-----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, J1JnMVJkaTZje6gGa2r6DS++QGXaKK7J/06MXa6E0/yRbbKJMwBFHGUpRg9MzZPc a3SF+gpA0F6w6pfaA/zHAw== 0000927016-98-002469.txt : 19980622 0000927016-98-002469.hdr.sgml : 19980622 ACCESSION NUMBER: 0000927016-98-002469 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980619 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN VIEW INC CENTRAL INDEX KEY: 0001055468 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279 FILM NUMBER: 98651159 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE CORP CENTRAL INDEX KEY: 0000875192 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 953656297 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-01 FILM NUMBER: 98651160 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SNF PHARMACY INC CENTRAL INDEX KEY: 0001064367 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954388713 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-02 FILM NUMBER: 98651161 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE CALIFORNIA INC CENTRAL INDEX KEY: 0001064368 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 952269142 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-03 FILM NUMBER: 98651162 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE PHARMACY INC CENTRAL INDEX KEY: 0001064369 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 953747839 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-04 FILM NUMBER: 98651163 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SKILLED CARE NETWORK CENTRAL INDEX KEY: 0001064370 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954475876 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-05 FILM NUMBER: 98651164 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE TEXAS EQUITY INC CENTRAL INDEX KEY: 0001064371 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954604050 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-06 FILM NUMBER: 98651165 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE TEXAS NO 2 INC CENTRAL INDEX KEY: 0001064372 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954060847 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-07 FILM NUMBER: 98651166 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE TEXAS NO 3 INC CENTRAL INDEX KEY: 0001064373 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 742582813 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-08 FILM NUMBER: 98651167 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE MANAGEMENT TEXAS INC CENTRAL INDEX KEY: 0001064374 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 742850517 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-09 FILM NUMBER: 98651168 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE TEXAS LP CENTRAL INDEX KEY: 0001064375 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954642711 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-10 FILM NUMBER: 98651169 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN VIEW HOLDINGS INC CENTRAL INDEX KEY: 0001064376 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954644788 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-11 FILM NUMBER: 98651170 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIB CORP CENTRAL INDEX KEY: 0001064377 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 953918421 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-12 FILM NUMBER: 98651171 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALEXANDRIA CONVALESCENT HOSPITAL INC CENTRAL INDEX KEY: 0001064378 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954395382 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-13 FILM NUMBER: 98651172 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIA HOTEL CORP CENTRAL INDEX KEY: 0001064379 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 953918420 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-14 FILM NUMBER: 98651173 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIER OAK CONVALESCENT INC CENTRAL INDEX KEY: 0001064380 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954212165 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-15 FILM NUMBER: 98651174 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELMCREST CONVALESCENT HOSPITAL CENTRAL INDEX KEY: 0001064381 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954274740 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-16 FILM NUMBER: 98651175 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAINVIEW CONVALESCENT HOSPITAL CENTRAL INDEX KEY: 0001064382 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 952506832 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-17 FILM NUMBER: 98651176 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN VIEW MANAGEMENT INC CENTRAL INDEX KEY: 0001064383 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954199013 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-18 FILM NUMBER: 98651177 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIO HONDO NURSING CENTER CENTRAL INDEX KEY: 0001064384 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954272737 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-19 FILM NUMBER: 98651178 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOCOMOTION HOLDINGS INC CENTRAL INDEX KEY: 0001064385 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954644786 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-20 FILM NUMBER: 98651179 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOCOMOTION THERAPY INC CENTRAL INDEX KEY: 0001064386 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954644790 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-21 FILM NUMBER: 98651180 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ON TRACK THERAPY CENTER INC CENTRAL INDEX KEY: 0001064387 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770447168 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-22 FILM NUMBER: 98651181 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: I N O INC CENTRAL INDEX KEY: 0001064388 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954560821 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-23 FILM NUMBER: 98651182 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYCAMORE PARK CONVALESCENT HOSPITAL CENTRAL INDEX KEY: 0001064389 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 952260970 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57279-24 FILM NUMBER: 98651183 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 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------- FOUNTAIN VIEW, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------- DELAWARE 95-4644784 (STATE OR OTHER JURISDICTION OF INCORPORATION OR OR- GANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
AND SUBSIDIARY GUARANTORS SUMMIT CARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3656297 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUMMIT CARE-CALIFORNIA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-2269142 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUMMIT CARE PHARMACY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3747839 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SKILLED CARE NETWORK (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4475876 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUMMIT CARE TEXAS EQUITY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4604050 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUMMIT CARE TEXAS, NO. 2, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 95-4060847 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUMMIT CARE TEXAS, NO. 3, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 74-2582813 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUMMIT CARE MANAGEMENT TEXAS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 74-2850517 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SUMMIT CARE TEXAS, L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 95-4642711 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
FOUNTAIN VIEW HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4644785 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
AIB CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3918421 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ALEXANDRIA CONVALESCENT HOSPITAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4395382 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
BIA HOTEL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3918420 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
BRIER OAK CONVALESCENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4212165 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ELMCREST CONVALESCENT HOSPITAL (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4274740 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
FOUNTAINVIEW CONVALESCENT HOSPITAL (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-2506832 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
FOUNTAIN VIEW MANAGEMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4199013 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
RIO HONDO NURSING CENTER (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4272737 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
LOCOMOTION HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4644786 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
LOCOMOTION THERAPY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4644790 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ON-TRACK THERAPY CENTER, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 77-0447168 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
I.'N O, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4560821 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SYCAMORE PARK CONVALESCENT HOSPITAL (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-2260970 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
SNF PHARMACY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4388713 (STATE OR OTHER JURISDICTION OF INCORPO- RATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
(Continued on next page) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Continued from previous page) 8051 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) -------------- 11900 W. OLYMPIC BOULEVARD SUITE 680 LOS ANGELES, CALIFORNIA 90064 (310) 571-0351 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ROBERT M. SNUKAL PRESIDENT AND CHIEF EXECUTIVE OFFICER FOUNTAIN VIEW, INC. 11900 W. OLYMPIC BOULEVARD, SUITE 680 LOS ANGELES, CALIFORNIA 90064 (310) 571-0351 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- WITH A COPY TO: STEPHEN M. L. COHEN, ESQ. CHOATE, HALL & STEWART EXCHANGE PLACE 53 STATE STREET BOSTON, MASSACHUSETTS 02109 (617) 248-5000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and they are in compliance with General Instruction G, check the following box: [_] -------------- CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED(1) REGISTERED PER UNIT(2) OFFERING PRICE FEE - ----------------------------------------------------------------------------------------------------------- 11 1/4% Senior Subordinated Notes due 2008, Series B...................... $120,000,000 100% $120,000,000 $35,400 - ----------------------------------------------------------------------------------------------------------- Guarantees of 11 1/4% Senior Subordinated Notes due 2008, Series B............................ (3) (3) (3) (3) - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) The issuer of the Notes registered hereby is Fountain View, Inc. The guarantees registered hereby are made by Summit Care Corporation, Summit Care-California, Inc., Summit Care Pharmacy, Inc., Skilled Care Network, Summit Care Texas Equity, Inc., Summit Care Texas, No. 2, Inc., Summit Care Texas, No. 3, Inc., Summit Care Management Texas, Inc., Summit Care Texas, L.P., Fountain View Holdings, Inc., AIB Corp., Alexandria Convalescent Hospital, Inc., BIA Hotel Corp., Brier Oak Convalescent, Inc., Elmcrest Convalescent Hospital, Fountainview Convalescent Hospital, Fountain View Management, Inc., Rio Hondo Nursing Center, Locomotion Holdings, Inc., Locomotion Therapy, Inc., On-Track Therapy Center, Inc., I.'N O, Inc., Sycamore Park Convalescent Hospital and SNF Pharmacy, Inc. (2) In accordance with Rule 457(f)(2), the registration fee is calculated based on the book value of the securities as of the most recent practicable date. (3) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is payable for the guarantees. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE 19, 1998 PROSPECTUS OFFER TO EXCHANGE UP TO $120,000,000 OF 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B OF FOUNTAIN VIEW, INC., WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008 FOUNTAIN VIEW, INC. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED Fountain View, Inc., a Delaware corporation (the "Company") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus (as the same may be amended or supplemented from time to time, this "Prospectus") and the accompanying letter of transmittal (the "Letter of Transmittal" and, together with this Prospectus, the "Exchange Offer"), to exchange up to an aggregate amount of $120,000,000 of the Company's 11 1/4% Senior Subordinated Notes Due 2008, Series B (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, which Exchange Notes shall be guaranteed (the "Exchange Guarantees"), jointly and severally, by each of the Guarantors (as defined) and all future Restricted Subsidiaries (as defined) of the Company, or any of the Guarantors for a like principal amount of the Company's outstanding 11 1/4% Senior Subordinated Notes Due 2008 (the "Outstanding Notes"), of which $120,000,000 in aggregate principal amount was issued on April 16, 1998 and is outstanding as of the date hereof, which Outstanding Notes have been guaranteed by the Guarantors (the "Outstanding Guarantees" and, together with the Exchange Guarantees, the "Guarantees"). The form and terms of the Exchange Notes and the Exchange Guarantees are identical in all material respects to the form and terms of the Outstanding Notes and the Outstanding Guarantees, except for certain transfer restrictions and registration rights relating to the Outstanding Notes. The Exchange Notes will be issued pursuant to, and entitled to the benefits of, the Indenture, dated as of April 16, 1998, between the Company, the Guarantors and State Street Bank and Trust Company of California, as trustee, governing the Outstanding Notes. The Exchange Notes and the Outstanding Notes are hereinafter sometimes collectively referred to as the "Notes". Holders of Outstanding Notes whose Outstanding Notes are not tendered and accepted in the Exchange Offer will continue to hold such Outstanding Notes and will be entitled to all the rights and benefits and will be subject to the limitations applicable thereto under the Indenture. Following the consummation of the Exchange Offer, the holders of Outstanding Notes will continue to be subject to the existing restrictions on the transfer thereof and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Outstanding Notes held by them. The Company will not receive any proceeds from, and has agreed to pay all the expenses incurred by it incident to, the Exchange Offer. No underwriter is being used in connection with this Exchange Offer. The Outstanding Notes are and the Exchange Notes will be general, unsecured obligations of the Company. The Outstanding Notes rank and the Exchange Notes will rank pari passu with all existing and future senior subordinated debt of the Company. The claims of the holders of the Outstanding Notes are and the claims of the holders of the Exchange Notes will be subordinated to Senior Debt (as defined). As of March 31, 1998, giving pro forma effect to the Transactions (as defined), approximately $124.9 million of Senior Debt would have been outstanding, including approximately $100 million of borrowings under the Company's New Credit Facility (as defined herein). See "Capitalization" and "Description of Other Indebtedness". SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR INFORMATION THAT SHOULD BE CONSIDERED BY HOLDERS OF OUTSTANDING NOTES AND PROSPECTIVE PURCHASERS OF EXCHANGE NOTES. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. (Continued on next page) ----------- The date of this Prospectus is , 1998. (Continued from previous page) The Company will accept for exchange any and all validly tendered Outstanding Notes not withdrawn prior to 5:00 p.m., New York City time, on , 1998 unless the Exchange Offer is extended by the Company (the "Expiration Date"). Tenders of Outstanding Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is not conditioned on any minimum aggregate principal amount of Outstanding Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions which may be waived by the Company and to the terms and provisions of the Registration Rights Agreement. See "The Exchange Offer--Certain Conditions to the Exchange Offer". This Prospectus contains summaries believed to be accurate with respect to certain terms of certain documents, but reference is made to the actual documents, including the Indenture governing the Notes (copies of which will be made available by the Company to prospective purchasers upon request) for complete information with respect thereto, and all such summaries are qualified in their entirety by such reference. Market data used throughout this Prospectus are approximations based on internal research of the Company or surveys or studies conducted by third parties, or industry or general publications. The Company has not independently verified market data provided by third parties or industry or general publications. Similarly, internal research of the Company, while believed by the Company to be reliable, has not been verified by any independent sources. Accordingly, no assurance can be given that any of such data is accurate. THE INITIAL PURCHASERS WHO PARTICIPATED IN THE NOTE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SPECIFICALLY, THE INITIAL PURCHASERS MAY BID FOR AND PURCHASE OUTSTANDING NOTES AND EXCHANGE NOTES IN THE OPEN MARKET. EACH PROSPECTIVE PURCHASER OF THE NOTES MUST COMPLY WITH ALL APPLICABLE LAWS AND REGULATIONS IN FORCE IN ANY JURISDICTION IN WHICH IT PURCHASES, OFFERS OR SELLS NOTES, OR POSSESSES OR DISTRIBUTES THIS PROSPECTUS AND MUST OBTAIN ANY CONSENT, APPROVAL OR PERMISSION REQUIRED OF IT FOR THE PURCHASE, OFFER OR SALE BY IT OF THE NOTES UNDER THE LAW AND REGULATIONS IN FORCE IN ANY JURISDICTION TO WHICH IT IS SUBJECT OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES, AND NEITHER THE COMPANY NOR THE INITIAL PURCHASERS SHALL HAVE ANY RESPONSIBILITY THEREFOR. IN MAKING AN INVESTMENT DECISION REGARDING THE EXCHANGE NOTES OFFERED HEREBY, PROSPECTIVE PURCHASERS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE EXCHANGE OFFER, INCLUDING THE MERITS AND RISKS INVOLVED. THE CONTENTS OF THIS PROSPECTUS ARE NOT TO BE CONSTRUED AS LEGAL, INVESTMENT, BUSINESS OR TAX ADVICE. EACH PROSPECTIVE PURCHASER SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND TAX ADVISOR AS TO LEGAL, BUSINESS, TAX, FINANCIAL AND RELATED ADVICE. NEITHER THE COMPANY NOR THE INITIAL PURCHASERS ARE MAKING ANY REPRESENTATION TO ANY OFFEREE OR PURCHASER OF THE NOTES REGARDING THE LEGALITY OF AN INVESTMENT THEREIN BY SUCH OFFEREE OR PURCHASER UNDER APPROPRIATE LEGAL, INVESTMENT OR SIMILAR LAWS. ---------------- NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE NEW HAMPSHIRE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. i PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless otherwise stated in this Prospectus, references to (a) "Fountain View" shall mean Fountain View, Inc., a Delaware corporation and its subsidiaries, other than Summit and its subsidiaries; (b) "Summit" shall mean Summit Care Corporation, a California corporation and its subsidiaries; and (c) the "Company" shall mean Fountain View and its subsidiaries, including Summit and its subsidiaries and, in certain cases, refers to the historical performance or operations of Fountain View and Summit, taken as a whole. All references to a fiscal year refer to the twelve months ended June 30, in the case of Summit, and December 31, in the case of Fountain View and the Company, of the year referenced. THE COMPANY The Company is a leading operator of long-term care facilities and a leading provider of a full continuum of post-acute care services, with a strategic emphasis on sub-acute specialty medical care. The Company operates a network of facilities in California, Texas and Arizona, including 44 skilled nursing facilities ("SNFs") that offer sub-acute, rehabilitative and specialty medical skilled nursing care, as well as six assisted living facilities ("ALFs") that provide room and board and social services in a secure environment. In addition to long-term care, the Company provides a variety of high-quality ancillary services such as physical, occupational and speech therapy in Company-operated facilities, unaffiliated facilities and acute care hospitals. The Company also operates three institutional pharmacies (one of which is a joint venture), which service acute care hospitals as well as SNFs and ALFs both affiliated and unaffiliated with the Company, an outpatient therapy clinic and a durable medical equipment ("DME") company. As a result of the Transactions, the Company consists of the combined operations of Fountain View and Summit and operates 50 facilities with approximately 6,600 beds serving Medicare, Medicaid, managed care, private pay and other patients. Both Fountain View and Summit have demonstrated records of revenue growth, increasing average census (occupancy) levels and improvements in quality mix (defined as non-Medicaid revenues). During the five fiscal years ended 1997, revenues for Fountain View and Summit increased at compound annual growth rates of 13.1% and 27.1%, respectively. During the same period, average census levels at Fountain View facilities increased from 87.0% to 89.3%, while quality mix increased from 58.4% to 72.9%. Average census levels at Summit facilities (excluding three facilities which commenced operations or were renovated in 1996 or later) increased from 87.2% for the year ended June 30, 1993 to 88.7% for the six months ended December 31, 1997, while quality mix increased from 64.8% to 69.6% during the four fiscal years ended 1997. Pro forma for the Transactions, the Company would have had revenues of $74.0 million, an average census level of 88.6% (excluding three Summit facilities which commenced operations or were renovated in 1996 or later) and a quality mix of 67.2% for the three months ended March 31, 1998. For the same period, the Company would have had Adjusted EBITDA (as defined) of $36.0 million and an Adjusted EBITDA margin of 12.2%, with Adjusted EBITDAR (as defined) of $42.8 million and an Adjusted EBITDAR margin of 14.5%. Management believes that the Company's strong operating performance has been supported by the Company's ability to (i) provide high-quality, high-acuity care, (ii) utilize an efficient cost structure, (iii) operate a network of attractive, modern facilities, (iv) maintain a leading market position and (v) capitalize on the extensive experience of its management. The Company intends to pursue a strategy of further increasing its revenues and profitability by capitalizing on the relative strengths of Fountain View and Summit. In implementing its strategy, the 1 Company expects to (i) further increase the proportion of revenues derived from high-acuity specialty medical services, (ii) broaden the implementation of its cost-effective operating model, (iii) expand its ancillary services businesses, (iv) pursue controlled expansion through construction and acquisition-related growth, and (v) capitalize on benefits derived from the Transactions. COMPANY STRENGTHS ABILITY TO PROVIDE HIGH-QUALITY AND HIGH-ACUITY CARE. Management believes that the Company's strong operating performance has been supported by the Company's ability to provide a broad range of high-quality, high-acuity services which are generally more profitable than routine healthcare services. Pro forma for the Transactions, revenues from sub-acute and specialty medical care would have represented 55% of the Company's total revenues for the year ended December 31, 1997. The Company currently serves Medicare, Medicaid, managed care, private pay and other patients by providing a continuum of sub- acute and specialty medical care, which consists of ventilator services, tracheotomy care, multiple intravenous therapy, chemotherapy, enteral/ parenteral nutrition, end-stage renal disease care, blood transfusions, dialysis, wound care, rehabilitation services, pharmacy services and the provision of durable medical equipment. In addition, both Fountain View and Summit have responded to the increased demand for Alzheimer's care by broadening their specialty medical care to include Alzheimer's units in a total of 21 facilities. Management believes that the Company's facilities provide services similar to those offered in acute care hospitals for approximately 40% to 60% of the costs generated by acute care hospitals in providing such services. As a result, management believes the Company will increase revenues by continuing to attract managed care payors and is well-positioned to benefit from growing managed care enrollment levels. EFFICIENT OPERATOR AND COST-EFFECTIVE PROVIDER. Management believes it has developed significant expertise in delivering high-quality, high-acuity care through the implementation of an efficient and cost-effective operating model. Developed within the Fountain View network of facilities, management believes this model has produced high levels of efficiency and facility-level EBITDAR through the application of specific operating initiatives. Management intends to expand its cost-effective operating model to maximize profitability and the quality of care provided across the Company's entire facility network. ATTRACTIVE, MODERN FACILITY NETWORK. Management believes the Company's facilities are in excellent aesthetic and operational condition as the result of recent comprehensive construction and renovation initiatives. Summit has expended more than $180 million over the past five years constructing, acquiring, expanding and upgrading facilities, and Fountain View has spent more than $4 million on facility improvements during the past two years. Approximately 80% of the Company's facilities were either constructed or renovated within the past three years. Management believes the Company's attractive and modern facility network will continue to support high average census and quality mix levels. In addition, management believes that the Company's recent construction and renovation initiatives will facilitate improvements in operating efficiency and reductions in maintenance capital expenditure levels. The Company owns 56% of its facilities (representing 70% of its beds) and holds options to purchase an additional 10% of its facilities, providing the Company with an attractive asset base, enhanced credit quality and increased financial flexibility. LEADING MARKET POSITION. Management believes the Company will operate as a leading provider of long-term and specialty medical care in several Southern California and Texas markets. The Company's Southern California facilities are strategically located in geographically clustered 2 networks which management believes are particularly attractive to managed care organizations. Management believes the Company is well-positioned to benefit from California's rapidly increasing managed care enrollment levels, which included 35% of Medicare enrollees during 1996 as compared to a nationwide enrollment level of 14% as of July 1997. The Company also expects that the increased density of its Southern California market presence as a result of the Transactions will result in heightened brand awareness, expanded referral networks, operating and administrative economies of scale as well as improved purchasing economies. In addition to the Company's geographically clustered networks in Southern California, the Company operates a broad network of facilities in small to mid- size markets in Texas. Management believes the Company's Texas facilities are located in several demographically attractive markets and are generally characterized by leading market positions. In addition to the Company's strong local market presence in both Southern California and Texas, management believes the Company will be subject to a relatively low level of direct competition from any single large competitor due to the considerable fragmentation which characterizes the Company's markets. STRONG MANAGEMENT TEAM. William Scott ("Mr. Scott"), the Chairman of the Company, and Robert Snukal ("Mr. Snukal"), the Chief Executive Officer of the Company, together have more than 43 years of senior management experience in the long-term care industry in Southern California and Texas. Mr. Scott has supervised significant expansion in the number of Summit's facilities and services through strategic acquisitions and construction. Mr. Snukal has demonstrated expertise in developing Fountain View's ability to provide specialty medical and sub-acute care in a cost-effective manner, achieving strong facility-level operating and financial performance. Both Mr. Scott and Mr. Snukal will maintain significant involvement in the daily operations of the Company and have made significant equity contributions to the Company in connection with the Transactions. See "--The Transactions". BUSINESS STRATEGY FURTHER INCREASE PROPORTION OF REVENUES DERIVED FROM SPECIALTY MEDICAL CARE. The Company intends to leverage its existing specialty medical infrastructure, further increasing the proportion of total revenues derived from specialty medical care. On a pro forma basis for the twelve months ended December 31, 1997, specialty medical revenues represented 55% of total revenues. Services comprising specialty medical care generally represent the most profitable types of services offered by long-term care providers since such services are generally reimbursed at higher rates than routine skilled nursing care and basic assisted living services. As a result of the trend toward shorter hospital stays by patients who require medically complex treatments and in order to deliver the highest quality care possible to its patients, the Company has developed significant expertise and experience caring for high-acuity patients. The Company's ability to provide high-acuity specialty medical and sub-acute care in its own facilities generates substantial revenue for the Company and benefits managed care payors by reducing hospital costs and eliminating expenses incurred by transferring patients to acute care hospitals to receive specialty medical care. BROADEN IMPLEMENTATION OF COST-EFFECTIVE OPERATING MODEL. Management intends to expand its cost-effective operating model to maximize profitability and the quality of care provided across its facilities. Management believes that expanded implementation of a well-designed and well-monitored operating model will enhance the quality and consistency of care delivered and improve profitability by streamlining procedures for administering care. EXPAND ANCILLARY SERVICES. The Company intends to increase the penetration of its therapy and pharmacy businesses within both affiliated and unaffiliated facilities. Ancillary services generally 3 have produced higher revenues and profitability than routine long-term care services. The Company currently provides rehabilitative physical, occupational and speech therapy through its subsidiary, Locomotion Therapy, Inc. ("Locomotion Therapy"). Locomotion Therapy generated $19.7 million of revenues for the year ended December 31, 1997, providing services to unaffiliated nursing homes and acute care hospitals under 97 contracts and to eight Fountain View facilities. Management expects Locomotion Therapy to expand its provision of services to Summit facilities, which purchased an aggregate of $34 million of therapy services from nonaffiliates during fiscal 1997. The Company also intends to pursue increased "bundling" of ancillary services, offering a unique package of rehabilitative and pharmacy services to unaffiliated facilities in a cost-efficient manner. In addition to providing ancillary therapy services, the Company operates three institutional pharmacies (one of which is a joint venture), a DME company and an outpatient therapy clinic through its subsidiary, On-Track Therapy Center, Inc. ("On-Track"). Several of Summit's facilities have existing, unoccupied space allocated to outpatient therapy services which the Company expects to utilize for the expansion of services provided by On-Track. PURSUE CONTROLLED EXPANSION THROUGH CONSTRUCTION AND ACQUISITION-RELATED GROWTH. The Company intends to acquire and construct facilities selectively in strategic locations which will facilitate operating efficiencies through economies of scale, will generate marketing synergies through further expansion of relationships and contracts with hospitals, physicians and physician groups and will lead to reduced overhead expenditures. The Company expects to acquire or construct new beds and facilities in a cost-effective manner, including expansion initiatives which utilize real estate currently owned by the Company. The Company currently owns properties adjacent to several facility locations which management believes can support the construction of approximately 1,400 additional beds at reduced cost levels relative to the expense associated with acquisition and development of new real estate. CAPITALIZE ON BENEFITS DERIVED FROM THE TRANSACTIONS. As a result of the Transactions, management believes the Company will be able to realize significant cost savings. As a result of the Company's contiguous geographic locations in several Southern California markets, management intends to eliminate specifically identified corporate expenses and leverage administrative resources across facilities. Management believes the Company will be able to reduce its cost of food, sanitary and medical supplies as a result of improved purchasing power and expects the Company to realize marketing and referral benefits as a result of the increased geographic density of the Company's clustered facilities. In addition, the Company expects to expand its provision of services through Locomotion Therapy to Summit facilities, which purchased $34 million of therapy services from nonaffiliates during 1997. THE TRANSACTIONS On February 6, 1998, Fountain View, Summit, Heritage Fund II, L.P. and FV-SCC Acquisition Corp., a wholly-owned subsidiary of Fountain View ("Acquisition"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of Summit by Fountain View. Pursuant to the Merger Agreement, Acquisition offered (the "Tender Offer") to purchase all of the outstanding shares of common stock of Summit (the "Summit Shares"), at a price of $21.00 per share, net to the seller in cash. A copy of the Merger Agreement is filed as an exhibit to the Schedule 14D-1 filed by Fountain View with the Securities and Exchange Commission (the "Commission") in connection with the Tender Offer. The Tender Offer expired on March 25, 1998 and Acquisition purchased approximately 99% of the Summit Shares at the closing of the Tender Offer on March 27, 1998. 4 Pursuant to the terms of the Merger Agreement, Acquisition merged with and into Summit on April 16, 1998 (the "Merger"). Summit was the surviving corporation in the Merger and became a wholly-owned subsidiary of Fountain View. In order to consummate the purchase of Summit Shares in the Tender Offer and the Merger, to refinance all then existing Fountain View funded indebtedness, to redeem all outstanding options for Summit Shares, and to pay certain fees, expenses and other costs arising in connection with such transactions, Fountain View sold, in a transaction exempt from registration pursuant to Rule 144A and Regulation S of the Securities Act, $120.0 million of the Outstanding Notes (the "Note Offering"). The Company also entered into a new revolving credit facility and term loan facilities (the "New Credit Facility") providing for revolving credit borrowings of up to $30.0 million and term loan borrowings of up to $85.0 million. In addition, Fountain View raised approximately $97.0 million of new equity investments in the amounts of $90.6 million from Heritage Fund II, L.P. and certain other co-investors, $5.0 million from Mr. Snukal, Fountain View's Chief Executive Officer, and Sheila Snukal, Fountain View's Executive Vice President and Mr. Snukal's wife ("Mrs. Snukal"), and $1.4 million from Mr. Scott, Summit's Chairman and Chief Executive Officer (collectively, the "Equity Investments"). The Company used the proceeds of the Note Offering to repay certain indebtedness of Summit assumed in connection with the Merger and to pay certain transaction fees and expenses. See "Use of Proceeds". The Tender Offer, the Merger, the establishment of the New Credit Facility, the Equity Investments, the Note Offering and the application of the proceeds therefrom are collectively referred to as the "Transactions". Since the Transactions, senior management of the Company have owned approximately 26.3% of the Company's outstanding common stock, on a fully- diluted basis, and Heritage Partners, Inc. and its affiliates ("Heritage"), along with certain co-investors, have owned approximately 72.7% of the Company's outstanding common stock, on a fully-diluted basis. Heritage is a Boston-based private equity firm with $530 million in capital under management, specializing in the acquisition and equity-based recapitalization of private, family-owned businesses. See "Management". In August 1997, Heritage invested $14.0 million in cash in Fountain View in a series of transactions (the "Fountain View Equity Transactions") which resulted in Heritage obtaining a 49.9% ownership position in the common equity of Fountain View and completing a $7.0 million preferred stock investment in Fountain View at that time. See Note 3 to the audited financial statements of Fountain View included elsewhere in this Prospectus. 5 THE FINANCINGS The following table illustrates the sources and uses of funds for the Transactions. See "Unaudited Pro Forma Financial Data".
(IN MILLIONS) SOURCES OF FUNDS New Credit Facility(1)........................................ $100.0 11 1/4% Senior Subordinated Notes............................. 120.0 ------ Total debt................................................ 220.0 ------ Equity Investments: Heritage and co-investors equity investments(2)............. 90.6 Fountain View management equity investment(3)............... 5.0 Summit management equity investment(4)...................... 1.4 ------ Total equity.............................................. 97.0 ------ Total sources of funds.................................... $317.0 ====== USES OF FUNDS Purchase of Summit Shares in the Tender Offer and the Merger(5).................................................... $145.6 Refinancing of Fountain View indebtedness(6).................. 32.0 Refinancing of Summit indebtedness(7)......................... 108.9 Fees and expenses............................................. 30.5 ------ Total uses of funds....................................... $317.0 ======
- -------- (1) The New Credit Facility provides for up to $30.0 million of revolving credit borrowings (with a $4.0 million sublimit for letters of credit) and up to $85.0 million of term loans and matures in 2004. As of the date of the closing of the Merger, term loans in the aggregate amount of approximately $85.0 million and revolving loans in the aggregate amount of approximately $15.0 million were outstanding under the New Credit Facility, and $15.0 million of revolving credit borrowings were then available to the Company. (2) Represents only the new cash invested in Fountain View by Heritage and certain co-investors in connection with the Transactions and excludes the Fountain View shares held by Heritage prior to the Transactions. (3) Represents only the new cash invested in Fountain View by Mr. Snukal and Mrs. Snukal in connection with the Transactions and excludes the Fountain View shares held by management prior to the Transactions. (4) Represents the full amount of the after-tax proceeds that Mr. Scott received from the cash-out in the Merger of all options to purchase Summit Shares held by him (and a payment from the Company to cover a portion of related taxes) and the full after-tax proceeds from payments under the Summit Executive Incentive Plan received by him from the Company, but does not include the issuance by Mr. Scott of a limited recourse promissory note in consideration for certain of the Fountain View shares issued to him in connection with the Transactions. See "Certain Relationships and Related Transactions--Investment Agreement" and "--Payments to Certain Stockholders". (5) Represents the purchase of all Summit Shares in the Tender Offer and the Merger, and the cash-out of options to purchase 909,500 Summit Shares which Summit effected upon the effectiveness of the Merger. (6) Reflects the total funded indebtedness of Fountain View outstanding immediately prior to the Merger. (7) Reflects total funded indebtedness of Summit (excluding mortgages, capital leases and certain other indebtedness) outstanding immediately prior to the Merger. 6 RECENT DEVELOPMENTS On May 4, 1998, Baylor Health Care System, a vertically integrated healthcare system operating in Texas ("Baylor"), and Buckner Foundation ("Buckner"), a subsidiary of Buckner Baptist Benevolences, a Texas social services organization (collectively, the "Baylor Group"), purchased from Heritage shares of Series A Preferred Stock of Fountain View and warrants to purchase shares of Fountain View's Series C Common Stock for approximately $12.4 million. The shares of Series A Preferred Stock purchased by the Baylor Group are entitled to receive a cumulative dividend calculated to achieve a 12% annual rate of return, and are subject to automatic redemption upon the completion of an initial public offering of Fountain View's common stock. The shares represented by the warrants issued to the Baylor Group currently represent approximately 5% of Fountain View's diluted capital stock. Baylor is also entitled to have one of its nominees serve on Fountain View's board of directors. Baylor and Fountain View also entered into an agreement on May 4, 1998 primarily to develop and operate skilled nursing facilities within a mile of the Baylor hospital campuses for which Baylor has the right to receive a market-rate development and license fee in the form of cash or warrants. Baylor, one of the nation's largest not-for-profit integrated health care providers, operates a network of 50 hospitals, clinics and primary care facilities in 19 cities throughout Northern Texas and Southern Oklahoma. Baylor is based in Dallas-Fort Worth, Texas, where its hospitals represent 16% of all hospital admissions in the Dallas-Forth Worth area. For the three months ended March 31, 1998, net revenues would have totaled $74.0 million pro forma for the Transactions. During the same period, management estimates that pro forma occupancy would have been 88.6% (excluding three Summit facilities which commenced operations or were renovated in 1996 or later) and the Company's pro forma quality mix would have been 67.2%. The Company was incorporated in Delaware in 1997. Its principal executive offices are located at 11900 Olympic Boulevard, Suite 680, Los Angeles, California 90064, and its telephone number is (310) 571-0351. 7 THE EXCHANGE OFFER Outstanding Notes........... The Outstanding Notes were sold by the Company on April 16, 1998 to Goldman, Sachs & Co., Nesbitt Burns Securities Inc., Paribas Corporation and Sutro & Co., Incorporated (collectively, the "Initial Purchasers") pursuant to a Purchase Agreement, dated April 16, 1998 (the "Purchase Agreement"). The Initial Purchasers subsequently resold the Outstanding Notes in transactions not registered under the Securities Act in reliance upon exemptions from registration pursuant to Rule 144A and Regulation S under the Securities Act. Registration Rights Pursuant to the Purchase Agreement, the Company Agreement................... and the Initial Purchasers entered into the Registration Rights Agreement, which grants the holders of the Outstanding Notes certain exchange and registration rights. The Exchange Offer is intended to satisfy such exchange and registration rights which terminate upon the consummation of the Exchange Offer. Securities Offered.......... $120,000,000 aggregate principal amount of 11 1/4% Senior Subordinated Notes due 2008, Series B (the "Exchange Notes"). The Exchange Offer.......... The Company is offering to exchange $1,000 principal amount of Exchange Notes for each $1,000 principal amount of Outstanding Notes that are properly tendered and accepted. The Company will issue Exchange Notes on or promptly after the Expiration Date. As of the date hereof, there is $120,000,000 aggregate principal amount of Outstanding Notes outstanding. The terms of the Exchange Notes are identical in all material respects to the terms of the Outstanding Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes will bear a Series B designation, are freely transferable by holders thereof (other than as provided herein), and are not subject to any covenant restricting transfer absent registration under the Securities Act. See "The Exchange Offer". The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Outstanding Notes being tendered for exchange. Based on no-action letters issued by the staff of the Commission to third parties with respect to similar transactions, the Company believes that the Exchange Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) a broker-dealer who purchases such Exchange Notes from the Company to resell pursuant to Rule 144A or any other 8 available exemption under the Securities Act, or (ii) a person that is an "affiliate" of the Company within the meaning of Rule 405 of the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders are not engaged in, have no arrangement or understanding with any person to participate in, and do not intend to engage in, any distribution of the Exchange Notes. However, the Company has not sought and does not intend to seek a no- action letter with respect to the Exchange Offer and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. Each holder of Exchange Notes, other than a broker-dealer, must represent that such conditions have been met. In addition, each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. A broker-dealer may nonetheless be deemed to be an "underwriter" under the Securities Act notwithstanding such disclaimer. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. Pursuant to the Registration Rights Agreements, the Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "The Exchange Offer-- Purpose of the Exchange Offer" and "Plan of Distribution". Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes could not rely on the position of the staff of the Commission enunciated in no- action letters and, in the absence of an applicable exemption, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Company. 9 Expiration Date............. 5:00 p.m., New York City time, on , 1998, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. See "The Exchange Offer--Expiration Date; Extensions; Termination; Amendments". Accrued Interest on the Exchange Notes............. Each Exchange Note will bear interest from the most recent date to which interest has been paid on the Outstanding Notes or, if no interest has been paid on such Outstanding Notes, from April 16, 1998. Exchange Date............... As soon as practicable after the close of the Exchange Offer, the Company will accept for exchange all Outstanding Notes properly tendered and not validly withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer--Withdrawal Rights". Conditions to the Exchange Offer....................... The Exchange Offer is subject to customary conditions, certain of which may be waived by the Company. The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. The Exchange Offer is not conditioned on any minimum aggregate principal amount of Outstanding Notes being tendered for exchange. See "The Exchange Offer--Certain Conditions to the Exchange Offer". Consequences of Failure to Exchange................... Any Outstanding Notes not tendered pursuant to the Exchange Offer will remain outstanding and continue to accrue interest. Such Outstanding Notes will remain "restricted securities" under the Securities Act, subject to the transfer restrictions described herein. As a result, the liquidity of the market for such Outstanding Notes could be adversely affected upon completion of the Exchange Offer. See "Risk Factors-- Consequences of Failure to Exchange". Certain Federal Income Tax Considerations............. The exchange of the Outstanding Notes for Exchange Notes by tendering holders should not be a taxable exchange for U.S. Federal income tax purposes, and such holders should not recognize any taxable gain or loss for U.S. Federal income tax purposes as a result of such exchange. See "Certain U.S. Federal Income Tax Consequences". Use of Proceeds............. There will be no cash proceeds to the Company from the Exchange Offer. See "Use of Proceeds". 10 Tendering Outstanding Notes....................... Each holder of Outstanding Notes wishing to accept the Exchange Offer must complete, sign and date a Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with such Outstanding Notes and any other required documents, to the Exchange Agent (as defined) at the address set forth herein. See "Exchange Offer--Procedures for Tendering Outstanding Notes". Withdrawal Rights........... The tender of Outstanding Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date, in accordance with the procedures set forth in this Prospectus. See "The Exchange Offer--Withdrawal Rights". Untendered Outstanding Notes....................... Upon consummation of the Exchange Offer, the holders of Outstanding Notes, if any, will have no further rights under the Registration Rights Agreement, except as provided herein. Holders of Outstanding Notes whose Outstanding Notes are not tendered or are tendered but not accepted in the Exchange Offer will continue to hold such Outstanding Notes and will be entitled to all the rights and preferences and subject to the limitations applicable thereto. Following consummation of the Exchange Offer, the holders of Outstanding Notes will continue to be subject to the existing restrictions upon transfer thereof and, except as provided herein, the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Outstanding Notes held by them. To the extent that Outstanding Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Outstanding Notes could be adversely affected. Exchange Agent.............. State Street Bank and Trust Company of California, N.A., is serving as Exchange Agent in connection with the Exchange Offer. See "The Exchange Offer--Exchange Agent". Shelf Registration Statement................... Under certain circumstances described in the Registration Rights Agreement, certain holders of Outstanding Notes (including holders who are not permitted to participate in the Exchange Offer or who may not freely resell Exchange Notes received in the Exchange Offer) may require the Company to file and use its reasonable efforts to cause to become effective, a shelf registration statement under the Securities Act, which would cover resales of Outstanding Notes by such holders. See "The Exchange Offer--Purpose of the Exchange Offer". 11 TERMS OF THE NOTES Except as otherwise indicated, the following description relates both to the Outstanding Notes issued pursuant to the Note Offering and to the Exchange Notes to be issued in exchange for Outstanding Notes in connection with the Exchange Offer. The Exchange Notes will be obligations of the Company evidencing the same indebtedness as the Outstanding Notes, and will be entitled to the benefits of the same Indenture. The form and terms of the Exchange Notes are the same as the form and terms of the Outstanding Notes, except that the Exchange Notes have been registered under the Securities Act and therefore will not bear legends restricting the transfer thereof. For a more complete description of the Notes see "Description of Notes". Throughout this Prospectus, references to the "Notes" refer to the Exchange Notes and the Outstanding Notes collectively. Issuer...................... Fountain View, Inc. Securities Offered.......... $120.0 million aggregate principal amount of 11 1/4% Senior Subordinated Notes due 2008, Series B that have been registered under the Securities Act. See "Description of Notes". Maturity Date............... April 15, 2008 Guarantees.................. The Company's payment obligations under the Notes are jointly and severally guaranteed on a senior subordinated basis by each of the Company's current and future Restricted Subsidiaries. As of the date of the Indenture, all of the Company's Subsidiaries will be Restricted Subsidiaries. The Outstanding Guarantees are, and the Exchange Guarantees will be, subordinated to all Senior Debt of the Guarantors. See "Description of Notes--Subsidiary Guarantees". Interest on the Notes....... The Outstanding Notes accrue interest at a rate of 11 1/4% per annum from the Issue Date. The Exchange Notes will accrue interest at a rate of 11 1/4% per annum from the Issue Date or from the most recent date to which interest had been paid on the Outstanding Notes. Interest Payment Dates...... April 15 and October 15 of each year, commencing October 15, 1998. Optional Redemption......... Except as described below, the Notes are not redeemable at the Company's option prior to April 15, 2003. From and after April 15, 2003, the Notes will be subject to redemption at the option of the Company, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined), if any, to the date of redemption. In addition, prior to April 15, 2001, up to 35% in aggregate principal amount of Notes will be redeemable at the option of the Company from the net proceeds of Public Equity Offerings (as defined) by the Company, at a price of 111.25% of the principal amount of the Notes, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption; provided that at least $78.0 million in aggregate principal amount of Notes remains outstanding immediately after each such redemption; and provided, further, that any such redemption occur within 60 days of the date of the closing of such Public Equity Offering. 12 Change of Control........... In the event of a Change of Control, Holders of the Notes will have the right to require the Company to repurchase their Notes, in whole or in part, at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of repurchase. Ranking..................... The Notes constitute general, unsecured obligations of the Company, subordinated in right of payment to all Senior Debt of the Company, ranked pari passu with all senior subordinated debt of the Company and senior in right of payment to all existing and future subordinated debt of the Company, if any. The claims of the Holders of the Notes will be subordinated to Senior Debt, which, as of March 31, 1998, on a pro forma basis, would have been approximately $124.9 million, approximately $100.0 million of which would have been fully secured borrowings under the New Credit Facility. See "Description of Notes--Subordination" and "Description of Other Indebtedness". Restrictive Covenants....... The Indenture governing the Notes (the "Indenture") contains certain covenants that, among other things, limit the ability of the Company and its Subsidiaries to incur additional Indebtedness (as defined herein) and issue Disqualified Stock (as defined herein), pay dividends or distributions or make investments or make certain other Restricted Payments (as defined herein), enter into certain transactions with affiliates, dispose of certain assets, incur liens securing pari passu and subordinated indebtedness and engage in mergers and consolidations. See "Description of Notes". Use of Proceeds............. The gross proceeds of $120.0 million from the Note Offering along with the proceeds of equity investments made by Heritage and members of management were used to repay certain existing indebtedness, pay certain fees and expenses in connection with the Transactions, and for general corporate purposes. No proceeds will be received by the Company and the Guarantors from the Exchange Offer. See "Use of Proceeds". COMPARISON OF EXCHANGE NOTES WITH OUTSTANDING NOTES Freely Transferable......... Generally, the Exchange Notes will be freely transferable under the Securities Act by holders thereof other than any holder that is either an affiliate of the Company or a broker-dealer that purchased the Notes from the Company to resell pursuant to Rule 144A, Regulation S or any other available exemption. The Exchange Notes otherwise will be substantially identical in all material respects (including interest rate and maturity) to the Outstanding Notes. See "The Exchange Offer". 13 Registration Rights......... The holders of Outstanding Notes currently are entitled to certain registration rights pursuant to the Registration Rights Agreement (the "Registration Rights Agreement"), dated as of April 16, 1998, among the Company, the Guarantors and the Initial Purchasers. However, upon consummation of the Exchange Offer, subject to certain exceptions, holders of Outstanding Notes who do not exchange their Outstanding Notes for Exchange Notes in the Exchange Offer will no longer be entitled to registration rights and will not be able to offer or sell their Outstanding Notes, unless such Outstanding Notes are subsequently registered under the Securities Act (which, subject to certain limited exceptions, the Company will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors--Consequences of Failure to Exchange" and "The Exchange Offer--Purpose of the Exchange Offer". Exchange Offer and Absence of a Public Market for the Notes...................... The Exchange Notes will generally be freely transferable (subject to the restrictions discussed elsewhere herein) but will be new securities for which there will not initially be a market. The Outstanding Notes have been designated for trading in the PORTAL market. The Company does not intend to apply for a listing of the Exchange Notes on any securities exchange or on any automated dealer quotation system. See "Plan of Distribution". FOR MORE COMPLETE INFORMATION REGARDING THE NOTES, SEE "DESCRIPTION OF NOTES". RISK FACTORS Holders of Outstanding Notes and prospective purchasers of the Exchange Notes should consider carefully all of the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors" for risks involved with an exchange or acquisition of the Exchange Notes. ADDITIONAL INFORMATION For additional information regarding the Notes, see "The Exchange Offer", "Description of Notes" and "Certain Federal Income Tax Consequences". 14 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA Set forth below is the pro forma financial information as of March 31, 1998 and December 31, 1997 and for the three months ended March 31, 1998 and for the year ended December 31, 1997. Such pro forma data does not purport to represent what the Company's actual results would have been if the Transactions had occurred on the date indicated, nor does such information purport to project the results of the Company for future periods. The summary unaudited pro forma financial information below should be read in conjunction with the "Unaudited Pro Forma Financial Data", "Selected Historical Financial and Other Data-- Fountain View", "Selected Historical Financial and Other Data--Summit" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus.
PRO FORMA PRO FORMA THREE MONTHS YEAR ENDED ENDED MARCH 31, 1998 DECEMBER 31, 1997 -------------------- ----------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA Net revenue............................. $ 73,996 $287,144 Salaries and related benefits........... 34,318 135,248 Other operating costs................... 28,967 115,022 Depreciation and amortization........... 3,747 14,092 Rent expense............................ 1,706 6,754 Interest, net........................... 5,831 23,324 -------- -------- 74,569 294,440 -------- -------- Loss before provision for income taxes and extraordinary item................. (573) (7,296) Income taxes benefit(1)................. 137 2,792 Extraordinary item, net of tax.......... (517) -- -------- -------- Net loss................................ $ (953) $ (4,504) ======== ======== OTHER FINANCIAL DATA EBITDA(2)............................... $ 9,005 $ 30,120 Adjusted EBITDA(3)...................... 36,020 41,613 Adjusted EBITDA margin.................. 12.2% 14.5% Adjusted EBITDAR(3)..................... $ 42,844 $ 48,367 Adjusted EBITDAR margin................. 14.5% 16.8% Ratio of earnings to fixed charges(4)... 0.9x 0.7x Ratio of Adjusted EBITDA to net interest expense................................ 1.5 1.8 Ratio of net debt to Adjusted EBITDA(5). 6.8 5.7 OTHER DATA Number of facilities (end of period).... 50 50 Total beds (end of period).............. 6,578 6,574 Patient days (in thousands)............. 468 1,963 Average occupancy rate(6)............... 89% 89% Percentage of revenues from: Managed care, private pay and Medicare............................. 67% 70% Medicaid.............................. 33 30 BALANCE SHEET DATA (AT MARCH 31, 1998 AND DECEMBER 31, 1997, RESPECTIVELY) Cash and cash equivalents............... $ 3,640 $ 4,253 Working capital......................... 34,475 23,146 Total assets............................ 407,516 410,800 Total debt and capital leases, including current maturities and excluding mandatory redeemable preferred stock... 244,904 241,990 Stockholders' equity.................... 70,119 69,764
15 - -------- (1) In July 1997, Fountain View's predecessor, which was comprised of all of Fountain View's operating units owned individually by certain controlling stockholders, was merged with and into several companies formed by Fountain View in connection with the Fountain View Equity Transactions. Prior to the Fountain View Equity Transactions, most of such individually owned corporations had elected to be taxed as cash-basis S-corporations. The pro forma income tax benefit for the year ended December 31, 1997 includes a charge in lieu of income taxes to indicate what the tax provision would have been had Fountain View been taxed as a C-corporation for all of 1997 with a combined federal and state tax rate of 41%. See Note 3 to the audited financial statements of Fountain View included elsewhere in this Prospectus. (2) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is a widely recognized financial indicator of a company's ability to service or incur debt. EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies. EBITDA may not be indicative of the historical operating results of the Company, nor is it meant to be predictive of future results of operations or cash flows. (3) For the year ended December 31, 1997, adjusted EBITDA represents EBITDA adjusted for certain non-recurring charges and management's estimate of cost savings relating to the Transactions shown below. Adjusted EBITDAR represents Adjusted EBITDA plus rent expense:
YEAR ENDED DECEMBER 31, 1997 ----------------- EBITDA.................................................... $30,120 Non-recurring charges(a).................................. 7,675 Management's estimate of ongoing cost reductions relating to the Transactions(b)................................... 3,818 ------- Total adjustments......................................... 11,493 ------- Adjusted EBITDA........................................... $41,613 Rent expense.............................................. 6,754 ------- Adjusted EBITDAR.......................................... $48,367 =======
(a) Non-recurring charges consist of: (1) $2,100 of Medicare reserves taken by Summit in the first six months of 1997 for changes in certain reimbursable items related to periods prior to 1997; (2) $1,074 of retroactive workers' compensation, group and general liability insurance costs; (3) $983 of incremental bad debt expense relating to 1996 and prior periods recorded in 1997 resulting from a change in management's methodology for determining the allowance for bad debt; (4) termination of non-compete agreements and consulting arrangements totaling $965 relating to the Fountain View Equity Transactions; (5) certain transaction expenses including discretionary employee bonuses totaling $872 paid upon completion of the Fountain View Equity Transactions; (6) severance for an executive and other costs totaling $871; and (7) $810 related to an employee lawsuit settled in 1997 involving a specific type of liability for which the Company currently maintains insurance coverage (net of ongoing insurance costs). (b) Management's estimate of ongoing cost reductions relating to the Transactions includes: (i) certain reductions in facility-level operating expense items totaling $1,451; (ii) $1,355 relating to the elimination of specifically identified duplicative staff; (iii) $512 relating to reductions in corporate expenses including the elimination of certain public company expenses; and (iv) a reduction in costs of supplies of $500. As a consequence of the Transactions, management anticipates significant ongoing cost savings and certain revenue enhancements. However, there can be no assurance that these cost savings or revenue enhancements will be realized. For the three months ended March 31, 1998, Adjusted EBITDA is defined as four times pro forma EBITDA. Adjusted EBITDAR represents Adjusted EBITDA plus four times pro forma rent expense. (4) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges consists of interest expense and one-third of operating rent expense, which management believes is representative of the interest component of rent expense. (5) Ratio of net debt to Adjusted EBITDA represents the ratio of total debt less cash and cash equivalents to Adjusted EBITDA. (6) Average occupancy rate has been adjusted to exclude three Summit facilities which were not operational prior to 1996 or were significantly renovated during 1997 such that beds were not available during the entire year. Such facilities were deemed to be in a fill-up stage and, therefore, their occupancies are not considered to be indicative of a mature facility. Actual occupancy for the year ended December 31, 1997 including these facilities was 87%. Also excludes Fountain View's ALF, which represented less than 2% of Fountain View's total revenue during fiscal 1997. 16 SUMMARY HISTORICAL FINANCIAL AND OTHER DATA--FOUNTAIN VIEW The summary financial data of Fountain View as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 are derived from the audited financial statements included elsewhere herein. The summary financial and other data as of December 31, 1993, 1994 and 1995, for the two years in the period ended December 31, 1994 and for the three months ended March 31, 1997 and 1998 have been derived from Fountain View's unaudited financial statements included elsewhere herein and, in the opinion of management, include all necessary adjustments for a fair presentation of such information in conformity with generally accepted accounting principles. The information set forth below should be read in conjunction with "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- -------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Net revenue................... $41,061 $51,824 $55,836 $59,432 $ 67,905 $ 16,409 $ 20,078 Salaries and related benefits. 23,248 27,823 35,048 36,166 38,215 9,435 10,686 Other operating costs......... 10,884 14,886 13,454 14,614 17,990 3,556 5,584 Depreciation and amortization. 110 149 416 600 1,198 142 524 Rent expense.................. 4,002 4,017 3,946 3,896 3,775 941 983 Interest, net................. 307 355 332 278 1,164 20 851 ------- ------- ------- ------- -------- --------- --------- 38,551 47,230 53,196 55,554 62,342 14,094 18,628 ------- ------- ------- ------- -------- --------- --------- Income before provision for income taxes and extraordinary item........... 2,510 4,594 2,640 3,878 5,563 2,315 1,450 Income tax benefit (provision).................. (81) 43 (54) (78) (361) (33) (580) Extraordinary item, net of tax.......................... -- -- -- -- -- -- (517) ------- ------- ------- ------- -------- --------- --------- Net income.................... $ 2,429 $ 4,637 $ 2,586 $ 3,800 $ 5,202 $ 2,282 $ 353 ======= ======= ======= ======= ======== ========= ========= Basic and diluted earnings per share before extraordinary item(5)...................... $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 11.41 $ 3.47 Basic and diluted loss per share-- extraordinary item........... -- -- -- -- -- -- (2.06) ------- ------- ------- ------- -------- --------- --------- Basic and diluted earnings per share--net income............ $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 11.41 $ 1.41 ======= ======= ======= ======= ======== ========= ========= OTHER FINANCIAL DATA EBITDA(1)..................... $ 2,927 $ 5,098 $ 3,388 $ 4,756 $ 7,925 $ 2,477 $ 2,825 EBITDA margin................. 7.1% 9.8% 6.1% 8.0% 11.7% 15.1% 14.1% EBITDAR(1).................... $ 6,929 $ 9,115 $ 7,334 $ 8,652 $ 11,700 $ 3,418 $ 3,808 EBITDAR margin................ 16.9% 17.6% 13.1% 14.6% 17.2% 20.8% 19.0% Capital expenditures.......... $ 8 $ 537 $ 665 $ 1,816 $ 2,570 $ 837 $ 655 Ratio of earnings to fixed charges(2)................... 2.5x 3.7x 2.6x 3.5x 3.3x 7.9x 2.2x OTHER DATA Number of facilities (end of period)...................... 9 9 9 9 9 9 50 Average licensed beds(3)...... 1,061 1,061 1,061 1,061 1,061 1,061 5,937 Total beds (end of period).... 1,227 1,227 1,227 1,227 1,227 1,227 6,578 Patient days (in thousands)... 337 345 341 344 346 81 106 Average occupancy rate(4)..... 87.0% 89.1% 88.1% 88.8% 89.3% 84.9% 86.6% Percentage of revenues from: Managed care, private pay and Medicare............... 58.4% 65.1% 67.2% 69.7% 72.9% 72.8% 72.0% Medicaid.................... 41.6 34.9 32.8 30.3 27.1 27.2 28.0 BALANCE SHEET DATA (END OF PERIOD) Cash and cash equivalents..... $ 465 $ 629 $ 2,355 $ 1,161 $ 2,551 -- 3,640 Working capital............... 8,266 11,140 10,334 13,566 10,021 -- 8,509 Total assets.................. 14,408 18,433 24,693 24,122 25,941 -- 396,116 Total debt, including current maturities................... 6,758 7,359 6,764 666 30,076 -- 227,378 Shareholders' equity (deficit).................... 5,570 9,399 9,957 16,601 (12,236) -- 70,119
- ------- (1) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is a widely recognized financial indicator of a company's ability to service or incur debt. EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating income, net income, cash 17 flows from operations, or other statement of operations or cash flow data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies. EBITDA may not be indicative of the historical operating results of the Company, nor is it meant to be predictive of future results of operations or cash flows. EBITDAR represents EBITDA plus rent expense. (2) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges consists of interest expense and one-third of operating rental expense, which management believes is representative of the interest component of rent expense. (3) Excludes ALF beds. (4) Excludes Fountain View's ALF, which represents less than 2% of total revenue. (5) Weighted average shares outstanding for the five years ended December 31, 1997 and for the three months ended March 31, 1997 has been computed based on the 200,000 shares of Common Stock issued and outstanding in connection with the Fountain View Equity Transaction. See note 2 to the consolidated financial statements of Fountain View included elsewhere herein. 18 SUMMARY HISTORICAL FINANCIAL AND OTHER DATA--SUMMIT The summary financial data of Summit as of and for each of the five years in the period ended June 30, 1997 are derived from Summit's audited financial statements. The financial and other data for the six months ended December 31, 1996 and 1997 have been derived from Summit's unaudited financial statements included elsewhere herein and, in the opinion of management, include all necessary adjustments for a fair presentation of such information in conformity with generally accepted accounting principles. The information set forth below should be read in conjunction with "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1996 1997 ------- -------- -------- -------- -------- ------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA Net revenue............. $83,992 $ 97,599 $137,026 $176,062 $197,927 $95,088 $108,507 Salaries and related benefits............... 40,044 45,962 63,171 78,233 89,577 43,386 47,742 Other operating costs... 29,998 34,655 49,206 70,696 89,932 41,750 45,736 Depreciation and amortization........... 2,308 2,949 5,249 6,142 7,393 3,632 4,235 Rent expense............ 2,315 1,613 2,141 2,656 2,864 1,410 1,525 Interest, net........... 1,080 2,243 4,761 6,574 7,973 4,057 4,588 ------- -------- -------- -------- -------- ------- -------- 75,745 87,422 124,528 164,301 197,739 94,235 103,826 ------- -------- -------- -------- -------- ------- -------- Income before provision for income taxes....... 8,247 10,177 12,498 11,761 188 853 4,681 Income tax provision.... (3,224) (4,010) (4,987) (4,452) (119) (337) (1,849) ------- -------- -------- -------- -------- ------- -------- Net income.............. $ 5,023 $ 6,167 $ 7,511 $ 7,309 $ 69 $ 516 $ 2,832 ======= ======== ======== ======== ======== ======= ======== OTHER FINANCIAL DATA EBITDA(1)............... $11,635 $ 15,369 $ 22,508 $ 24,477 $ 15,554 $ 8,542 $ 13,504 EBITDA margin........... 13.9% 15.7% 16.4% 13.9% 7.9% 9.0% 12.4% EBITDAR(1).............. $13,950 $ 16,982 $ 24,649 $ 27,133 $ 18,418 $ 9,952 $ 15,029 EBITDAR margin.......... 16.6% 17.4% 18.0% 15.4% 9.3% 10.5% 13.9% Capital expenditures.... $29,901 $ 15,505 $ 9,004 $ 26,558 $ 24,075 $12,049 $ 6,706 Ratio of earnings to fixed charges(2)....... 5.5x 4.7x 3.3x 2.6x 1.0x 1.2x 1.9x OTHER DATA Number of facilities (end of period)........ 21 23 37 38 39 39 41 Average licensed beds... 2,696 2,876 4,197 4,816 5,078 5,065 5,154 Total beds (end of period)................ 2,696 3,002 4,762 4,940 5,040 -- 5,347 Patient days (in thousands)............. 858 908 1,316 1,514 1,573 783 827 Average occupancy rate.. 87.2% 86.5% 85.9% 85.9% 84.8% 84.0% 87.2% Percentage of revenues from: Managed care and private pay.......... 36.5% 34.0% 33.8% 31.9% 29.9% 30.5% 31.6% Medicare.............. 28.3 30.3 29.5 34.7 39.7 39.1 36.7 Medicaid.............. 35.2 35.7 36.7 33.4 30.4 30.4 31.7 BALANCE SHEET DATA (END OF PERIOD) Cash and cash equivalents............ $ 6,301 $ 21,613 $ 3,101 $ 2,658 $ 3,994 -- $ 1,702 Working capital......... 7,151 24,880 10,161 13,906 12,648 -- 11,384 Total assets............ 73,369 114,915 184,480 223,052 250,516 -- 267,420 Total debt and capital leases, including current maturities..... 30,331 32,025 89,788 110,374 121,452 -- 129,754 Shareholders' equity.... 31,337 66,361 73,813 81,286 81,412 -- 84,721
- ------- (1) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is a widely recognized financial indicator of a company's ability to service or incur debt. EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies. EBITDA may not be indicative of the historical operating results of the Company, nor is it meant to be predictive of future results of operations or cash flows. EBITDAR represents EBITDA plus rent expense. (2) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges consists of interest expense and one-third of operating rental expense, which management believes is representative of the interest component of rent expense. 19 RISK FACTORS In addition to the other information contained in this Prospectus, holders of the Outstanding Notes and prospective purchasers should carefully consider the following risk factors before exchanging their Outstanding Notes or purchasing the Exchange Notes offered hereby. This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although the Company believes that its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's forward-looking statements are set forth below and elsewhere in this Prospectus. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth below. See "Special Note Regarding Forward-Looking Statements". SUBSTANTIAL LEVERAGE In connection with the Transactions, the Company incurred a significant amount of indebtedness, and, as a result, the Company is highly leveraged. At March 31, 1998, after giving pro forma effect to the Transactions, the Company would have had total funded indebtedness of approximately $244.9 million, excluding mandatory redeemable preferred stock (of which $120.0 million would have consisted of the Notes and the balance would have consisted of approximately $100.0 million of borrowings under the New Credit Facility and approximately $24.9 million of mortgages, capital leases and other debt) and stockholders' equity of approximately $70.1 million. Also, after giving pro forma effect to the Transactions, the Company's ratio of earnings to fixed charges would have been 0.9x for the three months ended March 31, 1998. The Company is permitted to incur substantial additional indebtedness in the future. See "Capitalization", "Unaudited Pro Forma Financial Data" and "Description of Notes". The Company's ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures and any acquisitions will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated cost savings and revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under the New Credit Facility, will be adequate to meet the Company's future liquidity needs for the next several years. The Company may, however, need to refinance all or a portion of the Notes on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the New Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources of the Company Following the Transactions". The degree to which the Company is leveraged could have important consequences to holders of the Notes, including, but not limited to: (i) making it more difficult for the Company to satisfy its obligations with respect to the Notes; (ii) increasing the Company's vulnerability to general adverse economic and industry conditions; (iii) limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements; (iv) requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, or other general corporate purposes; (v) limiting the Company's flexibility in planning for, or reacting to, changes in its business and the healthcare industry; and (vi) placing the Company at a competitive disadvantage with respect 20 to less leveraged competitors. In addition, the Indenture and the New Credit Facility contain financial and other restrictive covenants that limit the ability of the Company to, among other things, borrow additional funds. Failure by the Company to comply with such covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. In addition, the degree to which the Company is leveraged could prevent it from repurchasing all of the Notes tendered to it upon the occurrence of a Change of Control. See "Description of Notes--Repurchase at the Option of Holders--Change of Control" and "Description of Other Indebtedness--New Credit Facility". SUBORDINATION OF THE NOTES; GUARANTEES The Notes and the Guarantees will be subordinated in right of payment to all current and future Senior Debt of the Company and the Guarantors. However, the Indenture provides that the Company will not, and will not permit any of the Guarantors to, incur or otherwise become liable for any indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Notes or any of the Guarantees. Upon any distribution to creditors of the Company or a Guarantor in a liquidation or dissolution of the Company or a Guarantor or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or a Guarantor or its property, the holders of Senior Debt will be entitled to be paid in full before any payment may be made with respect to the Notes. In addition, the subordination provisions of the Indenture provide that payments with respect to the Notes will be blocked in the event of a payment default on Senior Debt and may be blocked for up to 179 days each year in the event of certain non-payment defaults on Senior Debt. In the event of a bankruptcy, liquidation or reorganization of the Company or a Guarantor, holders of the Notes will participate ratably with all holders of subordinated indebtedness of the Company or such Guarantor that is deemed to be of the same class as the Notes, and potentially with all other general creditors of the Company, based upon the respective amounts owed to each holder or creditor, in the remaining assets of the Company. In any of the foregoing events, there can be no assurance that there would be sufficient assets to pay amounts due on the Notes. As a result, holders of Notes may receive less, ratably, than the holders of Senior Debt. As of March 31, 1998, on a pro forma basis after giving effect to the Transactions, approximately $124.9 million of Senior Debt would have been outstanding, including approximately $100.0 million of borrowings under the New Credit Facility, and approximately $15.0 million would have been available for additional borrowings under the New Credit Facility. The Indenture permits the incurrence of substantial additional indebtedness, including Senior Debt, by the Company and its subsidiaries in the future. See "Description of Other Indebtedness--New Credit Facility" and "Description of Notes". RESTRICTIONS IMPOSED BY THE NEW CREDIT FACILITY AND THE INDENTURE Among other obligations, the New Credit Facility requires the Company to satisfy certain tests and maintain specified financial ratios, including a minimum fixed charge coverage ratio and a maximum leverage ratio. In addition, the New Credit Facility restricts, among other things, the Company's ability to incur additional indebtedness and to make acquisitions, investments and capital expenditures beyond a certain level. A failure to comply with the restrictions contained in the New Credit Facility could lead to an event of default thereunder which could result in an acceleration of such indebtedness. Such an acceleration would constitute an event of default under the Indenture relating to the Notes. In addition, the Indenture restricts, among other things, the Company's ability to incur additional indebtedness, make investments, sell assets, make certain payments and dividends or merge or consolidate. A failure to comply with the restrictions in the Indenture could result in an event of default under the Indenture. If, as a result thereof, a default occurs with respect to Senior Debt, the subordination provisions of the Indenture would likely restrict payments to holders of the Notes. See "Description of Other Indebtedness--New Credit Facility" and "Description of Notes--Subordination". 21 ENCUMBRANCES ON ASSETS TO SECURE NEW CREDIT FACILITY In addition to being subordinated to all existing and future Senior Debt of the Company, the Notes will not be secured by any of the Company's assets. The Company's obligations under the New Credit Facility are secured by a first priority pledge of and security interest in the common stock of the Company's subsidiaries and in substantially all of the Company's assets, both tangible and intangible, including the Company's personal property and real property. If the Company becomes insolvent or is liquidated, or if payment under the New Credit Facility is accelerated, the lenders under the New Credit Facility will be entitled to exercise the remedies available to a secured lender under applicable law. See "Description of Other Indebtedness--New Credit Facility". HOLDING COMPANY STRUCTURE The Company has no operations of its own and derives substantially all of its revenue from its subsidiaries. Holders of indebtedness of, and trade creditors of, subsidiaries of the Company would generally be entitled to payment of their claims from the assets of the affected subsidiaries before such assets were made available for distribution to the Company. As of March 31, 1998, on a pro forma basis after giving effect to the Transactions, the Company would have had approximately $124.9 million of Senior Debt outstanding, including approximately $100.0 million of borrowings under the New Credit Facility, and approximately $15 million would have been available for additional borrowings under the New Credit Facility. The Company's Subsidiaries would have had approximately $24.9 million of Indebtedness, $46.2 million of trade payables and other liabilities and $15.0 million of mandatory redeemable preferred stock outstanding as of March 31, 1998, on a pro forma basis after giving effect to the Transactions. The Indenture permits the incurrence of substantial additional indebtedness by the Company and its subsidiaries and permits significant investments by the Company in its subsidiaries. In the event of a bankruptcy, liquidation or reorganization of a subsidiary, holders of any of such subsidiary's indebtedness will have a claim to the assets of the subsidiaries that is prior to the Company's interest in those assets. BUSINESS INTEGRATION The Company has no prior history as a combined entity and its operations have not previously been managed on a combined basis. Prior to the Transactions, Fountain View and Summit had been operated as separate entities. The Company's future operations and earnings will be largely dependent upon management's ability to successfully execute the Company's strategy. This will require substantial attention from the Company's management team which, to date, has operated on a combined basis for only a short period. In addition, management will be required to apply its business strategy to an entity which is significantly larger than the entities it previously managed. Additionally, the need to focus management's attention on integration of the businesses and implementation of the Company's post-combination strategy may limit the Company's ability to successfully pursue other opportunities related to its business for the foreseeable future. The historical financial statements and pro forma financial statements presented in this Prospectus may not necessarily be indicative of the results that would have been attained had the Company operated on a combined basis. GOVERNMENT REGULATIONS The federal government and the states in which the Company operates regulate various aspects of the SNF, ALF, sub-acute and specialty medical care, therapy, pharmacy and DME businesses. In particular, the operation of long- term care facilities and the provision of specialty medical services are subject to federal, state and local laws relating to the adequacy of medical care, resident rights, equipment, personnel, operating policies, fire prevention, rate-setting and compliance with building codes and environmental and other laws. Facilities which are not in substantial compliance with such laws and do not correct deficiencies within a certain time frame may be terminated from the Medicare and/or Medicaid programs. While the Company endeavors to comply with all applicable regulatory requirements, from time to time certain of the Company's SNFs have been subject to various sanctions and penalties as a result of deficiencies alleged by the Health Care Financing Administration ("HCFA") 22 or state survey agencies. While in certain instances denial of certification or licensure revocation actions have been threatened, management believes that the Company will not suffer any material adverse effect as a result thereof. There can be no assurance, however, that the Company will not be subject to sanctions and penalties in the future as a result of such actions. The Company is also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. Such laws include the anti-kickback provisions of the federal Medicare and Medicaid Patient and Program Protection Act of 1987 (commonly referred to as the "Anti-Kickback Statute") and the physician self- referral ban contained in the Omnibus Budget Reconciliation Act as expanded in 1993 (commonly referred to as "Stark II"). The Anti-Kickback Statute provisions prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. Stark II prohibits, in part, physicians from making any Medicare or Medicaid referrals for certain "designated health services" to any entity with which the physician has a "financial relationship". In addition to these anti-kickback and self-referral prohibitions, there are various federal and state laws prohibiting other types of fraud by healthcare providers, including criminal provisions which prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments. Violation of the Anti-Kickback Statute or the criminal false claims statute is a felony punishable by up to five years imprisonment and/or $25,000 fines, while violation of Stark II may result in the imposition of civil monetary penalties of up to $15,000 for each prohibited service provided as well as restitution of payments for such services. Civil provisions prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment. The penalties for such a violation are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. In addition, some states restrict certain business relationships between physicians and other providers of healthcare services. Many states, including California, Texas and Arizona, prohibit business corporations from providing, or holding themselves out as providers of, medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs (including Medicare and Medicaid), asset forfeitures and civil and criminal penalties. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. Management believes the Company is in substantial compliance with the foregoing statutes and regulations. However, there can be no assurance that government officials responsible for enforcing these statutes will not assert that the Company or certain transactions in which the Company is involved are in violation of these statutes, possibly resulting in the imposition of fines or penalties that may adversely affect the Company's business, financial condition and results of operations. State and federal governments are devoting increasing attention and resources to anti-fraud initiatives against healthcare providers. The Health Insurance Portability and Accountability Act of 1996 (the "Accountability Act") and the Balanced Budget Act of 1997 (the "Balanced Budget Act") expand the penalties for healthcare fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs. Further, under Operation Restore Trust, a major anti-fraud demonstration project, the Office of the Inspector General of the U.S. Department of Health and Human Services (the "OIG"), in cooperation with other federal and state agencies, has focused on the activities of SNFs, home health agencies, hospices, and DME suppliers in certain states, including California and Texas, in which the Company currently operates. Due to the success of Operation Restore Trust, the project has been expanded to numerous other states and to additional healthcare providers including providers of ancillary nursing home services. While management believes that the Company's billing practices are consistent with Medicare and Medicaid criteria, those criteria are often vague and subject to interpretation. There can be no assurance that aggressive anti-fraud enforcement actions will not adversely affect the business of the Company. 23 The federal government has indicated that the implementation of an effective compliance program is recommended for healthcare providers in order to maximize a provider's ability to detect and prevent potential infractions of applicable law and to address any infractions that may occur. Further, the existence of an effective compliance program may be taken into account by the government to reduce any fines or penalties incurred by the Company for infractions or violations of applicable law. Although the Company does not currently have a compliance program in place, the Company is in the process of developing and implementing a compliance program. See "Business--Compliance Program". DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS On a pro forma basis, after giving effect to the Transactions the Company derived approximately 36% and 31% for the twelve months ended December 31, 1997 of its net patient revenues from Medicare and Medicaid, respectively. The Company expects to continue to derive a significant portion of its revenue from such federal and state reimbursement programs. There can be no assurance that the Company will achieve or improve this payor mix in the future. Both governmental and private payor sources have instituted cost containment measures designed to limit payments made to healthcare providers. Most recently, the Balanced Budget Act requires the establishment of a prospective payment system ("PPS") for Medicare SNFs under which facilities will be paid a federal per diem rate for virtually all covered SNF services in lieu of the current cost-based reimbursement rate. The cost-based system reimburses providers for reasonable direct and indirect allowable costs incurred in providing "routine costs" (as defined by the Medicare program) as well as capital costs and ancillary costs. Management believes that the transition to PPS will reward efficient providers and penalize those that are inefficient. The law contains numerous other changes that will adversely affect payments to Medicare and Medicaid providers. Further, the government has not yet set reimbursement rates under PPS. There can be no assurance that the implementation of PPS or other changes in the administration or interpretation of government healthcare programs will not have any adverse effect on the Company or that payments under government programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement under such programs. In addition, prior to the enactment of the Balanced Budget Act, federal law required state Medicaid programs to reimburse SNFs for the costs that are incurred by efficiently and economically operated providers in order to meet quality and safety standards. The Balanced Budget Act repealed this payment standard, effective for services provided on or after October 1, 1997, thereby granting states greater flexibility in establishing payment rates. There can be no assurance that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to SNFs or that payments to SNFs will be made on a timely basis. Any such efforts to reduce Medicaid payment rates or failure of states to meet their Medicaid obligations on a timely basis would have a material adverse effect on the Company. Further, government reimbursement programs are subject to additional statutory and regulatory changes, retroactive rate adjustments, administrative ceilings and government funding restrictions, all of which could materially decrease the rates paid to the Company for its future services or the services for which the Company will be able to seek reimbursement. Management cannot predict whether any of these additional proposals will be adopted or, if adopted and implemented, what effect such proposals would have on the Company. There can be no assurance that payments under state or federal governmental programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs, particularly with respect to individual state- administered Medicaid programs, which generally provide lower reimbursement rates than the Medicare program. In addition, there can be no assurance that the facilities to be operated by the Company and the services and supplies to be provided by the Company will meet or continue to meet the requirements for participation in such programs. 24 The Company's financial condition and results of operations may also be affected by the revenue reimbursement process, which in the Company's industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. The Company's results of operations would be materially and adversely affected if the amount actually received from third-party payors in any reporting period differed materially from the amounts accrued in prior periods. The Company's financial condition and results of operations may also be affected by the timing of reimbursement payments and rate adjustments from third-party payors. See "Business--Government Regulations". The Company is subject to periodic audits by the Medicare and Medicaid programs, and the payment agencies for these programs have various rights and remedies against the Company if they assert that the Company has failed to comply with program requirements. In 1997, one of Summit's facilities was the subject of a Medicare billing audit by such a payment agency, resulting in a finding that approximately $1,500,000 of charges (after cost report settlement and subject to downward adjustment) for SNF services lacked a timely certification of medical necessity by a physician. Summit is currently repaying such charges against reimbursement of current claims. Government agencies could seek to require the Company to repay any overcharges or amounts billed in violation of program requirements, or could make deductions from future amounts due to the Company. Such agencies could also impose fines, criminal penalties or program exclusions. See "Business--Government Regulations". In addition, several states are considering various healthcare reforms, including Medicaid managed care demonstration projects. Several states in which the Company operates have applied for, or received, approval from the U.S. Department of Health and Human Services for waivers from certain Medicaid requirements that have generally been required for managed care projects. Although these demonstration projects generally exempt institutional care, including long-term care facilities, no assurance can be given that these waiver projects ultimately will not change the reimbursement system for long- term care from fee for service to managed care negotiated or capitated rates. Furthermore, the Balanced Budget Act now allows states to mandate enrollment in managed care systems without going through the federal waiver process provided certain standards are met. Although the Company believes it will be well-positioned to operate in a managed care environment, it is not possible to predict which reforms of state healthcare systems will be adopted and the effect, if any, that the reforms will have on the Company's business. See "Business--Government Regulations". Current Medicare regulations applicable to transactions between related parties, such as the Company's subsidiaries, are relevant to the amount of Medicare reimbursement that the Company is entitled to receive for goods and services that are charged to the Medicare program. Management believes that the Company satisfies the requirements for exception to the related party rules in transactions between its long-term care facilities and its therapy, pharmacy and DME subsidiaries. If, however, the Company has failed, or in the future fails, to satisfy regulations for the related party exception with respect to inter-corporate transactions, the Medicare reimbursement that the Company received or will receive could be reduced, and as a result, the Company's financial condition could be materially and adversely affected. See "Business--Government Regulations". UNCERTAINTY OF HEALTHCARE LEGISLATION In addition to extensive government healthcare regulations, there are numerous initiatives on federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. Changes in the law, new interpretations of existing laws, or changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government. In 25 addition, there can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have an adverse effect on the Company. See "Business--Government Regulations". PRICING PRESSURES The healthcare services industry is currently experiencing market-driven reforms from forces within and outside the industry that are exerting pressure on healthcare and related companies to reduce healthcare costs. These market- driven reforms are resulting in industry-wide consolidation that is expected to increase the downward pressure on healthcare service providers' margins, as larger buyer and supplier groups exert pricing pressure on healthcare providers. Given the increasing importance of managed care in the healthcare industry and the continued cost containment pressures for Medicare and Medicaid, the Company is focusing on developing managed care contracts. Additionally, the Company is establishing a network of services to meet the needs of managed care organizations. The success of the Company's managed care strategy will depend in large part on its ability to increase demand for sub- acute services among managed care organizations, to obtain favorable agreements with managed care organizations and to manage effectively its operations and healthcare delivery costs through various methods, including utilization management and competitive pricing for purchased services. There can be no assurance that pricing pressures faced by healthcare providers will not have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The Company operates in a highly competitive industry. The Company's SNFs and ALFs are located in communities that also are served by similar facilities operated by others. Some competing facilities provide services not offered by the Company and some are operated by entities having greater financial and other resources than the Company. In addition, some are operated by non-profit organizations or government agencies supported by endowments, charitable contributions, tax revenues and other sources not available to the Company. Furthermore, cost containment efforts, which encourage more efficient utilization of acute care hospital services, have resulted in decreased hospital occupancy in recent years. As a result, a significant number of acute care hospitals have converted portions of their facilities to other purposes, including specialty and sub-acute units. In California, Texas and Arizona, a certificate of need is no longer required in order to build or expand a SNF, which is another factor increasing competition. However, in Texas, competition is limited by restrictions on the number of beds that can be enrolled in the Medicaid program. The Company also may encounter competition in acquiring or developing new facilities. The Company's pharmacies and DME business also operate in highly competitive environments and compete with regional and local pharmacies, medical supply companies and pharmacies operated by other long- term care chains or by other companies ranging from small local operators to companies which are national in scope and distribution capability. The Company also may encounter competition in connection with the provision of other ancillary services, including physical, occupational and speech therapy. GEOGRAPHIC CONCENTRATION; DEPENDENCE ON CERTAIN STATE MEDICAID PROGRAMS Approximately 54% of the Company's properties are located in the State of California and approximately 44% are located in the State of Texas. Consequently, the Company will be dependent on the economies of California and Texas, the supply and demand in these states for the services provided by the Company, the regulatory environment in these states and, to a certain extent, on the continued funding of and reimbursement rates paid under those states' Medicaid programs. During both 1996 and 1997, payments received from state Medicaid agencies accounted for approximately 31% of the Company's revenue. The Company expects that the California and Texas Medicaid reimbursement programs will continue to constitute a significant source of revenue for the Company. 26 Adverse changes in general economic factors affecting these states' respective healthcare industries or in these states' laws and regulatory environment, including Medicaid reimbursement rates, could have a material adverse effect on the Company's business, financial condition and results of operations. LIABILITY, INSURANCE AND LEGAL PROCEEDINGS The provision of healthcare services entails an inherent risk of liability. In recent years, participants in the long-term care industry have become subject to an increasing number of lawsuits alleging malpractice or related legal theories, many of which involve large claims and significant defense costs. The Company currently maintains liability insurance intended to cover such claims and the Company believes that its insurance is in keeping with industry standards. There can be no assurance, however, that claims in excess of the Company's insurance coverage or claims not covered by the Company's insurance coverage (e.g. claims for punitive damages) will not arise. A successful claim against the Company not covered by, or in excess of, the Company's insurance coverage could have a material adverse effect upon the Company's financial condition and results of operations. Claims against the Company, regardless of their merit or actual outcome, may also have a material adverse effect upon the Company's ability to attract patients or expand its business and would require management to devote time to matters unrelated to the operation of the Company's business. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance coverage in the future or that, if such coverage is available, it will be available on acceptable terms. DEPENDENCE ON KEY PERSONNEL The Company's business is managed by a number of key personnel, the loss of which could have a material adverse effect on the Company. In addition, as the Company's business develops and expands, the Company believes that its future success will depend greatly on its continued ability to attract and retain highly skilled and qualified personnel. Currently the Company has entered into employment agreements with Mr. Snukal and Mrs. Snukal, and with Mr. Scott. See "Management". There can be no assurance that key personnel will continue to be employed by the Company or that the Company will be able to attract and retain qualified personnel in the future. Failure by the Company to retain or attract such personnel could have a material adverse effect on the Company. CONTROLLING STOCKHOLDERS As a result of the Transactions, Heritage and certain members of senior management of the Company or their affiliates own a majority of the outstanding voting stock of the Company. By virtue of such ownership, these stockholders have the power to control all matters submitted to stockholders of the Company and to elect a majority of the directors of the Company and its subsidiaries. Circumstances may occur in which the interests of these stockholders conflict with the interests of the holders of the Notes. In addition, these stockholders may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, enhance their equity investment, even though such transactions might involve risks to the holders of the Notes. See "Principal Stockholders", "Management" and "Certain Relationships and Related Transactions". POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER Upon a Change of Control, the Company will be required to offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, to the date of repurchase. Under the terms of the Stockholder Agreement, Heritage has the right to cause a sale of the Company under certain circumstances, which would constitute a 27 Change of Control. See "Management--Stockholders Agreement". However, there can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchases of Notes tendered or that restrictions in the New Credit Facility will allow the Company to make such required repurchases. Notwithstanding these provisions, the Company could enter into certain transactions, including certain recapitalizations, that would not constitute a Change of Control but would increase the amount of debt outstanding at such time. See "Description of Notes--Repurchase at the Option of Holders". FRAUDULENT CONVEYANCE MATTERS Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, if, among other things, the Company, or any Guarantor, at the time it incurred the indebtedness evidenced by the Notes or the Guarantees, (i) (a) was or is insolvent or rendered insolvent by reason of such incurrence or (b) was or is engaged in a business or transactions for which the assets remaining with the Company or any Guarantor constituted unreasonably small capital or (c) intended or intends to incur, or believed or believes that it would incur debts beyond its ability to pay such debts as they mature, and (ii) received or receives less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness, then the Notes or the Guarantees, could be voided, or claims in respect of the Notes or the Guarantees could be subordinated to all other debts of the Company or any Guarantor. In addition, the payment of interest and principal by the Company or any Guarantor pursuant to the Notes could be voided and required to be returned to the person making such payment, or to a fund for the benefit of the creditors of the Company or any Guarantor. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Company or any Guarantor would be considered insolvent if (i) the sum of its debts, including contingent liabilities, were greater than the saleable value of all of its assets at a fair valuation or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature or (ii) it could not pay its debts as they become due. On the basis of historical financial information, recent operating history and other factors, the Company and the Guarantors believe that neither the Company nor any Guarantor will be insolvent, will have unreasonably small capital for the business in which it is engaged or will incur debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations or that a court would agree with the Company's and the Guarantors' conclusions in this regard. CONSEQUENCES OF FAILURE TO EXCHANGE The Outstanding Notes have not been registered under the Securities Act or any state securities laws, and therefore, may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act and any other applicable securities laws, or pursuant to an exemption therefrom or in a transaction not subject thereto, and in each case in compliance with certain other conditions and restrictions, including the right of the Company and the Notes Trustee (as defined) in certain cases to require the delivery of opinions of counsel, certifications and other information prior to any such transfer. Outstanding Notes that remain outstanding after the consummation of the Exchange Offer will continue to bear a legend reflecting such restrictions on transfer. In addition, upon consummation of the Exchange Offer, holders of Outstanding Notes that remain outstanding will not be entitled to any rights to have such Outstanding Notes registered under the Securities Act or to any similar rights under the Registration Rights Agreement (subject to certain 28 limited exceptions). The Company currently intends to register under the Securities Act Outstanding Notes that remain outstanding after consummation of the Exchange Offer only if such Outstanding Notes are held by Initial Purchasers or persons ineligible to participate in the Exchange Offer (other than due solely to the status of such holder as an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act). If Outstanding Notes are tendered and accepted in the Exchange Offer, the market for untendered Outstanding Notes is likely to diminish; accordingly, holders who do not tender their Outstanding Notes may encounter difficulties in selling such notes following the Exchange Offer. The Exchange Notes and any Outstanding Notes that remain outstanding after consummation of the Exchange Offer will constitute a single series of debt securities under the Indenture and, accordingly, will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal amount of the Notes have taken certain actions or exercised certain rights under the Indenture. ABSENCE OF PUBLIC MARKET The Outstanding Notes were issued to, and the Company believes are currently owned by, a relatively small number of beneficial owners. The Outstanding Notes have not been registered under the Securities Act and will be subject to restrictions on transferability to the extent that they are not exchanged for Exchange Notes. See "--Consequences of Failure to Exchange". Although the Exchange Notes will generally be permitted to be resold or otherwise transferred by the holders (who are not affiliates of the Company) without compliance with the registration and prospectus delivery requirements under the Securities Act, they will constitute a new issue of securities with no established trading market. If the Exchange Notes are traded after their initial issuance, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities and other factors including general economic conditions and the financial condition of the Company. The Company does not intend to apply for a listing or quotation of the Exchange Notes on any securities exchange or stock market. Accordingly, there can be no assurance as to the development or liquidity of any market for the Exchange Notes. The liquidity of, and trading market for, the Notes also may be adversely affected by general declines in the market for similar securities. Such a decline may adversely affect such liquidity and trading markets independent of the financial performance of, and prospects for, the Company. Each broker-dealer that receives Exchange Notes for its own account in exchange for Outstanding Notes, where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. Subject to certain provisions set forth in the Registration Rights Agreement, the Company has agreed that, for a period of up to 180 days after the consummation of the Exchange Offer, it will make this Prospectus available to any participating broker-dealer for use in connection with any such resale. However, under certain circumstance, the Company has the right to require that participating broker-dealers suspend the resale of Exchange Notes pursuant to this Prospectus. Notwithstanding that the Company may cause the resale of Exchange Notes pursuant to this Prospectus to be suspended, the Company has no obligation to extend the 180-day period referred to above during which participating broker-dealers are entitled to use this Prospectus in connection with such resales. See "The Exchange Offer--Procedures for Tendering Outstanding Notes" and "Plan of Distribution". POTENTIAL "YEAR 2000" PROBLEMS It is possible that the Company's currently installed computer systems, software products or other business systems, including certain date dependent medical equipment, or those of the Company's vendors or third-party payors, working either alone or in conjunction with other software or systems, will not accept input of, store, manipulate and output dates for the years 1999, 2000 or thereafter 29 without error or interruption (commonly known as the "Year 2000" problem). The Company intends to conduct a review of its business systems, including its computer systems, and query its vendors and third-party payors as to their progress in identifying and addressing problems that their computer systems may face in correctly interrelating and processing date information as the year 2000 approaches and is reached. However, there can be no assurance that the Company will identify all such Year 2000 problems in its computer systems or those of its vendors or third-party payors in advance of their occurrence or that the Company will be able to successfully remedy any problems that are discovered. The expenses of the Company's efforts to identify and address such problems, or the expenses or liabilities to which the Company may become subject as a result of such problems, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, failure of the Company to identify and remedy Year 2000 problems could put the Company at a competitive disadvantage relative to companies that have corrected such problems. 30 USE OF PROCEEDS The Company will not receive any of the proceeds of the issuance of the Exchange Notes offered hereby. In consideration for issuing the Exchange Notes as contemplated in this Prospectus, the Company will receive in exchange Outstanding Notes in like principal amount. The issuance of the Exchange Notes in exchange for the surrender of the Outstanding Notes will not result in any increase in the indebtedness of the Company. CAPITALIZATION The following table sets forth cash and cash equivalents and the capitalization of Fountain View as of March 31, 1998, and of the Company on a pro forma basis as of such date after giving effect to the Transactions. This table should be read in conjunction with "Unaudited Pro Forma Financial Data", "Selected Historical Financial and Other Data--Fountain View", "Selected Historical Financial and Other Data--Summit", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes thereto included elsewhere in this Prospectus.
AT MARCH 31, 1998 ----------------- PRO ACTUAL FORMA -------- -------- (IN THOUSANDS) Cash and cash equivalents................................. $ 3,640 $ 3,640 ======== ======== New Credit Facility(1).................................... -- 100,000 Outstanding Notes......................................... -- 120,000 Fountain View existing indebtedness....................... 202,474 -- Mortgages, capital leases and other debt assumed.......... 24,904 24,904 -------- -------- Total debt.............................................. 227,378 244,904 Mandatory redeemable preferred stock...................... -- 15,000 Shareholders' equity...................................... 70,119 70,119 -------- -------- Total capitalization...................................... $297,497 $330,023 ======== ========
- -------- (1) The New Credit Facility provides for up to $30.0 million of revolving credit borrowings (with a $4.0 million sublimit for letters of credit) and up to $85.0 million of term loans and matures in 2004. As of the date of consummation of the Merger, revolving credit loans in the aggregate amount of approximately $15.0 million and term loans in the aggregate amount of approximately $85.0 million were outstanding under the New Credit Facility, and $15.0 million of revolving credit borrowings were available to the Company. 31 UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data as of March 31, 1998 and for the three months then ended and for the year ended December 31, 1997 have been derived by the application of pro forma adjustments to the financial statements of Fountain View and Summit included elsewhere in this Prospectus. The pro forma statement of operations data for the three months ended March 31, 1998 give effect to the transactions as if they had occurred on January 1, 1998. The pro forma statement of operations data for the year ended December 31, 1997 give effect to (1) the Transactions and (2) the acquisition of Briarcliff, a SNF acquired by Summit on December 1, 1997, as if each had occurred as of January 1, 1997. The related pro forma balance sheet data give effect to the Transactions as if they had occurred on March 31, 1998. The adjustments are described in the accompanying notes. The pro forma adjustments are based on available data and certain assumptions that management believes are reasonable. The unaudited pro forma financial data do not purport to represent what the Company's results of operations actually would have been if the transactions described above had been consummated as of the dates or for the periods indicated above, or what such results will be for any future date or future period. The unaudited pro forma data should be read in conjunction with "Selected Historical Financial and Other Data--Fountain View", "Selected Historical Financial and Other Data--Summit", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included elsewhere in this Prospectus. 32 UNAUDITED PRO FORMA BALANCE SHEET MARCH 31, 1998 (DOLLARS IN THOUSANDS)
PRO FOUNTAIN VIEW, FORMA PRO INC. ADJUSTMENTS FORMA -------------- ----------- -------- ASSETS Cash and equivalents.................... $ 3,640 $ -- $ 3,640 Accounts receivable, net................ 55,267 -- 55,267 Other current assets.................... 22,202 -- 22,202 --------- -------- -------- Total current assets.................. 81,109 -- 81,109 Land and land improvements.............. 24.951 -- 24,951 Buildings and leasehold improvements.... 201,093 -- 201,093 Furniture and equipment................. 25,826 -- 25,826 Construction in progress................ 7,271 -- 7,271 --------- -------- -------- 259,141 -- 259,141 Less accumulated depreciation........... (2,892) -- (2,892) --------- -------- -------- 256,249 -- 256,249 Notes receivable, net................... 6,596 -- 6,596 Intangibles and other assets............ 52,162 11,400(3) 63,562 --------- -------- -------- Total assets.......................... $ 396,116 $ 11,400 $407,516 ========= ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Payable to banks........................ $ 4,192 $ -- $ 4,192 Accounts payable and accrued liabilities............................ 53,917 (21,126)(4) 32,791 Employee compensation and benefits...... 9,223 -- 9,223 Income taxes payable.................... 428 -- 428 Current portion of long-term debt....... 4,840 (4,840)(2) -- --------- -------- -------- Total current liabilities............. 72,600 (25,966) 46,634 Long-term debt.......................... 222,538 22,366 (2) 244,904 Deferred income taxes................... 30,859 -- 30,859 Mandatory redeemable preferred stock.... -- 15,000 (1) 15,000 SHAREHOLDERS' EQUITY Common stock.......................... 11 -- 11 Paid-in capital....................... 103,948 -- 103,948 Retained earnings..................... (33,840) -- (33,840) --------- -------- -------- Total shareholders' equity............ 70,119 -- 70,119 --------- -------- -------- Total liabilities and shareholders' equity............................... $ 396,116 $ 11,400 $407,516 ========= ======== ========
See Notes to Unaudited Pro Forma Balance Sheet. 33 NOTES TO UNAUDITED PRO FORMA BALANCE SHEET (DOLLARS IN THOUSANDS) (1) Represents $15,000 equity investment by Heritage in April 1998 which was subsequently purchased by Baylor and Buckner. The redeemable preferred stock is subject to mandatory redemption for cash at the time of an initial public offering. (2) Represents incremental borrowing computed as follows: New Credit Facility.............................................. $100,000 Senior Notes .................................................... 120,000 -------- Total new borrowings......................................... 220,000 -------- Less: Existing current portion of long-term debt refinanced ......... 4,840 Existing long-term debt refinanced............................. 192,794 -------- Total existing debt refinanced............................... 197,634 Incremental long-term borrowing.................................. $ 22,366 ========
(3) Represents bond issue costs. (4) Represents reduction of certain payables and accrued liabilities with the proceeds of the new debt and equity investment. 34 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
BRIARCLIFF 11 MONTHS FOUNTAIN SUMMIT CARE ENDED PRO FORMA VIEW, INC. CORPORATION 11/30/97 TOTAL ADJUSTMENTS PRO FORMA ---------- ----------- ---------- -------- ----------- --------- Net revenue............. $67,905 $211,346 $7,893 $287,144 $ -- $287,144 Expenses: Salaries and related benefits............. 38,215 93,933 3,100 135,248 -- 135,248 Supplies.............. 8,293 20,040 644 28,977 -- 28,977 Purchased services.... 4,256 53,587 70 57,913 -- 57,913 Provision for doubtful accounts............. 395 3,343 858 4,596 -- 4,596 Other expenses........ 5,046 16,948 1,542 23,536 -- 23,536 Depreciation and amortization......... 1,198 7,996 688 9,882 4,210 (1) 14,092 Rent expense.......... 2,004 2,979 -- 4,983 -- 4,983 Rent expense to related parties...... 1,771 -- -- 1,771 -- 1,771 Interest, net......... 1,164 8,504 11 9,679 13,645 (2) 23,324 ------- -------- ------ -------- -------- -------- 62,342 207,330 6,913 276,585 17,855 294,440 ------- -------- ------ -------- -------- -------- Income before provision for income taxes....... 5,563 4,016 980 10,559 (17,855) (7,296) Income tax benefit (provision)............ (1,951) (1,631) (402) (3,984) 6,776 (3) 2,792 ------- -------- ------ -------- -------- -------- Net income (loss)....... $ 3,612 $ 2,385 $ 578 $ 6,575 $(11,079) $ (4,504) ======= ======== ====== ======== ======== ======== Basic and diluted earn- ings per share......... $ 18.06 $ (22.53) ======= ======== OTHER DATA: EBITDA (as defined)(4).. $ 30,120 Adjusted EBITDA(5)...... 41,613 Adjusted EBITDA margin.. 14.5% Adjusted EBITDAR(5)..... $ 48,367 Adjusted EBITDAR margin. 16.8% Ratio of earnings to fixed charges(6)....... 0.7x Ratio of Adjusted EBITDA to net interest expense................ 1.8 Ratio of net debt to Adjusted EBITDA(7)..... 5.7
See Notes to Unaudited Pro Forma Statement of Operations 35 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 (DOLLARS IN THOUSANDS)
SUMMIT CARE CORPORATION PERIOD FROM FOUNTAIN JANUARY 1 TO PRO FORMA VIEW, INC. MARCH 26,1998 TOTAL ADJUSTMENTS PRO FORMA ---------- ------------- -------- ----------- --------- Patient Service Revenues............... $20,078 $ 53,918 $ 73,996 $ -- $ 73,996 Other Revenues -- -- -- -- -- ------- -------- -------- -------- -------- Total Revenue 20,078 53,918 73,996 -- 73,996 Expenses: Salaries and benefits. 10,686 23,632 34,318 -- 34,318 Supplies.............. 2,218 5,165 7,383 -- 7,383 Purchased services.... 1,828 13,743 15,571 -- 15,571 Provision for doubtful accounts............. 142 624 766 -- 766 Other expenses........ 1,396 3,851 5,247 -- 5,247 Rental................ 983 723 1,706 -- 1,706 Depreciation and amortization......... 524 2,119 2,643 1,104 (1) 3,747 Interest, net of Interest Income...... 851 2,604 3,455 2,376 (2) 5,831 ------- -------- -------- -------- -------- 18,628 52,461 71,089 3,480 74,569 ------- -------- -------- -------- -------- Income before provision for income taxes....... 1,450 1,457 2,907 (3,480) (573) Income tax benefit (provision)............ (580) (575) (1,155) 1,292 (3) 137 Extraordinary Item, net of tax................. (517) -- -- -- (517) ------- -------- -------- -------- -------- Net income (loss)....... $ 353 $ 882 $ 1,235 $( 2,188) $ (953) ======= ======== ======== ======== ======== Basic and diluted earn- ings per share before extraordinary item $ 3.47 $ (1.74) Basic and diluted loss per share--extraordinary item................... (2.06) (2.06) ------- -------- Basic and diluted earn- ings per share--net income (loss) ................ $ 1.41 $ (3.80) ======= ======== OTHER DATA: EBITDA (as defined)(4).. $ 9,005 Adjusted EBITDA......... 36,020 Adjusted EBITDA margin(5).............. 12.2% Adjusted EBITDAR(5)..... 42,844 Adjusted EBITDAR margin. 14.5% Ratio of earnings to fixed charges(6)....... 0.9x Ratio of Adjusted EBITDA to net interest expense................ 1.5 Ratio of net debt to Adjusted EBITDA(7)..... 6.8
See Notes to Unaudited Pro Forma Statement of Operations 36 NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) (1) Pro forma adjustments to reflect the step-up in basis of property, plant and equipment and intangible assets:
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED 1997 MARCH 31, 1998 ------------ -------------- Increase in amortization of deferred financing costs............................................. $ 1,283 $ 320 Increase in amortization of goodwill............... 1,308 327 Increase in depreciation of buildings, leaseholds and equipment..................................... 1,619 457 -------- ------ $ 4,210 $1,104 ======== ====== (2) Reflects additional interest on debt as follows: YEAR ENDED THREE MONTHS DECEMBER 31, ENDED 1997 MARCH 31, 1998 ------------ -------------- Interest on the New Credit Facility--Term Loan (8.44%)........................................... $ 7,171 $1,792 Interest on New Credit Facility--Revolver (8.44%).. 1,265 316 Interest on Notes offered hereby (11.25%).......... 13,500 3,375 Interest on capital leases and other existing debt (various rates)................................... 2,037 509 -------- ------ Total interest expense............................. 23,974 5,992 Net historical interest (gross of interest expense).......................................... (10,329) (3,616) -------- ------ Incremental interest............................... $ 13,645 $2,376 ======== ======
Interest with respect to the New Credit Facility, for both the Term Loan and the Revolver, is computed on a floating rate based on LIBOR plus 2.75%. A 0.125% increase in the interest rate on the New Credit Facility would result in additional interest expense of $125 and would reduce net income by $74 for the year ended December 31, 1997. (3) Represents incremental income tax benefit relating to amortization of deferred financing costs, depreciation and interest expense at an incremental rate of 41%. (4) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is a widely recognized financial indicator of a company's ability to service or incur debt. EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies. EBITDA may not be indicative of the historical operating results of the Company, nor is it meant to be predictive of future results of operations or cash flows. (5) For the year ended December 31, 1997, Adjusted EBITDA represents EBITDA adjusted for certain non-recurring charges and management's estimate of cost savings shown below. Adjusted EBITDAR represents Adjusted EBITDA plus rent expense:
YEAR ENDED DECEMBER 31, 1997 ----------------- EBITDA.................................................... $30,120 Non-recurring charges(a).................................. 7,675 Management's estimate of ongoing cost reductions relating to the Transactions(b)................................... 3,818 ------- Total adjustments......................................... 11,493 ------- Adjusted EBITDA........................................... 41,613 Rent expense.............................................. 6,754 ------- Adjusted EBITDAR.......................................... $48,367 =======
37 NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS--(CONTINUED) (a) Non-recurring charges consist of: (1) $2,100 of Medicare reserves taken by Summit in the first six months of 1997 for changes in certain reimbursable items related to periods prior to 1997; (2) $1,074 of retroactive workers' compensation, group and general liability insurance costs; (3) $983 of incremental bad debt expense relating to 1996 and prior periods recorded in 1997 resulting from a change in management's methodology for determining the allowance for bad debts; (4) termination of non-compete agreements and consulting arrangements totaling $965 relating to Fountain View Equity Transactions; (5) certain transaction expenses including discretionary employee bonuses totaling $872 paid upon completion of Fountain View Equity Transactions; (6) severance for an executive and other costs totaling $871; and (7) $810 related to an employee lawsuit settled in 1997 involving a specific type of liability for which the Company currently maintains insurance coverage (net of ongoing insurance costs). (b) Management's estimate of ongoing cost reductions relating to the Transactions includes: (i) certain reductions in facility-level operating expense items totaling $1,451; (ii) $1,355 relating to the elimination of specifically identified duplicative staff; (iii) $512 relating to reductions in corporate expenses, including the elimination of certain public company expenses; and (iv) a reduction in costs of supplies of $500. As a consequence of the Transactions, management anticipates significant ongoing cost savings and certain revenue enhancements. However, there can be no assurance that these cost savings or revenue enhancements will be realized. For the three months ended March 31, 1998, Adjusted EBITDA is defined as four times pro forma EBITDA. Adjusted EBITDAR represents Adjusted EBITDA plus four times pro forma rent expense. (6) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges consists of interest expense and one-third of operating rental expense, which management believes is representative of the interest component of rent expense. (7) Ratio of net debt to Adjusted EBITDA represents the ratio of total debt, exclusive of mandatory redeemable preferred stock, less cash and cash equivalents to Adjusted EBITDA. 38 SELECTED HISTORICAL FINANCIAL AND OTHER DATA--FOUNTAIN VIEW Set forth below are selected historical financial data of Fountain View as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, which are derived from the audited financial statements included elsewhere herein. The selected historical financial data as of December 31, 1993, 1994 and 1995, for the two years in the period ended December 31, 1994 and for the three months ended March 31, 1997 and 1998 have been derived from Fountain View's unaudited financial statements included elsewhere herein, and, in the opinion of management, include all necessary adjustments for a fair presentation of such information in conformity with generally accepted accounting principles. The selected historical financial data below should be read in conjunction with "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- -------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Net revenue............. $41,061 $51,824 $55,836 $59,432 $ 67,905 $ 116,409 $ 20,078 Salaries and related benefits............... 23,248 27,823 35,048 36,166 38,215 9,435 10,686 Other operating costs... 10,884 14,886 13,454 14,614 17,990 3,556 5,584 Depreciation and amortization........... 110 149 416 600 1,198 142 524 Rent expense............ 4,002 4,017 3,946 3,896 3,775 941 983 Interest, net........... 307 355 332 278 1,164 20 851 ------- ------- ------- ------- -------- --------- -------- 38,551 47,230 53,196 55,554 62,342 14,094 18,628 ------- ------- ------- ------- -------- --------- -------- Income before provision for income taxes and extraordinary item..... 2,510 4,594 2,640 3,878 5,563 2,315 1,450 Income tax benefit (provision)............ (81) 43 (54) (78) (361) (33) (580) Extraordinary item, net of tax................. -- -- -- -- -- -- (517) ------- ------- ------- ------- -------- --------- -------- Net income.............. $ 2,429 $ 4,637 $ 2,586 $ 3,800 $ 5,202 $ 2,282 $ 353 ======= ======= ======= ======= ======== ========= ======== Basic and diluted earnings per share before extraordinary item(5)................ $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 11.41 $ 3.47 Basic and diluted loss per share--extraordinary item................... -- -- -- -- -- -- (2.06) ------- ------- ------- ------- -------- --------- -------- Basic and diluted earn- ings per share--net income...... $ 12.15 $ 23.19 $ 12.93 $ 19.00 $ 26.01 $ 11.41 $ 1.41 ======= ======= ======= ======= ======== ========= ======== OTHER FINANCIAL DATA EBITDA(1)............... $ 2,927 $ 5,098 $ 3,388 $ 4,756 $ 7,925 $ 2,477 $ 2,825 EBITDA margin........... 7.1% 9.8% 6.1% 8.0% 11.7% 15.1% 14.1% EBITDAR(1).............. $ 6,929 $ 9,115 $ 7,334 $ 8,652 $ 11,700 $ 3,418 $ 3,808 EBITDAR margin.......... 16.9% 17.6% 13.1% 14.6% 17.2% 20.8% 19.0% Capital expenditures.... $ 8 $ 537 $ 665 $ 1,816 $ 2,570 $ 837 $ 655 Ratio of earnings to fixed charges(2)....... 2.5x 3.7x 2.6x 3.5x 3.3x 7.9x 2.2x Ratio of net debt to Adjusted EBITDA........ OTHER DATA Number of facilities (end of period)........ 9 9 9 9 9 9 50 Average licensed beds(3)................ 1,061 1,061 1,061 1,061 1,061 1,061 5,937 Total beds (end of period)................ 1,227 1,227 1,227 1,227 1,227 1,227 6,578 Patient days (in thousands)............. 337 345 341 344 346 81 106 Average occupancy rate(4)................ 87.0% 89.1% 88.1% 88.8% 89.3% 84.9% 86.6% Percentage of revenues from: Managed care, private pay and medicare..... 58.4% 65.1% 67.2% 69.7% 72.9% 72.8% 72.0% Medicaid.............. 41.6 34.9 32.8 30.3 27.1 27.2 28.0 BALANCE SHEET DATA (END OF PERIOD) Cash and cash equivalents............ $ 465 $ 629 $ 2,355 $ 1,161 $ 2,551 -- 3,640 Working capital......... 8,266 11,140 10,334 13,566 10,021 -- 8,509 Total assets............ 14,408 18,433 24,693 24,122 25,941 -- 396,116 Total debt, including current maturities..... 6,758 7,359 6,764 666 30,076 -- 227,378 Shareholders' equity (deficit).............. 5,570 9,399 9,957 16,601 (12,236) -- 70,119
- ------- (1) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is a widely recognized financial indicator of a company's ability to service or incur debt. EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies. EBITDA may not be indicative of the historical operating results of the Company, nor is it meant to be predictive of future results of operations or cash flows. EBITDAR represents EBITDA plus rent expense. (2) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges consists of interest expense and one-third of operating rental expense, which management believes is representative of the interest component of rent expense. (3) Excludes ALF beds. (4) Excludes Fountain View's ALF, which represents less than 2% of total revenue. (5) Weighted average shares outstanding for the five years ended December 31, 1997 and for the three months ended March 31, 1997 has been computed based on the 200,000 shares of Common Stock issued and outstanding in connection with the Fountain View Equity Transactions. See note 2 to the consolidated financial statements of Fountain View included elsewhere herein. 39 SELECTED HISTORICAL FINANCIAL AND OTHER DATA--SUMMIT Set forth below are selected historical financial data of Summit as of and for each of the five years in the period ended June 30, 1997, which are derived from Summit's audited financial statements. The selected historical financial data for the six months ended December 31, 1996 and 1997 have been derived from Summit's unaudited financial statements included elsewhere herein and, in the opinion of management, include all necessary adjustments for a fair presentation of such information in conformity with generally accepted accounting principles. The selected historical financial data below should be read in conjunction with "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1996 1997 ------- -------- -------- -------- -------- ------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA Net revenue............. $83,992 $ 97,599 $137,026 $176,062 $197,927 $95,088 $108,507 Salaries and related benefits............... 40,044 45,962 63,171 78,233 89,577 43,386 47,742 Other operating costs... 29,998 34,655 49,206 70,696 89,932 41,750 45,736 Depreciation and amortization........... 2,308 2,949 5,249 6,142 7,393 3,632 4,235 Rent expense............ 2,315 1,613 2,141 2,656 2,864 1,410 1,525 Interest, net........... 1,080 2,243 4,761 6,574 7,973 4,057 4,588 ------- -------- -------- -------- -------- ------- -------- 75,745 87,422 124,528 164,301 197,739 94,235 103,826 ------- -------- -------- -------- -------- ------- -------- Income before provision for income taxes....... 8,247 10,177 12,498 11,761 188 853 4,681 Income tax provision.... (3,224) (4,010) (4,987) (4,452) (119) (337) (1,849) ------- -------- -------- -------- -------- ------- -------- Net income.............. $ 5,023 $ 6,167 $ 7,511 $ 7,309 $ 69 $ 516 $ 2,832 ======= ======== ======== ======== ======== ======= ======== OTHER FINANCIAL DATA EBITDA(1)............... $11,635 $ 15,369 $ 22,508 $ 24,477 $ 15,554 $ 8,542 $ 13,504 EBITDA margin........... 13.9% 15.7% 16.4% 13.9% 7.9% 9.0% 12.4% EBITDAR(1).............. $13,950 $ 16,982 $ 24,649 $ 27,133 $ 18,418 $ 9,952 $ 15,029 EBITDAR margin.......... 16.6% 17.4% 18.0% 15.4% 9.3% 10.5% 13.9% Capital expenditures.... $29,901 $ 15,505 $ 9,004 $ 26,558 $ 24,075 $12,049 $ 6,706 Ratio of earnings to fixed charges(2)....... 5.5x 4.7x 3.3x 2.6x 1.0x 1.2x 1.9x OTHER DATA Number of facilities (end of period)........ 21 23 37 38 39 39 41 Average licensed beds... 2,696 2,876 4,197 4,816 5,078 5,065 5,154 Total beds (end of period)................ 2,696 3,002 4,762 4,940 5,040 -- 5,347 Patient days (in thousands)............. 858 908 1,316 1,514 1,573 783 827 Average occupancy rate.. 87.2% 86.5% 85.9% 85.9% 84.8% 84.0% 87.2% Percentage of revenues from: Managed care and private pay.......... 36.5% 34.0% 33.8% 31.9% 29.9% 30.5% 31.6% Medicare.............. 28.3 30.3 29.5 34.7 39.7 39.1 36.7 Medicaid.............. 35.2 35.7 36.7 33.4 30.4 30.4 31.7 BALANCE SHEET DATA (END OF PERIOD) Cash and cash equivalents............ $ 6,301 $ 21,613 $ 3,101 $ 2,658 $ 3,994 -- $ 1,702 Working capital......... 7,151 24,880 10,161 13,906 12,648 -- 11,384 Total assets............ 73,369 114,915 184,480 223,052 250,516 -- 267,420 Total debt and capital leases, including current maturities..... 30,331 32,025 89,788 110,374 121,452 -- 129,754 Shareholders' equity.... 31,337 66,361 73,813 81,286 81,412 -- 84,721
- ------- (1) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is a widely recognized financial indicator of a company's ability to service or incur debt. EBITDA is not a measurement of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with generally accepted accounting principles, or as a measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies. EBITDA may not be indicative of the historical operating results of the Company, nor is it meant to be predictive of future results of operations or cash flows. EBITDAR represents EBITDA plus rent expense. (2) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges consists of interest expense and one-third of operating rental expense, which management believes is representative of the interest component of rent expense. 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW--THE COMPANY The Company's business consists of the combined operations of Fountain View and Summit. At March 31, 1998, the Company operated 50 facilities in California, Texas and Arizona with approximately 6,600 skilled nursing and assisted living beds, three institutional pharmacies (one of which is a joint venture), a contract therapy company, an outpatient therapy clinic and a DME company. The Company generates revenues by providing basic healthcare services and specialty medical care. Basic healthcare services refer to (i) skilled nursing care which consists of room and board, special nutritional programs, social services, recreational activities and related medical services, and (ii) assisted living services which consist of room and board, social activities and assistance with activities of daily living such as dressing and bathing. Specialty medical care includes services other than routine skilled nursing care and are provided to patients who generally require more intensive treatment and a higher level of acute care. Specialty medical care also includes sub-acute services such as therapy, pharmacy and durable medical equipment, which the Company provides to both affiliated and unaffiliated facilities. Since the services comprising specialty medical care are reimbursed at higher rates as compared to basic healthcare services, specialty medical care generally represents the most profitable type of services offered by the Company. On a pro forma basis for the twelve months ended December 31, 1997, specialty medical revenues represented 55% of total revenues. The Company provides services to Medicare, Medicaid, managed care and private pay patients. Government payors, such as state-administered Medicaid programs, generally provide more restricted coverage and lower reimbursement rates than private pay and managed care payors. On a pro forma basis for the twelve months ended December 31, 1997, revenues from Medicare and Medicaid payors represented 36% and 31% of total revenues, respectively. Management believes the Company is well-positioned to benefit from the trend toward increased enrollment in managed care organizations by providing sub-acute specialty medical care on a cost-effective basis, offering managed care organizations an attractive alternative to acute hospital care. On a prospective basis, the Company will operate on a December 31 fiscal year end. Summit's historical results of operations, which were based on a June 30 fiscal year end, have not been restated for the purpose of any pro forma financial presentation of the Company's historical operations. In July 1997, Fountain View's predecessor, which was comprised of all of Fountain View's operating units owned individually by certain controlling stockholders, was merged with and into several companies formed by Fountain View in connection with the Fountain View Equity Transactions. The Fountain View Equity Transactions are described in more detail in Note 3 to the audited financial statements of Fountain View contained elsewhere in this Prospectus. 41 RESULTS OF OPERATIONS--FOUNTAIN VIEW The following table presents Fountain View's results of operations for the three months ended March 31, 1997 and 1998 and the three years ended December 31, 1997:
AMOUNT PERCENTAGE ------------------------------------------- --------------------------------- DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, ------------------------- ---------------- ------------------- ------------ 1995 1996 1997 1997 1998 1995 1996 1997 1997 1998 ------- ------- ------- -------- ------- ----- ----- ----- ----- ----- (DOLLARS IN THOUSANDS) Net revenue............. $55,836 $59,432 $67,905 16,409 20,078 100.0% 100.0% 100.0% 100.0% 100.0% Salaries and related benefits............... 35,048 36,166 38,215 9,435 10,686 62.8 60.9 56.3 57.5 53.2 Other operating costs... 13,454 14,614 17,990 3,556 5,584 24.1 24.5 26.5 21.7 27.8 Rent expense............ 3,946 3,896 3,775 941 983 7.1 6.6 5.5 5.7 4.9 Depreciation and amortization........... 416 600 1,198 142 524 0.7 1.0 1.8 .9 2.6 Interest, net........... 332 278 1,164 20 851 0.6 0.5 1.7 .1 4.2 ------- ------- ------- -------- ------- ----- ----- ----- ----- ----- $53,196 $55,554 $62,342 $ 14,094 $18,628 95.3% 93.5% 91.8% 85.9% 92.7% ------- ------- ------- -------- ------- ----- ----- ----- ----- ----- Income before provision for income taxes and extraordinary item..... 2,640 3,878 5,563 2,315 1,450 4.7 6.5 8.2 14.1 7.3 Income tax provision.... (1,079) (1,571) (1,951) 926 580 (1.9) (2.6) (2.9) .06 2.9 Extraordinary Item...... -- -- -- -- 517 -- -- -- -- 2.6 ------- ------- ------- -------- ------- ----- ----- ----- ----- ----- Net income.............. $ 1,561 $ 2,307 $ 3,612 1,389 353 2.8% 3.9% 5.3% 14.0% 1.8% ======= ======= ======= ======== ======= ===== ===== ===== ===== =====
OCCUPANCY: Average Licensed Beds...................................... 1,061 1,061 1,061 Patient Days (in thousands)................................ 341 344 346 Average Occupancy.......................................... 88.1% 88.8% 89.3%
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997 (DOLLARS IN THOUSANDS) Net revenue increased $3,669 or 22.4% from $16,409 for the quarter ended March 31, 1997 to $20,078 for the quarter ended March 31, 1998. The increase occurred due to the following:
AMOUNT PERCENT ------- ------- 1. Increased census days and revenue rates..................... $ 1,691 46.1% 2. Rehabilitative and other specialty services................. (1,208) (32.9) 3. Acquisition of Summit Care.................................. 3,186 86.8 ------- ----- $ 3,669 100.0% ======= =====
Average occupancy was 86.6% in the first quarter ended March 31, 1998 and 84.9% in the first quarter ended March 31, 1997. Excluding the Summit acquisition, the average occupancy was 86.4% in the first quarter ended March 31, 1998. The Company's quality mix (total net revenues less Medicaid net revenues) was 72.0% in the first quarter ended March 31, 1998 and 72.8% in the first quarter ended March 31, 1997. 42 Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues increased from 79.2% of net revenues in the first quarter ended March 31, 1997 to 81.0% in the first quarter ended March 31, 1998. Expenses increased $3,279 or 25.2% from $12,991 in the first quarter ended March 31, 1997 to $16,270 in the first quarter ended March 31, 1998 for the following reasons:
AMOUNT PERCENT ------ ------- 1. Salaries and benefits....................................... $ (102) (3.1)% 2. Rehabilitative and other specialty services................. (36) (1.1) 3. Other expenses.............................................. 644 19.6 4. Acquisition of Summit Care.................................. 2,773 84.6 ------ ----- $3,279 100.0% ====== =====
Income before rent, rent to related parties, depreciation and amortization and interest expense increased $390 or 11.4% from $3,418 in the first quarter ended March 31, 1997 to $3,808 in the first quarter ended March 31, 1998 and was 19.0% of net revenues in the first quarter ended March 31, 1998 compared to 20.8% in the first quarter ended March 31, 1997. Rent, rent to related parties, depreciation and amortization and interest expense increased $1,255 or 113.8% from $1,103 in the first quarter ended March 31, 1997 to $2,358 in the first quarter ended March 31, 1998. Substantially all of this increase was due to higher depreciation costs related to renovation expenditures and an increase in interest expense as a result of the Fountain View Equity Transactions. The Company's effective tax rate was 40.0% of income in the first quarter ended March 31, 1998. In the first quarter ended March 31, 1997 the Company was organized as a Subchapter S Corporation for tax purposes and only recorded state income taxes. On a proforma basis, the Company has recorded a charge in lieu of income taxes to arrive at a combined proforma effective tax rate of 40.0%. Net income before the extraordinary item and after the proforma charge in lieu of income taxes, decreased $519 or 37.4% from $1,389 in the first quarter ended March 31, 1997 to $870 in the first quarter ended March 31, 1998. PROFORMA FINANCIAL PERFORMANCE On a proforma basis (as if the acquisition of Summit occurred on January 1, 1997), the Company's revenues increased from $68.5 million in the first quarter ended March 31, 1997 to $74.0 million in the first quarter ended March 31, 1998, or 8.0%. The increase in revenues can be attributed to the following: (1) $2.4 million related to the acquisition of a skilled nursing facility in Texas on December 1, 1997, (2) $1.5 million related to the fill-up of new facilities and bed additions completed during the last half of 1997, (3) $2.7 million related to increased census days and revenue rates, (4) $0.1 million related to the pharmacy operations, and (5) a reduction of $1.2 million related to the therapy operations due to the replacement of certain established contracts with new contracts, which require additional time to reach their full potential. Proforma earnings before interest, taxes, depreciation and amortization (EBITDA) increased slightly from $8.9 million in the first quarter of 1997 to $9.0 million in the first quarter of 1998. The EBITDA margin decreased between periods as increases in revenue were offset by increases in wage and salary expenses and lower margins at the therapy operations due to the ramp up of its new contracts. 43 Selected statistics are shown below:
INCREASE 1998 1997 (DECREASE) ----- ----- ----------- Facilities in operation at: March 31.......................................... 50 9 41 Nursing center beds at: March 31.......................................... 5,937 1,061 4,876 Assisted living beds at: March 31.......................................... 641 166 475 Total beds at: March 31.......................................... 6,578 1,227 5,351 Total occupancy: First quarter..................................... 86.6% 84.9% 1.7% Nursing center occupancy: First quarter..................................... 89.4% 89.8% (0.4)% Assisted living center occupancy: First quarter..................................... 67.4% 53.7% 13.7% Percentage of revenues from private, managed care and Medicare (quality mix): First quarter..................................... 72.0% 72.8% (0.8)% Percentage of revenues from Medicaid: First quarter..................................... 28.0% 27.2% 0.8%
LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had $3,640 in cash and cash equivalents and working capital of $8,509. During the quarter ended March 31, 1998, the Company's cash and cash equivalents increased by $1,089. Net cash provided by operating activities decreased $10,997 from $6,651 of net cash provided in the first quarter of 1997 to $4,346 net cash used in the first quarter of 1998. Net cash used by operating activities during the first quarter ended March 31, 1998 was primarily due to an increase in accounts receivable. Long-term debt consisted of mortgage and capital lease indebtedness of $24,798, a credit facility of $62,730, $17,000 in borrowings on the Company's bank line of credit and $122,850 in senior secured debt totaling $227,378 at March 31, 1998. 1997 COMPARED TO 1996 (DOLLARS IN THOUSANDS) Net revenue increased from $59,432 in 1996 to $67,905 in 1997, an increase of $8,473 or 14.3%. The increase in net revenue is due in part to growth in the skilled nursing business, driven by occupancy, improving quality mix, and the increase in provision of services by Medi-Cal sub-acute units in two facilities. During 1997, Medi-Cal sub-acute per diem reimbursement rates were approximately three times higher than Medi-Cal SNF per diem reimbursement rates. Fountain View's quality mix (percentage of revenues from Medicare, Medi-Cal sub-acute, managed care, private pay patients and therapy) as a percentage of total revenues increased from 69.7% in 1996 to 72.9% in 1997. The increase in net revenue was also attributable to increased revenues generated by Fountain View's Locomotion Therapy subsidiary. Expenses consisting of salaries, benefits, supplies, purchased services, provision for doubtful accounts and other operating costs increased from $50,780 in 1996 to $56,205 in 1997, an increase 44 of $5,425 or 10.7%, and as a percentage of net revenue, decreased from 85.4% in 1996 to 82.8% in 1997. Salary and related benefit expenses increased primarily as the result of four separate increases in federal and state minimum wage levels between October 1, 1996 and December 31, 1997 as well as discretionary employee bonuses paid during 1997. However, salary and related benefit expenses decreased as a percentage of net revenue from 60.9% in 1996 to 56.3% in 1997, reflecting the revenue benefit of improvement in Fountain View's quality mix relative to the level of increased salary expenses associated therewith. Other operating costs increased as the result of the termination of non-compete agreements and consulting agreements relating to the Fountain View Equity Transactions totaling $965, $810 (net of ongoing insurance costs) of settlement costs associated with an employee lawsuit involving a specific type of liability for which the Company currently maintains insurance coverage, and $415 of other charges related to the Fountain View Equity Transactions. Rent expense, depreciation and amortization and interest expense, net of interest income, was $6,137 in 1997 compared to $4,774 in 1996, an increase of $1,363 or 28.6%. The increase was primarily due to increased depreciation costs related to renovation expenditures during 1996 and 1997 and an increase in interest expense as a result of the Fountain View Equity Transactions. Fountain View's pro forma effective tax rate was 40% in both 1996 and 1997. Prior to the Fountain View Equity Transactions, the entities comprising Fountain View were owned individually by certain controlling stockholders, and were primarily formed as S-corporations. The pro forma effective tax rate represents the estimated taxes had such companies been taxed as C- corporations. 1996 COMPARED TO 1995 (DOLLARS IN THOUSANDS) Net revenue increased from $55,836 in 1995 to $59,432 in 1996, an increase of $3,596 or 6.4%. The increase in net revenue relates primarily to revenues generated by Medi-Cal sub-acute units established in two facilities and a transitional care unit opened in one facility during 1996. Net revenue also increased as the result of higher revenues from managed care patients, which are typically reimbursed at higher rates than Fountain View's private or Medicaid patients. Expenses consisting of salaries, benefits, supplies, purchased services, provision for doubtful accounts and other expenses increased from $48,502 in 1995 to $50,780 in 1996, an increase of $2,278 or 4.7%. However, salary and related benefit expenses decreased from 62.8% in 1995 to 60.9% in 1996 as a percentage of net revenue, reflecting the benefit of an increase in revenues from managed care patients relative to the level of increased salary expenses associated therewith. Rent expense, depreciation and amortization and interest expense, net of interest income, was $4,774 in 1996 compared to $4,694 in 1995, an increase of $80 or 1.7%. Fountain View's pro forma effective tax rate was 40% in both 1995 and 1996. Prior to the Fountain View Equity Transactions, the entities comprising Fountain View were owned individually by certain controlling stockholders and were primarily formed as S-corporations. The pro forma effective tax rate represents the estimated taxes had such companies been taxed as C- corporations. HISTORIC LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) Cash and cash equivalents were $2,551 as of December 31, 1997, and working capital was $10,021. This compares to cash and cash equivalents of $1,161 and working capital of $13,566 as of December 31, 1996. Working capital declined primarily as a result of the Fountain View Equity Transactions and payment of a $43,700 distribution to certain controlling stockholders in August 1997. Proceeds of $14,000 from an investment by Heritage and $32,500 in bank borrowings financed the $43,700 distribution and payment of related transaction costs. 45 Cash generated from operating activities increased to $12,739 in 1997 compared to $1,059 in 1996 and $5,832 in 1995. The increased level of cash from operating activities in 1997 as compared to 1996 reflects differences in the timing of receiving payments on accounts receivable, primarily managed care and Medicare balances. Receivables increased by $3,757 in 1996, and decreased by $2,908 in 1997. The combination of the increase in receivables in 1996 and decrease in 1997 resulted in a variance of $6,665 in cash from operations between such periods. In addition, accounts payable and accrued expenses increased by $2,772 in 1997 compared to an increase in 1996 of $421. In 1997, $2,570 of cash was used for the acquisition of leasehold improvements and purchases of equipment compared to $1,816 and $665 used in 1996 and 1995, respectively, for the acquisition of leaseholds and equipment. Cash used in financing activities was $7,604 in 1997 compared to $438 in 1996 and $3,159 in 1995. In 1997, $32,500 of new bank borrowings and $14,000 of proceeds from an investment by Heritage were used to repay $6,065 in bank borrowings and $48,118 in total distributions to certain stockholders inclusive of the $43,700 distribution made in connection with the Fountain View Equity Transactions. RESULTS OF OPERATIONS--SUMMIT SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) Net revenues increased $13,419 or 14.1% from $95,088 for the six months ended December 31, 1996 to $108,507 for the six months ended December 31, 1997. The increase occurred due to the following:
AMOUNT PERCENT ------- ------- 1. Increased census days and revenue rates.................. $ 4,874 36.3% 2. Special charge to Medicare revenues...................... 4,000 29.8 3. New beds opened in fiscal years 1997 and 1998............ 3,973 29.6 4. Pharmacy operations...................................... 1,406 10.5 5. Rehabilitative and other specialty services.............. (834) (6.2) ------- ----- $13,419 100.0% ======= =====
In December 1996, Summit recorded a special charge of $4,000 against Medicare revenues as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. Average occupancy was 87.2% in the six months ended December 31, 1997 and 84.0% in the six months ended December 31, 1996. Excluding newly constructed beds, the average occupancy was 90.3% in the six months ended December 31, 1997 and 85.9% in the six months ended December 31, 1996. Summit's quality mix (revenues from Medicare, managed care and private pay patients, including pharmacy revenue) as a percentage of gross revenues was 68.3% in the six months ended December 31, 1997 and 69.6% in the six months ended December 31, 1996. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues, before the effect of the special charge, increased from 85.9% of net revenues in the six months ended December 31, 1996 to 86.1% in the six months ended December 31, 1997. Total salaries and employee related benefits were 44.0% of net revenues in the six months ended December 31, 1997 compared to 43.8% of net revenues, before the effect of the special charge, in the six months ended December 31, 1996. 46 Expenses increased $8,342 or 9.8% from $85,136 in the six months ended December 31, 1996 to $93,478 in the six months ended December 31, 1997 for the following reasons:
AMOUNT PERCENT ------ ------- 1. Expenses relating to new beds opened in fiscal years 1997 and 1998.......................................... $3,232 38.7% 2. Salaries and benefits................................... 2,776 33.3 3. Other expenses.......................................... 1,540 18.5 4. Rehabilitative and other specialty services............. 794 9.5 ------ ----- $8,342 100.0% ====== =====
Income before rental, depreciation and amortization and interest expense, net of interest income, increased $5,077 or 51.0% from $9,952 in the six months ended December 31, 1996 to $15,029 in the six months ended December 31, 1997 and was 13.9% of net revenues in the six months ended December 31, 1997 compared to 10.5% in the six months ended December 31, 1996 (and 14.1% of net revenues before the special charge to revenues). Rent, depreciation and amortization and interest expense, net of interest income, increased by $1,249 or 13.7% from $9,099 in the six months ended December 31, 1996 to $10,348 in the six months ended December 31, 1997. Substantially all of this increase was due to interest expense related to higher debt and depreciation expense related to capital additions. Summit's effective tax rate was 39.5% of income in the six months ended December 31, 1997 and in the six months ended December 31, 1996. Net income increased $2,316 from $516 in the six months ended December 31, 1996 to $2,832 in the six months ended December 31, 1997. The net income of $516 for the six months ended December 31, 1996 included $2,420 for the special charge described earlier. Net income before the special charge, decreased $104 or 3.5% from $2,936 in the six months ended December 31, 1996 to $2,832 in the six months ended December 31, 1997. 1997 COMPARED TO 1996 (DOLLARS IN THOUSANDS) Net revenues increased $21,865 or 12.4% from $176,062 in fiscal 1996 to $197,927 in fiscal 1997. The increase occurred due to the following:
AMOUNT PERCENT ------- ------- 1. Rehabilitative and other specialty services.............. $ 7,553 34.6% 2. New beds opened in fiscal years 1996 and 1997............ 12,450 56.9 3. Increased census days and revenue rates.................. 5,647 25.8 4. Pharmacy operations...................................... 2,315 10.6 5. Special charge to Medicare revenue....................... (6,100) (27.9) ------- ----- $21,865 100.0% ======= =====
The special charge to Medicare revenues reflects the result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and fiscal 1997. Average occupancy was 84.8% in the fiscal year ended June 30, 1997 compared to 85.9% in the fiscal year ended June 30, 1996. Excluding newly constructed beds, the average occupancy was 87.0% in the fiscal year ended June 30, 1997 and 86.4% in the fiscal year ended June 30, 1996. Summit's quality mix (revenues from Medicare, managed care and private pay patients, including pharmacy revenue) patients as a percentage of gross revenues was 69.6% in the fiscal year ended June 30, 1997 and 66.6% in the fiscal year ended June 30, 1996. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues, before the effect of the special charge, 47 increased from 84.6% of net revenues in the fiscal year ended June 30, 1996 to 88.0% in the fiscal year ended June 30, 1997. Total salaries and employee related benefits were 43.9% of net revenues, before the effect of the special charge, in the fiscal year ended June 30, 1997 compared to 44.4% of net revenues in the fiscal year ended June 30, 1996. Purchases of rehabilitative and other specialty services were 25.3% of net revenues, before the effect of the special charge, in the fiscal year ended June 30, 1997 compared to 21.6% of net revenues in the fiscal year ended June 30, 1996. Expenses increased $30,580 or 20.5% from $148,929 in the fiscal year ended June 30, 1996 to $179, 509 in the fiscal year ended June 30, 1997 for the following reasons:
AMOUNT PERCENT ------- ------- 1. Rehabilitative and other specialty services............ $ 8,680 28.4% 2. Expenses relating to new beds opened in fiscal years 1996 and 1997......................................... 11,529 37.7 3. Salaries and benefits.................................. 6,612 21.6 4. Other expenses......................................... 3,759 12.3 ------- ----- $30,580 100.0% ======= =====
Income before rental, depreciation and amortization and interest expense, net of interest income, decreased $8,715 or 32.1% from $27,133 in the fiscal year ended June 30, 1996 to $18,418 in the fiscal year ended June 30, 1997 and was 9.3% of net revenues in the fiscal year ended June 30, 1997 (and 12.0% of net revenues before the special charge to revenues) compared to 15.4% in the fiscal year ended June 30, 1996. Rental, depreciation and amortization and interest expense, net of interest income, increased by $2,858 or 18.6% from $15,372 in the fiscal year ended June 30, 1996 to $18,230 in the fiscal year ended June 30, 1997. The increase was primarily due to depreciation of additions to property and equipment and interest expense related to higher long-term debt. Summit's effective tax rate was 63.3% of income in the fiscal year ended June 30, 1997 compared to 37.9% of income in the fiscal year ended June 30, 1996. The increase in the effective tax rate was primarily due to certain permanent differences between book income and taxable income. Net income was $69 for the fiscal year ended June 30, 1997, a decrease of $7,240 or 99.1% from $7,309 for the fiscal year ended June 30, 1996. 1996 COMPARED TO 1995 (DOLLARS IN THOUSANDS) Net revenues increased $39,036 or 28.5% from $137,026 in fiscal 1995 to $176,062 in the fiscal year 1996. The increase occurred due to the following:
AMOUNT PERCENT ------- ------- 1. Acquisitions in fiscal year 1995.......................... $13,228 33.9% 2. Rehabilitative and other specialty services............... 11,527 29.5 3. Increased census days and revenue rates................... 8,017 20.5 4. New beds opened in fiscal years 1995 and 1996............. 3,614 9.3 5. Pharmacy operations....................................... 2,650 6.8 ------- ----- $39,036 100.0% ======= =====
Average occupancy was 85.9% in the fiscal years ended June 30, 1996 and 1995, and new beds were opened in both fiscal years. Excluding acquisitions and newly constructed beds, the average occupancy was 88.4% in the fiscal year ended June 30, 1996 and 89.0% in the fiscal year ended June 30, 1995. Summit's quality mix (revenues from Medicare, managed care and private pay patients, including pharmacy revenue) as a percentage of gross revenues was 66.6% in the fiscal year ended June 30, 1996 and 63.3% in the fiscal year ended June 30, 1995. 48 Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other as a percent of net revenues increased from 82.0% of net revenues in the fiscal year ended June 30, 1995 to 84.6% in the fiscal year ended June 30, 1996. Total salaries and employee related benefits were 44.4% of net revenues in the fiscal year ended June 30, 1996 compared to 46.1% of net revenues in the fiscal year ended June 30, 1995. Expenses increased $36,552 or 32.5% from $112,377 in the fiscal year ended June 30, 1995 to $148,929 in the fiscal year ended June 30, 1996 for the following reasons:
AMOUNT PERCENT ------- ------- 1. Rehabilitative and other specialty services............ $10,906 29.8% 2. Acquisitions in fiscal year 1995....................... 10,454 28.6 3. Salaries and benefits.................................. 7,592 20.8 4. Expenses relating to new beds opened in fiscal years 1995 and 1996......................................... 3,202 8.8 5. Other expenses......................................... 4,398 12.0 ------- ----- $36,552 100.0% ======= =====
Income before rental, depreciation and amortization and interest expense, net of interest income, increased $2,484 or 10.1% from $24,649 in the fiscal year ended June 30, 1995 to $27,133 in the fiscal year ended June 30, 1996 and was 15.4% of net revenues in the fiscal year ended June 30, 1996 compared to 18.0% in the fiscal year ended June 30, 1995. Rental, depreciation and amortization and interest expense, net of interest income, increased by $3,221 or 26.5% from $12,151 in the fiscal year ended June 30, 1995 to $15,372 in the fiscal year ended June 30, 1996. Substantially all of this increase was due to depreciation and amortization, rent and interest expense related to acquisitions and newly constructed beds in fiscal years 1995 and 1996. Summit's effective tax rate was 37.9% of income in the fiscal year ended June 30, 1996 and 39.9% of income in the fiscal year ended June 30, 1995. Net income after taxes decreased $202 or 2.7% from $7,511 in the fiscal year ended June 30, 1995 to $7,309 in the fiscal year ended June 30, 1996. HISTORIC LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) At June 30, 1997, Summit had $3,994 in cash and cash equivalents and working capital of $12,648. For the fiscal year ended June 30, 1997, Summit's cash and cash equivalents increased by $1,336 over the prior year. Net cash provided by operating activities increased $11,149 from $6,866 for the fiscal year ended June 30, 1996 to $18,015 for the fiscal year ended June 30, 1997. Net cash provided by operating activities, plus proceeds of $15,000 in new long-term debt (see description below) were used principally for capital expenditures of $24,075 for new and existing centers, the net reduction of loans outstanding on the line of credit of $1,000, the purchase of a lease option for $2,022, and the acquisition of a 50% interest in an institutional pharmacy for $1,565. Accounts receivable, less allowance for doubtful accounts, increased $5,819 due to increased total revenues in the fiscal year ended June 30, 1997 compared to the prior year, primarily in Medicare and managed care revenues. At June 30, 1997, Summit's average accounts receivable days outstanding were 41, compared to 39 at June 30, 1996. For the fiscal year ended June 30, 1997, Summit added $24,075 to its property and equipment. These additions were primarily for the completion of a 210-bed SNF in Fort Worth, Texas, at a cost of 49 $2,300, construction of a 66-bed ALF in Orange, California, at a cost of $3,525, and the renovation of buildings and replacement of furniture and equipment at the remaining centers and the pharmacies, at a cost of $18,250. These additions to property and equipment were primarily financed with funds from $15,000 of Senior Secured Notes issued in July 1996 and with cash generated from operations. The $15,000 funding represents the second and last issuance of the $70,000 Senior Secured Notes. The initial funding of $55,000 occurred in December 1995. Summit believes that it has sufficient cash flow from its existing operations and from its bank line of credit to service long-term debt due within one year of $6,997 (Summit intends to borrow this amount against its bank line of credit which has a revolver extending to September 30, 1998 followed by a three-year payment period), to make normal recurring capital replacements, additions and improvements to existing centers of approximately $9,100 planned for the next twelve months, to develop properties costing approximately $3,000 over the next twelve months, to purchase a 111-bed center for $1,871 in accordance with a purchase option in a lease and to meet other long-term working capital needs and obligations. The loans outstanding on the line of credit at June 30, 1997 were $5,000. Summit expects, on a selective basis, to pursue expansion of its existing centers and the acquisition or development of additional centers in markets where demographics and competitive factors are favorable. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY FOLLOWING THE TRANSACTIONS (DOLLARS IN THOUSANDS) Interest payments on the Notes and any borrowings under the New Credit Facility will represent significant liquidity requirements for the Company. Any future borrowings under the New Credit Facility will bear interest at floating rates and will require interest payments on varying dates depending on the interest rate option selected by the Company. See "Description of Other Indebtedness--New Credit Facility". The Company's remaining liquidity demands will be primarily for capital expenditures and working capital needs. The Company expects to spend approximately $4.5 million on capital projects in 1998, with approximately $4.0 million of that amount representing maintenance-related capital expenditures. The Company currently expects to spend a similar amount on capital expenditures in fiscal 1999. The New Credit Facility and the Indenture will impose restrictions on the Company's investments. The Company's primary sources of liquidity are expected to be cash flows from operations and borrowings under the New Credit Facility. See "Description of Other Indebtedness--New Credit Facility". Approximately $15.0 million is available to be drawn by the Company under the New Credit Facility. In addition, the Company has approximately $15.0 million in revolving credit loans and $85.0 million in term loans outstanding under the New Credit Facility. See "Description of Other Indebtedness--New Credit Facility". The Company's ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including the Notes), or to fund planned capital expenditures and any acquisitions will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated cost savings and revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under the New Credit Facility, will be adequate to meet the Company's future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the Notes on or prior to maturity. There can be no assurance that the Company's business will generate sufficient cash flow from operations, that 50 anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the New Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. See "Risk Factors". 51 BUSINESS THE COMPANY The Company is a leading operator of long-term care facilities and a leading provider of a full continuum of post-acute care services, with a strategic emphasis on sub-acute specialty medical care. The Company operates a network of facilities in California, Texas and Arizona, including 44 SNFs that offer sub-acute, rehabilitative and specialty medical skilled nursing care, as well as six ALFs that provide room and board and social services in a secure environment. In addition to long-term care, the Company provides a variety of high-quality ancillary services such as physical, occupational and speech therapy in Company-operated facilities, unaffiliated facilities and acute care hospitals. The Company also operates three institutional pharmacies (one of which is a joint venture), which service acute care hospitals as well as SNFs and ALFs both affiliated and unaffiliated with the Company, an outpatient therapy clinic and a DME company. The Company operates 50 facilities with approximately 6,600 beds serving Medicare, Medicaid, managed care, private pay and other patients. Both Fountain View and Summit have demonstrated records of revenue growth, increasing average census (occupancy) levels and improvements in quality mix (defined as non-Medicaid revenues). During the five fiscal years ended 1997, revenues for Fountain View and Summit increased at compound annual growth rates of 13.1% and 27.1%, respectively. During the same period, average census levels at Fountain View facilities increased from 87.0% to 89.3%, while quality mix increased from 58.4% to 72.9%. Average census levels at Summit facilities (excluding three facilities which commenced operations or were renovated in 1996 or later) increased from 87.2% for the year ended June 30, 1993 to 88.7% for the six months ended December 31, 1997, while quality mix increased from 64.8% to 69.6% during the four fiscal years ended 1997. Pro forma for the Transactions, the Company would have had revenues of $74.0 million, an average census level of 88.6% (excluding three Summit facilities which commenced operations or were renovated in 1996 or later) and a quality mix of 67.2% for the three months ended March 31, 1998. For the same period, the Company would have had Adjusted EBITDA of $36.0 million and an Adjusted EBITDA margin of 12.2%, with Adjusted EBITDAR of $42.8 million and an Adjusted EBITDAR margin of 14.5%. Management believes that the Company's strong operating performance has been supported by the Company's ability to (i) provide high-quality, high-acuity care, (ii) utilize an efficient cost structure, (iii) operate a network of attractive, modern facilities, (iv) maintain a leading market position and (v) capitalize on the extensive experience of its management. The Company intends to pursue a strategy of further increasing its revenues and profitability by capitalizing on the relative strengths of Fountain View and Summit. In implementing its strategy, the Company expects to (i) further increase the proportion of revenues derived from high-acuity specialty medical services, (ii) broaden the implementation of its cost-effective operating model, (iii) expand its ancillary services businesses, (iv) pursue controlled expansion through construction and acquisition-related growth, and (v) capitalize on benefits derived from the Transactions. COMPANY HISTORY Fountain View was founded in 1964 and originally operated two nursing homes in Los Angeles, California. Fountain View has expanded the size and scope of its core long-term care business by acquiring facilities and by introducing ancillary services to existing operations. Since 1982, the business has grown from two facilities to nine, with each facility providing a broad array of specialty medical care. Fountain View was one of the first operators of long- term care facilities to receive a contract with Medi-Cal to provide sub-acute care and currently has 36 beds in two facilities dedicated to providing Medi- Cal patients with sub-acute services (which are eligible for significantly higher per diem reimbursement rates than standard Medi-Cal per diem reimbursement rates). Fountain View's 52 nine facilities have a total of 1,227 beds, of which 1,061 are dedicated to serving skilled nursing patients and 166 of which comprise an ALF. Each of Fountain View's facilities is located in close proximity to a hospital, facilitating patient referrals. Many of Fountain View's skilled nursing patients have been discharged from acute care hospitals and require medically complex treatments. Fountain View has placed strategic emphasis on providing higher-acuity care while simultaneously developing a cost-effective operating model. Fountain View, through Locomotion Therapy, also provides physical, occupational and speech therapy to unaffiliated nursing homes and acute care hospitals as well as several Fountain View facilities. Fountain View also owns an outpatient therapy clinic company and a DME business. Summit was incorporated in 1981 as a wholly-owned subsidiary of Summit Health Ltd., an operator of acute care hospitals. Summit provides diversified nursing, specialty medical and sub-acute care at 36 owned or leased SNFs as well as assisted living services at five ALFs located in California, Texas and Arizona. Summit currently operates 36 SNFs with a total of 4,872 beds. Within its SNFs, Summit has established separate units for specialty medical and sub- acute care dedicated to patients requiring complex services such as chemotherapy, pulmonary and cardiac care, wound care, respiratory therapy and intensive physical, occupational and speech therapies. Summit also operates five ALFs with a total of 475 beds which include certain beds designated as specialty beds, primarily for early-stage Alzheimer's residents. Summit also operates two institutional pharmacies in Southern California and owns a 50% interest in a pharmacy in Texas through a joint venture. The pharmacies provide pharmaceutical products and services to all of Summit's facilities as well as to unaffiliated SNFs, ALFs and acute care hospitals in Southern California and Texas, including certain Fountain View facilities. INDUSTRY In 1997, nursing home spending was approximately $85 billion and is expected to reach more than $100 billion by the year 2000, representing an average annual increase of approximately 6.1%. Demand for long-term care facilities is expected to continue to increase substantially as the result of cost containment initiatives, demographic and social trends as well as industry consolidation. COST CONTAINMENT INITIATIVES. During the past several years, Medicare managed care enrollment has grown to more than 14% nationwide. The trend toward managed care in the Medicare population is particularly evident in California, where approximately 35% of Medicare enrollees were participating in a managed care program during 1996. Cost containment initiatives developed by managed care plans have contributed to shorter hospital stays for acute care patients. Because acute care patients often still require medically complex treatments following discharge from a hospital, management believes that SNFs will experience increased demand for high-acuity services, which are typically eligible for higher reimbursement rates. In addition, management believes that certain SNFs will further develop the ability to offer attractive rates to third-party payors for high-acuity specialty medical services primarily as the result of the significantly lower overhead costs generated by SNFs relative to acute care hospitals and hospital-based SNFs. Labor costs are also generally lower in SNFs than in hospitals, which typically have higher staffing ratios, higher salary structures, and significantly more administrative personnel, including nursing staff resources not fully dedicated to providing care. DEMOGRAPHIC TRENDS. Demand for long-term care services rises meaningfully among persons over the age of 75, an age group that has been growing and is projected to continue growing significantly faster than the overall population according to the United States Bureau of the Census. This increase in the elderly portion of the population reflects, among other things, improvements in medical technology, disease prevention, nutrition and overall health maintenance. The segment of the population over 85 years of age, which comprises the largest percentage of long-term care residents, is the fastest- growing segment of the population and is projected to increase by more than 19.4% from approximately 3.6 million or 1.4% of the domestic population in 1995 to approximately 4.3 million or 53 1.6% of the domestic population in the year 2000. By 2010, the population of this segment is expected to be approximately 5.7 million, representing more than a 58% increase from 1995. SOCIAL TRENDS. Two-income families often experience significant challenges in providing home care for elderly relatives. Management believes that ALFs will continue to experience increased demand as working families seek attractive alternatives to home care for the elderly. Additionally, management believes demand for higher-acuity services in long-term care facilities has contributed to the perception of SNFs as an increasingly attractive alternative to a wide range of potential patients. INDUSTRY CONSOLIDATION. Currently, approximately 1.7 million people receive care in approximately 17,000 long-term care facilities in the United States. Market share data indicates that the industry is highly fragmented, with the 30 largest operators accounting for less than 25% of total beds. Management believes that consolidation initiatives by industry participants have been structured to achieve economies of scale and to create networks of facilities that can be effectively marketed to managed care organizations. As a result, management expects that consolidation will continue among smaller local operators which lack sophisticated management information systems, high-acuity services necessary to remain attractive to acute patients and the ability to maintain strict compliance with complex regulations which govern the long-term care industry. COMPANY STRENGTHS ABILITY TO PROVIDE HIGH-QUALITY AND HIGH-ACUITY CARE. Management believes that the Company's strong operating performance has been supported by the Company's ability to provide a broad range of high-quality, high-acuity services which are generally more profitable than routine healthcare services. Pro forma for the Transactions, revenues from sub-acute and specialty medical care would have represented 55% of the Company's total revenues for the year ended December 31, 1997. The Company currently serves Medicare, Medicaid, managed care, private pay and other patients by providing a continuum of sub- acute and specialty medical care, which consists of ventilator services, tracheotomy care, multiple intravenous therapy, chemotherapy, enteral/parenteral nutrition, end-stage renal disease care, blood transfusions, dialysis, wound care, rehabilitation services, pharmacy services and the provision of durable medical equipment. In addition, both Fountain View and Summit have responded to the increased demand for Alzheimer's care by broadening their specialty medical care to include Alzheimer's units in a total of 21 facilities. Management believes that the Company's facilities provide services similar to those provided in acute care hospitals for approximately 40% to 60% of the costs generated by acute care hospitals in providing such services. As a result, management believes the Company will increase revenues by continuing to attract managed care payors and is well-positioned to benefit from growing managed care enrollment levels. EFFICIENT OPERATOR AND COST-EFFECTIVE PROVIDER. Management believes it has developed significant expertise in delivering high-quality, high-acuity care through the implementation of an efficient and cost-effective operating model. Developed within the Fountain View network of facilities, management believes this model has produced high levels of efficiency and facility-level EBITDAR through the application of specific operating initiatives. Following the Transactions, management intends to expand its cost-effective operating model to maximize profitability and the quality of care provided across the Company's entire facility network. ATTRACTIVE, MODERN FACILITY NETWORK. Management believes the Company's facilities are in excellent aesthetic and operational condition as the result of recent comprehensive construction and renovation initiatives. Summit has expended more than $180 million over the past five years constructing, acquiring, expanding and upgrading facilities, and Fountain View has spent more than $4 million on facility improvements during the past two years. Approximately 80% of the Company's 54 facilities were either constructed or renovated within the past three years. Management believes the Company's attractive and modern facility network will continue to support high average census and quality mix levels. In addition, management believes that the Company's recent construction and renovation initiatives will facilitate improvements in operating efficiency and reductions in maintenance capital expenditure levels. The Company owns 56% of its facilities (representing 70% of its beds) and holds options to purchase an additional 10% of its facilities, providing the Company with an attractive asset base, enhanced credit quality and increased financial flexibility. LEADING MARKET POSITION. Management believes the Company will operate as a leading provider of long-term and specialty medical care in several Southern California and Texas markets. The Company's Southern California facilities are strategically located in geographically clustered networks which management believes are particularly attractive to managed care organizations. Management believes the Company is well-positioned to benefit from California's rapidly increasing managed care enrollment levels, which included 35% of Medicare enrollees during 1996 as compared to a nationwide enrollment level of 14% as of July 1997. The Company also expects that the increased density of its Southern California market presence as a result of the Transactions will result in heightened brand awareness, expanded referral networks, operating and administrative economies of scale as well as improved purchasing economies. In addition to the Company's geographically clustered networks in Southern California, the Company operates a broad network of facilities in small to mid-size markets in Texas. Management believes the Company's Texas facilities are located in several demographically attractive markets and are generally characterized by leading market positions. In addition to the Company's strong local market presence in both Southern California and Texas, management believes the Company will be subject to a relatively low level of direct competition from any single large competitor due to the considerable fragmentation which characterizes the Company's markets. STRONG MANAGEMENT TEAM. Mr. Scott, the Chairman of the Company, and Mr. Snukal, the Chief Executive Officer of the Company, together have more than 43 years of senior management experience in the long-term care industry in Southern California and Texas. Mr. Scott has supervised significant expansion in the number of Summit's facilities and services through strategic acquisitions and construction. Mr. Snukal has demonstrated expertise in developing Fountain View's ability to provide specialty medical and sub-acute care in a cost-effective manner, and achieving strong facility-level operating and financial performance. Both Mr. Scott and Mr. Snukal will maintain significant involvement in the daily operations of the Company and have made significant equity contributions to the Company in connection with the Transactions. See "Prospectus Summary--The Transactions". BUSINESS STRATEGY FURTHER INCREASE PROPORTION OF REVENUES DERIVED FROM SPECIALTY MEDICAL CARE. The Company intends to leverage its existing specialty medical infrastructure, further increasing the proportion of total revenues derived from specialty medical care. On a pro forma basis for the twelve months ended December 31, 1997, specialty medical revenues represented 55% of total revenues. Services comprising specialty medical care generally represent the most profitable types of services offered by long-term care providers since such services are reimbursed at higher rates than routine skilled nursing care and basic assisted living services. As a result of the trend toward shorter hospital stays by patients who require medically complex treatments and in order to deliver the highest quality care possible to its residents, the Company has developed significant expertise and experience caring for high- acuity patients. The Company's ability to provide high-acuity specialty medical and sub-acute care in its own facilities generates substantial revenue for the Company and benefits managed care payors by reducing hospital costs and by eliminating costs incurred by transferring patients to acute care hospitals to receive specialty medical care. 55 BROADEN IMPLEMENTATION OF COST-EFFECTIVE OPERATING MODEL. Management intends to expand the Company's cost-effective operating model to maximize profitability and the quality of care provided across the Company's facilities. Management believes that expanded implementation of a well- designed and well-monitored operating model will enhance the quality and consistency of care delivered and improve profitability by simplifying procedures for administering care. EXPAND ANCILLARY SERVICES. The Company intends to increase the penetration of its therapy and pharmacy businesses within both affiliated and unaffiliated facilities. Ancillary services generally have produced higher revenues and profitability than routine long-term care services. The Company currently provides rehabilitative physical, occupational and speech therapy through Locomotion Therapy. Locomotion Therapy generated $19.7 million of revenues for the year ended December 31, 1997, providing services to unaffiliated nursing homes and acute care hospitals under 97 contracts and to eight Fountain View facilities. Management expects Locomotion Therapy to expand its provision of services to Summit facilities, which purchased approximately $34 million of therapy services from nonaffiliates during fiscal 1997. The Company also intends to pursue increased "bundling" of ancillary services, offering a unique package of rehabilitative and pharmacy services to unaffiliated facilities in a cost-efficient manner. In addition to providing ancillary therapy services, the Company operates three institutional pharmacies (one of which is a joint venture), a DME company and an outpatient therapy clinic through its subsidiary, On-Track. Several of Summit's facilities have existing, unoccupied space allocated to outpatient therapy services which the Company expects to utilize for the expansion of services provided by On-Track. PURSUE CONTROLLED EXPANSION THROUGH CONSTRUCTION AND ACQUISITION-RELATED GROWTH. The Company intends to acquire and construct facilities selectively in strategic locations which will facilitate operating efficiencies through economies of scale, will generate marketing synergies through further expansion of relationships and contracts with hospitals, physicians and physician groups and will lead to reduced overhead expenditures. The Company expects to acquire or construct new beds and facilities in a cost-effective manner, including expansion initiatives which utilize real estate currently owned by the Company. The Company currently owns properties adjacent to several facility locations which management believes can support the construction of approximately 1,400 additional beds at reduced cost levels relative to the expense associated with acquisition and development of new real estate. CAPITALIZE ON BENEFITS DERIVED FROM THE TRANSACTIONS. As a result of the Transactions, management believes the Company will be able to realize significant cost savings. As a result of the Company's contiguous geographic locations in several Southern California markets, management intends to eliminate specifically identified corporate expenses and leverage administrative resources across facilities. Management believes the Company will be able to reduce its cost of food, sanitary and medical supplies as a result of improved purchasing power and expects the Company to realize marketing and referral benefits as a result of the increased geographic density of the Company's clustered facilities. In addition, the Company expects to expand its provision of services through Locomotion Therapy to Summit facilities, which purchased approximately $34 million of therapy services from nonaffiliates during 1997. SERVICES BASIC HEALTHCARE SERVICES Basic healthcare services refer to skilled nursing care and assisted living services. The Company provides skilled nursing care in each of Fountain View's eight SNFs and in each of Summit's 36 SNFs (which collectively have 5,933 beds). Skilled nursing care consists of 24-hour care by registered nurses, licensed practical or vocational nurses and certified aides, as well as room and board, special nutritional programs, social services, recreational activities and related medical and other services that 56 may be prescribed by a physician. Assisted living services include general services provided by Fountain View in its ALF and by Summit in its five ALFs, all of which are located in California and which collectively have 641 beds. These services consist of basic room and board, social activities and assistance with activities of daily living such as dressing and bathing. SPECIALTY MEDICAL CARE The Company provides specialty medical care, including a wide range of sub- acute services, to patients with medically complex needs who generally require more intensive treatment and a higher level of skilled nursing care. These services represent an area of strategic emphasis for the Company and typically generate higher profit margins than basic healthcare services. SUB-ACUTE CARE. The Company provides a wide range of sub-acute services to patients with medically complex needs, including the following: COMPLEX MEDICAL CARE. The Company provides complex medical care to those patients who require a combination of medical treatments. Complex medical needs often include the administration of intravenous medications for various conditions, such as fluids for hydration, diuretics for congestive heart failure, antibiotics for the treatment of infection, anti-coagulants to prevent clotting or pain control for cancer patients. Patients requiring complex medical care have typically undergone surgical procedures ranging from common joint replacements to organ transplants, and require close monitoring. MULTIPLE INTRAVENOUS MEDICATIONS. A variety of intravenous medications are administered to patients through several types of veinous access. The Company's licensed nurses are intravenous therapy certified and skilled in initiating and handling central and peripheral lines for intravenous medications. BLOOD TRANSFUSIONS. The Company provides blood transfusions to post- surgical patients with severe and unresolved anemia. Blood products for transfusion are obtained through a contract with the American Red Cross. CHEMOTHERAPY. The Company provides chemotherapy to patients in accordance with instructions by attending hematologists/oncologists for the treatment of various cancers. Chemotherapy requires strict and careful handling of highly toxic chemotherapy agents. DIALYSIS. Peritoneal dialysis is typically provided to younger patients who can perform their own dialysis treatments, utilizing specialized solutions which are introduced through a peritoneal cavity port. Whenever possible, patients are taught to perform the procedure themselves upon discharge from the Company's facility. In addition, the Company provides hemodialysis to qualified patients. WOUND CARE PROGRAMS. Wound care programs address the needs of patients suffering from post-operative wounds, including stoma and ostomy care, and the care of amputees. Treatment for surgical wounds includes the prevention of post-operative infections and the removal of surgical staples. The Company also treats patients for existing infections, including the treatment of antibiotic resistant micro- organisms with multiple intravenous antibiotics. Physical therapists aid in the debridement of necrotic wounds with jet lavage or pulsed irrigation and whirlpool treatments. Electrical stimulation is used to encourage the growth of healthy tissue. ENTERAL/PARENTERAL NUTRITION. Patients who are unable to eat for various reasons may receive enteral or parenteral feeding. The Company's registered dietitians periodically review the nutritional needs of each patient. TRACHEOTOMY CARE. The Company provides care to patients who, due to any number of conditions, cannot maintain a clear or adequate airway and have undergone a 57 tracheotomy. These patients often require mechanical ventilator support. All such patients require frequent suctioning and humidified oxygen and aggressive pulmonary rehabilitation. VENTILATOR CARE. Many patients who have undergone a tracheotomy also require mechanical ventilation. In treating such patients, the Company utilizes a ventilator which mechanically regulates the breathing function of the patient by dictating the volume and/or the rates of inhalation and exhalation. The Company's licensed nurses and respiratory therapists oversee a ventilator weaning program under the direction of a pulmonologist. ALZHEIMER'S CARE. The Company's dedicated Alzheimer's units provide care for patients with Alzheimer's disease and severe dementia. This type of care is designed to reduce the stress and agitation associated with Alzheimer's disease by addressing the problems of short attention spans and hyperactivity. The physical environment of the Company's units is designed to address the problems of disorientation and perceptual confusion experienced by Alzheimer's sufferers. THERAPY SERVICES. Many of the Company's patients that have undergone orthopedic surgeries, including joint replacements such as total hip or knee replacements or fractures, receive physical therapy. The Company's physical therapists also perform wound care and utilize electric stimulation to stimulate viable tissue regrowth. Occupational therapy addresses functional skills of the upper body and all aspects of self-care. The Company also provides range of motion and strengthening exercises for contracture prevention and reduction. Speech therapists treat patients with speech disorders, perceptual problems, cognitive problems, and swallowing problems. In coordination with the efforts of the Company's nursing staff and respiratory therapists, speech therapists help tracheotomy and ventilator patients use speaking valves and breathing methods which allow them to communicate with others. During 1997, Locomotion Therapy provided rehabilitative physical, occupational and speech therapy to unaffiliated nursing home operators and acute care hospitals under 97 contracts, as well as to eight Fountain View facilities, using a progressive, personalized treatment approach to promote the resident's highest level of independence in mobility and strength. Historically, a majority of Fountain View's therapy services has been provided by Locomotion Therapy, which employs approximately 150 therapists licensed in various specialties who are assigned to facilities based on the types of contract services requested and the specialization of the therapists. Throughout the duration of the contract, the selected therapist functions as the resident therapist for a particular facility. Summit has also provided rehabilitative care in each of its 36 SNFs through the use of outside contractors. Historically, Summit has monitored the rehabilitative care provided in each Summit facility through the use of in-house supervisory therapists and therapy administration. PHARMACIES. The Company provides pharmaceutical products and services through two institutional pharmacies in Southern California. The Company also owns a 50% equity interest in a limited liability company that operates a pharmacy in Austin, Texas, which services Summit facilities in Texas as well as several unaffiliated facilities. These pharmacies service 86 unaffiliated SNFs, ALFs and acute care hospitals located throughout much of Southern California and in certain Texas markets, as well as all of Summit's and several of Fountain View's SNFs and ALFs. The Company's pharmacies, historically operated by Summit, provide prescription drugs, intravenous products, enteral nutrition therapy services and infusion therapy services, including nutrition, pain management, antibiotics and hydration. OUTPATIENT THERAPY CLINICS. The Company's On-Track subsidiary provides physical therapy services to the outpatient community through a facility in Fresno, California. The Company intends to open additional facilities in underserved markets where it has existing relationships with doctors and currently provides physical therapy services to nursing homes through Locomotion 58 Therapy. Several of Summit's Texas facilities have excess capacity intended for outpatient clinics which the Company expects to utilize for the expansion of services provided by On-Track. DURABLE MEDICAL EQUIPMENT. The Company provides various types of durable medical equipment to Fountain View-owned facilities, as well as unaffiliated facilities, through a subsidiary. The types of equipment and supplies provided include enteral feeding supplies, poles and pumps (on a rental basis), catheterization equipment and orthotics. SOURCES OF REVENUE The Company's SNFs receive payment for healthcare services from federally assisted Medicaid programs, Medicare, programs operated by preferred provider organizations, health maintenance organizations, the Veterans Administration and directly from patients or their responsible parties or insurers. The Company's ALFs receive payment exclusively from private individuals, some of whom depend upon supplemental Social Security payments as a primary source of income. The sources and amounts of the Company's revenues are and will continue to be determined by a number of factors, including the licensed bed capacity of its facilities, occupancy rate, quality mix, the type of services rendered to the patient and the rates of reimbursement among payor categories (primarily private, Medicare and Medicaid). The following table sets forth for Fountain View's SNFs, ALFs and therapy operations the approximate percentages of net revenues derived from the various sources of payment for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------- 1995 1996 1997 ----- ----- ----- Managed care and private pay, including Locomotion Therapy.............................................. 46.6% 47.5% 44.2% Medicare.............................................. 20.3 19.6 25.6 Medi-Cal Sub-Acute.................................... 0.3 2.6 3.1 ----- ----- ----- Subtotal (Quality Mix).............................. 67.2 69.7 72.9 Medi-Cal.............................................. 32.8 30.3 27.1 ----- ----- ----- Total............................................... 100.0% 100.0% 100.0% ===== ===== =====
The following table sets forth for Summit's SNFs, ALFs and pharmacy operations the approximate percentages of total revenues derived from the various sources of payment for the periods indicated.
YEAR ENDED JUNE 30, ------------------- 1995 1996 1997 ----- ----- ----- Managed care and private pay............................ 33.8% 31.9% 29.9% Medicare................................................ 29.5 34.7 39.7 ----- ----- ----- Subtotal (Quality Mix)................................ 63.3 66.6 69.6 Medicaid................................................ 36.7 33.4 30.4 ----- ----- ----- Total................................................. 100.0% 100.0% 100.0% ===== ===== =====
Changes in the quality mix between Medicaid (known as Medi-Cal in California), on the one hand, and either Medicare, managed care or private pay, on the other hand, can significantly affect profitability. Quality mix represents revenues from Medicare, Medi-Cal sub-acute, managed care, and private pay patients as a percentage of revenues. Medicare, Medi-Cal sub- acute, managed care and private pay patients constitute the most profitable categories of patient mix and Medicaid patients the least profitable. Management believes the Company has maintained an attractive and improving high quality mix. In addition, the Company's average reimbursement rate per patient day for Medicare 59 patients has increased more rapidly than for Medicaid patients, reflecting the increasing acuity level of the services provided by the Company. Services provided to Medicare patients generate a higher level of revenue per patient day at margins that generally exceed the level of profitability associated with services provided to Medicaid patients. However, the Company's profitability has not correlated directly with revenue growth, reflecting the additional costs associated with providing the higher level of care and other services required by high-acuity Medicare patients. QUALITY MIX, PATIENT MIX AND OCCUPANCY
YEAR ENDED DECEMBER 31, 1997 ----------------------------- FOUNTAIN VIEW SUMMIT COMPANY ------------- ------ ------- QUALITY MIX Managed care and private pay, including Locomotion Therapy.......................................... 44.2% 30.5% 33.4% Medicare.......................................... 25.6 38.5 35.8 Medi-Cal sub-acute................................ 3.1 -- 0.6 ----- ----- ----- Total (Quality Mix)............................. 72.9 69.0 69.8 Medicaid.......................................... 27.1 31.0 30.2 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== PATIENT MIX Managed care and private pay...................... 17.3 36.8 33.4 Medicare.......................................... 9.0 9.1 9.1 Medi-Cal sub-acute................................ 2.2 -- 0.4 ----- ----- ----- 28.5 45.9 42.9 Medicaid.......................................... 71.5 54.1 57.1 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== OCCUPANCY ........................................ 89.0% 86.0% 89.0%
The Company's contract therapy services are provided predominantly by Locomotion Therapy. Contract therapy revenues, after intercompany eliminations, represented $17.7 million, or 26.1%, of Fountain View's fiscal 1997 revenues and, on a pro forma basis after giving effect to the Transactions, would have represented 6.2% of the Company's revenues for the year ended December 31, 1997. The Company's pharmacy services are derived from the three institutional pharmacies historically operated by Summit (one of which is a joint venture). Pharmacy revenues represented $20.4 million, or 10.3%, of Summit's fiscal 1997 revenues and, on a pro forma basis after giving effect to the Transactions, would have represented 7.1% of the Company's revenues for the year ended December 31, 1997. The Company's DME business is provided by a Fountain View subsidiary. DME revenues represented approximately $3.0 million, or 4.4%, of Fountain View's fiscal 1997 revenues and, on a pro forma basis after giving effect to the Transactions, would have represented 1.0% of the Company's revenues for the year ended December 31, 1997. COMPLIANCE PROGRAM Historically, senior management of the Company has supervised the Company's compliance with applicable laws and regulations. The Company is in the process of developing and implementing an enhanced compliance program to facilitate the integration of Fountain View and Summit. In the past several years, federal and state governments have increased their scrutiny of healthcare providers with regard to compliance with applicable laws and regulations. The Accountability Act and the Balanced 60 Budget Act have provided the federal government with increased funding for this initiative as well as a broader range of penalties available for violation of applicable laws and regulations. See "--Government Regulations". Management believes that compliance programs are advisable, particularly in the current environment of stricter government enforcement in the healthcare industry. The OIG has released guidelines applicable to compliance programs for laboratories and hospitals, but has not yet developed a model compliance program or compliance program guidelines for the long-term care industry. Given the federal government's current fraud and abuse initiatives however, including Operation Restore Trust which focuses on the long-term care and home health industry, management believes that a compliance program will give the Company an additional layer of protection and assurance in a heavily regulated and continuously evolving industry. Management believes that an effective compliance program should maximize the Company's ability to detect and prevent potential infractions of applicable law (thus reducing the risk of a qui tam, or "whistleblower", action against the Company for infractions that were not timely detected and addressed) and may be used to resolve any infractions that do occur in a consistent and organized fashion. Further, the existence of an effective compliance program may be taken into account by the government to reduce any fines or penalties incurred by the Company for infractions or violations of applicable law or regulation. Management intends to develop and implement a compliance program that will involve the appointment of a compliance officer, who will report directly to the Company's board of directors and Chief Executive Officer, to assist in the development, implementation and maintenance of the compliance program. The Company anticipates that the compliance program will include policies and procedures applicable to all Fountain View and Summit facilities and will address all aspects of compliance with government requirements, including, among others, licensing obligations, quality of care, documentation requirements, billing and coding requirements, regulations regarding relationships with physicians and other healthcare providers, and federal and state reporting obligations. It is anticipated that the Company's compliance program will establish formal training requirements for all Company employees in areas applicable to individual job functions, as well as general training regarding criteria and requirements for participation in federal government healthcare programs. Management intends to establish a Company-wide hotline pursuant to which any employee may report activity that does not conform to current standards. Further, the Company anticipates that the existence of a compliance program will assist it in integrating all Fountain View and Summit facilities into a consistent Company-wide infrastructure, thereby facilitating operational and management economies of scale. QUALITY ASSURANCE The Company is committed to providing its patients with the highest possible standard of quality of care. To this end, both Fountain View and Summit have in place a Quality Assurance department consisting of registered nurses who routinely visit the Company's facilities and conduct quality assurance tests to ensure the consistently high quality of care provided in each facility. Further, Quality Assurance personnel conduct regular training for the nursing and other staff of each facility. The Company intends to consolidate the Quality Assurance departments of Fountain View and Summit in order to continue their tradition of providing the highest possible quality of care. In addition, the Company intends to develop and implement a compliance program that will address, in part, quality of care issues. See "--Compliance Program". The Company is in the process of obtaining accreditation by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") for each of its facilities. As of March 1, 1998, twelve of the Company's 44 SNFs are JCAHO accredited or are awaiting formal declaration of such accreditation, with the remainder of the facilities slated for JCAHO accreditation review in the next 24 months. Management believes that the Company's JCAHO accreditation will assist the Company in obtaining and maintaining high occupancy rates at its facilities and demonstrates its commitment to a high standard of quality of care. 61 MARKETING The Company's sales and marketing efforts are directed toward improving overall occupancy and quality mix by maximizing the number of private pay, managed care and Medicare patients on each facility's census. The Company believes that the selection of a long-term care facility is strongly influenced by word-of-mouth marketing and referrals from physicians, hospital discharge planners, community leaders and family members. Therefore, the Company's marketing strategy is focused at the local level, and the administrator, admissions coordinator and other personnel at each facility are responsible for contacting potential referral sources. Case managers at certain facilities actively market services to managed care organizations. Regional marketing directors support and coordinate sales and marketing efforts. The Company maintains a sales and marketing information system to monitor the results of its strategy. GOVERNMENT REGULATIONS LICENSURE. The Company's SNF, ALF, sub-acute and specialty medical service, therapy, pharmacy and DME supplies businesses are subject to various regulatory and licensing requirements of state and local authorities in California, Texas and Arizona. Each SNF is licensed by either the California Department of Health Services, the Texas Department of Human Services or the Arizona Department of Health Services, as applicable. Each ALF is licensed by the California Department of Social Services and the pharmacies are licensed by the California Board of Pharmacy and the Texas State Board of Pharmacy. All licenses must be renewed annually, and failure to comply with applicable rules, laws and regulations could lead to loss of licenses. In granting, monitoring and renewing licenses, these agencies consider, among other things, the physical condition of the facility, the qualifications of the administrative and nursing staffs, the quality of care and compliance with applicable laws and regulations. Such regulatory and licensing requirements are subject to change, and there can be no assurance that the Company will continue to be able to maintain necessary licenses or that it will not incur substantial costs in doing so. Failure to comply with such requirements could result in the loss of the right to payment by Medicare or Medicaid as well as the right to conduct the business of the licensed entity. Further, the facilities operated by the Company are subject to periodic inspection by governmental and other regulatory authorities to assure continued compliance with various standards and to provide for their continued licensing under state law and certification under the Medicare and Medicaid programs. From time to time, the Company receives notices from federal and state regulatory agencies relating to alleged deficiencies for failure to comply with all components of the regulations. Facilities which are not in substantial compliance and do not correct deficiencies within a certain time frame may be terminated from the Medicare and/or Medicaid programs. While the Company endeavors to comply with all applicable regulatory requirements, from time to time certain of the Company's nursing facilities have been subject to various sanctions and penalties as a result of deficiencies alleged by HCFA or state survey agencies. While in certain instances denial of certification or licensure revocation actions have been threatened, management believes that the Company will not suffer any material adverse effect as a result thereof. There can be no assurance, however, that the Company will not be subject to sanctions and penalties in the future as a result of such actions. MEDICARE AND MEDICAID. The Company's SNFs are subject to various requirements for participation in government-sponsored healthcare funding programs such as Medicare and Medicaid. To receive Medicare and Medicaid payments, each facility must also comply with a number of rules regarding charges and claims procedures, the violation of which can result in denial of reimbursement. Medicare is a health insurance program operated by the federal government for the aged and certain chronically disabled individuals. The Medicare program consists of Parts A and B. Participation in Part B is voluntary and is funded in part through the payment of premiums. Benefits under Part A include inpatient hospital services, skilled nursing services rendered in a SNF and medical services such as physical, occupational and speech therapy, certain pharmaceuticals and medical supplies. 62 Part B provides coverage for physician services. Part B also reimburses for medical services with the exception of pharmaceutical services. Medicare benefits are not available for intermediate and custodial levels of care including but not limited to residence in ALFs; however, medical and physician services furnished to patients requiring such care may be reimbursable under Part B. Currently, the Medicare program utilizes a cost-based reimbursement system for free-standing SNFs which, subject to limits fixed for the particular geographic area on the costs for routine services (excluding capital related expenses), reimburses SNFs for reasonable direct and indirect allowable costs incurred in providing services (as defined by the Medicare program). Allowable costs normally include administrative and general costs, as well as operating costs and rental, depreciation and interest expenses. Reimbursement is subject to retrospective audit adjustment. An interim rate based upon estimated costs is paid by Medicare during the cost reporting period and a cost settlement is made following an audit of the actual costs as reported in the filed cost report. Such adjustments may result in additional payments being made to the Company or in recoupments from the Company. The Company maintains reserves to cover retroactive audit adjustments. To the extent that the Company's costs exceed certain limits known as the Medicare Routine Cost Limits, the Company may submit exception requests seeking reimbursement for such excess costs from Medicare. To date, Summit has filed three exception requests and has received approval on all three. Fountain View has not filed any exception requests to date. There is no assurance the Company will be able to recover such excess costs on any future requests. If the Company files exception requests on a regular basis in the future and fails to recover the excess costs covered by such requests, such failure could adversely affect the Company's financial position and results of operations. However, exception requests will no longer be necessary upon implementation of PPS, as discussed more fully below. Fiscal intermediaries also occasionally undertake a more in-depth audit of a facility's billing records. In March 1997, one of Summit's facilities was the subject of a Medicare billing audit by its fiscal intermediary, resulting in a finding that approximately $1,500,000 of charges for SNF services (after cost report settlement and subject to downward adjustment) lacked a timely certification of medical necessity by a physician. Summit is currently repaying such charges against reimbursement of current claims. Following this audit, Summit adopted measures to strengthen its documentation relating to physician certification. While the Company does not believe that it is the target of any other focused reviews, there can be no assurance that substantial amounts will not be expended by the Company in connection with any such audit or to defend allegations arising therefrom. If it were found that a significant number of the Company's Medicare claims failed to comply with Medicare billing requirements, the Company could be materially adversely affected. The Balanced Budget Act requires the establishment of a prospective payment system, or PPS, for Medicare SNFs under which facilities will be paid a federal per diem rate for virtually all covered SNF services in lieu of the current cost-based reimbursement rate. PPS will be phased in over three cost reporting periods, starting with cost reporting periods beginning on or after July 1, 1998. The PPS rates have not yet been determined and there can be no assurance that the Company's revenues under PPS will be sufficient to cover its costs to operate its facilities. In addition, prior to the enactment of the Balanced Budget Act, federal law required state Medicaid programs to reimburse SNFs for costs incurred by efficiently and economically operated providers in order to meet quality and safety standards. The Balanced Budget Act repealed this payment standard, effective for services provided on or after October 1, 1997, thereby granting states greater flexibility in establishing payment rates. There can be no assurance that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to SNFs or that payments to SNFs will be made on a timely basis. Any such efforts to reduce Medicaid payment rates or failure of states to meet their Medicaid obligations on a timely basis would have a material adverse effect on the Company. 63 Current Medicare regulations applicable to transactions between related parties, such as the Company's subsidiaries, are relevant to the amount of Medicare reimbursement that the Company is entitled to receive for goods and services which are charged to the Medicare program. The amount charged on related party transactions is dependent upon whether or not the related party exception applies. For transactions between each provider and the applicable related party which do not qualify for the related party exception, the transaction is recorded at cost and no profit may be earned by the related party. For transactions which do qualify for the related party exception, the transaction is recorded at fair market value. The Company believes that it satisfies the requirements for exception to the related party rules in transactions between its long-term care facilities and its therapy, DME and pharmacy subsidiaries. If, however, the Company has failed or, in the future, fails to satisfy regulations for the related party exception with respect to inter-corporate transactions, the Medicare reimbursement that the Company received or will receive could be reduced, and as a result, the Company's financial condition could be materially and adversely affected. The Company's financial condition and results of operations may also be affected by the revenue reimbursement process, which in the Company's industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. Net revenues realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment by payors during the settlement process. Payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain costs are not reimbursable or because additional supporting documentation is necessary. The majority of third-party payor balances are settled within two to three years following provision of services. The Company's results of operations would be materially and adversely affected if the amount actually received from third-party payors in any reporting period differed materially from the amounts accrued in prior periods. The Company's financial condition and results of operations may also be affected by the timing of reimbursement payments and rate adjustments from third-party payors (for example, Medi-Cal has in the past exposed providers to payment delays, thus affecting reimbursement). THERAPY REGULATION. The Company furnishes therapy services on a contract basis to certain affiliated and unaffiliated providers. For Medicare patients, the providers bill the Medicare program for reimbursement of the amounts paid to the Company for these services. HCFA has the authority to establish limits on the amount Medicare reimburses for therapy services. For services other than inpatient hospital services, these limits are equivalent to the reasonable amount that would have been paid if provider employees had furnished the services. HCFA has exercised this authority by publishing "salary equivalency guidelines" for physical therapy, respiratory therapy, speech language pathology and occupational therapy services. On January 30, 1998, HCFA issued a final regulation, effective April 1, 1998, that will revise the pre-existing salary equivalency guidelines for physical therapy and respiratory therapy and establish, for the first time, salary equivalency guidelines for speech language pathology and occupational therapy services. HCFA estimates that the regulation will increase the reimbursement rates for physical therapy by 35% and for respiratory therapy by 10%. In contrast, however, HCFA expects the salary equivalency rates for occupational therapy and speech language pathology to reduce current reimbursement rates by 40% and 25%, respectively. The salary equivalency guidelines will not apply to SNFs that are paid under PPS, which is being phased-in by Medicare, as discussed above. Management cannot predict the effect the salary equivalency guidelines will have on the Company. PHARMACY REGULATION. The Company's pharmacies are subject to a variety of state licensing and other laws governing the storage, handling, sale or dispensing of drugs, and the provision of a duly licensed pharmacist in each pharmacy, in addition to federal regulation under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act. Moreover, the Company is required to register its pharmacies with the United States Drug Enforcement Administration, and to comply with requirements imposed by that agency with respect to security and reporting of inventories and 64 transactions. Medicare pays for the costs of prescription drugs furnished in a number of different settings under limited circumstances. The California and Texas Medicaid programs reimburse pharmacies for drugs supplied to patients based on the cost of the drug plus an additional amount which varies depending on the type of drugs supplied. OUTPATIENT THERAPY REGULATION. Outpatient therapy services are currently reimbursed on a per visit basis, subject to cost limits established by HCFA for the given type of therapy provided to the patient. The Balanced Budget Act contains provisions affecting outpatient rehabilitation agencies and providers, including a 10% reduction in operating and capital costs for 1998, a fee schedule for therapy services beginning in 1999, and the application of per beneficiary therapy caps currently applicable to independent therapists to all outpatient rehabilitation services beginning in 1999. These provisions may affect the reimbursement to the Company in connection with the services provided by On-Track, the Company's outpatient therapy subsidiary. DME REGULATION. Medicare generally provides reimbursement for DME on a fee schedule basis. The amount reimbursed depends on the classification of the DME and, generally, will be the lesser of (1) the provider's actual charge for the DME or (2) the fee schedule amount. REFERRAL RESTRICTIONS AND FRAUD AND ABUSE. The Company is also subject to federal and state laws which govern financial and other arrangements between healthcare providers. Federal law, as well as the law in California, Texas and Arizona and other states, prohibits direct or indirect payments in some cases or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the federal Anti-Kickback Statute which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of Medicare and Medicaid patients. A wide array of relationships and arrangements, including ownership interests in a company by persons who refer or are in a position to refer patients, as well as personal service agreements have, under certain circumstances, been alleged or been found to violate these provisions. Certain arrangements, such as the provision of services for less than fair market value compensation, may also violate such laws. Because of the law's broad reach, the federal government has published regulations, known commonly as "safe harbors", which set forth the requirements under which certain relationships will not be considered to violate the law. One of these safe harbors protects payments for personal services which are set in advance at a fair market rate and which do not vary with the value or volume of services referred, provided there is a written contract which meets certain requirements. A similar safe harbor applies for certain agreements for management services. A safe harbor for discounts, which focuses primarily on appropriate disclosure, is also available. A violation of the federal Anti-Kickback Statute and similar state laws could result in the loss of eligibility to participate in Medicare or Medicaid, or in criminal penalties of up to five years imprisonment and/or $25,000 fines. In addition, the federal government and some states restrict certain business relationships between physicians and other providers of healthcare services. Effective January 1, 1995, Stark II prohibits any physician with a financial relationship (defined as a direct or indirect ownership or investment interest or compensation arrangement) with an entity from making a referral for a Medicare or Medicaid (along with certain other federal payment programs) "designated health service" to that entity, and prohibits that entity from billing for such services. "Designated health services" do not include skilled nursing services, but do include many services which SNFs provide to their patients including therapy, DME and enteral and parenteral nutrition. An exception exists for the payment of fair market compensation for the provision of personal services, provided various requirements are met. Each of the Company's SNFs has at least one medical director who is a licensed physician. The medical directors may from time to time refer their patients to the Company's facilities in their independent professional judgment. The physician anti-referral restrictions and prohibitions could, among other things, require the Company to modify its contractual arrangements with its medical 65 directors or prohibit its medical directors from referring patients to the Company. Violations of Stark II may result in the imposition of civil monetary penalties of up to $15,000 for each prohibited service provided as well as restitution of reimbursement for such services. There are various federal and state laws prohibiting other types of fraud by healthcare providers, including criminal provisions which prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments. Violation of these provisions is a felony punishable by up to five years imprisonment and/or $25,000 fines. Civil provisions prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment. The penalties for such a violation are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. State and federal governments are devoting increasing attention and resources to anti-fraud initiatives against healthcare providers. The Accountability Act and the Balanced Budget Act expand the penalties for healthcare fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs and the establishment of civil monetary penalties for violations of the anti-kickback provisions. While the Company believes that its billing practices are consistent with Medicare and Medicaid criteria, those criteria are often vague and subject to interpretation. There can be no assurance that aggressive anti-fraud enforcement actions will not adversely affect the business of the Company. Under Operation Restore Trust, a major anti-fraud demonstration project, the OIG, in cooperation with other federal and state agencies, has focused on the activities of SNFs, home health agencies, hospices, and DME suppliers in certain states, including California and Texas, in which the Company currently operates. Due to the success of Operation Restore Trust, the project has been expanded to numerous other states and to additional healthcare providers including providers of ancillary nursing home services. While management does not believe the Company is the target of any Operation Restore Trust investigations, there can be no assurance that substantial amounts will not be expended by the Company to cooperate with any such investigation or to defend allegations arising therefrom. If it were found that any of the Company's practices failed to comply with the anti-fraud provisions, the Company could be materially affected. CORPORATE PRACTICE OF MEDICINE. Many states, including California, Texas and Arizona, prohibit business corporations and other persons or entities not licensed to practice medicine from providing, or holding themselves out as a provider of, medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws, their construction and level of enforcement, vary from state to state. PENDING LEGISLATION. Government reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative ceilings and government funding restrictions, all of which could materially decrease the rates paid to the Company for its future services or the services for which the Company will be able to seek reimbursement. Since 1972, Congress has consistently attempted to curb federal spending on healthcare programs. The Company expects that there will continue to be a number of state and federal proposals to limit Medicare and Medicaid reimbursement for healthcare services. The Company cannot at this time predict what healthcare reform legislation will ultimately be enacted and implemented or whether other changes in the administration or interpretation of the governmental healthcare programs will occur. There can be no assurance that future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs, if enacted, will not have a material adverse effect on the results of operations of the Company. 66 SHIFT TO MANAGED CARE. The growth in healthcare spending has caused the private sector, Medicare and state Medicaid programs to reshape the financing of healthcare services for their beneficiaries. Management anticipates that one of the most significant changes to the financing of healthcare services will be the shift to managed care, and that the federal Medicare program, state Medicaid programs and private insurers will place greater reliance on managed care alternatives in the future. According to HCFA, as of 1996, 35% of Medicare enrollees in California had enrolled in a managed care program. In comparison, 8% of Medicare enrollees in Texas are enrolled in managed care programs, and approximately 14% of Medicare enrollees nationwide are enrolled in a managed care program. Providers are generally willing to discount charges for services to managed care patients because managed care plans can direct (or strongly influence) the flow of patients. Management believes that the Company is likely to service an increasing proportion of managed care enrollees in the future, although payment rates for such services may not be as favorable as those presently in effect. There can be no assurance that reimbursements for services provided under managed care programs will not adversely affect the Company's revenues. ENVIRONMENTAL REGULATION. The Company is also subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Among the types of regulatory requirements faced by healthcare providers are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls, and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials and wastes; and certain other requirements. In its role as owner and/or operator of properties or centers, the Company may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off, or emitted, discharged, leaked, escaped or been transported from, the property. Ancillary to the Company's operations are, in various combinations, the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. Such activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. There can be no assurance that the Company will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the Company. COMPETITION The Company operates in a highly competitive industry. The Company's SNFs and ALFs are located in communities that also are served by similar facilities operated by others. Some competing facilities provide services not offered by the Company and some are operated by entities having greater financial and other resources than the Company. In addition, some competing facilities are operated by non-profit organizations or government agencies supported by endowments, charitable contributions, tax revenues and other resources not available to the Company. Furthermore, cost containment efforts, which encourage more efficient utilization of acute care hospital services, have resulted in decreased hospital occupancy in recent years. As a result, a significant number of acute care hospitals have converted portions of their facilities to other purposes, including specialty and sub-acute units. The competitiveness of the Company's markets is further supported by the fact that within California, Texas and Arizona, a Certificate of Need is no longer required in order to build or expand a SNF. However, in Texas, competition is limited by restrictions on the number of beds that can be enrolled in the Medicaid program. The Company also expects to encounter competition during future initiatives of acquiring or developing new facilities. The Company's pharmacies and DME business also operate in highly 67 competitive environments and compete with regional and local pharmacies, medical supply companies and pharmacies operated by other long-term care chains or by other companies ranging from small local operators to companies which are national in scope and distribution capability. The Company also expects to encounter continued competition in connection with the provision of other ancillary services, including physical, occupational and speech therapy. PROPERTIES As of March 31, 1998, the Company had a total of 44 SNFs with an aggregate of 5,937 beds and 6 ALFs with an aggregate of 641 beds, as reflected in the following tables:
SUMMIT FOUNTAIN VIEW ---------------- ---------------- TOTAL TOTAL STATES FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS ------ ---------- ----- ---------- ----- ---------- ----- SNFs California............. 13 1,515 8 1,061 21 2,576 Texas.................. 22 3,211 -- -- 22 3,211 Arizona................ 1 150 -- -- 1 150 --- ----- --- ----- --- ----- Subtotal............. 36 4,876 8 1,061 44 5,937 ALFs California............. 5 475 1 166 6 641 --- ----- --- ----- --- ----- Total................ 41 5,351 9 1,227 50 6,578 === ===== === ===== === =====
FOUNTAIN VIEW FACILITIES
YEAR YEAR FACILITY LOCATION # BEDS OWNED/LEASED BUILT RENOVATED -------- ----------- ------ ------------ ----- --------- SKILLED NURSING--CALIFORNIA Rio Hondo...................... Montebello 200 Leased(a) 1968 1996/1998 Hancock Park................... Los Angeles 141 Leased 1969 1996/1998 Brier Oak Terrace.............. Los Angeles 159 Leased 1966 1997/1998 Alexandria..................... Los Angeles 177 Leased 1969 1997 Montebello..................... Montebello 99 Leased(a) 1969 -- Fountain View.................. Los Angeles 99 Leased(a) 1963 1996/1998 Sycamore Park.................. Los Angeles 90 Leased(a) 1965 1997 Elmcrest....................... El Monte 96 Leased 1958 1997 ASSISTED LIVING--CALIFORNIA Hancock Park................... Los Angeles 166 Leased 1971 1996/1998 ----- Total.................................... 1,227 =====
- -------- (a) Facility is owned by the Snukal family and leased to a subsidiary of Fountain View. 68 SUMMIT FACILITIES
YEAR FACILITY LOCATION # BEDS OWNED/LEASED YEAR BUILT RENOVATED -------- ---------------- ------ ------------ ------------ --------- SKILLED NURSING-- CALIFORNIA Woodland................ Reseda 153 Leased 1972 1996 Royalwood............... Torrance 108 Leased 1952 1998(c) Valley.................. Fresno 99 Owned 1960 1996 Villa Maria............. Santa Maria 85 Owned 1970 1995 Earlwood................ Torrance 85 Owned 1967 1993 Sharon.................. Los Angeles 85 Leased 1967 1996 Bay Crest............... Torrance 78 Leased 1960/1968(b) 1995 Fountain................ Orange 172 Owned 1963/1966(b) 1994 Carehouse............... Santa Ana 174 Owned 1974/1994(b) 1998(c) Palm Grove.............. Garden Grove 122 Leased 1958 1994 Anaheim................. Anaheim 97 Leased 1967 1997 Devonshire.............. Hemet 98 Owned 1969 1992 Willow Creek............ Fresno 159 Owned 1996 -- ----- Subtotal.............. 1,515 SKILLED NURSING--TEXAS Coronado................ Abilene 219 Owned 1969 1996 West Side............... White Settlement 238 Owned 1985 1996 The Woodlands........... Houston 212 Owned 1988 1994 Colonial Tyler.......... Tyler 162 Owned 1968 1997 Colonial Manor.......... New Braunfels 152 Owned 1967 1996 Guadalupe Valley........ Seguin 149 Leased(a) 1990 1996 Town & Country.......... Boerme 124 Owned 1972 1994 Clairmont--Longview..... Longview 174 Owned 1986/1996(b) -- Clairmont--Beaumont..... Beaumont 148 Owned 1987/1996(b) -- Clairmont--Tyler........ Tyler 116 Owned 1989 1998 Southern Manor.......... Hallettsville 114 Leased(e) 1991 1995 Southwood............... Austin 112 Owned 1975 1992 Comanche Trail.......... Big Spring 115 Leased(a) 1991 1995 Lubbock................. Lubbock 114 Owned 1968 1995 Monument Hill........... La Grange 111 Owned 1987 1997 Live Oak................ George West 100 Leased(a) 1993 1995 Oak Crest............... Rockport 92 Owned 1991 1996 Oakland Manor........... Giddings 114 Leased(e) 1992 1995 Oak Manor............... Flatonia 80 Owned 1980 1995 Heritage Oaks........... Lubbock 161 Owned 1995/1996(b) -- Cityview................ Fort Worth 210 Owned 1997 -- Briarcliff.............. McAllen 194 Leased(a) 1993/1996(b) -- ----- Subtotal.............. 3,211 SKILLED NURSING--ARIZONA Phoenix................. Phoenix 150 Leased 1965/1995(b) 1995 ASSISTED LIVING-- CALIFORNIA Carson.................. Carson 202 Owned 1972 1994 Spring.................. Torrance 51 Owned 1962 1993 Hemet................... Hemet 84 Owned(d) 1965 1997 Fountain................ Orange 72 Owned 1967 1995 Ashton Court............ Orange 66 Owned 1967 1997 ----- Subtotal.............. 475 ----- Total................. 5,351
- -------- (a) Option to purchase. (b) Year of latest addition to facility. (c) Scheduled. (d) Building owned by Summit with real property held under a ground lease extending to 2030. (e) In May 1998, the Company notified the landlord of its intent to exercise the option to purchase effective August 1, 1998 at the predetermined price of $1,900,000. 69 EMPLOYEES As of March 31, 1998, Fountain View had approximately 1,200 full-time equivalent employees, and Summit had approximately 4,700 full-time equivalent employees. Fountain View has three collective bargaining agreements for a union covering approximately 400 of Fountain View's employees. Fountain View considers the relations with its employees to be good and it has not experienced any strikes or work stoppages. None of Summit's employees are covered by collective bargaining agreements and Summit considers the relations with its employees to be good and it has not experienced any strikes or work stoppages. Both Fountain View and Summit are subject to federal and state minimum wage and applicable federal and state wage and hour laws and maintain various employee benefit plans. INSURANCE Fountain View maintains general and professional liability coverage, employee benefits liability, property, inland marine, crime, boiler and machinery coverage, health, automobile, employment practices liability, earthquake and flood, workers' compensation and employers' liability that Fountain View believes is adequate. Summit maintains general and professional, property, casualty, health, directors and officers, automobile, crime, employee's and workers' compensation coverage that Summit believes is adequate. Summit's workers' compensation insurance for its California and Arizona employees pays for claims up to $250,000 per claim and for the purchase of reinsurance coverage for amounts in excess of the per claim limit and for annual aggregate claim amounts in excess of $986,000. Texas employees are covered by a policy for employer's excess and occupational indemnity for risks in excess of $150,000 up to $1,000,000 per occurrence and no annual aggregate stop loss. Summit pays for claims up to $150,000 per occurrence. Fountain View's and Summit's services subject them to liability risk. Malpractice claims may be asserted against them if their services are alleged to have resulted in patient injury or other adverse effects, the risk of which is greater for higher-acuity patients, such as those treated by specialty and sub-acute services, than for traditional long-term care patients. Fountain View and Summit have from time to time been subject to malpractice claims and other litigation in the ordinary course of their businesses. While the Company believes that the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's business or financial condition, there can be no assurance that future claims will not have such an effect on the Company. Fountain View's current policy for general and professional liability coverage is a per occurrence policy and has limits of $1,000,000 per occurrence and $3,000,000 in the aggregate per year and carries no deductible except for employee benefits liability coverage, which carries a $1,000 deductible per claim. In addition, Fountain View has a per occurrence umbrella policy which provides additional insurance limits of $10,000,000 per occurrence and $10,000,000 aggregate per year with a self-insured retention of $10,000 per occurrence over its primary general, professional, automobile and employers' liability coverage policies. Summit's current policy for general and professional liability coverages is a claims-made policy and has limits of $500,000 per occurrence and $1,000,000 in the aggregate per year and carries a self-insured retention of $100,000 per occurrence and a $700,000 annual aggregate loss limit. In addition, Summit has a claims-made umbrella policy which provides additional insurance of $8,500,000 per occurrence and $8,500,000 aggregate per year over its primary general and professional policy, its automobile liability policy and its employer liability policy. Although Fountain View and Summit have not been subject to any judgments or settlements in excess of their respective insurance limits, there can be no assurance that claims for damages in excess of such coverage limits will not arise in the future. 70 LEGAL PROCEEDINGS Fountain View and Summit are subject to routine litigation in the ordinary course of business. Although there can be no assurances, in the opinion of management, the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's business, financial condition or results of operations. 71 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION(S) ---- --- ----------- William C. Scott...................... 60 Director and Chairman Robert M. Snukal...................... 55 Director, Chief Executive Officer and President Director and Executive Vice Sheila S. Snukal...................... 54 President Derwin L. Williams.................... 60 Chief Financial Officer Keith Abrahams........................ 38 President, Locomotion Therapy, Inc. and On-Track Therapy Center, Inc. Michael H. Martel..................... 35 Senior Vice President, Marketing Michel Reichert....................... 47 Director Michael F. Gilligan................... 42 Director Peter Z. Hermann...................... 43 Director Mark J. Jrolf......................... 33 Director
William C. Scott became a Director and Chairman upon the closing of the purchase of Summit Shares in the Tender Offer on March 27, 1998. Mr. Scott previously served as Chief Executive Officer of Summit since May 1994 and Chairman of the Board of Summit since December 1995. Mr. Scott served as President of Summit from December 1985 until January 1996 and held the office of Chief Operating Officer from December 1985 until May 1994. Mr. Scott served as Senior Vice President of Summit Health Ltd., Summit's former parent company, from December 1985 until its acquisition by OrNda Health Corp. in April 1994 and previously was a partner with Arthur Andersen & Co. Robert M. Snukal became a Director, Chief Executive Officer and President on August 1, 1997, upon the formation of Fountain View. For the preceding five years, Mr. Snukal has served as a Director and President of each of Fountain View's subsidiaries, which were owned directly by Mr. Snukal and Sheila Snukal during that period and prior to the formation of Fountain View. Mr. Snukal is the husband of Sheila Snukal and the father-in-law of Mr. Abrahams. Sheila S. Snukal became a Director and Executive Vice President on August 1, 1997, upon the formation of Fountain View. For the preceding five years, Mrs. Snukal has served as a Director and Executive Vice President of each of Fountain View's subsidiaries, which were owned directly by Mrs. Snukal and Robert M. Snukal during that period and prior to the formation of Fountain View. Mrs. Snukal is the wife of Robert M. Snukal and the mother-in-law of Mr. Abrahams. Derwin L. Williams assumed the role of Chief Financial Officer on April 16, 1998. Mr. Williams previously served as Vice President--Finance and Chief Financial Officer of Summit from July 1, 1993, and Treasurer from May 10, 1994. Mr. Williams held the Treasurer position at three other nursing home companies: Hallmark Health Service, Inc., from November 1989 to February 1992; Care Enterprises from April 1980 to August 1987; and Flagg Industries, Inc., from June 1978 to March 1980. Mr. Williams has also served in various capacities specializing in Medicare reimbursement for the Company in 1992 and 1993 and for Beverly Enterprises in 1988 and 1989. He is also a certified public accountant. Mr. Williams has given notice to the Company of his resignation to be effective no later than July 31, 1998. Keith Abrahams has been President of Locomotion since 1995. Mr. Abrahams was previously employed as a Chief Financial Officer of Heftel Broadcasting from 1987 to 1992, a radio broadcasting company. He is also a certified public accountant. Mr. Abrahams is the son-in-law of Mr. and Mrs. Snukal. 72 Michael H. Martel assumed the role of Senior Vice President-Marketing on April 16, 1998. Mr. Martel previously served as Senior Vice President-- Marketing of Summit in March 1995. Prior to joining Summit, Mr. Martel was Vice President--Marketing for Arbor Health Care Company from August 1992 to March 1995. Mr. Martel served as Regional Director of Marketing for the acute care rehabilitation division of National Medical Enterprises from April 1988 to August 1992. Michel Reichert has been a Director of the Company since August 1, 1997. Since 1994, Mr. Reichert has been a Managing General Partner of Heritage Partners, Inc., a Boston-based private investment firm. Prior to 1994, Mr. Reichert was a Managing Director of BancBoston Capital Inc., a private investment firm. Michael F. Gilligan became a Director of the Company immediately prior to the consummation of the Tender Offer on March 27, 1998. Since December 1993, Mr. Gilligan has been a General Partner of Heritage Partners, Inc., a Boston- based private investment firm. Prior to 1994, Mr. Gilligan was a Director of BancBoston Capital Inc., a private investment firm. Peter Z. Hermann became a Director of the Company immediately prior to the consummation of the Tender Offer on March 27, 1998. Since January 1994, Mr. Hermann has been a General Partner of Heritage Partners, Inc., a Boston- based private investment firm. Prior to 1994, Mr. Hermann was a Director of BancBoston Capital Inc., a private investment firm. Mark J. Jrolf has been a Director of the Company since August 1, 1997. Since February 1997, Mr. Jrolf has served as Partner and Vice President of Heritage Partners, Inc. From September 1996 to January 1997, Mr. Jrolf served as a Vice President of Heritage Partners, Inc. From September 1993 to September 1996, Mr. Jrolf was a consultant with McKinsey & Co. specializing in healthcare. Executive officers of the Company are appointed by the Board, subject to the provisions of such officers' respective employment agreements. See "-- Employment Agreements". 73 EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth compensation for the past three fiscal years for the Company's Chief Executive Officer and the other four most highly compensated executive officers (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS --------------- ------------ SECURITIES UNDERLYING ALL OTHER FISCAL SALARY BONUS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($) - --------------------------- ------ ------- ------- ------------ ------------ Robert M. Snukal............. 1997 298,340 400,000 -- -- President, Chief Executive 1996 258,750 696,912 -- -- Officer and Director 1995 246,000 967,900 -- -- William C. Scott (2)......... 1997 394,773 -- -- -- Director and Chairman 1996 369,869 150,000 165,000 -- 1995 344,869 162,500 50,000 -- Sheila S. Snukal............. 1997 178,125 200,000 -- -- Executive Vice President 1996 144,750 327,570 -- -- and Director 1995 132,000 521,200 -- -- Derwin L. Williams (2)....... 1997 181,423 -- -- -- Chief Financial Officer 1996 171,008 50,000 25,000 -- 1995 147,162 40,000 20,000 -- Michael H. Martel (1)(2)..... 1997 152,404 10,000 10,000 -- Senior Vice President/Marketing 1996 141,308 -- 10,000 -- 1995 36,250 10,000 25,000 --
- -------- (1) Mr. Martel joined Summit Care Corporation in March 1995. (2) Compensation indicated is for the fiscal year ended June 30. Options Grants In Last Fiscal Year. The Company did not grant any options to the Named Executive Officers in the last fiscal year. All options to purchase shares of Summit Care Corporation outstanding immediately prior to the date of the Merger were converted into the right to receive $21.00 per share in cash, less the exercise price of such option. Fiscal Year-End Option Values. During fiscal 1997, none of the Named Executive Officers exercised stock options issued by the Company. In addition, none of the Named Executive Officers held options to purchase stock of the Company as of the end of the Company's most recent fiscal year. All options to purchase shares of Summit Care Corporation outstanding immediately prior to the date of the Merger were converted into the right to receive $21.00 per share in cash, less the exercise price of such option. STOCKHOLDERS AGREEMENT CORPORATE GOVERNANCE. On March 27, 1998, the Company and its stockholders entered into a Stockholders Agreement (the "Stockholders Agreement") concurrently with the closing of the Tender Offer. The Stockholders Agreement, which was amended on May 4, 1998, provides that the Company's board of directors (the "Board") will consist of directors nominated as follows: (i) two individuals (but not less than 25% of the total number of directors) will be designated by Mr. Snukal, as long as he continues to hold any shares of the Company's common stock; (ii) one individual will be designated by Mr. Scott, as long as he continues to hold any shares of the Company's common stock; (iii) one individual will be designated by Baylor, as long as it continues to hold any shares of the Company's common stock or any securities convertible into or exercisable for the Company's common stock; and (iv) all other directors will be designated by the holders of a majority of the shares of 74 common stock of the Company held by Heritage and certain co-investors (which designation is expected to be controlled by Heritage). The Board includes a majority of directors designated by Heritage. Under the Stockholders Agreement, each stockholder of the Company has granted Heritage an irrevocable proxy to vote such stockholder's securities of the Company, except with respect to matters the effect of which on such stockholder differs materially and adversely from the effect on Heritage. Board vacancies will be filled by a designee of the individual or group who originally designated the vacating director. Each individual or group entitled to designate a director will also be entitled to direct the removal of such director and designate a replacement director. SPECIAL PROVISIONS FOR SERIES B NON-VOTING COMMON STOCK. Mr. and Mrs. Snukal own an aggregate of 62,599 shares of the Company's Series B Non-Voting Common Stock and Mr. Scott owns 51,603 shares of the Company's Series B Non-Voting Common Stock, all of which were issued to them by the Company for nominal consideration. These shares represent approximately 9.63% of the total number of outstanding shares of the Company's common stock, on a fully-diluted basis. The Stockholders Agreement provides that some or all of the Company's Series B Non-Voting Common Stock will be subject to forfeiture upon a change of control of the Company, an initial public offering of its shares or other similar events (each, a "Trigger Event"), with the precise number of shares forfeited to be determined on a sliding scale based on the value of the Company's common equity at the date of the Trigger Event in relation to certain value targets at various dates in the future. Under this arrangement, the higher the value of the Company at the date of the Trigger Event, the more shares of Series B Non-Voting Common Stock Mr. and Mrs. Snukal and Mr. Scott will retain. STOCK TRANSFER RESTRICTIONS AND RIGHTS. The Stockholders Agreement provides for certain transfer restrictions on securities of the Company. The stockholders of the Company who are members of management may not transfer their securities until four years after the consummation of the Tender Offer, except for certain transfers in connection with estate planning, provided that Mr. Snukal may transfer his securities earlier if the Company terminates his employment without cause. See "--Employment Agreements". The Company and certain stockholders have a right of first refusal on transfers of Company securities by a stockholder, other than estate planning transfers by management, transfers by Heritage and certain transfers to affiliates. If Heritage transfers its securities, other than to its partners, the other stockholders will have the right to participate on a pro rata basis with Heritage in such transfers. Heritage will also have the right to require all other stockholders to transfer a pro rata portion of their shares in a transaction in which Heritage transfers its shares. OTHER. The Stockholders Agreement also (i) provides stockholders with pre- emptive rights in the event of certain future issuances of securities by the Company, (ii) restricts the ability of the Company to issue shares of capital stock having rights senior or on par with those of the Series A Preferred Stock and of the Company's subsidiaries to issue shares of capital stock while any shares of Series A Preferred Stock are outstanding, unless the Company is in compliance with certain financial tests, (iii) limits the amounts of dividends or distributions which the Company may pay with respect to its common stock while the Series A Preferred Stock remains outstanding, and (iv) includes a mechanism to convert all existing shares of common stock into a single series of common stock upon an initial public offering of the Company. The agreement will terminate upon the consummation of an initial public offering by the Company. EMPLOYMENT AGREEMENTS On March 27, 1998, the Company entered into employment agreements with Mr. Snukal, Mrs. Snukal and Mr. Scott. 75 Each employment agreement provides a term of employment of five years, which will automatically renew for up to five additional one-year terms unless either the Company or the respective employee provides prior written notice of termination to the other party, and specifies a base salary, a bonus range and a package of benefits. Mr. Snukal is employed as Chief Executive Officer, Mrs. Snukal is employed as Executive Vice President and Mr. Scott is employed as Chairman of the Company. The employment agreements provide base salaries for the year ending March 1999 as follows: William C. Scott--$450,000; Robert M. Snukal--$500,000; and Sheila Snukal--$225,000. Such base salaries will be subject to cost of living adjustments for each subsequent year. The employment agreements provide for annual bonuses, based upon the achievement of certain financial targets, of up to the following amounts for the year ending March 1999 and each subsequent year: William C. Scott--$350,000; Robert M. Snukal-- $500,000; and Sheila Snukal--$125,000. Each employment agreement provides for termination of employment at any time by the Company with or without cause or in the event of the death or disability of the employee. Each of the employment agreements also provides for severance pay upon termination by the Company without cause (other than for death or disability). The Company must pay the employee his or her base salary as in effect prior to any such termination for the duration of the employee's scheduled employment term (plus an additional $25,000 annually in the case of such termination of both Mr. and Mrs. Snukal and, in the case of Mr. Scott, less an amount, if any, he is then due under the Summit Special Severance Plan adopted by Summit in connection with the Merger). If Mr. Snukal is terminated without cause, Mrs. Snukal may, at her option, deem her employment to have been terminated without cause and receive the severance referred to in the preceding sentence. No severance will be payable in the event of a termination of employment as a result of death, disability or retirement, or a termination by the employee without good reason or by the Company with cause. Under the employment agreements, each of Mr. and Mrs. Snukal and Mr. Scott agree not to compete with the Company for the greater of five years after the date of such agreements or three years after termination of employment, subject to certain exceptions. In addition, each of Mr. and Mrs. Snukal and Mr. Scott agree that, for the greater of five years after the date of the employment agreement or two years after termination, he or she will not solicit (i) any person who is, or was within the one-year period immediately prior to termination of the employee's employment with the Company, employed by, a consultant to or associated with the Company or (ii) a recent (within two years) client, customer or supplier to the Company. MANAGEMENT EQUITY INCENTIVE PLANS The Company intends to adopt one or more management equity incentive plans to attract, retain and incentivize its management and employees. These plans may include a stock option plan to make stock options available to employees (other than Mr. Scott and Mr. Snukal), directors and consultants. Stock options granted may be qualified or non-qualified. The Company expects that vesting of stock options may be subject to certain conditions, including achievement of Company and individual performance objectives. In addition, these plans may include a restricted stock plan providing for the grant of restricted stock that would be subject to vesting based on the achievement of operating and financial goals. DIRECTOR COMPENSATION Directors of the Company do not currently receive compensation from the Company for their service in such capacity. 76 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding ownership of the voting common stock of the Company by (i) each person who beneficially owns more than 5% of the outstanding shares of the Company's voting common stock, (ii) each director of the Company, (iii) each of the executive officers of the Company and (iv) each of the directors and executive officers of the Company as a group. Each of the following stockholders has sole voting and investment power with respect to shares beneficially owned by such stockholder, except to the extent that authority is shared with spouses under applicable law or as otherwise noted.
NUMBER PERCENT NAME OF SHARES(1) OF CLASS ---- ------------ -------- Heritage Fund II, L.P.(2)............................. 537,486 50.2% Michel Reichert(2).................................... 537,486 50.2 Michael F. Gilligan(2)................................ 537,486 50.2 Peter Z. Hermann(2)................................... 537,486 50.2 Mark J. Jrolf(2) ..................................... 537,486 50.2 Robert M. Snukal(3)................................... 149,484 14.0 Sheila S. Snukal(3)................................... 149,484 14.0 Goldman, Sachs & Co.(4)............................... 79,032 7.4 GS Private Equity Partners, L.P.(4)................... 79,032 7.4 GS Private Equity Partners Offshore, L.P.(4).......... 79,032 7.4 PMI Mezzanine Fund, L.P.(5)........................... 59,275 5.5 Baylor Health Care System(6) ......................... 54,999 5.1 William C. Scott(7)................................... 31,357 2.9 Keith Abrahams(8)..................................... 16,588 1.6 All directors and executive officers as a group (10 persons)............................................. 734,915 68.6
- -------- (1) Number of shares represents the number of shares of Series A Common Stock and Series C Common Stock, which comprise all of the Company's voting stock. It does not include the Series A Preferred Stock and Series B Non- Voting Common Stock. For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares as of a given date which such person has the right to acquire within 60 days after such date. (2) The address of such stockholder is c/o Heritage Partners, Inc., 30 Rowes Wharf, Boston, MA 02110. The shares shown as beneficially owned by Mr. Reichert, Mr. Gilligan, Mr. Hermann and Mr. Jrolf represent 525,633 shares and warrants to purchase 11,853 shares owned of record by Heritage. Each of such persons, through one or more intermediaries may be deemed to control the voting and disposition of the securities owned by Heritage, and accordingly may be deemed to have shared voting and investment power with respect to all shares held by Heritage. However, each of such persons disclaims beneficial ownership of the securities held by Heritage. Heritage has a proxy to vote an additional 474,367 shares held by other stockholders, representing 44.2% of the Company's voting stock, except with respect to matters the effect of which on such other stockholders differs materially and adversely from the effect on Heritage. Heritage, Mr. Reichert, Mr. Gilligan, Mr. Hermann and Mr. Jrolf disclaim beneficial ownership of such shares. (3) The address of such stockholder is c/o Fountain View, Inc., 11900 Olympic Boulevard, Suite 680, Los Angeles, CA 90064. The shares shown as beneficially owned by Mr. Snukal and by Mrs. Snukal represent an aggregate of 149,484 shares owned jointly by them, and as to which they have shared voting and investment power. Mr. and Mrs. Snukal also own an aggregate of 62,599 shares of the Company's Series B Non-Voting Common Stock. (4) The address of such stockholder is c/o Goldman, Sachs & Co., 85 Broad Street, New York, NY 10004. Shares shown as beneficially owned by Goldman, Sachs & Co., GS Private Equity Partners, L.P. and GS Private Equity Partners Offshore, L.P. represent 53,393 shares owned of record by GS Private Equity Partners, L.P. and 25,639 shares owned of record by GS Private Equity Partners Offshore, L.P. Each of GS Private Equity Partners, L.P. and GS Private Equity Partners Offshore, L.P. is an affiliate of Goldman, Sachs & Co. and each of such entities disclaims beneficial ownership of the other entity's securities. Goldman, Sachs & Co. disclaims beneficial ownership of the securities owned by such entities. (5) The address of such stockholder is c/o Pacific Mezzanine Group, 610 Newport Center Dr., Suite 1100, Newport Beach, CA 92660. (6) The address of such stockholder is 3500 Gaston Avenue, Suite 150, Dallas, TX 75246. (7) Mr. Scott also owns an aggregate of 51,603 shares of the Company's Series B Non-Voting Common Stock. (8) The address of such stockholder is c/o Fountain View, Inc., 11900 Olympic Blvd., Suite 680, Los Angeles, CA 90064. Shares shown as beneficially owned by Mr. Abrahams include 8,294 shares owned by Stacy Abrahams, his wife. 77 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INVESTMENT AGREEMENT The Company and Robert Snukal, Sheila Snukal, William Scott, Heritage Fund II, L.P., Heritage Investors II, L.L.C., Heritage Fund II Investment Corporation, HFV Holdings, LLC, Nassau Capital Partners II L.P., NAS Partners I LLC, Paribas North America, Inc., Phoenix Home Life Mutual Insurance Company, PMI Mezzanine Fund, L.P., GS Private Equity Partners, L.P., GS Private Equity Partners Offshore, L.P. and Sutro Investment Partners V, LLC (collectively, the "Investors") entered into an Investment Agreement dated March 27, 1998, providing for the issuance by the Company to such stockholders of an aggregate of 15,000 shares of Series A Preferred Stock, 668,065 shares of Series A Common Stock, 114,202 shares of Series B Common Stock and a warrant to purchase 71,119 shares of Series C Common Stock. These securities were issued immediately prior to the consummation of the Tender Offer (other than the Series A Preferred Stock, the warrant and certain shares issued to Mr. Scott, which were issued promptly after the Merger). The Investment Agreement specifies the consideration paid by the Investors for the issuance of such Company securities, which includes (i) a new cash investment in an aggregate amount of approximately $82 million, (ii) in the case of Heritage, Mr. Snukal and Mrs. Snukal, the exchange of previously-held stock of Fountain View, and (iii) in the case of Mr. Scott, the issuance by him to the Company of a limited recourse promissory note. Pursuant to the terms of the Investment Agreement, Heritage made an additional cash investment of $2.6 million for the purchase of the shares of Series A Preferred Stock and the warrants for shares of Series C Common Stock. On May 4, 1998, Baylor and Buckner purchased certain shares of the Company's Series A Preferred Stock and a portion of the warrants to purchase Series C Preferred Stock from Heritage and signed a supplemental signature page agreeing to become parties to the Investment Agreement. See "Prospectus Summary--The Financings" and "--Recent Developments". THE CERTIFICATE OF INCORPORATION In connection with the Transactions, on March 27, 1998 and May 6, 1998, the Company amended its certificate of incorporation to provide that its authorized capital stock consists of (a) 3,000,000 shares of Common Stock designated as follows: (i) 1,500,000 shares of Series A Common Stock, (ii) 200,000 shares of Series B Non-Voting Common Stock, (iii) 1,300,000 shares of Series C Common Stock and (b) 1,000,000 shares of Preferred Stock, 200,000 of which are designated Series A Preferred Stock. The shares of Series A Preferred Stock are subject to mandatory redemption upon an underwritten initial public offering of the Company's common stock or after May 1, 2010. The certificate of incorporation further provides that, on liquidation of the Company, the holders of Series A Preferred Stock are entitled to receive a liquidation payment. After such payment, the assets of the Company will be divided ratably among the holders of (i) the Series A Common Stock and the Series B Non-Voting Common Stock, on the one hand, and (ii) the holders of the Series C Common Stock, on the other, based on the relative number of shares of Common Stock outstanding and held by such holders, provided that the aggregate number of outstanding shares of Series A Common Stock and Series B Non-Voting Common Stock shall be deemed to be 1,114,202, or, if different, shall be deemed to be the number of shares of Series A Common Stock and Series B Non- Voting Common Stock then outstanding plus any shares of Series B Non-Voting Common Stock previously outstanding but forfeited pursuant to the Stockholders Agreement. All amounts distributable among the Series A Common Stock and the Series B Non-Voting Common Stock will be divided as follows, to the extent of available proceeds: (A) first, each share of Series A Common Stock will receive $126.53 plus a 22% internal rate of return thereon calculated from March 27, 1998 (the "Series A Common Stock Preference"); (B) second, each share of Series B Non-Voting Common Stock will receive an amount equal to the Series A Common Stock Preference; and (C) third, the remaining assets will be distributed ratably among the Series A Common Stock and the Series B Non- Voting Common Stock. 78 The March 27 amendment to the Company's certificate of incorporation also provides that all shares of Company stock outstanding prior to the amendment were reclassified into an aggregate of 331,935 shares of Series A Common Stock. REGISTRATION RIGHTS AGREEMENT The Company and its stockholders entered into a Registration Rights Agreement (the "Investor Registration Rights Agreement") on March 27, 1998 concurrently with the consummation of the Tender Offer. The Investor Registration Rights Agreement provides that Heritage has the right to require the Company on two occasions to effect the registration of the Company's common stock held by it under the Securities Act and Mr. and Mrs. Snukal have the right to cause the Company to effect one demand registration, each at the Company's expense and subject to certain conditions. Mr. Scott has the right to request inclusion of the Company common stock held by him in any such registrations. In addition, all holders of Registrable Securities (as defined in the Investor Registration Rights Agreement) are entitled to request the inclusion of any shares of common stock of the Company in any registration statement at the Company's expense whenever the Company proposes to register any of its common stock under the Securities Act. However, the underwriter managing any such offering or any offering effected pursuant to a demand registration may reduce the number of shares included therein. PAYMENTS TO CERTAIN STOCKHOLDERS SUMMIT EXECUTIVE INCENTIVE PLAN FOR MR. SCOTT. Mr. Scott was the beneficiary of an Executive Incentive Plan maintained by Summit. Under the terms of this plan, which was amended by Summit prior to the signing of the Merger Agreement, Mr. Scott received a cash payment from Summit at the effective time of the Merger of approximately $1,275,000. REDEMPTION OF MR. SCOTT'S SUMMIT STOCK OPTIONS. Under the Summit Stock Option Plan, which terminated at the effective time of the Merger, Mr. Scott received in cash from Summit the net value of his options to purchase Summit Shares, which equalled $749,125. Mr. Scott held options to acquire 300,000 Summit Shares. BONUS TO MR. SCOTT FROM THE COMPANY. At the effective time of the Merger, the Company paid Mr. Scott a bonus equal to $550,000 to partially cover the tax cost he will incur upon redemption of his stock options described in the preceding paragraph. The amount of the bonus was calculated not to exceed the tax benefit which Summit realized as a result of the payments of those amounts. BONUS TO MR. SCOTT FROM SUMMIT. At the effective time of the Merger, Summit paid Mr. Scott a $100,000 bonus. REINVESTMENT BY MR. SCOTT. The entire net after-tax proceeds of the foregoing payments to Mr. Scott were invested by Mr. Scott in securities of the Company under the terms of the Investment Agreement. PAYMENT TO HERITAGE PARTNERS MANAGEMENT COMPANY, INC. At the effective time of the Merger, the Company paid Heritage Partners Management Company, Inc., a fee of $3 million in connection with the Transactions. PRE-TRANSACTION ARRANGEMENTS FOUNTAIN VIEW EQUITY TRANSACTIONS Prior to August 1, 1997, each of the corporations which is now a subsidiary of Fountain View (other than Summit and its subsidiaries) was owned directly by Mr. and Mrs. Snukal. On July 24, 1997, each of those corporations entered into a Stock Purchase and Contribution Agreement (the "1997 79 Agreement") with Mr. and Mrs. Snukal, Heritage and Fountain View providing for the recapitalization of Fountain View, the issuance of stock of Fountain View to Heritage and the restructuring of the ownership of the various corporations so that all of them became wholly-owned subsidiaries of Fountain View. In addition, under the terms of the 1997 Agreement, Mr. and Mrs. Snukal received cash payments from the investments by Heritage and loans from a senior lender in the aggregate amount of $43.7 million. The 1997 Agreement contained certain representations, warranties and covenants, and provided for Mr. and Mrs. Snukal to indemnify Heritage and Fountain View for varying amounts. The transactions contemplated by the 1997 Agreement were consummated on August 1, 1997. From August 1, 1997, until the closing of the purchase of Summit Shares in the Tender Offer, Fountain View's Board of Directors has consisted and will consist of three nominees of Mr. and Mrs. Snukal and two nominees of Heritage. For additional information with respect to the Fountain View Equity Transactions, see Note 3 to the audited financial statements of Fountain View included elsewhere in this Prospectus. RELATED PARTY LEASES Fountain View leases four SNFs from Mr. and Mrs. Snukal under leases entered into on August 1, 1997 pursuant to the 1997 Agreement. These facilities are Fountainview Convalescent Hospital in Los Angeles, California, Montebello Convalescent Hospital in Montebello, California, Rio Hondo Nursing Center in Montebello, California and Sycamore Park Convalescent Hospital in Los Angeles, California. Each lease is for a term of 20 years. The annual rent for the year ending July 31, 1998 for each of these facilities is as follows: Fountainview Convalescent Hospital--$360,000; Montebello Convalescent Hospital--$360,000; Rio Hondo Nursing Center--$720,000; and Sycamore Park Convalescent Hospital-- $324,000. The leases contain rent escalation clauses based on increases in the consumer price index. Fountain View believes the terms of these leases to be at fair market value. TWIN MED Mrs. Snukal owns approximately 33% of the outstanding equity of Twin Med, Inc. ("Twin Med"), a supplier of disposable products to long-term care facilities. Twin Med is one of Fountain View's and Summit's suppliers. Average monthly payments by Fountain View and Summit to Twin Med are approximately $50,000 to $70,000 in the aggregate. 80 DESCRIPTION OF OTHER INDEBTEDNESS NEW CREDIT FACILITY GENERAL. The Company entered into a credit facility with Bank of Montreal ("BMO") that provides Fountain View with financing in the aggregate amount of up to $115 million. The following summary of the material provisions of the New Credit Facility does not purport to be complete, and is subject to, and qualified in its entirety by reference to, (i) the Credit Agreement dated as of April 16, 1998 among Fountain View, the Banks party thereto and BMO, as Agent and (ii) the Loan Documents referenced therein . While BMO committed to fund the entire amount of the credit facilities described in the Summary of Terms, subject to the conditions described therein, BMO has formed a syndicate to participate in the New Credit Facility, and in the future may add financial institutions and other investors (collectively with BMO, the "Lenders") to such syndicate, who shall be reasonably acceptable to Fountain View, to join with BMO in providing the financing. BMO will act as agent for the Lenders (the "Agent"). The New Credit Facility commitments of the Lenders, which, after syndication, will be several and not joint, were allocated among (i) a $30 million revolving credit facility (the "Revolving Credit Facility"), with a $4 million sublimit for letters of credit (with BMO as the issuing bank), and (ii) one or more term loan facilities in an aggregate amount of up to $85.0 million (collectively, the "Term Loan Facility"). The proceeds of the New Credit Facility were used to refinance certain indebtedness incurred by Fountain View in connection with the Tender Offer and the Merger, to refinance certain indebtedness of Summit, to pay fees and expenses incurred in connection with the Transactions (not to exceed $28 million) and to fund working capital and capital expenditure needs of the Company and its subsidiaries and for other general corporate purposes. MATURITY AND PREPAYMENT. The Revolving Credit Facility will mature on April 16, 2004. The Term Loan Facility will be payable in installments with a final maturity on March 31, 2004. The Term Loan amortization schedule is as follows: year 1--$0; year 2--$5,000,000; year 3--$10,000,000; year 4--$20,000,000; year 5--$22,500,000; and year 6--$27,500,000. The New Credit Facility is also subject to mandatory prepayment out of the net cash proceeds of certain asset sales, issuances of equity, subordinated debt (excluding the Notes offered hereby) or senior debt securities, as well as out of 85% of excess cash flow if a specified leverage ratio is exceeded. Prepayments will be applied to reduce the Term Loan Facility. REPRESENTATIONS AND WARRANTIES. The credit documents relating to the New Credit Facility contain customary representations and warranties, including with respect to corporate status; corporate power, authority and enforceability; no violation of law, contracts or organizational documents; no material litigation; correctness of specified financial statements and no material adverse change; no required governmental or third party approvals; use of proceeds and compliance with margin regulations; status under the Investment Company Act of 1940; the Employment Retirement Income Security Act of 1974, as amended ("ERISA"); environmental matters; perfected liens and security interests; and payment of taxes. COVENANTS. The credit documents contain usual and customary covenants, including covenants with respect to delivery of financial statements and other reports; compliance with laws; payment of taxes; maintenance of insurance; limitations on liens; limitations on future mergers, consolidations, joint ventures and partnerships; prohibitions on sale of all or a substantial part of the Company's assets; limitations on the incurrence of debt; limitations on dividends, stock redemptions and the redemption and/or prepayment of other debt; limitations on investments and acquisitions; limitations on capital expenditures; compliance with ERISA; limitations on transactions with affiliates; and a negative pledge, 81 with certain exceptions, for equipment financing. The credit documents also contain certain financial covenants, including a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum net worth test. INTEREST AND FEES. Pursuant to the terms of New Credit Facility, Fountain View may elect to have the interest rate on loans outstanding under the Revolving Credit Facility and loans outstanding under the Term Loan Facility bear interest at the LIBOR or the applicable alternate base rate (defined as the higher of the federal funds rate plus 0.50% or BMO's base rate), in each case plus an applicable margin which will vary between 1.75% and 2.75% for LIBOR loans and between 0.75% and 1.75% for alternate base rate loans, depending upon the ratio of the sum of Fountain View's total funded debt plus a multiple of its operating rents to EBITDAR. During the continuance of an event of default, a default interest rate equal to 2.00% above the rate otherwise in effect shall apply. The Company will pay a commitment fee of 0.50% on the unused portion of the Revolving Credit Facility. The Company will also pay BMO, as Agent, a customary annual administration fee. EVENTS OF DEFAULT; REMEDIES. The New Credit Facility contains customary events of default, including with respect to nonpayment of principal, interest, fees or other amounts; violation of covenants; inaccuracy of representations and warranties; cross-default to other material agreements and indebtedness; bankruptcy; material judgments; ERISA; and actual or asserted invalidity of any loan documents or security interest. INDEMNIFICATION. Under the New Credit Facility, the Company will indemnify the Lenders from and against all losses, liabilities, claims, damages or expenses relating to their loans and the Company's use of loan proceeds or the commitments, including but not limited to, reasonable attorneys' fees and settlement costs. SECURITY AND GUARANTEES. The New Credit Facility contains a perfected first lien on all of the Company's assets, both tangible and intangible, including without limitation, cash, cash equivalents, inventory, accounts receivable, property, plant and equipment, intangibles, bank accounts, instruments, securities, contract rights and other agreements, and the stock of or other equity interests in all currently owned or to be acquired subsidiaries of the Company (other than the capital stock of Alexandria Convalescent Hospital, Inc.). The New Credit Facility is fully guaranteed by all existing and future subsidiaries of the Company. The guarantees are secured by a perfected first lien on all assets of the subsidiaries of the Company. BMO is an affiliate of Nesbitt Burns Securities Inc., one of the Initial Purchasers of the Notes. One of the other Lenders is Banque Paribas, an affiliate of Paribas Corporation, one of the Initial Purchasers of the Notes, and another affiliate of Paribas Corporation is a Fountain View stockholder. 82 CAPITAL LEASES In addition to the indebtedness described above, Summit is also party to seven capital leases for certain of its facilities. All of these capital leases contain purchase options and certain of these leases contain various renewal options and extend up to the year 2030. For the year ended June 30, 1997, property and equipment of Summit includes the following amounts for leases which have been capitalized (assuming the purchase options contained in these leases will be exercised):
(DOLLARS IN THOUSANDS) ---------------------- Land and land improvements.......................... $ 1,400 Buildings and leasehold improvements................ 21,481 Furniture and equipment............................. 2,405 ------- 25,286 Less accumulated amortization....................... 2,070 ------- $23,216 =======
The minimum rental payments for the next five years under noncancellable capital leases (including purchase options when expected to be exercised) that have initial or remaining lease terms in excess of one year as of the year ended June 30, 1997 are $3,321,000, $4,634,000, $4,297,000, $350,000 and $350,000 for 1998, 1999, 2000, 2001 and 2002, respectively. THE EXCHANGE OFFER GENERAL The Company hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (which together constitute the Exchange Offer), to exchange up to $120.0 million aggregate principal amount of Exchange Notes for a like aggregate principal amount of Outstanding Notes properly tendered on or prior to the Expiration Date and not withdrawn as permitted pursuant to the procedures described below. The Exchange Offer is being made with respect to all of the Outstanding Notes; the total aggregate principal amount of Outstanding Notes and Exchange Notes will in no event exceed $120.0 million. The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement, a copy of which will be available upon request of the Company. PURPOSE OF THE EXCHANGE OFFER On April 16, 1998, the Company issued $120.0 million aggregate principal amount of Outstanding Notes. The issuance of the Outstanding Notes was not registered under the Securities Act in reliance upon exemptions provided in Rule 144A and Regulation S under the Securities Act. The Company, the Guarantors and the Initial Purchasers entered into the Registration Rights Agreement on the Closing Date. Pursuant to the Registration Rights Agreement, the Company and the Guarantors agreed to use commercially reasonable efforts to file with the Commission the Exchange Offer Registration Statement on the appropriate form under the Securities Act with respect to the Exchange Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors will offer the Exchange Notes (which will have terms substantially identical in all material respects to the Outstanding Notes), including the Existing Guarantees (the "Exchange Notes") (except that the Exchange Notes will not contain terms with respect to transfer restrictions). If (i) the Company and the Guarantors are not required to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any Holder of Transfer 83 Restricted Securities notifies the Company within 20 days after the Exchange Offer has been consummated (A) that it is prohibited by applicable law or Commission policy from participating in the Exchange Offer or (B) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder, or (C) that such Holder is a broker-dealer and holds Notes acquired directly from the Company or one of its affiliates, then the Company and the Guarantors will use commercially reasonable efforts to file a shelf registration statement pursuant to Rule 415 under the Securities Act, which may be an amendment to the Existing Offer Registration Statement (in either event, the "Shelf Registration Statement") on or prior to the earliest to occur of (1) the 60th day after the date on which the Company determines that it is not required to file the Exchange Offer Registration Statement or (2) the 60th day after the date on which the Company receives notice from a Holder of Transfer Restricted Securities as contemplated by clause (ii) above (such earliest date being the "Shelf Filing Deadline"), which Shelf Registration Statement shall provide for resales of all Transfer Restricted Securities the Holders of which shall provide certain information to the Company. The Company and the Guarantors will use commercially reasonable efforts to cause such Shelf Registration Statement to be declared effective by the Commission on or before the 135th day after the obligation to file the Shelf Registration Statement arises. For purposes of the foregoing, "Transfer Restricted Securities" means each Note until the earliest of (i) the date on which such Note is exchanged in the Exchange Offer and the Note for which it is exchanged is entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Securities Act, (ii) the date on which such Note has been disposed of in accordance with a Shelf Registration Statement, or (iii) the date on which such Note is permitted to be distributed to the public pursuant to Rule 144 under the Securities Act or by a broker-dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of a copy of this prospectus). The Registration Rights Agreement provided that unless the Exchange Offer were not permissible under applicable law or Commission policy (i) the Company and the Guarantors would cause to be filed an Exchange Offer Registration Statement with the Commission as soon as practicable after the Closing Date, but in no event later than 90 days after the Closing Date, (ii) the Company and the Guarantors would use commercially reasonable efforts to cause the Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 150 days after the Closing Date, (iii) in connection with the foregoing, file (A) all pre-effective amendments to such Registration Statement as may be necessary in order to cause such Registration Statement to become effective, (B) if applicable, a post- effective amendment to such Registration Statement pursuant to Rule 430A under the Securities Act and (C) cause all necessary filings in connection with the registration and qualification of the Exchange Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit the Exchange Offer to be consummated, and (iv) upon the effectiveness of such Registration Statement, commence the Exchange Offer. The Company is entitled to suspend the effectiveness of any Shelf Registration Statement for certain limited periods under certain prescribed circumstances. If (a) any of the Registration Statements required by the Registration Rights Agreement is not filed with the Commission on or prior to the date specified for such filing; (b) any of such Registration Statements has not been declared effective by the Commission on or prior to the date specified for such effectiveness; (c) an Exchange Offer Registration Statement becomes effective but the Company and the Guarantors fail to consummate the Exchange Offer within 30 business days thereafter with respect to the Exchange Offer Registration Statement; or (d) subject to certain exceptions, the Shelf Registration Statement or the Exchange Offer Registration Statement is filed and is declared effective but thereafter ceases to be effective or fails to be usable for its intended purpose prior to the expiration of the time period specified in the Registration Rights Agreement without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (a) through (d) above, a "Registration Default", and each period during which a Registration Default has 84 occurred and is Continuing, a "Registration Default Period"), the Company and Guarantors jointly and severally agree that the liquidated damages ("Liquidated Damages"), in addition to the base interest that would otherwise accrue on the Transfer Restricted Securities, shall accrue at a per annum rate of 0.25% of the aggregate principal amount of such Transfer Restricted Securities for the first 90 days of the Registration Default Period, increasing by 0.25% per annum every 90 days up to a maximum of 1.0% per annum until such Registration Default has been cured. All accrued Liquidated Damages will be paid by the Company to the Record Holders by wire transfer of immediately available funds or by federal funds check on each interest payment date at the office or agency of the Company maintained for such purpose in the Borough of Manhattan, The City of New York. Following the cure of all Registration Defaults relating to any particular Transfer Restricted Securities, the accrual of Liquidated Damages with respect to such Transfer Restricted Securities will cease immediately. Holders of such Notes will be required to make certain representations to the Company and the Guarantors (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Notes included in the Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above. EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS The Exchange Offer will expire at 5:00 P.M., New York City time, on , 1998, unless the Company, in its sole discretion, has extended the period of time (as described below) for which the Exchange Offer is open (such date, as it may be extended, is referred to herein as the "Expiration Date"). The Expiration Date will be at least 20 business days after the commencement of the Exchange Offer (or longer if required by applicable law). The Company expressly reserves the right, at any time or from time to time, to extend the period of time during which the Exchange Offer is open, and thereby delay acceptance for exchange of any Outstanding Notes by giving oral notice (confirmed in writing) or written notice to the Exchange Agent (as defined herein) and by giving written notice of such extension to the holders thereof or by timely public announcement communicated, unless otherwise required by applicable law or regulation, by making a release through the Dow Jones News Service, in each case, no later than 9:00 A.M. New York City time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period of time. During any such extension, all Outstanding Notes previously tendered will remain subject to the Exchange Offer. In addition, the Company expressly reserves the right to terminate or amend the Exchange Offer and not to accept for exchange any Outstanding Notes not theretofore accepted for exchange upon the occurrence of any of the events specified below under "-- Certain Conditions to the Exchange Offer". If any such termination or amendment occurs, the Company will notify the Exchange Agent and will either issue a press release or give oral or written notice to the holders of the Outstanding Notes as promptly as practicable. PROCEDURES FOR TENDERING OUTSTANDING NOTES The tender to the Company of Outstanding Notes by a holder thereof as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. A holder of Outstanding Notes may tender the same by (i) properly completing and signing the Letter of Transmittal or a facsimile thereof (all references in this Prospectus to the Letter of Transmittal 85 shall be deemed to include a facsimile thereof) and delivering the same, together with the certificate or certificates representing the Outstanding Notes being tendered, if any, and any required signature guarantees, to the Exchange Agent at its address set forth below on or prior to 5:00 p.m., New York City time, on the Expiration Date (or complying with the procedure for book-entry transfer described below) or (ii) complying with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OUTSTANDING NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, OR AN OVERNIGHT OR HAND DELIVERY SERVICE, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY. NO OUTSTANDING NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE COMPANY. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Outstanding Notes surrendered for exchange pursuant thereto are tendered (i) by a registered holder of the Outstanding Notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined herein). In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a participant in a recognized signature guaranty medallion program (each an "Eligible Institution"). If Outstanding Notes are registered in the name of a person other than a signer of the Letter of Transmittal, the Outstanding Notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder with the signature thereon guaranteed by an Eligible Institution. The Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Outstanding Notes at the book-entry transfer facility, The Depository Trust Company, for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in the book-entry transfer facility's system may make book-entry delivery of Outstanding Notes by causing such book-entry transfer facility to transfer such Outstanding Notes into the Exchange Agent's account with respect to the Outstanding Notes in accordance with the book-entry transfer facility's procedures for such transfer. Although delivery of Outstanding Notes may be effected through book-entry transfer in the Exchange Agent's account at the book-entry transfer facility, an appropriate Letter of Transmittal with any required signature guarantee and other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth below on or prior to the Expiration Date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. If a holder desires to accept the Exchange Offer and time will not permit a Letter of Transmittal or Outstanding Notes to reach the Exchange Agent before the Expiration Date or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if the Exchange Agent has received at its address or facsimile number set forth below on or prior to the Expiration Date a letter, telegram or facsimile from an Eligible Institution setting forth the name and address of the tendering holder, the name in which the Outstanding Notes are registered and, if possible the certificate number or numbers of the certificate or certificates representing the Outstanding Notes to be tendered, and stating that the tender is being made thereby and guaranteeing that within three business days after the Expiration Date the Outstanding Notes in proper form for transfer (or a confirmation of book-entry transfer of such Outstanding Notes into the Exchange Agent's account at the book-entry transfer facility), will be delivered by such Eligible Institution together with a properly completed and duly executed Letter of Transmittal (and any other required documents). Unless 86 Outstanding Notes being tendered by the above-described method are deposited with the Exchange Agent within the time period set forth above (accompanied or preceded by a properly completed Letter of Transmittal and any other required documents), the Company may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery which may be used by an Eligible Institution for the purposes described in this paragraph are available from the Exchange Agent. A tender will be deemed to have been received as of the date when (i) the tendering holder's properly completed and duly signed Letter of Transmittal accompanied by the Outstanding Notes (or a confirmation of book-entry transfer of such Outstanding Notes into the Exchange Agent's account at the book-entry transfer facility) is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile to similar effect (as provided above) from an Eligible Institution is received by the Exchange Agent. Issuances of Exchange Notes in exchange for Outstanding Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile to similar effect (as provided above) by an Eligible Institution will be made only against deposit of the Letter of Transmittal (and any other required documents) and the tendered Outstanding Notes. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Outstanding Notes tendered for exchange will be determined by the Company in its sole discretion, which determination will be final and binding on all parties. The Company reserves the right to reject any and all tenders of any particular Outstanding Notes not properly tendered or reject any particular shares of Outstanding Notes the acceptance of which might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or condition of the Exchange Offer as to any particular Outstanding Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Outstanding Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Outstanding Notes for exchange must be cured within such time as the Company shall determine. Neither the Company nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Outstanding Notes for exchange, nor shall any of them incur any liability for failure to give such notification. If the Letter of Transmittal or any Outstanding Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in- fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. By tendering, each holder that is not a broker-dealer or is a broker-dealer but is not receiving Exchange Notes for its own account will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of such holder's business, that such holder has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that such holder is not an "affiliate" of the Company as defined in Rule 405 under the Securities Act or, if it is an affiliate, such holder will comply with the registration and prospectus delivery requirements of the Securities Act, to the extent applicable. Each broker-dealer that is receiving Exchange Notes for its own account in exchange for Outstanding Notes that were acquired as a result of market-making or other trading activities will represent to the Company that it will deliver a prospectus in connection with any resale of such Outstanding Notes. In addition, the Company reserves the right in its sole discretion to (a) purchase or make offers for any Outstanding Notes that remain outstanding subsequent to the Expiration Date, or, as set forth under "--Certain Conditions to the Exchange Offer", to terminate the Exchange Offer and (b) to the extent permitted by applicable law, purchase Outstanding Notes in the open market, in privately 87 negotiated transactions or otherwise. The terms of any such purchases or offers may differ from the terms of the Exchange Offer. WITHDRAWAL RIGHTS Tenders of Outstanding Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the business day prior to the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal sent by letter, telegram or facsimile must be received by the Exchange Agent at any time prior to 5:00 p.m., New York City time, on the business day prior to the Expiration Date at its address or facsimile number set forth below. Any such notice of withdrawal must (i) specify the name of the person having tendered the Outstanding Notes to be withdrawn (the "Depositor"), (ii) identify the Outstanding Notes to be withdrawn (including the certificate number of numbers of the certificate or certificates representing such Outstanding Notes and the aggregate principal amount of such Outstanding Notes), (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Outstanding Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to permit the Transfer Agent with respect to the Outstanding Notes to register the transfer of such Outstanding Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Outstanding Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such withdrawal notices will be determined by the Company in its sole discretion, which determination will be final and binding on all parties. Any Outstanding Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Outstanding Notes so withdrawn are validly retendered. Any Outstanding Notes which have been tendered but which are withdrawn will be returned to the holder thereof without cost to such holder as soon as practicable after such withdrawal. Properly withdrawn Outstanding Notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering Outstanding Notes" at any time prior to the Expiration Date. ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Company will accept, promptly after the Expiration Date, all Outstanding Notes properly tendered and will issue the Exchange Notes promptly after acceptance of the Exchange Offer. See "-- Certain Conditions to the Exchange Offer" below. For purposes of the Exchange Offer, the Company will be deemed to have accepted properly tendered Outstanding Notes for exchange when the Company has given oral or written notice thereof to the Exchange Agent. In all cases, issuance of the Exchange Notes in exchange for Outstanding Notes pursuant to the Exchange Offer will be made only after timely receipt by the Company of such Outstanding Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Outstanding Notes are not accepted for exchange for any reason set forth in the terms and conditions of the Exchange Offer, such unaccepted Outstanding Notes will be returned without expense to the tendering holder thereof as promptly as practicable after the rejection of such tender or the expiration or termination of the Exchange Offer. UNTENDERED OUTSTANDING NOTES Holders of Outstanding Notes whose Outstanding Notes are not tendered or are tendered but not accepted in the Exchange Offer will continue to hold such Outstanding Notes and will be entitled to all the rights and preferences and subject to the limitations applicable thereto. Following consummation of the Exchange Offer, the holders of Outstanding Notes will continue to be subject to the existing 88 restrictions upon transfer thereof and, except as provided herein, the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Outstanding Notes held by them. To the extent that Outstanding Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Outstanding Notes could be adversely affected. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange, or issue Exchange Notes in exchange for, any Outstanding Notes, and may terminate or amend the Exchange Offer, if at any time before the acceptance of such Outstanding Notes for exchange, any of the following events shall occur: (A) an injunction, order or decree shall have been issued by any court or governmental agency that would prohibit, prevent or otherwise materially impair the ability of the Company to proceed with the Exchange Offer; or (B) there shall occur a change in the current interpretation of the staff of the Commission which current interpretation permits the Exchange Notes issued pursuant to the Exchange Offer in exchange for the Outstanding Notes to be offered for resale, resold and otherwise transferred by holders thereof (other than (i) a broker-dealer who purchases such Exchange Notes directly from the Company to resell pursuant to Rule 144A, Regulation S or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of Exchange Notes. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. If the Company determines that it may terminate the Exchange Offer, as set forth above, the Company may (i) refuse to accept any Outstanding Notes and return any Outstanding Notes that have been tendered to the holders thereof, (ii) extend the Exchange Offer and retain all Outstanding Notes tendered prior to the Expiration Date, subject to the rights of such holders of tendered shares of Outstanding Notes to withdraw their tendered Outstanding Notes, or (iii) waive such termination event with respect to the Exchange Offer and accept all properly tendered Outstanding Notes that have not been withdrawn. If such waiver constitutes a material change in the Exchange Offer, the Company will disclose such change by means of a supplement to this Prospectus that will be distributed to each registered holder of Outstanding Notes, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders of the Outstanding Notes, if the Exchange Offer would otherwise expire during such period. In addition, the Company will not accept for exchange any Outstanding Notes tendered, and no Exchange Notes will be issued in exchange for any such Outstanding Notes, if at any time any stop order shall be threatened by the Commission or in effect with respect to the Registration Statement. The Exchange Offer is not conditioned on any minimum principal amount of Outstanding Notes being tendered for exchange. 89 EXCHANGE AGENT State Street Bank and Trust Company has been appointed as Exchange Agent for the Exchange Offer. Questions regarding Exchange Offer procedures and requests for additional copies of this Prospectus or the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: By Mail: By Hand: or Overnight Delivery: State Street Bank and Trust Company of California, N.A. c/o State Street Bank and Trust Company Two International Place Boston, MA 02110 Attention: Kellie Mullen Re: Fountain View, Inc. By Facsimile: 617-664-5290 Confirm by Telephone: 617-664-5587 State Street Bank and Trust Company of California, N.A. is also the Transfer Agent for the Outstanding Notes and Exchange Notes. SOLICITATION OF TENDERS; FEES AND EXPENSES The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or other persons soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred by the Company in connection with the Exchange Offer will be paid by the Company. No person has been authorized to give any information or to make any representation in connection with the Exchange Offer other than those contained in this Prospectus. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Outstanding Notes in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. TRANSFER TAXES The Company will pay all transfer taxes, if any, applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer. If, however, certificates representing Exchange Notes or Outstanding Notes not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Outstanding Notes tendered, or if tendered Outstanding Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of 90 Exchange Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holders. ACCOUNTING TREATMENT No gain or loss for accounting purposes will be recognized by the Company upon the consummation of the Exchange Offer. Expenses incurred in connection with the issuance of the Exchange Notes will be amortized by the Company over the term of the Exchange Notes under generally accepted accounting principles. PLAN OF DISTRIBUTION Based on interpretations of the staff of the Division of Corporation Finance of the SEC set forth in no-action letters issued to third parties, the Company believes that, except as described below, Exchange Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by the respective holders thereof without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that (i) such Exchange Notes are acquired in the ordinary course of such holder's business and (ii) such holder is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the Exchange Notes. A holder of Outstanding Notes that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or that is a broker-dealer that purchased Outstanding Notes from the Company to resell pursuant to an exemption from registration under the Securities Act (a) cannot rely on such interpretations by the staff of the Division of Corporation Finance of the SEC, (b) will not be permitted or entitled to tender such Outstanding Notes in the Exchange Offer and (c) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or other transfer of such Outstanding Notes unless such sale or transfer is made pursuant to an exemption from such requirements. In addition, any holder who tenders Outstanding Notes in the Exchange Offer with the intention or for the purpose of participating in a distribution of the Exchange Notes cannot rely on such interpretations by the staff of the Division of Corporation Finance of the SEC and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the secondary resale transaction. Unless an exemption from registration is otherwise available, any such resale transaction should be covered by an effective registration statement containing selling security holders information required by Item 507 of Regulation S-K under the Securities Act. To date, the staff of the Division of Corporation Finance of the SEC has taken the position that a broker-dealer that has acquired securities in exchange for securities that were acquired by such broker-dealer as a result of market-making activities or other trading activities may fulfill the prospectus delivery requirements with the prospectus contained in an exchange offer registration statement. Each holder of Outstanding Notes who wishes to exchange its Outstanding Notes for Exchange Notes in the Exchange Offer will be required to make certain representations to the Company set forth in "The Exchange Offer-- Purpose of the Exchange Offer". Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. This Prospectus may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired as a result of market-making activities or other trading activities. Subject to certain provisions set forth in the Registration Rights Agreement, the Company has agreed that, for a period of up to 180 days after the effective date of the Registration Statement, it 91 will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Risk Factors--Absence of Public Market" and "The Exchange Offer--Procedures for Tendering Outstanding Notes". The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit from any such resale of Exchange Notes and any commissions or concessions received by any such person may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Subject to certain provisions set forth in the Registration Rights Agreement, for a period of 180 days after the effective date of the Registration Statement, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any participating broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay the expenses incident to the Exchange Offer, other than any discounts or commissions incurred upon the sale of the Exchange Notes. The Company will indemnify each participating broker- dealer selling Exchange Notes against certain liabilities, including liabilities under the Securities Act. 92 DESCRIPTION OF NOTES GENERAL Except as otherwise indicated, the following description relates both to the Outstanding Notes issued in the Note Offering and the Exchange Notes, together with the Exchange Guarantees, to be issued in exchange for the Outstanding Notes in the Exchange Offer. The form and terms of the Exchange Notes are the same as the form and terms of the Outstanding Notes, except that the Exchange Notes have been registered under the Securities Act and therefore will not bear legends restricting the transfer thereof. The Exchange Notes will be obligations of the Company evidencing the same indebtedness as the Outstanding Notes. The Outstanding Notes were issued, and the Exchange Notes offered hereby will be issued, pursuant to an Indenture (the "Indenture") between the Company, the Guarantors and State Street Bank and Trust Company of California, N.A., as trustee (the "Trustee"), in a private transaction that is not subject to the registration requirements of the Securities Act. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. Copies of the proposed form of Indenture and Registration Rights Agreement are available as set forth below under "--Additional Information". The definitions of certain terms used in the following summary are set forth below under "--Certain Definitions". For purposes of this summary, the term "Company" refers only to Fountain View, Inc. and not to any of its Subsidiaries. The Notes are general unsecured obligations of the Company and are subordinated in right of payment to all current and future Senior Debt. As of March 31, 1998, on a pro forma basis giving effect to the Transactions, the Company would have had Senior Debt of approximately $124.9 million, $15.0 million of mandatory redeemable preferred stock and, through its Subsidiaries, would have had additional liabilities (including trade payables) aggregating approximately $71.1 million. The Indenture permits the incurrence of additional Senior Debt in the future. The operations of the Company are conducted through its Subsidiaries and, therefore, the Company is dependent upon the cash flow of its Subsidiaries to meet its obligations, including its obligations under the Notes. The Notes are effectively subordinated to all Indebtedness and other liabilities and commitments (including trade payables) of the Company's Subsidiaries. Any right of the Company to receive assets of any of its Subsidiaries upon the latter's liquidation or reorganization (and the consequent right of the Holders of the Notes to participate in those assets) will be effectively subordinated to the claims of that Subsidiary's creditors, except to the extent that the Company is itself recognized as a creditor of such Subsidiary, in which case the claims of the Company would still be subordinate to any security in the assets of such Subsidiary and any indebtedness of such Subsidiary senior to that held by the Company. As of March 31, 1998, the Company's Subsidiaries would have had approximately $24.9 million of Indebtedness, $46.2 million of trade payables and other liabilities outstanding and $15.0 million of mandatory redeemable preferred stock after giving pro forma effect to the Transactions. See "Risk Factors--Holding Company Structure". As of the date of the Indenture, all of the Company's Subsidiaries are Restricted Subsidiaries. However, under certain circumstances, the Company will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $120.0 million and will mature on April 15, 2008. Interest on the Notes accrues at the rate of 11 1/4% per annum and will be payable semi-annually 93 in arrears on April 15 and October 15, commencing on October 15, 1998, to Holders of record on the immediately preceding April 1 and October 1. Interest on the Notes accrues from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium, if any, and interest and Liquidated Damages on the Notes is payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest and Liquidated Damages may be made by check mailed to the Holders of the Notes at their respective addresses set forth in the register of Holders of Notes; provided that all payments of principal, premium, interest and Liquidated Damages with respect to Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the respective accounts specified by the Holders thereof. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the Trustee maintained for such purpose. The Notes will be issued in denominations of $1,000 and integral multiples thereof. SUBSIDIARY GUARANTEES The Company's payment obligations under the Notes are jointly and severally guaranteed by the Guarantors. The Guarantee of each Guarantor are unsecured and subordinated to the prior payment in full of all Senior Debt of such Guarantor, which as of March 31, 1998 on a pro forma basis giving effect to the Transactions would include approximately $124.9 million of Senior Debt and the amounts for which the Guarantors are liable under the guarantees issued from time to time with respect to Senior Debt, including guarantees of all Obligations under the New Credit Facility. The Subsidiary Guarantees provide that the Obligations of each Guarantor thereunder are limited so as not to constitute a fraudulent conveyance under applicable law. See, however, "Risk Factors--Fraudulent Conveyance Matters". The Indenture provides that no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Guarantor unless (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor under the Registration Rights Agreement and, pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Notes and the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; and (iii) except in the case of a merger of a Guarantor with or into another Guarantor or a merger of a Guarantor with or into the Company, the Company would be permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant described below under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock". The Indenture provides that in the event of a sale or other disposition of all of the assets of any Guarantor (other than to the Company or another Guarantor), by way of merger, consolidation or otherwise, or a sale or other disposition of all of the Capital Stock of any Guarantor (other than to the Company or another Guarantor), then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor) or the entity acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) will be released and relieved of any obligations under its Subsidiary Guarantee and any such acquiring entity will not be required to assume any obligations of such Guarantor under the applicable Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture. See "Repurchase at Option of Holders--Asset Sales". 94 SUBORDINATION The payment of principal of, premium, if any, and interest on the Notes is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Debt, whether outstanding on the date of the Indenture or thereafter incurred. Upon any distribution to creditors of the Company or any Guarantor in a liquidation or dissolution of the Company or any Guarantor or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or any Guarantor or its property, an assignment for the benefit of creditors or any marshalling of the Company's or any Guarantor's assets and liabilities, the holders of Senior Debt will be entitled to receive payment in full of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt) before the Holders of Notes will be entitled to receive any payment with respect to the Notes, and until all Obligations with respect to Senior Debt are paid in full, any distribution to which the Holders of Notes would be entitled shall be made to the holders of Senior Debt (except that Holders of Notes may receive and retain Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"). The Company and the Guarantors also may not make any payment upon or in respect of the Notes or the Guarantees (except in Permitted Junior Securities or from the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of, premium, if any, or interest on Senior Debt occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Debt that permits holders of the Designated Senior Debt as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Debt. Payments on the Notes may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received by the Trustee, unless the maturity of any Designated Senior Debt has been accelerated. No new period of payment blockage under clause (ii) above may be commenced unless and until (i) 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been waived for a period of not less than 180 days. The Indenture further requires that the Company promptly notify holders of Senior Debt if payment of the Notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency, Holders of Notes may recover less ratably than creditors of the Company and the Guarantors who are holders of Senior Debt. On a pro forma basis, the principal amount of Senior Debt outstanding at March 31, 1998 would have been approximately $124.9 million. The Indenture limits, subject to certain financial tests, the amount of additional Indebtedness, including Senior Debt, that the Company and its Subsidiaries can incur. See " - --Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock". OPTIONAL REDEMPTION The Notes will not be redeemable at the Company's option prior to April 15, 2003. Thereafter, the Notes will be subject to redemption at any time or from time to time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices 95 (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2003........................................................... 105.625% 2004........................................................... 103.750 2005........................................................... 101.875 2006 and thereafter............................................ 100.000%
Notwithstanding the foregoing, at any time prior to April 15, 2001, the Company may redeem up to 35% of the aggregate principal amount of Notes originally issued under the Indenture at a redemption price of 111.25% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings by the Company; provided that at least $78.0 million in aggregate principal amount of Notes remain outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its Subsidiaries); and provided, further, that such redemption shall occur within 60 days of the date of the closing of such Public Equity Offering. SELECTION AND NOTICE If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. MANDATORY REDEMPTION The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. REPURCHASE AT THE OPTION OF HOLDERS Change of Control Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within fifteen Business Days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. The Company will 96 comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Indenture will provide that, prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, the Company will either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of Notes required by this covenant. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. The New Credit Facility currently prohibits the Company from purchasing any Notes and also provides that certain change of control events, including, without limitation, a Change of Control, with respect to the Company would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing Notes, the Company could seek the consent of its lenders to the purchase of Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Notes. In such case, the Company's failure to purchase tendered Notes would constitute an Event of Default under the Indenture which would, in turn, constitute a default under the New Credit Facility. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the Holders of Notes. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all", there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Notes to require the Company to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. 97 Asset Sales The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or the Subsidiary Guarantees thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) in the case of any Asset Sale constituting the transfer (by merger or otherwise) of all of the Capital Stock of a Restricted Subsidiary, any liabilities (as shown on such Restricted Subsidiary's most recent balance sheet) of such Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or the Subsidiary Guarantees) that will remain outstanding after such transfer and will not be a liability of the Company or any other Restricted Subsidiary of the Company following such transfer and (z) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its option, (a) to repay Senior Debt, or (b) to the acquisition of a majority of the assets of, or a majority of the Voting Stock of, a Healthcare Related Business, the making of a capital expenditure or the acquisition of other long-term assets for use in a Healthcare Related Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes tendered into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. CERTAIN COVENANTS Restricted Payments The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) or to the direct or indirect holders of the Company's or 98 any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or to the Company or a Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes except a payment of interest or principal at Stated Maturity, or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (ii), (iii), (iv), (vi) and (vii) of the next succeeding paragraph), is less than the sum, without duplication, of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the date of the Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company since the date of the Indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock) or from the issue or sale of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment. The foregoing provisions will not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any Indebtedness that is subordinated to the Notes or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of, other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of Indebtedness that is subordinated to the Notes with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend (in cash or otherwise) by a Restricted Subsidiary of the Company to the holders of its common Equity Interests on a pro rata basis; and (v) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Company's (or any of its Restricted Subsidiaries') management pursuant to any management equity 99 subscription agreement, stock option agreement or employment agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $2.0 million in any twelve-month period and no Default or Event of Default shall have occurred and be continuing immediately after such transaction; (vi) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') management pursuant to any management equity subscription agreement, stock option agreement or employment agreement, provided that the purchase price is paid with the proceeds to the Company of key man life insurance or disability insurance policies purchased by the Company specifically to finance any such repurchase, redemption or other acquisition; or (vii) the payment of the Transaction Related Payments. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant or Permitted Investments, as applicable. All such outstanding investments will be deemed to constitute Restricted Investments in an amount equal to the greatest of (x) the net book value of such Investments at the time of such designation, (y) the fair market value of such Investments at the time of such designation and (z) the original fair market value of such Investments at the time they were made. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if such redesignation would not cause a Default. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. Incurrence of Indebtedness and Issuance of Preferred Stock The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Subsidiaries to issue any shares of preferred stock, provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock and the Company's Subsidiaries may incur Indebtedness or issue preferred stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters (excluding any fiscal quarters ending prior to July 1, 1997) for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 2.0 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, at the beginning of such four-quarter period. 100 The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company of Indebtedness and letters of credit (with letters of credit being deemed to have a principal amount equal to the stated amount thereof) and other obligations under Credit Facilities in an aggregate principal amount that does not exceed at any one time $115.0 million less the aggregate amount of all Net Proceeds of Asset Sales applied by the Company or any of its Subsidiaries to repay Indebtedness under such Credit Facilities pursuant to the covenant described above under the caption "--Asset Sales" (other than temporary paydowns pending final application of such Net Proceeds); (ii) the incurrence by the Company and the Guarantors of the Existing Indebtedness and the issuance of the Existing Disqualified Stock; (iii) the incurrence by the Company of Indebtedness represented by the Notes in an aggregate principal amount not to exceed $120.0 million; (iv) the incurrence by the Company or any of the Guarantors of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Subsidiary, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (iv), that does not exceed at any one time the amount of such Capital Lease Obligations, mortgage financings or purchase money obligations outstanding as of the date of the Indenture, plus $5.0 million; (v) the incurrence by the Company or any of the Guarantors of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the Indenture to be incurred under the first paragraph hereof or clauses (ii) or (iv) of this paragraph; (vi) the incurrence by the Company or any of the Guarantors of intercompany Indebtedness between or among the Company and any Guarantor; provided, however, that (i) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Guarantor thereof and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Guarantor thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Guarantor, as the case may be, that was not permitted by this clause (vi); (vii) the incurrence by the Company or any of the Guarantors of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding; and (viii) the guarantee by the Company or any of its Subsidiaries or any of the Guarantors of Indebtedness of the Company or another Guarantor that was permitted to be incurred by another provision of this covenant; (ix) the incurrence by the Company's Unrestricted Subsidiaries of Non- Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company that was not permitted by this clause (ix), and the issuance of preferred stock by Unrestricted Subsidiaries; and 101 (x) the incurrence by the Company or any of the Guarantors of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (x), not to exceed $5.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (x) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant. Accrual of interest, accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Fixed Charges of the Company as accrued (to the extent not already included in Fixed Charges). Liens The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind on any asset now owned or hereafter acquired, securing Indebtedness or trade payables, except Permitted Liens. Dividend and Other Payment Restrictions Affecting Subsidiaries The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries. However, the foregoing restrictions will not apply to encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are not materially more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in the agreements governing such Existing Indebtedness as in effect on the date of the Indenture, (b) the New Credit Facility as in effect as of the date of the Indenture, or other Credit Facilities entered into subsequent to the date of the Indenture, and in either case any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such other Credit Facilities or amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are not materially more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in the New Credit Facility as in effect on the date of the Indenture, (c) the Indenture and the Notes, (d) applicable law, (e) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or 102 the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (f) customary non-assignment provisions in leases and other contracts and other contracts entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (h) any agreement for the sale of a Subsidiary or a substantial proportion of such Subsidiary's assets that restricts distributions by that Subsidiary pending its sale, (i) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are not materially more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced, (j) secured Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenant described above under the caption "--Liens" that limits the right of the debtor to dispose of the assets securing such Indebtedness, (k) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business and (l) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Merger, Consolidation, or Sale of Assets The Indenture provides that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) except in the case of a merger or consolidation of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Registration Rights Agreement, the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) except in the case of a merger of the Company with or into a Wholly Owned Subsidiary of the Company, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, conveyance or other disposition shall have been made (A) will have Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (B) will, immediately after such transaction after giving pro forma effect thereto and any related financing transaction as if the same had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock". The Indenture will provide that the Company shall not lease its properties and assets substantially as an entirety to any Person. Transactions with Affiliates The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is 103 on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. Notwithstanding the foregoing, the following items shall not be deemed to be Affiliate Transactions: (i) any employment agreement entered into by the Company or any of its Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Subsidiary, (ii) transactions between or among the Company and/or its Restricted Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Company, (iv) any sale or other issuance of Equity Interests (other than Disqualified Stock) of the Company, (v) Restricted Payments that are permitted by the provisions of the Indenture described above under the caption "-- Restricted Payments", and (vi) Existing Affiliate Transactions. Sale and Leaseback Transactions The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company may enter into a sale and leaseback transaction if (i) the Company could have incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Additional Indebtedness and Issuance of Preferred Stock", (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, the covenant described above under the caption "--Asset Sales". Senior Subordinated Debt The Indenture provides that (i) the Company will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is expressly subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Notes, and (ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is expressly subordinate or junior in right of payment to the Senior Guarantees and senior in any respect in right of payment to the Guarantees. Payments for Consent The Indenture provides that neither the Company nor any of its Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. 104 Additional Subsidiary Guarantees The Indenture provides that if the Company or any of its Restricted Subsidiaries shall acquire or create another Subsidiary after the date of the Indenture, then such newly acquired or created Subsidiary shall become a Guarantor and execute a Supplemental Indenture and deliver an Opinion of Counsel, in accordance with the terms of the Indenture; provided, that all Subsidiaries that have properly been designated as Unrestricted Subsidiaries in accordance with the Indenture (i) shall not be subject to the requirements of this covenant and (ii) shall be released from all Obligations under any Guarantee, in each case for so long as they continue to constitute Unrestricted Subsidiaries. Reports The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company will furnish to the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports, in each case within the time periods specified in the Commission's rules and regulations. In addition, following the consummation of the Exchange Offer, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company and the Guarantors have agreed that, for so long as any Notes remain outstanding, they will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Any materials required to be furnished to Holders of Notes by this covenant shall discuss, in reasonable detail, either on the face of the financial statements included therein or in the footnotes thereto and in any Management's Discussion and Analysis of Financial Condition and Results of Operations, the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company. EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Notes (whether or not prohibited by the subordination provisions of the Indenture); (iii) failure by the Company or any of its Subsidiaries for 30 days after notice to comply with the provisions described under the captions "--Change of Control", "--Asset Sales", "--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (iv) failure by the Company or any of its Subsidiaries for 60 days after notice to comply with any of its other agreements in the Indenture or the Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the 105 principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness the maturity of which has been so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (vii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries; and (viii) except as permitted by the Indenture, any Guarantee shall be held in any judicial proceeding to be unenforceable or invalid in any material respect or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Guarantee. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, any Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to the optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to April 15, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to April 15, 2003, then the premium specified in the Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Notes. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest, Liquidated Damages or premium on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes, the Indenture or the Registration Rights Agreement or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. 106 LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages on such Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest and Liquidated Damages on the outstanding Notes on the Stated Maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound, including, without limitation, the New Credit Facility; (vi) the Company must have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the 107 Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Note selected for redemption. Also, the Company is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), and any existing default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (i) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"); (iii) reduce the rate of or change the time for payment of interest on any Note; (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, Liquidated Damages, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (v) make any Note payable in money other than that stated in the Notes; (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or premium, if any, or interest on the Notes; (vii) waive a redemption payment with respect to any Note (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"); or (viii) make any change in the foregoing amendment and waiver provisions. In addition, any amendment to the provisions of Article 10 of the Indenture (which relate to subordination) will require the consent of the Holders of at least 75% in aggregate principal amount of the Notes then outstanding if such amendment would adversely affect the rights of Holders of Notes. Notwithstanding the foregoing, without the consent of any Holder of Notes, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to Holders of Notes in the case of a merger or consolidation or sale of all or substantially all of the Company's assets, to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. 108 CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture and Registration Rights Agreement without charge by writing to Fountain View, Inc., 11900 W. Olympic Blvd., Suite 680, Los Angeles, California 90064, Attention: Chief Financial Officer. BOOK-ENTRY, DELIVERY AND FORM The Outstanding Notes were offered and sold to qualified institutional buyers in reliance on Rule 144A ("Rule 144A Notes"). The Outstanding Notes were also offered and sold in offshore transactions in reliance on Regulation S ("Regulation S Notes"). Except as set forth below, the Outstanding Notes are issued in registered, global form in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Notes were issued at the Closing only against payment in immediately available funds. Rule 144A Notes are represented by one or more Notes in registered, global form without interest coupons (collectively, the "Rule 144A Global Notes"). Regulation S Notes are represented by one or more Notes in registered, global form without interest coupons (collectively, the "Regulation S Global Notes" and, together with the Rule 144A Global Notes, the "Outstanding Global Notes"). The Outstanding Global Notes were deposited upon issuance with the Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC as described below. Through and including the 40th day after the later of the commencement of the Note Offering and the Closing (such period through and including such 40th day, the "Restricted Period"), beneficial interests in the Regulation S Global Notes could be held only through the Euroclear System ("Euroclear") and Cedel, S.A. ("Cedel") (as indirect participants in DTC), unless transferred to a person that took delivery through a Rule 144A Global Note in accordance with the certification requirements described below. Beneficial interests in the Rule 144A Global Notes may not be exchanged for beneficial interests in the Regulation S Global Notes at any time except in the limited circumstances described below. See "--Exchanges between Regulation S Notes and Rule 144A Notes". Except as set forth below, the Outstanding Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Outstanding Global Notes may not be exchanged for Outstanding Notes in certificated form except in the limited circumstances described below. See "--Exchange of Book-Entry Notes for Certificated Notes". Except in the limited circumstances described below, owners of beneficial interests in the Outstanding Global Notes are not entitled to receive physical delivery of Certificated Notes (as defined below). 109 Rule 144A Notes (including beneficial interests in the Rule 144A Global Notes) are subject to certain restrictions on transfer and bear a restrictive legend. Regulation S Notes also bear a restrictive legend. In addition, transfers of beneficial interests in the Outstanding Global Notes are subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of Euroclear and Cedel), which may change from time to time. The Trustee acts as Paying Agent and Registrar. The Outstanding Notes may be presented for registration of transfer and exchange at the offices of the Registrar. Depository Procedures The following description of the operations and procedures of DTC, Euroclear and Cedel are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them from time to time. The Company takes no responsibility for these operations and procedures and urges investors to contact the system or their participants directly to discuss these matters. DTC has advised the Company that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book- entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised the Company that, pursuant to procedures established by it, (i) upon deposit of the Outstanding Global Notes, DTC credited the accounts of Participants designated by the Initial Purchasers with portions of the principal amount of the Outstanding Global Notes and (ii) ownership of such interests in the Outstanding Global Notes is shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Outstanding Global Notes). Investors in the Rule 144A Global Notes may hold their interests therein directly through DTC, if they are Participants in such system, or indirectly through organizations (including Euroclear and Cedel) which are Participants in such system. Investors in the Regulation S Global Notes must initially hold their interests therein through Euroclear or Cedel, if they are participants in such systems, or indirectly through organizations that are participants in such systems. After the expiration of the Restricted Period (but not earlier), investors may also hold interests in the Regulation S Global Notes through Participants in the DTC system other than Euroclear and Cedel. Euroclear and Cedel will hold interests in the Regulation S Global Notes on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositories, which are Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, and Citibank, N.A., as operator of Cedel. All interests in a Global Note, including those held through Euroclear or Cedel, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Cedel may also be subject to the procedures and requirements of such systems. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of 110 Indirect Participants and certain banks, the ability of a person having beneficial interests in a Outstanding Global Note to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE OUTSTANDING GLOBAL NOTES DO NOT HAVE OUTSTANDING NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF OUTSTANDING NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Payments in respect of the principal of, and premium, if any, Liquidated Damages, if any, and interest on an Outstanding Global Note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered Holder under the Indenture. Under the terms of the Indenture, the Company and the Trustee will treat the persons in whose names the Outstanding Notes, including the Outstanding Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Company, the Trustee nor any agent of the Company or the Trustee has or will have any responsibility or liability for (i) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interest in the Outstanding Global Notes, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Outstanding Global Notes or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the Company that its current practice, upon receipt of any payment in respect of securities such as the Outstanding Notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in the principal amount of beneficial interest in the relevant security as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of the Outstanding Notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the Trustee or the Company. Neither the Company nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the Outstanding Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Except for trades involving only Euroclear and Cedel participants, interest in the Outstanding Global Notes are eligible to trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will, therefore, settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its Participants. See "--Same Day Settlement and Payment". Subject to any applicable transfer restrictions, transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same day funds, and transfers between participants in Euroclear and Cedel will be effected in the ordinary way in accordance with their respective rules and operating procedures. Subject to compliance with the transfer restrictions applicable to the Outstanding Notes described herein, cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or Cedel participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Cedel, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Cedel, as the case may be, will, if 111 the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Outstanding Global Note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Cedel participants may not deliver instructions directly to the depositories for Euroclear or Cedel. DTC has advised the Company that it will take any action permitted to be taken by a Holder of the Outstanding Notes only at the direction of one or more Participants to whose account DTC has credited the interests in the Outstanding Global Notes and only in respect of such portion of the aggregate principal amount of the Outstanding Notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the Outstanding Notes, DTC reserves the right to exchange the Outstanding Global Notes for legended Outstanding Notes in certificated form, and to distribute such Outstanding Notes to its Participants. Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to facilitate transfers of interests in the Regulation S Global Notes and in the Rule 144A Global Notes among Participants in DTC, Euroclear and Cedel, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee nor any of their respective agents will have any responsibility for the performance by DTC, Euroclear or Cedel or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Exchange of Book-Entry Notes for Certificated Notes An Outstanding Global Note is exchangeable for definitive Outstanding Notes in registered certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company that it is unwilling or unable to continue as depositary for the Outstanding Global Notes and the Company thereupon fails to appoint a successor depositary or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Certificated Notes or (iii) there shall have occurred and be continuing a Default or Event of Default with respect to the Outstanding Notes. In addition, beneficial interests in an Outstanding Global Note may be exchanged for Certificated Notes upon request upon compliance with the procedures set forth in the Indenture. In all cases, Certificated Notes delivered in exchange for any Outstanding Global Note or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear the applicable restrictive legend, unless the Company determines otherwise in compliance with applicable law. Exchange of Certificated Notes for Book-Entry Notes Outstanding Notes issued in certificated form may not be exchanged for beneficial interests in any Outstanding Global Note unless the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer will comply with any appropriate transfer restrictions applicable to such Outstanding Notes. Exchanges Between Regulation S Notes and Rule 144A Notes Prior to the expiration of the Restricted Period, beneficial interests in the Regulation S Global Note may be exchanged for beneficial interests in the Rule 144A Global Note only if such exchange occurs in connection with a transfer of the Outstanding Notes pursuant to Rule 144A and the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that the Outstanding Notes are being transferred to a person who the transferor reasonably believes to be a 112 qualified institutional buyer within the meaning of Rule 144A, purchasing for its own account or the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A and in accordance with all applicable securities laws of the states of the United States and other jurisdictions. Beneficial interest in a Rule 144A Global Note may be transferred to a person who takes delivery in the form of an interest in the Regulation S Global Note, whether before or after the expiration of the Restricted Period, only if the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer is being made in accordance with Rule 903 or 904 of Regulation S or Rule 144 (if available) and that, if such transfer occurs prior to the expiration of the Restricted Period, the interest transferred will be held immediately thereafter through Euroclear or Cedel. Transfers involving an exchange of a beneficial interest in the Regulation S Global Note for a beneficial interest in a Rule 144A Global Note or vice versa will be effected in DTC by means of an instruction originated by the Trustee through the DTC Deposit/Withdraw at Custodian system. Accordingly, in connection with any such transfer, appropriate adjustments will be made to reflect a decrease in the principal amount of the Regulation S Global Note and a corresponding increase in the principal amount of the Rule 144A Global Note or vice versa, as applicable. Any beneficial interest in one of the Outstanding Global Notes that is transferred to a person who takes delivery in the form of an interest in the other Outstanding Global Note will, upon transfer, cease to be an interest in such Outstanding Global Note and will become an interest in the other Outstanding Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interest in such other Outstanding Global Note for so long as it remains such an interest. The policies and practices of DTC may prohibit transfers of beneficial interests in the Regulation S Global Note prior to the expiration of the Restricted Period. Same Day Settlement and Payment The Indenture requires that payments in respect of the Outstanding Notes represented by the Outstanding Global Notes (including principal, premium, if any, interest and Liquidated Damages, if any) be made by wire transfer of immediately available funds to the accounts specified by the Outstanding Global Note Holder. With respect to Outstanding Notes in certificated form, the Company will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. The Outstanding Notes represented by the Outstanding Global Notes are expected to be eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Outstanding Notes will, therefore, be required by the Depositary to be settled in immediately available funds. The Company expects that secondary trading in any certificated Outstanding Notes will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or Cedel participant purchasing an interest in an Outstanding Global Note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Cedel participant, during the securities settlement processing day (which must be a business day for Euroclear and Cedel) immediately following the settlement date of DTC. DTC has advised the Company that cash received in Euroclear or Cedel as a result of sales of interests in an Outstanding Global Note by or through a Euroclear or Cedel participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Cedel cash account only as of the business day for Euroclear or Cedel following DTC's settlement date. 113 CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary course of business consistent with past practices (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption "--Change of Control" and/or the provisions described above under the caption "--Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing, the following items shall not be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii) a Restricted Payment that is permitted by the covenant described above under the caption "--Restricted Payments", and (iv) an exchange of facilities by the Company or a Restricted Subsidiary to the extent that such facilities are exchanged for one or more nursing centers, long-term care facilities, assisted living facilities, outpatient clinics or any other facilities or businesses that are used or useful in the provision of healthcare related services, in each case the aggregate fair market value of which is equal to or greater than the fair market value of the facilities so exchanged, as determined in good faith by the Board of Directors. "Attributable Debt" in respect of a sale and leaseback transaction or an operating lease in respect of a healthcare facility means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee of the property subject to such sale and leaseback transaction or operating lease in respect of a healthcare facility for net rental payments during the remaining term of the lease included in such transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. 114 "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the New Credit Facility or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition and (vi) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (i)-(v) of this definition. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than one or more Principals and their Related Parties, (ii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than one or more Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares), (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than one or more Principals and their Related Parties, becomes the "beneficial owner" (as defined above), directly or indirectly, of more than 35% of the Voting Stock of the Company (measured by voting power rather than number of shares) and the Principals and their Related Parties in the aggregate "beneficially own" (as defined above) less than 35% of the Voting Stock of the Company (measured by voting power rather than number of shares) or, in the event the Company has consummated a Public Equity Offering, less than 20% of the Voting Stock of the Company (measured by voting power rather than number of shares), or (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and its Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash 115 interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, plus (v) any non-recurring expenses related to Fountain View's reorganization transactions during August 1997, plus (vi) non-recurring financing, advisory and other expenses incurred in connection with the Transactions, minus (vii) non-cash items increasing such Consolidated Net Income for such period (other than items that were accrued in the ordinary course of business), in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash expenses of, a Subsidiary of the Company shall be added to Consolidated Net Income to compute Consolidated Cash Flow of the Company only to the extent that a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Subsidiary without prior governmental approval (that has not been obtained), and without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Subsidiary or its stockholders. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary thereof that is a Guarantor, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded, (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Subsidiaries and (vi) the Net Income of any Restricted Subsidiary shall be calculated after deducting preferred stock dividends payable by such Restricted Subsidiary to Persons other than the Company and its other Restricted Subsidiaries. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of preferred stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such preferred stock, less all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in each case, Permitted Investments). 116 "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of the Indenture, (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election, or (iii) was elected to such Board of Directors pursuant to a designation made pursuant to the Stockholder Agreement, provided that at such time the Principals and their Related Parties own more than 35% of the Voting Stock of the Company. "Credit Facilities" means, one or more debt facilities (including, without limitation, the New Credit Facility) or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. Indebtedness under Credit Facilities outstanding on the date on which Notes are first issued and authenticated under the Indenture shall be deemed to have been incurred on such date in reliance on the exception provided by clause (i) of the definition of Permitted Indebtedness. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Designated Senior Debt" means (i) so long as the New Credit Facility is outstanding, any Indebtedness outstanding under the New Credit Facility, and (ii) at any time thereafter any other Senior Debt permitted under the Indenture the principal amount of which is $25.0 million or more and that has been designated by the Company as "Designated Senior Debt". "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, however, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Certain Covenants--Restricted Payments". "Employment Agreement" means any of the employment agreements between the Company and William C. Scott, Robert M. Snukal or Sheila S. Snukal in effect as of the date of the Indenture. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Existing Affiliate Transactions" means any transaction contemplated by any of (i) the Stockholder Agreement, (ii) the Employment Agreements, (iii) the Agreement and Plan of Merger, dated as of February 6, 1998, among the Company, Summit Care Corporation, Heritage Fund II, L.P. and FV-SCC Acquisition Corp., (iv) the Investment Agreement, dated as of March 27, 1998, among the Company, Heritage Fund II, L.P., Heritage Investors II, L.L.C. and certain other Persons named therein, (v) the leases of the Company's Rio Hondo, Fountain View, Montebello and Sycamore Park skilled nursing facilities, between Robert M. Snukal, Sheila S. Snukal or their affiliates and the Company, and (vi) the purchase and supply agreements between the Company or its Subsidiaries and Twin Med, Inc. consistent with past practice in the ordinary course of business. 117 "Existing Disqualified Stock" means the Series A Preferred Stock of the Company. "Existing Indebtedness" means up to $165 million in aggregate principal amount of Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the New Credit Facility) in existence on the date of the Indenture, until such amounts are repaid. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of debt issuance costs (other than any such costs incurred in connection with the Transactions) and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or any of its Restricted Subsidiaries or secured by a Lien on assets of such Person or any of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the product of (a) all dividend payments, whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests of the Company (other than Disqualified Stock) or to the Company or a Restricted Subsidiary of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the referent Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Restricted Subsidiaries following the Calculation Date. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect from time to time. 118 "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantors" means each of Summit Care Corporation, a California corporation, Summit Care-California, Inc., a California corporation, Summit Care Pharmacy, Inc., a California corporation, Skilled Care Network, a California corporation, Summit Care Texas Equity, Inc., a California corporation, Summit Care-Texas No. 2, Inc., a Texas corporation, Summit Care- Texas No. 3, Inc., a Texas corporation, Summit Care Management Texas, Inc., a Texas corporation, Summit Care Texas, L.P., a Texas limited partnership, Fountain View Holdings, Inc., a Delaware corporation, AIB Corp., a California corporation, Alexandria Convalescent Hospital, Inc., a California corporation, BIA Hotel Corp., a California corporation, Brier Oak Convalescent, Inc., a California corporation, Elmcrest Convalescent Hospital, a California corporation, Fountainview Convalescent Hospital, a California corporation, Fountain View Management, Inc., a California corporation, Rio Hondo Nursing Center, a California corporation, Locomotion Holdings, Inc., a Delaware corporation, Locomotion Therapy, Inc., a Delaware corporation, On-Track Therapy Center, Inc., a California corporation, I.'N O., Inc., a California corporation, and Sycamore Park Convalescent Hospital, a California corporation, and (ii) any other subsidiary that executes a Guarantee in accordance with the provisions of this Indenture, and their respective successors and assigns. "Healthcare Related Business" means a business, at least a majority of whose revenues result from healthcare, long-term care or assisted living related businesses or facilities. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all Indebtedness of others secured by a Lien on any asset of such Person (whether or not such Indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any Indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the form of direct or indirect loans (including Guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, 119 the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Restricted Payments". "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss), together with any related provision for taxes on such extraordinary gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under the New Credit Facility) secured by a lien on the asset or assets that were the subject of such Asset Sale, and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "New Credit Facility" means that certain Credit Agreement, by and among the Company and Bank of Montreal, as agent, providing for up to $30 million of revolving credit borrowings and $85 million of term loan borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Notes being offered hereby) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Investments" means (a) any Investment in the Company or in a Restricted Subsidiary of the Company that is a Guarantor; (b) any Investment in Cash Equivalents; (c) any Investment by 120 the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Company and a Guarantor or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company that is a Guarantor; (d) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "-- Repurchase at the Option of Holders--Asset Sales"; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; (f) Hedging Obligations; (g) any Investment in Permitted Joint Ventures; (h) other Investments in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (h) that are at the time outstanding, not to exceed $2.5 million; and (i) Investments provided for in the Investment Agreement as of the date of the Indenture. "Permitted Joint Venture" means (i) any Restricted Subsidiary which owns, operates or services a Healthcare Related Business, and (ii) Summit Care Pharmacy, L.L.C., which owns and operates a pharmacy in Texas. "Permitted Junior Securities" means Equity Interests in the Company or any Guarantor or debt securities that are unsecured and subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) to at least the same extent as, or to a greater extent than, the Notes are subordinated to Senior Debt pursuant to Article 10 of the Indenture. "Permitted Liens" means (i) Liens on assets of the Company, and of its Restricted Subsidiaries or any of the Guarantors securing Senior Debt that was permitted by the terms of the Indenture to be incurred; (ii) Liens in favor of the Company; (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company; (iv) Liens on property existing at the time of acquisition thereof or the acquisition of a Person owning such property or assets by the Company or any Restricted Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of the second paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering only the assets acquired with such Indebtedness; (vii) Liens existing on the date of the Indenture; (viii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (ix) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (x) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (xi) Liens on assets of Guarantors to secure Senior Debt of such Guarantors that was permitted by the Indenture to be incurred; (xii) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or 121 credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by the Company or such Restricted Subsidiary; and (xiii) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Principals" means Heritage Partners Management Company, Inc. and Heritage Fund II, L.P. "Public Equity Offerings" means a public offering of common stock of the Company pursuant to a registration statement filed with the Securities and Exchange Commission in accordance with the Securities Act. "Related Party" with respect to any Principal means (A) any controlling holder of Equity Interests, 80% (or more) owned Subsidiary, or spouse or ex- spouse or immediate family member (in the case of an individual) of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A) or (C) any investment fund, whether a limited partnership, limited liability company or corporation or other entity managed or controlled by Heritage Partners Management Company, Inc. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Senior Debt" means (i) all Indebtedness outstanding under Credit Facilities and all Hedging Obligations with respect thereto, (ii) any other Indebtedness permitted to be incurred by the Company under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes and (iii) all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in violation of the Indenture. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date hereof. 122 "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Transaction Related Payments" means (i) certain bonus and other payments not to exceed $1,925,000 from Summit or the Company to William Scott, payable at the effective time of the Merger, (ii) payments not to exceed $2,535,000 in the aggregate to effect the cash-out of Summit stock options, as described in the Merger Agreement, (iii) the payment of a transaction fee of up to $3 million by the Company to Heritage, payable at the effective time of the Merger, and (iv) payments to Mr. and Mrs. Snukal and William Scott, not to exceed $150,000 in the aggregate, upon the forfeiture of Series B Common Stock pursuant to the Stockholders Agreement. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "Certain Covenants--Restricted Payments". If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock", the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock", 123 calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period, and (ii) no Default or Event of Default would be in existence following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. 124 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion of certain anticipated United States federal income tax consequences of an exchange of the Outstanding Notes for the Exchange Notes and of the purchase at original issue, ownership and disposition of the Exchange Notes. This discussion is based upon the United States federal tax law now in effect, which is subject to change, possibly retroactively. The tax treatment of holders of the Notes may vary depending upon their particular situations. Certain holders (including insurance companies, tax-exempt organizations, financial institutions, subsequent purchasers of Notes and broker-dealers) may be subject to special rules not discussed below. In addition, this discussion does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States federal government. In general, this discussion assumes that a holder acquires a Note at original issuance and holds such Note as a capital asset and not as part of a "hedge", "straddle", "conversion transaction", "synthetic security" or other integrated investment. Prospective investors are urged to consult their tax advisors regarding the United States federal tax consequences of acquiring, holding and disposing of Notes, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. TAXATION OF HOLDERS ON EXCHANGE Subject to the limitation set forth above, an exchange of Outstanding Notes for Exchange Notes should not be a taxable event to holders of Outstanding Notes, and holders should not recognize any taxable gain or loss as a result of such an exchange. Accordingly, a holder would have the same adjusted basis and holding period in the Exchange Notes as it had in the Outstanding Notes immediately before the exchange. Further, the tax consequences of ownership and disposition of any Exchange Notes should be the same as the tax consequences of ownership and disposition of Outstanding Notes. As used herein, the term "United States Holder" means a beneficial owner of a Note that is, for United States federal income tax purposes, a citizen or resident of the United States, a corporation, partnership or other entity created or organized in the United States or under the law of the United States or of any political subdivision thereof, an estate whose income is includible in gross income for United States federal income tax purposes regardless of its source or a trust, if a United States court is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust. UNITED STATES HOLDERS STATED INTEREST. Stated interest on a Note will be taxable to a United States Holder as ordinary interest income at the time that such interest accrues or is received, in accordance with the United States Holder's regular method of accounting for federal income tax purposes. The Company expects that the Notes will not be considered to be issued with original issue discount for federal income tax purposes. LIQUIDATED DAMAGES. The Company intends to take the position that the Liquidated Damages described above under "The Exchange Offer--Purpose of the Exchange Offer" will be taxable to a United States Holder as ordinary income in accordance with such United States Holder's method of accounting for tax purposes. The Internal Revenue Service ("IRS"), however, may take a different position, which could affect the timing of both a United States Holder's income and the timing of the Company's deduction with respect to such Liquidated Damages. SALE, EXCHANGE OR RETIREMENT OF THE NOTES. Upon the sale, exchange, redemption, retirement at maturity or other disposition of a Note, a United States Holder will generally recognize taxable gain or loss equal to the difference between the sum of cash plus the fair market value of all other property 125 received on such disposition (except to the extent such cash or property is attributable to accrued interest which will be taxable as ordinary income) and such holder's adjusted tax basis in the Note. Gain or loss recognized on the disposition of a Note generally will be capital gain or loss. Pursuant to the recently enacted Taxpayer Relief Act of 1997, long-term capital gains tax rates will apply to dispositions by individuals of capital assets (such as the Notes) held for more than 18 months. The maximum long-term capital gains tax rate applicable to individuals is currently 20% (10% for individuals in the 15% tax bracket). Mid-term capital gains tax rates will apply to dispositions by individuals of capital assets held for more than one year but not more than 18 months. The maximum mid-term capital gains tax rate applicable to individuals is currently 28% (15% for individuals in the 15% tax bracket). Corporate taxpayers continue to be subject to a maximum regular tax rate of 35% on all capital gains and ordinary income. The exchange of a Note by a United States Holder for an Exchange Note should not constitute a taxable exchange of the Note. As a result, a United States Holder should not recognize taxable gain or loss upon receipt of an Exchange Note, a United States Holder's holding period for an Exchange Note should generally include the holding period for the Note so exchanged and such holder's adjusted tax basis in an Exchange Note should generally be the same as such holder's adjusted tax basis in the Note so exchanged. BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, a United States Holder of a Note will be subject to backup withholding at the rate of 31% with respect to interest, premium and possibly principal, if any, paid on a Note, unless the holder (a) is an entity (including corporations, tax-exempt organizations and certain qualified nominees) that is exempt from withholding and, when required, demonstrates this fact, or (b) provides the Company with its Taxpayer Identification Number ("TIN") (which, for an individual, would be the holder's Social Security number), certifies that the TIN provided to the Company is correct and that the holder has not been notified by the IRS that it is subject to backup withholding due to underreporting of interest or dividends, and otherwise complies with applicable requirements of the backup withholding rules. In addition, such payments of interest, premium and possibly principal to United States Holders that are not corporations, tax- exempt organizations or qualified nominees will generally be subject to information reporting requirements. The amount of any backup withholding from a payment to a United States Holder will be allowed as a credit against such holder's federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the IRS. NON-UNITED STATES HOLDERS STATED INTEREST. Interest paid by the Company to any beneficial owner of a Note that is not a United States Holder (a "Non-United States Holder") will not be subject to United States federal income or withholding tax if such interest is not effectively connected with the conduct of a trade or business within the United States by such Non-United States Holder and (a) such Non- United States Holder (i) does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company; (ii) is not a controlled foreign corporation with respect to which the Company is a "related person" within the meaning of the United States Internal Revenue Code of 1986 (the "Code") and (iii) satisfies certain certification requirements or (b) such Non-United States Holder is entitled to the benefits of an income tax treaty under which the interest is exempt from United States withholding tax, and such Non-United States Holder provides a properly executed IRS Form 1001 claiming the exemption (or, after December 31, 1998, IRS Form W-8, which may require obtaining a TIN and making certain certifications). However, to the extent that any payment of Liquidated Damages is not treated as a payment of interest on the Notes, such payment may be subject to U.S. withholding taxes. See "--United States Holders". 126 SALE, EXCHANGE OR RETIREMENT OF THE NOTES. A Non-United States Holder will generally not be subject to United States federal income tax on gain recognized on a sale, exchange, redemption, retirement at maturity or other disposition of a Note unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder or (ii) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Note as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other requirements are met. FEDERAL ESTATE TAXES. If interest on the Notes is exempt from withholding of United States federal income tax under clause (a) of the rules described under "--Stated Interest", the Notes will not be included in the estate of a deceased Non-United States Holder for United States federal estate tax purposes. BACKUP WITHHOLDING AND INFORMATION REPORTING. The Company will, where required, report to the holders of Notes and the IRS the amount of any interest paid on the Notes in each calendar year and the amounts of tax withheld, if any, with respect to such payments. In the case of payments of interest to Non-United States Holders, Treasury Regulations provide that the 31% backup withholding tax and certain information reporting will not apply to such payment with respect to which either the requisite certification has been received or an exemption has otherwise been established; provided that neither the Company nor its payment agent has actual knowledge that the holder is a United States person or that the conditions of any other exemption are not in fact satisfied. Under the Treasury Regulations, these information reporting and backup withholding requirements will apply, however, to the gross proceeds paid to a Non-United States Holder on the disposition of the Notes by or through a United States office of a United States or foreign broker, unless certain certification requirements are met or the holder otherwise establishes an exemption. Information reporting requirements, but not backup withholding, will also apply to a payment of the proceeds of a disposition of the Notes by or through a foreign office of a United States broker or foreign brokers with certain types of relationships to the United States unless the holder is an exempt recipient (as demonstrated through appropriate certification) or such broker has documentary evidence in its file that the holder of the Notes is not a United States person and has no actual knowledge to the contrary and certain other conditions are met. Neither information reporting nor backup withholding generally will apply to a payment of the proceeds of a disposition of the Notes by or through a foreign office of a foreign broker not subject to the preceding sentence. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the Non-United States Holder's United States federal income tax liability, provided that the required information is furnished to the IRS. Recently, the Treasury Department has promulgated final regulations regarding the withholding and information reporting rules discussed above. In general, the final regulations do not significantly alter the substantive withholding and information reporting requirements but unify current certification procedures and forms and clarify reliance standards. Under the final regulations, special rules apply which permit the shifting of primary responsibility for withholding to certain financial intermediaries acting on behalf of beneficial owners. The final regulations are generally effective for payments made after December 31, 1998, subject to certain transition rules. Non-United States Holders are urged to consult their tax advisors with respect to the application of these final regulations. VALIDITY OF THE NOTES Certain legal matters with respect to U.S. federal and Delaware law in connection with the Exchange Notes offered hereby will be passed upon for the Company by Choate, Hall & Stewart (a partnership including professional corporations), Boston, Massachusetts. Stephen M. L. Cohen, a partner of Choate, Hall & Stewart, is a limited partner in Heritage Fund II, L.P. 127 AVAILABLE INFORMATION The Company is not currently subject to the periodic reporting and other informational requirements of the Exchange Act. The Company has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, the Company will furnish to the holders of the Notes and file with the Commission (unless the Commission will not accept such a filing) (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company was required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports, in each case within the time periods set forth in the Commission's rules and regulations. In addition, following the consummation of the Exchange Offer, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. Once the Registration Statement has been declared effective by the Commission, the Company will become subject to the informational requirements of the Exchange Act and in accordance therewith will be required to file reports and other information with the Commission. When filed, the Registration Statement and the exhibits thereto, as well as such reports and other information to be filed by the Company with the Commission, may be inspected, without charge, at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as the regional offices of the Commission at the Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such documents can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. In addition, the Company will be required to file electronic versions of these documents with the Commission through the Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site, located at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. EXPERTS The consolidated financial statements and schedule of Fountain View, Inc. as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Summit Care Corporation at June 30, 1997 and 1996, and for each of the three years in the period ended June 30, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 128 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains certain statements that may be considered "forward- looking". Such forward-looking statements include, among other things, synergies resulting from the Transactions, the success of the Company's business strategy, the Company's ability to develop and expand its business in its regional markets, the Company's ability to increase the level of sub-acute and specialty medical care it provides, the effects of government regulation and healthcare reform, litigation, the Company's anticipated future revenues and additional revenue opportunities, capital spending and financial resources, the liquidity demands of the Company, the Company's ability to meet its liquidity needs, the resolution of Year 2000 issues, and other statements contained in this Prospectus regarding matters that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Prospective investors in the Notes offered hereby are cautioned that although management believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be materially incorrect. The uncertainties in this regard include, but are not limited to, those identified in the section of this Prospectus entitled "Risk Factors". In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's plans and objectives will be achieved and prospective investors in the Notes should not place undue reliance on such forward-looking statements. 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. 129 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- FOUNTAIN VIEW, INC. Report of Independent Auditors............................................ F-2 Consolidated Balance Sheets at December 31, 1996 and 1997................. F-3 Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997............................................................ F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the Three Years Ended December 31, 1997............................................ F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997................................................................. F-6 Notes to Consolidated Financial Statements................................ F-7 Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 1997 and 1998.................................................. F-14 Consolidated Balance Sheet (Unaudited) at March 31, 1998.................. F-15 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1997 and 1998............................................ F-17 Notes to Unaudited Consolidated Financial Statements...................... F-18 SUMMIT CARE CORPORATION Report of Independent Auditors............................................ F-22 Consolidated Balance Sheets at June 30, 1996 and 1997..................... F-23 Consolidated Statements of Income for the Years Ended June 30, 1995, 1996 and 1997................................................................. F-24 Consolidated Statements of Shareholders' Equity for the Three Years Ended June 30, 1997............................................................ F-25 Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1996 and 1997............................................................ F-26 Notes to Consolidated Financial Statements................................ F-27 Consolidated Balance Sheet (Unaudited) at December 31, 1997............... F-38 Consolidated Statements of Income (Unaudited) for the Period from July 1, 1997 to December 31, 1997........................................................ F-39 Consolidated Statements of Cash Flows (Unaudited) for the Period from July 1, 1997 to December 31, 1997........................................................ F-40 Notes to Unaudited Consolidated Financial Statements...................... F-41
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Fountain View, Inc. We have audited the accompanying consolidated balance sheets of Fountain View, Inc. as of December 31, 1996 and 1997 and the related consolidated statements of income, shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fountain View, Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Los Angeles, California March 11, 1998 F-2 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ---------------- 1996 1997 ------- ------- ASSETS Current assets: Cash and cash equivalents.................................. $ 1,161 $ 2,551 Accounts receivable, less allowance for uncollectible accounts of $779 and $1,152, respectively ......................... 18,717 15,809 Deferred income taxes...................................... -- 927 Other current assets....................................... 713 576 ------- ------- Total current assets..................................... 20,591 19,863 ------- ------- Leasehold improvements and equipment, at cost: Leasehold improvements..................................... 2,329 4,659 Furniture and equipment.................................... 1,914 2,096 ------- ------- 4,243 6,755 Less accumulated depreciation and amortization............. (1,680) (2,481) ------- ------- 2,563 4,274 Other assets................................................. 968 1,804 ------- ------- Total assets................................................. $24,122 $25,941 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Payable to banks........................................... $ 2,975 $ -- Accounts payable and accrued liabilities................... 1,457 4,179 Employee compensation and benefits......................... 2,423 2,479 Income taxes payable....................................... -- 1,443 Current maturities of long-term debt....................... 170 1,741 ------- ------- Total current liabilities................................ 7,025 9,842 ------- ------- Long-term debt, less current maturities...................... 496 28,335 ------- ------- Total liabilities............................................ 7,521 38,177 Commitments and contingencies -- -- Shareholders' equity (deficit): Preferred stock, $0.01 par value: 7,000 shares authorized, issued and outstanding (liquidation preference $7,000).......................... $ -- $ -- Common Stock Series A-1, $0.01 par value: 53,850 shares authorized, issued and outstanding......... -- 1 Common Stock Series A-2, $0.01 par value: 99,950 shares authorized, issued and outstanding......... -- 1 Common Stock Series A-3, non-voting, $0.01 par value: 46,200 shares authorized, issued and outstanding......... -- -- Additional paid-in capital................................. 8,000 21,957 Treasury Stock............................................. (120) -- Retained earnings (accumulated deficit).................... 8,721 (34,195) ------- ------- Total shareholders' equity (deficit)......................... 16,601 (12,236) ------- ------- Total liabilities and shareholders' equity (deficit)......... $24,122 $25,941 ======= =======
See accompanying notes. F-3 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ------- ------- ------- REVENUES: Net revenue............................................ $55,836 $59,432 $67,905 EXPENSES: Salaries and benefits................................ 35,048 36,166 38,215 Supplies............................................. 5,642 5,483 8,293 Purchased services................................... 3,964 4,658 4,256 Provision for doubtful accounts...................... 427 430 395 Other expenses....................................... 3,421 4,043 5,046 Rent................................................. 1,890 2,120 2,004 Rent to related parties.............................. 2,056 1,776 1,771 Depreciation and amortization........................ 416 600 1,198 Interest (net of interest income--$65, $29 and $4 for 1995, 1996 and 1997, respectively).................. 332 278 1,164 ------- ------- ------- Total expenses..................................... 53,196 55,554 62,342 ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES............... 2,640 3,878 5,563 Provision for income taxes............................. 54 78 361 ------- ------- ------- NET INCOME............................................. $ 2,586 $ 3,800 $ 5,202 ======= ======= ======= Pro forma net income: Net income as reported............................... $ 2,586 $ 3,800 $ 5,202 Charge in lieu of income taxes....................... 1,025 1,493 1,590 ------- ------- ------- Net income............................................. $ 1,561 $ 2,307 $ 3,612 ======= ======= ======= Earnings per share: Basic and diluted--Historical........................ $ 12.93 $ 19.0 $ 26.01 ======= ======= ======= Pro forma............................ $ 7.81 $ 11.53 $ 18.06 ======= ======= ======= Weighted average shares outstanding: Basic and diluted.................................... 200 200 200 ======= ======= =======
See accompanying notes. F-4 FOUNTAIN VIEW, INC. CONSOLIIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) THREE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
SERIES A PREFERRED SERIES A-1 SERIES A-2 SERIES A-3 RETAINED STOCK COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL EARNINGS ------------- ------------- ------------- ------------- PAID-IN TREASURY (ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT) TOTAL ------ ------ ------ ------ ------ ------ ------ ------ ---------- -------- ------------ -------- Balance at January 1, 1995............ -- $ -- -- $ -- -- $ -- -- $ -- $ 916 $(120) $ 8,998 $ 9,794 Net income........ -- -- -- -- -- -- -- -- -- -- 2,586 2,586 Issuance of common stock...... -- -- -- -- -- -- -- -- 300 -- -- 300 Distributions to shareholders...... -- -- -- -- -- -- -- -- -- -- (2,724) (2,724) ----- ----- ------ ----- ------ ----- ------ ----- ------- ----- -------- -------- Balance at December 31, 1995........... -- -- -- -- -- -- -- -- 1,216 (120) 8,860 9,956 Contributions from shareholders...... -- -- -- -- -- -- -- -- 6,784 -- -- 6,784 Net income........ -- -- -- -- -- -- -- -- -- -- 3,800 3,800 Distributions to shareholders...... -- -- -- -- -- -- -- -- -- -- (3,939) (3,939) ----- ----- ------ ----- ------ ----- ------ ----- ------- ----- -------- -------- Balance at December 31, 1996........... -- -- -- -- -- -- -- -- 8,000 (120) 8,721 16,601 Net income........ -- -- -- -- -- -- -- -- -- -- 5,202 5,202 Contributions before reorganization.... -- -- -- -- -- -- -- -- 1,277 -- -- 1,277 Cancellation of treasury stock.... -- -- -- -- -- -- -- -- -- 120 -- 120 Distributions to shareholders before reorganization.... -- -- -- -- -- -- -- -- -- -- (4,418) (4,418) Reorganization: Issuance of preferred stock. 7,000 -- -- -- -- -- -- -- 7,000 -- -- 7,000 Issuance of common stock.... -- -- 53,850 1 99,950 1 46,200 -- 6,998 -- -- 7,000 Transactional costs........... -- -- -- -- -- -- -- -- (1,318) -- -- (1,318) Distributions to shareholders.... -- -- -- -- -- -- -- -- -- -- (43,700) (43,700) ----- ----- ------ ----- ------ ----- ------ ----- ------- ----- -------- -------- Balance at December 31, 1997........... 7,000 $ -- 53,850 $ 1 99,950 $ 1 46,200 $ -- $21,957 $ -- $(34,195) $(12,236) ===== ===== ====== ===== ====== ===== ====== ===== ======= ===== ======== ========
See accompanying notes. F-5 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------- ------- -------- OPERATING ACTIVITIES: Net income....................................... $ 2,586 $ 3,800 $ 5,202 ------- ------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 416 600 1,198 Changes in operating assets and liabilities: Accounts receivable............................ 1,176 (3,757) 2,908 Other current assets........................... 165 (92) 137 Accounts payable and accrued liabilities....... 317 421 2,722 Employee compensation and benefits............. 1,152 116 56 Income taxes payable........................... 20 (29) 1,443 Deferred income taxes.......................... -- -- (927) ------- ------- -------- Total adjustments............................ 3,246 (2,741) 7,537 ------- ------- -------- Net cash provided by operating activities.... 5,832 1,059 12,739 ------- ------- -------- INVESTING ACTIVITIES: Additions to leasehold improvements and equipment....................................... (665) (1,816) (2,570) Additions to other assets........................ (282) -- (1,175) ------- ------- -------- Net cash used in investing activities........ (947) (1,816) (3,745) ------- ------- -------- FINANCING ACTIVITIES: Decrease in payable to bank...................... (250) (925) (2,975) Principal payments on long-term debt............. (910) (472) (3,090) Proceeds from long-term debt..................... 725 249 32,500 Proceeds from issuances of stock................. -- -- 12,682 Contributions from shareholders.................. -- 4,649 1,277 Cancellation of treasury stock................... -- -- 120 Distributions to shareholders.................... (2,724) (3,939) (48,118) ------- ------- -------- Net cash used in financing activities........ (3,159) (438) (7,604) ------- ------- -------- Increase (decrease) in cash and cash equivalents... 1,726 (1,195) 1,390 Cash and cash equivalents at beginning of year..... 630 2,356 1,161 ------- ------- -------- Cash and cash equivalents at end of year........... $ 2,356 $ 1,161 $ 2,551 ======= ======= ======== NONCASH ACTIVITY: Additional paid-in-capital relating to debt forgiveness..................................... $ -- $ 2,135 $ -- Additional paid-in-capital relating to stock acquisition..................................... 300 -- --
See accompanying notes. F-6 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. DESCRIPTION OF BUSINESS Fountain View, Inc. (the "Company") provides a variety of healthcare services primarily to the elderly through the operation of eight skilled nursing care centers and a retirement hotel in California. These services include nursing care, lodging, food and certain specialty medical services, including rehabilitation care, infusion therapy and other ancillary services. The Company also provides therapy services to other long-term care providers. In July 1997, the Company's predecessor, which was comprised of all of the Company's operating units owned individually by the controlling shareholders, was merged with and into several companies formed by Fountain View, Inc., a holding company, formed for the express purpose of effectuating the reorganization of the Company. These transactions are described further in Note 3 to the consolidated financial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EARNINGS PER SHARE Basic and diluted earnings per share have been computed reflecting the Fountain View Equity Transactions as if such transactions had occurred as of January 1, 1995, and all common stock, series A-1, A-2 and A-3, was outstanding from that date. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid investments with an original or remaining maturity of three months or less when purchased. The Company places its temporary cash investments with high credit quality financial institutions. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Depreciation and amortization (straight-line method) is based on the estimated useful lives of the individual assets as follows: Leasehold improvements...... Shorter of lease term or estimated useful life, generally 5-10 years. Furniture and equipment..... 3-10 years.
NET PATIENT SERVICES REVENUE Approximately 53 percent, 52 percent and 56 percent of the Company's revenues in the years ended December 31, 1995, 1996 and 1997, respectively, were derived from funds under federal and state medical assistance programs, the continuation of which are dependent upon governmental policies. These revenues are based, in certain cases, upon cost reimbursement principles and are subject to audit. Revenues are recorded on an accrual basis as services are performed at their estimated net realizable value. Differences between final settlement and estimated net realizable value accrued in prior years are reported as adjustments to the current year's net revenues. A significant F-7 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) portion of the Company's skilled nursing care center revenues is derived from government-sponsored healthcare programs such as Medicare and Medicaid. These programs are highly regulated and are subject to budgetary and other constraints. While the Company's cash flow could be adversely affected by periodic government program funding delays or shortfalls, management does not believe there are any significant credit risks associated with these government programs. REGULATORY MATTERS Laws and regulations governing the Medicare program are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. INSURANCE COVERAGE The Company insures for workers' compensation and general and professional liability coverage under an occurrence based policy, with no deductible. Prior to October 1997, the Company was self-insured for claims arising from employees relating to employment matters. ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG LIVED ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company believes, based on current circumstances, that there are no indicators of impairment to its long-lived assets, and the Company presently has no expectations for disposing of any long-lived assets. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which is effective for fiscal years beginning after December 15, 1997. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Items recognized as components of comprehensive income which are not included in the income statement include unrealized gains and losses in marketable securities, foreign currency translation adjustments, tax benefits related to nonqualified stock options, and others. The Company is presently evaluating the new standard to determine how it will present comprehensive income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Settlements of an Enterprise and Related Information" (SFAS 131), which is effective for fiscal years ending after December 15, 1997. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements. It also requires that those enterprises report selected information about F-8 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. 3. FOUNTAIN VIEW EQUITY TRANSACTIONS On or about August 1, 1997, the controlling shareholders of the Company consummated a reorganization transaction (the "Fountain View Equity Transactions"). Prior to the Fountain View Equity Transactions, the controlling shareholders were the sole owners of a number of healthcare companies, which they managed as one business enterprise. The separately owned companies consisted of eight skilled nursing facilities, an assisted living facility and a therapy company which provides therapy services primarily to third-party owned facilities as well as Company-owned facilities. Additionally, the controlling shareholders owned the real estate which is operated by four of the nursing homes. The remaining real estate is leased from unrelated third parties. The controlling shareholders along with Heritage formed a new holding company known as Fountain View, Inc. ("New Fountain View") along with several acquisition subsidiaries to consolidate the healthcare companies owned by the controlling shareholders into one company. At the same time, New Fountain View entered into market rate leases for the four real estate facilities owned by the controlling shareholders. Under the terms of the Fountain View Equity Transactions, Heritage invested $14.0 million in cash in New Fountain View in exchange for all of the Company's preferred stock with a liquidation value of $7.0 million, and 99,950 shares of the Company's Common Stock Series A-2. The controlling shareholders at the same time contributed all of their healthcare assets, except for owned real estate, to New Fountain View in exchange for 53,850 shares of the Company's Common Stock Series A-1 and 46,200 shares of the Company's common Stock Series A-3. Concurrent with the exchange of shares, the New Fountain View obtained bank financing totaling $32.5 million, the proceeds of which along with the $14.0 million invested by Heritage was used to fund a distribution of $43.7 million of cash to the controlling shareholders and pay $1,318,000 in transaction costs. The Common Stock Series A-1 shares have three votes for each share, whereas Series A-2 has one vote per share, and Series A- 3 is non-voting. By virtue of the voting features, the controlling shareholders maintained a controlling financial interest in New Fountain View. Also, a shareholders agreement between the controlling shareholders and Heritage provides that the Controlling Shareholders hold a majority of the seats on the Board of Directors. The preferred shareholders are entitled to receive dividends, at the Board of Director's discretion, at an annual rate of 10 percent of the preferred stock base amount, as defined. The initial base amount is $7,000,000. The preferred stock is non-voting and the holders are entitled to be paid in cash, in respect of each share of preferred stock held, upon any liquidation or dissolution of the Company before any distribution is made to the common shareholders. Since the controlling shareholders maintained a controlling financial interest in New Fountain View, a change in control was not deemed to have occurred upon the consummation of the Fountain View Equity Transactions. Therefore, the Fountain View Equity Transactions were treated as a reorganization/merger of companies under common control, with no step-up in basis of the assets of New Fountain View. F-9 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair market value disclosures. CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. LONG-TERM DEBT (INCLUDING CURRENT PORTION) The carrying value of $30,076,000 of long-term approximates the fair market value of such debt since the interest rate approximates the Company's incremental borrowing rate. 5. MATERIAL TRANSACTIONS WITH RELATED ENTITIES Robert and Sheila Snukal own the real estate for four of the Company's facilities. Such real estate has not been included in the financial statements for any of the years presented herein since such real estate was excluded from the Fountain View Equity Transactions discussed in Note 3. Lease payments to the shareholders under operating leases for these facilities totaled $2,056,000, $1,776,000 and $1,771,000 for the years ended December 31, 1995, 1996 and 1997, respectively. 6. OTHER ASSETS Other assets consist of the following (in thousands):
DECEMBER 31, ----------- 1996 1997 ---- ------ Deposits........................................................ $ 56 $ 56 Goodwill, net................................................... 530 500 Lease acquisition costs, net.................................... 382 337 Deferred loan fees.............................................. -- 911 ---- ------ $968 $1,804 ==== ======
7. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, ------------ 1996 1997 ---- ------- Union Bank of California, $15 million Term Loan A due in 2002 and $15 million Term Loan B due in 2004, payable in quarterly installments ranging from $37 to $1,781, including interest based on the LIBOR rate. The Company's accounts receivable and equipment collateralize the Term Loans........................ $-- $29,925 Note payable to shareholders................................... 337 -- Other.......................................................... 329 151 ---- ------- 666 30,076 Less current maturities........................................ 170 1,741 ---- ------- $496 $28,335 ==== =======
F-10 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. LONG-TERM DEBT (CONTINUED) Future maturities of long-term debt are as follows: years ending December 31, 1998--$1,741,000; 1999--$3,710,000; 2000--$4,150,000; 2001--$4,150,000; 2002--$5,638,000; and thereafter $10,687,000. Interest payments were $397,000, $307,000 and $1,105,000, in 1995, 1996 and 1997, respectively. 8. LINE OF CREDIT The Company has a line of credit with a financial institution amounting to $4,500,000 in 1996 and $15,000,000 in 1997. Total draws on the line amounted to $0 and $2,975,000 as of December 31, 1996 and 1997, respectively. The line of credit terminates on August 1, 2002 and bears interest at the LIBOR rate. The Company's accounts receivable and equipment collateralize the line of credit. 9. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 1997 ------ ------ ---- Federal: Current................................................. $ -- $ -- $1,004 Deferred................................................ -- -- (722) State: Current................................................. 54 78 282 Deferred................................................ -- -- (203) ------ ------ ------ 54 78 361 Charge in lieu of income taxes............................ 1,025 1,493 1,590 ------ ------ ------ $1,079 $1,571 $1,951 ====== ====== ======
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Temporary differences are primarily attributable to reporting for income tax purposes the excess of tax over book depreciation, allowance for uncollectible accounts, accrued expenses and accrued vacation benefits. Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
DECEMBER 31, ------------------------------- 1996 1997 --------------- --------------- NON- NON- CURRENT CURRENT CURRENT CURRENT ------- ------- ------- ------- Deferred tax liabilities: Tax over book depreciation................... $ -- $ -- $-- $ 1 Total deferred tax liabilities................. -- -- -- 1 Deferred tax assets: Vacation, accrued expenses and allowance for uncollectible accounts -- -- 770 -- State tax...................................... -- -- 157 -- ----- ----- ---- ---- Total deferred tax assets...................... -- -- 927 -- ----- ----- ---- ---- Net deferred tax assets........................ $ -- $ -- $927 $ 1 ===== ===== ==== ====
F-11 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. INCOME TAXES (CONTINUED) A reconciliation of the provision for income taxes with the amount computed using the federal statutory rate is as follows (in thousands):
DECEMBER 31, -------------------- 1995 1996 1997 ------ ------ ------ Federal rate (34%).................................... $ 898 $1,324 $1,902 State taxes, net of federal tax benefit............... 158 234 336 Goodwill.............................................. -- -- 84 Other, net............................................ 23 13 (4) Establishment of deferred taxes due to conversion from S-Corporation to C-Corporation....................... -- -- (367) ------ ------ ------ $1,079 $1,571 $1,951 ====== ====== ======
Total income tax payments during 1995, 1996 and 1997 were $17,000, $30,000 and $8,000, respectively. CHARGE IN LIEU OF INCOME TAXES AND S-CORPORATION STATUS Prior to the Fountain View Equity Transactions, most of the individually owned corporations had elected to be taxed as cash basis S-Corporations. Included herein are pro forma charges in lieu of income taxes to indicate what the tax provision would have been had the Company been taxed as a C- Corporation for all years with a federal and state effective tax rate of 41%. In connection with the Fountain View Equity Transactions, the controlling shareholders elected to make a Section 338(h)(10) election (the "Election"). Since the corporations which comprised the predecessor organization were owned individually by the controlling shareholders, and some of such corporations had previously elected to be taxed as cash basis S-Corporations, upon the Election, the cash basis S-Corporations incurred taxable income to the extent of any receivables and payables not previously recognized in the S-Corporation tax returns. The controlling shareholders, and not the Company, are responsible for the taxes due as a result of the Election. 10. LEASES The Company leases certain of its centers and equipment under noncancelable operating leases. The leases generally provide for payment of property taxes, insurance and repairs, and have rent escalation clauses based upon the consumer price index or annual per bed adjustments. The future minimum rental payments under noncancelable operating leases that have initial or remaining lease terms in excess of one year as of December 31, 1997 are as follows (in thousands):
RELATED PARTY OTHER TOTAL ------- ------- ------- 1998................................................. $ 1,764 $ 1,954 $ 3,718 1999................................................. 1,764 2,003 3,767 2000................................................. 1,764 1,938 3,702 2001................................................. 1,764 1,995 3,759 2002................................................. 1,764 2,023 3,787 Thereafter........................................... 25,726 7,008 32,734 ------- ------- ------- $34,546 $16,921 $51,467 ======= ======= =======
F-12 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. CONTINGENCIES The Company is subject to malpractice claims and other litigation arising in the ordinary course of business. In the opinion of management, any liability beyond amounts covered by insurance and the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's financial position or results of operations. YEAR 2000 (UNAUDITED) Some of the Company's information systems and biomedical equipment have time-sensitive software that will not properly recognize the year 2000. This could result in a system failure or miscalculations causing disruption of the Company's operations. The Company is currently completing an assessment and developing a plan to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. 12. SHAREHOLDERS' EQUITY SHAREHOLDERS AGREEMENT In connection with the Fountain View Equity Transactions, the controlling shareholders and Heritage which owns all of the preferred stock, and all of the Series A-2 common stock consummated a shareholders agreement (the Agreement). Under the Agreement, each of the parties has certain rights and obligations. The controlling shareholders retain 3 of the 5 board of directors seats unless certain events occur including non-payment of any debt of $1 million or more, and the failure to meet certain earnings targets. In addition, at any time on or after July 1, 2001, at the option of Heritage, Heritage will have the right to put its common stock holdings to the Company at appraised value. At any time on or after July 1, 2003, if Heritage has not elected to put its stock to the Company, at the option of a majority of the controlling shareholders, the controlling shareholders will have the right to put the stock to the Company at appraised value. Heritage has also retained certain protective rights with respect to its investment in the Company. In addition to the above rights and obligations, should certain Company terminal value targets not be met, then the Common Stock Series A-3 will be returned to the Company and cancelled, without remuneration to the controlling shareholders. The number of shares returned is based on a formula included in the Agreement. The Agreement terminates upon the occurrence of an IPO. PURCHASE AND CONTRIBUTION AGREEMENT In connection with the Fountain View Equity Transactions, the controlling shareholders agreed to reimburse the Company for any adverse change in cost report settlements for periods prior to the investment of funds by Heritage. The controlling shareholders also agreed to indemnify the Company from any future liability arising from a certain lawsuit. 13. SUBSEQUENT EVENT In February 1998, the Company entered into a purchase agreement with Summit Care Corporation ("Summit") to acquire all of the outstanding common stock of Summit for cash of $21 per share. The total purchase price approximates $145 million. F-13 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------- 1997 1998 ------- ------- Net revenues.................................................. $16,409 $20,078 Expenses: Salaries and benefits....................................... 9,435 10,686 Supplies.................................................... 1,648 2,218 Purchased services.......................................... 846 1,828 Provision for doubtful accounts............................. 60 142 Other expenses.............................................. 1,002 1,396 Rent........................................................ 497 542 Rent to related parties..................................... 444 441 Depreciation and amortization............................... 142 524 Interest expense............................................ 20 851 ------- ------- 14,094 18,628 ------- ------- Income before provision for income taxes and extraordinary item......................................................... 2,315 1,450 Provision for income taxes.................................... 33 580 ------- ------- Income before extraordinary item.............................. 2,282 870 Extraordinary item: Loss on early extinguishment of debt, net of taxes.......... -- 517 ------- ------- Net income.................................................... $ 2,282 $ 353 ======= ======= Pro forma net income: Net income as reported...................................... $ 2,282 $ 353 Charge in lieu of income taxes for S-Corporation............ 893 -- ------- ------- Net income.................................................... $ 1,389 $ 353 ======= ======= Basic and diluted earnings per share: Income before extraordinary item............................ $ 11.41 $ 3.47 Extraordinary item, net of taxes............................ -- (2.06) ------- ------- Net income.................................................. $ 11.41 $ 1.41 ======= ======= Basic and diluted earnings per share--pro forma $ 6.95 ======= Weighted average shares outstanding: Basic and diluted........................................... 200 251 ======= =======
See accompanying notes. F-14 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DEC. 31, MARCH 31, 1997 1998 ------- ----------- (NOTE) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................... $ 2,551 $ 3,640 Accounts receivable, less allowance for doubtful accounts: March 1998--$7,245; December 1997--$1,152.... 15,809 55,267 Supplies inventory, at cost............................. -- 2,993 Other current assets.................................... 1,503 19,209 ------- -------- Total current assets.................................. 19,863 81,109 Property and equipment, at cost: Land and land improvements.............................. -- 24,951 Buildings and leasehold improvements.................... 4,659 201,093 Furniture and equipment................................. 2,096 25,826 Construction in progress................................ -- 7,271 ------- -------- 6,755 259,141 Less accumulated depreciation and amortization.......... (2,481) (2,892) ------- -------- 4,274 256,249 Notes receivable, less allowance for doubtful accounts: March 1998--$384;........................................ -- 6,596 Goodwill and other intangible assets...................... -- 44,199 Deferred financing costs.................................. -- 1,421 Other assets.............................................. 1,804 6,542 ------- -------- $25,941 $396,116 ======= ========
NOTE: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. F-15 FOUNTAIN VIEW, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS)
DEC. 31, MARCH 31, 1997 1998 -------- ----------- (NOTE) (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to banks....................................... $ -- $ 4,192 Accounts payable and accrued liabilities............... 4,179 53,917 Employee compensation and benefits..................... 2,479 9,223 Income taxes payable................................... 1,443 428 Current portion of long-term debt...................... 1,741 4,840 -------- -------- Total current liabilities............................ 9,842 72,600 Long-term debt, less current portion..................... 28,335 222,538 Deferred income taxes.................................... -- 30,859 -------- -------- Commitments and contingencies Shareholders' equity (deficit): Preferred Stock Series A, $0.01 par value: 1,000,000 shares authorized; none issued.............. -- -- Common Stock Series A, $0.01 par value: 1,500,000 shares authorized; 200,000 and 1,000,000 shares issued and outstanding at 1997 and 1998........ 2 10 Common Stock Series B, $0.01 par value: 200,000 shares authorized; 114,202 shares issued and outstanding at 1998................................... -- 1 Common Stock Series C, $0.01 par value: 1,300,000 shares authorized; none issued.............. -- -- Paid in capital........................................ 21,957 103,948 Accumulated deficit.................................... (34,195) (33,840) -------- -------- Total shareholders' equity (deficit)................. (12,236) 70,119 -------- -------- $ 25,941 $396,116 ======== ========
NOTE: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. F-16 FOUNTAIN VIEW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------ 1997 1998 ------- --------- OPERATING ACTIVITIES: Net income............................................... $ 2,282 $ 353 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 142 524 (Increase) decrease in accounts receivable, net........ 2,640 (2,988) (Increase) decrease in other current assets............ 153 (249) (Decrease) increase in accounts payable and accrued liabilities........................................... 1,244 (2,498) Increase in employee compensation and benefits......... 160 1,527 (Decrease) increase in income taxes payable............ 30 (1,015) ------- --------- Total adjustments.................................... 4,369 (4,699) ------- --------- Net cash (used in) provided by operating activities.. 6,651 (4,346) ------- --------- INVESTING ACTIVITIES: Additions to property and equipment...................... (837) (655) Decrease in deferred financing costs..................... -- 861 Acquisition of Summit Care, net of cash acquired......... -- (143,795) ------- --------- Net cash (used in) investing activities.............. (837) (143,589) ------- --------- FINANCING ACTIVITIES: Distributions to shareholders............................ (2,465) -- (Decrease) in payable to banks........................... (2,975) (27,677) (Decrease) in capital lease obligations.................. (20) (29) Proceeds from long-term debt............................. -- 94,730 Proceeds from stock issuance............................. -- 82,000 ------- --------- Net cash provided by (used in) financing activities.. (5,460) 149,024 ------- --------- Increase in cash and cash equivalents...................... 354 1,089 Cash and cash equivalents at beginning of period........... 1,161 2,551 ------- --------- Cash and cash equivalents at end of period................. $ 1,515 $ 3,640 ======= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest............................................... $ 20 $ 703 Income taxes........................................... -- 1,250 Detail of purchase business combination: Fair value of assets acquired............................ -- 367,944 Less: Liabilities assumed................................ -- 222,785 ------- --------- Cash paid for acquisition................................ -- 145,159 Less: Cash acquired from Summit.......................... -- (1,364) ------- --------- Net cash paid for acquisition........................ $ -- $ 143,795 ======= =========
F-17 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF BUSINESS Fountain View, Inc. ("Fountain View" or "Company") is a leading provider of long-term care with a full continuum of post-acute care services, with a strategic emphasis on sub-acute specialty medical care. With the acquisition of Summit Care Corporation ("Summit") on March 27, 1998, Fountain View now operates a network of facilities in California, Texas, and Arizona, including 44 skilled nursing facilities ("SNFs") that offer sub-acute, rehabilitative and specialty medical skilled nursing care, as well as six assisted living facilities ("ALFs") that provide room and board and social services in a secure environment. In addition to long-term care, Fountain View provides a variety of high-quality ancillary services such as physical, occupational and speech therapy in Fountain View-operated facilities, unaffiliated facilities and acute care hospitals. Fountain View also operates three institutional pharmacies (one of which is a joint venture), which service acute care hospitals as well as SNFs and ALFs, both affiliated and unaffiliated with Fountain View, an outpatient therapy clinic and a durable medical equipment ("DME") company. 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited financial information contained herein includes the results of operations of Fountain View for the full periods reported and the results of operations of Summit for the five day period March 27, 1998 through March 31, 1998. In the opinion of management, the unaudited financial information reflects all adjustments (all of which are of a normal recurring nature), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1997. The interim financial information herein is not necessarily representative of that to be expected for a full year. 3. FOUNTAIN VIEW EQUITY TRANSACTIONS On or about August 1, 1997, the controlling shareholders of the Company consummated a reorganization transaction (the "Fountain View Equity Transactions"). Prior to the Fountain View Equity Transactions, the controlling shareholders were the sole owners of a number of healthcare companies, which they managed as one business enterprise. The separately owned companies consisted of eight skilled nursing facilities, an assisted living facility and a therapy company which provides therapy services primarily to third-party owned facilities as well as Company-owned facilities. Additionally, the controlling shareholders owned the real estate which is operated by four of the nursing homes. The remaining real estate is leased from unrelated third parties. The controlling shareholders along with Heritage Fund II, L.P. ("Heritage") formed a new holding company known as Fountain View, Inc. along with several acquisition subsidiaries to consolidate the healthcare companies owned by the controlling shareholders into one company. At the same time, Fountain View entered into market rate leases for the four real estate facilities owned by the controlling shareholders. 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 F-18 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 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 $32.5 million, the proceeds of which, along with the $14.0 million invested by Heritage, was used to fund a distribution of $43.7 million 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 Acquisition was merged into Summit, 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 borrowing of $32.0 million and a credit facility of approximately $62.7 million. These borrowings and Summit's existing debt of $132.5 million, including capital lease and mortgage obligations of $24.7 million were outstanding as of March 31, 1998. 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. The Company also secured a commitment for an additional equity investment of $15.0 million as of March 31, 1998. 5. SUBSEQUENT EVENTS 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. These funds, as well as the remaining equity commitment of $15.0 million, were used to consummate the purchase of Summit's remaining shares, refinance all then existing Fountain View and Summit indebtedness (except for capital lease and mortgage obligations), redeem all outstanding options for Summit shares, and pay certain fees, expenses, and other costs arising in connection with such transactions. In exchange for the $15.0 million in new cash investment 15,000 shares of Preferred Stock Series A and warrants to purchase 71,119 shares of Common Stock Series C were issued. F-19 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) On May 4, 1998, Fountain View signed an investment agreement with the 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 million and Buckner invested $2.5 million in Fountain View and received shares of Series A Preferred Stock of Fountain View that entitles them to a dividend at the time of a liquidity event calculated to achieve a 12% annual rate of return, as well as warrants to purchase 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 have signed an agreement to develop and operate certain facilities on a joint or cooperative basis. 6. OTHER CURRENT ASSETS Other current assets (in thousands) consist of the following:
DECEMBER 31, MARCH 31, 1997 1998 ------------ --------- Deferred tax assets................................ $ 926 $ 9,468 Notes receivable................................... -- 1,253 Prepaid expenses................................... 551 2,758 Income tax receivable.............................. -- 3,741 Other receivables.................................. 26 1,989 ------ ------- $1,503 $19,209 ====== =======
7. 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 currently include: unrealized gains and losses on available-for-sale securities; foreign currency translation adjustments; changes in the market value of certain futures contracts; and changes in certain minimum pension liabilities. Fountain View has no items of other comprehensive income in the periods reported, and therefore, this statement does not apply. Disclosures about Segments of an Enterprise In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS F-20 FOUNTAIN VIEW, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 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 care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. F-21 REPORT OF INDEPENDENT AUDITORS The Board of Directors Summit Care Corporation We have audited the accompanying consolidated balance sheets of Summit Care Corporation and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Summit Care Corporation at June 30, 1997 and 1996, and the consolidated results of its operations and cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Los Angeles, California August 22, 1997 F-22 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, ----------------- 1996 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents.................................. $ 2,658 $ 3,994 Accounts receivable, less allowance for doubtful accounts: 1996--$2,084; 1997--$2,028................................ 27,930 33,749 Supplies inventory, at cost................................ 2,058 2,690 Other current assets....................................... 13,032 12,356 -------- -------- Total current assets..................................... 45,678 52,789 Property and equipment, at cost: Land and land improvements................................. 16,018 19,513 Buildings and leasehold improvements....................... 136,907 161,080 Furniture and equipment.................................... 18,668 23,978 Construction in progress................................... 15,043 5,947 -------- -------- 186,636 210,518 Less accumulated depreciation and amortization............. 21,713 28,605 -------- -------- 164,923 181,913 Notes receivable, less allowance for doubtful accounts: 1996--$268; 1997--$322..................................... 4,845 6,859 Other assets................................................. 7,606 8,955 -------- -------- $223,052 $250,516 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank............................................ $ 4,165 $ 4,678 Accounts payable........................................... 19,895 29,586 Employee compensation and benefits......................... 3,738 5,877 Income taxes payable....................................... 989 -- Long-term debt due within one year......................... 2,985 -- -------- -------- Total current liabilities................................ 31,772 40,141 Long-term debt............................................... 107,389 121,452 Deferred income taxes........................................ 2,605 7,511 -------- -------- Total liabilities........................................ 141,766 169,104 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 2,000,000 authorized shares, none issued............................................... -- -- Common stock, no par value, 100,000,000 authorized shares; 6,776,000 and 6,772,800 issued and outstanding, respectively.............................................. 51,486 51,543 Retained earnings............................................ 29,800 29,869 -------- -------- Total shareholders' equity............................... 81,286 81,412 -------- -------- $223,052 $250,516 ======== ========
See accompanying notes. F-23 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, -------------------------- 1995 1996 1997 -------- -------- -------- REVENUES: Net revenues........................................ $137,026 $176,062 $197,927 EXPENSES: Salaries and benefits............................. 63,171 78,233 89,577 Supplies.......................................... 15,374 18,071 20,160 Purchased services................................ 22,234 37,963 51,520 Provision for doubtful accounts................... 1,330 2,241 2,530 Other expenses.................................... 10,268 12,421 15,722 Rental............................................ 1,691 2,656 2,864 Rental to related parties......................... 450 -- -- Depreciation and amortization..................... 5,249 6,142 7,393 Interest (net of interest income: $513, $522 and $645, respectively).............................. 4,761 6,574 7,973 -------- -------- -------- 124,528 164,301 197,739 -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES............ 12,498 11,761 188 Provision for income taxes.......................... 4,987 4,452 119 -------- -------- -------- NET INCOME.......................................... $ 7,511 $ 7,309 $ 69 ======== ======== ========
See accompanying notes. F-24 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE YEARS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS)
COMMON STOCK ----------------- RETAINED SHARES AMOUNT EARNINGS TOTAL --------- ------- -------- ------- Balances at June 30, 1994.................. 6,743,600 $51,381 $14,980 $66,361 Net income............................... -- -- 7,511 7,511 Exercise of stock options................ 15,700 192 -- 192 Expenses on sale of common stock......... -- (251) -- (251) --------- ------- ------- ------- Balances at June 30, 1995.................. 6,759,300 51,322 22,491 73,813 Net income............................... -- -- 7,309 7,309 Exercise of stock options................ 13,500 164 -- 164 --------- ------- ------- ------- Balances at June 30, 1996.................. 6,772,800 51,486 29,800 81,286 Net income............................... -- -- 69 69 Exercise of stock options................ 3,200 57 -- 57 --------- ------- ------- ------- Balances at June 30, 1997.................. 6,776,000 $51,543 $29,869 $81,412 ========= ======= ======= =======
See accompanying notes. F-25 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED JUNE 30, ---------------------------- 1995 1996 1997 -------- -------- -------- OPERATING ACTIVITIES: Net income..................................... $ 7,511 $ 7,309 $ 69 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 5,249 6,142 7,393 (Increase) in accounts receivable............ (6,907) (7,594) (5,819) (Increase) decrease in supplies inventory.... (623) 118 (632) Decrease (increase) in other current assets.. (1,740) (8,429) 1,257 Increase in accounts payable................. 2,512 8,923 9,691 Increase (decrease) in employee compensation and benefits................................ 478 (270) 2,139 (Decrease) increase in income taxes payable.. 577 (72) (989) Increase (decrease) in deferred income taxes. (43) 739 4,906 -------- -------- -------- Total adjustments.......................... (497) (443) 17,946 -------- -------- -------- Net cash provided by operating activities.... 7,014 6,866 18,015 -------- -------- -------- INVESTING ACTIVITIES: Issuance of notes receivable................... (2,089) (916) (3,142) Principal payments of notes receivable......... 962 498 547 Additions to property and equipment............ (9,004) (26,558) (24,075) Acquisitions of nursing centers................ (51,178) -- -- Additions to other assets...................... (3,279) (2,276) (1,657) -------- -------- -------- Net cash used in investing activities........ (64,588) (29,252) (28,327) FINANCING ACTIVITIES: Increase in payable to bank.................... 826 1,193 513 Principal payments on long-term debt........... (38,225) (49,914) (17,922) Proceeds from long-term debt................... 76,520 70,500 29,000 Net expenses from sale of common stock......... (251) -- -- Net proceeds on exercise of stock options...... 192 164 57 -------- -------- -------- Net cash provided by financing activities.... 39,062 21,943 11,648 -------- -------- -------- Increase (decrease) in cash and cash equivalents. (18,512) (443) 1,336 Cash and cash equivalents at beginning of year... 21,613 3,101 2,658 -------- -------- -------- Cash and cash equivalents at end of year......... $ 3,101 $ 2,658 $ 3,994 ======== ======== ======== Supplemental disclosures of non-cash investing and financing activities: Acquisition notes payable...................... $ (2,814) $ -- $ -- Acquisition of nursing care centers............ 2,814 -- -- Acquisition of nursing care centers under capital leases................................ 16,654 -- -- Capital lease obligations...................... (16,654) -- --
See accompanying notes. F-26 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS. Summit Care Corporation ("Company" or "Summit") provides a variety of healthcare services primarily to the elderly through the operation of sub-acute, skilled nursing, Alzheimer's and assisted living units in skilled nursing care centers and assisted living centers in California, Texas and Arizona. These services include nursing care, room, board and certain specialty medical services, including rehabilitation care, infusion therapy and other ancillary services. The Company also provides specialty pharmaceutical and infusion therapy services to other long-term care providers. In April 1994, OrNda HealthCorp ("OrNda") acquired the Company's then majority shareholder, Summit Health Ltd. ("SHL"). OrNda's 7.5% Exchangeable Subordinated Notes ("OrNda Notes") were exchangeable into its equity interest in the Company's common stock, at the option of the holders. OrNda redeemed 100% of the outstanding OrNda Notes in exchange for its equity interest in the Company's common stock in August 1995. OrNda currently has no position in the Company's common stock. In January 1997, OrNda was merged into Tenet Healthcare Corporation ("Tenet"). BASIS OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. USE OF ESTIMATES. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INVENTORIES. Inventories are stated at the lower of cost (first-in, first- out method) or market. REVENUES. Approximately 68 percent, 70 percent and 72 percent of the Company's revenues in the years ended June 30, 1995, 1996 and 1997 were derived from funds under federal and state medical assistance programs, the continuation of which are dependent upon governmental policies. These revenues are based, in certain cases, upon cost reimbursement principles and are subject to audit. Revenues are recorded on an accrual basis as services are performed at their estimated net realizable value. Differences between final settlement and estimated net realizable value accrued in prior years are reported as adjustments to the current year's net revenues. These adjustments decreased net revenues by $4,892 in fiscal 1997. A significant portion of the Company's skilled nursing care center revenues is derived from government sponsored healthcare programs such as Medicare and Medicaid. These programs are highly regulated and are subject to budgetary and other constraints. While the Company's cash flow could be adversely affected by periodic government program funding delays or shortfalls, management does not believe there are any significant credit risks associated with these government programs. PROPERTY AND EQUIPMENT. Depreciation and amortization (straight-line method) is based on the estimated useful lives of the individual assets as follows: Buildings and improvements....... 15-40 years Shorter of lease term or estimated useful Leasehold improvements........... life Furniture and equipment.......... 3-20 years
F-27 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Amortization of capital leases is included in depreciation and amortization expense. For leasehold improvements, where the Company has acquired the right of first refusal to purchase or to renew the lease, amortization is based on the lesser of the estimated useful lives and the period covered by the right. INTANGIBLE ASSETS. Goodwill of $2,321 less accumulated amortization of $182 is included in other assets at June 30, 1997 and is amortized over 35 years using the straight-line method. INSURANCE COVERAGE. The Company self insures for certain levels of workers' compensation and general and professional liability coverage. The Company utilizes a captive insurance company for the purpose of providing reinsurance coverage for workers' compensation claims filed by its California and Arizona employees in excess of a $250 self insurance retention per occurrence and not subject to an annual aggregate limit. The Company has elected under Texas law to decline to participate in the Texas workers' compensation insurance program and maintains employer's excess and occupational indemnity insurance on claims subject to a $150 self insurance retention per occurrence with no annual aggregate limit. The Company maintains general and professional liability insurance on a claims made basis, subject to a $100 self insurance retention per occurrence and $600 on an annual aggregate basis. Under both self insurance programs, the Company estimates its liability, including potential legal fees and settlement amounts, based on claims filed and estimates of claims incurred but not reported, utilizing historical experience on an undiscounted basis. Differences between the amounts accrued and subsequent settlements are recorded in operations in the year of settlement. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. The Company places its temporary cash investments with high credit quality financial institutions. CASH MANAGEMENT. The Company utilizes a centralized cash management system. Payable to bank represents checks outstanding. ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company believes, based on current circumstances, that there are no indicators of impairment to its long-lived assets, and the Company presently has no expectations for disposing of any long-lived assets. RECENT ACCOUNTING PRONOUNCEMENTS. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if elected, would require companies to use a new fair value method of valuing stock-based compensation plans. The Company has elected to continue following present accounting rules under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" which uses an intrinsic value method and often results in no compensation expense. In accordance with SFAS 123, the Company has provided pro forma disclosure of what net income and earnings per share would have been had the new fair value method been used (see Note 10). F-28 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is effective for fiscal years ending after December 15, 1997, including interim periods. Earlier adoption is not permitted. However, an entity is permitted to disclose pro forma earnings per share amounts computed under SFAS 128 in the notes to the financial statements in periods prior to adoption. The statement requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share and is substantially similar to the standard recently issued by the International Accounting Standards Committee entitled "International Accounting Standards, Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998 and has not determined the impact of adoption. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. RECLASSIFICATIONS. Certain amounts have been reclassified to conform with 1997 presentations. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair market value disclosures. CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. NOTES RECEIVABLE (INCLUDING CURRENT PORTION). The carrying amount, before the allowance for doubtful accounts, is $8,434. The fair value of $8,400 is estimated using discounted cash flow analyses, based on interest rates currently being offered for notes with similar terms to borrowers of similar credit quality. LONG-TERM DEBT (INCLUDING CURRENT PORTION). The carrying value of $121,452 of long-term debt is based on the original face value (issue amount). The fair value of $120,300 is estimated based on the present value of the underlying cash flows discounted at the Company's incremental borrowing rate. 3. MATERIAL TRANSACTIONS WITH RELATED ENTITIES TENET HEALTHCARE CORPORATION, ORNDA HEALTHCORP AND SUMMIT HEALTH LTD. The Company had an agreement with Tenet/OrNda, which expired in March 1997, under which the Company leased a F-29 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. NATIONAL TRANSACTIONS WITH RELATED ENTITIES (CONTINUED) portion of its corporate office space to OrNda and shared the cost of building services with OrNda. The agreement also required OrNda to provide tax accounting to the Company. The Company's rental income from OrNda for the space exceeded the payments to OrNda for services by $31 for the year ended June 30, 1997. For the years ended June 30, 1996 and 1995, payments to OrNda for services exceeded rental income for the space by $50 and $23, respectively. The Company believes that the amount reimbursed for the services provided and the rental income received are reasonable. The agreement also indemnified the Company against any liability arising from its divestiture of facilities, the net assets of which were purchased by SHL during the year ended June 30, 1992. The provisions of the indemnification survive the termination of the agreement. Certain provisions of this agreement were terminated or amended as a result of the redemption on August 28, 1995 by OrNda of 100% of the OrNda Notes in exchange for the Company's common stock (see Note 1). In January 1994, the Company entered into a ten-year sub-lease of a nursing care center with SHL. The Company believes the monthly lease payments of $37 are reasonable for the market areas. Lease payments to Tenet, OrNda and SHL were $450 for each of the years ended June 30, 1995, 1996 and 1997. At June 30, 1997, the net amount due from Tenet for transactions between the Company and Tenet was $918 and is included in Other Current Assets (see Note 5). 4. ACQUISITIONS AND CONSTRUCTION ACTIVITY FISCAL YEAR 1995. On September 1, 1994, the Company purchased a 220-bed skilled nursing care center in White Settlement (Fort Worth), Texas, for $11,925 in cash and a four-acre site for $1,500 in cash for construction of a 210-bed skilled nursing care center located in Fort Worth, Texas, which began in May 1995. The Company acquired on October 1, 1994 the leasehold interest in six skilled nursing care centers and the real and personal property of a seventh with a combined total of 783 beds located in various communities in Texas for $30,938, including goodwill of $2,321. The purchase price consists of (i) $11,470 in cash (of which $8,541 was funded under the Company's bank line of credit), (ii) a $2,814 promissory note ($3,000 less a $186 discount) at 9% interest (7% contract rate) fully amortized in seven years and (iii) a $16,654 capital lease obligation assumed by the Company. The leases on the six centers range from eight to twenty-one years, include purchase options, the first exercisable in July 1996, and the last exercisable in February 2005, and have combined monthly payments of $159. On December 1, 1994, the Company acquired four skilled nursing care centers in three communities in East Texas with a combined total of 548 beds for $27,000 in cash and, in a separate transaction, the leasehold interest in a 119-bed skilled nursing care center located in Big Spring, Texas, for $800 in cash. Both transactions were funded under the Company's bank line of credit. The Company's acquisitions have been accounted for as purchases and, accordingly, the results of operations of the acquired centers have been included in the consolidated statement of income since the date of acquisition. The Company completed in May 1995 an addition of 74 beds to a 76-bed nursing care center which is operated under a ten-year sub-lease with OrNda (see Note 3). FISCAL YEAR 1996. On January 8, 1996, the Company opened a 108-bed skilled nursing care center in Fresno, California, and in August 1996, opened another 51 beds at the same site. Total cost of construction including the original purchase price was $14,024. In March 1996, the Company added F-30 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. ACQUISITION AND CONSTRUCTION ACTIVITY (CONTINUED) 20 licensed beds to one of its two skilled nursing care centers in Beaumont, Texas, increasing the center's total beds to 148. Total cost of construction was $785. In June 1996, the Company also added 54 beds to its skilled nursing care center in Longview, Texas, increasing the total beds to 182. Total cost of construction was $1,860. Cost of construction completed in the year ended June 30, 1996 was financed with funds from Notes issued in December 1995 and draws against the Company's bank line of credit (see Note 6). FISCAL YEAR 1997. In August 1996, the Company opened a 110-bed skilled nursing care center in Fort Worth, Texas, and in June 1997, opened another 100 beds at the same site. Total cost of construction including the original purchase price (see this Note, Fiscal Year 1995) was $12,012. On July 1, 1997, the Company opened a 66-bed assisted living center in Orange, California, dedicated to Alzheimer's and other patients with dementia. Total cost of construction, which constituted renovation of an existing building on a campus with a 172-bed skilled nursing center and a 72-bed assisted living center, was $3,525. Cost of construction completed in the year ended June 30, 1997 was financed with funds from $15 million of Senior Secured Notes ("Notes") issued in July 1996 and with cash generated from operations. The Notes represented the second and last issuance of $70 million of Notes. The first issuance of $55 million occurred in December 1995. In July 1996, the Company exercised a purchase option in its lease of a 88- bed skilled nursing care center in Rockport, Texas. The purchase price of $2,022 was financed with funds from the Notes. In December 1996, the Company entered into a limited liability company ("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price for its 50% membership interest was $1,565 in cash. The pharmacy services nursing centers in Texas operated by either the Company, the other LLC member or non-affiliated nursing center owners. The Company accounts for its investment in the LLC under the equity method of accounting. The Company's equity in earnings of the LLC was insignificant during fiscal year 1997. In June 1997, the Company purchased 10 acres of vacant land in Longview, Texas for $648 in cash. The land will be used for new services which will complement the 174-bed skilled nursing center currently owned and operated by the Company. 5. OTHER CURRENT ASSETS Other current assets consist of the following:
JUNE 30, --------------- 1996 1997 ------- ------- Due from third party payors.................................... $ 8,055 $ 2,491 Deferred tax assets............................................ 1,810 1,956 Notes receivable............................................... 672 1,253 Prepaid expenses............................................... 952 1,004 Income tax receivable.......................................... -- 4,128 Other receivables.............................................. 1,543 1,524 ------- ------- $13,032 $12,356 ======= =======
F-31 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, ------------------ 1996 1997 -------- -------- Senior secured notes, at fixed interest rates from 7.38% to 8.14%, interest only payable semi-annually, principal due from December 2000 to December 2010 in various annual payments, secured by property and equipment with a book value of approximately $91,781 at June 30, 1997........... $ 55,000 $ 70,000 Secured revolving bank line of credit expires September 30, 1998, variable interest rates approximating 7.44% in the year ending June 30, 1997, convertible to a term loan due in equal quarterly principal payments through September 2001, secured by property and equipment with a book value of approximately $6,556 at June 30, 1997.................. 6,000 5,000 8.96% senior secured notes, due 2002, interest only, payable semi-annually through June 1997, annual principal payments of $4,150 beginning December 1997, secured by property and equipment with a book value of approximately $32,779 at June 30, 1997.................................. 25,000 25,000 Present value of capital lease obligations at effective interest rates from 7% to 9%, secured by property and equipment with a book value of approximately $23,216 at June 30, 1997............................................. 15,680 13,133 Mortgage and other note payable, fixed interest rates from 7.75% to 9%, due in various monthly installments through January 2026, secured by property and equipment with a book value of approximately $7,379 at June 30, 1997....... 5,231 5,281 Promissory note, less imputed interest of $81 in the year ended June 30, 1997, at an effective interest rate of 9% due in October 2001, secured by the leasehold interest in a nursing care center, with a book value of approximately $3,060 at June 30, 1997................................... 2,304 1,944 Mortgage note payable, variable interest rates from 8.25% to 9.0% in year ended June 30, 1997, due in equal monthly principal installments through March 2001, secured by property and equipment with a book value of approximately $2,816 at June 30, 1997................................... 1,159 1,094 Less current portion....................................... (2,985) -- -------- -------- Non-current portion........................................ $107,389 $121,452 ======== ========
Future maturities of long-term debt (including capital lease obligations) are as follows: years ending June 30, 1998--$-0-; 1999--$8,699; 2000--$13,788; 2001--$17,187; 2002--$10,904, and thereafter--$70,874. In December 1995, the Company amended its secured bank line of credit which reduced the commitment from $60,000 to $40,000, converted accounts receivable from collateral to a negative pledge, extended the revolver to September 30, 1997 (the revolver has been subsequently extended to September 30, 1998) and reduced the period of the term loan upon termination of the revolver from four to three years. The interest rate is variable and at the Company's option, will equal either the bank prime rate or the Eurodollar rate plus a margin (reduced by the amendment) that varies depending on the ratio of certain senior debt to earnings before certain interest, taxes, depreciation and amortization. F-32 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. LONG-TERM DEBT (CONTINUED) At June 30, 1997, credit line loans outstanding were $5,000 which was used to finance the construction described in Note 4. At June 30, 1997, the Company classified $6,997 of current debt maturities as long-term debt based on its intent and ability to refinance these obligations under the bank line of credit. The bank line of credit loan agreement and the two senior secured note agreements contain covenants that include requirements to comply with certain financial tests and ratios and restrict the ability of the Company to incur additional indebtedness. Also, the Company is restricted by the agreements from the payment of dividends (other than dividends payable in common stock) or to acquire its common stock to the extent that such payments exceed $5,000 plus 50% of the Company's net income after June 30, 1995. The Company currently is meeting all financial tests and ratios. Interest expense was $6,033, $8,701 and $10,296 in fiscal years 1995, 1996 and 1997, respectively, of which $759, $1,605 and $1,678 in 1995, 1996 and 1997 were capitalized as part of the ongoing construction projects. Interest payments were $5,712 , $7,874 and $10,124 in fiscal years 1995, 1996 and 1997, respectively. 7. INCOME TAXES The provision for income taxes consists of the following:
YEARS ENDED JUNE 30, ---------------------- 1995 1996 1997 ------ ------ ------- Federal: Current............................................ $4,359 $3,611 $(3,979) Deferred........................................... (277) 19 4,003 ------ ------ ------- 4,082 3,630 24 State: Current............................................ 952 798 (662) Deferred........................................... (47) 24 757 ------ ------ ------- 905 822 95 ------ ------ ------- $4,987 $4,452 $ 119 ====== ====== =======
F-33 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES (CONTINUED) Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements and represent differences between income for tax purposes and income for financial statement purposes in future years. Temporary differences are primarily attributable to reporting for income tax purposes the excess of tax over book depreciation, bad debts and vacation benefits. The current deferred tax assets are included in other current assets (see Note 5). Significant components of the Company's deferred tax liabilities and assets as of June 30 are as follows:
1996 1997 ------------------- ------------------- CURRENT NON-CURRENT CURRENT NON-CURRENT ------- ----------- ------- ----------- Income Taxes Deferred tax liabilities: Tax over book depreciation........ $ -- $(3,136) $ -- $(7,858) Other............................. -- (137) -- (264) ------ ------- ------ ------- Total deferred tax liabilities.. -- (3,273) -- (8,122) Deferred tax assets: Vacation and deferred compensation benefits and bad debt............ 1,810 330 1,956 452 State tax......................... -- 338 -- 159 ------ ------- ------ ------- Total deferred tax assets....... 1,810 668 1,956 611 ------ ------- ------ ------- Net deferred tax assets (liabilities)...................... $1,810 $(2,605) $1,956 $(7,511) ====== ======= ====== =======
A reconciliation of the provision for income taxes with the amount computed using the federal statutory rate is as follows:
JUNE 30, ----------- 1996 1997 ---- ----- Federal rate 35.0% 34.0% State taxes, net of federal tax benefit........................ 4.5 4.5 Tax credits.................................................... (1.6) -- Other, net..................................................... -- 24.8 ---- ----- 37.9% 63.3% ==== =====
The increase in the effective tax rate was primarily due to certain permanent differences between book income and taxable income. Total income tax payments during fiscal years 1995, 1996 and 1997 were $4,876, $3,904 and $1,828, respectively. 8. LEASES The Company leases certain of its centers, equipment and its pharmacy space under both noncancellable operating leases and capital leases. The leases generally provide for payment of property taxes, insurance and repairs, and have rent escalation clauses based upon the consumer price index or annual per bed adjustments. F-34 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. LEASES (CONTINUED) All capital leases contain purchase options, and the accompanying balance sheet and following table have been prepared assuming such options will be exercised (see Note 11). Some leases contain various renewal options and extend up to the year 2030. Property and equipment includes the following amounts for leases which have been capitalized:
JUNE 30, 1997 ------------- Land and land improvements..................................... $ 1,400 Buildings and leasehold improvements........................... 21,481 Furniture and equipment........................................ 2,405 ------- 25,286 Less accumulated amortization.................................. 2,070 ------- $23,216 =======
The future minimum rental payments under noncancellable operating leases and capital leases (including purchase options when expected to be exercised) that have initial or remaining lease terms in excess of one year as of June 30, 1997 are as follows:
OPERATING CAPITAL YEAR ENDING JUNE 30, LEASES LEASES TOTAL -------------------- --------- -------- -------- 1998.......................................... $ 3,054 $ 3,321 $ 6,375 1999.......................................... 2,995 4,634 7,629 2000.......................................... 2,755 4,297 7,052 2001.......................................... 2,513 350 2,863 2002.......................................... 2,176 350 2,526 Thereafter.................................... 7,827 3,525 11,352 -------- -------- -------- Total minimum lease payments.................. 21,320 16,477 37,797 Less amount representing interest............. -- 3,344 3,344 -------- -------- -------- Present value of net minimum lease payments (capital lease amount included in long-term debt--see Note 6)............................ $21,320 $13,133 $34,453 ======== ======== ========
9. CONTINGENCIES The Company is subject to malpractice claims and other litigation arising in the ordinary course of business. In the opinion of management, any liability beyond amounts covered by insurance and the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's financial position or results of operations. 10. STOCK OPTION PLAN Effective July 1, 1991, the Company adopted a stock option plan authorizing the issuance of 250,000 shares of common stock. The plan was amended on December 9, 1994 and again on December 8, 1995 to increase the authorized shares to 1,400,000. Options may be granted to key employees and directors of the Company. Options granted to employees may be either incentive stock options or nonstatutory options. Only non-qualified options may be granted to non-employee directors. Options granted to non-employee directors are granted automatically pursuant to a formula grant provision contained in the plan. The option price per share for incentive stock options shall not be less than 85% of the fair market value at the date of the grant. The terms of each option and the increments F-35 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. STOCK OPTION PLAN (CONTINUED) in which each is exercisable are determined by a committee appointed by the Board of Directors. No option may be exercised after ten years from the date of the grant and no option may be granted under the plan after June 30, 2001. The following summarizes activity in the stock option plan:
YEARS ENDED JUNE 30, ------------------------------------------------------- 1995 1996 1997 ----------------- ----------------- ------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE AVERAGE OF EXERCISE OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- -------- --------- -------- Options at beginning of year................... 256,000 $12.97 523,000 $16.79 948,500 $18.91 Changes during year: Granted............... 284,500 $19.94 504,000 $21.15 112,000 $13.36 Exercised............. (15,700) $12.20 (13,500) $12.13 (3,200) $17.85 Canceled.............. (1,800) $12.26 (65,000) $20.58 (26,800) $20.31 ------- ------- --------- Options outstanding at end of year............ 523,000 $16.79 948,500 $18.91 1,030,500 $18.27 ======= ======= ========= Options exercisable at end of year............ 58,100 $12.26 161,600 $14.97 352,300 $17.10 Options available for grant at end of year... 57,700 418,700 333,500
The weighted average fair value per share of options granted during the year was $10.14 and $6.72 for fiscal years 1996 and 1997, respectively. The exercise prices for options outstanding at June 30, 1997 ranged from $10.50 to $22.50. The weighted average remaining contractual life of these options is approximately eight years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) which uses an intrinsic value method and, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, results in no compensation expense. However, pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation" (SFAS 123), and, in the following disclosure, has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the years ended June 30, 1997 and 1996, respectively: risk-free interest rates of 6.4% and 5.5%; dividend yields of zero percent for both years; volatility factors of the expected market price of the Company's common stock of 48.4% and 46.8%; and a weighted average expected life of the options of five years. Because the Company's stock options have characteristics significantly different from those options used in the Black-Scholes option pricing model, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options. F-36 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. STOCK OPTION PLAN (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of providing pro forma disclosure are not likely to be representative of the effects on reported net income for future years. The Company's pro forma information follows for the years ended June 30, 1996 and 1997:
1996 1997 ------ ----- Pro forma net income (loss)................................... $6,914 $(543)
11. SUBSEQUENT EVENT In September 1997, the Company exercised a purchase option in its lease of a 111-bed skilled nursing care center in La Grange, Texas. The purchase option price of $1,871 was financed by a draw on the Company's bank line of credit (see Note 6). 12. UNAUDITED QUARTERLY INFORMATION Following is a summary of unaudited quarterly results of operations from the years ended June 30, 1996 and 1997:
YEAR ENDED JUNE 30, 1996 ------------------------------------------ 1ST 2ND 3RD 4TH QTR. QTR. QTR. QTR. TOTAL ------- ------- ------- ------- -------- Net revenues..................... $41,270 $42,801 $45,232 $46,759 $176,062 Income before income taxes....... 3,924 3,400 2,077 2,360 11,761 Net income....................... 2,359 2,043 1,327 1,580 7,309 YEAR ENDED JUNE 30, 1997 ------------------------------------------ 1ST 2ND 3RD 4TH QTR. QTR. QTR. QTR. TOTAL ------- ------- ------- ------- -------- Net revenues..................... $48,907 $46,181 $52,012 $50,827 $197,927 Income (loss) before income taxes........................... 2,587 (1,734) 2,394 (3,059) 188 Net income (loss)................ 1,565 (1,049) 1,448 (1,895) 69
F-37 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................................... $ 1,702 Accounts receivable, less allowance for doubtful accounts of $2,474......................................................... 36,343 Supplies inventory, at cost..................................... 3,204 Other current assets............................................ 15,569 -------- Total current assets.......................................... 56,818 Property and equipment, at cost: Land and land improvements...................................... 20,036 Buildings and leasehold improvements............................ 175,078 Furniture and equipment......................................... 24,361 Construction in progress........................................ 5,298 -------- 224,773 Less accumulated depreciation and amortization.................. 30,220 -------- 194,553 Notes receivable, less allowance for doubtful accounts of $363 ... 6,842 Other assets...................................................... 9,207 -------- Total assets.................................................. $267,420 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank................................................. $ 2,985 Accounts payable................................................ 36,776 Employee compensation and benefits.............................. 4,622 Income taxes payable............................................ 1,051 -------- Total current liabilities..................................... 45,434 Long-term debt.................................................... 129,754 Deferred income taxes............................................. 7,511 -------- Total liabilities............................................. 182,699 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 2,000 authorized shares, none issued......................................................... -- Common stock, no par value, 100,000 authorized shares; 6,776 and 6,813 issued and outstanding, respectively..................... 52,020 Retained earnings............................................... 32,701 -------- Total shareholders' equity.................................... 84,721 -------- Total liabilities and shareholders' equity.................... $267,420 ========
See accompanying notes. F-38 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED DECEMBER 31, ---------------- 1996 1997 ------- -------- NET REVENUES.................................................. $95,088 $108,507 EXPENSES: Salaries and benefits....................................... 43,386 47,742 Supplies.................................................... 10,381 10,261 Purchased services.......................................... 24,144 26,211 Provision for doubtful accounts............................. 967 1,780 Other expenses.............................................. 6,258 7,484 Rent........................................................ 1,410 1,525 Depreciation and amortization............................... 3,632 4,235 Interest (net of interest income, $371 in 1997 and $179 in 1996, respectively)........................................ 4,057 4,588 ------- -------- 94,235 103,826 ------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES...................... 853 4,681 Provision for income taxes.................................... 337 1,849 ------- -------- NET INCOME.................................................... $ 516 $ 2,832 ======= ========
See accompanying notes. F-39 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, ------------------ 1996 1997 -------- -------- OPERATING ACTIVITIES: Net income............................................... $ 516 $ 2,832 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 3,632 4,235 (Increase) in accounts receivable, net................. (5,027) (2,594) (Increase) in supplies inventory......................... (66) (514) (Increase) in other current assets....................... (1,602) (3,152) Increase in accounts payable............................. 6,805 7,190 (Decrease) increase in employee compensation and benefits.............................................. 294 (1,255) Increase (decrease) in income taxes payable.............. (989) 1,051 -------- -------- Total adjustments...................................... 3,047 4,961 -------- -------- Net cash provided by operating activities.............. 3,563 7,793 -------- -------- INVESTING ACTIVITIES: Issuance of notes receivable............................. (550) (2,281) Principal payments of notes receivable................... 253 2,294 Additions to property and equipment...................... (12,049) (6,706) Property and equipment related to purchase of nursing center.................................................. -- (4,209) (Increase) in other assets............................... (1,579) (470) -------- -------- Net cash (used in) investing activities................ (13,925) (11,372) -------- -------- FINANCING ACTIVITIES: (Decrease) in payable to bank............................ (1,229) (1,693) Principal payments on long-term debt..................... (8,435) (10,497) Proceeds from long-term debt............................. 19,000 13,000 Proceeds from exercise of stock options.................. -- 477 -------- -------- Net cash provided by financing activities.............. 9,336 1,287 -------- -------- (Decrease) in cash and cash equivalents.................... (1,026) (2,292) Cash and cash equivalents at beginning of year............. 2,658 3,994 -------- -------- Cash and cash equivalents at end of the period............. $ 1,632 $ 1,702 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest............................................... $ 5,161 $ 5,015 Income taxes............................................. 1,654 808 Non cash investing and financing activities: Acquisition of nursing care center under capital lease. -- 5,799 Capital lease obligation............................... -- (5,799)
See accompanying notes. F-40 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 1. The unaudited financial information included herein, in the opinion of management, reflects all adjustments (all of which are of a normal recurring nature except for a special charge recorded in December 1996, see Note 5), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's annual report filed on Form 10-K for the year ended June 30, 1997. The interim financial information herein is not necessarily representative of that to be expected for a full year. 2. Certain amounts have been reclassified to conform with fiscal 1998 presentations. 3. Other current assets consist of the following:
DECEMBER 31, 1997 ------------ Due from third-party payors..................................... $ 4,743 Deferred tax assets............................................. 1,956 Notes receivable................................................ 1,257 Prepaid expenses................................................ 2,526 Income tax receivable........................................... 3,000 Other receivables............................................... 2,087 ------- $15,569 =======
4. In December 1996, the Company recorded a special charge of $4,000 against revenues ($2,420 against net income) as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995 completed in the quarter ended December 31, 1996, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. 5. In July 1997, the Company opened its fifth assisted living center with 66 beds in Orange, California, at a total cost of construction of $3,924. In September 1997, the Company exercised a purchase option in the amount of $1,871 in its lease of a 111-bed skilled nursing care center in La Grange, Texas. In November 1997, the Company opened 47 additional beds at one of its two skilled nursing care centers in Lubbock, Texas, at an approximate cost of construction of $1,900. In December 1997, the Company acquired the assets of a 194 bed skilled nursing care center in McAllen, Texas at an approximate cost of $10,058. The Compan's bank line of credit was used to finance the two construction projects, the exercise of the purchase option and $4,259 of the acquisition cost of the McAllen center. The balance of the McAllen acquisition cost of $5,799 was financed with a capitalized lease obligation. 6. In December 1997, the Company amended its secured bank line of credit by reducing the commitment from $40,000 to $33,000. One of the four lenders was deleted from the credit agreement, and the revolving credit termination date was extended one year to September 30, 1999. No other terms and conditions were added, deleted or amended. 7. Recent Accounting Pronouncement: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. This Statement is not required to be applied to interim financial statements in the F-41 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) initial year of its application. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. 8. Subsequent Event: On February 6, 1998, the Company and Fountain View, Inc., a privately-held skilled nursing care company based in Los Angeles, California, entered into a definitive merger agreement for Fountain View to acquire the Company. According to the terms of the merger agreement, the Company's shareholders will receive $21.00 per share in cash for a total purchase price of approximately $274 million, including the assumption of approximately $130 million of the Company's debt. On February 13, 1998, Fountain View commenced a cash tender offer for all outstanding shares of the Company's stock at $21.00 per share. The tender offer expired on March 25, 1998 and, following consummation of the tender offer on March 27, 1998, subject to the terms and conditions contained in the merger agreement, the Company will be merged with a subsidiary of Fountain View, and each remaining outstanding share of the Company will be converted in the merger into $21.00 in cash. Fountain View has received a commitment from Heritage Fund II, L.P. for $82 million of the equity financing necessary to complete the transaction and a bank financing commitment from Bank of Montreal covering an additional $250 million. Completion of the tender offer and the merger are subject to customary conditions to closing, including the receipt of any applicable regulatory approvals and the expiration of any applicable regulatory waiting periods. F-42 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ----------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 1 Risk Factors.............................................................. 20 Use of Proceeds........................................................... 31 Capitalization............................................................ 31 Unaudited Pro Forma Financial Data........................................ 32 Selected Historical Financial and Other Data--Fountain View............... 39 Selected Historical Financial and Other Data--Summit...................... 40 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 41 Business.................................................................. 52 Management................................................................ 72 Principal Stockholders.................................................... 77 Certain Relationships and Related Transactions............................ 78 Description of Other Indebtedness......................................... 81 The Exchange Offer........................................................ 83 Plan of Distribution...................................................... 91 Description of Notes...................................................... 93 Certain Federal Income Tax Consequences................................... 125 Validity of the Notes..................................................... 128 Available Information..................................................... 128 Experts................................................................... 128 Special Note Regarding Forward-Looking Statements......................... 129 Index to Consolidated Financial Statements................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FOUNTAIN VIEW, INC. OFFER TO EXCHANGE UP TO $120,000,000 OF 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED FOR ANY AND ALL OF ITS OUTSTANDING 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008 OF WHICH $120,000,000 IN PRINCIPAL AMOUNT IS OUTSTANDING ON THE DATE HEREOF. ----------- PROSPECTUS ----------- , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Fountain View, Inc. and certain of the Registrants (Fountain View Holdings, Inc., Locomotion Holdings, Inc. and Locomotion Therapy, Inc.) are Delaware corporations. Section 145 of the Delaware General Corporation Law (the "DGCL") grants a Delaware corporation the power to indemnify any director, officer, employee or other agent if such person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. No indemnification may be provided, however, for any person with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. With respect to indemnification of directors, Article Eight of the Certificate of Incorporation of the Company states that the Company shall indemnify and hold harmless any director, officer, employee or agent of the Company from any expenses and liabilities that may be imposed upon or incurred in connection with, or as a result of, any proceeding in which he or she may become involved, by reason of the fact that he or she is or was such a director, officer, employee, or agent, whether or not he or she is in such capacity at the time such expenses and liabilities are imposed or incurred, to the fullest extent permitted by the laws of the State of Delaware. Certain of the Registrants (Summit Care Corporation, Summit Care California, Inc., Summit Care Pharmacy, Inc., Skilled Care Network, Summit Care Texas Equity, Inc., AIB Corp., Alexandria Convalescent Hospital, Inc., BIA Hotel Corp., Brier Oak Convalescent, Inc., Elmcrest Convalescent Hospital, Fountainview Convalescent Hospital, Fountain View Management, Inc., Rio Hondo Nursing Center, On-Track Therapy Center, Inc., I.' NO, Inc., Sycamore Park Convalescent Hospital and SNF Pharmacy, Inc.) are California corporations. The California General Corporation Law provides that a corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. Certain of the Registrants (Summit Care Texas No. 2, Inc., Summit Care Texas No. 3, Inc. and Summit Care Management Texas, Inc.) are Texas corporations. Article 2.02-1 of the Texas Business Corporation Act provides that a corporation may indemnify its officers, directors, employees and agents for expenses and costs incurred in certain proceedings arising out of actions taken in their official capacity only if such persons were acting in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, except in relation to matters in which they have been found liable (i) to the corporation, or (ii) on the basis that personal benefit was improperly received regardless of whether or not the benefit resulted from action taken in their official capacity. In the case of any criminal proceeding, such persons must also have had no reasonable cause to believe such conduct was unlawful. Article 2.02-1 further provides that a corporation shall indemnify its officers II-1 and directors against reasonable expenses incurred in connection with proceedings arising out of actions taken in their official capacity in which such persons have been wholly successful, on the merits or otherwise, in the defense of such actions. The Companies maintain insurance, the general effect of which is to provide coverage for the Companies with respect to amounts that they may required to pay officers and directors under the indemnity provisions described above and coverage for officers and directors against certain liabilities, including certain liabilities under the federal securities law. Summit Care Texas, L.P. is a Texas limited partnership (the "Partnership"). Article 10.2 of its Articles of Limited Partnership provides that the Partnership shall indemnify the General Partner against all judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement and reasonable Expenses actually incurred by the General Partner in connection with any Proceeding to which it was, is or is threatened to be named a defendant or respondent, or in which it was or is a witness without being named a defendant or respondent, by reason, in whole or in part, of it serving or having served, as a General Partner if it is determined that the General Partner (a) acted in good faith, (b) reasonably believed, in the case of conduct in its official capacity, that its conduct was in the Partnership's best interests and, in all other cases, that its conduct was at least not opposed to the Partnership's best interests, and (c) in the case of any criminal proceeding, had no reasonable cause to believe that its conduct was unlawful. No indemnification shall be made under this Section 10.2 in respect of any judgment, penalty, fine, or amount paid in settlement in connection with any Proceeding in which such General Partner shall have been (x) found liable on the basis that personal benefit was improperly received by it whether or not the benefit resulted form an action taken in the General Partner's official capacity, or (y) found liable to the Partnership. However, if the General Partner is found liable on the basis that personal benefit was improperly received by it, or is found liable to the Partnership, or the Limited Partner, the General Partner shall be entitled to reasonable expenses actually incurred by it in connection with the Proceeding unless it has been found liable for willful or intentional misconduct in the performance of its duty to the Partnership or the Limited Partner. The termination of any Proceeding by judgment, order, settlement or conviction, or on a plea of nolo contendere or its equivalent, is not of itself determinative that the General Partner did not meet the requirements set forth in clauses (a), (b) or (c) in the first sentence of this Section 10.2. The General Partner shall be deemed to have been found liable in respect of any claim, issue or matter only after it shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Purchase Agreement dated as of April 16, 1998 by and among Fountain View and the Initial Purchasers named therein relating to the 11 1/4% Senior Subordinated Notes due 2008.+ 3.1 Certificate of Incorporation of Fountain View.+ 3.1(a) Certificate of Amendment amending Certificate of Incorporation of Fountain View filed March 27, 1998.+ 3.1(b) Certificate of Amendment amending Certificate of Incorporation of Fountain View filed May 6, 1998.+ 3.2 By-laws of Fountain View.+ 3.3 Articles of Incorporation of Summit Care Corporation.+
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.4 By-laws of Summit Care Corporation.+ 3.5 Articles of Incorporation of Summit Care-California, Inc.+ 3.6 By-laws of Summit Care-California, Inc.+ 3.7 Articles of Incorporation of Summit Care Pharmacy, Inc.+ 3.8 By-laws of Summit Care Pharmacy, Inc.+ 3.9 Articles of Incorporation of Skilled Care Network.+ 3.10 By-laws of Skilled Care Network.+ 3.11 Articles of Incorporation of Summit Care Texas Equity, Inc.+ 3.12 By-laws of Summit Care Texas Equity, Inc.+ 3.13 Articles of Organization of Summit Care Texas, No. 2, Inc.+ 3.14 By-laws of Summit Care Texas, No. 2, Inc.+ 3.15 Articles of Organization of Summit Care Texas, No. 3, Inc.+ 3.16 By-laws of Summit Care Texas, No. 3, Inc.+ 3.17 Articles of Organization of Summit Care Texas Management, Inc.+ 3.18 By-laws of Summit Care Texas Management, Inc.+ 3.19 Certificate of Limited Partnership of Summit Care Texas, L.P.+ 3.20 Omitted 3.21 Certificate of Incorporation of Fountain View Holdings, Inc.+ 3.22 By-laws of Fountain View Holdings, Inc.+ 3.23 Articles of Incorporation of AIB Corp.+ 3.24 By-laws of AIB Corp.+ 3.25 Articles of Incorporation of Alexandria Convalescent Hospital, Inc.+ 3.26 By-laws of Alexandria Convalescent Hospital, Inc.+ 3.27 Articles of Incorporation of BIA Hotel Corp.+ 3.28 By-laws of BIA Hotel Corp.+ 3.29 Articles of Incorporation of Briar Oak Convalescent, Inc.+ 3.30 By-laws of Briar Oak Convalescent, Inc.+ 3.31 Articles of Incorporation of Elmcrest Convalescent Hospital+ 3.32 By-laws of Elmcrest Convalescent Hospital+ 3.33 Articles of Incorporation of Fountainview Convalescent Hospital+ 3.34 By-laws of Fountainview Convalescent Hospital+ 3.35 Articles of Incorporation of Fountain View Management, Inc.+ 3.36 By-laws of Fountain View Management, Inc.+ 3.37 Articles of Incorporation of Rio Hondo Nursing Center+ 3.38 By-laws of Rio Hondo Nursing Center+ 3.39 Certificate of Incorporation of Locomotion Holdings, Inc.+ 3.40 By-laws of Locomotion Holdings, Inc.+ 3.41 Certificate of Incorporation of Locomotion Therapy, Inc.+
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.42 By-laws of Locomotion Therapy, Inc.+ 3.43 Articles of Incorporation of On-Track Therapy Center, Inc.+ 3.44 By-laws of On-Track Therapy Center, Inc.+ 3.45 Articles of Incorporation of I.' NO, Inc.+ 3.46 By-laws of I.' NO, Inc.+ 3.47 Articles of Incorporation of Sycamore Park Convalescent Hospital+ 3.48 By-laws of Sycamore Park Convalescent Hospital+ 3.49 Articles of Incorporation of SNF Pharmacy, Inc.+ 3.50 By-laws of SNF Pharmacy, Inc.+ 4.1 Indenture dated as of April 16, 1998 by and among Fountain View, certain subsidiaries of Fountain View, and State Street Bank and Trust Company of California, N.A., as trustee, for the 11 1/4% Senior Subordinated Notes due 2008.+ 4.2 Form of the Company's 11 1/4% Senior Subordinated Notes due 2008. 5.1 Opinion of Choate, Hall & Stewart.+ 10.1 Summit Care Corporation Stock Option Plan(+) as amended by Amendment to Summit Care Corporation Stock Option Plan.(+) 10.2 Form of Summit Care Corporation Stock Option Agreement.(+) 10.3 Tax Sharing Agreement among Sierra Land Group, Inc., SHL and Summit Care Corporation, dated May 17, 1991(+), as amended by Amendment to Tax Sharing Agreement, dated as of February 5, 1992.(+) 10.4 Agreement Regarding Shared Services and Other Matters between SHL and Summit Care Corporation, dated as of February 5, 1992.(+) 10.5 Form of Directors and Officers Indemnity Agreement.(+) 10.7 Palmcrest Convalescent Home (now known as Palm Grove Convalescent Center): Convalescent Hospital Lease, dated November 20, 1969, between Palmcrest Associates, Ltd., and Century Convalescent Centers, as amended by Lease of Convalescent Hospital Facility (as amended), dated September 1, 1979, by which SHL and its appointed nominee Royalwood Convalescent Hospital, Inc. (now Summit Care-California, Inc.) are substituted as lessees.(+) 10.8 Anaheim Care Center: Lease, dated June 1, 1995, between Sam Menlo, Trustee of the Menlo Trust U/T/I 5/22/83 and Summit Care-California, Inc., doing business as Anaheim Care Center.(+) 10.9 Sharon Care Center: Lease, dated May 1, 1987, between Jozef Nabel and Marie Gabrielle Nabel, as tenants in common, and Summit Care- California, Inc.(+) 10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964, between Jack H. Cramer and Walter Lee Brown (together, as lessors) and Albert J. Allasandra, as amended by Amendment to Lease and Right of First Refusal to Purchase, dated May 23, 1969, by which Alaric Corporation is substituted as lessee, and as further amended by Amendment to Agreement of Lease and Right of First Refusal, dated November 18, 1974, and as further amended by Second Amendment to Agreement of Lease and Right of First Refusal and Assignment of Lease, dated July 10, 1979, by which National Accommodations, Inc. (now SHL) is substituted as lessee(+), assigned to Summit Care Corporation by Assignment of Lease, dated March 9, 1992, between SHL and Summit Care Corporation.(+)
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.11 Bay Crest Convalescent Hospital: Lease, dated March 1, 1980, between South Bay Sanitarium and Convalescent Hospital and Garnet Convalescent Hospital, Inc. (now Summit Care-California, Inc.),(+) and Amendment to Lease dated March 1, 1994.(+) 10.12 Brier Oak Convalescent Center: Lease Agreement, dated February 18, 1985, between Bernard Bubman, Arnold Friedman, Irene Weiss and Sunset Motel and Development Co. (collectively, as lessors), and Summit Care-California, Inc.(+) 10.13 Valley Palms Convalescent Hospital: Lease, dated March 16, 1982, between Uni-Cal Associates and Valley Palms Convalescent, Inc. (now Summit Care-California, Inc.).(+) 10.14 Marina Care Center: Standard Industrial Lease--Net, dated March 1, 1989, between Summit Properties and Summit Care-California, Inc., as modified by Addendum to Standard Industrial Lease--Net.(+) 10.15 Phoenix Resident Hotel: Lease, dated July 29, 1977, between Sierra Land & Livestock, Inc. and Southwest Hotels, Inc., as modified by Addendum to Lease dated August 11, 1983, assigned to Summit Care Corporation by Assignment of Lease, dated July 1, 1982, between Southwest Hotels, Inc. and Summit Care Corporation.(+) 10.16 Sublease of Phoenix Retirement Hotel: Sublease, dated July 1, 1987, between Summit Care Corporation and Phoenix McDowell Properties, Inc.(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care Corporation and Summit Health Ltd.(+) 10.17 Sublease of Marina Care Center: Nursing Home Sublease Agreement, dated March 7, 1989, between Summit Care-California, Inc. and 5240 Sepulveda, Inc.(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care-California, Inc. and Summit Health Ltd.(+) 10.18 Sublease of Valley Palms Care Center: Nursing Home Sublease Agreement, dated May 11, 1989, between Summit Care-California, Inc. and Trinity Health Systems(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care-California, Inc. and Summit Health Ltd.(+) 10.19 Sublease of Brier Oak Terrace Care Center: Nursing Home Sublease Agreement, dated April 1, 1989, between Summit Care-California, Inc. and Brier Oak Hospital, Inc.(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care-California, Inc. and Summit Health Ltd.(+) 10.20 Sublease of Pharmacy: Standard Sublease, dated August 1, 1989, between St. Luke Medical Center and Mediscript, Inc., as modified by Addendum of the same date.(+) 10.21 Hemet Resident Hotel: Ground Lease dated June 25, 1980, between Genes, Ltd., and SHL, assigned to Summit Care Corporation by Assignment of Lease dated March 9, 1992, between SHL and Summit Care Corporation.(+) 10.22 Seller Note for purchase of The Woodlands.(+) 10.23 HUD Note for purchase of The Woodlands.(+) 10.24 Sublease with Summit Health Ltd., for Phoenix Living Center dated January 1994.(+) 10.25 Real Estate Lien Note--$3,000,000 dated September 30, 1994 and Security Agreement dated September 30, 1994.(+) 10.26 Live Oak Nursing Center, George West, Texas Lease Agreement dated July 19, 1991; Assignment of Lease With Option to Purchase dated September 30, 1994 and Consent To Assignment Of Leasehold Estate of Live Oak Nursing Center, George West, Texas dated August 15, 1994.(+)
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.27 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement dated February 28, 1989; Assignment Of Lease With Option To Purchase dated September 30, 1994 and Consent To Assignment Of leasehold Estate Of Guadalupe Valley Nursing Center, Sequin, Texas dated August 15, 1994.(+) 10.28 Southern Manor Nursing Center, Hallettsville, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994.(+) 10.29 Oak Crest Nursing Center, Rockport, Texas Nursing Home Lease Agreement dated October 18, 1990 and Consent To Assignment And Assumption Agreement dated October 5, 1994.(+) 10.30 Oakland Manor Nursing Center, Giddings, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994.(+) 10.31 Summit Care Corporation 401(k) Savings Plan.(+) 10.32 Limited Liability Company Agreement of APS-Summit Care Pharmacy, L.L.C., dated November 30, 1996.(+) 10.33 Robert Crone-South Texas Health Care, Inc. Agreement of Purchase and Sale of Assets of Briarcliff Nursing and Rehabilitation Center dated November 24, 1997.(+) 10.34 Agreement and Plan of Merger Among Summit Care Corporation, Fountain View, Inc., FV-SCC Acquisition Corporation and Heritage Fund II, L.P., dated February 6, 1998.(1) 10.35 Summit Care Corporation Special Severance Pay Plan dated February 6, 1998.(1) 10.36 Investment Agreement dated as of March 27, 1998 among Fountain View and certain investors.+ 10.37 Stockholders Agreement dated as of March 27, 1998 among Fountain View, the existing stockholders of Fountain View and certain investors.+ 10.38 Registration Rights Agreement dated as of March 27, 1998 among Fountain View, certain stockholders of Fountain View and certain investors.+ 10.39 Employment Agreement between Fountain View and Robert Snukal dated March 27, 1998.+ 10.40 Employment Agreement between Fountain View and Sheila Snukal dated March 27, 1998.+ 10.41 Employment Agreement between Fountain View and William Scott dated March 27, 1998.+ 10.42 Promissory Note and Pledge Agreement dated April 16, 1998 issued by William Scott to Fountain View relating to purchase of 20,000 Shares of Series A Common Stock.+ 10.43 Supplemental Signature Page to Investment Agreement dated as of May 4, 1998 among Fountain View, Heritage Fund II, L.P., Baylor Health Care System ("Baylor") and Buckner Foundation ("Buckner").+ 10.44 Amendment No. 1 to Stockholders Agreement dated as of May 4, 1998 among Fountain View, Heritage, Baylor, Buckner and certain other parties.+ 10.45 Amendment No. 1 to Registration Rights Agreement dated as of May 4, 1998 among Fountain View, Heritage, Baylor, Buckner and certain other parties.+ 10.46 Warrants to purchase Series C Common Stock of Fountain View issued by Fountain View to Heritage, Baylor, Buckner and certain of Baylor's brokers.+ 10.47 Credit Agreement Dated as of April 16, 1998 by and among Fountain View, The Banks party thereto and the Bank of Montreal, as agent.+
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.48 Guaranty Agreement Dated as of April 16, 1998 by and among Fountain View, the Guarantors, the Banks party thereto and Bank of Montreal.+ 10.49 Pledge Agreement Dated as of April 16, 1998 by and among Fountain View, the Guarantors, the Banks party thereto and Bank of Montreal.+ 10.50 Security Agreement Dated as of April 16, 1998 by and among Fountain View, the Guarantors, the Banks party thereto and Bank of Montreal.+ 10.51 Form of Revolving Note.+ 10.52 Form of Term Note.+ 12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges. 21.1 List of Subsidiaries+ 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Choate, Hall & Stewart (included as part of Exhibit 5.1).+ 24.1 Powers of Attorney (included in signature pages to Registration Statement). 25.1 Statement of eligibility of State Street Bank and Trust Company of California, N.A., as trustee. 99.1 Letter of Transmittal with respect to the Exchange Offer.+ 99.2 Notice of Guaranteed Delivery with respect to the Exchange Offer.+ 99.3 Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.+ 99.4 Form of Letter Regarding Eligibility for use of Form S-4. 99.5 Report of Ernst & Young LLP on Schedule II.
- -------- + To be filed by amendment. (B)FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Account II-7 ITEM 22. UNDERTAKINGS (a) Each of the undersigned registrants hereby undertakes that insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended ("the Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, such Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim of indemnification against such liabilities (other than the payment by the registrant of expenses incurred or the registrant in the successful defense of any action, suit paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, such Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) Each of the undersigned registrants hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (c) Each of the undersigned registrants hereby undertakes: (1) To file, during any period which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1993; (ii) To reflect in the prospectus and facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) of the Securities Act of 1933 if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-8 SCHEDULE II FOUNTAIN VIEW, INC. VALUATION AND QUALIFYING ACCOUNT
ADDITIONS -------------------- BALANCE AT CHARGED CHARGED BALANCE AT BEGINNING TO COST AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------- ---------- ----------- -------- ---------- ---------- Year ended December 31, 1995 Allowance for doubtful accounts.............. $528,000 $427,000 -- $(229,000)(1) $ 726,000 ======== ======== === ========= ========== Year ended December 31, 1996 Allowance for doubtful accounts.............. $726,000 $430,000 -- $(377,000)(1) $ 779,000 ======== ======== === ========= ========== Year ended December 31, 1997 Allowance for doubtful accounts.............. $779,000 $395,000 -- $ (22,000)(1) $1,152,000 ======== ======== === ========= ==========
- -------- (1) Deductions relate to uncollectible accounts written off. 1 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Fountain View, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. FOUNTAIN VIEW, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Chief Financial Officer and June 19, 1998 ____________________________________ Treasurer (Principal Derwin L. Williams Financial and Accounting Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Executive Vice President and June 19, 1998 ____________________________________ Director Sheila S. Snukal /s/ Michel Reichert Director June 19, 1998 ____________________________________ Michel Reichert
S-1
SIGNATURE TITLE DATE --------- ----- ---- /s/ Michael F. Gilligan Director June 19, 1998 ____________________________________ Michael F. Gilligan /s/ Peter Z. Hermann Director June 19, 1998 ____________________________________ Peter Z. Hermann /s/ Mark J. Jrolf Director June 19, 1998 ____________________________________ Mark J. Jrolf
S-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care Corporation has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE CORPORATION /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care-California, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE-CALIFORNIA, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care Pharmacy, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE PHARMACY, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Skilled Care Network has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SKILLED CARE NETWORK /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care Texas Equity, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE TEXAS EQUITY, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care Texas No. 2, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE TEXAS NO. 2, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care Texas No. 3, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE TEXAS NO. 3, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-9 SIGNA8URES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care Management Texas, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE MANAGEMENT TEXAS, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Summit Care Texas, L.P. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SUMMIT CARE TEXAS, L.P. By: ____Summit Care Management Texas, Inc. Its: General Partner /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal of Summit Care Management Texas, Inc. (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ of Summit Care Management William C. Scott Texas, Inc. /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ of Summit Care Management Sheila S. Snukal Texas, Inc.
S-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Fountain View Holdings, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. FOUNTAIN VIEW HOLDINGS, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-12 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, AIB Corp. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. AIB CORP. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Alexandria Convalescent Hospital, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. ALEXANDRIA CONVALESCENT HOSPITAL, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-14 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, BIA Hotel Corp. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. BIA HOTEL CORP. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-15 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Brier Oak Convalescent, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. BRIER OAK CONVALESCENT, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-16 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Elmcrest Convalescent Hospital has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. ELMCREST CONVALESCENT HOSPITAL /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-17 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Fountainview Convalescent Hospital has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. FOUNTAINVIEW CONVALESCENT HOSPITAL /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-18 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Fountain View Management, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. FOUNTAIN VIEW MANAGEMENT, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-19 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Rio Hondo Nursing Center has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. RIO HONDO NURSING CENTER /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-20 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Locomotion Holdings, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. LOCOMOTION HOLDINGS, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-21 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Locomotion Therapy, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. LOCOMOTION THERAPY, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal Chief Executive Officer and June 19, 1998 ____________________________________ Director (Principal Robert M. Snukal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Keith Abrahams President and Director June 19, 1998 ____________________________________ Keith Abrahams /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-22 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, On- Track Therapy Center has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. ON-TRACK THERAPY CENTER /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal Chief Executive Officer and June 19, 1998 ____________________________________ Director (Principal Robert M. Snukal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Keith Abrahams President and Director June 19, 1998 ____________________________________ Keith Abrahams /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-23 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, I.'NO, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. I.'NO, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-24 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Sycamore Park Convalescent Hospital has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SYCAMORE PARK CONVALESCENT HOSPITAL /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-25 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, SNF Pharmacy, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on June 19, 1998. SNF PHARMACY, INC. /s/ Robert M. Snukal By: _________________________________ Robert M. Snukal President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert M. Snukal, William C. Scott and Mark J. Jrolf, and each of them, with full power to act without the other, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement, and any and all amendments thereto (including pre- and post- effective amendments) or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert M. Snukal President, Chief Executive June 19, 1998 ____________________________________ Officer and Director Robert M. Snukal (Principal Executive Officer) /s/ Derwin L. Williams Treasurer (Principal June 19, 1998 ____________________________________ Financial and Accounting Derwin L. Williams Officer) /s/ William C. Scott Director and Chairman June 19, 1998 ____________________________________ William C. Scott /s/ Sheila S. Snukal Vice President and Director June 19, 1998 ____________________________________ Sheila S. Snukal
S-26 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Purchase Agreement dated as of April 16, 1998 by and among Fountain View and the Initial Purchasers named therein relating to the 11 1/4% Senior Subordinated Notes due 2008.+ 3.1 Certificate of Incorporation of Fountain View.+ 3.1(a) Certificate of Amendment amending Certificate of Incorporation of Fountain View filed March 27, 1998.+ 3.1(b) Certificate of Amendment amending Certificate of Incorporation of Fountain View filed May 6, 1998.+ 3.2 By-laws of Fountain View.+ 3.3 Articles of Incorporation of Summit Care Corporation.(+) 3.4 By-laws of Summit Care Corporation.(+) 3.5 Articles of Incorporation of Summit Care-California, Inc.+ 3.6 By-laws of Summit Care-California, Inc.+ 3.7 Articles of Incorporation of Summit Care Pharmacy, Inc.+ 3.8 By-laws of Summit Care Pharmacy, Inc.+ 3.9 Articles of Incorporation of Skilled Care Network.+ 3.10 By-laws of Skilled Care Network.+ 3.11 Articles of Incorporation of Summit Care Texas Equity, Inc.+ 3.12 By-laws of Summit Care Texas Equity, Inc.+ 3.13 Articles of Organization of Summit Care Texas, No. 2, Inc.+ 3.14 By-laws of Summit Care Texas, No. 2, Inc.+ 3.15 Articles of Organization of Summit Care Texas, No. 3, Inc.+ 3.16 By-laws of Summit Care Texas, No. 3, Inc.+ 3.17 Articles of Organization of Summit Care Texas Management, Inc.+ 3.18 By-laws of Summit Care Texas Management, Inc.+ 3.19 Certificate of Limited Partnership of Summit Care Texas, L.P.+ 3.20 Omitted 3.21 Certificate of Incorporation of Fountain View Holdings, Inc.+ 3.22 By-laws of Fountain View Holdings, Inc.+ 3.23 Articles of Incorporation of AIB Corp.+ 3.24 By-laws of AIB Corp.+ 3.25 Articles of Incorporation of Alexandria Convalescent Hospital, Inc.+ 3.26 By-laws of Alexandria Convalescent Hospital, Inc.+ 3.27 Articles of Incorporation of BIA Hotel Corp.+ 3.28 By-laws of BIA Hotel Corp.+ 3.29 Articles of Incorporation of Briar Oak Convalescent, Inc.+ 3.30 By-laws of Briar Oak Convalescent, Inc.+ 3.31 Articles of Incorporation of Elmcrest Convalescent Hospital+
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.32 By-laws of Elmcrest Convalescent Hospital+ 3.33 Articles of Incorporation of Fountainview Convalescent Hospital+ 3.34 By-laws of Fountainview Convalescent Hospital+ 3.35 Articles of Incorporation of Fountain View Management, Inc.+ 3.36 By-laws of Fountain View Management, Inc.+ 3.37 Articles of Incorporation of Rio Hondo Nursing Center+ 3.38 By-laws of Rio Hondo Nursing Center+ 3.39 Certificate of Incorporation of Locomotion Holdings, Inc.+ 3.40 By-laws of Locomotion Holdings, Inc.+ 3.41 Certificate of Incorporation of Locomotion Therapy, Inc.+ 3.42 By-laws of Locomotion Therapy, Inc.+ 3.43 Articles of Incorporation of On-Track Therapy Center, Inc.+ 3.44 By-laws of On-Track Therapy Center, Inc.+ 3.45 Articles of Incorporation of I.' NO, Inc.+ 3.46 By-laws of I.' NO, Inc.+ 3.47 Articles of Incorporation of Sycamore Park Convalescent Hospital+ 3.48 By-laws of Sycamore Park Convalescent Hospital+ 3.49 Articles of Incorporation of SNF Pharmacy, Inc.+ 3.50 By-laws of SNF Pharmacy, Inc.+ 4.1 Indenture dated as of April 16, 1998 by and among Fountain View, certain subsidiaries of Fountain View, and State Street Bank and Trust Company of California, N.A., as trustee, for the 11 1/4% Senior Subordinated Notes due 2008.+ 4.2 Form of the Company's 11 1/4% Senior Subordinated Notes due 2008.+ 5.1 Opinion of Choate, Hall & Stewart.+ 10.1 Summit Care Corporation Stock Option Plan(+) as amended by Amendment to Summit Care Corporation Stock Option Plan.(+) 10.2 Form of Summit Care Corporation Stock Option Agreement.(+) 10.3 Tax Sharing Agreement among Sierra Land Group, Inc., SHL and Summit Care Corporation, dated May 17, 1991(+), as amended by Amendment to Tax Sharing Agreement, dated as of February 5, 1992.(+) 10.4 Agreement Regarding Shared Services and Other Matters between SHL and Summit Care Corporation, dated as of February 5, 1992.(+) 10.5 Form of Directors and Officers Indemnity Agreement.(+) 10.7 Palmcrest Convalescent Home (now known as Palm Grove Convalescent Center): Convalescent Hospital Lease, dated November 20, 1969, between Palmcrest Associates, Ltd., and Century Convalescent Centers, as amended by Lease of Convalescent Hospital Facility (as amended), dated September 1, 1979, by which SHL and its appointed nominee Royalwood Convalescent Hospital, Inc. (now Summit Care- California, Inc.) are substituted as lessees.(+) 10.8 Anaheim Care Center: Lease, dated June 1, 1995, between Sam Menlo, Trustee of the Menlo Trust U/T/I 5/22/83 and Summit Care-California, Inc., doing business as Anaheim Care Center.(+)
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.9 Sharon Care Center: Lease, dated May 1, 1987, between Jozef Nabel and Marie Gabrielle Nabel, as tenants in common, and Summit Care- California, Inc.(+) 10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964, between Jack H. Cramer and Walter Lee Brown (together, as lessors) and Albert J. Allasandra, as amended by Amendment to Lease and Right of First Refusal to Purchase, dated May 23, 1969, by which Alaric Corporation is substituted as lessee, and as further amended by Amendment to Agreement of Lease and Right of First Refusal, dated November 18, 1974, and as further amended by Second Amendment to Agreement of Lease and Right of First Refusal and Assignment of Lease, dated July 10, 1979, by which National Accommodations, Inc. (now SHL) is substituted as lessee(+), assigned to Summit Care Corporation by Assignment of Lease, dated March 9, 1992, between SHL and Summit Care Corporation.(+) 10.11 Bay Crest Convalescent Hospital: Lease, dated March 1, 1980, between South Bay Sanitarium and Convalescent Hospital and Garnet Convalescent Hospital, Inc. (now Summit Care-California, Inc.),(+) and Amendment to Lease dated March 1, 1994.(+) 10.12 Brier Oak Convalescent Center: Lease Agreement, dated February 18, 1985, between Bernard Bubman, Arnold Friedman, Irene Weiss and Sunset Motel and Development Co. (collectively, as lessors), and Summit Care-California, Inc.(+) 10.13 Valley Palms Convalescent Hospital: Lease, dated March 16, 1982, between Uni-Cal Associates and Valley Palms Convalescent, Inc. (now Summit Care-California, Inc.).(+) 10.14 Marina Care Center: Standard Industrial Lease--Net, dated March 1, 1989, between Summit Properties and Summit Care-California, Inc., as modified by Addendum to Standard Industrial Lease--Net.(+) 10.15 Phoenix Resident Hotel: Lease, dated July 29, 1977, between Sierra Land & Livestock, Inc. and Southwest Hotels, Inc., as modified by Addendum to Lease dated August 11, 1983, assigned to Summit Care Corporation by Assignment of Lease, dated July 1, 1982, between Southwest Hotels, Inc. and Summit Care Corporation.(+) 10.16 Sublease of Phoenix Retirement Hotel: Sublease, dated July 1, 1987, between Summit Care Corporation and Phoenix McDowell Properties, Inc.(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care Corporation and Summit Health Ltd.(+) 10.17 Sublease of Marina Care Center: Nursing Home Sublease Agreement, dated March 7, 1989, between Summit Care-California, Inc. and 5240 Sepulveda, Inc.(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care-California, Inc. and Summit Health Ltd.(+) 10.18 Sublease of Valley Palms Care Center: Nursing Home Sublease Agreement, dated May 11, 1989, between Summit Care-California, Inc. and Trinity Health Systems(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care-California, Inc. and Summit Health Ltd.(+) 10.19 Sublease of Brier Oak Terrace Care Center: Nursing Home Sublease Agreement, dated April 1, 1989, between Summit Care-California, Inc. and Brier Oak Hospital, Inc.(+), as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care-California, Inc. and Summit Health Ltd.(+) 10.20 Sublease of Pharmacy: Standard Sublease, dated August 1, 1989, between St. Luke Medical Center and Mediscript, Inc., as modified by Addendum of the same date.(+) 10.21 Hemet Resident Hotel: Ground Lease dated June 25, 1980, between Genes, Ltd., and SHL, assigned to Summit Care Corporation by Assignment of Lease dated March 9, 1992, between SHL and Summit Care Corporation.(+)
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22 Seller Note for purchase of The Woodlands.(+) 10.23 HUD Note for purchase of The Woodlands.(+) 10.24 Sublease with Summit Health Ltd., for Phoenix Living Center dated January 1994.(+) 10.25 Real Estate Lien Note--$3,000,000 dated September 30, 1994 and Security Agreement dated September 30, 1994.(+) 10.26 Live Oak Nursing Center, George West, Texas Lease Agreement dated July 19, 1991; Assignment of Lease With Option to Purchase dated September 30, 1994 and Consent To Assignment Of Leasehold Estate of Live Oak Nursing Center, George West, Texas dated August 15, 1994.(+) 10.27 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement dated February 28, 1989; Assignment Of Lease With Option To Purchase dated September 30, 1994 and Consent To Assignment Of leasehold Estate Of Guadalupe Valley Nursing Center, Sequin, Texas dated August 15, 1994.(+) 10.28 Southern Manor Nursing Center, Hallettsville, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994.(+) 10.29 Oak Crest Nursing Center, Rockport, Texas Nursing Home Lease Agreement dated October 18, 1990 and Consent To Assignment And Assumption Agreement dated October 5, 1994.(+) 10.30 Oakland Manor Nursing Center, Giddings, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994.(+) 10.31 Summit Care Corporation 401(k) Savings Plan.(+) 10.32 Limited Liability Company Agreement of APS-Summit Care Pharmacy, L.L.C., dated November 30, 1996.(+) 10.33 Robert Crone-South Texas Health Care, Inc. Agreement of Purchase and Sale of Assets of Briarcliff Nursing and Rehabilitation Center dated November 24, 1997.(+) 10.34 Agreement and Plan of Merger Among Summit Care Corporation, Fountain View, Inc., FV-SCC Acquisition Corporation and Heritage Fund II, L.P., dated February 6, 1998.(+) 10.35 Summit Care Corporation Special Severance Pay Plan dated February 6, 1998.(+) 10.36 Investment Agreement dated as of March 27, 1998 among Fountain View and certain investors.+ 10.37 Stockholders Agreement dated as of March 27, 1998 among Fountain View, the existing stockholders of Fountain View and certain investors.+ 10.38 Registration Rights Agreement dated as of March 27, 1998 among Fountain View, certain stockholders of Fountain View and certain investors.+ 10.39 Employment Agreement between Fountain View and Robert Snukal dated March 27, 1998.+ 10.40 Employment Agreement between Fountain View and Sheila Snukal dated March 27, 1998.+ 10.41 Employment Agreement between Fountain View and William Scott dated March 27, 1998.+ 10.42 Promissory Note and Pledge Agreement dated April 16, 1998 issued by William Scott to Fountain View relating to purchase of 20,000 Shares of Series A Common Stock.+
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.43 Supplemental Signature Page to Investment Agreement dated as of May 4, 1998 among Fountain View, Heritage Fund II, L.P., Baylor Health Care System ("Baylor") and Buckner Foundation ("Buckner").+ 10.44 Amendment No. 1 to Stockholders Agreement dated as of May 4, 1998 among Fountain View, Heritage, Baylor, Buckner and certain other parties.+ 10.45 Amendment No. 1 to Registration Rights Agreement dated as of May 4, 1998 among Fountain View, Heritage, Baylor, Buckner and certain other parties.+ 10.46 Warrants to purchase Series C Common Stock of Fountain View issued by Fountain View to Heritage, Baylor, Buckner and certain of Baylor's brokers.+ 10.47 Credit Agreement Dated as of April 16, 1998 by and among Fountain View, The Banks party thereto and the Bank of Montreal, as agent.+ 10.48 Guaranty Agreement Dated as of April 16, 1998 by and among Fountain View, the Guarantors, the Banks party thereto and Bank of Montreal.+ 10.49 Pledge Agreement Dated as of April 16, 1998 by and among Fountain View, the Guarantors, the Banks party thereto and Bank of Montreal.+ 10.50 Security Agreement Dated as of April 16, 1998 by and among Fountain View, the Guarantors, the Banks party thereto and Bank of Montreal.+ 10.51 Form of Revolving Note.+ 10.52 Form of Term Note.+ 12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges. 21.1 List of Subsidiaries+ 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Choate, Hall & Stewart (included as part of Exhibit 5.1). 24.1 Powers of Attorney (included in signature pages to Registration Statement). 25.1 Statement of eligibility of State Street Bank and Trust Company of California, N.A., as trustee. 99.1 Letter of Transmittal with respect to the Exchange Offer.+ 99.2 Notice of Guaranteed Delivery with respect to the Exchange Offer.+ 99.3 Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.+ 99.4 Form of Letter Regarding Eligibility for use of Form S-4. 99.5 Report of Ernst & Young LLP on Schedule.
- -------- + To be filed by amendment. EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 FOUNTAIN VIEW, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS, EXCEPT RATIOS)
YEAR ENDED DECEMBER 31, ------------------------------------------ THREE MONTHS ENDED ACTUAL MARCH 31, ---------------------------------- -------------------- PRO PRO FORMA FORMA 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------ ------ ------ ------ ------ ------- ------ ------ ------ Income (loss) before income taxes........... $2,510 $4,594 $2,640 $3,878 $5,563 $(7,296) $2,315 $1,450 $ (573) Fixed charges: Interest expense...... 307 355 332 278 1,164 23,324 20 851 5,831 Portion of rent repre- senting interest..... 1,334 1,339 1,315 1,299 1,258 2,251 314 328 569 ------ ------ ------ ------ ------ ------- ------ ------ ------ Total fixed charges..... 1,641 1,694 1,647 1,577 2,422 25,575 334 1,179 6,400 ------ ------ ------ ------ ------ ------- ------ ------ ------ Income (loss) before income taxes and fixed charges................ $4,151 $6,288 $4,287 $5,455 $7,985 $18,279 $2,649 $2,629 $5,827 ====== ====== ====== ====== ====== ======= ====== ====== ====== Ratio of earnings to fixed charges.......... 2.5 3.7 2.6 3.5 3.3 0.7 7.9 2.2 0.9
EX-23.1 3 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 11, 1998, with respect to the consolidated financial statements of Fountain View, Inc. for the three years ended December 31, 1997 and the related financial statement schedule, and our report dated August 22, 1997 with respect to the consolidated financial statements of Summit Care Corporation for the three years ended June 30, 1997 included in the Registration Statement (Form S-4 No. 333- ) and related Prospectus of Fountain View, Inc. for the registration of $120,000,000 of 11 1/4% Senior Subordinated Notes. /s/ Ernst & Young LLP Los Angeles, California June 12, 1998 EX-25.1 4 STATEMENT OF ELIGIBILITY OF STATE STREET BANK Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 ---------------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) [_] STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) United States 06-1143380 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. Identification No.) national bank) 633 West 5th Street, 12th Floor, Los Angeles, California 90071 (Address of principal executive offices) (Zip Code) Lynda A. Vogel, Senior Vice President and Managing Director 633 West 5th Street, 12th Floor, Los Angeles, California 90071 (213) 362-7399 (Name, address and telephone number of agent for service) FOUNTAIN VIEW, INC. (Exact name of obligor 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 680 LOS ANGELES, CALIFORNIA 90064 (Address of principal executive offices) (Zip Code) 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B (TYPE OF SECURITIES) GENERAL ITEM 1. GENERAL INFORMATION FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A)NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT: Comptroller of the Currency, Western District Office, 50 Fremont Street, Suite 3900, San Francisco, California, 94105-2292 (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Bank and Trust Company. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibits with corresponding exhibit numbers to the Form T-1 of Western Digital Corporation, filed pursuant to Section 305(b)(2) of the Act, on May 12, 1998 (Registration No. 333-52463), and are incorporated herein by reference. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A Certificate of Corporate Existence (with fiduciary powers) from the Comptroller of the Currency, Administrator of National Banks is on file with the Securities and Exchange Commission as Exhibits with corresponding exhibit numbers to the Form T-1 of Western Digital Corporation, filed pursuant to Section 305(b)(2) of the Act, on May 12, 1998 (Registration No. 333-52463), and are incorporated herein by reference. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. Authorization of the Trustee to exercise fiduciary powers (included in Exhibits 1 and 2; no separate instrument). 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibits with corresponding exhibit numbers to the Form T-1 of Western Digital Corporation, filed pursuant to Section 305(b)(2) of the Act, on May 12, 1998 (Registration No. 333-52463), and are incorporated herein by reference. 1 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEE REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2 of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company of California, NATIONAL ASSOCIATION, organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Los Angeles, and State of California, on the 12th of June, 1998. STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION By: /s/ Scott C. Emmons ------------------------------------- Scott C. Emmons Assistant Vice President 2 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by FOUNTAIN VIEW, INC. of its 11 1/4% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION By: /s/ Scott C. Emmons ------------------------------------- Scott C. Emmons Assistant Vice President DATED: JUNE 12, 1998 3 EXHIBIT 7 Consolidated Report of Condition and Income for A Bank With Domestic Offices Only and Total Assets of Less than $100 Million of State Street Bank and Trust Company of California, a national banking association duly organized and existing under and by virtue of the laws of the United States of America, at the close of business March 31, 1998, published in accordance with a call made by the Federal Deposit Insurance Corporation pursuant to the required law; 12 U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember banks); and 12 U.S.C. Section 161 (National banks).
THOUSANDS OF DOLLARS --------- ASSETS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin............. $6,852 Interest-bearing balances...................................... 0 Securities....................................................... 38 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary............ 0 Loans and lease financing receivables: Loans and leases, net of unearned income....................... 0 Allowance for loan and lease losses............................ 0 Allocated transfer risk reserve................................ 0 Loans and leases, net of unearned income and allowances........ 0 Assets held in trading accounts.................................. 0 Premises and fixed assets........................................ 253 Other real estate owned.......................................... 0 Investments in unconsolidated subsidiaries....................... 0 Customers' liability to this bank on acceptances outstanding..... 0 Intangible assets................................................ 0 Other assets..................................................... 814 ------ Total assets..................................................... 7,957 ====== LIABILITIES Deposits: In domestic offices............................................ 0 Noninterest-bearing........................................... 0 Interest-bearing.............................................. 0 In foreign offices and Edge subsidiary......................... 0 Noninterest-bearing........................................... 0 Interest-bearing.............................................. 0 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge sub- sidiary......................................................... 0 Demand notes issued to the U.S. Treasury and Trading Liabilities. 0 Other borrowed money............................................. 0 Subordinated notes and debentures................................ 0 Bank's liability on acceptances executed and outstanding......... 0 Other liabilities................................................ 4,356 Total liabilities................................................ 4,356 ------ EQUITY CAPITAL Perpetual preferred stock and related surplus.................... 0 Common stock..................................................... 500 Surplus.......................................................... 750 Undivided profits and capital reserves/Net unrealized holding gains (losses).................................................. 2,352 Cumulative foreign currency translation adjustments.............. 0 Total equity capital............................................. 3,602 ------ Total liabilities and equity capital............................. $7,958 ======
4 I, Kevin R. Wallace, Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition and Income for this report date have been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true to the best of my knowledge and belief. Kevin R. Wallace We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true and correct. Lynda A. Vogel James A. Quale Stephen Rivero 5 EX-99.4 5 FORM OF LETTER REGARDING ELIGIBILITY FOR USE OFS-4 EXHIBIT 99.4 FOUNTAIN VIEW, INC. 11900 WEST OLYMPIC BOULEVARD, SUITE 680 LOS ANGELES, CA 90064 , 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Form S-4 Registration Statement relating to the offer to exchange up to $120,000,000 of 11 1/4% Senior Subordinated Notes (the "Exchange Notes") due 2008, Series B of Fountain View, Inc., which have been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 11 1/4% Senior Subordinated Notes due 2008 Dear Sir or Madam: In connection with our above-captioned Registration Statement, Fountain View, Inc. hereby represents that: 1. It is registering the Exchange Notes exchange offer registered thereby in reliance on the Staff's position set forth in Exxon Capital Holding Corp., SEC No-Action Letter (April 13, 1989), Morgan Stanley & Co., Inc., SEC No- Action Letter (June 2, 1993) and Sherman & Sterling, SEC No-Action Letter (July 2,1993). 2. It has not entered into any arrangement or understanding with any person to distribute the Exchange Notes to be received in the exchange offer and, to the best of its information and belief, each person participating in the exchange offer is acquiring the Exchange Notes in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the Exchange Notes to be received in the exchange offer; 3. It will make each person participating in the exchange offer aware that is such person is participating in the exchange offer for the purpose of distributing the Exchange Notes to be acquired in the exchange offer, such person (i) cannot rely on the staff position enunciated in Exxon Capital or interpretive letters to similar effect and (ii) must comply with registration and prospectus delivery requirements of the Securities Act of 1933 in connection with a secondary resale transaction. 4. It acknowledges that such a secondary resale transaction by such person participating in the exchange offer for the purpose of distributing the Exchange Notes should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K; and 5. The preliminary prospectus included in the above-referenced registration statement contains and the final prospectus included therein will contain disclosures making persons participating in the exchange offer aware of the limitations and obligations applicable to broker-dealers who participate in the exchange offer. Very truly yours, Fountain View, Inc. By: Robert M. Snukal President and Chief Executive Officer EX-99.5 6 REPORT OF ERNST & YOUNG LLP ON SCHEDULE EXHIBIT 99.5 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of Fountain View, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997, (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in item 21(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this schedule based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Los Angeles, California March 11, 1998 -----END PRIVACY-ENHANCED MESSAGE-----