-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OmE02zfRCKw6a/b23YLaX1BkU2yEjLPaN18D3W1+kL85BQ7cEctjBaWkMl7V+XJp BonvqhuqNjxif1uaEJjn6w== 0000927016-98-000917.txt : 19980312 0000927016-98-000917.hdr.sgml : 19980312 ACCESSION NUMBER: 0000927016-98-000917 CONFORMED SUBMISSION TYPE: SC 13E3/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19980311 SROS: NONE GROUP MEMBERS: FOUNTAIN VIEW INC GROUP MEMBERS: FV-SCC ACQUISITION CORP. GROUP MEMBERS: HERITAGE FUND II, L.P. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE CORP CENTRAL INDEX KEY: 0000875192 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 953656297 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 13E3/A SEC ACT: SEC FILE NUMBER: 005-43590 FILM NUMBER: 98563645 BUSINESS ADDRESS: STREET 1: 2600 W MAGNOLIA BLVD CITY: BURBANK STATE: CA ZIP: 91505-3031 BUSINESS PHONE: 8189724035 MAIL ADDRESS: STREET 1: 2600 W MAGNOLIA BLVD CITY: BURBANK STATE: CA ZIP: 91505-3031 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN VIEW INC CENTRAL INDEX KEY: 0001055468 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13E3/A BUSINESS ADDRESS: STREET 1: 11900 W OLYMPIC BLVD STREET 2: STE 680 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3105710351 MAIL ADDRESS: STREET 1: 11900 W OLYMPIC BLVD STREET 2: STE 680 CITY: LOS ANGELES STATE: CA ZIP: 90064 SC 13E3/A 1 AMENDMENT TO SC 13E-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1998 ============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT (PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934) AMENDMENT NO. 1 SUMMIT CARE CORPORATION (NAME OF ISSUER) FOUNTAIN VIEW, INC. FV-SCC ACQUISITION CORP. HERITAGE FUND II, L.P. (NAME OF PERSONS FILING STATEMENT) ------------------------ COMMON STOCK, NO PAR VALUE PER SHARE (TITLE OF CLASS OF SECURITIES) ------------------------ 865910103 (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------------ ROBERT M. SNUKAL FOUNTAIN VIEW, INC. 11900 W. OLYMPIC BOULEVARD SUITE 680 LOS ANGELES, CA 90064 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON PERSONS FILING STATEMENT) WITH A COPY TO: STEPHEN M. L. COHEN, ESQ. CHOATE, HALL & STEWART EXCHANGE PLACE 53 STATE STREET BOSTON, MASSACHUSETTS 02109 (617) 248-5000 ------------------------ MARCH 11, 1998 (DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS) THIS STATEMENT IS FILED IN CONNECTION WITH A TENDER OFFER - ------------------------------------------------------------------------------ CALCULATION OF FILING FEE - ------------------------------------------------------------------------------ TRANSACTION VALUATION* AMOUNT OF FILING FEE** $143,062,500 $28,613.00 - ------------------------------------------------------------------------------ * For purposes of calculating the filing fee only. This calculation assumes the purchase of an aggregate of 6,812,500 shares of common stock, no par value per share, of Summit Care Corporation (the "Shares") at $21.00 net per share in cash. ** The amount of the filing fee, calculated in accordance with Rule 0-11(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), equals 1/50th of 1% of the aggregate value of cash offered by FV-SCC Acquisition Corp. for such number of shares. [X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: $28,613.00 Filing Parties: Fountain View, Inc. and FV-SCC Acquisition Corp. Form: Schedule 14D-1, File No. 5-43590 Date Filed: February 13, 1998 ============================================================================= 2 INTRODUCTION This Amendment No. 1 (the "Amendment") to the Transaction Statement on Schedule 13E-3, filed jointly by FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser"), Fountain View, Inc., a Delaware corporation ("Parent") and Heritage Fund II, L.P., a Delaware limited partnership ("Heritage") (with any amendments, supplements, exhibits or schedules thereto, the "Schedule 13E-3), relates to the offer by Purchaser to purchase all outstanding Shares of Summit Care Corporation, a Delaware corporation (the "Company"), at a price of $21.00 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in Purchaser's Offer to Purchase dated February 13, 1998, as supplemented by a Supplement to Offer to Purchase dated March __, 1998 (the "Offer to Purchase") and in the related Letter of Transmittal (which together constitute the "Offer"), copies of which are incorporated herein by reference as Exhibits (d)(1), (d)(9) and (d)(2), respectively. This Amendment amends and restates the Transaction Statement on Schedule 13E-3 originally filed on February 13, 1998 by Purchaser and Parent. This Amendment is being filed jointly by Purchaser, Parent and Heritage. By filing this Amendment, the signatories do not concede that Rule 13e-3 under the Exchange Act is applicable to the Offer, the Merger (as defined in the Offer) or other transactions contemplated by the Agreement and Plan of Merger, dated as of February 6, 1998, by and among, inter alia, the Company, Parent and Purchaser. The cross-reference sheet below is being supplied pursuant to General Instruction F to Schedule 13E-3 and shows the location in the Tender Offer Statement on Schedule 14D-1 filed by Parent and Purchaser with the Securities and Exchange Commission (the "Commission") pursuant to Rule 14d-3 of the Exchange Act (with any amendments, supplements, exhibits or schedules thereto, the "Schedule 14D-1"), of the information required to be included in response to the items of the Schedule 13E-3. A copy of the Offer to Purchase, including all exhibits and annexes thereto, is hereby expressly incorporated herein by reference, and the responses to each item in the Schedule 13E-3 are qualified in their entirety by the information contained in the Schedule 14D-1. CROSS-REFERENCE SHEET ITEM IN SCHEDULE 13E-3 WHERE LOCATED IN SCHEDULE 14D-1 - -------------------------------------------------------------------------- Item 1(a).................................................. Item 1(a) Item 1(b).................................................. Item 1(b) Item 1(c).................................................. Item 1(c) Item 1(d)-(g).............................................. * Item 2(a)-(d),(g).......................................... Item 2(a)-(d), (g) Item 2(e)-(f).............................................. Item 2(e) and (f) Item 3..................................................... Item 3 Item 4..................................................... * Item 5..................................................... Item 5 Item 6..................................................... Item 4(a)-(b) Item 7(a).................................................. Item 5 Item 7(b).................................................. Item 5 Item 7(c).................................................. * Item 7(d).................................................. Item 5 Item 8..................................................... * Item 9..................................................... * Item 10.................................................... Item 6 Item 11.................................................... Item 7 Item 12.................................................... * Item 13.................................................... * Item 14(a)................................................. * Item 14(b)................................................. * Item 15.................................................... Item 8 Item 16.................................................... Item 10 Item 17.................................................... Item 11 2 ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION. (a) The name of the subject company is Summit Care Corporation, a Delaware corporation, which has its principal executive offices at 2600 Magnolia Boulevard, Burbank, California 91505. (b) The class of equity securities being sought is all the outstanding shares of common stock, no par value per share, of the Company. The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Terms of the Offer; Expiration Date;" and "-- Price Range of Shares" in the Offer to Purchase is incorporated herein by reference. (c) The information concerning the principal market in which the Shares are traded and certain high and low sales prices for the Shares in such principal market set forth in "THE TENDER OFFER -- Price Range of Shares" in the Offer to Purchase is incorporated herein by reference. (d) The information concerning dividends set forth in "THE TENDER OFFER -- Dividends and Distributions" in the Offer to Purchase is incorporated herein by reference. (e) Not Applicable. (f) Not Applicable. ITEM 2. IDENTITY AND BACKGROUND. (a)-(d) and (g) The information set forth under "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent and Schedule I in the Offer to Purchase is incorporated herein by reference. (e) and (f) During the last five years, none of Heritage, Purchaser or Parent, or, to the best knowledge of Heritage, Purchaser or Parent, none of the individuals listed in Schedule I of the Offer to Purchase, has been (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, United States federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS. (a) The information set forth under "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related Agreements" and "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" in the Offer to Purchase is incorporated herein by reference. 3 (b) The information set forth under "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related Agreements", "SPECIAL FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for the Offer and the Merger", "SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger", "THE TENDER OFFER -- Certain Information Concerning the Company" and "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" in the Offer to Purchase is incorporated herein by reference. ITEM 4. TERMS OF THE TRANSACTION. (a) The information set forth under "INTRODUCTION"; "SPECIAL FACTORS -- The Merger Agreement and Related Agreements" in the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "SPECIAL FACTORS -- The Merger Agreement and Related Agreements" and "SPECIAL FACTORS -- Interests of Certain Persons in the Offer and the Merger" in the Offer to Purchase is incorporated herein by reference. ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. (a)-(g) The information set forth under "SPECIAL FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for the Offer and the Merger", "SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger" and "THE TENDER OFFER -- Effect of the Offer in the Market for the Shares; Exchange Listing and Exchange Act Registration" and "-- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) The information set forth under "THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "THE TENDER OFFER -- Source and Amount of Funds" and "-- Fees and Expenses" in the Offer to Purchase is incorporated herein by reference. (c) The information set forth under "THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. (d) Not applicable. ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS. (a)-(d) The information set forth under "INTRODUCTION", "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for the Offer and the Merger", "SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related Agreements", "SPECIAL FACTORS -- Certain U.S. Federal Income Tax Consequences" in the Offer to Purchase is incorporated herein by reference. ITEM 8. FAIRNESS OF THE TRANSACTION. (a)-(f) The information set forth under "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Recommendation of the Special Committee and the Board; Fairness of the Offer and the Merger", "SPECIAL FACTORS - -- Opinion of Financial Advisor to the Company" and "SPECIAL FACTORS -- Purpose and Effects of the 4 Offer and the Merger; Reasons for the Offer and the Merger" in the Offer to Purchase is incorporated herein by reference. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS. (a)-(c) The information set forth under "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Recommendation of the Special Committee and the Company Board; Fairness of the Offer and the Merger" and "SPECIAL FACTORS -- Opinion of Financial Advisor to the Company" in the Offer to Purchase is incorporated herein by reference. ITEM 10. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) and (b) The information set forth under "INTRODUCTION", "SPECIAL FACTORS - -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL FACTORS - -- The Merger Agreement and Related Agreements", "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" and in Schedule II in the Offer to Purchase is incorporated herein by reference. ITEM 11. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES. The information set forth under "INTRODUCTION", "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for the Offer and the Merger", "SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger", "SPECIAL FACTORS -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related Agreements", "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" and "THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE TRANSACTION. (a) and (b) Not applicable. ITEM 13. OTHER PROVISIONS OF THE TRANSACTION. (a) The information set forth under "SPECIAL FACTORS -- Rights of Shareholders in the Merger" is incorporated herein by reference. (b) and (c) Not applicable. ITEM 14. FINANCIAL INFORMATION. (a) and (b) The information set forth under "THE TENDER OFFER -- Certain Information Concerning the Company", in the Offer to Purchase is incorporated herein by reference. Filed herewith as Exhibit (g) are the Consolidated Financial Statements of the Company for the Fiscal year ended June 30, 1997 and the Quarter ended December 31, 1997. 5 ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED. (a) The information set forth under "SPECIAL FACTORS -- The Merger Agreement and Related Agreements" and "THE TENDER OFFER -- Plans for the Company After the Offer and Merger" in the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Fees and Expenses" in the Offer to Purchase is incorporated herein by reference. ITEM 16. ADDITIONAL INFORMATION. The information set forth in the Offer to Purchase, the Supplement to Offer to Purchase and the Agreement and Plan of Merger, dated as of February 6, 1998, among, inter alia, Parent, Purchaser and the Company, copies of which are ----- ---- attached as Exhibits (a)(1), (a)(9) and (c)(1), respectively, to Schedule 14D-1, is incorporated herein by reference. ITEM 17. MATERIAL TO BE FILED AS EXHIBITS. (a) Commitment Letter dated as of February 6, 1998 issued by the Bank of Montreal, incorporated by reference to Exhibit (b) of the Schedule 14D-1.* (b) Opinion of Donaldson, Lufkin & Jenrette, dated February 6, 1998, incorporated by reference to Annex A to the Offer to Purchase.* (c)(1) Agreement and Plan of Merger, dated as of February 6, 1998, by and among the Company, Parent, Purchaser and Heritage Fund II, LP and the Company, incorporated by reference to Exhibit (c)(1) to Schedule 14D-1.* (c)(2) Agreement entered into as of February 6, 1998 by and among Parent, Robert Snukal, Sheila Snukal, William Scott and Heritage Fund II, L.P. incorporated by reference to Exhibit (c)(2) of the Schedule 14D-1.* (c)(3) Summit Care Corporation Special Severance Pay Plan, incorporated by reference to Exhibit (c)(3) of the Schedule 14D-1.* (d)(1) Offer to Purchase, dated February 13, 1998, incorporated by reference to Exhibit (a)(1) to the Schedule 14D-1.* (d)(2) Form of Letter of Transmittal, incorporated by reference to Exhibit (a)(2) to the Schedule 14D-1.* (d)(3) Form of Notice of Guaranteed Delivery, incorporated by reference to Exhibit (a)(3) to the Schedule 14D-1.* (d)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees, incorporated by reference to Exhibit (a)(4) to the Schedule 14D-1.* (d)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Nominees to Clients, incorporated by reference to Exhibit (a)(5) to the Schedule 14D-1.* (d)(6) Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9, incorporated by reference to Exhibit (a)(6) to the Schedule 14D-1.* (d)(7) Summary Advertisement as published in The Wall Street Journal on February 13, 1998, incorporated by reference to Exhibit (a)(7) to the Schedule 14D-1.* (d)(8) Text of Press Release issued by the Company on February 9, 1998, incorporated by reference to Exhibit (a)(8) to the Schedule 14D-1.* (d)(9) Proposed Supplement to Offer to Purchase dated March __, 1998, incorporated by reference to Exhibit (a)(9) to the Schedule 14D-1. (e) Chapter 13 of the California General Corporation Law, incorporated by reference to Annex B to the Offer to Purchase.* (f) Not applicable. (g) Consolidated Financial Statements of the Company for the periods ended June 30, 1997 and December 31, 1997. - ----------------- * Previously filed. 6 SIGNATURES After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Amendment is true, complete and correct. March 11, 1998 FV-SCC Acquisition Corp. By: /s/ Robert M. Snukal -------------------------------- Name: Robert M. Snukal Title: President and Treasurer FOUNTAIN VIEW, INC. By: /s/ Robert M. Snukal -------------------------------- Name: Robert M. Snukal Title: Chief Executive Officer and President HERITAGE FUND II, LP By: HF Partners II, L.L.C. (its general partner) By: /s/ Michel Reichert ----------------------------- Name: Michel Reichert --------------------------- Title: MANAGER -------------------------- 7 EXHIBIT INDEX (a) Commitment Letter dated as of February 6, 1998 issued by the Bank of Montreal, incorporated by reference to Exhibit (b) of the Schedule 14D-1.* (b) Opinion of Donaldson, Lufkin & Jenrette, dated February 6, 1998, incorporated by reference to Annex A to the Offer to Purchase.* (c)(1) Agreement and Plan of Merger, dated as of February 6, 1998, by and among the Company, Parent, Purchaser and Heritage Fund II, LP and the Company, incorporated by reference to Exhibit (c)(1) to Schedule 14D-1.* (c)(2) Agreement entered into as of February 6, 1998 by and among Parent, Robert Snukal, Sheila Snukal, William Scott and Heritage Fund II, L.P. incorporated by reference to Exhibit (c)(2) of the Schedule 14D-1.* (c)(3) Summit Care Corporation Special Severance Pay Plan, incorporated by reference to Exhibit (c)(3) of the Schedule 14D-1.* (d)(1) Offer to Purchase, dated February 13, 1998, incorporated by reference to Exhibit (a)(1) to the Schedule 14D-1.* (d)(2) Form of Letter of Transmittal, incorporated by reference to Exhibit (a)(2) to the Schedule 14D-1.* (d)(3) Form of Notice of Guaranteed Delivery, incorporated by reference to Exhibit (a)(3) to the Schedule 14D-1.* (d)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees, incorporated by reference to Exhibit (a)(4) to the Schedule 14D-1.* (d)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Nominees to Clients, incorporated by reference to Exhibit (a)(5) to the Schedule 14D-1.* (d)(6) Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9, incorporated by reference to Exhibit (a)(6) to the Schedule 14D-1.* (d)(7) Summary Advertisement as published in The Wall Street Journal on February 13, 1998, incorporated by reference to Exhibit (a)(7) to the Schedule 14D-1.* (d)(8) Text of Press Release issued by the Company on February 9, 1998, incorporated by reference to Exhibit (a)(8) to the Schedule 14D-1.* (d)(9) Proposed Supplement to Offer to Purchase dated March __, 1998, incorporated by reference to Exhibit (a)(9) to the Schedule 14D-1. (e) Chapter 13 of the California General Corporation Law, incorporated by reference to Annex B to the Offer to Purchase.* (f) Not applicable. (g) Consolidated Financial Statements of the Company for the periods ended June 30, 1997 and December 31, 1997. - ------------ * Previously filed. 8 EX-99.G 2 CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY Exhibit 99(g) SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 ------- ------- -------- ------- Net revenues $53,972 $46,181 $108,507 $95,088 Expenses: Salaries and benefits 24,132 22,309 47,742 43,386 Supplies 5,091 5,337 10,261 10,381 Purchased services 12,844 12,237 26,211 24,144 Provision for doubtful accounts 957 721 1,780 967 Other expenses 3,738 2,824 7,484 6,258 Rent 762 713 1,525 1,410 Depreciation and amortization 2,151 1,840 4,235 3,632 Interest (net of interest income, $169 and $371 in 1997 and $179 and $393 in 1996, respectively) 2,311 1,934 4,588 4,057 ------- ------- -------- ------- 51,986 47,915 103,826 94,235 ------- ------- -------- ------- Income (loss) before provision for income taxes 1,986 (1,734) 4,681 853 Provision (benefit) for income taxes 784 (685) 1,849 337 ------- ------- -------- ------- Net income (loss) 1,202 $(1,049) 2,832 $ 516 ======= ======= ======== ======= Earnings (loss) per share: Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08 ======= ======= ======== ======= Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08 ======= ======= ======== =======
See accompanying notes. 1 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
DECEMBER 31, 1997 JUNE 30, 1997 ------------------ -------------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 1,702 $ 3,994 Accounts receivable, less allowance for doubtful accounts: December 1997 - $2,474; June 1997 - $2,028 36,343 33,749 Supplies inventory, at cost 3,204 2,690 Other current assets 15,569 12,356 -------- -------- Total current assets 56,818 52,789 Property and equipment, at cost: Land and land improvements 20,036 19,513 Buildings and leasehold improvements 175,078 161,080 Furniture and equipment 24,361 23,978 Construction in progress 5,298 5,947 -------- -------- 224,773 210,518 Less accumulated depreciation and amortization 30,220 28,605 -------- -------- 194,553 181,913 Notes receivable, less allowance for doubtful accounts: December 1997 - $363; June 1997 - $322 6,842 6,859 Other assets 9,207 8,955 -------- -------- $267,420 $250,516 ======== ========
NOTE: The balance sheet at June 30, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 2 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
DECEMBER 31, 1997 JUNE 30, 1997 ----------------- ------------- (Unaudited) (Note) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank $ 2,985 $ 4,678 Accounts payable 36,776 29,586 Employee compensation and benefits 4,622 5,877 Income taxes payable 1,051 -- -------- -------- Total current liabilities 45,434 40,141 Long-term debt 129,754 121,452 Deferred income taxes 7,511 7,511 -------- -------- Total liabilities 182,699 169,104 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 2,000 authorized shares, none issued -- -- Common stock, no par value, 100,000 authorized shares; 6,813 and 6,776 issued and outstanding, respectively 52,020 51,543 Retained earnings 32,701 29,869 -------- -------- Total shareholders' equity 84,721 81,412 -------- -------- $267,420 $250,516 ======== ========
NOTE: The balance sheet at June 30, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
SIX MONTHS ENDED DECEMBER 31, 1997 1996 -------- -------- Operating activities: Net income $ 2,832 $ 516 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,235 3,632 (Increase) in accounts receivable, net (2,594) (5,027) (Increase) in supplies inventory (514) (66) (Increase) in other current assets (3,152) (1,602) Increase in accounts payable 7,190 6,805 (Decrease) increase in employee compensation and benefits (1,255) 294 Increase (decrease) in income taxes payable 1,051 (989) -------- -------- Total adjustments 4,961 3,047 -------- -------- Net cash provided by operating activities 7,793 3,563 -------- -------- Investing activities: Issuance of notes receivable (2,281) (550) Principal payments of notes receivable 2,294 253 Additions to property and equipment (6,706) (12,049) Property and equipment related to purchase of nursing center (4,209) -- (Increase) in other assets (470) (1,579) -------- -------- Net cash (used in) investing activities (11,372) (13,925) -------- -------- Financing activities: (Decrease) in payable to bank (1,693) (1,229) Principal payments on long-term debt (10,497) (8,435) Proceeds from long-term debt 13,000 19,000 Proceeds from exercise of stock options 477 -- -------- -------- Net cash provided by financing activities 1,287 9,336 -------- -------- (Decrease) in cash and cash equivalents (2,292) (1,026) Cash and cash equivalents at beginning of year 3,994 2,658 -------- -------- Cash and cash equivalents at end of the period $ 1,702 $ 1,632 ======== ========
4 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) (In thousands)
SIX MONTHS ENDED DECEMBER 31, 1997 1996 ------- ------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,015 $5,161 Income taxes 808 1,654 Non cash investing and financing activities: Acquisition of nursing care center under capital lease 5,799 -- Capital lease obligation (5,799) --
See accompanying notes. 5 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands) 1. The unaudited financial information included herein, in the opinion of management, reflects all adjustments (all of which are of a normal recurring nature except for a special charge recorded in December 1996, see Note 5), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's annual report filed on Form 10-K for the year ended June 30, 1997. The interim financial information herein is not necessarily representative of that to be expected for a full year. 2. Certain amounts have been reclassified to conform with fiscal 1998 presentations. 3. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 -------- --------- ------- ------- Numerator: Net income (loss) $1,202 $(1,049) $2,832 $ 516 Denominator: Denominator for basic earnings per share - weighted average shares 6,802 6,775 6,789 6,774 Effect of stock options 58 66 46 80 ------ ------- ------ ------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 6,860 6,841 6,835 6,854 Earnings per share: Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08 ====== ======= ====== ====== Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08 ====== ======= ====== ======
6 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) (In thousands) 4. Other current assets consist of the following:
December 31, 1997 June 30, 1997 ----------------- ------------- Due from third-party payors $ 4,743 $ 2,491 Deferred tax assets 1,956 1,956 Notes receivable 1,257 1,253 Prepaid expenses 2,526 1,004 Income tax receivable 3,000 4,128 Other receivables 2,087 1,524 ------- ------- $15,569 $12,356 ======= =======
5. In December 1996, the Company recorded a special charge of $4,000 against revenues ($2,420 against net income) as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995 completed in the quarter ended December 31, 1996, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. 6. In July 1997, the Company opened its fifth assisted living center with 66 beds in Orange, California, at a total cost of construction of $3,924. In September 1997, the Company exercised a purchase option in the amount of $1,871 in its lease of a 111-bed skilled nursing care center in La Grange, Texas. In November 1997, the Company opened 47 additional beds at one of its two skilled nursing care centers in Lubbock, Texas, at an approximate cost of construction of $1,900. In December 1997, the Company acquired the assets of a 194 bed skilled nursing care center in McAllen, Texas at an approximate cost of $10,058. The Company's bank line of credit was used to finance the two construction projects, the exercise of the purchase option and $4,259 of the acquisition cost of the McAllen center. The balance of the McAllen acquisition cost of $5,799 was financed with a capitalized lease obligation. 7. In December 1997, the Company amended its secured bank line of credit by reducing the commitment from $40,000 to $33,000. One of the four lenders was deleted from the credit agreement, and the revolving credit termination date was extended one year to September 30, 1999. No other terms and conditions were added, deleted or amended. 8. Recent Accounting Pronouncement: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. This Statement is not required to be applied to interim financial statements in the initial year of its application. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial 7 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) (In thousands) statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. 9. Subsequent Event: On February 6, 1998, the Company and Fountain View, Inc., a privately-held skilled nursing care company based in Los Angeles, California, entered into a definitive merger agreement for Fountain View to acquire the Company. According to the terms of the merger agreement, the Company's shareholders will receive $21.00 per share in cash for a total purchase price of approximately $274 million, including the assumption of approximately $130 million of the Company's debt. On February 13, 1998, Fountain View commenced a cash tender offer for all outstanding shares of the Company's stock at $21.00 per share. Following consummation of the tender offer, subject to the terms and conditions contained in the merger agreement, the Company will be merged with a wholly owned subsidiary of Fountain View, and each remaining outstanding share of the Company will be converted in the merger into $21.00 in cash. Fountain View has received a commitment from Heritage Fund II, L.P. for $82 million of the equity financing necessary to complete the transaction and a bank financing commitment from Bank of Montreal covering an additional $250 million. Completion of the tender offer and the merger are subject to customary conditions to closing, including the receipt of any applicable regulatory approvals and the expiration of any applicable regulatory waiting periods. 8 REPORT OF INDEPENDENT AUDITORS The Board of Directors Summit Care Corporation We have audited the accompanying consolidated balance sheets of Summit Care Corporation and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Summit Care Corporation at June 30, 1997 and 1996, and the consolidated results of its operations and cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Los Angeles, California August 22, 1997 9 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED JUNE 30, ---------------------------- 1997 1996 1995 ---------------------------- Net revenues $197,927 $176,062 $137,026 Expenses: Salaries and benefits 89,577 78,233 63,171 Supplies 20,160 18,071 15,374 Purchased services 51,520 37,963 22,234 Provision for doubtful accounts 2,530 2,241 1,330 Other expenses 15,722 12,421 10,268 Rental 2,864 2,656 1,691 Rental to related parties -- -- 450 Depreciation and amortization 7,393 6,142 5,249 Interest (net of interest income: $645, $522 and $513, respectively) 7,973 6,574 4,761 -------- -------- -------- 197,739 164,301 124,528 -------- -------- -------- Income before provision for income taxes 188 11,761 12,498 Provision for income taxes 119 4,452 4,987 -------- -------- -------- Net income $ 69 $ 7,309 $ 7,511 ======== ======== ======== Earnings per share $ .01 $ 1.06 $ 1.10 ======== ======== ======== See accompanying notes 10 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) JUNE 30, ----------------- 1997 1996 ----------------- ASSETS Current assets: Cash and cash equivalents $ 3,994 $ 2,658 Accounts receivable, less allowance for doubtful accounts: 1997 - $2,028; 1996 - $2,084 33,749 27,930 Supplies inventory, at cost 2,690 2,058 Other current assets 12,356 13,032 -------- -------- Total current assets 52,789 45,678 Property and equipment, at cost: Land and land improvements 19,513 16,018 Buildings and leasehold improvements 161,080 136,907 Furniture and equipment 23,978 18,668 Construction in progress 5,947 15,043 -------- -------- 210,518 186,636 Less accumulated depreciation and amortization 28,605 21,713 -------- -------- 181,913 164,923 Notes receivable, less allowance for doubtful accounts: 1997 - $322; 1996 - $268 6,859 4,845 Other assets 8,955 7,606 -------- -------- $250,516 $223,052 ======== ======== See accompanying notes 11 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS) JUNE 30, ------------------- 1997 1996 ------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank $ 4,678 $ 4,165 Accounts payable 29,586 19,895 Employee compensation and benefits 5,877 3,738 Income taxes payable -- 989 Long-term debt due within one year -- 2,985 -------- -------- Total current liabilities 40,141 31,772 Long-term debt 121,452 107,389 Deferred income taxes 7,511 2,605 -------- -------- Total liabilities 169,104 141,766 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 2,000,000 authorized shares, none issued Common stock, no par value, 100,000,000 authorized shares; 6,776,000 and 6,772,800 issued and outstanding, respectively 51,543 51,486 Retained earnings 29,869 29,800 -------- -------- Total shareholders' equity 81,412 81,286 -------- -------- $250,516 $223,052 ======== ======== See accompanying notes 12 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) THREE YEARS ENDED JUNE 30, 1997 Common Stock ------------------ Retained Shares Amount Earnings Total --------- -------- -------- -------- Balances at June 30, 1994 6,743,600 $51,381 $14,980 $66,361 Net income -- -- 7,511 7,511 Exercise of stock options 15,700 192 -- 192 Expenses on sale of common stock -- (251) -- (251) --------- ------- ------- ------- Balances at June 30, 1995 6,759,300 51,322 22,491 73,813 Net income -- -- 7,309 7,309 Exercise of stock options 13,500 164 -- 164 --------- ------- ------- ------- Balances at June 30, 1996 6,772,800 51,486 29,800 81,286 Net income -- -- 69 69 Exercise of stock options 3,200 57 -- 57 --------- ------- ------- ------- Balances at June 30, 1997 6,776,000 $51,543 $29,869 $81,412 ========= ======= ======= ======= See accompanying notes 13 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30, -------------------------------- 1997 1996 1995 -------------------------------- Operating activities: Net income $ 69 $ 7,309 $ 7,511 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,393 6,142 5,249 (Increase) in accounts receivable (5,819) (7,594) (6,907) (Increase) decrease in supplies inventory (632) 118 (623) Decrease (increase) in other current assets 1,257 (8,429) (1,740) Increase in accounts payable 9,691 8,923 2,512 Increase (decrease) in employee compensation and benefits 2,139 (270) 478 (Decrease) increase in income taxes payable (989) (72) 577 Increase (decrease) in deferred income taxes 4,906 739 (43) -------- -------- -------- Total adjustments 17,946 (443) (497) -------- -------- -------- Net cash provided by operating activities 18,015 6,866 7,014 -------- -------- -------- Investing activities: Issuance of notes receivable (3,142) (916) (2,089) Principal payments of notes receivable 547 498 962 Additions to property and equipment (24,075) (26,558) (9,004) Acquisitions of nursing centers -- -- (51,178) Additions to other assets (1,657) (2,276) (3,279) -------- -------- -------- Net cash used in investing activities (28,327) (29,252) (64,588) Financing activities: Increase in payable to bank 513 1,193 826 Principal payments on long-term debt (17,922) (49,914) (38,225) Proceeds from long-term debt 29,000 70,500 76,520 Net expenses from sale of common stock -- -- (251) Net proceeds on exercise of stock options 57 164 192 -------- -------- -------- Net cash provided by financing activities 11,648 21,943 39,062 -------- -------- -------- Increase (decrease) in cash and cash equivalents 1,336 (443) (18,512) Cash and cash equivalents at beginning of year 2,658 3,101 21,613 -------- -------- -------- Cash and cash equivalents at end of year $ 3,994 $ 2,658 $ 3,101 ======== ======== ========
See accompanying notes 14 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS) YEARS ENDED JUNE 30, ---------------------------- 1997 1996 1995 ---------------------------- Supplemental disclosures of non-cash investing and financing activities: Acquisition notes payable $ -- $ -- $ (2,814) Acquisition of nursing care centers -- -- 2,814 Acquisition of nursing care centers under capital leases -- -- 16,654 Capital lease obligations -- -- (16,654) See accompanying notes 15 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS. Summit Care Corporation ("Company" or "SCC") provides a variety of health care services primarily to the elderly through the operation of subacute, skilled nursing, Alzheimer's and assisted living units in skilled nursing care centers and assisted living centers in California, Texas and Arizona. These services include nursing care, lodging, food and certain specialty medical services, including rehabilitation care, infusion therapy and other ancillary services. The Company also provides specialty pharmaceutical and infusion therapy services to other long-term care providers. In April 1994, OrNda HealthCorp ("OrNda") acquired the Company's then majority shareholder, Summit Health Ltd. ("SHL"). OrNda's 7.5% Exchangeable Subordinated Notes ("OrNda Notes") were exchangeable into its equity interest in the Company's common stock, at the option of the holders. OrNda redeemed 100% of the outstanding OrNda Notes in exchange for its equity interest in the Company's common stock in August 1995. OrNda currently has no position in the Company's common stock. In January 1997, OrNda was merged into Tenet Healthcare Corporation ("Tenet"). BASIS OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. USE OF ESTIMATES. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out method) or market. REVENUES. Approximately 72 percent, 70 percent and 68 percent of the Company's revenues in the years ended June 30, 1997, 1996 and 1995 were derived from funds under federal and state medical assistance programs, the continuation of which are dependent upon governmental policies. These revenues are based, in certain cases, upon cost reimbursement principles and are subject to audit. Revenues are recorded on an accrual basis as services are performed at their estimated net realizable value. Differences between final settlement and estimated net realizable value accrued in prior years are reported as adjustments to the current year's net revenues. These adjustments decreased net revenues by $4,892 in fiscal 1997. A significant portion of the Company's skilled nursing care center revenues is derived from government sponsored health care programs such as Medicare and Medicaid. These programs are highly regulated and are subject to budgetary and other constraints. While the Company's cash flow could be adversely affected by periodic government program funding delays or shortfalls, management does not believe there are any significant credit risks associated with these government programs. PROPERTY AND EQUIPMENT. Depreciation and amortization (straight-line method) is based on the estimated useful lives of the individual assets as follows: Buildings and improvements 15-40 years Leasehold improvements Shorter of lease term or estimated useful life Furniture and equipment 3-20 years Amortization of capital leases is included in depreciation and amortization expense. For leasehold improvements, where the Company has acquired the right of first refusal to purchase or to renew the lease, amortization is based on the lesser of the estimated useful lives and the period covered by the right. INTANGIBLE ASSETS. Goodwill of $2,321, less accumulated amortization of $182, is included in other assets at June 30, 1997 and is amortized over 35 years using the straight-line method. 16 INSURANCE COVERAGE. The Company self insures for certain levels of workers' compensation and general and professional liability coverage. The Company utilizes a captive insurance company for the purpose of providing reinsurance coverage for workers' compensation claims filed by its California and Arizona employees in excess of a $250,000 self insurance retention per occurrence and not subject to an annual aggregate limit. The Company has elected under Texas law to decline to participate in the Texas workers' compensation insurance program and maintains employer's excess and occupational indemnity insurance on claims subject to a $150,000 self insurance retention per occurrence with no annual aggregate limit. The Company maintains general and professional liability insurance on a claims made basis, subject to a $100,000 self insurance retention per occurrence and $600,000 on an annual aggregate basis. Under both self insurance programs, the Company estimates its liability, including potential legal fees and settlement amounts, based on claims filed and estimates of claims incurred but not reported, utilizing historical experience on an undiscounted basis. Differences between the amounts accrued and subsequent settlements are recorded in operations in the year of settlement. EARNINGS PER SHARE. Earnings per share is based on the weighted average number of shares of common stock outstanding and common stock equivalents arising from stock options which were 6,818,247 for the year ended June 30, 1997, 6,895,661 for the year ended June 30, 1996 and 6,837,991 for the year ended June 30, 1995. The effect of common stock equivalents arising from stock options on the computation of earnings per share is not significant. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. The Company places its temporary cash investments with high credit quality financial institutions. CASH MANAGEMENT. The Company utilizes a centralized cash management system. Payable to bank represents checks outstanding. ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company believes, based on current circumstances, that there are no indicators of impairment to its long-lived assets, and the Company presently has no expectations for disposing of any long-lived assets. RECENT ACCOUNTING PRONOUNCEMENTS. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if elected, would require companies to use a new fair value method of valuing stock-based compensation plans. The Company has elected to continue following present accounting rules under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" which uses an intrinsic value method and often results in no compensation expense. In accordance with SFAS 123, the Company has provided pro forma disclosure of what net income and earnings per share would have been had the new fair value method been used (see Note 10). In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is effective for fiscal years ending after December 15, 1997, including interim periods. Earlier adoption is not permitted. However, an entity is permitted to disclose pro forma earnings per share amounts computed under SFAS 128 in the notes to the financial statements in periods prior to adoption. The statement requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share and is substantially similar to the standard recently issued by the International Accounting Standards Committee entitled "International Accounting Standards, Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998 and has not determined the impact of adoption. 17 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. RECLASSIFICATIONS. Certain amounts have been reclassified to conform with 1997 presentations. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair market value disclosures. CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. NOTES RECEIVABLE (INCLUDING CURRENT PORTION). The carrying amount, before the allowance for doubtful accounts, is $8,434. The fair value of $8,400 is estimated using discounted cash flow analyses, based on interest rates currently being offered for notes with similar terms to borrowers of similar credit quality. LONG-TERM DEBT (INCLUDING CURRENT PORTION). The carrying value of $121,452 of long-term debt is based on the original face value (issue amount). The fair value of $120,300 is estimated based on the present value of the underlying cash flows discounted at the Company's incremental borrowing rate. 3. MATERIAL TRANSACTIONS WITH RELATED ENTITIES TENET HEALTHCARE CORPORATION, ORNDA HEALTHCORP AND SUMMIT HEALTH LTD. The Company had an agreement with Tenet/OrNda, which expired in March 1997, under which the Company leased a portion of its corporate office space to OrNda and shared the cost of building services with OrNda. The agreement also required OrNda to provide tax accounting to the Company. The Company's rental income from OrNda for the space exceeded the payments to OrNda for services by $31 for the year ended June 30, 1997. For the years ended June 30, 1996 and 1995, payments to OrNda for services exceeded rental income for the space by $50 and $23, respectively. The Company believes that the amount reimbursed for the services provided and the rental income received are reasonable. The agreement also indemnified the Company against any liability arising from its divestiture of facilities, the net assets of which were purchased by SHL during the year ended June 30, 1992. The provisions of the indemnification survive the termination of the agreement. Certain provisions of this agreement were terminated or amended as a result of the redemption on August 28, 1995 by OrNda of 100% of the OrNda Notes in exchange for the Company's common stock (see Note 1). In January 1994, the Company entered into a ten-year sub-lease of a nursing care center with SHL. The Company believes the monthly lease payments of $37 are reasonable for the market area. Lease payments to Tenet, OrNda and SHL were $450 for each of the years ended June 30, 1997, 1996 and 1995. At June 30, 1997, the net amount due from Tenet for transactions between the Company and Tenet was $918 and is included in Other Current Assets (see Note 5). 18 4. ACQUISITIONS AND CONSTRUCTION ACTIVITY FISCAL YEAR 1997. In August 1996, the Company opened a 110-bed skilled nursing care center in Fort Worth, Texas, and in June 1997, opened another 100 beds at the same site. Total cost of construction including the original purchase price (see this Note, Fiscal Year 1995) was $12,012. On July 1, 1997, the Company opened a 66-bed assisted living center in Orange, California, dedicated to Alzheimer's and other patients with dementia. Total cost of construction, which constituted renovation of an existing building on a campus with a 172-bed skilled nursing center and a 72-bed assisted living center, was $3,525. Cost of construction completed in the year ended June 30, 1997 was financed with funds from $15 million of Senior Secured Notes ("Notes") issued in July 1996 and with cash generated from operations. The Notes represented the second and last issuance of $70 million of Notes. The first issuance of $55 million occurred in December 1995. In July 1996, the Company exercised a purchase option in its lease of a 88-bed skilled nursing care center in Rockport, Texas. The purchase price of $2,022 was financed with funds from the Notes. In December 1996, the Company entered into a limited liability company ("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price for its 50% membership interest was $1,565 in cash. The pharmacy services nursing centers in Texas operated by either the Company, the other LLC member or non-affiliated nursing center owners. The Company accounts for its investment in the LLC under the equity method of accounting. The Company's equity in earnings of the LLC was insignificant during fiscal year 1997. In June 1997, the Company purchased 10 acres of vacant land in Longview, Texas for $648 in cash. The land will be used for new services which will complement the 174-bed skilled nursing center currently owned and operated by the Company. FISCAL YEAR 1996. On January 8, 1996, the Company opened a 108-bed skilled nursing care center in Fresno, California, and in August 1996, opened another 51 beds at the same site. Total cost of construction including the original purchase price was $14,024. In March 1996, the Company added 20 licensed beds to one of its two skilled nursing care centers in Beaumont, Texas, increasing the center's total beds to 148. Total cost of construction was $785. In June 1996, the Company also added 54 beds to its skilled nursing care center in Longview, Texas, increasing the total beds to 182. Total cost of construction was $1,860. Cost of construction completed in the year ended June 30, 1996 was financed with funds from Notes issued in December 1995 and draws against the Company's bank line of credit (see Note 6). FISCAL YEAR 1995. On September 1, 1994, the Company purchased a 220-bed skilled nursing care center in White Settlement (Fort Worth), Texas, for $11,925 in cash and a four-acre site for $1,500 in cash for construction of a 210-bed skilled nursing care center located in Fort Worth, Texas, which began in May 1995. The Company acquired on October 1, 1994 the leasehold interest in six skilled nursing care centers and the real and personal property of a seventh with a combined total of 783 beds located in various communities in Texas for $30,938, including goodwill of $2,321. The purchase price consists of (i) $11,470 in cash (of which $8,541 was funded under the Company's bank line of credit), (ii) a $2,814 promissory note ($3,000 less a $186 discount) at 9% interest (7% contract rate) fully amortized in seven years and (iii) a $16,654 capital lease obligation assumed by the Company. The leases on the six centers range from eight to twenty-one years, include purchase options, the first exercisable in July 1996, and the last exercisable in February 2005, and have combined monthly payments of $159. On December 1, 1994, the Company acquired four skilled nursing care centers in three communities in East Texas with a combined total of 548 beds for $27,000 in cash and, in a separate transaction, the leasehold interest in a 119-bed skilled nursing care center located in Big Spring, Texas, for $800 in cash. Both transactions were funded under the Company's bank line of credit. The Company's acquisitions have been accounted for as purchases and, accordingly, the results of operations of the acquired centers have been included in the consolidated statement of income since the date of acquisition. 19 The Company completed in May 1995 an addition of 74 beds to a 76-bed nursing care center which is operated under a ten-year sub-lease with OrNda (see Note 3). 5. OTHER CURRENT ASSETS Other current assets as of June 30 consist of the following: 1997 1996 ----------------------- Due from third party payors $ 2,491 $ 8,055 Deferred tax assets 1,956 1,810 Notes receivable 1,253 672 Prepaid expenses 1,004 952 Income tax receivable 4,128 -- Other receivables 1,524 1,543 ------- ------- $12,356 $13,032 ======= ======= 6. LONG-TERM DEBT Long-term debt consists of the following: June 30, 1997 1996 ------------------------------------------------------------------------ Senior secured notes, at fixed interest rates from 7.38% to 8.14%, interest only payable semi-annually, principal due from December 2000 to December 2010 in various annual payments, secured by property and equipment with a book value of approximately $91,781 at June 30, 1997. $70,000 $55,000 Secured revolving bank line of credit expires September 30, 1998, variable interest rates approximating 7.44% in the year ending June 30, 1997, convertible to a term loan due in equal quarterly principal payments through September 2001, secured by property and equipment with a book value of approximately $6,556 at June 30, 1997. 5,000 6,000 8.96% senior secured notes, due 2002, interest only, payable semi-annually through June 1997, annual principal payments of $4,150 beginning December 1997, secured by property and equipment with a book value of approximately $32,779 at June 30, 1997. 25,000 25,000 Present value of capital lease obligations at effective interest rates from 7% to 9%, secured by property and equipment with a book value of approximately $23,216 at June 30, 1997. 13,133 15,680 Mortgage and other note payable, fixed interest rates from 7.75% to 9%, due in various monthly installments through January 2026, secured by property and equipment with a book value of approximately $7,379 at June 30, 1997. 5,281 5,231 Promissory note, less imputed interest of $81 in the year ended June 30, 1997, at an effective interest rate of 9% due in October 2001, secured by the leasehold interest in a nursing care center, with a book value of approximately $3,060 at June 30, 1997. 1,944 2,304 20 Mortgage note payable, variable interest rates from 8.25% to 9.0% in year ended June 30, 1997, due in equal monthly principal installments through March 2001, secured by property and equipment with a book value of approximately $2,816 at June 30, 1997. 1,094 1,159 Less current portion -- (2,985) -------- -------- Non-current portion $121,452 $107,389 ======== ======== Future maturities of long-term debt (including capital lease obligations) are as follows: years ending June 30, 1998 - $-0-; 1999 - $8,699; 2000 - $13,788; 2001 - $17,187; 2002 - $10,904, and thereafter - $70,874. In December 1995, the Company amended its secured bank line of credit which reduced the commitment from $60,000 to $40,000, converted accounts receivable from collateral to a negative pledge, extended the revolver to September 30, 1997 (the revolver has been subsequently extended to September 30, 1998) and reduced the period of the term loan upon termination of the revolver from four to three years. The interest rate is variable and at the Company's option, will equal either the bank prime rate or the Eurodollar rate plus a margin (reduced by the amendment) that varies depending on the ratio of certain senior debt to earnings before certain interest, taxes, depreciation and amortization. At June 30, 1997, credit line loans outstanding were $5,000 which was used to finance the construction described in Note 4. At June 30, 1997, the Company classified $6,997 of current debt maturities as long-term debt based on its intent and ability to refinance these obligations under the bank line of credit. The bank line of credit loan agreement and the two senior secured note agreements contain covenants that include requirements to comply with certain financial tests and ratios and restrict the ability of the Company to incur additional indebtedness. Also, the Company is restricted by the agreements from the payment of dividends (other than dividends payable in common stock) or to acquire its common stock to the extent that such payments exceed $5,000 plus 50% of the Company's net income after June 30, 1995. The Company currently is meeting all financial tests and ratios. Interest expense was $10,296, $8,701 and $6,033 in fiscal years 1997, 1996 and 1995, respectively, of which $1,678, $1,605 and $759 in 1997, 1996 and 1995 were capitalized as part of the ongoing construction projects. Interest payments were $10,124, $7,874 and $5,712 in fiscal years 1997, 1996 and 1995, respectively. 7. INCOME TAXES The provision for income taxes consists of the following: Years Ended June 30, 1997 1996 1995 ------------------------------------------------ Federal: Current $(3,979) $3,611 $4,359 Deferred 4,003 19 (277) ------- ------ ------ 24 3,630 4,082 State: Current (662) 798 952 Deferred 757 24 (47) ------- ------ ------ 95 822 905 ------- ------ ------ $ 119 $4,452 $4,987 ======= ====== ====== Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements and represent differences between income for tax purposes and income for financial statement purposes in future years. Temporary differences are primarily attributable to reporting for income tax purposes the excess of tax over book depreciation, bad debts and vacation benefits. The current deferred tax assets are included in other current assets (see Note 5). Significant components of the Company's deferred tax liabilities and assets as of June 30 are as follows: 21 1997 1996 ---- ---- Current Non-Current Current Non-Current ------- ----------- ------- ----------- Income Taxes Deferred tax liabilities: Tax over book depreciation $ -- $(7,858) $ -- $(3,136) Other -- (264) -- (137) ------ ------- ------ ------- Total deferred tax liabilities -- (8,122) -- (3,273) Deferred tax assets: Vacation and deferred compensation benefits and bad debt 1,956 452 1,810 330 State tax -- 159 -- 338 ------ ------- ------ ------- Total deferred tax assets 1,956 611 1,810 668 ------ ------- ------ ------- Net deferred tax assets (liabilities) $1,956 $(7,511) $1,810 $(2,605) ====== ======= ====== ======= A reconciliation of the provision for income taxes with the amount computed using the federal statutory rate is as follows: Years Ended June 30, 1997 1996 ------------------------------------------------------------- Federal rate 34.0% 35.0% State taxes, net of federal tax benefit 4.5 4.5 Tax credits -- (1.6) Other, net 24.8 -- ---- ---- 63.3% 37.9% ==== ==== The increase in the effective tax rate was primarily due to certain permanent differences between book income and taxable income. Total income tax payments during fiscal years 1997, 1996 and 1995 were $1,828, $3,904 and $4,876, respectively. 8. LEASES The Company leases certain of its centers, equipment and its pharmacy space under both noncancellable operating leases and capital leases. The leases generally provide for payment of property taxes, insurance and repairs, and have rent escalation clauses based upon the consumer price index or annual per bed adjustments. All capital leases contain purchase options, and the accompanying balance sheet and following table have been prepared assuming such options will be exercised (see Note 11). Some leases contain various renewal options and extend up to the year 2030. Property and equipment includes the following amounts for leases which have been capitalized: Year Ended June 30, 1997 ----------------------------------------------------------------- Land and land improvements $ 1,400 Buildings and leasehold improvements 21,481 Furniture and equipment 2,405 ------- 25,286 Less accumulated amortization 2,070 ------- $23,216 ======= 22 The future minimum rental payments under noncancellable operating leases and capital leases (including purchase options when expected to be exercised) that have initial or remaining lease terms in excess of one year as of June 30, 1997, are as follows: Operating Capital Year ending June 30, Leases Leases Total ----------------------------------------------------------------------------- 1998 $ 3,054 $ 3,321 $ 6,375 1999 2,995 4,634 7,629 2000 2,755 4,297 7,052 2001 2,513 350 2,863 2002 2,176 350 2,526 Thereafter 7,827 3,525 11,352 ------- ------- ------- Total minimum lease payments 21,320 16,477 37,797 Less amount representing interest -- 3,344 3,344 ------- ------- ------- Present value of net minimum lease payments (capital lease amount included in long-term debt - see Note 6) $21,320 $13,133 $34,453 ======= ======= ======= 9. CONTINGENCIES The Company is subject to malpractice claims and other litigation arising in the ordinary course of business. In the opinion of management, any liability beyond amounts covered by insurance and the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's financial position or results of operations. 10. STOCK OPTION PLAN Effective July 1, 1991, the Company adopted a stock option plan authorizing the issuance of 250,000 shares of common stock. The plan was amended on December 9, 1994 and again on December 8, 1995 to increase the authorized shares to 1,400,000. Options may be granted to key employees and directors of the Company. Options granted to employees may be either incentive stock options or nonstatutory options. Only non-qualified options may be granted to non-employee directors. Options granted to non-employee directors are granted automatically pursuant to a formula grant provision contained in the plan. The option price per share for incentive stock options shall not be less than 85% of the fair market value at the date of the grant. The terms of each option and the increments in which each is exercisable are determined by a committee appointed by the Board of Directors. No option may be exercised after ten years from the date of the grant and no option may be granted under the plan after June 30, 2001. 23 The following summarizes activity in the stock option plan:
Years Ended June 30, 1997 1996 1995 - -------------------- ----------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Shares Price of Shares Price of Shares Price --------- -------- --------- -------- --------- --------- Options at beginning of year 948,500 $18.91 523,000 $16.79 256,000 $12.97 Changes during year: Granted 112,000 $13.36 504,000 $21.15 284,500 $19.94 Exercised (3,200) $17.85 (13,500) $12.13 (15,700) $12.20 Canceled (26,800) $20.31 (65,000) $20.58 (1,800) $12.26 --------- ------- ------- Options outstanding at end of year 1,030,500 $18.27 948,500 $18.91 523,000 $16.79 ========= ======= ======= Options exercisable at end of year 352,300 $17.10 161,600 $14.97 58,100 $12.26 Options available for grant at end of year 333,500 418,700 57,700
The weighted average fair value per share of options granted during the year was $6.72 and $10.14 for fiscal years 1997 and 1996, respectively. The exercise prices for options outstanding at June 30, 1997 ranged from $10.50 to $22.50. The weighted average remaining contractual life of these options is approximately 8 years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) which uses an intrinsic value method and, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, results in no compensation expense. However, pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation" (SFAS 123), and, in the following disclosure, has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black- Scholes option pricing model with the following weighted average assumptions for the years ended June 30, 1997 and 1996, respectively: risk-free interest rates of 6.4% and 5.5%; dividend yields of zero percent for both years; volatility factors of the expected market price of the Company's common stock of 48.4% and 46.8%; and a weighted average expected life of the options of 5 years. Because the Company's stock options have characteristics significantly different from those options used in the Black-Scholes option pricing model, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options. 24 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of providing pro forma disclosure are not likely to be representative of the effects on reported net income for future years. The Company's pro forma information follows for the years ended June 30, 1997 and 1996: 1997 1996 ---- ---- Pro forma net income (loss) $ (543) $6,914 Pro forma earnings (loss) per share $(0.08) $ 1.00 11. SUBSEQUENT EVENT In September 1997, the Company exercised a purchase option in its lease of a 111-bed skilled nursing care center in La Grange, Texas. The purchase option price of $1,871 was financed by a draw on the Company's bank line of credit (see Note 6). 12. UNAUDITED QUARTERLY INFORMATION Following is a summary of unaudited quarterly results of operations from the years ended June 30, 1997 and 1996:
Year ended June 30, 1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total ------------------------ -------- -------- -------- -------- -------- Net revenues $ 48,907 $ 46,181 $ 52,012 $ 50,827 $197,927 Income (loss) before income taxes 2,587 (1,734) 2,394 (3,059) 188 Net income (loss) 1,565 (1,049) 1,448 (1,895) 69 Earnings (loss) per share $ 0.23 $ (0.15) $ 0.21 $ (0.28) $ 0.01 Year ended June 30, 1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total ------------------------ -------- -------- -------- -------- -------- Net revenues $ 41,270 $ 42,801 $ 45,232 $ 46,759 $176,062 Income before income taxes 3,924 3,400 2,077 2,360 11,761 Net income 2,359 2,043 1,327 1,580 7,309 Earnings per share $ 0.34 $ 0.30 $ 0.19 $ 0.23 $ 1.06
See accompanying notes 25 -----END PRIVACY-ENHANCED MESSAGE-----