10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED JUNE 30, 2001 ================================================================================ 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, 2001 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 333-57279 FOUNTAIN VIEW, INC. (Exact name of Registrant as specified in its charter) Delaware 95-4644784 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 W. Magnolia Blvd., Burbank, CA 91505-3031 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 841-8750 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Not Applicable. APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 14, 2001, the number of shares of each class of the Issuer's common stock outstanding was as follows: Series A Common Stock: 1,000,000; Series B Common Stock: 114,202; and Series C Common Stock: 20,742. ================================================================================ TABLE OF CONTENTS FOUNTAIN VIEW, INC. Pages ----- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations 1 Consolidated Balance Sheets 2-3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results 8 - 11 of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 11 PART II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------------------------------------------------- Net revenues $78,554 $71,548 $155,417 $143,115 Expenses: Salaries and benefits 42,988 37,534 84,533 74,110 Supplies 10,772 9,334 21,218 18,386 Purchased services 7,974 7,000 16,129 13,916 Provision for doubtful accounts 1,273 1,093 2,452 2,156 Other expenses 7,119 5,774 12,893 10,973 Charge related to decertification of facility - 1,715 - 3,413 Rent 1,382 1,331 2,762 2,635 Rent to related parties 474 462 948 924 Facility closing costs 4,123 - 4,123 - Depreciation and amortization 4,099 3,996 8,113 7,934 Interest expense, net of interest income 6,238 6,237 12,473 12,379 ------------------------------------------------- Total expenses 86,442 74,476 165,644 146,826 ------------------------------------------------- Loss before income tax benefit (7,888) (2,928) (10,227) (3,711) Income tax benefit - (990) (755) (1,123) ------------------------------------------------- Net loss $(7,888) $(1,938) $ (9,472) $ (2,588) =================================================
See accompanying notes. 1 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, December 31, 2001 2000 -------------------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 1,255 $ 346 Accounts receivable, less allowance for doubtful accounts of $10,737 and $9,961 at 2001 and 2000 55,075 53,668 Current portion of deferred income taxes 7,122 7,122 Other current assets 8,572 6,051 -------------------------- Total current assets 72,024 67,187 Property and equipment, at cost: Land and land improvements 25,089 25,086 Buildings and leasehold improvements 216,844 218,328 Furniture and equipment 31,598 31,492 Construction in progress 1,541 618 -------------------------- 275,072 275,524 Accumulated depreciation and amortization (41,012) (35,282) -------------------------- 234,060 240,242 Notes receivable, less allowance for doubtful accounts of $710 and $697 at 2001 and 2000 4,434 5,507 Goodwill, net 54,088 55,014 Deferred financing costs, net 9,168 9,156 Deferred income taxes 3,922 3,922 Other assets 4,145 4,440 -------------------------- Total assets $381,841 $385,468 ==========================
See accompanying notes. 2 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except stock information)
June 30, December 31, 2001 2000 --------------------------------- (Unaudited) Liabilities and Shareholders' Equity Current liabilities: Payable to banks $ 3,888 $ 3,128 Accounts payable and accrued liabilities 18,561 18,004 Employee compensation and benefits 8,466 7,959 Accrued interest payable 9,784 4,641 Current portion of deferred income taxes 332 332 Current maturities of long-term debt and capital leases (Note 5) 223,111 223,871 --------------------------------- Total current liabilities 264,142 257,935 Long-term debt and capital leases, less current maturities (Note 5) 17,047 17,409 Deferred income taxes 30,490 30,490 --------------------------------- Total liabilities 311,679 305,834 Preferred Stock Series A, mandatorily redeemable, $0.01 par value: 1,000,000 shares authorized, 15,000 shares issued and outstanding at 2001 and 2000 (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 2001 and 2000 10 10 Common Stock Series B, $0.01 par value: 200,000 shares authorized, 114,202 shares issued and outstanding at 2001 and 2000 1 1 Common Stock Series C, $0.01 par value: 1,300,000 shares authorized, 20,742 shares issued and outstanding at 2001 and 2000 - - Additional paid-in capital 106,488 106,488 Accumulated deficit (48,797) (39,325) Due from shareholder (2,540) (2,540) --------------------------------- Total shareholders' equity 55,162 64,634 --------------------------------- Total liabilities and shareholders' equity $381,841 $385,468 =================================
See accompanying notes. 3 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, 2001 2000 -------------------------------- Operating activities: Net loss $(9,472) $(2,588) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 8,113 7,934 Write down of fixed assets related to facility closing 2,274 - Changes in operating assets and liabilities: Accounts receivable (1,407) (397) Other current assets (877) 376 Accounts payable and accrued liabilities 590 1,469 Employee compensation and benefits 507 (430) Accrued interest payable 5,143 742 Income taxes receivable (869) - Deferred income taxes - (1,123) -------------------------------- Total adjustments 13,474 8,571 -------------------------------- Net cash provided by operating activities 4,002 5,983 -------------------------------- Investing activities: Principal payments on notes receivable 267 256 Additions to property and equipment (2,318) (1,744) Changes in other assets 278 (211) -------------------------------- Net cash used in investing activities (1,773) (1,699) -------------------------------- Financing activities: Increase in payable to bank 760 - Additions to deferred financing costs (958) (416) Decrease in capital lease obligations (495) (468) Principal payments on long-term debt (2,500) (3,750) Borrowing on revolving loan facility, net 1,873 350 -------------------------------- Net cash used in financing activities (1,320) (4,284) -------------------------------- Increase in cash and cash equivalents 909 - Cash and cash equivalents at beginning of period 346 - -------------------------------- Cash and cash equivalents at end of period $ 1,255 $ - ================================
See accompanying notes. 4 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands) 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 and Texas, including 43 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 and unaffiliated facilities. Fountain View also operates three institutional pharmacies (one of which is a joint venture), which serve acute care hospitals as well as SNFs and ALFs, both affiliated and unaffiliated with Fountain View, an outpatient therapy clinic and a durable medical equipment ("DME") company. 2. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. 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 accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2000 as filed on Form 10-K on April 16, 2001. The interim financial information herein is not necessarily representative of that to be expected for a full year. 3. Business Segments The Company has three reportable segments: nursing services, therapy services, and pharmacy services. The Company's reportable segments are business units that offer different services and products. The reportable segments are each managed separately due to the nature of the services provided or the products sold. The Company evaluates performance and allocates resources based on an efficient and cost-effective operating model which maximizes profitability and the quality of care provided across the Company's entire facility network. Certain of Fountain View's facilities are leased, under operating leases, and not owned. Accordingly, earnings before interest, taxes, depreciation, amortization and rent is used to determine and evaluate segment profit or loss. Facility closing costs are also not considered in evaluating the segment profit (loss) and are thus excluded from the following table of selected financial data. Corporate overhead is not allocated for purposes of determining segment profit or loss, and is included, along with the Company's DME subsidiary in the "all other" category in the selected segment financial data that follows. Intersegment revenues are recorded at the Company's cost plus standard mark-up; intersegment profit and loss has been eliminated in consolidation. 5 The following table sets forth selected financial data by business segment: Selected Financial Data:
Nursing Therapy Pharmacy Services Services Services All Other Totals ---------------------------------------------------------------------------- Six Months Ended June 30, 2001: Revenues from external customers $133,531 $ 9,112 $12,708 $ 66 $155,417 Intersegment revenues - 12,234 3,089 4,461 19,784 ---------------------------------------------------------------------------- Total revenues $133,531 $21,346 $15,797 $ 4,527 $175,201 ============================================================================ Segment profit (loss) $ 22,056 $ 4,054 $ 671 $(8,589) $ 18,192 Six Months Ended June 30, 2000: Revenues from external customers $125,341 $ 7,192 $10,485 $ 97 $143,115 Intersegment revenues - 12,153 2,992 4,057 19,202 ---------------------------------------------------------------------------- Total revenues $125,341 $19,345 $13,477 $ 4,154 $162,317 ============================================================================ Segment profit (loss) $ 22,120 $ 5,201 $ 1,281 $(8,441) $ 20,161
Six Months Ended June 30, 2001 2000 --------------------- Revenues: External revenues for reportable segments $155,417 $143,115 Intersegment revenues for reportable segments 19,784 19,202 Elimination of intersegment revenues (19,784) (19,202) --------------------- Total consolidated revenues $155,417 $143,115 =====================
4. Income Taxes The income tax benefit is calculated using a federal tax rate of 34% and a blended state tax rate of 6%. The difference between the federal and blended state tax rates and the effective rate is primarily due to the non-deductible portion of goodwill. The Company has not recorded any increase to its deferred tax asset in the second quarter of 2001 due to continuing losses and because the Company has not met the more likely than not criteria under SFAS No. 109, "Accounting for Income Taxes". 5. Debt The Company is required to maintain certain financial covenants and to comply with certain reporting requirements under its Term Loan and Revolving Credit Facility Agreement. For the quarter ended June 30, 2001, the Company was not in compliance with certain of these financial covenants. These covenant defaults are in addition to the technical defaults more fully described in the Company's December 31, 2000 financial statements. In addition, the Company was unable to make the June 30, 2001 scheduled principal payment of $5,000 under the Term Loan Facility. The Company has not yet obtained a waiver of any of these defaults from its lenders under its Term Loan and Revolving Credit Facility Agreement and such lenders may, as a result of these defaults, accelerate payment of the amounts due under the credit facility. Also, the Company was unable to make a required interest payment of $6,750 on its Senior Subordinated Notes, which was due on May 15, 2001 (after giving effect to the Company's election to defer this payment for 30 days). As a result, the holders of the Company's Senior Subordinated Notes have the right, while this payment default continues, to accelerate payment of the total outstanding amount under the notes. In July 2001, the Company received an acceleration notice from the holders of its Senior Subordinated Notes, however, no additional steps have been taken by such holders to collect the outstanding amounts under the notes in connection with this acceleration. 6 The Company intends to continue discussions with its lenders and the holders of its Senior Subordinated Notes, and consider all other options available to resolve this situation and achieve a result that is favorable to all interested parties. However, there can be no assurances that the Company will be able to resolve this situation and achieve such a result. Since the holders of the Company's Senior Subordinated Notes provided an acceleration notice to the Company and since the Company's lenders under the Term Loan and Revolving Credit Facility currently have the right to accelerate payment of the outstanding amount of the loans, the Company has classified the obligations in respect of the Senior Subordinated Notes and the loans under the Term Loan and Revolving Credit Facility as current liabilities in the accompanying financial statements. All of the events discussed above raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible outcome of these future events. 6. Deferred Financing Costs The Company has been engaged in discussions with the holders of its Senior Subordinated Notes and the lenders under its Term Loan and Revolving Credit Facility to restructure its debt. As of June 30, 2001, the Company has incurred costs related to these restructuring efforts of $958. These costs have been deferred in the accompanying financial statements. Should the discussions result in a restructuring of debt, these costs and any future costs that may be incurred in connection with such restructuring will be amortized over the term of the restructured debt. Should a restructuring of the debt of the Company not occur, these costs will be expensed. 7. Facility Closing Costs In June 2001, the Company closed a facility that it operated in Arizona resulting in a second quarter charge of $4,123. These facility closing costs include the write off of leasehold improvements and equipment of $2,274, estimated future lease payments of $954, and other costs of $895. 8. Contingent Liability In June 2001, a judge affirmed a verdict for a $5,800 judgment against the Company in a professional liability case. Counsel for the Company has opined that the verdict is fully covered by insurance. Consequently, the Company has not accrued any amount related to this contingency as of June 30, 2001. The Company has requested the insurance company post a bond to proceed with the appeal. To date, the insurance company has declined to post the bond because they are contesting their obligations in this matter. The Company does not have the financial resources to post the appeal bond. The Company and plaintiffs counsel have entered into a standstill agreement through August 14, 2001 under which the plaintiffs have agreed not to attempt to exercise on the judgment. Settlement discussions are in process, however, if this matter is not favorably resolved and the plaintiffs lawyers attempt to exercise on the judgment, the Company would have to consider other alternatives, including seeking bankruptcy court protection in order to stay the judgment. 9. New Accounting Pronouncement In June 2001, the Financial Accounting Standards Board voted to approve the issuance of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". This statement significantly changes the manner in which intangible assets are amortized. Among other provisions, goodwill and other intangible assets with indefinite useful lives acquired prior to June 30, 2001 will no longer be amortized, rather they will be reviewed annually, or more frequently if impairment indicators arise, for impairment. Calendar year-end companies are required to adopt SFAS No. 142 on January 1, 2002. While the Company has not yet evaluated the effect that the adoption of SFAS No. 142 may have, there is the potential that it could have a significant negative impact on the Company's financial position when adopted. 7 Item 2. Management's Discussion And Analysis of Financial Condition And Results of Operations (Unaudited) Quarter Ended June 30, 2001 Compared to Quarter Ended June 30, 2000 (Dollars in Thousands) Net revenues increased $7,006 or 9.8% from $71,548 for the quarter ended June 30, 2000 to $78,554 for the quarter ended June 30, 2001. Total average occupancy was 81.8% for the quarter ended June 30, 2001 and 81.9% for the quarter ended June 30, 2000. Although the total average occupancy declined slightly between quarters, net revenues increased due to greater Medicare census in the current quarter and rate increases experienced by us for both Medicare and Medicaid, and increases in third party business at the therapy and pharmacy operations. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts, and other expenses, as a percent of net revenues, increased from 84.9% of net revenues for the quarter ended June 30, 2000 to 89.3% for the quarter ended June 30, 2001. Expenses increased $9,391 or 15.5% from $60,735 for the quarter ended June 30, 2000 to $70,126 for the quarter ended June 30, 2001. This increase was primarily due to increased salaries and benefits which were 52.5% of net revenues for the quarter ended June 30, 2000 compared to 54.7% for the quarter ended June 30, 2001. The increase in salaries and benefits was due to additional personnel related to expansion of our therapy operations, increases in staffing level and wages rates at our nursing facilities, certain of which were mandated by the State of California, and an increase in workers compensation costs. Income before facility closing costs, charges related to the decertification of a facility, rent, rent to related parties, depreciation and amortization and interest expense decreased $2,385 or 22.1% from $10,813 for the quarter ended June 30, 2000 to $8,428 for the quarter ended June 30, 2001 and was 10.7% of net revenues for the quarter ended June 30, 2001 compared to 15.1% for the quarter ended June 30, 2000. This decrease was largely a result of a decrease in profitability at our nursing facilities and our therapy operation due to higher operating expenses, including labor costs and professional liability and workers compensation insurance costs. In June 2001, we closed a facility that we operated in Arizona, which resulted in a charge of $4,123 for the quarter ended June 30, 2001. In December 2000, we obtained a new provider agreement from both the Medicare and Medicaid Programs for our facility that had been decertified. As a result, there is no charge related to the decertification of this facility for the quarter ended June 30, 2001 compared to a charge of $1,715 for the quarter ended June 30, 2000. Rent, rent to related parties, depreciation and amortization and interest expense increased $167 or 1.4% from $12,026 for the quarter ended June 30, 2000 to $12,193 for the quarter ended June 30, 2001. Net loss was $7,888 for the quarter ended June 30, 2001 compared to a net loss of $1,938 for the quarter ended June 30, 2000. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 (Dollars in Thousands) Net revenues increased $12,302 or 8.6% from $143,115 for the six months ended June 30, 2000 to $155,417 for the six months ended June 30, 2001. Total average occupancy was 82.1% for the six months ended June 30, 2001 and 82.3% for the six months ended June 30, 2000. Although the total average occupancy declined slightly over this period, net revenues increased due to greater Medicare census, rate increases in both Medicare and Medicaid, and increases in third party business at our therapy and pharmacy operations. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts, and other expenses as a percent of net revenues increased from 83.5% of net revenues for the six months ended June 30, 2000 to 88.3% for the six months ended June 30, 2001. Expenses increased $17,684 or 14.8% from $119,541 for the six months ended June 30, 2000 to $137,225 for the six months ended June 30, 2001. This increase was primarily due to increased salaries and benefits which were 51.8% of net revenues for the six months ended June 30, 2000 compared to 54.4% for the six months ended June 30, 2001. The increase in salaries and benefits was due to additional personnel related to expansion of our therapy operations, increases in staffing level and wages rates at our nursing facilities, certain of which were mandated by the State of California, and an increase in workers compensation costs. 8 Income before facility closing costs, charges related to decertification of facility, rent, rent to related parties, depreciation and amortization and interest expense decreased $5,382 or 22.8% from $23,574 for the six months ended June 30, 2000 to $18,192 for the six months ended June 30, 2001 and was 11.7% of net revenues for the six months ended June 30, 2001 compared to 16.5% for the six months ended June 30, 2000. This decrease was largely due to a decrease in profitability at our nursing facilities and our therapy operation due to higher operating expenses, including labor costs and professional liability and workers compensation insurance costs. In June 2001, we closed a facility that we operated in Arizona. As a result, there is a charge of $4,123 for the six months ended June 30, 2001. In December 2000, we obtained a new provider agreement from both the Medicare and Medicaid Programs for our facility that had been decertified. As a result, there is no charge related to the decertification of this facility for the six months ended June 30, 2001 compared to a charge of $3,413 for the six months ended June 30, 2000. Rent, rent to related parties, depreciation and amortization and interest expense increased $424 or 1.8% from $23,872 for the six months ended June 30, 2000 to $24,296 for the six months ended June 30, 2001. Net loss was $9,472 for the six months ended June 30, 2001 compared to a net loss of $2,588 for the six months ended June 30, 2000. Selected statistics are shown below:
2001 2000 (Decrease) -------------------------------------- Facilities in operation at: March 31 50 50 - June 30 49 50 (1) Nursing center beds at: March 31 6,032 6,032 - June 30 5,882 6,032 (150) Assisted living beds at: March 31 700 700 - June 30 700 700 - Total beds at: March 31 6,732 6,732 - June 30 6,582 6,732 (150) Total occupancy: First quarter 82.5% 82.7% (0.2)% Second quarter 81.8% 81.9% (0.1)% Nursing center occupancy: First quarter 84.3% 84.4% (0.1)% Second quarter 83.5% 83.5% - Assisted living center occupancy: First quarter 66.2% 68.6% (2.4)% Second quarter 66.6% 68.8% (2.2)%
9 Liquidity and Capital Resources (Dollars in Thousands) Going Concern Issues We are required to maintain certain financial covenants and to comply with certain reporting requirements under our Term Loan and Revolving Credit Facility Agreement. For the quarter ended June 30, 2001, we were not in compliance with certain of these financial covenants. These covenant defaults are in addition to the technical defaults more fully described in our December 31, 2000 financial statements. In addition, we were unable to make the June 30, 2001 scheduled principal payment of $5,000 under the Term Loan Facility. We have not yet obtained a waiver of any of these defaults from our lenders under our Term Loan and Revolving Credit Facility Agreement and such lenders may, as a result of these defaults, accelerate payment of the amounts due under the credit facility. Also, we were unable to make a required interest payment of $6,750 on our Senior Subordinated Notes, which was due on May 15, 2001 (after giving the effect to our election to defer this payment for 30 days). As a result, the holders of our Senior Subordinated Notes have the right, while the payment default continues, to accelerate payment of the total outstanding amount under the notes. In July 2001, we received an acceleration notice from the holders of our Senior Subordinated Notes, however, no additional steps have been taken by such holders to collect the outstanding amounts under the notes in connection with this acceleration. We intend to continue discussions with our lenders and the holders of our Senior Subordinated Notes, and consider all other options available to resolve this situation and achieve a result that is favorable to all interested parties. However, there can be no assurances that we will achieve such a result. Since the holders of our Senior Subordinated Notes provided an acceleration notice to us and since our lenders under the Term Loan and Revolving Credit Facility currently have the right to accelerate payment on the outstanding amount of these loan, we have classified the obligations in respect of the Senior Subordinated Notes and the loans under the Term Loan and Revolving Credit Facility as current liabilities in the accompanying financial statements. We believe we will be able to generate sufficient cash flow from operations to meet our normal ongoing operating needs exclusive of future principal payments on the Term Loan Facility, and the principal and interest due on the Senior Subordinated Notes. However, given our declining operating results and the relatively small existing cash balances, there can be no assurance that we will be able to meet such obligations. All of the events discussed above raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible outcome of these events. Other At June 30, 2001, we had $1,255 in cash and cash equivalents and a working capital deficiency of $192,118, after the reclassification of certain of our debt to current as discussed above, compared to $346 in cash and cash equivalents and working capital deficiency of $190,748 at December 31, 2000. Net cash provided by operating activities decreased $1,981 from $5,983 for the six months ended June 30, 2000 to $4,002 for the six months ended June 30, 2001. This decrease was primarily due to an increase in net loss between quarters. Long-term debt, including current maturities, totaling $240,158 at June 30, 2001, consisted of mortgage and capital lease obligations of $17,785, a Term Loan Credit Facility of $75,000, Senior Subordinated Notes of $120,000, and borrowings on our Revolving Loan Facility of $27,373. We had $2,127 in available borrowings on our revolving loan facility at June 30, 2001 after giving effect to a $500 outstanding letter of credit relating to a previous year's workers' compensation program. As a result of the defaults mentioned in the preceding paragraphs, we do not have access to the unused portion of the revolving loan facility until the defaults are cured or a waiver is obtained from the Senior Bank Group. 10 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 we may have difficulty covering these cost increases in a timely fashion. In addition, Medicare SNFs are now paid a per diem rate under PPS, in lieu of the former cost-based reimbursement rate. Increases in the federal portion of the per diem rates may also lag behind actual cost increases. Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to future events or our future financial performance including, but not limited to, statements contained in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations". These forward-looking statements may include, among other things, the success of our business strategy, our ability to develop and expand its business in regional markets, our ability to increase the level of sub-acute and specialty medical care it provides, the effects of government regulation and healthcare reform, litigation, our anticipated future revenues and additional revenue opportunities, capital spending and financial resources, our liquidity demands, our ability to meet our liquidity needs, and other statements contained in this Quarterly Report on Form 10-Q that are not historical facts. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be materially incorrect. Readers are cautioned that such forward-looking statements, which may be identified by words including "anticipates," "believes," "intends," "estimates," "plans," and other similar expressions, are only predictions or estimations and are subject to known and unknown risks and uncertainties, over which we have little or no control. In evaluating such statements, readers should consider the various factors identified above which could cause actual events, performance or results to differ materially from those indicated by such statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Certain of our debt obligations are sensitive to changes in interest rates. The rates on the term loan credit and revolving loan facilities, which both bear interest at LIBOR plus an applicable margin, are reset at various intervals, thus limiting their risk. We have not experienced significant changes in market risk due to the relative stability of interest rates during the six months ended June 30, 2001. PART II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities (Dollars in Thousands) We are currently in default in the payment of interest on our Senior Subordinated Notes in the amount of $6,750, which was due on April 16, 2001. The total amount of interest on our Senior Subordinated Notes in arrears, including any additional interest, penalties and charges, on the date of this report is approximately $7,026. In addition, we are currently in default on the payment of principal due under our Term Loan Facility. The total amount of principal in arrears under our Term Loan Facility, including any additional interest, penalties and charges, on the date of this report is $5,000. Item 5. Other Information Our Chief Financial Officer, Paul C. Rathbun, has resigned effective August 17, 2001. Richard Kam, our Senior Vice President of Finance and Administration, will assume these responsibilities on an interim basis. Item 6. Exhibits and Reports on Form 8-K We did not file any reports on Form 8-K during the six months ended June 30, 2001. 11 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FOUNTAIN VIEW, INC. Date: August 14, 2001 By: /s/ PAUL C. RATHBUN ------------------------------------ Paul C. Rathbun Executive Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Date: August 14, 2001 By: /s/ RICHARD KAM ------------------------------- Richard Kam Senior Vice President - Finance and Assistant Secretary 12