<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-57279
PROSPECTUS
OFFER TO EXCHANGE UP TO $120,000,000 OF 11 1/4%
SENIOR SUBORDINATED NOTES DUE 2008, SERIES B OF
FOUNTAIN VIEW, INC., WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL
OF ITS OUTSTANDING 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008
FOUNTAIN VIEW, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON OCTOBER 13, 1998, UNLESS EXTENDED
Fountain View, Inc., a Delaware corporation (the "Company") hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus (as
the same may be amended or supplemented from time to time, this "Prospectus")
and the accompanying letter of transmittal (the "Letter of Transmittal" and,
together with this Prospectus, the "Exchange Offer"), to exchange up to an
aggregate amount of $120,000,000 of the Company's 11 1/4% Senior Subordinated
Notes Due 2008, Series B (the "Exchange Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to a Registration Statement of which this Prospectus is a part, which Exchange
Notes shall be guaranteed (the "Exchange Guarantees"), on a full and
unconditional basis, jointly and severally, by each of the Guarantors (as
defined) and all future Restricted Subsidiaries (as defined) of the Company,
or any of the Guarantors for a like principal amount of the Company's
outstanding 11 1/4% Senior Subordinated Notes Due 2008 (the "Outstanding
Notes"), of which $120,000,000 in aggregate principal amount was issued on
April 16, 1998 and is outstanding as of the date hereof, which Outstanding
Notes have been guaranteed on a full and unconditional basis by the Guarantors
(the "Outstanding Guarantees" and, together with the Exchange Guarantees, the
"Guarantees"). Except as described below, the Notes are not redeemable at the
Company's option prior to April 15, 2003. From and after April 15, 2003, the
Notes will be subject to redemption at the option of the Company, in whole or
in part, at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages (as defined), if any, to the date of
redemption. In addition, prior to April 15, 2001, up to 35% in aggregate
principal amount of Notes will be redeemable at the option of the Company from
the net proceeds of Public Equity Offerings (as defined) by the Company, at a
price of 111.25% of the principal amount of the Notes, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of redemption; provided
that at least $78.0 million in aggregate principal amount of Notes remains
outstanding immediately after each such redemption; and provided, further,
that any such redemption occur within 60 days of the date of the closing of
such Public Equity Offering. The form and terms of the Exchange Notes and the
Exchange Guarantees are identical in all material respects to the form and
terms of the Outstanding Notes and the Outstanding Guarantees, except for
certain transfer restrictions and registration rights relating to the
Outstanding Notes. The Exchange Notes will be issued pursuant to, and entitled
to the benefits of, the Indenture, dated as of April 16, 1998, between the
Company, the Guarantors and State Street Bank and Trust Company of California,
as trustee, governing the Outstanding Notes. The Exchange Notes and the
Outstanding Notes are hereinafter sometimes collectively referred to as the
"Notes".
The Company is a holding company, has no operations of its own and derives
substantially all of its revenue from its subsidiaries. The operations of the
Company are conducted through its subsidiaries and, therefore, the Company is
dependent upon the cash flow of its subsidiaries to meet its obligations,
including its obligations under the Notes. The Notes are effectively
subordinated to all Indebtedness and other liabilities and commitments
(including trade payables) of the Company's subsidiaries.
Holders of Outstanding Notes whose Outstanding Notes are not tendered and
accepted in the Exchange Offer will continue to hold such Outstanding Notes
and will be entitled to all the rights and benefits and will be subject to the
limitations applicable thereto under the Indenture. Following the consummation
of the Exchange Offer, the holders of Outstanding Notes will continue to be
subject to the existing restrictions on the transfer thereof and the Company
will have no further obligation to such holders to provide for the
registration under the Securities Act of the Outstanding Notes held by them.
The Company will not receive any proceeds from, and has agreed to pay all the
expenses incurred by it incident to, the Exchange Offer. No underwriter is
being used in connection with this Exchange Offer.
Except as otherwise indicated, the following description relates both to the
Outstanding Notes issued in the Note Offering and the Exchange Notes, together
with the Exchange Guarantees, to be issued in exchange for the Outstanding
Notes in the Exchange Offer. The form and terms of the Exchange Notes are the
same as the form and terms of the Outstanding Notes, except that the Exchange
Notes have been registered under the Securities Act and therefore will not
bear legends restricting the transfer thereof. The Outstanding Notes are and
the Exchange Notes will be general,
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(Continued from previous page)
unsecured obligations of the Company. There is currently no indebtedness
outstanding that is subordinated to the Notes.The Outstanding Notes rank and
the Exchange Notes will rank on the same level with all future senior
subordinated debt of the Company. The claims of the holders of the Outstanding
Notes are and the claims of the holders of the Exchange Notes will be
subordinated to Senior Debt (as defined). The Company is highly leveraged. As
of June 30, 1998, approximately $126 million of Senior Debt was outstanding,
including approximately $101 million of borrowings under the Company's New
Credit Facility (as defined herein). See "Capitalization" and "Description of
Other Indebtedness".
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
that Exchange Notes to be issued pursuant to the Exchange Offer may be offered
for resale, resold and otherwise transferred by any holder thereof (other than
(i) a broker-dealer who purchasers such Exchange Notes from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holder's business and such holder has no arrangement or understanding
with any person to participate in the distribution of such Exchange Notes.
However, the Company has not sought and does not intend to seek its own no-
action letter in connection with the Exchange Offer and there can be no
assurance that the Commission would make a similar determination with respect
to the Exchange Offer. Eligible holders of Outstanding Notes wishing to accept
the Exchange Offer must represent to the Company that such conditions have
been met. Each broker-dealer (a "Participating Broker-Dealer") that receives
Exchange Notes for its account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
A broker-dealer may nonetheless be deemed to be an "underwriter" under the
Securities Act notwithstanding such disclaimer. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired by
such Participating Broker-Dealer as a result of market making activities or
other trading activities, provided such Outstanding Notes do not constitute
any portion of an unsold allotment from the original sale of the Outstanding
Notes. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution".
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY HOLDERS OF OUTSTANDING NOTES AND PROSPECTIVE PURCHASERS OF
EXCHANGE NOTES.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is September 9, 1998.
The Company will accept for exchange any and all validly tendered
Outstanding Notes not withdrawn prior to 5:00 p.m., New York City time, on
October 13, 1998 unless the Exchange Offer is extended by the Company (the
"Expiration Date"); however, in no event shall the Exchange Offer be extended
beyond sixty (60) days after the date the registration statement of which this
Prospectus is a part is declared effective by the Commission. Tenders of
Outstanding Notes may be withdrawn at any time prior to the Expiration Date.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange. However, the Exchange
Offer is subject to certain customary conditions which may be waived by the
Company and to the terms and provisions of the Registration Rights Agreement.
See "The Exchange Offer--Certain Conditions to the Exchange Offer".
<PAGE>
THE INITIAL PURCHASERS WHO PARTICIPATED IN THE OFFERING OF THE OUTSTANDING
NOTES MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT
THE PRICE OF THE NOTES. SPECIFICALLY, THE INITIAL PURCHASERS MAY BID FOR AND
PURCHASE OUTSTANDING NOTES AND EXCHANGE NOTES IN THE OPEN MARKET.
NEITHER THE COMPANY NOR THE INITIAL PURCHASERS ARE MAKING ANY REPRESENTATION
TO ANY OFFEREE OR PURCHASER OF THE NOTES REGARDING THE LEGALITY OF AN
INVESTMENT THEREIN BY SUCH OFFEREE OR PURCHASER UNDER APPROPRIATE LEGAL
INVESTMENT OR SIMILAR LAWS. THE EXCHANGE OFFER IS BEING MADE ON THE BASIS OF
THIS PROSPECTUS. ANY DECISION TO EXCHANGE NOTES IN THE EXCHANGE OFFER MUST BE
BASED ON THE INFORMATION CONTAINED HEREIN. EACH PROSPECTIVE PURCHASER OF THE
EXCHANGE NOTES MUST COMPLY WITH ALL APPLICABLE LAWS AND REGULATIONS IN FORCE
IN ANY JURISDICTION IN WHICH IT PURCHASES, OFFERS OR SELLS THE EXCHANGE NOTES
OR POSSESSES OR DISTRIBUTES THIS PROSPECTUS AND MUST OBTAIN ANY CONSENT,
APPROVAL OR PERMISSION REQUIRED BY IT FOR THE PURCHASE, OFFER OR SALE BY IT OF
THE EXCHANGE NOTES UNDER THE LAWS AND REGULATIONS IN FORCE IN ANY JURISDICTION
TO WHICH IT IS SUBJECT OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES,
AND NEITHER THE COMPANY NOR THE INITIAL PURCHASERS SHALL HAVE ANY
RESPONSIBILITY THEREFOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES TO ANY PERSON IN ANY
JURISDICTION WHERE IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
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NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE NEW HAMPSHIRE SECRETARY OF STATE THAT ANY
DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
i
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise stated in this Prospectus, references to (a)
"Fountain View" shall mean Fountain View, Inc., a Delaware corporation and its
subsidiaries, other than Summit and its subsidiaries; (b) "Summit" shall mean
Summit Care Corporation, a California corporation and its subsidiaries; and (c)
the "Company" shall mean Fountain View and its subsidiaries, including Summit
and its subsidiaries and, in certain cases, refers to the historical
performance or operations of Fountain View and Summit, taken as a whole. All
references to a fiscal year refer to the twelve months ended June 30, in the
case of Summit, and December 31, in the case of Fountain View and the Company,
of the year referenced.
THE COMPANY
The 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. 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. Post-acute care is the provision of a
continuum of care to patients following discharge from an acute care hospital.
The Company 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, the Company
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. The Company also operates three
institutional pharmacies (one of which is a joint venture), which service acute
care hospitals as well as SNFs and ALFs both affiliated and unaffiliated with
the Company, an outpatient therapy clinic and a durable medical equipment
("DME") company. The Company consists of the combined operations of Fountain
View and Summit and operates 50 facilities with approximately 6,600 beds
serving Medicare, Medicaid, managed care, private pay and other patients.
THE TRANSACTIONS
On February 6, 1998, Fountain View, Summit, Heritage Fund II, L.P. and FV-SCC
Acquisition Corp., a wholly-owned subsidiary of Fountain View ("Acquisition"),
entered into an Agreement and Plan of Merger (the "Merger Agreement") providing
for the acquisition of Summit by Fountain View. Pursuant to the Merger
Agreement, Acquisition offered (the "Tender Offer") to purchase all of the
outstanding shares of common stock of Summit (the "Summit Shares"), at a price
of $21.00 per share, net to the seller in cash. A copy of the Merger Agreement
is filed as an exhibit to the Schedule 14D-1 filed by Fountain View with the
Securities and Exchange Commission (the "Commission") in connection with the
Tender Offer. The Tender Offer expired on March 25, 1998 and Acquisition
purchased approximately 99% of the Summit Shares at the closing of the Tender
Offer on March 27, 1998.
Pursuant to the terms of the Merger Agreement, Acquisition merged with and
into Summit on April 16, 1998 (the "Merger"). Summit was the surviving
corporation in the Merger and became a wholly-owned subsidiary of Fountain
View.
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In order to consummate the purchase of Summit Shares in the Tender Offer and
the Merger, 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 pursuant to Rule 144A and
Regulation S of the Securities Act, $120.0 million of the Outstanding Notes
(the "Note Offering"). The Company also entered into a new revolving credit
facility and term loan facilities (the "New Credit Facility") providing for
revolving credit borrowings of up to $30.0 million and term loan borrowings of
up to $85.0 million. 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 Sheila Snukal, Fountain
View's Executive Vice President and Mr. Snukal's wife ("Mrs. Snukal"), and
$1.4 million from Mr. Scott, Summit's Chairman and Chief Executive
Officer (collectively, the "Equity Investments"). The Company used the proceeds
of the Note Offering to repay certain indebtedness of Summit assumed in
connection with the Merger and to pay certain transaction fees and expenses.
See "Use of Proceeds".
The Tender Offer, the Merger, the establishment of the New Credit Facility,
the Equity Investments, the Note Offering and the application of the proceeds
therefrom are collectively referred to as the "Transactions".
Since the Transactions, senior management of the Company have owned
approximately 26.3% of the Company's outstanding common stock, on a fully-
diluted basis, and Heritage Partners, Inc. and its affiliates ("Heritage"),
along with certain co-investors, have owned approximately 72.7% of the
Company's outstanding common stock, on a fully-diluted basis. Heritage is a
Boston-based private equity firm with $530 million in capital under management,
specializing in the acquisition and equity-based recapitalization of private,
family-owned businesses. See "Management".
In August 1997, Heritage invested $14.0 million in cash in Fountain View in a
series of transactions (the "Fountain View Equity Transactions") which resulted
in Heritage obtaining a 49.9% ownership position in the common equity of
Fountain View and completing a $7.0 million preferred stock investment in
Fountain View at that time. See Note 3 to the audited financial statements of
Fountain View included elsewhere in this Prospectus.
2
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Set forth below is a diagram showing the post-Merger organizational structure
of Fountain View, Inc. and its subsidiaries (all subsidiaries are 100% owned,
unless otherwise indicated):
CHART APPEARS HERE
The diagram depicts:
(A) Fountain View as the owner of all of the outstanding stock of:
Summit Care Corporation, I'NO, Inc., Locomotion Holdings, Inc., On-Track
Therapy Center, Inc., Fountain View Holdings, Inc. and Sycamore Park
Convalescent Hospital;
(B) Summit Care Corporation as the owner of:
(i) all of the outstanding stock of Summit Care California, Inc., Summit
Care Pharmacy Inc., Summit Care Texas No. 2, Summit Care Texas
Management, Inc., and Summit Care Texas No. 3, and (ii) 82.8% of the
outstanding stock of Summit Care Texas Equity, Inc.
(C) Locomotion Holdings, Inc. as the owner of all the outstanding stock
Locomotion Therapy, Inc.
(D) Fountain View Holdings, Inc. as the owner of all the outstanding stock of;
AIB Corp., Alexandria Convalescent Hospital, Inc., BIA Hotel Corp., Brier
Oak Convalescent, Inc., Elmcrest Convalescent Hospital, Fountainview
Convalescent Hospital, Fountainview Management, Inc., Rio Hondo Nursing
Center
(E) Summit Care Texas No. 2, Inc. owning 17.2% of the outstanding stock of
Summit Care Texas Equity, Inc.
(F) Summit Care Texas Management, Inc. owning a 1% general partnership
interest in Summit Care Texas L.P.
(G) Summit Care Texas Equity, Inc. owning a 99% limited partnership interest
in Summit Care Texas L.P.
3
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THE FINANCINGS
The following table illustrates the sources and uses of funds for the
Transactions. See "Unaudited Pro Forma Financial Data".
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS
New Credit Facility(1)........................................ $100.0
11 1/4% Senior Subordinated Notes............................. 120.0
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Total debt................................................ 220.0
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Equity Investments:
Heritage and co-investors equity investments(2)............. 90.6
Fountain View management equity investment(3)............... 5.0
Summit management equity investment(4)...................... 1.4
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Total equity.............................................. 97.0
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Total sources of funds.................................... $317.0
======
USES OF FUNDS
Purchase of Summit Shares in the Tender Offer and the
Merger(5).................................................... $145.6
Refinancing of Fountain View indebtedness(6).................. 32.0
Refinancing of Summit indebtedness(7)......................... 108.9
Fees and expenses............................................. 30.5
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Total uses of funds....................................... $317.0
======
</TABLE>
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(1) The New Credit Facility provides for up to $30.0 million of revolving
credit borrowings (with a $4.0 million sublimit for letters of credit) and
up to $85.0 million of term loans and matures in 2004. As of June 30, 1998,
term loans in the aggregate amount of approximately $85.0 million and
revolving loans in the aggregate amount of approximately $16.0 million were
outstanding under the New Credit Facility, and $14.0 million of revolving
credit borrowings were then available to the Company.
(2) Represents only the new cash invested in Fountain View by Heritage and
certain co-investors in connection with the Transactions and excludes the
Fountain View shares held by Heritage prior to the Transactions.
(3) Represents only the new cash invested in Fountain View by Mr. Snukal and
Mrs. Snukal in connection with the Transactions and excludes the Fountain
View shares held by management prior to the Transactions.
(4) Represents the full amount of the after-tax proceeds that Mr. Scott
received from the cash-out in the Merger of all options to purchase Summit
Shares held by him (and a payment from the Company to cover a portion of
related taxes) and the full after-tax proceeds from payments under the
Summit Executive Incentive Plan received by him from the Company, but does
not include the issuance by Mr. Scott of a limited recourse promissory note
in consideration for certain of the Fountain View shares issued to him in
connection with the Transactions. See "Certain Relationships and Related
Transactions--Investment Agreement" and "--Payments to Certain
Stockholders".
(5) Represents the purchase of all Summit Shares in the Tender Offer and the
Merger, and the cash-out of options to purchase 909,500 Summit Shares which
Summit effected upon the effectiveness of the Merger.
(6) Reflects the total funded indebtedness of Fountain View outstanding
immediately prior to the Merger.
(7) Reflects total funded indebtedness of Summit (excluding mortgages, capital
leases and certain other indebtedness) outstanding immediately prior to the
Merger.
4
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RECENT DEVELOPMENTS
On May 4, 1998, Baylor Health Care System, a vertically integrated healthcare
system operating in Texas ("Baylor"), and Buckner Foundation ("Buckner"), a
subsidiary of Buckner Baptist Benevolences, a Texas social services
organization (collectively, the "Baylor Group"), purchased from Heritage shares
of Series A Preferred Stock of Fountain View and warrants to purchase shares of
Fountain View's Series C Common Stock for approximately $12.4 million. The
shares of Series A Preferred Stock purchased by the Baylor Group are entitled
to receive a cumulative dividend calculated to achieve a 12% annual rate of
return, and are subject to automatic redemption upon the completion of an
initial public offering of Fountain View's common stock. The shares represented
by the warrants issued to the Baylor Group currently represent approximately 5%
of Fountain View's diluted capital stock. Baylor is also entitled to have one
of its nominees serve on Fountain View's board of directors.
Baylor and Fountain View also entered into an agreement on May 4, 1998
primarily to develop and operate skilled nursing facilities within a mile of
the Baylor hospital campuses for which Baylor has the right to receive a
market-rate development and license fee in the form of cash or warrants.
Baylor, one of the nation's largest not-for-profit integrated health care
providers, operates a network of 50 hospitals, clinics and primary care
facilities in 19 cities throughout Northern Texas and Southern Oklahoma. Baylor
is based in Dallas-Fort Worth, Texas, where its hospitals represent 16% of all
hospital admissions in the Dallas-Forth Worth area.
For the six months ended June 30, 1998, net revenues totaled $88.3 million.
During the same period, occupancy was 86.4% (excluding three Summit facilities
which commenced operations or were renovated in 1996 or later) and the
Company's quality mix (which is total net revenues less Medicaid net revenues)
was 65.1%.
The Company was incorporated in Delaware in 1997. Its principal executive
offices are located at 11900 Olympic Boulevard, Suite 680, Los Angeles,
California 90064, and its telephone number is (310) 571-0351.
5
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THE EXCHANGE OFFER
Outstanding Notes........... The Outstanding Notes were sold by the Company on
April 16, 1998 to Goldman, Sachs & Co., Nesbitt
Burns Securities Inc., Paribas Corporation and
Sutro & Co., Incorporated (collectively, the
"Initial Purchasers") pursuant to a Purchase
Agreement, dated April 9, 1998 (the "Purchase
Agreement"). The Initial Purchasers subsequently
resold the Outstanding Notes in transactions not
registered under the Securities Act in reliance
upon exemptions from registration pursuant to
Rule 144A and Regulation S under the Securities
Act.
Registration Rights
Agreement................... Pursuant to the Purchase Agreement, the Company
and the Initial Purchasers entered into the
Registration Rights Agreement, which grants the
holders of the Outstanding Notes certain exchange
and registration rights. The Exchange Offer is
intended to satisfy such exchange and
registration rights which terminate upon the
consummation of the Exchange Offer.
Securities Offered.......... $120.0 million aggregate principal amount of 11
1/4% Senior Subordinated Notes due 2008, Series B
(the "Exchange Notes").
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Outstanding Notes that
are properly tendered and accepted. The Company
will issue Exchange Notes on or promptly after
the Expiration Date. As of the date hereof, there
is $120.0 million aggregate principal amount of
Outstanding Notes outstanding. The terms of the
Exchange Notes are identical in all material
respects to the terms of the Outstanding Notes
for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes
will bear a Series B designation, are freely
transferable by holders thereof (other than as
provided herein), and are not subject to any
covenant restricting transfer absent registration
under the Securities Act. See "The Exchange
Offer". The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Outstanding Notes being tendered for exchange.
Based on no-action letters issued by the staff of
the Commission to third parties with respect to
similar transactions (e.g. Exxon Capital Holdings
Corp. (April 13, 1989), Morgan Stanley & Co.,
Inc. (June 2, 1993) and Shearman & Sterling (July
2, 1993)), the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for
resale, resold and otherwise transferred by
holders thereof (other than (i) a
6
<PAGE>
broker-dealer who purchases such Exchange Notes
from the Company to resell pursuant to Rule 144A
or any other available exemption under the
Securities Act, or (ii) a person that is an
"affiliate" of the Company within the meaning of
Rule 405 of the Securities Act) without
compliance with the registration and prospectus
delivery requirements of the Securities Act,
provided that such Exchange Notes are acquired in
the ordinary course of such holders' business and
such holders are not engaged in, have no
arrangement or understanding with any person to
participate in, and do not intend to engage in,
any distribution of the Exchange Notes. However,
the Company has not sought and does not intend to
seek a no-action letter with respect to the
Exchange Offer and there can be no assurance that
the staff of the Commission would make a similar
determination with respect to the Exchange Offer.
Each holder of Exchange Notes, other than a
broker-dealer, must represent that such
conditions have been met. In addition, each
broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes.
The Letter of Transmittal accompanying this
Prospectus states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. A
broker-dealer may nonetheless be deemed to be an
"underwriter" under the Securities Act
notwithstanding such disclaimer. This Prospectus,
as it may be amended or supplemented from time to
time, may be used by a broker-dealer in
connection with resales of Exchange Notes
received in exchange for Outstanding Notes where
such Outstanding Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. Pursuant
to the Registration Rights Agreements, the
Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use
in connection with any such resale. See "The
Exchange Offer-- Purpose of the Exchange Offer"
and "Plan of Distribution".
By tendering Outstanding Notes in exchange for
Exchange Notes, each holder will represent to the
Company that: (i) it is not an affiliate of the
Company, (ii) it is not engaged in, and does not
intend to engage in, and has no arrangement or
understanding with any person to participate in,
a distribution of the Exchange Notes to be issued
in the Exchange Offer, and (iii) any Exchange
Notes to be received by it will be acquired in
the ordinary course of business. Any holder who
tenders in the Exchange Offer who is unable to
make the foregoing representations may not rely
on the position of the
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<PAGE>
staff of the Commission enunciated in no-action
letters and, in the absence of an applicable
exemption, must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not indemnified by
the Company.
Expiration Date............. 5:00 p.m., New York City time, on October 13,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended. See "The Exchange Offer--Expiration
Date; Extensions; Termination; Amendments".
Accrued Interest on the
Exchange Notes............. Each Exchange Note will bear interest from the
most recent date to which interest has been paid
on the Outstanding Notes or, if no interest has
been paid on such Outstanding Notes, from
April 16, 1998.
Exchange Date............... As soon as practicable after the close of the
Exchange Offer, the Company will accept for
exchange all Outstanding Notes properly tendered
and not validly withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal Rights".
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to the following
conditions: (A) an injunction, order or decree
shall not have been issued by any court or
governmental agency that would prohibit, prevent
or otherwise materially impair the ability of the
Company to proceed with the Exchange Offer; and
(B) there shall not have occurred a change in the
current interpretation of the staff of the
Commission which current interpretation permits
the Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Outstanding
Notes to be offered for resale, resold and
otherwise transferred by holders thereof (other
than (i) a broker-dealer who purchases such
Exchange Notes directly from the Company to
resell pursuant to Rule 144A, Regulation S or any
other available exemption under the Securities
Act or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions
of the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders have no
arrangement with any person to participate in the
distribution of Exchange Notes. The Company
reserves the right to terminate or amend the
Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition. The Exchange Offer is not conditioned
on any minimum aggregate principal amount
8
<PAGE>
of Outstanding Notes being tendered for exchange.
See "The Exchange Offer--Certain Conditions to
the Exchange Offer".
Consequences of Failure to
Exchange................... Any Outstanding Notes not tendered pursuant to
the Exchange Offer will remain outstanding and
continue to accrue interest. Such Outstanding
Notes will remain "restricted securities" under
the Securities Act, subject to the transfer
restrictions described herein. As a result, the
liquidity of the market for such Outstanding
Notes could be adversely affected upon completion
of the Exchange Offer. See "Risk Factors--
Consequences of Failure to Exchange the
Outstanding Notes".
Material Federal Income Tax
Consequences............... The exchange of the Outstanding Notes for
Exchange Notes by tendering holders will not be a
taxable exchange for U.S. Federal income tax
purposes, and such holders will not recognize any
taxable gain or loss for U.S. Federal income tax
purposes as a result of such exchange. See
"Material Federal Income Tax Consequences".
Use of Proceeds............. There will be no cash proceeds to the Company
from the Exchange Offer. See "Use of Proceeds".
Tendering Outstanding
Notes....................... Each holder of Outstanding Notes wishing to
accept the Exchange Offer must complete, sign and
date a Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Outstanding
Notes and any other required documents, to the
Exchange Agent (as defined) at the address set
forth herein. See "Exchange Offer--Procedures for
Tendering Outstanding Notes".
Withdrawal Rights........... The tender of Outstanding Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the
Expiration Date, in accordance with the
procedures set forth in this Prospectus. See "The
Exchange Offer--Withdrawal Rights".
Untendered Outstanding
Notes....................... Upon consummation of the Exchange Offer, the
holders of Outstanding Notes, if any, will have
no further rights under the Registration Rights
Agreement, except as provided herein. Holders of
Outstanding Notes whose Outstanding Notes are not
tendered or are tendered but not accepted in the
Exchange Offer will continue to hold such
Outstanding Notes and will be entitled to all the
rights and preferences and subject to the
limitations applicable thereto. Following
consummation of the Exchange Offer, the holders
of Outstanding Notes will continue to be subject
to the existing restrictions upon transfer
thereof and, except as provided herein, the
Company will have no further obligation to such
9
<PAGE>
holders to provide for the registration under the
Securities Act of the Outstanding Notes held by
them. To the extent that Outstanding Notes are
tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but
unaccepted Outstanding Notes could be adversely
affected.
Exchange Agent.............. State Street Bank and Trust Company of
California, N.A., is serving as Exchange Agent in
connection with the Exchange Offer. See "The
Exchange Offer--Exchange Agent".
Shelf Registration
Statement................... Under certain circumstances described in the
Registration Rights Agreement, certain holders of
Outstanding Notes (including holders who are not
permitted to participate in the Exchange Offer or
who may not freely resell Exchange Notes received
in the Exchange Offer) may require the Company to
file and use its reasonable efforts to cause to
become effective, a shelf registration statement
under the Securities Act, which would cover
resales of Outstanding Notes by such holders. See
"The Exchange Offer--Purpose of the Exchange
Offer".
TERMS OF THE NOTES
Except as otherwise indicated, the following description relates both to the
Outstanding Notes issued pursuant to the Note Offering and to the Exchange
Notes to be issued in exchange for Outstanding Notes in connection with the
Exchange Offer. The Exchange Notes will be obligations of the Company
evidencing the same indebtedness as the Outstanding Notes, and will be entitled
to the benefits of the same Indenture. The form and terms of the Exchange Notes
are the same as the form and terms of the Outstanding Notes, except that the
Exchange Notes have been registered under the Securities Act and therefore will
not bear legends restricting the transfer thereof. For a more complete
description of the Notes see "Description of Notes". Throughout this
Prospectus, references to the "Notes" refer to the Exchange Notes and the
Outstanding Notes collectively.
Issuer...................... Fountain View, Inc.
Securities Offered.......... $120.0 million aggregate principal amount of 11
1/4% Senior Subordinated Notes due 2008, Series B
that have been registered under the Securities
Act. See "Description of Notes".
Maturity Date............... April 15, 2008
Guarantees.................. The Company's payment obligations under the Notes
are fully and unconditionally, jointly and
severally guaranteed on a senior subordinated
basis by each of the Company's current and future
Restricted Subsidiaries. As of the date of the
Indenture, all of the Company's Subsidiaries will
be Restricted Subsidiaries. The Outstanding
Guarantees are, and the Exchange Guarantees will
be, subordinated to all Senior Debt of the
Guarantors. See "Description of Notes--Subsidiary
Guarantees".
10
<PAGE>
Interest on the Notes....... The Outstanding Notes accrue interest at a rate
of 11 1/4% per annum from the Issue Date. The
Exchange Notes will accrue interest at a rate of
11 1/4% per annum from the Issue Date or from the
most recent date to which interest had been paid
on the Outstanding Notes.
Interest Payment Dates...... April 15 and October 15 of each year, commencing
October 15, 1998.
Optional Redemption......... Except as described below, the Notes are not
redeemable at the Company's option prior to April
15, 2003. From and after April 15, 2003, the
Notes will be subject to redemption at the option
of the Company, in whole or in part, at the
redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages (as
defined), if any, to the date of redemption.
In addition, prior to April 15, 2001, up to 35%
in aggregate principal amount of Notes will be
redeemable at the option of the Company from the
net proceeds of Public Equity Offerings (as
defined) by the Company, at a price of 111.25% of
the principal amount of the Notes, plus accrued
and unpaid interest and Liquidated Damages, if
any, to the date of redemption; provided that at
least $78.0 million in aggregate principal amount
of Notes remains outstanding immediately after
each such redemption; and provided, further, that
any such redemption occur within 60 days of the
date of the closing of such Public Equity
Offering.
Change of Control........... In the event of a Change of Control, Holders of
the Notes will have the right to require the
Company to repurchase their Notes, in whole or in
part, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of repurchase.
Ranking..................... The Notes constitute general, unsecured
obligations of the Company, subordinated in right
of payment to all Senior Debt of the Company,
ranked on the same level with all senior
subordinated debt of the Company and senior in
right of payment to all existing and future
subordinated debt of the Company, if any. The
claims of the Holders of the Notes will be
subordinated to Senior Debt, which, as of June
30, 1998, was approximately $126 million,
approximately $101 million of which was fully
secured borrowings under the New Credit Facility.
See "Description of Notes--Subordination" and
"Description of Other Indebtedness".
Restrictive Covenants....... The Indenture governing the Notes (the
"Indenture") contains certain covenants that,
among other things, limit the ability of the
Company and its Subsidiaries to incur additional
11
<PAGE>
Indebtedness (as defined herein) and issue
Disqualified Stock (as defined herein), pay
dividends or distributions or make investments or
make certain other Restricted Payments (as
defined herein), enter into certain transactions
with affiliates, dispose of certain assets, incur
liens securing on the same level and subordinated
indebtedness and engage in mergers and
consolidations. See "Description of Notes".
Use of Proceeds............. The gross proceeds of $120.0 million from the
Note Offering along with the proceeds of equity
investments made by Heritage and members of
management were used to repay certain existing
indebtedness, pay certain fees and expenses in
connection with the Transactions, and for general
corporate purposes. No proceeds will be received
by the Company and the Guarantors from the
Exchange Offer. See "--The Financings" and "Use
of Proceeds".
COMPARISON OF EXCHANGE NOTES WITH OUTSTANDING NOTES
Freely Transferable......... Generally, the Exchange Notes will be freely
transferable under the Securities Act by holders
thereof other than any holder that is either an
affiliate of the Company or a broker-dealer that
purchased the Notes from the Company to resell
pursuant to Rule 144A, Regulation S or any other
available exemption. The Exchange Notes otherwise
will be substantially identical in all material
respects (including interest rate and maturity)
to the Outstanding Notes. See "The Exchange
Offer".
Registration Rights......... The holders of Outstanding Notes currently are
entitled to certain registration rights pursuant
to the Registration Rights Agreement (the
"Registration Rights Agreement"), dated as of
April 16, 1998, among the Company, the Guarantors
and the Initial Purchasers. However, upon
consummation of the Exchange Offer, subject to
certain exceptions, holders of Outstanding Notes
who do not exchange their Outstanding Notes for
Exchange Notes in the Exchange Offer will no
longer be entitled to registration rights and
will not be able to offer or sell their
Outstanding Notes, unless such Outstanding Notes
are subsequently registered under the Securities
Act (which, subject to certain limited
exceptions, the Company will have no obligation
to do), except pursuant to an exemption from, or
in a transaction not subject to, the Securities
Act and applicable state securities laws. See
"Risk Factors--Consequences of Failure to
Exchange the Outstanding Notes" and "The Exchange
Offer--Purpose of the Exchange Offer".
Exchange Offer and Absence
of a Public Market for the
Notes...................... The Exchange Notes will generally be freely
transferable (subject to the restrictions
discussed elsewhere herein) but
12
<PAGE>
will be new securities for which there will not
initially be a market. The Outstanding Notes are
eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages
("PORTAL") Market, the National Association of
Securities Dealers' ("NASD") screen-based
automated market for trading of securities
eligible for resale under Rule 144A. "PORTAL" or
"PORTAL Market" means the NASD's market for
designated foreign and domestic securities
through an automated quotation and communications
system that facilitates private offerings,
resales, trading, clearance and settlement by
PORTAL participants.
The PORTAL Market, as described by the NASD, is
an electronic screen based system, which
facilitates trading of SEC Rule 144A private
placements by qualified investors. The purpose of
PORTAL is to provide companies with increased
flexibility in raising capital by creating a
method for accessing a significant source of
funds. It also is intended to give U.S.
institutional investors another opportunity to
diversify their portfolios by making certain
foreign securities available for purchase in the
domestic market. PORTAL complements the
Commission's Rule 144A, which provides safe
harbor protections by exempting the private
placements of certain issuers from the
Commission's registration and disclosure
requirements and by allowing eligible
institutional investors to trade these securities
freely among themselves without having to observe
restrictions that, prior to the adoption of the
rule, otherwise delayed the trading of these
securities. The Company does not intend to apply
for a listing of the Exchange Notes on any
securities exchange or on any automated dealer
quotation system. See "Plan of Distribution".
FOR MORE COMPLETE INFORMATION REGARDING THE NOTES, SEE "DESCRIPTION OF
NOTES".
RISK FACTORS
Holders of Outstanding Notes and prospective purchasers of the Exchange Notes
should consider carefully all of the information set forth in this Prospectus
and, in particular, should evaluate the specific factors set forth under "Risk
Factors" for risks involved with an exchange or acquisition of the Exchange
Notes.
ADDITIONAL INFORMATION
For additional information regarding the Notes, see "The Exchange Offer",
"Description of Notes" and "Material Federal Income Tax Consequences".
13
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Set forth below is the pro forma financial information as of June 30, 1998
and December 31, 1997 and for the six months ended June 30, 1998 and for the
year ended December 31, 1997. Such pro forma data does not purport to represent
what the Company's actual results would have been if the Transactions had
occurred on the date indicated, nor does such information purport to project
the results of the Company for future periods. The summary unaudited pro forma
financial information below should be read in conjunction with the "Unaudited
Pro Forma Financial Data", "Selected Historical Financial and Other Data--
Fountain View", "Selected Historical Financial and Other Data--Summit" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue................................. $142,287 $287,144
Salaries and related benefits............... 68,099 135,248
Other operating costs....................... 53,097 115,022
Depreciation and amortization............... 7,152 14,072
Rent expense................................ 3,405 6,754
Interest, net............................... 11,199 23,324
-------- --------
142,952 294,420
-------- --------
Loss before provision for income taxes and
extraordinary item......................... (665) (7,276)
Income taxes benefit(1)..................... 190 2,854
Extraordinary item, net of tax.............. (517) --
-------- --------
Net loss.................................... $ (992) $ (4,422)
======== ========
OTHER FINANCIAL DATA
EBITDA(2)................................... $ 17,686 $ 30,120
Adjusted EBITDA(3).......................... 17,686 37,795
Adjusted EBITDA margin...................... 12.4% 13.2%
Adjusted EBITDAR(3)......................... $ 21,091 $ 44,549
Adjusted EBITDAR margin..................... 14.8% 15.5%
Ratio of earnings to fixed charges(4)....... -- --
Ratio of Adjusted EBITDA to net interest
expense.................................... 1.6 1.6
Ratio of net debt to Adjusted EBITDA(5)..... 6.8 6.3
Net cash (used in) provided by operating
activities................................. $(18,492) $ 34,984
OTHER DATA
Number of facilities (end of period)........ 50 50
Total beds (end of period).................. 6,578 6,574
Patient days (in thousands)(6).............. 1,029 1,963
Average occupancy rate(7)................... 87% 89%
Percentage of revenues from:
Managed care, private pay and Medicare.... 65% 70%
Medicaid.................................. 35 30
BALANCE SHEET DATA (AT JUNE 30, 1998 AND
DECEMBER 31, 1997, RESPECTIVELY)
Cash and cash equivalents................... $ 3,725 $ 4,253
Working capital............................. 27,434 23,146
Total assets................................ 408,555 410,800
Total debt and capital leases, including
current maturities and excluding mandatory
redeemable preferred stock................. 245,650 241,990
Stockholders' equity........................ 70,059 69,764
</TABLE>
14
<PAGE>
- --------
(1) In July 1997, Fountain View's predecessor, which was comprised of all of
Fountain View's operating units owned individually by certain controlling
stockholders, was merged with and into several companies formed by Fountain
View in connection with the Fountain View Equity Transactions. Prior to the
Fountain View Equity Transactions, most of such individually owned
corporations had elected to be taxed as cash-basis S-corporations. The pro
forma income tax benefit for the year ended December 31, 1997 includes a
charge in lieu of income taxes to indicate what the tax provision would
have been had Fountain View been taxed as a C-corporation for all of 1997
with a combined federal and state tax rate of 41%. See Note 3 to the
audited financial statements of Fountain View included elsewhere in this
Prospectus.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the historical
operating results of the Company, nor is it meant to be predictive of
future results of operations or cash flows.
(3) For the year ended December 31, 1997, adjusted EBITDA represents EBITDA
adjusted for certain non-recurring charges shown below. Adjusted EBITDAR
represents Adjusted EBITDA plus rent expense. EBITDAR is not a measurement
of operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. Similar to EBITDA, management views EBITDAR as a financial
indicator of a company's ability to service or incur debt. A majority of
Fountain View's nursing homes are leased, under operating leases, and not
owned. Accordingly, EBITDAR is used since the rent expense approximates the
interest and depreciation expense Fountain View may have incurred as if the
nursing homes were owned as opposed to leased:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
EBITDA..................................................... $30,120
Non-recurring charges(a)................................... 7,675
-------
Adjusted EBITDA............................................ $37,795
Rent expense............................................... 6,754
-------
Adjusted EBITDAR........................................... $44,549
=======
</TABLE>
(a) EBITDA is adjusted for the following non-recurring entries in
order to present comparable EBITDA with the preceding years
since these entries are only reflected in the results of
operations for the year ended December 31, 1997 for Fountain
View and for the six months ended December 31, 1997 for Summit.
In addition, the Company does not expect to incur similar costs
in the future. Non-recurring charges consist of: (1) $2,100 of
Medicare reserves taken by Summit due to adjustments proposed by
the Medicare intermediary during their audit of prior year cost
reports. The adjustments relate to issues not proposed by the
Medicare intermediary during previous audits and therefore the
one time impact relating to these adjustments for prior year
cost reports is all reflected in the results of operations for
the year ended December 31, 1997 when the cost reports were
audited and finalized with the Medicare intermediary; (2) $1,074
of retroactive workers' compensation, group and general
liability costs due to the recording of tail coverage insurance
expense at the time Summit converted from an occurrence based
insurance policy to a claims made insurance policy; (3) $983 of
incremental bad debt expense relating to 1996 and prior periods
recorded in 1997 resulting from a change in management's
methodology for determining the allowance for bad debt; the
change in methodology was made to convert Summit's allowance
methodology accounting practices to Fountain View's accounting
as a result of the acquisition; (4) termination of non-compete
agreements and consulting arrangements totaling $965 relating to
the Fountain View Equity Transactions; (5) certain transaction
expenses including discretionary employee bonuses totaling $872
paid upon completion of the Fountain View Equity Transactions;
(6) severance for an executive and other costs totaling $871,
the severance package was paid in connection with the
acquisition of Summit by Fountain View; and (7) $810 related to
an employee lawsuit settled in 1997 involving a specific type of
liability for which the Company currently maintains insurance
coverage (net of ongoing insurance costs).
(b) Management believes that as a consequence of the Transactions,
the Company will realize significant ongoing cost savings and
revenue enhancements. However there can be no assurance that
these cost savings or revenue enhancements will be realized.
Management's estimate of the ongoing cost reductions relating to
the Transactions includes: (i) certain reductions in facility-
level operating expense items totaling $1,451; (ii) $1,355
relating to the elimination of specifically identified
duplicative staff; (iii) $512 relating to reductions in
corporate expenses, including the elimination of certain public
company expenses; and (iv) a reduction in costs of supplies.
Such amounts have not been included in adjusted EBITDA or
adjusted EBITDAR.
(4) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges consists of interest expense and one-third of operating rent
expense, which management believes is representative of the interest
component of rent expense. Earnings were not sufficient to cover fixed
charges. The amount of the shortfall approximated $7.3 million for the
proforma year ended December 31, 1997 and $0.6 million for the proforma six
months ended June 30, 1998.
15
<PAGE>
(5) Ratio of net debt to Adjusted EBITDA represents the ratio of total debt
less cash and cash equivalents to Adjusted EBITDA.
(6) "Patient days" refers to the total number of days of patient care provided
by the Company's facilities.
(7) Average occupancy rate has been adjusted to exclude three Summit facilities
which were not operational prior to 1996 or were significantly renovated
during 1997 such that beds were not available during the entire year. Such
facilities were deemed to be in a fill-up stage and, therefore, their
occupancies are not considered to be indicative of a mature facility.
Actual occupancy for the year ended December 31, 1997 including these
facilities was 87%. Also excludes Fountain View's ALF, which represented
less than 2% of Fountain View's total revenue during fiscal 1997.
16
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA--FOUNTAIN VIEW
The summary financial data of Fountain View as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997 are
derived from the audited financial statements included elsewhere herein. The
summary financial and other data as of December 31, 1993, 1994 and 1995, for
the two years in the period ended December 31, 1994 and for the six months
ended June 30, 1997 and 1998 have been derived from Fountain View's unaudited
financial statements included elsewhere herein and, in the opinion of
management, include all necessary adjustments for a fair presentation of such
information in conformity with generally accepted accounting principles. The
information set forth below should be read in conjunction with
"Capitalization", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue................... $41,061 $51,824 $55,836 $59,432 $ 67,905 $33,423 $ 88,369
Salaries and related benefits. 23,248 27,823 35,048 36,166 38,215 18,638 44,467
Other operating costs......... 10,884 14,886 13,454 14,614 17,990 8,525 29,714
Depreciation and amortization. 110 149 416 600 1,198 366 3,934
Rent expense.................. 4,002 4,017 3,946 3,896 3,775 1,879 2,682
Interest, net................. 307 355 332 278 1,164 30 6,219
------- ------- ------- ------- -------- ------- --------
38,551 47,230 53,196 55,554 62,342 29,438 87,016
------- ------- ------- ------- -------- ------- --------
Income before provision for
income taxes and
extraordinary item........... 2,510 4,594 2,640 3,878 5,563 3,985 1,353
Income tax benefit
(provision).................. (81) 43 (54) (78) (361) (50) (541)
Extraordinary item, net of
tax.......................... -- -- -- -- -- -- (517)
------- ------- ------- ------- -------- ------- --------
Net income.................... 2,429 4,637 2,586 3,800 5,202 3,935 295
Preferred stock dividends..... -- -- -- -- -- -- (355)
------- ------- ------- ------- -------- ------- --------
Net income (loss) available to
common shareholders.......... $ 2,429 $ 4,637 $ 2,586 $ 3,800 $ 5,202 $ 3,935 $ (60)
======= ======= ======= ======= ======== ======= ========
Basic and diluted earnings per
share available to common
shareholders before extraor-
dinary item(5)............... $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 19.68 $ .66
Basic and diluted loss per
share available to common
shareholders--extraordinary
item......................... -- -- -- -- -- -- (.75)
------- ------- ------- ------- -------- ------- --------
Basic and diluted earnings per
share available to common
shareholders--net income
(loss)....................... $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 19.68 $ (.09)
======= ======= ======= ======= ======== ======= ========
OTHER FINANCIAL DATA
EBITDA(1)..................... $ 2,927 $ 5,098 $ 3,388 $ 4,756 $ 7,925 $ 4,381 $ 11,506
EBITDA margin................. 7.1% 9.8% 6.1% 8.0% 11.7% 13.1% 13.0%
EBITDAR(1).................... $ 6,929 $ 9,115 $ 7,334 $ 8,652 $ 11,700 $ 6,260 $ 14,188
EBITDAR margin................ 16.9% 17.6% 13.1% 14.6% 17.2% 18.7% 16.1%
Capital expenditures.......... $ 8 $ 537 $ 665 $ 1,816 $ 2,570 $ 1,380 $ 3,244
Ratio of earnings to fixed
charges(2)................... 2.5x 3.7x 2.6x 3.5x 3.3x 7.1x 1.2x
Net cash provided by (used in)
operating activities......... $(1,804) $ 908 $ 5,832 $ 1,059 $ 12,739 $ 8,603 $(18,492)
OTHER DATA
Number of facilities (end of
period)...................... 9 9 9 9 9 9 50
Average licensed beds(3)...... 1,061 1,061 1,061 1,061 1,061 1,061 5,937
Total beds (end of period).... 1,227 1,227 1,227 1,227 1,227 1,227 6,578
Patient days (in thousands)... 337 345 341 344 346 170 576
Average occupancy rate(4)..... 87.0% 89.1% 88.1% 88.8% 89.3% 89.3% 87.5%
Percentage of revenues from:
Managed care, private pay
and Medicare............... 58.4% 65.1% 67.2% 69.7% 72.9% 69.8% 65.1%
Medicaid.................... 41.6 34.9 32.8 30.3 27.1 30.2 34.9%
BALANCE SHEET DATA (END OF
PERIOD)
Cash and cash equivalents..... $ 465 $ 629 $ 2,355 $ 1,161 $ 2,551 -- 3,725
Working capital............... 8,266 11,140 10,334 13,566 10,021 -- 27,434
Total assets.................. 14,408 18,433 24,693 24,122 25,941 -- 408,555
Total debt, including current
maturities and excluding
redeemable, preferred stock.. 6,758 7,359 6,764 666 30,076 -- 245,650
Shareholders' equity
(deficit).................... 5,570 9,399 9,957 16,601 (12,236) -- 70,059
</TABLE>
17
<PAGE>
- --------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the historical
operating results of the Company, nor is it meant to be predictive of
future results of operations or cash flows. EBITDAR represents EBITDA plus
rent expense. EBITDAR is not a measurement of operating performance
computed in accordance with generally accepted accounting principles and
should not be considered as a substitute for operating income, net income,
cash flows from operations, or other statement of operations or cash flow
data prepared in conformity with generally accepted accounting principles,
or as a measure of profitability or liquidity. Similar to EBITDA,
management views EBITDAR as a financial indicator of a company's ability to
service or incur debt. A majority of Fountain View's nursing homes are
leased, under operating leases, and not owned. Accordingly, EBITDAR is used
since the rent expense approximates the interest and depreciation expense
Fountain View may have incurred as if the nursing home were owned as
opposed to leased.
(2) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges consists of interest expense and one-third of operating rental
expense, which management believes is representative of the interest
component of rent expense.
(3) Excludes ALF beds.
(4) Excludes Fountain View's ALF, which represents less than 2% of total
revenue.
(5) Weighted average shares outstanding for the five years ended December 31,
1997 and for the six months ended June 30, 1997 has been computed based on
the 200,000 shares of Common Stock issued and outstanding in connection
with the Fountain View Equity Transaction. See note 2 to the consolidated
financial statements of Fountain View included elsewhere herein.
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<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA--SUMMIT
The summary financial data of Summit as of and for each of the five years in
the period ended June 30, 1997 are derived from Summit's audited financial
statements. The financial and other data for the six months ended December 31,
1996 and 1997 have been derived from Summit's unaudited financial statements
included elsewhere herein and, in the opinion of management, include all
necessary adjustments for a fair presentation of such information in conformity
with generally accepted accounting principles. The information set forth below
should be read in conjunction with "Capitalization", "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- -------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net revenue............. $83,992 $ 97,599 $137,026 $176,062 $197,927 $95,088 $108,507
Salaries and related
benefits............... 40,044 45,962 63,171 78,233 89,577 43,386 47,742
Other operating costs... 29,998 34,655 49,206 70,696 89,932 41,750 45,736
Depreciation and
amortization........... 2,308 2,949 5,249 6,142 7,393 3,632 4,235
Rent expense............ 2,315 1,613 2,141 2,656 2,864 1,410 1,525
Interest, net........... 1,080 2,243 4,761 6,574 7,973 4,057 4,588
------- -------- -------- -------- -------- ------- --------
75,745 87,422 124,528 164,301 197,739 94,235 103,826
------- -------- -------- -------- -------- ------- --------
Income before provision
for income taxes....... 8,247 10,177 12,498 11,761 188 853 4,681
Income tax provision.... (3,224) (4,010) (4,987) (4,452) (119) (337) (1,849)
------- -------- -------- -------- -------- ------- --------
Net income.............. $ 5,023 $ 6,167 $ 7,511 $ 7,309 $ 69 $ 516 $ 2,832
======= ======== ======== ======== ======== ======= ========
OTHER FINANCIAL DATA
EBITDA(1)............... $11,635 $ 15,369 $ 22,508 $ 24,477 $ 15,554 $ 8,542 $ 13,504
EBITDA margin........... 13.9% 15.7% 16.4% 13.9% 7.9% 9.0% 12.4%
EBITDAR(1).............. $13,950 $ 16,982 $ 24,649 $ 27,133 $ 18,418 $ 9,952 $ 15,029
EBITDAR margin.......... 16.6% 17.4% 18.0% 15.4% 9.3% 10.5% 13.9%
Capital expenditures.... $29,901 $ 15,505 $ 9,004 $ 26,558 $ 24,075 $12,049 $ 6,706
Ratio of earnings to
fixed charges(2)....... 5.5x 4.7x 3.3x 2.6x 1.0x 1.2x 1.9x
Net cash provided by
operating activities... $ 4,186 $ 7,512 $ 7,014 $ 6,866 $ 18,015 $ 3,563 $ 7,793
OTHER DATA
Number of facilities
(end of period)........ 21 23 37 38 39 39 41
Average licensed beds... 2,696 2,876 4,197 4,816 5,078 5,065 5,154
Total beds (end of
period)................ 2,696 3,002 4,762 4,940 5,040 -- 5,347
Patient days (in
thousands)............. 858 908 1,316 1,514 1,573 783 827
Average occupancy rate.. 87.2% 86.5% 85.9% 85.9% 84.8% 84.0% 87.2%
Percentage of revenues
from:
Managed care and
private pay.......... 36.5% 34.0% 33.8% 31.9% 29.9% 30.5% 31.6%
Medicare.............. 28.3 30.3 29.5 34.7 39.7 39.1 36.7
Medicaid.............. 35.2 35.7 36.7 33.4 30.4 30.4 31.7
BALANCE SHEET DATA (END
OF PERIOD)
Cash and cash
equivalents............ $ 6,301 $ 21,613 $ 3,101 $ 2,658 $ 3,994 -- $ 1,702
Working capital......... 7,151 24,880 10,161 13,906 12,648 -- 11,384
Total assets............ 73,369 114,915 184,480 223,052 250,516 -- 267,420
Total debt and capital
leases, including
current maturities..... 30,331 32,025 89,788 110,374 121,452 -- 129,754
Shareholders' equity.... 31,337 66,361 73,813 81,286 81,412 -- 84,721
</TABLE>
- -------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the historical
operating results of the Company, nor is it meant to be predictive of
future results of operations or cash flows. EBITDAR represents EBITDA plus
rent expense. EBITDAR is not a measurement of operating performance
computed in accordance with generally accepted accounting principles and
should not be considered as a substitute for operating income, net income,
cash flows from operations, or other statement of operations or cash flow
data prepared in conformity with generally accepted accounting principles,
or as a measure of profitability or liquidity. Similar to EBITDA,
management views EBITDAR as a financial indicator of a company's ability to
service or incur debt. A majority of Fountain View's nursing homes are
leased, under operating leases, and not owned. Accordingly, EBITDAR is used
since the rent expense approximates the interest and depreciation expense
Fountain View may have incurred as if the nursing homes were owned as
opposed to leased.
(2) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges consists of interest expense and one-third of operating rental
expense, which management believes is representative of the interest
component of rent expense.
19
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of the Outstanding Notes and prospective purchasers should carefully consider
the following risk factors before exchanging their Outstanding Notes or
purchasing the Exchange Notes offered hereby. This Prospectus includes
statements that may be considered "forward-looking". Although the Company
believes that its plans, intentions and expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from the Company's forward-
looking statements are set forth below and elsewhere in this Prospectus. All
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the cautionary
statements set forth below. See "Special Note Regarding Forward-Looking
Statements".
SUBSTANTIAL LEVERAGE
Significant Leverage as a Result of the Transactions.
In connection with the Transactions, the Company incurred a significant
amount of indebtedness, and, as a result, the Company is highly leveraged. As
of June 30, the Company had total funded indebtedness of approximately $245.7
million, excluding mandatory redeemable preferred stock (of which $120.0
million consists of the Notes and the balance consisting of approximately
$101.2 million of borrowings under the New Credit Facility and approximately
$24.5 million of mortgages, capital leases and other debt). The Company's
ratio of earnings to fixed charges was 1.2x for the six months ended June 30,
1998. While the Indenture and the New Credit Facility contain financial and
other restrictive covenants that limit the ability of the Company to borrow
money, the Company is, under those provisions, still permitted to incur
substantial additional indebtedness in the future. For example, under the
terms of the Indenture and the New Credit Facility, the Company and its
subsidiaries may incur additional indebtedness if the Company continues to
meet, for four consecutive quarters, certain specified ratios involving fixed
charges, maximum leverage and minimum net worth. In addition, the incurrence
of certain specified indebtedness is also permitted. See "Capitalization",
"Unaudited Pro Forma Financial Data", "Description of Notes--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and
"Description of Other Indebtedness--New Credit Facility--Covenants".
Liquidity and Capital Revenues
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), 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 the New Credit Facility, will be
adequate to meet the Company's future liquidity needs for the next several
years. The Company may, however, need to refinance all or a portion of the
Notes on or prior to maturity. 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 the New Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources of the Company Following the Transactions".
Effects of Leverage
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to: (i)
making it more difficult for the Company to satisfy its
20
<PAGE>
obligations with respect to the Notes; (ii) increasing the Company's
vulnerability to general adverse economic and industry conditions; (iii)
limiting the Company's ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and other general
corporate requirements; (iv) requiring the dedication of a substantial portion
of the Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures, or other general corporate
purposes; (v) limiting the Company's flexibility in planning for, or reacting
to, changes in its business and the healthcare industry; and (vi) placing the
Company at a competitive disadvantage with respect to less leveraged
competitors. In addition, the Indenture and the New Credit Facility contain
financial and other restrictive covenants that limit the ability of the
Company to, among other things, borrow additional funds. Failure by the
Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company. In addition, the degree to which the Company is leveraged could
prevent it from repurchasing all of the Notes tendered to it upon the
occurrence of a Change of Control. See "Description of Notes--Repurchase at
the Option of Holders--Change of Control" and "Description of Other
Indebtedness--New Credit Facility".
SUBORDINATION OF THE NOTES; GUARANTEES
The Notes and the Guarantees are subordinated in right of payment to all
current and future Senior Debt of the Company and the Guarantors. However, the
Indenture provides that the Company will not, and will not permit any of the
Guarantors to, incur or otherwise become liable for any indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes or any of the Guarantees. The
practical effect of these provisions is that any new indebtedness of the
Company or Guarantors will have to be classified as Senior Debt under the
Indenture in order for it to have a preference over the Notes (for a
definition of "Senior Debt" see "Description of Notes--Certain Definitions").
Upon any distribution to creditors of the Company or a Guarantor in a
liquidation or dissolution of the Company or a Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or a Guarantor or its property, the holders of Senior Debt will be
entitled to be paid in full before any payment may be made with respect to the
Notes. In addition, the subordination provisions of the Indenture provide that
payments with respect to the Notes will be blocked in the event of a payment
default on Senior Debt and may be blocked for up to 179 days each year in the
event of certain non-payment defaults on Senior Debt. In the event of a
bankruptcy, liquidation or reorganization of the Company or a Guarantor,
holders of the Notes will participate ratably with all holders of subordinated
indebtedness of the Company or such Guarantor that is deemed to be of the same
class as the Notes, and potentially with all other general creditors of the
Company, based upon the respective amounts owed to each holder or creditor, in
the remaining assets of the Company. In any of the foregoing events, there can
be no assurance that there would be sufficient assets to pay amounts due on
the Notes. As a result, holders of Notes may receive less, ratably, than the
holders of Senior Debt. As of June 30, 1998, approximately $126.0 million of
Senior Debt was outstanding, including approximately $101 million of
borrowings under the New Credit Facility, and approximately $14 million was
available for additional borrowings under the New Credit Facility. The
Indenture permits the incurrence of substantial additional indebtedness,
including Senior Debt, by the Company and its subsidiaries in the future. See
"Description of Other Indebtedness--New Credit Facility" and "Description of
Notes".
EFFECTS OF NON-COMPLIANCE WITH COVENANTS IMPOSED BY THE NEW CREDIT FACILITY
AND THE INDENTURE
Among other obligations, the New Credit Facility requires the Company to
satisfy certain tests and maintain specified financial ratios, including a
minimum fixed charge coverage ratio and a maximum leverage ratio. In addition,
the New Credit Facility restricts, among other things, the Company's ability
to incur additional indebtedness and to make acquisitions, investments and
capital expenditures beyond a certain level. A failure to comply with the
restrictions contained in the New Credit Facility could lead to an event of
default thereunder which could result in an acceleration of such indebtedness.
Such an
21
<PAGE>
acceleration would constitute an event of default under the Indenture relating
to the Notes. In addition, the Indenture restricts, among other things, the
Company's ability to incur additional indebtedness, make investments, sell
assets, make certain payments and dividends or merge or consolidate. A failure
to comply with the restrictions in the Indenture could result in an event of
default under the Indenture. If, as a result thereof, a default occurs with
respect to Senior Debt, the subordination provisions of the Indenture would
likely restrict payments to holders of the Notes. See "Description of Other
Indebtedness--New Credit Facility" and "Description of Notes--Subordination".
ENCUMBRANCES ON ASSETS TO SECURE NEW CREDIT FACILITY
In addition to being subordinated to all existing and future Senior Debt of
the Company, the Notes will not be secured by any of the Company's assets. The
Company's obligations under the New Credit Facility are secured by a first
priority pledge of and security interest in the common stock of the Company's
subsidiaries and in substantially all of the Company's assets, both tangible
and intangible, including the Company's personal property and real property.
If the Company becomes insolvent or is liquidated, or if payment under the New
Credit Facility is accelerated, the lenders under the New Credit Facility will
be entitled to exercise the remedies available to a secured lender under
applicable law. See "Description of Other Indebtedness--New Credit Facility".
ABILITY OF COMPANY TO OBTAIN FUNDS FROM SUBSIDIARIES
The Company is a holding company, has no operations of its own and derives
substantially all of its revenue from its subsidiaries. Holders of
indebtedness of, and trade creditors of, subsidiaries of the Company would
generally be entitled to payment of their claims from the assets of the
affected subsidiaries before such assets were made available for distribution
to the Company. As of June 30, 1998, the Company had approximately
$126 million of Senior Debt outstanding, including approximately $101 million
of borrowings under the New Credit Facility, and approximately $14 million was
available for additional borrowings under the New Credit Facility. The
Company's Subsidiaries would have had approximately $24.5 million of
Indebtedness, $46.9 million of trade payables and other liabilities and $15.0
million of mandatory redeemable preferred stock outstanding as of June 30,
1998. The Indenture permits the incurrence of substantial additional
indebtedness by the Company and its subsidiaries and permits significant
investments by the Company in its subsidiaries. In the event of a bankruptcy,
liquidation or reorganization of a subsidiary, holders of any of such
subsidiary's indebtedness will have a claim to the assets of the subsidiaries
that is prior to the Company's interest in those assets.
FAILURE TO INTEGRATE BUSINESSES
The Company has no prior history as a combined entity and its operations
have not previously been managed on a combined basis. Prior to the
Transactions, Fountain View and Summit had been operated as separate entities.
The Company's future operations and earnings will be largely dependent upon
management's ability to successfully execute the Company's strategy. This will
require substantial attention from the Company's management team which, to
date, has operated on a combined basis for only a short period. In addition,
management will be required to apply its business strategy to an entity which
is significantly larger than the entities it previously managed. Additionally,
the need to focus management's attention on integration of the businesses and
implementation of the Company's post-combination strategy may limit the
Company's ability to successfully pursue other opportunities related to its
business for the foreseeable future. The historical financial statements and
pro forma financial statements presented in this Prospectus may not
necessarily be indicative of the results that would have been attained had the
Company operated on a combined basis.
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
REGULATIONS GOVERNING HEALTH CARE FACILITIES
The federal government and the states in which the Company operates regulate
various aspects of the SNF, ALF, sub-acute and specialty medical care,
therapy, pharmacy and DME businesses. In
22
<PAGE>
particular, the operation of long-term care facilities and the provision of
specialty medical services are subject to federal, state and local laws
relating to the adequacy of medical care, resident rights, equipment,
personnel, operating policies, fire prevention, rate-setting and compliance
with building codes and environmental and other laws. Facilities which are not
in substantial compliance with such laws and do not correct deficiencies
within a certain time frame may be 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 SNFs have
been subject to various sanctions and penalties as a result of deficiencies
alleged by the Health Care Financing Administration ("HCFA") or state survey
agencies. While in certain instances denial of certification or licensure
revocation actions have been threatened, management believes that the Company
will not suffer any material adverse effect as a result thereof. There can be
no assurance, however, that the Company will not be subject to sanctions and
penalties in the future as a result of such actions.
REGULATIONS GOVERNING FINANCIAL ARRANGEMENTS BETWEEN HEALTH CARE PROVIDERS
The Company is also subject to federal and state laws that govern financial
and other arrangements between healthcare providers. These laws prohibit
certain direct and indirect payments 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. Such laws include the anti-kickback provisions of the
federal Medicare and Medicaid Patient and Program Protection Act of 1987
(commonly referred to as the "Anti-Kickback Statute") and the physician self-
referral ban contained in the Omnibus Budget Reconciliation Act as expanded in
1993 (commonly referred to as "Stark II"). The Anti-Kickback Statute
provisions prohibit, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients. Stark II prohibits, in part, physicians from making any
Medicare or Medicaid referrals for certain "designated health services" to any
entity with which the physician has a "financial relationship". In addition to
these anti-kickback and self-referral prohibitions, there are 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
the Anti-Kickback Statute or the criminal false claims statute is a felony
punishable by up to five years imprisonment and/or $25,000 fines, while
violation 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 payments for such services. Civil provisions prohibit the knowing filing of
a false claim or the knowing 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. In addition, some states
restrict certain business relationships between physicians and other providers
of healthcare services. Many states, including California, Texas and Arizona,
prohibit business corporations from providing, or holding themselves out as
providers of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset
forfeitures and civil and criminal penalties. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. Management believes the Company is in substantial
compliance with the foregoing statutes and regulations. However, there can be
no assurance that government officials responsible for enforcing these
statutes will not assert that the Company or certain transactions in which the
Company is involved are in violation of these statutes, possibly resulting in
the imposition of fines or penalties that may adversely affect the Company's
business, financial condition and results of operations.
ANTI-FRAUD INITIATIVES GOVERNING HEALTH CARE PROVIDERS
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against healthcare providers. The Health
Insurance Portability and Accountability Act of 1996
23
<PAGE>
(the "Accountability Act") and the Balanced Budget Act of 1997 (the "Balanced
Budget Act") expand the penalties for healthcare fraud, including broader
provisions for the exclusion of providers from the Medicare and Medicaid
programs. Further, under Operation Restore Trust, a major anti-fraud
demonstration project, the Office of the Inspector General of the U.S.
Department of Health and Human Services (the "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. While management believes that the Company's billing
practices are consistent with Medicare and Medicaid criteria, those criteria
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.
The federal government has indicated that the implementation of an effective
compliance program is recommended for healthcare providers in order to
maximize a provider's ability to detect and prevent potential infractions of
applicable law and to address any infractions that may occur. Further, the
existence of an effective compliance program may be taken into account by the
government to reduce any fines or penalties incurred by the Company for
infractions or violations of applicable law. Although the Company does not
currently have a compliance program in place, the Company is in the process of
developing and implementing a compliance program. See "Business--Compliance
Program".
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
COST CONTAINMENT MEASURES IMPOSED BY THIRD PARTY PAYORS
On a pro forma basis, after giving effect to the Transactions the Company
derived approximately 36% and 31% for the twelve months ended December 31,
1997 of its net patient revenues from Medicare and Medicaid, respectively. The
Company expects to continue to derive a significant portion of its revenue
from such federal and state reimbursement programs. There can be no assurance
that the Company will achieve or improve this payor mix in the future. Both
governmental and private payor sources have instituted cost containment
measures designed to limit payments made to healthcare providers. Most
recently, the Balanced Budget Act requires the establishment of a prospective
payment system ("PPS") for Medicare SNFs under which facilities will be paid a
federal per diem rate for virtually all covered SNF services in lieu of the
current cost-based reimbursement rate. The cost-based system reimburses
providers for reasonable direct and indirect allowable costs incurred in
providing "routine costs" (as defined by the Medicare program) as well as
capital costs and ancillary costs. Management believes that the transition to
PPS will reward efficient providers and penalize those that are inefficient.
The law contains numerous other changes that will adversely affect payments to
Medicare and Medicaid providers. Further, the government has not yet set
reimbursement rates under PPS. There can be no assurance that the
implementation of PPS or other changes in the administration or interpretation
of government healthcare programs will not have any adverse effect on the
Company or that payments under government programs will remain at levels
comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement under such programs.
POSSIBLE CURTAILING OF MEDICAID PAYMENTS AND OTHER REIMBURSEMENT PROGRAMS DUE
TO BUDGET CONSTRAINTS
In addition, prior to the enactment of the Balanced Budget Act, federal law
required state Medicaid programs to reimburse SNFs for the costs that are
incurred by efficiently and economically operated providers in order 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
24
<PAGE>
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 would have a material adverse effect on the
Company.
Further, government reimbursement programs are subject to additional
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
future services or the services for which the Company will be able to seek
reimbursement. Management cannot predict whether any of these additional
proposals will be adopted or, if adopted and implemented, what effect such
proposals would have on the Company. There can be no assurance that payments
under state or federal governmental programs will remain at levels comparable
to present levels or will be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs, particularly
with respect to individual state-administered Medicaid programs, which
generally provide lower reimbursement rates than the Medicare program. In
addition, there can be no assurance that the facilities to be operated by the
Company and the services and supplies to be provided by the Company will meet
or continue to meet the requirements for participation in such programs.
DELAYS IN RECEIVING REIMBURSEMENT
The Company's financial condition and results of operations may also be
affected by the revenue reimbursement process, which in the Company's industry
is complex and can involve lengthy delays between the time that revenue is
recognized and the time that reimbursement amounts are settled. The Company's
results of operations would be materially and adversely affected if the amount
actually received from third-party payors in any reporting period differed
materially from the amounts accrued in prior periods. The Company's financial
condition and results of operations may also be affected by the timing of
reimbursement payments and rate adjustments from third-party payors. See
"Business--Government Regulations".
MEDICARE AND MEDICAID AUDITS AND REFORM
The Company is subject to periodic audits by the Medicare and Medicaid
programs, and the payment agencies for these programs have various rights and
remedies against the Company if they assert that the Company has failed to
comply with program requirements. In 1997, one of Summit's facilities was the
subject of a Medicare billing audit by such a payment agency, resulting in a
finding that approximately $1,500,000 of charges (after cost report settlement
and subject to downward adjustment) for SNF services lacked a timely
certification of medical necessity by a physician. Summit is currently
repaying such charges against reimbursement of current claims. Government
agencies could seek to require the Company to repay any overcharges or amounts
billed in violation of program requirements, or could make deductions from
future amounts due to the Company. Such agencies could also impose fines,
criminal penalties or program exclusions. See "Business--Government
Regulations".
In addition, several states are considering various healthcare reforms,
including Medicaid managed care demonstration projects. Several states in
which the Company operates have applied for, or received, approval from the
U.S. Department of Health and Human Services for waivers from certain Medicaid
requirements that have generally been required for managed care projects.
Although these demonstration projects generally exempt institutional care,
including long-term care facilities, no assurance can be given that these
waiver projects ultimately will not change the reimbursement system for long-
term care from fee for service to managed care negotiated or capitated rates.
Furthermore, the Balanced Budget Act now allows states to mandate enrollment
in managed care systems without going through the federal waiver process
provided certain standards are met. Although the Company believes it will be
well-positioned to operate in a managed care environment, it is not possible
to predict which reforms of state healthcare systems will be adopted and the
effect, if any, that the reforms will have on the Company's business. See
"Business--Government Regulations".
25
<PAGE>
Current Medicare regulations applicable to transactions between related
parties, such as the Company's subsidiaries, are relevant to the amount of
Medicare reimbursement that the Company is entitled to receive for goods and
services that are charged to the Medicare program. Management believes that
the Company satisfies the requirements for exception to the related party
rules in transactions between its long-term care facilities and its therapy,
pharmacy and DME subsidiaries. If, however, the Company has failed, or in the
future fails, to satisfy regulations for the related party exception with
respect to inter-corporate transactions, the Medicare reimbursement that the
Company received or will receive could be reduced, and as a result, the
Company's financial condition could be materially and adversely affected. See
"Business--Government Regulations".
UNCERTAINTY OF HEALTHCARE LEGISLATION
In addition to extensive government healthcare regulations, there are
numerous initiatives on federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services. Changes in
the law, new interpretations of existing laws, or changes in payment
methodology may have a dramatic effect on the definition of permissible or
impermissible activities, the relative costs associated with doing business
and the amount of reimbursement by the government. In addition, there can be
no assurance that currently proposed or future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have an adverse effect on the Company. See "Business--
Government Regulations".
DEVELOPMENT OF MANAGED CARE CONTRACTS IN RESPONSE TO PRICING PRESSURES
The healthcare services industry is currently experiencing market-driven
reforms from forces within and outside the industry that are exerting pressure
on healthcare and related companies to reduce healthcare costs. These market-
driven reforms are resulting in industry-wide consolidation that is expected
to increase the downward pressure on healthcare service providers' margins, as
larger buyer and supplier groups exert pricing pressure on healthcare
providers. Given the increasing importance of managed care in the healthcare
industry and the continued cost containment pressures for Medicare and
Medicaid, the Company is focusing on developing managed care contracts.
Additionally, the Company is establishing a network of services to meet the
needs of managed care organizations. The success of the Company's managed care
strategy will depend in large part on its ability to increase demand for sub-
acute services among managed care organizations, to obtain favorable
agreements with managed care organizations and to manage effectively its
operations and healthcare delivery costs through various methods, including
utilization management and competitive pricing for purchased services. There
can be no assurance that pricing pressures faced by healthcare providers will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
HEALTHCARE INDUSTRY EXTREMELY COMPETITIVE
The Company operates in a highly competitive industry. The Company's SNFs
and ALFs are located in communities that also are served by similar 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 are operated by non-profit
organizations or government agencies supported by endowments, charitable
contributions, tax revenues and other sources 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. In California, Texas and Arizona, a
certificate of need is no longer required in order to build or expand a SNF,
which is another factor increasing competition. However, in Texas, competition
is limited by
26
<PAGE>
restrictions on the number of beds that can be enrolled in the Medicaid
program. The Company also may encounter competition in acquiring or developing
new facilities. The Company's pharmacies and DME business also operate in
highly competitive environments and 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 may encounter competition in connection with the provision of other
ancillary services, including physical, occupational and speech therapy.
GEOGRAPHIC CONCENTRATION; DEPENDENCE ON CERTAIN STATE MEDICAID PROGRAMS
Approximately 54% of the Company's properties are located in the State of
California and approximately 44% are located in the State of Texas.
Consequently, the Company will be dependent on the economies of California and
Texas, the supply and demand in these states for the services provided by the
Company, the regulatory environment in these states and, to a certain extent,
on the continued funding of and reimbursement rates paid under those states'
Medicaid programs. During both 1996 and 1997, payments received from state
Medicaid agencies accounted for approximately 31% of the Company's revenue.
The Company expects that the California and Texas Medicaid reimbursement
programs will continue to constitute a significant source of revenue for the
Company. Adverse changes in general economic factors affecting these states'
respective healthcare industries or in these states' laws and regulatory
environment, including Medicaid reimbursement rates, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
LIABILITY, INSURANCE AND LEGAL PROCEEDINGS
The provision of healthcare services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have become
subject to an increasing number of lawsuits alleging malpractice or related
legal theories, many of which involve large claims and significant defense
costs. The Company currently maintains liability insurance intended to cover
such claims and the Company believes that its insurance is in keeping with
industry standards. There can be no assurance, however, that claims in excess
of the Company's insurance coverage or claims not covered by the Company's
insurance coverage (e.g. claims for punitive damages) will not arise. A
successful claim against the Company not covered by, or in excess of, the
Company's insurance coverage could have a material adverse effect upon the
Company's financial condition and results of operations. Claims against the
Company, regardless of their merit or actual outcome, may also have a material
adverse effect upon the Company's ability to attract patients or expand its
business and would require management to devote time to matters unrelated to
the operation of the Company's business. In addition, the Company's insurance
policies must be renewed annually. There can be no assurance that the Company
will be able to obtain liability insurance coverage in the future or that, if
such coverage is available, it will be available on acceptable terms.
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a number of key personnel, the loss of
which could have a material adverse effect on the Company. In addition, as the
Company's business develops and expands, the Company believes that its future
success will depend greatly on its continued ability to attract and retain
highly skilled and qualified personnel. Currently the Company has entered into
employment agreements with Mr. Snukal and Mrs. Snukal, and with Mr. Scott. See
"Management". The Company maintains key-man insurance on Mr. Snukal in the
amount of $5.0 million. There can be no assurance that key personnel will
continue to be employed by the Company or that the Company will be able to
attract and retain qualified personnel in the future. Failure by the Company
to retain or attract such personnel could have a material adverse effect on
the Company.
27
<PAGE>
CONTROLLING STOCKHOLDERS
As a result of the Transactions, Heritage and certain members of senior
management of the Company or their affiliates own approximately 68.6% of the
outstanding voting stock of the Company. By virtue of such ownership, these
stockholders have the power to control all matters submitted to stockholders
of the Company and to elect a majority of the directors of the Company and its
subsidiaries.
CONFLICTS OF INTEREST
Circumstances may occur in which the interests of the controlling
stockholders conflict with the interests of the holders of the Notes. For
example, if the Company encounters financial difficulties or is unable to pay
certain of its debts as they mature, the interests of such controlling persons
might conflict with those of holders of the Company's indebtedness, including
the Notes. In addition, these stockholders may have an interest in pursuing
acquisitions, divestitures or other transactions that, in their judgment,
enhance their equity investment, even though such transactions might involve
risks to the holders of the Notes. See "Principal Stockholders", "Management"
and "Certain Relationships and Related Transactions".
POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. Under the terms of the Stockholder Agreement, Heritage has the
right to cause a sale of the Company under certain circumstances, which would
constitute a Change of Control. See "Management--Stockholders Agreement".
However, there can be no assurance that sufficient funds will be available at
the time of any Change of Control to make any required repurchases of Notes
tendered or that restrictions in the New Credit Facility will allow the
Company to make such required repurchases. Notwithstanding these provisions,
the Company could enter into certain transactions, including certain
recapitalizations, that would not constitute a Change of Control but would
increase the amount of debt outstanding at such time. See "Description of
Notes--Repurchase at the Option of Holders".
EFFECT OF FRAUDULENT TRANSFER STATUTES ON VALIDITY OF NOTES AND GUARANTEES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company, or any Guarantor, at the time it incurred the indebtedness evidenced
by the Notes or the Guarantees, (i) (a) was or is insolvent or rendered
insolvent by reason of such incurrence or (b) was or is engaged in a business
or transactions for which the assets remaining with the Company or any
Guarantor constituted unreasonably small capital or (c) intended or intends to
incur, or believed or believes that it would incur debts beyond its ability to
pay such debts as they mature, and (ii) received or receives less than
reasonably equivalent value or fair consideration for the incurrence of such
indebtedness, then the Notes or the Guarantees, could be voided, or claims in
respect of the Notes or the Guarantees could be subordinated to all other
debts of the Company or any Guarantor. In addition, the payment of interest
and principal by the Company or any Guarantor pursuant to the Notes could be
voided and required to be returned to the person making such payment, or to a
fund for the benefit of the creditors of the Company or any Guarantor.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or any Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a
fair valuation or if the present fair saleable value of its assets were less
than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
mature or (ii) it could not pay its debts as they become due.
28
<PAGE>
On the basis of historical financial information, recent operating history
and other factors, the Company and the Guarantors believe that neither the
Company nor any Guarantor will be insolvent, will have unreasonably small
capital for the business in which it is engaged or will incur debts beyond its
ability to pay such debts as they mature. There can be no assurance, however,
as to what standard a court would apply in making such determinations or that
a court would agree with the Company's and the Guarantors' conclusions in this
regard.
CONSEQUENCES OF FAILURE TO EXCHANGE THE OUTSTANDING NOTES
The Outstanding Notes have not been registered under the Securities Act or
any state securities laws, and therefore, may not be offered, sold or
otherwise transferred except in compliance with the registration requirements
of the Securities Act and any other applicable securities laws, or pursuant to
an exemption therefrom or in a transaction not subject thereto, and in each
case in compliance with certain other conditions and restrictions, including
the right of the Company and the Notes Trustee (as defined) in certain cases
to require the delivery of opinions of counsel, certifications and other
information prior to any such transfer. Outstanding Notes that remain
outstanding after the consummation of the Exchange Offer will continue to bear
a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Outstanding Notes that remain
outstanding will not be entitled to any rights to have such Outstanding Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain
limited exceptions). The Company currently intends to register under the
Securities Act Outstanding Notes that remain outstanding after consummation of
the Exchange Offer only if such Outstanding Notes are held by Initial
Purchasers or persons ineligible to participate in the Exchange Offer (other
than due solely to the status of such holder as an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act). If Outstanding Notes
are tendered and accepted in the Exchange Offer, the market for untendered
Outstanding Notes is likely to diminish; accordingly, holders who do not
tender their Outstanding Notes may encounter difficulties in selling such
notes following the Exchange Offer. The Exchange Notes and any Outstanding
Notes that remain outstanding after consummation of the Exchange Offer will
constitute a single series of debt securities under the Indenture and,
accordingly, will vote together as a single class for purposes of determining
whether holders of the requisite percentage in outstanding principal amount of
the Notes have taken certain actions or exercised certain rights under the
Indenture.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Outstanding Notes were issued to, and the Company believes are currently
owned by, a relatively small number of beneficial owners. The Outstanding
Notes have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange Notes. See "--Consequences of Failure to Exchange". Although the
Exchange Notes will generally be permitted to be resold or otherwise
transferred by the holders (who are not affiliates of the Company) without
compliance with the registration and prospectus delivery requirements under
the Securities Act, they will constitute a new issue of securities with no
established trading market. If the Exchange Notes are traded after their
initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities and other factors including general economic conditions and the
financial condition of the Company. The Company does not intend to apply for a
listing or quotation of the Exchange Notes on any securities exchange or stock
market. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes. The liquidity of, and trading
market for, the Notes also may be adversely affected by general declines in
the market for similar securities. Such a decline may adversely affect such
liquidity and trading markets independent of the financial performance of, and
prospects for, the Company.
29
<PAGE>
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. Subject to certain provisions set forth in the Registration
Rights Agreement, the Company has agreed that, for a period of up to 180 days
after the consummation of the Exchange Offer, it will make this Prospectus
available to any participating broker-dealer for use in connection with any
such resale. However, under certain circumstance, the Company has the right to
require that participating broker-dealers suspend the resale of Exchange Notes
pursuant to this Prospectus. Notwithstanding that the Company may cause the
resale of Exchange Notes pursuant to this Prospectus to be suspended, the
Company has no obligation to extend the 180-day period referred to above
during which participating broker-dealers are entitled to use this Prospectus
in connection with such resales. See "The Exchange Offer--Procedures for
Tendering Outstanding Notes" and "Plan of Distribution".
STATE LAWS REGARDING PROHIBITION OF CORPORATE PRACTICE OF MEDICINE
The Company is a general business corporation. Corporations such as the
Company are not permitted under certain state laws to practice medicine or
exercise control over the medical judgments or decisions of practitioners.
Corporate practice of medicine laws and their interpretations vary from state
to state and are enforced by the courts and by regulatory authorities with
broad discretion. The Company believes that it performs only non-medical
services, does not represent to the public or its clients that it offers
medical services and does not exercise influence or control over the practice
of medicine by the practitioners with whom it deals. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the Company's
structure will not be challenged as constituting the unlicensed practice of
medicine or that the enforceability of the agreements underlying this
structure will not be limited. If such a challenge were made successfully in
any state, the Company could be subject to civil and criminal penalties under
such state's law. Such results could have a material adverse effect upon the
Company.
POTENTIAL "YEAR 2000" PROBLEMS
It is possible that the Company's currently installed computer systems,
software products or other business systems, including certain date dependent
medical equipment, or those of the Company's vendors or third-party payors,
working either alone or in conjunction with other software or systems, will
not accept input of, store, manipulate and output dates for the years 1999,
2000 or thereafter without error or interruption (commonly known as the "Year
2000" problem). The Company intends to conduct a review of its business
systems, including its computer systems, and query its vendors and third-party
payors as to their progress in identifying and addressing problems that their
computer systems may face in correctly interrelating and processing date
information as the year 2000 approaches and is reached. However, there can be
no assurance that the Company will identify all such Year 2000 problems in its
computer systems or those of its vendors or third-party payors in advance of
their occurrence or that the Company will be able to successfully remedy any
problems that are discovered. The expenses of the Company's efforts to
identify and address such problems, or the expenses or liabilities to which
the Company may become subject as a result of such problems, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, failure of the Company to identify and
remedy Year 2000 problems could put the Company at a competitive disadvantage
relative to companies that have corrected such problems.
30
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds of the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Outstanding Notes in like principal amount. The issuance of the Exchange Notes
in exchange for the surrender of the Outstanding Notes will not result in any
increase in the indebtedness of the Company.
The net proceeds of the sale of the Outstanding Notes were approximately
$114 million, after deducting discounts and commissions and expenses related
to the sale of the Outstanding Notes. The Company used the net proceeds of the
sale of the Outstanding Notes to consummate the Transactions, repay certain
existing indebtedness, pay certain fees and expenses in connection with the
Transactions and for general corporate purposes (see "Prospectus Summary--The
Financings").
CAPITALIZATION
The following table sets forth cash and cash equivalents and the
capitalization of Fountain View as of June 30, 1998, and of the Company as of
such date. The Summit acquisition and financing transactions were finalized as
of June 30, 1998. Accordingly, the June 30, 1998 balance sheet gives effect to
those transactions. This table should be read in conjunction with "Unaudited
Pro Forma Financial Data", "Selected Historical Financial and Other Data--
Fountain View", "Selected Historical Financial and Other Data--Summit",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------
ACTUAL
----------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 3,725
========
New Credit Facility(1)...................................... 101,161
Outstanding Notes........................................... 120,000
Mortgages, capital leases and other debt assumed............ 24,489
--------
Total debt................................................ 245,650
Mandatory redeemable preferred stock........................ 15,000
Shareholders' equity........................................ 70,059
--------
Total capitalization........................................ $330,709
========
</TABLE>
- --------
(1) The New Credit Facility provides for up to $30.0 million of revolving
credit borrowings (with a $4.0 million sublimit for letters of credit) and
up to $85.0 million of term loans and matures in 2004. As of June 30,
1998, revolving credit loans in the aggregate amount of approximately $16
million and term loans in the aggregate amount of approximately $85
million were outstanding under the New Credit Facility, and $14 million of
revolving credit borrowings were available to the Company.
31
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data for the six months ended
June 30, 1998 and for the year ended December 31, 1997 have been derived by
the application of pro forma adjustments to the financial statements of
Fountain View and Summit included elsewhere in this Prospectus. The Summit
acquisition and financing transactions were finalized as of June 30, 1998.
Accordingly, the June 30, 1998 balance sheet presented on pages F-15 and F-16
gives effect to these transactions and therefore a pro forma balance sheet is
not presented. The pro forma statement of operations data for the six months
ended June 30, 1998 give effect to the transactions as if they had occurred on
January 1, 1998. The pro forma statement of operations data for the year ended
December 31, 1997 give effect to (1) the Transactions and (2) the acquisition
of Briarcliff, a SNF acquired by Summit on December 1, 1997, as if each had
occurred as of January 1, 1997. The adjustments are described in the
accompanying notes.
The pro forma adjustments are based on available data and certain
assumptions that management believes are reasonable. The unaudited pro forma
financial data do not purport to represent what the Company's results of
operations actually would have been if the transactions described above had
been consummated as of the dates or for the periods indicated above, or what
such results will be for any future date or future period. The unaudited pro
forma data should be read in conjunction with "Selected Historical Financial
and Other Data--Fountain View", "Selected Historical Financial and Other
Data--Summit", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included elsewhere in this Prospectus.
32
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRIARCLIFF
11 MONTHS
FOUNTAIN SUMMIT CARE ENDED PRO FORMA
VIEW, INC. CORPORATION 11/30/97 TOTAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $67,905 $211,346 $7,893 $287,144 $ -- $287,144
Expenses:
Salaries and related
benefits............. 38,215 93,933 3,100 135,248 -- 135,248
Supplies.............. 8,293 20,040 644 28,977 -- 28,977
Purchased services.... 4,256 53,587 70 57,913 -- 57,913
Provision for doubtful
accounts............. 395 3,343 858 4,596 -- 4,596
Other expenses........ 5,046 16,948 1,542 23,536 -- 23,536
Depreciation and
amortization......... 1,198 7,996 688 9,882 4,190 (1) 14,072
Rent expense.......... 2,004 2,979 -- 4,983 -- 4,983
Rent expense to
related parties...... 1,771 -- -- 1,771 -- 1,771
Interest, net......... 1,164 8,504 11 9,679 13,645 (2) 23,324
------- -------- ------ -------- -------- --------
62,342 207,330 6,913 276,585 17,835 294,420
------- -------- ------ -------- -------- --------
Income (loss) before
provision for
income taxes........... 5,563 4,016 980 10,559 (17,835) (7,276)
Income tax benefit
(provision)............ (1,951) (1,631) (402) (3,984) 6,838 (3) 2,854
------- -------- ------ -------- -------- --------
Net income (loss)....... 3,612 2,385 578 6,575 (10,997) (4,422)
Preferred stock
dividends.............. -- -- -- -- (1,800)(4) (1,800)
------- -------- ------ -------- -------- --------
Net income (loss)
available to common
shareholders........... $ 3,612 $ 2,385 $ 578 $ 6,575 $(12,797) $ (6,222)
======= ======== ====== ======== ======== ========
Basic and diluted earn-
ings per share avail-
able to common share-
holders................ $ 18.06 $ (31.11)
======= ========
OTHER DATA:
EBITDA (as defined)(5).. $ 30,120
Adjusted EBITDA(6)...... 37,795
Adjusted EBITDA margin.. 13.2%
Adjusted EBITDAR(6)..... 44,549
Adjusted EBITDAR margin. 15.5%
Ratio of earnings to
fixed charges(7)....... --
Ratio of Adjusted EBITDA
to net interest
expense................ 1.6
Ratio of net debt to
Adjusted EBITDA(8)..... 6.3
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
33
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUMMIT CARE
CORPORATION
PERIOD FROM
FOUNTAIN JANUARY 1 TO PRO FORMA
VIEW, INC. MARCH 26,1998 TOTAL ADJUSTMENTS PRO FORMA
---------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Patient Service
Revenues............... $88,369 $ 53,918 $ 142,287 $ -- $ 142,287
------- -------- --------- ------- ---------
Total Revenue 88,369 53,918 142,287 -- 142,287
Expenses:
Salaries and benefits. 44,467 23,632 68,099 -- 68,099
Supplies.............. 9,534 5,165 14,699 -- 14,699
Purchased services.... 13,102 13,743 26,845 -- 26,845
Provision for doubtful
accounts............. 768 624 1,392 -- 1,392
Other expenses........ 6,310 3,851 10,161 -- 10,161
Rental................ 2,682 723 3,405 -- 3,405
Depreciation and
amortization......... 3,934 2,119 6,053 1,099 (1) 7,152
Interest, net of
Interest Income...... 6,219 2,604 8,823 2,376 (2) 11,199
------- -------- --------- ------- ---------
87,016 52,461 139,477 3,475 142,952
------- -------- --------- ------- ---------
Income before provision
for income taxes....... 1,353 1,457 2,810 (3,475) (665)
Income tax benefit
(provision)............ (541) (575) (1,116) 1,306 (3) 190
Extraordinary Item, net
of tax................. (517) -- (517) -- (517)
------- -------- --------- ------- ---------
Net income (loss)....... 295 882 1,177 (2,169) (992)
Preferred stock
dividends.............. (355) -- (355) (545)(4) (900)
------- -------- --------- ------- ---------
Net income (loss)
available to common
shareholders........... $ (60) $ 882 $ 822 $(2,714) $ (1,892)
======= ======== ========= ======= =========
Basic and diluted earn-
ings per share avail-
able to common share-
holders before
extraordinary item..... $ 0.66 $ (2.01)
Basic and diluted loss
per share available to
common shareholders--
extraordinary item..... (0.75) (0.75)
------- ---------
Basic and diluted
earnings per share
available to common
shareholders--net
income (loss).......... $ (0.09) $ (2.76)
======= =========
OTHER DATA:
EBITDA (as defined)(5).. $ 17,686
Adjusted EBITDA......... 17,686
Adjusted EBITDA mar-
gin(6)................. 12.4%
Adjusted EBITDAR(6)..... 21,091
Adjusted EBITDAR margin. 14.8%
Ratio of earnings to
fixed charges(7)....... --
Ratio of Adjusted EBITDA
to net interest
expense................ 1.6
Ratio of net debt to Ad-
justed EBITDA(8)....... 6.8
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) Pro forma adjustments to reflect the step-up in basis of property, plant
and equipment and intangible assets, in connection with the Summit Care
Corporation acquisition:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
AMORTIZATION DECEMBER 31, ENDED
PERIOD 1997 MARCH 31, 1998(A)
------------ ----------------- -----------------
<S> <C> <C> <C>
Increase in amortization of
deferred financing costs.. 10 years $ 1,414 $ 353
Increase in amortization of
goodwill.................. 35 years 1,157 289
Increase in depreciation of
buildings, leaseholds and
equipment................. 5-35 years 1,619 457
------- ------
$ 4,190 $1,099
======= ======
(a) Represents the period prior to the completion of the Summit Care
Corporation acquisition.
(2) Reflects additional interest on debt as follows:
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1997 MARCH 31, 1998(A)
------------ -----------------
<S> <C> <C> <C>
Interest on the New Credit
Facility--
Term Loan (8.44%)(b)...... $ 7,171 $ 1,792
Interest on New Credit
Facility--
Revolver (8.44%).......... 1,265 316
Interest on Notes offered
hereby (11.25%)........... 13,500 3,375
Interest on capital leases
and other existing debt
(various rates)........... 2,037 509
---------- -------
Total interest expense..... 23,974 5,992
Net historical interest
(gross of interest
expense).................. (10,329) (3,616)
---------- -------
Incremental interest....... $ 13,645 $ 2,376
========== =======
</TABLE>
(a) Represents the period prior to the completion of the financing.
(b) Interest with respect to the New Credit Facility, for both the Term
Loan and the Revolver, is computed on a floating rate based on LIBOR
plus 2.75%. A 0.125% increase in the interest rate on the New Credit
Facility would result in additional interest expense of $125 and would
reduce net income by $74 for the year ended December 31, 1997.
(3) Represents incremental income tax benefit relating to amortization of
deferred financing costs, depreciation and interest expense at an
incremental rate of 41%.
(4) Represents the preferred stock dividend of 12% computed on the $15 million
of mandatory redeemable preferred stock.
(5) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. In addition, EBITDA may not be comparable to similarly
titled measures of other companies. EBITDA may not be indicative of the
historical operating results of the Company, nor is it meant to be
predictive of future results of operations or cash flows.
(6) For the year ended December 31, 1997, Adjusted EBITDA represents EBITDA
adjusted for certain non-recurring charges shown below. Adjusted EBITDAR
represents Adjusted EBITDA plus rent expense. EBITDAR is not a measurement
of operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a
35
<PAGE>
measure of profitability or liquidity. Similar to EBITDA, management views
EBITDAR as a financial indicator of a company's ability to service or incur
debt. A majority of Fountain View's nursing homes are leased, under
operating leases, and not owned. Accordingly, EBITDAR is used since the
rent expense approximates the interest and depreciation expense Fountain
View may have incurred as if the nursing homes were owned as opposed to
leased:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
EBITDA.................................................... $30,120
Non-recurring charges(a).................................. 7,675
-------
Adjusted EBITDA(b)........................................ 37,795
Rent expense.............................................. 6,754
-------
Adjusted EBITDAR(b)....................................... $44,549
=======
</TABLE>
(a) EBITDA is adjusted for the non-recurring entries in order to present
comparable EBITDA with the preceding years since these entries are only
reflected in the results of operations for the year ended December 31,
1997 for Fountain View and for the six months ended December 31, 1997
for Summit. In addition, the Company does not expect to incur similar
costs in the future. Non-recurring charges consist of: (1) $2,100 of
Medicare reserves taken by Summit due to adjustments proposed by the
Medicare intermediary during their audit of prior year cost reports.
The adjustments relate to issues not proposed by the Medicare
intermediary during previous audits and therefore the one time impact
relating to these adjustments for prior year cost reports is all
reflected in the results of operations for the year ended December 31,
1997 when the cost reports were audited and finalized with the Medicare
intermediary; (2) $1,074 of retroactive workers' compensation, group
and general liability costs due to the recording of tail coverage
insurance expense at the time Summit converted from an occurrence based
insurance policy to a claims made insurance policy; (3) $983 of
incremental bad debt expense relating to 1996 and prior periods
recorded in 1997 resulting from a change in management's methodology
for determining the allowance for bad debts; the change in methodology
was made to convert Summit's allowance methodology accounting practices
to Fountain View's accounting as a result of the acquisition; (4)
termination of non-compete agreements and consulting arrangements
totaling $965 relating to Fountain View Equity Transactions; (5)
certain transaction expenses including discretionary employee bonuses
totaling $872 paid upon completion of Fountain View Equity
Transactions; (6) severance for an executive and other costs totaling
$871, the severance package was paid in connection with the acquisition
of Summit by Fountain View; and (7) $810 related to an employee lawsuit
settled in 1997 involving a specific type of liability for which the
Company currently maintains insurance coverage (net of ongoing
insurance costs).
(b) Management believes that as a consequence of the Transactions, the
Company will realize significant ongoing cost savings and revenue
enhancements. However there can be no assurance that these cost savings
or revenue enhancements will be realized. Management's estimate of the
ongoing cost reductions relating to the Transactions includes: (i)
certain reductions in facility-level operating expense items totaling
$1,451; (ii) $1,355 relating to the elimination of specifically
identified duplicative staff; (iii) $512 relating to reductions in
corporate expenses, including the elimination of certain public company
expenses; and (iv) a reduction in costs of supplies. Such amounts have
not been included in adjusted EBITDA or adjusted EBITDAR.
(7) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges consists of interest expense and one-third of operating rental
expense, which management believes is representative of the interest
component of rent expense. Earnings were not sufficient to cover fixed
charges. The amount of the shortfall approximated $7.3 million for the pro
forma year ended December 31, 1997 and $0.6 million for the pro forma six
months ended June 30, 1998.
(8) Ratio of net debt to Adjusted EBITDA represents the ratio of total debt,
exclusive of mandatory redeemable preferred stock, less cash and cash
equivalents to Adjusted EBITDA.
36
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA--FOUNTAIN VIEW
Set forth below are selected historical financial data of Fountain View as
of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997, which are derived from the audited financial
statements included elsewhere herein. The selected historical financial data
as of December 31, 1993, 1994 and 1995, for the two years in the period ended
December 31, 1994 and for the six months ended June 30, 1997 and 1998 have
been derived from Fountain View's unaudited financial statements included
elsewhere herein, and, in the opinion of management, include all necessary
adjustments for a fair presentation of such information in conformity with
generally accepted accounting principles. The selected historical financial
data below should be read in conjunction with "Capitalization", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net revenue............. $41,061 $51,824 $55,836 $59,432 $ 67,905 $33,423 $ 88,369
Salaries and related
benefits............... 23,248 27,823 35,048 36,166 38,215 18,638 44,467
Other operating costs... 10,884 14,886 13,454 14,614 17,990 8,525 29,714
Depreciation and
amortization........... 110 149 416 600 1,198 366 3,934
Rent expense............ 4,002 4,017 3,946 3,896 3,775 1,879 2,682
Interest, net........... 307 355 332 278 1,164 30 6,219
------- ------- ------- ------- -------- ------- --------
38,551 47,230 53,196 55,554 62,342 29,438 87,016
------- ------- ------- ------- -------- ------- --------
Income before provision
for income taxes and
extraordinary item..... 2,510 4,594 2,640 3,878 5,563 3,985 1,353
Income tax benefit
(provision)............ (81) 43 (54) (78) (361) (50) (541)
Extraordinary item, net
of tax................. -- -- -- -- -- -- (517)
------- ------- ------- ------- -------- ------- --------
Net income.............. 2,429 4,637 2,586 3,800 5,202 3,935 295
Preferred stock
dividends.............. -- -- -- -- -- -- (355)
------- ------- ------- ------- -------- ------- --------
Net income (loss)
available to common
shareholders........... $ 2,429 $ 4,637 $ 2,586 $ 3,800 $ 5,202 $ 3,935 $ (60)
======= ======= ======= ======= ======== ======= ========
Basic and diluted
earnings per share
available to common
shareholders--before
extraordinary item(5).. $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 19.68 $ 0.66
Basic and diluted loss
per share available to
common shareholders--
extraordinary item..... -- -- -- -- -- -- (.75)
------- ------- ------- ------- -------- ------- --------
Basic and diluted
earnings per share
available to common
shareholders--net
income................. $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 19.68 $ (0.09)
======= ======= ======= ======= ======== ======= ========
OTHER FINANCIAL DATA
EBITDA(1)............... $ 2,927 $ 5,098 $ 3,388 $ 4,756 $ 7,925 $ 4,381 $ 11,506
EBITDA margin........... 7.1% 9.8% 6.1% 8.0% 11.7% 13.1% 13.0%
EBITDAR(1).............. $ 6,929 $ 9,115 $ 7,334 $ 8,652 $ 11,700 $ 6,260 $ 14,188
EBITDAR margin.......... 16.9% 17.6% 13.1% 14.6% 17.2% 18.7% 16.1%
Capital expenditures.... $ 8 $ 537 $ 665 $ 1,816 $ 2,570 $ 1,380 $ 3,244
Ratio of earnings to
fixed charges(2)....... 2.5x 3.7x 2.6x 3.5x 3.3x 7.1x 1.2x
Net cash provided by
(used in) operating
activities............. $(1,804) $ 908 $ 5,832 $ 1,059 $ 12,739 $ 8,603 $(18,492)
OTHER DATA
Number of facilities
(end of period)........ 9 9 9 9 9 9 50
Average licensed
beds(3)................ 1,061 1,061 1,061 1,061 1,061 1,061 5,937
Total beds (end of
period)................ 1,227 1,227 1,227 1,227 1,227 1,227 6,578
Patient days (in
thousands)............. 337 345 341 344 346 170 576
Average occupancy
rate(4)................ 87.0% 89.1% 88.1% 88.8% 89.3% 89.3% 87.5%
Percentage of revenues
from:
Managed care, private
pay and medicare..... 58.4% 65.1% 67.2% 69.7% 72.9% 69.8% 65.1%
Medicaid.............. 41.6 34.9 32.8 30.3 27.1 30.2 34.9
BALANCE SHEET DATA (END
OF PERIOD)
Cash and cash
equivalents............ $ 465 $ 629 $ 2,355 $ 1,161 $ 2,551 -- 3,725
Working capital......... 8,266 11,140 10,334 13,566 10,021 -- 27,434
Total assets............ 14,408 18,433 24,693 24,122 25,941 -- 408,555
Total debt, including
current maturities and
excluding redeemable,
preferred stock........ 6,758 7,359 6,764 666 30,076 -- 245,650
Shareholders' equity
(deficit).............. 5,570 9,399 9,957 16,601 (12,236) -- 70,059
</TABLE>
37
<PAGE>
- --------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. In addition, EBITDA may not be comparable to similarly
titled measures of other companies. EBITDA may not be indicative of the
historical operating results of the Company, nor is it meant to be
predictive of future results of operations or cash flows. EBITDAR
represents EBITDA plus rent expense. EBITDAR is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. Similar to EBITDA, management views EBITDA as a financial
indicator of a company's ability to service or incur debt. A majority of
Fountain View's nursing homes are leased, under operating leases, and not
owned. Accordingly, EBITDAR is used since the rent expense approximates
the interest and depreciation expense Fountain View may have incurred as
if the nursing homes were owned as opposed to leased.
(2) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges consists of interest expense and one-third of operating rental
expense, which management believes is representative of the interest
component of rent expense.
(3) Excludes ALF beds.
(4) Excludes Fountain View's ALF, which represents less than 2% of total
revenue.
(5) Weighted average shares outstanding for the five years ended December 31,
1997 and for the three months ended March 31, 1997 has been computed based
on the 200,000 shares of Common Stock issued and outstanding in connection
with the Fountain View Equity Transactions. See note 2 to the consolidated
financial statements of Fountain View included elsewhere herein.
38
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA--SUMMIT
Set forth below are selected historical financial data of Summit as of and
for each of the five years in the period ended June 30, 1997, which are
derived from Summit's audited financial statements. The selected historical
financial data for the six months ended December 31, 1996 and 1997 have been
derived from Summit's unaudited financial statements included elsewhere herein
and, in the opinion of management, include all necessary adjustments for a
fair presentation of such information in conformity with generally accepted
accounting principles. The selected historical financial data below should be
read in conjunction with "Capitalization", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- -------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net revenue............. $83,992 $ 97,599 $137,026 $176,062 $197,927 $95,088 $108,507
Salaries and related
benefits............... 40,044 45,962 63,171 78,233 89,577 43,386 47,742
Other operating costs... 29,998 34,655 49,206 70,696 89,932 41,750 45,736
Depreciation and
amortization........... 2,308 2,949 5,249 6,142 7,393 3,632 4,235
Rent expense............ 2,315 1,613 2,141 2,656 2,864 1,410 1,525
Interest, net........... 1,080 2,243 4,761 6,574 7,973 4,057 4,588
------- -------- -------- -------- -------- ------- --------
75,745 87,422 124,528 164,301 197,739 94,235 103,826
------- -------- -------- -------- -------- ------- --------
Income before provision
for income taxes....... 8,247 10,177 12,498 11,761 188 853 4,681
Income tax provision.... (3,224) (4,010) (4,987) (4,452) (119) (337) (1,849)
------- -------- -------- -------- -------- ------- --------
Net income.............. $ 5,023 $ 6,167 $ 7,511 $ 7,309 $ 69 $ 516 $ 2,832
======= ======== ======== ======== ======== ======= ========
OTHER FINANCIAL DATA
EBITDA(1)............... $11,635 $ 15,369 $ 22,508 $ 24,477 $ 15,554 $ 8,542 $ 13,504
EBITDA margin........... 13.9% 15.7% 16.4% 13.9% 7.9% 9.0% 12.4%
EBITDAR(1).............. $13,950 $ 16,982 $ 24,649 $ 27,133 $ 18,418 $ 9,952 $ 15,029
EBITDAR margin.......... 16.6% 17.4% 18.0% 15.4% 9.3% 10.5% 13.9%
Capital expenditures.... $29,901 $ 15,505 $ 9,004 $ 26,558 $ 24,075 $12,049 $ 6,706
Ratio of earnings to
fixed charges(2)....... 5.5x 4.7x 3.3x 2.6x 1.0x 1.2x 1.9x
Net cash provided by
operating activities .. $ 4,186 $ 7,512 $ 7,014 $ 6,866 $ 18,015 $ 3,563 $ 7,793
OTHER DATA
Number of facilities
(end of period)........ 21 23 37 38 39 39 41
Average licensed beds... 2,696 2,876 4,197 4,816 5,078 5,065 5,154
Total beds (end of
period)................ 2,696 3,002 4,762 4,940 5,040 -- 5,347
Patient days (in
thousands)............. 858 908 1,316 1,514 1,573 783 827
Average occupancy rate.. 87.2% 86.5% 85.9% 85.9% 84.8% 84.0% 87.2%
Percentage of revenues
from:
Managed care and
private pay.......... 36.5% 34.0% 33.8% 31.9% 29.9% 30.5% 31.6%
Medicare.............. 28.3 30.3 29.5 34.7 39.7 39.1 36.7
Medicaid.............. 35.2 35.7 36.7 33.4 30.4 30.4 31.7
BALANCE SHEET DATA (END
OF PERIOD)
Cash and cash
equivalents............ $ 6,301 $ 21,613 $ 3,101 $ 2,658 $ 3,994 -- $ 1,702
Working capital......... 7,151 24,880 10,161 13,906 12,648 -- 11,384
Total assets............ 73,369 114,915 184,480 223,052 250,516 -- 267,420
Total debt and capital
leases, including
current maturities..... 30,331 32,025 89,788 110,374 121,452 -- 129,754
Shareholders' equity.... 31,337 66,361 73,813 81,286 81,412 -- 84,721
</TABLE>
39
<PAGE>
- --------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. In addition, EBITDA may not be comparable to similarly
titled measures of other companies. EBITDA may not be indicative of the
historical operating results of the Company, nor is it meant to be
predictive of future results of operations or cash flows. EBITDAR
represents EBITDA plus rent expense. EBITDAR is not a measurement of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. Similar to EBITDA, management views EBITDA as a financial
indicator of a company's ability to service or incur debt. A majority of
Fountain View's nursing homes are leased, under operating leases, and not
owned. Accordingly, EBITDAR is used since the rent expense approximates
the interest and depreciation expense Fountain View may have incurred as
if the nursing homes were owned as opposed to leased.
(2) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges consists of interest expense and one-third of operating rental
expense, which management believes is representative of the interest
component of rent expense.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW--THE COMPANY
The Company's business consists of the combined operations of Fountain View
and Summit. At June 30, 1998, the Company operated 50 facilities in
California, Texas and Arizona with approximately 6,600 skilled nursing and
assisted living beds, three institutional pharmacies (one of which is a joint
venture), a contract therapy company, an outpatient therapy clinic and a DME
company.
The Company generates revenues by providing basic healthcare services and
specialty medical care. Basic healthcare services refer to (i) skilled nursing
care which consists of room and board, special nutritional programs, social
services, recreational activities and related medical services, and (ii)
assisted living services which consist of room and board, social activities
and assistance with activities of daily living such as dressing and bathing.
Specialty medical care includes services other than routine skilled nursing
care and are provided to patients who generally require more intensive
treatment and a higher level of acute care. Specialty medical care also
includes sub-acute services such as therapy, pharmacy and durable medical
equipment, which the Company provides to both affiliated and unaffiliated
facilities. Since the services comprising specialty medical care are
reimbursed at higher rates as compared to basic healthcare services, specialty
medical care generally represents the most profitable type of services offered
by the Company. On a pro forma basis for the twelve months ended December 31,
1997, specialty medical revenues represented 55% of total revenues.
The Company provides services to Medicare, Medicaid, managed care and
private pay patients. Government payors, such as state-administered Medicaid
programs, generally provide more restricted coverage and lower reimbursement
rates than private pay and managed care payors. On a pro forma basis for the
twelve months ended December 31, 1997, revenues from Medicare and Medicaid
payors represented 36% and 31% of total revenues, respectively. Management
believes the Company is well-positioned to benefit from the trend toward
increased enrollment in managed care organizations by providing sub-acute
specialty medical care on a cost-effective basis, offering managed care
organizations an attractive alternative to acute hospital care.
On a prospective basis, the Company will operate on a December 31 fiscal
year end. Summit's historical results of operations, which were based on a
June 30 fiscal year end, have not been restated for the purpose of any pro
forma financial presentation of the Company's historical operations.
In July 1997, Fountain View's predecessor, which was comprised of all of
Fountain View's operating units owned individually by certain controlling
stockholders, was merged with and into several companies formed by Fountain
View in connection with the Fountain View Equity Transactions. The Fountain
View Equity Transactions are described in more detail in Note 3 to the audited
financial statements of Fountain View contained elsewhere in this Prospectus.
41
<PAGE>
RESULTS OF OPERATIONS--FOUNTAIN VIEW
The following table presents Fountain View's results of operations for the
six months ended June 30, 1997 and 1998 and the three years ended December 31,
1997:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------------------------------------------- ---------------------------------
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
------------------------- ---------------- ------------------- ------------
1995 1996 1997 1997 1998 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $55,836 $59,432 $67,905 $33,423 $88,369 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries and related
benefits............... 35,048 36,166 38,215 18,638 44,467 62.8 60.9 56.3 55.7 50.3
Other operating costs... 13,454 14,614 17,990 8,525 29,714 24.1 24.5 26.5 25.5 33.6
Rent expense............ 3,946 3,896 3,775 1,879 2,682 7.1 6.6 5.5 5.7 3.0
Depreciation and
amortization........... 416 600 1,198 366 3,934 0.7 1.0 1.8 1.1 4.6
Interest, net........... 332 278 1,164 30 6,219 0.6 0.5 1.7 .1 7.0
------- ------- ------- ------- ------- ----- ----- ----- ----- -----
$53,196 $55,554 $62,342 $29,438 $87,016 95.3% 93.5% 91.8% 88.1% 98.5%
------- ------- ------- ------- ------- ----- ----- ----- ----- -----
Income before provision
for income taxes and
extraordinary item..... 2,640 3,878 5,563 3,985 1,353 4.7 6.5 8.2 11.9 1.5
Income tax provision.... (1,079) (1,571) (1,951) (50) (541) (1.9) (2.6) (2.9) 0.1 (0.6)
Extraordinary Item...... -- -- -- -- (517) -- -- -- -- (0.6)
------- ------- ------- ------- ------- ----- ----- ----- ----- -----
Net income.............. $ 1,561 $ 2,307 $ 3,612 $ 3,935 $ 295 2.8% 3.9% 5.3% 11.8% 0.3%
======= ======= ======= ======= ======= ===== ===== ===== ===== =====
OCCUPANCY:
Average Licensed Beds........................................... 1,061 1,061 1,061
Patient Days (in thousands)..................................... 341 344 346
Average Occupancy............................................... 88.1% 88.8% 89.3%
</TABLE>
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997 (DOLLARS
IN THOUSANDS)
Net revenue increased $51,277 or 301.4% from $17,014 for the quarter ended
June 30, 1997 to $68,291 for the quarter ended June 30, 1998. Substantially
all of the increase was due to the acquisition of Summit.
Average occupancy was 86.4% in the quarter ended June 30, 1998 and 84.4% in
the quarter ended June 30, 1997. The Company's quality mix (total net revenues
less Medicaid net revenues) was 65.1% in the quarter ended June 30, 1998 and
69.8% in the quarter ended June 30, 1997.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net
revenues increased from 83.3% of net revenues in the quarter ended June 30,
1997 to 84.8% in the quarter ended June 30, 1998. Expenses increased $43,739
or 308.6% from $14,172 in the quarter ended June 30, 1997 to $57,911 in the
quarter ended June 30, 1998. 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 $7,538 or 265.2% from $2,842 in the quarter
ended June 30, 1997 to $10,380 in the quarter ended June 30, 1998 and was
15.2% of net revenues in the quarter ended June 30, 1998 compared to 16.7% in
the quarter ended June 30, 1997.
42
<PAGE>
Rent, rent to related parties, depreciation and amortization and interest
expense increased $9,305 or 793.9% from $1,172 in the quarter ended June 30,
1997 to $10,477 in the quarter ended June 30, 1998. Substantially all of this
increase was due to higher depreciation 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.
The Company's effective tax rate was 40.2% of income in the quarter ended
June 30, 1998. In the quarter ended June 30, 1997 the Company was organized as
a Subchapter S Corporation for tax purposes and only recorded state income
taxes. On a proforma basis, the Company has recorded a charge in lieu of
income taxes to arrive at a combined proforma effective tax rate of 39.1%. Net
income after the proforma charge in lieu of income taxes, decreased $1,064
from $1,006 in the quarter ended June 30, 1997 to a net loss of $58 in the
quarter ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net revenues increased $54,946 or 164.4% from $33,423 in the six months
ended June 30, 1997 to $88,369 in the six months ended June 30, 1998.
Substantially all of the increase was due to the acquisition of Summit.
Average occupancy was 86.4% in the six months ended June 30, 1998 and 84.6%
in the six months ended June 30, 1997. The Company's quality mix (total net
revenues, less Medicaid net revenues) was 66.6% in the six months ended June
30, 1998 and 72.0% in the six months ended June 30, 1997.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net
revenues increased from 81.3% of net revenues in the six months ended June 30,
1997 to 83.9% in the six months ended June 30, 1998. Expenses increased
$47,018 or 173.1% from $27,163 in the six months ended June 30, 1997 to
$74,181 in the six months ended June 30, 1998. 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 $7,928 or 126.6% from $6,260 in the six months
ended June 30, 1997 to $14,188 in the six months ended June 30, 1998 and was
16.1% of net revenues in the six months ended June 30, 1998 compared to 18.7%
in the six months ended June 30, 1997.
Rent, rent to related parties, depreciation and amortization and interest
expense increased by $10,560 or 464.2% from $2,275 in the six months ended
June 30, 1997 to $12,835 in the six months ended June 30, 1998. 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.
The Company's effective tax rate was 40.0% of income in the six months ended
June 30, 1998. In the six months ended June 30, 1997 the Company was organized
as a Subchapter S Corporation for tax purposes and only recorded state income
taxes. On a proforma basis, the Company has recorded a charge in lieu of
income taxes to arrive at a combined proforma effective tax rate of 39.1%. Net
income after the proforma charge in lieu of income taxes, decreased $2,100
from $2,395 in the six months ended June 30, 1997 to $295 in the six months
ended June 30, 1998.
43
<PAGE>
Selected statistics are shown below:
<TABLE>
<CAPTION>
INCREASE
1998 1997 (DECREASE)
----- ----- -----------
<S> <C> <C> <C>
Facilities in operation at:
March 31.......................................... 50 9 41
June 30........................................... 50 9 41
Nursing center beds at:
March 31.......................................... 5,937 1,061 4,876
June 30........................................... 5,937 1,061 4,876
Assisted living beds at:
March 31.......................................... 641 166 475
June 30........................................... 641 166 475
Total beds at:
March 31.......................................... 6,578 1,227 5,351
June 30........................................... 6,578 1,227 5,351
Total occupancy:
First quarter..................................... 86.6% 84.9% 1.7%
Second quarter.................................... 86.4% 84.4% 2.0%
Nursing center occupancy:
First quarter..................................... 89.4% 89.8% (0.4)%
Second quarter.................................... 87.5% 89.3% (1.8)%
Assisted living center occupancy:
First quarter..................................... 67.4% 53.7% 13.7%
Second quarter.................................... 76.1% 52.8% 23.3%
Percentage of revenues from private, managed care
and Medicare (quality mix):
First quarter..................................... 72.0% 72.8% (0.8)%
Second quarter.................................... 65.1% 69.8% (4.7)%
Percentage of revenues from Medicaid:
First quarter..................................... 28.0% 27.2% 0.8%
Second quarter.................................... 34.9% 30.2% 4.7%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $3,725 in cash and cash equivalents and
working capital of $27,434. During the six months ended June 30, 1998, the
Company's cash and cash equivalents increased by $1,174.
Net cash provided by operating activities decreased $27,095 from $8,603 of
net cash provided in the first six months of 1997 to $18,492 net cash used in
the first six months of 1998. Net cash used by operating activities during the
six months ended June 30, 1998 was primarily due to a reduction in accounts
payable and accrued liabilities primarily related to costs associated with the
acquisition of Summit and an increase in accounts receivable.
Long-term debt totaling $239,619 at June 30, 1998, consisted of mortgage and
capital lease obligations of $19,708, a term-loan credit facility of $83,750,
borrowings on the Company's bank line of credit of $16,161 and $120,000 in
senior subordinated notes.
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 $6,031, to make normal recurring capital replacements,
additions and improvements of approximately $5,000 planned for the next
12 months and to meet other long-term working capital needs and obligations.
The Company expects,
44
<PAGE>
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.
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 costs increases in a timely fashion.
Recent Accounting Pronouncements
See Note 6 to Consolidated Financial Statements.
1997 COMPARED TO 1996 (DOLLARS IN THOUSANDS)
Net revenue increased from $59,432 in 1996 to $67,905 in 1997, an increase
of $8,473 or 14.3%. The increase in net revenue is 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. Fountain View's quality mix (percentage of revenues from Medicare,
Medi-Cal sub-acute, managed care, private pay patients and therapy) as a
percentage of total revenues increased from 69.7% in 1996 to 72.9% in 1997.
The increase in net revenue was also attributable to increased revenues
generated by Fountain View's Locomotion Therapy subsidiary.
Expenses consisting of salaries, benefits, supplies, purchased services,
provision for doubtful accounts and other operating costs increased from
$50,780 in 1996 to $56,205 in 1997, an increase of $5,425 or 10.7%, and as a
percentage of net revenue, decreased from 85.4% in 1996 to 82.8% in 1997.
Salary and related benefit expenses 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, salary and related benefit expenses decreased as a
percentage of net revenue from 60.9% in 1996 to 56.3% in 1997, reflecting the
revenue benefit of improvement in Fountain View's quality mix relative to the
level of increased salary expenses associated therewith. Other operating costs
increased as the result of the termination of non-compete agreements and
consulting agreements relating to the Fountain View Equity Transactions
totaling $965, $810 (net of ongoing insurance costs) 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.
Rent expense, depreciation and amortization and interest expense, net of
interest income, was $6,137 in 1997 compared to $4,774 in 1996, an increase of
$1,363 or 28.6%. The increase was primarily due to increased 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.
Fountain View's pro forma effective tax rate was 40% in both 1996 and 1997.
Prior to the Fountain View Equity Transactions, the entities comprising
Fountain View were owned individually by certain controlling stockholders, and
were primarily formed as S-corporations. The pro forma effective tax rate
represents the estimated taxes had such companies been taxed as C-
corporations.
45
<PAGE>
1996 COMPARED TO 1995 (DOLLARS IN THOUSANDS)
Net revenue increased from $55,836 in 1995 to $59,432 in 1996, an increase
of $3,596 or 6.4%. The increase in net revenue relates primarily to revenues
generated by Medi-Cal sub-acute units established in two facilities and a
transitional care unit opened in one facility during 1996. Net revenue also
increased as the result of higher revenues from managed care patients, which
are typically reimbursed at higher rates than Fountain View's private or
Medicaid patients.
Expenses consisting of salaries, benefits, supplies, purchased services,
provision for doubtful accounts and other expenses increased from $48,502 in
1995 to $50,780 in 1996, an increase of $2,278 or 4.7%. However, salary and
related benefit expenses decreased from 62.8% in 1995 to 60.9% in 1996 as a
percentage of net revenue, reflecting the benefit of an increase in revenues
from managed care patients relative to the level of increased salary expenses
associated therewith.
Rent expense, depreciation and amortization and interest expense, net of
interest income, was $4,774 in 1996 compared to $4,694 in 1995, an increase of
$80 or 1.7%.
Fountain View's pro forma effective tax rate was 40% in both 1995 and 1996.
Prior to the Fountain View Equity Transactions, the entities comprising
Fountain View were owned individually by certain controlling stockholders and
were primarily formed as S-corporations. The pro forma effective tax rate
represents the estimated taxes had such companies been taxed as C-
corporations.
HISTORIC LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
Cash and cash equivalents were $2,551 as of December 31, 1997, and working
capital was $10,021. This compares to cash and cash equivalents of $1,161 and
working capital of $13,566 as of December 31, 1996. Working capital declined
primarily as a result of the Fountain View Equity Transactions and payment of
a $43,700 distribution to certain controlling stockholders in August 1997.
Proceeds of $14,000 from an investment by Heritage and $32,500 in bank
borrowings financed the $43,700 distribution and payment of related
transaction costs.
Cash generated from operating activities increased to $12,739 in 1997
compared to $1,059 in 1996 and $5,832 in 1995. The increased level of cash
from operating activities in 1997 as compared to 1996 reflects differences in
the timing of receiving payments on accounts receivable, primarily managed
care and Medicare balances. Receivables increased by $3,757 in 1996, and
decreased by $2,908 in 1997. The combination of the increase in receivables in
1996 and decrease in 1997 resulted in a variance of $6,665 in cash from
operations between such periods. In addition, accounts payable and accrued
expenses increased by $2,772 in 1997 compared to an increase in 1996 of $421.
In 1997, $2,570 of cash was used for the acquisition of leasehold
improvements and purchases of equipment compared to $1,816 and $665 used in
1996 and 1995, respectively, for the acquisition of leaseholds and equipment.
Cash used in financing activities was $7,604 in 1997 compared to $438 in
1996 and $3,159 in 1995. In 1997, $32,500 of new bank borrowings and $14,000
of proceeds from an investment by Heritage were used to repay $6,065 in bank
borrowings and $48,118 in total distributions to certain stockholders
inclusive of the $43,700 distribution made in connection with the Fountain
View Equity Transactions.
46
<PAGE>
RESULTS OF OPERATIONS--SUMMIT
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996 (DOLLARS IN THOUSANDS)
Net revenues increased $13,419 or 14.1% from $95,088 for the six months
ended December 31, 1996 to $108,507 for the six months ended December 31,
1997. The increase occurred due to the following:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------- -------
<S> <C> <C>
1. Increased census days and revenue rates.................. $ 4,874 36.3%
2. Special charge to Medicare revenues...................... 4,000 29.8
3. New beds opened in fiscal years 1997 and 1998............ 3,973 29.6
4. Pharmacy operations...................................... 1,406 10.5
5. Rehabilitative and other specialty services.............. (834) (6.2)
------- -----
$13,419 100.0%
======= =====
</TABLE>
In December 1996, Summit recorded a special charge of $4,000 against
Medicare revenues as a result of adjustments proposed by Medicare in
connection with an audit of fiscal 1995, which would have an effect on
revenues for that fiscal year, fiscal 1996 and the six months ended December
31, 1996. Average occupancy was 87.2% in the six months ended December 31,
1997 and 84.0% in the six months ended December 31, 1996. Excluding newly
constructed beds, the average occupancy was 90.3% in the six months ended
December 31, 1997 and 85.9% in the six months ended December 31, 1996.
Summit's quality mix (revenues from Medicare, managed care and private pay
patients, including pharmacy revenue) as a percentage of gross revenues was
68.3% in the six months ended December 31, 1997 and 69.6% in the six months
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, before the effect of the special charge, increased from 85.9% of net
revenues in the six months ended December 31, 1996 to 86.1% in the six months
ended December 31, 1997. Total salaries and employee related benefits were
44.0% of net revenues in the six months ended December 31, 1997 compared to
43.8% of net revenues, before the effect of the special charge, in the six
months ended December 31, 1996.
Expenses increased $8,342 or 9.8% from $85,136 in the six months ended
December 31, 1996 to $93,478 in the six months ended December 31, 1997 for the
following reasons:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------ -------
<C> <S> <C> <C>
1. Expenses relating to new beds opened in fiscal years
1997 and 1998.......................................... $3,232 38.7%
2. Salaries and benefits................................... 2,776 33.3
3. Other expenses.......................................... 1,540 18.5
4. Rehabilitative and other specialty services............. 794 9.5
------ -----
$8,342 100.0%
====== =====
</TABLE>
Income before rental, depreciation and amortization and interest expense,
net of interest income, increased $5,077 or 51.0% from $9,952 in the six
months ended December 31, 1996 to $15,029 in the six months ended December 31,
1997 and was 13.9% of net revenues in the six months ended December 31, 1997
compared to 10.5% in the six months ended December 31, 1996 (and 14.1% of net
revenues before the special charge to revenues).
Rent, depreciation and amortization and interest expense, net of interest
income, increased by $1,249 or 13.7% from $9,099 in the six months ended
December 31, 1996 to $10,348 in the six months ended December 31, 1997.
Substantially all of this increase was due to interest expense related to
higher debt and depreciation expense related to capital additions.
47
<PAGE>
Summit's effective tax rate was 39.5% of income in the six months ended
December 31, 1997 and in the six months ended December 31, 1996. Net income
increased $2,316 from $516 in the six months ended December 31, 1996 to $2,832
in the six months ended December 31, 1997. The net income of $516 for the six
months ended December 31, 1996 included $2,420 for the special charge
described earlier. Net income before the special charge, decreased $104 or
3.5% from $2,936 in the six months ended December 31, 1996 to $2,832 in the
six months ended December 31, 1997.
1997 COMPARED TO 1996 (DOLLARS IN THOUSANDS)
Net revenues increased $21,865 or 12.4% from $176,062 in fiscal 1996 to
$197,927 in fiscal 1997. The increase occurred due to the following:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------- -------
<S> <C> <C>
1. Rehabilitative and other specialty services.............. $ 7,553 34.6%
2. New beds opened in fiscal years 1996 and 1997............ 12,450 56.9
3. Increased census days and revenue rates.................. 5,647 25.8
4. Pharmacy operations...................................... 2,315 10.6
5. Special charge to Medicare revenue....................... (6,100) (27.9)
------- -----
$21,865 100.0%
======= =====
</TABLE>
The special charge to Medicare revenues reflects the result of adjustments
proposed by Medicare in connection with an audit of fiscal 1995, which would
have an effect on revenues for that fiscal year, fiscal 1996 and fiscal 1997.
Average occupancy was 84.8% in the fiscal year ended June 30, 1997 compared to
85.9% in the fiscal year ended June 30, 1996. Excluding newly constructed
beds, the average occupancy was 87.0% in the fiscal year ended June 30, 1997
and 86.4% in the fiscal year ended June 30, 1996. Summit's quality mix
(revenues from Medicare, managed care and private pay patients, including
pharmacy revenue) patients as a percentage of gross revenues was 69.6% in the
fiscal year ended June 30, 1997 and 66.6% in the fiscal year ended June 30,
1996.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts and other expenses as a percent of net
revenues, before the effect of the special charge, increased from 84.6% of net
revenues in the fiscal year ended June 30, 1996 to 88.0% in the fiscal year
ended June 30, 1997. Total salaries and employee related benefits were 43.9%
of net revenues, before the effect of the special charge, in the fiscal year
ended June 30, 1997 compared to 44.4% of net revenues in the fiscal year ended
June 30, 1996. Purchases of rehabilitative and other specialty services were
25.3% of net revenues, before the effect of the special charge, in the fiscal
year ended June 30, 1997 compared to 21.6% of net revenues in the fiscal year
ended June 30, 1996. Expenses increased $30,580 or 20.5% from $148,929 in the
fiscal year ended June 30, 1996 to $179, 509 in the fiscal year ended June 30,
1997 for the following reasons:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------- -------
<C> <S> <C> <C>
1. Rehabilitative and other specialty services............ $ 8,680 28.4%
2. Expenses relating to new beds opened in fiscal years
1996 and 1997......................................... 11,529 37.7
3. Salaries and benefits.................................. 6,612 21.6
4. Other expenses......................................... 3,759 12.3
------- -----
$30,580 100.0%
======= =====
</TABLE>
Income before rental, depreciation and amortization and interest expense,
net of interest income, decreased $8,715 or 32.1% from $27,133 in the fiscal
year ended June 30, 1996 to $18,418 in the fiscal year ended June 30, 1997 and
was 9.3% of net revenues in the fiscal year ended June 30, 1997 (and 12.0% of
net revenues before the special charge to revenues) compared to 15.4% in the
fiscal year ended June 30, 1996.
48
<PAGE>
Rental, depreciation and amortization and interest expense, net of interest
income, increased by $2,858 or 18.6% from $15,372 in the fiscal year ended
June 30, 1996 to $18,230 in the fiscal year ended June 30, 1997. The increase
was primarily due to depreciation of additions to property and equipment and
interest expense related to higher long-term debt.
Summit's effective tax rate was 63.3% of income in the fiscal year ended
June 30, 1997 compared to 37.9% of income in the fiscal year ended June 30,
1996. The increase in the effective tax rate was primarily due to certain
permanent differences between book income and taxable income. Net income was
$69 for the fiscal year ended June 30, 1997, a decrease of $7,240 or 99.1%
from $7,309 for the fiscal year ended June 30, 1996.
1996 COMPARED TO 1995 (DOLLARS IN THOUSANDS)
Net revenues increased $39,036 or 28.5% from $137,026 in fiscal 1995 to
$176,062 in the fiscal year 1996. The increase occurred due to the following:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------- -------
<S> <C> <C>
1. Acquisitions in fiscal year 1995.......................... $13,228 33.9%
2. Rehabilitative and other specialty services............... 11,527 29.5
3. Increased census days and revenue rates................... 8,017 20.5
4. New beds opened in fiscal years 1995 and 1996............. 3,614 9.3
5. Pharmacy operations....................................... 2,650 6.8
------- -----
$39,036 100.0%
======= =====
</TABLE>
Average occupancy was 85.9% in the fiscal years ended June 30, 1996 and
1995, and new beds were opened in both fiscal years. Excluding acquisitions
and newly constructed beds, the average occupancy was 88.4% in the fiscal year
ended June 30, 1996 and 89.0% in the fiscal year ended June 30, 1995. Summit's
quality mix (revenues from Medicare, managed care and private pay patients,
including pharmacy revenue) as a percentage of gross revenues was 66.6% in the
fiscal year ended June 30, 1996 and 63.3% in the fiscal year ended June 30,
1995.
Expenses, consisting of salaries and benefits, supplies, purchased
services, provision for doubtful accounts and other as a percent of net
revenues increased from 82.0% of net revenues in the fiscal year ended June
30, 1995 to 84.6% in the fiscal year ended June 30, 1996. Total salaries and
employee related benefits were 44.4% of net revenues in the fiscal year ended
June 30, 1996 compared to 46.1% of net revenues in the fiscal year ended June
30, 1995. Expenses increased $36,552 or 32.5% from $112,377 in the fiscal year
ended June 30, 1995 to $148,929 in the fiscal year ended June 30, 1996 for the
following reasons:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------- -------
<C> <S> <C> <C>
1. Rehabilitative and other specialty services............ $10,906 29.8%
2. Acquisitions in fiscal year 1995....................... 10,454 28.6
3. Salaries and benefits.................................. 7,592 20.8
4. Expenses relating to new beds opened in fiscal years
1995 and 1996......................................... 3,202 8.8
5. Other expenses......................................... 4,398 12.0
------- -----
$36,552 100.0%
======= =====
</TABLE>
Income before rental, depreciation and amortization and interest expense,
net of interest income, increased $2,484 or 10.1% from $24,649 in the fiscal
year ended June 30, 1995 to $27,133 in the fiscal year ended June 30, 1996 and
was 15.4% of net revenues in the fiscal year ended June 30, 1996 compared to
18.0% in the fiscal year ended June 30, 1995.
49
<PAGE>
Rental, depreciation and amortization and interest expense, net of interest
income, increased by $3,221 or 26.5% from $12,151 in the fiscal year ended
June 30, 1995 to $15,372 in the fiscal year ended June 30, 1996. Substantially
all of this increase was due to depreciation and amortization, rent and
interest expense related to acquisitions and newly constructed beds in fiscal
years 1995 and 1996.
Summit's effective tax rate was 37.9% of income in the fiscal year ended
June 30, 1996 and 39.9% of income in the fiscal year ended June 30, 1995. Net
income after taxes decreased $202 or 2.7% from $7,511 in the fiscal year ended
June 30, 1995 to $7,309 in the fiscal year ended June 30, 1996.
HISTORIC LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
At June 30, 1997, Summit had $3,994 in cash and cash equivalents and working
capital of $12,648. For the fiscal year ended June 30, 1997, Summit's cash and
cash equivalents increased by $1,336 over the prior year.
Net cash provided by operating activities increased $11,149 from $6,866 for
the fiscal year ended June 30, 1996 to $18,015 for the fiscal year ended June
30, 1997. Net cash provided by operating activities, plus proceeds of $15,000
in new long-term debt (see description below) were used principally for
capital expenditures of $24,075 for new and existing centers, the net
reduction of loans outstanding on the line of credit of $1,000, the purchase
of a lease option for $2,022, and the acquisition of a 50% interest in an
institutional pharmacy for $1,565.
Accounts receivable, less allowance for doubtful accounts, increased $5,819
due to increased total revenues in the fiscal year ended June 30, 1997
compared to the prior year, primarily in Medicare and managed care revenues.
At June 30, 1997, Summit's average accounts receivable days outstanding were
41, compared to 39 at June 30, 1996.
For the fiscal year ended June 30, 1997, Summit added $24,075 to its
property and equipment. These additions were primarily for the completion of a
210-bed SNF in Fort Worth, Texas, at a cost of $2,300, construction of a 66-
bed ALF in Orange, California, at a cost of $3,525, and the renovation of
buildings and replacement of furniture and equipment at the remaining centers
and the pharmacies, at a cost of $18,250.
These additions to property and equipment were primarily financed with funds
from $15,000 of Senior Secured Notes issued in July 1996 and with cash
generated from operations. The $15,000 funding represents the second and last
issuance of the $70,000 Senior Secured Notes. The initial funding of $55,000
occurred in December 1995.
Summit 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 $6,997 (Summit intends to borrow this amount against its
bank line of credit which has a revolver extending to September 30, 1998
followed by a three-year payment period), to make normal recurring capital
replacements, additions and improvements to existing centers of approximately
$9,100 planned for the next twelve months, to develop properties costing
approximately $3,000 over the next twelve months, to purchase a 111-bed center
for $1,871 in accordance with a purchase option in a lease and to meet other
long-term working capital needs and obligations. The loans outstanding on the
line of credit at June 30, 1997 were $5,000. Summit 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.
50
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY FOLLOWING THE TRANSACTIONS
(DOLLARS IN THOUSANDS)
Interest payments on the Notes and any borrowings under the New Credit
Facility will represent significant liquidity requirements for the Company.
Any future borrowings under the New Credit Facility will bear interest at
floating rates and will require interest payments on varying dates depending
on the interest rate option selected by the Company. See "Description of Other
Indebtedness--New Credit Facility".
The Company's remaining liquidity demands will be primarily for capital
expenditures and working capital needs. The Company expects to spend
approximately $4.5 million on capital projects in 1998, with approximately
$4.0 million of that amount representing maintenance-related capital
expenditures. The Company currently expects to spend a similar amount on
capital expenditures in fiscal 1999. The New Credit Facility and the Indenture
will impose restrictions on the Company's investments.
The Company's primary sources of liquidity are expected to be cash flows
from operations and borrowings under the New Credit Facility. See "Description
of Other Indebtedness--New Credit Facility". Approximately $16.0 million is
available to be drawn by the Company under the New Credit Facility. In
addition, the Company has approximately $14.0 million in revolving credit
loans and $85.0 million in term loans outstanding under the New Credit
Facility. See "Description of Other Indebtedness--New Credit Facility".
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), 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 the New Credit Facility, will be
adequate to meet the Company's future liquidity needs for at least the next
several years. The Company may, however, need to refinance all or a portion of
the principal of the Notes on or prior to maturity. 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 the New Credit
Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect
any such refinancing on commercially reasonable terms or at all. See "Risk
Factors".
51
<PAGE>
BUSINESS
THE COMPANY
The 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. The Company operates a network
of facilities in California, Texas and Arizona, including 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. In addition to long-term care, the Company 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. The Company also operates three institutional pharmacies (one of
which is a joint venture), which service acute care hospitals as well as SNFs
and ALFs both affiliated and unaffiliated with the Company, an outpatient
therapy clinic and a DME company. The Company operates 50 facilities with
approximately 6,600 beds serving Medicare, Medicaid, managed care, private pay
and other patients.
Both Fountain View and Summit have demonstrated records of revenue growth,
increasing average census (occupancy) levels and improvements in quality mix
(defined as non-Medicaid revenues). During the five fiscal years ended 1997,
revenues for Fountain View and Summit increased at compound annual growth
rates of 13.1% and 27.1%, respectively. During the same period, average census
levels at Fountain View facilities increased from 87.0% to 89.3%, quality mix
increased from 58.4% to 72.9% and net income increased from $2.4 million to
$5.2 million. Average census levels at Summit facilities (excluding three
facilities which commenced operations or were renovated in 1996 or later)
increased from 87.2% for the year ended June 30, 1993 to 88.7% for the six
months ended December 31, 1997, quality mix increased from 64.8% to 69.6%
during the four fiscal years ended 1997 and net income was $5.0 million for
the year ended June 30, 1993 and $2.8 million for the six months ended
December 31, 1997. The Company had revenues of $88.3 million, an average
census level of 86.4% (excluding three Summit facilities which commenced
operations or were renovated in 1996 or later), a quality mix of 65.1% and net
income of $295,000 for the six months ended June 30, 1998.
Management believes that the Company's strong operating performance has been
supported by the Company's ability to (i) provide high-quality, high-acuity
care, (ii) utilize an efficient cost structure, (iii) operate a network of
attractive, modern facilities, (iv) maintain a leading market position and
(v) capitalize on the extensive experience of its management.
The Company intends to pursue a strategy of further increasing its revenues
and profitability by capitalizing on the relative strengths of Fountain View
and Summit. In implementing its strategy, the Company expects to (i) further
increase the proportion of revenues derived from high-acuity specialty medical
services, (ii) broaden the implementation of its cost-effective operating
model, (iii) expand its ancillary services businesses, (iv) pursue controlled
expansion through construction and acquisition-related growth, and (v)
capitalize on benefits derived from the Transactions.
COMPANY HISTORY
Fountain View was founded in 1964 and originally operated two nursing homes
in Los Angeles, California. Fountain View has expanded the size and scope of
its core long-term care business by acquiring facilities and by introducing
ancillary services to existing operations. Since 1982, the business has grown
from two facilities to nine, with each facility providing a broad array of
specialty medical care. Fountain View was one of the first operators of long-
term care facilities to receive a contract with Medi-Cal to provide sub-acute
care and currently has 36 beds in two facilities dedicated to providing Medi-
Cal patients with sub-acute services (which are eligible for significantly
higher per diem reimbursement rates than standard Medi-Cal per diem
reimbursement rates). Fountain View's
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nine facilities have a total of 1,227 beds, of which 1,061 are dedicated to
serving skilled nursing patients and 166 of which comprise an ALF. Each of
Fountain View's facilities is located in close proximity to a hospital,
facilitating patient referrals. Many of Fountain View's skilled nursing
patients have been discharged from acute care hospitals and require medically
complex treatments. Fountain View has placed strategic emphasis on providing
higher-acuity care while simultaneously developing a cost-effective operating
model. Fountain View, through Locomotion Therapy, also provides physical,
occupational and speech therapy to unaffiliated nursing homes and acute care
hospitals as well as several Fountain View facilities. Fountain View also owns
an outpatient therapy clinic company and a DME business.
Summit was incorporated in 1981 as a wholly-owned subsidiary of Summit
Health Ltd., an operator of acute care hospitals. Summit provides diversified
nursing, specialty medical and sub-acute care at 36 owned or leased SNFs as
well as assisted living services at five ALFs located in California, Texas and
Arizona. Summit currently operates 36 SNFs with a total of 4,872 beds. Within
its SNFs, Summit has established separate units for specialty medical and sub-
acute care dedicated to patients requiring complex services such as
chemotherapy, pulmonary and cardiac care, wound care, respiratory therapy and
intensive physical, occupational and speech therapies. Summit also operates
five ALFs with a total of 475 beds which include certain beds designated as
specialty beds, primarily for early-stage Alzheimer's residents. Summit also
operates two institutional pharmacies in Southern California and owns a 50%
interest in a pharmacy in Texas through a joint venture. The pharmacies
provide pharmaceutical products and services to all of Summit's facilities as
well as to unaffiliated SNFs, ALFs and acute care hospitals in Southern
California and Texas, including certain Fountain View facilities.
INDUSTRY
In 1997, nursing home spending was approximately $85 billion and is expected
to reach more than $100 billion by the year 2000, representing an average
annual increase of approximately 6.1%. Demand for long-term care facilities is
expected to continue to increase substantially as the result of cost
containment initiatives, demographic and social trends as well as industry
consolidation.
COST CONTAINMENT INITIATIVES. During the past several years, Medicare
managed care enrollment has grown to more than 14% nationwide. The trend
toward managed care in the Medicare population is particularly evident in
California, where approximately 35% of Medicare enrollees were participating
in a managed care program during 1996. Cost containment initiatives developed
by managed care plans have contributed to shorter hospital stays for acute
care patients. Because acute care patients often still require medically
complex treatments following discharge from a hospital, management believes
that SNFs will experience increased demand for high-acuity services, which are
typically eligible for higher reimbursement rates. In addition, management
believes that certain SNFs will further develop the ability to offer
attractive rates to third-party payors for high-acuity specialty medical
services primarily as the result of the significantly lower overhead costs
generated by SNFs relative to acute care hospitals and hospital-based SNFs.
Labor costs are also generally lower in SNFs than in hospitals, which
typically have higher staffing ratios, higher salary structures, and
significantly more administrative personnel, including nursing staff resources
not fully dedicated to providing care.
DEMOGRAPHIC TRENDS. Demand for long-term care services rises meaningfully
among persons over the age of 75, an age group that has been growing and is
projected to continue growing significantly faster than the overall population
according to the United States Bureau of the Census. This increase in the
elderly portion of the population reflects, among other things, improvements
in medical technology, disease prevention, nutrition and overall health
maintenance. The segment of the population over 85 years of age, which
comprises the largest percentage of long-term care residents, is the fastest-
growing segment of the population and is projected to increase by more than
19.4% from approximately 3.6 million or 1.4% of the domestic population in
1995 to approximately 4.3 million or
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1.6% of the domestic population in the year 2000. By 2010, the population of
this segment is expected to be approximately 5.7 million, representing more
than a 58% increase from 1995.
SOCIAL TRENDS. Two-income families often experience significant challenges
in providing home care for elderly relatives. Management believes that ALFs
will continue to experience increased demand as working families seek
attractive alternatives to home care for the elderly. Additionally, management
believes demand for higher-acuity services in long-term care facilities has
contributed to the perception of SNFs as an increasingly attractive
alternative to a wide range of potential patients.
INDUSTRY CONSOLIDATION. Currently, approximately 1.7 million people receive
care in approximately 17,000 long-term care facilities in the United States.
Market share data indicates that the industry is highly fragmented, with the
30 largest operators accounting for less than 25% of total beds. Management
believes that consolidation initiatives by industry participants have been
structured to achieve economies of scale and to create networks of facilities
that can be effectively marketed to managed care organizations. As a result,
management expects that consolidation will continue among smaller local
operators which lack sophisticated management information systems, high-acuity
services necessary to remain attractive to acute patients and the ability to
maintain strict compliance with complex regulations which govern the long-term
care industry.
COMPANY STRENGTHS
ABILITY TO PROVIDE HIGH-QUALITY AND HIGH-ACUITY CARE. Management believes
that the Company's strong operating performance has been supported by the
Company's ability to provide a broad range of high-quality, high-acuity
services which are generally more profitable than routine healthcare services.
Pro forma for the Transactions, revenues from sub-acute and specialty medical
care would have represented 55% of the Company's total revenues for the year
ended December 31, 1997. The Company currently serves Medicare, Medicaid,
managed care, private pay and other patients by providing a continuum of sub-
acute and specialty medical care, which consists of ventilator services,
tracheotomy care, multiple intravenous therapy, chemotherapy,
enteral/parenteral nutrition, end-stage renal disease care, blood
transfusions, dialysis, wound care, rehabilitation services, pharmacy services
and the provision of durable medical equipment. In addition, both Fountain
View and Summit have responded to the increased demand for Alzheimer's care by
broadening their specialty medical care to include Alzheimer's units in a
total of 21 facilities.
Management believes that the Company's facilities provide services similar
to those provided in acute care hospitals for approximately 40% to 60% of the
costs generated by acute care hospitals in providing such services. As a
result, management believes the Company will increase revenues by continuing
to attract managed care payors and is well-positioned to benefit from growing
managed care enrollment levels.
EFFICIENT OPERATOR AND COST-EFFECTIVE PROVIDER. Management believes it has
developed significant expertise in delivering high-quality, high-acuity care
through the implementation of an efficient and cost-effective operating model.
Developed within the Fountain View network of facilities, management believes
this model has produced high levels of efficiency and facility-level EBITDAR
through the application of specific operating initiatives. EBITDAR is not a
measurement of operating performance computed in accordance with generally
accepted accounting principles and should not be considered as a substitute
for operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability or
liquidity. Similar to EBITDA, management views EBITDAR as a financial
indicator of a company's ability to service or incur debt. A majority of
Fountain View's nursing homes are lease, under operating leases, and not
owned. Accordingly, EBITDAR is used since the rent expense approximates the
interest and depreciation expense Fountain View may have
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<PAGE>
incurred as if the nursing homes were owned as opposed to leased. Management
intends to expand its cost-effective operating model to maximize profitability
and the quality of care provided across the Company's entire facility network.
ATTRACTIVE, MODERN FACILITY NETWORK. Management believes the Company's
facilities are in excellent aesthetic and operational condition as the result
of recent comprehensive construction and renovation initiatives. Summit has
expended more than $180 million over the past five years constructing,
acquiring, expanding and upgrading facilities, and Fountain View has spent
more than $4 million on facility improvements during the past two years.
Approximately 80% of the Company's facilities were either constructed or
renovated within the past three years. Management believes the Company's
attractive and modern facility network will continue to support high average
census and quality mix levels. In addition, management believes that the
Company's recent construction and renovation initiatives will facilitate
improvements in operating efficiency and reductions in maintenance capital
expenditure levels. The Company owns 56% of its facilities (representing 70%
of its beds) and holds options to purchase an additional 10% of its
facilities, providing the Company with an attractive asset base, enhanced
credit quality and increased financial flexibility.
LEADING MARKET POSITION. Management believes the Company will operate as a
leading provider of long-term and specialty medical care in several Southern
California and Texas markets. The Company's Southern California facilities are
strategically located in geographically clustered networks which management
believes are particularly attractive to managed care organizations. Management
believes the Company is well-positioned to benefit from California's rapidly
increasing managed care enrollment levels, which included 35% of Medicare
enrollees during 1996 as compared to a nationwide enrollment level of 14% as
of July 1997. The Company also expects that the increased density of its
Southern California market presence as a result of the Transactions will
result in heightened brand awareness, expanded referral networks, operating
and administrative economies of scale as well as improved purchasing
economies.
In addition to the Company's geographically clustered networks in Southern
California, the Company operates a broad network of facilities in small to
mid-size markets in Texas. Management believes the Company's Texas facilities
are located in several demographically attractive markets and are generally
characterized by leading market positions. In addition to the Company's strong
local market presence in both Southern California and Texas, management
believes the Company will be subject to a relatively low level of direct
competition from any single large competitor due to the considerable
fragmentation which characterizes the Company's markets.
STRONG MANAGEMENT TEAM. Mr. Scott, the Chairman of the Company, and Mr.
Snukal, the Chief Executive Officer of the Company, together have more than 43
years of senior management experience in the long-term care industry in
Southern California and Texas. Mr. Scott has supervised significant expansion
in the number of Summit's facilities and services through strategic
acquisitions and construction. Mr. Snukal has demonstrated expertise in
developing Fountain View's ability to provide specialty medical and sub-acute
care in a cost-effective manner, and achieving strong facility-level operating
and financial performance. Both Mr. Scott and Mr. Snukal will maintain
significant involvement in the daily operations of the Company and have made
significant equity contributions to the Company in connection with the
Transactions. See "Prospectus Summary--The Transactions".
BUSINESS STRATEGY
FURTHER INCREASE PROPORTION OF REVENUES DERIVED FROM SPECIALTY MEDICAL
CARE. The Company intends to leverage its existing specialty medical
infrastructure, further increasing the proportion of total revenues derived
from specialty medical care. On a pro forma basis for the twelve months ended
December 31, 1997, specialty medical revenues represented 55% of total
revenues. Services comprising specialty medical care generally represent the
most profitable types of services
55
<PAGE>
offered by long-term care providers since such services are reimbursed at
higher rates than routine skilled nursing care and basic assisted living
services. As a result of the trend toward shorter hospital stays by patients
who require medically complex treatments and in order to deliver the highest
quality care possible to its residents, the Company has developed significant
expertise and experience caring for high-acuity patients. The Company's
ability to provide high-acuity specialty medical and sub-acute care in its own
facilities generates substantial revenue for the Company and benefits managed
care payors by reducing hospital costs and by eliminating costs incurred by
transferring patients to acute care hospitals to receive specialty medical
care.
BROADEN IMPLEMENTATION OF COST-EFFECTIVE OPERATING MODEL. Management intends
to expand the Company's cost-effective operating model to maximize
profitability and the quality of care provided across the Company's
facilities. Management believes that expanded implementation of a well-
designed and well-monitored operating model will enhance the quality and
consistency of care delivered and improve profitability by simplifying
procedures for administering care.
EXPAND ANCILLARY SERVICES. The Company intends to increase the penetration
of its therapy and pharmacy businesses within both affiliated and unaffiliated
facilities. Ancillary services generally have produced higher revenues and
profitability than routine long-term care services. The Company currently
provides rehabilitative physical, occupational and speech therapy through
Locomotion Therapy. Locomotion Therapy generated $19.7 million of revenues for
the year ended December 31, 1997, providing services to unaffiliated nursing
homes and acute care hospitals under 97 contracts and to eight Fountain View
facilities. Management expects Locomotion Therapy to expand its provision of
services to Summit facilities, which purchased approximately $34 million of
therapy services from nonaffiliates during fiscal 1997. The Company also
intends to pursue increased "bundling" of ancillary services, offering a
unique package of rehabilitative and pharmacy services to unaffiliated
facilities in a cost-efficient manner. In addition to providing ancillary
therapy services, the Company operates three institutional pharmacies (one of
which is a joint venture), a DME company and an outpatient therapy clinic
through its subsidiary, On-Track. Several of Summit's facilities have
existing, unoccupied space allocated to outpatient therapy services which the
Company expects to utilize for the expansion of services provided by On-Track.
PURSUE CONTROLLED EXPANSION THROUGH CONSTRUCTION AND ACQUISITION-RELATED
GROWTH. The Company intends to acquire and construct facilities selectively in
strategic locations which will facilitate operating efficiencies through
economies of scale, will generate marketing synergies through further
expansion of relationships and contracts with hospitals, physicians and
physician groups and will lead to reduced overhead expenditures. The Company
expects to acquire or construct new beds and facilities in a cost-effective
manner, including expansion initiatives which utilize real estate currently
owned by the Company. The Company currently owns properties adjacent to
several facility locations which management believes can support the
construction of approximately 1,400 additional beds at reduced cost levels
relative to the expense associated with acquisition and development of new
real estate.
CAPITALIZE ON BENEFITS DERIVED FROM THE TRANSACTIONS. As a result of the
Transactions, management believes the Company will be able to realize
significant cost savings. As a result of the Company's contiguous geographic
locations in several Southern California markets, management intends to
eliminate specifically identified corporate expenses and leverage
administrative resources across facilities. Management believes the Company
will be able to reduce its cost of food, sanitary and medical supplies as a
result of improved purchasing power and expects the Company to realize
marketing and referral benefits as a result of the increased geographic
density of the Company's clustered facilities. In addition, the Company
expects to expand its provision of services through Locomotion Therapy to
Summit facilities, which purchased approximately $34 million of therapy
services from nonaffiliates during 1997.
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<PAGE>
SERVICES
BASIC HEALTHCARE SERVICES
Basic healthcare services refer to skilled nursing care and assisted living
services. The Company provides skilled nursing care in each of Fountain View's
eight SNFs and in each of Summit's 36 SNFs (which collectively have 5,933
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
Fountain View in its ALF and by Summit in its five ALFs, all of which are
located in California and 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.
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
veinous access. The Company's licensed nurses are intravenous therapy
certified and skilled in initiating and handling central and peripheral
lines for intravenous medications.
BLOOD TRANSFUSIONS. The Company provides blood transfusions to post-
surgical patients with severe and unresolved anemia. Blood products for
transfusion are obtained through a contract with the American Red
Cross.
CHEMOTHERAPY. The Company provides chemotherapy to patients in
accordance with instructions by attending hematologists/oncologists for
the treatment of various cancers. Chemotherapy requires strict and
careful handling of highly toxic chemotherapy agents.
DIALYSIS. Peritoneal dialysis is typically provided to younger
patients who can perform their own dialysis treatments, utilizing
specialized solutions which are introduced through a peritoneal cavity
port. Whenever possible, patients are taught to perform the procedure
themselves upon discharge from the Company's facility. In addition, the
Company provides hemodialysis to qualified patients.
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.
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<PAGE>
Physical therapists aid in the debridement of necrotic wounds with jet
lavage or pulsed irrigation and whirlpool treatments. Electrical
stimulation is used to encourage the growth of healthy tissue.
ENTERAL/PARENTERAL NUTRITION. Patients who are unable to eat for
various reasons may receive enteral or parenteral feeding. The
Company's registered dietitians periodically review the nutritional
needs of each patient.
TRACHEOTOMY CARE. The Company provides care to patients who, due to
any number of conditions, cannot maintain a clear or adequate airway
and have undergone a tracheotomy. These patients often require
mechanical ventilator support. All such patients require frequent
suctioning and humidified oxygen and aggressive pulmonary
rehabilitation.
VENTILATOR CARE. Many patients who have undergone a tracheotomy also
require mechanical ventilation. In treating such patients, the Company
utilizes a ventilator which mechanically regulates the breathing
function of the patient by dictating the volume and/or the rates of
inhalation and exhalation. The Company's licensed nurses and
respiratory therapists oversee a ventilator weaning program under the
direction of a pulmonologist.
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 address the problems of disorientation and perceptual confusion
experienced by Alzheimer's sufferers.
THERAPY SERVICES. Many of the Company's patients that 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 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 coordination with the efforts of 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.
During 1997, Locomotion Therapy provided rehabilitative physical,
occupational and speech therapy to unaffiliated nursing home operators and
acute care hospitals under 97 contracts, as well as to eight Fountain View
facilities, using a progressive, personalized treatment approach to promote
the resident's highest level of independence in mobility and strength.
Historically, a majority of Fountain View's therapy services has been
provided by Locomotion Therapy, which employs approximately 150 therapists
licensed in various specialties who are assigned to facilities based on the
types of contract services requested and the specialization of the
therapists. Throughout the duration of the contract, the selected therapist
functions as the resident therapist for a particular facility.
Summit has also provided rehabilitative care in each of its 36 SNFs
through the use of outside contractors. Historically, Summit has monitored
the rehabilitative care provided in each Summit facility through the use of
in-house supervisory therapists and therapy administration.
PHARMACIES. 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, which services Summit facilities in
Texas as well as several unaffiliated facilities. These pharmacies service
86 unaffiliated
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SNFs, ALFs and acute care hospitals located throughout much of Southern
California and in certain Texas markets, as well as all of Summit's and
several of Fountain View's SNFs and ALFs. The Company's pharmacies,
historically operated by Summit, 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 the outpatient community through a facility in
Fresno, California. The Company intends to open additional facilities in
underserved markets where it has existing relationships with doctors and
currently provides physical therapy services to nursing homes through
Locomotion Therapy. Several of Summit's Texas facilities have excess
capacity intended for outpatient clinics which the Company expects to
utilize for the expansion of services provided by On-Track.
DURABLE MEDICAL EQUIPMENT. The Company provides various types of durable
medical equipment to Fountain View-owned facilities, as well as
unaffiliated facilities, through a subsidiary. The types of equipment and
supplies provided include enteral feeding supplies, poles and pumps (on a
rental basis), catheterization equipment and orthotics.
SOURCES OF REVENUE
The Company's SNFs receive payment for healthcare services from federally
assisted Medicaid programs, 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).
The following table sets forth for Fountain View's SNFs, ALFs and therapy
operations the approximate percentages of net revenues derived from the
various sources of payment for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Managed care and private pay, including Locomotion
Therapy.............................................. 46.6% 47.5% 44.2%
Medicare.............................................. 20.3 19.6 25.6
Medi-Cal Sub-Acute.................................... 0.3 2.6 3.1
----- ----- -----
Subtotal (Quality Mix).............................. 67.2 69.7 72.9
Medi-Cal.............................................. 32.8 30.3 27.1
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table sets forth for Summit's SNFs, ALFs and pharmacy
operations the approximate percentages of total revenues derived from the
various sources of payment for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Managed care and private pay............................ 33.8% 31.9% 29.9%
Medicare................................................ 29.5 34.7 39.7
----- ----- -----
Subtotal (Quality Mix)................................ 63.3 66.6 69.6
Medicaid................................................ 36.7 33.4 30.4
----- ----- -----
Total................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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Changes in the quality mix between Medicaid (known as Medi-Cal in
California), on the one hand, and either Medicare, managed care or private
pay, on the other hand, can significantly affect profitability. Quality mix
represents revenues from Medicare, Medi-Cal sub-acute, managed care, and
private pay patients as a percentage of revenues. Medicare, Medi-Cal sub-
acute, managed care and private pay patients constitute the most profitable
categories of patient mix and Medicaid patients the least profitable.
Management believes the Company has maintained an attractive and improving
high quality mix. In addition, the Company's average reimbursement rate per
patient day for Medicare patients has increased more rapidly than for Medicaid
patients, reflecting the increasing acuity level of the services provided by
the Company. Services provided to Medicare patients generate a higher level of
revenue per patient day at margins that generally exceed the level of
profitability associated with services provided to Medicaid patients. However,
the Company's profitability has not correlated directly with revenue growth,
reflecting the additional costs associated with providing the higher level of
care and other services required by high-acuity Medicare patients.
QUALITY MIX, PATIENT MIX AND OCCUPANCY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------
FOUNTAIN VIEW SUMMIT COMPANY
------------- ------ -------
<S> <C> <C> <C>
QUALITY MIX
Managed care and private pay, including Locomotion
Therapy.......................................... 44.2% 30.5% 33.4%
Medicare.......................................... 25.6 38.5 35.8
Medi-Cal sub-acute................................ 3.1 -- 0.6
----- ----- -----
Total (Quality Mix)............................. 72.9 69.0 69.8
Medicaid.......................................... 27.1 31.0 30.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
PATIENT MIX
Managed care and private pay...................... 17.3 36.8 33.4
Medicare.......................................... 9.0 9.1 9.1
Medi-Cal sub-acute................................ 2.2 -- 0.4
----- ----- -----
28.5 45.9 42.9
Medicaid.......................................... 71.5 54.1 57.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
OCCUPANCY ........................................ 89.0% 86.0% 89.0%
</TABLE>
The Company's contract therapy services are provided predominantly by
Locomotion Therapy. Contract therapy revenues, after intercompany
eliminations, represented $17.7 million, or 26.1%, of Fountain View's fiscal
1997 revenues and, on a pro forma basis after giving effect to the
Transactions, would have represented 6.2% of the Company's revenues for the
year ended December 31, 1997.
The Company's pharmacy services are derived from the three institutional
pharmacies historically operated by Summit (one of which is a joint venture).
Pharmacy revenues represented $20.4 million, or 10.3%, of Summit's fiscal 1997
revenues and, on a pro forma basis after giving effect to the Transactions,
would have represented 7.1% of the Company's revenues for the year ended
December 31, 1997.
The Company's DME business is provided by a Fountain View subsidiary. DME
revenues represented approximately $3.0 million, or 4.4%, of Fountain View's
fiscal 1997 revenues and, on a pro forma basis after giving effect to the
Transactions, would have represented 1.0% of the Company's revenues for the
year ended December 31, 1997.
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COMPLIANCE PROGRAM
Historically, senior management of the Company has supervised the Company's
compliance with applicable laws and regulations. The Company is in the process
of developing and implementing an enhanced compliance program to facilitate
the integration of Fountain View and Summit. In the past several years,
federal and state governments have increased their scrutiny of healthcare
providers with regard to compliance with applicable laws and regulations. The
Accountability Act and the Balanced Budget Act have provided the federal
government with increased funding for this initiative as well as a broader
range of penalties available for violation of applicable laws and regulations.
See "--Government Regulations". Management believes that compliance programs
are advisable, particularly in the current environment of stricter government
enforcement in the healthcare industry. The OIG has released guidelines
applicable to compliance programs for laboratories and hospitals, but has not
yet developed a model compliance program or compliance program guidelines for
the long-term care industry. Given the federal government's current fraud and
abuse initiatives however, including Operation Restore Trust which focuses on
the long-term care and home health industry, management believes that a
compliance program will give the Company an additional layer of protection and
assurance in a heavily regulated and continuously evolving industry.
Management believes that an effective compliance program should maximize the
Company's ability to detect and prevent potential infractions of applicable
law (thus reducing the risk of a qui tam, or "whistleblower", action against
the Company for infractions that were not timely detected and addressed) and
may be used to resolve any infractions that do occur in a consistent and
organized fashion. Further, the existence of an effective compliance program
may be taken into account by the government to reduce any fines or penalties
incurred by the Company for infractions or violations of applicable law or
regulation.
Management intends to develop and implement a compliance program that will
involve the appointment of a compliance officer, who will report directly to
the Company's board of directors and Chief Executive Officer, to assist in the
development, implementation and maintenance of the compliance program. The
Company anticipates that the compliance program will include policies and
procedures applicable to all Fountain View and Summit facilities and will
address all aspects of compliance with government requirements, including,
among others, licensing obligations, quality of care, documentation
requirements, billing and coding requirements, regulations regarding
relationships with physicians and other healthcare providers, and federal and
state reporting obligations. It is anticipated that the Company's compliance
program will establish formal training requirements for all Company employees
in areas applicable to individual job functions, as well as general training
regarding criteria and requirements for participation in federal government
healthcare programs. Management intends to establish a Company-wide hotline
pursuant to which any employee may report activity that does not conform to
current standards. Further, the Company anticipates that the existence of a
compliance program will assist it in integrating all Fountain View and Summit
facilities into a consistent Company-wide infrastructure, thereby facilitating
operational and management economies of scale.
QUALITY ASSURANCE
The Company is committed to providing its patients with the highest possible
standard of quality of care. To this end, both Fountain View and Summit have
in place 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 of each facility. The Company intends to consolidate the
Quality Assurance departments of Fountain View and Summit in order to continue
their tradition of providing the highest possible quality of care. In
addition, the Company intends to develop and implement a compliance program
that will address, in part, quality of care issues. See "--Compliance
Program".
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<PAGE>
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 March 1, 1998, twelve 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
24 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.
MARKETING
The Company's sales and marketing efforts are directed toward improving
overall occupancy and quality mix by maximizing the number of private pay,
managed care and Medicare patients on each facility's census. The Company
believes that the selection of a long-term care facility is strongly
influenced by word-of-mouth marketing and referrals from physicians, hospital
discharge planners, community leaders and family members. Therefore, the
Company's marketing strategy is focused at the local level, and the
administrator, admissions coordinator and other personnel at each facility are
responsible for contacting potential referral sources. Case managers at
certain facilities actively market services to managed care organizations.
Regional marketing directors support and coordinate sales and marketing
efforts. The Company maintains a sales and marketing information system to
monitor the results of its strategy.
GOVERNMENT REGULATIONS
LICENSURE. The Company's SNF, ALF, sub-acute and specialty medical service,
therapy, pharmacy and DME supplies 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 loss 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 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 payment 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 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 HCFA or
state survey agencies. While in certain instances denial of certification or
licensure revocation actions have been threatened, management believes that
the Company will not suffer any material adverse effect as a result thereof.
There can be no assurance, however, that the Company will not be subject to
sanctions and penalties in the future as a result of such actions.
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<PAGE>
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. The
Medicare program consists of Parts A and B. Participation in Part B is
voluntary and is funded in part through the payment of premiums. Benefits
under Part A include inpatient hospital services, skilled nursing services
rendered in a SNF and medical services such as physical, occupational and
speech therapy, certain pharmaceuticals and medical supplies. Part B provides
coverage for physician services. Part B also reimburses for medical services
with the exception of pharmaceutical services. Medicare benefits are not
available for intermediate and custodial levels of care including but not
limited to residence in ALFs; however, medical and physician services
furnished to patients requiring such care may be reimbursable under Part B.
Currently, the Medicare program utilizes a cost-based reimbursement system
for free-standing SNFs which, subject to limits fixed for the particular
geographic area on the costs for routine services (excluding capital related
expenses), reimburses 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 retroactive audit adjustments. To the extent that the Company's costs
exceed certain limits known as the Medicare Routine Cost Limits, the Company
may submit exception requests seeking reimbursement for such excess costs from
Medicare. To date, Summit has filed three exception requests and has received
approval on all three. Fountain View has not filed any exception requests to
date. There is no assurance the Company will be able to recover such excess
costs on any future requests. If the Company files exception requests on a
regular basis in the future and fails to recover the excess costs covered by
such requests, such failure could adversely affect the Company's financial
position and results of operations. However, exception requests will no longer
be necessary upon implementation of PPS, as discussed more fully below.
Fiscal intermediaries also occasionally undertake a more in-depth audit of a
facility's billing records. In March 1997, one of Summit'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 (after cost
report settlement and subject to downward adjustment) lacked a timely
certification of medical necessity by a physician. Summit is currently
repaying such charges against reimbursement of current claims. Following this
audit, Summit adopted measures to strengthen its documentation relating to
physician certification. While the Company does not believe that it is the
target of any other focused reviews, there can be no assurance that
substantial amounts 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.
The Balanced Budget Act requires the establishment of a prospective payment
system, or PPS, for Medicare SNFs under which facilities will be paid a
federal per diem rate for virtually all covered SNF services in lieu of the
current cost-based reimbursement rate. PPS will be phased in over three cost
reporting periods, starting with cost reporting periods beginning on or after
July 1, 1998. The PPS rates have not yet been determined and there can be no
assurance that the Company's revenues under PPS will be sufficient to cover
its costs to operate its facilities.
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<PAGE>
In addition, prior to the enactment of the Balanced Budget Act, federal law
required state Medicaid programs to reimburse SNFs for costs incurred by
efficiently and economically operated providers in order 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 would have a
material adverse effect on the Company.
Current Medicare regulations applicable to transactions between related
parties, such as the Company's subsidiaries, are relevant to the amount of
Medicare reimbursement that the Company is entitled to receive for goods and
services which are charged to the Medicare program. The amount charged on
related party transactions is dependent upon whether or not the related party
exception applies. For transactions between each provider and the applicable
related party which do not qualify for the related party exception, the
transaction is recorded at cost and no profit may be earned by the related
party. For transactions which do qualify for the related party exception, the
transaction is recorded at fair market value. In order for transactions to
qualify as an exception to the related party rule, the following conditions
must be met: (i) the related party must be a bona fide organization; (ii) a
substantial part of the services of each such related party must be transacted
with non-affiliated entities, and there must be an open, competitive market
for such services; (iii) the services provided by each such entity commonly
are obtained by a provider from other organizations, and are not a basic
element of patient care provided by such facilities; and (iv) the prices
charged to the provider by such entities are in line with the charges for such
services in the open market, and no more than the prices charged by such
entities under comparable circumstances to non-affiliated entities. The
Company believes that it satisfies the requirements for exception to the
related party rules in transactions between its long-term care facilities and
its therapy, DME and pharmacy subsidiaries. If, however, the Company has
failed or, in the future, fails to satisfy regulations for the related party
exception with respect to inter-corporate transactions, the Medicare
reimbursement that the Company received or will receive could be reduced, and
as a result, the Company's financial condition could be materially and
adversely affected.
The Company's financial condition and results of operations may also be
affected by the revenue reimbursement process, which in the Company's industry
is complex and can involve lengthy delays between the time that revenue is
recognized and the time that reimbursement amounts are settled. Net revenues
realizable under third-party payor agreements are subject to change due to
examination and retroactive adjustment by payors during the settlement
process. Payors may disallow, in whole or in part, requests for reimbursement
based on determinations that certain costs are not reimbursable or because
additional supporting documentation is necessary. The majority of third-party
payor balances are settled within two to three years following provision of
services. The Company's results of operations would be materially and
adversely affected if the amount actually received from third-party payors in
any reporting period differed materially from the amounts accrued in prior
periods. The Company's financial condition and results of operations may also
be affected by the timing of reimbursement payments and rate adjustments from
third-party payors (for example, Medi-Cal has in the past exposed providers to
payment delays, thus affecting reimbursement).
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 amount that would have been paid if provider employees had
furnished the services. HCFA has exercised this authority by publishing
"salary equivalency guidelines" for physical therapy, respiratory therapy,
speech language pathology
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<PAGE>
and occupational therapy services. On January 30, 1998, HCFA issued a final
regulation, effective April 1, 1998, that will revise the pre-existing salary
equivalency guidelines for physical therapy and respiratory therapy and
establish, for the first time, salary equivalency guidelines for speech
language pathology and occupational therapy services. HCFA estimates that the
regulation will increase the reimbursement rates for physical therapy by 35%
and for respiratory therapy by 10%. In contrast, however, HCFA expects the
salary equivalency rates for occupational therapy and speech language
pathology to reduce current reimbursement rates by 40% and 25%, respectively.
The salary equivalency guidelines will not apply to SNFs that are paid under
PPS, which is being phased-in by Medicare, as discussed above. Management
cannot predict the effect the salary equivalency guidelines will have on the
Company.
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, and the provision of a duly licensed pharmacist in each
pharmacy, 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 limited circumstances. The California and Texas Medicaid
programs reimburse pharmacies for drugs supplied to patients based on the cost
of the drug plus an additional amount 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 currently applicable to independent therapists to
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.
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 (1) the provider's actual charge for the
DME or (2) 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 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
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<PAGE>
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 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 a
referral for a Medicare directors or prohibit its medical directors from
referring patients to the Company. 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 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 fines. Civil provisions prohibit the knowing
filing of a false claim or the knowing 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 billing practices are consistent with Medicare and
Medicaid criteria, those criteria 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.
Under Operation Restore Trust, a major anti-fraud demonstration project, the
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. While management does
not believe the Company is the target of any Operation Restore Trust
investigations, there can be no assurance that substantial amounts 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.
CORPORATE PRACTICE OF MEDICINE. Many states, including California, Texas and
Arizona, prohibit business corporations and other persons or entities not
licensed to practice medicine from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs and civil and criminal penalties. These
laws, their construction and level of enforcement, vary from state to state
and are enforced by both the courts and regulatory authorities, each with
broad discretion. Some states interpret the 'practice of medicine' broadly to
include activities of corporations such as the Company that have an indirect
impact on the practice of medicine, even where the physician rendering the
medical services is not an employee of the corporation and the corporation
exercises no discretion with respect to the diagnosis or treatment of a
particular patient. The Company believes that its current and intended
operations do not and will not violate applicable state laws regulating the
unlicensed practice of medicine by a business corporation. However, because
the laws
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<PAGE>
governing the corporate practice of medicine vary from state to state, any
expansion of the operations of the Company to a state with strict corporate
practice of medicine laws may require the Company to modify its operations
with respect to one or more of such practices, which may result in increased
financial risk to the Company. Further, there can be no assurance that the
Company's arrangements will not be successfully challenged as constituting the
unauthorized practice of medicine. See "Risk Factors -- State Laws Regarding
Prohibition of Corporate Practice of Medicine".
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 future services or the services
for which the Company will be able to seek reimbursement. 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 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. The growth in healthcare spending has caused the
private sector, Medicare and state Medicaid programs to reshape the financing
of healthcare services for their beneficiaries. Management anticipates that
one of the most significant changes to the financing of healthcare services
will be 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, as of 1996, 35% of
Medicare enrollees in California had enrolled in a managed care program. In
comparison, 8% of Medicare enrollees in Texas are enrolled in managed care
programs, and approximately 14% of Medicare enrollees nationwide are 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 service 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
reimbursements 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. Among the types of regulatory requirements faced by
healthcare providers are: air and water quality control requirements; waste
management requirements; specific regulatory requirements applicable to
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 properties or centers, the Company
may be subject to liability for investigating and remedying any hazardous
substances that have come to be located on the property, including any such
substances that may have migrated off, or emitted, discharged, leaked, escaped
or been transported from, the property. Ancillary to the Company's operations
are, in various combinations, 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 their 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.
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COMPETITION
The Company operates in a highly competitive industry. The Company's SNFs
and ALFs are located in communities that also are served by similar 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 supported by the fact that
within California, Texas and 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 also expects to encounter competition during future initiatives
of acquiring or developing new facilities. The Company's pharmacies and DME
business also operate in highly competitive environments and 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 the provision of other ancillary services,
including physical, occupational and speech therapy.
PROPERTIES
As of June 30, 1998, the Company had a total of 44 SNFs with an aggregate of
5,937 beds and 6 ALFs with an aggregate of 641 beds, as reflected in the
following tables:
<TABLE>
<CAPTION>
SUMMIT FOUNTAIN VIEW
---------------- ---------------- TOTAL TOTAL
STATES FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
------ ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
SNFs
California............. 13 1,515 8 1,061 21 2,576
Texas.................. 22 3,211 -- -- 22 3,211
Arizona................ 1 150 -- -- 1 150
--- ----- --- ----- --- -----
Subtotal............. 36 4,876 8 1,061 44 5,937
ALFs
California............. 5 475 1 166 6 641
--- ----- --- ----- --- -----
Total................ 41 5,351 9 1,227 50 6,578
=== ===== === ===== === =====
</TABLE>
FOUNTAIN VIEW FACILITIES
<TABLE>
<CAPTION>
YEAR YEAR
FACILITY LOCATION # BEDS OWNED/LEASED BUILT RENOVATED
-------- ----------- ------ ------------ ----- ---------
<S> <C> <C> <C> <C> <C>
SKILLED NURSING--CALIFORNIA
Rio Hondo...................... Montebello 200 Leased(a) 1968 1996/1998
Hancock Park................... Los Angeles 141 Leased 1969 1996/1998
Brier Oak Terrace.............. Los Angeles 159 Leased 1966 1997/1998
Alexandria..................... Los Angeles 177 Leased 1969 1997
Montebello..................... Montebello 99 Leased(a) 1969 --
Fountain View.................. Los Angeles 99 Leased(a) 1963 1996/1998
Sycamore Park.................. Los Angeles 90 Leased(a) 1965 1997
Elmcrest....................... El Monte 96 Leased 1958 1997
ASSISTED LIVING--CALIFORNIA
Hancock Park................... Los Angeles 166 Leased 1971 1996/1998
-----
Total.................................... 1,227
=====
</TABLE>
- --------
(a) Facility is owned by the Snukal family and leased to a subsidiary of
Fountain View.
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<PAGE>
SUMMIT FACILITIES
<TABLE>
<CAPTION>
YEAR
FACILITY LOCATION # BEDS OWNED/LEASED YEAR BUILT RENOVATED
-------- ---------------- ------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
SKILLED NURSING--
CALIFORNIA
Woodland................ Reseda 153 Leased 1972 1996
Royalwood............... Torrance 108 Leased 1952 1998(c)
Valley.................. Fresno 99 Owned 1960 1996
Villa Maria............. Santa Maria 85 Owned 1970 1995
Earlwood................ Torrance 85 Owned 1967 1993
Sharon.................. Los Angeles 85 Leased 1967 1996
Bay Crest............... Torrance 78 Leased 1960/1968(b) 1995
Fountain................ Orange 172 Owned 1963/1966(b) 1994
Carehouse............... Santa Ana 174 Owned 1974/1994(b) 1998(c)
Palm Grove.............. Garden Grove 122 Leased 1958 1994
Anaheim................. Anaheim 97 Leased 1967 1997
Devonshire.............. Hemet 98 Owned 1969 1992
Willow Creek............ Fresno 159 Owned 1996 --
-----
Subtotal.............. 1,515
SKILLED NURSING--TEXAS
Coronado................ Abilene 219 Owned 1969 1996
West Side............... White Settlement 238 Owned 1985 1996
The Woodlands........... Houston 212 Owned 1988 1994
Colonial Tyler.......... Tyler 162 Owned 1968 1997
Colonial Manor.......... New Braunfels 152 Owned 1967 1996
Guadalupe Valley........ Seguin 149 Leased(a) 1990 1996
Town & Country.......... Boerme 124 Owned 1972 1994
Clairmont--Longview..... Longview 174 Owned 1986/1996(b) --
Clairmont--Beaumont..... Beaumont 148 Owned 1987/1996(b) --
Clairmont--Tyler........ Tyler 116 Owned 1989 1998
Southern Manor.......... Hallettsville 114 Owned 1991 1995
Southwood............... Austin 112 Owned 1975 1992
Comanche Trail.......... Big Spring 115 Leased(a) 1991 1995
Lubbock................. Lubbock 114 Owned 1968 1995
Monument Hill........... La Grange 111 Owned 1987 1997
Live Oak................ George West 100 Leased(a) 1993 1995
Oak Crest............... Rockport 92 Owned 1991 1996
Oakland Manor........... Giddings 114 Owned 1992 1995
Oak Manor............... Flatonia 80 Owned 1980 1995
Heritage Oaks........... Lubbock 161 Owned 1995/1996(b) --
Cityview................ Fort Worth 210 Owned 1997 --
Briarcliff.............. McAllen 194 Leased(a) 1993/1996(b) --
-----
Subtotal.............. 3,211
SKILLED NURSING--ARIZONA
Phoenix................. Phoenix 150 Leased 1965/1995(b) 1995
ASSISTED LIVING--
CALIFORNIA
Carson.................. Carson 202 Owned 1972 1994
Spring.................. Torrance 51 Owned 1962 1993
Hemet................... Hemet 84 Owned(d) 1965 1997
Fountain................ Orange 72 Owned 1967 1995
Ashton Court............ Orange 66 Owned 1967 1997
-----
Subtotal.............. 475
-----
Total................. 5,351
</TABLE>
- --------
(a) Option to purchase.
(b) Year of latest addition to facility.
(c) Scheduled.
(d) Building owned by Summit with real property held under a ground lease
extending to 2030.
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<PAGE>
EMPLOYEES
As of June 30, 1998, Fountain View had approximately 1,200 full-time
equivalent employees, and Summit had approximately 4,700 full-time equivalent
employees. Fountain View has three collective bargaining agreements for a
union covering approximately 400 of Fountain View's employees. Fountain View
considers the relations with its employees to be good and it has not
experienced any strikes or work stoppages. None of Summit's employees are
covered by collective bargaining agreements and Summit considers the relations
with its employees to be good and it has not experienced any strikes or work
stoppages. Both Fountain View and Summit are subject to federal and state
minimum wage and applicable federal and state wage and hour laws and maintain
various employee benefit plans.
INSURANCE
Fountain View maintains general and professional liability coverage,
employee benefits liability, property, inland marine, crime, boiler and
machinery coverage, health, automobile, employment practices liability,
earthquake and flood, workers' compensation and employers' liability that
Fountain View believes is adequate. Summit maintains general and professional,
property, casualty, health, directors and officers, automobile, crime,
employee's and workers' compensation coverage that Summit believes is
adequate. Summit's workers' compensation insurance for its California and
Arizona employees pays for claims up to $250,000 per claim and for the
purchase of reinsurance coverage for amounts in excess of the per claim limit
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 and no annual
aggregate stop loss. Summit pays for claims up to $150,000 per occurrence.
Fountain View's and Summit's services subject them to liability risk.
Malpractice claims may be asserted against them if their 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 treated by specialty and
sub-acute services, than for traditional long-term care patients. Fountain
View and Summit have from time to time been subject to malpractice claims and
other litigation in the ordinary course of their businesses. While the Company
believes that the ultimate resolution of all pending legal proceedings will
not have a material adverse effect on the Company's business or financial
condition, there can be no assurance that future claims will not have such an
effect on the Company. Fountain View's current policy for general and
professional liability coverage 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 aggregate per year with a self-insured retention of
$10,000 per occurrence over its primary general, professional, automobile and
employers' liability coverage policies. Summit's current policy for general
and professional liability coverages 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, Summit has a claims-made umbrella policy
which provides additional insurance of $8,500,000 per occurrence and
$8,500,000 aggregate per year over its primary general and professional
policy, its automobile liability policy and its employer liability policy.
Although Fountain View and Summit have not been subject to any judgments or
settlements in excess of their respective insurance limits, there can be no
assurance that claims for damages in excess of such coverage limits will not
arise in the future.
LEGAL PROCEEDINGS
Fountain View and Summit are 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<C> <C> <S>
William C. Scott...................... 60 Director and Chairman
Robert M. Snukal...................... 55 Director, Chief Executive
Officer and President
Sheila S. Snukal...................... 54 Director and Executive Vice
President
Derwin L. Williams.................... 60 Chief Financial Officer
Paul Rathbun.......................... 39 Chief Financial Officer
(effective September 20, 1998)
Keith Abrahams........................ 38 President, Locomotion Therapy,
Inc. and On-Track Therapy
Center, Inc.
Michael H. Martel..................... 35 Senior Vice President, Marketing
Michel Reichert....................... 47 Director
Michael F. Gilligan................... 42 Director
Peter Z. Hermann...................... 43 Director
Mark J. Jrolf......................... 33 Director
Boone Powell, Jr. .................... 62 Director
</TABLE>
William C. Scott became a Director and Chairman upon the closing of the
purchase of Summit Shares in the Tender Offer 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 formation of Fountain View. For the preceding five
years, Mr. Snukal has served as a Director and President of each of Fountain
View's subsidiaries, which were owned directly by Mr. Snukal and Sheila Snukal
during that period and prior to the formation of Fountain View. Mr. Snukal is
the husband of Sheila Snukal and the father-in-law of Mr. Abrahams.
Sheila S. Snukal became a Director and Executive Vice President on August 1,
1997, upon the formation of Fountain View. For the preceding five years, Mrs.
Snukal has served as a Director and Executive Vice President of each of
Fountain View's subsidiaries, which were owned directly by Mrs. Snukal and
Robert M. Snukal during that period and prior to the formation of Fountain
View. Mrs. Snukal is the wife of Robert M. Snukal and the mother-in-law of Mr.
Abrahams.
Derwin L. Williams assumed the role of Chief Financial Officer on April 16,
1998. Mr. Williams previously served as Vice President--Finance and Chief
Financial Officer of Summit from July 1, 1993, and Treasurer from May 10,
1994. Mr. Williams held the Treasurer position at three other nursing home
companies: Hallmark Health Service, Inc., from November 1989 to February 1992;
Care Enterprises from April 1980 to August 1987; and Flagg Industries, Inc.,
from June 1978 to March 1980. Mr. Williams has also served in various
capacities specializing in Medicare reimbursement for the Company in 1992 and
1993 and for Beverly Enterprises in 1988 and 1989. He
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<PAGE>
is also a certified public accountant. Mr. Williams has given notice to the
Company of his resignation to be effective no later than September 30, 1998.
Paul Rathbun has agreed to join the Company as Chief Financial Officer
effective September 20, 1998. Mr. Rathbun previously served as the Executive
Vice President, 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 of Price Waterhouse in charge of the healthcare practice in the state
of Florida.
Keith Abrahams has been President of Locomotion since 1995. Mr. Abrahams was
previously employed as a 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 Mr. and Mrs. Snukal.
Michael H. Martel assumed the role of Senior Vice President-Marketing on
April 16, 1998. Mr. Martel previously served as Senior Vice President--
Marketing of Summit in March 1995. Prior to joining Summit, Mr. Martel was
Vice President--Marketing 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. See "--
Employment Agreements". Under the terms of their employment agreements, each
of Mr. Snukal, Mrs. Snukal and Mr. Scott is employed for a period of five
years as Chief Executive Officer, Executive Vice President and Chairman,
respectively, 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.
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<PAGE>
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").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
--------------- ------------
SECURITIES
UNDERLYING ALL OTHER
FISCAL SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- --------------------------- ------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert M. Snukal............. 1997 298,340 400,000 -- --
President, Chief Executive 1996 258,750 696,912 -- --
Officer and Director 1995 246,000 967,900 -- --
William C. Scott (2)......... 1997 394,773 -- -- --
Director and Chairman 1996 369,869 150,000 165,000 --
1995 344,869 162,500 50,000 --
Sheila S. Snukal............. 1997 178,125 200,000 -- --
Executive Vice President 1996 144,750 327,570 -- --
and Director 1995 132,000 521,200 -- --
Derwin L. Williams (2)....... 1997 181,423 -- -- --
Chief Financial Officer 1996 171,008 50,000 25,000 --
1995 147,162 40,000 20,000 --
Michael H. Martel (1)(2)..... 1997 152,404 10,000 10,000 --
Senior Vice 1996 141,308 -- 10,000 --
President/Marketing 1995 36,250 10,000 25,000 --
</TABLE>
- --------
(1) Mr. Martel joined Summit Care Corporation in March 1995.
(2) Compensation indicated is for the fiscal year ended June 30.
Options Grants In Last Fiscal Year. The Company did not grant any options to
the Named Executive Officers in the last fiscal year. All options to purchase
shares of Summit Care Corporation outstanding immediately prior to the date of
the Merger were converted into the right to receive $21.00 per share in cash,
less the exercise price of such option.
Fiscal Year-End Option Values. During fiscal 1997, none of the Named
Executive Officers exercised stock options issued by the Company. In addition,
none of the Named Executive Officers held options to purchase stock of the
Company as of the end of the Company's most recent fiscal year. All options to
purchase shares of Summit Care Corporation outstanding immediately prior to
the date of the Merger were converted into the right to receive $21.00 per
share in cash, less the exercise price of such option.
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;
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<PAGE>
(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 includes a
majority of 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 matter will
result in significant harm to the other stockholders of the Company, but not
to Heritage. For example, Heritage would not be able to exercise the proxy to
vote the shares of the other stockholders in favor of an amendment to the
Stockholders Agreement which would provide that, in the event of a sale of the
Company, the other stockholders would receive one-half the consideration per
share that Heritage would receive. The purpose of the limitation on Heritage's
exercise of the proxy is to protect the other stockholders from Heritage
abusing its control position.
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. For example, on the one
hand, if Heritage decides to sell half of its shares to a third party (other
than one of its partners), each of the other stockholders will have the right
also to sell half of their shares to the same third party; on the other hand,
if a third party wants to buy half of the Company, and Heritage is willing to
sell only half of its shares to this third party, then Heritage can require
each other stockholder to sell half of his shares to the same third party.
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
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<PAGE>
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,
unless the Company is in compliance with certain financial tests, (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 agreement will terminate upon the consummation of
an initial public offering 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 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 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 (other than
for death or disability). 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 and, in the case of
Mr. Scott, less an amount, if any, he is then due under the Summit Special
Severance Plan adopted by Summit in connection with the Merger). 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
referred to in the preceding sentence. 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, each of Mr. and Mrs. Snukal and Mr. Scott
agree 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, each of Mr. and Mrs. Snukal and
Mr. Scott agree that, for the greater of five years after 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.
MANAGEMENT EQUITY INCENTIVE PLANS
The Company intends to adopt one or more management equity incentive plans
to attract, retain and incentivize its management and employees. These plans
may include a stock option plan to make stock options available to employees
(other than Mr. Scott and Mr. Snukal), directors and consultants.
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<PAGE>
Stock options granted may be qualified or non-qualified. The Company expects
that vesting of stock options may be subject to certain conditions, including
achievement of Company and individual performance objectives. In addition,
these plans may include a restricted stock plan providing for the grant of
restricted stock that would be subject to vesting based on the achievement of
operating and financial goals.
DIRECTOR COMPENSATION
Directors of the Company do not currently receive compensation from the
Company for their service in such capacity.
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<PAGE>
PRINCIPAL STOCKHOLDERS
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.
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME OF SHARES(1) OF CLASS
---- ------------ --------
<S> <C> <C>
Heritage Fund II, L.P.(2)............................. 537,486 50.2%
Michel Reichert(2).................................... 537,486 50.2
Michael F. Gilligan(2)................................ 537,486 50.2
Peter Z. Hermann(2)................................... 537,486 50.2
Mark J. Jrolf(2) ..................................... 537,486 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)............................................. 734,915 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 11,853 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., 11900 Olympic
Boulevard, Suite 680, Los Angeles, CA 90064. 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.
(6) The address of such stockholder is 3500 Gaston Avenue, Suite 150, Dallas,
TX 75246.
(7) 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., 11900 Olympic
Blvd., Suite 680, Los Angeles, CA 90064. Shares shown as beneficially
owned by Mr. Abrahams include 8,294 shares owned by Stacy Abrahams, his
wife.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INVESTMENT AGREEMENT
The Company and Robert Snukal, Sheila Snukal, William 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 a
warrant 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 warrant 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 $2,530,600, 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 $1,012,240 of the principal amount of the note. Pursuant
to the terms of the Investment Agreement, Heritage made an additional cash
investment of $2.6 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 a supplemental signature page agreeing to
become parties to the Investment Agreement. See "Prospectus Summary--The
Financings" and "--Recent Developments".
THE CERTIFICATE OF INCORPORATION
In connection with the Transactions, on March 27, 1998 and May 6, 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 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) first, 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) second, each
share of Series B Non-Voting Common Stock will receive an amount
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equal to the Series A Common Stock Preference; and (C) third, the remaining
assets will be distributed ratably among the Series A Common Stock and the
Series B Non-Voting Common Stock.
The March 27 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
registrations. 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
SUMMIT EXECUTIVE INCENTIVE PLAN FOR MR. SCOTT. Mr. Scott was the beneficiary
of an Executive Incentive Plan maintained by Summit. Under the terms of this
plan, which was amended by Summit prior to the signing of the Merger
Agreement, Mr. Scott received a cash payment from Summit at the effective time
of the Merger of approximately $1,275,000.
REDEMPTION OF MR. SCOTT'S SUMMIT STOCK OPTIONS. Under the Summit Stock
Option Plan, which terminated at the effective time of the Merger, Mr. Scott
received in cash from Summit the net value of his options to purchase Summit
Shares, which equalled $749,125. Mr. Scott held options to acquire 300,000
Summit Shares.
BONUS TO MR. SCOTT FROM THE COMPANY. At the effective time of the Merger,
the Company paid Mr. Scott a bonus equal to $550,000 to partially cover the
tax cost he will incur upon redemption of his stock options described in the
preceding paragraph. The amount of the bonus was calculated not to exceed the
tax benefit which Summit realized as a result of the payments of those
amounts.
BONUS TO MR. SCOTT FROM SUMMIT. At the effective time of the Merger, Summit
paid Mr. Scott a $100,000 bonus.
REINVESTMENT BY MR. SCOTT. The entire net after-tax proceeds of the
foregoing payments to Mr. Scott were invested by Mr. Scott in securities of
the Company under the terms of the Investment Agreement.
PAYMENT TO HERITAGE PARTNERS MANAGEMENT COMPANY, INC. At the effective time
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 July 24, 1997,
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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 for Mr. and Mrs. Snukal to indemnify Heritage and
Fountain View for varying amounts.
The transactions contemplated by the 1997 Agreement were consummated on
August 1, 1997. From August 1, 1997, until the closing of the purchase of
Summit Shares in the Tender Offer, Fountain View's Board of Directors has
consisted and will consist of three nominees of Mr. and Mrs. Snukal and two
nominees of Heritage. For additional information with respect to the Fountain
View Equity Transactions, see Note 3 to the audited financial statements of
Fountain View included elsewhere in this Prospectus.
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. These facilities are
Fountainview Convalescent Hospital in Los Angeles, California, Montebello
Convalescent Hospital in Montebello, California, Rio Hondo Nursing Center in
Montebello, California and Sycamore Park Convalescent Hospital in Los Angeles,
California. Each lease is for a term of 20 years. The annual rent for the year
ending July 31, 1998 for each of these facilities is as follows: Fountainview
Convalescent Hospital--$360,000; Montebello Convalescent Hospital--$360,000;
Rio Hondo Nursing Center--$720,000; and Sycamore Park Convalescent Hospital--
$324,000. 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.
TWIN MED
Mrs. Snukal owns approximately 33% of the outstanding equity of Twin Med,
Inc. ("Twin Med"), a supplier of disposable products to long-term care
facilities. Twin Med is one of Fountain View's and Summit's suppliers. Average
monthly payments by Fountain View and Summit to Twin Med are approximately
$50,000 to $70,000 in the aggregate.
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DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
GENERAL. The Company entered into a credit facility with Bank of Montreal
("BMO") that provides Fountain View with financing in the aggregate amount of
up to $115 million. The following summary of the material provisions of the
New Credit Facility does not purport to be complete, and is subject to, and
qualified in its entirety by reference to, (i) the Credit Agreement dated as
of April 16, 1998 among Fountain View, the Banks party thereto and BMO, as
Agent and (ii) the Loan Documents referenced therein.
While BMO committed to fund the entire amount of the credit facilities
described in the Summary of Terms, subject to the conditions described
therein, BMO has formed a syndicate to participate in the New Credit Facility,
and in the future may add financial institutions and other investors
(collectively with BMO, the "Lenders") to such syndicate, who shall be
reasonably acceptable to Fountain View, to join with BMO in providing the
financing. BMO will act as agent for the Lenders (the "Agent"). The New Credit
Facility commitments of the Lenders, which, after syndication, will be several
and not joint, were allocated among (i) a $30 million revolving credit
facility (the "Revolving Credit Facility"), with a $4 million sublimit for
letters of credit (with BMO as the issuing bank), and (ii) one or more term
loan facilities in an aggregate amount of up to $85.0 million (collectively,
the "Term Loan Facility"). The proceeds of the New Credit Facility were used
to refinance certain indebtedness incurred by Fountain View in connection with
the Tender Offer and the Merger, to refinance certain indebtedness of Summit,
to pay fees and expenses incurred in connection with the Transactions (not to
exceed $28 million) and to fund working capital and capital expenditure needs
of the Company and its subsidiaries and for other general corporate purposes.
MATURITY AND PREPAYMENT. The Revolving Credit Facility will mature on April
16, 2004. The Term Loan Facility will be payable in installments with a final
maturity on March 31, 2004. The Term Loan amortization schedule is as follows:
year 1--$0; year 2--$5,000,000; year 3--$10,000,000; year 4--$20,000,000; year
5--$22,500,000; and year 6--$27,500,000. The New Credit Facility is also
subject to mandatory prepayment out of the net cash proceeds of certain asset
sales, issuances of equity, subordinated debt (excluding the Notes offered
hereby) or senior debt securities, as well as out of 85% of excess cash flow
if a specified leverage ratio is exceeded. Prepayments will be applied to
reduce the Term Loan Facility.
REPRESENTATIONS AND WARRANTIES. The credit documents relating to the New
Credit Facility contain customary representations and warranties, including
with respect to corporate status; corporate power, authority and
enforceability; no violation of law, contracts or organizational documents; no
material litigation; correctness of specified financial statements and no
material adverse change; no required governmental or third party approvals;
use of proceeds and compliance with margin regulations; status under the
Investment Company Act of 1940; the Employment Retirement Income Security Act
of 1974, as amended ("ERISA"); environmental matters; perfected liens and
security interests; and payment of taxes.
COVENANTS. The credit documents contain usual and customary covenants,
including covenants with respect to delivery of financial statements and other
reports; compliance with laws; payment of taxes; maintenance of insurance;
limitations on liens; limitations on future mergers, consolidations, joint
ventures and partnerships; prohibitions on sale of all or a substantial part
of the Company's assets; limitations on the incurrence of debt; limitations on
dividends, stock redemptions and the redemption and/or prepayment of other
debt; limitations on investments and acquisitions; limitations on capital
expenditures; compliance with ERISA; limitations on transactions with
affiliates; and a negative pledge, with certain exceptions, for equipment
financing. The credit documents also contain certain financial covenants,
including a minimum fixed charge coverage ratio, a maximum leverage ratio and
a minimum net worth test.
INTEREST AND FEES. Pursuant to the terms of New Credit Facility, Fountain
View may elect to have the interest rate on loans outstanding under the
Revolving Credit Facility and loans outstanding
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under the Term Loan Facility bear interest at the LIBOR or the applicable
alternate base rate (defined as the higher of the federal funds rate plus
0.50% or BMO's base rate), in each case plus an applicable margin which will
vary between 1.75% and 2.75% for LIBOR loans and between 0.75% and 1.75% for
alternate base rate loans, depending upon the ratio of the sum of Fountain
View's total funded debt plus a multiple of its operating rents to EBITDAR.
During the continuance of an event of default, a default interest rate equal
to 2.00% above the rate otherwise in effect shall apply. The Company will pay
a commitment fee of 0.50% on the unused portion of the Revolving Credit
Facility. The Company will also pay BMO, as Agent, a customary annual
administration fee.
EVENTS OF DEFAULT; REMEDIES. The New Credit Facility contains customary
events of default, including with respect to nonpayment of principal,
interest, fees or other amounts; violation of covenants; inaccuracy of
representations and warranties; cross-default to other material agreements and
indebtedness; bankruptcy; material judgments; ERISA; and actual or asserted
invalidity of any loan documents or security interest.
INDEMNIFICATION. Under the New Credit Facility, the Company will indemnify
the Lenders from and against all losses, liabilities, claims, damages or
expenses relating to their loans and the Company's use of loan proceeds or the
commitments, including but not limited to, reasonable attorneys' fees and
settlement costs.
SECURITY AND GUARANTEES. The New Credit Facility contains a perfected first
lien on all of the Company's assets, both tangible and intangible, including
without limitation, cash, cash equivalents, inventory, accounts receivable,
property, plant and equipment, intangibles, bank accounts, instruments,
securities, contract rights and other agreements, and the stock of or other
equity interests in all currently owned or to be acquired subsidiaries of the
Company (other than the capital stock of Alexandria Convalescent Hospital,
Inc.). The New Credit Facility is fully guaranteed by all existing and future
subsidiaries of the Company. The guarantees are secured by a perfected first
lien on all assets of the subsidiaries of the Company.
BMO is an affiliate of Nesbitt Burns Securities Inc., one of the Initial
Purchasers of the Notes. One of the other Lenders is Banque Paribas, an
affiliate of Paribas Corporation, one of the Initial Purchasers of the Notes,
and another affiliate of Paribas Corporation is a Fountain View stockholder.
CAPITAL LEASES
In addition to the indebtedness described above, Summit is also party to
seven capital leases for certain of its facilities. All of these capital
leases contain purchase options and certain of these leases contain various
renewal options and extend up to the year 2030. For the year ended June 30,
1997, property and equipment of Summit includes the following amounts for
leases which have been capitalized (assuming the purchase options contained in
these leases will be exercised):
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Land and land improvements.......................... $ 1,400
Buildings and leasehold improvements................ 21,481
Furniture and equipment............................. 2,405
-------
25,286
Less accumulated amortization....................... 2,070
-------
$23,216
=======
</TABLE>
The minimum rental payments for the next five years under noncancellable
capital leases (including purchase options when expected to be exercised) that
have initial or remaining lease terms in excess of one year as of the year
ended June 30, 1997 are $3,321,000, $4,634,000, $4,297,000, $350,000 and
$350,000 for 1998, 1999, 2000, 2001 and 2002, respectively.
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $120.0 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Outstanding Notes properly tendered on or prior to the Expiration
Date and not withdrawn as permitted pursuant to the procedures described
below. The Exchange Offer is being made with respect to all of the Outstanding
Notes; the total aggregate principal amount of Outstanding Notes and Exchange
Notes will in no event exceed $120.0 million.
The summary herein of material provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request of the Company.
PURPOSE OF THE EXCHANGE OFFER
On April 16, 1998, the Company issued $120.0 million aggregate principal
amount of Outstanding Notes. The issuance of the Outstanding Notes was not
registered under the Securities Act in reliance upon exemptions provided in
Rule 144A and Regulation S under the Securities Act.
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on the Closing Date. Pursuant to the
Registration Rights Agreement, the Company and the Guarantors agreed to use
commercially reasonable efforts to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the Exchange Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company and the Guarantors will offer the Exchange
Notes (which will have terms substantially identical in all material respects
to the Outstanding Notes), including the Existing Guarantees (the "Exchange
Notes") (except that the Exchange Notes will not contain terms with respect to
transfer restrictions). If (i) the Company and the Guarantors are not required
to consummate the Exchange Offer because the Exchange Offer is not permitted
by applicable law or Commission policy or (ii) any Holder of Transfer
Restricted Securities notifies the Company within 20 days after the Exchange
Offer has been consummated (A) that it is prohibited by applicable law or
Commission policy from participating in the Exchange Offer or (B) that it may
not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such Holder, or (C) that such Holder is a broker-dealer and holds
Notes acquired directly from the Company or one of its affiliates, then the
Company and the Guarantors will use commercially reasonable efforts to file a
shelf registration statement pursuant to Rule 415 under the Securities Act,
which may be an amendment to the Existing Offer Registration Statement (in
either event, the "Shelf Registration Statement") on or prior to the earliest
to occur of (1) the 60th day after the date on which the Company determines
that it is not required to file the Exchange Offer Registration Statement or
(2) the 60th day after the date on which the Company receives notice from a
Holder of Transfer Restricted Securities as contemplated by clause (ii) above
(such earliest date being the "Shelf Filing Deadline"), which Shelf
Registration Statement shall provide for resales of all Transfer Restricted
Securities the Holders of which shall provide certain information to the
Company. The Company and the Guarantors will use commercially reasonable
efforts to cause such Shelf Registration Statement to be declared effective by
the Commission on or before the 135th day after the obligation to file the
Shelf Registration Statement arises. For purposes of the foregoing, "Transfer
Restricted Securities" means each Note until the earliest of (i) the date on
which such Note is exchanged in the Exchange Offer and the Note for which it
is exchanged is entitled to be resold to the public by the Holder thereof
without complying
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with the prospectus delivery requirements of the Securities Act, (ii) the date
on which such Note has been disposed of in accordance with a Shelf
Registration Statement, or (iii) the date on which such Note is permitted to
be distributed to the public pursuant to Rule 144 under the Securities Act or
by a broker-dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of a copy of this
prospectus).
The Registration Rights Agreement provided that unless the Exchange Offer
were not permissible under applicable law or Commission policy (i) the Company
and the Guarantors would cause to be filed an Exchange Offer Registration
Statement with the Commission as soon as practicable after the Closing Date,
but in no event later than 90 days after the Closing Date, (ii) the Company
and the Guarantors would use commercially reasonable efforts to cause the
Exchange Offer Registration Statement to become effective at the earliest
possible time, but in no event later than 150 days after the Closing Date,
(iii) in connection with the foregoing, file (A) all pre-effective amendments
to such Registration Statement as may be necessary in order to cause such
Registration Statement to become effective, (B) if applicable, a post-
effective amendment to such Registration Statement pursuant to Rule 430A under
the Securities Act and (C) cause all necessary filings in connection with the
registration and qualification of the Exchange Notes to be made under the Blue
Sky laws of such jurisdictions as are necessary to permit the Exchange Offer
to be consummated, and (iv) upon the effectiveness of such Registration
Statement, commence the Exchange Offer. The Company is entitled to suspend the
effectiveness of any Shelf Registration Statement for certain limited periods
under certain prescribed circumstances. If (a) any of the Registration
Statements required by the Registration Rights Agreement is not filed with the
Commission on or prior to the date specified for such filing; (b) any of such
Registration Statements has not been declared effective by the Commission on
or prior to the date specified for such effectiveness; (c) an Exchange Offer
Registration Statement becomes effective but the Company and the Guarantors
fail to consummate the Exchange Offer within 30 business days thereafter with
respect to the Exchange Offer Registration Statement; or (d) subject to
certain exceptions, the Shelf Registration Statement or the Exchange Offer
Registration Statement is filed and is declared effective but thereafter
ceases to be effective or fails to be usable for its intended purpose prior to
the expiration of the time period specified in the Registration Rights
Agreement without being succeeded immediately by a post-effective amendment to
such Registration Statement that cures such failure and that is itself
declared effective immediately (each such event referred to in clauses (a)
through (d) above, a "Registration Default", and each period during which a
Registration Default has occurred and is Continuing, a "Registration Default
Period"), the Company and Guarantors jointly and severally agree that the
liquidated damages ("Liquidated Damages"), in addition to the base interest
that would otherwise accrue on the Transfer Restricted Securities, shall
accrue at a per annum rate of 0.25% of the aggregate principal amount of such
Transfer Restricted Securities for the first 90 days of the Registration
Default Period, increasing by 0.25% per annum every 90 days up to a maximum of
1.0% per annum until such Registration Default has been cured. All accrued
Liquidated Damages will be paid by the Company to the Record Holders by wire
transfer of immediately available funds or by federal funds check on each
interest payment date at the office or agency of the Company maintained for
such purpose in the Borough of Manhattan, The City of New York. Following the
cure of all Registration Defaults relating to any particular Transfer
Restricted Securities, the accrual of Liquidated Damages with respect to such
Transfer Restricted Securities will cease immediately.
Holders of such Notes will be required to make certain representations to
the Company and the Guarantors (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required
to deliver information to be used in connection with the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have their Notes included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set
forth above.
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EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 P.M., New York City time, on October
13, 1998, unless the Company, in its sole discretion, has extended the period
of time (as described below) for which the Exchange Offer is open (such date,
as it may be extended, is referred to herein as the "Expiration Date"). The
Expiration Date will be at least 20 business days after the commencement of
the Exchange Offer (or longer if required by applicable law). The Company
expressly reserves the right, at any time or from time to time, to extend the
period of time during which the Exchange Offer is open, and thereby delay
acceptance for exchange of any Outstanding Notes by giving oral notice
(confirmed in writing) or written notice to the Exchange Agent (as defined
herein) and by giving written notice of such extension to the holders thereof
or by timely public announcement communicated, unless otherwise required by
applicable law or regulation, by making a release through the Dow Jones News
Service, in each case, no later than 9:00 A.M. New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period of time. During any such extension, all Outstanding Notes previously
tendered will remain subject to the Exchange Offer.
In addition, the Company expressly reserves the right to terminate or amend
the Exchange Offer and not to accept for exchange any Outstanding Notes not
theretofore accepted for exchange upon the occurrence of any of the events
specified below under "-- Certain Conditions to the Exchange Offer". If any
such termination or amendment occurs, the Company will notify the Exchange
Agent and will either issue a press release or give oral or written notice to
the holders of the Outstanding Notes as promptly as practicable.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender to the Company of Outstanding Notes by a holder thereof as set
forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal.
A holder of Outstanding Notes may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references
in this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Outstanding Notes being tendered, if any, and
any required signature guarantees, to the Exchange Agent at its address set
forth below on or prior to 5:00 p.m., New York City time, on the Expiration
Date (or complying with the procedure for book-entry transfer described below)
or (ii) complying with the guaranteed delivery procedures described below. THE
METHOD OF DELIVERY OF OUTSTANDING NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, OR AN OVERNIGHT OR HAND DELIVERY SERVICE, BE
USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY
DELIVERY. NO OUTSTANDING NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE
COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Outstanding Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of the
Outstanding Notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution (as defined herein). In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantee must be by a
participant in a recognized signature guaranty medallion program (each an
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"Eligible Institution"). If Outstanding Notes are registered in the name of a
person other than a signer of the Letter of Transmittal, the Outstanding Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Outstanding Notes at the
book-entry transfer facility, The Depository Trust Company, for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of Outstanding Notes by causing
such book-entry transfer facility to transfer such Outstanding Notes into the
Exchange Agent's account with respect to the Outstanding Notes in accordance
with the book-entry transfer facility's procedures for such transfer. Although
delivery of Outstanding Notes may be effected through book-entry transfer in
the Exchange Agent's account at the book-entry transfer facility, an
appropriate Letter of Transmittal with any required signature guarantee and
other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Outstanding Notes to reach the Exchange Agent before
the Expiration Date or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if the Exchange Agent
has received at its address or facsimile number set forth below on or prior to
the Expiration Date a letter, telegram or facsimile from an Eligible
Institution setting forth the name and address of the tendering holder, the
name in which the Outstanding Notes are registered and, if possible the
certificate number or numbers of the certificate or certificates representing
the Outstanding Notes to be tendered, and stating that the tender is being
made thereby and guaranteeing that within three business days after the
Expiration Date the Outstanding Notes in proper form for transfer (or a
confirmation of book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the book-entry transfer facility), will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Outstanding Notes being tendered by the above-described method are deposited
with the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Company may, at its option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by an Eligible Institution for
the purposes described in this paragraph are available from the Exchange
Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Outstanding Notes (or a confirmation of book-entry transfer
of such Outstanding Notes into the Exchange Agent's account at the book-entry
transfer facility) is received by the Exchange Agent, or (ii) a Notice of
Guaranteed Delivery or letter, telegram or facsimile to similar effect (as
provided above) from an Eligible Institution is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Outstanding Notes tendered
pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile
to similar effect (as provided above) by an Eligible Institution will be made
only against deposit of the Letter of Transmittal (and any other required
documents) and the tendered Outstanding Notes. All questions as to the
validity, form, eligibility (including time of receipt) and acceptance of
Outstanding Notes tendered for exchange will be determined by the Company in
its sole discretion, which determination will be final and binding on all
parties. The Company reserves the right to reject any and all tenders of any
particular Outstanding Notes not properly tendered or reject any particular
shares of Outstanding Notes the acceptance of which might, in the judgment of
the Company or its counsel, be unlawful. The
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Company also reserves the absolute right to waive any defects or
irregularities or condition of the Exchange Offer as to any particular
Outstanding Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Outstanding
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of Outstanding Notes for exchange must be cured within such time as
the Company shall determine. Neither the Company nor any other person shall be
under any duty to give notification of defects or irregularities with respect
to tenders of Outstanding Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal or any Outstanding Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-
fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each holder that is not a broker-dealer or is a broker-dealer
but is not receiving Exchange Notes for its own account will represent to the
Company that the Exchange Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of such holder's business, that such
holder has no arrangement or understanding with any person to participate in
the distribution of such Exchange Notes and that such holder is not an
"affiliate" of the Company as defined in Rule 405 under the Securities Act or,
if it is an affiliate, such holder will comply with the registration and
prospectus delivery requirements of the Securities Act, to the extent
applicable. Each broker-dealer that is receiving Exchange Notes for its own
account in exchange for Outstanding Notes that were acquired as a result of
market-making or other trading activities will represent to the Company that
it will deliver a prospectus in connection with any resale of such Outstanding
Notes. In addition, the Letter of Transmittal requires each holder to
represent and warrant that (a) the holder accepts the terms and conditions of
the Exchange Offer, (b) the holder has a net long position within the meaning
of Rule 14e-4 under the Exchange Act ("Rule 14e-4") equal to or greater than
the principal amount of Outstanding Notes being tendered, (c) the tender of
such Outstanding Notes complies with Rule 14e-4 (to the extent that Rule 14e-4
is applicable to such exchange), (d) the holder has full power and authority
to tender, exchange, assign and transfer the Outstanding Notes being tendered,
and (e) when the same are accepted for exchange by the Company, the Company
will acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim or
right.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Outstanding Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth under "--Certain
Conditions to the Exchange Offer", to terminate the Exchange Offer and (b) to
the extent permitted by applicable law, purchase Outstanding Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers may differ from the terms of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of Outstanding Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the business day prior to the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
letter, telegram or facsimile must be received by the Exchange Agent at any
time prior to 5:00 p.m., New York City time, on the business day prior to the
Expiration Date at its address or facsimile number set forth below. Any such
notice of withdrawal must (i) specify the name of the person having tendered
the Outstanding Notes to be withdrawn (the "Depositor"), (ii) identify the
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Outstanding Notes to be withdrawn (including the certificate number of numbers
of the certificate or certificates representing such Outstanding Notes and the
aggregate principal amount of such Outstanding Notes), (iii) be signed by the
holder in the same manner as the original signature on the Letter of
Transmittal by which such Outstanding Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to permit the Transfer Agent with respect to the Outstanding Notes
to register the transfer of such Outstanding Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Outstanding
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such withdrawal notices will be determined by the Company in its sole
discretion, which determination will be final and binding on all parties. Any
Outstanding Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be
issued with respect thereto unless the Outstanding Notes so withdrawn are
validly retendered. Any Outstanding Notes which have been tendered but which
are withdrawn will be returned to the holder thereof without cost to such
holder as soon as practicable after such withdrawal. Properly withdrawn
Outstanding Notes may be retendered by following one of the procedures
described above under "-- Procedures for Tendering Outstanding Notes" at any
time prior to the Expiration Date.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Outstanding
Notes properly tendered and will issue the Exchange Notes promptly after
acceptance of the Exchange Offer. See "-- Certain Conditions to the Exchange
Offer" below. For purposes of the Exchange Offer, the Company will be deemed
to have accepted properly tendered Outstanding Notes for exchange when the
Company has given oral or written notice thereof to the Exchange Agent.
In all cases, issuance of the Exchange Notes in exchange for Outstanding
Notes pursuant to the Exchange Offer will be made only after timely receipt by
the Company of such Outstanding Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents. If any tendered
Outstanding Notes are not accepted for exchange for any reason set forth in
the terms and conditions of the Exchange Offer, such unaccepted Outstanding
Notes will be returned without expense to the tendering holder thereof as
promptly as practicable after the rejection of such tender or the expiration
or termination of the Exchange Offer.
UNTENDERED OUTSTANDING NOTES
Holders of Outstanding Notes whose Outstanding Notes are not tendered or are
tendered but not accepted in the Exchange Offer will continue to hold such
Outstanding Notes and will be entitled to all the rights and preferences and
subject to the limitations applicable thereto. Following consummation of the
Exchange Offer, the holders of Outstanding Notes will continue to be subject
to the existing restrictions upon transfer thereof and, except as provided
herein, the Company will have no further obligation to such holders to provide
for the registration under the Securities Act of the Outstanding Notes held by
them. To the extent that Outstanding Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Outstanding Notes could be adversely affected.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or issue Exchange Notes in exchange for,
any Outstanding Notes, and may terminate or amend the Exchange Offer, if at
any time before the acceptance of such Outstanding Notes for exchange, any of
the following events shall occur:
(A) an injunction, order or decree shall have been issued by any court or
governmental agency that would prohibit, prevent or otherwise materially
impair the ability of the Company to proceed with the Exchange Offer; or
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(B) there shall occur a change in the current interpretation of the staff
of the Commission which current interpretation permits the Exchange Notes
issued pursuant to the Exchange Offer in exchange for the Outstanding Notes
to be offered for resale, resold and otherwise transferred by holders
thereof (other than (i) a broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to Rule 144A, Regulation S or
any other available exemption under the Securities Act or (ii) a person
that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to
participate in the distribution of Exchange Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Outstanding Notes and
return any Outstanding Notes that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Outstanding Notes tendered prior
to the Expiration Date, subject to the rights of such holders of tendered
shares of Outstanding Notes to withdraw their tendered Outstanding Notes, or
(iii) waive such termination event with respect to the Exchange Offer and
accept all properly tendered Outstanding Notes that have not been withdrawn.
If such waiver constitutes a material change in the Exchange Offer, the
Company will disclose such change by means of a supplement to this Prospectus
that will be distributed to each registered holder of Outstanding Notes, and
the Company will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders of the Outstanding Notes, if the Exchange
Offer would otherwise expire during such period.
In addition, the Company will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at any time any stop order shall be threatened by the
Commission or in effect with respect to the Registration Statement.
The Exchange Offer is not conditioned on any minimum principal amount of
Outstanding Notes being tendered for exchange.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions regarding Exchange Offer procedures and requests
for additional copies of this Prospectus or the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
By Mail:
By Hand:
or Overnight Delivery:
State Street Bank and Trust Company of California, N.A.
c/o State Street Bank and Trust Company
Two International Place
Boston, MA 02110
Attention: Kellie Mullen
Re: Fountain View, Inc.
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By Facsimile:
617-664-5290
Confirm by Telephone:
617-664-5587
State Street Bank and Trust Company of California, N.A. is also the Transfer
Agent for the Outstanding Notes and Exchange Notes.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptance of the Exchange Offer. The Company, however,
will pay the Exchange Agent reasonable and customary fees for its services and
will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The cash expenses to be incurred by the Company in
connection with the Exchange Offer will be paid by the Company.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Exchange Offer is not being made to
(nor will tenders be accepted from or on behalf of) holders of Outstanding
Notes in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Outstanding Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Outstanding Notes not tendered or accepted for
exchange are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the Outstanding Notes
tendered, or if tendered Outstanding Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Exchange
Notes pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holders.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. Expenses incurred in connection
with the issuance of the Exchange Notes will be amortized by the Company over
the term of the Exchange Notes under generally accepted accounting principles.
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PLAN OF DISTRIBUTION
Based on interpretations of the staff of the Division of Corporation Finance
of the Commission set forth in no-action letters issued to third parties, the
Company believes that, except as described below, Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the respective holders thereof without further compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that (i) such Exchange Notes are acquired in the ordinary course of
such holder's business and (ii) such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
of the Exchange Notes. A holder of Outstanding Notes that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act or that is
a broker-dealer that purchased Outstanding Notes from the Company to resell
pursuant to an exemption from registration under the Securities Act (a) cannot
rely on such interpretations by the staff of the Division of Corporation
Finance of the Commission, (b) will not be permitted or entitled to tender
such Outstanding Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Outstanding Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
In addition, any holder who tenders Outstanding Notes in the Exchange Offer
with the intention or for the purpose of participating in a distribution of
the Exchange Notes cannot rely on such interpretations by the staff of the
Division of Corporation Finance of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with the secondary resale transaction. Unless an exemption from
registration is otherwise available, any such resale transaction should be
covered by an effective registration statement containing selling security
holders information required by Item 507 of Regulation S-K under the
Securities Act. To date, the staff of the Division of Corporation Finance of
the Commission has taken the position that a broker-dealer that has acquired
securities in exchange for securities that were acquired by such broker-dealer
as a result of market-making activities or other trading activities may
fulfill the prospectus delivery requirements with the prospectus contained in
an exchange offer registration statement.
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make
certain representations to the Company set forth in "The Exchange Offer--
Purpose of the Exchange Offer".
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of such Exchange Notes. This Prospectus may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired as a result of market-making
activities or other trading activities. Subject to certain provisions set
forth in the Registration Rights Agreement, the Company has agreed that, for a
period of up to 180 days after the effective date of the Registration
Statement, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Risk Factors--Absence of Public
Market for the Notes" and "The Exchange Offer--Procedures for Tendering
Outstanding Notes".
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer
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and any broker or dealer that participates in a distribution of such Exchange
Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit from any such resale of Exchange Notes and any
commissions or concessions received by any such person may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Subject to certain provisions set forth in the Registration Rights
Agreement, for a period of 180 days after the effective date of the
Registration Statement, the Company will promptly send additional copies of
this Prospectus and any amendment or supplement to this Prospectus to any
participating broker-dealer that requests such documents in the Letter of
Transmittal. The Company has agreed to pay the expenses incident to the
Exchange Offer, other than any discounts or commissions incurred upon the sale
of the Exchange Notes. The Company will indemnify each participating broker-
dealer selling Exchange Notes against certain liabilities, including
liabilities under the Securities Act.
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DESCRIPTION OF NOTES
GENERAL
Except as otherwise indicated, the following description relates both to the
Outstanding Notes issued in the Note Offering and the Exchange Notes, together
with the Exchange Guarantees, to be issued in exchange for the Outstanding
Notes in the Exchange Offer. The form and terms of the Exchange Notes are the
same as the form and terms of the Outstanding Notes, except that the Exchange
Notes have been registered under the Securities Act and therefore will not
bear legends restricting the transfer thereof. The Exchange Notes will be
obligations of the Company evidencing the same indebtedness as the Outstanding
Notes. The Outstanding Notes were issued, and the Exchange Notes offered
hereby will be issued, pursuant to an Indenture (the "Indenture") between the
Company, the Guarantors and State Street Bank and Trust Company of California,
N.A., as trustee (the "Trustee"), in a private transaction that is not subject
to the registration requirements of the Securities Act. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
proposed form of Indenture and Registration Rights Agreement are available as
set forth below under "--Additional Information". The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions". For purposes of this summary, the term "Company" refers only to
Fountain View, Inc. and not to any of its Subsidiaries.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all current and future Senior Debt. As of
June 30, 1998, the Company had Senior Debt of approximately $126 million, $15
million of mandatory redeemable preferred stock and, through its Subsidiaries,
would have had additional liabilities (including trade payables) aggregating
approximately $71.5 million. The Indenture permits the incurrence of
additional Senior Debt in the future.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes are
effectively subordinated to all Indebtedness and other liabilities and
commitments (including trade payables) of the Company's Subsidiaries. Any
right of the Company to receive assets of any of its Subsidiaries upon the
latter's liquidation or reorganization (and the consequent right of the
Holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors, except to the
extent that the Company is itself recognized as a creditor of such Subsidiary,
in which case the claims of the Company would still be subordinate to any
security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company. As of June 30, 1998, the
Company's Subsidiaries had approximately $24.5 million of Indebtedness, $46.9
million of trade payables and other liabilities outstanding and $15.0 million
of mandatory redeemable preferred stock. See "Risk Factors--Ability of Company
to Obtain Funds from Subsidiaries".
As of the date of the Indenture, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $120.0 million and
will mature on April 15, 2008. Interest on the Notes accrues at the rate of 11
1/4% per annum and will be payable semi-annually
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in arrears on April 15 and October 15, commencing on October 15, 1998, to
Holders of record on the immediately preceding April 1 and October 1. Interest
on the Notes accrues from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of original issuance. Interest
is computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages on the Notes
is payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company,
payment of interest and Liquidated Damages may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register
of Holders of Notes; provided that all payments of principal, premium,
interest and Liquidated Damages with respect to Notes the Holders of which
have given wire transfer instructions to the Company will be required to be
made by wire transfer of immediately available funds to the respective
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed by the Guarantors. The Guarantee of each Guarantor are unsecured
and subordinated to the prior payment in full of all Senior Debt of such
Guarantor, which as of June 30, 1998 included approximately $126 million of
Senior Debt and the amounts for which the Guarantors are liable under the
guarantees issued from time to time with respect to Senior Debt, including
guarantees of all Obligations under the New Credit Facility. The Subsidiary
Guarantees provide that the Obligations of each Guarantor thereunder are
limited so as not to constitute a fraudulent conveyance under applicable law.
See, however, "Risk Factors--Effect of Fraudulent Transfer Statutes on
Validity of Notes and Guarantees".
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor under the
Registration Rights Agreement and, pursuant to a supplemental indenture in
form and substance reasonably satisfactory to the Trustee, under the Notes and
the Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; and (iii) except in the case of a merger
of a Guarantor with or into another Guarantor or a merger of a Guarantor with
or into the Company, the Company would be permitted by virtue of the Company's
pro forma Fixed Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the covenant described below
under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock".
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor (other than to the Company or another
Guarantor), by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the Capital Stock of any Guarantor (other than to the
Company or another Guarantor), then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the entity acquiring the property
(in the event of a sale or other disposition of all of the assets of such
Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee and any such acquiring entity will not be required to
assume any obligations of such Guarantor under the applicable Subsidiary
Guarantee; provided that the Net Proceeds of such sale or other disposition
are applied in accordance with the applicable provisions of the Indenture. See
"Repurchase at Option of Holders--Asset Sales".
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SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company or any Guarantor in a
liquidation or dissolution of the Company or any Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or any Guarantor or its property, an assignment for the benefit of
creditors or any marshalling of the Company's or any Guarantor's assets and
liabilities, the holders of Senior Debt will be entitled to receive payment in
full of all Obligations due in respect of such Senior Debt (including interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Debt) before the Holders of Notes will be entitled to
receive any payment with respect to the Notes, and until all Obligations with
respect to Senior Debt are paid in full, any distribution to which the Holders
of Notes would be entitled shall be made to the holders of Senior Debt (except
that Holders of Notes may receive and retain Permitted Junior Securities and
payments made from the trust described under "--Legal Defeasance and Covenant
Defeasance").
The Company and the Guarantors also may not make any payment upon or in
respect of the Notes or the Guarantees (except in Permitted Junior Securities
or from the trust described under "--Legal Defeasance and Covenant
Defeasance") if (i) a default in the payment of the principal of, premium, if
any, or interest on Senior Debt occurs and is continuing beyond any applicable
period of grace or (ii) any other default occurs and is continuing with
respect to Designated Senior Debt that permits holders of the Designated
Senior Debt as to which such default relates to accelerate its maturity and
the Trustee receives a notice of such default (a "Payment Blockage Notice")
from the Company or the holders of any Designated Senior Debt. Payments on the
Notes may and shall be resumed (a) in the case of a payment default, upon the
date on which such default is cured or waived and (b) in case of a nonpayment
default, the earlier of the date on which such nonpayment default is cured or
waived or 179 days after the date on which the applicable Payment Blockage
Notice is received by the Trustee, unless the maturity of any Designated
Senior Debt has been accelerated. No new period of payment blockage under
clause (ii) above may be commenced unless and until (i) 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice and
(ii) all scheduled payments of principal, premium, if any, and interest on the
Notes that have come due have been paid in full in cash. No nonpayment default
that existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period of not
less than 180 days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company and the Guarantors who are holders of Senior Debt.
The principal amount of Senior Debt outstanding at June 30, 1998 was
approximately $126.0 million. The Indenture limits, subject to certain
financial tests, the amount of additional Indebtedness, including Senior Debt,
that the Company and its Subsidiaries can incur. See "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock".
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to April 15,
2003. Thereafter, the Notes will be subject to redemption at any time or from
time to time at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices
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(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest and Liquidated Damages thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on April
15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................... 105.625%
2004........................................................... 103.750
2005........................................................... 101.875
2006 and thereafter............................................ 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to April 15, 2001, the
Company may redeem up to 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price of 111.25% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds of
one or more Public Equity Offerings by the Company; provided that at least
$78.0 million in aggregate principal amount of Notes remain outstanding
immediately after the occurrence of such redemption (excluding Notes held by
the Company and its Subsidiaries); and provided, further, that such redemption
shall occur within 60 days of the date of the closing of such Public Equity
Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within fifteen Business Days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes on the date specified in such notice,
which date shall be no earlier than 30 days and no later than 60 days from the
date such notice is mailed (the "Change of Control Payment Date"), pursuant to
the procedures required by the Indenture and described in such notice. The
Company will
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comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will
either repay all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The New Credit Facility currently prohibits the Company from purchasing any
Notes and also provides that certain change of control events, including,
without limitation, a Change of Control, with respect to the Company would
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of Notes or
could attempt to refinance the borrowings that contain such prohibition. If
the Company does not obtain such a consent or repay such borrowings, the
Company will remain prohibited from purchasing Notes. In such case, the
Company's failure to purchase tendered Notes would constitute an Event of
Default under the Indenture which would, in turn, constitute a default under
the New Credit Facility. In such circumstances, the subordination provisions
in the Indenture would likely restrict payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
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Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash; provided that the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet), of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes
or the Subsidiary Guarantees thereof) that are assumed by the transferee of
any such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) in the
case of any Asset Sale constituting the transfer (by merger or otherwise) of
all of the Capital Stock of a Restricted Subsidiary, any liabilities (as shown
on such Restricted Subsidiary's most recent balance sheet) of such Restricted
Subsidiary (other than contingent liabilities and liabilities that are by
their terms subordinated to the Notes or the Subsidiary Guarantees) that will
remain outstanding after such transfer and will not be a liability of the
Company or any other Restricted Subsidiary of the Company following such
transfer and (z) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay Senior
Debt, or (b) to the acquisition of a majority of the assets of, or a majority
of the Voting Stock of, a Healthcare Related Business, the making of a capital
expenditure or the acquisition of other long-term assets for use in a
Healthcare Related Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce revolving credit borrowings or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds
exceeds $5.0 million, the Company will be required to make an offer to all
Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase, in accordance with the procedures set forth in the
Indenture. To the extent that any Excess Proceeds remain after consummation of
an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate principal amount
of Notes tendered into such Asset Sale Offer surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to
be purchased on a pro rata basis. Upon completion of such offer to purchase,
the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company's or
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any of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or to the Company or a Restricted
Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or
retire for value (including, without limitation, in connection with any merger
or consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company; (iii) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness that is subordinated to the Notes except a payment
of interest or principal at Stated Maturity, or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), (vi) and (vii) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company since the date of the Indenture as a contribution to its
common equity capital or from the issue or sale of Equity Interests of the
Company (other than Disqualified Stock) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company), plus (iii) to the extent that any Restricted Investment that
was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness that is subordinated to the Notes or Equity
Interests of the Company in exchange for, or out of the net cash proceeds of
the substantially concurrent sale (other than to a Restricted Subsidiary of
the Company) of, other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance
or other acquisition shall be excluded from clause (c) (ii) of the preceding
paragraph; (iii) the defeasance, redemption, repurchase or other acquisition
of Indebtedness that is subordinated to the Notes with the net cash proceeds
from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of
any dividend (in cash or otherwise) by a Restricted Subsidiary of the Company
to the holders of its common Equity Interests on a pro rata basis; and (v) the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Restricted Subsidiary of the Company
held by any member of the Company's (or any of its Restricted Subsidiaries')
management pursuant to any management equity
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subscription agreement, stock option agreement or employment agreement;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $2.0 million in any
twelve-month period and no Default or Event of Default shall have occurred and
be continuing immediately after such transaction; (vi) the repurchase,
redemption or other acquisition or retirement for value of any Equity
Interests of the Company or any Subsidiary of the Company held by any member
of the Company's (or any of its Subsidiaries') management pursuant to any
management equity subscription agreement, stock option agreement or employment
agreement, provided that the purchase price is paid with the proceeds to the
Company of key man life insurance or disability insurance policies purchased
by the Company specifically to finance any such repurchase, redemption or
other acquisition; or (vii) the payment of the Transaction Related Payments.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant or Permitted
Investments, as applicable. All such outstanding investments will be deemed to
constitute Restricted Investments in an amount equal to the greatest of (x)
the net book value of such Investments at the time of such designation, (y)
the fair market value of such Investments at the time of such designation and
(z) the original fair market value of such Investments at the time they were
made. Such designation will only be permitted if such Restricted Payment would
be permitted at such time and if such Restricted Subsidiary otherwise meets
the definition of an Unrestricted Subsidiary. The Board of Directors may
redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if such
redesignation would not cause a Default.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by
this covenant shall be determined by the Board of Directors whose resolution
with respect thereto shall be delivered to the Trustee, such determination to
be based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if such fair market value exceeds
$10.0 million. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which
the calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred
stock, provided, however, that the Company may incur Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock and the Company's
Subsidiaries may incur Indebtedness or issue preferred stock if the Fixed
Charge Coverage Ratio for the Company's most recently ended four full fiscal
quarters (excluding any fiscal quarters ending prior to July 1, 1997) for
which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock or preferred stock is issued would have been at least 2.0 to 1,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock or preferred stock had been issued, as the case may be,
at the beginning of such four-quarter period.
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The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness and letters of credit
(with letters of credit being deemed to have a principal amount equal to
the stated amount thereof) and other obligations under Credit Facilities in
an aggregate principal amount that does not exceed at any one time $115.0
million less the aggregate amount of all Net Proceeds of Asset Sales
applied by the Company or any of its Subsidiaries to repay Indebtedness
under such Credit Facilities pursuant to the covenant described above under
the caption "--Asset Sales" (other than temporary paydowns pending final
application of such Net Proceeds);
(ii) the incurrence by the Company and the Guarantors of the Existing
Indebtedness and the issuance of the Existing Disqualified Stock;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes in an aggregate principal amount not to exceed $120.0 million;
(iv) the incurrence by the Company or any of the Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Subsidiary, in an aggregate principal amount, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (iv), that does not
exceed at any one time the amount of such Capital Lease Obligations,
mortgage financings or purchase money obligations outstanding as of the
date of the Indenture, plus $5.0 million;
(v) the incurrence by the Company or any of the Guarantors of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to be incurred under the
first paragraph hereof or clauses (ii) or (iv) of this paragraph;
(vi) the incurrence by the Company or any of the Guarantors of
intercompany Indebtedness between or among the Company and any Guarantor;
provided, however, that (i) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the Notes and
(ii)(A) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Guarantor thereof and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a Guarantor
thereof shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Guarantor, as the case may be, that was
not permitted by this clause (vi);
(vii) the incurrence by the Company or any of the Guarantors of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate Indebtedness that is permitted
by the terms of this Indenture to be outstanding; and
(viii) the guarantee by the Company or any of its Subsidiaries or any of
the Guarantors of Indebtedness of the Company or another Guarantor that was
permitted to be incurred by another provision of this covenant;
(ix) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (ix), and
the issuance of preferred stock by Unrestricted Subsidiaries; and
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(x) the incurrence by the Company or any of the Guarantors of additional
Indebtedness in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (x), not to exceed $5.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (x) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms, and
the payment of dividends on Disqualified Stock in the form of additional
shares of the same class of Disqualified Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Stock for purposes
of this covenant; provided, in each such case, that the amount thereof is
included in Fixed Charges of the Company as accrued (to the extent not already
included in Fixed Charges).
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien of any kind on any asset now owned or hereafter
acquired, securing Indebtedness or trade payables, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are not materially more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than those
contained in the agreements governing such Existing Indebtedness as in effect
on the date of the Indenture, (b) the New Credit Facility as in effect as of
the date of the Indenture, or other Credit Facilities entered into subsequent
to the date of the Indenture, and in either case any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such other Credit
Facilities or amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are not materially more
restrictive, taken as a whole, with respect to such dividend and other payment
restrictions than those contained in the New Credit Facility as in effect on
the date of the Indenture, (c) the Indenture and the Notes, (d) applicable
law, (e) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or
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the property or assets of the Person, so acquired, provided that, in the case
of Indebtedness, such Indebtedness was permitted by the terms of the Indenture
to be incurred, (f) customary non-assignment provisions in leases and other
contracts and other contracts entered into in the ordinary course of business
and consistent with past practices, (g) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions
of the nature described in clause (iii) above on the property so acquired, (h)
any agreement for the sale of a Subsidiary or a substantial proportion of such
Subsidiary's assets that restricts distributions by that Subsidiary pending
its sale, (i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are not materially more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced,
(j) secured Indebtedness otherwise permitted to be incurred pursuant to the
provisions of the covenant described above under the caption "--Liens" that
limits the right of the debtor to dispose of the assets securing such
Indebtedness, (k) provisions with respect to the disposition or distribution
of assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business and (l) restrictions on cash
or other deposits or net worth imposed by customers under contracts entered
into in the ordinary course of business.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, convey or otherwise dispose of all or substantially all of
its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, conveyance or other disposition shall have been made is
a corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia; (ii) except in the case of a merger
or consolidation of the Company with or into a Wholly Owned Restricted
Subsidiary of the Company, the entity or Person formed by or surviving any
such consolidation or merger (if other than the Company) or the entity or
Person to which such sale, assignment, transfer, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Registration Rights Agreement, the Notes and the Indenture pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default
exists; and (iv) except in the case of a merger of the Company with or into a
Wholly Owned Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated
Net Worth of the Company immediately preceding the transaction and (B) will,
immediately after such transaction after giving pro forma effect thereto and
any related financing transaction as if the same had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock". The Indenture
provides that the Company shall not lease its properties and assets
substantially as an entirety to any Person.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is
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on terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Board of Directors and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing. Notwithstanding the
foregoing, the following items shall not be deemed to be Affiliate
Transactions: (i) any employment agreement entered into by the Company or any
of its Subsidiaries in the ordinary course of business and consistent with the
past practice of the Company or such Subsidiary, (ii) transactions between or
among the Company and/or its Restricted Subsidiaries, (iii) payment of
reasonable directors fees to Persons who are not otherwise Affiliates of the
Company, (iv) any sale or other issuance of Equity Interests (other than
Disqualified Stock) of the Company, (v) Restricted Payments that are permitted
by the provisions of the Indenture described above under the caption "--
Restricted Payments", and (vi) Existing Affiliate Transactions.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company may enter into a sale and leaseback transaction if
(i) the Company could have incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Additional
Indebtedness and Issuance of Preferred Stock", (ii) the gross cash proceeds of
such sale and leaseback transaction are at least equal to the fair market
value (as determined in good faith by the Board of Directors and set forth in
an Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and (iii) the transfer of
assets in such sale and leaseback transaction is permitted by, and the Company
applies the proceeds of such transaction in compliance with, the covenant
described above under the caption "--Asset Sales".
Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
expressly subordinate or junior in right of payment to any Senior Debt and
senior in any respect in right of payment to the Notes, and (ii) no Guarantor
will incur, create, issue, assume, guarantee or otherwise become liable for
any Indebtedness that is expressly subordinate or junior in right of payment
to the Senior Guarantees and senior in any respect in right of payment to the
Guarantees.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders of the Notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
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Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Subsidiary after the date of the
Indenture, then such newly acquired or created Subsidiary shall become a
Guarantor and execute a Supplemental Indenture and deliver an Opinion of
Counsel, in accordance with the terms of the Indenture; provided, that all
Subsidiaries that have properly been designated as Unrestricted Subsidiaries
in accordance with the Indenture (i) shall not be subject to the requirements
of this covenant and (ii) shall be released from all Obligations under any
Guarantee, in each case for so long as they continue to constitute
Unrestricted Subsidiaries.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the Commission's
rules and regulations. In addition, following the consummation of the Exchange
Offer, whether or not required by the rules and regulations of the Commission,
the Company will file a copy of all such information and reports with the
Commission for public availability within the time periods specified in the
Commission's rules and regulations (unless the Commission will not accept such
a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the
Guarantors have agreed that, for so long as any Notes remain outstanding, they
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act. Any materials required
to be furnished to Holders of Notes by this covenant shall discuss, in
reasonable detail, either on the face of the financial statements included
therein or in the footnotes thereto and in any Management's Discussion and
Analysis of Financial Condition and Results of Operations, the financial
condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations
of the Unrestricted Subsidiaries of the Company.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (ii) default in payment when
due of the principal of or premium, if any, on the Notes (whether or not
prohibited by the subordination provisions of the Indenture); (iii) failure by
the Company or any of its Subsidiaries for 30 days after notice to comply with
the provisions described under the captions "--Change of Control", "--Asset
Sales", "--Restricted Payments" or "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; (iv) failure by the Company or any of its Subsidiaries
for 60 days after notice to comply with any of its other agreements in the
Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, which default
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness the maturity of which
has been so accelerated, aggregates $5.0 million or more;
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(vi) failure by the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries; and (viii) except as permitted by the Indenture, any Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid in any
material respect or shall cease for any reason to be in full force and effect
or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny
or disaffirm its obligations under its Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
April 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to April 15, 2003, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest, Liquidated Damages or premium on, or the principal of,
the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or the Registration Rights Agreement or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below,
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(ii) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Notes on the Stated Maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound, including, without
limitation, the New Credit Facility; (vi) the Company must have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and
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transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture. The Company is not
required to transfer or exchange any Note selected for redemption. Also, the
Company is not required to transfer or exchange any Note for a period of
15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"); (iii) reduce the
rate of or change the time for payment of interest on any Note; (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
Liquidated Damages, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration); (v) make any Note payable in money other
than that stated in the Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of or premium, if any, or interest on
the Notes; (vii) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"); or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to
the provisions of Article 10 of the Indenture (which relate to subordination)
will require the consent of the Holders of at least 75% in aggregate principal
amount of the Notes then outstanding if such amendment would adversely affect
the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
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The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Fountain View,
Inc., 11900 W. Olympic Blvd., Suite 680, Los Angeles, California 90064,
Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The Outstanding Notes were offered and sold to qualified institutional
buyers in reliance on Rule 144A ("Rule 144A Notes"). The Outstanding Notes
were also offered and sold in offshore transactions in reliance on Regulation
S ("Regulation S Notes"). Except as set forth below, the Outstanding Notes are
issued in registered, global form in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof. Notes were issued at the
Closing only against payment in immediately available funds.
Rule 144A Notes are represented by one or more Notes in registered, global
form without interest coupons (collectively, the "Rule 144A Global Notes").
Regulation S Notes are represented by one or more Notes in registered, global
form without interest coupons (collectively, the "Regulation S Global Notes"
and, together with the Rule 144A Global Notes, the "Outstanding Global
Notes"). The Outstanding Global Notes were deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York,
New York, and registered in the name of DTC or its nominee, in each case for
credit to an account of a direct or indirect participant in DTC as described
below. Through and including the 40th day after the later of the commencement
of the Note Offering and the Closing (such period through and including such
40th day, the "Restricted Period"), beneficial interests in the Regulation S
Global Notes could be held only through the Euroclear System ("Euroclear") and
Cedel, S.A. ("Cedel") (as indirect participants in DTC), unless transferred to
a person that took delivery through a Rule 144A Global Note in accordance with
the certification requirements described below. Beneficial interests in the
Rule 144A Global Notes may not be exchanged for beneficial interests in the
Regulation S Global Notes at any time except in the limited circumstances
described below. See "--Exchanges between Regulation S Notes and Rule 144A
Notes".
Except as set forth below, the Outstanding Global Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee. Beneficial interests in the Outstanding Global Notes may
not be exchanged for Outstanding Notes in certificated form except in the
limited circumstances described below. See "--Exchange of Book-Entry Notes for
Certificated Notes". Except in the limited circumstances described below,
owners of beneficial interests in the Outstanding Global Notes are not
entitled to receive physical delivery of Certificated Notes (as defined
below).
Rule 144A Notes (including beneficial interests in the Rule 144A Global
Notes) are subject to certain restrictions on transfer and bear a restrictive
legend. Regulation S Notes also bear a restrictive legend. In addition,
transfers of beneficial interests in the Outstanding Global Notes are subject
to the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and Cedel), which
may change from time to time.
The Trustee acts as Paying Agent and Registrar. The Outstanding Notes may be
presented for registration of transfer and exchange at the offices of the
Registrar.
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Depository Procedures
The following description of the operations and procedures of DTC, Euroclear
and Cedel are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Outstanding Global Notes, DTC credited the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Outstanding Global Notes and (ii) ownership of
such interests in the Outstanding Global Notes is shown on, and the transfer
of ownership thereof will be effected only through, records maintained by DTC
(with respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interest in the
Outstanding Global Notes).
Investors in the Rule 144A Global Notes may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants
in such system. Investors in the Regulation S Global Notes must initially hold
their interests therein through Euroclear or Cedel, if they are participants
in such systems, or indirectly through organizations that are participants in
such systems. After the expiration of the Restricted Period (but not earlier),
investors may also hold interests in the Regulation S Global Notes through
Participants in the DTC system other than Euroclear and Cedel. Euroclear and
Cedel will hold interests in the Regulation S Global Notes on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective depositories, which are Morgan Guaranty Trust
Company of New York, Brussels office, as operator of Euroclear, and Citibank,
N.A., as operator of Cedel. All interests in a Global Note, including those
held through Euroclear or Cedel, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Cedel may also
be subject to the procedures and requirements of such systems. The laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Note to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act
on behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Outstanding Global Note to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the
lack of a physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE OUTSTANDING GLOBAL
NOTES DO NOT HAVE OUTSTANDING NOTES REGISTERED IN THEIR NAMES, WILL NOT
RECEIVE PHYSICAL DELIVERY OF OUTSTANDING NOTES IN CERTIFICATED FORM AND WILL
NOT BE CONSIDERED THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE
INDENTURE FOR ANY PURPOSE.
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Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on an Outstanding Global Note registered in the
name of DTC or its nominee will be payable to DTC in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the Outstanding
Notes, including the Outstanding Global Notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Outstanding Global Notes, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Outstanding Global Notes or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the Outstanding Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in the principal amount of beneficial interest in the relevant
security as shown on the records of DTC unless DTC has reason to believe it
will not receive payment on such payment date. Payments by the Participants
and the Indirect Participants to the beneficial owners of the Outstanding
Notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants
and will not be the responsibility of DTC, the Trustee or the Company. Neither
the Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Outstanding Notes,
and the Company and the Trustee may conclusively rely on and will be protected
in relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants, interest
in the Outstanding Global Notes are eligible to trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests
will, therefore, settle in immediately available funds, subject in all cases
to the rules and procedures of DTC and its Participants. See "--Same Day
Settlement and Payment".
Subject to any applicable transfer restrictions, transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same day funds, and transfers between participants in
Euroclear and Cedel will be effected in the ordinary way in accordance with
their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Outstanding Notes described herein, cross-market transfers between the
Participants in DTC, on the one hand, and Euroclear or Cedel participants, on
the other hand, will be effected through DTC in accordance with DTC's rules on
behalf of Euroclear or Cedel, as the case may be, by its respective
depositary; however, such cross-market transactions will require delivery of
instructions to Euroclear or Cedel, as the case may be, by the counterparty in
such system in accordance with the rules and procedures and within the
established deadlines (Brussels time) of such system. Euroclear or Cedel, as
the case may be, will, if the transaction meets its settlement requirements,
deliver instructions to its respective depositary to take action to effect
final settlement on its behalf by delivering or receiving interests in the
relevant Outstanding Global Note in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear participants and Cedel participants may not deliver
instructions directly to the depositories for Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of the Outstanding Notes only at the direction of one or
more Participants to whose account DTC has credited the interests in the
Outstanding Global Notes and only in respect of such portion of the aggregate
principal amount of the Outstanding Notes as to which such Participant or
Participants has
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or have given such direction. However, if there is an Event of Default under
the Outstanding Notes, DTC reserves the right to exchange the Outstanding
Global Notes for legended Outstanding Notes in certificated form, and to
distribute such Outstanding Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Regulation S Global Notes and in the
Rule 144A Global Notes among Participants in DTC, Euroclear and Cedel, they
are under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor
the Trustee nor any of their respective agents will have any responsibility
for the performance by DTC, Euroclear or Cedel or their respective
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
An Outstanding Global Note is exchangeable for definitive Outstanding Notes
in registered certificated form ("Certificated Notes") if (i) DTC (x) notifies
the Company that it is unwilling or unable to continue as depositary for the
Outstanding Global Notes and the Company thereupon fails to appoint a
successor depositary or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Company, at its option, notifies the Trustee
in writing that it elects to cause the issuance of the Certificated Notes or
(iii) there shall have occurred and be continuing a Default or Event of
Default with respect to the Outstanding Notes. In addition, beneficial
interests in an Outstanding Global Note may be exchanged for Certificated
Notes upon request upon compliance with the procedures set forth in the
Indenture. In all cases, Certificated Notes delivered in exchange for any
Outstanding Global Note or beneficial interests therein will be registered in
the names, and issued in any approved denominations, requested by or on behalf
of the depositary (in accordance with its customary procedures) and will bear
the applicable restrictive legend, unless the Company determines otherwise in
compliance with applicable law.
Exchange of Certificated Notes for Book-Entry Notes
Outstanding Notes issued in certificated form may not be exchanged for
beneficial interests in any Outstanding Global Note unless the transferor
first delivers to the Trustee a written certificate (in the form provided in
the Indenture) to the effect that such transfer will comply with any
appropriate transfer restrictions applicable to such Outstanding Notes.
Exchanges Between Regulation S Notes and Rule 144A Notes
Prior to the expiration of the Restricted Period, beneficial interests in
the Regulation S Global Note may be exchanged for beneficial interests in the
Rule 144A Global Note only if such exchange occurs in connection with a
transfer of the Outstanding Notes pursuant to Rule 144A and the transferor
first delivers to the Trustee a written certificate (in the form provided in
the Indenture) to the effect that the Outstanding Notes are being transferred
to a person who the transferor reasonably believes to be a qualified
institutional buyer within the meaning of Rule 144A, purchasing for its own
account or the account of a qualified institutional buyer in a transaction
meeting the requirements of Rule 144A and in accordance with all applicable
securities laws of the states of the United States and other jurisdictions.
Beneficial interest in a Rule 144A Global Note may be transferred to a
person who takes delivery in the form of an interest in the Regulation S
Global Note, whether before or after the expiration of the Restricted Period,
only if the transferor first delivers to the Trustee a written certificate (in
the form provided in the Indenture) to the effect that such transfer is being
made in accordance with Rule 903 or 904 of Regulation S or Rule 144 (if
available) and that, if such transfer occurs prior to the expiration of the
Restricted Period, the interest transferred will be held immediately
thereafter through Euroclear or Cedel.
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Transfers involving an exchange of a beneficial interest in the Regulation S
Global Note for a beneficial interest in a Rule 144A Global Note or vice versa
will be effected in DTC by means of an instruction originated by the Trustee
through the DTC Deposit/Withdraw at Custodian system. Accordingly, in
connection with any such transfer, appropriate adjustments will be made to
reflect a decrease in the principal amount of the Regulation S Global Note and
a corresponding increase in the principal amount of the Rule 144A Global Note
or vice versa, as applicable. Any beneficial interest in one of the
Outstanding Global Notes that is transferred to a person who takes delivery in
the form of an interest in the other Outstanding Global Note will, upon
transfer, cease to be an interest in such Outstanding Global Note and will
become an interest in the other Outstanding Global Note and, accordingly, will
thereafter be subject to all transfer restrictions and other procedures
applicable to beneficial interest in such other Outstanding Global Note for so
long as it remains such an interest. The policies and practices of DTC may
prohibit transfers of beneficial interests in the Regulation S Global Note
prior to the expiration of the Restricted Period.
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Outstanding Notes
represented by the Outstanding Global Notes (including principal, premium, if
any, interest and Liquidated Damages, if any) be made by wire transfer of
immediately available funds to the accounts specified by the Outstanding
Global Note Holder. With respect to Outstanding Notes in certificated form,
the Company will make all payments of principal, premium, if any, interest and
Liquidated Damages, if any, by wire transfer of immediately available funds to
the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address. The
Outstanding Notes represented by the Outstanding Global Notes are expected to
be eligible to trade in the PORTAL market and to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such Outstanding Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any certificated Outstanding Notes will also be
settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in an Outstanding Global Note from a
Participant in DTC will be credited, and any such crediting will be reported
to the relevant Euroclear or Cedel participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Cedel) immediately following the settlement date of DTC. DTC has advised the
Company that cash received in Euroclear or Cedel as a result of sales of
interests in an Outstanding Global Note by or through a Euroclear or Cedel
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Cedel cash account only as of the business day for Euroclear or Cedel
following DTC's settlement date.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of
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this definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities, by agreement
or otherwise; provided that beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "--Change of
Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following items shall not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to a
Restricted Subsidiary or by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary,
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "--Restricted Payments", and (iv) an exchange of facilities
by the Company or a Restricted Subsidiary to the extent that such facilities
are exchanged for one or more nursing centers, long-term care facilities,
assisted living facilities, outpatient clinics or any other facilities or
businesses that are used or useful in the provision of healthcare related
services, in each case the aggregate fair market value of which is equal to or
greater than the fair market value of the facilities so exchanged, as
determined in good faith by the Board of Directors.
"Attributable Debt" in respect of a sale and leaseback transaction or an
operating lease in respect of a healthcare facility means, at the time of
determination, the present value (discounted at the rate of interest implicit
in such transaction, determined in accordance with GAAP) of the obligation of
the lessee of the property subject to such sale and leaseback transaction or
operating lease in respect of a healthcare facility for net rental payments
during the remaining term of the lease included in such transaction (including
any period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not
exceeding six months and overnight bank deposits, in each case with
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any lender party to the New Credit Facility or with any domestic commercial
bank having capital and surplus in excess of $500 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial
paper having the highest rating obtainable from Moody's Investors Service,
Inc. or Standard & Poor's Corporation and in each case maturing within six
months after the date of acquisition and (vi) money market funds at least 95%
of the assets of which constitute Cash Equivalents of the kinds described in
clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than one or more Principals and their
Related Parties, (ii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than one or more Principals and their
Related Parties, becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall
be deemed to have "beneficial ownership" of all securities that such person
has the right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition), directly or
indirectly, of more than 50% of the Voting Stock of the Company (measured by
voting power rather than number of shares), (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than one or
more Principals and their Related Parties, becomes the "beneficial owner" (as
defined above), directly or indirectly, of more than 35% of the Voting Stock
of the Company (measured by voting power rather than number of shares) and the
Principals and their Related Parties in the aggregate "beneficially own" (as
defined above) less than 35% of the Voting Stock of the Company (measured by
voting power rather than number of shares) or, in the event the Company has
consummated a Public Equity Offering, less than 20% of the Voting Stock of the
Company (measured by voting power rather than number of shares), or (iv) the
first day on which a majority of the members of the Board of Directors of the
Company are not Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent
that such provision for taxes was included in computing such Consolidated Net
Income, plus (iii) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, plus (v) any non-recurring expenses
related to Fountain View's reorganization transactions during August 1997,
plus (vi) non-recurring financing, advisory and other expenses incurred in
connection with the Transactions, minus (vii) non-cash items increasing
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such Consolidated Net Income for such period (other than items that were
accrued in the ordinary course of business), in each case, on a consolidated
basis and determined in accordance with GAAP. Notwithstanding the foregoing,
the provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Subsidiary of the Company shall
be added to Consolidated Net Income to compute Consolidated Cash Flow of the
Company only to the extent that a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Guarantor, (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iv) the cumulative effect of
a change in accounting principles shall be excluded, (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Subsidiaries and (vi) the Net Income of any Restricted
Subsidiary shall be calculated after deducting preferred stock dividends
payable by such Restricted Subsidiary to Persons other than the Company and
its other Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments).
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture, (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election, or (iii) was elected to such Board of Directors
pursuant to a designation made pursuant to the Stockholder Agreement, provided
that at such time the Principals and their Related Parties own more than 35%
of the Voting Stock of the Company.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the New Credit Facility) or commercial paper facilities with banks
or other institutional lenders providing for revolving credit loans, term
loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time. Indebtedness under Credit Facilities outstanding on
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the date on which Notes are first issued and authenticated under the Indenture
shall be deemed to have been incurred on such date in reliance on the
exception provided by clause (i) of the definition of Permitted Indebtedness.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) so long as the New Credit Facility is
outstanding, any Indebtedness outstanding under the New Credit Facility, and
(ii) at any time thereafter any other Senior Debt permitted under the
Indenture the principal amount of which is $25.0 million or more and that has
been designated by the Company as "Designated Senior Debt".
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments".
"Employment Agreement" means any of the employment agreements between the
Company and William C. Scott, Robert M. Snukal or Sheila S. Snukal in effect
as of the date of the Indenture.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Affiliate Transactions" means any transaction contemplated by any
of (i) the Stockholder Agreement, (ii) the Employment Agreements, (iii) the
Agreement and Plan of Merger, dated as of February 6, 1998, among the Company,
Summit Care Corporation, Heritage Fund II, L.P. and FV-SCC Acquisition Corp.,
(iv) the Investment Agreement, dated as of March 27, 1998, among the Company,
Heritage Fund II, L.P., Heritage Investors II, L.L.C. and certain other
Persons named therein, (v) the leases of the Company's Rio Hondo, Fountain
View, Montebello and Sycamore Park skilled nursing facilities, between Robert
M. Snukal, Sheila S. Snukal or their affiliates and the Company, and (vi) the
purchase and supply agreements between the Company or its Subsidiaries and
Twin Med, Inc. consistent with past practice in the ordinary course of
business.
"Existing Disqualified Stock" means the Series A Preferred Stock of the
Company.
"Existing Indebtedness" means up to $165 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under the New Credit Facility) in existence on the date of the
Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs (other
than any such costs incurred in connection with the Transactions) and original
issue discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest of such Person and its
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Restricted Subsidiaries that was capitalized during such period, and (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or any of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or any of its Restricted Subsidiaries (whether or not such
Guarantee or Lien is called upon) and (iv) the product of (a) all dividend
payments, whether or not in cash, on any series of preferred stock of such
Person or any of its Restricted Subsidiaries, other than dividend payments on
Equity Interests payable solely in Equity Interests of the Company (other than
Disqualified Stock) or to the Company or a Restricted Subsidiary of the
Company, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to
have occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded,
and (iii) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of
the referent Person or any of its Restricted Subsidiaries following the
Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantors" means each of Summit Care Corporation, a California
corporation, Summit Care-California, Inc., a California corporation, Summit
Care Pharmacy, Inc., a California corporation, Skilled Care Network, a
California corporation, Summit Care Texas Equity, Inc., a California
corporation, Summit Care-Texas No. 2, Inc., a Texas corporation, Summit Care-
Texas No. 3, Inc., a Texas corporation, Summit Care Management Texas, Inc., a
Texas corporation, Summit Care Texas, L.P., a Texas limited partnership,
Fountain View Holdings, Inc., a Delaware corporation, AIB Corp., a California
corporation, Alexandria Convalescent Hospital, Inc., a California corporation,
BIA Hotel Corp., a California corporation, Brier Oak Convalescent, Inc., a
California corporation, Elmcrest
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Convalescent Hospital, a California corporation, Fountainview Convalescent
Hospital, a California corporation, Fountain View Management, Inc., a
California corporation, Rio Hondo Nursing Center, a California corporation,
Locomotion Holdings, Inc., a Delaware corporation, Locomotion Therapy, Inc., a
Delaware corporation, On-Track Therapy Center, Inc., a California corporation,
I.'N O., Inc., a California corporation, and Sycamore Park Convalescent
Hospital, a California corporation, and (ii) any other subsidiary that
executes a Guarantee in accordance with the provisions of this Indenture, and
their respective successors and assigns.
"Healthcare Related Business" means a business, at least a majority of whose
revenues result from healthcare, long-term care or assisted living related
businesses or facilities.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any Indebtedness of any other
Person. The amount of any Indebtedness outstanding as of any date shall be (i)
the accreted value thereof, in the case of any Indebtedness issued with
original issue discount, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments".
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
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"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than Indebtedness under the New Credit
Facility) secured by a lien on the asset or assets that were the subject of
such Asset Sale, and any reserve for adjustment in respect of the sale price
of such asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain Credit Agreement, by and among the
Company and Bank of Montreal, as agent, providing for up to $30 million of
revolving credit borrowings and $85 million of term loan borrowings, including
any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other
than the Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company that is a Guarantor; (b) any Investment
in Cash Equivalents; (c) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person, if as a result of such Investment (i)
such Person becomes a Restricted Subsidiary of the Company and a Guarantor or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Restricted Subsidiary of the Company that is a
Guarantor; (d) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (f) Hedging Obligations; (g) any Investment in Permitted Joint
Ventures; (h) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when
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taken together with all other Investments made pursuant to this clause
(h) that are at the time outstanding, not to exceed $2.5 million; and (i)
Investments provided for in the Investment Agreement as of the date of the
Indenture.
"Permitted Joint Venture" means (i) any Restricted Subsidiary which owns,
operates or services a Healthcare Related Business, and (ii) Summit Care
Pharmacy, L.L.C., which owns and operates a pharmacy in Texas.
"Permitted Junior Securities" means Equity Interests in the Company or any
Guarantor or debt securities that are unsecured and subordinated to all Senior
Debt (and any debt securities issued in exchange for Senior Debt) to at least
the same extent as, or to a greater extent than, the Notes are subordinated to
Senior Debt pursuant to Article 10 of the Indenture.
"Permitted Liens" means (i) Liens on assets of the Company, and of its
Restricted Subsidiaries or any of the Guarantors securing Senior Debt that was
permitted by the terms of the Indenture to be incurred; (ii) Liens in favor of
the Company; (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof or
the acquisition of a Person owning such property or assets by the Company or
any Restricted Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness; (vii) Liens existing on the
date of the Indenture; (viii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall
be required in conformity with GAAP shall have been made therefor; (ix)
statutory Liens of landlords and Liens of carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen and other Liens imposed by law incurred in
the ordinary course of business for sums not yet delinquent or being contested
in good faith, if such reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made in respect thereof; (x)
easements, rights-of-way, zoning restrictions and other similar charges or
encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries; (xi) Liens on assets of Guarantors to secure Senior
Debt of such Guarantors that was permitted by the Indenture to be incurred;
(xii) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred
in connection with the borrowing of money or the obtaining of advances or
credit (other than trade credit in the ordinary course of business) and (b) do
not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company
or such Restricted Subsidiary; and (xiii) Liens on assets of Unrestricted
Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or accreted value, if
applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable
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expenses incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Principals" means Heritage Partners Management Company, Inc. and Heritage
Fund II, L.P.
"Public Equity Offerings" means a public offering of common stock of the
Company pursuant to a registration statement filed with the Securities and
Exchange Commission in accordance with the Securities Act.
"Related Party" with respect to any Principal means (A) any controlling
holder of Equity Interests, 80% (or more) owned Subsidiary, or spouse or ex-
spouse or immediate family member (in the case of an individual) of such
Principal or (B) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding
an 80% or more controlling interest of which consist of such Principal and/or
such other Persons referred to in the immediately preceding clause (A) or (C)
any investment fund, whether a limited partnership, limited liability company
or corporation or other entity managed or controlled by Heritage Partners
Management Company, Inc.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) all Indebtedness outstanding under Credit Facilities
and all Hedging Obligations with respect thereto, (ii) any other Indebtedness
permitted to be incurred by the Company under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to
the Notes and (iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will
not include (w) any liability for federal, state, local or other taxes owed or
owing by the Company, (x) any Indebtedness of the Company to any of its
Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without
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regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or of one or more Subsidiaries of such
Person (or any combination thereof).
"Transaction Related Payments" means (i) certain bonus and other payments
not to exceed $1,925,000 from Summit or the Company to William Scott, payable
at the effective time of the Merger, (ii) payments not to exceed $2,535,000 in
the aggregate to effect the cash-out of Summit stock options, as described in
the Merger Agreement, (iii) the payment of a transaction fee of up to $3
million by the Company to Heritage, payable at the effective time of the
Merger, and (iv) payments to Mr. and Mrs. Snukal and William Scott, not to
exceed $150,000 in the aggregate, upon the forfeiture of Series B Common Stock
pursuant to the Stockholders Agreement.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "Certain Covenants--Restricted Payments".
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock", the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock", calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period, and (ii) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal,
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including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following general discussion represents Choate, Hall & Stewart's opinion
as to the material United States federal income tax consequences of an
exchange of the Outstanding Notes for the Exchange Notes and of the purchase
at original issue, ownership and disposition of the Exchange Notes. This
discussion is based upon the provisions of the Internal Revenue Code of 1986,
as amended, (the "Code"), the final, temporary and proposed regulations
promulgated thereunder, and administrative rulings and judicial decisions now
in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations. This discussion does not purport to deal
with all aspects of federal income taxation that may be relevant to a
particular investor, nor any tax consequences arising under the laws of any
state, locality, or foreign jurisdiction, and it is not intended to be
applicable to all categories of investors, some of which may be subject to
special rules. The tax treatment of holders of the Notes may vary depending
upon their particular situations. Certain holders (including insurance
companies, tax-exempt organizations, financial institutions, subsequent
purchasers of Notes and broker-dealers) may be subject to special rules not
discussed below. In general, this discussion assumes that a holder acquires a
Note at original issuance and holds such Note as a capital asset and not as
part of a "hedge", "straddle", "conversion transaction", "synthetic security"
or other integrated investment.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
UNITED STATES FEDERAL TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF
NOTES, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY
FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
TAXATION OF HOLDERS ON EXCHANGE
Subject to the limitations set forth above, an exchange of Outstanding Notes
for Exchange Notes will not be a taxable event to holders of Outstanding
Notes, and holders will not recognize any taxable gain or loss as a result of
such an exchange. Accordingly, a holder would have the same adjusted basis and
holding period in the Exchange Notes as it had in the Outstanding Notes
immediately before the exchange. Further, the tax consequences of ownership
and disposition of any Exchange Notes will be the same as the tax consequences
of ownership and disposition of Outstanding Notes.
As used herein, the term "United States Holder" means a beneficial owner of
a Note that is, for United States federal income tax purposes, a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the law of the United
States or of any political subdivision thereof, an estate whose income is
includible in gross income for United States federal income tax purposes
regardless of its source or a trust, if a United States court is able to
exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.
UNITED STATES HOLDERS
STATED INTEREST. Stated interest on a Note will be taxable to a United
States Holder as ordinary interest income at the time that such interest
accrues or is received, in accordance with the United States Holder's regular
method of accounting for federal income tax purposes. The Company expects that
the Notes will not be considered to be issued with original issue discount for
federal income tax purposes.
LIQUIDATED DAMAGES. The Company intends to take the position that the
Liquidated Damages described above under "The Exchange Offer--Purpose of the
Exchange Offer" will be taxable to a United States Holder as ordinary income
in accordance with such United States Holder's method of
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accounting for tax purposes. The Internal Revenue Service ("IRS"), however,
may take a different position, which could affect the timing of both a United
States Holder's income and the timing of the Company's deduction with respect
to such Liquidated Damages.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a United
States Holder will generally recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such cash or
property is attributable to accrued interest which will be taxable as ordinary
income) and such holder's adjusted tax basis in the Note. Gain or loss
recognized on the disposition of a Note generally will be capital gain or
loss. Pursuant to the recently enacted IRS Reform and Restructuring Act of
1998, long-term capital gains tax rates will apply to dispositions by
individuals of capital assets (such as the Notes) held for more than one year.
The maximum long-term capital gains tax rate applicable to individuals is
currently 20% (10% for individuals in the 15% tax bracket). Corporate
taxpayers continue to be subject to a maximum regular tax rate of 35% on all
capital gains and ordinary income.
The exchange of an Outstanding Note by a United States Holder for an
Exchange Note will not constitute a taxable exchange of the Note. As a result,
a United States Holder will not recognize taxable gain or loss upon receipt of
an Exchange Note, a United States Holder's holding period for an Exchange Note
will generally include the holding period for the Note so exchanged and such
holder's adjusted tax basis in an Exchange Note will generally be the same as
such holder's adjusted tax basis in the Outstanding Note so exchanged.
BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, a United States
Holder of a Note will be subject to backup withholding at the rate of 31% with
respect to interest, premium and possibly principal, if any, paid on a Note,
unless the holder (a) is an entity (including corporations, tax-exempt
organizations and certain qualified nominees) that is exempt from withholding
and, when required, demonstrates this fact, or (b) provides the Company with
its Taxpayer Identification Number ("TIN") (which, for an individual, would be
the holder's Social Security number), certifies that the TIN provided to the
Company is correct and that the holder has not been notified by the IRS that
it is subject to backup withholding due to underreporting of interest or
dividends, and otherwise complies with applicable requirements of the backup
withholding rules. In addition, such payments of interest, premium and
possibly principal to United States Holders that are not corporations, tax-
exempt organizations or qualified nominees will generally be subject to
information reporting requirements.
The amount of any backup withholding from a payment to a United States
Holder will be allowed as a credit against such holder's federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
NON-UNITED STATES HOLDERS
STATED INTEREST. Interest paid by the Company to any beneficial owner of a
Note that is not a United States Holder (a "Non-United States Holder") will
not be subject to United States federal income or withholding tax if such
interest is not effectively connected with the conduct of a trade or business
within the United States by such Non-United States Holder and (a) such Non-
United States Holder (i) does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company;
(ii) is not a controlled foreign corporation with respect to which the Company
is a "related person" within the meaning of the Code and (iii) satisfies
certain certification requirements or (b) such Non-United States Holder is
entitled to the benefits of an income tax treaty under which the interest is
exempt from United States withholding tax, and such Non-United States
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Holder provides a properly executed IRS Form 1001 claiming the exemption (or,
after December 31, 1999, IRS Form W-8, which may require obtaining a TIN and
making certain certifications). However, to the extent that any payment of
Liquidated Damages is not treated as a payment of interest on the Notes, such
payment may be subject to U.S. withholding taxes. See "--United States
Holders".
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. A Non-United States Holder will
generally not be subject to United States federal income tax on gain
recognized on a sale, exchange, redemption, retirement at maturity or other
disposition of a Note unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-United
States Holder or (ii) in the case of a Non-United States Holder who is a
nonresident alien individual and holds the Note as a capital asset, such
holder is present in the United States for 183 or more days in the taxable
year and certain other requirements are met.
FEDERAL ESTATE TAXES. If interest on the Notes is exempt from withholding of
United States federal income tax under clause (a) of the rules described under
"--Stated Interest", the Notes will not be included in the estate of a
deceased Non-United States Holder for United States federal estate tax
purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING. The Company will, where
required, report to the holders of Notes and the IRS the amount of any
interest paid on the Notes in each calendar year and the amounts of tax
withheld, if any, with respect to such payments.
In the case of payments of interest to Non-United States Holders, Treasury
Regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payment with respect to which
either the requisite certification has been received or an exemption has
otherwise been established; provided that neither the Company nor its payment
agent has actual knowledge that the holder is a United States person or that
the conditions of any other exemption are not in fact satisfied. Under the
Treasury Regulations, these information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a Non-United
States Holder on the disposition of the Notes by or through a United States
office of a United States or foreign broker, unless certain certification
requirements are met or the holder otherwise establishes an exemption.
Information reporting requirements, but not backup withholding, will also
apply to a payment of the proceeds of a disposition of the Notes by or through
a foreign office of a United States broker or foreign brokers with certain
types of relationships to the United States unless the holder is an exempt
recipient (as demonstrated through appropriate certification) or such broker
has documentary evidence in its file that the holder of the Notes is not a
United States person and has no actual knowledge to the contrary and certain
other conditions are met. Neither information reporting nor backup withholding
generally will apply to a payment of the proceeds of a disposition of the
Notes by or through a foreign office of a foreign broker not subject to the
preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS.
Recently, the Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, the final regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the
final regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations are generally effective for
payments made after December 31, 1999, subject to certain transition rules.
Non-United States Holders are urged to consult their tax advisors with respect
to the application of these final regulations.
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VALIDITY OF THE NOTES
Certain legal matters with respect to U.S. federal and Delaware law in
connection with the Exchange Notes offered hereby will be passed upon for the
Company by Choate, Hall & Stewart (a partnership including professional
corporations), Boston, Massachusetts; certain legal matters with respect to
California, Texas and New York law in connection with the Exchange Notes
offered hereby will be passed upon for the Company by Brobeck, Phleger &
Harrison LLP, Los Angeles, California. Stephen M. L. Cohen, a partner of
Choate, Hall & Stewart, is a limited partner in Heritage Fund II, L.P.
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Exchange Act. The Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, the Company
will furnish to the holders of the Notes and file with the Commission (unless
the Commission will not accept such a filing) (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company was required to file such
forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods set forth in the Commission's rules and
regulations.
In addition, following the consummation of the Exchange Offer, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request.
Once the Registration Statement has been declared effective by the
Commission, the Company will become subject to the informational requirements
of the Exchange Act and in accordance therewith will be required to file
reports and other information with the Commission. When filed, the
Registration Statement and the exhibits thereto, as well as such reports and
other information to be filed by the Company with the Commission, may be
inspected, without charge, at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
as well as the regional offices of the Commission at the Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
documents can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, the Company will be required to file electronic versions
of these documents with the Commission through the Commission's Electronic
Data Gathering, Analysis, and Retrieval (EDGAR) system. The Commission
maintains a World Wide Web site, located at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
EXPERTS
The consolidated financial statements and schedule of Fountain View, Inc. as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as
stated in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Summit Care Corporation at June 30,
1997 and 1996, and for each of the three years in the period ended June 30,
1997, appearing in this Prospectus and
128
<PAGE>
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain statements that may be considered "forward-
looking". Such forward-looking statements include, among other things,
synergies resulting from the Transactions, the success of the Company's
business strategy, the Company's ability to develop and expand its business in
its 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
contained in this Prospectus 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. Prospective investors in the Notes offered
hereby are cautioned that although management believes that the assumptions on
which the forward-looking statements contained herein are based are
reasonable, any of those assumptions could prove to be inaccurate and, as a
result, the forward-looking statements based on those assumptions also could
be materially incorrect. The uncertainties in this regard include, but are not
limited to, those identified in the section of this Prospectus entitled "Risk
Factors". 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 and
prospective investors in the Notes should not place undue reliance on such
forward-looking statements.
129
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FOUNTAIN VIEW, INC.
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997................. F-3
Consolidated Statements of Income for the Years Ended December 31, 1995,
1996 and 1997............................................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Three
Years Ended December 31, 1997............................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Consolidated Statements of Income (Unaudited) for the Three and Six Months
Ended June 30, 1997 and 1998............................................. F-14
Consolidated Balance Sheet (Unaudited) at June 30, 1998................... F-15
Consolidated Statements of Cash Flows (Unaudited) for the Three and Six
Months Ended June 30, 1997 and 1998...................................... F-17
Notes to Unaudited Consolidated Financial Statements...................... F-18
SUMMIT CARE CORPORATION
Report of Independent Auditors............................................ F-22
Consolidated Balance Sheets at June 30, 1996 and 1997..................... F-23
Consolidated Statements of Income for the Years Ended June 30, 1995, 1996
and 1997................................................................. F-24
Consolidated Statements of Shareholders' Equity for the Three Years Ended
June 30, 1997............................................................ F-25
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995,
1996 and 1997............................................................ F-26
Notes to Consolidated Financial Statements................................ F-27
Consolidated Balance Sheet (Unaudited) at December 31, 1997............... F-38
Consolidated Statements of Income (Unaudited) for the Period from July 1,
1997 to December 31, 1997................................................ F-39
Consolidated Statements of Cash Flows (Unaudited) for the Period from July
1, 1997 to December 31, 1997............................................. F-40
Notes to Unaudited Consolidated Financial Statements...................... F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Fountain View, Inc.
We have audited the accompanying consolidated balance sheets of Fountain
View, Inc. as of December 31, 1996 and 1997 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, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1996 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, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Los Angeles, California
March 11, 1998
F-2
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 1,161 $ 2,551
Accounts receivable, less allowance for uncollectible
accounts of $779 and $1,152, respectively ................ 18,717 15,809
Deferred income taxes...................................... -- 927
Other current assets....................................... 713 576
------- -------
Total current assets..................................... 20,591 19,863
------- -------
Leasehold improvements and equipment, at cost:
Leasehold improvements..................................... 2,329 4,659
Furniture and equipment.................................... 1,914 2,096
------- -------
4,243 6,755
Less accumulated depreciation and amortization............. (1,680) (2,481)
------- -------
2,563 4,274
Other assets................................................. 968 1,804
------- -------
Total assets................................................. $24,122 $25,941
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Payable to banks........................................... $ 2,975 $ --
Accounts payable and accrued liabilities................... 1,457 4,179
Employee compensation and benefits......................... 2,423 2,479
Income taxes payable....................................... -- 1,443
Current maturities of long-term debt....................... 170 1,741
------- -------
Total current liabilities................................ 7,025 9,842
------- -------
Long-term debt, less current maturities...................... 496 28,335
------- -------
Total liabilities............................................ 7,521 38,177
Commitments and contingencies -- --
Shareholders' equity (deficit):
Preferred stock, $0.01 par value:
7,000 shares authorized, issued and outstanding
(liquidation preference $7,000).......................... $ -- $ --
Common Stock Series A-1, $0.01 par value:
53,850 shares authorized, issued and outstanding......... -- 1
Common Stock Series A-2, $0.01 par value:
99,950 shares authorized, issued and outstanding......... -- 1
Common Stock Series A-3, non-voting, $0.01 par value:
46,200 shares authorized, issued and outstanding......... -- --
Additional paid-in capital................................. 8,000 21,957
Treasury Stock............................................. (120) --
Retained earnings (accumulated deficit).................... 8,721 (34,195)
------- -------
Total shareholders' equity (deficit)......................... 16,601 (12,236)
------- -------
Total liabilities and shareholders' equity (deficit)......... $24,122 $25,941
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Net revenue............................................ $55,836 $59,432 $67,905
EXPENSES:
Salaries and benefits................................ 35,048 36,166 38,215
Supplies............................................. 5,642 5,483 8,293
Purchased services................................... 3,964 4,658 4,256
Provision for doubtful accounts...................... 427 430 395
Other expenses....................................... 3,421 4,043 5,046
Rent................................................. 1,890 2,120 2,004
Rent to related parties.............................. 2,056 1,776 1,771
Depreciation and amortization........................ 416 600 1,198
Interest (net of interest income--$65, $29 and $4 for
1995, 1996 and 1997, respectively).................. 332 278 1,164
------- ------- -------
Total expenses..................................... 53,196 55,554 62,342
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES............... 2,640 3,878 5,563
Provision for income taxes............................. 54 78 361
------- ------- -------
NET INCOME............................................. $ 2,586 $ 3,800 $ 5,202
======= ======= =======
Pro forma net income:
Net income as reported............................... $ 2,586 $ 3,800 $ 5,202
Charge in lieu of income taxes....................... 1,025 1,493 1,590
------- ------- -------
Net income............................................. $ 1,561 $ 2,307 $ 3,612
======= ======= =======
Earnings per share:
Basic and diluted--Historical........................ $ 12.93 $ 19.0 $ 26.01
======= ======= =======
Pro forma............................ $ 7.81 $ 11.53 $ 18.06
======= ======= =======
Weighted average shares outstanding:
Basic and diluted.................................... 200 200 200
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
THREE YEARS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED SERIES A-1 SERIES A-2 SERIES A-3 RETAINED
STOCK COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL EARNINGS
------------- ------------- ------------- ------------- PAID-IN TREASURY (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT) TOTAL
------ ------ ------ ------ ------ ------ ------ ------ ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1995............ -- $ -- -- $ -- -- $ -- -- $ -- $ 916 $(120) $ 8,998 $ 9,794
Net income........ -- -- -- -- -- -- -- -- -- -- 2,586 2,586
Issuance of
common stock...... -- -- -- -- -- -- -- -- 300 -- -- 300
Distributions to
shareholders...... -- -- -- -- -- -- -- -- -- -- (2,724) (2,724)
----- ----- ------ ----- ------ ----- ------ ----- ------- ----- -------- --------
Balance at December
31, 1995........... -- -- -- -- -- -- -- -- 1,216 (120) 8,860 9,956
Contributions
from
shareholders...... -- -- -- -- -- -- -- -- 6,784 -- -- 6,784
Net income........ -- -- -- -- -- -- -- -- -- -- 3,800 3,800
Distributions to
shareholders...... -- -- -- -- -- -- -- -- -- -- (3,939) (3,939)
----- ----- ------ ----- ------ ----- ------ ----- ------- ----- -------- --------
Balance at December
31, 1996........... -- -- -- -- -- -- -- -- 8,000 (120) 8,721 16,601
Net income........ -- -- -- -- -- -- -- -- -- -- 5,202 5,202
Contributions
before
reorganization.... -- -- -- -- -- -- -- -- 1,277 -- -- 1,277
Cancellation of
treasury stock.... -- -- -- -- -- -- -- -- -- 120 -- 120
Distributions to
shareholders
before
reorganization.... -- -- -- -- -- -- -- -- -- -- (4,418) (4,418)
Reorganization:
Issuance of
preferred stock. 7,000 -- -- -- -- -- -- -- 7,000 -- -- 7,000
Issuance of
common stock.... -- -- 53,850 1 99,950 1 46,200 -- 6,998 -- -- 7,000
Transactional
costs........... -- -- -- -- -- -- -- -- (1,318) -- -- (1,318)
Distributions to
shareholders.... -- -- -- -- -- -- -- -- -- -- (43,700) (43,700)
----- ----- ------ ----- ------ ----- ------ ----- ------- ----- -------- --------
Balance at December
31, 1997........... 7,000 $ -- 53,850 $ 1 99,950 $ 1 46,200 $ -- $21,957 $ -- $(34,195) $(12,236)
===== ===== ====== ===== ====== ===== ====== ===== ======= ===== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income....................................... $ 2,586 $ 3,800 $ 5,202
------- ------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 416 600 1,198
Changes in operating assets and liabilities:
Accounts receivable............................ 1,176 (3,757) 2,908
Other current assets........................... 165 (92) 137
Accounts payable and accrued liabilities....... 317 421 2,722
Employee compensation and benefits............. 1,152 116 56
Income taxes payable........................... 20 (29) 1,443
Deferred income taxes.......................... -- -- (927)
------- ------- --------
Total adjustments............................ 3,246 (2,741) 7,537
------- ------- --------
Net cash provided by operating activities.... 5,832 1,059 12,739
------- ------- --------
INVESTING ACTIVITIES:
Additions to leasehold improvements and
equipment....................................... (665) (1,816) (2,570)
Additions to other assets........................ (282) -- (1,175)
------- ------- --------
Net cash used in investing activities........ (947) (1,816) (3,745)
------- ------- --------
FINANCING ACTIVITIES:
Decrease in payable to bank...................... (250) (925) (2,975)
Principal payments on long-term debt............. (910) (472) (3,090)
Proceeds from long-term debt..................... 725 249 32,500
Proceeds from issuances of stock................. -- -- 12,682
Contributions from shareholders.................. -- 4,649 1,277
Cancellation of treasury stock................... -- -- 120
Distributions to shareholders.................... (2,724) (3,939) (48,118)
------- ------- --------
Net cash used in financing activities........ (3,159) (438) (7,604)
------- ------- --------
Increase (decrease) in cash and cash equivalents... 1,726 (1,195) 1,390
Cash and cash equivalents at beginning of year..... 630 2,356 1,161
------- ------- --------
Cash and cash equivalents at end of year........... $ 2,356 $ 1,161 $ 2,551
======= ======= ========
NONCASH ACTIVITY:
Additional paid-in-capital relating to debt
forgiveness..................................... $ -- $ 2,135 $ --
Additional paid-in-capital relating to stock
acquisition..................................... 300 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS
Fountain View, Inc. (the "Company") provides a variety of healthcare
services primarily to the elderly through the operation of eight skilled
nursing care centers and a retirement hotel in California. These services
include nursing care, lodging, food and certain specialty medical services,
including rehabilitation care, infusion therapy and other ancillary services.
The Company also provides therapy services to other long-term care providers.
In July 1997, the Company's predecessor, which was comprised of all of the
Company's operating units owned individually by the controlling shareholders,
was merged with and into several companies formed by Fountain View, Inc., a
holding company, formed for the express purpose of effectuating the
reorganization of the Company. These transactions are described further in
Note 3 to the consolidated financial statements.
2. 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.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EARNINGS PER SHARE
Basic and diluted earnings per share have been computed reflecting the
Fountain View Equity Transactions as if such transactions had occurred as of
January 1, 1995, and all common stock, series A-1, A-2 and A-3, was
outstanding from that date.
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.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Depreciation and amortization (straight-line method) is based on the
estimated useful lives of the individual assets as follows:
<TABLE>
<C> <S>
Leasehold improvements...... Shorter of lease term or estimated useful
life, generally 5-10 years.
Furniture and equipment..... 3-10 years.
</TABLE>
NET PATIENT SERVICES REVENUE
Approximately 53 percent, 52 percent and 56 percent of the Company's
revenues in the years ended December 31, 1995, 1996 and 1997, respectively,
were derived from funds under federal and state medical assistance programs,
the continuation of which are dependent upon governmental policies. These
revenues are based, in certain cases, upon cost reimbursement principles and
are subject to audit. Revenues are recorded on an accrual basis as services
are performed at their estimated net realizable value. Differences between
final settlement and estimated net realizable value accrued in prior years are
reported as adjustments to the current year's net revenues. A significant
F-7
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
portion of the Company's skilled nursing care center revenues is derived from
government-sponsored healthcare programs such as Medicare and Medicaid. These
programs are highly regulated and are subject to budgetary and other
constraints. While the Company's cash flow could be adversely affected by
periodic government program funding delays or shortfalls, management does not
believe there are any significant credit risks associated with these
government programs.
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 government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
INSURANCE COVERAGE
The Company insures for workers' compensation and general and professional
liability coverage under an occurrence based policy, with no deductible. Prior
to October 1997, the Company was self-insured for claims arising from
employees relating to employment matters.
ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS 121), requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company believes,
based on current circumstances, that there are no indicators of impairment to
its long-lived assets, and the Company presently has no expectations for
disposing of any long-lived assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), which is effective for fiscal years beginning after December 15,
1997. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. Items recognized as components of comprehensive
income which are not included in the income statement include unrealized gains
and losses in marketable securities, foreign currency translation adjustments,
tax benefits related to nonqualified stock options, and others. The Company is
presently evaluating the new standard to determine how it will present
comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Settlements 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
F-8
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operating segments in interim financial reports issued to shareholders. Under
existing accounting standards, the Company has reported its operations as one
line of business because substantially all of its revenues have been derived
from its skilled nursing care centers and assisted living centers and closely
related ancillary services. The Company is presently evaluating the new
standard in order to determine its effect, if any, on the way the Company
might report its operations in the future.
3. 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 which is
operated by four of the nursing homes. The remaining real estate is leased
from unrelated third parties.
The controlling shareholders along with Heritage formed a new holding
company known as Fountain View, Inc. ("New Fountain View") along with several
acquisition subsidiaries to consolidate the healthcare companies owned by the
controlling shareholders into one company. At the same time, New Fountain View
entered into market rate leases for the four real estate facilities owned by
the controlling shareholders.
Under the terms of the Fountain View Equity Transactions, Heritage invested
$14.0 million in cash in New 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 New 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, the New Fountain
View obtained bank financing totaling $32.5 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
$1,318,000 in transaction costs. The Common Stock Series A-1 shares have three
votes for each share, whereas Series A-2 has one vote per share, and Series A-
3 is non-voting. By virtue of the voting features, the controlling
shareholders maintained a controlling financial interest in New Fountain View.
Also, a shareholders agreement between the controlling shareholders and
Heritage provides that the Controlling Shareholders hold a majority of the
seats on the Board of Directors.
The preferred shareholders are entitled to receive dividends, at the Board
of Director's discretion, at an annual rate of 10 percent of the preferred
stock base amount, as defined. The initial base amount is $7,000,000. The
preferred stock is non-voting and the holders are entitled to be paid in cash,
in respect of each share of preferred stock held, upon any liquidation or
dissolution of the Company before any distribution is made to the common
shareholders.
Since the controlling shareholders maintained a controlling financial
interest in New 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 New Fountain View.
F-9
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair market value disclosures.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
LONG-TERM DEBT (INCLUDING CURRENT PORTION)
The carrying value of $30,076,000 of long-term approximates the fair market
value of such debt since the interest rate approximates the Company's
incremental borrowing rate.
5. MATERIAL TRANSACTIONS WITH RELATED ENTITIES
Robert and Sheila Snukal own the real estate for four of the Company's
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 3. Lease payments to
the shareholders under operating leases for these facilities totaled
$2,056,000, $1,776,000 and $1,771,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
6. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1996 1997
---- ------
<S> <C> <C>
Deposits........................................................ $ 56 $ 56
Goodwill, net................................................... 530 500
Lease acquisition costs, net.................................... 382 337
Deferred loan fees.............................................. -- 911
---- ------
$968 $1,804
==== ======
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- -------
<S> <C> <C>
Union Bank of California, $15 million Term Loan A due in 2002
and $15 million Term Loan B due in 2004, payable in quarterly
installments ranging from $37 to $1,781, including interest
based on the LIBOR rate. The Company's accounts receivable and
equipment collateralize the Term Loans........................ $-- $29,925
Note payable to shareholders................................... 337 --
Other.......................................................... 329 151
---- -------
666 30,076
Less current maturities........................................ 170 1,741
---- -------
$496 $28,335
==== =======
</TABLE>
F-10
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt are as follows: years ending December
31, 1998--$1,741,000; 1999--$3,710,000; 2000--$4,150,000; 2001--$4,150,000;
2002--$5,638,000; and thereafter $10,687,000.
Interest payments were $397,000, $307,000 and $1,105,000, in 1995, 1996 and
1997, respectively.
8. LINE OF CREDIT
The Company has a line of credit with a financial institution amounting to
$4,500,000 in 1996 and $15,000,000 in 1997. Total draws on the line amounted
to $0 and $2,975,000 as of December 31, 1996 and 1997, respectively. The line
of credit terminates on August 1, 2002 and bears interest at the LIBOR rate.
The Company's accounts receivable and equipment collateralize the line of
credit.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
------ ------ ----
<S> <C> <C> <C>
Federal:
Current................................................. $ -- $ -- $1,004
Deferred................................................ -- -- (722)
State:
Current................................................. 54 78 282
Deferred................................................ -- -- (203)
------ ------ ------
54 78 361
Charge in lieu of income taxes............................ 1,025 1,493 1,590
------ ------ ------
$1,079 $1,571 $1,951
====== ====== ======
</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 tax over book
depreciation, allowance for uncollectible accounts, accrued expenses and
accrued vacation benefits. Significant components of the Company's deferred
tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
--------------- ---------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
------- ------- ------- -------
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................... $ -- $ -- $-- $ 1
Total deferred tax liabilities................. -- -- -- 1
Deferred tax assets:
Vacation, accrued expenses and allowance for
uncollectible accounts...................... -- -- 770 --
State tax...................................... -- -- 157 --
----- ----- ---- ----
Total deferred tax assets...................... -- -- 927 --
----- ----- ---- ----
Net deferred tax assets........................ $ -- $ -- $927 $ 1
===== ===== ==== ====
</TABLE>
F-11
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes with the amount computed
using the federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Federal rate (34%).................................... $ 898 $1,324 $1,902
State taxes, net of federal tax benefit............... 158 234 336
Goodwill.............................................. -- -- 84
Other, net............................................ 23 13 (4)
Establishment of deferred taxes due to conversion from
S-Corporation to C-Corporation....................... -- -- (367)
------ ------ ------
$1,079 $1,571 $1,951
====== ====== ======
</TABLE>
Total income tax payments during 1995, 1996 and 1997 were $17,000, $30,000
and $8,000, respectively.
CHARGE IN LIEU OF INCOME TAXES AND S-CORPORATION STATUS
Prior to the Fountain View Equity Transactions, most of the individually
owned corporations had elected to be taxed as cash basis S-Corporations.
Included herein 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 all years with a federal and state effective tax rate of 41%.
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 some of such 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.
10. LEASES
The Company leases certain of its centers 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.
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,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
RELATED
PARTY OTHER TOTAL
------- ------- -------
<S> <C> <C> <C>
1998................................................. $ 1,764 $ 1,954 $ 3,718
1999................................................. 1,764 2,003 3,767
2000................................................. 1,764 1,938 3,702
2001................................................. 1,764 1,995 3,759
2002................................................. 1,764 2,023 3,787
Thereafter........................................... 25,726 7,008 32,734
------- ------- -------
$34,546 $16,921 $51,467
======= ======= =======
</TABLE>
F-12
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. CONTINGENCIES
The Company is subject to malpractice claims and other litigation arising in
the ordinary course of business. In the opinion of management, any liability
beyond amounts covered by insurance and the ultimate resolution of all pending
legal proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
YEAR 2000 (UNAUDITED)
Some of the Company's information systems and biomedical equipment have
time-sensitive software that will not properly recognize the year 2000. This
could result in a system failure or miscalculations causing disruption of the
Company's operations. The Company is currently completing an assessment and
developing a plan to modify or replace portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter.
12. SHAREHOLDERS' EQUITY
SHAREHOLDERS AGREEMENT
In connection with the Fountain View Equity Transactions, the controlling
shareholders and Heritage which owns 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 has certain rights and
obligations. The controlling shareholders retain 3 of the 5 board of directors
seats unless certain events occur including non-payment of any debt of $1
million or more, and the failure to meet certain earnings targets. In
addition, at any time on or after July 1, 2001, at the option of Heritage,
Heritage will have the right to put its common stock holdings to the Company
at appraised value. At any time on or after July 1, 2003, if Heritage has not
elected to put its stock to the Company, at the option of a majority of the
controlling shareholders, the controlling shareholders will have the right to
put the stock to the Company at appraised value. Heritage has also retained
certain protective rights with respect to its investment in the Company.
In addition to the above rights and obligations, should certain Company
terminal value targets not be met, then the Common Stock Series A-3 will be
returned to the Company and cancelled, without remuneration to the controlling
shareholders. The number of shares returned is based on a formula included in
the Agreement. The Agreement terminates upon the occurrence of an IPO.
PURCHASE AND CONTRIBUTION AGREEMENT
In connection with the Fountain View Equity Transactions, the 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 controlling shareholders also agreed to indemnify the Company from any
future liability arising from a certain lawsuit.
13. SUBSEQUENT EVENT
In February 1998, the Company entered into a purchase agreement with Summit
Care Corporation ("Summit") to acquire all of the outstanding common stock of
Summit for cash of $21 per share. The total purchase price approximates $145
million.
F-13
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ---------------
1997 1998 1997 1998
------- --------- ------- -------
<S> <C> <C> <C> <C>
Net revenues............................... $17,014 $ 68,291 $33,423 $88,369
Expenses:.................................. 9,203 33,781 18,638 44,467
Salaries and benefits.................... 82 626 142 768
Provision for doubtful accounts.......... 2,434 7,316 4,082 9,534
Supplies................................. 768 11,274 1,614 13,102
Purchased services....................... 1,685 4,914 2,687 6,310
Other expenses........................... 494 1,258 991 1,800
Rent..................................... 444 441 888 882
Rent to related parties.................. 224 3,410 366 3,934
Depreciation and amortization............
Interest expense, net of interest income. 10 5,368 30 6,219
------- --------- ------- -------
15,344 68,388 29,438 87,016
Income (loss) before provision for income
taxes and extraordinary item.............. 1,670 (97) 3,985 1,353
Provision (benefit) for income taxes....... 17 (39) 50 541
------- --------- ------- -------
Income before extraordinary item........... 1,653 (58) 3,935 812
Extraordinary item:
Loss on early extinguishment of debt, net
of taxes................................ -- -- -- (517)
------- --------- ------- -------
Net income (loss).......................... 1,653 (58) 3,935 295
Preferred stock dividends.................. -- (355) -- (355)
------- --------- ------- -------
Net income (loss) available to common
shareholders.............................. $ 1,653 $ (413) $ 3,935 $ (60)
======= ========= ======= =======
Pro forma net income:
Net income (loss) as reported............ $ 1,653 $ (58) $ 3,935 $ 295
Charge in lieu of income taxes for S-
Corporation............................. 647 -- 1,540 --
------- --------- ------- -------
Net income (loss).......................... $ 1,006 $ (58) $ 2,395 $ 295
======= ========= ======= =======
Basic and diluted earnings per share
available to common shareholders before
extraordinary item........................ $ 8.27 $ (.37) $ 19.68 $ .66
Basic and diluted earnings per share
available to common shareholders--
extraordinary item, net of taxes.......... -- -- -- (.75)
------- --------- ------- -------
Basic and diluted earnings per share
available to common shareholders--net
income (loss)............................. $ 8.27 $ (.37) $ 19.68 $ (.09)
======= ========= ======= =======
Basic and diluted earnings per share--pro
forma..................................... $ 5.03 $ -- $ 11.98 $ --
======= ========= ======= =======
Weighted average shares outstanding:
Basic and diluted........................ 200,000 1,114,202 200,000 684,881
======= ========= ======= =======
</TABLE>
See accompanying notes.
F-14
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEC.
31, JUNE 30,
1997 1998
------- -----------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 2,551 $ 3,725
Accounts receivable, less allowance for doubtful
accounts: $1,152 at 1997 and $6,761 at 1998............ 15,809 58,538
Supplies inventory, at cost............................. -- 2,865
Other current assets.................................... 1,503 15,324
------- --------
Total current assets.................................. 19,863 80,452
Property and equipment, at cost:
Land and land improvements.............................. -- 25,062
Buildings and leasehold improvements.................... 4,659 207,828
Furniture and equipment................................. 2,096 27,002
Construction in progress................................ -- 1,839
------- --------
6,755 261,731
Less accumulated depreciation and amortization.......... (2,481) (5,529)
------- --------
4,274 256,202
Notes receivable, less allowance for doubtful accounts:
$640 at 1998............................................. -- 6,114
Goodwill and other intangible assets...................... -- 49,476
Deferred financing costs.................................. -- 11,573
Other assets.............................................. 1,804 4,738
------- --------
$25,941 $408,555
======= ========
</TABLE>
NOTE: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
F-15
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DEC. 31, JUNE 30,
1997 1998
-------- -----------
(NOTE) (UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to banks....................................... $ -- $ 4,514
Accounts payable and accrued liabilities............... 4,179 33,407
Employee compensation and benefits..................... 2,479 9,066
Income taxes payable................................... 1,443 --
Current portion of long-term debt...................... 1,741 6,031
-------- --------
Total current liabilities............................ 9,842 53,018
Long-term debt, less current portion..................... 28,335 239,619
Deferred income taxes.................................... -- 30,859
Mandatory redeemable preferred stock..................... -- 15,000
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred Stock Series A, $0.01 par value:
1,000,000 shares authorized, 15,000 issued and
outstanding at 1998.................................. -- --
Common Stock Series A, $0.01 par value:
1,500,000 shares authorized; 200,000 shares and
1,000,000 shares issued and outstanding at 1997 and
1998................................................. 2 10
Common Stock Series B, $0.01 par value:
200,000 shares authorized; 114,202 shares issued and
outstanding at 1998.................................. -- 1
Common Stock Series C, $0.01 par value:
1,300,000 shares authorized; none issued.............. -- --
Paid in capital........................................ 21,957 103,948
Accumulated deficit.................................... (34,195) (33,900)
-------- --------
Total shareholders' equity (deficit)................. (12,236) 70,059
-------- --------
$ 25,941 $408,555
======== ========
</TABLE>
NOTE: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
F-16
<PAGE>
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1998
------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 3,935 $ 295
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 366 3,934
(Increase) decrease in accounts receivable, net........ 3,717 (6,069)
Decrease in other current assets....................... 244 3,796
(Decrease) increase in accounts payable and accrued
liabilities........................................... 387 (20,294)
Increase (decrease) in employee compensation and
benefits.............................................. (93) 1,370
(Decrease) increase in income taxes payable............ 47 ( 1,524)
------- ---------
Total adjustments.................................... 4,668 (18,787)
------- ---------
Net cash (used in) provided by operating activities.. 8,603 (18,492)
------- ---------
INVESTING ACTIVITIES
Principal payments on notes receivable................... -- 482
Additions to property and equipment...................... (1,380) (3,244)
(Increase) in deferred financing costs................... -- (9,609)
Acquisition of Summit Care, net of cash acquired......... -- (150,291)
(Increase) decrease in other assets...................... 18 (289)
------- ---------
Net cash (used) in investing activities.............. (1,362) (162,951)
------- ---------
FINANCING ACTIVITIES:
Increase in payable to banks............................. -- 2,569
Distributions to shareholders............................ (2,444) --
Retirement of long-term debt............................. (2,975) (29,933)
(Decrease) in capital lease obligations.................. (46) (46)
Proceeds from long-term debt............................. -- 221,160
Principal payments on long-term debt..................... -- (108,133)
Proceeds from stock issuance............................. -- 97,000
------- ---------
Net cash provided by (used in) financing activities.. (5,465) 182,617
------- ---------
Increase in cash and cash equivalents...................... 1,776 1,174
Cash and cash equivalents at beginning of period........... 1,161 2,551
------- ---------
Cash and cash equivalents at end of period................. $ 2,937 $ 3,725
======= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 30 $ 1,892
Income taxes........................................... 50 1,498
Detail of purchase business combination:
Fair value of assets acquired............................ -- 374,440
Less: Liabilities assumed................................ -- (222,785)
------- ---------
Cash paid for acquisition................................ -- 151,655
Less: Cash acquired from Summit.......................... -- (1,364)
------- ---------
Net cash paid for acquisition........................ $ -- $ 150,291
======= =========
</TABLE>
F-17
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Fountain View, Inc. ("Fountain View" or "Company") is a leading operator on
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. With the acquisition of Summit Care Corporation ("Summit") on March 27,
1998, Fountain View now 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 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.
2. BASIS OF PRESENTATION
The accompanying 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. The unaudited financial information contained
herein includes the financial results of operations of Fountain View for the
full periods reported and the results of operations of Summit since March 27,
1998. 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, 1997. The interim financial information herein is not
necessarily representative of that to be expected for a full year.
3. 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 which is
operated by four of the nursing homes. The remaining real estate is 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 real estate facilities owned by
the controlling shareholders.
F-18
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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.
4. ACQUISITION OF SUMMIT CARE CORPORATION
On February 6, 1998, Fountain View, Summit, Heritage and FV-SCC Acquisition
Corp. ("Acquisition"), a wholly-owned subsidiary of 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. On February 13, 1998,
Acquisition initiated a Tender Offer for the outstanding shares of Summit. The
Tender Offer expired on March 25, 1998 and Acquisition purchased approximately
99% of the shares of Summit for approximately $141.8 million at the closing of
the Tender Offer on March 27, 1998. Pursuant to the short form merger
provisions of California law the Merger became effective 20 days later on
April 16, 1998 and Summit was merged into Acquisition, a wholly owned
subsidiary of Fountain View.
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 of $32.0 million and a credit facility of approximately $62.7
million. In addition, Fountain View raised approximately $82.0 million of new
equity investments in the amounts of $75.6 million from Heritage and certain
other co-investors, $5.0 million 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.
On April 16, 1998 concurrent with the Merger becoming effective, Fountain
View entered into a new $30.0 million revolving credit facility, and $85.0
million term-loan facility, and successfully completed a Senior Subordinated
Note Offering providing for borrowings of $120.0 million. In addition,
Heritage made an additional equity investment of $15.0 million and received
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-
F-19
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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. 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.
5. OTHER CURRENT ASSETS
Other current assets (in thousands) consist of the following:
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 30,
1997 1998
------------ -------
<S> <C> <C>
Deferred tax assets................................... $ 926 $ 9,468
Notes receivables..................................... -- 1,165
Prepaid expenses...................................... 551 1,589
Income tax receivable................................. -- 2,654
Other receivables..................................... 26 448
------ -------
$1,503 $15,324
====== =======
</TABLE>
6. RECENT ACCOUNTING PRONOUNCEMENT
Reporting Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 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. An enterprise is required to report a total for
comprehensive income in condensed financial statements of interim periods
issued for external reporting purposes. 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, this statement
does not apply.
Disclosures about Segments of an Enterprise
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997. This Statement is not required
to be applied to interim financial statements in the initial year of its
application. SFAS 131 establishes standards for the way that public
enterprises report information about operating segments
F-20
<PAGE>
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
in annual financial statements. It also requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. Under existing accounting standards, the Company has
reported its operations as one line of business because substantially all of
its revenues have been derived from its skilled nursing care centers and
assisted living centers and closely related ancillary services. The Company is
presently evaluating the new standard in order to determine its effect, if
any, on the way the Company might report its operations in the future.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Summit Care Corporation
We have audited the accompanying consolidated balance sheets of Summit Care
Corporation and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Summit Care Corporation at June 30, 1997 and 1996, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
August 22, 1997
F-22
<PAGE>
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,658 $ 3,994
Accounts receivable, less allowance for doubtful accounts:
1996--$2,084; 1997--$2,028................................ 27,930 33,749
Supplies inventory, at cost................................ 2,058 2,690
Other current assets....................................... 13,032 12,356
-------- --------
Total current assets..................................... 45,678 52,789
Property and equipment, at cost:
Land and land improvements................................. 16,018 19,513
Buildings and leasehold improvements....................... 136,907 161,080
Furniture and equipment.................................... 18,668 23,978
Construction in progress................................... 15,043 5,947
-------- --------
186,636 210,518
Less accumulated depreciation and amortization............. 21,713 28,605
-------- --------
164,923 181,913
Notes receivable, less allowance for doubtful accounts:
1996--$268; 1997--$322..................................... 4,845 6,859
Other assets................................................. 7,606 8,955
-------- --------
$223,052 $250,516
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank............................................ $ 4,165 $ 4,678
Accounts payable........................................... 19,895 29,586
Employee compensation and benefits......................... 3,738 5,877
Income taxes payable....................................... 989 --
Long-term debt due within one year......................... 2,985 --
-------- --------
Total current liabilities................................ 31,772 40,141
Long-term debt............................................... 107,389 121,452
Deferred income taxes........................................ 2,605 7,511
-------- --------
Total liabilities........................................ 141,766 169,104
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 2,000,000 authorized shares,
none issued............................................... -- --
Common stock, no par value, 100,000,000 authorized shares;
6,776,000 and 6,772,800 issued and outstanding,
respectively.............................................. 51,486 51,543
Retained earnings............................................ 29,800 29,869
-------- --------
Total shareholders' equity............................... 81,286 81,412
-------- --------
$223,052 $250,516
======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Net revenues........................................ $137,026 $176,062 $197,927
EXPENSES:
Salaries and benefits............................. 63,171 78,233 89,577
Supplies.......................................... 15,374 18,071 20,160
Purchased services................................ 22,234 37,963 51,520
Provision for doubtful accounts................... 1,330 2,241 2,530
Other expenses.................................... 10,268 12,421 15,722
Rental............................................ 1,691 2,656 2,864
Rental to related parties......................... 450 -- --
Depreciation and amortization..................... 5,249 6,142 7,393
Interest (net of interest income: $513, $522 and
$645, respectively).............................. 4,761 6,574 7,973
-------- -------- --------
124,528 164,301 197,739
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............ 12,498 11,761 188
Provision for income taxes.......................... 4,987 4,452 119
-------- -------- --------
NET INCOME.......................................... $ 7,511 $ 7,309 $ 69
======== ======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE>
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Balances at June 30, 1994.................. 6,743,600 $51,381 $14,980 $66,361
Net income............................... -- -- 7,511 7,511
Exercise of stock options................ 15,700 192 -- 192
Expenses on sale of common stock......... -- (251) -- (251)
--------- ------- ------- -------
Balances at June 30, 1995.................. 6,759,300 51,322 22,491 73,813
Net income............................... -- -- 7,309 7,309
Exercise of stock options................ 13,500 164 -- 164
--------- ------- ------- -------
Balances at June 30, 1996.................. 6,772,800 51,486 29,800 81,286
Net income............................... -- -- 69 69
Exercise of stock options................ 3,200 57 -- 57
--------- ------- ------- -------
Balances at June 30, 1997.................. 6,776,000 $51,543 $29,869 $81,412
========= ======= ======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE>
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................... $ 7,511 $ 7,309 $ 69
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 5,249 6,142 7,393
(Increase) in accounts receivable............ (6,907) (7,594) (5,819)
(Increase) decrease in supplies inventory.... (623) 118 (632)
Decrease (increase) in other current assets.. (1,740) (8,429) 1,257
Increase in accounts payable................. 2,512 8,923 9,691
Increase (decrease) in employee compensation
and benefits................................ 478 (270) 2,139
(Decrease) increase in income taxes payable.. 577 (72) (989)
Increase (decrease) in deferred income taxes. (43) 739 4,906
-------- -------- --------
Total adjustments.......................... (497) (443) 17,946
-------- -------- --------
Net cash provided by operating activities.... 7,014 6,866 18,015
-------- -------- --------
INVESTING ACTIVITIES:
Issuance of notes receivable................... (2,089) (916) (3,142)
Principal payments of notes receivable......... 962 498 547
Additions to property and equipment............ (9,004) (26,558) (24,075)
Acquisitions of nursing centers................ (51,178) -- --
Additions to other assets...................... (3,279) (2,276) (1,657)
-------- -------- --------
Net cash used in investing activities........ (64,588) (29,252) (28,327)
FINANCING ACTIVITIES:
Increase in payable to bank.................... 826 1,193 513
Principal payments on long-term debt........... (38,225) (49,914) (17,922)
Proceeds from long-term debt................... 76,520 70,500 29,000
Net expenses from sale of common stock......... (251) -- --
Net proceeds on exercise of stock options...... 192 164 57
-------- -------- --------
Net cash provided by financing activities.... 39,062 21,943 11,648
-------- -------- --------
Increase (decrease) in cash and cash equivalents. (18,512) (443) 1,336
Cash and cash equivalents at beginning of year... 21,613 3,101 2,658
-------- -------- --------
Cash and cash equivalents at end of year......... $ 3,101 $ 2,658 $ 3,994
======== ======== ========
Supplemental disclosures of non-cash investing
and financing activities:
Acquisition notes payable...................... $ (2,814) $ -- $ --
Acquisition of nursing care centers............ 2,814 -- --
Acquisition of nursing care centers under
capital leases................................ 16,654 -- --
Capital lease obligations...................... (16,654) -- --
</TABLE>
See accompanying notes.
F-26
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Summit Care Corporation ("Company" or "Summit")
provides a variety of healthcare services primarily to the elderly through the
operation of sub-acute, skilled nursing, Alzheimer's and assisted living units
in skilled nursing care centers and assisted living centers in California,
Texas and Arizona. These services include nursing care, room, board and
certain specialty medical services, including rehabilitation care, infusion
therapy and other ancillary services. The Company also provides specialty
pharmaceutical and infusion therapy services to other long-term care
providers. In April 1994, OrNda HealthCorp ("OrNda") acquired the Company's
then majority shareholder, Summit Health Ltd. ("SHL"). OrNda's 7.5%
Exchangeable Subordinated Notes ("OrNda Notes") were exchangeable into its
equity interest in the Company's common stock, at the option of the holders.
OrNda redeemed 100% of the outstanding OrNda Notes in exchange for its equity
interest in the Company's common stock in August 1995. OrNda currently has no
position in the Company's common stock. In January 1997, OrNda was merged into
Tenet Healthcare Corporation ("Tenet").
BASIS OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated.
USE OF ESTIMATES. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-
out method) or market.
REVENUES. Approximately 68 percent, 70 percent and 72 percent of the
Company's revenues in the years ended June 30, 1995, 1996 and 1997 were
derived from funds under federal and state medical assistance programs, the
continuation of which are dependent upon governmental policies. These revenues
are based, in certain cases, upon cost reimbursement principles and are
subject to audit. Revenues are recorded on an accrual basis as services are
performed at their estimated net realizable value. Differences between final
settlement and estimated net realizable value accrued in prior years are
reported as adjustments to the current year's net revenues. These adjustments
decreased net revenues by $4,892 in fiscal 1997. A significant portion of the
Company's skilled nursing care center revenues is derived from government
sponsored healthcare programs such as Medicare and Medicaid. These programs
are highly regulated and are subject to budgetary and other constraints. While
the Company's cash flow could be adversely affected by periodic government
program funding delays or shortfalls, management does not believe there are
any significant credit risks associated with these government programs.
PROPERTY AND EQUIPMENT. Depreciation and amortization (straight-line method)
is based on the estimated useful lives of the individual assets as follows:
<TABLE>
<C> <S>
Buildings and improvements....... 15-40 years
Leasehold improvements........... Shorter of lease term or estimated useful
life
Furniture and equipment.......... 3-20 years
</TABLE>
F-27
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Amortization of capital leases is included in depreciation and amortization
expense. For leasehold improvements, where the Company has acquired the right
of first refusal to purchase or to renew the lease, amortization is based on
the lesser of the estimated useful lives and the period covered by the right.
INTANGIBLE ASSETS. Goodwill of $2,321 less accumulated amortization of $182
is included in other assets at June 30, 1997 and is amortized over 35 years
using the straight-line method.
INSURANCE COVERAGE. The Company self insures for certain levels of workers'
compensation and general and professional liability coverage. The Company
utilizes a captive insurance company for the purpose of providing reinsurance
coverage for workers' compensation claims filed by its California and Arizona
employees in excess of a $250 self insurance retention per occurrence and not
subject to an annual aggregate limit. The Company has elected under Texas law
to decline to participate in the Texas workers' compensation insurance program
and maintains employer's excess and occupational indemnity insurance on claims
subject to a $150 self insurance retention per occurrence with no annual
aggregate limit. The Company maintains general and professional liability
insurance on a claims made basis, subject to a $100 self insurance retention
per occurrence and $600 on an annual aggregate basis.
Under both self insurance programs, the Company estimates its liability,
including potential legal fees and settlement amounts, based on claims filed
and estimates of claims incurred but not reported, utilizing historical
experience on an undiscounted basis. Differences between the amounts accrued
and subsequent settlements are recorded in operations in the year of
settlement.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with an original maturity of three months or less. The Company
places its temporary cash investments with high credit quality financial
institutions.
CASH MANAGEMENT. The Company utilizes a centralized cash management system.
Payable to bank represents checks outstanding.
ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS. Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company believes, based on current
circumstances, that there are no indicators of impairment to its long-lived
assets, and the Company presently has no expectations for disposing of any
long-lived assets.
RECENT ACCOUNTING PRONOUNCEMENTS. In October 1995, Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), was issued which, if elected, would require companies to use a new fair
value method of valuing stock-based compensation plans. The Company has
elected to continue following present accounting rules under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
which uses an intrinsic value method and often results in no compensation
expense. In accordance with SFAS 123, the Company has provided pro forma
disclosure of what net income and earnings per share would have been had the
new fair value method been used (see Note 10).
F-28
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
which is effective for fiscal years ending after December 15, 1997, including
interim periods. Earlier adoption is not permitted. However, an entity is
permitted to disclose pro forma earnings per share amounts computed under SFAS
128 in the notes to the financial statements in periods prior to adoption. The
statement requires restatement of all prior-period earnings per share data
presented after the effective date. SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
substantially similar to the standard recently issued by the International
Accounting Standards Committee entitled "International Accounting Standards,
Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998
and has not determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years ending after December 15, 1997. SFAS 131 establishes standards
for the way that public enterprises report information about operating
segments in annual financial statements. It also requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Under existing accounting standards,
the Company has reported its operations as one line of business because
substantially all of its revenues have been derived from its skilled nursing
care centers and assisted living centers and closely related ancillary
services. The Company is presently evaluating the new standard in order to
determine its effect, if any, on the way the Company might report its
operations in the future.
RECLASSIFICATIONS. Certain amounts have been reclassified to conform with
1997 presentations.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair market value disclosures.
CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
NOTES RECEIVABLE (INCLUDING CURRENT PORTION). The carrying amount, before
the allowance for doubtful accounts, is $8,434. The fair value of $8,400 is
estimated using discounted cash flow analyses, based on interest rates
currently being offered for notes with similar terms to borrowers of
similar credit quality.
LONG-TERM DEBT (INCLUDING CURRENT PORTION). The carrying value of
$121,452 of long-term debt is based on the original face value (issue
amount). The fair value of $120,300 is estimated based on the present value
of the underlying cash flows discounted at the Company's incremental
borrowing rate.
3. MATERIAL TRANSACTIONS WITH RELATED ENTITIES
TENET HEALTHCARE CORPORATION, ORNDA HEALTHCORP AND SUMMIT HEALTH LTD. The
Company had an agreement with Tenet/OrNda, which expired in March 1997, under
which the Company leased a
F-29
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. NATIONAL TRANSACTIONS WITH RELATED ENTITIES (CONTINUED)
portion of its corporate office space to OrNda and shared the cost of building
services with OrNda. The agreement also required OrNda to provide tax
accounting to the Company. The Company's rental income from OrNda for the
space exceeded the payments to OrNda for services by $31 for the year ended
June 30, 1997. For the years ended June 30, 1996 and 1995, payments to OrNda
for services exceeded rental income for the space by $50 and $23,
respectively. The Company believes that the amount reimbursed for the services
provided and the rental income received are reasonable. The agreement also
indemnified the Company against any liability arising from its divestiture of
facilities, the net assets of which were purchased by SHL during the year
ended June 30, 1992. The provisions of the indemnification survive the
termination of the agreement. Certain provisions of this agreement were
terminated or amended as a result of the redemption on August 28, 1995 by
OrNda of 100% of the OrNda Notes in exchange for the Company's common stock
(see Note 1).
In January 1994, the Company entered into a ten-year sub-lease of a nursing
care center with SHL. The Company believes the monthly lease payments of $37
are reasonable for the market areas. Lease payments to Tenet, OrNda and SHL
were $450 for each of the years ended June 30, 1995, 1996 and 1997.
At June 30, 1997, the net amount due from Tenet for transactions between the
Company and Tenet was $918 and is included in Other Current Assets (see Note
5).
4. ACQUISITIONS AND CONSTRUCTION ACTIVITY
FISCAL YEAR 1995. On September 1, 1994, the Company purchased a 220-bed
skilled nursing care center in White Settlement (Fort Worth), Texas, for
$11,925 in cash and a four-acre site for $1,500 in cash for construction of a
210-bed skilled nursing care center located in Fort Worth, Texas, which began
in May 1995.
The Company acquired on October 1, 1994 the leasehold interest in six
skilled nursing care centers and the real and personal property of a seventh
with a combined total of 783 beds located in various communities in Texas for
$30,938, including goodwill of $2,321. The purchase price consists of (i)
$11,470 in cash (of which $8,541 was funded under the Company's bank line of
credit), (ii) a $2,814 promissory note ($3,000 less a $186 discount) at 9%
interest (7% contract rate) fully amortized in seven years and (iii) a $16,654
capital lease obligation assumed by the Company. The leases on the six centers
range from eight to twenty-one years, include purchase options, the first
exercisable in July 1996, and the last exercisable in February 2005, and have
combined monthly payments of $159.
On December 1, 1994, the Company acquired four skilled nursing care centers
in three communities in East Texas with a combined total of 548 beds for
$27,000 in cash and, in a separate transaction, the leasehold interest in a
119-bed skilled nursing care center located in Big Spring, Texas, for $800 in
cash. Both transactions were funded under the Company's bank line of credit.
The Company's acquisitions have been accounted for as purchases and,
accordingly, the results of operations of the acquired centers have been
included in the consolidated statement of income since the date of
acquisition.
The Company completed in May 1995 an addition of 74 beds to a 76-bed nursing
care center which is operated under a ten-year sub-lease with OrNda (see Note
3).
FISCAL YEAR 1996. On January 8, 1996, the Company opened a 108-bed skilled
nursing care center in Fresno, California, and in August 1996, opened another
51 beds at the same site. Total cost of construction including the original
purchase price was $14,024. In March 1996, the Company added
F-30
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACQUISITION AND CONSTRUCTION ACTIVITY (CONTINUED)
20 licensed beds to one of its two skilled nursing care centers in Beaumont,
Texas, increasing the center's total beds to 148. Total cost of construction
was $785. In June 1996, the Company also added 54 beds to its skilled nursing
care center in Longview, Texas, increasing the total beds to 182. Total cost
of construction was $1,860. Cost of construction completed in the year ended
June 30, 1996 was financed with funds from Notes issued in December 1995 and
draws against the Company's bank line of credit (see Note 6).
FISCAL YEAR 1997. In August 1996, the Company opened a 110-bed skilled
nursing care center in Fort Worth, Texas, and in June 1997, opened another 100
beds at the same site. Total cost of construction including the original
purchase price (see this Note, Fiscal Year 1995) was $12,012. On July 1, 1997,
the Company opened a 66-bed assisted living center in Orange, California,
dedicated to Alzheimer's and other patients with dementia. Total cost of
construction, which constituted renovation of an existing building on a campus
with a 172-bed skilled nursing center and a 72-bed assisted living center, was
$3,525. Cost of construction completed in the year ended June 30, 1997 was
financed with funds from $15 million of Senior Secured Notes ("Notes") issued
in July 1996 and with cash generated from operations. The Notes represented
the second and last issuance of $70 million of Notes. The first issuance of
$55 million occurred in December 1995.
In July 1996, the Company exercised a purchase option in its lease of a 88-
bed skilled nursing care center in Rockport, Texas. The purchase price of
$2,022 was financed with funds from the Notes.
In December 1996, the Company entered into a limited liability company
("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price
for its 50% membership interest was $1,565 in cash. The pharmacy services
nursing centers in Texas operated by either the Company, the other LLC member
or non-affiliated nursing center owners. The Company accounts for its
investment in the LLC under the equity method of accounting. The Company's
equity in earnings of the LLC was insignificant during fiscal year 1997.
In June 1997, the Company purchased 10 acres of vacant land in Longview,
Texas for $648 in cash. The land will be used for new services which will
complement the 174-bed skilled nursing center currently owned and operated by
the Company.
5. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------- -------
<S> <C> <C>
Due from third party payors.................................... $ 8,055 $ 2,491
Deferred tax assets............................................ 1,810 1,956
Notes receivable............................................... 672 1,253
Prepaid expenses............................................... 952 1,004
Income tax receivable.......................................... -- 4,128
Other receivables.............................................. 1,543 1,524
------- -------
$13,032 $12,356
======= =======
</TABLE>
F-31
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1996 1997
-------- --------
<S> <C> <C>
Senior secured notes, at fixed interest rates from 7.38% to
8.14%, interest only payable semi-annually, principal due
from December 2000 to December 2010 in various annual
payments, secured by property and equipment with a book
value of approximately $91,781 at June 30, 1997........... $ 55,000 $ 70,000
Secured revolving bank line of credit expires September 30,
1998, variable interest rates approximating 7.44% in the
year ending June 30, 1997, convertible to a term loan due
in equal quarterly principal payments through September
2001, secured by property and equipment with a book value
of approximately $6,556 at June 30, 1997.................. 6,000 5,000
8.96% senior secured notes, due 2002, interest only,
payable semi-annually through June 1997, annual principal
payments of $4,150 beginning December 1997, secured by
property and equipment with a book value of approximately
$32,779 at June 30, 1997.................................. 25,000 25,000
Present value of capital lease obligations at effective
interest rates from 7% to 9%, secured by property and
equipment with a book value of approximately $23,216 at
June 30, 1997............................................. 15,680 13,133
Mortgage and other note payable, fixed interest rates from
7.75% to 9%, due in various monthly installments through
January 2026, secured by property and equipment with a
book value of approximately $7,379 at June 30, 1997....... 5,231 5,281
Promissory note, less imputed interest of $81 in the year
ended June 30, 1997, at an effective interest rate of 9%
due in October 2001, secured by the leasehold interest in
a nursing care center, with a book value of approximately
$3,060 at June 30, 1997................................... 2,304 1,944
Mortgage note payable, variable interest rates from 8.25%
to 9.0% in year ended June 30, 1997, due in equal monthly
principal installments through March 2001, secured by
property and equipment with a book value of approximately
$2,816 at June 30, 1997................................... 1,159 1,094
Less current portion....................................... (2,985) --
-------- --------
Non-current portion........................................ $107,389 $121,452
======== ========
</TABLE>
Future maturities of long-term debt (including capital lease obligations)
are as follows: years ending June 30, 1998--$-0-; 1999--$8,699; 2000--$13,788;
2001--$17,187; 2002--$10,904, and thereafter--$70,874.
In December 1995, the Company amended its secured bank line of credit which
reduced the commitment from $60,000 to $40,000, converted accounts receivable
from collateral to a negative pledge, extended the revolver to September 30,
1997 (the revolver has been subsequently extended to September 30, 1998) and
reduced the period of the term loan upon termination of the revolver from four
to three years. The interest rate is variable and at the Company's option,
will equal either the bank prime rate or the Eurodollar rate plus a margin
(reduced by the amendment) that varies depending on the ratio of certain
senior debt to earnings before certain interest, taxes, depreciation and
amortization.
F-32
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
At June 30, 1997, credit line loans outstanding were $5,000 which was used to
finance the construction described in Note 4. At June 30, 1997, the Company
classified $6,997 of current debt maturities as long-term debt based on its
intent and ability to refinance these obligations under the bank line of
credit.
The bank line of credit loan agreement and the two senior secured note
agreements contain covenants that include requirements to comply with certain
financial tests and ratios and restrict the ability of the Company to incur
additional indebtedness. Also, the Company is restricted by the agreements
from the payment of dividends (other than dividends payable in common stock)
or to acquire its common stock to the extent that such payments exceed $5,000
plus 50% of the Company's net income after June 30, 1995. The Company
currently is meeting all financial tests and ratios.
Interest expense was $6,033, $8,701 and $10,296 in fiscal years 1995, 1996
and 1997, respectively, of which $759, $1,605 and $1,678 in 1995, 1996 and
1997 were capitalized as part of the ongoing construction projects. Interest
payments were $5,712 , $7,874 and $10,124 in fiscal years 1995, 1996 and 1997,
respectively.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Federal:
Current............................................ $4,359 $3,611 $(3,979)
Deferred........................................... (277) 19 4,003
------ ------ -------
4,082 3,630 24
State:
Current............................................ 952 798 (662)
Deferred........................................... (47) 24 757
------ ------ -------
905 822 95
------ ------ -------
$4,987 $4,452 $ 119
====== ====== =======
</TABLE>
F-33
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred income taxes result from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements and represent differences between income for tax purposes and
income for financial statement purposes in future years. Temporary differences
are primarily attributable to reporting for income tax purposes the excess of
tax over book depreciation, bad debts and vacation benefits. The current
deferred tax assets are included in other current assets (see Note 5).
Significant components of the Company's deferred tax liabilities and assets as
of June 30 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------------- -------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Income Taxes
Deferred tax liabilities:
Tax over book depreciation........ $ -- $(3,136) $ -- $(7,858)
Other............................. -- (137) -- (264)
------ ------- ------ -------
Total deferred tax liabilities.. -- (3,273) -- (8,122)
Deferred tax assets:
Vacation and deferred compensation
benefits and bad debt............ 1,810 330 1,956 452
State tax......................... -- 338 -- 159
------ ------- ------ -------
Total deferred tax assets....... 1,810 668 1,956 611
------ ------- ------ -------
Net deferred tax assets
(liabilities)...................... $1,810 $(2,605) $1,956 $(7,511)
====== ======= ====== =======
</TABLE>
A reconciliation of the provision for income taxes with the amount computed
using the federal statutory rate is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------
1996 1997
---- -----
<S> <C> <C>
Federal rate 35.0% 34.0%
State taxes, net of federal tax benefit........................ 4.5 4.5
Tax credits.................................................... (1.6) --
Other, net..................................................... -- 24.8
---- -----
37.9% 63.3%
==== =====
</TABLE>
The increase in the effective tax rate was primarily due to certain
permanent differences between book income and taxable income. Total income tax
payments during fiscal years 1995, 1996 and 1997 were $4,876, $3,904 and
$1,828, respectively.
8. LEASES
The Company leases certain of its centers, equipment and its pharmacy space
under both noncancellable operating leases and capital leases. The leases
generally provide for payment of property taxes, insurance and repairs, and
have rent escalation clauses based upon the consumer price index or annual per
bed adjustments.
F-34
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LEASES (CONTINUED)
All capital leases contain purchase options, and the accompanying balance
sheet and following table have been prepared assuming such options will be
exercised (see Note 11). Some leases contain various renewal options and
extend up to the year 2030. Property and equipment includes the following
amounts for leases which have been capitalized:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Land and land improvements..................................... $ 1,400
Buildings and leasehold improvements........................... 21,481
Furniture and equipment........................................ 2,405
-------
25,286
Less accumulated amortization.................................. 2,070
-------
$23,216
=======
</TABLE>
The future minimum rental payments under noncancellable operating leases and
capital leases (including purchase options when expected to be exercised) that
have initial or remaining lease terms in excess of one year as of June 30,
1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING JUNE 30, LEASES LEASES TOTAL
-------------------- --------- -------- --------
<S> <C> <C> <C>
1998.......................................... $ 3,054 $ 3,321 $ 6,375
1999.......................................... 2,995 4,634 7,629
2000.......................................... 2,755 4,297 7,052
2001.......................................... 2,513 350 2,863
2002.......................................... 2,176 350 2,526
Thereafter.................................... 7,827 3,525 11,352
-------- -------- --------
Total minimum lease payments.................. 21,320 16,477 37,797
Less amount representing interest............. -- 3,344 3,344
-------- -------- --------
Present value of net minimum lease payments
(capital lease amount included in long-term
debt--see Note 6)............................ $21,320 $13,133 $34,453
======== ======== ========
</TABLE>
9. CONTINGENCIES
The Company is subject to malpractice claims and other litigation arising in
the ordinary course of business. In the opinion of management, any liability
beyond amounts covered by insurance and the ultimate resolution of all pending
legal proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
10. STOCK OPTION PLAN
Effective July 1, 1991, the Company adopted a stock option plan authorizing
the issuance of 250,000 shares of common stock. The plan was amended on
December 9, 1994 and again on December 8, 1995 to increase the authorized
shares to 1,400,000. Options may be granted to key employees and directors of
the Company. Options granted to employees may be either incentive stock
options or nonstatutory options. Only non-qualified options may be granted to
non-employee directors. Options granted to non-employee directors are granted
automatically pursuant to a formula grant provision contained in the plan. The
option price per share for incentive stock options shall not be less than 85%
of the fair market value at the date of the grant. The terms of each option
and the increments
F-35
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
in which each is exercisable are determined by a committee appointed by the
Board of Directors. No option may be exercised after ten years from the date
of the grant and no option may be granted under the plan after June 30, 2001.
The following summarizes activity in the stock option plan:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------
1995 1996 1997
----------------- ----------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE AVERAGE
OF EXERCISE OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of
year................... 256,000 $12.97 523,000 $16.79 948,500 $18.91
Changes during year:
Granted............... 284,500 $19.94 504,000 $21.15 112,000 $13.36
Exercised............. (15,700) $12.20 (13,500) $12.13 (3,200) $17.85
Canceled.............. (1,800) $12.26 (65,000) $20.58 (26,800) $20.31
------- ------- ---------
Options outstanding at
end of year............ 523,000 $16.79 948,500 $18.91 1,030,500 $18.27
======= ======= =========
Options exercisable at
end of year............ 58,100 $12.26 161,600 $14.97 352,300 $17.10
Options available for
grant at end of year... 57,700 418,700 333,500
</TABLE>
The weighted average fair value per share of options granted during the year
was $10.14 and $6.72 for fiscal years 1996 and 1997, respectively. The
exercise prices for options outstanding at June 30, 1997 ranged from $10.50 to
$22.50. The weighted average remaining contractual life of these options is
approximately eight years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) which uses an
intrinsic value method and, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant,
results in no compensation expense. However, pro forma information regarding
net income and earnings per share is required by Statement of Financial
Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based
Compensation" (SFAS 123), and, in the following disclosure, has been
determined as if the Company had accounted for its stock options under the
fair value method of SFAS 123. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for the years ended June 30, 1997 and
1996, respectively: risk-free interest rates of 6.4% and 5.5%; dividend yields
of zero percent for both years; volatility factors of the expected market
price of the Company's common stock of 48.4% and 46.8%; and a weighted average
expected life of the options of five years.
Because the Company's stock options have characteristics significantly
different from those options used in the Black-Scholes option pricing model,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the
Company's stock options.
F-36
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects
of providing pro forma disclosure are not likely to be representative of the
effects on reported net income for future years. The Company's pro forma
information follows for the years ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
Pro forma net income (loss)................................... $6,914 $(543)
</TABLE>
11. SUBSEQUENT EVENT
In September 1997, the Company exercised a purchase option in its lease of a
111-bed skilled nursing care center in La Grange, Texas. The purchase option
price of $1,871 was financed by a draw on the Company's bank line of credit
(see Note 6).
12. UNAUDITED QUARTERLY INFORMATION
Following is a summary of unaudited quarterly results of operations from the
years ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
------------------------------------------
1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues..................... $41,270 $42,801 $45,232 $46,759 $176,062
Income before income taxes....... 3,924 3,400 2,077 2,360 11,761
Net income....................... 2,359 2,043 1,327 1,580 7,309
<CAPTION>
YEAR ENDED JUNE 30, 1997
------------------------------------------
1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues..................... $48,907 $46,181 $52,012 $50,827 $197,927
Income (loss) before income
taxes........................... 2,587 (1,734) 2,394 (3,059) 188
Net income (loss)................ 1,565 (1,049) 1,448 (1,895) 69
</TABLE>
F-37
<PAGE>
SUMMIT CARE CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,702
Accounts receivable, less allowance for doubtful accounts of
$2,474......................................................... 36,343
Supplies inventory, at cost..................................... 3,204
Other current assets............................................ 15,569
--------
Total current assets.......................................... 56,818
Property and equipment, at cost:
Land and land improvements...................................... 20,036
Buildings and leasehold improvements............................ 175,078
Furniture and equipment......................................... 24,361
Construction in progress........................................ 5,298
--------
224,773
Less accumulated depreciation and amortization.................. 30,220
--------
194,553
Notes receivable, less allowance for doubtful accounts of $363 ... 6,842
Other assets...................................................... 9,207
--------
Total assets.................................................. $267,420
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Payable to bank................................................. $ 2,985
Accounts payable................................................ 36,776
Employee compensation and benefits.............................. 4,622
Income taxes payable............................................ 1,051
--------
Total current liabilities..................................... 45,434
Long-term debt.................................................... 129,754
Deferred income taxes............................................. 7,511
--------
Total liabilities............................................. 182,699
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 2,000 authorized shares, none
issued......................................................... --
Common stock, no par value, 100,000 authorized shares; 6,776 and
6,813 issued and outstanding, respectively..................... 52,020
Retained earnings............................................... 32,701
--------
Total shareholders' equity.................................... 84,721
--------
Total liabilities and shareholders' equity.................... $267,420
========
</TABLE>
See accompanying notes.
F-38
<PAGE>
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------
1996 1997
------- --------
<S> <C> <C>
NET REVENUES.................................................. $95,088 $108,507
EXPENSES:
Salaries and benefits....................................... 43,386 47,742
Supplies.................................................... 10,381 10,261
Purchased services.......................................... 24,144 26,211
Provision for doubtful accounts............................. 967 1,780
Other expenses.............................................. 6,258 7,484
Rent........................................................ 1,410 1,525
Depreciation and amortization............................... 3,632 4,235
Interest (net of interest income, $371 in 1997 and $179 in
1996, respectively)........................................ 4,057 4,588
------- --------
94,235 103,826
------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES...................... 853 4,681
Provision for income taxes.................................... 337 1,849
------- --------
NET INCOME.................................................... $ 516 $ 2,832
======= ========
</TABLE>
See accompanying notes.
F-39
<PAGE>
SUMMIT CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 516 $ 2,832
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 3,632 4,235
(Increase) in accounts receivable, net................. (5,027) (2,594)
(Increase) in supplies inventory......................... (66) (514)
(Increase) in other current assets....................... (1,602) (3,152)
Increase in accounts payable............................. 6,805 7,190
(Decrease) increase in employee compensation and
benefits.............................................. 294 (1,255)
Increase (decrease) in income taxes payable.............. (989) 1,051
-------- --------
Total adjustments...................................... 3,047 4,961
-------- --------
Net cash provided by operating activities.............. 3,563 7,793
-------- --------
INVESTING ACTIVITIES:
Issuance of notes receivable............................. (550) (2,281)
Principal payments of notes receivable................... 253 2,294
Additions to property and equipment...................... (12,049) (6,706)
Property and equipment related to purchase of nursing
center.................................................. -- (4,209)
(Increase) in other assets............................... (1,579) (470)
-------- --------
Net cash (used in) investing activities................ (13,925) (11,372)
-------- --------
FINANCING ACTIVITIES:
(Decrease) in payable to bank............................ (1,229) (1,693)
Principal payments on long-term debt..................... (8,435) (10,497)
Proceeds from long-term debt............................. 19,000 13,000
Proceeds from exercise of stock options.................. -- 477
-------- --------
Net cash provided by financing activities.............. 9,336 1,287
-------- --------
(Decrease) in cash and cash equivalents.................... (1,026) (2,292)
Cash and cash equivalents at beginning of year............. 2,658 3,994
-------- --------
Cash and cash equivalents at end of the period............. $ 1,632 $ 1,702
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 5,161 $ 5,015
Income taxes............................................. 1,654 808
Non cash investing and financing activities:
Acquisition of nursing care center under capital lease. -- 5,799
Capital lease obligation............................... -- (5,799)
</TABLE>
See accompanying notes.
F-40
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. The unaudited financial information included herein, in the opinion of
management, reflects all adjustments (all of which are of a normal recurring
nature except for a special charge recorded in December 1996, see Note 5),
which are considered necessary to fairly state the Company's financial
position, its cash flows and the results of operations. These statements do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the Company's annual report filed on Form 10-K for
the year ended June 30, 1997. The interim financial information herein is not
necessarily representative of that to be expected for a full year.
2. Certain amounts have been reclassified to conform with fiscal 1998
presentations.
3. Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Due from third-party payors..................................... $ 4,743
Deferred tax assets............................................. 1,956
Notes receivable................................................ 1,257
Prepaid expenses................................................ 2,526
Income tax receivable........................................... 3,000
Other receivables............................................... 2,087
-------
$15,569
=======
</TABLE>
4. In December 1996, the Company recorded a special charge of $4,000 against
revenues ($2,420 against net income) as a result of adjustments proposed by
Medicare in connection with an audit of fiscal 1995 completed in the quarter
ended December 31, 1996, which would have an effect on revenues for that
fiscal year, fiscal 1996 and the six months ended December 31, 1996.
5. In July 1997, the Company opened its fifth assisted living center with 66
beds in Orange, California, at a total cost of construction of $3,924. In
September 1997, the Company exercised a purchase option in the amount of
$1,871 in its lease of a 111-bed skilled nursing care center in La Grange,
Texas. In November 1997, the Company opened 47 additional beds at one of its
two skilled nursing care centers in Lubbock, Texas, at an approximate cost of
construction of $1,900. In December 1997, the Company acquired the assets of a
194 bed skilled nursing care center in McAllen, Texas at an approximate cost
of $10,058. The Compan's bank line of credit was used to finance the two
construction projects, the exercise of the purchase option and $4,259 of the
acquisition cost of the McAllen center. The balance of the McAllen acquisition
cost of $5,799 was financed with a capitalized lease obligation.
6. In December 1997, the Company amended its secured bank line of credit by
reducing the commitment from $40,000 to $33,000. One of the four lenders was
deleted from the credit agreement, and the revolving credit termination date
was extended one year to September 30, 1999. No other terms and conditions
were added, deleted or amended.
7. Recent Accounting Pronouncement: In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years ending after December 15, 1997.
This Statement is not required to be applied to interim financial statements
in the
F-41
<PAGE>
SUMMIT CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
initial year of its application. SFAS 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements. It also requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. Under existing accounting standards, the Company has reported its
operations as one line of business because substantially all of its revenues
have been derived from its skilled nursing care centers and assisted living
centers and closely related ancillary services. The Company is presently
evaluating the new standard in order to determine its effect, if any, on the
way the Company might report its operations in the future.
8. Subsequent Event: On February 6, 1998, the Company and Fountain View,
Inc., a privately-held skilled nursing care company based in Los Angeles,
California, entered into a definitive merger agreement for Fountain View to
acquire the Company. According to the terms of the merger agreement, the
Company's shareholders will receive $21.00 per share in cash for a total
purchase price of approximately $274 million, including the assumption of
approximately $130 million of the Company's debt.
On February 13, 1998, Fountain View commenced a cash tender offer for all
outstanding shares of the Company's stock at $21.00 per share. The tender offer
expired on March 25, 1998 and, following consummation of the tender offer on
March 27, 1998, subject to the terms and conditions contained in the merger
agreement, the Company will be merged with a subsidiary of Fountain View, and
each remaining outstanding share of the Company will be converted in the merger
into $21.00 in cash.
Fountain View has received a commitment from Heritage Fund II, L.P. for $82
million of the equity financing necessary to complete the transaction and a
bank financing commitment from Bank of Montreal covering an additional $250
million. Completion of the tender offer and the merger are subject to customary
conditions to closing, including the receipt of any applicable regulatory
approvals and the expiration of any applicable regulatory waiting periods.
F-42
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 20
Use of Proceeds........................................................... 31
Capitalization............................................................ 31
Unaudited Pro Forma Financial Data........................................ 32
Selected Historical Financial and Other Data--Fountain View............... 37
Selected Historical Financial and Other Data--Summit...................... 39
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 41
Business.................................................................. 52
Management................................................................ 71
Principal Stockholders.................................................... 77
Certain Relationships and Related Transactions............................ 78
Description of Other Indebtedness......................................... 81
The Exchange Offer........................................................ 83
Plan of Distribution...................................................... 91
Description of Notes...................................................... 93
Material Federal Income Tax Consequences.................................. 125
Validity of the Notes..................................................... 128
Available Information..................................................... 128
Experts................................................................... 128
Special Note Regarding Forward-Looking Statements......................... 129
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FOUNTAIN VIEW, INC.
OFFER TO EXCHANGE UP TO
$120,000,000 OF 11 1/4% SENIOR
SUBORDINATED NOTES DUE 2008,
SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED FOR
ANY AND ALL OF ITS OUTSTANDING
11 1/4% SENIOR SUBORDINATED
NOTES DUE 2008 OF WHICH
$120,000,000 IN PRINCIPAL
AMOUNT IS OUTSTANDING
ON THE DATE HEREOF.
-----------
PROSPECTUS
-----------
SEPTEMBER 9, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
11 1/4% SENIOR SUBORDINATED NOTES DUE 2008
OF
FOUNTAIN VIEW, INC.
PURSUANT TO
PROSPECTUS DATED SEPTEMBER 9, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME ON OCTOBER 13, 1998, UNLESS THE EXCHANGE OFFER IS EXTENDED
BY THE COMPANY IN ITS SOLE DISCRETION. TENDERS OF 11 1/4% SENIOR
SUBORDINATED NOTES DUE 2008 MAY ONLY BE WITHDRAWN UNDER THE CIRCUMSTANCES
DESCRIBED IN THE PROSPECTUS AND HEREIN.
The Exchange Agent for the Exchange Offer Is:
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A.
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Overnight Courier: By Hand before 4:30 P.M.:
State Street Bank and Trust State Street Bank and Trust State Street Bank and Trust
Company of California, N.A. Company of California, N.A. Company of California, N.A.
c/o State Street Bank and Trust c/o State Street Bank and Trust c/o State Street Bank and Trust
Company Company Company
Two International Place Two International Place Two International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Boston, Massachusetts 02110
Attention: Kellie Mullen Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
By Facsimile: 617-664-5290
Confirm by Telephone to: Kellie Mullen 617-664-5587
PLEASE FOLLOW CAREFULLY THE INSTRUCTIONS HEREIN
<TABLE>
<CAPTION>
DESCRIPTION OF OUTSTANDING NOTES TENDERED
- -----------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF HOLDER(S)
(IF THE NAME AND ADDRESS SHOWN ARE NOT CURRENT PLEASE OUTSTANDING NOTES TENDERED
INDICATE ANY CHANGES NECESSARY)(1) (PLEASE FILL IN NUMBERS AND AMOUNTS AND
ATTACH ADDITIONAL LIST IF NECESSARY)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CERTIFICATE PRINCIPAL
NUMBER(S) (IF AMOUNT(S)
ENCLOSING OF OUTSTANDING
CERTIFICATES)(2) NOTES TENDERED(3)
- -----------------------------------------------------------------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
TOTAL
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE PROSPECTUS, DATED SEPTEMBER 9,
1998 (THE "PROSPECTUS"), OF FOUNTAIN VIEW, INC., A DELAWARE CORPORATION (THE
"COMPANY"), AND THIS LETTER OF TRANSMITTAL RELATING TO THE OFFER (THE
"EXCHANGE OFFER") OF THE COMPANY, UPON THE TERMS AND SUBJECT TO THE CONDITIONS
SET FORTH IN THE PROSPECTUS AND HEREIN AND THE INSTRUCTIONS HERETO, TO
EXCHANGE $1,000 PRINCIPAL AMOUNT OF ITS 11 1/4% SENIOR SUBORDINATED NOTES DUE
2008, SERIES B (THE "EXCHANGE NOTES") FOR EACH $1,000 PRINCIPAL AMOUNT OF ITS
OUTSTANDING 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008 (THE "OUTSTANDING
NOTES"), OF WHICH $120 MILLION AGGREGATE PRINCIPAL AMOUNT IS OUTSTANDING. THE
MINIMUM PERMITTED TENDER IS $1,000 PRINCIPAL AMOUNT OF OUTSTANDING NOTES, AND
ALL OTHER TENDERS MUST BE IN INTEGRAL MULTIPLES OF $1,000.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION BY
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
The Exchange Offer will expire at 5:00 p.m., New York City time, on October
13, 1998 (the "Expiration Date"), unless extended by the Company in its sole
discretion, in which case the term Expiration Date shall mean the latest date
and time to which the Exchange Offer is extended.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE NOTES PURSUANT TO THE
EXCHANGE OFFER MUST VALIDLY TENDER THEIR OUTSTANDING NOTES TO THE EXCHANGE
AGENT PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
This Letter of Transmittal should be used only to exchange the Outstanding
Notes, pursuant to the Exchange Offer as set forth in the Prospectus.
This Letter of Transmittal is to be used (a) if Outstanding Notes are to be
physically delivered to the Exchange Agent or (b) if delivery of Outstanding
Notes is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company ("DTC" or the "Book-Entry
Transfer Facility") pursuant to the procedures set forth in the Prospectus
under the caption "The Exchange Offer-- Procedures for Tendering." Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
Holders whose Outstanding Notes are not available or who cannot deliver
their Outstanding Notes and all other documents required hereby to the
Exchange Agent by 5:00 p.m. on the Expiration Date nevertheless may tender
their Outstanding Notes in accordance with the guaranteed delivery procedures
set forth in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures." See Instruction 1.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF
OUTSTANDING NOTES FOR EXCHANGE BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN
ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD
NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Prospectus.
HOLDERS WHO WISH TO EXCHANGE THEIR OUTSTANDING NOTES MUST COMPLETE COLUMNS
(1) THROUGH (3) IN THE BOX ENTITLED "DESCRIPTION OF OUTSTANDING NOTES
TENDERED" ON THE PRIOR PAGE, COMPLETE THE BOX BELOW ENTITLED "METHOD OF
DELIVERY" AND SIGN WHERE INDICATED BELOW.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OUTSTANDING
NOTES TENDERED" AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE
TENDERED THE OUTSTANDING NOTES AND MADE CERTAIN REPRESENTATIONS DESCRIBED IN
THE PROSPECTUS AND HEREIN.
2
<PAGE>
METHOD OF DELIVERY
[_]CHECK HERE IF CERTIFICATE FOR TENDERED OUTSTANDING NOTES ARE ENCLOSED
HEREWITH.
[_]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-
ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ____________________________________________
Account Number: ___________________ Transaction Code Number: ____________
Principal Amount of Tendered Notes: _______________________________________
[_]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT
TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE
AGENT AND COMPLETE THE FOLLOWING (SEE INSTRUCTIONS 1 AND 4):
Name(s) of Registered Holder(s): ________________________________________
Window Ticket Number (if any): __________________________________________
Date of Execution of Notice of Guaranteed Delivery: _____________________
Name of Eligible Institution which Guaranteed Delivery: _________________
IF DELIVERED BY THE BOOK-ENTRY TRANSFER FACILITY, PROVIDE THE FOLLOWING
INFORMATION:
[_]The Depository Trust Company
Account Number: _________________ Transaction Code Number: ____________
------------------------------------------------------------------------
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE TEN
ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
PLEASE NOTE: THE COMPANY HAS AGREED THAT, FOR A PERIOD OF DAYS AFTER THE
EXPIRATION DATE, IT WILL MAKE COPIES OF THE PROSPECTUS AVAILABLE TO ANY
PARTICIPATING BROKER-DEALER FOR USE IN CONNECTION WITH RESALES OF THE
EXCHANGE NOTES.
Name: ___________________________________________________________________
Address: ________________________________________________________________
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
3
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of Outstanding
Notes indicated in the box entitled "Description of Outstanding Notes
Tendered." Subject to, and effective upon, the acceptance for exchange of the
Outstanding Notes tendered hereby, the undersigned hereby irrevocably sells,
assigns and transfers to or upon the order of the Company all right, title and
interest in and to such Outstanding Notes, and hereby irrevocably constitutes
and appoints the Exchange Agent the true and lawful agent and attorney-in-fact
of the undersigned (with full knowledge that said Exchange Agent also acts as
the agent of the Company and as Trustee under the Indenture governing the
Outstanding Notes and the Exchange Notes) with respect to such Outstanding
Notes, with full power of substitution (such power of attorney being deemed to
be an irrevocable power coupled with an interest) to (a) deliver certificates
representing such Outstanding Notes, and to deliver all accompanying evidences
of transfer and authenticity to or upon the order of the Company upon receipt
by the Exchange Agent, as the undersigned's agent, of the Exchange Notes to
which the undersigned is entitled upon the acceptance by the Company of such
Outstanding Notes for exchange pursuant to the Exchange Offer, (b) receive all
benefits and otherwise to exercise all rights of beneficial ownership of such
Outstanding Notes, all in accordance with the terms of the Exchange Offer, and
(c) present such Outstanding Notes for transfer on the register for such
Outstanding Notes, and receive all benefits and otherwise exercise all rights
of beneficial ownership of such Notes, all in accordance with the terms of the
Exchange Offer.
The undersigned acknowledges that prior to this Exchange Offer, there has
been no public market for the Outstanding Notes or the Exchange Notes. If a
market for the Exchange Notes should develop, the Exchange Notes could trade
at a discount from their principal amount. The undersigned is aware that the
Company does not intend to list the Exchange Notes on a national securities
exchange and that there can be no assurance that an active market for the
Exchange Notes will develop.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive
Exchange Notes, it represents that the Outstanding Notes to be exchanged for
Exchange Notes were acquired as a result of market-making activities or other
trading activities and it acknowledges that it will deliver a prospectus in
connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM
OR ON BEHALF OF, HOLDERS OF THE OUTSTANDING NOTES IN ANY JURISDICTION IN WHICH
THE MAKING OF THE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY
PROVISION OF ANY APPLICABLE SECURITY LAW.
The undersigned represents that (a) it is not an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company or any of the Subsidiary
Guarantors (as defined in the Prospectus), (b) it is not engaged in, and does
not intend to engage in, and has no arrangement or understanding with any
person to participate in, a distribution of the Exchange Notes, and (c) it is
acquiring the Exchange Notes in the ordinary course of business. In addition,
the undersigned acknowledges that an person participating in the Exchange
Offer for the purpose of distributing the Exchange Notes must, in the absence
of an exemption therefrom, comply with the registration and prospectus deliver
requirements of the Securities Act in connection with a secondary resale of
the Exchange Notes and cannot rely on the position of the staff of the
Securities and Exchange Commission enunciated in no action letters and failure
to comply with such requirements in such instance could result in the
undersigned incurring liability under the Securities Act for which the
undersigned is not indemnified by the Company. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the assignment,
transfer and purchase of the Notes tendered hereby.
The undersigned understands and acknowledges that the Company reserves the
right, in its sole discretion, the purchase or make offers for any Outstanding
Notes that remain outstanding subsequent to the Expiration Date or to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Outstanding Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers will
differ from the terms of the Exchange Offer.
4
<PAGE>
The undersigned hereby represents and warrants that (a) the undersigned
accepts the terms and conditions of the Exchange Offer, (b) the undersigned
has a net long position within the meaning of Rule 14e-4 under the Exchange
Act ("Rule 14e-4") equal to or greater than the principal amount of
Outstanding Notes tendered hereby, (c) the tender of such Outstanding Notes
complies with Rule 14e-4 (to the extent that Rule 14e-4 is applicable to such
exchange), (d) the undersigned has full power and authority to tender,
exchange, assign and transfer the Outstanding Notes tendered hereby, and (e)
when the same are accepted for exchange by the Company, the Company will
acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim or
right. The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the sale, assignment and transfer of the Outstanding
Notes tendered hereby.
The undersigned agrees that all authority conferred or agreed to be
conferred by this Letter of Transmittal and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. The undersigned also agrees that, except as
stated in the Prospectus, the Outstanding Notes tendered hereby cannot be
withdrawn.
The undersigned understands that tenders of the Outstanding Notes pursuant
to any one of the procedures described in the Prospectus under the caption
"The Exchange Offer--Procedures for Tendering Outstanding Notes" and in the
instructions hereto will constitute a binding agreement between the
undersigned and the Company in accordance with the terms and subject to the
conditions of the Exchange Offer.
The undersigned understands that by tendering Outstanding Notes pursuant to
one of the procedures described in the Prospectus and the instructions
thereto, the tendering holder will be deemed to have waived the right to
receive any payment in respect of interest on the Outstanding Notes accrued up
to the date of issuance of the Exchange Notes.
The undersigned recognizes that, under certain circumstances set forth in
the Prospectus, the Company may not be required to accept for exchange any of
the Outstanding Notes tendered. Outstanding Notes not accepted for exchange or
withdrawn will be returned to the undersigned at the address set forth below
unless otherwise indicated under "Special Delivery Instructions" below.
Unless otherwise indicated herein under the box entitled "Special Issuance
Instructions" below, Exchange Notes, and Outstanding Notes not validly
tendered or accepted for exchange, will be issued in the name of the
undersigned. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, Exchange Notes, and Outstanding Notes
not validly tendered or accepted for exchange, will be delivered to the
undersigned at the address shown below the signature of the undersigned. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" to transfer any Outstanding Notes from the
name of the registered holder thereof if the Company does not accept for
exchange any of the principal amount of such Outstanding Notes so tendered.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Outstanding Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Outstanding Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in this Letter of Transmittal) will be final and binding.
Unless waived, any defects or irregularities in connection with tenders of
Outstanding Notes must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agent nor any other person shall
be under any duty to give notification of defects or irregularities with
respect to tenders of Outstanding Notes, nor shall any of them incur any
liability for failure to give such notification. Tenders of Outstanding Notes
will not be deemed to have been made until such irregularities have been cured
or waived. Any Outstanding Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to such holder by the Exchange
Agent to the tendering holders of Outstanding Notes, unless otherwise provided
in this Letter of Transmittal, as soon as practicable following the Expiration
Date.
5
<PAGE>
SIGN HERE
(ALSO COMPLETE SUBSTITUTE FORM W-9 ON REVERSE)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(SIGNATURE(S) OF TENDERING SHAREHOLDER(S))
Dated: , 1998
Must be signed by the registered holder(s) of the Outstanding Notes
exactly as their name(s) appear(s) on certificate(s) for the Outstanding
Notes or by person(s) with this Letter of Transmittal. If signature is by
a trustee, executor, administrator, guardian, attorney-in-fact, officer of
a corporation, agent or other person acting in a fiduciary or
representative capacity, please provide the following information. See
Instruction 3.
Name(s): __________________________________________________________________
(PLEASE PRINT)
Capacity (Full Title): ____________________________________________________
Address: __________________________________________________________________
---------------------------------------------------------------------------
(ZIP CODE)
Daytime Area Code and Telephone Number: ( )_____________________________
Tax Identification or Social Security Number: _____________________________
(COMPLETE SUBSTITUTE FORM W-9 ON REVERSE)
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTIONS 1 AND 5 OF THIS LETTER OF TRANSMITTAL)
Authorized Signature: _____________________________________________________
Name: _____________________________________________________________________
(PLEASE PRINT)
Title: ____________________________________________________________________
Name of Firm: _____________________________________________________________
Address: __________________________________________________________________
---------------------------------------------------------------------------
(ZIP CODE)
Area Code and Telephone Number: ___________________________________________
Dated: , 1998
6
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4 AND 6)
(SEE INSTRUCTIONS 3, 4, AND 6)
To be completed ONLY if certifi- To be completed ONLY if certifi-
cates for Outstanding Notes in a cates for Outstanding Notes in a
principal amount not exchanged principal amount not exchange
and/or certificates for Exchange and/or certificates for Exchange
Notes are to be issued in the name Notes are to be sent to someone
of someone other than the under- other than undersigned at an ad-
signed, or if Outstanding Notes dress other than that shown above.
are to be returned by credit to an
account maintained by the Book-En-
try Transfer Facility.
Deliver (check appropriate box)
[_]Exchange Notes to:
[_]Outstanding Notes to:
Issue (check appropriate box)
Name: _____________________________
[_]Exchange Notes to:
(PLEASE PRINT)
[_]Outstanding Notes to:
Address ___________________________
Name ______________________________ (ZIP CODE)
(PLEASE PRINT)
-----------------------------------
Address ___________________________ (TAXPAYER IDENTIFICATION OR
(ZIP CODE)
SOCIAL SECURITY NUMBER)
----------------------------------- (ALSO COMPLETE SUBSTITUTE FORM W-9
(TAXPAYER IDENTIFICATION OR BELOW)
SOCIAL SECURITY NUMBER)
(ALSO COMPLETE SUBSTITUTE FORM W-9
BELOW)
Credit unaccepted Outstanding
Notes tendered by book-entry
transfer to:
[_The]Depository Trust Company ac-
count set forth below:
___________________________________
(DTC Account Number)
7
<PAGE>
INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF
THE OFFER AND THE SOLICITATION
1. Delivery of this Letter of Transmittal and Certificates; Guaranteed
Delivery Procedures. To be effectively tendered pursuant to the Exchange
Offer, the Outstanding Notes, together with a properly completed Letter of
Transmittal (or facsimile thereof), duly executed by the registered holder
thereof, and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent at one of its addresses set forth on the
first page of this Letter of Transmittal. If the beneficial owner of any
Outstanding Notes is not the registered holder, then such person may validly
tender his or her Outstanding Notes only by obtaining and submitting to the
Exchange Agent a properly completed Letter of Transmittal from the registered
holder. OUTSTANDING NOTES SHOULD BE DELIVERED ONLY TO THE EXCHANGE AGENT AND
NOT TO THE COMPANY OR TO ANY OTHER PERSON.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND ALL OTHER REQUIRED DOCUMENTS
TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER.
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE
AGENT BY 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
If a holder desires to tender Outstanding Notes and such holder's
Outstanding Notes are not immediately available or time will not permit such
holder's Letter of Transmittal, Outstanding Notes or other required documents
to reach the Exchange Agent on or before the Expiration Date, such holder's
tender may be effected if:
(a) the tender is made through an Eligible Institution (as defined);
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Outstanding Notes,
the certificate number or numbers of such Outstanding Notes and the
principal amount of Outstanding Notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within three business days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Outstanding Notes to be
tendered in proper form for transfer or a Book-Entry Confirmation, as the
case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) together with the certificate(s) representing all
tendered Outstanding Notes in proper form for transfer and all other
documents required by this Letter of Transmittal are received by the
Exchange Agent within three business days after the Expiration Date.
2. Withdrawal of Tenders. Tendered Outstanding Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date, unless
previously accepted for exchange.
To be effective, a written or facsimile transmission notice of withdrawal
must (a) be received by the Exchange Agent at one of its addresses set forth
on the first page of this Letter of Transmittal prior to 5:00 p.m., New York
City time, on the Expiration Date, unless previously accepted for exchange,
(b) specify the name of the person who tendered the Outstanding Notes, (c)
contain the description of the Outstanding Notes to be withdrawn, the
certificate numbers shown on the particular certificate evidencing such
Outstanding Notes and the aggregate principal amount represented by such
Outstanding Notes and (d) be signed by the holder of such Outstanding Notes in
the same manner as the original signature appears on this Letter of
Transmittal (including any required signature guarantee) or be accompanied by
evidence sufficient to have the Trustee with respect to the Outstanding Notes
register the transfer of such Outstanding Notes into the name of the holder
withdrawing the tender. The signature(s) on the notice of withdrawal must be
guaranteed by an Eligible Institution unless such Outstanding Notes have been
tendered (a) by a registered holder of Outstanding Notes who has not completed
either the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery
8
<PAGE>
Instructions" on this Letter of Transmittal or (b) for the account of an
Eligible Institution. All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices shall be determined by
the company, whose determination shall be final and binding on all parties. If
the Outstanding Notes to be withdrawn have been delivered or otherwise
identified to the Exchange Agent, a signed notice of withdrawal is effective
immediately upon receipt by the Exchange Agent of a written or facsimile
transmission notice of withdrawal even if physical release is not yet
effected. In addition, such notice must specify, in the case of Outstanding
Notes tendered by delivery of certificates for such outstanding Notes, the
name of the registered holder (if different from that of the tendering holder)
to be credited with the withdrawn Outstanding Notes. Withdrawals may not be
rescinded, and any Outstanding Notes withdrawn will thereafter be deemed not
validly tendered for purposes of the Exchange Offer. However, properly
withdrawn Outstanding Notes may be retendered by following one of the
procedures described under "The Exchange Offer--Procedures for Tendering" in
the Prospectus at any time on or prior to the applicable Expiration Date.
3. Signatures on this Letter of Transmittal, Bond Powers and Endorsement;
Guarantee of Signatures. If this Letter of Transmittal is signed by the
registered holder(s) of the Outstanding Notes tendered hereby, the signature
must correspond exactly with the name(s) as written on the face of the
certificates without any change whatsoever.
If any Outstanding Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any Outstanding Notes tendered hereby are registered in different names
on several certificates, it will be necessary to complete, sign and submit as
many separate copies of this Letter of Transmittal as there are different
registrations of certificates.
When this Letter of Transmittal is signed by the registered holder or
holders specified herein and tendered hereby, no endorsements of certificates
or separate bond powers are required unless Exchange Notes are to be issued,
or certificates for any untendered principal amount of Outstanding Notes are
to be reissued, to a person other than the registered holder.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either cased signed exactly as the name(s) of the registered holder(s)
appear(s) on the certificate(s).
If this Letter of Transmittal or a Notice of Guaranteed Delivery or any
certificates or bond powers are signed by trustees, executors, administrators,
guardians, attorney-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and unless waived by the Company, evidence satisfactory to the
Company of their authority so to act must be submitted with this Letter of
Transmittal.
Except as described below, signatures on this Letter of Transmittal or a
notice of withdrawal, as the case may be, must be guaranteed by an Eligible
Institution, Signatures of this Letter of Transmittal or a notice of
withdrawal, as the case may be, need not be guaranteed if the Outstanding
Notes tendered pursuant hereto are tendered (a) by a registered holder of
Outstanding Notes who has not completed either the box "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" on this
Letter of Transmittal or (b) for the account of an Eligible Institution. In
the event that signatures on this Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.
or by a commercial bank or trust company having an office or correspondent in
the United States (each as "Eligible Institutions").
Endorsements on certificates for Outstanding Notes or signatures on bond
powers required by this Instruction 3 must be guaranteed by an Eligible
Incitation.
9
<PAGE>
4. Special Issuance and Delivery Instructions. Tendering holders should
indicate in the applicable box the name and address to which certificates for
Exchange notes and/or substitute certificates evidencing Outstanding Notes for
the principal amounts not exchanged are to be issued or sent, if different
from the name and address of the person signing this Letter of Transmittal. In
the case of issuance in a different name, the employer identification or
social security number of the person named must also be indicated. If not such
instructions are given, any Outstanding Notes not exchanged will be returned
to the name and address of the person signing this Letter of Transmittal.
5. Tax Identification Number Withholding. Federal income tax law of the
United States requires that a holder of Outstanding Notes whose Outstanding
Notes are accepted for exchange provide the Company with the holder's correct
taxpayer identification number, which, in the case of a holder who is an
individual, is his or her social security number, or otherwise establish an
exemption from backup withholding. If the Company is not provided with the
correct taxpayer identification number, the exchanging holder of Outstanding
Notes may be subject to a $50 penalty imposed by the Internal Revenue Service
(the "IRS"). In addition, interest on the Exchange Notes acquired pursuant to
the Exchange Offer may be subject to backup withholding in an amount equal to
31% of any interest payment. If withholding occurs and results in an
overpayment of taxes, a refund may be obtained.
To prevent backup withholding, an exchanging holder of Outstanding Notes
must provide his correct taxpayer identification number by completing the
Substitute Form W-9 provided in this Letter of Transmittal, certifying that
the taxpayer identification number provided is correct (or that the exchanging
holder of Outstanding Notes is awaiting a taxpayer identification number) and
that either (a) the exchanging holder has not yet been notified by the IRS
that such holder is subject to backup withholding as a result of failure to
report all interest or dividends or (b) the IRS has notified the exchanging
holder that such holder is no longer subject to backup withholding.
Certain exchanging holders of Outstanding Notes (including, among others,
all corporations and certain foreign individuals) are not subject to these
backup withholding requirements. A foreign individual and other exempt holders
other than foreign individuals (e.g., corporations) should certify, in
accordance with the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9," to such exempt status on the
Substitute Form W-9 provided in this Letter of Transmittal. Foreign
individuals should complete and provide Form W-8 to indicate their foreign
status.
6. Transfer Taxes. Holders tendering pursuant to the Exchange Offer will not
be obligated to pay brokerage commissions or fees or to pay transfer taxes
with respect to their exchange under the Exchange Offer unless the box
entitled "Special Issuance Instructions" in this Letter of Transmittal has
been completed, or unless the Exchange Notes are to be issued to any person
other than the holder of the Outstanding Notes tendered for exchange. The
company will pay all other charges or expenses in connection with the Exchange
Offer. If holders tender Outstanding Notes for exchange and the Exchange Offer
is not consummated, certificates representing the Outstanding Notes will be
returned to the holders at the Company's expense.
Except as provided in this Instructions 6, it will not be necessary for
transfer tax stamps to be affixed to the certificate(s) specified in this
Letter of Transmittal.
7. Inadequate Space. If the space provided herein is inadequate, the
aggregate principal amount of the Outstanding Notes being tendered and the
certificate numbers (if available) should be listed on a separate schedule
attached hereto and separately signed by all parties required to sign this
Letter of Transmittal.
8. Partial Tenders. Tenders of Outstanding Notes will be accepted only in
integral multiples of $1,000. If tenders are to be made with respect to less
than the entire principal amount of any Outstanding Notes, fill in the
principal amount of Outstanding Notes which are tendered in column (3) in the
box on the cover entitled "Description of Outstanding Notes Tendered." In the
case of partial tenders, new certificates representing the
10
<PAGE>
Outstanding Notes in fully registered form for the remainder of the principal
amount of the Outstanding Notes will be sent to the person(s) as promptly as
practicable after the expiration or termination of the Exchange Offer.
9. Mutilated, Lost, Stolen or Destroyed Notes. Any holder whose Outstanding
Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated above for further instructions.
10. Request for Assistance or Additional Copies. Requests for assistance or
additional copies of the Prospectus or this Letter of Transmittal may be
obtained from the Exchange Agent at its telephone number set forth on the
first page.
11. No Conditional Tender. No alternative, conditional, irregular or
contingent tender of Notes on transmittal of this Letter of Transmittal will
be accepted.
11
<PAGE>
IMPORTANT TAX INFORMATION
PAYER'S NAME:
- --------------------------------------------------------------------------------
PART 1--PLEASE PROVIDE -----------------
YOUR TIN IN THE BOX AT Social Security
RIGHT AND CERTIFY BY SIGN- Number
ING AND DATING BELOW.
SUBSTITUTE
FORM W-9 or
DEPARTMENT OF -----------------
THE TREASURY Employer
INTERNAL Identification Number
REVENUE SERVICE PART 2--Check the box if you are not subject to
backup withholding under the provisions of section
3406(a)(1)(c) of the internal revenue code because
(1) you are exempt from backup withholding, or (2)
you have not been notified that you are subject to
backup withholding as a result of failure to re-
port all interest or dividends or (3) the internal
revenue service has notified you that you are no
longer subject to backup withholding. [_]
-----------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
-----------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES PART 3--
OF PERJURY, I CERTIFY THAT THE IN- Awaiting
FORMATION PROVIDED ON THIS FORM IS TIN [_]
TRUE, CORRECT, AND COMPLETE.
SIGNATURE _______________ DATE ______
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer
identification number has not been issued to me, and either (a) I
have mailed or delivered an application to receive a taxpayer
identification number to the appropriate Internal Revenue Service
Center or Social Security Administration Office or (b) I intend to
mail or deliver an application in the near future. I understand
that if I do not provide a taxpayer identification number to the
payer by the time of payment, 31% of all reportable payments made
to me will be withheld until I provide a number and that, if I do
not provide my taxpayer identification number within 60 days, such
retained amounts shall be remitted to the IRS as backup
withholding.
------------------------------- -------------------------------
Signature Date
12
<PAGE>
NOTICE OF GUARANTEED DELIVERY
TO TENDER FOR EXCHANGE
11 1/4% SENIOR SECURED NOTES DUE 2008, SERIES B
OF
FOUNTAIN VIEW, INC.
PURSUANT TO
PROSPECTUS DATED SEPTEMBER 9, 1998
This Notice of Guaranteed Delivery or a form substantially equivalent hereto
must be used to accept the offer (the "Exchange Offer") of Fountain View,
Inc., a Delaware corporation (the "Company"), to exchange $1,000 principal
amount of its 11 1/4% Senior Subordinated Notes due 2008, Series B for each
$1,000 principal amount of its outstanding 11 1/4% Senior Subordinated Notes
due 2008 (the "Outstanding Notes") if (a) certificates representing the
Outstanding Notes are not immediately available or (b) time will not permit
the Outstanding Notes and all other required documents to reach the Exchange
Agent on or prior to the Expiration Date. This form may be delivered by an
Eligible Institution (as defined) by mail or hand delivery, or transmitted via
facsimile, telegram or telex, to the Exchange Agent as set forth below. All
capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Prospectus dated September 9, 1998 (the "Prospectus").
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF
OUTSTANDING NOTES BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS OF OUTSTANDING
NOTES IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE EXCHANGE
OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON OCTOBER
13, 1998, UNLESS EXTENDED. TENDERS OF 11 1/4% SENIOR SUBORDINATED NOTES
DUE 2008 MAY ONLY BE WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE
PROSPECTUS AND THE LETTER OF TRANSMITTAL.
The Exchange Agent for the Exchange Offer Is:
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Overnight Courier: By Hand before 4:30 P.M.:
State Street Bank and Trust State Street Bank and Trust State Street Bank and Trust
Company of California, N.A. Company of California, N.A. Company of California, N.A.
c/o State Street Bank and Trust Company c/o State Street Bank and Trust Company c/o State Street Bank and Trust Company
Two International Place Two International Place Two International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Boston, Massachusetts 02110
Attention: Kellie Mullen Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
By Facsimile: 617-664-5290
Confirm by Telephone to: Kellie Mullen 617-664-5587
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION VIA FACSIMILE, TELEGRAM OR TELEX, OTHER THAN AS SET FORTH ABOVE,
WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. if a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and subject
to the conditions set forth in the Prospectus, receipt of which is hereby
acknowledged, the principal amount of Outstanding Notes set forth below,
pursuant to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures."
Subject to and effective upon acceptance for exchange of the Outstanding
Notes tendered herewith, the undersigned hereby sells, assigns and transfers
to or upon the order of the Company all right, title and interest in and to,
and any and all claims in respect of or arising or having arisen as a result
of the undersigned's status as a holder of, all Outstanding Notes tendered
hereby. In the event of a termination of the Exchange Offer, the Outstanding
Notes tendered pursuant thereto will be returned promptly to the tendering
Outstanding Note holder.
The undersigned hereby represents and warrants that the undersigned accepts
the terms and conditions of the Prospectus and the Letter of Transmittal, has
full power and authority to tender, sell, assign and transfer the Outstanding
Notes tendered hereby and that the Company will acquire good and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Outstanding Notes tendered.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed
Delivery shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
<PAGE>
PLEASE SIGN AND COMPLETE
Signature(s) of Registered
Holder(s) or
Addresses:
Authorized Signatory: ---------------------------------
--------------------------------- ---------------------------------
--------------------------------- ---------------------------------
--------------------------------- Area Code and Telephone
Name(s) of Registered Holder(s) ---------------------------------
No.: ---------------------------------
---------------------------------
---------------------------------
IF OUTSTANDING NOTES WILL BE DELIVERED BY A BOOK-ENTRY TRANSFER, PROVIDE
THE FOLLOWING INFORMATION:
Principal Amount of Outstanding Notes Tendered: ___________________________
Transaction Code No.: _____________________________________________________
Certificate No(s). of Outstanding Notes (if available): ___________________
Depository Account No.: ___________________________________________________
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Outstanding Notes exactly as their name(s) appear(s) on the
Outstanding Notes or by person(s) authorized to become registered
holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, guardian, attorney-in-
fact, officer of a corporation, executor, administrator, agent or other
representative, such person must provide the following information:
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): __________________________________________________________________
_____________________________________________________________________
Capacity: _________________________________________________________________
_____________________________________________________________________
Address(es): ______________________________________________________________
___________________________________________________________________
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the
United States (each, an "Eligible Institution"), hereby guarantees that,
within three business days from the date of this Notice of Guaranteed
Delivery, a properly completed and validly executed Letter of Transmittal
(or a facsimile thereof), together with Outstanding Notes tendered hereby
in proper form for transfer (or confirmation of the book-entry transfer of
such Outstanding Notes into the Exchange Agent's account at a Book-Entry
Transfer Facility) and all other required documents will be deposited by
the undersigned with the Exchange Agent at one of its addresses set forth
above.
Name of Firm: _____________________________________________________________
Authorized Signature: _____________________________________________________
Address: __________________________________________________________________
Name: _____________________________________________________________________
Title: ____________________________________________________________________
Area Code and Telephone No.: ______________________________________________
Date: _____________________________________________________________________
DO NOT SEND OUTSTANDING NOTES WITH THIS FORM. ACTUAL SURRENDER OF NOTES
MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND
VALIDLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery. A properly completed and duly executed copy of this Notice of
Guaranteed Delivery and any other documents required by this Notice of
Guaranteed Delivery must be received by the Exchange Agent at its address set
forth herein prior to the Expiration Date. The method of delivery is at the
election and sole risk of the holders and the delivery will be deemed made
only when actually received by the Exchange Agent. In all cases, sufficient
time should be allowed to assure timely delivery.
2. Requests for Assistance or Additional Copies. Questions and requests for
assistance and requests for additional copies of this document and/or the
Prospectus may be directed to the Exchange Agent at the address specified in
the Prospectus. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
<PAGE>
OFFER TO EXCHANGE
11 1/4% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
FOR ANY AND ALL OUTSTANDING
11 1/4% SENIOR SUBORDINATED NOTES DUE 2008
OF
FOUNTAIN VIEW, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON OCTOBER
13, 1998, UNLESS EXTENDED. TENDERS OF 11 1/4% SENIOR SECURED NOTES DUE 2008
MAY ONLY BE WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS
AND THE LETTER OF TRANSMITTAL.
September 9, 1998
To Our Clients:
Enclosed for your consideration is the Prospectus dated September 9, 1998
(the "Prospectus") and the related Letter of Transmittal and instructions
thereto (the "Letter of Transmittal") in connection with the offer (the
"Exchange Offer") of Fountain View, Inc., a Delaware corporation (the
"Company"), to exchange $1,000 principal amount of its 11 1/4% Senior
Subordinated Notes due 2008, Series B (the "Exchange Notes") for each $1,000
principal amount of its outstanding 11 1/4% Senior Subordinated Notes due 2008
(the "Outstanding Notes").
Consummation of the Exchange Offer is subject to certain conditions
described in the Prospectus. Capitalized terms used herein but not defined
shall have the meanings ascribed to them in the Prospectus.
WE ARE THE REGISTERED HOLDER OF OUTSTANDING NOTES HELD BY US FOR YOUR
ACCOUNT. A TENDER OF ANY SUCH OUTSTANDING NOTES CAN BE MADE ONLY BY US AS THE
REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL
IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO
TENDER OUTSTANDING NOTES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender any
or all such Outstanding Notes held by us for your account pursuant to the
terms and conditions set forth in the Prospectus and the Letter of
Transmittal. We urge you to read carefully the Prospectus and the Letter of
Transmittal before instructing us to tender your Outstanding Notes.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Outstanding Notes on your behalf in accordance with the
provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON October 13, 1998 (the "Expiration Date"), UNLESS
EXTENDED. Outstanding Notes tendered pursuant to the Exchange Offer may only
be withdrawn under the circumstances described in the Prospectus and the
Letter of Transmittal.
Your attention is directed to the following:
1. The Exchange Offer is for the entire aggregate principal amount of
Outstanding Notes.
2. Consummation of the Exchange Offer is conditioned upon the conditions
set forth in the Prospectus under the caption "The Exchange Offer--Certain
Conditions to the Exchange Offer."
3. Tendering holders may withdraw their tender at any time until the
Expiration Date.
<PAGE>
4. Any transfer taxes incident to the transfer of Outstanding Notes from
the tendering holder to the Company will be paid by the Company, except as
provided in the Prospectus and the instructions to the Letter of
Transmittal.
5. The Exchange Offer is not being made to (nor will the surrender of
Outstanding Notes for exchange be accepted from or on behalf of) holders of
Outstanding Notes in any jurisdiction in which the making or acceptance of
the Exchange Offer would not be in compliance with the laws of such
jurisdiction.
6. The acceptance for exchange of Outstanding Notes validly tendered and
not be validly withdrawn and the issuance of Exchange Notes will be made as
promptly as practicable after the Expiration Date. However, subject to
rules promulgated pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company expressly reserves the right to
delay acceptance of any of the Outstanding Notes or to terminate the
Exchange Offer and not accept for purchase any Outstanding Notes not
theretofore accepted if any of the conditions set forth in the Prospectus
under the caption "Certain Conditions of the Exchange Offer" shall not have
been satisfied or waived by the Company.
7. The Company expressly reserves the right, in its sole discretion, (i)
to delay accepting any Outstanding Notes, (ii) to extend the Exchange
Offer, (iii) to amend the terms of the Exchange Offer or (iv) to terminate
the Exchange Offer. Any delay, extension, amendment or termination will be
followed as promptly as practicable by oral or written notice to the
Exchange Agent and the Company will mail to the registered holders an
announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Except as
otherwise provided in the Prospectus, withdrawal rights with respect to
Outstanding Notes tendered pursuant to the Exchange Offer will not be
extended or reinstated as a result of an extension or amendment of the
Exchange Offer.
8. Consummation of the Exchange Offer may have adverse consequences to
non-tendering Outstanding Note holders, including that the reduced amount
of Outstanding Notes as a result of the Exchange Offer may adversely affect
the trading market, liquidity and market price of the Outstanding Notes.
If you wish to have us tender any or all of the Outstanding Notes held by us
for your account, please so instruct us by completing, executing and returning
to us the instruction form that follows:
<PAGE>
INSTRUCTIONS REGARDING THE EXCHANGE OF
11 1/4% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
FOR ANY AND ALL OUTSTANDING
11 1/4% SENIOR SUBORDINATED NOTES DUE 2008
OF
FOUNTAIN VIEW, INC.
TO REGISTERED HOLDER AND/OR PARTICIPANTS OF
THE BOOK-ENTRY TRANSFER FACILITY
THE UNDERSIGNED ACKNOWLEDGE(S) RECEIPT OF YOUR LETTER AND THE ENCLOSED
DOCUMENTS REFERRED TO THEREIN RELATING TO THE EXCHANGE OFFER OF THE COMPANY.
THIS WILL INSTRUCT YOU TO TENDER THE PRINCIPAL AMOUNT OF OUTSTANDING NOTES
INDICATED BELOW HELD BY YOU FOR THE ACCOUNT OF THE UNDERSIGNED PURSUANT TO THE
TERMS OF AND CONDITIONS SET FORTH IN THE PROSPECTUS AND THE LETTER OF
TRANSMITTAL.
Box 1 [_] Please tender the Outstanding Notes held by you for my account,
as indicated below.
Box 2 [_] Please do not tender any Outstanding Notes held by you for my
account.
The aggregate face amount of the Notes held by you for the account of the
undersigned is [fill in amount]: $ of the 11 1/4% Senior Subordinated
Notes due 2008.
With respect to the Exchange Offer, the undersigned hereby instructs you
[check appropriate box]:
[_]To TENDER the following Notes held by you for the account of the
undersigned [insert principal amount of notes to be tendered if any]:
$ .
[_]NOT TO TENDER any Notes held by you for the account of the undersigned.
Date: , 1998 ____________________________________
____________________________________
SIGNATURE(S)
Principal Amount of Outstanding Notes to be Tendered: $ * (must be in the
principal amount of $1,000 or an integral multiple thereof)
____________________________________
____________________________________ ____________________________________
PLEASE PRINT NAME(S) HERE TAXPAYER IDENTIFICATION OR SOCIAL
SECURITY NUMBER
____________________________________
____________________________________
____________________________________
AREA CODE AND TELEPHONE NUMBER ____________________________________
MY ACCOUNT NUMBER WITH YOU
<PAGE>
* UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S)
SHALL CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL OUTSTANDING
NOTES OF SUCH BENEFICIAL OWNER(S).
If the undersigned instructs you to tender the Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in
the Letter of Transmittal that are to be made with respect to the undersigned
as a beneficial owner, including but not limited to the representations that
(i) the undersigned's principal residence is in the state of [fill in state]
, (ii) the undersigned is acquiring the Exchange Notes in the ordinary
course of business of the undersigned, (iii) the undersigned is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate in the distribution of the
Exchange Notes, (iv) the undersigned acknowledges that any person
participating in the Exchange Offer for the purpose of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "Act"), in
connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the Staff of the Securities
and Exchange Commission set forth in noaction letters that are discussed in
the section of the Prospectus entitled "Plan of Distribution," and (v) the
undersigned is not an "affiliate," as defined in Rule 405 under the Act, of
the Company; (b) to agree, on behalf of the undersigned, as set forth in the
Letter of Transmittal; and (c) to take such other action as necessary under
the Prospectus or the Letter of Transmittal to effect the valid tender of such
Notes.
[_]Check this box if the Beneficial Owner of the Notes is a Participating
Broker-Dealer and such Participating Broker-Dealer acquired the Notes
for its own account as a result of market-making activities or other
trading activities. IF THIS BOX IS CHECKED, PLEASE SEND A COPY OF THESE
INSTRUCTIONS TO ROBERT M. SNUKAL, CHIEF EXECUTIVE OFFICER OF THE
COMPANY, VIA FACSIMILE: (310) 571-0365.
<PAGE>
OFFER TO EXCHANGE
11 1/4% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
FOR ANY AND ALL OUTSTANDING
11 1/4% SENIOR SUBORDINATED NOTES DUE 2008
OF
FOUNTAIN VIEW, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON OCTOBER
13, 1998, UNLESS EXTENDED. TENDERS OF 11 1/4% SENIOR SUBORDINATED NOTES
DUE 2008 MAY ONLY BE WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE
PROSPECTUS AND THE LETTER OF TRANSMITTAL.
To Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees:
We have been appointed by Fountain View, Inc., a Delaware corporation (the
"Company"), to act as the Exchange Agent in connection with the offer (the
"Exchange Offer") of the Company to exchange $1,000 principal amount of its 11
1/4% Senior Subordinated Notes due 2008, Series B for each $1,000 principal
amount of its 11 1/4% Senior Subordinated Notes due 2008 (the "Outstanding
Notes"), upon the terms and subject to the conditions set forth in the
Prospectus dated September 9, 1998 (the "Prospectus") and in the related
Letter of Transmittal and the instructions thereto (the "Letter of
Transmittal").
Enclosed herewith are copies of the following documents:
1. The Prospectus;
2. The Letter of Transmittal for your use and for the information of your
clients, together with guidelines of the Internal Revenue Service for
Certification of Taxpayer Identification Number on Substitute Form W-9
providing information relating to backup federal income tax withholding;
3. Notice of Guaranteed Delivery to be used to accept the Exchange Offer
if the Notes and all other required documents cannot be delivered to the
Exchange Agent on or prior to the Expiration Date (as defined);
4. A form of letter which may be sent to your clients for whose account
you hold the Notes in your name or in the name of a nominee, with space
provided for obtaining such clients' instructions with regard to the
Exchange Offer; and
5. A return envelope addressed to the Exchange Agent.
PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME ON OCTOBER 13, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED. WE URGE YOU
TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE.
The Company will not pay any fees or commission to any broker or dealer or
other person (other than to the Exchange Agent) for soliciting tenders of the
Notes pursuant to the Exchange Offer. You will be reimbursed for customary
mailing and handling expenses incurred by you in forwarding the enclosed
materials to your clients.
Additional copies of the enclosed materials may be obtained by contacting
the Exchange Agent as provided in the enclosed Letter of Transmittal.
Very truly yours,
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON, THE AGENT OF THE COMPANY OR THE EXCHANGE AGENT OR
AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER NOT
CONTAINED IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.-- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen: i.e. 00-0000000. The table below will help determine the
number to give the payer.
- ----------------------------------- -----------------------------------
<TABLE>
<CAPTION>
GIVE THE TAXPAYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- ---------------------------------------------
<S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account
or, if combined
funds, the first
individual on
the account(1)
3. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
4.a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also
trustee)
b. So-called trust account The actual
that is not a legal or owner(1)
valid trust under State
law
5. Sole proprietorship The owner(3)
9. A valid trust, estate, The legal entity
or pension trust (Do not furnish
the identifying
number of the
personal
representative
or trustee
unless the legal
entity itself is
not designated
in the account
title.)(4)
- ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GIVE THE TAXPAYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF--
<S> <C>
7. Corporate account The corporation
8. Religious, charitable, The organization
or educational
organization account
9. Partnership account The partnership
10. Association, club, or The organization
other tax-exempt
organization
11. A broker or registered The broker or
nominee nominee
12. Account with the The public
Department of entity
Agriculture in the
name of a public
entity (such as a
state or local
government, school
district, or prison)
that receives
agricultural program
payments
</TABLE>
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has an SSN, that person's number must
be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show your individual name. You may also enter your business or "doing
business as" name. You may use either your social security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name listed, the
number will be considered to be that of the first name listed.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
Note: Section references are to the Internal Revenue Code unless otherwise
noted.
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card (for
individuals), or Form SS-4, Application for Employer Identification Number
(for businesses and all other entities), at the local office of the Social
Security Administration or the Internal Revenue Service (the "IRS") and apply
for a number.
PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING
The following is a list of payees exempt from backup withholding and for which
no information reporting is required. For interest and dividends, all listed
payees are exempt except item (9). For broker transactions, payees listed in
items (1) through (13) and a person registered under the Investment Advisors
Act of 1940 who regularly acts as a broker are exempt. Payments subject to
reporting under sections 6041 and 6041A are generally exempt from backup
withholding only if made to payees described in items (1) through (7), except
a corporation (other than certain hospitals described in Regulations section
1.6041-3(c)) that provides medical and health care services or bills and
collects payments for such services is not exempt from backup withholding or
information reporting. Only payees described in items (1) through (5) are
exempt from backup withholding for barter exchange transactions and patronage
dividends.
(1) An organization exempt from tax under section 501(a), or an IRA, or a
custodial account under section 403(b)(7), if the account satisfies the
requirements of section 401(f)(2).
(2) The United States or any of its agencies or instrumentalities.
(3) A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(4) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(5) An international organization or any of its agencies or instrumentalities.
(6) A corporation.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the United
States, the District of Columbia or a possession of the United States.
(9) A futures commission merchant registered with the Commodity Futures
Trading Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the
Investment Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in
the most recent publication of the American Society of Corporate Secretaries,
Inc., Nominee List.
(15) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends and patronage dividends that generally are exempt from
backup withholding include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S.
and which have at least one nonresident alien partner.
. Payments of patronage dividends not paid in money.
. Payments made by certain foreign organizations.
. Section 404(k) payments made by an ESOP.
Payments of interest that generally are exempt from backup withholding include
the following:
. Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payor.
. Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
. Payments described in section 6049(b)(5) to non-resident aliens.
. Payments on tax-free covenant bonds under section 1451.
. Payments made by certain foreign organizations.
. Payments of mortgage interest to you.
Exempt payees described above should file substitute Form W-9 to avoid
possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM,
SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. IF YOU ARE A NON-RESIDENT
ALIEN OR A FOREIGN ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH PAYER A
COMPLETED INTERNAL REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS).
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see sections 6041, 6041A, 6042, 6044,
6045, 6049, 6050A and 6050N and the regulations promulgated thereunder.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payors
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish
a taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your correct taxpayer identification number to a requester,
you are subject to a penalty of $50 for each such failure unless your failure
is due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
