Summit Health Ltd., which operates 21 hospitals and 21 nursing homes and retirement centers, is seriously ill itself. The 12-year-old company lost $15 million in the past two years, piled up a mountain of debt and watched its stock plunge to $1.50 a share from $14 in 1985.
What's the solution? Summit founder and Chairman Don Freeberg, and the rest of Summit's board, think that they found part of the answer last month in a 37-year-old numbers whiz named Donald J. Amaral, who was hired as president and chief operating officer after a yearlong search.
Shedding assets also is part of the plan. Last month, Burbank-based Summit said its bankers urged the company to weigh the sale of its nursing-home division, which accounted for 15% of Summit's $376 million revenues for the fiscal year that ended June 30.
That division already had been pared by the divestiture of 31 nursing homes over the past three years, according to Summit's fiscal 1989 annual report. During the same period, Summit sold one hospital and closed two others to cut its debt load and improve profitability.
But whatever other strategies Freeberg and Amaral have in store for Summit, they're not sharing them publicly. Both declined to be interviewed, as did Vice Chairman John E. Anderson.
Regardless, one thing is for sure: Freeberg, Anderson and the other directors have more riding on the company's turnaround than just fiduciary duty to the public stockholders. Lots of their own money also is at stake.
According to Summit's latest proxy statement, issued Oct. 18, Freeberg, through his 93%-owned Sierra Land Group Inc., and his two sons control 56% of Summit's stock, worth about $26.4 million. But the value of their stake has plunged 71% since early 1988, when Summit's stock traded for $5.25 a share in the over-the-counter market. Summit's directors and officers as a group own 66% of the company.
Summit began looking for a new president a year ago, after William L. Pierpoint, who had held the post since 1977, resigned. Summit gave no explanation for his departure. But a money manager who owns Summit stock and who asked not to be identified said that with the company sagging under Pierpoint's leadership, "they mutually agreed that he should go."
Pierpoint remains a director and still owns 11% of the stock, according to the proxy statement. Freeberg assumed the president's post during the search for Pierpoint's successor.
Amaral, who has a master's degree in business administration from UCLA, came to Summit from Mediplex Group Inc., a health-care unit of Avon Products. Amaral was president and chief executive of Mediplex, based in Wellesley, Mass., and had plans to expand Mediplex with Avon's backing. But in 1988, Avon decided to largely abandon the health-care field and began divesting Mediplex's assets, so Amaral quit.
Amaral "left because the mission that brought him here and attracted him, in terms of expansion, was gone," said William J. Hartigan, who succeeded Amaral as Mediplex's president.
Amaral had spent 10 years working in various financial posts for the hospital group of National Medical Enterprises, a Los Angeles-based health-care concern.
Hartigan said Amaral has the credentials to help Summit, whose local facilities include the Woodland Care Center in Reseda, Midway Hospital Medical Center in Los Angeles and St. Luke Medical Center in Pasadena. The company employs about 4,600 people.
"He's very bright, with very good management ability," Hartigan said. "He's an exceptional talent around numbers. He could do them in his head faster than I could do them with my calculator."
Summit's numbers certainly present Amaral with a challenge. In fiscal 1989, Summit lost $8.4 million, and its long-term debt as of June 30 of $137 million--although down 4% from a year earlier--remained nearly twice as large as Summit's equity, or net worth. By contrast, the net worth of Humana Inc., one of the biggest health-care concerns, is about equal to its long-term debt.
Summit's fiscal 1989 loss stemmed in part from a $15.5-million provision for the company's losses on the sale or closure of assets during the year, which included the closing of a loss-ridden hospital in Colorado Springs, Colo. Excluding the provision, Summit's pretax income from operations tumbled 82% to $1.2 million, from $6.8 million the previous year.
In an effort to further cut its debt, Summit last January also suspended its semiannual dividend of 2 cents per share. And Summit can't pay future dividends without approval from its bank lenders.
Summit's problems grew serious in the mid-1980s, after the company aggressively raised cash for acquisitions, including an initial public offering of stock (priced at $7 a share), bank borrowings and its issuance of $86.3 million of high-yield "junk bonds" (of which $49 million remained due as of June 30).
Just as Summit was gearing up to expand, financial trends in the health-care field began undergoing major changes that subsequently put pressure on the industry's profits. Specifically, Medicare, the federal health insurer for the elderly that accounts for up to half of some hospitals' revenue, began to clamp down on its costs in 1983.
Medicare once reimbursed hospitals with a fee based on each service given to a Medicare patient. But to encourage hospitals and doctors to cut costs, the government switched to a system of paying a flat fee based only on the patient's ailment.
This new system often forces hospitals to perform fewer tests and discharge patients sooner to earn a profit on each patient. But the shorter visits, together with the growth of health maintenance organizations (HMOs), have reduced hospitals' overall occupancy rates.
Summit's U. S. hospitals "have been experiencing declining occupancy levels and average lengths of hospital stays for the past few years," the company stated. The average occupancy rate, for example, fell to 42% in fiscal 1989 from 48% in fiscal 1986, Summit said.
As a result, "reimbursement from Medicare and other governmental programs have lagged behind increases in labor and other costs" at Summit, the company stated in its fiscal 1989 10-K, an annual financial report that publicly held companies must file with the Securities and Exchange Commission.
Even outside the United States and the Medicare regulations, Summit is struggling. The company has a 60% stake in Orbit Summit Health, a partnership that manages several hospitals in Saudi Arabia. But Summit has decided that the business--which kicked in $20.2 million of Summit's fiscal 1989 revenue--is not worth the cost and is trying to sell its interest in the partnership.
Amaral has some room in which to work. As of June 30, Summit's current assets--its cash on hand plus money the company expects to receive within a year--totaled $119 million. That was nearly twice as much as Summit's current liabilities, or bills due within the year, including the payments on its long-term debt of $69.3 million.
Amaral could get a bigger cushion if Summit continues shedding properties and uses the cash to reduce its debts. Even so, he will remain under pressure to control Summit's costs if the company is to turn steady profits over the long haul because the government's efforts to curb health-care expenses are unlikely to abate anytime soon.