<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 333-57279
FOUNTAIN VIEW, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4644784
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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
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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Not Applicable.
================================================================================
<PAGE>
TABLE OF CONTENTS
FOUNTAIN VIEW, INC.
<TABLE>
<CAPTION>
Pages
------
PART I - FINANCIAL INFORMATION
<S> <C> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Income 1
Consolidated Balance Sheets 2, 3
Consolidated Statements of Cash Flows 4, 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 14
Item 3. Quantitative and Qualitative Disclosure of Market Risk 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
</TABLE>
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Net revenues $67,821 $67,118 $204,838 $155,487
Expenses:
Salaries and benefits 33,418 35,296 101,186 81,015
Supplies 8,535 7,157 23,946 17,682
Purchased services 7,354 7,670 23,804 19,786
Provision for doubtful accounts 756 680 3,066 1,448
Other expenses 5,143 4,471 15,590 9,524
Rent 1,319 1,250 3,918 3,050
Rent to related parties 444 457 1,332 1,339
Depreciation and amortization 3,989 3,585 11,753 7,518
Interest expense, net of interest income 5,900 5,870 17,665 12,089
------------------------ ------------------------
Total expenses 66,858 66,436 202,260 153,451
------------------------ ------------------------
Income before provision for income taxes and
extraordinary item 963 682 2,578 2,036
Income tax provision 562 272 1,562 813
------------------------ ------------------------
Income before extraordinary item 401 410 1,016 1,223
Extraordinary item:
Loss on early extinguishment of debt, net of taxes
- - - (517)
------------------------ ------------------------
Net income $ 401 $ 410 $ 1,016 $ 706
======================== ========================
</TABLE>
See accompanying notes.
1
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,553 $ -
Accounts receivable, less allowance for doubtful accounts
of $11,973 and $11,052 in 1999 and 1998, respectively 45,342 51,384
Income taxes receivable 732 732
Current portion of deferred income taxes 10,308 10,308
Other current assets 9,387 7,221
----------------------------------------
Total current assets 67,322 69,645
Property and equipment, at cost:
Land and land improvements 25,064 25,064
Buildings and leasehold improvements 214,789 211,348
Furniture and equipment 29,607 28,440
Construction in progress 871 1,289
----------------------------------------
270,331 266,141
Less accumulated depreciation and amortization (19,997) (11,123)
----------------------------------------
250,334 255,018
Notes receivable, less allowance for doubtful accounts of
$656 and $590 in 1999 and 1998, respectively 4,926 5,553
Goodwill, net 57,266 58,689
Deferred financing costs, net 10,684 11,961
Deferred income taxes 3,350 5,385
Other assets 4,499 4,248
----------------------------------------
Total assets $398,381 $410,499
========================================
</TABLE>
Note: The balance sheet at December 31, 1998 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
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except stock information)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Payable to banks $ - $ 1,451
Accounts payable and accrued liabilities 26,396 29,652
Employee compensation and benefits 7,340 9,780
Accrued interest payable 7,215 3,366
Current portion of deferred income taxes 332 332
Current maturities of long-term debt and capital leases 11,953 4,735
----------------------------------------
Total current liabilities 53,236 49,316
Long-term debt and capital leases, less current maturities 227,613 244,153
Deferred income taxes 34,658 35,172
----------------------------------------
Total liabilities 315,507 328,641
Preferred Stock Series A, mandatorily redeemable, $0.01 par value:
1,000,000 shares authorized, 15,000 shares issued and outstanding at
1999 and 1998 (liquidation preference of $15 million) 15,000 15,000
Commitments and contingencies - -
Shareholders' equity:
Common Stock Series A, $0.01 par value: 1,500,000 shares authorized,
1,000,000 shares issued and outstanding at 1999 and 1998 10 10
Common Stock Series B, $0.01 par value: 200,000 shares authorized,
114,202 shares issued and outstanding at 1999 and 1998 1 1
Common Stock Series C, $0.01 par value: 1,300,000 shares authorized,
20,742 shares issued and outstanding at 1999 and 1998 - -
Additional paid-in capital 106,488 106,488
Accumulated deficit (36,085) (37,101)
Due from shareholder (2,540) (2,540)
----------------------------------------
Total shareholders' equity 67,874 66,858
----------------------------------------
Total liabilities and shareholders' equity $398,381 $410,499
========================================
</TABLE>
Note: The balance sheet at December 31, 1998 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
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,016 $ 706
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 11,753 7,518
Changes in operating assets and liabilities:
Accounts receivable 6,266 (6,689)
Other current assets (2,454) 2,067
Accounts payable and accrued liabilities (3,256) (6,627)
Employee compensation and benefits (2,440) 1,538
Accrued interest payable 3,849 7,657
Income taxes payable - 868
Deferred income taxes 1,521 (230)
-------------------------------------
Total adjustments 15,239 6,102
------------------------------------
Net cash provided by operating activities 16,255 6,808
Investing activities:
Principal payments on notes receivable 659 873
Additions to property and equipment (4,190) (5,695)
Acquisition of Summit, net of cash acquired - (151,792)
Decrease in acquisition related liabilities - (16,531)
Changes in other assets (398) (99)
------------------------------------
Net cash used in investing activities (3,929) (173,244)
Financing activities:
Decrease in payable to bank (1,451) (1,177)
Decrease in capital lease obligations (761) (4,071)
Principal payments on and retirement of long-term debt (2,500) (138,066)
Draw (pay down) on revolving loan facility, net (6,061) 4,000
Proceeds from long-term debt, net of issuance costs - 209,964
Proceeds from issuance of common stock - 82,000
Proceeds from issuance of mandatorily redeemable
preferred stock - 15,000
------------------------------------
Net cash (used in) provided by financing activities (10,773) 167,650
------------------------------------
Increase in cash and cash equivalents 1,553 1,214
Cash and cash equivalents at beginning of period - 2,551
------------------------------------
Cash and cash equivalents at end of period $ 1,553 $ 3,765
====================================
</TABLE>
See accompanying notes.
4
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------------------------------
<S> <C> <C>
Noncash activity:
Stock purchase in exchange for note receivable $ - $ 2,540
Conversion of stock into paid-in capital - 2
Details of purchase business combination:
Fair value of assets acquired $ - $ 373,948
Less: Liabilities assumed - (220,792)
----------------------------------
Cash paid for acquisition - 153,156
Less: Cash acquired from Summit - (1,364)
----------------------------------
Net cash paid for acquisition $ - $ 151,792
==================================
</TABLE>
See accompanying notes.
5
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Fountain View, Inc. ("Fountain View" or "Company") is a leading operator of
long-term care facilities and a leading provider of a full continuum of post-
acute care services, with a strategic emphasis on sub-acute specialty medical
care. Fountain View operates a network of facilities in California, Texas, and
Arizona, including 44 skilled nursing facilities ("SNFs") that offer sub-acute,
rehabilitative and specialty medical skilled nursing care, as well as six
assisted living facilities ("ALFs") that provide room and board and social
services in a secure environment. In addition, Fountain View provides a variety
of high-quality ancillary services such as physical, occupational and speech
therapy in Fountain View-operated facilities, unaffiliated facilities and acute
care hospitals. Fountain View also operates three institutional pharmacies (one
of which is a joint venture), which serve acute care hospitals as well as SNFs
and ALFs, both affiliated and unaffiliated with Fountain View, an outpatient
therapy clinic and a durable medical equipment ("DME") company.
The Company acquired Summit Care Corporation ("Summit") on March 27, 1998 (see
Note 3). The Summit operation consisted of 36 SNFs, five ALFs and three
institutional pharmacies. The acquisition has been accounted for under the
purchase method and, as such, the accompanying financial statements include the
results of Summit's operations from the acquisition date.
2. Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, the unaudited financial information reflects
all adjustments (all of which are of a normal recurring nature), 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 audited financial statements for the year ended December 31, 1998. The
interim financial information herein is not necessarily representative of that
to be expected for a full year.
3. Acquisition of Summit Care Corporation
On February 6, 1998, Fountain View entered into an Agreement and Plan of Merger
(the "Tender Offer") providing for the acquisition of Summit by Fountain View at
a price of $21.00 per share. Approximately 99% of the shares of Summit were
purchased for approximately $141.8 million at the closing of the Tender Offer on
March 27, 1998.
In order to consummate the purchase of the Summit shares in the Tender Offer and
to refinance Fountain View's existing debt, Fountain View entered into a term
loan agreement for borrowings of $32.0 million and a credit facility of
approximately $62.7 million. Fountain View amended its certificate of
incorporation to provide for: (i) 3.0 million shares of Common Stock designated
as 1.5 million shares of Series A Common Stock, 200,000 shares of Series B Non-
Voting Common Stock, 1.3 million shares of Series C Common Stock; and (ii) 1.0
million shares of Preferred Stock, 200,000 of which are designated Series A
Preferred Stock. In addition, Fountain View raised approximately $97.0 million
of new equity investments in the amounts of $90.6 million from Heritage Fund II,
L.P. ("Heritage") and certain other co-investors, $5.0 million combined from Mr.
Robert Snukal, Fountain View's Chief Executive Officer, and Mrs. Sheila Snukal,
Fountain View's Executive Vice President, and $1.4 million from Mr. William
Scott, Summit's Chairman and Chief Executive Officer.
Concurrent with the Merger becoming effective, Fountain View entered into a new
$30.0 million revolving credit facility, an $85.0 million term-loan facility,
and successfully completed a Senior Subordinated Note Offering providing for
borrowings of $120.0 million. Heritage's equity investment included $15.0
million for 15,000 shares of Series A Preferred Stock of Fountain View that
entitles them to a dividend at the time of a liquidity event calculated to
achieve a 12% annual rate of return, as well as warrants to purchase 71,119
shares of Fountain View's Series C Common Stock. These funds were used to
consummate the purchase of Summit's remaining shares not tendered in the Tender
Offer, refinance all then existing Fountain View indebtedness,
6
<PAGE>
as described above, and Summit indebtedness (except for capital lease and
mortgage obligations) totaling $107.8 million, redeem all outstanding options
for Summit shares, and pay certain fees, expenses, and other costs arising in
connection with such transactions.
On May 4, 1998, Fountain View signed an investment agreement with Baylor Health
Foundation System ("Baylor"), a vertically integrated healthcare system
operating in Texas, and Buckner Foundation, a non-profit foundation,
(collectively, the "Baylor Group"). In addition, Fountain View signed an
operating agreement with Baylor. Pursuant to these agreements, Baylor invested
$10.0 million and Buckner invested $2.5 million in Fountain View through the
purchase of 12,342 shares of Series A Preferred Stock from Heritage that
entitles them to a dividend at the time of a liquidity event calculated to
achieve a 12% annual rate of return, as well as warrants to purchase 59,266
shares of Fountain View's Series C Common Stock.
On October 6, 1998, the Company amended its $85.0 million term loan credit
agreement with the bank extending $5.0 million of additional mortgage
refinancing loans to the Company. The Company used the proceeds to finance the
exercise of capital lease purchase options on two skilled nursing facilities in
Texas.
4. Pro Forma Financial Results
The following table sets forth the pro forma unaudited results of operations
assuming the purchase of Summit had been consummated as of January 1, 1998 (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
----------------------------
<S> <C>
Net revenues $209,405
Income before provision for income taxes
and extraordinary item 18
Net loss (581)
</TABLE>
5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Company expects to adopt
SFAS 133 effective January 1, 2000. SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of SFAS 133 will have a significant effect on
its results of operations or financial position. The Company has no derivatives
as of September 30, 1999.
6. Business Segments
The Company has three reportable segments: nursing services, therapy services,
and pharmaceuticals. The nursing services are provided by 44 SNFs that offer
sub-acute, rehabilitative and specialty medical skilled nursing care, as well as
six ALFs that provide room and board and social services in a secure
environment. Therapy services include ancillary services such as physical,
occupational and speech therapy provided in Fountain View-operated facilities,
unaffiliated facilities and acute care hospitals. Pharmaceuticals are provided
by three institutional pharmacies (one of which is a joint venture), which serve
acute care hospitals as well as SNFs and ALFs, both affiliated and unaffiliated
with Fountain View.
The Company evaluates performance and allocates resources based on an efficient
and cost-effective operating model which maximizes profitability and the quality
of care provided across the Company's entire facility network. Certain of
Fountain View's facilities are leased, under operating leases, and not owned.
Accordingly, earnings before interest, taxes, depreciation, amortization, rent
and extraordinary items is used to determine and evaluate segment profit or
loss. Corporate overhead is not allocated for purposes of determining segment
profit or loss, and is included, along with the Company's DME subsidiary in the
"all other" category in the selected segment financial data that follows.
Intersegment sales and transfers are recorded at the Company's cost plus
standard mark-up; intersegment profit and loss has been eliminated in
consolidation.
The Company's reportable segments are business units that offer different
services and products. The reportable segments are each managed separately due
to the nature of the services provided or the products sold.
7
<PAGE>
The following table sets forth selected financial data by business segment (in
thousands):
Selected Financial Data:
<TABLE>
<CAPTION>
Nursing Therapy
Services Services Pharmaceuticals All Other Totals
------------------------------------------------------------------------------------
Nine Months Ended
September 30, 1999:
<S> <C> <C> <C> <C> <C>
Revenues from external customers $180,832 $ 6,829 $16,248 $ 929 $204,838
Intersegment revenues - 11,860 3,763 1,702 17,325
------------------------------------------------------------------------------------
Total revenues $180,832 $18,689 $20,011 $ 2,631 $222,163
====================================================================================
Segment profit (loss) $ 40,060 $ 4,451 $ 2,824 $(10,089) $ 37,246
<CAPTION>
Nursing Therapy
Services Services Pharmaceuticals All Other Totals
------------------------------------------------------------------------------------
Nine Months Ended
September 30, 1998:
Revenues from external customers $139,671 $ 7,909 $ 7,905 $ 2 $155,487
Intersegment revenues - 7,744 4,424 2,600 14,768
------------------------------------------------------------------------------------
Total revenues $139,671 $15,653 $12,329 $ 2,602 $170,255
====================================================================================
Segment profit (loss) $ 27,602 $ 2,253 $ 1,820 $(5,643) $ 26,032
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-----------------------------------------
<S> <C> <C>
Revenues:
External revenues for reportable segments $204,838 $155,487
Intersegment revenues for reportable segments 17,325 14,768
Elimination of intersegment revenues (17,325) (14,768)
-----------------------------------------
Total consolidated revenues $204,838 $155,487
=========================================
</TABLE>
7. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for the reporting of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. SFAS 130 uses the term comprehensive
income to describe the total of all components of comprehensive income, that is,
net income plus other comprehensive income. Other comprehensive income items
include unrealized gains and losses on available-for-sale securities; foreign
currency translation adjustments; changes in the market value of certain futures
contracts; and changes in certain minimum pension liabilities. Fountain View has
no items of other comprehensive income in the periods reported, and, therefore,
comprehensive income is equal to net income, as reported.
8
<PAGE>
Item 2. Management's Discussion And Analysis of Financial Condition And Results
of Operations (Unaudited)
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
(Dollars in Thousands)
Net revenues increased $703 or 1.0% from $67,118 for the quarter ended September
30, 1998 to $67,821 for the quarter ended September 30, 1999.
Total average occupancy was 82.8% for the quarter ended September 30, 1999 and
84.5% for the quarter ended September 30, 1998. The Company's quality mix (total
net revenues less Medicaid net revenues) was 62.2% for the quarter ended
September 30, 1999 and 62.8% for the quarter ended September 30, 1998.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net revenues
decreased from 82.4% of net revenues for the quarter ended September 30, 1998 to
81.4% for the quarter ended September 30, 1999. Salaries and benefits were 49.3%
of net revenues for the quarter ended September 30, 1999 compared to 52.6% for
the quarter ended September 30, 1998. Expenses decreased $68 or 0.1% from
$55,274 for the quarter ended September 30, 1998 to $55,206 for the quarter
ended September 30, 1999.
Income before rent, rent to related parties, depreciation and amortization and
interest expense increased $771 or 6.5% from $11,844 for the quarter ended
September 30, 1998 to $12,615 for the quarter ended September 30, 1999 and was
18.6% of net revenues for the quarter ended September 30, 1999 compared to 17.6%
for the quarter ended September 30, 1998.
Rent, rent to related parties, depreciation and amortization and interest
expense increased $490 or 4.4% from $11,162 for the quarter ended September 30,
1998 to $11,652 for the quarter ended September 30, 1999. Substantially all of
this increase is due to higher depreciation costs related to the purchase of
property and equipment.
Net income decreased $9 or 2.2% from $410 for the quarter ended September 30,
1998 to $401 for the quarter ended September 30, 1999.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998 (Dollars in Thousands)
Net revenues increased $49,351 or 31.7% from $155,487 for the nine months ended
September 30, 1998 to $204,838 for the nine months ended September 30, 1999.
Substantially all of the increase was due to the acquisition of Summit.
Total average occupancy was 83.2% for the nine months ended September 30, 1999
and 84.6% for the nine months ended September 30, 1998. The Company's quality
mix (total net revenues less Medicaid net revenues) was 63.0% for the nine
months ended September 30, 1999 and 64.3% for the nine months ended September
30, 1998.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net revenues
decreased from 83.3% of net revenues for the nine months ended September 30,
1998 to 81.8% for the nine months ended September 30, 1999. Salaries and
benefits were 49.4% of net revenues for the nine months ended September 30, 1999
compared to 52.1% for the nine months ended September 30, 1998. Expenses
increased $38,137 or 29.5% from $129,455 for the nine months ended September 30,
1998 to $167,592 for the nine months ended September 30, 1999. Substantially all
of the increase was due to the acquisition of Summit.
Income before rent, rent to related parties, depreciation and amortization and
interest expense increased $11,214 or 43.1% from $26,032 for the nine months
ended September 30, 1998 to $37,246 for the nine months ended September 30, 1999
and was 18.2% of net revenues for the nine months ended September 30, 1999
compared to 16.7% for the nine months ended September 30, 1998.
Rent, rent to related parties, depreciation and amortization and interest
expense increased $10,672 or 44.5% from $23,996 for the nine months ended
September 30, 1998 to $34,668 for the nine months ended September 30, 1999.
Substantially all of this increase was due to higher depreciation and
amortization costs related to the acquisition of Summit's tangible and
intangible assets and an increase in amortization costs and interest expense as
a result of the debt refinancing.
9
<PAGE>
Net income increased $310 or 43.9% from $706 for the nine months ended September
30, 1998 to $1,016 for the nine months ended September 30, 1999.
Selected statistics are shown below:
<TABLE>
<CAPTION>
Increase
1999 1998 (Decrease)
------------------------------------------------------
<S> <C> <C> <C>
Facilities in operation at:
March 31 50 50 -
June 30 50 50 -
September 30 50 50 -
Nursing center beds at:
March 31 6,033 6,033 -
June 30 6,033 6,033 -
September 30 6,033 6,033 -
Assisted living beds at:
March 31 700 700 -
June 30 700 700 -
September 30 700 700 -
Total beds at:
March 31 6,733 6,733 -
June 30 6,733 6,733 -
September 30 6,733 6,733 -
Total occupancy:
First quarter 83.7% 86.1% (2.4)%
Second quarter 83.0% 84.4% (1.4)%
Third quarter 82.8% 84.5% (1.7)%
Nursing center occupancy:
First quarter 85.2% 89.0% (3.8)%
Second quarter 84.5% 86.1% (1.6)%
Third quarter 84.1% 86.1% (2.0)%
Assisted living center occupancy:
First quarter 70.7% 66.3% 4.4%
Second quarter 69.7% 69.7% -
Third quarter 71.7% 70.4% 1.3%
Percentage of revenues from
private, managed care and
Medicare (quality mix):
First quarter 64.1% 72.0% (7.9)%
Second quarter 62.7% 63.5% (0.8)%
Third quarter 62.2% 62.8% (0.6)%
</TABLE>
10
<PAGE>
Liquidity and Capital Resources (Dollars in Thousands)
At September 30, 1999, the Company had $1,553 in cash and cash equivalents and
working capital of $14,086. During the nine months ended September 30, 1999, the
Company's cash and cash equivalents increased by $1,553.
Net cash provided by operating activities increased $9,447 from $6,808 for the
nine months ended September 30, 1998 to $16,255 for the nine months ended
September 30, 1999. This increase was primarily due to reductions in accounts
receivable which includes receipts from Medicare settlements and operating
activities generated from Summit facilities.
Long-term debt, including current maturities, totaling $239,566 at September 30,
1999 consisted of mortgage and capital lease obligations of $19,466, a term loan
credit facility of $87,500, $120,000 in senior subordinated notes, and
borrowings on the Company's revolving loan facility of $12,600.
The Company had $17,400 in available borrowings on its revolving loan facility
at September 30, 1999. 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 $11,953, which includes a capital lease
purchase option of $3,584 on a skilled nursing facility in Texas which the
Company plans to exercise in March of 2000, to make normal recurring capital
replacements, additions and improvements of approximately $7,000 planned for the
next 12 months and to meet other long-term working capital needs and
obligations. The Company expects, on a selective basis, to pursue expansion of
its existing centers and the acquisition or development of additional centers in
markets where demographics and competitive factors are favorable.
Recent Accounting Pronouncements
See Note 5 to Consolidated Financial Statements.
Prospective Payment System
Pursuant to the Balanced Budget Act, a prospective payment system ("PPS") was
established for Medicare SNFs. Under PPS, facilities are paid a federal per diem
rate for virtually all covered SNF services in lieu of the former cost-based
reimbursement rate. PPS is being phased in over three cost reporting periods
beginning on or after July 1, 1998. At July 1, 1998, 36 of the Company's 44 SNFs
transitioned to PPS. The remaining eight facilities transitioned on January 1,
1999.
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 these
cost increases in a timely fashion. In addition, as described above, Medicare
SNFs are now paid a per diem rate under PPS, in lieu of the former cost-based
reimbursement rate. Increases in the federal portion of the per diem rates may
also lag behind actual cost increases.
Impact of Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send billings, or engage in similar normal business
activities.
The Company has completed its assessment of Year 2000 issues. This assessment
includes information technology and non-information technology systems, as well
as Year 2000 issues relating to third parties. This assessment includes
estimated costs, an evaluation of associated risks, and contingency plans, as
necessary, to ensure the Company is Year 2000 compliant. The
11
<PAGE>
Company's plan with regard to the Year 2000 issue involves the following phases:
(i) assessment of systems to determine the extent to which the Company may be
vulnerable to the Year 2000 issue, both internally and with respect to third
parties; (ii) the development of remedies to address problems discovered in the
assessment phase; (iii) the testing and implementation of such remedies; and
(iv) the preparation of contingency plans to address potential worst case
scenarios should the remedies not be successful.
Based on its assessments, the Company is replacing certain of its existing
packaged software applications that have been determined to be non-compliant
with the Year 2000. These applications include certain of the facility-level
billing and accounts receivable packages along with certain of the company-level
accounts payable and general ledger applications, and certain hardware. The
Company believes that, with modifications or replacements of existing software
and certain hardware, the Year 2000 issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 issue could have a material adverse impact on the operations of the
Company.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
With respect to its information technology exposures, the Company has completed
its hardware and facility-level billing and accounts receivable software
replacement. The Company is currently considering two options with regards to
replacing the company-level accounts payable and general ledger applications.
The two options are the replacement of both systems in either early December
1999 or early January 2000. The latter option includes the completion of the
year end financial statements on the existing computer system and the
implementation of both systems for January 2000 transactions. Although the
existing general ledger and accounts payable systems have been determined to be
non-compliant with the Year 2000, management has determined that it will be
sufficient to process all year end activity. Management anticipates deciding on
these options by the end of November 1999. There can be no assurance, however,
that such assessment will identify all potential Year 2000 issues. The failure
of such assessment to identify all potential Year 2000 issues or the failure of
the Company to timely develop and test remedies to any such issues, could result
in delays in implementing any required modifications, conversions and updates to
the Company's computer systems, as well as the implementation of any contingency
plans. If such modifications, conversions and updates are not made or not
completed in a timely manner, the Year 2000 issue could have a material adverse
impact on the operations of the Company.
The remediation of non-information technology systems, primarily biomedical
equipment, is significantly more difficult than the remediation of the
information technology systems because each piece of equipment must be
separately remediated and tested if identified as Year 2000 non-compliant. The
Company has completed its inventorying and assessment of these non-information
technology systems, has identified all mission-critical systems, and has queried
all vendors to determine whether these systems are Year 2000 compliant and/or
what remediation, if any, is required. The Company has completed its remediation
efforts and testing and implementation of its remediated equipment. The cost of
these external resources for this portion of the Year 2000 project totaled
approximately $100,000.
Nature and Level of Importance of Third Parties and their Exposure to the Year
2000
The Company's payroll is processed directly by a third party vendor. The Company
has received notification from the third party vendor ensuring that their
payroll system is Year 2000 compliant.
Certain of the Company's billing systems interface directly with the Medicare
and Medicaid Programs. In addition, payments are received electronically from
the Medicare Program. Approximately 68% of net revenues are derived from these
federally assisted programs. We understand that the Medicare and the applicable
Medicaid Programs have notified their payees that they expect their systems to
be Year 2000 compliant. However, the Company has no means of ensuring that these
programs are or will be Year 2000 compliant. The inability of these programs to
become Year 2000 compliant in a timely fashion could materially adversely impact
the Company.
The Company does not share information systems or exchange information
electronically with its suppliers or vendors. The Company has queried its
significant suppliers and vendors (external agents) that do not share
information systems with the Company. To date, the Company is not aware of any
external agent with a Year 2000 issue that would materially impact the Company.
However, the Company has no means of ensuring that external agents will be Year
2000 compliant. The inability of external agents to become Year 2000 compliant
in a timely fashion could materially adversely impact the Company.
12
<PAGE>
Estimated Costs with Respect to the Year 2000
The Company is utilizing both internal and external resources to reprogram, or
replace, test, and implement the software, hardware and equipment to ensure that
it is Year 2000 compliant. The software and hardware costs relating to these new
systems or new system upgrades are estimated to be approximately $500,000 and
$130,000, respectively, and are being funded through operating cash flows. To
date, the Company has incurred approximately $376,000 and $130,000,
respectively, for new systems and equipment related to all phases of the Year
2000 project.
Contingency Plans with Respect to the Year 2000
The Company believes that it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not successfully convert its existing packaged software
applications, the Company will most likely be unable to process transactions
electronically via its current systems, impacting primarily its customer
billing, cash collections and cash disbursements. This may result in lost
revenues or cash flow constraints. The Company does not believe patient care
will be directly impacted. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely impact the
Company. The Company could be subject to litigation for computer systems
failures. The amount of any potential liability or lost revenue cannot be
reasonably estimated at this time.
The Company is in the final stages of completing worst case contingency plans
for certain critical applications. Year 2000 compliant computers have been
placed at each facility and at the Company's corporate office. The Company has
purchased certain Year 2000 compliant software which will facilitate the
production of manual accounts payable and payroll checks should the Company's
primary computer applications fail to perform as designed. In addition, the
Company is considering the possibility of preprinting and securing payroll
checks to ensure timely payment to employees.
Certain of the Company's Year 2000 compliant computers interface and access
computer programs maintained by the Medicare and Medicaid Programs. In addition,
certain funds are received electronically from these programs. In the event the
Company is unable to bill these programs electronically due to system failures
of these programs, the Company is positioned to perform manual billing via
templates, manual workarounds and the reallocation of personnel to handle the
workload. We understand that cash receipts will be received in lump sums via
checks should system failures at the Medicare and Medicaid Programs occur.
Company personnel are developing procedures to facilitate the manual recording
of transactions normally maintained in computerized subledgers and the general
ledger in the event the ledger systems fail to perform as designed. Current
personnel are well versed in the manual processing of all applications and all
new personnel will be trained to perform functions manually to ensure continued
operations of the Company. All non-information technology systems (i.e.,
hardware, biomedical equipment, etc.) which could not be remediated have been
replaced.
Forward-looking Statements
Certain information included in this Form 10-Q and other materials filed or to
be filed by the Company with the Securities and Exchange Commission may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking information
involves known and unforeseen risks, uncertainties and other factors that may
cause actual results or performance to be materially different from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, uncertainties affecting the
Company's business generally, such as, the success of the Company's business
strategy, the Company's ability to increase the level of sub-acute and specialty
medical care it provides, the effects of government regulation and health care
reform, litigation, the Company's anticipated future revenues and additional
revenue opportunities, capital spending and financial resources, the Company's
ability to meet its liquidity needs, the resolution of Year 2000 issues, and
other statements contained in this Form 10-Q regarding matters that are not
historical facts.
13
<PAGE>
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements of the Company expressed or implied by such forward-looking
statements. Although management believes that the assumptions on which the
forward-looking statements contained herein are based are reasonable, any of
those assumptions could prove to be inaccurate and, as a result, the forward-
looking statements based on those assumptions also could be materially
incorrect. In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
the Company that the Company's plans and objectives will be achieved. The
Company disclaims any obligation to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain of the Company's debt obligations are sensitive to changes in interest
rates. The rates on the term loan and revolving credit facility, which both bear
interest at LIBOR plus an applicable margin, are reset at various intervals,
thus limiting their risk. The Company has not experienced significant changes in
market risk due to the stability of interest rates during the nine months ended
September 30, 1999.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
(27) Financial Data Schedule
The Company did not file any reports on Form 8-K during the nine months ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUNTAIN VIEW, INC.
Date: November 15, 1999 By: /s/PAUL C. RATHBUN
-----------------------------------
Paul C. Rathbun
Senior Vice President - Finance,
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date: November 15, 1999 By: /s/JOHN L. FARBER
-----------------------------------
John L. Farber
Vice President - Controller and
Assistant Secretary
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant Company Consolidated Balance Sheet (Unaudited) for September 30, 1999
and Consolidated Statements of Income (Unaudited) for the Nine Months ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,553
<SECURITIES> 0
<RECEIVABLES> 57,315
<ALLOWANCES> 11,973
<INVENTORY> 2,910
<CURRENT-ASSETS> 67,322
<PP&E> 270,331
<DEPRECIATION> 19,997
<TOTAL-ASSETS> 398,381
<CURRENT-LIABILITIES> 53,236
<BONDS> 120,000
15,000
0
<COMMON> 11
<OTHER-SE> 67,863
<TOTAL-LIABILITY-AND-EQUITY> 398,381
<SALES> 0
<TOTAL-REVENUES> 204,838
<CGS> 0
<TOTAL-COSTS> 202,260
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,665
<INCOME-PRETAX> 2,578
<INCOME-TAX> 1,562
<INCOME-CONTINUING> 2,578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,016
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
