-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ARu8VOIvSbnQGktpRXW6ivfKHCvp95/BIJTVBJw5Wv8nNid3duqQ2Layj76PNpgR siQliv09E7Wo+JUIhXZyKA== 0000898430-99-003299.txt : 19990817 0000898430-99-003299.hdr.sgml : 19990817 ACCESSION NUMBER: 0000898430-99-003299 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN VIEW INC CENTRAL INDEX KEY: 0001055468 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-57279 FILM NUMBER: 99691362 BUSINESS ADDRESS: STREET 1: 11900 W OLYMPIC BLVD STREET 2: STE 680 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3105710351 MAIL ADDRESS: STREET 1: 11900 W OLYMPIC BLVD STREET 2: STE 680 CITY: LOS ANGELES STATE: CA ZIP: 90064 10-Q 1 FORM 10-Q DATED JUNE 30, 1999 ================================================================================ 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, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 333-57279 FOUNTAIN VIEW, INC. (Exact name of Registrant as specified in its charter) Delaware 95-4644784 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 W. Magnolia Blvd., Burbank, CA 91505-3031 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 841-8750 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Not Applicable. APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Not Applicable. ================================================================================ TABLE OF CONTENTS FOUNTAIN VIEW, INC.
PAGES --------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income 1 Consolidated Balance Sheets 2,3 Consolidated Statements of Cash Flows 4,5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results 9-14 of Operations Item 3. Quantitative and Qualitative Disclosure of Market Risk 14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15
PART I - FINANCIAL INFORMATION Item 1. Financial Statements FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------------------------- ------------------------ Net revenues $ 68,001 $ 68,291 $ 137,017 $ 88,369 Expenses: Salaries and benefits 33,745 35,033 67,768 45,719 Supplies 7,882 8,307 15,411 10,525 Purchased services 7,806 10,288 16,450 12,116 Provision for doubtful accounts 1,130 626 2,310 768 Other expenses 5,498 3,657 10,447 5,054 Rent 1,296 1,258 2,599 1,800 Rent to related parties 444 441 888 882 Depreciation and amortization 3,902 3,410 7,764 3,933 Interest expense, net of interest income 6,148 5,368 11,765 6,219 ------------------------- ------------------------ Total expenses 67,851 68,388 135,402 87,016 ------------------------- ------------------------ Income (loss) before provision for income taxes and extraordinary item 150 (97) 1,615 1,353 Income tax provision (benefit) 237 (39) 1,000 541 ------------------------- ------------------------ Income (loss) before extraordinary item (87) (58) 615 812 Extraordinary item: Loss on early extinguishment of debt, net of taxes - - - 517 ------------------------- ------------------------ Net income (loss) $ (87) $ (58) $ 615 $ 295 ========================= ========================
See accompanying notes. 1 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, December 31, 1999 1998 ------------- ------------ (Unaudited) (Note) Assets Current assets: Cash and cash equivalents $ 3,002 $ - Accounts receivable, less allowance for doubtful accounts of $11,470 and $11,052 in 1999 and 1998, respectively 46,053 51,384 Income taxes receivable 732 732 Current portion of deferred income taxes 10,308 10,308 Other current assets 8,755 7,221 --------------------------------- Total current assets 68,850 69,645 Property and equipment, at cost: Land and land improvements 25,064 25,064 Buildings and leasehold improvements 214,120 211,348 Furniture and equipment 29,585 28,440 Construction in progress 771 1,289 --------------------------------- 269,540 266,141 Less accumulated depreciation and amortization (16,982) (11,123) --------------------------------- 252,558 255,018 Notes receivable, less allowance for doubtful accounts of $634 and $590 in 1999 and 1998, respectively 5,116 5,553 Goodwill, net 57,637 58,689 Deferred financing costs, net 11,109 11,961 Deferred income taxes 4,069 5,385 Other assets 4,353 4,248 --------------------------------- Total assets $403,692 $410,499 =================================
Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 2 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (Continued) (in thousands, except stock information)
June 30, December 31, 1999 1998 ---------------------------------- (Unaudited) (Note) Liabilities and Shareholders' Equity Current liabilities: Payable to banks $ - $ 1,451 Accounts payable and accrued liabilities 26,305 29,652 Employee compensation and benefits 10,123 9,780 Accrued interest payable 4,223 3,366 Current portion of deferred income taxes 332 332 Current maturities of long-term debt and capital leases 10,738 4,735 ---------------------------------- Total current liabilities 51,721 49,316 Long-term debt and capital leases, less current maturities 234,681 244,153 Deferred income taxes 34,817 35,172 ---------------------------------- Total liabilities 321,219 328,641 Preferred Stock Series A, mandatorily redeemable, $0.01 par value: 1,000,000 shares authorized, 15,000 shares issued and outstanding at 1999 and 1998 (liquidation preference of $15 million) 15,000 15,000 Commitments and contingencies - - Shareholders' Equity: Common Stock Series A, $0.01 par value: 1,500,000 shares authorized, 1,000,000 shares issued and outstanding at 1999 and 1998 10 10 Common Stock Series B, $0.01 par value: 200,000 shares authorized, 114,202 shares issued and outstanding at 1999 and 1998 1 1 Common Stock Series C, $0.01 par value: 1,300,000 shares authorized, 20,742 shares issued and outstanding at 1999 and 1998 - - Additional paid-in capital 106,488 106,488 Accumulated deficit (36,486) (37,101) Due from shareholder (2,540) (2,540) ---------------------------------- Total shareholders' equity 67,473 66,858 ---------------------------------- Total liabilities and shareholders' equity $ 403,692 $ 410,499 ==================================
Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, 1999 1998 ----------------------------- Operating activities: Net income $ 615 $ 295 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,764 3,933 Changes in operating assets and liabilities: Accounts receivable 5,555 (6,255) Other current assets (1,751) 2,584 Accounts payable and accrued liabilities (3,347) (4,822) Employee compensation and benefits 343 1,370 Accrued interest payable 857 4,274 Income taxes payable - (356) Deferred income taxes 961 42 ----------------------------- Total adjustments 10,382 769 ----------------------------- Net cash provided by operating activities 10,997 1,065 Investing activities: Principal payments on notes receivable 430 403 Additions to property and equipment (3,399) (3,244) Acquisition of Summit, net of cash acquired - (152,031) Decrease in acquisition related liabilities - (16,531) Changes in other assets (106) (107) ----------------------------- Net cash used in investing activities (3,075) (171,510) Financing activities: Decrease in payable to bank (1,451) 2,568 Decrease in capital lease obligations (508) (47) Principal payments on and retirement of long-term debt (1,250) (138,066) Pay down on revolving loan facility, net (1,711) - Proceeds from long-term debt, net of issuance costs - 210,164 Proceeds from issuance of common stock - 82,000 Proceeds from issuance of mandatorily redeemable preferred stock - 15,000 ----------------------------- Net cash (used in) provided by financing activities (4,920) 171,619 ----------------------------- Increase in cash and cash equivalents 3,002 1,174 Cash and cash equivalents at beginning of period - 2,551 ----------------------------- Cash and cash equivalents at end of period $ 3,002 $ 3,725 =============================
See accompanying notes. 4 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) (In thousands)
Six Months Ended June 30, 1999 1998 ---------------------------- Noncash activity: Stock purchase in exchange for note receivable $ - $ 2,540 Conversion of stock into paid-in capital - 2 Details of purchase business combination: Fair value of assets acquired $ - $ 373,915 Less: Liabilities assumed - (220,520) ------------------------------ Cash paid for acquisition - 153,395 Less: Cash acquired from Summit - (1,364) Net cash paid for acquisition $ - $ 152,031 =============================
See accompanying notes. 5 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Description of Business Fountain View, Inc. ("Fountain View" or "Company") is a leading operator of long-term care facilities and a leading provider of a full continuum of post- acute care services, with a strategic emphasis on sub-acute specialty medical care. Fountain View operates a network of facilities in California, Texas, and Arizona, including 44 skilled nursing facilities ("SNFs") that offer sub-acute, rehabilitative and specialty medical skilled nursing care, as well as six assisted living facilities ("ALFs") that provide room and board and social services in a secure environment. In addition, Fountain View provides a variety of high-quality ancillary services such as physical, occupational and speech therapy in Fountain View-operated facilities, unaffiliated facilities and acute care hospitals. Fountain View also operates three institutional pharmacies (one of which is a joint venture), which serve acute care hospitals as well as SNFs and ALFs, both affiliated and unaffiliated with Fountain View, an outpatient therapy clinic and a durable medical equipment ("DME") company. The Company acquired Summit Care Corporation ("Summit") on March 27, 1998 (see Note 3). The Summit operation consisted of 36 SNFs, five ALFs and three institutional pharmacies. The acquisition has been accounted for under the purchase method and, as such, the accompanying financial statements include the results of Summit's operations from the acquisition date. 2. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the unaudited financial information reflects all adjustments (all of which are of a normal recurring nature), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1998. The interim financial information herein is not necessarily representative of that to be expected for a full year. 3. Acquisition of Summit Care Corporation On February 6, 1998, Fountain View entered into an Agreement and Plan of Merger (the "Tender Offer") providing for the acquisition of Summit by Fountain View at a price of $21.00 per share. Approximately 99% of the shares of Summit were purchased for approximately $141.8 million at the closing of the Tender Offer on March 27, 1998. In order to consummate the purchase of the Summit shares in the Tender Offer and to refinance Fountain View's existing debt, Fountain View entered into a term loan agreement for borrowings of $32.0 million and a credit facility of approximately $62.7 million. Fountain View amended its certificate of incorporation to provide for: (i) 3.0 million shares of Common Stock designated as 1.5 million shares of Series A Common Stock, 200,000 shares of Series B Non- Voting Common Stock, 1.3 million shares of Series C Common Stock; and (ii) 1.0 million shares of Preferred Stock, 200,000 of which are designated Series A Preferred Stock. In addition, Fountain View raised approximately $97.0 million of new equity investments in the amounts of $90.6 million from Heritage Fund II, L.P. ("Heritage") and certain other co-investors, $5.0 million combined from Mr. Robert Snukal, Fountain View's Chief Executive Officer, and Mrs. Sheila Snukal, Fountain View's Executive Vice President, and $1.4 million from Mr. William Scott, Summit's Chairman and Chief Executive Officer. Concurrent with the Merger becoming effective, Fountain View entered into a new $30.0 million revolving credit facility, an $85.0 million term-loan facility, and successfully completed a Senior Subordinated Note Offering providing for borrowings of $120.0 million. Heritage's equity investment included $15.0 million for 15,000 shares of Series A Preferred Stock of Fountain View that entitles them to a dividend at the time of a liquidity event calculated to achieve a 12% annual rate of return, as well as warrants to purchase 71,119 shares of Fountain View's Series C Common Stock. These funds were used to consummate the purchase of Summit's remaining shares not tendered in the Tender Offer, refinance all then existing Fountain View indebtedness, 6 as described above, and Summit indebtedness (except for capital lease and mortgage obligations) totaling $107.8 million, redeem all outstanding options for Summit shares, and pay certain fees, expenses, and other costs arising in connection with such transactions. On May 4, 1998, Fountain View signed an investment agreement with Baylor Health Foundation System ("Baylor"), a vertically integrated healthcare system operating in Texas, and Buckner Foundation, a non-profit foundation, (collectively, the "Baylor Group"). In addition, Fountain View signed an operating agreement with Baylor. Pursuant to these agreements, Baylor invested $10.0 million and Buckner invested $2.5 million in Fountain View through the purchase of 12,342 shares of Series A Preferred Stock from Heritage that entitles them to a dividend at the time of a liquidity event calculated to achieve a 12% annual rate of return, as well as warrants to purchase 59,266 shares of Fountain View's Series C Common Stock. On October 6, 1998, the Company amended its $85.0 million term loan credit agreement with the bank extending $5.0 million of additional mortgage refinancing loans to the Company. The Company used the proceeds to finance the exercise of capital lease purchase options on two skilled nursing facilities in Texas. 4. Pro Forma Financial Results The following table sets forth the pro forma unaudited results of operations assuming the purchase of Summit had been consummated as of January 1, 1998 (in thousands):
Six Months Ended June 30, 1998 -------------------- Net revenues $142,287 Loss before provision for income taxes and extraordinary item (665) Net loss (992)
5. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Company expects to adopt SFAS 133 effective January 1, 2000. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of SFAS 133 will have a significant effect on its results of operations or financial position. The Company has no derivatives as of June 30, 1999. 6. Business Segments The Company has three reportable segments: nursing services, therapy services, and pharmaceuticals. The nursing services are provided by 44 SNFs that offer sub-acute, rehabilitative and specialty medical skilled nursing care, as well as six ALFs that provide room and board and social services in a secure environment. Therapy services include ancillary services such as physical, occupational and speech therapy provided in Fountain View-operated facilities, unaffiliated facilities and acute care hospitals. Pharmaceuticals are provided by three institutional pharmacies (one of which is a joint venture), which serve acute care hospitals as well as SNFs and ALFs, both affiliated and unaffiliated with Fountain View. The Company evaluates performance and allocates resources based on an efficient and cost-effective operating model which maximizes profitability and the quality of care provided across the Company's entire facility network. Certain of Fountain View's facilities are leased, under operating leases, and not owned. Accordingly, earnings before interest, taxes, depreciation, amortization, rent and extraordinary items is used to determine and evaluate segment profit or loss. Corporate overhead is not allocated for purposes of determining segment profit or loss, and is included, along with the Company's DME subsidiary in the "all other" category in the selected segment financial data that follows. Intersegment sales and transfers are recorded at the Company's cost plus standard mark-up; intersegment profit and loss has been eliminated in consolidation. The Company's reportable segments are business units that offer different services and products. The reportable segments are each managed separately due to the nature of the services provided or the products sold. 7 The following table sets forth selected financial data by business segment (in thousands): SELECTED FINANCIAL DATA:
Nursing Therapy Pharma- Services Services ceuticals All Other Totals --------------------------------------------------------------- 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 Nursing Therapy Pharma- Services Services ceuticals All Other Totals --------------------------------------------------------------- Six Months Ended June 30, 1998: Revenues from external customers $ 78,717 $ 5,614 $ 4,036 $ 2 $ 88,369 Intersegment revenues - 4,657 2,352 1,836 8,845 ---------------------------------------------------------------- Total revenues $ 78,717 $ 10,271 $ 6,388 $ 1,838 $ 97,214 ================================================================ Segment profit (loss) $ 14,450 $ 1,656 $ 936 $ (2,855) $ 14,187
Six Months Ended June 30, 1999 1998 ---------------------------- Revenues: External revenues for reportable segments $ 137,017 $ 88,369 Intersegment revenues for reportable segments 11,113 8,845 Elimination of intersegment revenues (11,113) (8,845) ---------------------------- Total consolidated revenues $ 137,017 $ 88,369 ============================
7. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), establishes standards for the reporting of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. SFAS No. 130 uses the term comprehensive income to describe the total of all components of comprehensive income, that is, net income plus other comprehensive income. Other comprehensive income items include unrealized gains and losses on available-for- sale securities; foreign currency translation adjustments; changes in the market value of certain futures contracts; and changes in certain minimum pension liabilities. Fountain View has no items of other comprehensive income in the periods reported, and, therefore, comprehensive income is equal to net income, as reported. 8 Item 2. Management's Discussion And Analysis of Financial Condition And Results of Operations (Unaudited) Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998 (Dollars in Thousands) Net revenues decreased $290 or 0.4% from $68,291 for the quarter ended June 30, 1998 to $68,001 for the quarter ended June 30, 1999. Total average occupancy was 83.0% for the quarter ended June 30, 1999 and 84.4% for the quarter ended June 30, 1998. The Company's quality mix (total net revenues less Medicaid net revenues) was 62.7% for the quarter ended June 30, 1999 and 63.5% for the quarter ended June 30, 1998. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues decreased from 84.8% of net revenues for the quarter ended June 30, 1998 to 82.4% for the quarter ended June 30, 1999. Salaries and benefits were 49.6% of net revenues for the quarter ended June 30, 1999 compared to 51.3% for the quarter ended June 30, 1998. Expenses decreased $1,850 or 3.2% from $57,911 for the quarter ended June 30, 1998 to $56,061 for the quarter ended June 30, 1999. Income before rent, rent to related parties, depreciation and amortization and interest expense increased $1,560 or 15.0% from $10,380 for the quarter ended June 30, 1998 to $11,940 for the quarter ended June 30, 1999 and was 17.6% of net revenues for the quarter ended June 30, 1999 compared to 15.2% for the quarter ended June 30, 1998. Rent, rent to related parties, depreciation and amortization and interest expense increased $1,313 or 12.5% from $10,477 for the quarter ended June 30, 1998 to $11,790 for the quarter ended June 30, 1999. Substantially all of this increase was due to higher depreciation costs related to the purchase of property and equipment and an increase in amortization costs and interest expense as a result of the debt refinancing. Net loss increased $29 or 50.0% from $58 for the quarter ended June 30, 1998 to $87 for the quarter ended June 30, 1999. Although the Company's results for the second quarter were favorable compared to the same quarter last year, the results were down compared to the first quarter of 1999. Net revenues for the first quarter of 1999 were $69,016 and income before rent, rent to related parties, depreciation and amortization and interest expense was $12,691, or 18.4% of net revenues. This shortfall from the first quarter was substantially due to a decline in census in the nursing center operations without a corresponding reduction in operating expenses. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 (Dollars in Thousands) Net revenues increased $48,648 or 55.1% from $88,369 for the six months ended June 30, 1998 to $137,017 for the six months ended June 30, 1999. Substantially all of the increase was due to the acquisition of Summit. Total average occupancy was 83.3% for the six months ended June 30, 1999 and 84.7% for the six months ended June 30, 1998. The Company's quality mix (total net revenues less Medicaid net revenues) was 63.4% for the six months ended June 30, 1999 and 66.6% for the six months ended June 30, 1998. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues decreased from 83.9% of net revenues for the six months ended June 30, 1998 to 82.0% for the six months ended June 30, 1999. Salaries and benefits were 49.5% of net revenues for the six months ended June 30, 1999 compared to 51.7% for the six months ended June 30, 1998. Expenses increased $38,204 or 51.5% from $74,182 for the six months ended June 30, 1998 to $112,386 for the six months ended June 30, 1999. Substantially all of the increase was due to the acquisition of Summit. Income before rent, rent to related parties, depreciation and amortization and interest expense increased $10,444 or 73.6% from $14,187 for the six months ended June 30, 1998 to $24,631 for the six months ended June 30, 1999 and was 18.0% of net revenues for the six months ended June 30, 1999 compared to 16.1% for the six months ended June 30, 1998. Rent, rent to related parties, depreciation and amortization and interest expense increased $10,182 or 79.3% from $12,834 for the six months ended June 30, 1998 to $23,016 for the six months ended June 30, 1999. Substantially all of this increase was due to higher depreciation and amortization costs related to the acquisition of Summit's tangible and intangible assets and an increase in amortization costs and interest expense as a result of the debt refinancing. Net income increased $320 or 108.5% from $295 for the six months ended June 30, 1998 to $615 for the six months ended June 30, 1999. 9 Selected statistics are shown below:
Increase 1999 1998 (Decrease) ---------------------------------------- Facilities in operation at: March 31 50 50 - June 30 50 50 - Nursing center beds at: March 31 6,033 6,033 - June 30 6,033 6,033 - Assisted living beds at: March 31 700 700 - June 30 700 700 - Total beds at: March 31 6,733 6,733 - June 30 6,733 6,733 - Total occupancy: First quarter 83.7% 86.1% (2.4)% Second quarter 83.0% 84.4% (1.4)% Nursing center occupancy: First quarter 85.2% 89.0% (3.8)% Second quarter 84.5% 86.1% (1.6)% Assisted living center occupancy: First quarter 70.7% 66.3% 4.4% Second quarter 69.7% 69.7% - Percentage of revenues from private, managed care and Medicare (quality mix): First quarter 64.1% 72.0% (7.9)% Second quarter 62.7% 63.5% (0.8)%
10 Liquidity and Capital Resources (Dollars in Thousands) At June 30, 1999, the Company had $3,002 in cash and cash equivalents and working capital of $17,129. During the six months ended June 30, 1999, the Company's cash and cash equivalents increased by $3,002. Net cash provided by operating activities increased $9,932 from $1,065 for the six months ended June 30, 1998 to $10,997 for the six months ended June 30, 1999. This increase was primarily due to reductions in accounts receivable which includes receipts from Medicare settlements, an increase in depreciation and amortization and operating activities generated from Summit facilities. Long-term debt, including current maturities, totaling $245,419 at June 30, 1999 consisted of mortgage and capital lease obligations of $19,719, a term loan credit facility of $88,750, $120,000 in senior subordinated notes, and borrowings on the Company's revolving loan facility of $16,950. The Company had $13,050 in available borrowings on its revolving loan facility at June 30, 1999. The Company believes that it has sufficient cash flow from its existing operations and from its bank line of credit to service long-term debt due within one year of $10,738, which includes a capital lease purchase option of $3,584 on a skilled nursing facility in Texas which the Company plans to exercise in March of 2000, to make normal recurring capital replacements, additions and improvements of approximately $7,000 planned for the next 12 months and to meet other long-term working capital needs and obligations. The Company expects, on a selective basis, to pursue expansion of its existing centers and the acquisition or development of additional centers in markets where demographics and competitive factors are favorable. Recent Accounting Pronouncements See Note 5 to Consolidated Financial Statements. Prospective Payment System Pursuant to the Balanced Budget Act, a prospective payment system ("PPS") was established for Medicare SNFs. Under PPS, facilities are paid a federal per diem rate for virtually all covered SNF services in lieu of the former cost-based reimbursement rate. PPS is being phased in over three cost reporting periods beginning on or after July 1, 1998. At July 1, 1998, 36 of the Company's 44 SNFs transitioned to PPS. The remaining eight facilities transitioned on January 1, 1999. Impact of Inflation The health care industry is labor intensive. Wages and other expenses increase more rapidly during periods of inflation and when shortages in the labor market occur. In addition, suppliers pass along rising costs in the form of higher prices. Increases in reimbursement rates under Medicaid generally lag behind actual cost increases, so that the Company may have difficulty covering these cost increases in a timely fashion. In addition, as described above, Medicare SNFs are now paid a per diem rate under PPS, in lieu of the former cost-based reimbursement rate. Increases in the federal portion of the per diem rates may also lag behind actual cost increases. Impact of Year 2000 General Description of the Year 2000 Issue and the Nature and Effects of the Year 2000 on Information Technology (IT) and Non-IT Systems The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send billings, or engage in similar normal business activities. The Company has nearly completed its assessment of Year 2000 issues. This assessment includes information technology and non-information technology systems, as well as Year 2000 issues relating to third parties. This assessment includes estimated costs, an evaluation of associated risks, and contingency plans, as necessary, to ensure the Company is Year 2000 compliant. 11 The Company's plan with regard to the Year 2000 issue involves the following phases: (i) assessment of systems to determine the extent to which the Company may be vulnerable to the Year 2000 issue, both internally and with respect to third parties; (ii) the development of remedies to address problems discovered in the assessment phase; (iii) the testing and implementation of such remedies; and (iv) the preparation of contingency plans to address potential worst case scenarios should the remedies not be successful. Based on assessments to date, the Company has determined that it will replace certain of its existing packaged software applications that have been determined to be non-compliant with the Year 2000. These applications include certain of the facility-level billing and accounts receivable packages along with certain of the company-level accounts payable and general ledger applications, and certain hardware. The Company presently believes that, with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 issue could have a material adverse impact on the operations of the Company. Status of Progress in Becoming Year 2000 Compliant, Including Timetable for Completion of Each Remaining Phase With respect to its information technology exposures, the Company has completed its assessment and the Company has begun its software and hardware replacement. Once software is replaced for a system, the Company will begin testing and implementation. These phases run concurrently for different systems. Completion of the testing phase for all significant systems is expected by September 1999, with all remediated systems fully tested and implemented by October 1999. There can be no assurance, however, that such assessment, when completed, will identify all potential Year 2000 issues. The failure of such assessment to identify all potential Year 2000 issues or the failure of the Company to timely develop and test remedies to any such issues, could result in delays in implementing any required modifications, conversions and updates to the Company's computer systems, as well as the implementation of any contingency plans. If such modifications, conversions and updates are not made or not completed in a timely manner, the Year 2000 issue could have a material adverse impact on the operations of the Company. The remediation of non-information technology systems, primarily biomedical equipment, is significantly more difficult than the remediation of the information technology systems because each piece of equipment must be separately remediated and tested if identified as Year 2000 non-compliant. The Company has completed its inventorying and assessment of these non-information technology systems and has identified all mission-critical systems. The Company is in the process of querying vendors to determine whether these systems are Year 2000 compliant and/or what remediation, if any, is required. The cost of these external resources for this portion of the Year 2000 project is expected to total approximately $100,000. The Company expects to complete its remediation efforts and testing and implementation of its remediated equipment by October 1999. Nature and Level of Importance of Third Parties and Their Exposure to the Year 2000 The Company's payroll is processed directly by a third party vendor. The Company has received notification from the third party vendor ensuring that their payroll system is Year 2000 compliant. The Company is in the process of testing the payroll system for compliance. Certain of the Company's billing systems interface directly with the Medicare and Medicaid Programs. In addition, payments are received electronically from the Medicare Program. Approximately 67% of net revenues are derived from these federally assisted programs. We understand that the Medicare and the applicable Medicaid Programs have notified their payees that they expect their systems to be Year 2000 compliant. However, the Company has no means of ensuring that these programs are or will be Year 2000 compliant. The inability of these programs to become Year 2000 compliant in a timely fashion could materially adversely impact the Company. The Company does not share information systems or exchange information electronically with its suppliers or vendors. The Company is in the process of querying its significant suppliers and vendors (external agents) that do not share information systems with the Company. To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company. However, the Company has no means of ensuring that external agents will be Year 2000 compliant. The inability of external agents to become Year 2000 compliant in a timely fashion could materially adversely impact the Company. 12 Estimated Costs With Respect to the Year 2000 The Company is utilizing both internal and external resources to reprogram, or replace, test, and implement the software, hardware and equipment to ensure that it is Year 2000 compliant. The software and hardware costs relating to these new systems or new system upgrades are estimated to be approximately $500,000 and $125,000, respectively, and are being funded through operating cash flows. To date, the Company has incurred approximately $315,000 and $110,000, respectively, for new systems and equipment related to all phases of the Year 2000 project. Contingency Plans With Respect to the Year 2000 The Company believes that it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not successfully convert its existing packaged software applications, the Company will most likely be unable to process transactions electronically via its current systems, impacting primarily its customer billing, cash collections and cash disbursements. This may result in lost revenues or cash flow constraints. The Company does not believe patient care will be directly impacted. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely impact the Company. The Company could be subject to litigation for computer systems failures. The amount of any potential liability or lost revenue cannot be reasonably estimated at this time. The Company is in the process of completing worst case contingency plans for certain critical applications. Year 2000 compliant computers are being placed at each facility and at the Company's corporate office. The Company is in the process of purchasing certain Year 2000 compliant software which will facilitate the production of manual accounts payable and payroll checks should the Company's primary computer applications fail to perform as designed. In addition, the Company is considering the possibility of preprinting and securing payroll checks to ensure timely payment to employees. Certain of the Company's Year 2000 compliant computers interface and access computer programs maintained by the Medicare and Medicaid Programs. In addition, certain funds are received electronically from these programs. In the event the Company is unable to bill these programs electronically due to system failures of these programs, the Company is positioned to perform manual billing via templates, manual workarounds and the reallocation of personnel to handle the workload. We understand that cash receipts will be received in lump sums via checks should system failures at the Medicare and Medicaid Programs occur. Company personnel are developing templates to facilitate the manual recording of transactions normally maintained in computerized subledgers and the general ledger in the event the ledger systems fail to perform as designed. Current personnel are well versed in the manual processing of all applications and all new personnel will be trained to perform functions manually to ensure continued operations of the Company. All non-information technology systems (i.e., hardware, biomedical equipment, etc.) which cannot be remediated and tested by October 1999 will be replaced immediately. Forward-looking Statements Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking information involves known and unforeseen risks, uncertainties and other factors that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, uncertainties affecting the Company's business generally, such as, the success of the Company's business strategy, the Company's ability to increase the level of sub-acute and specialty medical care it provides, the effects of government regulation and health care reform, litigation, the Company's anticipated future revenues and additional revenue opportunities, capital spending and financial resources, the Company's ability to meet its liquidity needs, the resolution of Year 2000 issues, and other statements contained in this Form 10-Q regarding matters that are not historical facts. 13 Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Although management believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate and, as a result, the forward- looking statements based on those assumptions also could be materially incorrect. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's plans and objectives will be achieved. The Company disclaims any obligation to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Item 3. Quantitative and Qualitative Disclosures About Market Risk Certain of the Company's debt obligations are sensitive to changes in interest rates. The rates on the term loan and revolving credit facility, which both bear interest at LIBOR plus an applicable margin, are reset at various intervals, thus limiting their risk. The Company has not experienced significant changes in market risk due to the stability of interest rates during the six months ended June 30, 1999. 14 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, 1999. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FOUNTAIN VIEW, INC. Date: August 16, 1999 By: /s/ PAUL C. RATHBUN ------------------------------------- Paul C. Rathbun Senior Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Date: August 16, 1999 By: /s/ JOHN L. FARBER ------------------------------------ John L. Farber Vice President - Controller and Assistant Secretary 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) FOR JUNE 30, 1999 AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JUN-30-1999 3,002 0 57,523 11,470 3,305 68,850 269,540 16,982 403,692 51,721 120,000 15,000 0 11 67,462 403,692 0 68,001 0 67,851 0 0 6,148 150 237 150 0 0 0 (87) 0 0
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