At Sharon Care Center on Third Street in Los Angeles one recent morning, a group of patients lounged easily, sipping coffee and chatting against the backdrop of a caf & #233;-like patio.
“I can think of a lot of places that I’d rather be. But if you have to be here it’s a nice place,” said Roy Silver, who sported a horseshoe-shaped scar atop his nearly bald pate. “I got a manicure today and tomorrow I need my hair done, as funny as it sounds.”
If they’re fortunate, Silver and the other 80 or so patients will be allowed to continue their stay indefinitely. But it will take some doing.
Fountain View Inc., the Burbank-based owner of Sharon Care and 48 other facilities in California and Texas, is in financial trouble. Facing a cash squeeze and a professional liability judgment the company says it can’t pay, Fountain View has threatened in a Securities and Exchange Commission filing to declare bankruptcy to protect its assets from creditors. Chief Executive Robert Snukal said the company has no intention of doing so. But if creditors who so far haven’t taken drastic action to collect cease cooperating, bankruptcy protection may be the only option.
“We have no plans to file Chapter 11 ourselves,” Snukal said. “We need to restructure the capital repayment so everyone comes out OK in the end.”
Fountain View, with 2000 revenues of $340 million, faces a torrent of financial problems. Formed from the 1998 buyout of locally owned Summit Care Corp. by investors led by Heritage Partners Inc. of Boston, Fountain View was highly leveraged from the beginning.
Debt pressures mount
Shortly after the merger, it issued $120 million in senior subordinated notes paying 11.25 percent interest, and obtained a $30 million revolving credit facility and a term loan facility of up to $85 million. But by May of this year, battling a Medicare reimbursement dispute and high liability insurance rates, Fountain View couldn’t come up with a $6.75 million payment to holders of the notes.
One month later, it balked on a separate, $5 million payment on its term loan facility. The company also is liable for a $5.8 million jury award that resulted from the death of an elderly woman who stayed at one of its health centers in Clovis, Calif.
Fountain View’s insurance company won’t admit to any obligation in the matter and has refused to post the appeal bond.
In a recent SEC filing, Fountain View said it couldn’t afford to post the bond itself. If the company couldn’t reach a settlement with the dead woman’s family by Aug. 14, it said it might have to seek bankruptcy protection to halt collection. That deadline passed without a deal. “There is no agreement, tacit or otherwise at this point, to further delay the execution of the judgment,” said Stephen Garcia of Wilkes & McHugh, a lawyer for the family of the dead woman, Margaret Muccianti.
The jury award appears to be the most urgent of Fountain View’s problems. With the company unable to post bond, opposing lawyers are free to go after its assets. Garcia wouldn’t say what actions he might take, but said his expectations for a settlement “are diminished to the point of nonexistence.” In contrast, Snukal is upbeat. “These discussions have been going on for some time, they continue to be consensual and fruitful,” Snukal said.
He declined to discuss negotiations with Fountain View’s unnamed insurance carrier.
Fountain View’s other problems are substantial, too. The holders of its senior subordinated notes called for accelerated payment after the default, but as of the Aug. 14 SEC filing hadn’t yet taken any collection action. As of that date, Fountain View’s bank lenders hadn’t called for accelerated payment of their loans.
“We are in discussions with both of them, they’ve both indicated a willingness to work with us, and they both agree that it is not in the best interests of the company or anyone else for the company to have to file under Chapter 11,” he said. Fountain View did close its only Arizona facility in June, but Snukal said he has no plans to close any more. The company now has 25 facilities in Southern California, two in Fresno County and 22 in Texas, with more than 6,000 total beds.
To further blur Fountain View’s financial outlook, its chief financial officer, Paul Rathbun, resigned on Aug. 17. Snukal said the departure was planned and related to the birth of a child. Richard Kam, senior vice president for finance, has assumed financial duties.
Fountain View has a few factors working in its favor. First, its creditors don’t appear to crave a bankruptcy filing. The company’s biggest antagonists lawyers for the Muccianti family have no incentive to force one either, as it would only delay collection for their clients. And, the company’s ongoing operations are profitable, Snukal said. “We expect to continue to be profitable, it’s not an operational issue,” Snukal said.
In fact, Fountain View’s current brush with insolvency comes after the company weathered a disastrous period for nursing home operators that left five of the seven largest nursing-home chains bankrupt. Changes in Medicare reimbursements for certain services which drastically cut payments to many nursing-home operators along with emergent competition from assisted-living centers, caught large nursing-home operators off-guard. “They borrowed money to buy these cash flow streams that basically went away,” said Frank Morgan, an analyst with Jefferies & Co.
Fountain View largely avoided these pitfalls, but it ran into regulatory trouble in November 1999, when one of its California facilities was decertified from the Medicare and Medicaid programs. The facility was eventually reinstated and an administrative law judge has overturned the decertification. If the decision holds up on appeal, Fountain View says it stands to receive $6.2 million it is owed by the Health Care Financing Administration for unreimbursed costs while the facility was decertified. “We’re very confident that we’re going to win,” Snukal said.
