10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 333-57279 FOUNTAIN VIEW, INC. (Exact name of Registrant as specified in its charter) Delaware 95-4644784 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 W. Magnolia Blvd., Burbank, CA 91505-3031 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 841-8750 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Not Applicable. APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of June 30, 2000, the number of shares of each class of the Issuer's common stock outstanding was as follows: Series A Common Stock: 1,000,000; Series B Common Stock: 114,202; and Series C Common Stock: 20,742. TABLE OF CONTENTS FOUNTAIN VIEW, INC.
Pages ----- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations 1 Consolidated Balance Sheets 2, 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results 7 - 9 of Operations Item 3. Quantitative and Qualitative Disclosures of Market Risk 9 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 10
PART I - FINANCIAL INFORMATION Item 1. Financial Statements FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------- Net revenues $71,548 $68,001 $143,115 $137,017 Expenses: Salaries and benefits 37,534 33,745 74,110 67,768 Supplies 9,334 7,882 18,386 15,411 Purchased services 7,000 7,806 13,916 16,450 Provision for doubtful accounts 1,093 1,130 2,156 2,310 Other expenses 5,774 5,498 10,973 10,447 Charge related to decertification of facility 1,715 - 3,413 - Rent 1,331 1,296 2,635 2,599 Rent to related parties 462 444 924 888 Depreciation and amortization 3,996 3,902 7,934 7,764 Interest expense, net of interest income 6,237 6,148 12,379 11,765 ------------------------------------------------- Total expenses 74,476 67,851 146,826 135,402 ------------------------------------------------- Income (loss) before provision for income taxes (2,928) 150 (3,711) 1,615 Income tax provision (benefit) (990) 237 (1,123) 1,000 ------------------------------------------------- Net income (loss) $(1,938) $ (87) $ (2,588) $ 615 =================================================
See accompanying notes. 1 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, December 31, 2000 1999 --------------------------------------- (Unaudited) (Note) Assets Current assets: Cash and cash equivalents $ - $ - Accounts receivable, less allowance for doubtful accounts of $15,070 and $13,996 at 2000 and 1999, respectively 45,640 45,243 Current portion of deferred income taxes 11,176 11,176 Other current assets 9,989 10,512 ------------------------------------ Total current assets 66,805 66,931 Property and equipment, at cost: Land and land improvements 25,065 25,064 Buildings and leasehold improvements 216,270 215,517 Furniture and equipment 30,892 30,209 Construction in progress 1,240 933 ------------------------------------ 273,467 271,723 Less accumulated depreciation and amortization (29,142) (23,056) ------------------------------------ 244,325 248,667 Notes receivable, less allowance for doubtful accounts of $686 and $674 at 2000 and 1999, respectively 4,664 4,773 Goodwill, net 54,434 55,388 Deferred financing costs, net 9,798 10,258 Deferred income taxes 5,270 4,463 Other assets 4,749 4,556 ------------------------------------ Total assets $ 390,045 $ 395,036 ====================================
Note: The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 2 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except stock information) June 30, December 31, 2000 1999 ---------------------------------- (Unaudited) (Note) Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 23,924 $ 22,455 Employee compensation and benefits 8,039 8,469 Accrued interest payable 4,347 3,605 Current portion of deferred income taxes 332 332 Current maturities of long-term debt and capital leases 13,426 13,247 --------------------------------- Total current liabilities 50,068 48,108 Long-term debt and capital leases, less current maturities 227,820 231,867 Deferred income taxes 33,266 33,582 --------------------------------- Total liabilities 311,154 313,557 Preferred Stock Series A, mandatorily redeemable, $0.01 par value: 1,000,000 shares authorized, 15,000 shares issued and outstanding at 2000 and 1999 (liquidation preference of $15 million) 15,000 15,000 Commitments and contingencies - - Shareholders' equity: Common Stock Series A, $0.01 par value: 1,500,000 shares authorized, 1,000,000 shares issued and outstanding at 2000 and 1999 10 10 Common Stock Series B, $0.01 par value: 200,000 shares authorized, 114,202 shares issued and outstanding at 2000 and 1999 1 1 Common Stock Series C, $0.01 par value: 1,300,000 shares authorized, 20,742 shares issued and outstanding at 2000 and 1999 - - Additional paid-in capital 106,488 106,488 Accumulated deficit (40,068) (37,480) Due from shareholder (2,540) (2,540) --------------------------------- Total shareholders' equity 63,891 66,479 --------------------------------- Total liabilities and shareholders' equity $390,045 $395,036 =================================
Note: The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, 2000 1999 -------------------------------- Operating activities: Net income (loss) $(2,588) $ 615 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,934 7,764 Changes in operating assets and liabilities: Accounts receivable (397) 5,555 Other current assets 376 (1,751) Accounts payable and accrued liabilities 1,469 (4,798) Employee compensation and benefits (430) 343 Accrued interest payable 742 857 Deferred income taxes (1,123) 961 ------------------------------- Total adjustments 8,571 8,931 ------------------------------- Net cash provided by operating activities 5,983 9,546 Investing activities: Principal payments on notes receivable 256 430 Additions to property and equipment (1,744) (3,399) Changes in other assets (211) (106) ------------------------------- Net cash used in investing activities (1,699) (3,075) Financing activities: Additions to deferred financing costs (416) - Decrease in capital lease obligations (468) (508) Principal payments on long-term debt (3,750) (1,250) Draw (pay down) on revolving loan facility, net 350 (1,711) -------------------------------- Net cash used in financing activities (4,284) (3,469) -------------------------------- Increase in cash and cash equivalents - 3,002 Cash and cash equivalents at beginning of period - - ------------------------------- Cash and cash equivalents at end of period $ - $ 3,002 ===============================
See accompanying notes. 4 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Description of Business Fountain View, Inc. ("Fountain View" or "Company") is a leading operator of long-term care facilities and a leading provider of a full continuum of post- acute care services, with a strategic emphasis on sub-acute specialty medical care. Fountain View operates a network of facilities in California, Texas, and Arizona, including 44 skilled nursing facilities ("SNFs") that offer sub-acute, rehabilitative and specialty medical skilled nursing care, as well as six assisted living facilities ("ALFs") that provide room and board and social services in a secure environment. In addition, Fountain View provides a variety of high-quality ancillary services such as physical, occupational and speech therapy in Fountain View-operated facilities, unaffiliated facilities and acute care hospitals. Fountain View also operates three institutional pharmacies (one of which is a joint venture), which serve acute care hospitals as well as SNFs and ALFs, both affiliated and unaffiliated with Fountain View, an outpatient therapy clinic and a durable medical equipment ("DME") company. 2. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the unaudited financial information reflects all adjustments (all of which are of a normal recurring nature), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1999. The interim financial information herein is not necessarily representative of that to be expected for a full year. 3. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. 4. Business Segments The Company has three reportable segments: nursing services, therapy services, and pharmacy services. The Company's reportable segments are business units that offer different services and products. The reportable segments are each managed separately due to the nature of the services provided or the products sold. The Company evaluates performance and allocates resources based on an efficient and cost-effective operating model which maximizes profitability and the quality of care provided across the Company's entire facility network. Certain of Fountain View's facilities are leased, under operating leases, and not owned. Accordingly, earnings before interest, taxes, depreciation, amortization and rent is used to determine and evaluate segment profit or loss. Corporate overhead is not allocated for purposes of determining segment profit or loss, and is included, along with the Company's DME subsidiary, in the "all other" category in the selected segment financial data that follows. Intersegment revenues are recorded at the Company's cost plus standard mark-up; intersegment profit and loss has been eliminated in consolidation. 5 The following table sets forth selected financial data by business segment (in thousands): Selected Financial Data:
Nursing Therapy Pharmacy Services Services Services All Other Totals ------------------------------------------------------------------------------------ Six Months Ended June 30, 2000: Revenues from external customers $125,341 $ 7,192 $10,485 $ 97 $143,115 Intersegment revenues - 12,153 2,992 4,057 19,202 ------------------------------------------------------------------------------------ Total revenues $125,341 $19,345 $13,477 $ 4,154 $162,317 ==================================================================================== Segment profit (loss) $ 22,120 $ 5,201 $ 1,281 $(8,441) $ 20,161 Six Months Ended June 30, 1999: Revenues from external customers $120,741 $ 5,455 $10,817 $ 4 $137,017 Intersegment revenues - 7,063 2,349 1,702 11,114 ------------------------------------------------------------------------------------ Total revenues $120,741 $12,518 $13,166 $ 1,706 $148,131 ==================================================================================== Segment profit (loss) $ 26,800 $ 2,941 $ 1,773 $(6,883) $ 24,631
Six Months Ended June 30, 2000 1999 ----------------------------------------- Revenues: External revenues for reportable segments $143,115 $137,017 Intersegment revenues for reportable segments 19,202 11,114 Elimination of intersegment revenues (19,202) (11,114) ---------------------------------------- Total consolidated revenues $143,115 $137,017 ========================================
5. Comprehensive Income Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for the reporting of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. SFAS 130 uses the term comprehensive income to describe the total of all components of comprehensive income, that is, net income plus other comprehensive income. Other comprehensive income items include unrealized gains and losses on available-for-sale securities; foreign currency translation adjustments; changes in the market value of certain futures contracts; and changes in certain minimum pension liabilities. Fountain View has no items of other comprehensive income in the periods reported, and, therefore, comprehensive income (loss) is equal to net income (loss), as reported. 6. Income Taxes The income tax provision (benefit) is calculated using a federal tax rate of 34% and a blended state tax rate of 6%. The difference between the federal and blended state tax rates and the effective rate is primarily due to the non- deductible portion of goodwill. 6 7. Charge Related to Decertification of Facility In November 1999, one of the Company's SNF's was decertified from the Medicare and Medicaid Programs. The Company continues to vigorously contest this decertification. The previously anticipated May 2000 recertification did not occur and, in July, a new recertification process was begun which is expected to be completed in November 2000. Pretax losses related to this matter are approximately $600,000 a month. If not resolved, these losses could possibly cause the Company to be out of compliance with certain financial covenants of its term loan and revolving loan facilities in the third quarter of 2000. Item 2. Management's Discussion And Analysis of Financial Condition And Results of Operations (Unaudited) Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999 (Dollars in Thousands) Net revenues increased $3,547 or 5.2% from $68,001 for the quarter ended June 30, 1999 to $71,548 for the quarter ended June 30, 2000. Total average occupancy was 81.9% for the quarter ended June 30, 2000 and 83.0% for the quarter ended June 30, 1999. Although the total average occupancy declined between quarters, net revenues increased primarily due to additional external business at the Company's therapy subsidiary, higher Medicare census and higher Medicare rates effective April 1, 2000. Expenses increased $6,389 or 11.4% from $56,061 for the quarter ended June 30, 1999 to $62,450 for the quarter ended June 30, 2000. As a percent of net revenues, expenses increased from 82.4% of net revenues for the quarter ended June 30, 1999 to 87.3% for the quarter ended June 30, 2000. This increase was primarily due to higher salaries and benefits ($3,789), higher supplies costs related primarily to nursing services and pharmacy services ($1,452), and the charge related to decertification of a facility ($1,715). Salaries and benefits were 52.5% of net revenues for the quarter ended June 30, 2000 compared to 49.6% for the quarter ended June 30, 1999. The increase in salaries and benefits was largely due to additional personnel related to expansion of the Company's therapy operations and increases in wage rates and staffing levels at the Company's nursing facilities. Income before rent, rent to related parties, depreciation and amortization and interest expense decreased $2,842 or 23.8% from $11,940 for the quarter ended June 30, 1999 to $9,098 for the quarter ended June 30, 2000 and was 12.7% of net revenues for the quarter ended June 30, 2000 compared to 17.6% for the quarter ended June 30, 1999. Rent, rent to related parties, depreciation and amortization and interest expense increased $236 or 2.0% from $11,790 for the quarter ended June 30, 1999 to $12,026 for the quarter ended June 30, 2000. Substantially all of this increase was due to higher interest expense due in part to higher interest rates on the Company's term loan credit and revolving loan facilities. Net loss increased from $87 for the quarter ended June 30, 1999 to $1,938 for the quarter ended June 30, 2000. Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 (Dollars in Thousands) Net revenues increased $6,098 or 4.5% from $137,017 for the six months ended June 30, 1999 to $143,115 for the six months ended June 30, 2000. Total average occupancy was 82.3% for the six months ended June 30, 2000 and 83.3% for the six months ended June 30, 1999. Although the total average occupancy declined between periods, net revenues increased primarily due to additional external business at the Company's therapy subsidiary, higher Medicare census and higher Medicare rates effective April 1, 2000. Expenses increased $10,568 or 9.4% from $112,386 for the six months ended June 30, 1999 to $122,954 for the six months ended June 30, 2000. As a percent of net revenues, expenses increased from 82.0% of net revenues for the six months ended June 30, 1999 to 85.9% for the six months ended June 30, 2000. This increase was primarily due to higher salaries and benefits ($6,342), higher supplies costs related primarily to nursing services and pharmacy services ($2,975), and the charge related to decertification of a facility ($3,413), partially offset by decreased purchased services ($2,534). Salaries and benefits were 51.8% of net revenues for the six months ended June 30, 2000 compared to 49.5% for the six months ended June 30, 1999. The increase in salaries and benefits was largely due to additional personnel related to expansion of the Company's therapy operations and increases in wage rates and staffing levels at the Company's nursing facilities. The decrease in purchased services was primarily due to the conversion of therapy business from outside contractors to the Company's therapy operations. 7 Income before rent, rent to related parties, depreciation and amortization and interest expense decreased $4,470 or 18.1% from $24,631 for the six months ended June 30, 1999 to $20,161 for the six months ended June 30, 2000 and was 14.1% of net revenues for the six months ended June 30, 2000 compared to 18.0% for the six months ended June 30, 1999. Rent, rent to related parties, depreciation and amortization and interest expense increased $856 or 3.7% from $23,016 for the six months ended June 30, 1999 to $23,872 for the six months ended June 30, 2000. Substantially all of this increase was due to higher interest expense due in part to higher interest rates on the Company's term loan credit and revolving loan facilities. Net income was $615 for the six months ended June 30, 1999 compared to a net loss of $2,588 for the six months ended June 30, 2000. Selected statistics are shown below:
2000 1999 (Decrease) -------------------------------------------------------------------- Facilities in operation at: March 31 50 50 - June 30 50 50 - Nursing center beds at: March 31 6,032 6,032 - June 30 6,032 6,032 - Assisted living beds at: March 31 700 700 - June 30 700 700 - Total beds at: March 31 6,732 6,732 - June 30 6,732 6,732 - Total occupancy: First quarter 82.7% 83.7% (1.0)% Second quarter 81.9% 83.0% (1.1)% Nursing center occupancy: First quarter 84.4% 85.2% (0.8)% Second quarter 83.5% 84.5% (1.0)% Assisted living center occupancy: First quarter 68.6% 70.7% (2.1)% Second quarter 68.8% 69.7% (0.9)%
Liquidity and Capital Resources (Dollars in Thousands) At June 30, 2000, the Company had $0 in cash and cash equivalents and working capital of $16,737. The Company utilizes its cash balances to reduce amounts drawn on its revolving credit facility; as such, the cash and cash equivalents balance is minimal. During the six months ended June 30, 2000, the Company's cash and cash equivalents remained unchanged. Net cash provided by operating activities decreased $3,563 from $9,546 for the six months ended June 30, 1999 to $5,983 for the six months ended June 30, 2000. This decrease was primarily due to a reduction in earnings in 2000. 8 Long-term debt, including current maturities, totaling $241,246 at June 30, 2000 consisted of mortgage and capital lease obligations of $18,746, a term loan credit facility of $82,500, senior subordinated notes of $120,000, and borrowings on the Company's revolving loan facility of $20,000. The Company had $10,000 in available borrowings on its revolving loan facility at June 30, 2000. 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 $13,426 to make normal recurring capital replacements, additions and improvements of approximately $6,000 planned for the next 12 months and to meet other long-term working capital needs and obligations. Impact of Inflation The health care industry is labor intensive. Wages and other expenses increase more rapidly during periods of inflation and when shortages in the labor market occur. In addition, suppliers pass along rising costs in the form of higher prices. Increases in reimbursement rates under Medicaid generally lag behind actual cost increases, so that the Company may have difficulty covering these cost increases in a timely fashion. In addition, Medicare SNFs are now paid a per diem rate under PPS, in lieu of the former cost-based reimbursement rate. Increases in the federal portion of the per diem rates may also lag behind actual cost increases. Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to future events or the future financial performance of the Company including, but not limited to, statements contained in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations". These forward- looking statements may include, among other things, the success of the Company's business strategy, the Company's ability to develop and expand its business in regional markets, the Company's ability to increase the level of sub-acute and specialty medical care it provides, the effects of government regulation and healthcare reform, litigation, the Company's anticipated future revenues and additional revenue opportunities, capital spending and financial resources, the liquidity demands of the Company, the Company's ability to meet its liquidity needs, and other statements contained in this Quarterly Report on Form 10-Q that are not historical facts. Although management of the Company believes that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be materially incorrect. Readers are cautioned that such forward-looking statements, which may be identified by words including "anticipates," "believes," "intends," "estimates," "plans," and other similar expressions, are only predictions or estimations and are subject to known and unknown risks and uncertainties, over which the Company has little or no control. In evaluating such statements, readers should consider the various factors identified above which could cause actual events, performance or results to differ materially from those indicated by such statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Certain of the Company's debt obligations are sensitive to changes in interest rates. The rates on the term loan credit and revolving loan facilities, which both bear interest at LIBOR plus an applicable margin, are reset at various intervals, thus limiting their risk. The Company has not experienced significant changes in market risk due to the relative stability of interest rates during the six months ended June 30, 2000. 9 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K The following exhibits are included herein: (27) Financial Data Schedule The Company did not file any reports on Form 8-K during the six months ended June 30, 2000. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FOUNTAIN VIEW, INC. Date: August 14, 2000 By: /s/ PAUL C. RATHBUN -------------------------- Paul C. Rathbun Senior Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 10