409 beds in California and opened a fifth center with 66 beds on July 1,
1997. Included in three of the centers are units dedicated to the needs of early
stage Alzheimer's residents.
At June 30, 1997, the Company operated two pharmacies in Southern
California and through a joint venture, operates one in Texas. The pharmacies
provide pharmaceutical products and services to 86 non-affiliated skilled
nursing care centers, assisted living centers and acute hospitals located in
Southern California and Texas. The pharmacies also provide products and services
to the Company's skilled nursing care and assisted living centers. The Company
manages subacute units in three acute hospitals.
During fiscal year 1997, the Company opened 261 new beds in two skilled
nursing care centers, and on July 1, 1997, opened another 66 new beds in an
assisted living center. An existing center in Fresno, California, with 108 beds
was expanded to 159 beds in July 1996. This center offers services to
Alzheimer's residents in 47 beds and to subacute/skilled nursing residents in
112 beds. In August 1996, 110 beds in a newly constructed skilled nursing care
center in Fort Worth, Texas were opened and in June 1997 were increased to 210
beds. The 66 beds opened on July 1, 1997 are in a new assisted living center
dedicated to Alzheimer's residents situated on a campus in Orange, California,
with a 172-bed skilled nursing care center and an assisted living center with 72
beds.
In addition, construction is in progress to open 47 new beds in a
skilled nursing care center currently with 114 beds including 26 Alzheimer's
beds. It is presently estimated that the new beds will be open in October 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 1998*
CENTERS
Acquired 2 13 -- -- --
Constructed -- 1 1 1 1
--- ----- --- --- ---
Total 2 14 1 1 1
=== ===== === === ===
Owned 1 7 1 1 1
Leased-
With Option to Purchase -- 7** -- -- --
With No Purchase Option 1 -- -- -- --
--- ----- --- --- ---
Total 2 14 1 1 1
=== ===== === === ===
BEDS
Acquired 282 1,670 -- -- --
Constructed in New Centers -- 118 108 210 66
Constructed in Existing Centers 24 74 74 51 47
--- ----- --- --- ---
Total 306 1,862 182 261 113
=== ===== === === ===
Owned 230 976 182 261 113
Leased-
With Option to Purchase -- 812** -- -- --
With No Purchase Option 76 74 -- -- --
--- ----- --- --- ---
Total 306 1,862 182 261 113
=== ===== === === ===
* Centers and beds planned to open in fiscal 1998.
** One center with 88 beds was purchased in July 1996 upon exercise of an option
to purchase and another center with 111 beds was purchased in September 1997
upon exercise of an option to purchase.
In April 1994, OrNda HealthCorp ("OrNda") acquired the Company's then
majority shareholder, Summit Health, Ltd. ("SHL"). 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 January 1997, OrNda was merged into Tenet
Healthcare Corporation ("Tenet").
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 of $55,000,000, for $12,978,000 in construction of new beds
and $2,022,000 for the exercise of a purchase option for a skilled nursing
center in July 1996. 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.
In December 1996, the Company entered into a limited liability company
("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price for
its 50% membership interest was $1,565,000 in cash. The pharmacy is servicing
nursing care centers in Texas operated by either the Company, the other LLC
member or non-affiliated nursing center owners.
SUBSEQUENT EVENTS. The Company exercised its purchase option in a lease
of a 111-bed skilled nursing care center in Texas in September 1997 for
$1,871,000 in cash.
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. 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 three hospital-based units
managed by the Company. 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 six centers surveyed by the
Commission to date and six 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.
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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
eighteen Alzheimer's units (fifteen in skilled nursing care centers and three in
assisted living centers) with a total of 617 beds and 35 units with 899 beds
providing subacute and specialty medical services.
PHARMACEUTICAL PRODUCTS AND SERVICES. The Company provides
pharmaceutical products and services through the operation of two pharmacies in
Southern California and another in Texas. The pharmacies service 86
non-affiliated skilled nursing care centers, assisted living centers and acute
hospitals located in Southern California and Texas, 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 five assisted living centers operated by
the Company are located in California and have 475 beds, with 194 beds in three
of the centers 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 purchased vacant land in Texas for future development
and operation of assisted living centers.
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,
-------------------
1997 1996 1995
---- ---- ----
Private/Managed Care 27.8% 30.2% 32.4%
Medicare 41.8 36.5 30.7
----- ----- -----
Subtotal 69.6 66.7 63.1
Medicaid 30.4 33.3 36.9
----- ----- -----
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,
-------------------
1997 1996 1995
---- ---- ----
Specialty medical, subacute
and rehabilitative revenues 48.1% 43.0% 36.8%
Pharmacy revenues 7.7 7.9 8.9
---- ---- ----
55.8% 50.9% 45.7%
==== ==== ====
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YEAR ENDED JUNE 30,
-------------------
1997 1996 1995
------------ ------------ -----------
Specialty medical, subacute
and rehabilitative revenues $118,139,000 $ 87,829,000 $57,116,000
Pharmacy revenues 18,967,000 16,193,000 13,822,000
------------ ------------ -----------
$137,106,000 $104,022,000 $70,938,000
============ ============ ===========
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, 1997, the Company had approximately 4,200
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 and state
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 50%, 53% and
56% of the Company's expenses (excluding rental, depreciation and amortization
and interest) for fiscal years 1997, 1996 and 1995, 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. However, in Texas, competition is limited by
restrictions on the number of beds that can be enrolled in the Medicaid program.
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.
The funds received by the insurance company 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 audited
premiums. 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 no annual aggregate stop loss. 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 is a claims-made
policy and has limits of $500,000 per occurrence and $1,000,000 in the aggregate
per year and carries a self-insured retention of $100,000 per occurrence and a
$600,000 annual aggregate loss limit. In addition, the Company has a claims-made
umbrella policy
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which provides additional insurance of $8,500,000 per occurrence and $8,500,000
aggregate per year over its primary general and professional policy, its
automobile liability policy and its employer liability policy.
Although the Company has not been subject to any judgments or
settlements in excess of its insurance limits, there can be no assurance that
claims for damages in excess of its coverage limits will not arise in the
future.
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 Human Services 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, the violation of which can result in denial of
reimbursement. 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. The Company maintains reserves to
cover retroactive audit adjustments. 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 three exception requests. Approval has
been received on two and the other is subject to the government completing their
review of a reopened Medicare cost report for fiscal year 1995. There is no
assurance the Company will be able to recover such excess costs under the
pending request 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, proposed regulations have been issued which, if
adopted, may result in the disallowance of a portion of such costs 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. Medicare will reimburse charges for certain products, such as enteral
and parenteral nutrition, provided by a pharmacy directly to Medicare
beneficiaries who are not eligible for inpatient services based on a fee screen
amount. Finally, under proposed legislation and proposed action by the Health
Care Financing Administration, Medicare payments to skilled nursing facilities
may be changed from cost reimbursement to a prospective payment system. Under
proposals currently being considered, each skilled nursing center would receive
the same rate for each day of skilled nursing care, subject to adjustments
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for the facility's case mix and the area wage index period. The impact on the
Company of payments under a prospective payment system is not known.
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 has 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.
California and Texas Medicaid programs 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 87") 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 87 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 87 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 87, 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.
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 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, 1997 from Medi-Cal. Medi-Cal delayed payments for approximately
30 days in 1997 and 1991 and nursing center rate
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increases for several months in 1991 and 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. 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 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.
9
10
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. Governors of several states have sought
congressional assistance to allow states more flexibility in determining
Medicaid payment methods and rates, including payment rates for skilled nursing
care. If Congress adopts legislation granting states the power to determine
Medicaid payment methods and rates, it could have a substantial adverse impact
on the Company. 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 final legislation is adopted implementing the budget
agreement, the scope of such proposed reductions on skilled nursing care centers
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 adversely affect the Company's
revenues. Changes in the reimbursement levels under Medicare or Medicaid and
changes in applicable governmental regulations could materially 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.
In August 1996, federal legislation was signed into law that increased
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. An initiative statute entitled "Minimum
Wage
10
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Increase" was adopted in California by the voters on November 5, 1996. The
initiative statute increased the then current minimum wages of $4.25 per hour to
$5.00 per hour on March 1, 1997 and which will increase to $5.75 per hour on
March 1, 1998 for all industries. The initiative statute affects 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.
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
As of September 16, 1997, the Company owns or leases 35 skilled nursing
care and five 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 currently operated by
the Company.
SPECIALTY AND AVERAGE OCCUPANCY
TOTAL SUBACUTE FOR F.Y.E. OWNED/
SKILLED NURSING CARE CENTERS: LOCATION BEDS BEDS 6/30/97 LEASED
- ----------------------------- -------- ----- ------------- ----------------- ------
California:
Woodland Reseda 153 30 87% Leased
Royalwood Torrance 108 21 93% Leased
Valley Fresno 99 22 93% Owned
Villa Maria Santa Maria 85 24 91% Owned
Earlwood Torrance 85 20 92% Owned
Sharon Los Angeles 85 39 89% Leased(1)
Bay Crest Torrance 78 47 93% Leased
Fountain Orange 172 53 90% Owned
Carehouse Santa Ana 174 40 94% Owned
Palm Grove Garden Grove 122 48 90% Leased(1)
Anaheim Anaheim 97 22 95% Leased
Devonshire Hemet 98 15 95% Owned
Willow Creek Fresno 159 101 56% Owned
Texas:
Coronado Abilene 219 57 83% Owned
West Side White Settlement 238 28 87% Owned
The Woodlands Houston 212 22 94% Owned
Colonial Tyler Tyler 162 20 82% Owned
Colonial Manor New Braunfels 152 62 87% Owned
Guadalupe Valley Seguin 149 49 88% Leased(2)
Town & Country Boerne 124 36 89% Owned
Clairmont - Longview Longview 174 46 80% Owned
Clairmont - Beaumont Beaumont 148 30 84% Owned
Clairmont - Tyler Tyler 116 18 85% Owned
Oakland Manor Giddings 114 40 73% Leased(2)
Southern Manor Hallettsville 114 40 77% Leased(2)
Southwood Austin 112 14 86% Owned
Comanche Trail Big Spring 115 36 82% Leased(2)
Heritage Oaks Lubbock 114 55 94% Owned
Lubbock Lubbock 114 12 94% Owned
Monument Hill La Grange 111 17 92% Owned
Live Oak George West 100 34 87% Leased(2)
Oak Manor Flatonia 80 28 63% Owned
Oak Crest Rockport 88 30 88% Owned
Cityview Fort Worth 210 92 49% Owned
Arizona:
Phoenix Living Center Phoenix 150 74 89% Leased(3)
ASSISTED LIVING CENTERS:
California:
Carson Carson 202 80 82% Owned
Spring Torrance 51 -- 89% Owned
Hemet Hemet 84 48 74% Owned(4)
Fountain Orange 72 -- 75% Owned
Ashton Court Orange 66 66 --% Owned(5)
----- -----
5,106 1,516
===== =====
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(1) The Company's leases for its Sharon and Palm Grove centers require that
Tenet guarantee the Company's obligations under each lease.
(2) Leased with options to purchase ranging from July 1998 to February 2005.
(3) Subleased to the Company by Tenet.
(4) Building owned by the Company with real property held under a ground lease
extending to June 2030.
(5) Center opened July 1, 1997.
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, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, who are not also directors are:
Name Position Age
---- -------- ---
David G. Schumacher, Jr. President and Chief Operating Officer 41
Derwin L. Williams Sr. Vice President - Finance, 60
Chief Financial Officer and Treasurer
Michael H. Martel Sr. Vice President - Marketing 35
John L. Farber Vice President - Controller, Chief 47
Accounting Officer and Secretary
David G. Schumacher, Jr., has been President and Chief Operating Officer
of Summit Care Corporation since January 1, 1997 and previously served as Sr.
Vice President - Operations and Chief Operating Officer from 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.
Michael H. Martel was appointed Senior Vice President - Marketing in
March 1995. Prior to joining Summit, Mr. Martel was Vice President - Marketing
for Arbor Health Care Company from August 1992 to March 1995. Mr. Martel served
as Regional Director of Marketing for the acute care rehabilitation division of
National Medical Enterprises from April 1988 to August 1992.
John L. Farber was appointed Vice President - Controller, Chief
Accounting Officer and Secretary on June 2, 1997. Prior to joining Summit, Mr.
Farber was Vice President of Finance at FHP Insurance Company and Director of
Finance at FHP International Corporation from September 1990 to May 1997. Mr.
Farber also served in financial executive positions in two other companies from
September 1979 to August 1990. He is also a certified public accountant.
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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 September 11, 1997, the Company had approximately 1,600
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 1997:
1st Quarter $23-1/2 $18-3/4
2nd Quarter 22 12-3/4
3rd Quarter 15-3/4 10-5/8
4th Quarter 15-3/4 12
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
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:
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
Consolidated Income Statement Data
(year ended June 30):
Net revenues $197,927 $176,062 $137,026 $97,599 $83,992
Income before provision for income taxes 188 11,761 12,498 10,177 8,247
Net income 69 7,309 7,511 6,167 5,023
Earnings per share(1) 0.01 1.06 1.10 1.20 1.00
Consolidated Balance Sheet Data
(at June 30):
Total assets 250,516 223,052 184,480 114,915 73,369
Long-term debt (including current portion) 121,452 110,374 89,788 32,025 30,331
Shareholders' equity 81,412 81,286 73,813 66,361 31,337
Other Data:
Nursing centers operated:
Total beds (at June 30) 4,631 4,472 4,294 2,534 2,228
Average occupancy (year ended June 30) 85.4% 86.7% 86.9% 88.9% 90.3%
Assisted living centers operated:
Total beds (at June 30) 409(2) 468 468 468 468
Average occupancy (year ended June 30) 79.6% 78.7% 77.9% 73.7% 72.5%
Total centers operated:
Total beds (at June 30) 5,040(2) 4,940 4,762 3,002 2,696
Average occupancy (year ended June 30) 84.8% 85.9% 85.9% 86.5% 87.2%
(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 6,818,247 for the year ended June 30, 1997; 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 and 5,028,936 for the year
ended June 30, 1993. The effect of common stock equivalents arising from
stock options on the computation of earnings per share is not significant.
(2) Does not include 66 beds opened on July 1, 1997 specializing in Alzheimer's
patients.
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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, 1997 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1996
Net revenues increased $21,865 or 12.4% from $176,062 in fiscal 1996 to
$197,927 in fiscal 1997. The increase occurred due to the following:
AMOUNT PERCENT
------ -------
1. Rehabilitative and other specialty services $ 7,553 34.6%
2. New beds opened in fiscal years 1996 and 1997 12,450 56.9
3. Increased census days and revenue rates 5,647 25.8
4. Pharmacy operations 2,315 10.6
5. Special charge to Medicare revenues (6,100) (27.9)
------- -----
$21,865 100.0%
======= =====
The special charge to Medicare revenues reflect the result of
adjustments proposed by Medicare in connection with an audit of fiscal 1995,
which would have an effect on revenues for that fiscal year, fiscal 1996 and
fiscal 1997. Average occupancy was 84.8% in the fiscal year ended June 30, 1997
compared to 85.9% in the fiscal year ended June 30, 1996. Excluding newly
constructed beds, the average occupancy was 87.0% in the fiscal year ended June
30, 1997 and 86.4% in the fiscal year ended June 30, 1996. The Company's quality
mix (revenues from Medicare, managed care and private pay patients as a
percentage of gross revenues excluding pharmacy revenues) was 69.6% in the
fiscal year ended June 30, 1997 and 66.7% in the fiscal year ended June 30,
1996.
Expenses, consisting of salaries and benefits, supplies, purchased
services, provision for doubtful accounts and other expenses as a percent of net
revenues, before the effect of the special charge, increased from 84.6% of net
revenues in the fiscal year ended June 30, 1996 to 88.0% in the fiscal year
ended June 30, 1997. Total salaries and employee related benefits were 43.9% of
net revenues, before the effect of the special charge, in the fiscal year ended
June 30, 1997 compared to 44.4% of net revenues in the fiscal year ended June
30, 1996. Purchases of rehabilitative and other specialty services were 25.3% of
net revenues, before the effect of the special charge, in the fiscal year ended
June 30, 1997 compared to 21.6% of net revenues in the fiscal year ended June
30, 1996. Expenses increased $30,580 or 20.5% from $148,929 in the fiscal year
ended June 30, 1996 to $179,509 in the fiscal year ended June 30, 1997 for the
following reasons:
AMOUNT PERCENT
------ -------
1. Rehabilitative and other specialty services $ 8,680 28.4%
2. Expenses relating to new beds opened in fiscal
years 1996 and 1997 11,529 37.7
3. Salaries and benefits 6,612 21.6
4. Other expenses 3,759 12.3
------- -----
$30,580 100.0%
======= =====
Income before rental, depreciation and amortization and interest
expense, net of interest income, decreased $8,715 or 32.1% from $27,133 in the
fiscal year ended June 30, 1996 to $18,418 in the fiscal year ended June 30,
1997 and was 9.3% of net revenues in the fiscal year ended June 30, 1997 (and
12.0% of net revenues before the special charge to revenues) compared to 15.4%
in the fiscal year ended June 30, 1996.
Rental, depreciation and amortization and interest expense, net of
interest income, increased by $2,858 or 18.6% from $15,372 in the fiscal year
ended June 30, 1996 to $18,230 in the fiscal year ended June 30, 1997. The
increase was primarily due to depreciation of additions to property and
equipment and interest expense related to higher long-term debt.
The Company's effective tax rate was 63.3% of income in the fiscal year
ended June 30, 1997 compared to 37.9% of income in the fiscal year ended June
30, 1996. The increase in the effective tax rate was primarily due to
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17
certain permanent differences between book income and taxable income. Net income
was $69 for the fiscal year ended June 30, 1997, a decrease of $7,240 or 99.1%
from $7,309 for the fiscal year ended June 30, 1996.
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.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $3,994 in cash and cash equivalents
and working capital of $12,648. For the fiscal year ended June 30, 1997, the
Company's cash and cash equivalents increased by $1,336.
Net cash provided by operating activities increased $11,149 from $6,866
for the fiscal year ended June 30, 1996 to $18,015 for the fiscal year ended
June 30, 1997. Net cash provided by operating activities, plus proceeds of
$15,000 in new long-term debt (see description below) were used principally for
capital expenditures of $24,075 for new and existing centers, the net reduction
of loans outstanding on the line of credit of $1,000, the purchase of a lease
option for $2,022, and the acquisition of a 50% interest in a limited liability
company for $1,565.
Accounts receivable, less allowance for doubtful accounts, increased
$5,819 due to increased total revenues in the fiscal year ended June 30, 1997
compared to the prior year, primarily in Medicare and managed care revenues. At
June 30, 1997, the Company's average accounts receivable days outstanding were
41, compared to 39 at June 30, 1996.
For the fiscal year ended June 30, 1997, the Company added $24,075 to
its property and equipment. These additions were primarily for the completion of
a 210 bed skilled nursing facility in Fort Worth, Texas or $2,300, construction
of a 66 bed assisted living center in Orange, California, or $3,525, and the
renovation of buildings and replacement of furniture and equipment at the
remaining centers and the pharmacies, or $18,250.
These additions to property and equipment were primarily financed with
funds from $15,000 of Senior Secured Notes issued in July 1996 and with cash
generated from operations. The $15,000 funding represents the second and last
issuance of the $70,000 Senior Secured Notes. The initial funding of $55,000
occurred in December 1995.
The Company believes that it has sufficient cash flow from its existing
operations and from its bank line of credit to service long-term debt due within
one year of $6,997 (the Company intends to borrow this amount against its bank
line of credit which has a revolver extending to September 30, 1998 followed by
a three-year payment period), to make normal recurring capital replacements,
additions and improvements to existing centers of approximately $9,100 planned
for the next 12 months, to develop properties costing approximately $3,000 over
the next 12 months, to purchase a 111-bed center for $1,871 in accordance with a
purchase option in a lease and to meet other long-term working capital needs and
obligations. The loans outstanding on the line of credit at June 30, 1997 were
$5,000. 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.
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 October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if
elected, would require companies to use a new fair value method of valuing
stock-based compensation plans. The Company has elected to continue following
present accounting rules under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" which uses an intrinsic value method
and often results in no compensation expense. In accordance with SFAS 123, the
Company has provided in the notes to the accompanying financial statements pro
forma disclosure of what net income and earnings per share would have been had
the new fair value method been used.
18
19
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which is effective for fiscal years ending after December 15, 1997,
including interim periods. Earlier adoption is not permitted. However, an entity
is permitted to disclose pro forma earnings per share amounts computed under
SFAS 128 in the notes to the financial statements in periods prior to adoption.
The statement requires restatement of all prior-period earnings per share data
presented after the effective date. SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
substantially similar to the standard recently issued by the International
Accounting Standards Committee entitled "International Accounting Standards,
Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998 and
has not determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years ending after December 15, 1997. SFAS 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements. It also requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Under existing accounting standards, the Company has reported its
operations as one line of business because substantially all of its revenues
have been derived from its skilled nursing care centers and assisted living
centers and closely related ancillary services. The Company is presently
evaluating the new standard in order to determine its effect, if any, on the way
the Company might report its operations in the future.
19
20
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, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Summit Care Corporation at June 30, 1997 and 1996, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
August 22, 1997
20
21
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
----------------------------------
Net revenues $197,927 $176,062 $137,026
Expenses:
Salaries and benefits 89,577 78,233 63,171
Supplies 20,160 18,071 15,374
Purchased services 51,520 37,963 22,234
Provision for doubtful accounts 2,530 2,241 1,330
Other expenses 15,722 12,421 10,268
Rental 2,864 2,656 1,691
Rental to related parties -- -- 450
Depreciation and amortization 7,393 6,142 5,249
Interest (net of interest income:
$645, $522 and $513, respectively) 7,973 6,574 4,761
-------- -------- --------
197,739 164,301 124,528
-------- -------- --------
Income before provision for income taxes188 11,761 12,498
Provision for income taxes 119 4,452 4,987
-------- -------- --------
Net income $ 69 $ 7,309 $ 7,511
======== ======== ========
Earnings per share $ .01 $ 1.06 $ 1.10
======== ======== ========
See accompanying notes
21
22
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30,
---------------------
1997 1996
---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,994 $ 2,658
Accounts receivable, less allowance for doubtful
accounts: 1997 - $2,028; 1996 - $2,084 33,749 27,930
Supplies inventory, at cost 2,690 2,058
Other current assets 12,356 13,032
-------- --------
Total current assets 52,789 45,678
Property and equipment, at cost:
Land and land improvements 19,513 16,018
Buildings and leasehold improvements 161,080 136,907
Furniture and equipment 23,978 18,668
Construction in progress 5,947 15,043
-------- --------
210,518 186,636
Less accumulated depreciation and amortization 28,605 21,713
-------- --------
181,913 164,923
Notes receivable, less allowance for doubtful accounts:
1997 - $322; 1996 - $268 6,859 4,845
Other assets 8,955 7,606
-------- --------
$250,516 $223,052
======== ========
See accompanying notes
22
23
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
JUNE 30,
---------------------
1997 1996
---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank $ 4,678 $ 4,165
Accounts payable 29,586 19,895
Employee compensation and benefits 5,877 3,738
Income taxes payable -- 989
Long-term debt due within one year -- 2,985
-------- --------
Total current liabilities 40,141 31,772
Long-term debt 121,452 107,389
Deferred income taxes 7,511 2,605
-------- --------
Total liabilities 169,104 141,766
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value,
2,000,000 authorized shares, none issued
Common stock, no par value, 100,000,000 authorized shares;
6,776,000 and 6,772,800 issued and outstanding,
respectively 51,543 51,486
Retained earnings 29,869 29,800
-------- --------
Total shareholders' equity 81,412 81,286
-------- --------
$250,516 $223,052
======== ========
See accompanying notes
23
24
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
THREE YEARS ENDED JUNE 30, 1997
Common Stock
---------------------- Retained
Shares Amount Earnings Total
--------- -------- -------- --------
Balances at June 30, 1994 6,743,600 $ 51,381 $14,980 $ 66,361
Net income -- -- 7,511 7,511
Exercise of stock options 15,700 192 -- 192
Expenses on sale of common stock -- (251) -- (251)
--------- -------- ------- --------
Balances at June 30, 1995 6,759,300 51,322 22,491 73,813
Net income -- -- 7,309 7,309
Exercise of stock options 13,500 164 -- 164
--------- -------- ------- --------
Balances at June 30, 1996 6,772,800 51,486 29,800 81,286
Net income -- -- 69 69
Exercise of stock options 3,200 57 -- 57
--------- -------- ------- --------
Balances at June 30, 1997 6,776,000 $ 51,543 $29,869 $ 81,412
========= ======== ======= ========
See accompanying notes
24
25
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
------------------------------------
1997 1996 1995
------------------------------------
Operating activities:
Net income $ 69 $ 7,309 $ 7,511
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,393 6,142 5,249
(Increase) in accounts receivable (5,819) (7,594) (6,907)
(Increase) decrease in supplies inventory (632) 118 (623)
Decrease (increase) in other current assets 1,257 (8,429) (1,740)
Increase in accounts payable 9,691 8,923 2,512
Increase (decrease) in employee compensation
and benefits 2,139 (270) 478
(Decrease) increase in income taxes payable (989) (72) 577
Increase (decrease) in deferred income taxes 4,906 739 (43)
-------- -------- --------
Total adjustments 17,946 (443) (497)
-------- -------- --------
Net cash provided by operating activities 18,015 6,866 7,014
-------- -------- --------
Investing activities:
Issuance of notes receivable (3,142) (916) (2,089)
Principal payments of notes receivable 547 498 962
Additions to property and equipment (24,075) (26,558) (9,004)
Acquisitions of nursing centers -- -- (51,178)
Additions to other assets (1,657) (2,276) (3,279)
-------- -------- --------
Net cash used in investing activities (28,327) (29,252) (64,588)
Financing activities:
Increase in payable to bank 513 1,193 826
Principal payments on long-term debt (17,922) (49,914) (38,225)
Proceeds from long-term debt 29,000 70,500 76,520
Net expenses from sale of common stock -- -- (251)
Net proceeds on exercise of stock options 57 164 192
-------- -------- --------
Net cash provided by financing activities 11,648 21,943 39,062
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,336 (443) (18,512)
Cash and cash equivalents at beginning of year 2,658 3,101 21,613
-------- -------- --------
Cash and cash equivalents at end of year $ 3,994 $ 2,658 $ 3,101
======== ======== ========
See accompanying notes
25
26
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
--------------------------------
Supplemental disclosures of non-cash
investing and financing activities:
Acquisition notes payable $ -- $ -- $ (2,814)
Acquisition of nursing care centers -- -- 2,814
Acquisition of nursing care centers
under capital leases -- -- 16,654
Capital lease obligations -- -- (16,654)
See accompanying notes
26
27
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Summit Care Corporation ("Company" or "SCC")
provides a variety of health care services primarily to the elderly through the
operation of subacute, skilled nursing, Alzheimer's and assisted living units in
skilled nursing care centers and assisted living centers in California, Texas
and Arizona. These services include nursing care, lodging, food and certain
specialty medical services, including rehabilitation care, infusion therapy and
other ancillary services. The Company also provides specialty pharmaceutical and
infusion therapy services to other long-term care providers. In April 1994,
OrNda HealthCorp ("OrNda") acquired the Company's then majority shareholder,
Summit Health Ltd. ("SHL"). OrNda's 7.5% Exchangeable Subordinated Notes ("OrNda
Notes") were exchangeable into its equity interest in the Company's common
stock, at the option of the holders. OrNda redeemed 100% of the outstanding
OrNda Notes in exchange for its equity interest in the Company's common stock in
August 1995. OrNda currently has no position in the Company's common stock. In
January 1997, OrNda was merged into Tenet Healthcare Corporation ("Tenet").
BASIS OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated.
USE OF ESTIMATES. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out method) or market.
REVENUES. Approximately 72 percent, 70 percent and 68 percent of the
Company's revenues in the years ended June 30, 1997, 1996 and 1995 were derived
from funds under federal and state medical assistance programs, the continuation
of which are dependent upon governmental policies. These revenues are based, in
certain cases, upon cost reimbursement principles and are subject to audit.
Revenues are recorded on an accrual basis as services are performed at their
estimated net realizable value. Differences between final settlement and
estimated net realizable value accrued in prior years are reported as
adjustments to the current year's net revenues. These adjustments decreased net
revenues by $4,892 in fiscal 1997. A significant portion of the Company's
skilled nursing care center revenues is derived from government sponsored health
care programs such as Medicare and Medicaid. These programs are highly regulated
and are subject to budgetary and other constraints. While the Company's cash
flow could be adversely affected by periodic government program funding delays
or shortfalls, management does not believe there are any significant credit
risks associated with these government programs.
PROPERTY AND EQUIPMENT. Depreciation and amortization (straight-line
method) is based on the estimated useful lives of the individual assets as
follows:
Buildings and improvements 15-40 years
Leasehold improvements Shorter of lease term or estimated
useful life
Furniture and equipment 3-20 years
Amortization of capital leases is included in depreciation and
amortization expense. For leasehold improvements, where the Company has acquired
the right of first refusal to purchase or to renew the lease, amortization is
based on the lesser of the estimated useful lives and the period covered by the
right.
INTANGIBLE ASSETS. Goodwill of $2,321, less accumulated amortization of
$182, is included in other assets at June 30, 1997 and is amortized over 35
years using the straight-line method.
27
28
INSURANCE COVERAGE. The Company self insures for certain levels of
workers' compensation and general and professional liability coverage. The
Company utilizes a captive insurance company for the purpose of providing
reinsurance coverage for workers' compensation claims filed by its California
and Arizona employees in excess of a $250,000 self insurance retention per
occurrence and not subject to an annual aggregate limit. The Company has elected
under Texas law to decline to participate in the Texas workers' compensation
insurance program and maintains employer's excess and occupational indemnity
insurance on claims subject to a $150,000 self insurance retention per
occurrence with no annual aggregate limit. The Company maintains general and
professional liability insurance on a claims made basis, subject to a $100,000
self insurance retention per occurrence and $600,000 on an annual aggregate
basis.
Under both self insurance programs, the Company estimates its liability,
including potential legal fees and settlement amounts, based on claims filed and
estimates of claims incurred but not reported, utilizing historical experience
on an undiscounted basis. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the year of settlement.
EARNINGS PER SHARE. Earnings per share is based on the weighted average
number of shares of common stock outstanding and common stock equivalents
arising from stock options which were 6,818,247 for the year ended June 30,
1997, 6,895,661 for the year ended June 30, 1996 and 6,837,991 for the year
ended June 30, 1995. The effect of common stock equivalents arising from stock
options on the computation of earnings per share is not significant.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly
liquid investments with an original maturity of three months or less. The
Company places its temporary cash investments with high credit quality financial
institutions.
CASH MANAGEMENT. The Company utilizes a centralized cash management
system. Payable to bank represents checks outstanding.
ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"), requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company believes,
based on current circumstances, that there are no indicators of impairment to
its long-lived assets, and the Company presently has no expectations for
disposing of any long-lived assets.
RECENT ACCOUNTING PRONOUNCEMENTS. In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), was issued which, if elected, would require
companies to use a new fair value method of valuing stock-based compensation
plans. The Company has elected to continue following present accounting rules
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" which uses an intrinsic value method and often results in no
compensation expense. In accordance with SFAS 123, the Company has provided pro
forma disclosure of what net income and earnings per share would have been had
the new fair value method been used (see Note 10).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which is effective for fiscal years ending after December 15, 1997,
including interim periods. Earlier adoption is not permitted. However, an entity
is permitted to disclose pro forma earnings per share amounts computed under
SFAS 128 in the notes to the financial statements in periods prior to adoption.
The statement requires restatement of all prior-period earnings per share data
presented after the effective date. SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
substantially similar to the standard recently issued by the International
Accounting Standards Committee entitled "International Accounting Standards,
Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998 and
has not determined the impact of adoption.
28
29
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years ending after December 15, 1997. SFAS 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements. It also requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Under existing accounting standards, the Company has reported its
operations as one line of business because substantially all of its revenues
have been derived from its skilled nursing care centers and assisted living
centers and closely related ancillary services. The Company is presently
evaluating the new standard in order to determine its effect, if any, on the way
the Company might report its operations in the future.
RECLASSIFICATIONS. Certain amounts have been reclassified to conform
with 1997 presentations.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair market value disclosures.
CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
NOTES RECEIVABLE (INCLUDING CURRENT PORTION). The carrying amount,
before the allowance for doubtful accounts, is $8,434. The fair value of $8,400
is estimated using discounted cash flow analyses, based on interest rates
currently being offered for notes with similar terms to borrowers of similar
credit quality.
LONG-TERM DEBT (INCLUDING CURRENT PORTION). The carrying value of
$121,452 of long-term debt is based on the original face value (issue amount).
The fair value of $120,300 is estimated based on the present value of the
underlying cash flows discounted at the Company's incremental borrowing rate.
3. MATERIAL TRANSACTIONS WITH RELATED ENTITIES
TENET HEALTHCARE CORPORATION, ORNDA HEALTHCORP AND SUMMIT HEALTH LTD.
The Company had an agreement with Tenet/OrNda, which expired in March 1997,
under which the Company leased a portion of its corporate office space to OrNda
and shared the cost of building services with OrNda. The agreement also required
OrNda to provide tax accounting to the Company. The Company's rental income from
OrNda for the space exceeded the payments to OrNda for services by $31 for the
year ended June 30, 1997. For the years ended June 30, 1996 and 1995, payments
to OrNda for services exceeded rental income for the space by $50 and $23,
respectively. The Company believes that the amount reimbursed for the services
provided and the rental income received are reasonable. The agreement also
indemnified the Company against any liability arising from its divestiture of
facilities, the net assets of which were purchased by SHL during the year ended
June 30, 1992. The provisions of the indemnification survive the termination of
the agreement. Certain provisions of this agreement were terminated or amended
as a result of the redemption on August 28, 1995 by OrNda of 100% of the OrNda
Notes in exchange for the Company's common stock (see Note 1).
In January 1994, the Company entered into a ten-year sub-lease of a
nursing care center with SHL. The Company believes the monthly lease payments of
$37 are reasonable for the market area. Lease payments to Tenet, OrNda and SHL
were $450 for each of the years ended June 30, 1997, 1996 and 1995.
At June 30, 1997, the net amount due from Tenet for transactions between
the Company and Tenet was $918 and is included in Other Current Assets (see
Note 5).
29
30
4. ACQUISITIONS AND CONSTRUCTION ACTIVITY
FISCAL YEAR 1997. In August 1996, the Company opened a 110-bed skilled
nursing care center in Fort Worth, Texas, and in June 1997, opened another 100
beds at the same site. Total cost of construction including the original
purchase price (see this Note, Fiscal Year 1995) was $12,012. On July 1, 1997,
the Company opened a 66-bed assisted living center in Orange, California,
dedicated to Alzheimer's and other patients with dementia. Total cost of
construction, which constituted renovation of an existing building on a campus
with a 172-bed skilled nursing center and a 72-bed assisted living center, was
$3,525. Cost of construction completed in the year ended June 30, 1997 was
financed with funds from $15 million of Senior Secured Notes ("Notes") issued in
July 1996 and with cash generated from operations. The Notes represented the
second and last issuance of $70 million of Notes. The first issuance of $55
million occurred in December 1995.
In July 1996, the Company exercised a purchase option in its lease of a
88-bed skilled nursing care center in Rockport, Texas. The purchase price of
$2,022 was financed with funds from the Notes.
In December 1996, the Company entered into a limited liability company
("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price for
its 50% membership interest was $1,565 in cash. The pharmacy services nursing
centers in Texas operated by either the Company, the other LLC member or
non-affiliated nursing center owners. The Company accounts for its investment in
the LLC under the equity method of accounting. The Company's equity in earnings
of the LLC was insignificant during fiscal year 1997.
In June 1997, the Company purchased 10 acres of vacant land in Longview,
Texas for $648 in cash. The land will be used for new services which will
complement the 174-bed skilled nursing center currently owned and operated by
the Company.
FISCAL YEAR 1996. On January 8, 1996, the Company opened a 108-bed
skilled nursing care center in Fresno, California, and in August 1996, opened
another 51 beds at the same site. Total cost of construction including the
original purchase price was $14,024. In March 1996, the Company added 20
licensed beds to one of its two skilled nursing care centers in Beaumont, Texas,
increasing the center's total beds to 148. Total cost of construction was $785.
In June 1996, the Company also added 54 beds to its skilled nursing care center
in Longview, Texas, increasing the total beds to 182. Total cost of construction
was $1,860. Cost of construction completed in the year ended June 30, 1996 was
financed with funds from Notes issued in December 1995 and draws against the
Company's bank line of credit (see Note 6).
FISCAL YEAR 1995. On September 1, 1994, the Company purchased a 220-bed
skilled nursing care center in White Settlement (Fort Worth), Texas, for $11,925
in cash and a four-acre site for $1,500 in cash for construction of a 210-bed
skilled nursing care center located in Fort Worth, Texas, which began in May
1995.
The Company acquired on October 1, 1994 the leasehold interest in six
skilled nursing care centers and the real and personal property of a seventh
with a combined total of 783 beds located in various communities in Texas for
$30,938, including goodwill of $2,321. The purchase price consists of (i)
$11,470 in cash (of which $8,541 was funded under the Company's bank line of
credit), (ii) a $2,814 promissory note ($3,000 less a $186 discount) at 9%
interest (7% contract rate) fully amortized in seven years and (iii) a $16,654
capital lease obligation assumed by the Company. The leases on the six centers
range from eight to twenty-one years, include purchase options, the first
exercisable in July 1996, and the last exercisable in February 2005, and have
combined monthly payments of $159.
On December 1, 1994, the Company acquired four skilled nursing care
centers in three communities in East Texas with a combined total of 548 beds for
$27,000 in cash and, in a separate transaction, the leasehold interest in a
119-bed skilled nursing care center located in Big Spring, Texas, for $800 in
cash. Both transactions were funded under the Company's bank line of credit.
The Company's acquisitions have been accounted for as purchases and,
accordingly, the results of operations of the acquired centers have been
included in the consolidated statement of income since the date of acquisition.
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31
The Company completed in May 1995 an addition of 74 beds to a 76-bed
nursing care center which is operated under a ten-year sub-lease with OrNda (see
Note 3).
5. OTHER CURRENT ASSETS
Other current assets as of June 30 consist of the following:
1997 1996
---------------------
Due from third party payors $ 2,491 $ 8,055
Deferred tax assets 1,956 1,810
Notes receivable 1,253 672
Prepaid expenses 1,004 952
Income tax receivable 4,128 --
Other receivables 1,524 1,543
------- -------
$12,356 $13,032
======= =======
6. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 1997 1996
---------------------------------------------------------------------------------------------------
Senior secured notes, at fixed interest rates from 7.38% to 8.14%,
interest only payable semi-annually, principal due from December
2000 to December 2010 in various annual payments, secured by
property and equipment with a book value of approximately $91,781
at June 30, 1997. $ 70,000 $ 55,000
Secured revolving bank line of credit expires September 30, 1998,
variable interest rates approximating 7.44% in the year ending June
30, 1997, convertible to a term loan due in equal quarterly principal
payments through September 2001, secured by property and equipment
with a book value of approximately $6,556 at June 30, 1997. 5,000 6,000
8.96% senior secured notes, due 2002, interest only, payable
semi-annually through June 1997, annual principal payments of $4,150
beginning December 1997, secured by property and equipment with a book
value of approximately $32,779 at June 30, 1997. 25,000 25,000
Present value of capital lease obligations at effective interest rates
from 7% to 9%, secured by property and equipment with a book value of
approximately $23,216 at June 30, 1997. 13,133 15,680
Mortgage and other note payable, fixed interest rates from 7.75% to 9%,
due in various monthly installments through January 2026, secured by
property and equipment with a book value of approximately $7,379 at
June 30, 1997. 5,281 5,231
Promissory note, less imputed interest of $81 in the year ended June 30,
1997, at an effective interest rate of 9% due in October 2001, secured
by the leasehold interest in a nursing care center, with a book value
of approximately $3,060 at June 30, 1997. 1,944 2,304
31
32
Mortgage note payable, variable interest rates from 8.25% to 9.0% in
year ended June 30, 1997, due in equal monthly principal installments
through March 2001, secured by property and equipment with a book
value of approximately $2,816 at June 30, 1997. 1,094 1,159
Less current portion -- (2,985)
-------- --------
Non-current portion $121,452 $107,389
======== ========
Future maturities of long-term debt (including capital lease
obligations) are as follows: years ending June 30, 1998 - $-0-; 1999 - $8,699;
2000 - $13,788; 2001 - $17,187; 2002 - $10,904, and thereafter - $70,874.
In December 1995, the Company amended its secured bank line of credit
which reduced the commitment from $60,000 to $40,000, converted accounts
receivable from collateral to a negative pledge, extended the revolver to
September 30, 1997 (the revolver has been subsequently extended to September 30,
1998) and reduced the period of the term loan upon termination of the revolver
from four to three years. The interest rate is variable and at the Company's
option, will equal either the bank prime rate or the Eurodollar rate plus a
margin (reduced by the amendment) that varies depending on the ratio of certain
senior debt to earnings before certain interest, taxes, depreciation and
amortization. At June 30, 1997, credit line loans outstanding were $5,000 which
was used to finance the construction described in Note 4. At June 30, 1997, the
Company classified $6,997 of current debt maturities as long-term debt based on
its intent and ability to refinance these obligations under the bank line of
credit.
The bank line of credit loan agreement and the two senior secured note
agreements contain covenants that include requirements to comply with certain
financial tests and ratios and restrict the ability of the Company to incur
additional indebtedness. Also, the Company is restricted by the agreements from
the payment of dividends (other than dividends payable in common stock) or to
acquire its common stock to the extent that such payments exceed $5,000 plus 50%
of the Company's net income after June 30, 1995. The Company currently is
meeting all financial tests and ratios.
Interest expense was $10,296, $8,701 and $6,033 in fiscal years 1997,
1996 and 1995, respectively, of which $1,678, $1,605 and $759 in 1997, 1996 and
1995 were capitalized as part of the ongoing construction projects. Interest
payments were $10,124, $7,874 and $5,712 in fiscal years 1997, 1996 and 1995,
respectively.
7. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended June 30, 1997 1996 1995
------------------------------------------------------------
Federal:
Current $(3,979) $3,611 $4,359
Deferred 4,003 19 (277)
------- ------ ------
24 3,630 4,082
State:
Current (662) 798 952
Deferred 757 24 (47)
------- ------ ------
95 822 905
------- ------ ------
$ 119 $4,452 $4,987
======= ====== ======
Deferred income taxes result from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements and represent differences between income for tax purposes and income
for financial statement purposes in future years. Temporary differences are
primarily attributable to reporting for income tax purposes the excess of tax
over book depreciation, bad debts and vacation benefits. The current deferred
tax assets are included in other current assets (see Note 5). Significant
components of the Company's deferred tax liabilities and assets as of June 30
are as follows:
32
33
1997 1996
---- ----
Current Non-Current Current Non-Current
------ ------- ------ -------
Income Taxes
Deferred tax liabilities:
Tax over book depreciation $ -- $(7,858) $ -- $(3,136)
Other -- (264) -- (137)
------ ------- ------ -------
Total deferred tax liabilities -- (8,122) -- (3,273)
Deferred tax assets:
Vacation and deferred
compensation benefits and bad debt 1,956 452 1,810 330
State tax -- 159 -- 338
------ ------- ------ -------
Total deferred tax assets 1,956 611 1,810 668
------ ------- ------ -------
Net deferred tax assets (liabilities) $1,956 $(7,511) $1,810 $(2,605)
====== ======= ====== =======
A reconciliation of the provision for income taxes with the amount
computed using the federal statutory rate is as follows:
Years Ended June 30, 1997 1996
------------------------------------------------------------------
Federal rate 34.0% 35.0%
State taxes, net of federal tax benefit 4.5 4.5
Tax credits -- (1.6)
Other, net 24.8 --
---- ----
63.3% 37.9%
==== ====
The increase in the effective tax rate was primarily due to certain
permanent differences between book income and taxable income. Total income tax
payments during fiscal years 1997, 1996 and 1995 were $1,828, $3,904 and $4,876,
respectively.
8. LEASES
The Company leases certain of its centers, equipment and its pharmacy
space under both noncancellable operating leases and capital leases. The leases
generally provide for payment of property taxes, insurance and repairs, and have
rent escalation clauses based upon the consumer price index or annual per bed
adjustments.
All capital leases contain purchase options, and the accompanying
balance sheet and following table have been prepared assuming such options will
be exercised (see Note 11). Some leases contain various renewal options and
extend up to the year 2030. Property and equipment includes the following
amounts for leases which have been capitalized:
Year Ended June 30, 1997
-----------------------------------------------------------------
Land and land improvements $ 1,400
Buildings and leasehold improvements 21,481
Furniture and equipment 2,405
-------
25,286
Less accumulated amortization 2,070
-------
$23,216
=======
33
34
The future minimum rental payments under noncancellable operating leases
and capital leases (including purchase options when expected to be exercised)
that have initial or remaining lease terms in excess of one year as of June 30,
1997, are as follows:
Operating Capital
Year ending June 30, Leases Leases Total
---------------------------------------------------------------------------------
1998 $ 3,054 $ 3,321 $ 6,375
1999 2,995 4,634 7,629
2000 2,755 4,297 7,052
2001 2,513 350 2,863
2002 2,176 350 2,526
Thereafter 7,827 3,525 11,352
------- ------- -------
Total minimum lease payments 21,320 16,477 37,797
Less amount representing interest -- 3,344 3,344
------- ------- -------
Present value of net minimum lease
payments (capital lease amount
included in long-term debt - see Note 6) $21,320 $13,133 $34,453
======= ======= =======
9. CONTINGENCIES
The Company is subject to malpractice claims and other litigation
arising in the ordinary course of business. In the opinion of management, any
liability beyond amounts covered by insurance and the ultimate resolution of all
pending legal proceedings will not have a material adverse effect on the
Company's financial position or results of operations.
10. STOCK OPTION PLAN
Effective July 1, 1991, the Company adopted a stock option plan
authorizing the issuance of 250,000 shares of common stock. The plan was amended
on December 9, 1994 and again on December 8, 1995 to increase the authorized
shares to 1,400,000. Options may be granted to key employees and directors of
the Company. Options granted to employees may be either incentive stock options
or nonstatutory options. Only non-qualified options may be granted to
non-employee directors. Options granted to non-employee directors are granted
automatically pursuant to a formula grant provision contained in the plan. The
option price per share for incentive stock options shall not be less than 85% of
the fair market value at the date of the grant. The terms of each option and the
increments in which each is exercisable are determined by a committee appointed
by the Board of Directors. No option may be exercised after ten years from the
date of the grant and no option may be granted under the plan after June 30,
2001.
34
35
The following summarizes activity in the stock option plan:
Years Ended June 30, 1997 1996 1995
- -------------------- --------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- --------
Options at
beginning of
year 948,500 $18.91 523,000 $16.79 256,000 $12.97
Changes during
year:
Granted 112,000 $13.36 504,000 $21.15 284,500 $19.94
Exercised (3,200) $17.85 (13,500) $12.13 (15,700) $12.20
Canceled (26,800) $20.31 (65,000) $20.58 (1,800) $12.26
--------- ------- -------
Options
outstanding at
end of year 1,030,500 $18.27 948,500 $18.91 523,000 $16.79
========= ======= =======
Options
exercisable
at end of year 352,300 $17.10 161,600 $14.97 58,100 $12.26
Options
available for
grant at end
of year 333,500 418,700 57,700
The weighted average fair value per share of options granted during the
year was $6.72 and $10.14 for fiscal years 1997 and 1996, respectively. The
exercise prices for options outstanding at June 30, 1997 ranged from $10.50 to
$22.50. The weighted average remaining contractual life of these options is
approximately 8 years.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) which uses an
intrinsic value method and, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant,
results in no compensation expense. However, pro forma information regarding net
income and earnings per share is required by Statement of Financial Accounting
Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation" (SFAS
123), and, in the following disclosure, has been determined as if the Company
had accounted for its stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended June 30, 1997 and 1996, respectively: risk-free
interest rates of 6.4% and 5.5%; dividend yields of zero percent for both years;
volatility factors of the expected market price of the Company's common stock of
48.4% and 46.8%; and a weighted average expected life of the options of 5 years.
Because the Company's stock options have characteristics significantly
different from those options used in the Black-Scholes option pricing model, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
stock options.
35
36
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
providing pro forma disclosure are not likely to be representative of the
effects on reported net income for future years. The Company's pro forma
information follows for the years ended June 30, 1997 and 1996:
1997 1996
---- ----
Pro forma net income (loss) $ (543) $6,914
Pro forma earnings (loss) per share $(0.08) $ 1.00
11. SUBSEQUENT EVENT
In September 1997, the Company exercised a purchase option in its lease
of a 111-bed skilled nursing care center in La Grange, Texas. The purchase
option price of $1,871 was financed by a draw on the Company's bank line of
credit (see Note 6).
12. UNAUDITED QUARTERLY INFORMATION
Following is a summary of unaudited quarterly results of operations from
the years ended June 30, 1997 and 1996:
Year ended June 30, 1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
------------------------ -------- -------- -------- -------- -----
Net revenues $48,907 $46,181 $52,012 $50,827 $197,927
Income (loss) before
income taxes 2,587 (1,734) 2,394 (3,059) 188
Net income (loss) 1,565 (1,049) 1,448 (1,895) 69
Earnings (loss) per share $ 0.23 $ (0.15) $ 0.21 $ (0.28) $ 0.01
Year ended June 30, 1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
------------------------ -------- -------- -------- -------- -----
Net revenues $41,270 $42,801 $45,232 $46,759 $176,062
Income before income taxes 3,924 3,400 2,077 2,360 11,761
Net income 2,359 2,043 1,327 1,580 7,309
Earnings per share $ 0.34 $ 0.30 $ 0.19 $ 0.23 $ 1.06
See accompanying notes
36
37
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 11, 1997, 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 20
Consolidated Statements of Income for each of the three years
ended June 30, 1997 21
Consolidated Balance Sheets at June 30, 1997 and 1996 22, 23
Consolidated Statements of Shareholders' Equity
for each of the three years ended June 30, 1997 24
Consolidated Statements of Cash Flows for each of the three years
ended June 30, 1997 25, 26
Notes to Consolidated Financial Statements 27-36
(2) Financial Statement Schedules:
VIII Valuation and Qualifying Accounts 41
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.
3.2 Amended and Restated Bylaws.
4.1 Form of Common Stock Certificate.
10.1 Summit Care Corporation Stock Option Plan as amended by Amendment
to Summit Care Corporation Stock Option Plan.
10.2 Form of Summit Care Corporation Stock Option Agreement.
10.3 Tax Sharing Agreement among Sierra Land Group, Inc., SHL and the Company,
dated May 17, 1991, as amended by Amendment to Tax Sharing Agreement,
dated as of February 5, 1992.
10.4 Agreement Regarding Shared Services and Other Matters between SHL and the
Company, dated as of February 5, 1992.
10.5 Form of Directors and Officers Indemnity Agreement.
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.
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.
37
38
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, 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 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,
between Bernard Bubman, Arnold Friedman, Irene Weiss and Sunset Motel and
Development Co. (collectively, as lessors), and Summit Care - California,
Inc.
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.).
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.
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.
10.16 Sublease of Phoenix Retirement Hotel: Sublease, dated July 1, 1987,
between the Company and Phoenix McDowell Properties, Inc., as assigned by
Assignment of Sublease, dated March 9, 1992, between the Company and
Summit Health Ltd.
10.17 Sublease of Marina Care Center: Nursing Home Sublease Agreement, dated
March 7, 1989, between Summit Care - California, Inc. and 5240 Sepulveda,
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,
dated May 11, 1989, between Summit Care - California, Inc. and Trinity
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,
dated April 1, 1989, between Summit Care - California, Inc. and Brier Oak
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.
Luke Medical Center and Mediscript, Inc., as modified by Addendum of the
same date.
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.
10.22 Summit Care Corporation Note Purchase Agreement dated as of December
15, 1992; 8.96% Senior Secured Notes Due 2002.
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.
10.24 Seller Note for purchase of The Woodlands.
10.25 HUD Note for purchase of The Woodlands.
10.26 Sublease with Summit Health Ltd. for Phoenix Living Center dated
January 1994.
10.27 Real Estate Lien Note - $3,000,000 dated September 30, 1994 and Security
Agreement dated September 30, 1994.
38
39
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 $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.
10.33 $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.
10.34 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.
10.35 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.
10.36 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.
10.37 Note, dated December 20, 1995, in the aggregate principal amount of
$7,000,000, made by Summit Care Corporation in favor of Banque Paribas.
10.38 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.
10.39 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, and Summit Care-Texas No. 3, Inc., a Texas corporation.
10.40 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.
10.41 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.
10.42 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.
10.43 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.
10.44 401(k) Savings Plan.
21 List of the Company's Significant Subsidiaries.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
39
40
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 and September 24, 1997
---------------------------- Chief Executive Officer
William C. Scott
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, September 24, 1997
---------------------------- Chief Financial Officer and
Derwin L. Williams Treasurer
(Principal Financial Officer)
/s/ JOHN L. FARBER Vice President - Controller September 24, 1997
---------------------------- and Secretary
John L. Farber (Principal Accounting Officer)
/s/ DONALD AMARAL Director September 24, 1997
----------------------------
Donald Amaral
/s/ JOHN A. BRENDE Director September 24, 1997
----------------------------
John A. Brende
/s/ WILLIAM J. CASEY Director September 24, 1997
----------------------------
William J. Casey
/s/ GARY MASSIMINO Director September 24, 1997
----------------------------
Gary Massimino
40
41
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, 1997
Allowance for doubtful $2,084 $2,476 $ 8 $(2,540) $2,028
accounts
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
NOTES RECEIVABLE:
YEAR ENDED JUNE 30, 1997
Allowance for notes $ 268 $ 54 $-- $ -- $ 322
receivable
YEAR ENDED JUNE 30, 1996
Allowance for notes $ 184 $ 84 $-- $ -- $ 268
receivable
YEAR ENDED JUNE 30, 1995
Allowance for notes $ -- $ 184 $-- $ -- $ 184
receivable
(1) Recoveries of amounts written off.
(2) Write-offs of uncollectible accounts.
41
42
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1997
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. Incorporated
by Reference
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 Incorporated
of the Menlo Trust U/T/I 5/22/83 and Summit Care - California, Inc., by Reference
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
10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964, between Incorporated
Jack H. Cramer and Walter Lee Brown (together, as lessors) and Albert J. by Reference
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, 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 Incorporated
South Bay Sanitarium and Convalescent Hospital and Garnet Convalescent by Reference
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 by Reference
Lease 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, Incorporated
between 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.
42
43
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1997
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
15, 1992; 8.96% Senior Secured Notes Due 2002. by Reference
10.23 Loan Agreement and Term Note made and entered into by and between Incorporated
Summit Care 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
10.28 Live Oak Nursing Center, George West, Texas Lease Agreement dated Incorporated
July 19, 1991; Assignment of Lease With Option to Purchase dated by Reference
September 30, 1994 and Consent To Assignment Of Leasehold Estate of
Live Oak Nursing Center, George West, Texas dated August 15, 1994.
10.29 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement dated Incorporated
February 28, 1989; Assignment Of Lease With Option To Purchase dated by Reference
September 30, 1994 and Consent To Assignment Of Leasehold Estate Of
Guadalupe Valley Nursing Center, Sequin, Texas dated August 15, 1994.
10.30 Southern Manor Nursing Center, Hallettsville, Texas Nursing Home Lease Incorporated
Agreement dated June 29, 1992; Assignment Of Lease With Option To by Reference
Purchase dated September 30, 1994; Consent To Assignment Of Lease dated
June 29, 1992 and Agreement Re Option dated September 30, 1994.
10.31 Oakland Manor Nursing Center, Giddings, Texas Nursing Home Lease Incorporated
Agreement dated June 29, 1992; Assignment Of Lease With Option To by Reference
Purchase dated September 30, 1994; Consent To Assignment Of Lease dated
June 29, 1992 and Agreement Re Option dated September 30, 1994.
43
44
SUMMIT CARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1997
EXHIBIT INDEX
BEGIN ON
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
- ------ ----------
10.32 $70,000,000 Note Purchase Agreement dated as of December 15, 1995 among Incorporated
Summit Care Corporation and the several purchasers listed by Reference
on the acceptance form at the end thereof.
10.33 $25,000,000 Amended and Restated Note Purchase Agreement dated as of Incorporated
December 15, 1995 among Summit Care Corporation and the several by Reference
purchasers listed on the acceptance form at the end thereof.
10.34 Third Amended and Restated Credit Agreement dated as of December 15, 1995 Incorporated
among Summit Care Corporation, the Lenders named therein, and Bank of by Reference
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.
10.35 7.80% Note, dated December 20, 1995, in the aggregate principal amount Incorporated
of $18,071,429, made by Summit Care Corporation in favor of John Hancock by Reference
Mutual Life Insurance Company.
10.36 Amended and Restated 8.96% Senior Secured Note due 2002, dated December Incorporated
31, 1992, in the aggregate principal amount of $5,000,000, made by Summit by Reference
Care Corporation in favor of Northwestern National Life Insurance Company.
10.37 Note, dated December 20, 1995, in the aggregate principal amount of Incorporated
$7,000,000, made by Summit Care Corporation in favor of Banque Paribas. by Reference
10.38 Guaranty in favor of certain note purchasers listed therein, dated as of Incorporated
December 15, 1995, executed by Summit Care Pharmacy, Inc., a California by Reference
corporation and Summit Care-Texas No. 2, Inc., a Texas corporation and
Summit Care-Texas No. 3, Inc., a Texas corporation.
10.39 Amended and Restated Guaranty in favor of certain note purchasers listed Incorporated
therein, dated as of December 15, 1995, executed by Summit Care Pharmacy, by Reference
Inc., a California corporation, Summit Care-Texas No. 2 Inc., a Texas
corporation, and Summit Care-Texas No. 3, Inc., a Texas corporation.
10.40 Second Amended and Restated Guaranty dated as of December 15, 1995 Incorporated
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 in favor of the Bank of Montreal.
10.41 Collateral Account Agreement, dated as of December 15, 1995, by and Incorporated
between Summit Care Corporation, Summit Care-California, Inc., a by Reference
California corporation, Summit Care - Texas No. 2, Inc., a Texas
corporation and Harris Trust and Savings Bank.
10.42 Intercreditor Agreement dated as of December 15, 1995 by and among the Incorporated
Bank of Montreal, Harris Trust and Savings Bank, and acknowledged and by Reference
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.
10.43 Assignment of Deed of Trust and Amended and Restated Deed of Trust, Incorporated
Assignment of Rents, Security Agreement, Financing Statement and Fixture by Reference
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.
10.44 401(k) Savings Plan. 45
21 List of the Company's Significant Subsidiaries. 133
23 Consent of Ernst & Young LLP. 134
27 Financial Data Schedule. 135
44