-----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, IND5sEQgtq9Pln6BWmGJ3uZhJfPqqst+ka54RCbKBBt4GHKM3XZfNzc9IFctn2Q+ TA/qfU5nt1tubFZ5rIMLsw== 0001017062-98-002323.txt : 19981123 0001017062-98-002323.hdr.sgml : 19981123 ACCESSION NUMBER: 0001017062-98-002323 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN VIEW INC CENTRAL INDEX KEY: 0001055468 STANDARD INDUSTRIAL CLASSIFICATION: 8051 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-57279 FILM NUMBER: 98753396 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 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - - --- EXCHANGE ACT OF 1934 For the period ended September 30, 1998 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: 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.) 11900 W. Olympic Boulevard Suite 600 Los Angeles, California 90064 (address of principal executive offices) (310) 571-0351 (Registrant's telephone number, including area code) Indicate by checkmark 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 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 checkmark 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 ================================================================================ FOUNTAIN VIEW, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS
Page of Form 10-Q --------- Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21
2 PART 1 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net revenues $ 67,118 $ 16,970 $155,487 $ 50,393 Expenses: Salaries and benefits 35,296 9,911 81,015 28,549 Provision for doubtful accounts 680 252 1,448 394 Supplies 7,157 2,681 17,682 7,215 Purchased services 7,670 1,517 19,786 4,079 Other expenses 4,471 758 9,524 2,045 Rent 1,250 518 3,050 1,509 Rent to related parties 457 435 1,339 1,323 Depreciation and amortization 3,585 289 7,518 655 Interest expense, net of interest income 5,870 467 12,089 497 -------- -------- -------- -------- 66,436 16,828 153,451 46,266 Income before provision for income taxes and extraordinary item 682 142 2,036 4,127 Provision for income taxes 272 373 813 423 -------- -------- -------- -------- Income (loss) before extraordinary item 410 (231) 1,223 3,704 Extraordinary item: Loss on early extinguishment of debt, net of taxes -- -- (517) -- -------- -------- -------- -------- Net income (loss) $ 410 $ (231) $ 706 $ 3,704 ======== ======== ======== ======== Pro forma net income: Net income (loss) as reported $ 410 $ (231) $ 706 $ 3,704 Charge (credit) in lieu of income taxes for S - Corporation -- (317) -- 1,224 -------- -------- -------- -------- Net income $ 410 $ 86 $ 706 $ 2,480 ======== ======== ======== ========
See accompanying notes. 3 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
SEPT. 30, 1998 DEC. 31, 1997 -------------- ------------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 3,765 $ 2,551 Accounts receivable, less allowance for doubtful accounts: $7,022 at 1998 and $1,152 at 1997 58,972 15,809 Other current assets 17,737 1,503 -------- -------- Total current assets 80,474 19,863 Property and equipment, at cost: Land and land improvements 25,064 -- Buildings and leasehold improvements 208,670 4,659 Furniture and equipment 27,339 2,096 Construction in progress 3,109 -- -------- -------- 264,182 6,755 Less accumulated depreciation and amortization (8,303) (2,481) -------- -------- 255,879 4,274 Notes receivable, less allowance for doubtful accounts: $662 at 1998 5,723 -- Goodwill and other intangible assets, net 49,073 -- Deferred financing costs, net 11,398 -- Other assets 4,730 1,804 -------- -------- $407,277 $ 25,941 ======== ========
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. 4 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands)
SEPT. 30, 1998 DEC. 31, 1997 -------------- ------------- (Unaudited) (Note) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to banks $ 768 $ -- Accounts payable and accrued liabilities 34,985 4,179 Employee compensation and benefits 9,234 2,479 Income taxes payable 335 1,443 Current portion of long-term debt 3,490 1,741 -------- -------- Total current liabilities 48,812 9,842 Long-term debt, less current portion 242,136 28,335 Deferred income taxes 30,859 -- -------- -------- Total liabilities 321,807 38,177 -------- -------- Commitments and contingencies -- -- -------- -------- 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; 1,000,000 shares and 200,000 shares issued and outstanding at 1998 and 1997 10 2 Common Stock Series B, $0.01 par value: 200,000 shares authorized; 114,202 shares issued and outstanding at 1998 1 -- Common Stock Series C, $0.01 par value: 1,300,000 shares authorized; none issued -- -- Paid in capital 118,948 21,957 Accumulated deficit (33,489) (34,195) -------- -------- Total shareholders' equity (deficit) 85,470 (12,236) -------- -------- $407,277 $ 25,941 ======== ========
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. 5 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ---- ---- Operating activities: Net income $ 706 $ 3,704 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,518 655 (Increase) decrease in accounts receivable, (6,502) 4,309 net Decrease (increase) in other current assets 4,148 (24) (Decrease) increase in accounts payable and accrued liabilities (2,390) 1,785 Increase (decrease) in employee compensation and benefits 1,569 (292) (Decrease) increase in income taxes payable (912) 417 --------- -------- Total adjustments 3,431 6,850 --------- -------- Net cash provided by operating activities 4,137 10,554 --------- -------- Investing activities: Principal payments on notes receivable 873 -- Additions to property and equipment (5,695) (1,983) (Increase) in deferred financing costs (9,807) -- Acquisition of Summit Care, net of cash acquired (150,291) -- (Decrease) in acquisition related liabilities (16,531) -- (Increase) in other assets (318) (954) --------- -------- Net cash (used in) investing activities (181,769) (2,937) --------- -------- Financing activities: (Decrease) in payable to banks (1,177) -- Distributions to shareholders -- (53,740) Retirement of long-term debt (29,933) (4,850) (Decrease) in capital lease obligations (4,071) (71) Proceeds from long-term debt 225,160 32,500 Principal payments on long-term debt (108,133) -- Proceeds from stock issuance 97,000 19,682 --------- -------- Net cash provided by (used in) financing activities 178,846 (6,479) --------- -------- Increase in cash and cash equivalents 1,214 1,138 Cash and cash equivalents at beginning of period 2,551 1,161 --------- -------- Cash and cash equivalents at end of period $ 3,765 $ 2,299 ========= ========
See accompanying notes. 6 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) (In thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ---- ---- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 4,564 $ 497 Income Taxes 1,250 50 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 $ -- ========= =========
See accompanying notes. 7 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 4). 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 the Summit operation from the acquisition date. 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. 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. 8 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) 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. 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 were used to fund a distribution of $43.7 million of cash to the controlling shareholders and pay $1.3 million in transaction costs. Since the controlling shareholders maintained a controlling financial interest in Fountain View, a change in control was not deemed to have occurred upon the consummation of the Fountain View Equity Transactions. Therefore, the Fountain View Equity Transactions were treated as a reorganization/merger of companies under common control, with no step-up in basis of the assets of Fountain View. 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, an $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% 9 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) annual rate of return, as well as warrants to purchase 71,119 shares of Fountain View's Series C Common Stock. These funds were used to consummate the purchase of Summit's remaining shares, refinance all then existing Fountain View indebtedness, as described above, and Summit indebtedness (except for capital lease and mortgage obligations) totaling $107.8 million, redeem all outstanding options for Summit shares, and pay certain fees, expenses, and other costs arising in connection with such transactions. On May 4, 1998, Fountain View signed an investment agreement with Baylor Health Foundation System ("Baylor"), a vertically integrated healthcare system operating in Texas, and Buckner, a non-profit foundation, (collectively, the "Baylor Group"). In addition, Fountain View signed an operating agreement with Baylor. Pursuant to these agreements, Baylor invested $10.0 million and Buckner invested $2.5 million in Fountain View through the purchase of 12,342 shares of Series A Preferred Stock from Heritage that entitles them to a dividend at the time of a liquidity event calculated to achieve a 12% annual rate of return, as well as warrants to purchase 59,266 shares of Fountain View's Series C Common Stock. 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. PROFORMA FINANCIAL RESULTS The following table sets forth the financial results (in thousands) of the Company on a proforma basis, as if the acquisition of Summit occurred on January 1, 1997.
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net revenues $67,118 $70,378 $209,405 $203,159 Income (loss) before extraordinary item 410 (1,037) (65) (4,952) Net income (loss) 410 (1,037) (582) (4,952)
6. 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 will be phased in over three cost reporting periods beginning on or after July 1, 1998. As of July 1, 1998, 36 of the Company's 44 SNFs transitioned to PPS. The remaining eight facilities will transition on January 1, 1999. 10 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) 7. OTHER CURRENT ASSETS Other current assets (in thousands) consist of the following:
Sept. 30, 1998 Dec. 31, 1997 -------------- ------------- Deferred taxes $ 9,468 $ 926 Notes receivable 1,086 -- Prepaid expenses 1,832 551 Recoverable income taxes 1,765 -- Other receivables 407 26 Other 3,179 -- ------- -------- $17,737 $ 1,503 ======= ========
8. RECENT ACCOUNTING PRONOUNCEMENTS 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, comprehensive income is equal to net income, as reported. 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 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 facilities and assisted living facilities 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. 11 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) 9. SUBSEQUENT EVENTS 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. 12 FOUNTAIN VIEW, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (In thousands) RESULTS OF OPERATIONS - - --------------------- QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997 Net revenues increased $50,148 or 295.5% from $16,970 for the quarter ended September 30, 1997 to $67,118 for the quarter ended September 30, 1998. Substantially all of the increase was due to the acquisition of Summit Care. Average occupancy was 86.5% in the quarter ended September 30, 1998 and 83.7% in the quarter ended September 30, 1997. The Company's quality mix (total net revenues less Medicaid net revenues) was 62.8% in the quarter ended September 30, 1998 and 72.9% in the quarter ended September 30, 1997. Expenses, consisting of salaries and benefits, provision for doubtful accounts, supplies, purchased services and other expenses as a percent of net revenues decreased from 89.1% of net revenues in the quarter ended September 30, 1997 to 82.4% in the quarter ended September 30, 1998. This decrease was substantially due to certain charges (related to the Fountain View Equity Transactions, as described in Note 3) which were recorded in the quarter ended September 30, 1997. Expenses increased $40,155 or 265.6% from $15,119 in the quarter ended September 30, 1997 to $55,274 in the quarter ended September 30, 1998. Substantially all of the increase was due to the acquisition of Summit Care. Income before rent, rent to related parties, depreciation and amortization and interest expense increased $9,993 or 539.9% from $1,851 in the quarter ended September 30, 1997 to $11,844 in the quarter ended September 30, 1998 and was 17.6% of net revenues in the quarter ended September 30, 1998 compared to 10.9% in the quarter ended September 30, 1997. Rent, rent to related parties, depreciation and amortization and interest expense increased $9,453 or 553.1% from $1,709 in the quarter ended September 30, 1997 to $11,162 in the quarter ended September 30, 1998. Substantially all of this increase was due to higher depreciation and amortization costs related to the acquisition of Summit Care's tangible and intangible assets and an increase in amortization costs and interest expense as a result of the debt refinancing. The Company's effective tax rate was 39.9% of income in the quarter ended September 30, 1998. The Company was organized as a Subchapter S Corporation for tax purposes until July 31, 1997 and only recorded state income taxes. On a proforma basis, for the quarter ended September 30, 1997, the Company has recorded a charge in lieu of income taxes to arrive at a combined proforma effective tax rate of 39.4%. Net income after the proforma charge in lieu of income taxes, increased $324 from $86 in the quarter ended September 30, 1997 to $410 in the quarter ended September 30, 1998. 13 FOUNTAIN VIEW, INC. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Unaudited) (In thousands) NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Net revenues increased $105,094 or 208.5% from $50,393 in the nine months ended September 30, 1997 to $155,487 in the nine months ended September 30, 1998. Substantially all of the increase was due to the acquisition of Summit Care. Average occupancy was 86.5% in the nine months ended September 30, 1998 and 84.3% in the nine months ended September 30, 1997. The Company's quality mix (total net revenues, less Medicaid net revenues) was 64.3% in the nine months ended September 30, 1998 and 71.8% in the nine months ended September 30, 1997. Expenses consisting of salaries and benefits, provision for doubtful accounts, supplies, purchased services and other expenses as a percent of net revenues, decreased from 83.9% of net revenues in the nine months ended September 30, 1997 to 83.3% in the nine months ended September 30, 1998. Expenses increased $87,173 or 206.2% from $42,282 in the nine months ended September 30, 1997 to $129,455 in the nine months ended September 30, 1998. Substantially all of the increase was due to the acquisition of Summit Care. Income before rent, rent to related parties, depreciation and amortization and interest expense increased $17,921 or 220.9% from $8,111 in the nine months ended September 30, 1997 to $26,032 in the nine months ended September 30, 1998 and was 16.7% of net revenues in the nine months ended September 30, 1998 compared to 16.1% in the nine months ended September 30, 1997. Rent, rent to related parties, depreciation and amortization and interest expense increased by $20,012 or 502.3% from $3,984 in the nine months ended September 30, 1997 to $23,996 in the nine months ended September 30, 1998. Substantially all of this increase was due to higher depreciation and amortization costs related to the acquisition of Summit Care's tangible and intangible assets and an increase in amortization costs and interest expense as a result of the debt refinancing. The Company's effective tax rate was 39.9% of income in the nine months ended September 30, 1998. The Company was organized as a Subchapter S Corporation for tax purposes until July 31, 1997 and only recorded state income taxes. On a proforma basis, for the nine months ended September 30, 1997, the Company has recorded a charge in lieu of income taxes to arrive at a combined proforma effective tax rate of 39.9%. Net income after the proforma charge in lieu of income taxes, decreased $1,774 from $2,480 in the nine months ended September 30, 1997 to $706 in the nine months ended September 30, 1998. 14 FOUNTAIN VIEW, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Unaudited) Selected statistics are shown below:
INCREASE 1998 1997 (DECREASE) ----------------------- ----------------------- ------------------------ Facilities in operation at: March 31 50 9 41 June 30 50 9 41 September 30 50 9 41 Nursing center beds at: March 31 5,937 1,061 4,876 June 30 5,937 1,061 4,876 September 30 5,937 1,061 4,876 Assisted living beds at: March 31 641 166 475 June 30 641 166 475 September 30 641 166 475 Total beds at: March 31 6,578 1,227 5,351 June 30 6,578 1,227 5,351 September 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% Third quarter 86.5% 83.7% 2.8% Nursing center occupancy: First quarter 89.4% 89.8% (0.4%) Second quarter 87.5% 89.3% (1.8%) Third quarter 87.6% 88.8% (1.2%) Assisted living center occupancy: First quarter 67.4% 53.7% 13.7% Second quarter 76.1% 52.8% 23.3% Third quarter 76.9% 50.5% 26.4%
15 FOUNTAIN VIEW, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Unaudited) Selected statistics are shown below:
INCREASE 1998 1997 (DECREASE) --------- ----------- ------------- Percentage of revenues from private, managed care and Medicare (quality mix): First quarter 72.0% 72.8% (0.8%) Second quarter 63.5% 69.8% (6.3%) Third quarter 62.8% 72.9% (10.1%) Percentage of revenues from Medicaid: First quarter 28.0% 27.2% 0.8% Second quarter 36.5% 30.2% 6.3% Third quarter 37.2% 27.1% 10.1%
16 FOUNTAIN VIEW, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Unaudited) (In thousands) LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- At September 30, 1998, the Company had $3,765 in cash and cash equivalents and working capital of $31,662. During the nine months ended September 30, 1998, the Company's cash and cash equivalents increased by $1,214. Net cash provided by operating activities decreased $6,417 from $10,554 in the first nine months of 1997 to $4,137 in the first nine months of 1998. This decrease was primarily due to an increase in accounts receivable. Long-term debt totaling $242,136 at September 30, 1998, consisted of mortgage and capital lease obligations of $19,475, a term-loan credit facility of $82,500, borrowings on the Company's bank line of credit of $20,161 and $120,000 in senior subordinated notes. The Company had $9,839 in available borrowings on its bank line of credit at September 30, 1998. The Company believes that it has sufficient cash flow from its existing operations and from its bank line of credit to service long-term debt due within one year of $3,490, 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. 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 8 to Consolidated Financial Statements. 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 in Note 6, Medicare SNFs are now paid a federal 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. 17 FOUNTAIN VIEW, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Unaudited) (In thousands) IMPACT OF YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send billings, or engage in similar normal business activities. The Company is in the process of assessing its Year 2000 issues. This assessment will address information technology and non-information technology systems, as well as, Year 2000 issues relating to third parties. This assessment will include estimated costs, an evaluation of associated risks and contingency plans, as necessary, to ensure the Company is Year 2000 compliant. The Company's plan with regard to the Year 2000 issue for each of these items involves the following phases: (i) assessment of systems to determine the extent to which the Company may be vulnerable to the Year 2000 issue, both internally and with respect to third parties; (ii) the development of remedies to address problems discovered in the assessment phase; (iii) the testing and implementation of such remedies; and (iv) the preparation of contingency plans to address potential worst case scenarios should the remedies not be successful. The Company expects to complete its assessment in the first quarter of 1999. There can be no assurance, however, that the Company will complete such assessment in a timely manner nor that such assessment, when completed will identify all potential Year 2000 issues. Failure to timely complete an assessment of Year 2000 issues which may affect the Company, the failure of such assessment to identify all potential Year 2000 issues, or the failure of the Company to timely develop and test remedies to any such issues, could result in delays in implementing any required modifications, conversions and updates to the Company's computer systems, as well as the implementation of any contingency plans. If such modifications, conversions and updates are not made or not completed in a timely manner, the Year 2000 issue could have a material adverse impact on the operations of the Company. FORWARD-LOOKING STATEMENTS Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with 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 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 Form 10-Q regarding matters that are not historical facts. 18 FOUNTAIN VIEW, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Unaudited) (In thousands) 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. 19 PART II FOUNTAIN VIEW, INC. OTHER INFORMATION QUARTER ENDED SEPTEMBER 30, 1998 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.53 Amendment No. 1 to Credit Agreement dated as of April 16, 1998 by and among Fountain View, The Banks party thereto and the Bank of Montreal, as agent. 27 FINANCIAL DATA SCHEDULE (b) Reports on Form 8-K None. 20 FOUNTAIN VIEW, INC. SIGNATURES Pursuant to the requirements of the Securities 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: November 13, 1998 By: S/ PAUL RATHBUN ---------------------------- Paul Rathbun Sr. Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: November 13, 1998 By: S/ JOHN FARBER --------------------------- John Farber Vice President - Controller and Assistant Secretary (Principal Accounting Officer) 21 EX-10.53 2 AMENDMENT NO.1 TO CREDIT AGREEMENT FOUNTAIN VIEW, INC. FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement (herein, the "Amendment") is entered into as of October 6, 1998, among Fountain View, Inc., a Delaware corporation, the Banks party hereto, and Bank of Montreal as Agent for the Banks. PRELIMINARY STATEMENTS A. The Borrower, the Banks, and the Agent entered into a certain Credit Agreement, dated as of April 16, 1998 (herein, the "Credit Agreement"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. B. The Borrower used proceeds of certain Loans under the Credit Agreement for the acquisition of the Texas Real Property referred to below, and to pay costs and expenses related to such acquisition, and now desires to refinance such Indebtedness for Borrowed Money with proceeds of the Mortgage Refinancing Loans referred to below. C. The Borrower has therefore requested that the one or more of the Banks extend $5,000,000 of Mortgage Refinancing Loans to the Borrower and to make certain other amendments to the Credit Agreement, and the Banks are willing to do so under the terms and conditions set forth in this Amendment. D. It is intent of the Borrower, the Banks and the Agent that proceeds of the Mortgage Refinancing Loans used in accordance with clause B above constitute Permitted Refinancing Indebtedness as such term is defined in the Subordinated Note Indenture. E. The Borrower and the Banks wish to amend the Credit Agreement to add Balanced High-Yield Fund II Ltd., as a Bank. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. AMENDMENTS. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the Credit Agreement shall be and hereby is amended as follows: 1.1. Section 1.3 of the Credit Agreement shall be amended and restated in its entirety to read as follows: Section 1.3. Term Loan Commitments. On or about April 16, 1998, term loans in the aggregate principal amount of $85,000,000 were made available to the Borrower by the Banks (herein, the "Original Term Loan Commitments") and are currently owing to the Banks in the amounts set forth on Schedule I attached hereto (individually an "Original Term Loan" and collectively the "Original Term Loans"). Subject to the terms and conditions hereof, certain Banks, by their acceptance hereof, severally agree to make mortgage refinancing loans (individually a "Mortgage Refinancing Loan" and collectively the "Mortgage Refinancing Loans"; the Original Term Loans and the Mortgage Refinancing Loans being hereinafter referred to collectively as the "Term Loans" and individually as a "Term Loan") to the Borrower, with each Mortgage Refinancing Loan to be in the amount of the Mortgage Refinancing Commitment of the relevant Bank as set forth on Schedule I attached hereto (individually a "Mortgage Refinancing Commitment" and collectively the "Mortgage Refinancing Commitments"; the Original Term Loan Commitments and the Mortgage Refinancing Commitments being referred to herein collectively as the "Term Loan Commitments"). The Mortgage Refinancing Loans shall be made, if at all, on or before October 16, 1998, at which time Mortgage Refinancing Commitments of the relevant Banks shall expire. The Mortgage Refinancing Loans shall be advanced in a single Borrowing and shall be made by the Banks in accordance with their respective Mortgage Refinancing Commitments. Not less than $4,000,000 of the proceeds of the Mortgage Refinancing Loans shall be used to refinance the Obligations incurred by the Borrower under the Revolving Credit in connection with its purchase of the real estate commonly known as Southern Manner Nursing Center, Hallettsville, Texas and Oakland Manor Nursing Center, Giddings, Texas (collectively, the "Texas Real Property"). As provided in Section 1.6(a) hereof, the Borrower may elect that the Term Loans (whether advanced as an Original Term Loan or as a Mortgage Refinancing Loan) be outstanding as Base Rate Loans or Eurodollar Loans. As provided in Sections 1.8(b) and 1.8(c), the Term Loans shall mature in installments as therein provided. No amount repaid or prepaid on any Term Loan may be borrowed again. 1.2. Clause (a), (b), and (c) of Section 1.7 of the Credit Agreement shall be amended and restated in their entirety to read as follows: (a) any Interest Period for a Borrowing of Revolving Loans consisting of Base Rate Loans that otherwise would end after the Revolving Credit Termination Date shall end on the Revolving Credit Termination Date, and any Interest Period for a Borrowing of Term Loans consisting of Base Rate Loans that otherwise would end after the final maturity date of the relevant Term Loans shall end on the final maturity date of such Term Loans; (b) no Interest Period with respect to any portion of the relevant Term Loans shall extend beyond the final maturity date of such Term Loans, and no Interest Period with respect to any portion of the -2- Revolving Loans shall extend beyond the Revolving Credit Termination Date; (c) no Interest Period with respect to any portion of the relevant Term Loans consisting of Eurodollar Loans shall extend beyond a date on which the Borrower is required to make a scheduled payment of principal on such Term Loans, unless the sum of (a) the aggregate principal amount of relevant Term Loans that are Base Rate Loans plus (b) the aggregate principal amount of relevant Term Loans that are Eurodollar Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount to be paid on such Term Loans on such payment date; 1.3. Section 1.8(b) of the Credit Agreement shall be amended and restated in its entirety, and a new Section 1.8(c) shall be added to the Credit Agreement, each of which shall read as follows: (b) Scheduled Payments of Original Term Loans. The Borrower shall make principal payments on the Original Term Loans in installments on the last day of each March, June, September and December in each year, commencing with the calendar quarter ending June 30, 1999, with the amount of each such installment to equal to the amount set forth in Column B below opposite the relevant due date as set forth in Column A below: COLUMN B COLUMN A SCHEDULED PRINCIPAL PAYMENT PAYMENT DATE ON THE ORIGINAL TERM LOANS 06/30/99 $1,250,000.00 09/30/99 $1,250,000.00 12/31/99 $1,250,000.00 03/31/00 $1,250,000.00 06/30/00 $2,500,000.00 09/30/00 $2,500,000.00 12/31/00 $2,500,000.00 03/31/01 $2,500,000.00 06/30/01 $5,000,000.00 09/30/01 $5,000,000.00 12/31/01 $5,000,000.00 03/31/02 $5,000,000.00 06/30/02 $5,625,000.00 09/30/02 $5,625,000.00 12/31/02 $5,625,000.00 03/31/03 $5,625,000.00 -3- 06/30/03 $6,875,000.00 09/30/03 $6,875,000.00 12/31/03 $6,875,000.00 with a final payment of both principal and interest not sooner paid on the Original Term Loans due and payable on March 31, 2004, the final maturity thereof. Each such principal payment shall be applied to the Banks holding the Term Notes evidencing the Original Term Loans pro rata based on the principal amounts thereof. (c) Scheduled Payments of Mortgage Refinancing Loans. Each Mortgage Refinancing Loan shall mature and become due and payable by the Borrower on April 17, 2004, the final maturity thereof. 1.4. The last two sentences of Section 1.9(a) of the Credit Agreement shall be amended and restated in their entirety to read as follows: No amount of any Term Loans paid or prepaid may be reborrowed. The amount of each prepayment of the relevant Term Loans shall be applied on a ratable basis among all remaining payments on such Term Loans based on the principal amounts thereof. 1.5. Section 1.11(b) of the Credit Agreement shall be amended and restated in its entirety to read as follows: (b) The Original Term Loans made to the Borrower by a Bank shall be evidenced by a single promissory note of the Borrower issued to such Bank in the form of Exhibit E-l hereto. The Mortgage Refinancing Loans made to the Borrower by a Bank shall be evidenced by a single promissory note of the Borrower issued to such Bank in the form of Exhibit E-2 hereto. Each such promissory note is hereinafter referred to as a "Term Note" and collectively such promissory notes are referred to as the "Term Notes." 1.6. Clause (a) of Section 4.1 of the Credit Agreement shall be corrected by deleting the phrase "Liens need be granted" appearing at the beginning thereof and inserting the phrase "Liens need not be granted" in lieu thereof. 1.7. Clause (c)(i) of Section 4.1 of the Credit Agreement shall be corrected by deleting the word "Lenders" appearing therein and inserting the word "Banks" in lieu thereof. 1.8. The definition of "Applicable Margin" appearing in Section 5.1 of the Credit Agreement shall be amended by adding at the end thereof the following additional sentence: -4- In addition, the Applicable Margin for any portion of the Mortgage Refinancing Loans from time to time outstanding (whether outstanding as Base Rate Loans or Eurodollar Loans) shall bear an additional interest rate margin of .50% per annum. 1.9. The definition of Commitments appearing in Section 5.1 of the Credit Agreement shall be amended and restated in its entirety to read as follows: "Commitments" means the Revolving Credit Commitments, the L/C Commitment, and the Term Loan Commitments. The Commitments of each Bank shall be the amount specified therefor on Schedule I attached hereto and made a part hereof (as the same shall be deemed amended after giving effect to Section 12.12 hereof), as reduced from time to time pursuant hereto. 1.10. The definition of "Term Loan Commitment" and "Term Loan Percentage" appearing in Section 5.1 of the Credit Agreement shall each be amended and restated in their entirety to read as follows: "Term Loan Commitments" is defined in Section 1.3 hereof, and includes the Original Term Loan Commitments and the Mortgage Refinancing Commitments. "Term Loan Percentage" means, for each Bank, the percentage held by such Bank of the aggregate principal amount of all Term Loans (whether funded as part of the Original Term Loans or the Mortgage Refinancing Loans) then outstanding. 1.11. Section 5.1 of the Credit Agreement shall be further amended by adding definitions of "Original Term Loans", "Original Term Loan Commitments", "Mortgage Refinancing Loans", and "Mortgage Refinancing Commitments" which shall read as follows: "Original Term Loans" is defined in Section 1.3 hereof. "Original Term Loan Commitments" is defined in Section 1.3 hereof. "Mortgage Refinancing Loans" is defined in Section 1.3 hereof. "Mortgage Refinancing Commitments" is defined in Section 1.3 hereof. 1.12. Section 6.4 of the Credit Agreement shall be amended by adding the following sentence at the end thereof: The Borrower shall use at least $4,000,000 of the proceeds of the Mortgage Refinancing Loans to refinance Obligations incurred by the Borrower under the Revolving Credit in connection with its purchase of the Texas Real Property. -5- 1.13. Section 12.1(b) of the Credit Agreement shall be amended by adding at the end thereof the following additional sentence: If a Bank is unable to deliver a Form 1001 or Form 4224 but claims exemption from United States withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", such Bank shall provide to the Borrower and the Agent within the time period set forth above a Form W-8 or any successor form prescribed by the Internal Revenue Service, together with a certificate representing that such Bank is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code) and such other forms or certificates as the Borrower or the Agent may reasonably request establishing such Bank's exemption from United States withholding tax. 1.14. Section 12.12 of the Credit Agreement shall be amended and restated in its entirety to read as follows: Section 12.12. Assignment Agreements. (a) Each Bank shall have the right at any time, with the prior consent of the Agent and, so long as no Event of Default then exists, the Borrower (which consent of the Borrower shall not be unreasonably withheld) to sell, assign, transfer or negotiate all or any part of its rights and obligations under the Loan Documents (including, without limitation, the indebtedness evidenced by the Notes held by such assigning Bank, together with an equivalent percentage of its obligation to make Loans and participate in L/Cs) to one or more commercial banks or other financial institutions or investors, provided that, unless otherwise agreed to by the Agent, such assignment shall be of a fixed percentage (and not by its terms of varying percentage) of the assigning Bank's rights and obligations under the Loan Documents; provided, however, that in order to make any such assignment (i) unless the assignee Bank is assigning all of its Commitments, outstanding Loans and Reimbursement Obligations, the assigning Bank shall retain at least $5,000,000 in outstanding Loans, interests in Letters of Credit and unused Commitments, (ii) the assignee bank shall have outstanding Loans, interests in Letters of Credit and unused Commitments of at least $5,000,000, (iii) each such assignment shall be evidenced by a written agreement (substantially in the form attached hereto as Exhibit G or in such other form acceptable to the Agent) executed by such assigning Bank, such assignee bank or banks, the Agent and, if required as provided above, the Borrower, which agreement shall specify in each instance the portion of the Obligations which are to be assigned to the assignee bank and the portion of the Commitments of the assigning Bank to be assumed by the assignee bank or banks, and (iv) the assigning Bank shall pay to the Agent a -6- processing fee of $3,500 and any out-of-pocket attorneys' fees and expenses incurred by the Agent in connection with any such assignment agreement. Any such assignee shall become a Bank for all purposes hereunder to the extent of the rights and obligations under the Loan Documents it assumes and the assigning Bank shall be released from its obligations, and will have released its rights, under the Loan Documents to the extent of such assignment. The Borrower authorizes each Bank to disclose to any purchaser or prospective purchaser of an interest in the Loans and Reimbursement Obligations owed to it or its Commitments under this Section any financial or other information pertaining to the Borrower. Promptly upon the effectiveness of any such assignment agreement, the Borrower shall execute and deliver replacement Notes to the assigning Bank and the assignee Bank in the respective amounts of their Commitments (or assigned principal amounts, as applicable) after giving effect to the reduction occasioned by such assignment (all such Notes to constitute "Notes" for all purposes of this Agreement and the other Loan Documents) and the assigning Bank shall surrender to the Borrower its old Notes. (b) Any Bank may at any time pledge or grant a security interest in all or any portion of its rights under this Agreement to secure obligations of such Bank, including any such pledge or grant to a Federal Reserve Bank, and this Section shall not apply to any such pledge or grant of a security interest; provided that no such pledge or grant of a security interest shall release a Bank from any of its obligations hereunder or substitute any such pledgee or secured party for such Bank as a party hereto; provided further, however, that the right of any such pledgee or grantee (other than any Federal Reserve Bank) to further transfer all or any portion of the rights pledged or granted to it, whether by means of foreclosure or otherwise, shall be at all times subject to the terms of this Agreement. 1.15. The Credit Agreement shall be amended by adding at the end thereof a Schedule I which shall read as set forth on Schedule I attached hereto and made a part hereof. 1.16. Exhibit E to the Credit Agreement shall be deleted and a new Exhibit E-1 and Exhibit E-2 shall be inserted in lieu thereof which shall read as set forth on Exhibits E-1 and E-2 attached hereto. 1.17. The term "Bank" or "Banks" as defined in the Credit Agreement shall mean and include the Banks currently a party to the Credit Agreement and also Balanced High-Yield Fund II Ltd. -7- SECTION 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: 2.1. The Borrower, the Agent, and each of the Banks shall have executed and delivered this Amendment. 2.2. The Agent shall have received for each of the Banks replacement Revolving Notes and Term Notes evidencing the Loans made or to be made by such Banks in the amounts set forth on Schedule I attached hereto and otherwise in compliance with the provision of Section 1.11 hereof. 2.3. The Borrower shall execute and deliver, or cause the relevant Subsidiaries to execute and deliver, in favor of the Agent for the benefit of the Banks mortgage liens on the real estate commonly known as Southern Manor Nursing Center, Hallettsville, Texas, and Oakland Manor Nursing Center, Giddings, Texas, pursuant to one or more deeds of trust in form and substance satisfactory to the Agent. 2.4. The Agent shall have received for each Bank copies of resolutions of the Borrower's Board of Directors authorizing the execution, delivery, and performance of this Amendment and of resolutions of the Board of Directors of the Borrower and its Subsidiaries authorizing the execution, delivery, and performance of the other Loan Documents to be executed by them pursuant to the terms hereof, in each case certified to by its Secretary or Assistant Secretary. 2.5. The Agent shall receive for the Banks making the Mortgage Refinancing Loans hereunder such fees, if any, agreed to by the Borrower and the Agent and such Banks. 2.6. Each Subsidiary shall have executed its acknowledgement and consent to this Amendment in the space provided for that purpose below. 2.7. The Agent shall have received for each Bank the favorable written opinion of counsel to the Borrower and its Subsidiaries, in form and substance reasonably satisfactory to the Agent. 2.8. Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Agent and its counsel. Within 90 days of the date of this Amendment, the Borrower shall provide to the Agent environmental assessment reports (and reliance letters), surveys, local counsel opinions, and lenders title insurance policies on such properties in form and substance satisfactory to the Agent (the parties acknowledging and agreeing that only Phase I environmental assessment shall be required unless such Phase I environmental assessments reveal the potential existence of environmental issues that pose a threat to health and safety or the use of the premises in question for its intended purposes or which would materially detract from the overall value of the real property to be mortgaged (in which case further -8- environmental tests and remediation may be required by the Agent or the Required Banks)) for the two properties referred to in Section 2.3 above. The Borrower's failure to comply with the foregoing conditions subsequent within the time period set forth above shall constitute an "Event of Default" under the Credit Agreement. SECTION 3. REPRESENTATIONS. In order to induce the Banks to execute and deliver this Amendment, the Borrower hereby represents to the Agent and the Banks that as of the date hereof the representations and warranties set forth in Section 6 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 6.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Banks) and the Borrower and its Subsidiaries are in compliance with all of the terms and conditions of the Credit Agreement and the other Loan Documents and no Default or Event of Default has occurred and is continuing or shall result after giving effect to this Amendment. Without limiting the foregoing, the Borrower hereby represents to the Agent and the Banks that the Mortgage Financing Loans, when issued, will constitute "Senior Debt", as defined in the Indenture dated as of April 16. 1998, relating to the Fountain View, Inc. Series A and Series B 11 1/4% Senior Subordinated Notes Due 2008 (the "Indenture"), permitted by the Indenture, and the issuance of the Mortgage Refinancing Loans, and the granting of collateral security therefor, will not conflict with or create a default under the Indenture. SECTION 4. MISCELLANEOUS. 4.1. The Borrower has heretofore executed and delivered to the Agent and the Banks certain of the Collateral Documents. The Borrower hereby acknowledges and agrees that, notwithstanding the execution and delivery of this Amendment, the Collateral Documents remain in full force and effect and the rights and remedies of the Agent and the Banks thereunder, the obligations of the Borrower thereunder, and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired, or discharged hereby. The Borrower hereby acknowledges and agrees that the Mortgage Refinancing Loans made hereunder constitute Obligations secured by each of the Collateral Documents, including each of the Mortgages. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Collateral Documents as to the indebtedness which would be secured thereby prior to giving effect to this Amendment and the making of the Supplemental Term Loans hereunder. 4.2. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 4.3 By signing below, each Bank hereby (i) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered to the Banks pursuant to the terms thereof and such other documents and information as it has deemed -9- appropriate to make its own credit analysis and decision to enter into this Amendment; (ii) agrees that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Agent to take such action as Agent on its behalf and to exercise such powers under the Credit Agreement and the other Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement and the other Loan Documents are required to be performed by it as a Bank. 4.4. The Borrower agrees to pay on demand all costs and expenses of or incurred by the Agent in connection with the negotiation, preparation, execution, and delivery of this Amendment and the other instruments and documents to be executed and delivered in connection herewith, including the fees and expenses of counsel for the Agent. 4.5. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. (SIGNATURE PAGES TO FOLLOW] -10- This First Amendment to Credit Agreement is dated as of October 6, 1998. FOUNTAIN VIEW, INC By /s/ Robert Snukal --------------------------------- Name Robert Snukal ------------------------------ Title President ----------------------------- Accepted and agreed to as of the day and year last above written. BANK OF MONTREAL, in its individual capacity as a Bank and as Agent By /s/ John T. Mead. Jr. ---------------------------------- Name JOHN T. MEAD. JR. ------------------------------ Title DIRECTOR ----------------------------- PARIBAS (formerly known as Banque Paribas) /s/ Clare Bailhe By /s/ Sean T. Conlon Clare Bailhe ---------------------------------- Director Name Sean T. Conlon [SIGNATURE APPEARS HERE] ------------------------------ Title Director ----------------------------- UNION BANK OF CALIFORNIA By /s/ Stephen W. Dunne ---------------------------------- Name Stephen W. Dunne ------------------------------ Title Vice President ----------------------------- HELLER FINANCIAL, INC. By /s/ Andrew W. Chidester ---------------------------------- Name Andrew W. Chidester ------------------------------ Title AVP ----------------------------- FINOVA CAPITAL CORPORATION By [SIGNATURE APPEARS HERE] ---------------------------------- Name ------------------------------ Title ------------------ -11- PILGRIM AMERICA PRIME RATE TRUST By: PILGRIM AMERICA INVESTMENTS, INC. as its Investment Manager By /s/ Michael Prince ------------------------------- Name Michael Prince, CFA --------------------------- Title Vice President -------------------------- BHF-BANK AKTIENGESELLSCHAFT By /s/ Dan Dobrjanskyj ------------------------------- Name Dan Dobrjanskyj --------------------------- Title Assistant Vice President -------------------------- By /s/ Hans J. Scholz ------------------------------- Name Hans J. Scholz --------------------------- Title Assistant Vice President -------------------------- BALANCED HIGH-YIELD FUND II LTD. By BHF-BANK Aktiengesellschaft, acting through its New York Branch, as attorney-in-fact By /s/ Dan Dobrjanskyj ------------------------------- Name Dan Dobrjanskyj --------------------------- Title Assistant Vice President -------------------------- By /s/ Hans J. Scholz ------------------------------- Name Hans J. Scholz --------------------------- Title Assistant Vice President -------------------------- -12- ACKNOWLEDGEMENT AND CONSENT The undersigned, being all of the Subsidiaries of Fountain View, Inc., have heretofore executed and delivered to the Agent and the Banks one or more Guaranties and Collateral Documents. Each of the undersigned hereby consents to the Amendment to the Credit Agreement as set forth above and confirms that its Guaranty and Collateral Documents, and all of its obligations thereunder, remain in full force and effect and, without limiting the foregoing, acknowledges and agrees that the Supplemental Term Loans constitute Obligations guaranteed by, or otherwise secured by, the Loan Documents executed by it, including each of the Mortgages. Each of the undersigned further agrees that the consent of the undersigned to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Loan Documents referred to above. "GUARANTORS" FOUNTAIN VIEW HOLDINGS, INC. LOCOMOTION THERAPY, INC. LOCOMOTION HOLDINGS, INC. ON-TRACK THERAPY CENTER, INC. FOUNTAIN VIEW MANAGEMENT, INC. SYCAMORE PARK CONVALESCENT HOSPITAL AIB CORP. By /s/ Robert Snukal ------------------------------ ELMCREST CONVALESCENT HOSPITAL Name: Robert M. Snukal BRIER OAK CONVALESCENT, INC. Title: Chief Executive Officer BIA HOTEL CORP. RIO HONDO NURSING CENTER SUMMIT CARE TEXAS, L.P. FOUNTAINVIEW CONVALESCENT HOSPITAL ALEXANDRIA CONVALESCENT HOSPITAL, By: Summit Care Management Texas, Inc., INC. in its capacity as general partner I.'N O., INC. SUMMIT CARE CORPORATION SUMMIT CARE-CALIFORNIA, INC. By /s/ Robert Snukal SUMMIT CARE-TEXAS NO. 2, INC. --------------------------- SUMMIT CARE-TEXAS NO. 3, INC. Robert M. Snukal, President SUMMIT CARE PHARMACY, INC. SKILLED CARE NETWORK By: Summit Care Texas Equity, Inc., in SUMMIT CARE TEXAS EQUITY, INC. its capacity as limited partner SUMMIT CARE MANAGEMENT TEXAS, INC. SNF PHARMACY, INC. FV-SCC ACQUISITION CORP. By /s/ Robert Snukal --------------------------- Robert M. Snukal, President By. /s/ Robert Snukal -------------------------------- Name: Robert M. Snukal Title: President -13- SCHEDULE I AGGREGATE COMMITMENTS AND OUTSTANDING TERM LOANS MORTGAGE REVOLVING CREDIT ORIGINAL TERM REFINANCING NAME OF BANK COMMITMENT LOAN AMOUNT COMMITMENT Bank of Montreal $ 6,521,739.13 $18,478,260.87 .00 Paribas $ 3,913,043.48 $11,086,956.52 .00 Union Bank of California $ 5,043,478.26 $16,956,521.74 .00 Heller Financial, Inc. $ 3,913,043.48 $11,086,956.52 .00 Finova Capital Corporation $ 8,000,000.00 $ 5,000,000.00 $1,000,000.00 BHF-Bank $ 2,608,695.65 $ 7,391,304.35 $ .00 Aktiengesellschaft Balanced High-Yield Fund .00 .00 $4,000,000.00 II Ltd. Pilgrim America Prime Rate Trust .00 $15,000,000.00 .00 -------------- -------------- -------------- TOTAL $30,000,000.00 $85,000,000.00 $5,000,000.00 EXHIBIT E-1 TERM NOTE U.S. $ ----------------- ------------, 19--- FOR VALUE RECEIVED, the undersigned, FOUNTAIN VIEW, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of _______________________ (the "Bank") at the principal office of Bank of Montreal, as Agent, in Chicago, Illinois, in immediately available funds, the principal sum of ____________________ Dollars ($_______ ) or, if less, the aggregate unpaid principal amount of the Original Term Loan made or maintained by the Bank to the Borrower pursuant to the Credit Agreement, in consecutive quarter-annual principal installments in the amounts called for by Section 1.8(b) of the Credit Agreement, commencing on June 30, 1999, and continuing on the last day of each June, September, December and March occurring thereafter, together with interest on the principal amount of such Original Term Loan from time to time outstanding hereunder at the rates, and payable in the manner and on the dates, specified in the Credit Agreement, except that all principal and interest not sooner paid on the Original Term Loan evidenced hereby shall be due and payable on March 31, 2004, the final maturity date hereof. The Bank shall record on its books or records or on a schedule attached to this Note, which is a part hereof, the Original Term Loan made or maintained by it pursuant to the Credit Agreement, together with all payments of principal and interest and the principal balances from time to time outstanding hereon, whether the Original Term Loan is a Base Rate Loan or a Eurodollar Loan, the interest rate and Interest Period applicable thereto, provided that prior to the transfer of this Note all such amounts shall be recorded on a schedule attached to this Note. The record thereof, whether shown on such books or records or on a schedule to this Note, shall be prima facie evidence of the same, provided, however, that the failure of the Bank to record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay the Original Term Loan made to it pursuant to the Credit Agreement together with accrued interest thereon. This Note is one of the Term Notes referred to in the Credit Agreement dated as of April 16, 1998, among the Borrower, Bank of Montreal, as Agent, and the Banks party thereto (the "Credit Agreement"), and this Note and the holder hereof are entitled to all the benefits and security provided for thereby or referred to therein, to which Credit Agreement reference is hereby made for a statement thereof. All defined terms used in this Note, except terms otherwise defined herein, shall have the same meaning as in the Credit Agreement. This Note shall be governed by and construed in accordance with the internal laws of the State of Illinois. Voluntary prepayments may be made hereon, certain prepayments are required to be made hereon, and this Note may be declared due prior to the expressed maturity hereof (in each case without premium or penalty except as otherwise set forth in the Credit Agreement), all in the events, on the terms and in the manner as provided for in the Credit Agreement. The Borrower hereby waives demand, presentment, protest or notice of any kind hereunder. FOUNTAIN VIEW, INC. By ------------------------------- Name -------------------------- Title -------------------------- -2- EXHIBIT E-2 TERM NOTE U.S.$ , 19 ---------- --------- -- FOR VALUE RECEIVED, the undersigned, FOUNTAIN VIEW, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of _________________ (the "Bank") at the principal office of Bank of Montreal, as Agent, in Chicago, Illinois, in immediately available funds, the principal sum of ____________________ Dollars ($________) or, if less, the aggregate unpaid principal amount of the Mortgage Refinancing Loan made or maintained by the Bank to the Borrower pursuant to the Credit Agreement, in the amounts called for by Section 1.8(c) of the Credit Agreement, together with interest on the principal amount of such Mortgage Refinancing Loan from time to time outstanding hereunder at the rates, and payable in the manner and on the dates, specified in the Credit Agreement, except that all principal and interest not sooner paid on the Mortgage Refinancing Loan evidenced hereby shall be due and payable on April 17, 2004, the final maturity date hereof. The Bank shall record on its books or records or on a schedule attached to this Note, which is a part hereof, the Mortgage Refinancing Loan made or maintained by it pursuant to the Credit Agreement, together with all payments of principal and interest and the principal balances from time to time outstanding hereon, whether the Mortgage Refinancing Loan is a Base Rate Loan or a Eurodollar Loan, the interest rate and Interest Period applicable thereto, provided that prior to the transfer of this Note all such amounts shall be recorded on a schedule attached to this Note. The record thereof, whether shown on such books or records or on a schedule to this Note, shall be prima facie evidence of the same, provided, however, that the failure of the Bank to record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay the Mortgage Refinancing Loan made to it pursuant to the Credit Agreement together with accrued interest thereon. This Note is one of the Term Notes referred to in the Credit Agreement dated as of April 16, 1998, among the Borrower, Bank of Montreal, as Agent, and the Banks party thereto (the "Credit Agreement"), and this Note and the holder hereof are entitled to all the benefits and security provided for thereby or referred to therein, to which Credit Agreement reference is hereby made for a statement thereof. All defined terms used in this Note, except terms otherwise defined herein, shall have the same meaning as in the Credit Agreement. This Note shall be governed by and construed in accordance with the internal laws of the State of Illinois. Voluntary prepayments may be made hereon, certain prepayments are required to be made hereon, and this Note may be declared due prior to the expressed maturity hereof (in each case without premium or penalty except as otherwise set forth in the Credit Agreement), all in the events, on the terms and in the manner as provided for in the Credit Agreement. The Borrower hereby waives demand, presentment, protest or notice of any kind hereunder. FOUNTAIN VIEW, INC. By -------------------------- Name ---------------------- Title --------------------- -2- EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 3,765 2,551 0 0 65,994 16,961 7,022 1,152 0 0 80,474 19,863 264,182 6,755 8,303 2,481 407,277 25,941 48,812 9,842 0 0 0 0 0 0 11 2 85,459 (12,238) 407,277 25,941 67,118 155,487 67,118 155,487 0 0 66,436 153,451 0 0 680 1,448 5,870 12,089 682 2,036 272 813 410 1,223 0 0 0 (517) 0 0 410 706 0 0 0 0
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