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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-57279
FOUNTAIN VIEW, INC.
(Exact name of Registrant 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Not Applicable.
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TABLE OF CONTENTS
FOUNTAIN VIEW, INC.
<TABLE>
<CAPTION>
Pages
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Statements of Income 1
Consolidated Balance Sheets 2, 3
Consolidated Statements of Cash Flows 4, 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results 9 - 13
of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------------------------------------
<S> <C> <C>
Net revenues $69,016 $20,078
Expenses:
Salaries and benefits 34,023 10,686
Supplies 7,529 2,218
Purchased services 8,644 1,828
Provision for doubtful accounts 1,180 142
Other expenses 4,949 1,395
Rent 1,303 542
Rent to related parties 444 441
Depreciation and amortization 3,862 523
Interest expense, net of interest income 5,617 851
------------------------------------------
Total expenses 67,551 18,626
------------------------------------------
Income before provision for income taxes and extraordinary item 1,465 1,452
Income tax provision 763 580
------------------------------------------
Income before extraordinary item 702 872
Extraordinary item:
Loss on early extinguishment of debt, net of taxes - 517
------------------------------------------
Net income $ 702 $ 355
==========================================
</TABLE>
See accompanying notes.
1
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FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 458 $ -
Accounts receivable, less allowance for doubtful accounts
of $11,565 and $11,052 in 1999 and 1998, respectively 50,539 51,384
Income taxes receivable 732 732
Current portion of deferred income taxes 10,308 10,308
Other current assets 8,544 7,221
-------------------------------------
Total current assets 70,581 69,645
Property and equipment, at cost:
Land and land improvements 25,064 25,064
Buildings and leasehold improvements 212,029 211,348
Furniture and equipment 28,790 28,440
Construction in progress 1,867 1,289
-------------------------------------
267,750 266,141
Less accumulated depreciation and amortization (14,039) (11,123)
-------------------------------------
253,711 255,018
Notes receivable, less allowance for doubtful accounts of $612 and $590 in 1999
and 1998, respectively 5,329 5,553
Goodwill, net 58,095 58,689
Deferred financing costs, net 11,535 11,961
Deferred income taxes 4,464 5,385
Other assets 4,341 4,248
-------------------------------------
Total assets $408,056 $410,499
=====================================
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
2
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FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except stock information)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Payable to banks $ - $ 1,451
Accounts payable and accrued liabilities 27,725 29,652
Employee compensation and benefits 10,833 9,780
Accrued interest payable 6,955 3,366
Current portion of deferred income taxes 332 332
Current maturities of long-term debt and capital leases 5,981 4,735
---------------------------------------
Total current liabilities 51,826 49,316
Long-term debt and capital leases, less current maturities 238,656 244,153
Deferred income taxes 35,014 35,172
---------------------------------------
Total liabilities 325,496 328,641
Preferred Stock Series A, mandatorily redeemable, $0.01 par value:
1,000,000 shares authorized, 15,000 shares issued and outstanding at
1999 and 1998 (liquidation preference of $15 million) 15,000 15,000
Commitments and contingencies - -
Shareholders' equity:
Common Stock Series A, $0.01 par value: 1,500,000 shares authorized,
1,000,000 shares issued and outstanding at 1999 and 1998 10 10
Common Stock Series B, $0.01 par value: 200,000 shares authorized, 114,202
shares issued and outstanding at 1999 and 1998 1 1
Common Stock Series C, $0.01 par value: 1,300,000 shares authorized, 20,742
shares issued and outstanding at 1999 and 1998 - -
Additional paid-in capital 106,488 106,488
Accumulated deficit (36,399) (37,101)
Due from shareholder (2,540) (2,540)
---------------------------------------
Total shareholders' equity 67,560 66,858
---------------------------------------
Total liabilities and shareholders' equity $408,056 $410,499
=======================================
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
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FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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<CAPTION>
Three Months Ended March 31,
1999 1998
------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 702 $ 355
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,862 523
Changes in operating assets and liabilities:
Accounts receivable 845 (2,984)
Other current assets (1,326) (255)
Accounts payable and accrued liabilities 1,662 3,431
Employee compensation and benefits 1,053 1,527
Income taxes payable - (1,015)
Deferred income taxes 763 3
------------------------------------
Total adjustments 6,859 1,230
------------------------------------
Net cash provided by operating activities 7,561 1,585
Investing activities:
Principal payments on notes receivable 227 -
Additions to property and equipment (1,609) (654)
Acquisition of Summit, net of cash acquired - (148,349)
Changes in other assets (19) 11
------------------------------------
Net cash used in investing activities (1,401) (148,992)
Financing activities:
Decrease in payable to bank (1,451) (1,393)
Decrease in capital lease obligations (251) (29)
Principal payments on and retirement of long-term debt - (29,933)
Pay down on revolving loan facility, net (4,000) -
Proceeds from long-term debt, net of issuance costs - 94,211
Proceeds from issuance of common stock - 82,000
------------------------------------
Net cash (used in) provided by financing activities (5,702) 144,856
------------------------------------
Increase (decrease) in cash and cash equivalents 458 (2,551)
Cash and cash equivalents at beginning of period 2,551
------------------------------------
Cash and cash equivalents at end of period $ 458 $ -
====================================
</TABLE>
See accompanying notes.
4
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FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------------------------------
<S> <C> <C>
Noncash activity:
Stock purchase in exchange for note receivable $ - $ 2,540
Conversion of stock into paid in capital - 2
Details of purchase business combination:
Fair value of assets acquired $ - $ 370,272
Less: Liabilities assumed - (220,559)
------------------------------------
Cash paid for acquisition - 149,713
Less: Cash acquired from Summit - (1,364)
------------------------------------
Net cash paid for acquisition $ - $ 148,349
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</TABLE>
See accompanying notes.
5
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FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Fountain View, Inc. ("Fountain View" or "Company") is a leading operator of
long-term care facilities and a leading provider of a full continuum of post-
acute care services, with a strategic emphasis on sub-acute specialty medical
care. Fountain View operates a network of facilities in California, Texas, and
Arizona, including 44 skilled nursing facilities ("SNFs") that offer sub-acute,
rehabilitative and specialty medical skilled nursing care, as well as six
assisted living facilities ("ALFs") that provide room and board and social
services in a secure environment. In addition, Fountain View provides a variety
of high-quality ancillary services such as physical, occupational and speech
therapy in Fountain View-operated facilities, unaffiliated facilities and acute
care hospitals. Fountain View also operates three institutional pharmacies (one
of which is a joint venture), which serve acute care hospitals as well as SNFs
and ALFs, both affiliated and unaffiliated with Fountain View, an outpatient
therapy clinic and a durable medical equipment ("DME") company.
The Company acquired Summit Care Corporation ("Summit") on March 27, 1998 (see
Note 3). The Summit operation consisted of 36 SNFs, five ALFs and three
institutional pharmacies. The acquisition has been accounted for under the
purchase method and, as such, the accompanying financial statements include the
results of Summit's operations from the acquisition date.
2. Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, the unaudited financial information reflects
all adjustments (all of which are of a normal recurring nature), which are
considered necessary to fairly state the Company's financial position, its cash
flows and the results of operations. These statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1998. The
interim financial information herein is not necessarily representative of that
to be expected for a full year.
3. Acquisition of Summit Care Corporation
On February 6, 1998, Fountain View entered into an Agreement and Plan of Merger
(the "Tender Offer") providing for the acquisition of Summit by Fountain View at
a price of $21.00 per share. Approximately 99% of the shares of Summit were
purchased for approximately $141.8 million at the closing of the Tender Offer on
March 27, 1998.
In order to consummate the purchase of the Summit shares in the Tender Offer and
to refinance Fountain View's existing debt, Fountain View entered into a term
loan agreement for borrowings of $32.0 million and a credit facility of
approximately $62.7 million. Fountain View amended its certificate of
incorporation to provide for: (i) 3.0 million shares of Common Stock designated
as 1.5 million shares of Series A Common Stock, 200,000 shares of Series B Non-
Voting Common Stock, 1.3 million shares of Series C Common Stock; and (ii) 1.0
million shares of Preferred Stock, 200,000 of which are designated Series A
Preferred Stock. In addition, Fountain View raised approximately $97.0 million
of new equity investments in the amounts of $90.6 million from Heritage Fund II,
L.P. ("Heritage") and certain other co-investors, $5.0 million combined from Mr.
Robert Snukal, Fountain View's Chief Executive Officer, and Mrs. Sheila Snukal,
Fountain View's Executive Vice President, and $1.4 million from Mr. William
Scott, Summit's Chairman and Chief Executive Officer.
Concurrent with the Merger becoming effective, Fountain View entered into a new
$30.0 million revolving credit facility, an $85.0 million term-loan facility,
and successfully completed a Senior Subordinated Note Offering providing for
borrowings of $120.0 million. Heritage's equity investment included $15.0
million for 15,000 shares of Series A Preferred Stock of Fountain View that
entitles them to a dividend at the time of a liquidity event calculated to
achieve a 12% annual rate of return, as well as warrants to purchase 71,119
shares of Fountain View's Series C Common Stock. These funds were used to
consummate the purchase of Summit's remaining shares not tendered in the Tender
Offer, refinance all then existing Fountain View indebtedness, as described
above, and Summit
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indebtedness (except for capital lease and mortgage obligations) totaling $107.8
million, redeem all outstanding options for Summit shares, and pay certain fees,
expenses, and other costs arising in connection with such transactions.
On May 4, 1998, Fountain View signed an investment agreement with Baylor Health
Foundation System ("Baylor"), a vertically integrated healthcare system
operating in Texas, and Buckner Foundation, a non-profit foundation,
(collectively, the "Baylor Group"). In addition, Fountain View signed an
operating agreement with Baylor. Pursuant to these agreements, Baylor invested
$10.0 million and Buckner invested $2.5 million in Fountain View through the
purchase of 12,342 shares of Series A Preferred Stock from Heritage that
entitles them to a dividend at the time of a liquidity event calculated to
achieve a 12% annual rate of return, as well as warrants to purchase 59,266
shares of Fountain View's Series C Common Stock.
On October 6, 1998, the Company amended its $85.0 million term loan credit
agreement with the bank extending $5.0 million of additional mortgage
refinancing loans to the Company. The Company used the proceeds to finance the
exercise of capital lease purchase options on two skilled nursing facilities in
Texas.
4. Pro Forma Financial Results
The following table sets forth the pro forma unaudited results of operations
assuming the purchase of Summit had been consummated as of January 1, 1998 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
---------------------------
<S> <C>
Net revenues $ 71,862
Loss before provision for income taxes and extraordinary item (573)
Net loss (953)
</TABLE>
5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Company expects to adopt
SFAS 133 effective January 1, 2000. SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of SFAS 133 will have a significant effect on
its results of operations or financial position. The Company has no derivatives
as of March 31, 1999.
6. Business Segments
The Company has three reportable segments: nursing services, therapy services,
and pharmaceuticals. The nursing services are provided by 44 SNFs that offer
sub-acute, rehabilitative and specialty medical skilled nursing care, as well as
six ALFs that provide room and board and social services in a secure
environment. Therapy services include ancillary services such as physical,
occupational and speech therapy provided in Fountain View-operated facilities,
unaffiliated facilities and acute care hospitals. Pharmaceuticals are provided
by three institutional pharmacies (one of which is a joint venture), which serve
acute care hospitals as well as SNFs and ALFs, both affiliated and unaffiliated
with Fountain View.
The Company evaluates performance and allocates resources based on an efficient
and cost-effective operating model which maximizes profitability and the quality
of care provided across the Company's entire facility network. Certain of
Fountain View's facilities are leased, under operating leases, and not owned.
Accordingly, earnings before interest, taxes, depreciation, amortization, rent
and extraordinary items is used to determine and evaluate segment profit or
loss. Corporate overhead is not allocated for purposes of determining segment
profit or loss, and is included, along with the Company's DME subsidiary in the
"all other" category in the selected segment financial data that follows.
Goodwill and deferred financing costs are also not allocated for purposes of
determining segment assets and are included in the "all other" category.
Intersegment sales and transfers are recorded at the Company's cost plus
standard mark-up; intersegment profit and loss has been eliminated in
consolidation. The Company's reportable segments are business units that offer
different services and products. The reportable segments are each managed
separately due to the nature of the services provided or the products sold.
7
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The following table sets forth selected financial data by business segment (in
thousands):
<TABLE>
<CAPTION>
Nursing Therapy Pharma-
Services Services ceuticals All Other Totals
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<S> <C> <C> <C> <C> <C>
Three Months Ended March 31,
1999:
Revenues from external customers $ 60,552 $ 2,892 $ 5,572 $ - $ 69,016
Intersegment revenues 3,428 1,104 816 5,348
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Total revenues $ 60,552 $ 6,320 $ 6,676 $ 816 $ 74,364
====================================================================================
Segment profit (loss) $ 13,516 $ 1,356 $ 1,050 $ (3,231) $ 12,691
<CAPTION>
Nursing Therapy Pharma-
Services Services ceuticals All Other Totals
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31,
1998:
Revenues from external customers $ 16,130 $ 3,601 $ 346 $ 1 $ 20,078
Intersegment revenues 909 32 955 1,896
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Total revenues $ 16,130 $ 4,510 $ 378 $ 956 $ 21,974
====================================================================================
Segment profit (loss) $ 3,452 $ 675 $ 46 $ (364) $ 3,809
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------------------------------------
<S> <C> <C>
Revenues:
External revenues for reportable segments $69,016 $20,078
Intersegment revenues for reportable segments 5,348 1,896
Elimination of intersegment revenues (5,348) (1,896)
----------------------------------------
Total consolidated revenues $69,016 $20,078
========================================
</TABLE>
7. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), establishes standards for the reporting of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. SFAS 130 uses the term
comprehensive income to describe the total of all components of comprehensive
income, that is, net income plus other comprehensive income. Other comprehensive
income items include unrealized gains and losses on available-for-sale
securities; foreign currency translation adjustments; changes in the market
value of certain futures contracts; and changes in certain minimum pension
liabilities. Fountain View has no items of other comprehensive income in the
periods reported, and, therefore, comprehensive income is equal to net income,
as reported.
8
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Item 2. Management's Discussion And Analysis of Financial Condition And Results
of Operations (Unaudited)
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998 (Dollars
in Thousands)
Net revenues increased $48,938 or 243.7% from $20,078 for the quarter ended
March 31, 1998 to $69,016 for the quarter ended March 31, 1999. Substantially
all of the increase was due to the acquisition of Summit.
Total average occupancy was 83.5% for the quarter ended March 31, 1999 and 86.6%
for the quarter ended March 31, 1998. The Company's quality mix (total net
revenues less Medicaid net revenues) was 64.1% for the quarter ended March 31,
1999 and 72.0% for the quarter ended March 31, 1998.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net revenues
increased from 81.0% of net revenues for the quarter ended March 31, 1998 to
81.6% for the quarter ended March 31, 1999. Salaries and benefits were 49.3% of
net revenues for the quarter ended March 31, 1999 compared to 53.2% for the
quarter ended March 31, 1998. This decrease was primarily due to certain
economies of scale and partly due to a restructuring of Company benefits in
August 1998. Expenses increased $40,056 or 246.2% from $16,269 for the quarter
ended March 31, 1998 to $56,325 for the quarter ended March 31, 1999.
Substantially all of the increase was due to the acquisition of Summit.
Income before rent, rent to related parties, depreciation and amortization and
interest expense increased $8,882 or 233.2% from $3,809 for the quarter ended
March 31, 1998 to $12,691 for the quarter ended March 31, 1999 and was 18.4% of
net revenues for the quarter ended March 31, 1999 compared to 19.0% for the
quarter ended March 31, 1998.
Rent, rent to related parties, depreciation and amortization and interest
expense increased $8,869 or 376.3% from $2,357 for the quarter ended March 31,
1998 to $11,226 for the quarter ended March 31, 1999. Substantially all of this
increase was due to higher depreciation and amortization costs related to the
acquisition of Summit's tangible and intangible assets and an increase in
amortization costs and interest expense as a result of the debt refinancing.
Net income increased $347 or 97.7% from $355 for the quarter ended March 31,
1998 to $702 for the quarter ended March 31, 1999.
9
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Selected statistics are shown below:
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<CAPTION>
Increase
1999 1998 (Decrease)
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Facilities in operation at:
March 31 50 50 -
Nursing center beds at:
March 31 6,033 5,937 96
Assisted living beds at:
March 31 700 641 59
Total beds at:
March 31 6,733 6,578 155
Total occupancy:
First quarter 83.5% 86.6% (3.1)%
Nursing center occupancy:
First quarter 84.9% 89.4% (4.5)%
Assisted living center occupancy:
First quarter 70.7% 67.4% 3.3%
Percentage of revenues from
private, managed care and
Medicare (quality mix):
First quarter 64.1% 72.0% (7.9)%
Percentage of revenues from
Medicaid:
First quarter 35.9% 28.0% 7.9%
</TABLE>
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Liquidity and Capital Resources (Dollars in Thousands)
At March 31, 1999, the Company had $458 in cash and cash equivalents and working
capital of $18,755. During the quarter ended March 31, 1999, the Company's cash
and cash equivalents increased by $458.
Net cash provided by operating activities increased $5,976 from $1,585 in the
quarter ended March 31, 1998 to $7,561 in the quarter ended March 31, 1999. This
increase was primarily due to reductions in accounts receivable related to
receipts from Medicare settlements and an increase in depreciation and
amortization.
Long-term debt, including current maturities, totaling $244,637 at March 31,
1999 consisted of mortgage and capital lease obligations of $19,976, a term loan
credit facility of $90,000, $120,000 in senior subordinated notes, and
borrowings on the Company's revolving loan facility of $14,661.
The Company had $15,339 in available borrowings on its revolving loan facility
at March 31, 1999. The Company believes that it has sufficient cash flow from
its existing operations and from its bank line of credit to service long-term
debt due within one year of $5,981, to make normal recurring capital
replacements, additions and improvements of approximately $7,000 planned for the
next 12 months and to meet other long-term working capital needs and
obligations. The Company expects, on a selective basis, to pursue expansion of
its existing centers and the acquisition or development of additional centers in
markets where demographics and competitive factors are favorable.
Recent Accounting Pronouncements
See Note 5 to Consolidated Financial Statements.
Prospective Payment System
Pursuant to the Balanced Budget Act, a prospective payment system ("PPS") was
established for Medicare SNFs. Under PPS, facilities are paid a federal per diem
rate for virtually all covered SNF services in lieu of the former cost-based
reimbursement rate. PPS is being phased in over three cost reporting periods
beginning on or after July 1, 1998. At July 1, 1998, 36 of the Company's 44 SNFs
transitioned to PPS. The remaining eight facilities transitioned on January 1,
1999.
Impact of Inflation
The health care industry is labor intensive. Wages and other expenses increase
more rapidly during periods of inflation and when shortages in the labor market
occur. In addition, suppliers pass along rising costs in the form of higher
prices. Increases in reimbursement rates under Medicaid generally lag behind
actual cost increases, so that the Company may have difficulty covering these
cost increases in a timely fashion. In addition, as discussed above, Medicare
SNFs are now paid a per diem rate under PPS, in lieu of the former cost-based
reimbursement rate. Increases in the federal portion of the per diem rates may
also lag behind actual cost increases.
Impact of Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send billings, or engage in similar normal business
activities.
The Company is in the process of assessing its Year 2000 issues. This assessment
includes information technology and non-information technology systems, as well
as Year 2000 issues relating to third parties. This assessment includes
estimated costs, an evaluation of associated risks, and contingency plans, as
necessary, to ensure the Company is Year 2000 compliant. The Company's plan with
regard to the Year 2000 issue involves the following phases: (i) assessment of
systems to determine the
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extent to which the Company may be vulnerable to the Year 2000 issue, both
internally and with respect to third parties; (ii) the development of remedies
to address problems discovered in the assessment phase; (iii) the testing and
implementation of such remedies; and (iv) the preparation of contingency plans
to address potential worst case scenarios should the remedies not be successful.
Based on assessments to date, the Company has determined that it will replace
certain of its existing packaged software applications that have been determined
to be non-compliant with the Year 2000. These applications include certain of
the facility-level billing and accounts receivable packages along with certain
of the company-level accounts payable and general ledger applications, and
certain hardware. The Company presently believes that, with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
are not completed timely, the Year 2000 issue could have a material adverse
impact on the operations of the Company.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
The Company expects to complete its assessment of the information technology and
non-information technology systems in the second quarter of 1999. With respect
to its information technology exposures, to date the Company is nearly complete
with its assessment and the Company has begun its software and hardware
replacement. Once software is replaced for a system, the Company will begin
testing and implementation. These phases run concurrently for different systems.
Completion of the testing phase for all significant systems is expected by June
1999, with all remediated systems fully tested and implemented by September
1999. There can be no assurance, however, that such assessment, when completed,
will identify all potential Year 2000 issues. The failure of such assessment to
identify all potential Year 2000 issues or the failure of the Company to timely
develop and test remedies to any such issues, could result in delays in
implementing any required modifications, conversions and updates to the
Company's computer systems, as well as the implementation of any contingency
plans. If such modifications, conversions and updates are not made or not
completed in a timely manner, the Year 2000 issue could have a material adverse
impact on the operations of the Company.
The remediation of non-information technology systems, primarily biomedical
equipment, is significantly more difficult than the remediation of the
information technology systems because each piece of equipment must be
separately remediated and tested if identified as Year 2000 non-compliant. The
Company is in the initial stages with its assessment. The Company is utilizing
both internal and external resources in the inventorying and assessment of these
non-information technology systems. The cost of these external resources for
this portion of the Year 2000 project is expected to be approximately $100,000.
The Company expects to complete its remediation efforts and testing and
implementation of its remediated equipment by October 1999.
Nature and Level of Importance of Third Parties and their Exposure to the Year
2000
The Company's payroll is processed directly by a third party vendor. The Company
has received notification from the third party vendor ensuring that their
payroll system is Year 2000 compliant. The Company is in the process of testing
the payroll system for compliance.
Certain of the Company's billing systems interface directly with the Medicare
and Medicaid Programs. In addition, payments are received electronically from
the Medicare Program. Approximately 60% of net revenues are derived from these
federally assisted programs. We understand that the Medicare and the applicable
Medicaid Programs have notified their payees that they expect their systems to
be Year 2000 compliant. However, the Company has no means of ensuring that these
programs are or will be Year 2000 compliant. The inability of these programs to
become Year 2000 compliant in a timely fashion could materially adversely impact
the Company.
The Company does not share information systems or exchange information
electronically with its suppliers or vendors. The Company is in the process of
querying its significant suppliers and vendors (external agents) that do not
share information systems with the Company. To date, the Company is not aware of
any external agent with a Year 2000 issue that would materially impact the
Company. However, the Company has no means of ensuring that external agents will
be Year 2000 compliant. The inability of external agents to become Year 2000
compliant in a timely fashion could materially adversely impact the Company.
12
<PAGE>
Estimated Costs and Contingency Plans with Respect to the Year 2000
The Company is utilizing both internal and external resources to reprogram, or
replace, test, and implement the software, hardware and equipment to ensure that
it is Year 2000 compliant. The software and hardware costs relating to these new
systems or new system upgrades are estimated to be approximately $500,000 and
$125,000, respectively, and are being funded through operating cash flows. To
date, the Company has incurred approximately $80,000 for new systems and
equipment related to all phases of the Year 2000 project.
The Company believes that it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, the Company may be unable to
bill its customers and may be unable to collect payments or record transactions
in a timely manner. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems failures. The amount
of any potential liability or lost revenue cannot be reasonably estimated at
this time.
The Company is in the initial phases of developing worst case contingency plans
for certain critical applications. These contingency plans will involve, among
other actions, manual workarounds and the reallocation of personnel to handle
the workload for these applications. All current personnel are well versed in
the manual processing of these applications and all new personnel will be
trained to perform functions manually to ensure continued operations of the
Company. All non-information technology systems (i.e., hardware, biomedical
equipment, etc.) which cannot be remediated and tested by October 1999 will be
replaced immediately.
Forward-looking Statements
Certain information included in this Form 10-Q and other materials filed or to
be filed by the Company with the Securities and Exchange Commission may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking information
involves known and unforeseen risks, uncertainties and other factors that may
cause actual results or performance to be materially different from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, uncertainties affecting the
Company's business generally, such as, the success of the Company's business
strategy, the Company's ability to increase the level of sub-acute and specialty
medical care it provides, the effects of government regulation and health care
reform, litigation, the Company's anticipated future revenues and additional
revenue opportunities, capital spending and financial resources, the Company's
ability to meet its liquidity needs, the resolution of Year 2000 issues, and
other statements contained in this Form 10-Q regarding matters that are not
historical facts.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements of the Company expressed or implied by such forward-looking
statements. Although management believes that the assumption on which the
forward-looking statements contained herein are based are reasonable, any of
those assumptions could prove to be inaccurate and, as a result, the forward-
looking statements based on those assumptions also could be materially
incorrect. In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
the Company that the Company's plans and objectives will be achieved. The
Company disclaims any obligation to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain of the Company's debt obligations are sensitive to changes in interest
rates. The rates on the Term Loan and Revolving Credit Facility, which both bear
interest at LIBOR plus an applicable margin, are reset at various intervals,
thus limiting their risk. The Company has not experienced significant changes in
market risk due to the stability of interest rates during the quarter ended
March 31, 1999.
13
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
(27) Financial Data Schedule
The Company did not file any reports on Form 8-K during the three months ended
March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUNTAIN VIEW, INC.
<TABLE>
<S> <C>
Date: May 17, 1999 By: /s/PAUL C. RATHBUN
------------------------------------------
Paul C. Rathbun
Senior Vice President - Finance,
Chief Financial Officer and Treasurer)
(Principal Financial and
Accounting Officer)
Date: May 17, 1999 By: /s/JOHN L. FARBER
------------------------------------------
John L. Farber
Vice President - Controller and
Assistant Secretary
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED) FOR MARCH 31, 1999 AND CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 458
<SECURITIES> 0
<RECEIVABLES> 62,104
<ALLOWANCES> 11,565
<INVENTORY> 3,585
<CURRENT-ASSETS> 70,581
<PP&E> 267,750
<DEPRECIATION> 14,039
<TOTAL-ASSETS> 408,056
<CURRENT-LIABILITIES> 51,826
<BONDS> 120,000
15,000
0
<COMMON> 11
<OTHER-SE> 67,549
<TOTAL-LIABILITY-AND-EQUITY> 408,056
<SALES> 0
<TOTAL-REVENUES> 69,016
<CGS> 0
<TOTAL-COSTS> 67,551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,617
<INCOME-PRETAX> 1,465
<INCOME-TAX> 763
<INCOME-CONTINUING> 1,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 702
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
