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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 333-57279
FOUNTAIN VIEW, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-4644784
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 W. Magnolia Blvd., Burbank, CA 91505-3031
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 841-8750
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 21, 2001, the number of shares of each class of the Issuer's common
stock outstanding was as follows: Series A Common Stock: 1,000,000; Series B
Common Stock: 114,202; and Series C Common Stock: 20,742.
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TABLE OF CONTENTS
FOUNTAIN VIEW, INC.
Pages
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2, 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
Item 3. Quantitative and Qualitative Disclosures of Market Risk 10
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 10
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended March 31,
2001 2000
----------------------------
Net revenues $76,863 $71,567
Expenses:
Salaries and benefits 41,545 36,576
Supplies 10,446 9,052
Purchased services 8,155 6,916
Provision for doubtful accounts 1,179 1,063
Other expenses 5,774 5,199
Charge related to decertification of facility - 1,698
Rent 1,380 1,304
Rent to related parties 474 462
Depreciation and amortization 4,014 3,938
Interest expense, net of interest income 6,235 6,142
----------------------------
Total expenses 79,202 72,350
----------------------------
Loss before income tax benefit (2,339) (783)
Income tax benefit (755) (133)
----------------------------
Net loss $(1,584) $ (650)
============================
See accompanying notes.
1
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2001 2000
---------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,746 $ 346
Accounts receivable, less allowance for
doubtful accounts of $10,475 and $9,961
at 2001 and 2000 56,076 53,668
Current portion of deferred income taxes 7,122 7,122
Other current assets 6,209 6,051
-------------------------------
Total current assets 72,153 67,187
Property and equipment, at cost:
Land and land improvements 25,086 25,086
Buildings and leasehold improvements 218,690 218,328
Furniture and equipment 31,750 31,492
Construction in progress 1,094 618
-------------------------------
276,620 275,524
Accumulated depreciation and amortization (38,351) (35,282)
-------------------------------
238,269 240,242
Notes receivable, less allowance for doubtful
accounts of $704 and $697 at 2001 and 2000 5,245 5,507
Goodwill, net 54,550 55,014
Deferred financing costs, net 8,691 9,156
Deferred income taxes 4,519 3,922
Other assets 3,870 4,440
-------------------------------
Total assets $ 387,297 $ 385,468
===============================
See accompanying notes.
2
FOUNTAIN VIEW, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except stock information)
March 31, December 31,
2001 2000
-------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities:
Payable to banks $ 3,044 $ 3,128
Accounts payable and accrued liabilities 19,050 18,004
Employee compensation and benefits 8,329 7,959
Accrued interest payable 7,754 4,641
Current portion of deferred income taxes 332 332
Current maturities of long-term debt and capital leases (Note 5) 223,221 223,871
-------------------------------
Total current liabilities 261,730 257,935
Long-term debt and capital leases, less current maturities (Note 5) 17,185 17,409
Deferred income taxes 30,332 30,490
-------------------------------
Total liabilities 309,247 305,834
Preferred Stock Series A, mandatorily redeemable, $0.01 par value:
1,000,000 shares authorized, 15,000 shares issued and outstanding
at 2001 and 2000 (liquidation preference of $15 million) 15,000 15,000
Commitments and contingencies - -
Shareholders' equity:
Common Stock Series A, $0.01 par value: 1,500,000 shares authorized,
1,000,000 shares issued and outstanding at 2001 and 2000 10 10
Common Stock Series B, $0.01 par value: 200,000 shares authorized,
114,202 shares issued and outstanding at 2001 and 2000 1 1
Common Stock Series C, $0.01 par value: 1,300,000 shares authorized,
20,742 shares issued and outstanding at 2001 and 2000 - -
Additional paid-in capital 106,488 106,488
Accumulated deficit (40,909) (39,325)
Due from shareholder (2,540) (2,540)
-------------------------------
Total shareholders' equity 63,050 64,634
-------------------------------
Total liabilities and shareholders' equity $387,297 $385,468
===============================
See accompanying notes.
3
FOUNTAIN VIEW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
2001 2000
-----------------------------------
Operating activities:
Net loss $ (1,584) $ (650)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 4,014 3,938
Changes in operating assets and liabilities:
Accounts receivable (2,408) (2,933)
Other current assets (26) 1,135
Accounts payable and accrued liabilities 1,046 (154)
Employee compensation and benefits 370 (8)
Accrued interest payable 3,113 3,304
Deferred income taxes (755) (133)
-----------------------------------
Total adjustments 5,354 5,149
-----------------------------------
Net cash provided by operating activities 3,770 4,499
-----------------------------------
Investing activities:
Principal payments on notes receivable 132 202
Additions to property and equipment (1,096) (879)
Changes in other assets 560 7
-----------------------------------
Net cash used in investing activities (404) (670)
-----------------------------------
Financing activities:
Decrease in payable to bank (84) -
Bank financing fee (8) (385)
Decrease in capital lease obligations (247) (244)
Principal payments on long-term debt (2,500) (1,250)
Pay down (borrowing) on revolving loan facility, net 1,873 (1,950)
-----------------------------------
Net cash used in financing activities (966) (3,829)
-----------------------------------
Increase in cash and cash equivalents 2,400 -
Cash and cash equivalents at beginning of period 346 -
-----------------------------------
Cash and cash equivalents at end of period $ 2,746 $ -
===================================
See accompanying notes.
4
FOUNTAIN VIEW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Fountain View, Inc. ("Fountain View" or "Company") is a leading operator of
long-term care facilities and a leading provider of a full continuum of post-
acute care services, with a strategic emphasis on sub-acute specialty medical
care. Fountain View operates a network of facilities in California, Texas, and
Arizona, including 44 skilled nursing facilities ("SNFs") that offer sub-acute,
rehabilitative and specialty medical skilled nursing care, as well as six
assisted living facilities ("ALFs") that provide room and board and social
services in a secure environment. In addition, Fountain View provides a variety
of high-quality ancillary services such as physical, occupational and speech
therapy in Fountain View-operated facilities and unaffiliated facilities.
Fountain View also operates three institutional pharmacies (one of which is a
joint venture), which serve acute care hospitals as well as SNFs and ALFs, both
affiliated and unaffiliated with Fountain View, an outpatient therapy clinic and
a durable medical equipment ("DME") company.
2. Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The balance sheet at December 31, 2000 has been
derived from the audited financial statements at that date. In the opinion of
management, the unaudited financial information reflects all adjustments (all of
which are of a normal recurring nature), which are considered necessary to
fairly state the Company's financial position, its cash flows and the results of
operations. These statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements and should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 2000 as
filed with the Form 10-K on April 16, 2001. The interim financial information
herein is not necessarily representative of that to be expected for a full year.
3. Business Segments
The Company has three reportable segments: nursing services, therapy services,
and pharmacy services. The Company's reportable segments are business units that
offer different services and products. The reportable segments are each managed
separately due to the nature of the services provided or the products sold.
The Company evaluates performance and allocates resources based on an efficient
and cost-effective operating model which maximizes profitability and the quality
of care provided across the Company's entire facility network. Certain of
Fountain View's facilities are leased, under operating leases, and not owned.
Accordingly, earnings before interest, taxes, depreciation, amortization and
rent is used to determine and evaluate segment profit or loss. Corporate
overhead is not allocated for purposes of determining segment profit or loss,
and is included, along with the Company's DME subsidiary in the "all other"
category in the selected segment financial data that follows. Intersegment
revenues are recorded at the Company's cost plus standard mark-up; intersegment
profit and loss has been eliminated in consolidation.
5
The following table sets forth selected financial data by business segment (in
thousands):
Selected Financial Data:
Nursing Therapy Pharmacy All
Services Services Services Other Totals
------------------------------------------------
Three Months Ended March 31, 2001:
Revenues from external customers $66,222 $ 4,447 $6,167 $ 27 $76,863
Intersegment revenues - 6,263 1,552 2,222 10,037
------------------------------------------------
Total revenues $66,222 $10,710 $7,719 $ 2,249 $86,900
================================================
Segment profit (loss) $11,229 $ 2,347 $ 345 $(4,157) $ 9,764
Three Months Ended March 31, 2000:
Revenues from external customers $63,229 $ 3,106 $5,181 $ 51 $71,567
Intersegment revenues - 6,249 1,612 2,023 9,884
------------------------------------------------
Total revenues $63,229 $ 9,355 $6,793 $ 2,074 $81,451
================================================
Segment profit (loss) $11,842 $ 2,704 $ 790 $(4,273) $11,063
Three Months Ended
March 31,
2001 2000
------------------------
Revenues:
External revenues for reportable segments $ 76,863 $71,567
Intersegment revenues for reportable segments 10,037 9,884
Elimination of intersegment revenues (10,037) (9,884)
------------------------
Total consolidated revenues $ 76,863 $71,567
========================
4. Income Taxes
The income tax benefit is calculated using a federal tax rate of 34% and a
blended state tax rate of 6%. The difference between the federal and blended
state tax rates and the effective rate is primarily due to the non-deductible
portion of goodwill.
5. Debt
The Company is required to maintain certain financial covenants and to comply
with certain reporting requirements under its Term Loan and Revolving Credit
Facility Agreement. For the quarter ended March 31, 2001, the Company was not in
compliance with certain of these financial covenants including covenants
concerning the delivery of the Company's financial statements no more than 45
days after the end of the quarter. These covenant defaults are in addition to
the technical defaults more fully described in the December 31, 2000 financial
statements. The Company has been unable to obtain a waiver of these defaults
from its lenders under the Term Loan and Revolving Credit Facility Agreement and
such lenders may, as a result of these defaults, accelerate payment of the
amounts due under the credit facility. As noted in the December 31, 2000
financial statements, the Company elected to defer, for thirty days, the
interest payment due April 16, 2001 on its Senior Subordinated Notes. During the
deferral period, the Company was negotiating with its lenders to restructure the
Term Loan and Revolving Credit Facility, with the intention of having sufficient
funds available to make the interest payment on the Senior Subordinated Notes by
May 15, 2001 as required. However, the Company was unable to restructure the
Term Loan and Revolving Credit Facility and the interest payment on the Senior
Subordinated Notes was not made on May 15, 2001 as required. As a result, the
holders of the Company's Senior Subordinated Notes have the right to accelerate
6
payment of the outstanding amounts under the notes, while the payment default
continues.
The Company intends to continue discussions with its lenders, initiate
discussions with the holders of its Senior Subordinated Notes, and consider all
other options available to resolve this situation and achieve a result that is
favorable to all parties involved. However, there can be no assurances that the
Company will be able to resolve this situation and achieve such a result. Since
the holders of the Company's Senior Subordinated Notes and the Company's lenders
under the Term Loan and Revolving Credit Facility currently have the right to
accelerate payment of these notes and the loans, respectively, the Company has
classified the obligations in respect of the Senior Subordinated Notes and the
loans under the Term Loan and Revolving Credit Facility as current liabilities
in the accompanying financial statements.
All of the events discussed above raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible outcome of these future events.
Item 2. Management's Discussion And Analysis of Financial Condition And Results
of Operations (Unaudited)
Quarter Ended March 31, 2001 Compared to Quarter Ended March 31, 2000 (Dollars
in Thousands)
Net revenues increased $5,296 or 7.4% from $71,567 for the quarter ended March
31, 2000 to $76,863 for the quarter ended March 31, 2001. Total average
occupancy was 82.5% for the quarter ended March 31, 2001 and 82.7% for the
quarter ended March 31, 2000. Although the total average occupancy declined
between quarters, net revenues increased due to greater Medicare census in the
current quarter and rate increases experienced by us for both Medicare and
Medicaid during the last three quarters of 2000, and increases in third party
business at the therapy and pharmacy operations.
Expenses, consisting of salaries and benefits, supplies, purchased services,
provision for doubtful accounts, and other expenses as a percent of net revenues
increased from 82.2% of net revenues for the quarter ended March 31, 2000 to
87.3% for the quarter ended March 31, 2001. Expenses increased $8,293 or 14.1%
from $58,806 for the quarter ended March 31, 2000 to $67,099 for the quarter
ended March 31, 2001. This increase was primarily due to increased salaries and
benefits which were 54.1% of net revenues for the quarter ended March 31, 2001
compared to 51.1% for the quarter ended March 31, 2000. The increase in salaries
and benefits was due to additional personnel related to expansion of our therapy
operations, increases in wages rates at our nursing facilities, certain of which
were mandated by the State of California, and an increase in workers
compensation expense.
Income before charge related to decertification of facility, rent, rent to
related parties, depreciation and amortization and interest expense decreased
$2,997 or 23.5% from $12,761 for the quarter ended March 31, 2000 to $9,764 for
the quarter ended March 31, 2001 and was 12.7% of net revenues for the quarter
ended March 31, 2001 compared to 17.8% for the quarter ended March 31, 2000.
This decrease was largely due to a decrease in profitability at our nursing
facilities due to higher operating expenses, including professional liability
and workers compensation insurance. We believe the increases in workers
compensation and professional liability insurance reflect a general industry
trend, not supported by our own experience.
In December 2000, we obtained a new provider agreement from both the Medicare
and Medicaid Programs for the facility that had been decertified. As a result,
there is no charge related to decertification of facility for the quarter ended
March 31, 2001 compared to a charge of $1,698 for the quarter ended March 31,
2000.
Rent, rent to related parties, depreciation and amortization and interest
expense increased $257 or 2.2% from $11,846 for the quarter ended March 31, 2000
to $12,103 for the quarter ended March 31, 2001.
Net loss was $1,584 for the quarter ended March 31, 2001 compared to a net loss
of $650 for the quarter ended March 31, 2000.
7
Selected statistics are shown below:
2001 2000 (Decrease)
--------------------------------
Facilities in operation at:
March 31 50 50 -
Nursing center beds at:
March 31 6,032 6,032 -
Assisted living beds at:
March 31 700 700 -
Total beds at:
March 31 6,732 6,732 -
Total occupancy:
First quarter 82.5% 82.7% (0.2)%
Nursing center occupancy:
First quarter 84.3% 84.4% (0.1)%
Assisted living center occupancy:
First quarter 66.2% 68.6% (2.4)%
Liquidity and Capital Resources (Dollars in Thousands)
Going Concern Issues
Under the Term Loan and Revolving Credit Facility Agreement, we are required to
maintain certain financial covenants and to comply with certain reporting
requirements. For the quarter ended March 31, 2001, we were not in compliance
with certain of these financial covenants and will not be able to deliver our
financial statements within 45 days after the end of the quarter, as
required under the agreement. These covenant defaults are in addition to the
technical defaults more fully described in the December 31, 2000 financial
statements. We have been unable to obtain a waiver of these defaults from our
lenders and such lenders may, as a result of these defaults, accelerate payment
of the amounts due under the credit facility. As noted in the December 31, 2000
financial statements, we elected to defer, for thirty days, the interest payment
due April 16, 2001 on our Senior Subordinated Notes. During the deferral period,
we were working with our lenders to restructure the Term Loan and Revolving
Credit Facility, with the intention of having sufficient funds available to make
the interest payment on the Senior Subordinated Notes by May 15, 2001. However,
we were unable to restructure the Term Loan and Revolving Credit Facility and
the interest payment on the Senior Subordinated Notes was not made on May 15,
2001 as required. As a result, the holders of our Senior Subordinated Notes have
the right to accelerate payment of these Notes, while the payment default
continues.
We intend to continue discussions with our lenders, initiate discussions with
holders of our Senior Subordinated Notes, and consider all other options
available to resolve this situation and achieve a result that is favorable to
all parties involved. However, there can be no assurance that we will achieve
such a result. Since the holders of our Senior Subordinated Notes currently have
the right to accelerate payment of these notes and the loans respectively, we
have classified the obligations in respect of the Senior Subordinated Notes and
the loans under the Term Loan and Revolving Credit Facility as current
liabilities in the accompanying financial statements.
8
We believe we will be able to generate sufficient cash flow from operations to
meet our normal ongoing operating needs exclusive of future principal payments
on the Term Loan Facility, and the past due interest on the Senior Subordinated
Notes.
All of the events discussed above raise substantial doubt about our ability to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible outcome of these events.
Other
At March 31, 2001, we had $2,746 in cash and cash equivalents and a working
capital deficiency of $189,577, after the reclassification of certain of our
debt to current as discussed above, compared to $346 in cash and cash
equivalents and working capital deficiency of $190,748 at December 31, 2000.
Net cash provided by operating activities decreased $729 from $4,499 for the
three months ended March 31, 2000 to $3,770 for the three months ended March 31,
2001. This decrease was primarily due to an increase in net loss between
quarters.
Long-term debt, including current maturities, totaling $240,406 at March 31,
2001, consisted of mortgage and capital lease obligations of $18,033, a Term
Loan Credit Facility of $75,000, Senior Subordinated Notes of $120,000, and
borrowings on our Revolving Loan Facility of $27,373.
We had $2,127 in available borrowings on our revolving loan facility at March
31, 2001 after giving effect to a $500 outstanding letter of credit relating to
a previous year's workers' compensation program. As a result of the defaults
mentioned in the preceding paragraphs, we do not have access to the unused
portion of the revolving loan facility until the defaults are cured or a waiver
is obtained from the Senior Bank Group. We believe we currently have sufficient
cash available and will generate sufficient additional cash to meet our
operating and ongoing capital replacement needs, exclusive of certain future
scheduled principal payments and the past due interest on the Senior
Subordinated Notes discussed in the preceding paragraphs.
Impact of Inflation
The health care industry is labor intensive. Wages and other expenses increase
more rapidly during periods of inflation and when shortages in the labor market
occur. In addition, suppliers pass along rising costs in the form of higher
prices. Increases in reimbursement rates under Medicaid generally lag behind
actual cost increases, so that we may have difficulty covering these cost
increases in a timely fashion. In addition, Medicare SNFs are now paid a per
diem rate under PPS, in lieu of the former cost-based reimbursement rate.
Increases in the federal portion of the per diem rates may also lag behind
actual cost increases.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 relating to
future events or our future financial performance including, but not limited to,
statements contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations". These forward-looking statements
may include, among other things, the success of our business strategy, our
ability to develop and expand its business in regional markets, our ability to
increase the level of sub-acute and specialty medical care it provides, the
effects of government regulation and healthcare reform, litigation, our
anticipated future revenues and additional revenue opportunities, capital
spending and financial resources, our liquidity demands, our ability to meet our
liquidity needs, and other statements contained in this Quarterly Report on Form
10-Q that are not historical facts. Although we believe that the assumptions on
which these forward-looking statements are based are reasonable, any of those
assumptions could prove to be inaccurate and, as a result, the forward-looking
statements based on those assumptions also could be materially incorrect.
Readers are cautioned that such forward-looking statements, which may be
identified by words including "anticipates," "believes," "intends," "estimates,"
"plans," and other similar expressions, are only predictions or estimations and
are subject to known and unknown risks and uncertainties, over which we have
little or no control. In evaluating such statements, readers should consider the
various factors identified above which could cause actual events, performance or
results to differ materially from those indicated by such statements.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain of our debt obligations are sensitive to changes in interest rates. The
rates on the term loan credit and revolving loan facilities, which both bear
interest at LIBOR plus an applicable margin, are reset at various intervals,
thus limiting their risk. We have not experienced significant changes in market
risk due to the relative stability of interest rates during the three months
ended March 31, 2001.
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
We are currently in default in the payment of our Senior Subordinated Notes in
the amount of $6,750,000, which was due on April 16, 2001. The total amount of
interest on our Senior Subordinated Notes in arrears, including any additional
interest, penalties and charges, on the date of this report is approximately
$6,830,000.
Item 6. Exhibits and Reports on Form 8-K
We did not file any reports on Form 8-K during the three months ended March 31,
2001.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUNTAIN VIEW, INC.
Date: May 21, 2001 By: /s/PAUL C. RATHBUN
-------------------------------------
Paul C. Rathbun
Executive Vice President - Finance,
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date: May 21, 2001 By: /s/RICHARD KAM
-------------------------------------
Richard Kam
Senior Vice President - Finance and
Assistant Secretary
10