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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
( ) 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 Company as specified in its charter)
Delaware 95-4644784
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 W. Magnolia Blvd., Burbank, CA 91505-3031
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 841-8750
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As the registrant's common stock is not publicly traded, the aggregate market
value of the voting stock held by non-affiliates of the registrant is not
determinable.
The number of shares outstanding of the registrant's common stock as of December
31, 1998 was 1,134,944.
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TABLE OF CONTENTS
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Pages
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PART I
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Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
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Forward-looking Statements
Certain information included in this Form 10-K 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-K regarding matters that are not
historical facts.
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PART I
Item 1. Business
General
Fountain View, Inc. ("Fountain View" or the "Company"), a Delaware Corporation,
along with its subsidiaries, 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. The Company operates 50
facilities with approximately 6,600 beds serving Medicare, Medicaid, managed
care, private pay and other patients. Sub-acute care is generally short-term,
goal-oriented rehabilitation care intended for individuals who have a specific
illness, injury or disease, but who do not require many of the services provided
in an acute care hospital. Sub-acute care is typically rendered immediately
after, or in lieu of, acute hospitalization in order to treat such specific
medical conditions.
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 to long-term care, Fountain View
provides a variety of high-quality ancillary services such as physical,
occupational and speech therapy in company-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.
Fountain View Equity Transactions
On or about August 1, 1997, the controlling shareholders of the Company
consummated a reorganization transaction (the "Fountain View Equity
Transactions"). Prior to the Fountain View Equity Transactions, the controlling
shareholders were the sole owners of a number of healthcare companies, which
they managed as one business enterprise. The separately owned companies
consisted of eight skilled nursing facilities, an assisted living facility and a
therapy company which provides therapy services primarily to third-party owned
facilities as well as Company-owned facilities. Additionally, the controlling
shareholders owned the real estate for four of the skilled nursing facilities.
The remaining real estate was leased from unrelated third parties.
The controlling shareholders along with Heritage Fund II, L.P. ("Heritage")
formed a new holding company known as Fountain View, Inc. along with several
acquisition subsidiaries to consolidate the healthcare companies owned by the
controlling shareholders into one company. At the same time, Fountain View
entered into market rate leases for the four skilled nursing facilities whose
real estate was owned by the controlling shareholders.
Under the terms of the Fountain View Equity Transactions, Heritage invested
$14.0 million in cash in Fountain View in exchange for all of the Company's
preferred stock with a liquidation value of $7.0 million, and 99,950 shares of
the Company's Common Stock Series A-2. The controlling shareholders at the same
time contributed all of their healthcare assets, except for owned real estate,
to Fountain View in exchange for 53,850 shares of the Company's Common Stock
Series A-1 and 46,200 shares of the Company's Common Stock Series A-3.
Concurrent with the exchange of shares, Fountain View obtained bank financing
totaling $31.0 million, the proceeds of which along with the $14.0 million
invested by Heritage was used to fund a distribution of $43.7 million of cash to
the controlling shareholders and pay $1.3 million in transaction costs.
Since the controlling shareholders maintained a controlling financial interest
in Fountain View, a change in control was not deemed to have occurred upon the
consummation of the Fountain View Equity Transactions. Therefore, the Fountain
View Equity Transactions were treated as a reorganization/merger of companies
under common control, with no step-up in basis of the assets of Fountain View.
Acquisition of Summit Care Corporation
On February 6, 1998, Fountain View, Summit Care Corporation, a California
corporation and its subsidiaries ("Summit"), and Heritage entered into an
Agreement and Plan of Merger providing for the acquisition of Summit by Fountain
View. Pursuant to the Merger Agreement, Fountain View offered to purchase all of
the outstanding shares of common stock of Summit at a price
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of $21.00 per share. The tender offer for the Summit shares expired on March 25,
1998 and Fountain View purchased approximately 99% of the Summit shares on March
27, 1998. The Summit operations 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 information included
herein includes the results of the Summit operations from the date of
acquisition.
In order to purchase the Summit shares, to refinance all then existing Fountain
View funded indebtedness, to redeem all outstanding options for Summit shares,
and to pay certain fees, expenses and other costs arising in connection with
such transactions, Fountain View sold, in a transaction exempt from registration
$120.0 million of 11 1/4% Senior Subordinated Notes due 2008 ("Notes"). The
Company also entered into a new revolving credit facility and term loan
facilities ("New Credit Facility") providing for revolving credit borrowings of
up to $30.0 million and term loan borrowings of up to $85.0 million. Fountain
View amended its certificate of incorporation to provide for 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 and 1.3 million shares of
Series C Common Stock, and 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. and certain other co-investors, $5.0 million
from Mr. Snukal, Fountain View's Chief Executive Officer, and Mrs. Snukal,
Fountain View's Executive Vice President and Mr. Snukal's wife, and $1.4 million
from Mr. Scott, Summit's Chairman and Chief Executive Officer.
Other 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 ("Buckner"), 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 return, as well as warrants to purchase 59,266 shares of
Fountain View's Series C Common Stock. As part of its investment, the Baylor
Group is entitled to have one of its nominees serve on Fountain View's board of
directors. Fountain View and Baylor are also in the process of discussing the
possible development or operation of certain facilities on a joint or
cooperative basis.
Operations
Services
Basic Healthcare Services
The Company provides skilled nursing care in each of its 44 SNFs which
collectively have 5,937 beds. Skilled nursing care consists of 24-hour care by
registered nurses, licensed practical or vocational nurses and certified aides,
as well as room and board, special nutritional programs, social services,
recreational activities and related medical and other services that may be
prescribed by a physician. Assisted living services include general services
provided by the Company's six ALFs, which collectively have 641 beds. These
services consist of basic room and board, social activities and assistance with
activities of daily living such as dressing and bathing.
Specialty Medical Care
The Company provides specialty medical care, including a wide range of sub-acute
services, to patients with medically complex needs who generally require more
intensive treatment and a higher level of skilled nursing care. These services
represent an area of strategic emphasis for the Company and typically generate
higher profit margins than basic healthcare services.
The Company is committed to providing its patients with the highest possible
standard of care. Fountain View has a Quality Assurance department consisting of
registered nurses who routinely visit the Company's facilities and conduct
quality assurance tests to ensure the consistently high quality of care provided
in each facility. Further, Quality Assurance personnel conduct regular training
for the nursing and other staff in each facility.
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The Company is in the process of obtaining accreditation by the Joint Commission
on Accreditation of Healthcare Organizations ("JCAHO") for each of its
facilities. As of December 31, 1998, 18 of the Company's 44 SNFs are JCAHO
accredited or are awaiting formal declaration of such accreditation, with the
remainder of the facilities slated for JCAHO accreditation review in the next 36
months. Management believes that the Company's JCAHO accreditation will assist
the Company in obtaining and maintaining high occupancy rates at its facilities
and demonstrates its commitment to a high standard of quality of care.
Sub-Acute Care. The Company provides a wide range of sub-acute services to
patients with medically complex needs, including the following:
Complex Medical Care. The Company provides complex medical care to those
patients who require a combination of medical treatments. Complex medical needs
often include the administration of intravenous medications for various
conditions, such as fluids for hydration, diuretics for congestive heart
failure, antibiotics for the treatment of infection, anti-coagulants to prevent
clotting or pain control for cancer patients. Patients requiring complex medical
care have typically undergone surgical procedures ranging from common joint
replacements to organ transplants, and require close monitoring.
Multiple Intravenous Medications. A variety of intravenous medications are
administered to patients through several types of venous access. The Company's
licensed nurses are intravenous therapy certified and skilled in initiating and
handling central and peripheral lines for intravenous medications.
Wound Care Programs. Wound care programs address the needs of patients suffering
from post-operative wounds, including stoma and ostomy care, and the care of
amputees. Treatment for surgical wounds includes the prevention of post-
operative infections and the removal of surgical staples. The Company also
treats patients for existing infections, including the treatment of antibiotic
resistant micro-organisms with multiple intravenous antibiotics.
Other Programs. The Company also provides blood transfusions, chemotherapy,
dialysis, enteral/parenteral nutrition, tracheotomy care, and ventilator care.
Alzheimer's Care. The Company's dedicated Alzheimer's units provide care for
patients with Alzheimer's disease and severe dementia. This type of care is
designed to reduce the stress and agitation associated with Alzheimer's disease
by addressing the problems of short attention spans and hyperactivity. The
physical environment of the Company's units is designed to reduce the problems
of disorientation and perceptual confusion experienced by Alzheimer's patients.
Therapy Services. Locomotion Therapy, a subsidiary of the Company, provides
rehabilitative physical, occupational and speech therapy to unaffiliated nursing
home operators and acute care hospitals as well as to Fountain View facilities,
using a progressive, personalized treatment approach to promote the patient's
highest level of independence in mobility and strength. Many of the Company's
patients who have undergone orthopedic surgeries, including joint replacements
such as total hip or knee replacements or fractures, receive physical therapy.
The Company's physical therapists also perform wound care and utilize electric
stimulation to stimulate viable tissue regrowth. Occupational therapy addresses
improvements in functional skills of the upper body and all aspects of self-
care. The Company also provides range of motion and strengthening exercises for
contracture prevention and reduction. Speech therapists treat patients with
speech disorders, perceptual problems, cognitive problems and swallowing
problems. In conjunction with the Company's nursing staff and respiratory
therapists, speech therapists help tracheotomy and ventilator patients use
speaking valves and breathing methods which allow them to communicate with
others.
Pharmacy Services. The Company provides pharmaceutical products and services
through two institutional pharmacies in Southern California. The Company also
owns a 50% equity interest in a limited liability company that operates a
pharmacy in Austin, Texas. These pharmacies serve unaffiliated SNFs, ALFs and
acute care hospitals located throughout much of Southern California and in
certain Texas markets, as well as most of the Company's SNFs and ALFs. The
Company's pharmacies provide prescription drugs, intravenous products, enteral
nutrition therapy services and infusion therapy services, including nutrition,
pain management, antibiotics and hydration.
Outpatient Therapy Clinics. The Company's On-Track subsidiary provides physical
therapy services to outpatients through two facilities in Fresno, California.
The Company intends to open additional facilities in underserved markets where
it has
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existing relationships with doctors and currently provides physical
therapy services to nursing homes through Locomotion Therapy.
Durable Medical Equipment. The Company provides various types of durable medical
equipment to Company-owned facilities, as well as unaffiliated facilities,
through a subsidiary. The types of equipment and supplies provided include
enteral feeding supplies, poles and pumps, catheterization equipment and
orthotics.
Sources of Revenue
The Company's SNFs receive payment for healthcare services from federally
assisted Medicaid and Medicare programs operated by preferred provider
organizations, health maintenance organizations, the Veterans Administration and
directly from patients or their responsible parties or insurers. The Company's
ALFs receive payment exclusively from private individuals, some of whom depend
upon supplemental Social Security payments as a primary source of income. The
sources and amounts of the Company's revenues are and will continue to be
determined by a number of factors, including the licensed bed capacity of its
facilities, occupancy rate, quality mix, the type of services rendered to the
patient and the rates of reimbursement among payor categories (primarily
private, Medicare and Medicaid). Quality mix represents revenues from Medicare,
Medi-Cal sub-acute, managed care, and private pay patients as a percentage of
net revenues.
The following table sets forth for the Company's SNFs, ALFs, pharmacy and
therapy operations the approximate percentages of net revenues, on a combined
basis, derived from the various payor categories for the periods indicated.
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Year Ended December 31,
1998 1997 1996
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Managed care and private pay 40.1% 44.2% 47.5%
Medicare 24.6 25.6 19.6
Medi-Cal sub-acute 1.5 3.1 2.6
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Subtotal (Quality Mix) 66.2 72.9 69.7
Medicaid 33.8 27.1 30.3
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Total 100.0% 100.0% 100.0%
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Changes in the quality mix between Medicaid, Medicare, managed care or private
pay can significantly affect profitability. Medicare, Medi-Cal sub-acute,
managed care and private pay patients constitute the most profitable payor
categories and Medicaid patients the least profitable. The Company continues to
maintain an attractive and improving high quality mix.
Employees
As of December 31, 1998, Fountain View had approximately 5,900 full-time
equivalent employees. The Company has three collective bargaining agreements
with a union covering approximately 400 employees. Fountain View considers the
relations with its employees to be good and it has not experienced any strikes
or work stoppages. Fountain View is subject to federal and state minimum wage
and applicable federal and state wage and hour laws and maintains various
employee benefit plans.
Competition
The Company operates in a highly competitive industry. The Company's SNFs and
ALFs are located in communities that are also served by competing facilities
operated by others. Some competing facilities provide services not offered by
the Company and some are operated by entities having greater financial and other
resources than the Company. In addition, some competing facilities are operated
by non-profit organizations or government agencies supported by endowments,
charitable contributions, tax revenues and other resources not available to the
Company. Furthermore, cost containment efforts, which encourage more efficient
utilization of acute care hospital services, have resulted in decreased hospital
occupancy in recent years. As a result, a significant number of acute care
hospitals have converted portions of their facilities to other purposes,
including specialty and sub-acute units. The competitiveness of the Company's
markets is further increased by the fact that within California, Texas and
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Arizona, a Certificate of Need is no longer required in order to build or expand
a SNF. However, in Texas, competition is limited by restrictions on the number
of beds that can be enrolled in the Medicaid program.
The Company's pharmacies and DME business also operate in highly competitive
environments. They compete with regional and local pharmacies, medical supply
companies and pharmacies operated by other long-term care chains or by other
companies ranging from small local operators to companies which are national in
scope and distribution capability. The Company also expects to encounter
continued competition in connection with its other ancillary services, including
physical, occupational and speech therapy.
Insurance
Fountain View maintains general and professional liability coverage, employee
benefits liability, property, casualty, directors and officers, inland marine,
crime, boiler and machinery coverage, health, automobile, employment practices
liability, earthquake and flood, workers' compensation and employers' liability.
The Company believes that its insurance programs are adequate.
Workers' Compensation. Fountain View's policy for workers' compensation for the
original Fountain View facilities, is a fully insured program for its California
employees. Fountain View's policy for the former Summit facilities for its
California and Arizona employees covers claims in excess of $250,000 per
occurrence and for annual aggregate claim amounts in excess of $986,000. Texas
employees are covered by a policy for employer's excess and occupational
indemnity for risks in excess of $150,000 up to $1,000,000 per occurrence with
no annual aggregate stop loss.
Professional Liability. Fountain View's skilled nursing services subject it to
liability risk. Malpractice claims may be asserted against the Company if its
services are alleged to have resulted in patient injury or other adverse
effects, the risk of which is greater for higher-acuity patients, such as those
receiving specialty and sub-acute services, than for traditional long-term care
patients. Fountain View has from time to time been subject to malpractice claims
and other litigation in the ordinary course of business. While the Company
believes that the ultimate resolution of all pending legal proceedings will not
have a material adverse effect on the Company's financial condition, there can
be no assurance that future claims will not have such an effect on the Company.
Fountain View's policy for general and professional liability coverage for the
original Fountain View facilities is a per occurrence policy and has limits of
$1,000,000 per occurrence and $3,000,000 in the aggregate per year and carries
no deductible except for employee benefits liability coverage, which carries a
$1,000 deductible per claim. In addition, Fountain View has a per occurrence
umbrella policy which provides additional insurance limits of $10,000,000 per
occurrence and $10,000,000 in the aggregate per year with a self-insured
retention of $10,000 per occurrence over its primary general, professional,
automobile and employers' liability coverage policies. Fountain View's policy
for general and professional liability coverages for the former Summit
facilities is a claims-made policy and has limits of $500,000 per occurrence and
$1,000,000 in the aggregate per year and carries a self-insured retention of
$100,000 per occurrence and a $700,000 annual aggregate loss limit. In addition,
for former Summit facilities, it has a claims-made umbrella policy which
provides additional insurance of $8,500,000 per occurrence and $8,500,000 in the
aggregate per year over its primary general and professional policy, its
automobile liability policy and its employer liability policy, for a combined
coverage of $9,500,000 in the aggregate.
Although Fountain View has not been subject to any judgments or settlements in
excess of its respective insurance limits, there can be no assurance that claims
for damages in excess of such coverage limits will not arise in the future.
Regulation
Licensure. The Company's SNF, ALF, sub-acute and specialty medical services,
therapy, pharmacy and DME businesses are subject to various regulatory and
licensing requirements of state and local authorities in California, Texas and
Arizona. Each SNF is licensed by either the California Department of Health
Services, the Texas Department of Human Services or the Arizona Department of
Health Services, as applicable. Each ALF is licensed by the California
Department of Social Services and the pharmacies are licensed by the California
Board of Pharmacy and the Texas State Board of Pharmacy. All licenses must be
renewed annually, and failure to comply with applicable rules, laws and
regulations could lead to revocation of licenses. In granting, monitoring and
renewing licenses, these agencies consider, among other things, the physical
condition of the facility, the qualifications of the administrative and nursing
staffs, the quality of care and compliance with applicable laws and regulations.
Such regulatory and licensing requirements are subject to change, and there can
be no assurance that the Company will continue
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to be able to maintain necessary licenses or that it will not incur substantial
costs in doing so. Failure to comply with such requirements could result in the
loss of the right to reimbursement by Medicare or Medicaid as well as the right
to conduct the business of the licensed entity. Further, the facilities operated
by the Company are subject to periodic inspection by governmental and other
regulatory authorities to assure continued compliance with various standards and
to provide for their continued licensing under state law and certification under
the Medicare and Medicaid programs.
From time to time, the Company receives notices from federal and state
regulatory agencies relating to alleged deficiencies for failure to comply with
all components of the regulations. Facilities which are not in substantial
compliance and do not correct deficiencies within a certain time frame may be
subject to civil money penalties and/or terminated from the Medicare and/or
Medicaid programs. While the Company endeavors to comply with all applicable
regulatory requirements, from time to time certain of the Company's nursing
facilities have been subject to various sanctions and penalties as a result of
deficiencies alleged by the Health Care Finance Administration ("HCFA") or state
survey agencies. In certain instances denial of certification or licensure
revocation actions have occurred. There can be no assurance that the Company
will not be subject to additional sanctions and penalties in the future as a
result of such actions.
In December 1998, the provider agreement for one of the Company's SNFs was
terminated as a result of surveys conducted by the California Department of
Health Services. The Company is both appealing this decision and proceeding with
the steps required to reinstate the a provider agreement for the Medicare and
Medicaid Programs. See Note 17 to the consolidated financial statements.
Medicare and Medicaid. The Company's SNFs are subject to various requirements
for participation in government-sponsored healthcare funding programs such as
Medicare and Medicaid. To receive Medicare and Medicaid payments, each facility
must also comply with a number of rules regarding charges and claims procedures,
the violation of which can result in denial of reimbursement. Medicare is a
health insurance program operated by the federal government for the aged and
certain chronically disabled individuals. Medicare benefits are not available
for the costs of intermediate and custodial levels of care including but not
limited to residents in ALFs; however, medical and physician services furnished
to patients requiring such care may be reimbursable under Medicare.
Cost-based Reimbursement System. Through December 31, 1998, for eight of the
Company's SNFs and through June 30, 1998, for 36 of the Company's SNFs, the
Medicare program utilized a cost-based reimbursement system which, subject to
limits fixed for the particular geographic area on the costs for routine
services (excluding capital related expenses), reimbursed SNFs for reasonable
direct and indirect allowable costs incurred in providing services as defined by
the Medicare program. Allowable costs normally include administrative and
general costs, as well as operating costs and rental, depreciation and interest
expenses. Reimbursement is subject to retrospective audit adjustment. An interim
rate based upon estimated costs is paid by Medicare during the cost reporting
period and a cost settlement is made following an audit of the actual costs as
reported in the filed cost report. Such adjustments may result in additional
payments being made to the Company or in recoupments from the Company. The
Company maintains reserves to cover such retroactive audit adjustments.
Fiscal intermediaries also occasionally undertake a more in-depth audit of a
facility's billing records. In March 1997, one of the Company's facilities was
the subject of a Medicare billing audit by its fiscal intermediary, resulting in
a finding that approximately $1,500,000 of charges for SNF services lacked a
timely certification of medical necessity by a physician. The Company repaid
such charges against the reimbursement of current claims. Following this audit,
the Company adopted measures to strengthen its documentation relating to
physician certification. While the Company does not believe that it is subject
to any other focused reviews, there can be no assurance that substantial monies
will not be expended by the Company in connection with any such audit or to
defend allegations arising therefrom. If it were found that a significant number
of the Company's Medicare claims failed to comply with Medicare billing
requirements, the Company could be materially adversely affected.
Prospective Payment System ("PPS"). The Balanced Budget Act requires the
establishment of a prospective payment system, or PPS, for Medicare Part A SNF
services under which facilities are paid a 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, starting with cost reporting
periods beginning on or after July 1, 1998. The Balanced Budget Act also
implemented consolidated billing on non-physician Part B services provided to
Medicare residents. Consolidated billing requires that SNFs be responsible for
billing all but specifically excluded services provided to Medicare residents.
Prior to consolidated billing, vendors who contracted with
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SNFs to provide Medicare-covered services, such as therapy services, billed
Medicare independently for those services. Under consolidated billing, SNFs will
be responsible for billing for most such services and, consequently, will be
directly compensating their vendors for services provided to Medicare residents.
Consolidated billing was to begin for services provided on or after July 1, 1998
but it has been indefinitely delayed by the Medicare Program. The Balanced
Budget Act also implemented fee screens for Part B therapy services provided on
or after January 1, 1999. These fee screens establish a set amount of
reimbursement for each procedure compared to the former cost-based system. In
addition, the Balanced Budget Act imposes a $1,500 per beneficiary annual cap on
certain Part B therapy services. Because PPS is in the process of being phased
in and its actual impact is still uncertain, there can be no assurance that the
Company's revenues under PPS will be sufficient to cover its costs to operate
its facilities.
In addition, prior to the enactment of the Balanced Budget Act, federal law
required state Medicaid programs to reimburse SNFs for costs incurred to meet
quality and safety standards. The Balanced Budget Act repealed this payment
standard, effective for services provided on or after October 1, 1997, thereby
granting states greater flexibility in establishing payment rates. There can be
no assurance that budget constraints or other factors will not cause states to
reduce Medicaid reimbursement to SNFs or that payments to SNFs will be made on a
timely basis. Any such efforts to reduce Medicaid payment rates or failure of
states to meet their Medicaid obligations on a timely basis could have a
material adverse effect on the Company.
Therapy Regulation. The Company furnishes therapy services on a contract basis
to certain affiliated and unaffiliated providers. For Medicare patients, the
providers bill the Medicare program for reimbursement of the amounts paid to the
Company for these services. HCFA has the authority to establish limits on the
amount Medicare reimburses for therapy services. For services other than
inpatient hospital services, these limits are equivalent to the reasonable
reimbursement that would have been paid if provider employees had furnished the
services. HCFA has exercised this authority by instituting "salary equivalency
guidelines" for physical therapy, respiratory therapy, speech language pathology
and occupational therapy services. In January 1998, HCFA issued a regulation,
effective April 1, 1998, that revised the pre-existing salary equivalency
guidelines for physical therapy and respiratory therapy and established, for the
first time, salary equivalency guidelines for speech language pathology and
occupational therapy services. The salary equivalency guidelines do not apply to
SNFs that are paid under PPS, which is being phased-in by Medicare, as discussed
above.
Pharmacy Regulation. The Company's pharmacies are subject to a variety of state
licensing and other laws governing the storage, handling, sale or dispensing of
drugs, in addition to federal regulation under the Food, Drug and Cosmetic Act
and the Prescription Drug Marketing Act. Moreover, the Company is required to
register its pharmacies with the United States Drug Enforcement Administration,
and to comply with requirements imposed by that agency with respect to security
and reporting of inventories and transactions. Medicare pays for the costs of
prescription drugs furnished in a number of different settings under very
limited circumstances. Medicaid programs reimburse pharmacies for drugs supplied
to patients based on the cost of the drug plus a mark-up which varies depending
on the type of drugs supplied.
Outpatient Therapy Regulation. Outpatient therapy services are currently
reimbursed on a per visit basis, subject to cost limits established by HCFA for
the given type of therapy provided to the patient. The Balanced Budget Act
contains provisions affecting outpatient rehabilitation agencies and providers,
including a 10% reduction in operating and capital costs for 1998, a fee
schedule for therapy services beginning in 1999 and the application of per
beneficiary therapy caps for all outpatient rehabilitation services beginning in
1999. These provisions may affect the reimbursement to the Company in connection
with the services provided by On-Track, the Company's outpatient therapy
subsidiary, and for Part B services provided to patients of the Company's SNFs.
DME Regulation. Medicare generally provides reimbursement for DME on a fee
schedule basis. The amount reimbursed depends on the classification of the DME
and, generally, will be the lesser of the provider's actual charge for the DME
or the fee schedule amount.
Referral Restrictions and Fraud and Abuse. The Company is also subject to
federal and state laws which govern financial and other arrangements between
healthcare providers. Federal law, as well as the law in California, Texas and
Arizona and other states, prohibits direct or indirect payments in some cases or
fee-splitting arrangements between healthcare providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
federal Anti-Kickback Statute which prohibits, among other things, the offer,
payment, solicitation or receipt of any form of remuneration in return for, or
to induce, the referral of Medicare and Medicaid patients. A
7
<PAGE>
wide array of relationships and arrangements, including ownership interests in a
company by persons who refer or are in a position to refer patients, as well as
personal service agreements have, under certain circumstances, been alleged or
been found to violate these provisions. Certain arrangements, such as the
provision of services for less than fair market value compensation, may also
violate such laws. Because of the law's broad reach, the federal government has
published regulations, known commonly as "safe harbors", which set forth the
requirements under which certain relationships will not be considered to violate
the law. One of these safe harbors protects payments for personal services which
are set in advance at a fair market rate and which do not vary with the value or
volume of services referred, provided there is a written contract which meets
certain requirements. A similar safe harbor applies for certain agreements for
management services. A safe harbor for discounts, which focuses primarily on
appropriate disclosure, is also available. A violation of the federal Anti-
Kickback Statute and similar state laws could result in the loss of eligibility
to participate in Medicare or Medicaid, or in criminal penalties of up to five
years imprisonment and/or $25,000 in fines.
In addition, the federal government and some states restrict certain business
relationships between physicians and other providers of healthcare services.
Effective January 1, 1995, Stark II prohibits any physician with a financial
relationship (defined as a direct or indirect ownership or investment interest
or compensation arrangement) with an entity from making any Medicare or Medicaid
referrals for a broad array of "designated health services" to such entity.
Violations of Stark II may result in the imposition of civil monetary penalties
of up to $15,000 for each prohibited service provided, as well as restitution of
reimbursement for such services.
There are also various federal and state laws prohibiting other types of fraud
by healthcare providers, including criminal provisions which prohibit filing
false claims or making false statements to receive payment or certification
under Medicare and Medicaid, or failing to refund overpayments or improper
payments. Violation of these provisions is a felony punishable by up to five
years imprisonment and/or $25,000 in fines. Civil provisions prohibit the known
filing of a false claim or the known use of false statements to obtain payment.
The penalties for such a violation are fines of not less than $5,000 nor more
than $10,000, plus treble damages, for each claim filed.
State and federal governments are devoting increasing attention and resources to
anti-fraud initiatives against healthcare providers. The Accountability Act and
the Balanced Budget Act expand the penalties for healthcare fraud, including
broader provisions for the exclusion of providers from the Medicare and Medicaid
programs and the establishment of civil monetary penalties for violations of the
anti-kickback provisions. While the Company believes that its practices are
consistent with Medicare and Medicaid guidelines, those guidelines are often
vague and subject to interpretation. There can be no assurance that aggressive
anti-fraud enforcement actions will not adversely affect the business of the
Company.
OIG Work Plan. Under Operation Restore Trust, a major anti-fraud demonstration
project, the Office of the Inspector General ("OIG"), in cooperation with other
federal and state agencies, has focused on the activities of SNFs, home health
agencies, hospices and DME suppliers in certain states, including California and
Texas, in which the Company currently operates. Due to the success of Operation
Restore Trust, the project has been expanded to numerous other states and to
additional healthcare providers including providers of ancillary nursing home
services. The Fiscal Year 1999 OIG Work Plan identifies eleven investigative
focus areas relating to nursing home care. These areas include patient care
issues identified in surveys, a review of SNF base year costs and the necessity
of therapy services. While management does not believe the Company is the
subject of any Operation Restore Trust or other OIG investigations, there can be
no assurance that substantial monies will not be expended by the Company to
cooperate with any such investigation or to defend allegations arising
therefrom. If it were found that any of the Company's practices failed to comply
with the anti-fraud provisions, the Company could be materially affected.
Pending Legislation. Government reimbursement programs are subject to statutory
and regulatory changes, retroactive rate adjustments, administrative ceilings
and government funding restrictions, all of which could materially decrease the
rates paid to the Company for its services. Since 1972, Congress has
consistently attempted to curb federal spending on healthcare programs. The
Company expects that there will continue to be a number of state and federal
proposals to limit Medicare and Medicaid reimbursement for healthcare services.
The Company cannot, at this time, predict what healthcare reform legislation
will ultimately be enacted and implemented or whether other changes in the
administration
8
<PAGE>
or interpretation of the governmental healthcare programs will occur. There can
be no assurance that future healthcare legislation or other changes in the
administration or interpretation of governmental healthcare programs, if
enacted, will not have a material adverse effect on the results of operations of
the Company.
Shift to Managed Care. Management anticipates that one of the most significant
changes to the financing of healthcare services is the shift to managed care,
and that the federal Medicare program, state Medicaid programs and private
insurers will place greater reliance on managed care alternatives in the future.
According to HCFA, in 1996, 35% of Medicare enrollees in California had enrolled
in a managed care program. In comparison, 8% of Medicare enrollees in Texas had
enrolled in managed care programs, and approximately 14% of Medicare enrollees
nationwide had enrolled in a managed care program. Providers are generally
willing to discount charges for services to managed care patients because
managed care plans can direct or strongly influence the flow of patients.
Management believes that the Company is likely to serve an increasing proportion
of managed care enrollees in the future, although payment rates for such
services may not be as favorable as those presently in effect. There can be no
assurance that changes in reimbursement rates for services provided under
managed care programs will not adversely affect the Company's revenues.
Environmental Regulation. The Company is also subject to a wide variety of
federal, state and local environmental and occupational health and safety laws
and regulations. Regulatory requirements faced by healthcare providers are in
the following areas: air and water quality control; waste management; asbestos,
polychlorinated biphenyls, and radioactive substances; requirements for
providing notice to employees and members of the public about hazardous
materials and wastes; and certain other requirements.
In its role as owner and/or operator of its facilities, the Company may be
subject to liability for investigating and remediating any hazardous substances
that are located on the property, including any such substances that may have
migrated off, or emitted, discharged, leaked, escaped or been transported from
the property. Part of the Company's operations may involve the handling, use,
storage, transportation, disposal and/or discharge of hazardous, infectious,
toxic, radioactive, flammable and other hazardous materials, wastes, pollutants
or contaminants. Such activities may result in damage to individuals, property
or the environment; may interrupt operations and/or increase costs; may result
in legal liability, damages, injunctions or fines; may result in investigations,
administrative proceedings, penalties or other governmental agency actions; and
may not be covered by insurance. There can be no assurance that the Company will
not encounter such risks in the future, and such risks may result in material
adverse consequences to the operations or financial condition of the Company.
Item 2. Properties
As of December 31, 1998, the Company owns or leases 44 SNFs with a total of
5,937 beds and six ALFs with a total of 641 beds. In addition, the Company owns
its corporate headquarters and leases space in buildings for its pharmacy and
therapy businesses. The following table sets forth certain information
concerning the SNFs and ALFs currently operated by the Company.
9
<PAGE>
<TABLE>
<CAPTION>
Number of Beds
----------------------------------------------------
Facility Location Owned Leased Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Skilled Nursing - California
Woodland Reseda - 153 153
Royalwood Torrance - 108 108
Valley Fresno 99 - 99
Villa Maria Santa Maria 85 - 85
Earlwood Torrance 85 - 85
Sharon Los Angeles - 85 85
Bay Crest Torrance - 78 78
Fountain Orange 172 - 172
Carehouse Santa Ana 174 - 174
Palm Grove Garden Grove - 122 122
Anaheim Anaheim - 97 97
Devonshire Hemet 98 - 98
Willow Creek Fresno 159 - 159
Rio Hondo Montebello - 200 200
Hancock Park Los Angeles - 141 141
Brier Oak Terrace Los Angeles - 159 159
Alexandria Los Angeles - 177 177
Montebello Montebello - 99 99
Fountain View Los Angeles - 99 99
Sycamore Park Los Angeles - 90 90
Elmcrest El Monte - 96 96
------------------------------------------------
Subtotal 872 1,704 2,576
Skilled Nursing - Texas
Coronado Abilene 219 - 219
West Side White Settlement 238 - 238
The Woodlands Houston 212 - 212
Colonial Tyler Tyler 162 - 162
Colonial Manor New Braunfels 152 - 152
Guadalupe Valley Seguin - 149* 149
Town & Country Boerne 124 - 124
Clairmont-Longview Longview 174 - 174
Clairmont-Beaumont Beaumont 148 - 148
Clairmont-Tyler Tyler 116 - 116
Hallettsville Rehab & Nursing Hallettsville 114 - 114
Southwood Austin 112 - 112
Comanche Trail Big Spring - 115* 115
Lubbock Lubbock 114 - 114
Monument Hill La Grange 111 - 111
Live Oak George West - 100* 100
Oak Crest Rockport 92 - 92
Oakland Manor Giddings 114 - 114
Oak Manor Flatonia 80 - 80
Heritage Oaks Lubbock 161 - 161
Cityview Fort Worth 210 - 210
Briarcliff McAllen - 194* 194
------------------------------------------------
Subtotal 2,653 558 3,211
Skilled Nursing - Arizona
Los Olivos Phoenix - 150 150
------------------------------------------------
Total Skilled Nursing 3,525 2,412 5,937
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Number of Beds
-------------------------------------------------
Facility Location Owned Leased Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assisted Living - California
Carson Carson 202 - 202
Spring Torrance 51 - 51
Hemet Hemet 84 - 84
Fountain Orange 72 - 72
Ashton Court Orange 66 - 66
Hancock Park Los Angeles - 166 166
-----------------------------------------------
Total Assisted Living 475 166 641
-----------------------------------------------
Grand Total 4,000 2,578 6,578
===============================================
</TABLE>
* The lease agreement includes an option to purchase these facilities.
Item 3. Legal Proceedings
Fountain View is subject to routine litigation in the ordinary course of
business. Although there can be no assurances, in the opinion of management, the
ultimate resolution of all pending legal proceedings will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of its fiscal year ended December 31, 1998.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Market Information
There is no established public trading market for the Company's common stock.
Holders
As of March 22, 1999, the Company had 1,134,944 shares of common stock
outstanding held by approximately 34 shareholders of record.
Dividends
No dividends were paid during the year ended December 31, 1998. The Company's
ability to pay dividends is limited by the credit agreement related to the Term
Loan Facility and the Revolving Credit Facility and the indenture agreement
related to the Senior Subordinated Notes. See Note 7 to the consolidated
financial statements. Payment of dividends or distributions is also limited as
long as the Series A Preferred Stock remains outstanding.
11
<PAGE>
PART II
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(Dollars in thousands)
The following table summarizes selected financial data of the Company and should
be read in conjunction with the related Consolidated Financial Statements and
accompanying Notes to Consolidated Financial Statements:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income Data (year ended
December 31):
Net revenue $223,143 $ 67,905 $59,432 $55,836 $51,824
Income (loss) before provision for income taxes and
extraordinary item (3,121) 5,563 3,878 2,640 4,594
Net income (loss) (2,906) 5,202 3,800 2,586 4,637
Consolidated Balance Sheet Data (at December 31):
Total assets 411,728 25,941 24,122 24,693 18,433
Long-term debt, including current maturities and
excluding redeemable, preferred stock 248,888 30,076 666 6,764 7,359
Stockholders' equity (deficit) 66,858 (12,236) 16,601 9,957 9,399
Other Data:
Nursing centers:
Total beds (at December 31) 5,937 1,061 1,061 1,061 1,061
Average occupancy (year ended December 31) 87.7% 89.3% 88.8% 88.1% 89.1%
Assisted living centers:
Total beds (at December 31) 641 166 166 166 166
Average occupancy (year ended December 31) 76.2% 52.8% 50.0% 50.0% 50.0%
Total nursing and assisted living centers:
Total beds (at December 31) 6,578 1,227 1,227 1,227 1,227
Average occupancy (year ended December 31) 86.6% 84.4% 83.6% 82.9% 83.8%
</TABLE>
Item 7. Management's Discussion And Analysis of Financial Condition And Results
of Operations (Dollars in Thousands)
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended December
31, 1997
Net revenues increased $155,238 or 228.6% from $67,905 in the year ended
December 31, 1997 to $223,143 in the year ended December 31, 1998. Substantially
all of the increase was due to the acquisition of Summit Care.
Total average occupancy was 86.6% in the year ended December 31, 1998 and 84.4%
in the year ended December 31, 1997. The Company's quality mix (total net
revenues less Medicaid net revenues) was 66.2% in the year ended December 31,
1998 and 72.9% in the year ended December 31, 1997.
12
<PAGE>
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net revenues
increased from 82.8% of net revenues in the year ended December 31, 1997 to
85.5% in the year ended December 31, 1998. Salaries and benefits were 52.0% of
net revenues in the year ended December 31, 1998 compared to 56.3% in the year
ended December 31, 1997. This decrease was partly due to a restructuring of
Company benefits in August 1998. Expenses increased $134,482 or 239.3% from
$56,205 in the year ended December 31, 1997 to $190,687 in the year ended
December 31, 1998. Substantially all of the increase was due to the acquisition
of Summit Care.
Income before rent, rent to related parties, depreciation and amortization and
interest expense increased $20,756 or 177.4% from $11,700 in the year ended
December 31, 1997 to $32,456 in the year ended December 31, 1998 and was14.5% of
net revenues in the year ended December 31, 1998 compared to 17.2% in the year
ended December 31, 1997.
Rent, rent to related parties, depreciation and amortization and interest
expense increased $29,440 or 479.7% from $6,137 in the year ended December 31,
1997 to $35,577 in the year ended December 31, 1998. Substantially all of this
increase was due to higher depreciation and amortization costs related to the
acquisition of Summit Care's tangible and intangible assets and an increase in
amortization costs and interest expense as a result of the debt refinancing.
Prior to the Fountain View Equity Transactions, most of the individually owned
corporations had elected to be taxed as cash basis S-Corporations and, until
July 31, 1997, only recorded state income taxes. On a proforma basis, for the
year ended December 31, 1997, the Company has recorded a charge in lieu of
income taxes to arrive at a combined proforma effective tax rate of 35.1% as if
the Company had been taxed as a C-Corporation. Net income after the proforma
charge in lieu of income taxes, decreased $6,518 or 180.5% from $3,612 in the
year ended December 31, 1997 to a net loss of $2,906 in the year ended December
31, 1998.
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996
Net revenues increased $8,473 or 14.3% from $59,432 in the year ended December
31, 1996 to $67,905 in the year ended December 31, 1997. The increase in net
revenue was due in part to growth in the skilled nursing business, driven by
occupancy, improving quality mix, and the increase in provision of services by
Medi-Cal sub-acute units in two facilities. During 1997, Medi-Cal sub-acute per
diem reimbursement rates were approximately three times higher than Medi-Cal SNF
per diem reimbursement rates. The increase in net revenue was also attributable
to increased revenues generated by Fountain View's Locomotion Therapy
subsidiary.
Total average occupancy was 84.4% in the year ended December 31, 1997 and 83.6%
in the year ended December 31, 1996. The Company's quality mix (total net
revenues less Medicaid net revenues) was 72.9% in the year ended December 31,
1997 and 69.7% in the year ended December 31, 1996.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net revenues
decreased from 85.4% of net revenues in the year ended December 31, 1996 to
82.8% in the year ended December 31, 1997. Salaries and benefits increased,
primarily as the result of four separate increases in federal and state minimum
wage levels between October 1, 1996 and December 31, 1997 as well as
discretionary employee bonuses paid during 1997. However, salaries and benefits
were 56.3% of net revenues in the year ended December 31, 1997 compared to 60.9%
in the year ended December 31, 1996, reflecting the revenue improvement.
Expenses increased $5,425 or 10.7% from $50,780 in the year ended December 31,
1996 to $56,205 in the year ended December 31, 1997. Expenses increased partly
as the result of the termination of non-compete agreements and consulting
agreements relating to the Fountain View Equity Transactions totaling $965, $810
of settlement costs associated with an employee lawsuit involving a specific
type of liability for which the Company currently maintains insurance coverage,
and $415 of other charges related to the Fountain View Equity Transactions.
Income before rent, rent to related parties, depreciation and amortization and
interest expense increased $3,048 or 35.2% from $8,652 in the year ended
December 31, 1996 to $11,700 in the year ended December 31, 1997 and was 17.2%
of net revenues in the year ended December 31, 1997 compared to 14.6% in the
year ended December 31, 1996.
Rent, rent to related parties, depreciation and amortization and interest
expense increased $1,363 or 28.6% from $4,774 in the year ended December 31,
1996 to $6,137 in the year ended December 31, 1997. The increase was primarily
due to increased
13
<PAGE>
depreciation costs related to renovation expenditures during
1996 and 1997 and an increase in interest expense as a result of the Fountain
View Equity Transactions.
Prior to the Fountain View Equity Transactions, most of the individually owned
corporations had elected to be taxed as cash basis S-Corporations and, until
July 31, 1997, only recorded state income taxes. On a proforma basis, for the
years ended December 31, 1997 and 1996, the Company has recorded a charge in
lieu of income taxes to arrive at a combined proforma effective tax rate of
35.1% and 40.5%, respectively, as if the Company had been taxed as a C-
Corporation. Net income after the proforma charge in lieu of income taxes,
increased $1,305 or 56.6% from $2,307 in the year ended December 31, 1996 to
$3,612 in the year ended December 31, 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company had $1,229 in cash and cash equivalents and
working capital of $20,329. During the year ended December 31, 1998, the
Company's cash and cash equivalents decreased by $1,322.
Net cash provided by operating activities decreased $8,306 from $12,739 in the
year ended December 31, 1997 to $4,433 in the year ended December 31, 1998.
This decrease was primarily due to a reduction in accounts payable and accrued
liabilities and an increase in accounts receivable.
In 1998, $7,654 was used for the purchase of property and equipment compared to
$2,570 and $1,816 in 1997 and 1996, respectively. In addition, $175,090, net of
cash acquired, was used for the acquisition of Summit in 1998.
In 1998, $314,859 was provided by financing activities (net of applicable
issuance costs) from the issuance of common stock, preferred stock and proceeds
from the issuance of long-term debt and borrowings on the Company's bank line of
credit, offset by the payoff of the Company's then existing credit facilities
totaling $139,804 in connection with the Summit acquisition. In 1997, the
Company used a net $7,604 in financing activities which consisted principally of
borrowings on the Company's credit facility of $32,500, proceeds from the
issuance of stock and shareholder contributions of $13,959, less distributions
to shareholders of $48,118, and repayments of debt totaling $6,065.
Long-term debt, including current maturities, totaling $248,888 at December 31,
1998 consisted of mortgage and capital lease obligations of $20,227, a term loan
credit facility of $90,000, $120,000 in senior subordinated notes, and
borrowings on the Company's revolving loan facility of $18,661. The term loan
credit and revolving loan facilities, collectively known as the "Bank Credit
Facility", contain usual and customary covenants including certain financial
covenants, including a minimum fixed charge ratio, a maximum leverage ratio and
a minimum net worth test. The Company was not in compliance with certain
financial covenants at December 31, 1998. The covenants were amended by the bank
group in March 1999. After the amendment, the Company was in compliance with all
financial covenants and the Company anticipates it will be in compliance during
1999.
The Company had $11,339 in available borrowings on its revolving loan facility
at December 31, 1998. 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 $4,735, 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.
The Company's ability to make scheduled principal and interest payments or to
fund planned capital expenditures and any acquisitions will depend on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the current level of operations and anticipated
cost savings and revenue growth, management believes that cash flow from
operations and available cash, together with available borrowings under its bank
line of credit, will be adequate to meet the Company's future liquidity needs
for at least the next twelve months. There can be no assurance that the
Company's business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
future borrowings will be available under its bank line of credit in an amount
sufficient to enable the Company to service its indebtedness or to fund its
14
<PAGE>
other liquidity needs. In addition, there can be no assurance that the Company
will be able to obtain any refinancing or additional borrowings, if necessary.
The Company is restricted in its ability to pay dividends on its Common Stock
based on certain provisions of its loan agreements. The Company does not expect
to pay any dividends in 1999.
Recent Accounting Pronouncements
Disclosure of Information about Capital Structure
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information
about Capital Structure," ("SFAS No. 129"), which consolidates the existing
guidance relating to an entity's capital structure. The required capital
structure disclosures include liquidation preferences of preferred stock,
information about pertinent rights and privileges of the outstanding equity
securities and the redemption amount of all issues of capital stock that are
redeemable at fixed or determinable prices on fixed or determinable dates. All
required disclosures have been made in the accompanying consolidated financial
statements.
Reporting Comprehensive Income
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for the reporting of comprehensive income
and its components in a full set of general purpose financial statements. The
standard is effective for fiscal years beginning after December 15, 1997.
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.
Disclosures about Segments of an Enterprise
In 1997, the FASB issued SFAS 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. The Company has identified its business segments to be nursing
services, therapy services and pharmacy services. See Note 16 of notes to
consolidated financial statements for such disclosure.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 1999. SFAS 133 permits early adoption
as of the beginning of any fiscal quarter after its issuance. The Company
expects to adopt SFAS 133 effective January 1, 2000. SFAS will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not have any derivatives at
December 31, 1998, and does not anticipate that the adoption of SFAS 133 will
have a significant effect on its results of operations or financial position.
15
<PAGE>
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, 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
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 that have time-sensitive software 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 is in the process of assessing its Year 2000 issues. This assessment
will address information technology and non-information technology systems, as
well as, Year 2000 issues relating to third parties. This assessment will
include estimated costs, an evaluation of associated risks and contingency
plans, as necessary, to ensure the Company is Year 2000 compliant. The Company's
plan with regard to the Year 2000 issue for each of these items 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.
The Company expects to complete its assessment in the second quarter of 1999.
There can be no assurance, however, that the Company will complete such
assessment in a timely manner nor that such assessment, when completed will
identify all potential Year 2000 issues. Failure to timely complete an
assessment of Year 2000 issues which may affect the Company, 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 Company intends to replace certain of its existing packaged software
applications that have been determined to be non-compliant with the Year 2000
compliant version. These applications include certain of the facility billing
and accounts receivable packages along with certain of the company-level
accounts payable and general ledger applications. The Company has either
selected or is near the finalization of the selection process for these various
applications. The software and hardware costs relating to these new systems or
new system upgrades are estimated to be approximately $500,000 and $125,000,
respectively. The Company intends to implement these systems primarily utilizing
internal resources. The Company anticipates that these implementations will
primarily occur during the second and third quarters of 1999 with completion of
implementation of all applications by early in the fourth quarter of 1999.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements relating to
future events or the future financial performance of the Company including, but
not limited to, statements contained in "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations". These forward-looking statements include, among other things,
synergies resulting from the Summit acquisition, the success of the Company's
business strategy, the Company's ability to develop and expand its business in
regional markets, the Company's ability to increase the level of sub-acute and
specialty medical care it provides, the effects of government regulation and
healthcare reform, litigation, the Company's anticipated future revenues and
additional revenue opportunities, capital spending and financial resources, the
liquidity demands of the Company, the Company's ability to meet its liquidity
needs, the resolution of Year 2000 issues, and other statements
16
<PAGE>
contained in this Annual Report on Form 10-K that are not historical facts.
Although management of the Company believes that the assumptions on which these
forward-looking statements 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. Readers are
cautioned that such forward-looking statements, which may be identified by words
including "anticipates," "believes," "intends," "estimates," "plans," and other
similar expressions, are only predictions or estimations and are subject to
known and unknown risks and uncertainties, over which the Company has little or
no control. In evaluating such statements, readers should consider the various
factors identified above which could cause actual events, performance or results
to differ materially from those indicated by such statements.
17
<PAGE>
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
The following table provides information about the Company's debt obligations
that are sensitive to changes in interest rates. The table presents principal
cash flows and related weighted-average interest rates by maturity dates.
Additionally, the Company has assumed its other long-term debt, comprised of
capital lease obligations, promissory notes, mortgages, and other notes payable,
are similar enough to aggregate for fixed rate presentation purposes. The Term
Loan and Revolving Credit Facility (the "Variable Rate Loans"), which both bear
interest at LIBOR plus an applicable margin between 1.75% and 2.75%, are
aggregated for variable rate presentation purposes. The margin as of December
31, 1998 was 2.75%. The rates on the Variable Rate Loans are reset at various
intervals. The average interest rate for the Variable Rate Loans was based on
the weighted average rate of outstanding borrowings at December 31, 1998. The
Company does not have any other material balances which are sensitive to changes
in interest rates.
<TABLE>
<CAPTION>
Fair Value
There- at December
(Dollars in thousands) 1999 2000 2001 2002 2003 after Total 31, 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term debt, including
current portion:
Senior Subordinated Notes
Fixed rate $ - $ - $ - $ - $ - $120,000 $120,000 $105,600
Average interest rate 11.25% 11.25% 11.25% 11.25% 11.25% 11.25%
Term Loan and Revolving
Credit Facility
Variable rate $3,750 $8,750 $17,500 $21,875 $26,250 $ 30,536 $108,661 $108,661
Average interest rate 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%
Other long-term debt
Fixed rate $ 268 $3,630 $ 127 $ 139 $ 1,712 $ 2,695 $ 8,571 $ 8,571
Average interest rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Fixed rate $ 171 $ 186 $ 202 $ 219 $ 4,863 $ - $ 5,641 $ 5,641
Average interest rate 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%
Fixed rate $ 42 $ 45 $ 49 $ 53 $ 57 $ 3,418 $ 3,664 $ 3,664
Average interest rate 7.8% 7.8% 7.8% 7.8% 7.8% 7.8%
Fixed rate $ 439 $ 481 $ 434 $ - $ - $ - $ 1,354 $ 1,354
Average interest rate 7.0% 7.0% 7.0% - - -
Variable rate* $ 65 $ 65 $ 867 $ - $ - $ - $ 997 $ 997
Average interest rate 8.0% 8.0% 8.0% - - -
</TABLE>
* LIBOR plus 2.95%
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Fountain View, Inc.
We have audited the accompanying consolidated balance sheets of Fountain View,
Inc. and the related consolidated statements of income, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements 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
Fountain View, Inc. at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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
March 17, 1999
19
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Net revenues $223,143 $67,905 $59,432
Expenses:
Salaries and benefits 116,004 38,215 36,166
Supplies 23,617 8,293 5,483
Purchased services 30,990 4,256 4,658
Provision for doubtful accounts 3,892 395 430
Other expenses 16,184 5,046 4,043
Rent 4,346 2,004 2,120
Rent to related parties 1,776 1,771 1,776
Depreciation and amortization 11,510 1,198 600
Interest expense, net of interest income 17,945 1,164 278
-------------------------------
Total expenses 226,264 62,342 55,554
Income (loss) before provision for income taxes and
extraordinary item (3,121) 5,563 3,878
Income tax (benefit) provision (732) 361 78
-------------------------------
Income (loss) before extraordinary item (2,389) 5,202 3,800
Extraordinary item:
Loss on early extinguishment of debt, net of taxes (517) - -
-------------------------------
Net income (loss) $ (2,906) $ 5,202 $ 3,800
===============================
Proforma net income:
Net income (loss) as reported $ (2,906) $ 5,202 $ 3,800
Charge in lieu of income taxes for S-Corporation - 1,590 1,493
-------------------------------
Net income (loss) $ (2,906) $ 3,612 $ 2,307
===============================
</TABLE>
See accompanying notes.
20
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,229 $ 2,551
Accounts receivable, less allowance for doubtful accounts of $11,052 and $1,152,
in 1998 and 1997, respectively 51,384 15,809
Income taxes receivable 732 -
Current portion of deferred income taxes 10,308 927
Other current assets 7,221 576
--------------------------------
Total current assets 70,874 19,863
Property and equipment, at cost:
Land and land improvements 25,064 -
Buildings and leasehold improvements 211,348 4,659
Furniture and equipment 28,440 2,096
Construction in progress 1,289 -
--------------------------------
266,141 6,755
Less accumulated depreciation and amortization (11,123) (2,481)
--------------------------------
255,018 4,274
Notes receivable, less allowance for doubtful accounts of $590 for 1998 5,553 -
Goodwill, net 58,689 500
Deferred financing costs, net 11,961 911
Deferred income taxes 5,385 -
Other assets 4,248 393
--------------------------------
Total assets $411,728 $25,941
================================
</TABLE>
See accompanying notes.
21
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except stock information)
<TABLE>
<CAPTION>
December
1998 1997
--------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Payable to banks $ 2,680 $ -
Accounts payable and accrued liabilities 29,652 4,084
Employee compensation and benefits 9,780 2,479
Accrued interest payable 3,366 94
Income taxes payable - 1,443
Current portion of deferred income taxes 332 -
Current maturities of long-term debt and capital leases 4,735 1,741
--------------------------------
Total current liabilities 50,545 9,841
Long-term debt and capital leases, less current maturities 244,153 28,335
Deferred income taxes 35,172 1
--------------------------------
Total liabilities 329,870 38,177
Preferred Stock Series A, mandatorily redeemable, $0.01 par value: 1,000,000
shares authorized, 15,000 shares issued and outstanding at 1998 (liquidation
preference of $15 million), none at 1997 15,000 -
Commitments and contingencies - -
Shareholders' equity (deficit):
Preferred Stock, $0.01 par value: 7,000 shares authorized, issued and
outstanding at 1997 (liquidation preference of $7 million), none at 1998 - -
Common Stock Series A, $0.01 par value: 1,500,000 shares authorized, 1,000,000
and 200,000 shares issued and outstanding at 1998 and 1997 10 2
Common Stock Series B, $0.01 par value: 200,000 shares authorized, 114,202
shares issued and outstanding at 1998, none at 1997 1 -
Common Stock Series C, $0.01 par value: 1,300,000 shares authorized, 20,742
shares issued and outstanding at 1998, none at 1997 - -
Additional paid-in capital 106,488 21,957
Retained earnings (accumulated deficit) (37,101) (34,195)
Due from shareholder (2,540) -
-------------------------------
Total shareholders' equity (deficit) 66,858 (12,236)
-------------------------------
Total liabilities and shareholders' equity (deficit) 411,728 $ 25,941
===============================
</TABLE>
See accompanying notes.
22
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Three years ended December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Common Stock Common Stock Common Stock
----------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 - $ - - $ - - $ - - $ -
Net income - - - - - - - -
Contributions from shareholders - - - - - - - -
Distributions to shareholders - - - - - - - -
-----------------------------------------------------------------------------------
Balance at December 31, 1996 - - - - - - - -
Net income - - - - - - - -
Contributions before reorganization - - - - - - - -
Cancellation of treasury stock - - - - - - - -
Distributions to shareholders before
reorganization - - - - - - - -
Reorganization:
Issuance of preferred stock 7,000 - - - - - - -
Issuance of common stock - - - - - - - -
Transactional costs - - - - - - - -
Distributions to shareholders - - - - - - - -
------------------------------------------------------------------------------------
Balance at December 31, 1997 7,000 - - - - - - -
Net income (loss) - - - - - - - -
Issuance of common stock - - 648,065 10 114,202 1 - -
Exercise of warrants - - - - - - 20,742 -
Stock purchase in exchange for note
receivable - - 20,000 - - - - -
Exchange of common stock (7,000) - 331,935 - - - - -
------------------------------------------------------------------------------------
Balance at December 31, 1998 - $ - 1,000,000 $ 10 114,202 $ 1 20,742 $ -
====================================================================================
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Series A-1 Series A-2 Series A-3 Retained
Common Stock Common Stock Common Stock Additional Earnings
- ----------------------------------------------------------- Paid-In Treasury (Accumulated Due From
Shares Amount Shares Amount Shares Amount Capital Stock Deficit) Share-holder Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- $ - - $ - - $ - $ 1,216 $ (120) $ 8,860 $ - $ 9,956
- - - - - - - - 3,800 - 3,800
- - - - - - 6,784 - - - 6,784
- - - - - - - - (3,939) - (3,939)
- -------------------------------------------------------------------------------------------------------------------------------
- - - - - - 8,000 (120) 8,721 - 16,601
- - - - - - - - 5,202 - 5,202
- - - - - - 1,277 - - - 1,277
- - - - - - - 120 - - 120
- - - - - - - - (4,418) - (4,418)
- - - - - - 7,000 - - - 7,000
53,850 1 99,950 1 46,200 - 6,998 - - - 7,000
- - - - - - (1,318) - - - (1,318)
- - - - - - - - (43,700) - (43,700)
- -------------------------------------------------------------------------------------------------------------------------------
53,850 1 99,950 1 46,200 - 21,957 - (34,195) - (12,236)
- - - - - - - - (2,906) - (2,906)
- - - - - - 81,989 - - - 82,000
- - - - - - - - - - -
- - - - - - 2,540 - - (2,540) -
(53,850) (1) (99,950) (1) (46,200) - 2 - - - -
- -------------------------------------------------------------------------------------------------------------------------------
- $ - - $ - - $ - $ 106,488 $ - $(37,101) $ (2,540) $ 66,858
===============================================================================================================================
</TABLE>
See accompanying notes.
24
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (2,906) $ 5,202 $ 3,800
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 11,510 1,198 600
Changes in operating assets and liabilities:
Accounts receivable (4,266) 2,908 (3,757)
Other current assets 1,237 137 (92)
Accounts payable and accrued liabilities (4,519) 2,722 421
Employee compensation and benefits 1,959 56 116
Income taxes payable 1,567 1,443 (29)
Deferred income taxes (149) (927)
-----------------------------------
Total adjustments 7,339 7,537 (2,741)
-----------------------------------
Net cash provided by operating activities 4,433 12,739 1,059
Investing activities:
Principal payments on notes receivable 1,089 - -
Additions to property and equipment (7,654) (2,570) (1,816)
Acquisition of Summit Care, net of cash acquired (153,521) - -
Decrease in acquisition related liabilities (16,531) - -
Additions to other assets (857) (1,175) -
-----------------------------------
Net cash used in investing activities (177,474) (3,745) (1,816)
Financing activities:
Increase (decrease) in payable to bank 735 (2,975) (925)
Decrease in capital lease obligations (4,071) - -
Principal payments on and retirement of long-term debt (139,804) (3,090) (472)
Proceeds from long-term debt, net of issuance costs 217,859 32,500 249
Proceeds from issuances of common stock 82,000 12,682 -
Proceeds from issuance of mandatorily redeemable preferred stock 15,000 - -
Contributions from shareholders - 1,277 4,649
Cancellation of treasury stock - 120 -
Distributions to shareholders - (48,118) (3,939)
-----------------------------------
Net cash provided by (used in) financing activities 171,719 (7,604) (438)
----------------------------------
Increase (decrease) in cash and cash equivalents (1,322) 1,390 (1,195)
Cash and cash equivalents at beginning of year 2,551 1,161 2,356
-----------------------------------
Cash and cash equivalents at end of year $ 1,229 $ 2,551 $ 1,161
===================================
</TABLE>
See accompanying notes.
25
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Noncash activity:
Additional paid-in-capital relating to debt forgiveness $ - $ - $2,135
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 $ 374,016 $ - $ -
Less: Liabilities assumed (219,131) - -
-----------------------------------
Cash paid for acquisition 154,885 - -
Less: Cash acquired from Summit (1,364) - -
-----------------------------------
Net cash paid for acquisition $ 153,521 $ - $ -
===================================
</TABLE>
See accompanying notes.
26
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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. Fountain View Equity Transactions
On or about August 1, 1997, the controlling shareholders of the Company
consummated a reorganization transaction (the "Fountain View Equity
Transactions"). Prior to the Fountain View Equity Transactions, the controlling
shareholders were the sole owners of a number of healthcare companies, which
they managed as one business enterprise. The separately owned companies
consisted of eight skilled nursing facilities, an assisted living facility and a
therapy company which provides therapy services primarily to third-party owned
facilities as well as Company-owned facilities.
Under the terms of the Fountain View Equity Transactions, Heritage Fund II, L.P.
("Heritage") invested $14.0 million in cash in Fountain View in exchange for all
of the Company's preferred stock with a liquidation value of $7.0 million and
99,950 shares of the Company's Common Stock Series A-2. The controlling
shareholders at the same time contributed all of their healthcare assets, except
for owned real estate, to Fountain View in exchange for 53,850 shares of the
Company's Common Stock Series A-1 and 46,200 shares of the Company's Common
Stock Series A-3. Concurrent with the exchange of shares, Fountain View obtained
bank financing totaling $31.0 million, the proceeds of which along with the
$14.0 million invested by Heritage were used to fund a distribution of $43.7
million of cash to the controlling shareholders and pay $1.3 million in
transaction costs.
Since the controlling shareholders maintained a controlling financial interest
in Fountain View, a change in control was not deemed to have occurred upon the
consummation of the Fountain View Equity Transactions. Therefore, the Fountain
View Equity Transactions were treated as a reorganization/merger of companies
under common control, with no step-up in basis of the assets of Fountain View.
3. Acquisition of Summit Care Corporation
On February 6, 1998, Fountain View entered into an Agreement and Plan of Merger
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.
27
<PAGE>
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 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, refinance all then
existing Fountain View indebtedness, 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, 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. Summary of Significant Accounting Policies
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 in consolidation.
Use of Estimates
The preparation of the consolidated 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.
Net Revenue
Approximately 60 percent, 56 percent and 52 percent of the Company's revenues in
the years ended December 31, 1998, 1997 and 1996, respectively, were derived
from funds under federal Medicare and state Medicaid 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
28
<PAGE>
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.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with an original or
remaining maturity of three months or less when purchased. The Company places
its temporary cash investments with high credit quality financial institutions.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and are included in other current assets in the accompanying consolidated
financial statements.
Property and Equipment
Depreciation and amortization (straight-line method) is based on the estimated
useful lives of the individual assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements 15-40 years
Leasehold improvements Shorter of lease term or estimated useful life, generally 5-10 years.
Furniture and equipment 3-10 years.
</TABLE>
Amortization of property and equipment under 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 or the
period covered by the right.
Intangible Assets
Goodwill, which represents the excess of the purchase price over the net assets
acquired, substantially relates to the purchase of Summit and is being amortized
over 35 years using the straight-line method. Goodwill at December 31, 1998 was
$61,949,000 less accumulated amortization of $3,260,000.
Deferred financing costs substantially relate to the Term Loan Facility and
issuance of the Senior Subordinated Notes (Note 7) and are being amortized over
the maturity periods using an effective interest method. Deferred financing
costs at December 31, 1998 were $13,163,000 less accumulated amortization of
$1,202,000.
Long Lived Assets
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.
Accounting for Stock-Based Compensation
In 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 would have been had the new
fair value method been used. See Note 14.
29
<PAGE>
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information
about Capital Structure," ("SFAS No. 129"), which consolidates the existing
guidance relating to an entity's capital structure. The standard is effective
for fiscal years beginning after December 15, 1997. The required capital
structure disclosures include liquidation preferences of preferred stock,
information about pertinent rights and privileges of the outstanding equity
securities and the redemption amount of all issues of capital stock that are
redeemable at fixed or determinable prices on fixed or determinable dates. All
required disclosures have been made in the accompanying consolidated financial
statements.
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for the reporting of comprehensive income
and its components in a full set of general purpose financial statements. The
standard is effective for fiscal years beginning after December 15, 1997.
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.
In 1997, the FASB issued SFAS 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. The Company has identified its business segments to be
nursing services, therapy services and pharmacy services. See Note 16.
In June 1998, the FASB issued SFAS 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 December 31, 1998.
5. Proforma Financial Results
The following table sets forth the proforma unaudited results of operations for
the years ended December 31, 1998 and 1997, assuming the purchase 0f Summit had
been consummated as of January 1, 1997 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
-------------------------------------------
<S> <C> <C>
Net revenues $277,061 $287,144
Loss before provision for income taxes and extraordinary item (5,144) (7,296)
Net loss (4,212) (4,504)
</TABLE>
30
<PAGE>
6. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
fair market value (in thousands):
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued
Liabilities, and Employee Compensation and Benefits
The carrying amounts for these items approximate their fair value due to the
short maturity of these instruments.
Notes Receivable (Including Current Portion)
The carrying value of the notes receivable approximates its fair value since the
interest rates approximate those currently being offered for notes with similar
terms to borrowers of similar credit quality.
Long-term Debt (Including Current Portion)
The fair market value of the $120.0 million Senior Subordinated Notes
approximates $105.6 million based on the trading price of the notes as of
December 31, 1998. The carrying value of the remaining debt approximates its
fair market value since the interest rate of such debt approximates the
Company's incremental borrowing rate.
31
<PAGE>
7. Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------------------------
<S> <C> <C>
Senior Subordinated Notes, at 11 1/4 % per annum, interest only payable
semi-annually, principal due 2008, unsecured. $120,000 $ -
$90 million Term Loan Facility, interest based on LIBOR plus the applicable
margin, principal due in quarterly installments from June 1999 to December
2003, secured by all tangible and intangible assets. 90,000 -
$30 million Revolving Credit Facility, interest based on LIBOR plus the
applicable margin, principal due April 2004, secured by all tangible and 18,661 -
intangible assets.
$30 million Term Loans due in 2002 through 2004, payable in quarterly
installments, including interest based on LIBOR plus the applicable
margin, secured by accounts receivable and equipment. - 29,925
Present value of capital lease obligations at effective interest rates from
8.4% to 9.0%, secured by property and equipment with a book value of
approximately $25,416 at December 31, 1998. 12,565 -
Mortgage and other notes payable, fixed interest rates from 7.75% to 9.0%,
due in various monthly installments through January 2026, secured by
property and equipment with a book value of approximately $9,292 at
December 31, 1998. 5,311 -
Promissory note, effective interest rate of 7% due in October 2001, secured
by the leasehold interest in a nursing care center, with a book value of
approximately $3,870 at December 31, 1998. 1,354 -
Mortgage note payable, at LIBOR plus 2.95% (8.0% at December 31, 1998) due
in equal monthly principal installments through March 2001, secured by
property and equipment with a book value of approximately $5,056 at
December 31, 1998. 997 -
Other - 151
---------------------------------
248,888 30,076
Less current maturities 4,735 1,741
---------------------------------
$244,153 $28,335
=================================
</TABLE>
Senior Subordinated Notes
In April 1998, the Company successfully completed a Senior Subordinated Note
Offering for an aggregate principal amount of $120.0 million, with an interest
rate of 11 1/4 % due in 2008. Interest is payable semiannually in April and
October of each year, commencing October 1998. The notes constitute general,
unsecured obligations of the Company, subordinate to all Senior debt.
Term Loan Facility
In April 1998, the Company entered into a term loan facility in the aggregate
principal amount of $85.0 million payable in installments with a final maturity
on March 31, 2004. The loans bear interest at LIBOR plus an applicable margin
between 1.75% and 2.75% depending on certain financial ratios. At December 31,
1998, the margin was 2.75%. In October 1998, the Company amended its term loan
agreement extending $5.0 million of an additional mortgage refinancing loan to
the Company. The loan bears interest at LIBOR plus the applicable margin as
described above plus
32
<PAGE>
an additional 0.5% and matures in March 2004. The Company used the proceeds to
finance the exercise of capital lease purchase options on two skilled nursing
facilities in Texas.
Revolving Loan Facility
In April 1998, the Company entered into a revolving credit facility of $30.0
million maturing April 2004. Borrowings bear interest at LIBOR plus an
applicable margin. At December 31, 1998, the margin was 2.75% and the unused
portion of the line was $11,339,000.
The term loan and revolving loan facilities, collectively known as the "Bank
Credit Facility", contain a perfected first lien on all of the Company's assets,
both tangible and intangible. The Bank Credit Facility also contains usual and
customary covenants including certain financial covenants, including a minimum
fixed charge ratio, a maximum leverage ratio and a minimum net worth test. The
Company was not in compliance with certain financial covenants at December 31,
1998. The covenants were amended by the bank group in March 1999. After the
amendment, the Company was in compliance with all financial covenants, and the
Company anticipates it will be in compliance during 1999.
During the year ended December 31, 1998, the Company recognized an extraordinary
charge of $517,000 (net of a $344,000 income tax benefit) associated with
prepayment penalties incurred on the early extinguishment of debt.
Property and equipment includes the following amounts for leases which have been
capitalized (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
-------------------
<S> <C>
Land and land improvements $ 1,767
Buildings and leasehold improvements 22,714
Furniture and equipment 1,585
---------
26,066
Less accumulated amortization (650)
---------
$25,416
=========
</TABLE>
Future maturities of long-term debt and capital lease obligations are as
follows (in thousands):
<TABLE>
<S> <C>
1999 $ 4,735
2000 13,157
2001 19,179
2002 22,286
2003 32,882
Thereafter 156,649
---------
$248,888
=========
</TABLE>
Interest payments were $14,673,000, $1,105,000, and $307,000 in 1998, 1997, and
1996, respectively.
33
<PAGE>
8. Income Taxes
The provision (benefit) for income taxes including $344,000 attributable to
the extraordinary item in 1998, consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ - $1,004 $ -
Deferred (789) (722) -
State:
Current - 282 78
Deferred (287) (203) -
--------------------------------------------------------------
(1,076) 361 78
Charge in lieu of income taxes for S-Corporation - 1,590 1,493
--------------------------------------------------------------
$(1,076) $1,951 $1,571
==============================================================
</TABLE>
A reconciliation of the provision (benefit) for income taxes with the amount
computed using the federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C>
Federal rate (34%) $(1,348) $1,902 $1,324
State taxes, net of federal tax benefit (205) 336 234
Goodwill amortization 501 84 -
Other, net (24) (4) 13
Establishment of deferred taxes due to conversion from
S-Corporation to C-Corporation - (367) -
--------------------------------------------------------------
$(1,076) $1,951 $1,571
==============================================================
</TABLE>
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Temporary differences are primarily attributable to
reporting for income tax purposes the excess of book over tax depreciation due
to purchase accounting adjustments, allowance for uncollectible accounts,
accrued expenses and accrued vacation benefits. The December 31, 1998 deferred
tax liabilities increased significantly due to the recording of deferred taxes
associated with the purchase accounting basis step-up of assets related to the
acquisition of Summit.
34
<PAGE>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------------------------------------------------------
Non- Non-
Current Current Current Current
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Vacation and other accrued expenses $ 2,721 $ - $264 $ -
Allowance for uncollectible accounts 5,164 - 506 -
Professional liability accrual 1,775 - - -
Net operating loss carryforward - 4,745 -
State taxes - - 157 -
Other 648 640 - -
--------------------------------- --------------------------------
Total deferred tax assets 10,308 5,385 927 -
Deferred tax liabilities:
Tax over book depreciation - (10,432) - 1
Step-up of assets acquired - (23,857) - -
Other (332) (883) - -
--------------------------------- --------------------------------
Total deferred tax liabilities (332) (35,172) - 1
--------------------------------- --------------------------------
Net deferred tax assets (liabilities) $ 9,976 $(29,787) $927 $1
================================= ================================
</TABLE>
Total income tax payments during 1998, 1997 and 1996 were $1,218,000, $8,000 and
$30,000, respectively.
As of December 31, 1998, the Company has federal net operating loss
carryforwards of $12,900,000 which begin to expire in 2012. $5,152,000 of the
federal loss carryforwards are subject to the separate return limitation year
("SRLY") provisions.
Charge in Lieu of Income Taxes and S-corporation Status
Prior to the Fountain View Equity Transactions, most of the individually owned
corporations were taxed as cash basis S-Corporations. Included in the
consolidated statements of income for 1997 and 1996 are pro forma charges in
lieu of income taxes to indicate what the tax provision would have been had the
Company been taxed as a C-Corporation for 1997 and 1996.
In connection with the Fountain View Equity Transactions, the controlling
shareholders elected to make a Section 338(h)(10) election (the "Election").
Since the corporations which comprised the predecessor organization were owned
individually by the controlling shareholders, and most of the corporations had
previously elected to be taxed as cash basis S-Corporations, upon the Election,
the cash basis S-Corporations incurred taxable income to the extent of any
receivables and payables not previously recognized in the S-Corporation tax
returns. The controlling shareholders, and not the Company, are responsible for
the taxes due as a result of the Election.
9. Leases
The Company leases certain of its facilities and equipment under noncancelable
operating 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.
35
<PAGE>
The future minimum rental payments under noncancelable operating
leases that have initial or remaining lease terms in excess of one year as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Related Party Other Total
------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 1,793 $ 4,895 $ 6,688
2000 1,793 4,517 6,310
2001 1,793 4,231 6,024
2002 1,793 4,136 5,929
2003 1,793 3,742 5,535
Thereafter 24,350 13,627 37,977
------------------------------------------------------------
$33,315 $35,148 $68,463
============================================================
</TABLE>
10. Commitments and Contingent Liabilities
Litigation
As is typical in the health care industry, the Company has experienced an
increasing trend in the number and severity of litigation claims asserted
against the Company. In addition, there has been an increase in governmental
investigations of long-term care providers. While the Company believes that it
provides quality care to its patients and is in compliance with regulatory
requirements, a legal judgment or adverse governmental investigation could have
a material negative effect on the Company. See Note 17.
From time to time, the Company has been a party to professional liability 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.
Regulatory Matters
Laws and regulations governing the Medicare program are complex and subject to
interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. Compliance with
such laws and regulations can be subject to future governmental review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
Insurance Coverage
Fountain View maintains general and professional liability coverage, employee
benefits liability, property, casualty, directors and officers, inland marine,
crime, boiler and machinery coverage, health, automobile, employment practices
liability, earthquake and flood, workers' compensation and employers' liability.
The Company believes that its insurance programs are adequate.
Workers' Compensation. Fountain View's policy for workers' compensation for the
original Fountain View facilities is a fully insured program for its California
employees. Fountain View's policy for the former Summit facilities for its
California and Arizona employees covers claims in excess of $250,000 per
occurrence and for annual aggregate claim amounts in excess of $986,000. Texas
employees are covered by a policy for employer's excess and occupational
indemnity for risks in excess of $150,000 up to $1,000,000 per occurrence with
no annual aggregate stop loss. Included in accounts payable and accrued
liabilities is an actuarially determined amount to accrue for Fountain View's
self-insured occurrence basis risk under its workers' compensation policies.
36
<PAGE>
Professional Liability. Fountain View's skilled nursing services subject it to
liability risk. Malpractice claims may be asserted against the Company if its
services are alleged to have resulted in patient injury or other adverse
effects, the risk of which is greater for higher-acuity patients, such as those
receiving specialty and sub-acute services, than for traditional long-term care
patients. Fountain View has from time to time been subject to malpractice claims
and other litigation in the ordinary course of business. While the Company
believes that the ultimate resolution of all pending legal proceedings will not
have a material adverse effect on the Company's financial condition, there can
be no assurance that future claims will not have such an effect on the Company.
Fountain View's policy for general and professional liability coverage for the
original Fountain View facilities is a per occurrence policy and has limits of
$1,000,000 per occurrence and $3,000,000 in the aggregate per year and carries
no deductible except for employee benefits liability coverage, which carries a
$1,000 deductible per claim. In addition, Fountain View has a per occurrence
umbrella policy which provides additional insurance limits of $10,000,000 per
occurrence and $10,000,000 in the aggregate per year with a self-insured
retention of $10,000 per occurrence over its primary general, professional,
automobile and employers' liability coverage policies. Fountain View's policy
for general and professional liability coverages for the former Summit
facilities is a claims-made policy and has limits of $500,000 per occurrence and
$1,000,000 in the aggregate per year and carries a self-insured retention of
$100,000 per occurrence and a $700,000 annual aggregate loss limit. In addition,
for former Summit facilities, it has a claims-made umbrella policy which
provides additional insurance of $8,500,000 per occurrence and $8,500,000 in the
aggregate per year over its primary general and professional policy, its
automobile liability policy and its employer liability policy, for a combined
coverage of $9,500,000. Included in accounts payable and accrued liabilities is
an actuarially determined amount to accrue for Fountain View's self-insured
occurrence basis risk under its professional liability policy.
Locomotion Indemnification
Locomotion Therapy, Inc. ("Locomotion"), the Company's wholly-owned
rehabilitation services subsidiary, provides physical, occupational and speech
therapy services to various unaffiliated skilled nursing facilities. These
skilled nursing facilities are reimbursed for the costs of certain of these
services from the Medicare Program. Locomotion has indemnified these skilled
nursing facilities from potential disallowances of these services. The
accompanying financial statements do not include an estimate of these potential
disallowances as management has concluded that they are not determinable.
11. Stockholders' Equity
Stockholders Agreement
In connection with the Fountain View Equity Transactions, the controlling
shareholders and Heritage which owned all of the preferred stock and all of the
Series A-2 common stock, consummated a Shareholders Agreement ("the Agreement").
Under the Agreement, each of the parties had certain rights and obligations. In
connection with the Summit acquisition on March 27, 1998, the Shareholder
Agreement was terminated.
On March 27, 1998, a new Stockholders Agreement was executed in conjunction with
an Investment Agreement. The Investment Agreement outlined the restructuring of
the stock ownership of the Company and denoted the cash or other consideration
required for the respective owners' common shares. The Stockholders Agreement
establishes the composition of the Board of Directors, establishes restrictions
on the transfer of these common shares and contains a termination clause in the
event of an initial public offering.
In conjunction with the execution of the above agreements, the Company issued
114,202 shares of Series B Common Stock, in total, to the Chairman, the Chief
Executive Officer and the Executive Vice President of the Company (the "Senior
Executives"). These shares may be forfeited should a trigger event occur and
certain predefined terminal values not be achieved. These terminal values are
defined in the Stockholders Agreement and increase through the passage of time.
Upon any such forfeiture, the Company will pay the holder of those shares an
amount equal to the purchase price of $.10 per share. These shares are treated
as compensatory stock options for financial reporting purposes and compensation
expense will be recorded upon the achievement of a trigger event, when the
number of shares retained
37
<PAGE>
by the Senior Executives are known. Compensation will be measured as the number
of shares retained times the fair value of the shares at the measurement
date.
Preferred Stock
In connection with the Summit acquisition on March 27, 1998, the Company issued
15,000 shares of Series A Preferred Stock (the "Preferred Stock") to Heritage in
exchange for $15 million. The Preferred Stock is subject to mandatory redemption
upon an underwritten initial public offering of the Company's common stock on or
after May 1, 2010. The Preferred Stock entitles the holder to a dividend at the
time of a liquidity event calculated to achieve a 12% annual rate of return. A
liquidity event is defined as an underwritten initial public offering or
liquidation of the Company. As of December 31, 1998, there is $1,369,999 of
undeclared and unpaid dividends on the Preferred Stock.
Warrants
In connection with the Summit acquisition on March 27, 1998, the Company issued
71,119 warrants to purchase the Company's Series C Common Stock at an exercise
price of $.01 per share. The warrants are exercisable beginning April 16, 1998
and expire in April 2008. During 1998, 20,742 Warrants were exercised.
Dividend Restrictions
The Company is restricted in its ability to pay dividends on its Common Stock
based on certain provisions of its loan agreements.
12. Purchase and Contribution Agreement
In connection with the Fountain View Equity Transactions, the former controlling
shareholders agreed to reimburse the Company for any adverse change in cost
report settlements for periods prior to the investment of funds by Heritage. The
former controlling shareholders also agreed to indemnify the Company from any
future liability arising from a certain lawsuit.
13. Stock Option Plan
In August 1998, the Company adopted a stock option plan which provides for the
grant of incentive stock options to certain directors, employees and consultants
of the Company to purchase up to 49,388 shares of Series C Common Stock, which
was considered the fair market value at date of grant. These options represent
non-qualified stock options and have an exercise price of $104.61 per share. The
options vest 20% on each anniversary of the option grant and are fully vested
upon the sale of the Company. No option may be exercised after ten years from
the date of the grant. The vesting provisions and other conditions upon which
the options are exercisable are determined by the Stock Option Committee or the
Board of Directors. During this original granting of options, approximately
26,900 options were granted to employees and consultants of the Company. Options
granted to consultants are considered compensatory, and the fair value of the
options at date of grant is being expensed over the vesting period.
38
<PAGE>
The following table summarizes activity in the stock option plan:
<TABLE>
<CAPTION>
Year Ended December 31,
1998
------------------------------------
Weighted
Number Average
of Exercise
Shares Price
------------------------------------
<S> <C> <C>
Options at beginning of year - $ -
Changes during year:
Granted 26,900 104.61
Exercised - -
Canceled - -
------------------
Options outstanding at end of year 26,900 104.61
==================
Options exercisable at end of year - 104.61
Options available for grant at end of year 22,488
</TABLE>
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 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 minimum value option pricing
model with the following weighted average assumptions for the year ended
December 31, 1998: risk-free interest rates of 4.75%; dividend yields of zero
percent; and a weighted average expected life of the options of ten years. The
weighted average fair value per share of options granted during the year was
$39.55 for the year ended December 31, 1998. The weighted average remaining
contractual life of these options is approximately ten years.
Because the Company's stock options have characteristics significantly different
from those options used in the minimum value 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.
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 net
loss for the year ended December 31, 1998, given the effect of the fair value
method, is $2,960,000.
15. Material Transactions with Related Entities
Leased Facilities
The Company's Chief Executive Officer and his wife, an Executive Vice President
of the Company, own the real estate for four of the Company's leased facilities.
Such real estate has not been included in the financial statements for any of
the years presented herein since such real estate was excluded from the Fountain
View Equity Transactions discussed in Note 2. Lease payments to the these
related parties under operating leases for these facilities totaled $1,776,000,
$1,771,000, and $1,776,000 and for the years ended December 31, 1998, 1997 and
1996, respectively.
39
<PAGE>
Medical Supply Company
The Company's Executive Vice President, who is also the wife of the Company's
Chief Executive Officer, owns approximately 33% of a medical supply company that
provides supplies to the Company. Payments to the medical supply company totaled
$478,000, $251,000, and $76,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Note Receivable
The Company has a limited recourse promissory note receivable from the Chairman
in the amount of $2,540,000 with an interest rate of 5.7%. The Note is due and
payable on the earlier of April 15, 2007 or the sale by the Chairman of 20,000
shares of the Company's common stock pledged as security for the note. The
Company has recourse for payment up to $1.0 million of the principal amount of
the note.
16. 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.
Goodwill and deferred financing costs are also not allocated for purposes of
determining segment assets and are included in the "all other" category. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies. 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.
The following table sets forth selected financial data by
business segment (in thousands):
Selected Financial Data:
<TABLE>
<CAPTION>
Nursing Therapy Pharma-
Services Services ceuticals All Other Totals
------------------------------------------------------------------------------------
Year Ended December 31, 1998:
<S> <C> <C> <C> <C> <C>
Revenues from external customers $196,392 $12,369 $14,378 $ 4 $223,143
Intersegment revenues - 9,920 4,226 3,168 17,314
------------------------------------------------------------------------------------
Total revenues $196,392 $22,289 $18,604 $ 3,172 $240,457
====================================================================================
Segment profit (loss) $ 34,925 $ 3,144 $ 2,776 $(8,389) $ 32,456
Segment assets 325,726 3,919 15,642 72,322 417,609
Capital expenditures 6,806 103 20 725 7,654
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Nursing Therapy Pharma-
Services Services ceuticals All Other Totals
------------------------------------------------------------------------------------
Year Ended December 31, 1997:
<S> <C> <C> <C> <C> <C>
Revenues from external customers $49,835 $17,954 $ - $ 116 $67,905
Intersegment revenues 1,910 - 2,836 4,746
------------------------------------------------------------------------------------
Total revenues $49,835 $19,864 $ - $ 2,952 $72,651
====================================================================================
Segment profit (loss) $ 8,534 $ 2,923 $ - $ 243 $11,700
Segment assets 20,776 8,557 - (1,079) 28,254
Capital expenditures 2,431 69 - 70 2,570
Year Ended December 31, 1996:
Revenues from external customers $43,648 $15,784 $ - $ - $59,432
Intersegment revenues 1,027 - - 1,027
------------------------------------------------------------------------------------
Total revenues $43,648 $16,811 $ - $ - $60,459
====================================================================================
Segment profit (loss) $ 6,984 $ 1,790 $ - $ (122) $ 8,652
Segment assets 16,044 8,027 - 710 24,781
Capital expenditures 1,793 20 - 3 1,816
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
External revenues for reportable segments $223,143 $67,905 $59,432
Intersegment revenues for reportable segments 17,314 4,746 1,130
Elimination of intersegment revenues (17,314) (4,746) (1,130)
-------------------------------------------------------------
Total consolidated revenues $223,143 $67,905 $59,432
=============================================================
<CAPTION>
December 31,
1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Total assets for reportable segments $417,609 $28,254 $24,781
Elimination of intercompany receivables (5,881) (2,313) (659)
-------------------------------------------------------------
Total consolidated assets $411,728 $25,941 $24,122
=============================================================
</TABLE>
17. Loss Lease
In December 1998, one of the Company's SNFs was decertified from the Medicare
and Medicaid Programs as a result of surveys conducted by the California
Department of Health Services. The facility continued to receive payments for
services provided to its Medicare and Medicaid patients for an additional 30
days at which time the Company received a temporary restraining order to
prohibit the decertification of this facility from the Medicare and Medicaid
Programs. This temporary restraining order expired in February 1999 and was not
renewed. The Company is both appealing this issue and proceeding with the steps
required to reinstate the a provider agreement for the Medicare and Medicaid
Programs.
41
<PAGE>
This facility is operating under a lease agreement which expires in August 1999,
at which time, the Company has a unilateral option to renew the lease. At
December 31, 1998, the Company has recorded a loss on this lease in the amount
of $1,733,000. This amount represents the estimated loss of operating this
facility through August 1999 and includes probable fines and associated legal
costs.
18. Defined Contribution Plan
As of December 31, 1998, the Company sponsors two defined contribution plans
covering substantially all employees who meet certain eligibility requirements.
Under the plan for the original Fountain View facilities, employees can
contribute up to 15% of their annual compensation. For the former Summit
facilities, employees can contribute up to 15% of their annual compensation, and
through July 31, 1998, the Company matched 50% of the former Summit employees
contribution up to a maximum of 4% of the employee's total annual compensation.
On August 1, 1998, the Company match was discontinued. The total expense under
the plan was $156,000 in 1998 ($0 in 1997 and 1996).
42
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in accountants or disagreements with accountants on
accounting and financial disclosure matters.
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Name Position(s) Age
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William C. Scott Director and Chairman 62
Robert M. Snukal Director, Chief Executive Officer and President 56
Sheila S. Snukal Director, Executive Vice President and Chief 55
Operating Officer
Paul C. Rathbun Chief Financial Officer 39
Keith Abrahams President, Locomotion Therapy, Inc. and On-Track 39
Therapy Center, Inc.
Michael H. Martel Senior Vice PresidentTexas and Arizona Operations 37
Michel Reichert Director 48
Michael F. Gilligan Director 43
Peter Z. Hermann Director 44
Mark J. Jrolf Director 34
Boone Powell, Jr. Director 62
</TABLE>
William C. Scott became a Director and Chairman upon the closing of the
acquisition of Summit on March 27, 1998. Mr. Scott previously served as Chief
Executive Officer of Summit since May 1994 and Chairman of the Board of Summit
since December 1995. Mr. Scott served as President of Summit from December 1985
until January 1996 and held the office of Chief Operating Officer from December
1985 until May 1994. Mr. Scott served as Senior Vice President of Summit Health
Ltd., Summit's former parent company, from December 1985 until its acquisition
by OrNda Health Corp. in April 1994 and previously was a partner with Arthur
Andersen & Co.
Robert M. Snukal became a Director, Chief Executive Officer and President on
August 1, 1997, upon the consummation of Fountain View Equity Transactions. For
the preceding five years, Mr. Snukal had served as a Director and President of
each of Fountain View's subsidiaries, which were owned directly by Mr. Snukal
and Mrs. Snukal during that period. Mr. Snukal is the husband of Sheila S.
Snukal and the father-in-law of Keith Abrahams.
Sheila S. Snukal became a Director and Executive Vice President on August 1,
1997, upon the consummation of Fountain View Equity Transactions. For the
preceding five years, Mrs. Snukal had served as a Director and Executive Vice
President of each of Fountain View's subsidiaries, which were owned directly by
Mrs. Snukal and Mr. Snukal during that period. Mrs. Snukal is the wife of Robert
M. Snukal and the mother-in-law of Keith Abrahams.
Paul C. Rathbun joined the Company as Chief Financial Officer effective
September 17, 1998. Mr. Rathbun previously served as the Executive Vice
President and Chief Financial Officer of Life Care Centers of America, a
privately held nursing home chain, from 1995. From 1994 to 1995, Mr. Rathbun
served as the chief financial officer of Largo Medical Center/Clearwater
Community Hospital. Prior to that, from 1993 to 1994, Mr. Rathbun was a director
at Price Waterhouse with responsibilities for the healthcare practice in the
state of Florida. He is also a certified public accountant.
43
<PAGE>
Keith Abrahams has been President of Locomotion Therapy, Inc. since 1995. Mr.
Abrahams was previously employed as the Chief Financial Officer of Heftel
Broadcasting from 1987 to 1992, a radio broadcasting company. He is also a
certified public accountant. Mr. Abrahams is the son-in-law of Robert M. Snukal
and Sheila S. Snukal.
Michael H. Martel assumed the role of Senior Vice PresidentTexas and Arizona
Operations in June 1998. Mr. Martel previously served as Senior Vice President-
Marketing of the Company from April 1998 and as Senior Vice President Marketing
of Summit from March 1995 to April 1998. Prior to joining Summit, Mr. Martel was
Vice PresidentMarketing for Arbor Health Care Company from August 1992 to March
1995. Mr. Martel served as Regional Director of Marketing for the acute care
rehabilitation division of National Medical Enterprises from April 1988 to
August 1992.
Michel Reichert has been a Director of the Company since August 1, 1997. Since
1994, Mr. Reichert has been a Managing General Partner of Heritage Partners,
Inc., a Boston-based private investment firm. Prior to 1994, Mr. Reichert was a
Managing Director of BancBoston Capital Inc., a private investment firm.
Michael F. Gilligan became a Director of the Company immediately prior to the
consummation of the Tender Offer on March 27, 1998. Since December 1993, Mr.
Gilligan has been a General Partner of Heritage Partners, Inc., a Boston-based
private investment firm. Prior to 1994, Mr. Gilligan was a Director of
BancBoston Capital Inc., a private investment firm.
Peter Z. Hermann became a Director of the Company immediately prior to the
consummation of the Tender Offer on March 27, 1998. Since January 1994, Mr.
Hermann has been a General Partner of Heritage Partners, Inc., a Boston-based
private investment firm. Prior to 1994, Mr. Hermann was a Director of BancBoston
Capital Inc., a private investment firm.
Mark J. Jrolf has been a Director of the Company since August 1, 1997. Since
February 1997, Mr. Jrolf has served as Partner and Vice President of Heritage
Partners, Inc. From September 1996 to January 1997, Mr. Jrolf served as a Vice
President of Heritage Partners, Inc. From September 1993 to September 1996, Mr.
Jrolf was a consultant with McKinsey & Co. specializing in healthcare.
Boone Powell, Jr. became a Director of the Company in August 1998. Mr. Powell
has been President and Chief Executive Officer of Baylor Health Care System and
Baylor University Medical Center since 1980.
Executive officers of the Company are appointed by the Board, subject to the
provisions of such officers' respective employment agreements. Under the terms
of their employment agreements, Mr. Snukal, Mrs. Snukal and Mr. Scott are each
employed for a period of five years commencing on March 27, 1998. The employment
agreements will automatically renew for up to five additional one year terms
unless either the Company or the respective employee provides prior written
notice of termination to the other party. The other officers and Directors are
elected to serve until their respective successors have been duly elected and
qualified or until their earlier resignation or removal.
44
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth compensation for the past three fiscal years for
the Company's Chief Executive Officer and the other four most highly compensated
executive officers (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-term
Compensation
Awards Securities
Annual Compensation Underlying
All Other
Fiscal Salary Bonus Options Compensation
Name and Principal Position Year ($) ($) (#) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert M. Snukal 1998 470,843 133,334 - -
President, Chief Executive Officer 1997 298,340 400,000 - -
and Director 1996 258,750 696,912 - -
William C. Scott (1) 1998 293,592 - - -
Director and Chairman 1997 - - - -
1996 - - - -
Sheila S. Snukal 1998 225,000 83,333 - -
Executive Vice President, Chief 1997 178,125 200,000 - -
Operating Officer and Director 1996 144,750 327,570 - -
Keith Abrahams 1998 168,417 70,000 - -
President, Locomotion Therapy, Inc. 1997 150,005 160,000 - -
and On-Track Therapy, Inc. 1996 150,005 150,000 - -
Michael H. Martel (1) 1998 115,075 - - -
Senior Vice President-Texas and 1997 - - - -
Arizona Operations 1996 - - - -
</TABLE>
____________________
(1) Mr. Scott and Mr. Martel joined the Company on March 27, 1998.
1998 Stock Option Plan
In August 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan provides for the grant of incentive stock options to certain directors,
employees and consultants of the Company to purchase up to 49,388 shares of
Series C Common Stock of the Company. These options represent non-qualified
stock options and have an exercise price of $104.61 per share, which represents
the fair market value of Series C Common Stock at date of Plan adoption. The
options vest 20% on each anniversary of the option grant and are fully vested
upon the sale of the Company.
45
<PAGE>
The following table sets forth the stock options granted to the Named Executive
Officers during fiscal 1998:
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percent of at Assumed Annual Rates of
Securities Total Options Exercise Stock Price Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Expiration ---------------------------
Name Granted (#) Fiscal Year ($/Share) Date 5% 10%
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sheila S. Snukal 6,173 23.0% $104.61 August 2008 $406,122 $1,029,163
Keith Abrahams 1,976 7.4% $104.61 August 2008 $130,001 $ 329,439
Michael H. Martel 1,976 7.4% $104.61 August 2008 $130,001 $ 329,439
</TABLE>
During fiscal 1998, none of the Named Executive Officers exercised stock options
issued by the Company.
Employment Agreements
On March 27, 1998, the Company entered into employment agreements with Mr.
Snukal, Mrs. Snukal and Mr. Scott.
Each employment agreement provides a term of employment of five years, which
will automatically renew for up to five additional one-year terms unless either
the Company or the respective employee provides prior written notice of
termination to the other party, and specifies a base salary, a bonus range and a
package of benefits. Mr. Snukal is employed as Chief Executive Officer, Mrs.
Snukal is employed as Executive Vice President and Mr. Scott is employed as
Chairman of the Company. The employment agreements provide base salaries for the
year ending March 1999 as follows: William C. Scott$450,000; Robert M.
Snukal$500,000; and Sheila S. Snukal$225,000. Such base salaries will be subject
to cost of living adjustments for each subsequent year. The employment
agreements provide for annual bonuses, based upon the achievement of certain
financial targets, of up to the following amounts for the year ending March 1999
and each subsequent year: William C. Scott$350,000; Robert M. Snukal$500,000;
and Sheila S. Snukal$125,000.
Each employment agreement provides for termination of employment at any time by
the Company with or without cause or in the event of the death or disability of
the employee. Each of the employment agreements also provides for severance pay
upon termination by the Company without cause. The Company must pay the employee
his or her base salary as in effect prior to any such termination for the
duration of the employee's scheduled employment term (plus an additional $25,000
annually in the case of such termination of both Mr. and Mrs. Snukal). If Mr.
Snukal is terminated without cause, Mrs. Snukal may, at her option, deem her
employment to have been terminated without cause and receive the severance as
described above. No severance will be payable in the event of a termination of
employment as a result of death, disability or retirement, or a termination by
the employee without good reason or by the Company with cause.
Under the employment agreements, Mr. and Mrs. Snukal and Mr. Scott each agrees
not to compete with the Company for the greater of five years after the date of
such agreements or three years after termination of employment, subject to
certain exceptions. In addition, Mr. and Mrs. Snukal and Mr. Scott each agrees
that, for the greater of five years after
46
<PAGE>
the date of the employment agreement or two years after termination, he or she
will not solicit (i) any person who is, or was within the one-year period
immediately prior to termination of the employee's employment with the Company,
employed by, a consultant to or associated with the Company or (ii) a recent
(within two years) client, customer or supplier to the Company.
On August 12, 1998, the Company entered into an employment agreement with Mr.
Rathbun, which provides for a term of employment of five years commencing
September 1998. Mr. Rathbun is employed as Chief Financial Officer of the
Company. The employment agreement provides a base salary of $250,000, subject to
annual cost of living adjustments. The employment agreement provides for annual
bonuses of up to $125,000, based upon the achievement of certain financial
targets. However, the bonus is limited to $65,000 for the period ending June 30,
1999 based on a June 30 year end. The employment agreement provides for
termination of employment at any time by the Company with or without cause or in
the event of the death or disability of the employee. The employment agreement
also provides for severance pay upon termination by the Company without cause.
The Company must pay the employee his base salary and prorated bonus for the
duration of six months. Under the employment agreement, Mr. Rathbun agrees that,
for the greater of five years after the date of such agreement or two years
after termination of employment, he will not solicit (i) any person who is, or
was, within the one-year period immediately prior to termination of Mr.
Rathbun's employment with the Company, employed by, a consultant to or
associated with the Company or (ii) a recent (within two years) client, customer
or supplier to the Company.
Director Compensation
Compensation for Directors
The directors of the Company do not currently receive compensation from the
Company for their service in such capacity. The directors are reimbursed for
their out-of-pocket expenses incurred in connection with attendance at meetings
of the Board of Directors.
Board of Director Interlocks and Insider Participation
During the year ended December 31, 1998, no executive officer of the Company or
any of its subsidiaries served as a member of the board of directors or
compensation committee (or other board committee performing equivalent
functions) of another entity one of whose executive officers served on the
Company's Board of Directors.
Determination of Executive Compensation
During the year ended December 31, 1998, the Board of Directors of the Company
determined the compensation for Mr. Snukal, Mrs. Snukal and Mr. Scott in
accordance with their respective employment agreements dated March 27, 1998.
Pursuant to such agreements, each of Mr. Snukal, Mrs. Snukal and Mr. Scott was
entitled to a stated annual salary, plus an annual bonus based on the
achievement of certain financial targets set forth therein. With respect to the
other executive officers of the Company, their compensation during the year
ended December 31, 1998 was determined by the Chairman and the Chief Executive
Officer.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding ownership of the
voting common stock of the Company by (i) each person who beneficially owns more
than 5% of the outstanding shares of the Company's voting common stock, (ii)
each director of the Company, (iii) each of the executive officers of the
Company and (iv) each of the directors and executive officers of the Company as
a group. Each of the following stockholders has sole voting and investment power
with respect to shares beneficially owned by such stockholder, except to the
extent that authority is shared with spouses under applicable law or as
otherwise noted.
47
<PAGE>
<TABLE>
<CAPTION>
Number Percent
Name of Shares (1) of Class
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Heritage Fund II, L.P. (2) 537,476 50.2%
Michel Reichert (2) 537,476 50.2
Michael F. Gilligan (2) 537,476 50.2
Peter Z. Hermann (2) 537,476 50.2
Mark J. Jrolf (2) 537,476 50.2
Robert M. Snukal (3) 149,484 14.0
Sheila S. Snukal (3) 149,484 14.0
Goldman, Sachs & Co. (4) 79,032 7.4
GS Private Equity Partners, L.P. (4) 79,032 7.4
GS Private Equity Partners Offshore, L.P. (4) 79,032 7.4
PMI Mezzanine Fund, L.P. (5) 59,275 5.5
Baylor Health Care System (6) 54,999 5.1
William C. Scott (7) 31,357 2.9
Keith Abrahams (8) 16,588 1.6
All directors and executive officers as a group (10 persons) 734,905 68.6
</TABLE>
____________________
(1) Number of shares represents the number of shares of Series A Common Stock
and Series C Common Stock, which comprise all of the Company's voting stock.
It does not include the Series A Preferred Stock and Series B Non-Voting
Common Stock. For purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares as of a given date which
such person has the right to acquire within 60 days after such date.
(2) The address of such stockholder is c/o Heritage Partners, Inc., 30 Rowes
Wharf, Boston, MA 02110. The shares shown as beneficially owned by Mr.
Reichert, Mr. Gilligan, Mr. Hermann and Mr. Jrolf represent 525,633 shares
and warrants to purchase 11,843 shares owned of record by Heritage. Each of
such persons, through one or more intermediaries may be deemed to control
the voting and disposition of the securities owned by Heritage, and
accordingly may be deemed to have shared voting and investment power with
respect to all shares held by Heritage. However, each of such persons
disclaims beneficial ownership of the securities held by Heritage. Heritage
has a proxy to vote an additional 474,367 shares held by other stockholders,
representing 44.2% of the Company's voting stock, except with respect to
matters the effect of which on such other stockholders differs materially
and adversely from the effect on Heritage. Heritage, Mr. Reichert, Mr.
Gilligan, Mr. Hermann and Mr. Jrolf disclaim beneficial ownership of such
shares.
(3) The address of such stockholder is c/o Fountain View, Inc., 2600 West
Magnolia Boulevard, Burbank, CA 91505. The shares shown as beneficially
owned by Mr. Snukal and by Mrs. Snukal represent an aggregate of 149,484
shares owned jointly by them, and as to which they have shared voting and
investment power. Mr. and Mrs. Snukal also own an aggregate of 62,599 shares
of the Company's Series B Non-Voting Common Stock.
(4) The address of such stockholder is c/o Goldman, Sachs & Co., 85 Broad
Street, New York, NY 10004. Shares shown as beneficially owned by Goldman,
Sachs & Co., GS Private Equity Partners, L.P. and GS Private Equity Partners
Offshore, L.P. represent 53,393 shares owned of record by GS Private Equity
Partners, L.P. and 25,639 shares owned of record by GS Private Equity
Partners Offshore, L.P. Each of GS Private Equity Partners, L.P. and GS
Private Equity Partners Offshore, L.P. is an affiliate of Goldman, Sachs &
Co. and each of such entities disclaims beneficial ownership of the other
entity's securities. Goldman, Sachs & Co. disclaims beneficial ownership of
the securities owned by such entities.
(5) The address of such stockholder is c/o Pacific Mezzanine Group, 610 Newport
Center Dr., Suite 1100, Newport Beach, CA 92660.
48
<PAGE>
(6) The address of such stockholder is 3500 Gaston Avenue, Suite 150, Dallas, TX
75246.
(7) The address of such stockholder is 2600 West Magnolia Boulevard, Burbank, CA
91505. Mr. Scott also owns an aggregate of 51,603 shares of the Company's
Series B Non-Voting Common Stock.
(8) The address of such stockholder is c/o Fountain View, Inc., 2600 West
Magnolia Boulevard, Burbank, CA 91505. Shares shown as beneficially owned
by Mr. Abrahams include 8,294 shares owned by Mrs. Stacy Abrahams, his wife.
Item 13. Certain Relationships and Related Transactions
Investment Agreement
The Company and Robert M. Snukal, Sheila S. Snukal, William C. Scott, Heritage
Fund II, L.P., Heritage Investors II, L.L.C., Heritage Fund II Investment
Corporation, HFV Holdings, LLC, Nassau Capital Partners II L.P., NAS Partners I
LLC, Paribas North America, Inc., Phoenix Home Life Mutual Insurance Company,
PMI Mezzanine Fund, L.P., GS Private Equity Partners, L.P., GS Private Equity
Partners Offshore, L.P. and Sutro Investment Partners V, LLC (collectively, the
"Investors") entered into an Investment Agreement dated March 27, 1998,
providing for the issuance by the Company to such stockholders of an aggregate
of 15,000 shares of Series A Preferred Stock, 668,065 shares of Series A Common
Stock, 114,202 shares of Series B Common Stock and warrants to purchase 71,119
shares of Series C Common Stock. These securities were issued immediately prior
to the consummation of the Tender Offer (other than the Series A Preferred
Stock, the warrants and certain shares issued to Mr. Scott, which were issued
promptly after the Merger). The Investment Agreement specifies the consideration
paid by the Investors for the issuance of such Company securities, which
includes (i) a new cash investment in an aggregate amount of approximately $82
million, (ii) in the case of Heritage, Mr. Snukal and Mrs. Snukal, the exchange
of previously-held stock of Fountain View, and (iii) in the case of Mr. Scott,
the issuance by him to the Company of a limited recourse promissory note in the
amount of $2,531, with an interest rate of 5.7%, due and payable on the earlier
to occur of (A) April 15, 2007, or (B) the sale by Mr. Scott of the 20,000
shares of the Company's common stock pledged as security for the note; the
Company has recourse for the payment of up to $1,012 of the principal amount of
the note. Pursuant to the terms of the Investment Agreement, Heritage made an
additional cash investment of $15.0 million for the purchase of the shares of
Series A Preferred Stock and the warrants for shares of Series C Common Stock.
On May 4, 1998, Baylor and Buckner purchased certain shares of the Company's
Series A Preferred Stock and a portion of the warrants to purchase Series C
Preferred Stock from Heritage and signed an agreement to become parties to the
Investment Agreement.
Stockholders Agreement
Corporate Governance
On March 27, 1998, the Company and its stockholders entered into a Stockholders
Agreement (the "Stockholders Agreement") concurrently with the closing of the
Tender Offer. The Stockholders Agreement, which was amended on May 4, 1998,
provides that the Company's board of directors (the "Board") will consist of
directors nominated as follows: (i) two individuals (but not less than 25% of
the total number of directors) will be designated by Mr. Snukal, as long as he
continues to hold any shares of the Company's common stock; (ii) one individual
will be designated by Mr. Scott, as long as he continues to hold any shares of
the Company's common stock; (iii) one individual will be designated by Baylor,
as long as it continues to hold any shares of the Company's common stock or any
securities convertible into or exercisable for the Company's common stock; and
(iv) all other directors will be designated by the holders of a majority of the
shares of common stock of the Company held by Heritage and certain co-investors
(which designation is expected to be controlled by Heritage). The Board
currently includes 4 of 8 directors designated by Heritage. Under the
Stockholders Agreement, each stockholder of the Company has granted Heritage an
irrevocable proxy to vote such stockholder's securities of the Company, except
with respect to matters the effect of which on such stockholder differs
materially and adversely from the effect on Heritage. The practical effect of
the grant of the proxy is that Heritage will control the outcome of most matters
which come before the stockholders of the Company, except where such matters
will result in significant harm to the other stockholders of the Company, but
not to Heritage. The
49
<PAGE>
purpose of the limitation on Heritage's exercise of the
proxy is to protect the other stockholders from Heritage abusing its position of
control.
Board vacancies will be filled by a designee of the individual or group who
originally designated the vacating director. Each individual or group entitled
to designate a director will also be entitled to direct the removal of such
director and designate a replacement director.
Special Provisions for Series B Non-Voting Common Stock
Mr. and Mrs. Snukal own an aggregate of 62,599 shares of the Company's Series B
Non-Voting Common Stock and Mr. Scott owns 51,603 shares of the Company's Series
B Non-Voting Common Stock, all of which were issued to them by the Company for
nominal consideration. These shares represent approximately 9.63% of the total
number of outstanding shares of the Company's common stock, on a fully-diluted
basis. The Stockholders Agreement provides that some or all of the Company's
Series B Non-Voting Common Stock will be subject to forfeiture upon a change of
control of the Company, an initial public offering of its shares or other
similar events (each, a "Trigger Event"), with the precise number of shares
forfeited to be determined on a sliding scale based on the value of the
Company's common equity at the date of the Trigger Event in relation to certain
value targets at various dates in the future. Under this arrangement, the higher
the value of the Company at the date of the Trigger Event, the more shares of
Series B Non-Voting Common Stock Mr. and Mrs. Snukal and Mr. Scott will retain.
Stock Transfer Restrictions and Rights
The Stockholders Agreement provides for certain transfer restrictions on
securities of the Company. The stockholders of the Company who are members of
management may not transfer their securities until four years after the
consummation of the Tender Offer, except for certain transfers in connection
with estate planning, provided that Mr. Snukal may transfer his securities
earlier if the Company terminates his employment without cause. See Employment
Agreements. The Company and certain stockholders have a right of first refusal
on transfers of Company securities by a stockholder, other than estate planning
transfers by management, transfers by Heritage and certain transfers to
affiliates. If Heritage transfers its securities, other than to its partners,
the other stockholders will have the right to participate on a pro rata basis
with Heritage in such transfers. Heritage will also have the right to require
all other stockholders to transfer a pro rata portion of their shares in a
transaction in which Heritage transfers its shares.
Other
The Stockholders Agreement also (i) provides stockholders with pre-emptive
rights in the event of certain future issuances of securities by the Company,
(ii) restricts the ability of the Company to issue shares of capital stock
having rights senior or on par with those of the Series A Preferred Stock and of
the Company's subsidiaries to issue shares of capital stock while any shares of
Series A Preferred Stock are outstanding, (iii) limits the amounts of dividends
or distributions which the Company may pay with respect to its common stock
while the Series A Preferred Stock remains outstanding, and (iv) includes a
mechanism to convert all existing shares of common stock into a single series of
common stock upon an initial public offering of the Company. The Stockholders
Agreement will terminate upon the consummation of an initial public offering by
the Company.
Amendment to the Certificate of Incorporation
In connection with the transactions, on March 27, 1998 and May 4, 1998, the
Company amended its certificate of incorporation to provide that its authorized
capital stock consists of (a) 3,000,000 shares of Common Stock designated as
follows: (i) 1,500,000 shares of Series A Common Stock, (ii) 200,000 shares of
Series B Non-Voting Common Stock, (iii) 1,300,000 shares of Series C Common
Stock and (b) 1,000,000 shares of Preferred Stock, 200,000 of which are
designated Series A Preferred Stock. The shares of Series A Preferred Stock are
subject to mandatory redemption upon an underwritten initial public offering of
the Company's common stock or after May 1, 2010. The certificate of
incorporation further provides that, on liquidation of the Company, the holders
of Series A Preferred Stock are entitled to receive a liquidation payment. After
such payment, the assets of the Company will be divided ratably among the
50
<PAGE>
holders of (i) the Series A Common Stock and the Series B Non-Voting Common
Stock, on the one hand, and (ii) the holders of the Series C Common Stock, on
the other, based on the relative number of shares of Common Stock outstanding
and held by such holders, provided that the aggregate number of outstanding
shares of Series A Common Stock and Series B Non-Voting Common Stock shall be
deemed to be 1,114,202, or, if different, shall be deemed to be the number of
shares of Series A Common Stock and Series B Non-Voting Common Stock then
outstanding plus any shares of Series B Non-Voting Common Stock previously
outstanding but forfeited pursuant to the Stockholders Agreement. All amounts
distributable among the Series A Common Stock and the Series B Non-Voting Common
Stock will be divided as follows, to the extent of available proceeds: (A) each
share of Series A Common Stock will receive $126.53 plus a 22% internal rate of
return thereon calculated from March 27, 1998 (the "Series A Common Stock
Preference"); (B) each share of Series B Non-Voting Common Stock will receive an
amount equal to the Series A Common Stock Preference; and (C) the remaining
assets will be distributed ratably among the Series A Common Stock and the
Series B Non-Voting Common Stock.
The amendment to the Company's certificate of incorporation also provides that
all shares of Company stock outstanding prior to the amendment were reclassified
into an aggregate of 331,935 shares of Series A Common Stock.
Registration Rights Agreement
The Company and its stockholders entered into a Registration Rights Agreement
(the "Investor Registration Rights Agreement") on March 27, 1998 concurrently
with the consummation of the Tender Offer. The Investor Registration Rights
Agreement provides that Heritage has the right to require the Company on two
occasions to effect the registration of the Company's common stock held by it
under the Securities Act and Mr. and Mrs. Snukal have the right to cause the
Company to effect one demand registration, each at the Company's expense and
subject to certain conditions. Mr. Scott has the right to request inclusion of
the Company common stock held by him in any such registration. In addition, all
holders of Registrable Securities (as defined in the Investor Registration
Rights Agreement) are entitled to request the inclusion of any shares of common
stock of the Company in any registration statement at the Company's expense
whenever the Company proposes to register any of its common stock under the
Securities Act. However, the underwriter managing any such offering or any
offering effected pursuant to a demand registration may reduce the number of
shares included therein.
Payments to Certain Stockholders
At the effective date of the Merger, the Company paid Heritage Partners
Management Company, Inc., a fee of $3 million in connection with the
transactions.
Pre-Transaction Arrangements
Fountain View Equity Transactions
Prior to August 1, 1997, each of the corporations which is now a subsidiary of
Fountain View (other than Summit and its subsidiaries) was owned directly by Mr.
and Mrs. Snukal. On or about August 1, 1997, each of those corporations entered
into a Stock Purchase and Contribution Agreement (the "1997 Agreement") with Mr.
and Mrs. Snukal, Heritage and Fountain View providing for the recapitalization
of Fountain View, the issuance of stock of Fountain View to Heritage and the
restructuring of the ownership of the various corporations so that all of them
became wholly-owned subsidiaries of Fountain View. In addition, under the terms
of the 1997 Agreement, Mr. and Mrs. Snukal received cash payments from the
investments by Heritage and loans from a senior lender in the aggregate amount
of $43.7 million. The 1997 Agreement contained certain representations,
warranties and covenants, and provided that Mr. and Mrs. Snukal indemnify
Heritage and Fountain View for certain items as described in Note 12 to the
consolidated financial statements.
51
<PAGE>
Related Party Leases
Fountain View leases four SNFs from Mr. and Mrs. Snukal under leases entered
into on August 1, 1997 pursuant to the 1997 Agreement. The leases contain rent
escalation clauses based on increases in the consumer price index. Fountain View
believes the terms of these leases to be at fair market value. Lease payments to
the these related parties under operating leases for these facilities totaled
$1,776,000, $1,771,000, and $1,776,000 and for the years ended December 31,
1998, 1997 and 1996, respectively.
Medical Supply Company
Mrs. Snukal owns approximately 33% of a medical supply company that provides
supplies to the Company. Payments to the medical supply company totaled
$478,000, $251,000, and $76,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
52
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>
Pages
------------
(a) Financial Statements and Financial Statement Schedules:
<S> <C> <C> <C>
(1) Financial Statements:
Report of Independent Auditors 19
Consolidated Statements of Income for each of the three years
ended December 31, 1998 20
Consolidated Balance Sheets at December 31, 1998 and 1997 21, 22
Consolidated Statements of Shareholder's Equity for each of the
three years ended December 31, 1998 23, 24
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1998 25, 26
Notes to Consolidated Financial Statements 27 - 42
(2) Financial Statement Schedules:
II Valuation and Qualifying Accounts 60
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Company's consolidated financial statements and
notes thereto.
</TABLE>
<TABLE>
<S> <C> <C>
(3) Exhibits
* 3.1 Certificate of Incorporation of Fountain View.
* 3.1(a) Certificate of Amendment amending Certificate of Incorporation of
Fountain View filed March 27, 1998.
* 3.1(b) Certificate of Amendment amending Certificate of Incorporation of
Fountain View filed May 6, 1998.
* 3.2 By-laws of Fountain View.
* 4.1 Indenture dated as of April 16, 1998 by and among Fountain View,
certain subsidiaries of Fountain View, and State Street Bank and
Trust Company of California, N.A., as trustee, for the 11 1/4%
Senior Subordinated Notes due 2008.
* 4.2 Form of the Company's 11 1/4% Senior Subordinated Notes due 2008
(see Exhibit A-1 to Exhibit 4.1).
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C>
* 10.1 Hancock Park Convalescent Hospital, Los Angeles, California, Lease
Agreement dated May 19, 1987 between La Brea Convalescent
Investments, and A.I.B. Corporation and Robert and Sheila Snukal;
Consent, Agreement, and Acknowledgment, dated July 30, 1997.
* 10.2 Hancock Park Retirement Hotel, Los Angeles, California, Lease
Agreement dated May 19, 1987 between La Brea Convalescent
Investments, and B.I.A. Corporation and Robert and Sheila Snukal;
Consent, Agreement, and Acknowledgment dated July 30, 1997.
* 10.3 Montebello Convalescent Hospital, Montebello, California, Lease
Agreement dated August 1, 1997 between Robert and Sheila Snukal
and Elmcrest Convalescent Hospital; First Amendment to Lease,
dated March 27, 1998.
* 10.4 Fountainview Convalescent Hospital, Los Angeles, California, Lease
Agreement dated August 1, 1997 between Robert and Sheila Snukal
and Fountainview Convalescent Hospital; First Amendment to Lease,
dated March 27, 1998.
* 10.5 Rio Hondo Convalescent Hospital, Montebello, California, Lease
Agreement dated August 1, 1997 between Robert and Sheila Snukal
and Rio Hondo Nursing Center and Fountain View Holdings; First
Amendment to Lease, dated March 27, 1998.
* 10.6 Sycamore Park Convalescent Hospital, Los Angeles, California,
Lease Agreement dated August 1, 1997 between Robert and Sheila
Snukal and Sycamore Park Convalescent Hospital; First Amendment to
Lease, dated March 27, 1998.
* 10.7 Palmcrest Convalescent Home (now known as Palm Grove Convalescent
Center): Convalescent Hospital Lease, dated November 20, 1969,
between Palmcrest Associates, Ltd., and Century Convalescent
Centers, as amended by Lease of Convalescent Hospital Facility (as
amended), dated September 1, 1979, by which SHL and its appointed
nominee Royalwood Convalescent Hospital, Inc. (now Summit
Care-California, Inc.) are substituted as lessees.
* 10.8 Anaheim Care Center: Lease, dated June 1, 1995, between Sam Menlo,
Trustee of the Menlo Trust U/T/I 5/22/83 and Summit
Care-California, Inc., doing business as Anaheim Care Center.
* 10.9 Sharon Care Center: Lease, dated May 1, 1987, between Jozef Nabel
and Marie Gabrielle Nabel, as tenants in common, and Summit
Care-California, Inc.
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C>
* 10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964,
between Jack H. Cramer and Walter Lee Brown (together, as lessors)
and Albert J. Allasandra, as amended by Amendment to Lease and
Right of First Refusal to Purchase, dated May 23, 1969, by which
Alaric Corporation is substituted as lessee, and as further
amended by Amendment to Agreement of Lease and Right of First
Refusal, dated November 18, 1974, and as further amended by Second
Amendment to Agreement of Lease and Right of First Refusal and
Assignment of Lease, dated July 10, 1979, by which National
Accommodations, Inc. (now SHL) is substituted as lessee, assigned
to Summit Care Corporation by Assignment of Lease, dated March 9,
1992, between SHL and Summit Care Corporation.
* 10.11 Bay Crest Convalescent Hospital: Lease, dated March 1, 1980,
between South Bay Sanitarium and Convalescent Hospital and Garnet
Convalescent Hospital, Inc. (now Summit Care-California, Inc.),
and Amendment to Lease dated March 1, 1994.
* 10.12 Brier Oak Convalescent Center: Lease Agreement, dated February 18,
1985, between Bernard Bubman, Arnold Friedman, Irene Weiss and
Sunset Motel and Development Co. (collectively, as lessors), and
Brier Oak Convalescent, Inc.
* 10.13 Hemet Resident Hotel: Ground Lease dated June 25, 1980, between
Genes, Ltd., and SHL, assigned to Summit Care Corporation by
Assignment of Lease dated March 9, 1992, between SHL and Summit
Care Corporation.
* 10.14 Seller Note for purchase of The Woodlands.
* 10.15 HUD Note for purchase of The Woodlands.
* 10.16 Phoenix Living Center Lease dated August 1, 1993, between Sierra
Land Group, Inc. and Summit Care Corporation; Sublease with Summit
Health Ltd., for Phoenix Living Center dated January 1994.
* 10.17 Real Estate Lien Note$3,000,000 dated September 30, 1994 and
Security Agreement dated September 30, 1994.
* 10.18 Live Oak Nursing Center, George West, Texas Lease Agreement dated
July 19, 1991; Assignment of Lease With Option to Purchase dated
September 30, 1994 and Consent To Assignment Of Leasehold Estate
of Live Oak Nursing Center, George West, Texas dated August 15,
1994.
* 10.19 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement
dated February 28, 1989; Assignment Of Lease With Option To
Purchase dated September 30, 1994 and Consent To Assignment Of
leasehold Estate Of Guadalupe Valley Nursing Center, Sequin, Texas
dated August 15, 1994.
* 10.20 Omitted
* 10.21 Limited Liability Company Agreement of APS-Summit Care Pharmacy,
L.L.C., dated November 30, 1996.
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C>
* 10.22 Robert Crone-South Texas Health Care, Inc. Agreement of Purchase
and Sale of Assets of Briarcliff Nursing and Rehabilitation Center
dated November 24, 1997.
* 10.23 Alexandria Convalescent Hospital, Los Angeles, California, Lease
Agreement dated November 2, 1992 between Alexandria Convalescent
Investments and Robert Snukal, Sheila Snukal, Manuel Padama and
Clair Padama; Consent, Agreement, and Acknowledgment, dated July
30, 1997.
* 10.24 Lease Agreement for office space at 11900 Olympic Boulevard, Los
Angeles, California, dated February 1, 1995 between Douglas Emmett
Joint Venture and The Fountain View Management Group.
* 10.25 Locomotion Therapy, Inc., Fresno, California, Lease Agreement,
dated December 18, 1996 between M.D. Bautista Developments and
Locomotion Therapy, Inc.
* 10.26 Elmcrest Convalescent Hospital, El Monte, California, Lease
Agreement dated November 15, 1977 between Convalescent Hospital
Management Corporation and Elmcrest Convalescent Center, Inc.;
Assignment and Assumption of Lease Agreement dated May 31, 1990;
Consent to Assignment and Agreement, dated July 30, 1997.
* 10.27 Monument Hill Nursing Center, Flatonia, Texas, Lease Agreement
dated October 20, 1986; Bill of Sale and General Warranty Deed
from Hobbs & Curry Family Limited Partnership to Summit Care
Corporation, dated September 11, 1997.
* 10.28 Comanche Trail Nursing Home, Big Spring, Texas, Lease Agreement,
dated April 10, 1990, between Lloyd G. Hobbs and Select Care
Enterprises, Inc. (assigned to Summit Care Corporation); Consent
to Assignment of Lease, dated April 10, 1990; Assignment of Lease
with Option to Purchase, dated December 1, 1994; Assignment and
Assumption of Lease, dated September 1, 1997.
* 10.29 Woodland Convalescent Center, Reseda, California Lease Agreement,
dated February 1, 1995 between Uni-Cal Associates and Summit
Care-California, Inc.
* 10.30 Agreement for Development and Operation of Skilled Nursing
Facilities, dated May 4, 1998, between Fountain View, Inc. and
Baylor Health Care System; Service Mark Sublicense Agreement,
dated May 4, 1998, between Fountain View, Inc. and Baylor Health
Care System; Trademark License Agreement, dated July 24, 1997,
between Baylor University and Baylor Health Care System.
* 10.31 On Track Physical Therapy, Office Building Lease Agreement,
Fresno, California, dated January 31, 1997 between M.D. Bautista
Developments and On Track Physical Therapy, Inc.
10.32 Omitted
10.33 Omitted
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
** 10.34 Agreement and Plan of Merger Among Summit Care Corporation,
Fountain View, Inc., FV-SCC Acquisition Corporation and Heritage
Fund II, L.P., dated February 6, 1998.
** 10.35 Summit Care Corporation Special Severance Pay Plan dated February
6, 1998.
* 10.36 Investment Agreement dated as of March 27, 1998 among Fountain
View and certain investors.
* 10.37 Stockholders Agreement dated as of March 27, 1998 among Fountain
View, the existing stockholders of Fountain View and certain
investors.
* 10.38 Registration Rights Agreement dated as of March 27, 1998 among
Fountain View, certain stockholders of Fountain View and certain
investors.
* 10.39 Employment Agreement between Fountain View and Robert Snukal dated
March 27, 1998.
* 10.40 Employment Agreement between Fountain View and Sheila Snukal dated
March 27, 1998.
* 10.41 Employment Agreement between Fountain View and William Scott dated
March 27, 1998.
* 10.42 Promissory Note and Pledge Agreement dated April 16, 1998 issued
by William Scott to Fountain View relating to purchase of 20,000
Shares of Series A Common Stock.
* 10.43 Supplemental Signature Page to Investment Agreement dated as of
May 4, 1998 among Fountain View, Heritage Fund II, L.P., Baylor
Health Care System ("Baylor") and Buckner Foundation ("Buckner").
* 10.44 Amendment No. 1 to Stockholders Agreement dated as of May 4, 1998
among Fountain View, Heritage, Baylor, Buckner and certain other
parties.
* 10.45 Amendment No. 1 to Registration Rights Agreement dated as of May
4, 1998 among Fountain View, Heritage, Baylor, Buckner and certain
other parties.
* 10.46 Warrants to purchase Series C Common Stock of Fountain View issued
by Fountain View to Heritage, Baylor, Buckner and certain of
Baylor's brokers.
* 10.47 Credit Agreement Dated as of April 16, 1998 by and among Fountain
View, The Banks party thereto and the Bank of Montreal, as agent.
* 10.48 Guaranty Agreement Dated as of April 16, 1998 by and among
Fountain View, the Guarantors, the Banks party thereto and Bank of
Montreal.
</TABLE>
57
<PAGE>
<TABLE>
<S> <C> <C>
* 10.49 Pledge Agreement Dated as of April 16, 1998 by and among Fountain
View, the Guarantors, the Banks party thereto and Bank of Montreal.
* 10.50 Security Agreement Dated as of April 16, 1998 by and among
Fountain View, the Guarantors, the Banks party thereto and Bank of
Montreal.
* 10.51 Form of Revolving Note.
* 10.52 Form of Term Note.
*** 10.53 Amendment No. 1 to Credit Agreement dated as of April 16, 1998 by
and among Fountain View, the Banks party thereto and Bank of
Montreal, as agent.
10.54 Employment Agreement between Fountain View and Paul Rathbun dated
August 12, 1998.
10.55 Amendment No. 2 to Credit Agreement dated as of March 26, 1999 by
and among Fountain View, the Banks party thereto and Bank of
Montreal, as agent.
* 21.1 List of Subsidiaries
27.1 Financial Data Schedule.
</TABLE>
______________
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (No. 333-57279) filed with the Securities and Exchange Commission
on June 19, 1998, as amended.
** Incorporated by reference to the Company's Schedule 14D-1 (File No. 005-
43592) filed with the Commission on February 13, 1998, as amended.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on November 16, 1998.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ROBERT M. SNUKAL President and Chief Executive Officer March 31, 1999
-----------------------
Robert M. Snukal
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ROBERT M. SNUKAL President and Chief Executive Officer March 31, 1999
------------------------
Robert M. Snukal
/s/PAUL C. RATHBUN* Chief Financial Officer (Principal March 31, 1999
----------------------- Financial and Accounting Officer)
Paul C. Rathbun
/s/WILLIAM C. SCOTT* Director and Chairman of the Board March 31, 1999
-----------------------
William C. Scott
/s/SHEILA S. SNUKAL* Executive Vice President and Director March 31, 1999
-----------------------
Sheila S. Snukal
/s/MICHEL REICHERT* Director March 31, 1999
-----------------------
Michel Reichert
/s/MICHAEL F. GILLIGAN Director March 31, 1999
-------------------------
Michael F. Gilligan
/s/PETER Z. HERMANN* Director March 31, 1999
-------------------------
Peter Z. Hermann
/s/MARK J. JROLF* Director March 31, 1999
-------------------------
Mark J. Jrolf
/s/BOONE POWELL, JR.* Director March 31, 1999
-------------------------
Boone Powell,
*By /s/ROBERT M. SNUKAL Attorney-in-fact
--------------------------
Robert M. Snukal
</TABLE>
59
<PAGE>
FOUNTAIN VIEW, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Addition Charged to Charged to Balance at
Beginning due to Costs and Other End of
Description of Period Acquisition(1) Expenses Accounts(2) Deductions(3) Period
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accounts Receivable:
Year Ended December 31, 1998
Allowance for doubtful accounts $1,152 $7,918 $3,826 $ 38 $1,882 $11,052
Year Ended December 31, 1997
Allowance for doubtful accounts $ 779 $ - $ 395 $ - $ 22 $ 1,152
Year Ended December 31, 1996
Allowance for doubtful accounts $ 726 $ 430 $ - $ - $ 377 $ 779
Notes Receivable:
Year Ended December 31, 1998
Allowance for loss on notes
receivable $ - $ 618 $ 66 $ - $ 94 $ 590
Year Ended December 31, 1997
Allowance for loss on notes
receivable $ - $ - $ - $ - $ - $ -
Year Ended December 31, 1996
Allowance for loss on notes
receivable $ - $ - $ - $ - $ - $ -
</TABLE>
(1) Balance of Summit allowance at acquisition date.
(2) Recoveries of amounts written off.
(3) Write-offs of uncollectible accounts.
60
<PAGE>
EXHIBIT 10.54
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is made as of August 12, 1998
between FOUNTAIN VIEW, INC., a Delaware corporation (hereinafter the "Company"
and/or "Companies", which includes all subsidiaries and affiliates) and
PAUL RATHBUN (the "Executive").
Introduction
------------
The Executive presently resides in the State of Tennessee. The Executive
has interviewed with the Company and desires to accept employment with the
Company. The Executive's position with the Company shall be that of Chief
Financial Officer, subject to the terms and conditions set forth herein.
The employment of the Executive, requires that he relocate his principal
residence to Los Angeles County, California. During the term of his employment,
he shall be employed at the Executive Offices of the Company in either Los
Angeles County or Orange County, California. Executive shall be given full
access to information concerning the Company, in his capacity as Chief Financial
Officer. The disclosure of information obtained by the Executive in the
employment of the Company, or the engaging in competitive activities would
cause substantial harm to the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
Section 1. Term. The Company shall employ the Executive for a term
--------- ----
commencing on September 21, 1998, and continuing for a period of five (5)
years, unless earlier terminated pursuant to Section 7 (the "Employment
Period").
Section 2. Duties. The Executive shall be employed as the Chief
--------- ------
Financial Officer of the Company.
The Executive will report to the President. The Executive has
represented in connection with his being hired by the Company, that he has
specialized experience and knowledge with respect to the duties of a Chief
Financial Officer.
The Company may, in their sole and absolute discretion seek to have a
fidelity bond issued covering the Executive. If the Company decides to do such,
the Executive shall cooperate with the Company and will furnish all information
and take any and all other steps reasonably required to enable the Company to
obtain said fidelity bond.
Section 3. Full Time. During the term of this Agreement, the Executive
--------- ---------
shall use the Executive's best efforts to promote the
1
<PAGE>
interests of the Company and shall devote substantially all the Executive's full
business time and efforts to its business and affairs.
Section 4. Compensation. The Executive shall be entitled to
--------- -------------
compensation as follows:
a. Base Salary. During the term of the Executive's employment with
-----------
the Company, the Executive will receive a salary at the rate of $250,000.00
annually (the "Base Salary"), payable in equal installments not less than
bi-weekly in arrears. The Company shall withhold from compensation payable to
the Executive all applicable federal, state and local withholding taxes. The
Base Salary will be subject to annual consumer price adjustments and such
increases, if any, that the Board of Directors the Company (hereinafter
the "Board"), in its absolute discretion, may approve.
b. Bonus. In addition to the payment of the Base Salary and the
-----
other payments and benefits available to the Executive under this Agreement,
while the Executive is employed by the Company, the Company will pay to the
Executive for each fiscal year incentive compensation (the "Bonus") in an amount
up to $125,000.00 determined ratably based on the Company's EBITDA being between
the Base Case, each of the Mid Cases and/or the Target Case, such Bonus payable
within 120 days after the end of such fiscal year, as determined by the Board.
Payments with respect to partial percentages will be prorated. The payment of
Bonus shall be prorated for any partial fiscal year during the term of this
Agreement, except if the Executive resigns or is terminated for cause, before
the fiscal year end in which the Bonus accrues, in which case no Bonus
whatsoever shall be payable to the Executive.
C. Definition of Base Case, Mid Case and Target Cases. As used
--------------------------------------------------
herein, "Base Case", "Mid Case" and "Target Case" shall have the meanings
specified on Exhibit "A" hereto, on the respective dates indicated, and may be
----------
changed by approval of the Company's Board to reflect acquisitions,
dispositions, start-ups and other transactions not in the ordinary course,
provided that in selecting the new targets the members of the Board approving
such changes believe in good faith that the new targets are broadly consistent
with the valuation methodology applied in determining the initial EBITDA targets
set forth on Exhibit "A" hereto.
----------
d. Moving Expenses. Immediately following the execution of
---------------
this Agreement, the Company shall pay to Executive the sum of $40,000.00 to
cover the moving expenses to be incurred by the Executive in moving from
Tennessee to Los Angeles County, California. Except for said sum, the Company
shall not be liable to the Executive for any moving expenses and/or relocation
expenses of any nature whatsoever incurred by the Executive on account of said
move.
2
<PAGE>
e. Stock Option Plan. The Company is presently in the process of
-----------------
formulating a non-qualified Stock Option Plan (the "Plan") for management of the
Companies. Said Plan shall be finalized and put into effect within 90 days from
the date of execution of this Agreement. The Executive shall be granted at the
time said Plan is formally adopted by the Board, options to purchase the number
of shares of the Company, as of June 30, 1998 equal to one-half of one percent
of the current equity in the Company. Other than as to the number of shares as
referenced herein, the Executive understands and agrees that he shall be bound
by, and the grant of said options shall be subject to all other terms,
conditions, covenants, and agreements that shall be set forth in said Plan and a
Stock Option Agreement, as adopted by the Board. A draft of the proposed Plan
and Stock Option Agreement are attached as Exhibit "C"; the Plan and Stock
Option Agreement approved by the Board will be substantially the same as Exhibit
"C" in all material respects.
Section 5. Benefits. In addition to salary and Bonus, the Executive
--------- --------
shall be entitled to receive reasonable and customary fringe benefits in an
amount not less than the greater of those benefits that are generally and
customarily available to the Company's executive and managerial employees. Such
benefits include health insurance and vacation time in accordance with the
Company's policies, consistent with prior practices. The Executive will be
entitled to reimbursement of all reasonable expenses incurred in the ordinary
course of business on behalf of the Company, subject to presentation of
appropriate documentation, in accordance with policies approved by the Board.
Section 6. Confidentiality and Non-Competition. In consideration of,
--------- -----------------------------------
and as a condition to, the mutual promises contained herein, and to preserve
the goodwill of the Company and its direct and indirect subsidiaries
(collectively, the "Companies"), the Executive agrees as follows:
a. The Executive will not at any time, directly or indirectly,
disclose or divulge, except as reasonably required in connection with the
performance of the Executive's duties for the Companies, any Confidential
Information (as hereinafter defined) acquired by the Executive during
the Executive's affiliation with or employment by the Companies. As used herein,
"Confidential Information" means all trade secrets and all other proprietary or
non-public information of a business, financial, marketing, technical or other
nature pertaining to the Companies or their affairs and all information of
others that the Companies have agreed not to disclose; provided, that
--------
Confidential Information shall not include any information which has entered or
enters the public domain through no fault of the Executive or which the
Executive is required to disclose by law or legal process.
3
<PAGE>
b. The Executive shall make no use whatsoever, directly or
indirectly, of any Confidential Information, except as reasonably required in
connection with the performance of the Executive's duties for the Companies.
c. Upon the Companies' request at any time and for any reason, the
Executive shall immediately deliver to the Companies all materials (including
all copies) in the Executive's possession which contain or relate to
Confidential Information.
d. All inventions, developments or improvements made by the
Executive, either alone or in conjunction with others, at any time or at any
place during the term of the Executive's employment by the Companies, whether or
not reduced to writing or practice during such term, which relate to the
business in which the Companies are engaged or in which the Companies intend to
engage, or which were developed or made in whole or in part using the Companies'
facilities, shall be the exclusive property of the Companies. The Executive
shall promptly disclose any such invention, development or improvement to the
Companies, and, at the request and expense of the Companies, shall assign all of
the Executive's rights to the same to the Companies. The Executive shall sign
all instruments necessary for the filing and prosecution of any applications for
or extension or renewals of letters patent of the United States or any foreign
country which the Companies desire to file.
e. All copyrightable work by the Executive during the term of the
Executive's employment by the Companies which relate to the businesses in which
the Companies are engaged is intended to be "work made for hire" as defined in
Section 101 of the Copyright Act of 1976, and shall be the property of the
Companies. If the copyright to any such copyrightable work is not the property
of the Companies by operation of law, the Executive will, without further
consideration, assign to the Companies all right, title and interest in such
copyrightable work and will assist the Companies and their nominees in every
way, at the Companies' expense, to secure, maintain and defend for the
Companies' benefit copyrights and any extensions and renewals thereof on any and
all such work including translations thereof in any and all countries, such work
to be and to remain the property of the Companies whether copyrighted or not.
f. Prior to the termination of the Executive's employment with the
Companies, the Executive will not directly or indirectly, individually or as a
consultant to, or executive, officer, director, stockholder, partner or other
owner or participant in any business entity, engage in or assist any other
person to engage in the businesses of skilled nursing facilities, assisted
living facilities, inpatient or outpatient therapy services, pharmacies,
urological supplies, enteral feeding supplies and orthotics anywhere in the
counties of the State of California
4
<PAGE>
identified on Exhibit "B" hereto or in Arizona, Texas or any other state within
----------
the United States; provided, however, that the Executive may own not more than a
-------- -------
5% interest in any publicly-traded company.
g. Prior to the termination of the Executive's employment with the
Companies, and for the greater of five years after the date of this Agreement or
two years after such termination, the Executive will not directly or indirectly,
individually or as a consultant to, or as employee, officer, director,
stockholder, partner or other owner or participant in any business entity other
than the Companies, solicit or endeavor to entice away from the Companies, or
otherwise materially interfere with the business relationship of the Companies
with, (i) any person who is or was, within the one-year period immediately prior
to the termination of the Executive's employment by the Companies, employed by,
a consultant to or associated with the Companies, or (ii) any person or entity
who is or was, within the two-year period immediately prior to the termination
of the Executive's employment by the Companies, a customer, client of or
supplier to the Companies.
h. Without limiting the remedies available to the Companies, the
Executive acknowledges that a breach of any of the covenants contained in this
Section 6 could result in irreparable injury to the Companies for which there
might be no adequate remedy at law, and that, in the event of such a breach or
threat thereof, the Companies shall be entitled to obtain a temporary
restraining order and/or a preliminary injunction and a permanent injunction
restraining the Executive from engaging in any activities prohibited by this
Section 6 or such other equitable relief as may be required to enforce
specifically any of the covenants of this Section 6. The provisions of this
Section 6 shall survive the termination of this Agreement and shall continue
thereafter indefinitely in full force and effect in accordance with the terms of
this Section 6.
Section 7. Termination.
---------- ------------
a. The Executive's employment with the Company may be terminated
at any time by the Company with cause or without cause or in the event of the
death or Disability (as hereinafter defined) of the Executive. As used herein,
"cause" shall mean the reasonable and good faith determination by a majority
of the Board that the Executive has (i) breached any material term of this
Agreement, or any representation of the Executive set forth in this Agreement
proves to be untrue, (ii) engaged in criminal acts or acts of moral turpitude
causing injury to the Companies or their reputations, or (iii) engaged in
material acts of dishonesty affecting the Companies. As used herein,
"Disability" shall mean illness (mental or physical) or accident which, in the
good faith and reasonable determination of a majority of the Board, based on
5
<PAGE>
the report of a reputable physician, renders him unable to perform his duties
for ninety days during any 12-month period.
b. If the Executive's employment is terminated hereunder for cause,
by death or disability, or by the Executive for any reason, the Company shall
have no further obligation to make any payments or provide any benefits to the
Executive, except for (i) payments of Base Salary that had accrued but had not
paid prior to the date of termination, and (ii) payments of Bonus that had been
earned by the Executive but not paid prior to the date of termination.
c. The Company shall have the right, in its sole and absolute
discretion to terminate the Executive without cause at any time. If the Company
shall terminate the Executive without cause, so long as the Executive remains in
material compliance with the provisions of Section 6, the Company shall be
obligated to pay to the Executive his Base Salary, health insurance and car
allowance, for six months following the date of said termination, together with
the prorated bonus provided for in Section 4(b).
d. The provisions of Section 6 in any and all events shall survive
the termination of the Executive's employment in accordance with its terms.
Section 8. Enforceability. This Agreement shall be interpreted so as to
--------- --------------
be effective under applicable law, but if any portion hereof is prohibited or
invalid, such portion shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of this Agreement.
If any one or more of the provisions contained in this Agreement are for any
reason held to be excessively broad as to duration, geographical scope, activity
or subject, such provisions shall be construed by limiting and reducing them so
as to be enforceable to the maximum extent permitted under applicable law.
Section 9. Notices. Any notice or other communication given pursuant to
--------- -------
this Agreement shall be in writing and shall be personally delivered, sent by
overnight courier or express mail, or mailed by first class certified or
registered mail, postage prepaid, return receipt requested, as follows:
a. If to the Company:
Fountain View, Inc.
11900 W. Olympic Boulevard, Suite 680
Los Angeles, CA 90064
6
<PAGE>
b. If to the Executive:
Paul Rathbun
8207 Carriage Crossing
Chattanooga, TN 37421
or to such other address as the parties shall have designated by notice to the
other party.
Section 10. Governing Law. This Agreement shall be governed by and
----------- -------------
construed in accordance with the laws of the State of California without regard
to the choice of law provisions thereof.
Section 11. Amendments and Waivers. No amendment or waiver of this
----------- ----------------------
Agreement or any provision hereof shall be binding upon the party against whom
enforcement of such amendment or waiver is sought unless it is made in writing
and signed by or on behalf of such party. The waiver by either party of a breach
of any provision of this Agreement by the other party shall not operate as a
waiver by that party of the same or any subsequent breach of any provision of
this Agreement by the other party.
Section 12. Binding Effect; Assignment. This Agreement shall be binding on
----------- --------------------------
and inure to the benefit of the parties hereto and their respective heirs,
executors and administrators, successors and assigns. This Agreement may not be
assigned in whole or in party by either party (whether by operation of law or
otherwise, including by merger or consolidation).
Section 13. Entire Agreement. This Agreement constitutes the final and
----------- ----------------
entire agreement of the parties with respect to the matters covered hereby, and
replaces and supersedes all other agreements and understandings relating
thereto.
Section 14. Counterparts. This Agreement may be executed in any number of
----------- ------------
counterparts, and with counterpart signature pages, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
Section 15. Arbitration. Any controversy between the parties regarding the
----------- -----------
construction or application of this Agreement, any claims arising out of this
Agreement or its breach, whether sounding in contract, tort or otherwise, shall
be settled by binding arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, and judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction.
The arbitrator and/or arbitrators hearing said matter shall be retired judge
and/or judges formerly sitting on the bench of the California Superior Court, or
any higher state court, or a retired Federal District
7
<PAGE>
Court Judge sitting on the bench in any District Court of California.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
as of the date first above written.
"COMPANY"
FOUNTAIN VIEW, INC.
BY: /S/ ROBERT SNUKAL
_________________________
PRINTED NAME: Robert Snukal
---------------
Title: President/C.E.O.
----------------------
"EXECUTIVE"
PAUL RATHBUN
/s/ Paul C. Rathbun
----------------------------
Paul Rathbun
<PAGE>
EXHIBIT "A"
-----------
Proposed Base $250,000.00
Proposed Bonus $125,000.00
<TABLE>
<CAPTION>
Base Case Mid Case Target
--------- -------- ------
Step 1 Step 2
------ ------
<S> <C> <C> <C> <C> <C>
6/30/99 EBITDA Target $38,000,000 $45,188,000 $47,314,000 N/A
Bonus Paid 40,000 65,000
Total Cash Pay 250,000 290,000 315,000
6/30/00 EBITDA Target $45,500,000 $53,581,000 $57,101,000 $59,320,000
Bonus Paid 62,500 106,250 125,000
Total Cash Pay 250,000 312,500 356,250 375,000
6/30/01 EBITDA Target $48,000,000 $56,499,000 $67,030,000 $71,287,000
Bonus Paid 62,500 106,250 125,000
Total Cash Pay 250,000 312,500 356,250 375,000
6/30/02 EBITDA Target $51,300,000 $60,395,000 $78,196,000 $85,390,000
Bonus Paid 62,500 106,250 125,000
Total Cash Pay 250,000 312,500 356,250 375,000
6/30/03 EBITDA Target $55,320,000 $65,080,000 $87,063,000 $95,621,000
Bonus Paid 62,500 106,250 125,000
Total Cash Pay 250,000 312,500 356,250 375,000
</TABLE>
<PAGE>
EXHIBIT B
Identified Counties
-------------------
Alameda Orange
Alpine Placer
Amador Plumas
Butte Riverside
Calaveras Sacramento
Colusa San Benito
Contra Costa San Bernardino
Del Norte San Diego
El Dorado San Francisco
Fresno San Joaquin
Glenn San Luis Obispo
Humboldt San Mateo
Imperial Santa Barbara
Inyo Santa Clara
Kern Santa Cruz
Kings Shasta
Lake Sierra
Lassen Siskiyou
Los Angeles Solano
Madera Sonoma
Marin Stanislaus
Mariposa Sutter
Mendocino Tehama
Merced Trinity
Modoc Tulare
Mono Tuolumne
Monterey Ventura
Napa Yolo
Nevada Yuba
-11-
<PAGE>
Exhibit C
FOUNTAIN VIEW, INC.
Non-Qualified Stock Option Agreement
------------------------------------
This Stock Option Agreement (the "Agreement") is entered into as of
---------
_______, 1998 by and among Fountain View, Inc., a Delaware corporation (the
"Company"), and Paul Rathbun (the "Optionee").
------- --------
Introduction
------------
The Company has adopted its 1998 Stock Option Plan (as amended from time to
time, the "Plan"), pursuant to which the Board of Directors or Stock Option
Committee of the Company has authorized the grant of the stock options described
herein. Capitalized terms used herein and not defined shall have the meanings
given to them in the Plan.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Optionee agree
as follows:
Section 1. Grant of Non-Qualified Stock Option. The Company hereby grants
--------- -----------------------------------
to the Optionee an option (the "Option") to purchase an aggregate of up to
6,174 shares of Series C Common Stock, $.01 par value per share (the "Common
------
Stock"), of the Company at a price of $104.61 per share, subject to the terms
- -----
and conditions of this Agreement and the Plan. This Option is not intended to
qualify as an incentive stock option within the meaning of Section 422 of
Internal Revenue Code of 1986, as amended.
Section 2. Exercise of Option.
--------- ------------------
(a) Vesting. Except as otherwise provided below, this Option will
-------
vest with respect to one-fifth of the number of shares for which this Option was
originally granted on each ________, commencing on ________, 1999 and continuing
until ________, 2004 or the earlier date, if any, on which the Optionee ceases
to be employed by a Related Company, after which no additional shares will vest
hereunder. If the Optionee is an employee of a Related Company on the date of a
Sale, this Option will vest as to all shares covered hereby on the date of Sale.
If the Optionee's employment is terminated by a Related Company with Cause
(which term is used herein as defined in the Employment Agreement between Paul
Rathbun and a Related Company), or by the Optionee other than as a result of the
Optionee's death or Disability, prior to the date on which this Option first
becomes exercisable under Subsection (b) below, this Option will
<PAGE>
not be vest as to any shares covered hereby and will cease to be vested with
respect to any shares previously vested. If the Optionee is an employee of a
Related Company on the date that is one year after the Company's first firm
commitment underwritten public offering of common stock registered under the
Securities Act of 1933, as amended (a "Public Offering"), this Option will vest
---------------
as to any shares as to which it has not previously vested.
(b) Timing of Exercise. This Option may not be exercised prior to
------------------
the first to occur of (i) a Sale, (ii) the termination of the Optionee's
employment by the Company without Cause or as a result of the Optionee's death
or Disability, (iii) one year after a Public Offering and (iv) five years after
the date hereof. In no event may this Option be exercised later than the earlier
of (x) three months after the termination of the Optionee's employment with a
Related Company and (y) the tenth anniversary of the date hereof (the
"Expiration Date").
(c) Number of Shares for Which Exercisable. Subject to the other
--------------------------------------
provisions of this Option, this Option may be exercised on one or more occasions
for up to an aggregate number of shares equal to the number of shares that are
vested hereunder.
(d) Exercise Procedure. Subject to the conditions set forth herein,
------------------
this Option may be exercised by the Optionee's delivery of written notice to the
Company specifying the number of shares to be purchased and the purchase price
therefor, and accompanied by payment in full.
Section 3. Payment of Purchase Price.
--------- -------------------------
(a) Method of Payment. The price for shares purchased hereunder
-----------------
shall be paid by delivery to the Company of cash or a check to the order of the
Company or, if acceptable to the Company, by delivery to the Company of shares
of Common Stock having a fair market value equal to the purchase price of the
shares to be purchased (as determined in good faith by the Company), or by any
combination of such methods of payment. If the purchase price is paid with
shares of Common Stock, the certificates representing such shares shall be
accompanied by a stock power executed in blank, and suitable for transferring
the shares to the Company.
(b) Restriction on Use of Certain Shares. Notwithstanding the
-------------------------------------
foregoing, without the consent of the Company, shares of stock may not be used
to pay the exercise price of this Option if the shares to be used were issued to
the Optionee upon exercise of a stock option and such shares have not been held
by the Optionee for the applicable minimum statutory
-2-
<PAGE>
holding period required to receive the tax benefits afforded under Section
421(a) of the Code.
Section 4. Delivery of Shares. The Company shall, upon receipt of payment
--------- ------------------
in full for shares properly purchased hereunder, promptly deliver certificates
representing such shares to the Optionee. Nothwithstanding the foregoing, if
the Company is required by law or by any securities exchange on which the Common
Stock is listed to take any action before the issuance of such shares, the date
of delivery shall be extended for a reasonable period to allow such action to be
completed. The Company's obligation to deliver shares is also subject to the
satisfaction of all applicable tax withholding requirements. These requirements
shall be satisfied by the Optionee remitting the required taxes to the Company
prior to the delivery of the shares or in such other reasonable manner as may be
acceptable to the Company.
Section 5. Non-transferability of Option. This Option is personal and the
--------- -----------------------------
rights granted hereunder may not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise), except that
this Option may be transferred to the Company or to the Optionee's heirs or
estate upon the Optionee's death, and may be exercised in accordance with its
terms by such transferees. Upon any transfer, assignment, pledge or
hypothecation in violation hereof, this Option shall, at the election of the
Company, become null and void.
Section 6. No Employment Rights. Nothing contained in the Plan or this
--------- --------------------
Option shall be construed or deemed to require any Related Company to continue
the employment of the Optionee for any period.
Section 7. No Rights as a Shareholder. The Optionee shall have no rights
--------- --------------------------
as a shareholder with respect to any shares which are subject to this Option
until the Optionee has satisfied all legal and contractual obligations which are
conditions precedent to the Company's obligation to issue and deliver a
certificate to the Optionee for the shares which are subject to this Option.
Section 8. Investment Representations. If the issuance of the shares
---------- --------------------------
issuable upon exercise of this Option is not exempt from registration under Rule
701 (or any similar subsequently enacted provision) under the Securities Act of
133, as amended (the "Securities Act"), or covered by a registration statement
--------------
under the Securities Act, the Optionee's right to exercise this Option and the
Company's obligation to deliver shares upon exercise of this Option shall be
subject to receipt by the Company of an investment letter in a form reasonably
acceptable
-3-
<PAGE>
to the Company and signed by the Optionee (or any other holder of this Option).
Section 9. Stockholders Agreement.
--------- ----------------------
(a) If the Optionee or other holder of this Option is not already a
party to the Stockholders Agreement dated as of March 27, 1998 by and among the
Company, Robert Snukal, Sheila Snukal, Heritage Fund II, L.P. and certain other
parties, as amended from time to time (the "Stockholders Agreement"), the
----------------------
Optionee's right to exercise this Option and the Company's obligation to deliver
shares upon exercise of this Option are subject to the execution by the Optionee
(or other holder of this Option) of a supplemental signature page to the
Stockholders Agreement pursuant to which the Optionee (or other holder of this
Option) becomes a party to the Stockholders Agreement with respect to those
provisions of the Stockholders Agreement designated by the Board.
(b) In addition, the Optionee (and any subsequent holder of this
Option or of any shares issued hereunder) agrees to be bound by Sections 4.02,
4.03, 4.04, 4.05 and 6.01 of the Stockholders Agreement from and after the date
hereof as a "Management Stockholder".
Section 10. Legends. Certificates representing shares issued upon
---------- -------
exercise of this Option shall bear legends acceptable to the Company as to (a)
restrictions contained in the Stockholders Agreement, (b) the provisions of
Section 9 above, and (c) such other matters as the Board may determine.
Section 12. Miscellaneous.
---------- -------------
(a) This Option shall be subject in all respects to the terms of the
Plan.
(b) Except as provided herein, this Option may not be amended or
modified except in writing and signed by the Company and the Optionee.
(c) All notices under this Option shall be mailed registered mail,
return receipt requested, sent by recognized overnight delivery service, or
delivered by hand (i) if to the Company at Fountain View Management, Inc., 11900
W. Olympic Blvd., Los Angeles, CA 90064, Attn: President, with copies to
Heritage Partners, Inc., 30 Rowes Wharf, Suite 300, Boston, Massachusetts 02110,
Attn: Mark J. Jrolf, and (ii) if to the Optionee, at the Optionee's address set
forth below or at such other address as may be designated in writing by either
of the parties to one another.
-4-
<PAGE>
(d) This Option shall be governed by and construed in accordance with
the laws of the State of Delaware.
IN WITNESS WHEREOF, this Option has been executed as of the date set forth
below.
FOUNTAIN VIEW, INC.
By_______________________________
(title)
The undersigned Optionee hereby accepts this Option and agrees to the
terms and conditions thereof as of the date hereof, and acknowledges receipt of
a copy of the Plan.
_________________________________
Paul Rathbun
ADDRESS
_________________________________
_________________________________
-5-
<PAGE>
FOUNTAIN VIEW, INC.
1998 Stock Option Plan
----------------------
Section 1. Purpose. The purpose of this Fountain View, Inc. (the "Company")
--------- ------- -------
1998 Stock Option Plan (the "Plan") is to provide an incentive to certain
----
directors, employees and consultants of the Company and its subsidiaries by
providing an opportunity for them to participate in the ownership of the
Company. The Company and its direct and indirect subsidiaries are sometimes
referred to herein collectively as the "Related Companies."
-----------------
This plan provides for the grant of incentive stock options ("Incentive
---------
Stock Options"), as defined in Section 422 of the Internal Revenue Code of
- -------------
1986, as amended (the "Code"), and for the grant of non-qualified stock options
----
("Non-Qualified Options"), to certain directors, employees and consultants of
---------------------
the Related Companies. All such Incentive Stock Options and Non-Qualified
Options are sometimes hereinafter collectively referred to as "Options."
-------
Section 2. Administration of Plan. This Plan shall be administered by the
--------- ----------------------
Board of Directors of the Company (the "Board") or by a Stock Option Committee
-----
(the "Committee") designated by the Board. If administered by the Committee, a
---------
majority of the Committee shall constitute a quorum and acts of a majority of
the members present at any meeting at which a quorum is present, or acts
approved in writing by all members of the Committee shall be deemed to be valid
acts of the Committee. The Committee shall consist of directors who qualify as
"non-employee directors" within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended. The Board and the Committee are
authorized to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other determinations necessary or
advisable for its administration. If Options are intended to qualify as
Incentive Stock Options, the Board and the Committee shall so specify in the
grant of the Option.
Section 3. Shares Covered by Plan. Options may be granted under the Plan
--------- ----------------------
and while the Plan is in effect for the purchase of not in excess of 49,388
shares of the Series C Common Stock, $.01 par value per share, of the Company.
Shares covered by unexercised Options which are no longer exercisable for any
reason shall be available for issuance under Options hereunder for purposes of
computing the foregoing limitation, unless the Plan has been terminated. Shares
delivered on exercise of
<PAGE>
Options may be from authorized and unissued stock or reacquired stock.
Section 4. Eligibility. The persons who shall be eligible to receive
--------- -----------
Incentive Stock Options pursuant to this Plan shall be such employees of the
Related Companies as the Board or the Committee shall select from time to time.
The persons who shall be eligible to receive Non-Qualified Options pursuant to
this Plan shall be such directors, employees and consultants of the Related
Companies as the Board or the Committee shall select from time to time. An
optionee under this Plan may hold more than one Option hereunder, but only on
the terms and conditions hereinafter set forth. Notwithstanding any of the
other provisions of this Plan, Options intended to qualify as Incentive Stock
Options shall not be granted hereunder to an individual who then owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company, such ownership to be determined by application
of the applicable attribution rules under the Code, unless the Option price is
at least one hundred ten percent (110%) of the fair market value (at the time of
grant) of the Common Stock subject to the Option and such Option by its terms is
not exercisable after the expiration of five (5) years after the date the Option
is granted. For the purposes of this Section, stock owned directly or
indirectly, by or for a corporation, partnership, estate, or trust shall be
considered as being owned proportionately by or for its shareholders, partners,
or beneficiaries, and stock owned, directly or indirectly, by or for the
brothers and sisters (whether by whole or half blood), spouse, ancestors, and
lineal descendants of an optionee shall be considered to be owned by the
optionee.
Section 5. Allotment of Options and Number of Shares. The allotment of
--------- -----------------------------------------
Options among the eligible optionees, and the number of shares to be covered by
each Option to be granted, shall be determined by the Board or the Committee;
provided that no Option which is intended to qualify as an Incentive Stock
Option shall be granted to an optionee under this Plan if the grant of such
Option would cause the aggregate fair market value (determined at the time the
Option is granted) of the stock with respect to which Incentive Stock Options
(including such Option) are exercisable for the first time by such optionee
during any calendar year (under all such plans of the optionee's employer
corporation and its parent and subsidiary corporations, if any) to exceed
$100,000.
Section 6. Option Agreements. Each optionee to whom an Option is granted
--------- -----------------
shall enter into a written agreement with the Company, subject to such amendment
and modification from time to time as the Board or the Committee shall deem
necessary to comply with applicable law or regulation, setting forth the terms
and
-2-
<PAGE>
conditions of the Option granted to such optionee, which agreement may contain
such terms, conditions and restrictions not inconsistent with the terms of the
Plan as the Board or the Committee shall approve, and specifying, to the extent
applicable, whether the Option granted pursuant hereto is intended to qualify as
an Incentive Stock Option.
Section 7. Option Price. The price to be paid by an optionee who
--------- ------------
exercises an Option shall be determined by the Board or the Committee. In the
case of any Option which is intended to qualify as an Incentive Stock Option,
such price shall in no instance be less than the fair market value of the Common
Stock on the date such Option is granted (or 110% of such fair market value, in
the circumstances described in Section 4). The Board or the Committee shall have
full authority to determine the fair market value of a share of Common Stock.
Section 8. Duration and Rate of Exercise of Options.
--------- ----------------------------------------
(a) The option period shall be fixed by the Board or the
Committee but in any event each Option intended to qualify as an Incentive
Stock Option shall by its terms not be exercisable later than the expiration of
ten (10) years from the date such Option is granted.
(b) The Board or the Committee shall determine the rate at and
conditions upon which each Option shall be exercisable.
(c) The Board or the Committee shall determine the method by
which each Option shall be exercised and the timing and form of the purchase
price to be paid by an optionee upon the exercise of an Option under the Plan.
In the Company's discretion, previously issued shares of Common Stock may be
accepted as payment in an amount equal to the then fair market value of the
surrendered shares. The Board or the Committee shall have full authority to
determine the fair market value of the surrendered shares. If the surrendered
share is traded on an exchange, such fair market value shall be the closing
price of the Common Stock on the exchange on which the Common Stock of the
Company is then listed, on the last day during which the Common Stock traded
prior to the date of exercise of the Options. If the share is traded in the
over-the-counter market such fair market value shall be based on the closing
average of the bid and asked prices of Common Stock as quoted by the National
Association of Securities Dealers.
(d) Unless otherwise provided in the agreement establishing an
Option, the term "Cause" with respect to the holder of an Option granted
-----
hereunder means that, in the good faith determination of the Board, the holder
of such Option has
-3-
<PAGE>
(i) breached any of the holder's material fiduciary duties or material legal or
contractual obligations to any Related Company or any stockholder of the
Company, (ii) failed to perform satisfactorily the holder's material duties to
any Related Company (other than as a result of incapacity due to illness or
accident) after demand for performance has been made in writing by the Related
Company, (iii) engaged in misconduct which is injurious to any Related Company,
or (iv) been convicted of or pleaded nolo contendere to (A) any misdemeanor
relating to the affairs of a Related Company or (B) any felony.
(e) Unless otherwise provided in the agreement establishing an Option,
the term "Disability" with respect to the holder of an Option granted hereunder
----------
means illness (mental or physical) or accident which results in the holder being
unable to perform the holder's duties as an employee of a Related Company for
three months during any 12 month period.
Section 9. Nontransferability of Options. Each Option shall by its terms
--------- -----------------------------
not be transferable by the holder unless than by will or the law of descent and
distribution.
Section 10. Rights as Stockholder. An optionee shall have no rights as a
---------- ---------------------
stockholder with respect to any shares covered by such optionee's Options until
such optionee shall have become the holder of record of such shares, except as
otherwise provided in the Option Agreement entered into pursuant to Section 6
hereof.
Section 11. Granting of Options. The granting of any Option pursuant to
---------- -------------------
this Plan shall be entirely in the discretion of the Board or the Committee and
nothing herein contained shall be construed to give any director, employee or
consultant any right to participate under this Plan or to receive any Option
under it. The granting of an Option shall impose no duty upon the optionee to
exercise such Option.
Neither the adoption and maintenance of the plan nor the granting of an
Option pursuant to this Plan shall be deemed to constitute a contract of
employment between any of the Related Companies and any employee or to be a
condition of the employment of any person. Nothing herein contained shall be
deemed to (a) give to any director, employee or consultant the right to be
retained by any of the Related Companies or (b) interfere with the right of any
of the Related Companies to discharge or retire any director, employee or
consultant at any time.
Section 12. Stock Dividends, etc. In the event there is any change in the
---------- --------------------
shares of Common Stock of the Company through the declaration of stock dividends
or through any stock split, combinations, recapitalizations or similar
transactions, the number of shares available for Option and the shares subject
to
-4-
<PAGE>
any option shall be appropriately adjusted, and in the Board's or the
Committee's discretion, in such cases, fractional parts of shares may be
disregarded.
Section 13. Sale. Except as otherwise provided in an option agreement
---------- ----
entered into pursuant to Section 6, in the event of a Sale (as hereinafter
defined) while unexercised Options remain outstanding, the Board or the
Committee, as the case may be, may in their discretion cause one or more of the
following provisions to apply:
(a) the Board or the Committee may, subject to the provisions of
Subsections (c) and (d) below, after the effective date of such Sale, permit
each person who is a holder of an outstanding Option immediately prior to such
effective date, upon exercise of such Option, to receive in lieu of shares of
Common Stock, shares of such stock or other securities or consideration as the
holders of shares of Common Stock received pursuant to the terms of the Sale;
(b) the Board or the Committee may waive any discretionary
limitations imposed pursuant to Section 8 hereof so that some or all Options,
from and after a date prior to the effective date of such Sale specified by the
Board or the Committee, are exercisable in full;
(c) the Board or the Committee may cause all outstanding
Options to be canceled as of the effective date of any such Sale, provided that
notice of such cancellation is given to each holder of an Option, and each
holder of an Option has the right to exercise such Option in full prior to or
contemporaneous with the effective date of such Sale; or
(d) the Board or the Committee may cause all outstanding
Options to be canceled as of the effective date of any such Sale, provided that
notice of such cancellation is given to each holder of an Option, and each
holder of an Option has the right to exercise such Option, to the extent then
exercisable in accordance with any discretionary limitations imposed pursuant to
Section 8, prior to or contemporaneous with the effective date of such Sale.
As used herein, "Sale" means (i) a sale of all or substantially all of the
----
consolidated assets of the Company or (ii) a sale or other transfer of Common
Stock of the Company, in one transaction or a series of related transactions,
or a consolidation or merger of the Company, as a result of which the beneficial
holders of a majority of the Company's Common Stock prior to such transaction
do not, directly or indirectly, hold beneficially a majority of the Company's
Common Stock after such transaction.
-5-
<PAGE>
Section 14. Withholding. The Company may, upon exercise of a Non-Qualified
---------- -----------
Option or the making of a Disqualifying Disposition (as hereinafter defined),
require the holder of the option to pay additional withholding taxes in respect
of the amount that is considered compensation includable in such person's gross
income. Each person who receives an Incentive Stock Option shall notify the
Company in writing immediately upon such person making a Disqualifying
Disposition. As used herein, "Disqualifying Disposition" means any disposition
-------------------------
(including any sale) of stock received pursuant to the exercise of an Incentive
Stock Option before the later of (a) two years after such person was granted the
Incentive Stock Option under which such stock was acquired, or (b) one year
after such person acquired such stock by exercising the Incentive Stock Option.
Section 15. Use of Proceeds. The proceeds received by the Company from the
---------- ---------------
sale of stock pursuant to the Plan may be used by the Related Companies for
general corporate purposes.
Section 16. Amendment and Discontinuance. The Board of Directors may from
---------- ----------------------------
time to time alter, suspend or discontinue the Plan, provided, however, that no
-------- -------
such action shall materially impair the rights of an optionee without such
optionee's consent, other than as provided by Section 8(d), and provided,
--------
further, that no provision of Section 4, 5, or 7 hereof relating to Incentive
- -------
Stock Options shall be altered or amended without the approval of the
stockholders of the Company.
Section 17. Effective Date and Termination Date. The Plan shall become
---------- -----------------------------------
effective on August , 1998, and shall remain in effect until terminated by the
--
Board of Directors, provided that no Incentive Stock Options may be granted
after the tenth anniversary of such effective date.
The foregoing Plan was adopted by the Board of Directors of the Company on
August , 1998, and by the Company's stockholders on , 1998.
-- -------
-6-
<PAGE>
[LETTERHEAD OF CHAPMAN AND CUTLER]
March 18, 1998
Via Overnight Mail
To the parties on the
Attached Distribution List
Re: Fountain View
Ladies and Gentlemen:
Attached please find a draft of the proposed Second Amendment to Credit
Agreement which provides for the amended "EBITDAR" definition described in Bank
of Montreal's summary letter (which is also enclosed). If acceptable, please
execute and return all eleven (11) of your signature pages to me. If you have
any questions, please do not hesitate to call me.
Very truly yours,
CHAPMAN AND CUTLER
/s/ Steven G. Hastings
By ___________________________________________
Steven G. Hastings
SGH:jm
Enclosure
<PAGE>
DISTRIBUTION LIST
<TABLE>
<S> <C>
Ronald A. Launsbach Bill McKinley
Bank of Montreal Heritage Partners Management Company, Inc.
601 South Figueroa Street, Suite 4900 50 Rowes Wharf, Suite 300
Los Angeles, CA 90017 Boston, MA 02440
Tel: (213) 239-0602 Tel: (617) 428-0108
Fax: (213) 239-0609 Fax: (617) 439-0689
Paul Rathbun Sean Conlon
Fountain View, Inc. Paribas
2600 West Magnolia Boulevard 2029 Century Park East, Suite 3900
Burbank, CA 91505 Los Angeles, CA 90067
Tel: (310) 571-0351 Tel: (310) 551-7334
Fax: (310) 571-0365 Fax: (310) 556-3157
Peter Palladino, Esq. L. John Stewart
Choate, Hall & Steward BHF-Bank Aktiengesellschaft
Exchange Place 111 West Ocean Boulevard, Suite 1325
53 State Street Long Beach, CA 90802-4645
Boston, MA 02181 Tel: (562) 983-5006
Tel: (617) 248-5000 Fax: (562) 983-5015
Fax: (617) 248-4000
Lori Rosell Patrick Marsh
Finova Capital Corporation BHF-Bank Aktiengesellschaft
Healthcare Finance Division 5900 Madison Avenue
311 S. Wacker Drive, Suite 4400 New York, NY 10022
Chicago, IL 60606-6618 Tel: (212) 756-5553
Tel: (312) 322-3523 Fax: (212) 756-5536
Fax: (312) 322-3553
Michel Prince Brian Baldwin
Pilgrim America Prime Rate Trust Heller Financial, Inc.
Two Renaissance Square 500 West Monroe
40 North Central Avenue, Suite 1200 Chicago, IL 60661
Phoenix, AZ 85004-3444 Tel: (312) 441-7218
Tel: (602) 417-8212 Fax: (312) 441-7367
Fax: (602) 417-8327
Ron Watterworth Robert Tietjen
Union Bank of California Union Bank of California
44 South Figueroa Street, 10th Floor 5855 Topanga Canyon Blvd., Suite 200
Los Angeles, CA 90071 Woodland Hills, CA 91367
Tel: 213-236-7688 Tel: (818) 595-2096
Fax: 213-236-7635 Fax: (818) 595-2063
</TABLE>
<PAGE>
[LETTERHEAD OF BANK OF MONTREAL AND HARRIS BANK]
To: Fountain View Bank Group
Date: March 18, 1999
Re: $120MM Fountain View Bank Facility
The following requests your approval to amend the definition of "EBITDAR" in the
Company's $120 million credit agreement to allow for $6.903 million of "special
charges" to 4th quarter earnings. A brief analysis outlining the charges is
enclosed. This package will be followed by documentation, which should be
received by the Bank Group no later than Friday, March 19th.
We have planned a conference call with Fountain View management on Monday, March
22 at 8:30am (PST) to answer detailed questions. Conference call dial in
number: 1-877-322-9654; Access Code: 720436.
We request your response by returning your executed signature page via facsimile
to myself, at facsimile 213-239-0680, no later than Thursday, March 25, 1999.
Original executed signature pages should be returned to Steve Hastings at
Chapman & Cutler the next business day.
Steve Hastings
Chapman and Cutler
111 West Monroe Street
Chicago, IL 60603-4080
Tel: 312-845-3000
Also, we are planning a bank meeting on April 15th in Dallas, Texas. At that
time, the company will present its FY1999 budget. Details of that meeting will
follow shortly.
On behalf of the company we wish to thank you for your consideration. Please
direct questions to myself at 213-239-0602 or Mitsoo Iravani at 213-239-0609.
Sincerely,
Bank of Montreal, as Agent
/s/ Ronald Launsbach
- ------------------------------
Ronald Launsbach, Director
cc: Jeff Titus (w/o enclosures)
Paul Rathbun (w/o enclosures)
Bill McKinley (w/o enclosures)
<PAGE>
FOUNTAIN VIEW, INC.
YEAR END SPECIAL CHARGES - 1998
<TABLE>
<CAPTION> (In $000)
<S> <C>
MEDICARE 3,560
- -------- -----
Adjustments represent a revision of estimates previously utilized to record the
Medicare settlements. At this point, filed or pre-filed cost reports were
available to assist in the refinement of these estimates. Although no specific
intermediary issues impacted this number, the Company is recording these amounts
in light of the increased scrutiny by intermediaries of cost report items in
general.
Bad Debts 1,600
- --------- -----
The Company has adopted a more conservative approach in providing allowances for
doubtful accounts. This approach is warranted due to changes within the industry
and should serve as a better model to estimate these items on a go-forward
basis.
Palm Grove 1,733
- ---------- -----
There has been a significant increase in the regulatory focus within the
long-term care industry. The company has recorded a liability to estimate the
cost of the decertification of one of its facilities (Palm Grove) from Medicare
and Medicaid programs. The Company is appealing the decision and working with
HCFA and its representatives to recertify the facility. The Company strongly
feels that it is providing high quality care to its patients and believes that
this case represents an unreasonable reaction to the underlying facts and
circumstances of this case.
MedPartners 300
- ----------- ---
The Company recorded an estimate of the potential loss due to the bankruptcy
filing of MedPartners. The company is working diligently to minimize this
potential risk.
Other (290)
- ----- -----
Represents the net amount of several small adjustment areas.
TOTAL CHARGES 6,903*
</TABLE>
*Note: The special charges are added back to EBITDA for QE 12/98 - as recorded
in the covenant calculations shown in the following pages.
<PAGE>
FOUNTIAN VIEW, INC.
YEAR END DEBT COVENANTS
1998
<TABLE>
<CAPTION>
Projected Leverage Ratio: Leverage Leverage
TTM Funded Ratio Ratio
EBITDA Rent EBITDAR EBITDAR Debt Projected Required
------ ---- ------- ------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
QE 3/98 10,681 1,717 12,398
QE 6/98 10,049 1,705 11,754
QE 9/98 10,138 1,706 11,844
QE 12/98 11,594 1,707 13,301 49,297 307,379 6.24 6.50
QE 3/99 10,500 1,707 12,207 49,106 300,749 6.12 6.25
QE 6/99 11,000 1,707 12,707 50,059 297,852 5.95 6.25
QE 9/99 11,500 1,707 13,207 51,422 292,951 5.70 6.00
QE 12/99 12,000 1,707 13,707 51,828 291,025 5.62 6.00
QE 3/00 12,200 1,707 13,907 53,528 285,795 5.34 5.50
QE 6/00 12,500 1,707 14,207 55,028 282,648 5.14 5.50
QE 9/00 12,700 1,707 14,407 56,228 276,197 4.91 5.00
QE 12/00 12,900 1,707 14,607 57,128 273,950 4.80 5.00
</TABLE>
<TABLE>
<CAPTION>
Projected Funded Debt:
QE12/98 QE3/99 QE6/99 QE9/99 QE12/99 QE3/00 QE6/00 QE9/00 QE12/00
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revolver 18,661
Term 90,000
Bonds 120,000
Cap leases 20,228
LOCs 500
-------
subtotal 249,389 244,389 242,139 236,889 234,989 229,739 227,239 221,089 218,589
Accrued Interest -beg 7,758 3,366 6,736 3,339 6,688 3,312 6,682 3,285 6,634
Changes in int accrual (4,392) 3,370 (3,397) 3,349 (3,376) 3,370 (3,397) 3,349 (3,397)
------- ------- ------- ------- ------- ------- ------- ------- -------
Accrued Interest -end 3,366 6,736 3,339 6,688 3,312 6,682 3,285 6,634 3,237
Rent(past 4qtrs) 54,624 54,624 54,624 54,624 54,624 54,624 54,624 54,624 54,624
Total funded debt
before paydown 307,379 305,749 300,102 298,201 292,925 291,045 285,148 282,347 276,450
Required debt paydown - - 1,250 1,250 1,250 1,250 2,500 2,500 2,500
Additional debt paydown - 5,000 1,000 4,000 650 4,000 - 3,650 -
------- ------- ------- ------- ------- ------- ------- ------- -------
5,000 2,250 5,250 1,900 5,250 2,500 6,150 2,500
Total funded debt 307,379 300,749 297,852 292,951 291,025 285,795 282,648 276,197 273,950
</TABLE>
<PAGE>
FOUNTAIN VIEW, INC.
YEAR END DEBT COVENANTS
1998
<TABLE>
<CAPTION>
Projected Senior Leverage Ratios:
Senior Senior
Leverage Leverage
TTM Funded Ratio Ratio
EBITDA Rent EBITDAR EBITDAR Debt Projected Required
------ ---- ------- ------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
QE 3/98 10,681 1,717 12,398
QE 6/98 10,049 1,705 11,754
QE 9/98 10,138 1,706 11,844
QE 12/98 11,594 1,707 13,301 49,297 187,379 3.80 4.50
QE 3/99 10,500 1,707 12,207 49,106 180,749 3.68 4.00
QE 6/99 11,000 1,707 12,707 50,059 177,852 3.55 4.00
QE 9/99 11,500 1,707 13,207 51,422 172,951 3.36 3.75
QE 12/99 12,000 1,707 13,707 53,828 171,025 3.30 3.75
QE 3/00 12,200 1,707 13,907 53,528 165,795 3.10 3.50
QE 6/00 12,500 1,707 14,207 55,028 162,648 2.96 3.50
QE 9/00 12,700 1,707 14,407 56,228 156,197 2.78 3.50
QE 12/00 12,900 1,707 14,607 57,128 153,950 2.69 3.50
Projected Funded Debt:
QE 12/98 QE 3/99 QE 6/99 QH 9/99 QE 12/99 QE 3/00 QE 6/00 QE 9/00 QH 12/00
-------- ------- ------- ------- -------- ------- ------- ------- --------
Revolver 18,661
Term 90,000
Bonds 120,000
Cap Indexes 20,228
LOCs 500
-------
subtotal 249,389 244,339 242,139 236,119 234,989 229,739 227,239 221,089 218,589
Accrued Interest-beg 7,758 3,366 6,736 3,339 6,688 3,312 6,682 3,285 6,694
Changes in int accrual (4,392) 3,370 (3,397) 3,349 (3,376) 3,370 (3,397) 3,349 (3,397)
------- ------- ------- ------- ------- ------- ------- ------- -------
Accrued Interest-end 3,366 6,736 3,539 6,688 3,312 6,682 3,285 6,634 3,237
Rent(past 4qtrs) 54,624 54,624 54,624 54,624 54,624 54,624 54,624 54,624 54,624
Total funded debt
before paydown 307,379 305,749 300,102 298,201 292,925 291,045 285,148 282,347 276,450
Required debt paydown - - 1,250 1,250 1,250 1,250 2,500 2,500 2,500
Additional debt paydown - 5,000 1,000 4,000 650 4,000 - 3,650 -
------- ------- ------- ------- ------- ------- ------- ------- -------
5,000 2,250 5,250 1,900 5,250 2,500 4,150 2,500
Total funded debt 307,379 300,749 297,852 292,951 291,025 285,795 282,648 276,197 273,950
Bonds 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000
------- ------- ------- ------- ------- ------- ------- ------- -------
Total senior
funded debt 187,379 180,749 177,852 172,951 171,025 165,795 162,648 156,197 153,950
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOUNTAIN VIEW, INC.
YEAR END DEBT COVENANTS
1998
4QS 4QS
FIXED INCOME
Projected Fund Charge Ratio: TIM ASSED TAXES
EBITDA RENT EBITDAR EBITDAR MAINT PAID
------- ---- ------- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
QE 3/98 10,681 1,717 12,398
QE 6/98 10,049 1,705 11,754
QE 9/98 10,131 1,706 11,844
QE 12/98 11,594 1,707 13,301 49,297 5,489 -
QE 3/99 10,500 1,707 12,207 49,106 4,158 400
QE 6/99 11,000 1,707 12,707 50,055 3,781 800
QE 9/99 11,500 1,707 13,207 51,422 3,465 1,200
QE 12/99 12,000 1,707 13,707 51,828 3,150 1,600
QE 3/00 12,200 1,707 13,907 53,528 3,038 2,100
QE 6/00 12,500 1,707 14,207 55,028 2,925 2,160
QE 9/00 12,700 1,707 14,407 56,228 2,813 3,100
QE 12/00 12,900 1,707 14,607 57,128 2,700 3,600
<CAPTION>
Fixed Fixed
4Qs 4Qs 4Qs Charge Charge
Projected Fund Charge Ratio: Principal Interest Rent Ratio Ratio
Payments Expenses Expense Projected Required
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
QE 3/98
QE 6/98
QE 9/98
QE 12/98 43,104 - 19,147 6,835 25,982 1.69 1.15
QE 3/99 44,548 - 20,360 6,825 27,185 1.64 1.15
QE 6/99 45,478 1,250 21,573 6,827 29,650 1.53 1.15
QE 9/99 46,757 2,500 22,716 6,828 32,114 1.46 1.15
QE 12/99 47,078 3,758 24,000 6,828 34,578 1.36 1.15
QE 3/00 48,391 5,000 23,750 6,828 35,578 1.36 1.15
QE 6/00 49,503 6,250 23,500 6,828 36,578 1.35 1.15
QE 9/00 50,316 7,500 23,250 6,828 37,578 1.34 1.15
QE 12/00 50,828 8,750 23,008 6,828 38,578 1.32 1.15
<CAPTION>
Projected Funded Debt:
QE 12/98 QE 3/99 QE 6/99 QE 9/99 QE 12/99
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revolver 18,661
Term 90,000
Bonds 120,000
Cap leases 20,228
LOCs 500
--------
subtotal 249,389 244,589 242,139 236,889 234,989
Accrued Interest-beg 7,751 3,366 6,736 3,339 6,688
Change in int.accrued (4,392) 3,370 (3,397) 3,349 (3,376)
-------- ------- ------- ------- -------
Accrued Interest-end 3,366 6,736 3,339 6,688 3,312
Rent (past 4qts)*R 54,624 54,624 54,624 54,624 54,624
Total funded debt before paydown 307,379 305,749 300,102 298,201 292,925
Required debt paydown - - 1,250 1,250 1,250
Additional debt paydown - 5,000 1,000 4,000 650
------- ------- ------- ------- -------
5,000 2,250 5,250 1,900
Total funded debt 307,379 300,749 297,852 292,951 291,025
Capital Expenditures 2,451 1,750 1,750 1,750 1,750
% Maintenance 0.45 0.45 0.45 0.45 0.45
------- ------- ------- ------- -------
1,103 788 788 788 788
<CAPTION>
Projected Funded Debt:
QE 3/00 QE 6/00 QE 9/00 QE 12/00
------- ------- ------- --------
<S> <C> <C> <C> <C>
subtotal 229,739 227,239 221,089 218,589
Accrued Interest-beg 3,312 6,682 3,285 6,634
Change in int accrued 3,378 (3,397) 3,349 (3,397)
------- ------- ------- -------
Accrued Interest-end 6,682 3,285 6,634 3,237
Rent (past 4 qts)*R 54,624 54,624 54,624 54,624
Total funded debt before paydown 291,045 285,148 282,347 276,490
Required debt paydown 1,250 2,500 2,500 2,500
Additional debt paydown 4,000 - 3,650 -
------- ------- ------- -------
5,250 2,500 6,150 2,500
Total funded debt 285,795 282,619 276,197 273,950
Capital Expenditures 1,500 1,500 1,500 1,500
% Maintenance 0.45 0.45 0.45 0.45
------- ------- ------- -------
675 675 675 675
</TABLE>
<PAGE>
EXHIBIT 10.55
FOUNTAIN VIEW, INC.
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement (herein, the "Amendment") is
entered into as of March __, 1999, among Fountain View, Inc., a Delaware
corporation, the Banks party hereto, and Bank of Montreal as Agent for the
Banks.
PRELIMINARY STATEMENTS
A. The Borrower, the Banks, and the Agent entered into a certain Credit
Agreement, dated as of April 16, 1998, as amended (herein, the "Credit
Agreement"). All capitalized terms used herein without definition shall have the
same meanings herein as such terms have in the Credit Agreement.
B. The Borrower has requested that the Banks amend the definition of
"EBITDAR" and the Required Banks are willing to do so on the terms and
conditions provided for in this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. AMENDMENT.
Subject to the satisfaction of the conditions precedent set forth in
Section 2 below, the definition of "EBITDAR" appearing in Section 5.1 of the
Credit Agreement shall be amended and restated in its entirety to read as
follows:
"EBITDAR" means, with reference to any period, Net Income for
such period plus the sum (without duplication) of all amounts deducted in
arriving at such Net Income amount in respect of (w) Interest Expense for
such period, (x) federal, state and local income taxes for such period, (y)
depreciation of fixed assets and amortization of intangible assets for such
period, and (z) Rental Expense for such period (plus, to the extent
deducted in arriving at EBITDAR for the relevant period, (i) expenses
incurred pursuant to the August 1997 Fountain View, Inc. recapitalization
and expenses incurred pursuant to the Summit Merger and the financing
associated with it and (ii) charges incurred during the fourth fiscal
quarter of 1998 in the aggregate amount not exceeding $6,903,000).
SECTION 2. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all
of the following conditions precedent:
2.1. The Borrower, the Agent, and the Required Banks shall have
executed and delivered this Amendment.
<PAGE>
2.2. Each Subsidiary shall have executed its acknowledgement and
consent to this Amendment in the space provided for that purpose below.
2.3. Legal matters incident to the execution and delivery of this
Amendment shall be satisfactory to the Agent and its counsel.
SECTION 3. REPRESENTATIONS.
In order to induce the Banks to execute and deliver this Amendment, the
Borrower hereby represents to the Agent and the Banks that as of the date hereof
the representations and warranties set forth in Section 6 of the Credit
Agreement are and shall remain true and correct (except that the representations
contained in Section 6.5 shall be deemed to refer to the most recent financial
statements of the Borrower delivered to the Banks) and the Borrower and its
Subsidiaries are in compliance with all of the terms and conditions of the
Credit Agreement and the other Loan Documents and no Default or Event of Default
has occurred and is continuing or shall result after giving effect to this
Amendment.
SECTION 4. MISCELLANEOUS.
4.1 The Borrower has heretofore executed and delivered to the Agent and the
Banks certain of the Collateral Documents. The Borrower hereby acknowledges and
agrees that, notwithstanding the execution and delivery of this Amendment, the
Collateral Documents remain in full force and effect and the rights and remedies
of the Agent and the Banks thereunder, the obligations of the Borrower
thereunder, and the liens and security interests created and provided for
thereunder remain in full force and effect and shall not be affected, impaired,
or discharged hereby. Nothing herein contained shall in any manner affect or
impair the priority of the liens and security interests created and provided for
by the Collateral Documents as to the indebtedness which would be secured
thereby prior to giving effect to this Amendment.
4.2 Except as specifically amended herein, the Credit Agreement shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Credit Agreement,
the Notes, or any other instrument or document executed in connection therewith,
or in any certificate, letter of communication issued or made pursuant to or
with respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as amended
hereby.
4.3 The Borrower agrees to pay on demand all costs and expenses of or
incurred by the Agent in connection with the negotiation, preparation,
execution, and delivery of this Amendment and the other instruments and
documents to be executed and delivered in connection herewith, including the
fees and expenses of counsel for the Agent.
-2-
<PAGE>
4.4 This Amendment may be executed in any number of counterparts, and
by the different parties on different counterpart pages, all of which taken
together shall constitute one and the same agreement. Any of the parties hereto
may execute this Amendment by signing any such counterpart and each of such
counterparts shall for all purposes be deemed to be an original. This Amendment
shall be governed by the internal laws of the State of Illinois.
[SIGNATURE PAGES TO FOLLOW]
-3-
<PAGE>
This Second Amendment to Credit Agreement is entered into as of the date
and year first above written.
FOUNTAIN VIEW, INC.
By
----------------------------
Name
------------------------
Title
----------------------
Accepted and agreed to as of the day and year last above written.
BANK OF MONTREAL, in its
individual capacity as a Bank
and as Agent
By
----------------------------
Name
------------------------
Title
----------------------
PARIBAS
By
----------------------------
Name
------------------------
Title
----------------------
UNION BANK OF CALIFORNIA
By
----------------------------
Name
------------------------
Title
----------------------
HELLER FINANCIAL, INC.
By
----------------------------
Name
------------------------
Title
----------------------
FINOVA CAPITAL CORPORATION
By
----------------------------
Name
------------------------
Title
----------------------
-4-
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By ____________________________________________
Name ________________________________________
Title _______________________________________
BHF-BANK AKTIENGESELLSCHAFT
By ____________________________________________
Name ________________________________________
Title _______________________________________
By ____________________________________________
Name ________________________________________
Title _______________________________________
BALANCED HIGH-YIELD FUND II LTD.
By BHF-BANK Aktiengesellschaft, acting
through its New York Branch, as attorney-in-
fact
By ____________________________________________
Name ________________________________________
Title _______________________________________
By ____________________________________________
Name ________________________________________
Title _______________________________________
-5-
<PAGE>
ACNOWLEDGEMENT AND CONSENT
The undersigned, being all of the Subsidiaries of Fountain View, Inc., have
heretofore executed and delivered to the Agent and the Banks one or more
Guaranties and Collateral Documents. Each of the undersigned hereby consents to
the Second Amendment to Credit Agreement as set forth above and confirms that
its Guaranty and Collateral Documents, and all of its obligations thereunder,
remain in full force and effect. Each of the undersigned further agrees that the
consent of the undersigned to any further amendments to the Credit Agreement
shall not be required as a result of this consent having been obtained, except
to the extent, if any, required by the Loan Documents referred to above.
<TABLE>
<CAPTION>
"GUARANTORS"
<S> <C>
FOUNTAIN VIEW HOLDINGS, INC. LOCOMOTION THERAPY, INC.
LOCOMOTION HOLDINGS, INC. ON-TRACK THERAPY CENTER, INC.
FOUNTAIN VIEW MANAGEMENT, INC.
SYCAMORE PARK CONVALESCENT
HOSPITAL By
AIB CORP. -------------------------------
ELMCREST CONVALESCENT HOSPITAL Name: Robert M. Snukal
BRIER OAK CONVALESCENT, INC. Title: Chief Executive Officer
BIA HOTEL CORP.
RIO HONDO NURSING CENTER SUMMIT CARE TEXAS, L.P.
FOUNTAINVIEW CONVALESCENT HOSPITAL
ALEXANDRIA CONVALESCENT HOSPITAL, By: Summit Care Management Texas Equity, Inc., in
INC. its capacity as general partner
I.'N O., INC.
SUMMIT CARE CORPORATION
SUMMIT CARE-CALIFORNIA, INC. By
SUMMIT CARE-TEXAS NO. 2, INC. -----------------------------------------
SUMMIT CARE-TEXAS NO. 3, INC. Name: Robert M. Snukal
SUMMIT CARE PHARMACY, INC. Title: President
SKILLED CARE NETWORK
SUMMIT CARE TEXAS EQUITY, INC. By: Summit Care Texas Equity, Inc., in
SUMMIT CARE MANAGEMENT TEXAS, INC. its capacity as limited partner
SNF PHARMACY, INC.
FV-SCC ACQUISITION CORP. By
-----------------------------------------
By Name: Robert M. Snukal
----------------------------- Title: President
Name: Robert M. Snukal
Title: President
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,229
<SECURITIES> 0
<RECEIVABLES> 62,436
<ALLOWANCES> 11,052
<INVENTORY> 3,030
<CURRENT-ASSETS> 70,874
<PP&E> 266,141
<DEPRECIATION> 11,123
<TOTAL-ASSETS> 411,728
<CURRENT-LIABILITIES> 50,545
<BONDS> 120,000
15,000
0
<COMMON> 11
<OTHER-SE> 66,847
<TOTAL-LIABILITY-AND-EQUITY> 411,728
<SALES> 0
<TOTAL-REVENUES> 223,143
<CGS> 0
<TOTAL-COSTS> 226,264
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,945
<INCOME-PRETAX> (3,121)
<INCOME-TAX> (732)
<INCOME-CONTINUING> (3,121)
<DISCONTINUED> 0
<EXTRAORDINARY> (517)
<CHANGES> 0
<NET-INCOME> (2,906)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>